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To follow along with the slides, please visit jabil.com within our investor section of our website.
At the conclusion of today's call, the entire call will be posted for audio playback on our website.
These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2020 and other filings.
I appreciate everyone taking the time to join our call today.
In stepping back and reflecting for a moment, it's hard to believe that 12 months have passed since we first encountered COVID.
I think about sitting alongside Mike and Adam one year ago during our March 2020 earnings call when clarity vanished and uncertainty ran wild.
Yet, in typical Jabil fashion, our people did what they do.
They dove in and gave their very best to combat the pandemic.
They did so by looking after one another while taking outstanding care of our customers.
It's a point in time that I'll never forget.
It's a point in time that highlights the level of respect and admiration that I have for our team here at Jabil.
Their attitude and their actions continue to impress.
And for sure, there is no other team I'd rather be part of.
Our second quarter came in well ahead of expectations, driven by stronger than expected product demand, solid execution, and a well-balanced contribution throughout the entire company.
The team delivered core earnings per share of $1.27 and revenue of $6.8 billion, resulting in a core operating margin of 4.2%.
I'm really pleased with our financial results for the quarter.
Although, what's quite interesting to me is the overall construct of the business in combination with the improvements we've made to our balance sheet.
All in all, our performance during the first half of the year gives us excellent momentum as we push toward the back half of fiscal '21.
It also sets a firm foundation for further margin expansion as we look to FY '22.
I'd now like to share a pie chart which is indicative of our commercial portfolio.
Slide 6 underscores the effectiveness of our approach and the base from which we operate.
Today, our business is wide-ranging and resilient.
This is especially true when any individual product or product family is faced with a macro disruption or cyclical demand.
Furthermore, our current business mix provides a unique set of capabilities, innovative capabilities openly shared across the enterprise with speed and precision as we simplify the complex for our customers.
It's a proven formula that's trusted by many of the world's most remarkable brands.
Moving to Slide 7, I'll address our updated outlook for the year.
We now believe core earnings will be in the neighborhood of $5 a share, an increase of 25% from what we anticipated back in September, with top-line revenue coming in around $28.5 billion.
This incremental revenue improves our portfolio as evidenced by another 10-basis-point increase to core operating margin, which we now forecast to be 4.2% for the year.
Lastly, we remain committed to generating a minimum of $600 million in free cash flow, a testament to how we're managing our capital investments.
As I wrap up the outlook, it's notable that our strategy is working, our path is well understood, and how we go about producing results is important.
On this last point, when we think about the how, we think about purpose.
A purpose that guides us in our journey.
A purpose which is grounded in a series of behaviors.
Behaviors such as keeping our people safe, servant leadership, ensuring a fully inclusive environment, and giving back to our communities around the world.
I'm just so proud that our team is hitting the mark in all of these areas.
Their efforts over the past two to three years have allowed us to reshape the business as we've targeted growth in select markets.
Markets that largely align with secular trends.
A few example of these being 5G, personalized healthcare, electric vehicles, digital learning, cloud computing, clean energy, and eco-friendly packaging.
Our team continues to develop deep domain expertise in concert with these secular tailwinds.
I like the decisions we're making and what we're doing.
And we do what we do while respecting the environment and safeguarding our workplace.
We're committed to a workplace which encompasses tolerance, respect, and acceptance.
We encourage each and every employee here at Jabil to be their true self.
We strive to make the world just a little bit better, a little bit healthier, and a little bit safer each and every day.
One factor that makes good companies great is possessing a value system which allows them to solve problems over and over again.
As Mark has detailed, our second-quarter performance was outstanding, driven by the combination of broad-based end market strength and associated leverage, an improved portfolio mix, and excellent operational execution by the entire Jabil team.
We saw broad-based revenue strength across the business, most notably in mobility, cloud, healthcare, connected devices, automotive, and semi-cap.
Given the additional revenue, I am particularly pleased with the strong leverage we achieved during the quarter which enabled us to deliver a strong core operating margin of 4.2%.
And finally, our net interest expense came in better than expected during the quarter due in large part to better working capital management coupled with the proactive steps we've taken over the past year to optimize our capital structure.
Putting it all together on the next slide, net revenue for the second quarter was $6.8 billion, $300 million above the midpoint of our guidance range.
On a year-over-year basis, revenue increased by $700 million or 11%.
GAAP operating income was $236 million and the GAAP diluted earnings per share was $0.99.
Core operating income during the quarter was $285 million, an increase of 78% year over year, representing a core operating margin of 4.2%, a 160-basis-point improvement over the prior year.
Net interest expense in Q2 was $33 million and core tax rate came in at approximately 23%.
Core diluted earnings per share was $1.27, a 154% improvement over the prior-year quarter.
Now, turning to our second quarter segment results on the next slide.
Revenue for our DMS segment was $3.6 billion, an increase of 26% on a year-over-year basis.
The strong performance in our DMS segment was extremely broad-based as several of the end markets we serve are becoming increasingly critical such as connected devices, healthcare, automotive, and mobility.
Core margins for the segment came in at an impressive 5.1%, 210 basis points higher than the previous year.
An incredible performance by the team.
Revenue for our EMS segment was $3.2 billion, also reflecting strong broad-based demand.
Core margins for the segment were 3.1%, 80 basis points over the prior year.
Turning now to our cash flows and balance sheet.
Cash flows provided by operations were $20 million in Q2 and capital expenditures net of customer co-investments total $152 million.
We exited the quarter with a cash balance of $838 million.
We ended Q2 with committed capacity under the global credit facilities of $3.8 billion.
With this available capacity, along with our quarter-end cash balance, Jabil ended Q2 with access to more than $4.6 billion of available liquidity, which we believe provides us ample flexibility.
During Q2, we repurchased approximately 1.9 million shares or $82 million.
At the end of the quarter, $254 million remain outstanding in our current stock repurchase authorization and we intend to complete this authorization during the second half of FY '21 as we remain committed to returning capital to shareholders.
Turning now to our third-quarter guidance.
DMS segment revenue is expected to increase 19% on a year-over-year basis to $3.5 billion.
This is mainly due to the strong end-market outlook.
EMS segment revenue is expected to be $3.4 billion, an increase of 1% on a year-over-year basis.
It's worth noting, our EMS business remains strong and healthy.
The modest increase is reflective of our previously announced transition to a consignment model in the cloud business.
We expect total company revenue in the third quarter of fiscal '21 to be in the range of $6.6 billion to $7.2 billion for an increase of 9% on a year-over-year basis at the midpoint of the range.
Core operating income is estimated to be in the range of $220 million to $270 million.
Core diluted earnings per share is estimated to be in the range of $0.90 to $1.10.
GAAP diluted earnings per share is expected to be in the range of $0.69 to $0.89.
Next, I'd like to take a few moments to provide an update on the long-term secular trends under way across our businesses, which we believe will drive sustainable growth across the enterprise in FY '21 and beyond.
In healthcare today, the industry is undergoing tremendous change due to rising costs, aging populations, the demand for better healthcare in emerging markets, and the accelerated pace of change and innovation.
Consequently, we are witnessing healthcare companies shifting their core competencies away from manufacturing toward innovative and connected product solutions.
We're in the early days of outsourcing of manufacturing in the healthcare space.
On top of this, we're also seeing the impact of connectivity and digitization across healthcare.
I expect these trends to accelerate over the next few years.
Our deep domain expertise within the healthcare industry uniquely positions us to both technology-enabled products that help our customers excel in today's evolution of healthcare.
Another end market experiencing a rapid shift in technologies is the automotive market.
Today, electric vehicles account for less than 2% of total vehicles in the market.
Climate change, fuel efficiency, and emissions are ongoing concerns, and regulatory policies worldwide are beginning to mandate more eco-friendly technologies.
As a result, OEMs are making a substantial investment into vehicle electrification effort.
Jabil's long-standing capabilities and over 10 years of experience and credibility in this space has positioned us extremely well to benefit from this ongoing trend.
Turning now to 5G.
5G will transform the way we live, work, play, and educate.
As the underlying infrastructure continues to roll out, 5G adoption is accelerating.
Jabil is well-positioned to benefit from both the worldwide infrastructural labs and with devices which would be needed to recognize the full potential of a robust 5G network.
5G is also accelerating secular expansion of cloud adoption and infrastructure growth.
This, coupled with the value proposition Jabil offers to cloud hyperscalers, is helping us gain market share in an expanding market evidenced by the significant growth over the last three years.
The value proposition that continues to resonate with our customers is our design to those capabilities, which incorporates engineering, manufacturing, and eco-friendly decommissioning of servers, all within co-located facilities.
This is incredibly powerful as accelerating cycle times, security, and transparency at every step of the hardware lifecycle become continually more important to our U.S.-domiciled hyperscalers.
Shifting now to packaging.
We are uniquely positioned to benefit from the global shift to smart and eco-friendly packaging.
As consumers become more informed about the environmental impact of plastic waste, demand for sustainable packaging solutions is accelerating.
And then finally, within semi-cap, the demand for semiconductors has never been higher with the accelerated convergence of technologies and the associated data generation and storage needs.
Nearly every part of the economy runs on silicone today.
Jabil serves the semi-cap space with end-to-end solutions spanning the front end with design and complex fabrication equipment, along with the back end, the validation, and test solutions.
In summary, I'm extremely pleased with the sustainable broad-based momentum under way across the business which has allowed us to deliver much better than expected results in the first half of FY '21.
As we turn our attention to the back half of the year and beyond, we fully expect the long-term secular tailwinds that are driving our business to continue.
This, coupled with our improving portfolio mix and lower interest and tax expenses, has given us the confidence to meaningfully raise our FY '21 estimates for revenue, core operating income, core margins, and core earnings per share.
We now expect core operating margins to be 4.2% on revenue of approximately $28.5 billion.
This improved outlook translates to core earnings per share of approximately $5.
And importantly, despite the stronger growth, we remain committed to delivering free cash flow in excess of $600 million for the year.
We've been working extremely hard as a team to grow margins, cash flows, and positively impact our interest in tax.
I am very pleased with our team's exceptional execution of our strategy on all fronts.
As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address any customer or product-specific information.
We appreciate your understanding and cooperation.
Operator, we're now ready for Q&A.
| jabil raises outlook for fiscal year.
q2 non-gaap core earnings per share $1.27.
q2 gaap earnings per share $0.99.
q2 revenue $6.8 billion versus refinitiv ibes estimate of $6.56 billion.
sees q3 2021 net revenue $6.6 billion to $7.2 billion.
sees q3 2021 u.s. gaap diluted earnings per share $0.69 to $0.89 per diluted share.
sees q3 2021 core diluted earnings per share (non-gaap) $0.90 to $1.10 per diluted share.
expect fy21 to deliver revenue in range of $28.5 billion, core earnings per share of about $5.
|
We are joined here today by Bill Meaney, president and CEO; and Barry Hytinen, our EVP and CFO.
Today, we plan to share a number of key messages to help you better understand our performance, including our Q2 outperformance, the increased momentum in the business, our updated outlook for 2021 financial guidance, the continued growth in our data center business, and the strong performance in our growth areas.
In addition, we use several non-GAAP measures when presenting our financial results.
We have included the reconciliations to these measures in our supplemental financial information.
I hope you and your families are safe and well.
This strong performance in both Q2 and the first half of the year reflects the breadth and depth of our products and solutions and the strength of our deep customer relationships.
Our second-quarter results especially reflect increased demand for our services across our key markets and is based upon these strong results and the increased momentum in the business that has caused us to increase the midpoint of our financial guidance, as well has increased the expected bookings in our data center business.
As we celebrate and honor Iron Mountain's 70th anniversary this month, I am extremely proud of what our team has accomplished in growing our relationships with our large and diverse customer base in spite of the continued challenges due to COVID.
Our Mountaineers across the globe have conquered every obstacle with tenacity in an innovative mindset, all with a focus on accelerating growth in services to assist our customers.
Before we dive into our record results and the positive momentum in our business, I want to take a moment to reflect on the current situation with the pandemic and new variants still wreaking havoc in many parts of the world.
In addition to operational complexities, we're also dealing with the realities of the workplace and a world changed forever by the COVID-19 pandemic.
In Iron Mountain, we're thinking how we can move forward instead of getting back to normal, all while remaining diligent to ensure the physical and mental health, as well as the overall safety of our teams, their families and our customers.
As I mentioned earlier, this year, we celebrate 70 years of Iron Mountain.
It's a legacy with a rich inspired past, which continues inspiring the future.
Since that day on 24 August 1951, we have built, evolved and expanded our trusted relationship with our customers to include not just the leading storage platform of physical assets but now includes a rapidly increasing range of business services.
These new services are centered around data center colocation, information security, data insights, IT asset disposition and business process management.
And today, with this broadened portfolio of services and storage capabilities, we have become an innovative and global leader in our field with more than 225,000 customers, including more than 95% of the Fortune 1000, a global footprint of more than 1,450 facilities with a presence in 58 countries and 24,000 dedicated Mountaineers across the globe.
And doing all this with -- in an energy sustainable way with 100% of our data centers powered by renewable energy.
Many of the things about us have changed in 70 years.
What hasn't changed is our core values and commitment to building and delivering on the trust our customers have come to count on.
Over the last two quarters, we shared with you that we now have an expanded total addressable market, or TAM, of more than $80 billion.
And against that expanded TAM, we've identified the building blocks for growth that will enable future growth and success.
And in fact, you can already see evidence of this expansion through our year-on-year digital service revenue growth, together with secure IT asset disposition or ITAD.
In this quarter versus a year ago, these business lines have grown over 37%, resulting in $25 million of incremental growth.
I want to highlight a few examples which illustrate our progress in helping our customers through utilizing new technologically enabled approaches and products to not only protect, but unlock value from what matters most to them.
The first win I want to highlight is in Singapore with a multinational banking and financial services corporation.
We won a $750,000 annual recurring revenue digital mailroom contract over their current service provider.
At first, the bank didn't believe that Iron Mountain could solve this need for them as they had only known us to support their storage and scanning requirements.
However, the account team pursued the opportunity and highlighted Iron Mountain's strength utilizing a new technologically based approach, which allows us to assist in managing the very start of much of the information entering the bank while securely facilitating a hybrid office and home working model.
As we are already this customer's partner for business process outsourcing and processing much of the bank's critical information, the mailroom is a key additional service, which will yield further security and simplicity for the bank.
Turning to another area representing part of our expanded TAM, I want to touch briefly on Secure ITAD.
Think of this as an area where we apply our highly secure chain of custody with a service that allows our customers to dispose securely in an environmentally responsible way their IT assets, which are at end of life.
We have continued to see good momentum in our Secure ITAD solution following a number of big wins last quarter.
We won a deal with one of the world's largest banks to recycle corporate laptops, monitors, and outdated IT equipment across over 400 corporate offices, 4,000 conference rooms and 5,000 retail offices, which we expect to generate annual run-rate revenues greater than $5 million.
This is a valuable offering given our expertise in chain of custody and compliance, helping customers securely dispose of their IT equipment.
Turning to our data center business.
We want to share not only our continued growth in top and bottom line, but some recent exciting developments in the last month which has led us to increase our guidance for expected 2021 leasing from 25 to 30 megawatts to over 30 megawatts, not including additional leasing expected from the recent acquisitions in Frankfurt and India.
Our increased guidance around leasing activity is based upon the momentum we have seen in the business in the first half of the year, as well as the pipeline.
Today, we announced not only the 3.6 megawatts of new leases we signed in the second quarter, but also a six-megawatt lease with a new logo to our platform that was signed post Q2 in Northern Virginia.
Taken together, along with our strong results in Q1, we have recorded a total of 19 megawatts of new and expansion leases in the first seven months of the year.
This is a great launching off point for the remainder of the year, and we feel confident we will achieve leasing activity above the top end of our original guidance.
Turning back to Q2, it should be noted, of the 3.6 megawatts we leased in the quarter, the majority was in the retail and enterprise segments.
This resulted in attractive pricing for the quarter which increased 14% sequentially.
Our strongest markets in terms of new and expansion leasing were Phoenix, Singapore and Northern Virginia.
We have a new 27-megawatt greenfield build in London, adjacent to our existing London-1 facility, as well as the pending acquisition of a multi-tenant colocation data center in Frankfurt.
Taken together, this will increase our total potential capacity in Europe to more than 88 megawatts and will provide access to important interconnection markets for new and existing customers looking for a reliable, flexible and secure data center location.
As always, sustainability continues to be a top priority.
And as part of our commitments, we will power our new buildings in London and Frankfurt with 100% renewable energy.
Before I hand the call over, I also wish to touch upon some new product areas which are leading to more growth in our traditional storage areas.
One of these newer product offerings is Clean Start, which is a service that helps customers navigate today's changing workplace requirements from reconfiguring the office for social distancing to office closures or moving to a more digital way of working.
Since its inception, the Clean Start product has generated over $19 million in revenue and has uncovered 1.1 million net new cube over a three-year period.
In 2020, we decided to expand Clean Start globally with all regions engaged in growing the program.
Since taking the business globally, we have seen an acceleration in bookings.
Specifically, in the first half of 2021, Clean Start has delivered $5 million of new revenue or some 25% of the total revenue from this program since its inception three years ago.
A specific customer example in this quarter includes a $1.8 million deal with a leading global hotel chain over the next five years.
Due to challenges from the pandemic, the customer needed solutions to help with compliance and storage of materials.
This customer has been with Iron Mountain for years at an individual hotel level and its corporate team saw the value in our scale, breadth of offerings, compliance expertise in risk reduction solutions.
This prompted their decision to deploy our services across 103 hotels, plus an additional 15 one-off sites as required.
We were able to manage much more than just their record storage, also meeting the destruction needs and providing image-on-demand services, all of this being done companywide at a scale unmatched by any other provider.
Another example which showcases our innovative new products which drive record volume and services growth is Smart Sort.
Our customers want to reduce cost and risk by defensively destroying records as they meet retention requirements, which is difficult to do if records are not stored by the destruction eligibility date.
For example, many healthcare accounts store records by patient number or last date of visit and not by retention requirement.
With Smart Sort, we organize the records by destruction date so the customer knows what they can destroy and when.
Our team understood a pervasive customer problem, took a customer-centric approach and proactively came up with a solution to solve it with Smart Sort.
Just in the last year, we've had 10 healthcare vertical wins for Smart Sort with our most recent win with Johns Hopkins Medical Center.
The agreement is a five-year term which includes a $1.2 million Smart Sort move project, bringing an additional 160,000 cubic feet of inventory, representing over 4 million individual patient records.
Reflecting some of these successes, total global volume grew to a record 733 million cubic feet this quarter.
In spite of organic volume being down 10 basis points in the second quarter versus the first quarter, total global organic volume was up 1.6 million cubic feet in the first half of the year, and we continue to expect organic volume to be flat to slightly up for the full year.
This expected organic volume, together with continued strong price increases, sets us up well for continued strength in organic storage revenue growth from our physical business areas.
I'm extremely proud of their relentless dedication to each other and our customers.
With a resilient business model, ongoing market share growth and strategic investments to transform the company, we are excited about the significant opportunities ahead of us, which continue to exceed even our ambitious targets.
The second quarter exceeded our expectations across each of our key financial metrics.
Continuing the trend we have seen over the last few quarters, revenue continued to strengthen with a strong recovery in service revenue and activity levels.
Our core physical storage business performed well, and we are seeing great progress in our growth areas.
Reflecting that progress and the outperformance in the first half, we increased the midpoint of our financial guidance.
Turning to our results for the quarter.
On a reported basis, revenue of $1.1 billion grew 14%.
Total organic revenue increased 10%.
Organic service revenue increased $81 million or 26%, and was ahead of our expectations.
Our team drove strong growth in both our Global Digital Solutions business and Secure IT Asset Disposition.
Total organic storage rental revenue grew 2.5% with continued benefit from pricing, together with positive trends in volume.
Adjusted EBITDA was $406 million.
We exceeded the projections we shared on our last call as the team delivered better-than-expected Project Summit savings, together with the revenue beat.
AFFO was $246 million or $0.85 on a per-share basis.
If you recall, last year's AFFO benefited from a $23 million tax refund.
Adjusting for this, AFFO would have increased 8% year over year.
As we mentioned on our prior earnings call, AFFO also reflects an increase in recurring capex as we catch up on some projects that were deferred during the pandemic.
Our full-year recurring capex guidance is unchanged.
Turning to segment performance.
In the second quarter, our Global RIM business delivered revenue of $993 million, an increase of $116 million from last year.
On an organic basis, revenue increased 9.1%.
The team performed well with constant-currency storage rental revenue growth of 1.9% or 1.6% on an organic basis.
Growth was driven primarily by pricing and volume.
We added about 4.5 million cubic feet from our acquisition in Indonesia, which closed during the quarter.
Our traditional services business continued to recover from the pandemic with revenue growing 24% year over year and 4% from the first quarter.
Our Global Digital Solutions business continued to display strong momentum, growing 24% year over year.
Global RIM adjusted EBITDA was $430 million, an increase of $47 million year on year.
Adjusted EBITDA margin declined 50 basis points year over year as a result of mix given the strong service revenue growth.
Sequentially, EBITDA margin increased 110 basis points due to Project Summit benefits and the contribution from pricing.
Turning to our global data center business, where the team continues to perform exceptionally well.
We booked 3.6 megawatts in the quarter, and through the first half, we have booked 12.6 megawatts.
Subsequent to the end of the quarter, we signed a six-megawatt lease in Northern Virginia.
Based on the year-to-date performance and the strength of our pipeline, we increased our full-year leasing target to more than 30 megawatts, which would represent a 23% increase in bookings.
In terms of revenue, as we projected, growth accelerated sharply to 15% year over year.
We continue to plan for full-year revenue growth in the range of low double digits to approaching mid teens.
The combination of our strong prior-year bookings and the team's leasing performance year to date provides high visibility.
Adjusted EBITDA margin of 43.4% increased 60 basis points from the first quarter and was ahead of our expectations.
As compared to our prior outlook, the improvement was driven primarily by timing related to the Frankfurt build-out we discussed last quarter, which has been modestly delayed.
As a result, we now expect more of the work associated with that project to occur in the second half, which will result in a temporary impact on segment margins on the order of three points relative to the second-quarter level.
Turning to Project Summit, this quarter, the team delivered $42 million of incremental year-on-year adjusted EBITDA benefit.
With the strength of the team's performance year to date, we now expect year-on-year benefits from Summit to approach $160 million, with another $50 million of year-on-year benefit in 2022.
Total capital expenditures were $136 million, of which $100 million was growth and $36 million was recurring.
Turning to capital recycling.
As we have said before, we view the market for industrial assets as highly attractive as a means to supplement our growth capital.
With that backdrop, in the second quarter, we upsized our recycling program and generated approximately $203 million of proceeds.
Year to date, we have generated $215 million in proceeds, compared to our previous guidance of $125 million.
With our strong data center development pipeline, we are now expecting to generate full-year proceeds of approximately $250 million.
Turning to the balance sheet.
At quarter end, we had approximately $2.1 billion of liquidity.
We ended the quarter with net lease-adjusted leverage of 5.3 times, slightly better than our projection and down from both last year and last quarter.
This marks our lowest leverage level since year-end 2017.
As we have said before, we are committed to our long-term leverage range of four and a half to five and a half times.
For 2021, we expect to end the year within our target range and estimate we will exit the year at levels similar to the second quarter.
With our strong financial position, our board of directors declared our quarterly dividend of $0.62 per share to be paid in early October.
Turning to our outlook.
Today, we are pleased to increase the midpoint of our 2021 financial guidance.
There are three factors driving the improved projections.
First, operational performance in the second quarter was better than expected, and we have good momentum in our key growth areas.
Second, we have identified additional benefits from Project Summit, primarily related to opportunities that our commercial team has been able to uncover.
And third, we have acquired a small records management business in Morocco that will add about $5 million in revenue.
Conversely, as compared to our prior guidance, there are two headwinds I would call out.
First, we divested our Intellectual Property Management business in early June.
Compared to our prior guidance, this represents a reduction of approximately $20 million of revenue and $15 million of EBITDA.
dollar is more of a headwind by nearly $20 million for revenue and $7 million for EBITDA.
For the full-year 2021, we now expect revenue of $4.415 billion to $4.515 billion.
We now expect adjusted EBITDA to be in a range of $1.6 billion to $1.635 billion.
At the midpoint, this guidance represents growth of 8% and EBITDA growth of 10%.
We now expect AFFO to be in the range of $970 million to $1.005 billion.
And AFFO per share of $3.33 to $3.45.
At the midpoint, this represents 11% and 10% growth, respectively.
Our guidance assumes global organic physical volume will be flat to slightly positive versus last year.
And with continued benefit from pricing, we anticipate low single-digit growth in total organic storage revenue.
For services, we expect to maintain positive revenue growth through the remainder of the year.
With the ongoing pandemic, we believe it is helpful to share our short-term expectations.
For the third quarter, we expect revenue and EBITDA to both increase approximately $10 million sequentially from the second-quarter levels.
We expect AFFO to be slightly in excess of $250 million in the third quarter.
In summary, our team is executing well.
We have seen positive trends in the macro environment, and our pipeline continues to build.
The momentum we had entering the year has strengthened, our addressable market continues to expand, and we feel confident in our ability to drive growth.
We feel well-positioned and look forward to updating you on our progress during -- following the third quarter.
And with that, operator, please open the line for Q&A.
| q2 revenue rose 14 percent to $1.12 billion.
|
I'm Alexandra Deignan, the Company's Head of Investor Relations and Corporate Sustainability.
Today's discussion, it also includes certain non-GAAP financial measures that we believe are meaningful when evaluating the Company's performance.
Hosting our call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Evan Russo, our Chief Financial Officer.
Evan will start the discussion with an overview of our financial results.
Then Ken will provide his perspective on the outlook for our business.
After that, we will open the call to questions.
Third quarter revenue was a record $702 million, up 23% from a year ago.
Revenue for the first nine months was a record $2.2 billion, up 30% year-over-year.
In Financial Advisory, record third quarter revenue of $381 million increased 24% from last year's period, reflecting broad-based activity across sectors, market cap and regions.
Advisory revenue was driven primarily by M&A completions in the Americas and in Europe.
A high percentage of these were in the $1 billion to $10 billion range.
Private equity-related activity is increasing.
Year-to-date, our advisory revenue from transactions involving financial sponsors has more than doubled.
Our Private Capital Advisory franchise continues to show strength, as we advise financial sponsors globally on fundraising and innovative secondary market solutions.
As we've noted on previous calls, restructuring activity has been relatively subdued, reflecting the high level of liquidity across markets.
Our sovereign and capital markets advisory businesses remain active, advising governments and corporations on financing, capital structure and shareholder strategy.
Overall, our advisory activity is at an all-time high, and we currently expect record fourth quarter revenue for Financial Advisory, with strong momentum going into 2022.
Asset Management third quarter operating revenue of $311 million increased 19% from last year's period, reflecting a larger base of assets under management.
Average AUM reached a record high of $278 billion for the third quarter, 23% higher than a year ago and 1% higher on a sequential basis.
As of September 30, we reported AUM at quarter-end of $273 billion, 20% higher than last year's period and 2% lower on a sequential basis.
The decrease was primarily driven by negative foreign exchange movement of $3.3 billion and net outflows of $2.3 billion, partly offset by market appreciation of $0.8 billion.
The quarter's net outflows were primarily from equities, partly offset by net inflows in fixed income and alternatives.
Gross inflows continue to be healthy across our platforms.
As of October 22, AUM increased to approximately $279 billion, driven primarily by market appreciation of $6.6 billion and positive foreign exchange movement of $0.9 billion, partly offset by net outflows of $1.1 billion.
Our pattern of investment performance has been good this year.
Approximately two-thirds of our composite strategies are outperforming their benchmarks on a one-year basis.
Our recent investments in thematic, fixed income and alternative platforms, as well as their performance position them well for growth.
We see significant opportunities for growth in both of our businesses.
In Asset Management, we continue to invest in people, technology and our distribution effort, as well as the development of new and existing funds and the scaling up of our platforms.
These include the recent addition of a long/short equity team focused on the technology, media and telecom sector; the launch of a global investment-grade convertible bond fund; and a new quantitative small cap fund.
In addition, we have recently made senior hires in global marketing, in ESG and sustainability, and to support the expansion of US and European distribution.
We continue to see substantial opportunities to recruit talented investment teams, adding strategies that are complementary to our existing platforms.
In Financial Advisory, we are executing on our growth strategy with an elevated pace of strategic recruiting, especially in high-growth sectors such as biopharma, fintech, alternative energy and private capital.
While we continue to focus on internal promotes, year-to-date, we have made more than 20 senior hires, including MDs and senior advisors.
Now, turning to expenses.
Even as we invest for growth, we remain focused on cost discipline.
Our adjusted non-compensation ratio for the third quarter was 16.6% compared to 18.1% in last year's third quarter.
Non-compensation expenses were 13% higher than the same period last year, reflecting increased business activity and technology investments.
We continue to accrue compensation expense at a 59.5% adjusted compensation ratio in the third quarter.
Regarding taxes, our adjusted effective tax rate in the third quarter was 25.1%.
For the first nine months of the year, it was 26.2%.
We continue to expect this year's annual effective tax rate to be in the mid-20% range.
Lazard continues to generate strong cash flow, which supports return of capital to shareholders.
In the third quarter, we returned $103 million, which included $52 million in share repurchases.
During the quarter, we bought back 1.1 million shares of our common stock at an average price of $46.01 per share.
As of September 30, our total outstanding share repurchase authorization was $314 million.
Ken will now provide perspective on our outlook.
Market conditions remain excellent for both of our businesses.
In the US, economic growth is generally robust and a strong recovery appears likely to continue into next year.
In Europe, recovery remains on track as business conditions normalize.
The strength of economic demand, combined with pandemic-related labor shortages, is leading to supply chain disruptions and growing concerns about inflation, and these developments are driving a new set of discussions with CEOs, boards and institutional investors.
As travel restrictions ease, we are having more in-person meetings and reinforcing the personal engagement that's so important to both sides of our business.
The M&A environment continues to be as good as we've seen, and we are as active as we've ever been.
The forces driving global strategic activity remain in place.
Technology-driven disruption continues to be a catalyst for M&A across industries.
The global drive to reduce carbon emissions is an emerging catalyst.
And an abundance of private capital, alongside strategic capital, continues to drive activity.
On the investor side, demand for risk assets with a growing focus on sustainability continues to create opportunities for active managements to drive alpha.
Our Asset Management franchise is providing clients with a growing and innovative array of investment strategies and customized solutions.
The investments we've been making in both our businesses position us well for further growth.
We continue to invest in people, resources and technology to enhance our market capabilities, geographic reach and sector-specific expertise.
We remain focused on serving our clients well, while managing the firm for profitable growth and shareholder value over the long run.
Now, let's open the call to questions.
| compname reports q3 revenue rose 23% to $702 mln.
q3 revenue rose 23 percent to $702 million.
record financial advisory third-quarter revenue; high levels of activity globally.
record average assets under management of $278 billion in q3.
well positioned with unprecedented advisory activity.
|
To follow along with slides, please visit jabil.com with our -- within our investor relations section.
At the conclusion of today's call, the entire call will be posted for audio playback on our website.
These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2020, and other filings.
I appreciate everyone taking the time to join our call today.
At Jabil, it's people that drive our success.
And it's these same people that truly make us who we are.
Each day, they carry our culture and they cement our values.
The quarter came in ahead of expectations, driven by solid execution and a moderate uptick in demand.
Said differently, we saw well-balanced contributions across the company.
Altogether, the team delivered core operating income of $277 million on revenue of $7.2 billion, creating a core operating margin of 3.8% for the quarter.
For sure, I'm pleased with these results.
Although, what's most interesting to me is the current construct of the business and the improvements we've made to our balance sheet.
This powerful combination has us feeling confident as we look toward fiscal '22.
Moving to Slide 6, you'll see a pie chart.
A colorful chart that represents our commercial portfolio and underscores the effectiveness of our team.
Today, our business is diversified and is diversified at scale, providing more resiliency than ever before.
And in my opinion, it offers Jabil a real competitive advantage, especially when we consider our performance and the sustainability of the business.
Furthermore, each individual piece of the pie harbors specific domain expertise and deep technical knowledge, all of which make up our library of essential and valuable capabilities.
Add to this the method in which our team weaved together these capabilities.
It elevates the way in which we serve our customers, particularly when we move with speed and precision.
This approach is enabled by our structure and open collaboration across the enterprise.
And when it's done correctly, it yields a proven formula that allows us to simplify the complex for many of the world's most remarkable brands.
And looking at the slide, you can see the earnings power of the company and imagine our potential as we look to FY '22 and beyond.
For this year, we now anticipate core earnings per share to be in the range of $5.50 on revenue of $29.5 billion.
But most importantly, we're maintaining our outlook of 4.2% for core operating margin and increasing our outlook for free cash flow by 5% to $630 million.
For me, a positive testament on how the team is managing the business.
In wrapping up our forecast for FY '21, I'd like to note, when we communicate inside the company, our strategy is understood and our path is clear.
During these internal discussions, the thing that stands out to me is our team's obsession with how we produce outcomes.
And when we think about the how, we think about our behaviors.
Behaviors such as keeping our people safe, servant leadership, ensuring a fully inclusive work environment, and giving back to our communities.
I'm proud that our teams dialed in on all of these areas.
In fact, their conduct is exceptional.
Consistent with the past few years, we're looking forward to hosting our annual investor briefing.
We'll open the session by reporting our fourth-quarter and full-year results.
We'll then follow with a complete review of our priorities.
And we'll connect the dots on how these priorities will guide us throughout fiscal '22.
Add to this, a discussion on end markets and our observations specific to the macro environment.
Our management team will also share how we plan to expand core operating margin year on year.
In addition, we'll also describe the hard work put forth that reinforces our goal to deliver double-digit growth in core earnings per share and free cash flow for fiscal '22.
In wrapping up the September session, Mike will break down the shape of the year and share our capital return framework for the coming one to two years ahead.
We have lots to share and we have a good story to tell.
Their efforts over the past two to three years have allowed us to reshape the business as we've targeted growth in select markets.
A few examples of these markets are areas of 5G infrastructure, electric vehicles, personalized healthcare, cloud computing, clean energy, and eco-friendly packaging.
I really like the decisions we're making, and we're doing so while ensuring each employee can be their true self while respecting the environment in which we work.
In closing, we've made tremendous progress financially, operationally, and commercially.
At Jabil, we solve problems over and over again.
As Mark just highlighted, our third-quarter results were very strong, driven higher by the combination of continued end-market strength and excellent operational execution by the entire Jabil team.
In Q3, we saw continued strength with notable revenue upside during the quarter in mobility, cloud-connected devices, and semi-cap relative to our plan 90 days ago.
Given the additional revenue, I'm particularly pleased with the strong leverage we achieved during the quarter, which enabled us to deliver a solid core operating margin of 3.8%, approximately 30 basis points higher than expected.
In Q3, our interest and tax expense also came in better than expected.
The compounding effects of higher revenue and the associated leverage, along with lower interest and tax expense, allowed us to deliver strong quarter diluted earnings per share in Q3.
Putting it all together on the next slide.
Net revenue for the third quarter was $7.2 billion, approximately $300 million above the midpoint of our guidance range.
On a year-over-year basis, revenue increased 14%.
GAAP operating income was $240 million and our GAAP diluted earnings per share was $1.12.
Core operating income during the quarter was $277 million, an increase of 61% year over year, representing a core operating margin of 3.8%, a 110-basis-point improvement over the prior year.
Net interest expense in Q3 was $36 million and core tax rate came in at approximately 18%.
Core diluted earnings per share was $1.30, a 251% improvement over the prior-year quarter.
Now, turning to our third-quarter segment results in the next slide.
Revenue for our DMS segment was $3.6 billion, an increase of 21% on a year-over-year basis.
The strong year-over-year performance in our DMS segment was broad-based, with strength across our connected devices, healthcare, automotive, and mobility businesses.
Core margins for the segment came in at 3.9%, 140 basis points higher than the previous year.
An incredible performance by the team.
Revenue for our EMS segment also came in at $3.6 billion, reflecting strong year-over-year growth in our cloud and semi-cap businesses.
Core margins for the segment were 3.8%, up 90 basis points over the prior year, reflecting solid execution by the team.
Turning now to our cash flows and balance sheet.
Cash flows provided by operations were $585 million in Q3 and capital expenditures net of customer co-investments total $197 million.
We exited the quarter with cash balances of $1.2 billion.
We ended Q3 with committed capacity under the global credit facilities of $3.8 billion.
With this available capacity, along with our quarter-end cash balance, Jabil ended Q3 with access to more than $5 billion of available liquidity, which we believe provides us ample flexibility.
During Q3, we repurchased approximately 2.5 million shares for $130 million.
At the end of the quarter, $124 million remain outstanding in our current stock repurchase authorization and we intend to complete this authorization during Q4 as we remain committed to returning capital to shareholders in FY '21 and beyond.
Turning now to our fourth-quarter guidance.
DMS segment revenue is expected to increase 11% on a year-over-year basis to $3.95 billion.
This is mainly due to strong end-market outlook.
EMS segment revenue is expected to be $3.65 billion, a decrease of 2% on a year-over-year basis.
It's worth noting, our EMS business remains strong and healthy.
The modest decrease is reflective of our previously announced transition to a consignment model, offset by higher server volumes in the cloud business.
We expect total company revenue in the fourth quarter of fiscal 2021 to be in the range of $7.3 billion to $7.9 billion for an increase of 4% on a year-over-year basis at the midpoint of the range.
Core operating income is estimated to be in the range of $280 million to $340 million for a margin range of approximately 3.8% to 4.3%.
Core diluted earnings per share is estimated to be in the range of $1.25 to $1.45.
GAAP diluted earnings per share is expected to be in the range of $1 to $1.20.
Next, I'd like to take a few moments to highlight our balanced portfolio of businesses by end market.
Today, both segments are in incredibly good shape.
Last quarter, I highlighted some long-term sustainable secular trends in strategically important end markets such as healthcare, automotive, connected devices, 5G, cloud, and semi-cap, all of which continue to show strong performance for the balance of FY '21 and beyond.
In tandem with this, in more foundational areas of businesses like print, retail, mobility, networking, and storage, we've retooled, reoptimized, and reimagined our long-standing partnerships with some of the best brands in the world by leveraging Jabil's differentiated capabilities to deliver successful solutions to our customers.
The resiliency in our portfolio, coupled with the long-term secular trends under way across our businesses, we believe, will continue to drive sustainable growth across the enterprise in FY '21 and beyond.
Putting it all together for the year on the next slide.
For FY '21, we expect core operating margins to be 4.2% on revenue of approximately $29.5 billion.
This improved outlook translates to core earnings per share of approximately $5.50.
And importantly, we now expect to deliver more than $630 million in free cash flow despite the stronger growth.
In summary, I'm extremely pleased with the sustainable broad-based momentum under way across the business, which has allowed us to deliver much better-than-expected results through the first nine months of fiscal '21.
As we enter Q4 and look beyond, we fully expect the long-term secular tailwinds that are driving our business to continue.
This, coupled with our improved portfolio mix and lower interest and tax expenses, gives me confidence around continued margin accretion and strong earnings growth in FY '22.
We've been working extremely hard as a team to grow margins, cash flows, and positively impact our interest and tax.
Seeing this hard work manifest in strong financial results is a testament to the exceptional execution by our teams on all fronts.
As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address any customer- or product-specific questions.
We appreciate your understanding.
Operator, we are now ready for Q&A.
| compname posts q3 gaap earnings per share $1.12.
q3 non-gaap core earnings per share $1.30.
q3 gaap earnings per share $1.12.
q3 revenue $7.2 billion versus refinitiv ibes estimate of $6.95 billion.
sees q4 revenue $7.3 billion to $7.9 billion.
sees q4 gaap earnings per share $1.00 to $1.20.
sees q4 core earnings per share $1.25 to $1.45.
compname says now expects fy21 revenue to be in neighborhood of $29.5 billion, with core earnings per share of about $5.50.
|
In just a moment, we will share some brief remarks and then open it up for Q&A.
And on our call today, we have our chairman of the board and CEO, Gary Kelly; executive vice president and incoming CEO, Bob Jordan; executive vice president and CFO, Tammy Romo; executive vice president and chief commercial officer, Andrew Watterson; and president and chief operating officer, Mike Van de Ven.
Just a few quick notes.
And second, we had a few special items in our fourth quarter results, which we excluded from our trends for non-GAAP purposes, and we will reference these non-GAAP results in our remarks today.
So, with that, I have the pleasure of turning it over one last time to my friend, Gary Kelly.
And first and foremost, I'm delighted to be able to say there were earnings and better than we thought at Investor Day last month.
It's obviously a great way to end a tough, but much improved year, a great way to start a new year.
We're, of course, finding our way through the Omicron surge in January, February, and looking forward to a strong rebound in March and thereafter.
And, as always, as barring any unforeseen events, I expect we'll make great progress in 2022 and will enjoy another much improved year.
As we all know too well, it will not be without its challenges.
But, our people and our leadership are more than up to the task.
I'm enormously proud of all of them.
They've just done a phenomenal job.
Southwest is on top, because our people deliver great service, low fares and our business model delivers consistent profits and handsome returns on capital.
And we've emerged from two years of pandemic with our balance sheet strength and our liquidity intact.
And we are perfectly positioned to restore, to expand, and compete aggressively in the coming years.
And I could not be more enthused and more excited about our future.
We were last together on December 8th at Investor Day, and a lot has happened since then.
Gary is a phenomenal leader and done so much for Southwest and for me personally.
And I'm thrilled that he will be our executive chairman.
I'll take over the CEO responsibility for investor meetings going forward.
So, this is Gary's last earnings call.
Well, 2022 has had a challenging start, but that doesn't change our goals for the year, getting properly staffed focusing on our people, making meaningful progress returning to our historic operational reliability and efficiency, providing our legendary hospitality, and returning to consistent profitability.
We made significant progress in '21, including a profitable fourth quarter, despite the pandemic and saw strong demand.
88% of 2019 revenues restored and managed business demand ahead of our expectations for December.
While we don't expect to be profitable this quarter, the omicron impact does appear to be isolated to January and February, and we expect a profit in March, expect to be profitable in the remaining quarters and for the full year 2022 based on our current plans.
Our people performed just really well during fourth quarter as they always do, and particularly during the holidays and demand held up well through year and despite the omicron variant.
Beginning in early January, we experienced a very difficult environment due to rapidly rising COVID cases and a decrease in available staffing levels.
It's amazing, when in the first three weeks we had roughly 5,000 employees test positive for COVID, with employee cases roughly two and a half times what they were during the delta variant.
The resulting staffing shortage combined with winter weather caused a spike in flight cancels and a significant disruption to the operation.
I'm pleased to report though that over the last few weeks, the operation and staffing has stabilized, and we've seen performance even better than during the holidays.
Yesterday, for example, we were 95% on time, which I'm just usually proud of.
To maintain sufficient available staff, we extended incentive pay programs for ops employees through early February.
While that does add temporary cost pressure, it's imperative that we have sufficient staff to operate our schedule and minimize our flight cancellations.
COVID case counts are on a downward trend and we intend to normalize our staffing and pay structure as a result.
Hiring is part of the equation, of course, and we met our 2021 hiring goals and we are on track with plans to add at least 8,000 employees this year.
We're also raising our starting wage rates to be competitive in the market and due to the impacts from omicron and the variant and recent staffing challenges.
And we're further moderating our first half 2022 capacity plans to provide additional buffer for the operation.
We're encouraged by the recent improvement in bookings across the booking curve, especially in the March timeframe and we are hopeful that business travel resume the 2021 trend.
It appears that omicron impacts are pretty well contained to January and February from a revenue perspective, and we believe our temporary approach to boost available staffing is working.
We'll stay flexible, of course, and we'll be willing to further adjust our plans if needed.
So, several things have transpired since Investor Day, all driven by the pandemic though, but for omicron, we would be on our Investor Day Q1 and full year 2022 guidance.
However, I want you to know, make no mistake, we are laser focused on preserving our low cost position in the industry and returning to 2018 productivity and efficiency levels by the end of 2023.
We believe Q1 CASM-X as a peak, and our plans call for unit cost to ease from here into 2023.
Looking at 2023 based on current growth plans, we expect CASM-X to be down as compared to 2022.
Restoring both, the network and our fleet efficiency are key to returning to historic efficiency levels.
And beyond that, I'm really excited about opportunities that continue network growth as we add gates in key cities such as Denver and Phoenix and Las Vegas, Baltimore, Nashville, and even more.
Beyond 2023, we see opportunities to meet and then beat our historic productivity and efficiency levels as we continue to grow the company and focus on modernizing our operational tools and processes.
And Mike will talk more about that.
But I want to repeat my main message from Investor Day.
Despite the near-term noise, we have a superb business model, the substantial underlying competitive advantages.
We have a great five-year strategy and a strong set of initiatives that will drive significant value.
Our new co-brand credit card agreement is in place with a partner Chase, our GDS expansion is complete, and our Southwest business team is armed with the tools they need to grow our business customer base.
We continue to work on our new fare product and our revenue management system optimization, so more to come there.
But both should begin producing value this year.
And as we continue retiring older 737-700 aircraft and taking the MAX aircraft this year, in support of our fleet modernization initiatives as well.
All combined, these initiatives are expected to deliver incremental EBIT of 1 to 1.5 billion in 2023, and we continue to expect roughly half of that value this year, given the initiatives in place.
There have been all kinds of challenges and they have performed just superbly.
They continue to do an incredible job and manage through all of these challenges, and I am just in awe of them.
And together, we will emerge from the pandemic, and we will seize the opportunities in front of us.
I've worked with Bob for a long time, and I agree with Gary.
He is going to be a great CEO.
And I'm not going to say anything else because I will get choked up.
It is their hard work, dedication, and focus that enabled us to achieve an important milestone in our recovery with our first quarterly profit since the pandemic began.
We reported a $68 million profit in fourth quarter or $0.11 per diluted share.
And excluding special items, we reported an $85 million profit or $0.14 per diluted share.
As Bob mentioned, our fourth quarter profit was driven by strong leisure demand during the holidays, business travel momentum, and incremental revenue from our new co-brand credit card agreement with Chase.
Our fourth quarter results were all within the guidance ranges provided last month at Investor Day.
For full year 2021, our net income was 977 million or $1.61 per diluted share, driven by 2.7 billion of payroll support program proceeds.
Excluding this temporary benefit to salary, wages, and benefits expense, and other smaller special items, our full year net loss was 1.3 billion or a $2.15 loss per diluted share.
Andrew will cover our revenue trends and outlook here in a minute.
Taking a look at cost.
We continue to experience inflationary cost pressure experienced in fourth quarter, primarily in salary, wages and benefits and airport costs as expected.
A portion relates to hiring, and we made great strides toward our hiring efforts in 2021 and remain on track with plans this year.
And, of course, the labor market continues to be a challenge, which continues to pressure wage rates across the board.
Since Investor Day, we have experienced additional cost pressures related to omicron and winter weather.
As a result, our first quarter unit cost inflation compared with first quarter 2019 and excluding fuel special items and profit sharing has increased about 10 points.
Roughly half of that increase is driven by the 150 million of additional incentive pay we are offering to operations employees to early February, and the other half is associated with flying fewer ASMs than we were planning.
In light of the significant impact from the omicron wave on available staffing, extending the temporary incentive pay and further reducing our capacity were necessary steps to stabilize the operation.
Aside from these impacts, we would be on track with our previous unit cost outlook.
Market fuel prices have continued to rise here, which also resulted in a $0.10 increase in our fuel cost per gallon guidance.
Our estimated first quarter fuel price in the $2.25 to $2.35 per gallon range is also roughly $0.25 higher than our first quarter 2019 fuel price, and that's inclusive of an estimated $0.35 of hedging gains here in the first quarter.
Turning to our full year guidance.
At Investor Day, we were planning for capacity to be roughly flat versus 2019 levels with no material impact from the omicron variant on either revenues or costs at that time.
Fast forward to today, the impact from the omicron variant on available staffing has led us to reevaluate our first half 2022 capacity plans, in particular March through May.
Our planned flight schedule adjustments take some capacity upside optimism off the table for this year and reduces our full year 2022 capacity outlook by about four points from roughly flat to down 4% versus 2019.
I've already covered the 150 million of additional incentive pay in first quarter.
And in order to be more competitive on the hiring front, in particular for ground operations, we are raising starting wage rates from $15 per hour to $17 per hour, which is estimated to be a 20 to $25 million total impact to this year.
And of course, we have contemplated labor rate inflation in our guidance as best we can for this year, understanding that the market is somewhat uncertain.
This is clearly not where we hope to be along our recovery curve nearly two years into this pandemic, but we are making great progress.
While we must remain nimble in this environment, it takes the necessary actions to take care of our employees and provide a reliable product for our customers.
We are very focused on the long term and determined to get back to 2018 levels of productivity and efficiencies as we shared with you all at Investor Day.
As Bob said, our goal is to get there by the end of next year.
Although it is early based on our current plan for 2022 and preliminary plan for 2023, we expect 2023 CASM-X will decline year over year compared with 2022.
Longer term, our framework that we provided at Investor Day remains unchanged, and that includes a post-pandemic target of mid-single-digit ASM growth accompanied by low single-digit CASM-X growth.
I want to be clear that our longer-term CASM-X framework includes an estimate for labor rate increases as best we can estimate today.
We currently have 77 MAX firm orders and 37 MAX options with Boeing this year.
While our plan assumes we will exercise the remaining 37 options this year, we maintain the flexibility to evaluate that intention as decision points arise.
We continue to believe that taking the additional options this year will yield a positive NPV on aircraft replacement if we don't deploy them in the network.
As I have mentioned to you all before, we won't incur a material CASM-X penalty from holding on to extra aircraft in the event we temporarily park some of our -700 while capacity is moderated this year.
As we work our way back to an efficient utilization of the fleet, we remain in the fortunate position to have the flexibility needed with our retirement plans without a financial penalty.
I'll wrap up with a quick note on our balance sheet strength.
We ended 2021 with liquidity of 16.5 billion, our leverage is at a very manageable 54%, and we continue to be the only U.S. airline with an investment-grade rating by all three rating agencies, which I believe is one of our key competitive advantages.
We have ample liquidity that allows us for a further cushion in the event of further COVID wave.
Overall, our balance sheet strength puts us in a category of one in terms of our ability to withstand shocks and remain financially healthy.
I'll also start by extending my gratitude to Gary.
I'll be forever grateful for all that he taught me with his words and its actions.
Looking back to our last earnings call in October, we were dealing with a delta variant.
The negative revenue impact to Q3 was $300 million.
At that time, we estimated negative revenue impact to Q4 of $100 million.
Revenue trends have begun to pick up -- pick back up and stabilize in mid-September, and our outlook called for a sequential monthly improvement in revenues throughout Q4.
We reaffirmed this in our early December investor update, and we closed the quarter strong.
Our operating revenues finished within guidance, down 11.8%.
And managed business revenues came in better than guidance, down 50% in December.
The negative revenue impact from the delta variant came in lower than we thought at around $60 million as we saw a continued rebound in demand and yields throughout the quarter.
However, we saw some choppiness in late December from decelerating bookings and increasing cancellations, and we had a $30 million negative revenue impact from the omicron variant as COVID cases increased.
Combined, this $90 million COVID impact in Q4 was slightly less than our original estimate of $100 million from COVID as we were able to mitigate some of the load factor decrease through higher yields.
And, of course, the most notable item in Q4 was incremental revenue from our new credit card agreement with Chase, which we covered at Investor Day and included in our most recent revenue guidance.
While we can't share the specifics about the incremental revenue from our new credit card agreement, you can see that other revenues in fourth quarter 2021 increased 20% compared with Q4 2019 while outpacing the recovery in passenger revenue, and we are on track for expected benefits in 2022.
Our new markets continue to develop and perform overall in line with expectations aside from the impacts from the delta and omicron waves.
Hawaiian markets also showed improvement, and all of these markets turned in line with a broad-based improvement we saw across the rest of the network.
Now, looking at first quarter, we estimate the weather-related and staff-related flight cancellations in January, resulting in a $50 million negative impact to operating revenues.
Additionally, bookings have slowed for January and February, which are seasonally low travel periods anyway for leisure.
And trip cancellations were running quite high, beginning in early January but have moderated and are back to normal trends.
We expect the omicron-related negative revenue impact to January and February combined to be roughly $330 million.
Like the delta variant, the impact of omicron-related trip cancellations has been mainly focused in the closed-in window, and we remain optimistic about the likelihood of demand recovery and time for spring break travel.
On the corporate travel side, the business demand we experienced in December has slowed, but we continue to believe there is pent-up demand for business travel, and we are hearing from many of our corporate customers that they intend to ramp up travel post-President's Day.
I think that will depend on where we are with COVID case counts and hospitalizations, but we are encouraged by what we are hearing from our customers in terms of their future travel plans.
We expect first quarter managed business revenues to be down 45 to 55% versus 2019, and improve sequentially from January through March.
And our Southwest and GDS business initiatives is also on track for expected benefits in 2022.
When you put all these moving parts together, that gets us to our first quarter operating revenue guidance of down 10 to 15% versus first quarter 2019.
This outlook is in line where we were in the fourth quarter, but we are currently expecting a step change in improvement in March.
As far as our other initiatives, new fare product remains on track for deployment by midyear, and the new revenue management system continues its progressive rollout.
And lastly, we're in the process of adjusting our published flight schedules in March through May in order to further support the operations and adjust to available staffing trends.
The result of this exercise, combined with the flight cancellations we have experienced so far this month, is a three-point reduction in first quarter 2022 capacity from down 6% to down 9% compared with the first quarter 2019.
And for full year 2022, as Tammy mentioned, it's a four-point reduction from roughly flat to down 4% compared with the full year 2019.
Our flight schedules remain subject to further adjustments, if needed.
But while this is a slight delay to our previous capacity plan, we still have time to get back on track.
As of March 2022, we are roughly 75% restored based on trips, and we continue to expect to restore the vast majority of our route network by the end of 2023.
Our people did face quite a bit of adversity in 2021, and I just am really proud of their tremendous finish to the year, and they've built quite a bit of momentum thus far into 2022.
As we've all said, we've moderated or we began moderating our capacity in the fourth quarter to provide more staffing cushion in the environment.
And we needed all hands on deck to those periods, and we incented folks, and we urge them or those that were willing to pick up open time or voluntarily work on their days off with premium pay.
And that certainly worked.
Our people really responded.
And our on-time performance for that period was 87%, and that was better than our five-year average.
So, we ran a similar play over the Christmas holiday, and our daily trips there increased to roughly 3,600 a day.
And again, our people responded.
So normally, during the Christmas holiday, we deal with weather, but this year, we also saw the beginning of a sudden and the surging spike in COVID cases.
And because we had those people to pitch in to pick up extra shifts during that week of Christmas, we had a completion factor of 99.2%, and we had less than 1% of our flights canceled in the face of that COVID surge.
All told, we ended up the fourth quarter with an on-time performance of 72.6%, mainly due to some of the challenges we faced in October.
That's certainly not up to our standards.
We must do better, and we will.
But our holiday performances were very good, and we know that we can operate in our peak travel days when everyone is available.
So, we really have momentum to build on.
So, in contrast to those previous holiday periods, January started in the face of severe weather and this omicron variant spreading rapidly.
And as Bob mentioned, we had roughly two and a half times the number of employees with COVID cases for omicron than we did with delta.
And we had roughly 5,000 employees become sick in the first three weeks of January.
And so, the biggest impacts were in terms of flight cancellations for the period of time, the first week of January, January 1 through January 7.
And that week, we canceled roughly 3,800 flights.
About 1,900 of those were for weather, and about 1,600 of those were for staffing.
And then our on-time performance of that period was 41.5%.
So we reinstated the incentive pay program to encourage again those who would come in and pick up extra shifts and help cover the flight schedule.
And again, the response was superb.
We got all that implemented.
And so from January 9th through the 25th, our on-time performance jumped to almost 87%, and that leads the industry for marketing carriers, and the incentive pay program runs through February 8.
We're also benefiting from a decline in our employees that were sidelined due to COVID.
Our case counts peaked in that first week of January.
And just by way of example, we had over 700 pilots and 1,500 flight attendants that were able to work in that time frame.
And thus, the incentive program to help cover those that were out.
Those COVID numbers have dropped substantially since then to roughly 100 to 150 people for each group, and that's a lot closer to what we originally expected.
Next, we continue to aggressively hire.
Bob mentioned that getting staffed is one of our key objectives of 2022.
We also want to make progress toward our historic operational reliability and efficiency metrics.
And then a lot of ways, those go hand in hand as we're not operating at optimal levels today, nor is our network restored to where we want to be relative to 2019.
For the over 8,000 employees that we intend to hire this year, about 40% of them are fly crews, about 40% of them are ground operations.
So, it's very heavily operations-focused to support the schedule this year and beyond as we resume the growth.
As we restore the route network this year into 2023, that should provide the foundation to recapture better operating leverage.
And we're also working on other initiatives to improve efficiencies.
Of course, we've got the fleet modernization cost initiative, but we're also working on things like enhancing our turn times, which are already the best in the industry; expanding self-service options for our customers; and investing in daily schedule management tools, which will help us manage regular operations more efficiently.
So we've got many items in our technology and process improvement pipeline in order to support our low-cost position within the industry and improve our overall efficiency and our resilience.
Just in closing, as we move forward into 2022, we have an exceptional order book for the fleet with its economics and its flexibility.
We have new technology foundations in place for our maintenance and our airport systems.
We have a laser focus on getting staffed and running a reliable operation.
And we're building an operations modernization portfolio of initiatives that I touched on.
And our employees have sacrificed.
They've worked hard through a challenging and ever-changing environment.
And I think that positioned us well to carry this January momentum through the first quarter and beyond.
So, I am immensely grateful for the grit, their determination and, of course, their care for our customers.
And so, with that, Ryan, back to you.
I believe we have analysts queued up.
| compname says qtrly adjusted earnings per share $0.14.
southwest airlines - qtrly earnings per share $0.11; qtrly adjusted earnings per share $0.14.
southwest airlines - with omicron variant and weather impacting our results, expect losses in jan and feb and a return to profitability in march 2022.
southwest airlines - leisure travel demand was strong, particularly during holidays, and business revenues continued to recover compared with 2019 levels.
southwest airlines - experiencing higher unit cost inflation in 2022 as we continue to navigate the pandemic.
southwest airlines - temporarily extended incentive pay for operations employees through early february 2022.
southwest airlines - omicron variant has delayed the demand improvement we were previously expecting in early 2022.
southwest airlines - omicron variant significantly impacted available staffing beginning in early jan 2022.
southwest airlines - sees q1 operating revenue compared with 2019 down 10% to 15%.
southwest airlines - sees q1 asms compared with 2019 down about 9%.
southwest airlines - sees q1 casm-x compared with 2019 up 20% to 24%.
southwest airlines - sees q1 load factor 75% to 80%.
|
As always, we appreciate your interest.
Brent Wood, our CFO, is also participating on the call.
We refer to certain of these risks in our SEC filings.
We hope everyone and their families remain well and out of harm's way.
They've done a great job transitioning our operating strategy quickly and doing so while working remotely.
Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
The team had a solid quarter, producing such stats as funds from operations came in above guidance, up 9% compared to second quarter last year.
This marks 29 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
And for the year, FFO per share is up 9.5%.
Our quarterly occupancy was high, averaging 96.6%, leaving us 97.5% leased and 97% occupied at quarter end, ahead of our projections.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last-mile delivery trends, also benefiting our occupancy as a high year-to-date retention rate of 84%.
Re-leasing spreads were strong for the quarter at 13.8% GAAP and 7.9% cash.
Year-to-date leasing spreads are higher at 20.1% GAAP and 11.5% cash.
Finally, same-store NOI was up 4.1% for the quarter and 3.9% year-to-date.
In sum, during an extremely choppy environment, I'm proud of our team's results.
Our strategy remains one of maintaining occupancy and cash flow with an eye on liquidity.
I'm hopeful our strategy will shift again later in 2020 to focus on growth.
Brent will give you color or commentary about our upcoming debt placement, further improves our liquidity while lowering our cost of capital.
I'm grateful we ended the quarter generally full at 97.5% leased, while Houston, our largest market at 13.8% of rents, is 97.9% leased, has roughly a 4% square footage roll through year-end and a five-month average collection rate on rents of over 99%.
My five months used being the length of this pandemic to date.
Company level rent collections remain resilient.
For July thus far, we've collected 95% of rents.
The unknown is when the economy truly reopens, how fast it will reopen, in which cities and are there any shutdowns remaining.
We and everyone else simply have less clarity than normal even several months into this.
Brent will speak to our budget assumptions, but I'm pleased that with our second quarter results and a realistic plan, we can reach $5.28 per share in FFO.
We are only $0.02 shy of our original pre-pandemic expectations.
As we've stated before, our development starts are pulled by market demand.
With the shutdown, we reduced projected 2020 starts to reflect first quarter actual starts as well as some level of pre-lease conversations under way.
In other words, we're not forecasting new spec developments at this time.
We're also looking at acquisitions and value-add investments in the same light.
Given the positive long-term distribution trends we foresee, we're working on several land sites which we view as valuable development parcels when the economy stabilizes.
And in the meantime, we view operations, working with our tenants and maximizing liquidity as the key goals until we reach the next market phase.
And now Brent will review a variety of financial topics, including our updated 2020 guidance.
Our second quarter results reflect the resiliency of our team and strong overall performance of our portfolio amid unprecedented conditions.
FFO per share for the second quarter exceeded our guidance range at $1.33 per share and, compared to second quarter 2019 of $1.22, represented an increase of 9%.
The outperformance was primarily driven by our operating portfolio, maintaining occupancy and collections better than we had estimated in April, which was the initial onset of the pandemic.
I will center my comments around our capital status, rent collections and deferment requests and assumption changes that increased the midpoint of our FFO per share estimate.
During the second quarter, we raised $30 million of equity at an average price of $123 per share.
And earlier this month, we agreed to terms on two senior unsecured private placement notes totaling $175 million.
The $100 million note has a 10-year term with a fixed interest rate of 2.61%.
The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%.
We anticipate closing on both notes in October.
That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength, which is serving us well during this time of uncertainty.
Our debt-to-total market capitalization is 21%, debt-to-EBITDA ratio is 5.1 times, and our interest and fixed charge coverage ratios are over 7.2 times.
Our rent collections have been equally strong.
We have collected 98.1% of our second quarter revenue and entered into deferral agreements for an additional 0.8%, bringing our total collected and deferred to 99% for the second quarter.
As for July, we have collected 95.5% of rents thus far and have entered into deferral agreements on an additional 0.7%, bringing the total of collected and deferred for the month to 96.2%.
That is slightly ahead of June's pace.
Last April, we reported that 26% of our tenants have requested some form of rent deferment.
In the three subsequent months, that has only risen to 29%.
We have denied 79% of the request, are in various stages of consideration on 8% and have entered into some form of deferral agreement with 13% of the request.
The rent deferred this far totals $1.5 million, which only represents approximately 0.4% of our estimated 2020 revenues.
As we stated last quarter, the depth and duration of the pandemic and its impact on the economy is undeterminable.
However, the menacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for in April did not occur in the second quarter.
As a result, our actual performance and revised assumptions for the remainder of the year increased our FFO earnings guidance by 2.1% from a midpoint of $5.17 per share to $5.28 per share or a 6% increase over 2019.
Among the changes were an increase in average occupancy from 95.2% to 96% and a decrease in reserves for uncollectible rent from $3.8 million to $3.6 million.
Note that the reserve for potential bad debt for the third and fourth quarter of $2.4 million is not attributable to specific tenants.
Rather, it is a general assumption that there will be some companies who succumb to the disruption in the economy caused by the pandemic.
Other notable revisions include a lower average interest rate on new debt and the increase of equity issuances by $95 million.
In summary, we were very pleased with our second quarter results.
We will continue to rely on our financial strength, the experience of our team and the quality of our portfolio to navigate us through the remainder of the year.
Now Marshall will make some final comments.
In closing, I'm proud of our second quarter results.
We said the past few years, our fear wasn't shallow bay oversupply as much as a black swan economic event.
We don't want either, but now we have just that.
Our company and our team have worked through these before and while different, we're working through this one, too.
As the economy stabilizes, it's the future that makes me the most excited for EastGroup.
Our strategy, which has worked well the past few years, will come out of this pandemic with trends that we're hearing of, including companies carrying additional safety stock inventory, shopping habits that have changed accelerating the consumer to e-commerce, new industrial users as a result of these shopping habits and increased U.S. manufacturing or nearshoring in Mexico.
Meanwhile, our bread and butter traditional tenants will remain and continue needing last-mile distribution space in fast-growing Sunbelt markets.
All of these, along with the combination of our team, our markets and our properties, have me optimistic about our future.
| q2 ffo per share $1.33.
during q2 did not begin construction of any new development projects.
|
I hope you are all healthy and staying safe and we certainly appreciate you joining our call today.
Let me start by expressing my sincere appreciation to our global team for their extraordinary commitment during this unprecedented time.
We made every effort to keep our employees and other stakeholders safe as we've navigated the COVID-19 pandemic and I'm very proud of the collective role our team members played in supporting our customers in the critical water industry.
We continue to follow all health and safety measures according to health organization recommendations and local government regulations.
At our sites, key actions have been taken to include steps to ensure employees are practicing social distancing, on-site temperature monitoring, use of face coverings, enhanced cleaning and sanitation efforts and staggered production schedules.
All of our manufacturing and distribution locations are operational.
The majority of our non-production employees continue to work from home.
The potential for order delays and operations and supply chain disruptions that I mentioned during last quarter's earnings call gradually diminished throughout the quarter.
We remain encouraged by the backlog and funnel of project opportunities and our balance sheet is in excellent shape to weather whatever lies ahead, recognizing conditions and potential business impacts are continuously evolving.
Bob will walk you through the details of the quarter and after that I'll come back and talk further about the market outlook and what we're hearing from customers in the current environment.
I want to begin by stating it is incredibly difficult to quantify the specific impact of COVID-19 on our financial results in the quarter.
Clearly it was far-reaching in terms of customer order patterns, supply chain logistics and capacity interruptions and ultimately costs, including the various implemented cost savings actions.
So, similar to the release, my comments will not include that break down or level of granularity.
Given our sales concentration in the U.S. market, it is not surprising that the month of April marked the low point for us in terms of both orders and sales as the vast majority of states were under government lockdown restrictions.
Customers were definitely taking a pause in determining the impacts to their operations, how to operate remotely, how to continue with projects and how long the restrictions would last.
Municipal water demand began to improve to become less worse, if you will, as the lockdowns began to be lifted in mid-May and into June.
In municipal water, overall sales decreased 9% with April representing the largest year-over-year decline with sequential improvement off of that bottom to a more stabilized level as the quarter progressed.
I would not characterize it as back to normal, but definitely off of the April bottom with relative consistent.
In addition, backlog grew as orders exceeded sales in the quarter due to a number of factors.
These included manufacturing disruptions from stay-at-home orders in the U.S. and Mexico, higher rates of intermittent employee absenteeism and early supply chain challenges, all of which combined to limit output at certain of our manufacturing facilities.
Additionally, the sequential demand ramp impacted order timing and our ability to convert orders into sales late in the quarter.
On a positive note, revenue mix trends toward adoption of smart metering solutions including BEACON service revenue along with ultrasonic meter penetration continued.
In contrast, flow instrumentation sales declined 22% year-over-year with April again representing the most difficult demand level.
As expected, demand trends improved from April -- from the April low, but at a very modest pace, reflective of the significantly challenged industrial markets served and our continuing view of this product line being lower for longer, compared to the more resilient municipal water trend.
Operating profit as a percent of sales was 13.9%, a 60 basis point decline from the prior year 14.5%.
As we discussed on our last call in mid-April, we enacted a number of temporary cost containment measures to mitigate the impact of the rapid sales decline to both profitability and cash flows.
These included reductions in discretionary spending, a hiring freeze, reduced work hour furloughs and executive salary reductions among others.
While the reduced work hour and salary reductions were initiated -- initially targeted for five weeks, we did extend those reductions for an additional four weeks through mid-June.
The combined actions helped to contain the decremental operating margin impact from the rapid sales decline to approximately 20% in the quarter.
Gross margin for the quarter was 39.3%, up 40 basis points year-over-year despite the sales decline and once again in the upper half of what we would call our normalized range of 36% to 40%.
The implemented cost actions helped to offset lower production volumes.
Additionally, positive sales mix, notably, the overall trends of ultrasonic meter adoption and higher BEACON service revenues, along with lower commodity costs, benefited gross margins in the quarter.
SEA expenses for the second quarter were $23.2 million, down $2 million year-over-year resulting from the net benefit of the implemented cost actions, partially offset by higher investments in certain business optimization initiatives.
The income tax provision in the second quarter of 2020 was 24.3%, slightly higher than the prior year's 23.8% rate.
In summary, earnings per share was $0.33 in the second quarter of 2020, a decline of 15% from the prior year's earnings per share of $0.39.
Working capital as a percent of sales was 22.9%, in line with the prior sequential quarter.
Free cash flow of $20.1 million was just $700,000 below the prior year comparable quarter despite lower earnings and was due primarily to the working capital differential between quarters and deferral of our quarterly federal income tax payment under the CARES Act.
We continue to monitor customer cash receipts and supplier payment terms and we have not experienced any significant collectability or other issues.
We ended the quarter with approximately $85 million of cash on the balance sheet and a net cash position of approximately $81 million.
In addition, we have an untapped credit facility of $125 million.
We believe we have ample liquidity to fund operations, our dividend and other capital allocation priorities under a wide range of potential economic scenarios.
We participated in a number of virtual investor conferences during the quarter, so I thought I'd start by addressing the common questions and themes from those discussions.
So let's start with the current environment.
As we discussed in the release and in our earlier remarks, we do believe we are entering the new normal after the shock in April and early May when most of the U.S. was shut down.
While some of the municipal water activity never stopped, there was definitely a break as our customers, like all of us, had to figure out how to navigate the COVID-19 pandemic and the rapid pace of changing government rules and requirements globally.
Once that settled a bit and gradual reopenings occurred, we started to see activity improve off the April bottom.
I can't say we're completely back to normal, but activity has steadied on a relative basis.
Customers are requesting in-person meetings and site visits, bid tenders and awards are proceeding, some projects have accelerated despite others being temporarily deferred.
We have not experienced any outright cancellations.
As it relates to supply chain and logistics, we commented last quarter that it could potentially create operating challenges.
While there was and still is a significant amount of active management, it was not a major factor.
As Bob noted, we did however experience manufacturing disruptions from the stay-at-home orders in the U.S., various government mandates in Mexico related to vulnerable populations and intermittent employee absenteeism, as well as early logistics and supply chain glitches, all of which contributed to slightly lower than expected output at our manufacturing facilities.
These impacts continue to lessen in severity and we expect them to be behind us shortly, barring any new currently unforeseen developments.
We previously outlined a series of temporary cost reductions that were instituted in mid-April.
And as Bob mentioned, we did extend the reduced work hour and salary reduction measures into mid-June.
Not surprisingly, we continue to manage hiring and discretionary spending action given continuing market uncertainty.
While painful in the short term, we believe these steps were both necessary and adequate to responsibly manage the cost structure of the company during the worst of the impact.
We obviously continue to stay close to the rapidly changing implications of the pandemic and are prepared to take additional actions if they become warranted.
Turning to the outlook.
While the economic environment appears more stable, there is certain market data and sentiment that points to the potential for a protracted recovery from COVID-19 and this continued uncertainty could weigh on customer demand and municipal budgets moving forward.
We cannot confidently predict the degree or duration of the impact.
So therefore we continue to focus on the items we can control.
We are actively investing in and launching new products, an example of which is our recently released E-Series Ultrasonic Plus Meter with integrated control valve, which allows water utilities to remotely restrict water flow.
With multiple valve positions, this safe, humane and efficient solution to controlling water service and residential applications improves utility efficiency, expenses and safety.
It addresses one of the two longer-term trends we believe could accelerate as a result of COVID-19, the other being accelerated AMI adoption.
Our operations teams are adapting manufacturing processes to increase output while optimizing safety.
We do expect to recover the majority of the backlog built in the second quarter during the third quarter.
We are managing cash flow and working capital with $85 million of cash on the balance sheet and a $125 million of revolving credit available to fund capital allocation priorities including the dividend.
Finally, we continue to pursue strategic tuck-in M&A that will expand our offerings in attractive adjacencies serving our critical and essential markets.
In summary, I'm pleased with the resilience of our business model and our financial performance in relation to the economic severity of this unprecedented crisis.
Our organization is prepared and well-positioned to successfully manage the uncertain days ahead, remaining nimble and reactive to our market trends.
| q2 earnings per share $0.33.
|
As always, we appreciate your interest.
Brent Wood, our CFO, is also participating on the call.
We refer to certain of these risks in our SEC filings.
We hope everyone and their families remain well and out of harm's way.
Our third quarter results were strong and demonstrated the resiliency of our portfolio and of the industrial market.
The team produced another solid quarter with statistics such as funds from operations came in above guidance, up 6.3% compared to last quarter -- third quarter last year.
This marks 30 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
Year-to-date FFO per share is up 7.8%.
Our quarterly occupancy, while below prior year, was high averaging 96.6% and at quarter end were ahead of projections at 97.8% leased and 96.4% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends, also benefiting occupancy as a high 83% year-to-date retention rate.
Re-leasing spreads set a quarterly record at 28% GAAP and 16.1% cash.
Year-to-date leasing spreads were solid at 23.1% GAAP and 13.3% cash.
And finally, same-store NOI was up 3% for the quarter and 3.6% year-to-date.
In summary, during a choppy environment, I'm proud of our team's results.
Our strategy is evolving to not only include maintaining occupancy, cash flow and liquidity, as has been the case since March.
Today, we're responding to the strength in the market and restarting development.
Looking at each of our goals, I'm grateful we ended the quarter generally fall at 97.8% leased, our second highest quarter on record.
Houston, our largest market, at 13.5% of rents is 96.2% leased, with an eight-month average collection rate over 99%.
Companywide rent collections remain resilient.
For October, thus far, we've collected 97.6% of monthly rents.
There's still many unknowns about how fast and when the economy truly reopens and recovers.
We all, as a result, simply have less clarity than normal.
Brent will speak to our budget assumptions, but I'm pleased that in spite of the uncertainty, we're tracking toward $5.35 per share in FFO.
This represents a $0.07 per share increase to our July forecast and $0.05 per share above our pre pandemic expectations.
As we've stated before, our development starts are pulled by market demand.
So with the shutdown, we halted new starts.
Given the strength we're seeing in select submarkets, we're planning a few fourth quarter starts and pending permitting timing, these will continue into first quarter of 2021.
And to position us following the pandemic, we've also been working on several new land sites and park expansion.
More details to follow as we close on these investments.
Other strategic transitions -- transactions we've worked on include our 162,000 square foot value-add acquisition in Rancho Cucamonga, near the Ontario airport and dispositions, which hopefully continue toward closing in Houston and on our last property in Santa Barbara.
And now Brent will review a variety of financial topics, including our updated 2020 guidance.
Our third quarter results reflect the resiliency of our team and strong overall performance of our portfolio amid a very challenging year.
FFO per share for the third quarter exceeded our guidance range at $1.36 per share and compared to third quarter 2019 of $1.28 represented an increase of 6.3%.
The outperformance continues to be driven by our operating portfolio performing better-than-anticipated namely higher occupancy and strong rent collections.
From a capital perspective, during the third quarter, we issued $32 million of equity at an average price of $133 per share and earlier this month we closed on two senior unsecured private placement notes totaling $175 million.
The $100 million note was a 10-year -- has a 10-year term with a fixed interest rate of 2.61%.
The second note is $75 million on a 12-year term with a fixed interest rate of 2.71%.
That activity, combined with our already strong and conservative balance sheet, has kept us in a position of financial strength and flexibility, including the complete availability of our $395 million revolver as of today.
Our debt to total market capitalization is 19%, debt-to-EBITDA ratio is 4.9 times, and our interest and fixed charge coverage ratios are over 7.4 times.
Our rent collections have been equally strong.
We have collected 99% of our third quarter revenue and entered into deferral agreements for an additional 0.5%, bringing our total collected and deferred to 99.5% for the third quarter.
Last April, we reported that 26% of our tenants have requested some form of rent deferment.
In the six subsequent months, that only rose to 28% and deferral requests have basically ceased.
The agreed-upon rent deferrals thus far totaled $1.7 million, an increase of only $200,000 since our report in July.
That represents just 0.5% of our estimated 2020 revenues.
We have consistently stated the depth and duration of the pandemic and its impact on the economy is undeterminable.
However, the immediacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for has not materialized.
As a result, our actual performance and revised assumptions for the fourth quarter increased our FFO earnings guidance from a midpoint of $5.28 per share to $5.35 per share or a 7.4% increase over 2019.
The revised midpoint exceeds our original pre-COVID guidance at the beginning of the year.
Among the budget changes were an increase in average occupancy from 96% to 96.5% and a decrease in reserves for uncollectible rent from $3.6 million to $2.3 million.
Note that the reserve for potential bad debt for fourth quarter of $600,000 is not attributable to specific tenants.
Our continued earnings growth directly contributed to increasing our quarterly dividend by 5.3% to $0.79 per share.
Our third quarter dividend was the 163rd consecutive quarterly distribution to EastGroup shareholders and represents an annualized dividend rate of $3.16 per share.
In summary, we were very pleased with our third quarter results.
We will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to carry our momentum into next year.
Now Marshall will make some final comments.
In closing, I'm also proud of our third quarter results.
Our company and our team has worked through numerous downturns and, while different, will work through this one, too.
As the economy stabilizes, it's the future that makes me the most excited for EastGroup.
Our strategy has worked well the past few years.
And coming out of this pandemic, we foresee an acceleration and a number of positive trends for our properties and within our markets.
Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sun Belt markets.
These, along with the mix of our team, our operating strategy and our markets, has us optimistic about the future.
| q3 ffo per share $1.36.
|
Last night, we released results for our first quarter of fiscal year 2021 copies of which are posted in the Investor Relations section of our website.
In order to provide greater transparency regarding our operating performance, we will refer to certain non-GAAP financial measures that involve adjustments to GAAP results.
Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.
I'm very pleased with the exceptional operating results we've reported as we saw a strengthening recovery across our end markets.
For the quarter, we generated record adjusted earnings per share of $1.18 and segment EBIT of $140 million.
The results were driven by improving demand trends, robust unit margins, disciplined operational execution, and strong performance in our targeted growth initiatives.
I'd like to recognize the extraordinary employees of Cabot, whose team work and commitment made it possible for us to meet the dynamic needs of our customers while maintaining the safety of our people and our communities.
The COVID pandemic has challenged our normal ways of working, but I believe our strong culture of connectivity and collaboration enabled us to distinguish Cabot in the marketplace, and we will continue to build on these strengths into 2021.
During the quarter, we saw strong volumes in the tire and automotive markets as the recovery momentum continued globally with a sharp rebound of the lows experienced last spring.
We are pleased to see that miles driven trends have improved, though still generally lagged pre-COVID levels.
In terms of automotive builds, a similar trend has taken hold.
With both end markets still below prior peaks, we are optimistic about our growth runway as the economic recovery strengthens.
As highlighted in previous calls, we experienced real strength throughout 2020 for products sold into the infrastructure, packaging and consumer sectors and this continued in our first fiscal quarter of 2021.
Our strong product portfolio, global reach and technical support have enabled us to capitalize on favorable infrastructure trends in wire and cable, pipe and geo membranes.
Additionally, the COVID pandemic has changed certain consumer behaviors and these trends are supportive of our packaging and consumer-driven applications.
While the underlying end market trends are favorable, there likely was some level of channel replenishment in the quarter as the combination of sharply [Technical Issues] and low inventories in most value chains created upward pressure on orders.
We are also seeing tightness across transportation modes globally and the supply chain uncertainty is likely causing customers to build some inventory to mitigate disruptions.
I would like to spend a little time now on China.
[Technical Issues] had driven some softening in that market.
We are seeing real strength there now.
China was the only major economy to avoid a recession in 2020 and the market there was very strong for us in Q1 as PMI hit 57 and industrial production surged.
As we look forward, our belief in the fundamentals of the China market is strong and our long-standing strategic assumptions remain sound.
Given that almost 40% of the world's tires are produced in China and 50% of the world's silicones, our differentiated position there means we are extremely well-positioned for growth.
We believe that the feedstock markets will be in balance over the long-term, which should provide a foundation of stability over time.
And finally we expect environmental pressures will continue to ratchet and Cabot's leadership and sustainability will position us in a differentiated way relative to competition.
Looking at our segments, Reinforcement Materials generated record EBIT performance in the quarter driven by very strong results in Asia as our focus on margin paid off.
Our global footprint and focus on operational excellence are the foundations of our customer value proposition and I believe we are seeing benefits of that in our results.
During the quarter we completed the negotiation of our Reinforcement Materials customer agreements for calendar year 2021.
We are pleased with the outcome, which was broadly in line with our 2020 agreements in terms of pricing and share.
This is a positive development as we negotiated during a period of low volumes and extremely uncertain forward visibility.
By maintaining our share we will participate in a demand recovery with our customers.
We were also very pleased to see the significant step-up in results in the Performance Chemicals segment.
The segment delivered EBIT in the first fiscal quarter of $54 million, up 32% compared to the first fiscal quarter of 2020.
This was primarily due to higher volumes across all applications, strong product mix from automotive applications and specialty carbons and compounds, and progress in our targeted market growth initiatives.
Despite the pandemic we continue to advance critical strategic initiatives that we believe will create long-term value while staying committed to our balanced capital allocation framework.
In Xuzhou, China, we're in the process of converting this acquired plant to manufacture specialty carbons.
The strategic project will provide growth capacity for a high value specialty carbons grade and complement our footprint so that we are balanced geographically.
This project is progressing well and we remain on track for completion in early calendar 2022.
In the battery space, the integration of Shenzhen Sanshun Nano into our Energy Materials business is complete and sales of our conductive carbon additives are growing at attractive rates.
Customer adoptions and sales with the top 10 global battery producers continue to build momentum and we believe this business will grow to become a meaningful profit contributor for Cabot.
We are also making important progress to grow our inkjet business.
Our investment focus over the last couple of years has been in the space of packaging as that sector begins a transition from analog to digital printing with inkjet technology.
Our sales are growing in the packaging space and we are well-positioned with product adoptions at many of the leading printer OEMs. We expect the penetration of inkjet technology to accelerate over the next three years and we believe we are extremely well-positioned.
These investments are critical in supporting our earnings growth targets and we've been disciplined in our choices and execution so that we balance growth along with cash return to shareholders.
In addition to our growth investments, sustainability and ESG leadership have long been a strategic priority for Cabot and their importance is growing in the eyes of our stakeholders.
I am pleased to highlight two achievements this quarter that demonstrate our industry leading position.
First, we received a Platinum level rating in recognition of our sustainability efforts from EcoVadis.
EcoVadis is an independent assessment organization that evaluates company's sustainability programs in the areas of environment, labor practices and human rights, ethics and sustainable procurement.
Many of our customers utilize EcoVadis to confirm performance of their supply chain partners.
And our Platinum rating confirms that Cabot is ranked among the top 1% of companies in its peer group in the manufacturing of basic chemicals.
We are also proud of being named one of America's Most Responsible Companies 2021 by Newsweek magazine.
This is the second year that Cabot has received this recognition, which was developed in 2020 to highlight the most responsible companies in the United States across 14 industries.
This accomplishment recognizes Cabot's reputation and programs in corporate governance, community engagement and management of environmental performance, as well as transparent reporting.
Sustainability, leadership and corporate responsibility are integrated in the business strategy and daily management of Cabot and by leading in this area we will ensure that all stakeholders are part of our success.
I will start with discussing results in the Reinforcement Materials segment.
The Reinforcement Materials segments delivered record operating results with EBIT of $88 million compared to the same quarter of fiscal 2020 driven by improved pricing and product mix in our calendar year 2020 tire customer agreement and with spot customers in the Asia region.
This improvement included our ability to raise prices ahead of rising feedstock cost in Asia that shows strong unit margins.
Globally volumes were up 1% in the first quarter as compared to the same period of the prior year primarily due to 13% growth in Europe and 9% higher volumes in the Americas as key end market demand continue to recover along with some level of inventory replenishments from the drawdowns earlier in the calendar year.
Asia volumes were down 8% year-over-year largely due to a schedule planned turnaround and our decision to balance pricing and volume in order to improve margin levels.
Looking ahead to the second quarter of 2021 we expect stronger year-over-year EBIT in the second quarter as compared to the prior year driven by higher year-over-year volumes.
Looking sequentially, we expect volumes to remain solid slightly higher than the first fiscal quarter.
We anticipate that margins will moderate from the levels seen in the first quarter as [Indecipherable] cost increase and we will not experience the same pricing tailwind in Asia ahead of costs.
In addition, we anticipate an increase in fixed costs sequentially as volumes increase and we spend a bit more on maintenance activity.
Now turning to Performance Chemicals, EBIT increased by $13 million as compared to the first fiscal quarter of 2020 primarily due to higher volumes and improved product mix in specialty carbons and compounds product lines.
Year-over-year volumes increased by 9% in both the Performance Additives and Formulated Solutions businesses driven by increases across all of our key product lines from higher demand levels and some level of customer inventory replenishment during the quarter.
We experienced strong demand related to automotive application, which drove the favorable mix in the specialty carbons and compounds product lines.
These favorable impacts were partially offset by weaker pricing and product mix year-over-year in our fumed silica product line.
Looking ahead to the second quarter of fiscal 2021 we expect stronger year-over-year EBIT in the second quarter as compared to the prior year driven by higher year-over-year volumes.
Looking sequentially, we expect EBIT will moderate somewhat from the first quarter as raw material costs increase and specialty carbons and compounds product lines and we expect higher costs associated with the draw-down of inventory levels in the quarter.
Moving to Purification Solutions, EBIT in the first quarter of 2021 was flat compared to the first quarter of fiscal 2020.
The reduction in fixed costs resulting from the sale of our mine in Marshall, Texas and the related long-term supply agreement was offset by reduced demand in mercury removal applications and higher costs associated with the reduction of inventory levels related to the transition to a long-term supply agreement.
Looking ahead to the second quarter, we expect to see a sequential EBIT increase from improved pricing and product mix for specialty applications and lower fixed cost.
I will now turn to corporate items.
We ended the quarter with a cash balance of $147 million, and our liquidity position remains strong at approximately $1.5 billion.
During the first quarter of fiscal 2021, cash flows from operating activities were $21 million, which included a working capital increase of $99 million.
The working capital increase was largely driven by growth related to net working capital, as accounts receivables increased with higher sales and inventory increased from purchases of higher cost raw materials.
The change in net working capital also included the final payment of $33 million related to the prior year respirator settlement.
Capital expenditures for the first quarter of fiscal 2021 were $29 million.
For the full year, we expect capital expenditures to be between $175 million and $200 million.
This estimate includes continued EPA related compliance spend and capital related to upgrading our new China carbon black plant to produce specialty products.
Additional uses of cash during the quarter included $20 million for dividend.
Our operating tax rate was 30% for the first quarter of fiscal 2021, and we continue to anticipate the fiscal year rate will be between 28% and 30%.
We are very pleased with the record results in the first quarter of 2021 with volumes recovering from the COVID-related lows we experienced in fiscal 2020 and the great execution across the organization.
We achieved record-setting results in Reinforcement Materials and much improved performance in the Performance Chemicals' segment.
This is a great start to our fiscal year.
As I look at the second quarter, there are some tailwinds that benefited our results in the first quarter that we don't expect to repeat.
Based on the underlying business performance, we expect adjusted earnings per share in the second quarter to be in the range of $0.90 to a $1.
While I expect our second quarter adjusted earnings per share to moderate from the first quarter, I believe this level of expected earnings in the second quarter reflects how well our businesses are performing in the current environment.
January volumes were strong and we anticipate the underlying demands in our key end markets will remain robust during the quarter driving year-over-year EBIT growth across all segments.
On the cash side, we anticipate our cash and liquidity will remain robust.
Net working capital increases should moderate from what we saw in the first quarter with more consistent volume levels going forward.
As the fiscal year unfolds, we expect the environment will remain uncertain and there are several factors that we will be managing closely.
The first is the level and timing of COVID-19 vaccine distribution across the world and its impact on the economic recovery.
Infection rates remain very high in many parts of the world and the stability of economic growth will depend on favorable trends in reducing the level of infection.
Next is Global Logistics where we have begun to see some negative impact in terms of availability and cost of transportation in our supply chain.
This influence is being felt across global value chains and may take some time to fully stabilize.
And finally, the movement of pricing and input costs particularly in the spot markets in Asia.
We have demonstrated our ability to execute well over the past year no matter what the challenge and I have confidence that this will continue in the year to come.
Our company's true character has been showcased during these times of adversity.
I am proud of how the team has responded with great resilience and a focus on our customers, our communities and one another.
Our exceptional first quarter results are a true testament to our company's capabilities and that position us well for a successful 2021.
| sees q2 adjusted earnings per share $0.90 to $1.00.
q1 adjusted earnings per share $1.18.
about $1.5 billion of liquidity, total debt to ebitda ratio of 2.5x as of december 31, 2020.
anticipate demand to remain strong in q2 with january levels starting quarter above prior year.
anticipate increasing raw material & fixed costs sequentially, less customer inventory replenishment than experienced in q1.
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Yesterday, we reported all-time record quarterly sales from continuing operations and record second quarter adjusted EBIT and EBITDA.
These outstanding results are a testament to the dedication and hard work of our employees around the globe.
Second quarter sales were $1.27 billion, EBIT was $172 million, and earnings per share were $0.82, all significantly higher than the second quarter of 2020.
Strong year-over-year results reflect recovery in most of our businesses from the significant impacts related to the COVID-19 pandemic.
When comparing to the pre-pandemic results of second quarter 2019, trade sales grew 5%, adjusted EBITDA was up 9%, and adjusted EBITDA margin improved 60 basis points and adjusted earnings per share increased 12%.
During the quarter, we made two strategic acquisitions, expanding our capabilities and product offerings in our Work Furniture and International Bedding businesses.
At the end of May, we acquired a small manufacturer of bent metal tubing used in office and residential furniture located in Poland that has been an important supplier to our local Work Furniture operation.
On June 4, we acquired a leading provider of specialty foam and finished mattresses, primarily serving customers in the U.K. and Ireland.
The company, Kayfoam, is located near Dublin and has two manufacturing facilities with combined annual sales of approximately $80 million.
Kayfoam expands the capabilities of our European Bedding business and establishes a platform in foam technology in finished mattress production.
Similar to our U.S. Bedding business, this acquisition allows us to support our European Bedding customers anywhere in the value chain from innerspring and foam components to finished products, including private label mattresses, toppers, pillows and other bedding accessories.
We increased our full year sales guidance as a result of continued material cost inflation and sales related to the acquisitions just mentioned.
Increased earnings per share guidance is largely due to metal margin expansion in our Steel Rod business.
Jeff will provide more detail on updated guidance later in the call.
Your commitment, resolve and ingenuity allowed us to navigate raw material constraints, labor shortages and freight challenges to service our customers in a very strong demand environment.
Your efforts and accomplishments are greatly appreciated.
We had strong operating performance in the second quarter as sales have recovered to near or above pre-pandemic levels in most of our businesses.
Supply chain disruptions continued throughout the quarter, most notably in chemicals, semiconductors, labor and transportation, constraining volume growth.
While we are seeing incremental improvements in many of these areas, they continue to create volatility in both supply and in cost.
Given the significant pandemic-related impact to last year's second quarter results, my comments will compare our segment and business unit results to second quarter 2019, which provides a more meaningful insight to our quarterly operating performance.
Sales in our Bedding Products segment were up 7% versus the second quarter of 2019, primarily from raw material related selling price increases from inflation in steel, chemicals and nonwoven fabrics.
Volume was down in part due to exited business in Fashion Bed and Drawn Wire.
Volume was also lower due to foam shortages and labor availability, which continue to constrain the U.S. mattress production, negatively impacting component demand and our finished goods production.
Availability of chemicals used in our specialty foam operation improved during the second quarter, but at a slower pace than anticipated, due to supplier production disruptions and logistics challenges.
While supply improved, chemical allocations could persist to some degree throughout the remainder of the year.
In U.S. Spring, our planned Comfort Core capacity expansion is largely in place, and we have built inventory of Comfort Core innersprings to fulfill customer requirements as foam becomes more readily available.
Demand in our European bedding business was strong throughout the second quarter, but recently, we are seeing some signs of seasonal softening over the summer months.
Long term, we anticipate more growth opportunities in Europe with the Kayfoam acquisition.
Similar to the trends we've seen in the U.S. bedding market over the past several years, European consumers are purchasing more mattresses online and in compressed form, increasing demand for specialty foam and hybrid mattresses.
Adjusted EBITDA margins in the segment improved over the two-year period, primarily from pricing discipline, expanded metal margins in our Steel Rod business and fixed cost actions taken last year.
Sales in our Specialized Products segment were down 9% for the second quarter of 2019 due to lower volume across the segment.
In our Automotive business, volume was down over the two-year period, primarily from recent semiconductor shortages.
Industry production was heavily impacted in April and May with many OEMs reducing or completely shutting down production of some models.
Supply is expected to slowly improve, but we anticipate these shortages to continue through at least the first half of 2022.
In our Aerospace business, demand for fabricated duct assemblies is near second quarter 2019 levels, but demand for welded and seamless tube products is still well below pre-pandemic levels.
With the lingering impact from pandemic-related disruption in air travel and resulting buildup of aircraft and supply chain inventories, the industry is not anticipated to return to 2019 demand levels until 2024.
End market demand in Hydraulic Cylinders is very strong with the surge in lift truck orders.
However, global supply chain constraints and labor availability have hampered the OEMs' ability to ramp up production.
We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into early 2022.
EBITDA margins in the segment declined over the two-year period, primarily from lower volume, partially offset by fixed cost actions taken last year.
Sales in our Furniture, Flooring & Textile Products segment were up 11% versus the second quarter of 2019, driven by demand strength in home furniture and geo components.
We expect strong market demand in our Home Furniture products business for the remainder of the year and into 2022.
In our Geo Components business, private construction and retail market demand is strong.
Demand in our Fabric Converting business softened due to the foam constraints that are impacting bedding and furniture manufacturers.
As foam availability improves, we anticipate sales to rebound.
In Flooring products, residential end market demand is above pre-pandemic levels, whereas hospitality demand remains well below 2019 levels.
And while recovery in Work Furniture lags the other businesses in this segment over the two-year comparison period, we continue to see strong demand for products sold for residential use and are beginning to see some improved demand in the contract market.
Adjusted EBITDA margins in the segment increased over the two-year period, primarily from improvement in our Home Furniture business and fixed cost actions taken last year.
Overall, the fixed cost actions we took last year reduced our second quarter cost by approximately $20 million versus the second quarter of 2019.
Across all of our businesses, we are focused on controlling costs by keeping our variable cost structure aligned with demand levels and only adding fixed costs as necessary to support higher volumes and future growth opportunities.
Spring to build inventory in order to meet anticipated customer demand as foam and labor availability improves across the industry.
In the fourth quarter, we will also take our rod mill out of operation for three weeks to replace the reheat furnace.
As a result, higher levels of inventory in these businesses are expected through the remainder of the year.
The inventory build and sales will likely alter our normal seasonal cash flow cycle to some degree.
In the second quarter, cash from operations was $41 million.
Higher earnings were partially offset by planned working capital investments to build and maintain the higher inventory levels that Mitch just discussed as well as inflation in the cost of those inventories.
With the expectation of carrying higher levels of inventory through the end of the year, we have lowered our full year operating cash estimate.
We now anticipate cash flow from operations to approximate $450 million in 2021.
At the end of the quarter, adjusted working capital as a percentage of annualized sales was 12.8%.
During the first half of the year, we brought back $187 million of offshore cash and currently expect to return at least $200 million of cash for the full year.
In May, we increased the quarterly dividend by $0.02 to $0.42 per share.
At an annual indicated dividend of $1.68, the yield is 3.5% based upon Friday's closing price of $48.03, one of the higher yields among the S&P 500 dividend aristocrats.
This year marks our 50th consecutive year of annual increases.
We're proud of our dividend record, and we plan to extend it.
Our strong financial base, along with our deleveraging efforts over the last two years, give us flexibility when making capital and investment decisions.
We ended the quarter with net debt to trailing 12-month EBITDA of 2.32 times and $1.3 billion of total liquidity.
Our long-term priorities for use of cash are unchanged.
They include, in order of priority: funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash.
For the full year 2021, we expect capital expenditures of approximately $140 million.
Dividends should approximate $215 million and acquisition spending of approximately $150 million.
We do not expect any significant share repurchases as we continue to focus on deleveraging.
As announced yesterday, we are again increasing our 2021 sales and earnings per share guidance.
2021 sales are now expected to be $4.9 billion to $5.1 billion or up 14% to 19% over 2020, resulting from mid- to high single-digit volume growth, raw material related price increases, currency benefit and approximately 1% growth from acquisitions, net of divestitures.
The increased versus prior guidance of $4.8 billion to $5 billion reflects a combination of higher raw material related price increases and acquisition sales.
We expect continued strong consumer demand for home-related products and global automotive along with some improvements in supply chain constraints as we move through the remainder of this year.
2021 earnings per share are now expected to be in the range of $2.86 to $3.06, including $0.16 per share from the real estate gain recognized in the second quarter.
Full year adjusted earnings per share is now expected to be $2.70 to $2.90, with increase versus prior guidance of $2.55 to $2.75, primarily due to higher metal margin.
This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70 million.
Based upon this guidance framework, our 2021 full year adjusted EBIT margin range should be 11.4% to 11.6%.
Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $195 million, net interest expense of approximately $75 million, and fully diluted shares of 137 million.
In closing, we remain focused on cash generation, while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture near- and long-term growth opportunities, both organically and through strategic acquisitions.
Daryl, we're ready to start Q&A.
| compname reports q2 sales of $1.27 billion.
compname reports q2 sales $1.27 billion.
q2 earnings per share $0.82.
q2 sales $1.27 billion versus refinitiv ibes estimate of $1.23 billion.
sees fy sales $4.9 billion to $5.1 billion.
sees fy adjusted earnings per share $2.70 to $2.90.
sees 2021 earnings per share of $2.86-$3.06.
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COVID-19 remains a constant in our daily work and home lives.
Our team has been able to rapidly adapt to a very dynamic situation, and I sincerely appreciate their ongoing efforts to deliver the products and services we provide to our customers around the world.
For the third quarter of 2020, our combined adjusted EBITDA was $218.5 million as our Global Ingredients platform continues to be resilient.
Our health, nutrient and bio energy businesses continue to prosper and make the necessary adjustments to keep our momentum for a record 2020 and set the stage for even a better 2021.
Our fuel segment and our food segment showed improvement year-over-year and grew sequentially to the second quarter of 2020.
Overall, we continued to see an improving and positive trend on our gross margin percentages across our business lines.
As I talked with you back in May, we continue to work diligently on cost control measures and widening our gross margins, thus improving our returns.
Our USA team has done an exceptional job.
As expected, our Feed segment for the third quarter declined from the strong performance we had in the second quarter as protein prices in the third quarter moved lower sequentially compared to Q2 and prices for Q3 2020 were also lower when you compare them to 2019.
With the positive upward movement in the grain and oilseed complex, we are experiencing a better pricing environment for our protein products and for our fats and oil products in the fourth quarter.
And this should provide a positive catalyst heading into 2021.
In the food segment, there was a nice recovery of hydrolyzed collagen sales for the quarter.
We're in the process of commissioning our third new collagen peptide production facility in Presidente Epitacio, Brazil as we speak, which broadens our ability to supply this on-trend food ingredient to our customers worldwide.
The food segment, led by Rousselot, the Number 1 collagen provider in the world, is poised to provide meaningful earnings growth in 2021.
The fuel segment performance was significantly better than a year ago, both in our international green energy businesses and at Diamond Green Diesel.
Diamond Green Diesel achieved a $2.41 per gallon EBITDA margin on record sales of 80 million gallons for the quarter.
We recorded $96.4 million of EBITDA, which is Darling's share of the joint venture.
The energy market did show some improvements from a demand standpoint during the quarter.
Although oil and diesel prices remained significantly lower than the same time a year ago, diesel is currently trading $0.80 a gallon under Q4 of 2019.
On the positive side, the green premium we are able to capture for the renewable diesel has offset the majority of this downward price in the current environment.
And we expect that Diamond Green will sell between 55 million and 60 million gallons of renewable diesel in the fourth quarter and should average between $2.30 and $2.40 a gallon for those gallons sold.
On a year-to-date basis, Darling has generated $627 million of combined adjusted EBITDA for the Company, putting us on pace to finish what most everyone considers to be a challenging year with record results.
We currently believe that we can finish 2020 with combined adjusted EBITDA between $800 million and $810 million.
We certainly believe this gives us a solid platform as we move into 2021 for what we believe will be a transformative year as the 400 million gallon expansion, or what's known as DGD 2, comes online in late 2021.
If you've not had a chance to look at our refreshed corporate website or read our 2020 ESG report, I encourage you to do so.
Our ESG team did an excellent job in publishing our 2020 fact sheet, which gives us an exciting story to build on as we move forward.
It outlines our goals and initiatives and how Darling will play a significant role in the decarbonization of our planet.
For Darling, we take great pride in our green leadership position in the world, and we plan to do our part in conserving water, energy and reducing greenhouse gas emissions directly and indirectly by our DGD business producing more low-carbon renewable fuels for the world to consume.
I will touch base on a few of the highlights for this quarter and year-to-date.
Net income for the third quarter of 2020 totaled $101.1 million or $0.61 per diluted share compared to a net income of $25.7 million or $0.15 per diluted share for the 2019 third quarter.
For the first nine months of 2020, net income was $252.1 million or $1.51 per diluted share compared to $70 million or $0.42 per diluted share for the same period of 2019.
As Randy mentioned earlier, our gross margin continues to show improvement as we reported 24.9% for the third quarter of 2020 compared to 22.5% for the same period in 2019 as net sales increased $8.5 million and cost of sales and operating expenses decreased $14.6 million.
Operating income improved $67.7 million in the third quarter 2020 as compared to the prior year, reaching $127.5 million for the third quarter and totaled $356.6 million year-to-date 2020 compared to $182.5 million for the 2019 period.
In addition to the improved gross margin, the improvement in operating income benefited from a $59.1 million increase in Darling's equity and net income from Diamond Green Diesel.
SG&A expense was higher by $6.4 million in the quarter, partially attributable to the higher cost related to COVID-19, certain insurance increases as we recently renewed our coverages across the business, and higher benefits more than offsetting lower travel cost.
Interest expense was $18.8 million for the third quarter of 2020 compared to $19.4 million for the prior-year period.
We currently project quarterly interest expense to be approximately $15 million per quarter over the next several quarters.
The Company reported income tax expense of $4.8 million for the three months ended September 26, 2020.
The effective tax rate is 4.5%, which differs from the federal statutory rate of 21% due primarily to the biofuel tax incentives; the relative mix of earnings among jurisdictions with different tax rates and discrete items, including the recognition of a previously unrecognized tax benefit; and the favorable impact of certain US Treasury regulations issued during the quarter.
For the nine months ended September 26, 2020, the Company recorded income tax expense of $43.1 million with an effective tax rate of 14.5%.
Excluding discrete items, the year-to-date effective tax rate is 18.2%.
The Company also paid $24.9 million of income taxes as of the end of the third quarter.
For the remainder of the year, we project the effective tax rate to be about 20% with cash taxes for the year totaling approximately $35 million.
For the three and nine months 2020, Darling's share of Diamond Green Diesel's earnings was $91.1 million and $252.4 million as compared to $32 million and $94.4 million for the same period of 2019.
A reminder that there was no BTC in place to recognize during 2019 until the fourth quarter.
Capital expenditures of $184.9 million were made for the nine months of 2020 as we continue to take a disciplined approach during the pandemic prioritizing compliance and safety needs of the business and our reduced capex spend.
Now, turning to the balance sheet, in the third quarter, we were successful in amending and extending our $1 billion revolving credit facility with favorable terms.
The amendment extends the maturity date of the revolving credit facility under the credit agreement from December 16, 2021 to September 18, 2025.
In addition, we paid down our term loan balance by $145 million to a new balance of $350 million outstanding at the end of the quarter.
With our improved financial results and the paydown of the term loan B, our bank covenant leverage ratio for Q3 was 1.93 to 1.00.
We continue to make progress toward achieving an investment grade rating.
Our liquidity remains very strong with approximately $934 million available under our revolving credit facility at the end of Q3, providing strategic flexibility, while at the same time, maintaining a very solid capital structure.
As I mentioned earlier, our share of the 2020 DGD earnings should be approximately $330 million based on the ranges I laid out for you.
With the strong performance of Q3 and prices for our products improving as we work through the fourth quarter, we believe we can produce EBITDA of approximately $470 million to $480 million in 2020 in our Global Ingredients business.
That is back in line with the guidance we were anticipating back in February of this year pre-COVID.
The permitting process for these types of facility is no easy task.
Once approved, construction should begin immediately, putting DGD 3 in a position to be operational in early 2024.
We understand that there is concern with oversupply of renewable diesel and potentially a shortage of low-carbon feedstocks in the future.
Our simple answer is, we plan to take advantage of the first-mover position.
We have to be the largest low-cost producer of renewable diesel in North America.
While others are trying to figure out how to build or convert existing 80-year-old refineries to renewable diesel, we continue to focus on building new facilities with the lowest operating cost structure, the latest technologies, incorporating the trade secrets we've learned over the last seven years of operating our plants.
Darling's vertically integrated supply chain will continue to provide DGD with superior low-cost feedstock, which enhances that first-mover advantage for DGD.
This was especially challenging for diligence given COVID-19 protocols, but our Euro team did a nice job.
And we expect, even while small, this acquisition to strengthen our already successful Belgian system and immediately be accretive.
With that, let's go ahead, Matt, and open it up to Q&A.
| compname reports q3 earnings per share of $0.61.
q3 earnings per share $0.61.
|
I'm Arnold Donald, President and CEO of Carnival Corporation and PLC; and today I'm joined telephonically by our Chairman, Micky Arison; as well as by David Bernstein, our Chief Financial Officer; and by Beth, Robert Vice President, Investor Relations.
What a difference a year made.
We are clearly on our way back to full cruise operations with with 50 ships now serving guests as we end the fiscal year, and that's up from just one ship, one short a year ago.
We've already returned over 65,000 crew members to our ships and thus resuming operations, over 1.2 million guests and counting and still we are [Phonetic] Now we've achieved that while delivering an exceptional guest experience with historically high net promoter scores.
These are strong accomplishment, especially in light of the uncertainty we faced just one year ago when vaccines were not yet available and effective protocols to mitigate the spread of the virus were still evolving.
Today, our team members and the vast majority of guests have received vaccines and many have received boosters.
We have [Indecipherable] the effective protocols for COVID-19 and its very enabling occupancy to progress toward historical lows.
In fact, occupancies at our Carnival Cruise Line brand which currently operates and generates that are most similar to its normally [Indecipherable] generates are now approaching 90% and that's after the impact of the variants on near-term book.
Again, Carnival Cruise Lines continues to outperform with both occupancy and price.
Even at this early stage, as a company, we are now generating meaningful cash flow at the ship level to date and growth, helping to fund start-up costs for the remaining fleet.
Total customer deposits have grown by over $1.2 billion from the prior year alone as our book position continues to build and to strength.
Importantly, we ended the year with $9.4 billion of liquidity and as essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead, as the aforementioned ship operating cash flows and [Indecipherable] continue to build, with 68% of our capacity now in operation and the remainder planned by spring, we are well positioned for our important summer season, where we historically have the lion's share of our operating profit.
Throughout 2021, we said that we expected the environment to remain dynamic and it certainly has.
Of course, [Indecipherable] has been a key strength of ours and we continue to aggressively manage to optimize given this ever changing landscape as we have demonstrated through the Delta variant and now with Omicron, we have navigated near term operational challenges.
While the variants and their corresponding effect on consumer confidence have created some near term booking volatility, out book position has remained resilient.
And in the case of Delta variant, already recovered.
Importantly, these variants have not had a significant impact on our ultimate plan to return our full fleet to guest operations in the spring of 2022.
It is clear we have maximized our return to service in 2021 and we have positioned the company well to withstand the potential volatility on our path to profitability.
At the same time, we have not lost sight of our highest responsibility and therefore our top priorities, which is always compliance, environmental protection and the health, safety and well-being of everyone, that's our guests, the people in the communities we touch and serve, and of course, our Carnival family, our team members shipboard and shoreside.
And to that end, we've achieved many important milestone along the way in our return service, or events, broadening our commitments to ESG with introduction of our 2030 sustainability goals and our 2050 aspiration, and that's building on the successful achievement of our 2020 goal, increase our ESG disclosure by incorporating SASB be and TCFD framework in our sustainability report, bolstering our compliance efforts with the addition of a new Board member with valuable compliance experience, a strong addition to our Board of Directors and our Board Compliance Committee, improving our culture through emphasizing essential behaviors and incorporating them into our ethos [Phonetic] through training and development and through every day real time feedback, as we are already among the most diverse companies in the world with a global employee base representing over 130 countries.
We're focusing our efforts on diversity and inclusion at every level and in all areas of our operation.
And of course, there are many more operational milestones, such as reopening our eight owned and operated private destinations and port facilities, Princess [Indecipherable] Mahogany Bay, Amber Cove [Indecipherable] Santa Cruz de Tenerife and Barcelona, all delivering an exceptional experience to over 630,000 of the 1.2 million guests that's resuming.
Welcoming nine new more efficient ships across our world-leading brand, including Mardi Gras powered by LNG.
Mardi Gras is nothing short of a gamechanger for our namesake brand Carnival Cruise Line, premium brand Holland America introduced the new Rotterdam, sister ships to the very successful Koningsdam and Nieuw Statendam.
For the U.K., we successfully introduced Iona, also powered by LNG.
For Germany, we shortly take delivery about six LNG powered ship AIDAcosma system to the also highly successful AIDAnova.
And for Southern Europe, Costa Firenze and LNG powered Costa Toscana will replace the exit of several less efficient ships.
Now these new ship Mardi Gras, Iona, Costa Toscana have joined AIDAnova and Costa Smeralda to be the only and with the addition of AIDAcosma shortly.
The only six large cruise ships in the world currently powered by LNG, demonstrating our leading edge decarbonization efforts.
Now while the utilization of LNG is a positive step with the environment, so LNG is inherently 20% more carbon efficient.
It is not our ultimate solution.
We have announced our net zero aspirations by 2050.
Now where there is no known answer to zero carbon emissions in our industry at this time, we are working to be part of the solution.
We have and expect to continue to demonstrate leadership and executing carbon reduction strategy.
We are focused on decreasing our unit fuel consumption today, reducing even the need for carbon offsets.
Our decarbonization efforts have enabled us to peak our absolute carbon emissions way back in 2011, and that's despite an approximately 25% capacity growth since that time.
And while today based on publicly available information, we believe we are the only major cruise operator to peak our absolute emissions, our entire industry is moving in the right direction.
And as a company with a 25% reduction in carbon intensity already under our belt, we are well positioned to achieve our 40% reduction goal by 200 and are working hard to reach that deliverable ahead of schedule.
Now in addition to our cutting edge LNG efforts, we have many other ongoing efforts to accelerate decarbonization.
To name just a few, they include itinerary optimization and technology upgrades to or existing fleet and an investment of over $350 million in areas such as air conditioning, waste management lighting, and of course, the list goes on.
We are actively increasing our shore power capabilities.
Greater than 45% of our fleet is already equipped to connect the shore power and we plan to reach at least 60% by 2030.
Now we helped develop the first port with show power capability for cruise ships, leading to the development of 21 ports to date and counting.
We are focused on expanding shore power to our high value ports around the world, that includes Miami; Southampton, England; and Hamburg, Germany.
So ultimately achieve net zero emissions over time, we are investing in research and development, partly on projects to evaluate and pilot maritime skill battery and fuel cell technology and working with Classification Societies and engine manufacturers to assess hydrogen, methanol as well as bio synthetic fuels, as future low carbon fuel options for our cruise ships.
Also, these efforts combined with the exit of 19 less efficient ships are forecasted to deliver upon return to full operation a 10% reduction in unit fuel consumption on an annualized base.
Now that's a significant achievement on our path to decarbonization.
Our strategic assist to accelerate the exit of 19 ships vessels with a more efficient and a more effective fleet overall and it's lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025, now that's down from 4.5% annually pre COVID.
While capacity growth is constrained, we will benefit from this exciting roster of new ships spread across our brand and they even to capitalize on the pent-up demand and drive even more enthusiasm around our restart plans.
A enjoy a further structural benefit to revenue from these enhanced guest experiences, new ship, due to the richer mix of premium price balcony cabins, which will increase 6 percentage points to 55% of our fleet in 2023.
Now of course, as we mentioned before, we've also achieved a structural benefit to unit costs as we deliver these new, larger, more efficient ships, coupled with the exit of 19 less efficient ships, it will help generate a 4% reduction in ship level unit cost going forward, enabling us to deliver more revenue to the bottom line.
Upon returning to full operation, nearly 50% of our capacity will consist of these newly delivered, larger, more efficient ships, expediting our return to profitability and improving our return on invested capital.
Now we are clearly resuming operation as a more efficient operating company, and we'll use our cash flow strength to reduce our leverage on our path back to investment grade credit.
Last quarter, we discussed the initial impact of the Delta variant.
We indicated we saw an impact on near-term booking volumes in the month of March.
Booking volumes have since accelerated sequentially and returned to pre-delta levels in November.
And as we said we would, we maintain price despite the disruption, achieving 4% higher revenue per passenger cruise day in our fourth quarter than in the fourth quarter of 2019.
In fact, the Carnival Cruise Line brand where we as I mentioned are able to offer more comparable itineraries to those in 2019 experienced its second consecutive quarter of double-digit revenue growth for the year, while improving occupancy with nearly 60% of its capacity returned to serve.
Now that's a testament to the fundamental strength in demand for our cruise product, especially when you consider this was accomplished without the benefit of a major advertisement.
We expect to build on this momentum with the brands announcement just last week on its Funderstruck campaign, engineered to highlight the joy and following of our Carnival Cruise.
That advertising campaign is launching over the holiday, including the activations on Christmas Day and Times Square on New Year's Eve, in time for our [Indecipherable] something that's very present in the news today, Omicron there.
We have also experienced some initial impact on near-term bookings, although difficult to measure.
That said, we have a solid book position and intensely constrained capacity for the first half of 2022.
With the existing demand and limited capacity, we remain focused on maintaining price.
Bookings continue to build for the remainder of 2022 and well into 2023, and we are achieving those early bookings with strong demand.
In fact, pricing on our book position for the back half of 2022 improved since last quarter, and that's despite the Delta variant.
The current environment while challenging, has improved dramatically since last summer.
And as the current trend of vaccine rollout and advancements in therapies continues, it should improve even further by next summer.
So looking forward, we remain on a path to consistently deliver and slow from operations during the second quarter 2022 and generate profit in the second half of 2022.
Importantly, we believe we have the potential to generate higher EBITDA in 2023 compared to 2019, given despite our modest growth rate, additional capacity and our improved cost structure.
Throughout the pause, we have been proactively managing to resume operations as an even stronger and more efficient operating company, to maximize cash generation and to deliver double-digit return on investment.
Once we return to full operations, our cash flow will be the primary driver to return to investment grade credit over time, creating greater shareholder value, and we continue to move forward in a very positive way.
And for that, I again express my deepest appreciation to our Carnival team members, both shipboard and shoreside, who consistently go above and beyond.
I am very proud of all we've accomplished collectively to sustain our organization through these challenging time and I'm very humbled by the dedication I've seen from our teams throughout.
Of course, we couldn't have done it without the overwhelming support from all of you.
I'll start today with some color on our positive cash from operation followed by a review of guest cruise operations along with a summary of our fourth quarter cash flow, then I'll provide an update on booking trends and finish up with some insights into our financial position.
Turning to cash from operation.
I am so happy to report that our cash from operations turned positive in the month of November, ahead of our previous indication, driven by increases in customer deposits and other working capital changes.
We all know that booking trend are a leading indicator of the health of our business with solid fourth quarter booking trend leading the way, driving customer deposits higher, positive EBITDA is clearly within our site.
Over the next few months, we expect ship level cash contributions to grow as more ships return to service and as we build on our occupancy percentage.
However, cash from operations and EBITDA over the next few months will be impacted by restart related spending and dry-dock expenses as 28 ships, almost a third of our fleet will be in dry-dock during the first half of fiscal 2022.
Given all these factors combined, we expect both monthly cash from operations and monthly EBITDA to consistently turn positive during the second quarter of fiscal 2022.
So 2022 will be a tail to hear.
While we expect the net loss for the first half of 2022, it makes me feel so good to say we expect the profit for the second half of 2022.
Now let's look at guest cruise operation.
During the fourth quarter, we successfully restarted 22 ships.
During the month of December, we will restart an additional seven ships, so we will be celebrating on New Year's Eve with over two thirds of our fleet capacity in service.
Our plans call for the remainder of the fleet to restart guest cruise operations by spring, putting us in a great position for our seasonally strong summer period.
For the fourth quarter, occupancy was 58% across the ships in service and that was a 4 point improvement over the 54% we achieved last quarter during the peak summer season despite the slowdown in bookings just prior to the fourth quarter from the Delta variant.
During the fourth quarter, we carried over 850,000 guests, which was 2.5 times the number of guests we carried in the third quarter.
Our brands executed extremely well with net promoter scores continuing at elevated levels compared to pre-COVID scores.
Revenue per passenger cruise day for the fourth quarter 2021 increased 4% compared to a strong 2019 despite the current constraints on itinerary offering.
We had great growth in onboard and another per diems on both sides of the Atlantic.
Increases in bar, casino, shops, spot, and Internet led the way onboard.
Over the past two years, we have offered and our guests have chosen more and more bundled package options.
In the end, we will see the benefit of these bundled packages and onboard and other revenue as we did during the second half of 2021.
As a result of these bundled packages, the line between passenger ticket revenue and onboard revenue is blurred.
For accounting purposes, we allocate the total price paid by the guests between the two categories.
Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics.
For those of you who are modeling our future results based on our planned restart schedule for fiscal 2022, available lower berth days or ALBDs as they are more commonly called, will be approximately $78 million.
By quarter, the ALBDs will be for the first quarter $14.1 million.
For the second quarter, $17.8 million.
For the third quarter, $23 million even.
And for the fourth quarter, $23.1 million.
Fuel consumption will be approximately 2.9 million metric tons.
The current blended spot price for fuel is $563 per metric ton.
I did want to point out that due to the cost of a portion of our fleet being in pause status during the first half of 2022, restart related expenses, the cost of maintaining enhanced health and safety protocols and inflation, we are projecting net cruise costs without fuel per ALBD in 2022 to be significantly higher than 2019 despite the benefit we get from the 19 smaller less efficient ships leaving the fleet.
Remember that because a portion of the fleet will be in pause status during the first half, we are spreading costs over less ALBDs.
We do anticipate that most of these costs and expenses will end with 2022 and will not reoccur in fiscal 2023.
In addition, we expect depreciation and amortization to be $2.4 billion for fiscal 2022, while net interest expense without any further refinancings is likely to be around $1.5 billion.
Next, I'll provide a summary of our fourth quarter cash flows.
During the fourth quarter 2021, our liquidity, increased by $1.6 billion to $9.4 billion at the end of the fourth quarter from $7.8 billion at the end of the third quarter.
The increase in liquidity was driven by the $2 billion senior unsecured notes we issued in October to refinance 2022 maturities.
The $360 million customer deposit increase added to the total.
This was the third consecutive quarter we saw an increase in customer deposits.
Completion of a loan we previously mentioned, supported by the Italian government, with some debt holiday principal refund payments added another $400 million.
Working capital and other items net contributed $300 million.
All these increases totaled $3.1 billion, which was somewhat offset by our cash burn of $1.5 billion.
Simply, our monthly average cash burn rate of $510 million per month times 3.
it should be noted that our monthly average cash burn rate for the fourth quarter 2021 was better than planned, driven by lower capital expenditures.
Turning to booking trends.
Our cumulative advance book position for the second half of 2022 and the first half of 2023 are at the higher end of historical ranges and at higher prices compared to 2019, with or without FCC's, but normalized for bundled packages.
This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was the high watermark for historical yield.
Booking volumes for the same period during the fourth quarter of 2021 were higher than the third quarter.
During the fourth quarter 2021, we significantly increased our advertising expense compared to the third quarter in anticipation of the full fleet being in operation in the spring of 2022, generating demand and allowing us to improve pricing on our book position.
However, the fourth quarter advertising expense is still significantly below our spending in the fourth quarter 2019.
Finally, I will finish up with some insights into our financial position.
What a difference a year makes except for our liquidity.
As Arnold indicated, we entered 2022 with $9.4 billion of liquidity, essentially the same liquidity level as last year, but with significantly improved cash flow generation ahead as ship operating cash flows and customer deposits continue to build.
Through our debt management efforts, we have refinanced $9 billion to date, reducing our future annual interest expense by approximately $400 million per year and extending maturities, optimizing our debt maturity profile.
With our 2022 maturities already refinanced, we do not have any financing needs for 2022.
However, we will pursue refinancings to extend maturities and reduce interest expense at the right time.
Given our long history of positive strong resilient and growing cash flows, unlike many other industries, in 2023 our focus will shift to deleveraging, driven by cash from operations.
We expect to return to investment grade credit over time, creating greater shareholder value.
| carnival corporation & plc provides fourth quarter 2021 business update.
oration & plc provides fourth quarter 2021 business update.
q4 2021 ended with $9.4 billion of liquidity.u.s. gaap net loss of $2.6 billion and adjusted net loss of $2.0 billion for q4 of 2021.
for cruise segments, revenue per passenger cruise day ("pcd") for q4 of 2021 increased approximately 4% compared to a strong 2019.
monthly average cash burn rate for q4 of 2021 was $510 million, which was better than expected.
over last few weeks, we have experienced an initial impact on bookings related to near-term sailings as a result of omicron variant.
cumulative advanced bookings for second half of 2022 and first half of 2023 are at higher end of historical ranges and at higher prices.
booking volumes for same periods during q4 of 2021 were higher than q3 of 2021.
expects a net loss for first half of 2022 and a profit for second half of 2022 on both a u.s. gaap and adjusted basis for both periods.
cash from operations turned positive in month of november.
expect consistently positive cash flow beginning in q2 of 2022 as additional ships resume guest cruise operations.
occupancy in q4 of 2021 was 58%, which was better than 54% in q3 of 2021.
expects to continue incurring incremental restart related spend.
total customer deposits increased $360 million to $3.5 billion as of november 30, 2021 from $3.1 billion as of august 31, 2021.
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During today's call, we will also reference non-GAAP metrics.
I greatly appreciate the work they do every day to keep us moving forward.
As always, we remain focused on those things under our control.
Despite a significant shift in the economic environment during fiscal '20, there were several things that went as planned including: sales of replacement parts performed better than new equipment and first-fit products, gross margin increased from the prior year, we reduced our discretionary expenses while investing in growth businesses, and we maintained a strong financial position while returning cash to shareholders through dividends and share repurchase.
We are entering fiscal '21 with clear priorities and engaged employees.
We do not anticipate strong market conditions overall this year but our diverse business model and robust operational capabilities give me confidence that we can make progress on our strategic initiatives in any economic environment.
We will talk more about our longer term opportunities later in the call.
So I'll now turn to a brief overview of fourth quarter sales.
Total sales were $617 million in the quarter with sequential increases in June and July.
Compared with the prior year, sales were down 15%, which is consistent with the forecast we provided in early August.
Both segments experienced a similar decline.
However, there was quite a bit of variability within the results.
In the Engine segment our first-fit businesses remain under the most pressure.
Fourth quarter On-Road sales were down 44% from the prior year.
The U.S. is the largest portion of On-Road and it accounted for much of the decline as the cyclical slowdown in Class 8 truck production was magnified by the pandemic.
As a reminder, On-Road first-fit in the U.S. is only about 3% of total Donaldson sales so our aggregate exposure to that market is limited.
Sales in Off-Road were down 24% in the quarter.
More than half the decline was due to Exhaust and Emissions.
There were pre-buys in Europe last year related to an oncoming regulatory change and new programs for our Exhaust and Emissions products are not yet at meaningful volumes.
In the U.S. production on heavy duty Off-Road equipment remains depressed, particularly for the construction and mining industries.
On the other hand, Off-Road sales in China were up nearly 50% in the fourth quarter.
The Chinese government is investing to stimulate activity which is benefiting our Off-Road business.
Additionally, we continue to win new programs with local manufacturers and some of those programs were won with PowerCore.
These are new customer relationships in the country that produces more heavy duty equipment than anywhere in the world.
We are learning how to best support these local manufacturers and we know that will come with order volatility, but our team in China is motivated as we see the opportunity for significant long-term growth.
Sales trends for Engine aftermarket were predictably better than our first-fit businesses.
Fourth quarter aftermarket sales were down 11% reflecting a decline in the mid-teens for sales through our independent channel.
The headlines in our independent channel are fairly consistent with third quarter.
Sales in the U.S. fell with the collapse of the oil and gas market combined with slowing transportation activity.
In Latin America, utilization is slowing across the region as the spread of the virus is compounding the impact from geopolitical uncertainty.
And fourth quarter sales in Eastern Europe remain strong as we continue gaining share.
Sales through the OEM channel of aftermarket experienced a more modest, low-single-digit decline.
In the U.S., large customers pulled down inventory to match demand, which was partially offset by strong growth in China as we continue gaining share with local customers.
In fact, aftermarket sales in China were at a record level last quarter and we see a long runway as we expect to continue winning new programs with innovative technology.
Our portfolio of innovative products performed well in the fourth quarter.
This portfolio makes up nearly a quarter of the total aftermarket revenue and fourth quarter sales were up in the low-single digits.
For nearly two decades, we have been improving, expanding and reinventing our offering related to these razor-to-sell razor-blade products.
After all that time we still have very strong retention rates.
These products create a significant opportunity for growth and relative stability in our Engine business.
So, we will continue to invest in new technologies for a long time to come.
Sales of Aerospace and Defense were down 3% in fourth quarter driven by soft sales of products for commercial helicopters.
The decline was partially offset by a strong increase in sales for ground defense vehicles but some of the growth is timing-related as key distributors build inventory in the quarter.
I also want to update you on a change to our strategic portfolio classification.
Beginning in fiscal '21, we are recategorizing the defense business to critical core from mature.
Our mature businesses are committed to generating cash that allows for investment elsewhere while critical core businesses are geared toward driving share gains in existing markets with new technology, services and relationships.
The Defense business has won new programs with our robust engineering capabilities and we expect these wins will deliver solid returns over a long time horizon.
Turning to our Industrial segment, fourth quarter sales were down 15% driven in large part by the Dust Collection business within Industrial Filtration Solutions or IFS.
Sales of new dust collectors and replacement parts were down as customers continue to defer investment and reduce output.
The quote-to-order cycle remains elongated with large projects being put on hold while smaller must-do projects tend to move forward.
At the same time, our value proposition still resonates.
Fourth quarter sales of our Downflo Evolution dust collection systems were up in the low teens and the sales of those replacement parts grew more than 30%.
The Downflo family of products is only about 15% of total dust collection sales today, but it has grown rapidly as customers appreciate the space and energy savings it offers and we value the ability to retain the aftermarket.
We are also building the dust collection business through our e-commerce platform shop.
We turned on the ability to take guest orders earlier this year and we are encouraged by the results.
While incremental dollars are still small, we have seen a significant number of new dust collection customers.
With our robust sales and delivery model, we believe the simplicity of our e-commerce platform gives customers another reason to choose Donaldson.
Fourth quarter sales of Process Filtration were down in the low-single digits after an increase of more than 10% last year.
The decline was driven by new equipment while replacement parts were about flat with the prior year.
We continue to make progress penetrating the highly valuable food and beverage industry.
We position ourselves as an engaged partner and we market our ability to quickly fulfill orders with a product that can help improve efficiency in our customer's processes.
The pandemic gave us the opportunity to prove this value proposition to our customers in the food and beverage industry and our Process Filtration team delivered.
We remain very excited about this market, so we will continue to invest in growing the sales force and adding new tools to drive this profitable business.
Sales of Special Applications were down 10% in fourth quarter.
Disk Drive was down from the prior year after having a significant increase in third quarter while the slowdown in the automotive market resulted in lower sales of Venting Solutions.
Fourth quarter sales in Gas Turbine Systems or GTS were up 6% due primarily to strength in small turbines.
Once again the GTS team delivered another profit increase in terms of both dollars and rates.
As you know, we shifted the GTS go-to-market strategy four years ago.
We determined that the best path forward was to focus on replacement parts and small turbines while being highly selective in deciding which large turbine projects we pursue.
The GTS team has done an incredible job executing their strategy and we see it in the results.
In the past quarter we also chose to consolidate our joint venture in Saudi Arabia into our company.
Once again, we are focused on rightsizing and streamlining GTS to enhance our profitability.
Based on what the GTS team has delivered and the opportunities in front of us, we are reclassifying GTS as a mature business in our portfolio.
The GTS team has transitioned from fixing the business to driving profitability and we are on solid footing today.
The success in GTS is not an isolated incident.
Our company is filled with great people working together to deliver results and create value for all our stakeholders.
That's why I'm comfortable and confident in our future.
Before turning the call to Scott, I want to briefly touch on fiscal 2021.
We're not sure how long the pandemic will last nor are we sure about its ultimate impact on our business.
Given those uncertainties, we will remain focused on what we control, prioritizing the health and safety of our employees, fulfilling our customer commitments, pursuing market share and growth opportunities around the world, executing margin enhancement initiatives and maintaining a balanced approach to expense management, which includes making targeted investments to advance our strategic priorities.
Scott will share some more fiscal '21 details.
Like most companies, we had to quickly adjust to a new way of working over the past six months, and our employees did an excellent job at that period.
We increased our level of collaboration, we deepened our relationships with customers and suppliers, and we performed in critical businesses around the world with minimal disruption.
Overall, I'm very impressed by what our team accomplished.
As we turn to fiscal '21, we have a solid foundation.
But the markets are not yet on firm footing.
Given the wide range of possible outcomes, including the timing and shape of the inevitable recovery, we are not issuing detailed guidance at this time.
We do however want to provide some of our 2021 planning assumptions.
I'll cover those later in the call, but first I'll share some thoughts on fiscal '20 results.
Decremental margin was a notable highlight for us.
We delivered 20% in the fourth quarter and 18% for the full year.
Those results are stronger than our historic averages.
So let me walk through some of the details.
I'll start with operating expenses, which declined 10% to $125 million in the fourth quarter, that's flat sequentially, and it's our lowest fourth quarter level in four years.
Discretionary expenses were down significantly, due in part to pandemic-related travel restrictions, and we maintained our investments in strategic growth businesses like Process Filtration, Dust Collection and Connected Solutions.
We will continue to focus on balancing expense [Indecipherable] investments, and we are pleased with the performance in the fourth quarter.
We are also pleased with our gross margin performance.
Fourth quarter gross margin was up 20 basis points in the prior year, and our full year rate was up 50 basis points despite headwinds in lower sales and higher depreciation related to our capacity expansion projects.
As a side note, many of these projects are now completed.
That's why our capital expenditures in fiscal '21 are planned well below the $122 million we invested last year.
Our focus has now shifted to the optimization opportunities enabled by these investments.
We plan to lower our cost structure while maintaining or improving service levels.
While benefits from these initiatives will ramp up over time our list of optimization projects give me confidence that we can deliver strong returns with these new assets.
Lower raw material costs are helping us offset the loss of leverage, impact on gross margin.
We have seen favorability in market prices for steel, media and petroleum-based products and our procurement team is driving incremental savings as they strengthen our supplier network while improving terms.
I also want to touch on pricing, while it has been a major contributor to the year-over-year gross margin increase it hasn't been a headwind.
We have more latitude to drive pricing in many of our replacement parts businesses and teams like those in the independent channel of Engine Aftermarket have done an excellent job consistently executing our pricing strategy.
It makes a big difference especially in this economic environment.
A favorable mix of sales is also making a difference to gross margin.
In the fourth quarter and for most of the year we have realized mixed benefits as replacement parts make up a greater share of total sales.
To a certain extent these mixed benefits are by design.
We invest in technology to win first-fit programs that drive aftermarket retention.
As we move through an economic cycle, our strong base of recurring revenue creates some relative stability and provide some gross margin inflation [Phonetic].
Replacement parts now account for 64% of total sales giving us confidence in the durability of our business model.
Before moving further down the P&L, I want to quickly talk about segment profit margins.
The story is Engine is consistent with the consolidated results.
Mix benefits and lower raw material costs after the loss of leverage results in a year-over-year margin increase of 20 basis points in the fourth quarter.
Within the Industrial segment, the loss of leverage was magnified by continued investments in our strategic growth businesses.
We expect Industrial margins will bounce back helping us deliver our goal of mixing the company's margins up over time.
Moving back to the P&L, Other income was $2.7 million in the fourth quarter compared with an expense of $0.5 million in the prior year, and improved performance in our joint ventures was a benefit in fiscal '20 and the fourth quarter expense in the prior year reflects a charge related to our global cash optimization initiatives.
These initiatives, which allowed us to streamline our legal and fee structure were enabled by tax reform.
We excluded the charge of last year's calculation of adjusted earnings per share and we also excluded a non-recurring charge related to tax reform legislation.
With that in mind, it's best to compare the reported fourth quarter tax rate of 21.1% with the prior year's adjusted tax rate of 21.4%.
While the delta between rates is not significant, I'll point out that current and prior year rates were well below what we would typically expect.
The fourth quarter 2020 rate benefit from a favorable mix of earnings across jurisdictions while the 2019 adjusted rate included a non-recurring benefit related to the favorable settlement of an audit.
As we think about fiscal '21, we see our full year tax rate going up in 2020 to be more in line with our long-term estimate of 24% to 27%.
In terms of our financial position, we feel good about where we ended the year.
Our leverage ratio was 0.9 times net-debt-to-EBITDA and in the fourth quarter we paid off a term loan for $50 million and we reduced borrowings in our revolver by $110 million.
We proactively reduce from our revolver in the early days of the pandemic as a way to bolster our liquidity out of an abundance of caution.
While markets still are uncertain, we are confident in our strong position and no longer feel the need for that extra layer of security.
Receivables were down meaningfully from the prior year, which is what we expect in this environment.
Inventory was also down.
So we plan further improvements this year as we focus on leveling with demand.
Our fourth quarter and full year 2020 cash conversion rates increased meaningfully to 165% and 103% respectively and we plan to exceed 100% again this year.
Our fiscal '21 assumptions for sales are directionally consistent with recent trends.
Sales are expected to vary widely by geography and market and sales of our replacement parts and products for new markets should continue to outperform the company average.
Additionally, we expect sales during the first half of '21 will be down versus the prior year due to the timing of when the pandemic began.
We are seeing these sales trends play out in August, which we expect will be down about 10% from the prior year.
Total sales for the month will also be down from July, but that's typical seasonality.
Regional trends in August match what we saw in the fourth quarter.
Sales in the APAC region are performing the best versus the prior led by growth in China.
Europe is faring better due in part to currency while the U.S. and Latin America remain under the most pressure.
And as expected we have pockets of relative strength from some of our more stable businesses including Engine Aftermarket and Process Filtration, which are both up in Europe while new equipment remains under more pressure.
In terms of fiscal '21 gross margin, benefits from product mix and lower raw material costs would lessen as we compare against strong tailwinds in the prior year.
At the same time, we will execute our optimization projects to position ourselves for long-term increases in gross margin.
Our fiscal '21 operating expenses will also have some puts and takes.
Resetting our annual incentive compensation plan generates a headwind of about $13 million and we are planning to make further investments in our strategic growth businesses and technology development.
We plan to substantially offset these increases by controlling expenses, which will likely see some benefits from pandemic-related restrictions and comparing against a higher level spend in the first half of the prior year.
Should we see an opportunity that makes sense, we will also explore additional optimization initiatives.
Finally, we plan to repurchase at least 1% of outstanding shares in fiscal '21, which would offset any dilution from stock-based compensation.
Any repurchases beyond that level would be governed by macroeconomic conditions, our investment opportunities and our balance sheet metrics.
Should conditions improve, it is not unreasonable to assume this goal above the 1% in fiscal '21.
At a high level, our objectives for the New Year are consistent with our long-term strategic agenda.
We will pursue growth and market share opportunities in our Advance & Accelerate portfolio of businesses, drive optimization initiatives that will strengthen gross margins, control discretionary expenses while making targeted investments and protect our strong financial position to discipline capital deployment and working capital management.
These are the actions we can control and I am confident in our ability to deliver in 2021.
Before turning the call back to Tod, I want to share some news.
After five years as our Investor Relations Director, Brad is going to be moving to Belgium to take over as Finance Director of our Europe-Middle East region.
COVID makes the timing a little uncertain, but I know he's committed to facilitate a smooth transition when we find his replacement.
You have done an excellent job and congratulations on the exciting new adventure with Donaldson.
You'll clearly be missed in this role, but we all know it's a great opportunity, so we're very excited for you.
I'm confident in our ability to navigate the complexities of the current environment and I'm equally confident in our ability to create long-term value by meeting the evolving needs of our customers.
We have strong relationships with our customers and they range from some of the world's biggest brands to small business owners.
Our goal is to solve our customers' complicated filtration challenges in a way that allows them to deliver great products efficiently and I think we're doing well against that objective.
Let me share some examples of what I mean.
In the Engine segment, our Filter Minder team released a wireless monitoring system that helps fleet managers optimize their maintenance schedules for On-Road and Off-Road equipment.
Our system integrates into the existing telematics and fleet management infrastructure making it easy for our customers to adopt this valuable technology.
We're also expanding connecting solutions into the dust collection market with our IQ offering.
This service provides customers with real-time monitoring of their equipment performance helping them save energy costs and reduce unplanned downtime.
Once again, we made it easy to adopt, our IQ set up can be used on any brand of dust collector and the retrofit process is very simple.
Our e-commerce platform is another tool for helping customers operate more efficiently.
donaldson.com has a global reach and offers features like real-time availability and personalization functionality making it easy for customers to find what they need and place new or repeat orders.
As always, new technology is a critical part of our success formula and we continue to expand our technologies and solutions to drive growth.
Many of our Engine customers are looking to improve fuel economy and reduce emissions and our products can help them achieve their goals.
We have shown that consistent use of our PowerCore products can help end-users improve fuel economy and it provides value to our OEM customers as they can retain more of their parts business.
We still see many opportunities with diesel engines and we also see a growing opportunity with alternative powertrains like hybrid solutions and hydrogen fuel cells.
Hybrid platforms leverage the portfolio of air and liquid solutions we have today so we have good opportunity with that equipment.
The needs are different for fuel cells and we have a specialized air filtration system that is specifically designed to meet those needs.
In addition to our air systems, we also have venting products and specialized membranes for fuel cells.
With our technical capabilities, we are well-positioned to participate in this growing market.
We are also pursuing non-Engine markets like food and beverage.
Sales of process filtration were about $15 million in fiscal '20, that's an increase of more than 60% over the past three years.
We have continued investing in new technologies and we are building capabilities that will facilitate our future expansion into life sciences.
Our long-term success is dependent on our team, so we're committed to making our company a great place to work.
We have a strong culture and we place a high value on integrity, commitment, respect and innovation.
We also have a continuous improvement mindset, so we've recently created a diversity, equity and inclusion council that will help identify and implement practices to make us a stronger company.
We are also on a journey with our sustainability practices.
We began developing our global sustainability strategy last year.
We have engaged our stakeholders and we have identified a long list of projects while reducing greenhouse gas emission, energy consumption and wastewater.
Implementing and maintaining sustainable practices is one more way we drive toward our purpose of advancing filtration for a cleaner world.
I'm proud of what we accomplished as One Donaldson and I look forward to another successful new year.
| fiscal 2021 market conditions expected to be uneven.
expects to repurchase at least 1 percent of its outstanding shares in fiscal 2021.
sales in the first half of fiscal 2021 will likely experience year-over-year declines.
full-year sales trends are expected to vary widely by geography and market.
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These statements are subject to change due to new information or future events.
For the first time in our history, Assured Guaranty's adjusted book value has surpassed $100 per share and both shareholders' equity per share and adjusted operating shareholders' equity per share were also new records.
We achieved this milestone while producing our best direct new business insurance production for second quarter since the acquisition of AGM in July of 2009.
Our financial guaranty, guaranty PVP of $96 million was 71% higher than in last year's second quarter.
Our success reflects the tremendous work we did over several years to prepare for the unexpected.
Our people were extremely effective, operating 100% remotely in unprecedented economic and market conditions.
We had the technology, processes, and training in place to help us excel during this pandemic and we did excel, proving again not only the competence and dedication of our employees, but also the resilience of our business model and the benefits of our value proposition.
With the virus creating market and economic uncertainty, bond yields had increased by the beginning of the quarter and credit spreads widened.
Investors turned more of their attention to credit quality for which our financial guaranty insurance is a solution and also to ratings durability, trading value stability and market liquidity, to all of which our product tends to add value.
The result has manifested in heightened demand for bond insurance.
As a result, we saw the best second quarter and first half direct U.S. public finance production in more than a decade, driving direct PVP of $60 million and $89 million, respectively.
And I can tell you that with our July municipal insured par volume exceeding $2 billion, the surge in demand for our guaranty has not let up.
At the industry level, more than $9.1 billion of U.S. public finance primary market par was sold with bond insurance in the second quarter, the most for any quarter since mid-2009 and industry insurance penetration reached 8.7% of total new issue par sold, the highest quarterly level since 2009.
Six months industry insured volume is 43% higher than in the first six months of 2019.
In this strengthened municipal bond insurance market, Assured Guaranty was selected to ensure 63% of the insured new issue par sold in the second quarter.
Compared with the second quarter of last year, Assured Guaranty's primary market production was up 58% to $5.8 billion in insured par sold and up 22% to 318 new issue in transaction count.
He heightened par volume was partly driven by large transactions, but we continue to be the insurer of choice.
We insured large tax exempt and taxable deals across a variety of sectors and underlying rating categories, including, for example, A healthcare issues and AA general obligations.
We guaranteed 11 transactions of over $100 million in insured par during the quarter, the largest of which was a $385 million school district transaction with the dormitory authority of the state of New York, rated double AA3 by Moody's and AA minus by Fitch.
The high value that investors place in our guaranty was visible among credits with underlying S&P or Moody's ratings in the AA category, where we insured more than $1 billion of primary market par in the second quarter.
We are also seeing heightened demand for our secondary market insurance.
During the second quarter, we insured $533 million of secondary market par compared with $233 million for the first quarter of the year and $327 million for the second quarter of 2019.
In aggregate for the primary and secondary markets, Assured Guaranty provided insurance on $6.3 billion of municipal bonds, 58% more than in last year's second quarter.
Although by quarter end, municipal yields have trended close to historic lows seen in March, credit spreads generally remain wider than the pre-pandemic levels and that is one reason along with very strong issuance volume for the successful performance we are seeing.
We also had a great second quarter in our international infrastructure business, where we generated $28 million of direct PVP, over 3 times last year's second quarter PVP and the second highest quarterly direct PVP in the sector, since before the Great Recession.
Notable transactions included our third solar bond wrap in Spain, the modification of terms of existing investment grade insured transaction to provide additional flexibility to the issuer and a secondary market guarantee to a European financial institution for a public sector credit.
The impact of COVID-19 has been mix for the international business.
On one hand, fewer transactions are coming to especially in transport and social infrastructure.
And some transactions in our pipeline have been delayed though nine have been canceled.
On the other hand, credit spreads widen materially have not fully return to the previous tighter levels, which increases the value of our guarantees.
Also, we continue to see an increased variety of incoming new transaction inquiries, some of which are a direct result of COVID related investor concerns.
Our global structured finance business also performed well in the second quarter contributing $8 million of PVP from a variety of transactions, including an insurance securitization and two whole business securitizations.
The pandemic has slowed both asset backed issuance and the progress in some of our transactions and development, but it has also widened credit spreads and created new opportunities.
We are seeing an increased number of investors led opportunities relating to portfolios of corporate credit exposure.
On our last call, I explained in detail our insured portfolio is in good shape to weather this economic disruption.
We have continued our due diligence and reached out to almost all the obligors we identified in the vulnerable section to learn how they plan to manage their resources.
Based on our research and the additional information provided by obligors, we continue to expect no material pandemic related liquidity claims.
To-date, we have not been asked by any financial guarantee claims that we attribute to COVID-19 pandemic.
For below investment grade insured obligations, which we have identified is already under stress, we have updated assumptions to take into account the added stress of the pandemic.
We continue to believe that for the remainder of the portfolio, the 96% of par exposure that is investment grade, there should be no material losses caused by the pandemic.
In any case, as I said before, we have proven the resilience of our business model.
For example from 2008 through second quarter 2020, we paid $11 billion in gross claims, $5 billion in net and returned more than $4.3 billion to shareholders through share repurchases and dividends.
Yet our claim paying resources were virtually the same at the end of the period compared with the beginning.
Meanwhile, we have dramatically reduced our par -- total par exposure and cut our insured leverage by more than half, measured by a variety of ratios.
We are in better shape today than before the Great Recession.
I hope you will take a look at two -- at the two reports S&P published since the pandemic began.
I mentioned one on our last call, S&P's April 3rd report on the bond insurance industry.
The second was S&P's annual review of Assured Guaranty that came out on July 16th.
The common theme of these reports was that, notwithstanding the current macroeconomic environment.
S&P assess the risk profile to be low for both the bond insurers as an industry and for Assured Guaranty, a very positive conclusion.
S&P affirmed the ratings of all of our business units -- of all of our insurance units at AA with a stable outlook in June.
In the annual review that followed S&P reiterated how our strong capital position, exceptional liquidity and proven business model support our financial strength rating.
Additionally, S&P recognized the increased demand for Assured Guaranty's products since the spread of COVID-19.
Writing that investors flight to quality and wider credit spreads should continue to provide us with primary and secondary market underwriting opportunities.
In U.S. public finance it attribute the strong secondary market demand we've experienced to institutional investors finding the economics of bond insurance appealing as a tool for risk mitigation.
In the same report S&P said it ran a COVID-19 sensitivity stress test and even under the increased loss assumptions in that scenario our capital adequacy assessment would still be excellent, S&P also described our financial risk profile is very strong and wrote that during periods of economic stress, our insured exposures outperforms relative to the market segments in which we underwrite, due to our underwriting and risk management guideline.
S&P does not published a figure for our excess capital under their AAA depression stress model.
We estimate that we have $2.6 billion of capital in excess of S&P's AAA requirement as of year-end 2019.
And this incorporates the impact of our capital management program, the acquisition of BlueMountain, our elimination of an excess of loss credit facility and the continued payment of Puerto Rico debt service claims.
Another report I was reading was issued by Kroll Bond Rating Agency on July 30th.
They provided a detailed discussion of the recent increased activity in demand for bond insurance.
In the report, KBRA also makes a positive observation that it believes the pandemic should remain largely a liquidity event for bond insurers, with the exception of Puerto Rico.
On the subject of Puerto Rico, we continue to pursue a consensual resolution of the situation, while defending our rights in the Title III bankruptcies.
COVID-19 and the pending gubernatorial election may be slowing progress somewhat.
In recent news, PREPA hired a private U.S. Canadian consortium to operate its electricity transmission and distribution system.
This appears on the face to be a step in the right direction, but the essential step to restore and improve the power system is to complete the restructuring support agreement that all appropriate parties have agreed to.
We agree with the Oversight Board that quote as long as PREPA remains in Title III, the utility will not have an effective access to capital markets to fund the critical grid modernization and improvement plans.
Title III Court refused the lift to stay on our ability to assert our property rights with respect to Highways and Transportation Authority Revenue bonds.
We will appeal this ruling.
At least two members of the Oversight Board announced their immediate resignations -- imminent resignation and all members are subject to replacement or renomination.
We hope congressional leadership and the President choose Board members more familiar with municipal government and finance.
Lastly, supply chain management has become a significant issue on Capitol Hill, creating an opportunity for legislation that could allow the country to take full advantage of Puerto Rico's long history and well-established capabilities in the production of pharmaceuticals, medical supply to medical devices.
This would have solved the current public health crisis and improve the nation's security and preparedness for the future.
While at the same time revive a key portion of the island's manufacturing base and provide impetus to its economic recovery.
Coming from the financial guaranty business to asset management, Assured Investment Management benefited from a strong rally in the credit markets during the second quarter and profitably monetize CLO debt tranches.
With CLO, issuance gaining steam, we acquired newly issued investment grade CLOs and in June Assured Management and Investment Management priced its first CLO issuance since the market dislocation.
For the current market environment as delay the realization of this business lines potential for the short-term, we remain confident in its diversification strategy.
Yesterday we announced an important change within the leadership of our Asset Management business.
Andrew Feldstein, Chief Investment Officer and Head of the Asset management has decided to leave the company.
David Buzen, BlueMountain's Deputy Chief Investment Officer will assume Andrew's responsibility as CEO and CIO of BlueMountain and Head of Asset Management and CIO at Assured Guaranty.
Andrew will continue to serve on the boards of BlueMountain funds and to support a smooth transition.
He'll remain with the company as Senior Advisor to David through the end of October 2020.
We are confident in the long-term prospects of our Asset Management business under the leadership David Buzen and the talented senior management team.
I want to emphasize that this leadership transition reflects no change in Assured Guaranty's strategy with respect to Assured Investment Management.
We continue to support the growth of the business and have allocated $1 billion of our investment portfolio to investment it manages, with the goal of generating even greater value for our investors and policyholder.
I look forward to seeing our Asset Management business, making a significant contribution to the value of Assured Guaranty and I am certain Dave is the right person to lead this effort.
He was lead executive in our acquisition of BlueMountain and has been involved in every aspect of our Asset Management strategy and operations.
He is a consummate financial professional, who has served in top executive roles at a number of financial companies.
As we worked with David for a long time has over 30 years of experience includes senior positions at ACE Financial Solutions, which required Capital Re when David was its CFO and which is a company we now know as Assured Guaranty Corp.
We are in the middle of a unique year, in which a previously unknown disease has effective means of people, caused hundreds of thousands of deaths and disrupted economies worldwide.
Congress, the administration and the Fed have taken action to provide money to people in need, inject monetary liquidity of businesses survive and support Capital market.
State and local governments are tackling the challenges of providing essential services, administering social programs and meeting financial obligations and made sharp reductions in revenues.
They deserve additional direct federal assistance to provide -- to prevent large scale lay-offs of government employees and a potential cascade of economic hardships.
We've been impressed by the determination of our insured issuers, public officials to maintain essential services, while recognizing imperative to meet debt obligations to preserve their access to the capital market.
As a company, Assured Guaranty is better positioned than most to thrive in this environment.
By definition, our main product is designed to confident investors when the future is uncertain.
Credit conscious investors have driven increased demand for our guaranty, giving issuers a way to reduce the cost of financing when they most need to do so.
We have abundant capital liquidity, supporting a 96% investment grade insured portfolio, consisting of transactions carefully selected to perform better under economic stress than others in their respective sectors.
With our ability as a guarantor to work with issuers facing short-term liquidity problems, or requesting reasonable amendments or waivers, we can help them in very serious financial trouble and we have now clearly demonstrated that we can be highly productive, while prioritizing the safety of our employees and clients.
I'm very pleased with our results and progress on our strategic initiative this quarter.
Despite the continued market turmoil, our business model proved resilient, we made significant progress in all three areas of our strategic focus.
In our Insurance segment, we had strong new business development, which is replenishing our unearned premium reserve and offsetting the scheduled amortization of the existing book of business.
In the Asset Management segment, we launched a new liquid asset strategy and restarted CLO issuance toward the end of the second quarter.
In terms of capital management, we are ahead of our plan, relative to the number of shares repurchased, which helped us to propel our adjusted book value per share to over $100, a record high.
Turning to second quarter 2020, adjusted operating income was strong coming in at $190 million or $1.36 per share.
This consists of $154 million of income from our Insurance segment, a $9 million loss from our Asset Management segment and a $26 million loss from our Corporate division, which is where we reflect our holding company interest and other corporate expenses.
Starting with the Insurance segment, adjusted operating income was $154 million compared to $161 million in the second quarter of 2019.
Net earned premiums and credit derivative revenues in the second quarter 2020 were $125 million compared with $127 million in the second quarter of 2019.
Structured finance net earned premiums and credit-driven revenues decreased to total of $13 million, due to the decline in this portfolio.
On the other hand, public finance net earned premiums increased in the second quarter 2020 compared to the second quarter of 2019, due to higher accelerations as well as a modest increase in scheduled net earned premiums, which is a result of increased premium writings in the last few quarters.
In total, accelerations due to refundings and terminations were $32 million in the second quarter 2020 compared with $29 million in the second quarter of 2019.
Also contributing to our increasing unearned premiums reserve was the reassumption of a previously ceded book of business from our largest reinsurer.
This reassumption resulted in the $30 million -- $38 million commutation gain.
Net investment income for the Insurance segment was $82 million in the second quarter of 2020 compared with $110 million in the second quarter of 2019.
The decrease was primarily due to a large non-recurring benefit in 2019 from the favorable settlement of a troubled insurance transaction, that decreased the size of the loss mitigation portfolio.
Proceeds from the settlement were reinvested in lower yielding assets.
The average balance of the externally managed portfolio also declined, in part, because of a shift into alternative investments, including Assured Investment Management funds, which recorded at fair value in a separate line item, as opposed to net investment income.
Second quarter 2020 Insurance segment adjusted operating income also includes a $21 million after-tax mark-to-market gain on our investments in Assured Investment Management funds.
These investments are mark-to-market each reporting period with changes in the fair value recorded as a component of adjusted operating income in the line item equity and earnings of investees.
The fair value gains on the investments in Assured Investment Management funds in the second quarter of 2020 were driven by the overall market rebound.
As of June 30, 2020, the insurance companies had authorization to invest up to $500 million in funds managed by Assured Investment Management, of which $354 million have been invested as of June 30, 2020.
Going forward, we expect adjusted operating income will be subject to more volatility than in the past, as we shift investments from fixed income securities.
Our long-term view of the enhanced return from the Assured Investment Management funds remains positive.
Loss expense in the Insurance segment was $39 million in the second quarter of 2020 and was primarily related to economic loss development on certain Puerto Rico exposures.
In the second quarter of 2019, we recorded a benefit of $50 million primarily related to higher projected recoveries for previously charged up loans for second lien U.S. RMBS.
An increase in excess spread, improved performance and loss mitigation efforts offset in part by economic loss development on certain Puerto Rico exposures.
The net economic development in the second quarter 2020 was $34 million, which primarily consisted of loss development of $30 million in the U.S. public finance sector, primarily attributable to Puerto Rico exposures.
Net economic loss development in U.S. RMBS of $1 million mainly consisted of increased delinquencies, offset by higher projected excess spread across both third and second lien transactions.
In the Asset Management segment, adjusted operating income was a loss of $9 million.
We had previously announced our strategy to transition the investment focus and business model of our Assured Investment Management platform core strategies, including the orderly wind down of certain hedge funds and legacy opportunity funds.
Prior to the current market disruptions, we had made good progress on the winding down of legacy funds, with outflows of $541 million in the second quarter.
We expect the restructuring to continue throughout 2020, but depending on the duration and market impact of the pandemic, the execution of our strategy may take longer than originally anticipated.
Toward the end of the second quarter 2020, we launched a new liquid asset strategy, with initial funds focused on investments in municipal securities.
In addition, in second quarter of 2020, AGM, AGC and MAC entered into investment management agreement, with Assured Investment Management to manage a portfolio of their general account municipal obligations and CLOs.
As of June 30, 2020, the insurance subsidiaries have together allocated $250 million to the municipal obligation strategies and $100 million to CLO strategies, with authorization to allocate an additional $200 million to CLO strategies.
We believe the effect of the pandemic on market conditions and increased volatility may present attractive opportunities for the alternative asset management industry that Assured Investment Management may be able to capitalize on.
And so our long-term outlook for the asset management platform remains positive.
In our Corporate division, the holding companies currently have cash and investment available for liquidity needs in capital management activities of approximately $70 million, of which $80 million resides in AGL.
Adjusted operating loss for the Corporate division was a loss of $26 million in both second quarter 2020 and second quarter 2019.
This mainly consists of interest expense on the U.S. holding companies, public long-term debt and intercompany to the insurance companies, which were primarily used to fund the BlueMountain acquisition.
It also includes Board of Directors and other corporate expenses.
On a consolidated basis, the effective tax rate may fluctuate from period to period, based on the proportion of income in different tax jurisdictions.
In second quarter 2020, the effective tax rate was 14.2%, compared with 21% in the second quarter of 2019.
Turning to our capital management strategy, in the second quarter of 2020, we repurchased 6 million shares for $164 million, for an average price of $27.49 per share.
Since the end of the quarter, we have purchased an additional 800,000 shares for $90 million, bringing our year-to-date repurchases as of today to over 10 million shares.
Since January 2013, our successful capital management program has returned $3.5 billion to shareholders, resulting in a 60% reduction in total shares outstanding.
As always future share repurchases are contingent on available free cash, our capital position and market conditions.
The cumulative effect of these repurchases was a benefit of approximately $23.56 per share in adjusted operating shareholders' equity and approximately $42.76 in adjusted book value per share, which helped drive these important metrics to new record highs of $71.34 in adjusted operating shareholders' equity per share and $104.63 of adjusted book value per share, which both represent record high.
| compname reports q2 adjusted operating earnings per share of $1.36.
q2 adjusted operating earnings per share $1.36.
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Such as statements about our strategy, plans, including but not limited to our 2021 real estate outlook, our initiatives, goals, priorities, opportunities, investment, guidance, expectations or beliefs about future matters, including but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer and other statements that are not limited to historical fact.
We also may reference certain financial measures that have not been derived in accordance with GAAP.
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Despite continued significant uncertainty in the operating environment, our team members have been unwavering in their commitment to fulfilling our mission of serving others, by providing affordable, convenient and close to home access to everyday essentials, at a time when our customers need them most.
I could not be more proud of their efforts.
As always, the health and safety of our employees and customer continues to be our top priority.
We continue to closely monitor CDC and other governmental guidelines regarding COVID-19 and are evaluating and adapting our safety protocols as that guidance evolves.
As one of America's essential retailers, we remain committed to being part of the solution during these difficult times.
And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17,000 stores located within 5 miles of approximately 75% of the US population.
At the same time, we remain focused on advancing our operating priorities and strategic initiatives, as we continue to meet the evolving needs of our customers and further position Dollar General for a long-term sustainable growth.
To that end, and from a position of strength, I'm excited to share an update on some of our more recent plans.
First, as you saw in our release, we plan to further accelerate our pace of new store openings and remodels in 2021.
In total, we expect to execute 2,900 real estate projects next year, as we continue to lay and strengthen the foundation for future growth.
As previously announced, we recently introduced our newest store concept pOpshelf, further building on our proven track record of store format innovation.
We opened our first two locations during the quarter and while still early, we are encouraged by their initial results.
Finally, one of our core values is representing and respecting the dignity and differences of others.
Building on this core value, along with our commitment to diversity and inclusion, we recently updated our fourth operating priority to better capture and express our intent.
We will discuss each of these updates in more detail later in the call.
But first, let's recap some of the results for the third quarter.
The quarter was once again highlighted by exceptional growth on both the top and bottom lines.
We're particularly pleased that for the quarter, our three non-consumable categories once again delivered a combined sales increase, well in excess of our consumable business.
Of note, this represents our 10th consecutive quarter of year-over-year comp sales growth in our non-consumable business, which speaks to the strong and sustained momentum in these product categories.
From a monthly cadence perspective, comp sales for Q3 periods range from the low double digits to mid-teens with the best performance in August followed by modest moderation as we move through the quarter.
Overall, third quarter net sales increased 17.3% to $8.2 billion, driven by comp sales growth of 12.2%.
These results include significant growth in average basket size, partially offset by a decline in customer traffic, as we believe customers continue to consolidate shopping trips in an effort to limit social contact.
Once again this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data, driven by double-digit increases in both units and dollars.
Importantly, our data suggests an increase in new customers this quarter, as compared to Q3 of 2019.
These new customers skew younger, higher income and more ethnically diverse, further underscoring the broadening appeal of our value and convenience proposition.
We are also encouraged by the repurchase rates of new customers and are working hard to retain them, with more targeted marketing and continued execution of our key initiatives.
We're particularly pleased with the -- and how we delivered significant operating margin expansion, which contributed to third quarter diluted earnings per share of $2.31, an increase of 63% over the prior year.
Collectively, our Q3 results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to create meaningful long-term shareholder value.
We operate in one of the most attractive sectors in retail and with our unique combination of value and convenience, further enhanced through our initiatives, we believe we are well positioned to successfully navigate the current environment and emerge even stronger than before.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless I specifically note otherwise, all comparisons are year-over-year and all references to earnings per share refer to diluted earnings per share.
As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by meaningful increase in sales including the impact of COVID-19.
Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year-over-year gross margin rate expansion.
This increase was primarily attributable to a reduction markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
SG&A as a percentage of sales was 21.9%, a decrease of 62 basis points.
Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales this quarter include, occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance and employee benefits.
These items were partially offset by increases in incentive compensation expense and hurricane-related expenses.
Moving down the income statement, operating profit for the third quarter increased 57.3% to $773 million, compared to $491 million in the third quarter of 2019.
As a percentage of sales, operating profit was 9.4%, an increase of 240 basis points.
Operating profit in the third quarter was positively impacted by COVID-19, primarily through higher sales.
The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers, and approximately $25 million in appreciation bonuses for eligible frontline employees.
Year-to-date to the third quarter, we have invested approximately $153 million in COVID-19 related expenses including about $99 million in appreciation bonuses for our frontline employees.
Our effective tax rate for the quarter was 21.6% and compares to 21.7% in the third quarter last year.
Finally, as Todd noted earlier, earnings per share for the third quarter increased 62.7% to $2.31.
Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times, while continuing to invest for the long term.
We finished the quarter with $2.2 billion of cash and cash equivalents, a decrease of $760 million compared to Q2 and an increase of $1.9 billion over the prior year.
Merchandise inventories were $5 billion at the end of the third quarter, an increase of 11.8% overall and 5.9% on a per store basis.
While out of stocks remain higher than normal for certain high demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels.
Year-to-date to Q3, we generated significant cash flow from operations totaling $3.4 billion, an increase of 103.7%.
Total capital expenditures through the first three quarters were $698 million and included our planned investments in remodels and relocations, new stores and spending related to our strategic initiatives.
During the quarter, we repurchased 4.4 million shares of our common stock for $902 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $88 million.
At the end of Q3, the remaining share repurchase authorization was $1.6 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDAR.
Moving to an update on our financial outlook for fiscal 2020.
We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business.
As a result, we are not providing guidance for fiscal 2020 sales or earnings per share at this time and are unlikely to resume issuing guidance to the extent such uncertainties persist.
Let me now provide some context as to what we expect in the fourth quarter.
Given the unusual situation, I will elaborate on our comp sales trends thus far in Q4.
From the end of Q3 through December 1, comp sales accelerated increasing approximately 14% during this timeframe, reflecting increased demand in our consumables business.
And while we remain cautious in our sales outlook, we are encouraged with our sales trends, particularly as we move further past government stimulus payments and the expiration of enhanced unemployment benefits under the CARES Act.
That said, significant uncertainty still exists concerning the duration of the positive sales environment, including external factors related to the ongoing health crisis and their potential impact on our business.
Beyond these macro factors, there are number of more specific considerations as it relates to the fourth quarter.
First, we anticipate higher transportation and distribution costs in Q4.
Like other retailers, our business is seeing the effect of higher transportation costs due to a tight carrier market, as a result of driver shortages and a greater demand for services at third-party carriers.
In addition, we are in the process of building, expanding or opening a number of distribution centers across our dry and DG Fresh networks.
And while we expect, these investments will enable us to drive even greater efficiencies going forward and further support future growth, these investments will pressure gross margin rates in Q4.
Also please keep in mind that the fourth quarter represents our most challenging lap of the year from a gross margin perspective filing 60 basis points of rate improvement in Q4 2019.
With regards to our strategic initiatives, we continue to anticipate they will positively contribute to operating margin over time as the benefit to gross margin continues to scale and outpace the associated expense with both NCI and DG Fresh on pace to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure SG&A rates in the fourth quarter, as we further accelerate their rollouts.
Finally, we expect to make additional investments in the fourth quarter as a result of COVID-19, including up to $75 million in employee appreciation bonuses, which includes our recent announcement to award approximately $50 million in additional bonuses, bringing our full year investment in appreciation bonuses to approximately $173 million, as well as continued investments in health and safety measures.
In closing, we are very proud of the team's execution and service resulting in another quarter of exceptional results.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our four operating priorities.
Our first operating priority is driving profitable sales growth.
The team once again did a fantastic job in Q3, executing against a portfolio of growth initiatives.
Let me highlight some of our recent efforts.
Starting with our cooler door expansion program which continues to be our most impactful merchandising initiative.
During the first three quarters, we added approximately 49,000 cooler doors across our store base.
In total, we expect to install more than 60,000 cooler doors this year.
The majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.
Turning now to private brands, which remain a priority, as we look to drive overall category awareness and even greater customer adoption through rebranding, repositioning and expansion of select brands as well as the introduction of new product lines.
We're very pleased with the continued progress across these fronts, including the successful rebranding of six product lines and the introduction of two new brands so far this year.
And we're excited about the continued momentum we're seeing across the portfolio.
Finally, a quick update on our FedEx relationship.
During the quarter, we completed our initial rollout of this convenient customer package pick-up and drop-off service, which is now available in more than 8,500 stores.
We're very pleased with the reception this offering is receiving from our customers and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers in convenient and nearby locations.
Beyond these sales driving initiatives, enhancing gross margin remains a key area of focus for us.
In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us.
The team once again did a great job during the quarter, working with our supply partners to ensure product availability.
Looking ahead, we continue to pursue opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies including the continued expansion of our private fleet, the opening of additional DG Fresh facilities and the recent purchase of our future Walton, Kentucky dry distribution center, which should contribute to a further reduction in stem miles beginning early next year.
In addition, we recently began construction on our first ever ground up combination DG Fresh and dry distribution center in Blair, Nebraska.
We anticipate this facility will be completed in early 2022, enabling us to drive even greater efficiencies as we move ahead.
The team is also executing against additional opportunities to enhance gross margin, including further improvements in shrink, as we continue to build on our success with electronic article surveillance.
Our second priority is capturing growth opportunities.
Our proven high-return low-risk real estate model continues to be a core strength of our business.
As previously announced, we recently celebrated a significant milestone with the opening of our 17,000th store.
This is a testament to the fantastic work of our best-in-class real estate team as we continue to expand our footprint and enhance our ability to serve even more customers.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities.
These metrics include, new store productivity, actual sales performance, average returns, cannibalization and the payback period.
Of note, we continue to see strong performance across these metrics.
For 2020, we remain on track to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores.
Through the first three quarters, we opened 780 new stores, remodeled 1,425 stores, including more than 1,000 in the higher cooler count, DGTP or DGP formats, and we relocated 76 stores.
We also added produce in more than 140 stores, bringing the total number of stores which carry produce to more than 1,000.
As Todd noted for fiscal 2021, we plan to execute 2,900 real estate projects in total including 1,050 new stores, 1,750 remodels and 100 store relocations.
Additionally, we plan to add produce in approximately 600 stores.
Notably, we expect approximately 50% of our new unit openings and about 75% of our remodels to be in the DGTP or DGP formats.
The remainder of our new store openings and remodels will primarily be in the traditional format with higher capacity coolers.
Our plans also include having approximately 30 stores in our new pOpshelf concept, which Todd will discuss in more detail by the end of fiscal 2021 up from two locations today.
Overall, our real estate pipeline remains extremely robust and we are excited about the significant growth opportunities ahead.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
Over the years, we've established a clear and defined process to control spending, which governs our disciplined approach to spending decisions.
This zero based budgeting approach, internally branded as Save to Serve keeps the customer at the center of all we do, while reinforcing our cost control mindset.
We continue to build on our success with Fast Track, which Todd will discuss in more detail later.
As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand, as evidenced by our recent customer survey results where we continue to see overall satisfaction scores at all time highs.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.
We have three business operating priorities.
But at the heart of them is our foundational fourth operating priority.
This priority is anchored in our people and it's truly foundational to everything we do at Dollar General.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As Todd noted, this updated language more fully expresses our values and core beliefs and more closely aligns with the investments we continue to make in the development of our people.
Importantly, we believe these investments continue to yield positive results across our store base, as evidenced by continued, record low store manager turnover, record staffing levels, healthy applicant flows and a robust internal promotion pipeline.
As a growing retailer, we also continue to create new jobs and opportunities for career advancement.
In fact, more than 12,000 of our current store managers are internal promotes and we continue to innovate on the development opportunities we can offer our teams.
We believe, the opportunity to start and develop a career with a growing and purpose-driven Company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also recently completed our annual community giving campaign, where employees across the organization come together to raise funds for a variety of important causes.
I was once again humbled by the generosity and compassion of our people.
This event truly embodies the Serving Others culture that is so deeply embedded at Dollar General.
In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can drive continued growth in the years ahead.
I'm proud of the great progress the team has made in advancing our strategic initiatives.
Let me take you through some of the most recent highlights.
Starting with our non-consumable initiative or NCI.
As a reminder, NCI consist of a new and expanded product offering in key non-consumable categories.
The NCI offering was available in 5,200 stores at the end of Q3, and given our strong execution to date, we now expect to expand the offering to more than 5,600 stores by the end of 2020.
Including approximately 400 stores in our NCI lite [Phonetic] version.
This compares to our prior expectation of more than 5,400 stores at year end.
We're especially pleased with the strong sales and margin performance our NCI stores once again delivered in the quarter.
We also continue to benefit from incorporating select NCI products and planograms throughout the broader store base.
And we are pleased with the performance of our lite stores which incorporates a vast majority of the NCI assortment, but through a more streamlined approach.
As noted earlier, we are also excited about the recent introduction of pOpshelf and the opening of our first two locations, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through, first, continually refresh merchandise, primarily in targeted non-consumable product categories.
Second, a differentiated in-store experience, including impactful displays of our offering designed to create a highly visual, fun and easy shopping experience.
And third, exceptional value with approximately 95% of our items priced at $5 or less.
Importantly, while pOpshelf delivers many of Dollar General's core strengths, including customer insights, merchandise innovation, operational excellence, digital capabilities and real estate expertise, it is specifically tailored to a different shop indication.
We'll primarily be located in suburban communities and initially targets a higher income customer, potentially unlocking additional and incremental growth opportunities going forward.
We're proud of all of the incredible work the team has done in standing up this concept and with the initial work now behind us, we look forward to welcoming additional customers to pOpshelf, as we move forward, our goal of approximately 30 stores by the end of 2021.
Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods.
As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, by removing the markup paid to third-party distributors, thereby enhancing gross margin.
And we continue to be very pleased with the product cost savings we are seeing.
In fact, DG Fresh continues to be the largest contributor to gross margin benefit we are realizing from higher initial mark-ups on inventory purchases.
Importantly, we expect this benefit to grow as we continue to scale this transformational initiative.
Another important goal of DG Fresh is to increase sales in these categories.
We're pleased with the success we are already seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional items, including both national and private brands in select stores being serviced by DG Fresh.
And while produce is not included in our initial rollout plans, we plan -- we plan and continue to believe DG Fresh could provide a potential path forward to expanding our produce offering to even more stores in the future.
In total, we were self-distributing to more than 13,000 stores from eight DG Fresh facilities at the end of Q3.
We expect to capture benefits from this initiative in more than 14,000 stores from 10 facilities by the end of this year and are well on track to complete our initial rollout across the chain in 2021.
Next, our digital initiative, where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
In an environment where customers continue to seek safe, familiar and convenient experiences, we believe our unique footprint combined with our digital assets, provides a distinct competitive advantage.
More specifically, I'm pleased to note that during the quarter, we expanded DG Pickup, our buy online, pickup in the store offering to nearly 17,000 stores compared to more than 2,500 stores at the end of Q2, providing another convenient access point for those seeking a more contactless customer experience.
In addition to DG Pickup, our plans include further expansion of DG GO checkout, as we look to make this feature available in select stores that includes self checkout further enhancing our convenience proposition.
By leading our channel in digital tools and experiences, we believe we are well positioned to drive more in-store traffic, grow basket size and offer even greater convenience to new and existing customers.
Moving now to Fast Track, where our goals, including increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging.
The second component of Fast Track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
During the quarter, we accelerated the rollout of self checkout to more than 900 stores, compared to approximately 400 stores at the end of Q2, with plans for further expansion as we move forward.
And while still early, we are pleased with the initial results, including our customer adoption rates as well as positive feedback from both customers and employees.
Overall, we remain focused on controlling what we can control, while taking actions, including the continued execution of our key initiatives to further differentiate and distance Dollar General from the rest of the discount retail landscape.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives and continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly changing retail landscape.
In closing, we are very proud of the team's performance and our results through the first three quarters of 2020, which further demonstrate that our unique combination of value and convenience continues to resonate with our customers and positions us well going forward.
| compname posts q3 earnings per share $2.31.
q3 earnings per share $2.31.
q3 same store sales rose 12.2 percent.
q3 sales $8.2 billion versus refinitiv ibes estimate of $8.15 billion.
declares q4 2020 cash dividend of $0.36 per share.
plan to award a total of up to $75 million in appreciation bonuses to eligible frontline employees in q4.
for fy 2021, co plans to execute 2,900 real estate projects.
since the end of the third quarter, the company has continued to experience elevated demand in its stores.
same-store sales increased about 14% as compared to comparable timeframe in 2019 fiscal year.
|
In our financial guaranty business, Assured Guaranty is having our best year for direct new business production in more than a decade based on direct PVP results since 2009 for both the third quarter and first nine months of 2020.
Additionally on a per share basis, Assured Guaranty's adjusted book value, shareholders' equity, and adjusted operating shareholders equity reached new highs.
As part of our capital management strategy, we have purchased more shares in nine months of this year than we did in all of 2019.
And our Board of Directors has authorized additional share repurchases of $250 million.
Also on October 1st, S&P Dow Jones Indices announced that Assured Guaranty would become a component stock of the S&P SmallCap 600 index on October 7th.
Both the price and trading volume of our shares increased on the news.
Presumably, because index funds and ETFs attract the S&P 600, as well as actively managed funds benchmark to the index began accumulating positions in our shares.
KBW estimated that has the funds that track the S&P 600 will need to purchase 8.7 million shares.
I think it's safe to say that certain passive investors and active small cap mutual funds and ETFs now form an additional base of AGO shareholders.
There are more than 2000 funds in the SmallCap investment category.
Turning to U.S. product public finance production, we wrote $93 million of PVP in the third quarter, more than double our third quarter 2019 PVP and an 11 year record.
In terms of insured par sold, we continue to lead the industry guaranteeing 64% of the $11.9 billion of primary market insured par sold in the third quarter, which was the industry's highest quarterly insured par amount since mid-2009 and 82% higher than in last year's third quarter.
Bond insurance penetration reached 8.3%, up from last year's third quarter penetration of 5.7%.
The 7.7% penetration for the first three quarter, municipal bond insurance industry is likely to see its best annual market penetration in the insured par volume in over a decade and this is still in a very low interest rate environment.
We benefited from credit spreads that are wired than at the beginning of the year, but this is still a market where AAA benchmark yields have been below 2% almost all year.
Wall Street Journal has called this increase in penetration, a renaissance in the municipal bond insurance industry.
Driven by the heightened demand for insurance, combined with a 35 [Phonetic] year-over-year increase in quarterly issuance, Assured Guaranty's third quarter originations totaled $7.5 billion of primary market par sold, essentially double the amount during the third quarter of 2019.
One of the new issues sold with our insurance in the third quarter was Assured Guaranty's largest U.S. public finance transactions since 2009, a $726 million of insured par for the Yankee Stadium project.
This transaction closed in October so it's PVP and par exposure will be reflected in the fourth quarter results.
It refunded $335 million of our previous exposure, so our net exposure to this credit increased by $391 million.
This is one of 19 new issues that utilize $100 million or more of our insurance during the third quarter.
For the first nine months, we provided insurance on $100 million or more of par on 32 individuals issued -- individual new issues, more than in any full year over the past decade.
Our significant capital resources and strong trading value on larger transactions are important competitive advantages.
We believe two types of investors have driven our increase in larger transactions.
The first our institutions investing in the traditional tax exempt market, which are attracted by our strong balance sheet and broad proficiency and credit analysis.
The others are non-traditional investors in the growing taxable municipal bond market, including international investors to internal resources to evaluating surveil U.S. municipal credits may be limited.
Actual issuance represented approximately 30% of the muni market's total new issue par volume during the first nine months of 2020 compared with 5% to 10% in recent years.
And 35% of our par insured on new issues sold in the period was taxable.
During those nine months, the par amount we insured on taxable new issues totaled $5.5 billion compared with $1.5 billion in the first nine months of 2019.
In case of credits with underlying S&P or Moody's ratings in the AA category, we insured a total of $806 million of par for the quarter and during the first nine months more than $2 billion of par.
This year-to-date par volume is greater than our par volume of such AA credits in all of 2019.
This reflects the strength of our value proposition and the market's view of our financial strength.
Year-to-date through September, we provided insurance on $15.7 billion municipal new issue par sold, of which $1 billion -- which is $1 billion more than in all of 2019.
Combining primary and secondary market activity for the first nine months, we guaranteed $16.6 billion of municipal par, $6.2 billion more than in the same period last year, a 60% increase.
In international infrastructure finance, we completed the best third quarter origination since 2009's acquisition of AGM, producing $24 million of PVP, 52% more than in last year's third quarter.
Our guaranty is now a mainstream solution and widely accepted option for efficiently financing infrastructure development.
The flow of transaction inquiries is much stronger than it was just a few years ago and little over a year's time we guaranteed four solar power transactions in Spain, including the most recent one in August.
These transactions are good examples of how our guaranty makes the financing of renewable energy projects more cost efficient.
Another significant third quarter transaction was a GBP90 million private placement to finance improvements to students accommodations at Kingston University in the United Kingdom.
The high insured ratings and associated lower investment -- investor capital charges as well as the long tenure of many infrastructure bonds we guaranty makes them an attractive for institutions seeking to optimize long-term asset liability matching.
The impact of COVID-19 has temporary slowed the new issued transaction flow.
It is also creating conditions that we expect to provide significant international opportunities.
We believe downgrades with a potential for them could make our guaranty more valuable for even a broader range of essential investment grade infrastructure financings, such as airports that are crucial for the region's economies.
In the medium term, we expect a massive global policy initiative to invest in infrastructure and renewables.
Additionally, we see opportunities where guaranty has been underutilized.
In Australia for example, we are ramping up our business development and advertising efforts and working with the local origination consultant to help us expand our network of relationships on the ground.
Our international and structure finance groups often collaborate when it comes to bilateral risk transfer transactions that allow large asset portfolios to be managed more efficiently, whether from the perspective of capital efficiency, capital management, or risk mitigation.
Transactions of these types are a strategic focus of our structured finance underwriting group.
These tend to be large transactions requiring significant due diligence and the timing regular.
We have a number of them in progress and expect to close in the fourth quarter or next year.
In other aspects of structured finance, we continue to explore opportunities to add value to a variety of securitizations, including for example, those for whole business revenues, tax credits and consumer debt.
Now, let me provide some insight into the ability of our insured portfolio to weather today's unique economic circumstances.
We have continued to take a deep dive analytically into our highly diversified universe of insured exposures, especially in the sectors we view as the most potentially vulnerable to the consequences of pandemic such as mass transits, stadiums and hospitality among others.
What we found is that the underwriting we did to select the credits we've insured and the structural protections we've required in order to be able to guaranty those transactions and work the way they were intended.
We again model performance of transactions in vulnerable sectors under economic stress test, assuming no Federal assistance beyond what was already authorized before September as well as significant reductions in future revenues.
Having updated that analysis, we remain confident that we do not expect first time claims arising from the pandemic that will lead to material ultimate losses.
On some transactions that were already classified as below investment grade, prior to the pandemic, we did make marginal reserve adjustments.
As of now, we have paid no claims that we believe were due to credit stress arising specifically from COVID-19.
Last week, KBRA wrote that it used the pandemic as primarily a potential liquidity event for Assured Guaranty, it expressed that view in its ratings affirmation and release for our insurance companies last week, which were AA plus for AGM, MAC and our U.K. and French subsidiaries and AA for AGC.
We taken active role in managing risk at the transaction level.
This year, we have worked with some of our insured issuers to take advantage of low interest rates to reduce or to further debt service over the near-term through refinancings.
These transactions also typically benefit us by accelerating our premium earnings and generating new premium on refunding bonds that we insure.
I won't say a lot about Puerto Rico today because a new Commonwealth Administration will be starting soon and the composition of the Oversight Board is in flex.
Sub-Board members have resigned and new Board members joined and others may be reappointed or replaced.
I'll just repeat that achieving a consensual restructuring without further delay is the best thing that could happen for the people of Puerto Rico.
The recently announced release of $13 billion in federal assistance helped to improve the conditions for reaching such an agreement.
The integration of BlueMountain Capital, which we acquired last year is progressing.
In September we rebranded it, Assured Investment Management and rolled out the new branding on a newly launched Investment Management website.
These changes reflect the close alignment of our Investment Management business with our overall corporate strategy.
Assured Investment Management currently manages $1 billion of our insured companies investable assets.
Throughout the company, we are actively developing synergies between our Insurance division credit underwriting and surveillance skills and the Investment Management division's ability to structure and market investment products.
We want our Investment Management business to grow, as we continue to leverage our capital through the strategic business diversification.
I believe that Assured Guaranty is in good position, both in the market and financially.
I expect a strong finish for 2020, our U.S. public finance, international infrastructure and global structured finance businesses are strong pipelines of potential originations.
Assured Guaranty is fortunate to be a company designed from the ground up to be resilient and succeed in difficult times, which we proved during the previous recession.
As the effectiveness of our remote operations and the diligence and commitment of our employees made it possible for us to perform well and operating safely in challenging times, allowing us to continue to working toward protecting investors and securities we insure during uncertain economy, assisting issuers and funding public services and manage their fiscal challenges and building a greater value for Assured Guaranty shareholders.
This quarter we have continued to make progress on our strategic initiatives.
In our Insurance segment, our strong premium production is replenishing our unearned proved reserve, offsetting the amortization of the existing book of business, which will be accretive to future earnings.
In terms of capital management, year-to-date at September 30th, we have already repurchased 11.4 million shares, which is well over our initial plan of approximately 10 million shares.
As for our third quarter 2020 results, adjusted operating income was $48 million or $0.58 per share.
This consists primarily of $81 million of income from our Insurance segment, a $12 million loss from our Asset Management segment and a $18 million loss from our Corporate division which -- where we reflect our holding company interest expense as well as other corporate income and expense items.
Starting with the Insurance segment, adjusted operating income was $81 million compared to $107 million in the third quarter 2019.
This includes net earned premiums and credit derivative revenues of $113 million compared with the $129 million in the third quarter of 2019.
The decrease was primarily due to lower net earned premium accelerations from refundings and terminations, offset in part by an increase in scheduled earned premiums due to higher levels of premiums written in recent periods.
In total, accelerations of net earned premiums were $18 million in the third quarter 2020 compared with $38 million in the third quarter of 2019.
Net investment income for the Insurance segment was $75 million compared with $89 million in the third quarter of 2019, which do not include mark-to-market gains related to our Assured Investment Management funds and other alternative investments.
As we shift to alternative investments and continue our share repurchase program, average balances in the fixed maturity portfolio have declined.
As of September 30, 2020, the insurance companies have authorization to invest up to $500 million in funds managed by Assured Investment Management, of which over $350 million had been deployed.
Income related to our Assured Investment Management funds and other alternative investments are recorded at fair value in a separate line item from net investment income.
The change in fair value of our investments in Assured Investment Management funds was a $13 million gain in the third quarter 2020 across all strategies.
These gains were recorded in equity and earnings of investees, along with an additional $7 million gain on other non-Assured Investment Management alternative investments with a carrying value of almost $100 million.
This compared to only $1 million in fair value gains in the third quarter of 2019.
Going forward, we expect adjusted operating income will be subject to more volatility than in the past.
As we shift assets to alternative investments.
Loss expense in the Insurance segment was $76 million in the third quarter 2020 and was primarily related to economic loss development on certain Puerto Rico exposures.
In the third quarter of 2019, loss expense was $37 million also primarily related to Puerto Rico exposures, but was partially offset by a benefit in the U.S. RMBS transactions.
The net economic development in the third quarter 2020 was $70 million, which mostly consisted of $56 million in loss development for the U.S. public finance sector principally Puerto Rico exposures.
The Asset Management segment adjusted operating income was a loss of $12 million.
The impact of the pandemic continues to challenge the timing of distributions out of our wind-down funds and of new CLO issuance.
Additionally, price volatility and down grades have triggered over-collateralization provisions in CLO transactions that resulted in the third quarter 2020 management fee deferrals of approximately $3 million.
In the third quarter 2020, AUM inflows were mainly attributable to the additional funding of a CLO strategy under the intercompany investment management agreement, which we executed last quarter.
These represent assets in our insurance company subsidiaries' fixed maturity investment portfolios.
Our long-term view of the enhanced returns from the Assured Investment Management funds remains positive.
We believe the ongoing effect of the pandemic on market conditions and increased market volatility may present attractive opportunities for Assured Investment Management and for the alternative asset management industry as a whole.
Adjusted operating loss for the Corporate division was $18 million for the third quarter of 2020 compared with $28 million for the third quarter of 2019.
This mainly consists of interest expense on the U.S. holding company's public long-term debt as well as inter-company debt to the insurance companies that was primarily used to fund the BlueMountain acquisition.
It also includes Board of Directors and other corporate expenses and in the third quarter of 2020, it also include a $12 million benefit in connection with the separation of the former Chief Investment Officer and Head of Asset Management from the company.
From a liquidity standpoint, the holding company currently have cash and investment available for liquidity needs and capital management activities of approximately $82 million, of which $20 million reside AGL.
On a consolidated basis, the effective tax rate may fluctuate from period-to-period, based on the proportion of income in different tax jurisdictions.
In the third quarter 2020, the effective tax rate was a benefit of 32.7% compared with a provision of 16.3% in the third quarter 2019.
The tax benefit in the third quarter of 2020 was primarily due to a $17 million release of reserves for uncertain tax positions upon the closing of the 2016 audit year.
Turning to our capital management strategy, in the third quarter of 2020, we repurchased 1.9 million shares for $40 million for an average price of $20.72 per share.
Since the end of the quarter, we have purchased an additional 1.7 million shares for $46 million, bringing our year-to-date share repurchases as of today to over 13 million shares.
Since January 2013 our successful capital management program has returned $3.6 billion to shareholders, resulting in a 61% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of approximately $25.43 per share in adjusted operating shareholders' equity and approximately $45.48 in adjusted book value per share, which helped drive these important metrics to new record highs of $73.80 in adjusted operating shareholders' equity per share and over $108 million of adjusted book value per share.
Finally, in connection with the capitalization of AGM French subsidiary, AGM's third quarter 2020 investment income increased due to dividends received from its U.K. subsidiary, which increased AGM's 2020 dividend capacity to its holding company parent.
However, as always future share repurchases are contingent on available free cash, our capital position and market conditions.
| q3 adjusted operating earnings per share $0.58.
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Actual results may differ materially from these statements.
For more information about the factors that can adversely affect the Company's results, please see our SEC filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures.
Spring's here and we're feeling particularly optimistic and it really doesn't have anything to do with the improving weather.
For the first time in over a year, the news regarding COVID is predominantly positive.
As we sit here today, over 50% of adults in the U.S. have at least one vaccine shot and at the current pace there is potential for 90% of adults in the U.S. to be vaccinated by summer.
We realize that the global progress against the pandemic is uneven, but I am very encouraged on what we're experiencing here on the home front, especially in our target markets.
Our tenants are open and operating, our collections continue to be sector leading, up to 97% this quarter and the velocity of demand for our well-located centers is accelerating.
We had another very strong quarter of leasing, signing over 426,000 square feet of space at blended lease spreads of 12.2% and 6.4% on a GAAP basis and cash basis respectively.
Excluding a single strategic anchor renewal, we realized blended leasing spreads of 16.7% and 10.5% on a GAAP and cash basis respectively.
As we mentioned on our last call, the strong leasing will cause the spread between our leased and occupied rates to widen.
Our current signed, not open NOI is approximately $10 million, which will come online in late 2021 and early 2022.
Another impressive aspect of the new leases is the quality of tenants we are signing.
This quarter our portfolio gained another Total Wine & More at Cool Creek Commons in Indianapolis and another Aldi at our newly acquired Eastgate Crossing Community Center in Chapel Hill.
The latter addition makes Eastgate Crossing a very unique dual grocery anchored center, with all of these joining the existing Trader Joe's.
As we told you last quarter, we've got great expectations for Eastgate Crossing and all of our assets in Raleigh.
Speaking of Raleigh, as I'm sure you've all heard earlier in the week, Apple announced the creation of a $1 billion East Coast campus in the Research Triangle Park located in the Raleigh, Durham MSA.
KRG will be a direct beneficiary of this announcement as we own Parkside Town Commons, a 350,000 square foot Target in Harris Teeter anchored center that is adjacent to the future campus.
Assuming an average salary of $187,000, the 3,000 new employees will generate over $550 million of annual spending power.
Not only is this great news for Parkside Town Commons, it reinforces the migration to warmer and cheaper markets such as Texas, Florida and North Carolina.
We're even seeing this play out in the reallocation of congressional representatives with those same three states adding seats.
With the announcement of the Weingarten/Kimco merger, KRG is now the most compelling way to directly invest in Sun Belt open-air retail real estate.
78% of our ABR is located in the South and West.
Our next closest peer has less than 50% of their ABR in those same markets.
We're proud that our strategy is paying dividends, and we continue to prudently look to expand our exposure to these markets.
As we discussed on our fourth quarter call, we partially match funded our Eastgate acquisition by selling 17 ground leases for a combined $41.8 million.
One outparcel is awaiting final subdivision approval and should close next quarter.
This trade demonstrates our commitment to maintaining our low leverage while at the same time acquiring accretive opportunities.
In terms of our portfolio lease rates, we believe we're at or near the low watermark.
On the anchor front, we've already executed four leases and are negotiating multiple leases on the remaining 23 vacant boxes.
Anchor acceleration is off to a very strong start.
As we discussed last quarter, assuming the current ABR for our in-place anchors, there is a potential mark to market of nearly 20%.
To increase transparency, we've added Page 22 in the sup so you can track our progress as we lease up boxes.
The four leases signed to date have achieved a 12% lease spread and over a 40% return on capital.
These metrics also provide confirmation.
The KRG remains focused on return on capital, not buying up lease spreads.
As we've said before and I'll say again, we're very focused on maximizing total return to our stakeholders.
We believe the market does not fully appreciate the potential upside in our NOI given the robust current leasing environment.
Please keep in mind the while KRG has some of the highest occupancy dislocation in our sector, our revenue decline was one of the lowest.
This means that low paying often dying tenants have finally left our centers.
Not only should this enable us to outperform when it comes to NOI growth, but it allows us to create value by upgrading tenancy, which often results in cap rate compression for the property.
As shown on Page 4, we have the potential to increase our NOI by roughly 14% simply by leasing up vacant space to pre-COVID levels at current portfolio ABR.
Please note we aren't saying that's a guaranteed outcome or providing any sort of forward guidance.
We're simply doing the math using information from our supplement to show investors what's possible.
The strength of our operations is impossible without them.
There are very good times ahead for KRG and I cannot wait to see what the future holds for us.
I want to echo John's enthusiasm for the momentum we are seeing in our industry especially as it relates to leasing.
I'm equally enthusiastic about some of the structural changes we see coming out of COVID.
Many retailers have a renewed appreciation for the value of brick and mortar locations, realizing the importance of these distribution channels as they reimagine their supply chains.
Another pleasant surprise we are experiencing as we emerge from the pandemic is a change in the national narrative.
Over the course of the decade, we have steadfastly maintained that the relentless reports regarding the depth of retail were greatly exaggerated.
Turning to our first quarter results, we generated $0.34 of NAREIT FFO and we also generated $0.34 of FFO as adjusted.
As a reminder, last quarter, we guided to 2021 FFO on an as-adjusted basis, so as to reduce the noise associated with 2020 receivables and 2020 bad debt.
By way of example, to the extent we are unable to collect any of the 2020 accounts receivable, it will become a bad debt expense in 2021, but it will be excluded from our FFO as adjusted.
The same holds true in the reverse.
As we continue to collect 2020 bad debt, we will recognize that as revenue, but it will also be excluded from our FFO as adjusted.
As set forth on Page 17 of our supplemental, the net 2020 collection impact in the first quarter was de minimis with the collection of $2.2 million of prior bad debt, offset by $1.9 million of accounts receivable we've now deemed to be on the collectables.
There are other several notable items on Page 17 of the supplemental that demonstrate our improving fundamentals on a sequential basis.
Total bad debt to this quarter was $1.6 million as compared to $2.6 million for the fourth quarter of 2020.
Our first quarter recurring revenue has ticked up compared to fourth quarter of 2020.
As for accounts receivable, we collected $5.8 million that was outstanding at year end, including deferred rents.
Today, total outstanding deferred rent stands at $3.5 million, down from $6.1 million at year end, with only $30,000 delinquent to date.
With respect to our small business loan program, the total balance is down to $1.4 million and not a single tenant is delinquent.
Needless to say, these are all encouraging signs regarding the health of our tenants.
Last quarter, we did not give same property NOI guidance as we don't feel like this is a meaningful metric in light of the pandemic impacted 2020 results.
Our same-store NOI growth this quarter is negative 2.9% as a result of COVID-related vacancies.
This includes the benefit of approximately $800,000 of previously written-off debt that we collected in the first quarter.
Excluding those amounts, our same-store NOI would be negative 4.5%.
At 160 basis point difference, it's just noise from 2020 and is precisely why we didn't provide guidance on this metric.
While we are committed to reporting this number, it is best taken with a grain of salt.
Our balance sheet and liquidity profile remains solid.
Our net debt to EBITDA, pro forma for the ground lease dispositions, was 6.6 times, down from 6.8 times last quarter.
During the first quarter, we issued $175 million of exchangeable notes due in 2027.
These notes have an interest coupon of 0.75%.
In conjunction with these notes offerings, we entered into a capped call transaction to increase the conversion price of the notes to $30.26.
The proceeds of this transaction will remain in the balance sheet to retire the 2022 mortgages as they become due next year.
Excluding future lease-up costs, we have only $15 million of outstanding capital commitments and have roughly $420 million of liquidity.
We are extremely pleased with the execution and the added flexibility this delivers to our balance sheet.
We are raising our 2021 guidance of FFO as adjusted to be between $1.26 and $1.34 per share.
This guidance assumes full year bad debt of approximately $7.6 million and no additional material transactional activity.
We are in the early stages of the recovery and while we have put some points on the board, we still have room to run.
We have an envious balance sheet, a best-in-class platform, a strong portfolio of assets and a market strategy that continues to pay dividends.
| compname reports trust q1 ffo per share of $0.34.
q1 ffo per share $0.34.
raising 2021 guidance for ffo, as adjusted, to $1.26 to $1.34 per share.
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We also will reference certain financial measures that have not been derived in accordance with GAAP.
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Throughout this period, our team has remained steadfast in its focus on employee and customer safety, while providing affordable, convenient and close to home access to everyday essentials.
I could not be more proud of our team's efforts to serve our customers, our communities and each other.
For over 80 years, Dollar General has served our customers [Technical Issues] through a unique combination of value and convenience.
But it has never been more evident, just how essential our role is as our customers depend on us now more than ever for their everyday household needs.
We remain committed to being part of the solution during these difficult times, and believe we are uniquely positioned to continue supporting our customers through our expansive network of nearly 17,000 [Technical Issues] within 5 miles or more than 75% of the US population.
Our convenient small box format, providing for a quick in-and-out access, our broad assortment of everyday household essential items, our ongoing commitment to everyday low prices, our flexible supply chain, our growing digital capabilities and most importantly, our talented and committed associates.
Let me now highlight some of the actions we've taken to further protect our employees and customers, while keeping our operations running with minimal disruption.
As we discussed on last quarter's call, with the onset of COVID-19, we quickly and proactively implemented numerous safety protocols across the Company, based on recommendations by federal, state and local government agencies.
We continue to monitor CDC and other government guidelines regarding COVID-19 and are adapting our protocols and policies as that guideline evolves.
As announced in today's release, we invested approximately $13 million in employee appreciation bonuses during the quarter, bringing our total incremental investment in appreciation bonuses to about $73 million through the end of Q2.
Additionally, we expect to invest up to $50 million in additional financial incentives in the second half of the year.
Overall, these actions have helped to further ensure the continuity of our business at a time when our customers need us most, while recognizing our employees for their extraordinary efforts.
While navigating the challenging times of COVID-19, our country has simultaneously entered a period of deep reflection on its societal values including racial equality and other matters of social justice.
Our mission at Dollar General is serving others and our core values include, respecting the dignity and differences of others.
We are committed to ensuring these values are evident in all we do, including working to promote racial equality and social justice across our communities.
To further advance these efforts, we recently expanded our diversity and inclusion team and announced the combined $5 million pledge with the Dollar General Literacy Foundation to support racial and social justice and education.
Additionally, during the quarter, we published our most recent Serving Others report which highlights many of our efforts on the ESG front.
We first published this report in 2019 and expect that it will evolve and expand as we move into the future.
Beyond these efforts, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and better position Dollar General for continued long-term growth.
To that end, and from a position of strength, we are pleased to announce the acceleration of several value-creating initiatives including DG Pickup, DG Fresh and our non-consumable initiatives.
We are also increasing our expectation for remodels and relocations in 2020.
We will discuss each of these updates in more detail later in the call.
Turning now to our second quarter performance.
The quarter was once again highlighted by extraordinary growth on both the top and bottom lines, as some of the consumer trends we experienced in Q1 related to the pandemic continued in Q2.
More specifically, and as we discussed on our Q1 earnings call, we experienced significant growth in our non-consumable business in the month of April and through May 26.
These trends continued through the end of Q2, and we're pleased to note that for the second quarter, our three non-consumable product categories in total delivered a combined comp sales percentage increase, well in excess [Technical Issues] of our consumable businesses.
In terms of our monthly comp cadence, sales increased 21.5% in May, 17.9% in June and 17.2% in July.
While we do not typically disclose monthly comp sales, we believe it's helpful in this environment.
Overall second quarter net sales increased 24.4% to $8.7 billion driven by comp sales growth of 18.8%.
These results include significant growth in average basket size, particular -- partially, excuse me, offset by a decline in customer traffic, as we believe customers consolidated trips in an effort to limit social contact.
During the quarter, our highly consumable market share trends as measured by syndicated data continued to exhibit strength, including strong double-digit increases in both units and dollars over the 4-week, 12-week, 24-week and 52-week periods ending July 25th, 2020.
Importantly, our data suggest another meaningful increase in new customers this quarter compared to Q2 2019, underscoring the broadening appeal of our value and convenience proposition.
We are very focused on retaining these new customers, and the incremental spend of current customers through the acceleration of several key initiatives which I noted earlier.
We're particularly pleased that we once again delivered significant operating margin expansion, which contributed to second quarter diluted earnings per share of $3.12, an increase of 89% over the prior year.
Collectively, we view these results as further validation that we are pursuing the right strategies to enable balanced and sustainable growth, while creating meaningful long-term shareholder value.
We continue to operate in one of the most attractive sectors in retail and with the plans and initiatives we have in place, we believe we are well positioned to serve an even broader set of consumers even in a challenging economic environment.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless I specifically note otherwise, all comparisons are year-over-year and all references to earnings per share refer to diluted earnings per share.
As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19.
Gross profit as a percentage of sales was 32.5% in the second quarter, an increase of 167 basis points.
This increase was primarily attributable to higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumable categories and a reduction in markdowns as a percentage of sales.
These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
SG&A as a percentage of sales was 20.4%, a decrease of 205 basis points or 161 basis points compared to Q2 2019 adjusted SG&A.
Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales in the quarter include retail labor, occupancy costs, utilities, employee benefits, depreciation and amortization, and taxes and licenses.
These items were partially offset by increased incentive compensation and charitable giving expenses.
As I mentioned, we also recorded expenses of $31 million in Q2 2019 reflecting our estimate for the settlement of certain legal matters.
Moving down the income statement, operating profit for the second quarter was $1 billion, an increase of 80.5% or 71.3% compared to Q2 2019 adjusted operating profit.
As a percentage of sales, operating profit was 12%, an increase of 373 basis points or 329 basis points compared to Q2 2019 adjusted operating profit.
Operating profit in the second quarter was positively impacted by COVID-19 primarily through higher sales.
The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers and approximately $13 million in appreciation bonuses for eligible frontline employees.
Our effective tax rate for the quarter was 21.5% and compares to 22.9% in the second quarter last year.
Finally, as Todd noted earlier, earnings per share for the second quarter was $3.12, which represents an increase of 89% or 79% compared to Q2 2019 adjusted EPS.
Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers, employees during these challenging times while continuing to invest for the long term.
Merchandise inventories were $4.4 billion at the end of the second quarter, essentially flat overall, and down 6% on a per store basis.
Year-to-date through Q2, we generated significant cash flow from operations totaling $2.9 billion, an increase of $1.8 billion or 157%.
This increase was primarily driven by strong operating performance combined with lower levels of inventory, as our supply chain teams continue to work closely with our vendor partners to improve in-stock levels for high demand products.
Total capital expenditures through the first half were $424 million and included our planned investments in new stores, remodels and relocations and spending related to our strategic initiatives.
Moving on to liquidity and capital structure.
We continue to have ample liquidity as a result of the measures we took earlier in the year to further bolster our liquidity position, coupled with our extremely strong cash flow in the quarter.
As a result, we finished the quarter with $3 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility.
As one of the measures to preserve liquidity at the onset of COVID-19, we temporarily suspended share repurchases during Q1.
We continue to evaluate business conditions in our liquidity and as a result of this evaluation, we resumed share repurchases in the second quarter.
During the quarter, we repurchased 3.2 million shares of our common stock for $602 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $90 million.
With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $2.5 billion under the repurchase program.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt-to-EBITDAR.
Moving to an update on our financial outlook for fiscal 2020.
We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic including its impact on the economy, consumer behavior and our business.
As a result, we are not providing guidance for fiscal 2020 sales or earnings per share at this time.
With regards to share repurchases, we now expect to repurchase approximately $2.5 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long-term growth opportunity for our business.
As Todd noted earlier, we are increasing our expectations for remodels and relocations in 2020.
Overall, we now expect to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores representing 2,780 real estate projects in total.
Finally, we are increasing our expectations for capital spending in 2020 to a range of $1 billion to $1.1 billion as we accelerate key initiatives and continue to invest in our core business to support and drive future growth.
Let me now provide some additional context as it relates to our full year outlook.
Given the unusual situation, I will elaborate on our comp sales trends thus far in August.
Since the end of Q2 and through August 25th, we have continued to experience elevated same-store sales, which have increased by approximately 15% during this timeframe.
That said, we remain cautious in our sales outlook and recognize the significant uncertainty that still exists concerning the duration of the positive operating environment.
In particular, we can't speculate as to whether there will be additional government stimulus or, if so, to what degree, our business would benefit.
Ultimately, we expect to see our comp sales trends moderate as we move through the back half, but believe we are very well positioned to deliver positive sales growth for the balance of the year even if broader economic conditions deteriorate.
With regards to our strategic initiatives, we continue to anticipate they will improve operating margin over time, particularly as benefits to gross margin continue to scale and outpace the associated expense with both NCI and DG Fresh expected to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure SG&A rates in the back half, particularly as we further accelerate their rollouts.
Finally, we expect to make additional investments in the second half as a result of COVID-19 including up to $50 million in employee appreciation bonuses which Todd mentioned, as well as investments in additional safety measures.
In closing, we are very proud of the team's execution and service, which resulted in another quarter of exceptional results.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our four operating priorities.
Our first operating priority is driving profitable sales growth.
The team did an outstanding job this quarter executing against a portfolio of growth initiatives while keeping the customer at the center of all we do.
Let me highlight a few of our recent efforts.
Starting with our cooler door expansion program, which continues to be our most impactful merchandising initiative.
During the first half we added more than 30,000 cooler doors across our store base.
In total, we now expect to install more than 60,000 cooler doors this year compared to our previous target of 55,000 cooler doors in 2020.
Notably, the majority of these doors will be in high capacity coolers creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.
Turning now to private brands, which remains a priority as we pursue opportunities to further enhance our value proposition.
During the quarter, we made great progress with our rebranding and repositioning efforts including the recent relaunch of our office products brand.
Looking ahead, our plans include the continued expansion of existing brands as well as the rebranding of several additional product lines as we seek to drive greater category awareness and even higher customer adoption.
Moving to our Better For You offering which is especially important for our customers as more food continues to be consumed at home.
This offering is now available in approximately 6,400 stores with plans to expand more than 7,000 stores by year-end.
Finally, a quick update on our FedEx relationship.
This convenient, package pick up and drop off service is now available in over 8,000 locations.
We now expect to complete our initial rollout to more than 8,500 stores by the end of Q3, further advancing our long track record of serving rural communities.
Beyond these sales driving initiatives, enhancing gross margin remains a key focus area for us.
In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us.
During the quarter the team once again did a phenomenal job working with our global supply partners to ensure product availability.
Looking ahead, we continue to see opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies through the further reduction of stem miles and accelerated expansion of our private fleet.
To this end, we recently announced the purchase of our 18th traditional distribution center in Walton, Kentucky.
We anticipate this facility will begin shipping early next year, enabling us to drive additional efficiencies as we move ahead.
Finally, shrink remains an opportunity as we continue to build on our success with electronic article surveillance.
Over the past year, we've increased the number of items tagged by more than 40%, and we continue to focus on leveraging technology to drive even higher levels of in-store execution.
Our second priority is capturing growth opportunities.
Our proven high-return, low-risk real estate model continues to be a core strength of our business.
During the first half, we opened 500 new stores, remodeled 973 stores including 704 in the higher cooler count DGTP or DGP formats and relocated 43 stores.
We also added produce in more than 120 stores, bringing the total number of stores which carry [Phonetic] produce to more than 870.
As John noted, we now expect 2,780 real estate projects in total this year, as we continue to deploy capital in these high return investments while delivering an expanded assortment offering to an additional 200 communities in 2020.
Overall, our real estate pipeline remains robust, and I am very proud of the team's ability to execute such high volumes of real estate product -- projects despite the added complexities as a result of COVID-19.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending, which governs our disciplined approach to spending decisions.
This zero based budgeting approach internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost-control mindset.
Our operational initiatives consist of building on our success with Fast Track, which Todd will discuss in more detail.
As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand as evidenced by recent customer survey results which we are seeing overall satisfaction at all time highs.
Beyond enhancing our ability to serve, this process has also generated significant savings across the business.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is to invest in our people as we believe they are our competitive advantage.
In total, for fiscal 2020, we now expect to invest up to $123 million in appreciation bonuses for eligible frontline employees to provide them with further support and demonstrate our continued appreciation for their exceptional efforts during these difficult times.
As a reminder, these bonuses follow our 2017 investment of nearly $70 million in store manager compensation and training, as well as prior and continued investments in employee training, benefits and wages.
Importantly, these investments continue to yield positive results across our store base, including continued record low store manager turnover, strong applicant flows and a robust internal promotion pipeline as well as record staffing levels over the first half of the year.
We believe the opportunity to start and develop a career with a growing and purpose-driven Company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also held our annual leadership meeting earlier this month, and I was amazed by the team's ability to seamlessly transition to a virtual event resulting in continued development for more than 1,500 leaders of our Company.
This meeting was once again a testament to how our people truly embrace the Serving Others culture.
In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can continue to provide continued growth in years ahead.
I'm very proud of the progress the team has made in advancing our key strategic initiatives, which we believe better positions us for long-term sustainable growth.
Let me take you through some of the most recent highlights.
Starting with our non-consumable initiative or NCI, as a reminder, NCI consist of a new and expanded product offering in key non-consumable categories.
The NCI offering was available in approximately 4,300 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance we are seeing across our NCI product categories.
In fact, this performance is contributing to an incremental 8% comp sales increase in total non-consumable sales compared to stores without the NCI offering, as well as a meaningful improvement in gross margin rate in these stores.
We also continue to realize meaningful benefits from incorporating select NCI products and planograms throughout the broader store base resulting in positive sales and margin contributions across the chain.
As a result of our strong performance in learnings to date, our plans now include accelerating the rollout of our NCI offering to more than 5,400 stores by the end of 2020.
By incorporating a lite [Phonetic] version of this initiative into approximately 400 stores.
The lite version provides for a more streamlined approach as the full NCI assortment is incorporated into space already dedicated to non-consumable products resulting in less disruption to the stores and the ability to more aggressively scale this initiative as we move ahead.
Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods.
As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items by removing the markup paid to third party distributors, thereby enhancing gross margin.
And we continue to be very pleased with the product cost savings we are seeing.
In fact, DG Fresh continues to be the largest contributor to the gross margin benefit we are seeing from higher initial markups on the inventory purchases, which John noted earlier and we expect this benefit to grow as we continue to scale this transformational initiative.
Another important goal of DG Fresh is to increase sales in these categories.
We are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional new items including both the national and private brands in select stores being serviced by DG Fresh.
In total, we were self-distributing to more than 12,000 stores from eight -- excuse me, from eight DG fresh facilities at the end of Q2.
Given our success and strong execution to date, we now expect to capture benefits from DG Fresh in approximately 14,000 stores from at least ten facilities by the end of this year.
This compares to our previous expectation of approximately 12,000 stores by year's end.
Turning to our digital initiative where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience, all of which have become even more important as a result of COVID-19.
Today, customers are seeking safe, familiar and convenient experiences in many aspects of their lives, and in that regard, we believe our unique store footprint combined with our digital assets are a distinct competitive advantage.
During the quarter, we accelerated the rollout of DG Pickup, our Buy Online Pickup in the Store offering to more than 2,500 stores compared to about 40 stores at the end of Q1 with plans for even more aggressive expansion as we move ahead.
In fact, we now expect to introduce this offering into essentially all of our stores by the end of Q3.
In addition to DG Pickup, our plans include the further expansion of DG GO!
mobile checkout as we look to combine this feature with self checkout providing an even more convenient and contactless shopping experience.
Moving now to Fast Track where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
We continue to be pleased with the labor productivity investments we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging.
The second component of Fast Track is self checkout which represents added flexibility for customers who may seek to limit face to face interactions while also driving greater efficiencies in the store for our associates.
Self checkout is currently available in approximately 400 stores compared to more than 30 stores at the end of Q1.
And our plans consist of a broader rollout later this year as we look to further enhance our convenience proposition.
Overall, we are focused on controlling what we can control, while taking action, including the acceleration of our strategic initiatives to further differentiate and distance Dollar General from the rest of the discount retail landscape.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, as we are constantly evaluating what lies ahead for our customers and our business.
We continue to believe we are pursuing the right strategies to drive long-term sustainable growth, while creating value for our shareholders.
In closing, we are excited about our position midway through the year.
Our extraordinary first half results are a testament to the strong execution and disciplined approach of our team.
We are very proud of our people, especially those serving on the front lines.
| compname reports q2 earnings per share of $3.12.
q2 earnings per share $3.12.
q2 same store sales rose 18.8 percent.
q2 sales $8.7 billion versus refinitiv ibes estimate of $8.35 billion.
dollar general - believes consumer behavior driven by covid-19 had positive effect on net sales and same-store sales.
on august 25, co's board declared a quarterly cash dividend of $0.36 per share.
as of july 31, 2020, total merchandise inventories, at cost, were $4.4 billion compared to $4.4 billion as of august 2, 2019.
not issuing updated fiscal 2020 sales or earnings per share guidance at this time.
from august 1, 2020 through august 25, 2020, same-store sales increased approximately 15%.
sees fy capital expenditures in range of $1.0 billion to $1.1 billion.
|
Today, we plan to start the call by educating investors about our current business and our growth strategy, followed by a discussion of the value proposition that we believe will drive business results and stockholder value going forward.
I will also provide a review of our operational and high-level financial results for the three months ended June 30, 2021.
We believe Genie Energy offers unique investment opportunity within the energy space.
Genie operates in two core parts of the energy industry, retail and renewables.
Our global retail energy businesses are asset-light operations that market and resell electricity and natural gas to consumers and small enterprises in deregulated markets, while our renewables business sells services and installs solar solutions.
Currently, our U.S. retail business is the primary driver of our profits, but we believe the other segments have tremendous potential.
Our current businesses are supported by our enterprise function, which is responsible for customer acquisition, risk management and customer care.
Our marketing and sales professionals leverage deep data analysis to identify market opportunities and efficiencies that our sales and marketing teams can then exploit through a variety of sales channels, offering green or traditional options as well as fixed and variable rate plans.
This data analysis also allows us to segment current and potential customers with specific payback periods based on product and customer type, while also enabling us to bring a higher level of customer care and retention and also offer customer reward programs.
Finally, our risk management function acquires both green energy and carbon-based supply and utilizing hedging strategies to reduce commodity volatility risk.
From the total enterprise viewpoint, we believe three key areas differentiate us from the competition and will allow us to create outsized stockholder returns over time.
First, we have derisked the company through market product and geographical diversification with retail energy operations across 16 U.S. jurisdictions, The U.K. and Scandinavia and the rapidly growing solar energy business in the U.S. Second, we differentiate ourselves from the competition through our strong balance sheet with minimal to no debt, an asset-light business model, which not only reduces our relative cost of capital that allows us to self-fund and invest in growth opportunities, such as expanding our international retail energy and domestic solar businesses.
It also provides us the flexibility to opportunistically grow our U.S. retail business through a disciplined approach to taking share in existing markets or enter new markets as conditions permit.
Finally, we believe the operational excellence we have gained in deregulated markets in the U.S. helped drive growth and profits in our European business.
Ultimately, we believe these factors provide us with competitive advantages and will help us drive higher returns on the competition.
Moving into each of our businesses, we have three reporting segments.
Two of these are emerging growth businesses, Genie Retail International and Genie Renewables, and the third, Genie Retail USA, consistently generates cash in up or down markets on an annualized basis.
Our retail energy business operates under several different names in both the U.S. and Europe.
Our core business today, Genie Retail U.S., is the largest and most mature of the three segments, generating the most revenue and highest margins and profits.
It currently operates in 15 states and Washington, D.C. under a variety of names reselling electricity from both carbon-based and green sources as well as natural gas.
This business has proven to be financially stable and has made money in a variety of market environments, which has allowed the company to remain principally debt-free and make disciplined investments in growth.
The competitive environment is fragmented with few large players and many independent small players.
We believe our competitive advantages, including our ability to self-fund expansion without borrowing, our strong risk management and trading programs that reduce commodity volatility, strong data and analytics capabilities and the depth and breadth of experience in our various sales channels.
Our current U.S. strategy revolves around opportunistically taking incremental share in our existing 16 markets.
We also plan to leverage our installed base and marketing prowess to add new products and services.
Bottom line, we believe we have market-leading capabilities that will allow us to take share, introduce and upsell new products and successfully expand into new states as conditions warrant.
With respect to our current growth investments, we've been investing in and generating customer growth with expanding margins in Genie Retail International through an established presence in unregulated markets in the U.K. and Scandinavia.
We believe this opportunity is comparable to the U.S. opportunity with a few differentiators that we believe bode well for value creation.
Between The U.K. and Scandinavia, there are roughly 60 million energy meters installed with about 80% of them in The U.K.
We initially penetrated The U.K., which has shown strong growth, expanding margins and is now nearly capable self-funding continued growth.
In Scandinavia, we initially acquired our way into filling 2019, which similar to the U.K. is starting to mature, and we'll soon have the ability to sell on future growth in Finland while also expanding into new markets, such as our recent expansion into Sweden.
Our Scandinavian strategy is to centralize our enterprise functions to efficiently manage operations and create significant operating leverage as we continue to gain scale and in the years to come, move into other markets such as Denmark, Norway and possibly others.
Finally, moving to Genie Renewables, our strategy here today is to leverage our existing geographic footprint and sales channels in the U.S. to offer a range of residential and commercial solar solutions.
We aspire to capture a larger part of the solar value chain to both drive growth and higher margins.
While we are not ready to talk in full detail publicly about these plans, we have a robust pipeline of solar installations and projects that we expect will generate meaningful revenue and profits.
We believe our Renewables segment has excellent potential, and we will provide more details as appropriate.
Today, we benefit from diversification both at the state level and with our international operations in solar business.
However, we realized that with three business segments, each of which is in a different stage of maturity, we have to prioritize growth investments and, therefore, can only take advantage of opportunities on a business-by-business basis.
Additionally, we believe that our valuation doesn't reflect the individual prospects and performance of each business as there are different value propositions for investors due to the higher growth in international energy operations and the moderate growth and cash flow generation of the U.S. retail business.
Given these factors, we have been conducting a strategic review of our businesses and are currently evaluating opportunities to unlock shareholder value by separating our international operations from the U.S. business, potentially through a spin-off to existing Genie stockholders of a new publicly traded entity as we don't believe the combined company is being valued appropriately by investors.
We believe doing so accomplishes several goals, and the rationale here is typical for companies carving out operations.
First, with a dedicated management team, the international operation can be solely focused on aggressive expansion in current and new markets through both organic and inorganic mechanisms without diluting Genie Energy stockholders.
With less internal competition for resources, it will also allow Genie to grow more aggressively in its U.S. retail business through market share gains in existing markets as well as potential expansion into new states as well as provide additional capital to expand our renewables operations as discussed earlier.
We are currently still in the evaluation process, and we'll continue to provide updates on any material progress.
Now I'll talk briefly about our second quarter business trends and results as well as provide some insight in the third and fourth quarter expectations.
Q2 was a strong quarter despite ongoing issues related to COVID-19.
We did have some moving parts in the financials due to the sale of our Japanese business and in Texas as the Governor signed review legislation into law, which is expected to provide a minimum of $1.5 million of relief.
We hope and expect the relief amount to grow as the legislature in Texas continues to discuss fair outcomes from the February storm.
In the U.S., our door-to-door marketing efforts are still not back to full strength due to government restrictions, but they are growing again.
That growth, of course, continues to be dependent on what happens with Covid.
In the meantime, our U.S. Retail business contributed strong profitability even as the second quarter is usually the seasonally weakest part of our year.
International operations revenue and gross profits increased as we continue to invest in our U.K. and Sweden operations and the Finland business recorded material profitability.
The Renewables division was still small, executed on another profitable quarter and is poised for both revenue and gross profit growth in the future.
We are excited about our potential and look forward to updating you further on the potential spin-off and other initiatives.
Now over to Avi Goldin for his discussion of our Q2 financial results.
My remarks today cover our financial results for the three months ended June 30, 2021.
Throughout my remarks, I compare second quarter 2020 results to the second quarter of 2020.
Focusing on the year-over-year rather than sequential comparisons removes from consideration the seasonal factors that are characteristic of our retail energy business.
I do want to point out, however, that the second quarter, like our fourth, is characterized by low commodity consumption relative to peak and cooling seasons during the first and third quarters, respectively.
I'd also like to point out that there are some moving parts this quarter that make an apples-to-apples comparison somewhat challenging.
For example, we acquired the part of Orbit Energy that we didn't already own in the fourth quarter of 2020.
So our second quarter 2020 results were not fully consolidated into our financials as they are in the second quarter of 2021 under Genie Retail Energy International.
On the other side, we sold our Japanese operations in early 2Q '21, which generated a gain, but we recorded minimal revenue during the quarter.
While in Q2 2020, a full quarter of Genie Japan revenue was recorded under Genie Retail Energy International.
That said, results this quarter were strong and comparable to the outstanding second quarter results we reported a year ago.
Consolidated revenue increased 28% to $98 million, the highest level for any second quarter in our history.
The top line increase was generated predominantly by Genie Retail Energy International, where revenue increased to $28 million from $5 million in the year ago quarter.
Results from Orbit Energy in the U.K. were not consolidating to repurchase the outstanding stake in the fourth quarter.
In the year ago quarter, Orbit generated $15 million in revenue.
Setting aside the impact of consolidating Orbit revenue in the current period, the international business increased revenue by $8 million year-over-year, driven by the robust growth of our business in The U.K. and Scandinavia.
Revenue at Genie Retail Energy, our domestic retail business, increased 1% to $67 million.
Electricity and natural gas consumption per meter, both increased compared to year ago quarter, which suggests that the boost in per meter consumption we've seen since the shift to work from home could have an enduring impact.
The increase in assumption was augmented by higher average sales per commodity unit, partially offset by a decrease in overall meters served.
The net meter count decreased in the quarter as churn outpaced sales.
Both churn and sales are below historical levels as the industry continues to be limited and access to face-to-face marketing channels that traditionally drive growth.
Revenue for our Renewables business was $2.3 million, a decrease from $4.6 million in the year ago quarter, when we delivered the remainder of a large solar panel manufacturing order at a very low margin.
As Michael mentioned, we are excited about the potential of this segment as we continue to expand into higher-margin renewables-focused businesses, including our community solar installations and community solar projects.
Consolidated gross profit increased 22% to $24 million, a very strong second quarter results with increased contributions from all three of our reporting segments.
Consolidated SG&A increased to $22.4 million from $16 million.
The increase was primarily at GRE International and reflects the consolidation of Orbit Energy, including Orbit customer acquisition expense, but also at Genie Retail Energy, driven by the partial resumption in door-to-door sales channel as well as other marketing spending.
Our consolidated income from operations totaled $1.4 million compared to $2.7 million in the year ago quarter.
The key driver here was again the consolidation of Orbit Energy, which, while it is nearing the ability to self fund is still losing money as we continue to invest in customer acquisition.
Adjusted EBITDA was $3.1 million compared to $3.5 million in the year ago quarter.
Although the scale is small, it's worth noting that our renewables business achieved positive income from operations and adjusted EBITDA for the second straight quarter.
Genie Energy's income per diluted share was $0.19 compared to $0.06 in the year ago quarter.
Our bottom line benefited from a $4.2 million gain on the sale of Genie Japan and an unrealized gain of $2.9 million on marketable equity investments, predominantly our investment in holdings that are mark-to-market.
Turning now to the balance sheet.
At quarter end, cash, restricted cash and marketable equity securities totaled $50.9 million at June 30, a strong increase from $41.7 million three months earlier and our highest levels in recent years.
From a working capital perspective, we have more than fully recovered from the impact of winter storm area in the first quarter.
To wrap up, our operating results were strong even compared to outstanding year ago quarter, and our bottom line results were positively impacted by the nonroutine gains I mentioned earlier.
Our balance sheet is in very good shape and provides us the flexibility to invest in the growth programs, as Michael discussed.
| qtrly earnings per share $0.19.
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I'm joined today by Chris Simon, our CEO; Stewart Strong, President of the Hospital Business Unit; and Bill Burke, our CFO.
Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows, as well as reconciliations of our GAAP to non-GAAP adjusted results.
Before we get started, unless noted otherwise, all revenue growth rates discussed today are on an organic basis and exclude the impacts of currency fluctuation, strategic exits of product lines, acquisitions and divestitures.
Please note that these measures exclude certain charges and income items.
Please note that these measures exclude certain charges and income items.
Our improved third quarter results are evidence in the strength of our strategy and our progress transitioning to transformational growth.
We have a lot to discuss today.
Let me start by highlighting five key themes.
Revenue improved sequentially in all three business units as our markets are recovering from the pandemic.
Productivity from the Operational Excellence Program and cost management helped improve our profitability.
We are making meaningful progress with NexSys adoption.
Our innovation agenda continues to propel organic growth, and the Cardiva acquisition will help us diversify, grow, and create shareholder value.
Moving to our results.
Organic revenue was down 6% in the quarter and 12% [Technical Issues] as the impacts from the pandemic continue to affect our business.
Third quarter adjusted earnings per diluted share was $0.81, down 14% from the prior year quarter and down 28% year-to-date.
While our results were below our pre-pandemic fiscal 23rd [Phonetic] quarter, we did see a 14% sequential improvement in revenue driven by all three business units, and our adjusted earnings per diluted share was up 31% from second quarter.
Plasma revenue declined 13% in the third quarter and 26% year-to-date as the pandemic continued to have a pronounced effect on the U.S. source plasma donor pool.
Revenue declines were partially offset by a $6 million one-time safety stock order of plasma disposables.
Sequentially, North America collection volume improved 29% excluding the effect of the safety stock order.
To put this in perspective, we typically have a 3% to 5% seasonal increase in the third quarter.
Our customers have taken extensive donor safety measures and launched a myriad of promotional campaigns to encourage donations.
Heightened safety protocols and compelling financial incentives along with waning government stimulus contributed to 10 consecutive weeks of volume recovery.
NexSys platform adoption is progressing, and we are confident that it will supplant PCS2 as a standard for source plasma collection worldwide.
We are on track to upgrade all U.S. customers to our NexLynk DMS software by the end of the calendar year.
All major customers have agreed to adopt NexSys PCS devices somewhere in their network.
This bodes well for eventual broad-based implementation, because history shows that first-hand user experience leads to adoption.
Rollout will not be immediate as there is important planning and support work to be done and near-term, Haemonetics and our customers primary focus is on driving a robust recovery in collections.
Our innovation agenda continues to propel organic growth.
Persona's individualized donor-specific approach is expected to yield an incremental 9% to 12% of plasma per collection.
NexSys early adopters are validating the new nomograms impact on immunoglobulin levels and implementing logistics changes needed to support the new procedure, including accommodating our collection bottle, that is a third largest.
The real world data being collected will strengthen the NexSys offering and inform ongoing innovation in our proprietary collection technology, including safely advancing additional personalization and further yield enhancements.
Meanwhile, we continue to do everything we can to support our customers and we remain cautiously optimistic about the timing and pace of recovery.
The third quarter highlights the critical role that donor economics play in plasma collections.
Collection volumes weakened over the last few weeks, which we believe was driven by a donor response to the new government stimulus.
Nonetheless, our customers are ramping up to support end-market growth, and although forecasting remains difficult in this environment, once the pandemic subsides, we expect to see 8% to 10% collections growth over the long-term and the potential to grow in excess of that, as customers replenish their inventories.
Blood center revenue declined 1.4% in the third quarter and 2.6% year-to-date.
The business continues to outperform as our continuity and responsiveness enables us to supply blood bankers around the world seeking expanded safety stocks.
We also continue to support customers globally in collecting convalescent plasma.
We had strong capital sales both in the third quarter and year-to-date, as our apheresis devices continue to play an important role in helping to provide essential blood products to our customers.
We believe the increased installed base should provide longer-term benefits to our disposable sales.
Apheresis revenue was up 6% in the third quarter and 1.8% year-to-date.
Continued plasma growth and favorable order timing among distributors in both periods was partially offset by the impact of a previously disclosed customer loss of about $4 million in the quarter and $12 million year-to-date.
We did not see distributor stocking order reversals in the third quarter.
Whole blood revenue declined 19% in the quarter and 11% year-to-date, driven by lower-than-usual procedure volumes due to COVID-19, previously discontinued customer contracts, and overall declines in blood utilization rates.
Additionally, whole blood revenue in the third quarter was impacted by unfavorable order timing among distributors.
Our recent efforts to optimize this portfolio has allowed our team to focus on apheresis devices and disposable, which is driving performance.
Cardiva is a leader in vascular closure, an under-developed segment with significant potential.
VASCADE is a leading product with strong tailwinds and the Cardiva team is talented and highly motivated to deliver.
With focus and support, we can accelerate growth, especially in electrophysiology, where VASCADE MVP is uniquely positioned for use with cardiac ablation procedures.
This is a revenue deal.
But with added scale, there will also be increased operating leverage.
We avoid the G&A cost Cardiva would have incurred to operate as a public company.
We can use our infrastructure to support U.S. expansion and our international commercial organization can help to launch VASCADE outside the U.S. Together, we can improve our global reach and relevance.
Investments in sales and clinical reps, as well as clinical medical and health economics capabilities will benefit both portfolios in IC and EP.
Our TEG long-range plan is anchored in interventional cardiology with further opportunity in electrophysiology.
Haemonetics [Indecipherable] can learn from Cardiva.
And over time, there may be commercial and-or clinical calpoint [Phonetic] synergies.
We value diversification and growth.
Cardiva diversifies our product offerings in [Indecipherable] and vascular closure.
Attractive near adjacencies that can fuel accelerated growth.
Our focus has shifted to integration and execution is now our top priority.
Over to you, Steve.
I would like to reiterate my excitement about Cardiva.
The acquisition is on track to close this quarter.
Detailed integration planning is under way, and we are squarely focused on driving revenue growth.
We are supporting the Cardiva team's strategy in their commercial, product innovation and manufacturing plans, while working on G&A integration.
Now moving to our results.
Hospital revenue increased 5% in the third quarter and 1% year-to-date.
Our hospital business has seen continued sequential improvement over the course of the fiscal year and our third quarter growth was driven by our direct markets across the globe, and in particular, our top two markets, North America and China.
Hemostasis Management revenue was up 11% [11.3%] in the third quarter and 6% year-to-date, compared with the prior year, driven by strong sales of TEG disposables in the U.S. and capital sales in Europe.
The pandemic continued to partially offset the strength of this business, both in the quarter and year-to-date.
We are excited to share that the FDA has issued guidance on the use of viscoelastic testing in patients suspected of COVID-19 coagulopathy, and we are working to update our indication in line with the guidance.
The use of TEG analyzers for hypercoagulable patients has already been discussed in a number of scientific publications, and updated indications will give us the opportunity to be proactive in deploying this technology to help advance COVID-19 patient management.
In parallel, we're driving our go-to-market strategies.
We recently signed an agreement in China to manufacture locally designed and made viscoelastic testing analyzers, and locally manufactured reagents to expand our product offering to meet the unique needs of the Chinese market.
The product line will focus on automation, high-throughput, and easy customer interface as we build on market specific platform with further innovation in the pipeline.
Transfusion management was up 7% in the third quarter and 9% year-to-date, primarily driven by strong growth in BloodTrack through new accounts in several key geographies.
Our teams have implemented alternative methods to advance installations and utilization in customer environments where access continues to be restricted.
Cell salvage revenue declined 6% in the third quarter and 11% year-to-date, primarily driven by declines in disposable usage.
Sequentially, cell salvage revenue was up 1% in the third quarter as additional recovery in procedure volumes plateaued toward the end of the quarter.
The pandemic continues to validate the essential role our technologies play in assessing bleeding and thrombosis risks, autologous blood transfusions and effectively managing blood supply.
Recovery has been very encouraging, but we're cautious about the near-term forecast as procedure volumes have leveled-off over the past four weeks, driven by a global resurgence of COVID cases that may prolong the recovery.
We are confident in the hospital business unit's long-term value to our customers and their patients, and our significant opportunity for growth and expansion.
Chris has already discussed revenue.
So, I will start with adjusted gross margin, which was 51.4% in the third quarter, a decline of 70 basis points compared with the third quarter of the prior year.
Adjusted gross margin year-to-date was 50.4%, a decline of 160 basis points compared with the first nine months of the prior year.
The primary drivers of the declines in both the third quarter and year-to-date we're impacts from higher costs, including an inventory charge in the third quarter, cost per COVID-19 protective measures, and lower volume.
There was also some un-favorability due to product mix.
These downward effects on gross margin were partially offset by productivity savings realized from the ongoing strength in our operational excellence program, and lower depreciation expense as our PCS2 devices were mostly depreciated by the end of the prior fiscal year.
Additionally, the combination of our recent divestitures and our strategic exit of the liquid solution business resulted in a net negative impact on our third quarter, and about neutral impact on our year-to-date adjusted gross margin.
We continue to successfully execute an appropriate balance of cost control measures and investments without disrupting our growth objectives.
Adjusted operating expenses in the third quarter were $71 million, a decrease of $2.4 million or 3% [3.3%] compared with the third quarter of the prior year.
Adjusted operating expenses year-to-date were $201.1 million, a decrease of $19.1 million or 9% compared with the first nine months of the prior year.
Lower adjusted operating expenses, both in the third quarter and year-to-date were due to a combination of ongoing productivity savings related to our operational excellence program and cost containment measures implemented to help offset the negative effects of COVID-19.
Partially offsetting these savings were ongoing investments in key growth areas of the business.
As a result of the performance and adjusted gross margin and adjusted operating expenses, the third quarter adjusted operating income was $52.6 million, a decrease of $9 million or 15% [14.6%], and adjusted operating income year-to-date was $124.1 million, a decrease of $46.7 million or 27% compared with the same period in fiscal ' 20.
As our business continue to recover from the pandemic, we have seen significant progress in the sequential quarterly improvement of our adjusted operating margins throughout the fiscal year.
We continue to expect adjusted operating margins to improve to levels above fiscal '20 once the pandemic fully subsides.
Adjusted operating margin was 21.9% in the third quarter and 19.2% year-to-date, down 190 basis points and 350 basis points respectively compared with the same periods in fiscal ' 20.
For both periods, the lost leverage from revenue declines outpaced the impacts of cost mitigation efforts.
The adjusted income tax rate was 16% in the third quarter and 15% in the first nine months of the fiscal year, compared with 17% in the third quarter and 14% in the first nine months of the prior year.
Third quarter adjusted net income was $41.4 million, down $7.1 million or 15% [14.5%] and adjusted earnings per diluted share was $0.81, down 14% [13.8% ] when compared with the third quarter of fiscal ' 20.
Adjusted net income year-to-date with $96.8 million, down $39.1 million or 29%, and adjusted earnings per diluted share was $1.89, down 28% when compared with the prior year.
Our third quarter results are encouraging and show a significant recovery from the effects of the pandemic.
In the short-term, however, we continue to view the current environment as uncertain and we will not be providing guidance for the fourth quarter.
Our operational excellence program is delivering positive results and continues to drive improvements in adjusted gross margin and adjusted operating margin.
We remain committed to delivering $80 million to $90 million of savings by the end of fiscal '23 as part of this program, which is essential for our future growth.
The progress we have made has helped us to reduce the impacts from the pandemic.
We expect the majority of savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels.
Free cash flow before restructuring and turnaround costs was $99 million in the first nine months of fiscal '21, compared with $95 [$95.2 ] million in the prior year.
We have been able to offset the decline in earnings due to the impact of the pandemic on sales volumes, particularly in the plasma business through a combination of lower increases in inventory, lower capital expenditures, an improvement in accounts receivable, when compared with the prior year.
Although our free cash flow for inventory is lower than the same period of the prior year, the impact from lower sales volumes and plasma has resulted in a higher disposables inventory balance.
We continue to monitor our inventory levels and have seen a decrease in our disposable inventory sequentially.
Additional fluctuations in inventory may occur as we adjust our production to support customer demand and our operational excellence program initiatives.
Cash on hand at the end of the third quarter was $189 million, an increase of $52 [$51.7] million since the beginning of the fiscal year.
In addition to free cash flow, the third quarter ending cash balance increased $28 million from recent portfolio moves and decreased $73 million due to debt repayments, including a $60 million repayment of the revolving credit line that was outstanding at the end of fiscal ' 20.
The borrowing of $150 million under the revolving credit facility in the first quarter of this fiscal year was repaid during the third quarter, and has no effect on the cash increase in this fiscal year.
Our current debt structure includes a $700 million credit facility that does not mature until the first quarter of fiscal '24, with the majority of the principal payments weighted toward the end of the term.
At the end of the third quarter, total debt outstanding under the facility included $311 million term loan.
There were no borrowings outstanding under the existing $350 million revolving credit line at the end of the third quarter.
Following our announcement to acquire Cardiva Medical, we will execute additional term loan of $150 million and we'll finance the remaining $325 million balance using a combination of our cash on hand and our existing revolving credit line.
At the completion of this transaction, which is expected to occur during the fourth quarter, our EBITDA leverage ratio as calculated in accordance with the terms set forth in the company's existing credit agreement will increase from 1.3 at the end of our third quarter of fiscal '21 up to about 3.2.
Our capital allocation priorities are clear and remain unchanged as we continue to prioritize organic growth followed by inorganic opportunities and share repurchases.
Over the last fours years, we put a lot of emphasis on strengthening our portfolio in funding key organic growth initiatives.
These investments have enabled us to improve our growth trajectory and will continue to fuel growth.
We have also bought back a total of $435 million or $4.5 million of the company's shares outstanding.
And while we do not plan to make additional purchases under the current share repurchase authorization, we view share repurchases as an important driver of shareholder return.
M&A is also a critical pillar of our capital allocation and by acquiring Cardiva Medical, we are adding a high growth asset, which will help us sustain future revenue growth and provide attractive financial returns.
And now, I'd like to open the call for Q&A.
| compname reports quarterly adj earnings per diluted share of $0.81.
qtrly adjusted earnings per diluted share $0.81.
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If not, it may be found on our Investor Relations website at ir.
Our discussions today will include non-GAAP financial measures.
Our entire executive leadership team is available during the Q&A session.
Chipotle's third quarter results highlight strong momentum in our business, fueled by a multi-pronged growth strategy and a passionate team that's delighted to see more guests coming back into our restaurants.
We continue to retain about 80% of digital sales but have now recovered nearly 80% of in-restaurant sales.
While COVID impacts will likely persist for a few more quarters, we are hopeful that the worst is behind us and society can shortly return to a more normal environment.
For the quarter, we reported record quarterly sales of $2 billion, representing 21.9% year-over-year growth, which was fueled by a 15.1% increase in comparable restaurant sales.
Restaurant level margin of 23.5% was 400 basis points higher than the 19.5% we reported last year.
Earnings per share adjusted for unusual items of $7.02, representing an increase of 86.7% year-over-year.
Digital sales growth of 8.6% year-over-year, representing 42.8% of sales and we opened 41 new restaurants, including 36 with a Chipotlane.
And I'm pleased to report that Q4 is off to a great start.
These results highlight that our key strategies continue to resonate with guests and allow us to win today, while we create the future.
While we regularly get asked, what's next, I believe our current growth drivers have plenty of runway and will be critical to us reaching our longer-term goal of 6,000 restaurants in North America with AUVs above $3 million and improving returns on invested capital.
To remind everyone, we're focusing on five key areas.
Number one, opening and running successful restaurants with a strong culture that provides great food with integrity, while delivering exceptional in-restaurant and digital experiences.
Number two, utilizing a disciplined approach to creativity and innovation.
Number three, leveraging digital capabilities to drive productivity and expand access, convenience, and engagement.
Number four, engaging with customers through our loyalty program to drive transactions in frequency.
And last but certainly not least, number five, making the brand visible, relevant, and loved.
Let me now provide a brief update on each of these, starting with operations.
Well-trained and supported employees consistently preparing delicious food and delivering excellent guest experiences are at the heart of our success.
We're fortunate to have amazing employees at our restaurants who have stayed focused on safety, reliability, and excellent culinary, despite the dynamic and challenging environment.
We are extremely proud of Chipotle's world-class employee value proposition that includes industry-leading benefits, attractive wages, specialized training and development, access to education, and a transparent pathway to significant career advancement opportunities.
We believe these efforts are helping to attract and retain great employees, which is more important than ever given the challenging labor environment we're all experiencing today.
Over the past 18 months, we've made operational adjustments to adapt to our constantly changing environment in support of our in-restaurant business as well as our record-breaking digital business.
As a result, we've had to allocate labor as needed among the different roles, including the DML and the frontline, depending on available staff to accommodate the needs of our customers and our restaurant teams.
This flexibility has allowed us to keep our frontline open, given our ability to divert orders on the digital line as needed to overcome periodic staffing challenges.
This is part of the normal business balancing that occurs at the discretion of on-site managers and has not had a material impact on our business in the past.
This was through pre-pandemic and is more relevant now as dining room volumes recover.
The good news is that I believe we're finally getting back to pre-pandemic operations and I couldn't be more excited.
We're fortunate to have a dedicated digital make line and a dedicated dining room serving line.
Our frontline represented nearly 60% of our business or $1.1 billion of sales for the quarter.
It is big and it is growing.
We are committed to ensuring guests on the frontline get the customized meal they want, made with real ingredients, excellent culinary, and faster than anywhere else.
We still have some work to do, but our goal is to provide exceptional throughput as speed of service is a foundational element of convenience that our guests truly value.
Therefore, we are committed to teaching, training, and validating the five pillars of throughput every day during every shift to ensure we meet our high standards and provide a great guest experience.
While taking good care of guest is always a top priority, utilizing our stage gate process to continue innovating is critical to our growth.
The great news is that Chipotle's delicious food that you feel good about eating, which creates an emotional connection with our customers and they love to see ongoing innovation from us.
As a result, we introduced new menu items on a regular cadence as it helps bring in additional customers, drive frequency with existing users, and gives us an opportunity to create buzz around the brand.
Recently, we launched Smoked Brisket for limited time across all our U.S. and Canadian restaurants.
Our culinary team spent the last two years developing the perfect Smoked Brisket recipe that is unique to our brand and pairs flawlessly with our fresh, real ingredients.
This is our third new menu item this year, following on the success of our Cilantro-Lime Cauliflower Rice and handcrafted Quesadilla.
Early customer feedback on this entree, which is expected to last through November, has been very positive and we're delighted to see an increase in both check size and transactions.
Quesadillas, which we launched as a permanent digital exclusive offering in March, continues to perform well and is also helping attract new customers to Chipotle.
By the way, if you haven't had a chance to try the brisket quesadilla, you really are missing out.
And we're far from being done.
Plant-Based Chorizo is currently being tested in a couple of markets and our talented culinary team is in the early stages of developing other exciting menu items.
All that being said, our stage gate process is not limited to new menu innovations.
We use it for many parts of the business, including development.
As you know, we validated a new restaurant expansion in Canada earlier this year, impressive unit economics with AUVs and margins, equal to or above those in the U.S. led us to accelerate development in this market.
We've opened one new restaurant in Canada year-to-date and have several more planned before year-end, including our first ever Chipotlane that's scheduled to open next week.
Similarly, we are now in the early stages of using this process to learn, iterate, and eventually validate expansion in Western Europe.
COVID slowed our ability to execute several critical initiatives, however, with restrictions easing, we're making nice progress and have implemented some of our digital assets as well as begun to test alternative formats and explore new trade areas.
The recent openings have exceeded expectations.
So while we continue to view international expansion as a medium to longer-term opportunity, I remain quite optimistic about its future contributions to the Chipotle story.
A more near-term pillar of growth has been our ongoing digital transformation, which is helping Chipotle become a real food-focused digital lifestyle brand.
During the third quarter, digital sales grew nearly 9% year-over-year to $840 million and represented 43% of sales.
We're not surprised to see the mix moderate as the world continues to reopen.
However, we're pleased to see our digital sales dollars continue to grow despite lapping tough comparisons.
In fact, our year-to-date digital sales of nearly $2.7 billion are just slightly below the $2.8 billion we achieved during all of last year.
Digital is proving to be sticky as it's a frictionless and convenient experience that has been aided by continuous technology investments to improve operational execution, innovation, and the customer value proposition.
As a result of the pandemic, many new consumers were introduced to Chipotle via our digital channels and are now using us for alternative occasions.
The thing I love about having two separate businesses is that they serve different needs that will likely prove to be incremental and complementary over the long run.
This is reinforced by the fact that different guests are accessing Chipotle through different channels.
Currently, about 65% of our guest use in-restaurant as their main access point, nearly 20% use digital as their primary channel, and the remaining 15% to 20% use both channels.
We're encouraged by this dynamic as it gives us several future opportunities, including the ability to convert more of our in-restaurant guests into higher frequency digital users.
Not only are we pleased with the level of digital sales and overall mix, but we're also delighted to see that our highest margin transaction, digital pickup orders, is gaining traction.
This channel represented slightly more than half of digital sales in Q3.
As always, we're not being complacent and continue to look for ways to enhance convenience and access through alternate restaurant formats, digital-only menu offerings, and leveraging our large and growing loyalty program.
Speaking of the loyalty program, we're excited to have more than 24.5 million members, many of whom are new to the brand.
This gives us a large captive audience to engage with and distribute content that promotes our values, as well as motivates our super fans.
We continue to leverage our CRM sophistication by focusing a lot more on personalization and using predictive modeling to trigger journeys, primarily for new and lapsed customers.
These personalized messages are more brand-related as opposed to offers or discounts, which is allowing us to optimize program foundation and economics.
All these efforts, along with the use of enhanced analytics, are allowing us to consistently attract more visits from loyalty members than non-members.
No doubt the loyalty program has moved from a crawl to the walk stage, and we still have a lot of room to grow.
Offering new ways to engage with Chipotle is essential to the ongoing evolution of our digital business.
Our first enhancement was Rewards Exchange, which provides greater customization and flexibility to redeem rewards and allows guests to earn rewards faster.
More recently, we announced Extras, an exclusive feature that gamifies Chipotle rewards with personalized challenges to earn extra points and/or collect achievement badges in order to drive engagement.
As the program grows, so does our ability to provide sophisticated and relevant communications to our guests, which will ultimately deepen the relationship between members and the brand.
We are pleased with our progress to-date, but believe with ongoing investments and further leveraging of data-driven insights, we can get even better.
Amplifying all the growth initiatives I've mentioned thus far are the collective efforts of the marketing team, which are designed to make Chipotle more visible, more relevant, and more loved.
We believe that real food has the power to change the world and using custom creative across a wide variety of media channels that allow us to drive culture, drive difference, and ultimately, drive a purchase.
For example, we use numerous campaigns to stay relevant via important sporting events such as the basketball championships, where we hit $1 million worth of free burritos in our TV advertising.
We also utilize social media, including our website, to authentically highlight real food for real athletes during the broadcast from Tokyo.
And, of course, to celebrate the launch of Smoked Brisket, we offered an exclusive peek to our loyalty members prior to a full launch, supported by a media plan across online video, digital, and social media platforms as well as traditional TV spots.
All of these helped attract new guests into the Chipotle family as well as increase frequency of existing users.
We're fortunate to have an innovative marketing team that wants to be a leader, not a follower, and our marketing organization is built on a culture of accountability that encourages new ideas, that's committed to experimentation, and is ruthless on measuring returns, and isn't afraid to pivot to different opportunities if they don't perform to our high standards.
Every day this team is focused on driving sales today, while enhancing our brand for tomorrow.
Chipotle is committed to fostering a culture that values and champions our diversity, while leveraging the individual talents of all team members to grow our business, elevate our brand, and cultivate a better world.
Our team has proven their ability to be resilient and successfully execute against macro complexities.
As a result, I believe, we are better positioned to drive sustainable, long-term growth than we were before the pandemic, which makes me even more excited about what we can accomplish in the years ahead.
With that, here's Jack to walk you through the financials.
We're pleased to report solid third quarter results with sales growing 21.9% year-over-year to $2 billion as comp sales grew 15.1%.
Restaurant level margin of 23.5% expanded 400 basis points over last year, and earnings per share adjusted for unusual items was $7.02, representing 86.7% year-over-year growth.
The third quarter had a GAAP tax benefit that I'll discuss shortly, which is partially offset by expenses related to a previously disclosed modification to our 2018 performance share and transformation expenses, which netted to positively impact our earnings per share by $0.16 leading to GAAP earnings per share of $7.18.
As we look ahead to Q4, there remains uncertainty on several fronts, including COVID-related impacts as well as inflationary and staffing pressures.
But given our strong underlying business momentum, we expect our comp to be in the low-to-mid double digits, which is encouraging considering that will be about 200 basis points less than pricing contribution during Q4 versus Q3 as we've lap some of our delivery menu price increases.
And our brisket LTO will be for a partial quarter as compared to the full quarter of carne asada last year.
Let me now go through the P&L line items, beginning with cost of sales.
Our supply chain team has done an outstanding job, navigating the numerous industrywide disruption, which led to food costs being 30.3% in Q3, a decrease of 200 basis points from last year.
This is due primarily to leverage from menu price increases, which were partially offset by higher costs associated with beef and freight that unfortunately are continuing to worsen.
It's hard to predict how much of these headwinds will ultimately be temporary versus permanent but they are likely to persist for the foreseeable future.
In addition, Q4 will also include the higher cost brisket LTO, which collectively will result in our food costs being in the low-31% range for the quarter.
Labor costs for the third quarter were 25.8%, an increase of about 40 basis points from last year.
This increase was driven by our strategy to increase average nationwide wages to $15 per hour, which is partially offset by menu price increases, sales leverage, and a one-time employee retention credit.
Given ongoing elevated wage inflation and greater new unit openings, we expect labor costs to be in the mid-26% range in Q4.
Other operating costs for the quarter were 15.1%, a decrease of 170 basis points from last year due primarily to price and sales leverage.
Marketing and promo costs for the quarter were 2.4%, about 20 basis points lower than we spent last year.
While Q3 tends to be a seasonally lower advertising quarter, the timing of some initiatives also shifted into Q4 this year.
As a result, we anticipate marketing expense to be around 4% in Q4 to support Smoked Brisket and for the latest brand messaging under our Behind The Foil campaign.
For the full year 2021, marketing expense is expected to remain right about 3% of sales.
Overall, other operating costs are expected to be in the mid-16% range for the fourth quarter.
Looking at overall restaurant margins, we expect Q4 to be in the 20% to 21% range.
Our Q4 underlying margin would be around 22% when you normalize marketing spend and remove the temporary headwind from the brisket LTO.
And the remaining cost pressure will continue to evaluate and take appropriate actions on menu prices to offset any lasting impacts.
Our value proposition remains strong, which we believe gives us a lot of pricing power.
Despite these challenges, we remain confident in our ability to drive restaurant level margins higher as our average unit volumes increase.
G&A for the quarter was $146 million on a GAAP basis or $137 million on a non-GAAP basis, including $7.6 million for the previously mentioned modification for 2018 performance shares, and $1.6 million related to transformation and other expenses.
G&A also includes about $100 million in underlying G&A, about $28 million related to non-cash stock compensation, about $8.5 million related to higher performance-based bonus accruals and payroll taxes and equity vesting, and stock option exercises, and roughly, $600,000 related to our upcoming all-manager conference.
Looking to Q4, we expect our underlying G&A to be right around $101 million as we continue to make investments primarily intact to support ongoing growth.
We anticipate stock comp will likely be around $27 million in Q4, although this amount could move up or down based on our actual performance.
We also expect to recognize around $5.5 million related to performance-based bonus expense and employer taxes associated with shares that vest during the quarter as well as about $1.5 million related to our all-manager conference.
Our effective tax rate for Q3 was 14.7% on a GAAP basis and 19.7% on a non-GAAP basis.
Both rates benefited from our option exercises and share vesting at elevated stock prices.
In addition, our GAAP tax rate included a return to provision benefit for additional NOL generated on our 2020 federal income tax return and carried back to prior years.
For Q4, we continue to estimate our underlying effective tax rate to be in the 25% to 27% range, though it may vary based on discrete items.
Our balance sheet remains healthy as we ended Q3 with $1.2 billion in cash, restricted cash and investments with no debt along with a $500 million untapped revolver.
During the quarter, we repurchased $99 million of our stock at average price of $1,813 and we expect to continue using excess free cash flow to opportunistically repurchase our stock.
However, opening more Chipotles continues to be the best return we can generate.
During Q3, despite a few delays in opening timeline, we opened 41 new restaurants with 36 of these including a Chipotlane.
While we're experiencing construction inflationary pressures, subcontractor labor shortages, critical equipment shortages and landlord delivery delays, our development team is doing an excellent job opening these new restaurants.
In fact, we currently have more than 110 restaurants under construction, and while timing is somewhat unpredictable, this gives us confidence in ending the year at or slightly above the 200 new restaurants with now more than 75% including a Chipotlane versus our prior expectation of 70%.
Also, the team has done a nice job building a robust new unit pipeline, which we believe will allow us to accelerate openings in 2022.
But because of the challenges I just mentioned and how they could impact the timeline, we will provide 2022 opening guidance during our Q4 call.
As of September 30th, we had a total of 284 Chipotlanes, including 12 conversions and 8 relocations.
They continue to enhance access and convenience for our guests, while demonstrating stellar performance.
And while it's early days, Chipotlane conversions and relocations are yielding encouraging results.
We will leverage our stage gate process to learn and refine our strategic approach to accelerating our Chipotlane portfolio.
You can see why we remain optimistic about our future.
| compname reports q3 earnings per share of $7.18.
q3 earnings per share $7.18.
q3 revenue rose 21.9 percent to $2.0 billion.
q3 adjusted earnings per share $7.02 excluding items.
qtrly comparable restaurant sales increased 15.1%.
qtrly digital sales grew 8.6% year over year to $840.4 million.
qtrly food, beverage and packaging costs in q3 were 30.3% of revenue, decrease of 200 basis points compared to q3 of 2020.
qtrly restaurant level operating margin was 23.5%, an increase from 19.5% in q3 of 2020.
for q4 expect comparable restaurant sales to be in low to mid double-digits range.
sees q4 2021 comparable restaurant sales growth in low to mid double-digits range.
sees for fy 2021 at or slightly above 200 new restaurant openings.
sees an estimated underlying effective q4 2021 tax rate between 25% and 27% before discrete items.
|
I'm pleased to report that we delivered another strong quarter with excellent performance in both segments.
Our operations continue to do a great job for our customers with best-in-class delivery, quality and service.
I'm really proud of our employees and how they stayed focused on safety, productivity, cost savings in Lean Kaizen process improvements.
As a company, we delivered $235 million in revenue in the second quarter, growing revenues both year-over-year and sequentially and we achieved near record levels of profitability.
Gross margins of 43% and operating margins of 21%, our second highest quarterly margin performance.
We achieved GAAP earnings per share of $0.97 for adjusted earnings per share of $1.1 [Phonetic] and our best free cash flow quarter in the company's history, generating over $50 million in free cash flow in the second quarter.
We did face supply chain challenges in materials, cost inflation and logistics that our teams were able to manage through and successfully offset some of their impact on the bottom line and we'll keep an eye on these going forward.
We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth.
As we've mentioned before, we're increasing our investment in research and technology across the company.
In general, we're encouraged by the economic recovery in key markets coming out of the pandemic slowdown.
We're cautiously watching how the delta variant might affect this recovery, particularly international air travel in the less-vaccinated regions of the world.
That said, long-term secular trends are favorable and Albany's market positions global footprint and product development take advantage of these trends.
In our Engineered Composites segment.
As domestic airline travel recovers, we expect to benefit from our position on narrow-body aircraft with LEAP engines in our partnership with Safran.
As we mentioned last quarter, we're working closely with Safran to coordinate ramping production as LEAP demand picks up on recovering narrow-body OEM production.
Our plans include hiring additional workers and preparing for increased production in our three LEAP facilities as we exit 2021 grow in the future.
We're very excited about Safran's recent announcement with GE to partner and development in the next generation RISE engine.
We view Safran as an important long-term customer and partner.
As we previously mentioned, we're investing more this year in R&D projects, particularly with new customers and new products, using advanced materials such as our 3D-woven composites, with the goal to diversify and grow our customer base, broaden our material science capabilities.
This ranges from our proprietary 3D-woven composites currently used on LEAP engine, fan blades and fan cases, to automated fiber placement composite wing skins for Lockheed Martin's F-35 Joint Strike Fighter to complex components on the Sikorsky CH-53K helicopter.
We continue to develop applications for the Wing of Tomorrow program with airbus industries and along these lines, we are pleased to announce earlier this month our technology collaboration with Spirit AeroSystems to develop advanced 3D-woven composite applications for hypersonic vehicles.
This collaboration capitalizes on the unique capabilities of both companies to achieve superior hypersonic design solutions and efficient manufacturability using Albany's proprietary 3D-woven composite technologies, and it builds on our demonstrative ability to manufacture 3D-woven composites at commercial scale.
This is an exciting example of the types of new business and advanced technology programs we're investing in today to help secure our future long-term growth.
In the Machine Clothing segment, we're optimistic about recovering global growth, expect to benefit from long-term secular trends, which should underpin the demand for paper products.
Our Machine Clothing business has benefited as a leading supplier in the industry since we're well-positioned globally, particularly in the growing end markets for packaging and tissue products.
Our product development strategies, operational improvements and technical service continue to target these higher growth end markets.
Our operating teams have been firing on all cylinders and we expect to continue our strong execution in the second half of the year.
Let me say a few words about Machine Clothing's end markets.
Packaging, tissue, corrugated products, pulp and building products, end markets have remained the strongest sub-segments with packaging benefiting from increasing online shopping as retail goes through a fundamental shift worldwide.
In tissue, we may be in a transition phase whereby at-home demand settles down and people return to school, restaurants, offices, vacations, et cetera.
We have yet to see a pickup however, in the away-from-home paper markets for our belts, which should eventually improve.
Not surprisingly, publication grades continue their decline and only represented 16% of MC revenues in the second quarter.
Markets in North America and China robust while emerging economies are still grappling with COVID and low vaccination rates likely requiring more time to rebound.
In summary, our Machine Clothing segment continues to perform well, our operations are strong, taking advantage of the higher growth sub-segments and serving customers well around the world as a recognized global leader in the industry.
This success is a result of disciplined execution of our long-term strategy.
As I mentioned, we have a strong balance sheet and good free cash flow generation, which allows us to continue investing in the technologies and customer programs that expand and broaden our competitive position in both segments.
Our first priority for capital allocation is to invest in organic growth programs across both business segments and then to seek acquisitions that fill our long-term strategy.
Our reputation for reliability, service and technical excellence is well-established in Machine Clothing and our brand is growing in aerospace as a reliable supplier and engineered materials partner.
We're optimistic about the long-term opportunities in both segments.
I'll talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year.
For the second quarter, total company net sales were $234.5 million, an increase of 3.8% compared to $226 million delivered in the same quarter last year.
Adjusting for currency translation effects, net sales rose by 1% year-over-year in the quarter.
In Machine Clothing, also adjusting for currency translation effects, net sales were up 0.8% year-over-year, driven by increases in packaging grades and engineered fabrics, partially offset by declines in all other grades.
Publication revenue declined by over 7% in the quarter and as Bill mentioned, represented only 16% of MC's revenue this quarter.
Tissue grades also declined over year-over-year due to a more normal level of demand for grades to support customer production for at-home use, resulting in the decline from the highs for those grades that we saw last year without significant recovery to date in the away-from-home product grades.
Engineered Composites net sales, again after adjusting for currency translation effects, grew by 1.3%, primarily driven by growth on LEAP and CH-53K, partially offset by a decline on the 787 platform.
During the quarter, the ASC LEAP program generated little over $25 million in revenue.
Comparable to the first quarter of this year, but up over $10 million from the second quarter of last year.
At the same time, we reduced our inventory of LEAP-1B finished goods by over 20 engine shipsets in the quarter, leaving us with about 170 LEAP-1B engine shipsets on the balance sheet at the end of the second quarter.
As you will recall, we previously recognized revenue on these engine shipsets and their value was reported under contract assets on our balance sheet.
Also during the most recent quarter, we generated about $3 million in revenue on the 787 program, up from less than $1 million in the first quarter, but down from almost $14 million in the second quarter of last year.
Second quarter gross profit for the company was $101.7 million, a reduction of 1% from the comparable period last year.
The overall gross margin decreased by 220 basis points from 45.6% to 43.4% of net sales.
Within the MC segment, gross margin declined from 54.5% to 52.9% of net sales principally due to foreign currency effects, higher input costs and higher fixed costs, partially offset by improved absorption.
For the AEC segment, the gross margin declined from 26.7% to 23% of net sales, driven primarily by a smaller impact from changes in the estimated profitability of long-term contracts.
During this quarter, we recognize the net favorable change in the estimated profitability of long-term contracts of just over $4 million.
But this compares to a net favorable change of over $7 million in the same quarter last year.
The favorable adjustment this quarter was principally due to a reduction as a result of changes in volume expectations to previously established loss reserves on a couple of specific programs and is therefore not necessarily reflective of ongoing enhancements to profitability.
In fact, as we previously discussed, the expected revenue declines this year in some of our fixed price programs are leading to headwinds to long-term program profitability this year.
Second quarter selling, technical, general and research expenses increased from $47.4 million in the prior year quarter to $51.8 million in the current quarter and also increased as a percentage of net sales from 21% to 22.1%.
The increase in the amount of expense reflects higher incentive compensation expense, higher R&D spending, higher travel expenses and higher foreign currency revaluation losses.
Total operating income for the company was $50 million, down from $52.7 million in the prior year quarter.
Machine Clothing operating income fell by $600,000, caused by higher STG [Phonetic] in our expense, partially offset by higher gross profit and lower restructuring expense.
And AEC operating income fell by $1.1 million, caused by lower gross profit and higher STG in our expense, partially offset by lower restructuring expense.
The income tax rate for this quarter was 30%, compared to 32.1% in the same quarter last year.
The lower rate this year was caused by the generation of a lower share of our global profits in jurisdictions with higher tax rates, partially offset by a higher level of unfavorable discrete income tax adjustments.
Net income attributable to the company for the quarter was $31.4 million, reduction of $1 million from $32.4 million last year.
The reduction was caused primarily by the lower operating profit, partially offset by the lower tax rate.
Earnings per share was $0.97 in this quarter compared to $1 last year.
After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses and expenses associated with the CirComp acquisition and integration, adjusted earnings per share was $1.01 this quarter, compared to $1.09 last year.
Adjusted EBITDA declined by 5.8% to $69.4 million for the most recent quarter compared to the same period last year.
Machine Clothing adjusted EBITDA was $63 million, essentially flat compared to the prior year quarter and represented 39.4% of net sales.
AEC adjusted EBITDA was $19.3 million or 25.9% of net sales, down from last year's $22.8 million or 31.4% of net sales.
Turning to our debt position.
Total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt declined from $384 million at the end of Q1 2021 to $350 million at the end of Q2 and cash increased by just over $15 million during the quarter, resulting in the reduction in net debt of about $50 million.
Capital expenditures in the quarter were approximately $11 million compared to $9 million in the same quarter last year.
The increase was caused primarily by higher capital expenditures in Machine Clothing.
As we look forward to the balance of 2021, the outlook for the Machine Clothing segment remains strong.
Compared to the same period last year, MC orders were up 10% in the second quarter and up over 3% year-to-date.
We are also seeing some foreign currency tailwinds to our MC revenue, primarily driven by the strong Euro, although the recent strength in the dollar versus the euro means that we are unlikely to see the same foreign currency tailwinds in the back half of the year.
Overall, we are raising our previously issued guidance of revenue for the segment to between $585 million and $600 million, up from the prior range of $570 million $590 million.
From a margin perspective in Machine Clothing, we delivered another strong quarter with adjusted EBITDA margins of almost 40%.
We saw some increase in the level of travel during the quarter, but we are still not back to a normal level of travel and the segment's travel expense in the quarter was still almost $2 million, below the level in the same quarter in 2019.
So, we may see some additional pressure from that in the balance of the year as we continue with the return to normal.
We have also seen some pressure from increased input expenses both raw materials and logistics and expect these pressures to continue through the balance of the year.
We continue to work to offset the impact of these cost increases to the greatest extent possible by driving down our production cost through continuous improvement initiatives.
However, we do expect to see overall margin pressures in the back half of the year, driven by both increasing travel expenses and rising input costs.
At the start of the year, we had anticipated seeing foreign currency exchange rate pressures on MC profitability, particularly caused by the recovery in the Mexican peso and Brazilian real as the devaluation of both of those currencies in the middle of 2020 has provided us a bottom line benefit since we've more expenses than revenues in those currencies.
Year-to-date, we have not seen as much headwind from those currencies as we had expected and we have also benefited from the strong euro, a currency where we have more revenues than expenses.
As a result, overall year-to-date, foreign exchange rates have actually provided us with a modest adjusted EBITDA benefit compared to the same period last year.
However, based on current exchange rates, we will not see the same comparable foreign currency benefit in the back half of the year.
We are also cautious about the effects of a potential resurgence in COVID cases on segment results in the back half of the year.
As a result of all of these factors and the increase in revenue guidance, we are increasing our adjusted EBITDA guidance for the MC segment to a range of $210 million to $220 million, up from the prior range of $195 million to $205 million.
Turning to Engineered Composites.
We delivered a strong quarter aided by the net favorable adjustment to long-term contract profitability.
Absent that pickup, our Q2 results were consistent with what we had indicated last quarter, down from Q1, representing of what we had expected to be the trough for the year.
However, given the impact of the net favorable adjustment on the second quarter results, we now expect that Q2 will be the quarter with the highest segment profitability this year as we expect Q3 and Q4 profitability to be more in-line with what we delivered in Q1.
For the full year, we still expect 787 program revenue to be down over $40 million from the roughly $50 million generated on that program last year.
With Boeing's recent announcement of a reduction in 787 build rate, all but eliminating the possibility for any upside on that program later in the year.
We also still expect LEAP revenue to be in-line with prior expectations and roughly flat to last year.
However, on a more positive note, while F-35 revenue was down slightly in the second quarter compared to the same period last year, recent order volume has given us confidence that we will not see the full-year decline in F-35 revenue that we had previously expected.
Overall, due to the increased confidence in F-35 revenue, the adjustments to long-term contract profitability this quarter and improvements in several other areas, we are raising our guidance for segment revenues to be between $290 million and $310 million, up from the previous range of $275 million to $295 million.
From a profitability perspective driven by the same factors, we are raising our AEC adjusted EBITDA guidance to be between $65 million and $75 million, up from the prior range of $55 million to $65 million.
We are also updating our previously issued guidance ranges for company-level performance including revenue of between $880 million and $910 million, increased from prior guidance of $850 million to $890 million; effective income tax rate of 28% to 30%, unchanged from prior guidance; depreciation and amortization of approximately $75 million, the top end of prior guidance; capital expenditures in the range of $40 million to $50 million, down from prior guidance of $50 million to $60 million; GAAP earnings per share of between $2.84 and $3.14 increased from prior guidance of $2.38 to $2.78; adjusted earnings per share of between $2.90 and $3.20, increased from prior guidance of $2.40 to $2.80; and adjusted EBITDA of between $225 million and $240 million, increased from prior guidance of $195 million to $220 million.
Overall, we continue to be very pleased with the performance of both segments.
Both face challenges -- primarily rising input cost for Machine Clothing and recovering commercial aerospace market for the Engineered Composites segments, but both segments are overcoming the challenges and delivering strong results, which is a testament for the hard work by all of our employees across the globe.
| albany international raises 2021 guidance.
sees fy adjusted earnings per share $2.90 to $3.20.
sees fy gaap earnings per share $2.84 to $3.14.
q2 adjusted earnings per share $1.01.
q2 earnings per share $0.97.
sees fy revenue $880 million to $910 million.
q2 revenue $235 million.
|
Today, we'll update you on the company's first quarter results.
In the first quarter, we had all-time record sales of almost $2.7 billion, an increase of 17% as reported or 9% on a constant basis with adjusted operating income of $329 million, our highest ever first quarter earnings per share of $3.49.
Our business continued to strengthen in the first quarter and did not reflect the industry's normal seasonality.
Around the world, consumers are continuing to invest in their homes and new flooring plays a major role in most remodeling projects.
We're also starting to see moderate improvement in commercial demand as global economies expand and businesses begin to invest in an anticipation of a return to normal.
In most countries, construction is considered an essential business, so our sales have been less impacted by government restrictions.
Those specific regions have interrupted our customers' businesses.
Our Flooring Rest of World segment continues to outperform with strong residential sales of our flooring, improved mix from our premium products and less exposure to commercial channels.
The segment benefited from lower marketing expenses, product mix and increased days, which resulted in a greater margin in the first quarter.
Our other segments also performed well with strong growth in residential products and expanding operating margins, while their results were impacted by low commercial sales and severe storms in the United States.
Market demand strengthened as the period progressed, and our order backlog remains robust going into the second quarter.
Most of our businesses are running at high production rates, though inventories remain lower than we would like.
Our production and operating costs were impacted in the period by supply limitations in many of our markets as well as absenteeism, new employee training and severe winter weather in the United States.
Our margins have benefited from stronger consumer demand, our restructuring and productivity actions and leverage our SG&A costs.
With increased prices in most product categories and geographies, reflecting inflation in raw materials, labor, energy and transportation.
Global transportation capacity has been limited, increasing our cost and delaying receipt of our imported products.
We've seen similar constraints on local shipments and are increasing our freight rates to respond.
The investments we made in our U.S. trucking fleet and local delivery systems have enabled us to provide our customers with more consistent service while improving our efficiencies.
Even with COVID surges in some markets, we anticipate continued strengthening of economies around the world.
Government actions and monetary policies are stimulating higher economic growth rates and stronger housing markets, and vaccination program should reduce the risk of COVID related disruptions.
Recent U.S. stimulus actions as well as proposed infrastructure spending should further expand economic growth and employment level.
Though government investments are lower than in the U.S. Other countries are beginning to see their economies expand, which should support ongoing demand in our product categories.
We continue to implement our restructuring plans, which have achieved $75 million of our anticipated $100 million to $110 million in savings.
The balance of the savings will be spread over the next three quarters as specific projects are completed.
In the first quarter, we purchased $123 million of our stock at an average price of $179 for a total of $686 million since we initiated our purchasing program.
Our balance sheet remains strong with net debt less short-term investments of $1.3 billion.
Our leverage is now below onetime adjusted EBITDA.
Given our higher sales and operating levels, we are reviewing additional investment opportunities to expand our business and capacity.
Jim will you review the first quarter financials.
Sales in Q1 2021 were $2,669 billion.
That's a 17% increase as reported and 9% on a constant basis.
All segments showed positive volume growth with Flooring Rest of the World being the strongest.
As a reminder, Q1 had three additional shipping days and Q4 will have four fewer days.
Gross margin was 29.7% as reported or 30.1% excluding charges, increasing from 27.5% in the prior year.
The year-over-year increase was driven primarily by higher volume and productivity, greater manufacturing uptime, improved price mix and favorable FX, partially offset by increased inflation.
The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed later today.
SG&A, as reported, was 17.
8% or 17.7% versus 20.3% in the prior year, both excluding charges, as we saw strong leverage on the increased volume and productivity actions, partially offset by inflation in FX.
Gives us an operating income, as reported, of 11.9% of sales.
Restructuring charges for the quarter were $11 million, and our savings, as Jeff said, are on track as we have recorded approximately $75 million of the plan.
Operating margin excluding charges of 12.3%, improving from 7.2% in the prior year or 510 basis points.
Similar to gross margin, the increase was driven by stronger volume productivity actions, improved price/mix and FX, greater manufacturing uptime, partially offset by the increased inflation.
Interest expense of $15 million includes the full impact of the 2020 bond offerings.
Other income of $2 million, mainly the result of favorable transactional FX.
Our non-GAAP tax rate was 22% versus 20% in the prior year, and we expect the full year to be 21.5% to 22.5%.
Giving us an earnings per share as reported of $3.36 or excluding charges, $3.49, which is 110% improvement versus prior year.
Now turning to the segments.
Global Ceramic had sales of $930 million, a 10% increase as reported, or approximately 5% on a constant basis with strong geographic growth, especially in Brazil, Mexico and Russia, while the U.S. was unfavorably impacted by the February ice storm.
Operating income, excluding charges of 9.6%, that's up 400 basis points versus prior year, and this improvement was from strengthening volume and price/mix increased manufacturing uptime and productivity, partially offset by unfavorable inflation.
In Flooring North America, sales of $969 million or a 14% increase as reported or 9% on a constant basis, driven by strong residential demand with commercial beginning to recover from its trough.
Operating income excluding charges of 9.3%, that's an increase of 410 basis points versus prior year.
The improvement similar to global ceramic was driven by increased volume and productivity, less temporary shutdowns, partially offset by higher inflation.
And finally, Flooring Rest of the World with sales of $770 million.
That's an increase of 31% as reported or 15% on a constant basis as our focus on the residential channel drove improvement across product -- all our product groups led by laminate, LVT and soft surface business in Australia and New Zealand.
The operating margin excluding charges of 20.9%, an increase of 740 basis points versus prior year, driven by the higher volume, favorable impact of price/mix and productivity, partially offset by the increase in inflation.
Corporate and eliminations came in at $11 million, and I expect for the full year 2021 to be approximately $40 million to $45 million.
Turning to the balance sheet; cash and short-term investments are approximately $1.3 billion, with free cash flow in the quarter of $145 million.
Receivables at just over $1.
8 billion, giving us a DSO improvement to 54.
4 days versus 57 days in the prior year.
Inventories were just shy of $2 billion.
That's a decrease of approximately $200 million or 9% from the prior year, with the marginal sequential increase of 4% from Q4 or approximately $80 million.
Inventory days remained historically low at 105.5 days versus almost 130 in the prior year.
Property plant equipment just over $4.4 billion with CapEx for the quarter of $115 million versus D&A of $151 million.
Full year CapEx is currently estimated at $620 million with us reevaluating our plan, and we will most likely see an increase from that level.
Full year D&A is projected to be $583 million.
And lastly, the overall balance sheet and cash flow remained very strong with gross debt of $2.7 billion.
As I said, total cash and short-term investments of over $1.3 billion, giving us a leverage of 0.9 times adjusted EBITDA.
First quarter sales of our Flooring Rest of World segment increased 31% as reported or 15% on a constant basis, exceeding our expectations.
Sales across all our product categories and geographies were strong as housing and residential renovation continued at a brisk pace.
Margins expanded over last year to approximately 21% due to higher volume, favorable price and mix and positive leverage on SG&A, partially offset by inflation.
During the period, most of our facilities ran at high levels, though some supply constraints limited our utilization.
At this point, we anticipate some material shortages continuing into the second quarter.
Our backlog has increased as customer inventories remain low.
We have raised prices across all product categories and have announced additional increases where material inflation has continued to expand.
Our laminate business, the segment's largest product category continues to record significant growth as consumers embrace our more realistic visuals and superior performance.
Our leadership in premium laminate products and our higher volumes drove improved margins during the period.
Our unique manufacturing methods create proprietary products that cannot be duplicated.
Our next-generation laminate technology provides premium wood consumers with features that exceed traditional wood in beauty and durability.
In the second quarter, we are installing additional manufacturing assets to support future growth.
During the period, our LVT sales rose substantially with significant growth in rigid LVT.
Our margins expanded from enhanced formulations and operational improvements that increased our production speeds.
In the period, our sales were restricted by material supply disruptions that caused unscheduled shutdowns.
We anticipate continued improvement in our operations as the material supply normalizes and production increases to expand our new rigid LVT collections.
Our sheet vinyl sales were limited in the period by COVID lockdowns of our retailers in Europe.
We anticipate sheet vinyl sales improving as government restrictions are lifted and our customers reopen their shops.
Our Russian sheet vinyl business continues to expand rapidly as we broaden our customer base and product offering.
We have initiated a third shift at the plant to support higher sales volumes.
Our insulation business continues to grow as our panels provide the best option for energy conservation.
Sales growth was robust in most of our geographies, though COVID restrictions in Ireland impacted our plant operations and results.
Chemical supply problems have limited our production and dramatically increased our costs.
We have announced our third price increase to offset the continued inflation and chemical shortages are expected to last through the second quarter.
Our wood panels business delivered improved performance with our plant running full and operating margins expanding.
As market demand for panels grows, we are allocating our production.
We improved our mix during the period with increased sales of our higher-value decorative products and mezzanine floors.
We're installing a new melamine press to expand production of our higher-value products and increased efficiencies.
Our new plant that uses waste to create energy for the facilities is operating well and benefiting our results.
Sales in both Australia and New Zealand increased significantly and margins expanded due to higher volume, improved productivity and favorable price mix, partially offset by inflation.
Sales grew in soft and hard surfaces with a strong residential performance driven by high levels of remodeling and a solid housing market.
Our updated carpet collections and SmartStrand and Wolf have enhanced our sales and mix.
We increased our sales by leveraging our comprehensive soft and hard service collections, strong sales organization, and industry-leading service.
The commercial performance was stronger, primarily driven by projects that were postponed.
For the period, our Flooring North America sales increased 14% as reported or 9% on a constant basis.
Adjusted margins expanded to 9% due to higher volume, productivity gains and mix improvements, partially offset by inflation.
Our performance was seasonally stronger than historical first quarters with consumers increasing investments in residential remodeling and new construction.
Our commercial business continued to improve sequentially from its trough with growing investments in new projects.
Our order rates remain strong and our backlog is higher than normal.
We have increased prices as a material and transportation costs have escalated and we'll adjust further as required.
All of our operations are maximizing their output to support higher sales and improve our service.
In the period, we managed through interference from labor shortages and supply constraints, which impacted our production levels.
Our inventories and service levels have also been impacted by delayed shipment of our imported products due to bottlenecks in ocean freight.
We are continuing to execute our restructuring initiatives, which will provide ongoing benefit to our results as they are completed this year.
Our residential carpet sales improved as consumers desire more comfortable, quieter spaces in their homes.
Retail remodeling was our strongest channel, improving our mix through increased sales of our premium products.
We are expanding our proprietary SmartStrand franchise with new collections that offer superior design and performance.
We have significantly reduced operational complexity by simplifying our yarn and product strategies and reducing low-volume SKUs.
So that our workforce to meet higher market demand, we have implemented extensive training processes and are relocating assets to increase production where necessary.
Our commercial sales are recovering as business remodeling increases along with the economic improvement.
We are also seeing increasing volume of higher-value products as larger specified projects are commencing.
The April Architectural Billing Index reflects the highest level of project inquiries since 2019.
We have increased carpet tile production in anticipation of the commercial markets improving.
In our commercial LVT business, we are managing supply limitations and import delays.
Our laminate sales are setting records as the appeal of our realistic visuals and waterproof performance expands across all channels.
Through numerous process improvements, we have significantly increased our domestic production and are supplementing it with imports from our global operations.
We are installing additional production at the end of this year to further expand our sales.
Our new line will also produce the next generation of Redwood, which is already being well accepted by European consumers.
We have completed upgrades and streamlined our MDF board facility to enhance our volume and cost.
We are ramping up production of our premium ultra wood, the first waterproof natural wood flooring that also features industry-leading scratch, dent and fade resistance.
Ultra wood is being well received as a superior alternative to traditional engineered wood flooring.
Our LVT and sheet vinyl sales continue to increase in the new construction and residential retail channels.
We are upgrading our LVT offering with enhanced visuals unique water type joints and improved stain and scratch resistance.
Our local manufacturing has continued its improvement and production output increased as we implemented processes similar to those proven to work in our European operations.
Our service has been impacted by material supply disruptions in the U.S. and delays in shipments of sourced products.
We anticipate our supply will increase and we will see further improvements in our domestic offering and production output.
In the quarter, our Global Ceramic sales rose 10% as reported and 5% on a constant basis, with sales increases in each of our markets, driven by growth in residential remodeling and new construction.
The segment's adjusted margin expanded to approximately 10% due to volume, price, mix and productivity gains, partially offset by inflation.
Our Russian, Brazilian and Mexican ceramic businesses delivered strong results though they were limited by their capacities and are allocating production as necessary.
All of our businesses are facing rising material, energy and transportation costs, and we have taken pricing actions to offset.
Our U.S. ceramic residential sales grew from remodeling and new construction and commercial sales are improving from their low levels.
Our strongest growth was in new residential construction, and we are seeing activity strengthen with contractors at our service centers.
We are introducing higher-value products, including polished, mosaic, decorative wall and antimicrobial collections to improve our mix.
We are focusing on the fastest-growing channels and implementing advanced technologies to make doing business with us faster, easier and more profitable for our customers.
Across the business, our plants are running at higher levels, and we have increased our productivity with our restructuring actions.
Escalating freight costs have hurt our margins, and we are raising prices to offset.
Our quartz plant is improving its productivity, and we are introducing more sophisticated bank collections, which are increasing our mix and should enhance our margins.
In the period, the ice storm that hit the Southwest temporarily stopped production at most of our manufacturing facilities by interrupting our electricity and natural gas supply.
The facilities have all recovered and are operating as expected, improving our service.
Our European ceramic business delivered a strong performance in the quarter, risk productivity, improving mix and greater consumer demand.
Sales grew substantially in Southern Europe and in our export markets, led by a robust residential business and with some improvement in commercial projects.
Our operations are running at high rates to satisfy the greater demand and improve service, leveraging our cost and enhancing our results.
We are increasing our production levels through improvements in our processes and equipment as well as optimizing product flows to support growth and enhance our mix.
Our ceramic businesses in Mexico, Brazil and Russia are all benefiting from lower interest rates and expanded credit, which are driving greater home remodeling and housing sales.
In all three businesses, our order backlog is high, and we are allocating production as necessary.
We have streamlined our product offering and enhanced our planning strategies to optimize service.
Our inventory levels are low, and we are maximizing our output by enhancing our manufacturing and scheduling processes.
In Brazil and Mexico, we are increasing capacity this year to improve our sales and mix.
In Russia, we are optimizing our tile production and ramping up our new premium sanitary ware plant to meet growing demand.
Sanitary Ware complements our floor and wall tile offering and allows our owned and franchised stores to provide a more complete solution to satisfy our customer needs.
Given higher market demand and our increased sales, we are reviewing the expansion of our ceramic capacities.
As we progress through the year, we anticipate that historically low interest rates, government actions and fewer pandemic restrictions should improve our markets around the world, which we see the present robust residential trends continuing with commercial sales slowly improving in the second period.
Across the enterprise, we will increase product introduction to provide additional features to strengthen our offering and margins.
We're enhancing our manufacturing operations to increase our volume and efficiencies while executing our ongoing cost savings programs.
Our suppliers indicate that material availability should improve from the first quarter though some operations could still face supply constraints.
We are managing challenging labor markets in some of our U.S. communities and supplemental federal unemployment programs could interfere with staffing to maximize those operations.
If raw materials, energy and transportation costs continue to rise, further price increases could be required around the world.
Given these factors, we anticipate our second quarter adjusted earnings per share to be $3.57 to $3.
67 excluding any restructuring charges.
Currently, our strong backorder -- backlog reflects the escalated levels of residential demand across the globe.
We're introducing new product innovations to enhance our offering and optimizing our production to improve our service.
We're preparing for an improvement in commercial projects, anticipating an economic expansion and a return to normal business investments.
With strong liquidity and historically low leverage, we will increase our capital investments and take advantage of opportunities to expand.
| compname reports q1 earnings per share of $3.49 excluding items.
q1 earnings per share $3.49 excluding items.
sees q2 adjusted earnings per share $3.57 to $3.67 excluding items.
q1 earnings per share $3.36.
q1 sales rose 16.8 percent to $2.7 billion.
anticipate some material shortages continuing at least in q2.
|
that contain a number of risks and uncertainties, among which are the potential effects of the COVID-19 pandemic on our operations, the markets we serve and our financial results.
We're pleased to report another good quarter of results.
We executed well and we continue to do a great job for our customers on many fronts in quality, delivery service, and our technology partnerships.
Our supply chain teams work 24/7 to overcome unprecedented logistics challenges and material shortages to keep our factory supplied.
And I am most pleased that we achieved a record level of performance and safety something our teams have been working hard at in all of our plants around the world.
As a company, we delivered GAAP earnings per share of $0.95, $0.83 on an adjusted basis on $232 million in revenue, an increase of nearly 10% from Q3 last year.
Our Machine Clothing segment continues to fire on all cylinders and grew sales by 11% compared to Q3 last year with excellent profitability and free cash flow generation.
Engineered composites delivered top-line growth of nearly 7% and performed well, as we work toward the upturn in commercial aerospace.
Our profitability was solid with gross margins of 40%, operating margins of 19%, and adjusted EBITDA margins of 26% and we continued our strong free cash flow generation, over $40 million in the quarter.
We have low debt and a healthy balance sheet, and we look forward to continuing solid performance from our Machine Clothing segment and gradual recovery in commercial aerospace.
As we mentioned last quarter, long-term secular trends are favorable and Albany's market positions, global footprint, and product development take advantage of these trends.
In our Engineered Composites segment, we expect commercial aerospace to gradually improve with narrow-body aircraft demand improving before wide-body demand.
Consequently, we're hiring employees and planning for a ramp-up in LEAP production driven by Airbus A320neo and Boeing 737 MAX growth.
We are coordinating with Safran to expand production in our three LEAP facilities in the US, France, and Mexico.
We see positive signs in international travel bookings as borders reopen and people have begun to travel internationally, although we don't expect any near-term pickup in wide-body production demand such as for our Boeing 787 composite frames line as there still inventory in the system and international travel has been slow to recover.
Our AEC businesses continue to perform well on our military platforms Sikorsky CH-53K helicopter, Lockheed Martin's F-35 Joint Strike Fighter, and Jazan missile programs.
We're fortunate to be on excellent programs and our teams are executing well.
We also continued our pursuit of new customers and new applications for advanced composites.
During the quarter, we announced our technology collaboration with Spirit AeroSystems to apply our advanced 3D woven composite technology to hypersonic vehicles and take advantage of our proprietary 3D woven composites in a high-temperature environment providing both structural robustness and thermal protection, and building on our proven ability to industrialize 3D woven composites at high volumes.
This is an example of the intense collaboration our teams are good at, working closely with our technology partners in the design, development, and commercialization of the most advanced composite applications.
In addition to working on engine component applications with our partner Safran, we continue development of Wing applications with Airbus Wing of Tomorrow program and other composite programs in commercial and defense applications.
Our Machine Clothing segment continue to perform exceptionally well.
Our engineers and sales and service teams in MC work closely with key customers to develop the next generation of belt materials for improved operational efficiency, performance, and durability.
And customers value our service technical expertise and innovation.
We saw a good demand in the quarter for new products and all product lines.
Demand in MC's end markets has been resilient and particularly strong in packaging in the Americas.
Tissue markets have held up although demand is mixed and flat overall as tissue machine utilization is below long-term averages and tissue producers are working through distortions caused by the pandemic's effect on away-from-home paper markets.
This should improve as workers go back to offices and students are back in school.
In other end markets, demand was strong in the quarter for corrugators, nonwovens, and building products.
Even publication was better this quarter, likely a pause in the longer-term secular decline of printing and writing grades of paper.
We are seeing significant logistics challenges and price inflation on various raw materials and wages.
So far, supply chain management and operations teams have done an excellent job.
They've been able to secure the materials we need to run our operations that only moderate increases in cost.
In general, we strive to offset inflationary costs through productivity savings.
This time may be different, as we don't see inflationary pressures abating anytime soon.
If anything, conditions grew more challenging during the third quarter.
Let me make a few comments on corporate governance and capital allocation before turning the call over to Stephen.
In early August, the company move closer to a single-class share structure following the secondary offering of nearly all of the Standish Family's ownership in the company with our few remaining shares converted to Class A common stock.
As a result, today, there are more than 32.3 million shares of Class A common stock outstanding and less than 1,200 shares of Class B stock outstanding, which are held by two former employees.
The transaction effectively created a conventional single-class governance structure for our shareholders.
As we mentioned in the past, our priority is to use our balance sheet first for organic growth investments where we can add value for our customers.
And then acquisitions that fit our strategy enable us to build on our technology, leadership, and market positions in both segments.
Adding to these options, Albany's Board of Directors has authorized a $200 million share repurchase program, expanding the set of capital allocation alternatives we have at our disposal.
We continue to look for acquisitions that advance our technology and market position at a fair price and we're focused on value creation from both an organic and inorganic investment perspective.
In summary, we had another good quarter.
Our businesses are executing well, we continue to push the envelope in our technology development with new products in both segments, and secular trends in our end markets are favorable.
So with that, I'll hand the call over to Stephen for more detail on the financials.
I will talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year.
For the third quarter, total company net sales were $232.4 million, an increase of 9.6% compared to the $212 million delivered in the same quarter last year.
Adjusting for currency translation effects, net sales rose by 8.8% year-over-year in the quarter.
In Machine Clothing also adjusting for currency translation effects, net sales were up 9.9% year-over-year.
All major grades of product led by engineered fabrics and packaging grades contributed to the year-over-year increase in net sales.
Engineered composites' net sales, again, after adjusting for currency translation effects, grew by 6.7% primarily driven by growth on LEAP and CH-53K partially offset by expected declines on the 787 and F-35 platforms.
During the quarter, the ASC LEAP program generated about $25 million in revenue, comparable to the first two quarters of this year, but up about $9 million from the third quarter of last year.
We are pleased with the reduction in our inventory of LEAP-1B finished goods.
During the most recent quarter, we reduce that inventory by over 30 engine shipsets down to about 140 engine shipsets on hand.
Given the current rates of the inventory consumption on that program, we would not plan to have that inventory level drop below about 100 engine shipsets, so we can see the light at the end of the tunnel in terms of inventory destocking.
I'm looking forward to an earnings call for I no longer have to discuss LEAP-1B inventory at all.
We hope to return to a more normal levels of production on LEAP-1B on par with the current production rates for LEAP-1A early in 2022.
However, we do have some concern with the rate of which Boeing is destocking its inventory of finished 737 MAX aircraft, so there is still some lack of clarity around 2022 build rates.
We will hopefully have better insight for you on our fourth quarter call.
Also during the quarter, we generated under $3 million of revenue on the 787 program down slightly from the second quarter, but down from almost $9 million in the same quarter last year.
Third quarter gross profit for the company was $92 million, an increase of over 5% from the comparable period last year.
The overall gross margin decreased by 160 basis points from 41.2% to 39.5% of net sales.
Within the MC segment, gross margin was flat at 51.5% of net sales as the benefit from improved absorption was offset by the impact of year-over-year foreign currency changes and rising input costs.
For the AEC segment, the gross margin declined from 21.6% to 16.1% of net sales caused by a smaller impact from changes in the estimated profitability of long-term contracts, a change in program mix, and lower fixed cost absorption due to the lower 787 and F-35 revenues, and the impact of sharing with our customer base a portion of The Aviation Manufacturing Jobs Protection grant received during the quarter.
The $5.8 million benefit of this grant appears in the corporate portion of the results while the reduced profitability caused by sharing a portion of the grant with our customer base is reported in the segment results.
During the quarter, we recognized a net favorable change in the estimated profitability of AEC's long-term contracts of about $2 million but this compares to a net favorable change of about $3.5 million in the same quarter last year.
Third quarter Selling, Technical, General, and Research expenses were $47.4 million in the current quarter, down slightly from $47.8 million in the prior year quarter and were down as a percentage of net sales from 22.6% to 20.4%.
While R&D was up over $4 million -- over $1 million this quarter and while we also incurred higher travel expenses, these were more than offset by a foreign currency revaluation gain this quarter compared to a foreign currency revaluation loss in the same quarter last year.
Total operating income for the company was $44.5 million, up from $38.8 million in the prior year quarter.
Machine Clothing operating income rose by $9.8 million, driven by higher gross profit and lower STG&R expense.
And AEC operating income fell by $3.9 million caused by lower gross profit and higher STG&R expense partially offset by lower restructuring expense.
The income tax rate for this quarter was 29.4% compared to 24.7% in the same quarter last year.
The higher rate this year was caused by the generation of a higher share of our global profits in jurisdictions with higher tax rates and by less favorable discrete income tax adjustments.
We reported over $2 million in expense under other income expense this quarter primarily due to a true-up of indirect taxes in a foreign jurisdiction.
Net income attributable to the company for the quarter was $30.9 million, an increase of over $1 million from $29.6 million last year.
The increase was caused primarily by the higher operating profit, partially offset by higher interest expense and the higher tax rate.
Earnings per share were $0.95 in this quarter compared to $0.92 last year.
In addition to the normal non-GAAP adjustments we typically make to cover the impact of foreign currency revaluation gains and losses, restructuring expenses, and expenses associated with the CirComp acquisition and integration, this quarter, we are also adjusting out the impact of The Aviation Manufacturing Jobs Protection grant as we do not believe it is reflective of ongoing profitability.
After making these non-GAAP adjustments, adjusted earnings per share was $0.83 this quarter compared to $0.96 last year.
Adjusted EBITDA declined by 2.6% to $60.2 million for the most recent quarter compared to the same period last year.
Machine Clothing adjusted EBITDA was $59.2 million or 38.4% of net sales, up from $52.6 million or 37.9% of net sales in the prior year quarter.
AEC adjusted EBITDA was $16.3 million or 20.8% of net sales, down from last year's $19.5 million or 26.6% of net sales.
Turning to our debt position.
Total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt remained steady at $350 million.
We have a floating to fixed interest rate swap in the place of debt level for the life of the current credit agreement and currently, we do not intend to pay down total debt below that level.
Cash increased by about $33 million during the quarter resulting in a reduction in net debt by the same $33 million.
Capital expenditures in the quarter of about $9 million were roughly the same as incurred in the same quarter last year.
From a capital deployment perspective, as Bill mentioned, our priorities are unchanged.
The first priority is organic investments followed by disciplined and targeted acquisitions followed by returning capital to shareholders.
Our fundamental strategy has not changed.
However, given our modest leverage and strong free cash flow outlook, the Board of Directors has authorized a $200 million share repurchase program.
We believe that such a program will be the most efficient, effective and value-additive approach to returning additional capital to our shareholders.
While there is no guarantee that we will execute all or even any of this authorization, it is the company's intention to make use of this authorization subject to prevailing market conditions and while recognizing the inherent limitations on how quickly we can execute such a significant program.
Fully executed, the share repurchase program would increase our net leverage a little under one turn of EBITDA leaving us with sufficient dry powder for additional strategic actions.
As we look forward to the balance of 2021, the outlook for the Machine Clothing segment remains strong.
Q3 revenues were up over 11% compared to last year partially aided by some currency tailwinds to revenue, primarily due to strong euro.
Packaging and tissue grades remain the primary drivers of long-term growth.
While we also saw a nice recovery in publication revenue in the third quarter, driven by a return to office and schools, a continuation of this recovery is in jeopardy as a result of the Delta Varian surge which at par has paused some return to office efforts.
Also, after we get through the pandemic effects, we do not expect any change in the long-term secular decline in the publication market.
I would also like to note that the growth rate for the MC segment this quarter was unusually high driven by timing of customer needs.
Segment orders year-to-date are up about 6% compared to last year and backlog entering Q4 is only modestly higher than at the same time last year.
We typically generate about 23% to 25% of the segment's revenue in the fourth quarter, and we expect this year to be broadly similar to that.
As a result, we are raising our previously issued guidance of revenue for the segment to between -- to be between $600 million and $610 million, up from the prior range of $585 million to $600 million.
From a margin perspective in Machine Clothing, we delivered another strong quarter, with adjusted EBITDA margins of almost 39%.
We are seeing increased pressure from input expenses of all types particularly logistics and expect these pressures to continue to increase through the balance of the year.
However, as previously discussed, many of these cost increases began in Q2 and accelerated in Q3, have yet to materially impact our results due to both the terms of our supply agreements and the roughly six-month lag between procuring raw materials of the higher cost and those cost being reflected in the segment's cost of goods sold.
We will see more impact from these cost pressures in Q4, but we will not see the full impact until 2022.
In addition, late in the third quarter and early in the fourth quarter, we have seen some relaxation of travel restrictions in certain regions and are beginning to see our level of visits to customers increase, which will result in somewhat higher STG -- oh, sorry.
SG&A in the fourth quarter.
Driven primarily by the strong revenue performance, we are increasing our adjusted EBITDA guidance for the segment to a range of $215 million to $225 million, up from the prior range of $210 million to $220 million.
Turning to Engineered composites.
We delivered a strong quarter, very much in line with expectations.
Last quarter, we indicated that we expected Q3 profitability to be similar to that delivered in Q1 and it was within a few hundred thousand dollars of that level.
We were very pleased to be awarded an Aviation Manufacturing Jobs Protection grant during the quarter of $5.8 million which recognizes the challenges that we, along with the rest of the industry have experienced due to the COVID pandemic.
However, as I already noted, we have adjusted the effects out of both Q3 adjusted results and segment guidance for the year as it is not reflective of continuing operational performance.
While unlikely to have any material impact on the balance of 2021, we are concerned about the slow recovery of the Boeing 787 program where Boeing has indicated that they will continue to produce at a low rate for the foreseeable future.
As of the end of the third quarter, we had the equivalent of about five shipsets of 787 product in either finished goods or WIP which is not unusually high.
However, significant quantities of our finished goods exist in Boeing's overall supply chain, which combined with Boeing's low level of production will likely lead to very low levels of production for us, for the foreseeable future and may even lead to significant production gaps.
Any impact in 2021 would be modest as we are not anticipating any significant recovery on the program this year, but it will likely delay any meaningful recovery on the program until beyond 2022.
As you know, our production levels on the F-35 have been uncertain this year, as our customer has dealt with issues elsewhere in the supply chain over the last 18 months and with lower depot consumption of aftermarket parts.
We are confident in our outlook for the balance of the year, but I will note that Lockheed Martin and its government customer have established a new outlook for program production that plateaus at 156 aircraft in 2023, a lower rate, and an earlier date than the previously planned plateau.
The F-35 remains a very good and profitable program for us.
This programmatic change has no impact on this year, but it will likely temper the revenue upside in the program for us in future years.
Overall for the AEC segment, the year is progressing largely as we expected when we last issued guidance, although we are now less concerned about downside risk.
Therefore we are raising the lower end of our guidance range for segment revenues resulting in the range of between $310 million, up from the previous range of $290 million to $310 million.
From a profitability perspective, given the year is progressing largely as expected, we are maintaining the previously issued guidance range for AEC adjusted EBITDA of between $65 million and $70 million.
We are also updating our previously issued guidance ranges for company-level performance, including revenue of between $900 million and $920 million increased from prior guidance of $880 million to $910 million.
Effective income tax rate of 28% to 30%, unchanged from prior guidance.
Depreciation and amortization of about $75 million, unchanged from prior guidance.
Capital expenditures in the range of $40 million to $50 million also unchanged from prior guidance.
GAAP earnings per share of between $3.23 and $3.38 increased from prior guidance of $2.84 to $3.14.
Adjusted earnings per share of between $3.15 and $3.30 increased from prior guidance of $2.19 to $3.20 and adjusted EBITDA of between $230 million and $240 million increased from prior guidance of $225 million to $240 million.
Overall, while the pandemic is not yet behind us and risks still remain across our business, we are very pleased to be able to raise guidance yet again, reflecting the hard work and dedication of our teams across the globe.
The coming years will continue to be a challenge as we and the rest of the industry slowly recover from the severe downturn in commercial aviation and as the machine clothing market searches for its new post-pandemic normal.
We also recognize of our risks ahead in terms of supply chain constraints and inflationary pressures, should the recent and current increases be more than transitory.
However, our track record of operational excellence and continuous improvement positions us well to address these challenges.
| compname reports q3 adjusted earnings per share of $0.83.
sees fy adjusted earnings per share $3.15 to $3.30.
sees fy gaap earnings per share $3.23 to $3.38.
q3 adjusted earnings per share $0.83.
q3 earnings per share $0.95.
sees fy revenue $900 million to $920 million.
q3 revenue rose 9.6 percent to $232 million.
on october 25, co's board authorized company to repurchase shares of up to $200 million.
share repurchase program does not have an expiration date.
sees full-year 2021 capital expenditures in range of $40 to $50 million.
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Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.
Today's discussions may include statements about future events, financial projections, and expectations about the company's products, markets and growth.
We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.
Our results discussed today include references to non-GAAP financial measures.
Earlier today, we reported the highest adjusted first quarter earnings in company history at $5.89 per share, a 193% increase over last year and record revenues of $4.3 billion.
These results were driven by strong operational performance across all business lines and channels, an acceleration of acquisitions and the strengthening retail environment.
During the quarter, total revenue grew 55% over last year and 52% over 2019, while total gross profit increased 55% over last year and 58% compared to 2019.
As a reminder, the pandemic only impacted our first quarter 2020 results for the last two weeks of March.
New vehicle revenue increased 60%; Used vehicle increased 55%; F&I increased 63%; and service, body, and parts increased 30% compared to the first quarter of 2020.
Total vehicle gross profit per unit for the quarter increased to $4,392 per unit, a $692 increase over last year, driven largely by a 24% increase in new vehicle gross profit per unit.
Chris will be giving our same-store sales results and further color on inventory levels and their respective impact on vehicle margins in just a few moments.
Earlier this month, we announced one of the largest acquisitions in the history of the automotive industry.
The Suburban Collection adds $2.4 billion in annual revenues, over 2,000 team members, 34 locations and is a key pillar of the Lithia & Driveway footprint in our most sparse North Central Region 3.
With nearly $6.5 billion in expected annualized revenues purchased since the launch of our five-year plan in July 2020, we are considerably ahead of our expectations.
The combination of elevated gross profit levels in the new and used vehicles, rapid integration of high-performing acquisitions, incremental lift from the new Driveway channel, significant improvements in all business lines, and strategic cost savings measures instituted last year led us to earning over $250 million of adjusted EBITDA in the quarter.
Entering our 75th year in operations, we reflect on how our history of exponential growth, coupled with our team's ability to execute, has positioned us to pragmatically and profitably disrupt the status quo of the industry.
Our multifaceted strategy for disruption begins by combining our proprietary technology with the scale of our people, inventory, and network to modernize the industry.
As we continue to develop and enhance our digital home solutions, our Lithia & Driveway teams are ready to serve not only our traditional customers, but incremental e-commerce customers as well.
Our focus on the most expansive addressable market of any retailer in the automotive space allows us to leverage our massive competitive advantages to demonstrate that e-commerce can be highly profitable and ultimately yield the highest possible EBITDA returns in this space.
The used car business lacks barriers to entry.
However, success requires infrastructure, financing solutions for all customers, reconditioning expertise and the procurement of high-demand scarce vehicles to quickly achieve scale with smooth execution, all of which Lithia & Driveway have established and have proven to be effective at executing on since 1946.
Hopefully, Dick Heimann, our former COO is listening in today, as the 1946 comment was especially made for him.
Building on the broadest nationwide network and multi-year design and technology development of Driveway, we are excited by our initial success and continue to enhance the most comprehensive e-commerce home solution in the automotive retail space.
Our proprietary consumer applications are maturing and now ready to quickly scale across our existing network that is the broadest in the country.
Now entering our second quarter with a full spectrum of offerings, Driveway is empowering consumers to simply and transparently shop, sell, and service their vehicles from the convenience of their homes.
The Driveway brand was designed to attract a different and incrementally new consumer than the Lithia channel.
This is the first time in our history that we've been able to market and deliver our 77,000-vehicle inventory to the entire country under a single brand name and experience.
We knew our used inventory was broader and more scarce than our competitors and we are now realizing these advantages as evidenced in our same-store and margin results.
While Driveway's full spectrum offerings have only been live for a few months, our early learnings and data are showing a clear pathway for Driveway to become the brand of choice for online buying, selling, and servicing, both domestically and internationally.
We are on target to achieve a run rate of 15,000 Driveway shop and sell transactions by year-end.
Important to note that this target does not include Driveway finance and service transactions.
On our pathway toward this first volume milestone that took other e-commerce use-only competitors two to three years to reach, we are finding several interesting early trends we'd like to share with you today.
First, 97.8% of our Driveway customers during our first quarter were incremental and had never done business with a Lithia dealership before.
Second, we are seeing that it is taking 19 minutes on average for a customer to complete a full vehicle purchase transaction online with financing included.
We are also seeing that about 15% of all credit decisions are auto-approved.
An overwhelming majority of our consumers still need help from our Driveway Care Center to structure their purchase, balance their credit with their desires, and get through the financing process.
43% of our sales are out of region and our average shipping distance is 732 miles with an average shipping fee of $477.
Lastly, we continue to build our online reputation, with an average Google Reviews Score of 4.98 stars out of 5.
During the first quarter, Driveway also became the first e-commerce retailer in the country to offer negotiation-free new vehicles with free in-home delivery and a 7-day money back guarantee at a national level.
Driveway's financing solutions with new vehicle leasing and captive manufacturer financing now totals 29 lenders and are available to consumers with auto approvals in a matter of seconds.
This lease and finance auto approval optionality was released two quarters ahead of our previously shared plans.
Driveway now offers the largest selection of negotiation-free, new and used vehicles of any retailer in the country.
Our new vehicle inventory represents all major brands and our selection of used vehicles spans the entire spectrum from certified used vehicles to 20-year-old value autos.
Today, consumers can purchase any vehicle accompanied with our full brand guarantees, subscribe to full ownership, repair and maintenance options, and receive in-home delivery anywhere in the country.
In addition, our marketing dollars have recently expanded outside the original Portland and Pittsburgh markets.
As such, our Driveway brand marketing is now live in Tampa Bay, Dallas, Houston, Metro New York and New Jersey, Los Angeles, Riverside, Oxnard, Des Moines and the surrounding markets.
With these recent market launches, the Driveway brand message is now reaching over 67 million individuals or 21% of the population, a 16-fold increase over our two initial launch markets.
As we continue to perfect our execution in these markets, our innovation and product teams are working relentlessly on improving the Driveway experience.
Driveway receives continuous enhancements that will be released every two weeks throughout the year and is on its way to becoming the e-commerce leader of automotive retail.
During the quarter, LAD's fintech arm, Driveway Finance Corporation, originated over 1,000 loans per month across the channels.
We continue to see Driveway's fintech platform elevating the experience for consumers with the ability to capture up to 20% of all vehicle sales transactions, further differentiating LAD in profitability.
Today, our team of 110 Driveway engineers and data scientists have developed a suite of consumer solutions and functionality that provides the first complete end-to-end digital ownership experience spanning the full vehicle ownership lifecycle.
In addition, our exclusive Driveway Care Center and inventory procurement teams are growing rapidly to mirror the exponential growth in consumer demand.
The foundation to our omni-channel plan is the growth and expansion of our physical network.
Having the ability for consumers to conveniently access all of our business lines and for us to store and recondition vehicles closer to them ensures a highly profitable digital experience across the United States.
The opportunities for rapid consolidation within our industry remain plentiful and our acquisition pipeline remains full.
For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after-tax return of over 25% annually.
During the quarter, we completed the acquisition of the Fields Auto Group in the Greater Orlando market, the Fink Auto Group in Tampa, Florida area, and Avondale Nissan in Phoenix, Arizona.
We also opened a previously awarded Infiniti location in downtown Los Angeles.
As mentioned earlier, we completed the acquisition of The Suburban Collection in the Detroit, Michigan area earlier this month, adding a massive platform of 34 locations to our North Central Region.
Combined, these acquisitions strengthened our strategic network density in regions 2, 3, and 6 and are anticipated to generate nearly $3.1 billion in annualized steady state revenues.
Since launching our five-year plan nine months ago, this brings our total network expansion to over $6.5 billion, adding more than $4 in future annualized EPS.
Important to note that the consolidation of the largest retail segment in the country can be accomplished in a highly accretive way and these cash flow positive businesses further add to our massive capital engine.
We are in the most active consolidation environment that we have seen in the last two decades.
Even with the pace being well ahead of schedule, we continue to replenish the more than $3 billion in revenue still under LOI and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our disciplined hurdle rates.
As such, we are expecting our network expansion in 2021 to far exceed our record levels achieved last year as we seek to continue improving our network density, especially in the Central and Southeastern regions.
As our top priority for allocating capital continues to be to accretively expand our network with new locate -- new vehicle locations, it is important to highlight the competitive advantages and points of differentiation for Lithia & Driveway's network growth strategy.
First, new vehicle franchises create an accretive growth model with the self-generating profit engine of nearly $1 billion of EBITDA annually.
Second, network costs are considerably lower investment when compared to any new entrants into the industry.
High ticket new vehicle margins are quite strong at 10% and the carrying costs are subsidized by our manufacturer partners.
Upstream procurement from new and certified vehicle trade-ins have more attractive valuations than direct from consumer or auction purchases.
Fifth, affordable offerings at all levels allows the customers to remain in the Lithia & Driveway ecosystem their entire lives with vehicles and services that match a full spectrum of income and credit levels that change over time.
A sophisticated reconditioning network with specialized diagnostic equipment located closest to the customer to eliminate any logistics costs.
These reconditioning centers are also utilized for the industry's highest or 50% margin service, body, and parts businesses.
These businesses bring 10 times the consumer lifecycle touch points as compared to used-vehicle-only retailers and allow for substantially lower marketing cost per vehicle sold.
Captive leasing through our OEM-affiliated partners provides new vehicles with attractive competitively priced monthly payments when compared to one- to three-year-old used vehicles.
Additional financing support from our manufacturer partners through rate subvention with their captive financing arm and new vehicle incentives or rebates that allow for the highest level of financibility, and absorption of negative equity, plus lower down payments for our consumers.
Tenth, a diverse upstream offering of zero-emission products and supporting repair and maintenance services through manufacturer partners' product lines.
Also, leading advocacy for lower and zero-emission vehicle, ownership with a comprehensive resource center, providing education on vehicles, incentives, charging infrastructure, ownership, affordability guides, and a sustainable vehicle marketplace through green cars.
Lastly, new vehicle franchises create loaner and fleet management opportunities to build a factory-like used vehicle inventory pipeline.
As our nationwide network continues to grow in each of our six regions, we continue to target a 100-mile reach to allow for convenient, affordable, and timely consumer servicing experiences during and after the purchase of their vehicle.
As a reminder, infrastructure costs for delivering the Driveway e-commerce experience are zero as it resides in the underutilized capacity of our growing network.
Key to our design three years ago was allowing the flexibility to adjust our investments between channels and multiple business lines to align with consumer demand, whether any economic cycle compete with any future competitor and expand our cash engines to expand into further adjacencies.
These combined with our many competitive advantages strongly position us to achieve our five-year plan and pave the way to even greater aspirations.
In closing, our first quarter results doubled the previous highest first quarter earnings in our history as we live our mission of Growth Powered by People.
We continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities.
The advantages of a responsive and adaptable team with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment.
With our technology poised for rapid scalability across our existing and future network, we are positioned to as quickly as possible lead Lithia & Driveway's progress toward $50 billion in revenue and $50 of earnings per share the first leg of our journey.
We continued the momentum from last year and delivered another record performance in the quarter.
The demand from consumers remained strong for both in-home and in-network solutions and we accelerated the rollout of Driveway through our key strategic markets and our platform.
Each day, our leaders are rising to the challenge of achieving our 50/50 plan, evolving to meet consumer demand, developing our talent and living our mission of Growth Powered by People.
Our team remains humble and never satisfied as they look to continue record performance levels throughout 2021 and beyond.
Following is a discussion about our quarterly results and is on a same-store basis.
And as Bryan mentioned earlier, the pandemic impacted only the last two weeks of our first quarter 2020 results.
For the three months ended March 31, 2021, total same-store sales increased 28% over last year.
These increases were driven by a 29% increase in new vehicle sales, a 32% increase in used vehicle sales, a 30% increase in F&I revenue, and a slight increase in service, body, and parts revenues.
Comparing our 2021 results to a 2019 baseline, first quarter same-store sales increased 28% with new vehicle revenue up 23%, used vehicle revenue up 43%, F&I increased 32%, and service, body and parts increasing 6%.
For the quarter, our new vehicle business line increased 29% over last year.
Our average selling price increased 6% and unit sales increased 22%.
Gross profit per unit increased to $2,979 compared to $2,188, a $791 increase or up 36%.
Total new vehicle gross profit per unit, including F&I, was $4,778, an increase of $897 per unit or 23%.
At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with a 12% margin, similar selling cost per unit as used vehicles, and inventory carrying costs that are subsidized by our manufacturer partners.
As of the end of the quarter, we had a 41-day supply of new vehicle inventory, excluding in-transit orders, indicating we have well over a month's supply of vehicles on the ground and an adequate supply of in-transit that are replenishing our on-ground inventory every day.
However, new vehicle margins may remain elevated in the near term due to continued microchip and other supply chain shortages, coupled with elevated consumer demand levels driven by additional stimulus funds.
While select OEMs are experiencing reduced level of inventory, we currently have sufficient inventory to balance the current supply and demand trends expected over the coming months.
For used vehicles, we saw a 32% increase in revenues for the quarter.
Gross profit per unit for the quarter was $2,426, an increase of 14% or $295 over last year.
Total used vehicle gross profit per unit, including F&I, was $3,994, an increase of $421 or up 12%.
Total used vehicle gross profit per unit began to normalize early in the quarter, but accelerated again in March finishing at $4,384 per unit.
Our used vehicle sales mix in the quarter was 20% certified, 59% core are vehicles three to seven years old and 21% value auto or vehicles older than eight years.
With over 60% of the annual 40 million used vehicles sold in the US being nine years or older, our continued strategy of selling deeper into the used vehicle age spectrum and our ability to procure the right scarce vehicles from multiple channels remains the catalyst for the future success and growth of Lithia & Driveway.
As of March 31, we had a 42-day supply of used vehicles and our 800 used vehicles procurement specialists are working diligently to ensure we are meeting the current demand environment with our focus on procuring scarce high demand used vehicles through the most profitable channels.
As a top of funnel new car dealer, 80% of our inventory comes from non-auction sources, which allows us to meet consumer demand in a low supply environment.
New and used vehicle sales are supported by our 1,500 experienced finance specialists that help match the complexity of consumers' financial position with lending options at over 150 financial institutions, including Driveway Financial.
In the quarter, our finance and insurance business line continued to show substantial improvement averaging $1,674 per retail unit compared to $1,557 the prior year, an increase of $117 per unit.
New and used vehicle sales create incremental profit opportunities through the resale of trade-in vehicles, greater manufacturer incentives, F&I sales, and future parts and service work.
We continue to monitor this through the growth of our total gross profit per unit, which was $4,388 this quarter, an increase of $664 per unit or 18% over last year.
Our stores remain focused on the highest margin business lines, service, body, and parts, which decreased 1% for the quarter.
Adjusting for one less day of production compared to last year, service, body, and parts saw a slight increase for the quarter.
This was driven by a 7% increase in customer pay, a 12% decrease in warranty, a 6% decrease in wholesale parts, and a 14% decrease in body shop revenues.
But in March, we saw double-digit increases in service, body, and parts driven by a 32% increase in our highest margin customer pay work.
We expect these trends to continue into the second quarter, as the economy reopens further and consumers look to get back on the road and return to the normal routines.
As a reminder, our service, body, and parts business see over 5 million paying consumers and brand impressions annually, which generate over 50% margins and remain a huge competitive advantage for Lithia & Driveway.
Same-store adjusted SG&A to gross profit was 64% in the quarter, an improvement of 990 basis points over the prior year, driven largely by the gross profit expansion in our new and used vehicles segment and recovery in service, body, and parts.
We expect to see the normalization of SG&A to gross profit as supply constraints are alleviated later in the year and gross margins return to normalized levels.
With our highest performing stores consistently maintaining an SG&A to gross profit metric in the mid 50s, our five-year plan continues to target an SG&A to gross profit level in the low 60% range.
As we continue to profitably modernize the consumer experience, the opportunity to leverage our cost structure will continue as we maximize the utilization and the integration of our existing location and as our digital home solution, Driveway, adds meaningful additional incremental sales.
In summary, our teams continue to be responsive to the changing environment and the opportunities available to continuously improve in the evolving personal transportation industry.
We are innovating and meeting consumers increasing digital and in-home expectations and are focused on meeting the preferences of our consumers wherever, whenever, and however they desire.
With the integration of several regional platforms that come with performing teams, including strong operational leaders and customer-focused associates, we remain humble and confident that we continue to deliver industry-leading results, while pragmatically modernizing automotive retail.
For the quarter, we generated nearly $265 million of adjusted EBITDA, an increase of 154% compared to 2020 and $189 million of free cash flows, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash, interest, income taxes, dividends, and capital expenditures.
As a result, we ended the quarter with $1.4 billion in cash and available credit.
In addition, our unfinanced real estate could provide additional liquidity of approximately $552 million for a combined nearly $2 billion of liquidity.
As of March 31, we had $4 billion outstanding of debt, of which $1.8 billion was floor plan, used vehicle, and service loaner financing.
The remaining portion of our debt is primarily related to senior notes and the financing of real estate as we own over 85% of our physical network.
A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt.
The financing is integral to our operations and collateralized by these assets.
The industry treats the associated interest expense as an operating expense in EBITDA and excludes this debt from balance sheet leverage calculations.
On adjusted, our total debt to EBITDA is overstated at 4.3 times.
Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.7 times.
This means we could add over $1.2 billion in additional debt, which equals acquiring $4.8 billion in annualized revenues at our 25% purchase price to revenue metric, while remaining within our targeted range.
If our network growth and associated planned capital deployment would increase our leverage beyond 3 times for a sustained period, we would look to deleverage quickly through the equity capital market.
As a reminder, our disciplined approach is to maintain leverage between 2 and 3 times, as we continue to progress toward another sizable competitive cost advantage of achieving an investment-grade credit rating.
Our capital allocation priorities for deployment of our annual free cash flows generated remain unchanged.
We target 65% investment in acquisitions, 25% in internal investment, including capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share repurchases.
Even with the acquisition of The Suburban Collection announced earlier this month, we continue to have the capacity to grow and are well positioned for accelerated disciplined growth.
We continue to make strong progress in modernizing the consumer experience through Driveway and building a robust balance sheet, positioning us to be the leader in consolidating this massive industry, all while progressing toward our five-year plan of achieving $50 billion in revenue and $50 of earnings per share.
| compname says q1 adjusted earnings per share $5.89.
compname reports highest first quarter earnings in company history; increases revenue 55% and earnings per share 195%.
q1 adjusted earnings per share $5.89.
q1 2021 revenue increased 55% to $4.3 billion from $2.8 billion in q1 of 2020.
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Joining me on the call today are Nish Vartanian, Chairman, President and CEO; and Ken Krause, Senior Vice President, CFO and Treasurer.
These risks, uncertainties and other factors are detailed in our Form 10-K filings with the SEC.
As you've seen, we've accomplished a lot in the second quarter.
Most importantly, we closed the acquisition of Bacharach on July 1, which I'll discuss after a brief overview of the quarter.
We had a pretty good quarter.
Our revenue returned to growth, up 5% from a year ago.
Core product revenue was up 12%.
Margins are on track as we effectively manage through inflation we see in our supply chain.
I mentioned on the April call that we were optimistic that the worst was behind us from a demand perspective.
I'm glad to reiterate that sentiment today.
Not only did revenue come in a bit higher than our expectations, our order book continued to strengthen throughout the quarter and drove significant increase in backlog.
Our fire service business remains strong, and we're seeing improved demand for gas detection and industrial products.
Overall, our U.S. business continues to lead the recovery.
Europe is starting to recover as the vaccine situation improves.
Like everyone, we continue to manage through supply chain issues, which is a dynamic situation that requires daily attention.
Our most challenging areas are electronic components used in our SCBA and gas detection products.
Our level of revenue indicates we've done a good job of managing through these issues.
Still, we did have pockets of production starts and stops and extended lead times that contributed to our backlog bill.
But even with those challenges, I remain very confident in our ability to enhance our market positions as business conditions improve.
Ken will provide more color on the quarter.
I'd like to now provide more insight into three areas that support my confidence in the long-term future of MSA as the leader in advanced safety technology.
First, we continue to launch safety technologies that solve our customers' toughest safety challenges, and I'll talk about those in a moment.
Second, our continuous improvement culture is driving efficiencies for our organization.
The strong execution of our international margin expansion road map is one example.
And third, we're using our balance sheet to make strategic acquisitions and investments that strengthen our leadership positions in key markets.
We recently closed the acquisition of Bacharach and the integration of our two organizations is off to a strong start.
Starting with the first area, our innovation engine and R&D pipeline.
We're bringing innovation to the fire service market in the form of connected technologies.
We officially launched LUNAR this spring, and our Q2 results include about $1 million of revenue related to product sales.
LUNAR, for those of you who haven't seen or read about it, is a handheld device that uses cloud technology to deliver fire scene management capabilities for incident commanders.
The feedback we're getting from early adopters provides encouragement that we've hit the mark with this new technology.
We're also using our strong balance sheet to invest in other forward-thinking organizations who share similar mission to protect firefighters.
We established this partnership to improve firefighter safety and enhance their capabilities when it comes to fire seeing situational awareness and decision making.
Fotokite is the brand name for a tethered drone system that gives incident commanders a bird's eye perspective of a fire scene without requiring a pilot.
This collaboration is an exciting venture for us because it represents a new avenue to advance the MSA mission through revolutionary technology for firefighters.
The second area I want to highlight is our culture of continuous improvement and our margin expansion progress in the international business segment.
Our entire international team continues to execute a playbook focused on three areas; driving growth in select markets, optimizing our channels approach and delivering operational efficiencies.
We've been executing this playbook for three years now, and it's encouraging to see the margin improvement as revenue starts to recover from the pandemic.
In the second quarter, the International segment operating margin rose 70 basis points to 16.5%.
And looking back to Q2 of 2019, segment margin is up more than 350 basis points.
With the pipeline of programs we have in place, we remain confident in our ability to continue driving margin expansion in international.
The third area I want to highlight is how we use our balance sheet to make acquisitions that strengthen our leadership position in key markets.
On July 1, we closed the acquisition of Bacharach.
Bacharach is a leader in gas detection technologies, which is used in the HVAC refrigeration markets.
With annual revenue of about $70 million, it's headquartered here in Pittsburgh, not far from our gas detection center of excellence, where we've recently made significant investments.
Bacharach aligns well with our product and manufacturing expertise.
Moreover, it provides a strong brand and access to attractive end markets that build further diversification in our gas detection business.
From an integration perspective, we'll be focused broadly on growing the business and reducing complexity.
I'm very confident in our team's ability to capture value from the acquisition while strengthening the brands at both Bacharach and MSA.
From a balance sheet perspective, our leverage remains healthy.
If we add Bacharach into our quarter end net leverage, the pro forma would be about 1.7 times net.
So we're well positioned to continue investing in our business.
One additional topic I'd like to mention is our approach to ESG.
Social responsibility is not new to MSA.
For 17 years, we've been dedicated to helping protect the world's workers.
So we help our customers achieve their own ESG goals by enhancing workplace safety.
But we also focus internally on ESG objectives that help us to build greater resiliency and adaptability into our overall business model to safeguard the value that we've created.
It's become clear to me that our investments in worker safety, talent, environmental sustainability, supply chain resiliency and various risk mitigation programs all help to create a better business model.
And I believe that companies who do these things effectively will be the ones to prosper and be fit for the future.
We're prioritizing areas specific to our strategy.
For example, we know that attracting and retaining a quality workforce through broad talent pipelines is not just the top business challenge for any organization today, but particularly for manufacturing companies.
For that reason, we invest a lot of time and resources into talent development and retention.
And for the first time, MSA was recently recognized by Forbes as one of the best employers for diversity in 2021.
This recognition was based on a survey of more than 50,000 employees around the country.
We were also ranked number 16 on the Forbes Best Midsize Employers list, and we were number one for engineering and manufacturing industry category.
So it's encouraging to see further recognition of our efforts to create a top workplace.
So to summarize, there are three areas that give me confidence in MSA's future.
Our innovation engine is very strong, and it continues to power new and exciting developments in safety technology.
Our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment and we're effectively using our balance sheet to grow and strengthen our business.
I'll start the discussion with financial highlights centered on revenue, profitability and cash flow.
We returned to revenue growth in the second quarter with total sales up 5% in constant currency.
I'm pleased that our Q2 order pace tracked well above 2020 and increased high single digits from 2019.
Both fire service and industrial-related products are contributing to the stronger order book.
That momentum provides confidence around demand for our products as we look at the coming quarters.
Second, our operating margin of 17.2% showed a nice sequential uptick from Q1 despite $4 million of higher stock compensation expense related to our recently announced acquisition and its expected revenue and profitability contributions over the coming years.
The expenses, noncash and negatively impacted operating margin by approximately 130 basis points in the quarter.
And third, our cash flow performance was healthy.
Receivable performance was excellent on the increase in revenue, and our inventory levels position us to deliver a stronger second half compared to the first half.
We completed the Bacharach acquisition earlier this month for $337 million with an after-tax cost of debt of less than 2%.
And as Nish had indicated, our balance sheet is strong, and we are positioned very well to invest in our business.
Now let's take a closer look at the financial results in the second quarter.
I'll start with a focus on revenue.
Quarterly revenue was up 9%, reaching $341 million.
Revenue was up 5% on a constant currency basis.
While we saw about a 2.5% benefit associated with the addition of Bristol, our APR business presented a 5% headwind on a year-over-year basis.
In constant currency, revenue in the Americas was up 6%, while international revenues were up 3%.
The international performance reflects a lag in vaccine deployment and economic recovery, which is tracking a few months behind the U.S. Core product revenue was up 12% on growth across fire service and industrial PPE, partially offsetting a lower FGFD business.
The strong core recovery was partially offset by a difficult comparison in air purifying respirators.
Looking at industrial PPE, it's great to see the strong growth rates in these areas, upwards of 20% or 30% compared to 2020.
It was also good to see head protection sales back at 2019 levels in the second quarter.
Touching on fire service, backlog remains very healthy, and we're excited about the recent product launches for LUNAR and connected firefighter.
The mission-critical nature of our products and our strategic investments provide a healthy outlook for the global fire service business.
I should note that the SCBA revenues came in ahead of 2019 levels.
Our FGFD business declined 4% compared to last year on challenging comps in the Middle East.
However, we continue to see incoming business strengthen through the second quarter.
In June, we booked one of the largest FGFD orders in our history.
Our FGFD backlog is back to pre-pandemic levels heading into the second half.
For MSA overall, quarterly incoming orders surpassed 2019 levels.
At the same time, supply chain constraints with electronic components are presenting challenges to our ability to deliver in certain areas.
This has resulted in backlog increasing 15% from the end of Q1, particularly in gas detection products.
While it's difficult to predict how long the supply chain challenges will last, we expect the constraints around electronic components will persist into the second half.
Gross profit was relatively consistent compared to last year.
Pricing and stronger throughput in our factories offset higher material costs.
Despite a number of headwinds in margins associated with input costs, gross margins were roughly in line with prior year levels.
We have implemented an off-cycle price increase to respond to the inflation that we are seeing in the U.S. across electronic components, resins and other inputs.
We will continue to evaluate additional pricing opportunities through the second half as we navigate these inflationary pressures.
SG&A expenses was -- were $83 million or 24.4% of sales and was up $12 million from a year ago in constant currency.
As I had indicated on the April call, we expected a difficult SG&A comp in the second quarter because of the variable comp resets at the onset of the pandemic.
This trend played out as expected and impacted the quarterly comparison in SG&A by about $3 million.
Quarterly SG&A also includes about $8 million of costs related to Bacharach and and Bristol acquisitions, including the stock compensation of about $4 million adjustment that I spoke about previously.
Bacharach transaction costs of about $2 million and the remainder being the Bristol base SG&A.
Our cost savings from restructuring programs effectively offset discretionary costs coming back into the business.
We continue to control the controllables and bring costs back into the business at a slower pace than revenue improvements.
We expect SG&A to approximate 23.5% of sales for the second half of 2021.
We invested $7 million in restructuring programs in the quarter, primarily in our International segment as we continue to execute on our margin expansion road map.
Our restructuring actions have produced excellent results to date and position us well for the economic recovery.
Together with the programs we had discussed in 2020, we continue to expect to deliver approximately $15 million of savings across the income statement in 2021 and annual savings of $25 million thereafter.
Our quarterly adjusted operating margin was down 150 basis points from a year ago.
The decline reflects the impact of the Bristol noncash stock compensation adjustment I mentioned earlier, which is booked in our corporate segment.
Looking at our segment performance.
International margins were up 70 basis points to 16.5% of sales.
Our cost reductions and pricing programs remain very much on track.
It's great to see the return to margin expansion for the segment as the volume starts to improve.
America margins were down 140 basis points to 22.6% of sales.
Variable compensation resets associated with the improved revenue performance drove 140 basis point decline in the quarter.
And we continue to navigate the inflationary pressures and are assessing additional levers that will help mitigate these pressures in future quarters.
Our quarterly tax rate was 27.8% on a GAAP basis or 27.4% on an adjusted basis.
There were two discrete items that drove the quarterly rate up.
First, the statutory tax rate increase in the U.K. from 19% to 25% drove a onetime adjustment to our deferred taxes.
Second, we incurred higher nondeductible expenses associated with the acquisition of Bacharach.
From a cash flow and capital allocation perspective, quarterly free cash flow conversion was more than 100% of net income.
While overall working capital performance was strong on improvements in receivables, we did build some inventory in the quarter, which aligns with our backlog build as well as managing supply chain risks.
Our strong balance sheet positions us well to gain share as the market rebounds.
We continue to execute on a balanced capital allocation strategy.
In the second quarter, we paid down $25 million of debt, funded $17 million of dividends to shareholders and invested $11 million in capex programs.
Since we completed the Bacharach acquisition on July 1, its impact is not yet reflected on our balance sheet.
On a pro forma basis, following the acquisition, net debt-to-EBITDA would be 1.7 times compared to 0.6 times at June 30.
We continue to expect Bacharach to provide $0.10 to $0.15 of adjusted earnings per share in the second half of 2021.
In line with our existing methodology, adjusted earnings will exclude purchase accounting amortization.
In connection with the acquisition, we funded $200 million of 15-year senior notes with a fixed interest rate of 2.69%.
The remainder of the transaction was funded with our revolving credit facility, which we amended and extended in May to provide greater borrowing capacity and flexibility.
We also included a sustainability-linked pricing structure on our revolver.
Our borrowing cost flexes up or down based on our performance on certain ESG metrics.
With the pro forma debt for Bacharach, we'd expect interest expense to be in the range of $3.5 million to $4 million in Q3 and Q4 of this year.
We also completed a buyout of our minority partner in our China business for about $19 million in July.
China is a key market for us, and it's an important part of our growth strategy moving forward.
China has consistently been accretive to MSA's growth over time.
As a result, we continue to invest in this business, and this buyout represents a key strategic milestone for us.
We funded the investment with local cash balances.
And as part of this deal, we expect to repatriate between $10 million to $15 million of cash back to the U.S. in the third quarter.
The transaction provides full ownership of our business in a highly strategic market as well as helping us optimize foreign cash balances.
Before we move on, let's touch on the adjustment to the product liability reserve, which drove $12 million of expense in the quarter.
We increased our product liability reserve as a result of an increase in the number of asserted cumulative trauma claims pending against our subsidiary, MSA LLC
We continue to monitor development and filing rates.
We plan to conduct our annual review process later this year, where we will evaluate many factors, including the potential developments in filing trends.
As we look ahead, we're operating in a very dynamic environment.
While the strong rebound in order pace in the second quarter and elevated backlog provide a sense of optimism heading into the second half, the supply chain challenges we are facing are having an impact.
From where we operate today, the supply chain constraints are the largest variable for us.
Raw material availability as well as the cost of those inputs can be difficult to predict.
We're closely monitoring the situation, and we're laser-focused on executing initiatives to mitigate the impact of this on our business, both on the top line and our margin profile.
Our market positions have never been stronger, and we continue to invest in growth programs and acquisitions that support our position as the safety technology leader.
We've taken a number of steps through this recession to position ourselves for strong performance upon the recovery.
The Bristol and Bacharach acquisitions, significant cost takeout programs, midyear pricing actions and expanding our borrowing capacity at historically low rates are just a few examples.
I remain very confident that these actions will benefit our shareholders and stakeholders as conditions continue to improve.
The return to revenue growth and improving order book positions us well for the future in the second half of 2021.
My level of optimism about demand is higher today and has been since the onset of the pandemic.
In the coming months, we'll remain focused on acquisition integration, evaluating additional pricing opportunities, navigating supply chain constraints and improving our leadership positions across core markets and geographies.
At this time, Ken and I will be glad to take any questions you may have.
Please remember, MSA does not give guidance.
| q2 revenue $341 million versus refinitiv ibes estimate of $329.2 million.
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Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations, and there can be no assurance the company's actual future performance will meet management's expectations.
With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer.
We're pleased to report that our fourth quarter and full year results were strong, in fact, very strong and stronger than expected.
As you can see shown in Slide three, adjusted EBITDA for fiscal 2021 increased to $28 million, which was up 96% from $14.3 million of adjusted EBITDA in fiscal 2020 and up 36% when compared to fiscal 2019 strong $20.6 million of adjusted EBITDA.
This result was well above our original guidance for the 2021 fiscal year of between 20 and $22 million and also $1.5 million above the high end of our updated guidance range of $24.5 to $26.5 million.
These results reflect the strength and power of Franklin Covey's high-growth and durable subscription business model, which is shown in Slide four, achieved strong growth on every key metric.
Specifically, as you can see on Slide four, first, total revenue grew 40.7% or $20 million in the fourth quarter and grew 13% or $25.7 million for the full fiscal year 2021.
Second, you can see there that total subscription revenue grew 33% or $7.2 million in the fourth quarter and 15% or $13 million for the full fiscal year.
Total subscription and subscription service revenue grew 52% or $17.7 to $52.1 million in the fourth quarter and 21% or $27.5 million for the year.
And finally, as you can see shown there, the sum of billed and unbilled deferred revenue grew 27% or $27.2 million to $127.4 million for the year.
There are five things we'd like to talk about today and have you takeaway from our discussion, and you can see these summarized in Slide five.
The first is that our results for the fourth quarter and full year 2021 were strong and even stronger than expected.
And as you'll hear in a moment, this strength is reflected in every key P&L category, including revenue growth, gross margins, adjusted EBITDA and cash flow.
The second takeaway we'll talk about today is that this strong performance was driven by the strength of our rapidly growing subscription business model.
The third is that also driving our growth is the fundamental importance of challenges, we're helping our clients address.
The fourth is that we expect subscription and subscription services to account for greater than 90% of the company's sales within three years.
And finally, the fifth takeaway is that we expect our almost complete conversion to our subscription and subscription services to also drive significant additional value to our shareholders.
To talk about this first takeaway, I'd like to turn time and ask Steve Young to address this, our performance for the fourth quarter and full fiscal year results.
I'm very pleased to have an opportunity to share some comments about our results for the quarter and for the year.
As you can see in Slide seven and eight, there are some key highlights for the quarter and for the year.
As shown, revenue for FY '21 grew 13% or $25.7 million to $224.2 million.
Our fourth quarter revenue increased 40.7% or $20 million to $68.9 million.
Gross margin for the year increased 388 basis points to 77.1% from 73.3% in FY '20.
The operating SG&A to sales percentage declined to 64.7% from 66.1% in FY '20.
Adjusted EBITDA for the year increased to $28 million, an increase of 96% or $13.7 million compared to $14.3 million in FY '20.
Adjusted EBITDA for the fourth quarter increased 18.5% to $10.6 million.
Cash flow from operating activities for the year increased 68% to $46.2 million, up from $27.6 million in FY '20, and we ended the quarter with $62.4 million in liquidity.
I'd like to provide a little more detail on these key highlights as shown in Slide nine.
Revenue in the fourth quarter, like we said, grew 40.7% to $68.9 million, an increase of $20 million compared to the $49 million of revenue generated in last year's fourth quarter.
This revenue was also $3.8 million higher than the $65.2 million of revenue recorded in the fourth quarter of FY '19.
We're also pleased that revenue for FY '21 came in essentially the same as in FY '19, with strong revenue growth in North America and the Education Division offsetting the fact that despite significant improvement, international revenue did not quite get back to the FY '19 levels.
And as strong as our revenue growth was, the growth in our profitability and cash flow related to this revenue was even more significant.
Our gross margin percentage increased a strong 388 basis points for the year to $77.1 million, up from an already good $73.3 million in FY '20.
The gross margin percentage is 644 basis points higher than the 70.7% gross margin percentage we achieved in FY '19, reflecting the ongoing shift to our high-margin subscription offerings.
Our operating SG&A as a percentage of sales declined 139 basis points to 64.7% for FY '21.
And this improvement despite operating SG&A increasing 287 basis points in the fourth quarter to 62%, primarily reflecting the accelerated commissions associated with FY '21's strong finish compared to those in last year's COVID impacted fourth quarter.
Adjusted EBITDA increased 96% or $13.7 million to $28 million for FY '21 compared to $14.3 million in FY '20.
This $28 million of adjusted EBITDA also represented a 36% increase in adjusted EBITDA compared to the $20.6 million achieved in FY '19.
As noted, this was also significantly higher than our initial guidance in FY '21 of $20 million to $22 million, also higher than our updated full year guidance of 24.5 and $26.5 million of adjusted EBITDA.
This $28 million of adjusted EBITDA also represented a $7.9 million or 36% increase over even the strong $20.6 million in adjusted EBITDA achieved in FY '19.
For the fourth quarter, adjusted EBITDA increased to $10.6 million, an increase of 18.5% compared to $8.9 million in adjusted EBITDA last year.
Our cash flow and liquidity position were also very strong.
As shown in Slide 10, net cash generated for FY '21 was $39.7 million, which is $30.8 million higher than the $8.9 million generated in FY '20 and up 78% compared to the $22.2 million of net cash generated in FY '19.
This increase in net cash generated reflects very strong growth in adjusted EBITDA, a very significant increase in deferred subscription revenue and reduced amounts of capital expenditures and capitalized content development.
Also shown in Slide 11, our cash flow from operating activities for FY '21 increased a very strong $18.6 million or 68% to $46.2 million compared to $27.6 million in FY '20 and $30.5 million in FY '19.
This strong cash flow reflects an additional benefit of our subscription model, specifically that the invoice upfront and collect the cash from invoiced amounts even faster than we recognized all of the subscription revenue.
With this strong cash flow, we ended the fourth quarter with $62.4 million in total liquidity, even after investing $10.6 million in the third quarter related to the acquisition of Strive, extending our management training and learning platform.
Our $62.4 million of liquidity at year-end was comprised of $47.4 million in cash, which means no net debt.
And with our $15 million revolving credit facility remaining fully undrawn.
Importantly, this $26.4 million of liquidity is significantly higher than even the $39.8 million in liquidity we had at the end of our second quarter in February 2020, just before the start of the pandemic.
So we're very pleased with our results.
I'd just like to add that this strong performance reflects the continuation and acceleration of three key trends that we've talked about on the last number of calls with you.
And these are shown on Slide 12.
The first, is the Enterprise Division sales in North America continue to be extremely strong, driven by rapidly accelerating growth in All Access Pass subscription and subscription services sales.
Total revenue in North America grew $16.3 million or 16% from $103.3 million in fiscal '20 million to $119.6 million in fiscal '21.
The second, as you can see there in the middle of that page is that our international operations have continued to strengthen.
While pandemic related challenges continue in Japan and in certain of our licensee partner operations, resulting in our total international revenue still being somewhat below fiscal '19 levels.
We're pleased with the strong ongoing rebound in our international operations, where in the fourth quarter, revenue grew 54% compared to the fourth quarter of fiscal 2020.
In addition, the strong focus on All Access Pass sales in our international operations has resulted in significant increases in All Access Pass deferred revenue, which will establish the foundation for strong sales growth in the future.
And third, as you can see on the right side of Slide 12, the performance of and trends in our Education division have strengthened substantially.
The strengthening is reflected by two things: first, an increase in the number of leader in Me schools that renewed their leader in Me membership to 2,323 schools in fiscal '21, up from 2,193 schools in fiscal '20.
And second, the significant 79% increase in the number of new Leader in Me schools brought on during fiscal '21.
We added 574 new leader in Me schools, up from 320 in fiscal '20.
This increase in New and retained schools drove strong performance in the Education division, with revenue growing $5.5 million or 12.7% compared to fiscal '20 and adjusted EBITDA increasing $4.9 million over fiscal '20 and $1.2 million over fiscal '19.
So that's the first takeaway we want to share relative to our strong fourth quarter and strong full fiscal '21 results.
The second takeaway we'd like to talk about is that this strong performance was driven by the strength of and our rapidly growing subscription business model.
As you can see in Slide 14, our total subscription and subscription services sales grew 21% to $157.2 million in fiscal '21, representing additional growth of $27.5 million compared to $129.7 million in subscription and subscription services revenue in fiscal 2020.
In the fourth quarter, subscription and subscription services sales grew 52% to $52.1 million, which was an increase of $17.7 million compared to the fourth quarter of fiscal 2020.
Importantly, this also represented growth of 29% compared to the $40.3 million in subscription and subscription services sales achieved even in the strong fourth quarter of fiscal 2019.
As you can see the sum of billed and unbilled deferred revenue also grew substantially, growing 27% for the year to $127.4 million.
That was an increase of $27.2 million compared to our sum of $100.2 million of billed and unbilled deferred revenue at the end of last year's fourth quarter.
This provides significant stability of and visibility into our future revenue growth.
The breakout between Billed deferred and unbilled deferred revenue, as you can also see on Slide 14.
As shown, our balance of deferred subscription revenue grew 27% or $16.4 million to $77 million at the end of -- at year-end compared to $60.6 million at year-end fiscal 2020.
And our balance of unbilled deferred revenue grew 27% or $10.8 million to $50.4 million in this year's fourth quarter, reflecting the significant ongoing increase in the percentage of our All Access Pass contracts, which are now multiyear.
An example of this would be North America.
In fiscal 2021, 41% of All Access Pass contracts, representing 53% of total All Access Pass contract value were under multiyear contracts.
Importantly, we achieved this strong subscription growth in both Enterprise and Education divisions.
As shown in Slide 15, in the Enterprise division, All Access Pass subscription and subscription services sales grew 24% or $22 million to $112.5 million in fiscal 2021 compared with $90.5 million in fiscal 2020.
This also reflected growth of 38% or $31 million compared to fiscal 2019.
And in the fourth quarter, All Access Pass subscription and subscription sales grew 41% or $9.3 million to $32 million.
Additionally, the number of All Access Pass new logos in North America increased 39% in the fourth quarter.
Annual revenue retention continue to exceed 90%, and the sale of multiyear contracts, as I mentioned a minute ago continue to be strong with our balance of unbilled deferred revenue increasing 28% to $49.2 million in the Enterprise division, and that compares to $38.5 million in the fourth quarter of fiscal '20 and is up 69% compared to the $29.1 million balance of unbilled deferred revenue we had at the end of the fourth quarter fiscal 2019.
As shown in Slide 16, in the Education division, in fiscal 2021, Leader in Me subscription and subscription services sales grew 14% or $5.4 million to $44.7 million compared with $39.2 million in fiscal '20.
Fiscal 2021's $44.7 million of subscription and subscription services sales reflected growth of 5% or $2.1 million compared to fiscal 2019.
In the fourth quarter, Leader in Me subscription sales and subscription services grew $8.4 million to $20.1 million.
This represented growth of 72% compared to the $11.7 million in the fourth quarter of fiscal '20 and growth of 13% compared to the strong fourth quarter of fiscal '19, which was pre-pandemic.
The third overall takeaway we'd like to talk about today, as shown in Slide 17 is that also driving our strong performance is the importance of the opportunities and the challenges that we help our clients address.
As you can see in Slide 18, while lots of things, including sharing information and helping people learn new skills can add value to an organization.
What it takes to really move any organization aggressively forward is to achieve collective behavioral change on the most important challenges.
In other words, getting everyone moving together and offering their collective best contributions toward the achievement of the organization's highest priorities.
Helping organizations achieve this kind of seismic progress is where Franklin Covey really shines.
This is the reason why in the middle of the pandemic, more than 1,000 organizations purchased, renewed and/or expanded their All Access Pass and purchased support services from Franklin Covey to help them achieve their objectives in an incredibly challenging environment.
It's also the reason why during the last 12 months, in the middle of the pandemic, when schools were scrambling to learn how to teach remotely, connect with kids, provide breakfast and lunches to students who otherwise wouldn't have any and the myriad other challenges they were facing, 2,323 schools renewed their Leader in Me subscription and 574 new schools became Leader in Me schools.
It's also the reason why as shown in Slide 19, the lifetime value of our customers continues to be both large and growing.
As shown in Slide '20, the fourth takeaway that we want to share today is that we expect subscription and subscription services to account for greater than 90% of the company's sales within three years.
As this almost complete conversion to subscription and subscription services occurs, we expect virtually the entire company to be able to generate the same strong growth in revenue, gross margins, revenue retention and customer impact that we've seen in our subscription business over the past five years.
In North America, All Access Pass subscription and subscription services already account for 83% of total sales.
And this is expected to increase to more than 90% within the next couple of years.
As shown in Slide '21, All Access Pass subscription and subscription services sales represented only 13% or $13.7 million of total sales in North America in 2016, when we first introduced the All Access Pass.
The dramatic, sustained, compounded growth since then has resulted in All Access Pass subscription and subscription services sales increasing to $112.5 million in fiscal 2021.
With annual All Access Pass subscription and subscription services sales expected to continue to grow at a more than double-digit pace.
And with legacy sales now at very low levels and expected to remain flat or even decline a bit further, we expect All Access Pass subscription and subscription services sales to increase to more than 90% in North America, as I mentioned over the next couple of years.
All Access Pass subscription and subscription services are also expected to make up the vast majority of our sales internationally in the coming years.
The growth and penetration of All Access Pass subscription and subscription services has also progressed rapidly in our English Seating direct offices.
As you can see also shown on the right side of Slide '21, from having no subscription sales at all of these offices just five years ago, All Access Pass subscription and subscription services sales for the latest 12 months now account for 81% of total sales in the U.K. and 76% in Australia.
Both of these offices are well on their way toward the same 90% penetration we expect to achieve in North America.
As you know, our largest international direct offices are in China and Japan.
Both of which are in the relatively early stages of converting themselves to All Access Path.
But having made the conversion in the U.S., Canada, U.K. and Australia, we're confident that in China and Japan, we too will convert the vast majority of their revenue to All Access Pass subscription and subscription services in the coming years.
In fact, I think it's important to note that in fiscal '21, All Access Pass subscription and subscription services made up a third of Japan's total sales.
So we're pleased with the progress there.
And finally, because of our Leader in Me subscription model, more than 90% of sales in the Education division are already subscription and subscription services.
Another reason we expect that our subscription and subscription services growth will accelerate is that we continue to make significant growth investments.
We've continued to invest in hiring additional salespeople or client partners.
As you can see in Slide 22, we ended fiscal 2021 with 273 client partners.
And as we've discussed in the past, we have many decades of headroom for additional client partner growth.
As we continue to aggressively grow our sales force and our licensee network, the volume of new All Access Pass logos, all with high lifetime value is expected to continue to accelerate.
Additionally, we expect significant growth to come from the approximately 120 existing client partners we've hired over the past few years who are still in the middle of their ramp-up process.
We've also made ongoing in growth investments in new content, technology, and as shown in Slide 23, acquisitions, such as Jhana, Robert Gregory and most recently Strive.
The combination of our powerful content and solutions, Jhana, our vast coaching and training delivery capabilities and key behavior change in performance metrics, all integrated into our new Strive learning platform will create an industry-leading solution for clients who seek to drive collective behavior change to address their most important challenges.
These investments are accelerating our ability to ensure that the All Access Pass users have constant access to the solutions and tools they need to improve performance and increase results on a daily basis.
They're also providing an important foundation for us to address larger and larger populations inside existing and new pass holding clients and are helping us accelerate the growth of All Access Pass sales.
I think it's important to note that we're also making significant investments in marketing and advertising.
The annual global learning and development spend totals nearly $400 billion, with more than $90 billion of that spent externally.
Additionally, billions more spent by business leaders on strategy execution and sales performance and by school superintendents and principles around the world.
These markets are large and growing, and no single provider in the space owns more than 1% or 2% of the market.
We -- the opportunity for us is massive.
And we're focusing heavily on ensuring that Franklin Covey is clearly positioned at the top of the mines for current and future clients around the world.
Finally, the fifth takeaway today is that we expect our almost complete conversion to subscription and subscription services to drive significant additional value to our shareholders.
And to discuss this takeaway, I'd like to turn the time to Bob.
Nice to talk to all of you.
Shareholders, you all have often asked us how we think about the true value of the company.
And while the specific valuation is something we'll leave to you to determine, I would emphasize that we expect the achievement of our multiyear business plan to create significant incremental value for our shareholders.
Just note, we expect the additional value to be created in three key ways: first, just as a natural result of the significant growth in adjusted EBITDA that we expect, with strong continued growth in subscription and subscription services revenue and the expectation of achieving strong gross margins and a high flow-through of these additional sales to incremental adjusted EBITDA and cash flow.
As shown in Slide 25, we expect adjusted EBITDA over the next three years to grow from $28 million in fiscal 2021 to between 34 and $36 million in fiscal 2022 to between 44 and $46 million in fiscal 2023 and between 54 and $56 million in fiscal '24.
Second reason we believe that just the natural result of our growth will drive shareholder value is that we expect to generate a significant amount of cash flow during those same years and to use it to create additional shareholder value.
We expect our growth in cash to meet or even exceed our rapid growth and adjusted EBITDA.
And we believe the expected growth in cash flow is likely to far exceed any reasonable discount rate anyone might apply to it.
As a result, we believe the net present value of our expected cash flow is likely were significantly more than the value implied by applying a -- to a given year's adjusted EBITDA, particularly when adjusted EBITDA is growing at a 25% compounded rate or higher.
As a consequence, we expect we'll be able to create additional shareholder value by investing a portion of more than $100 million of available cash we expect to have over the coming years to make strategic acquisitions to grow the business and also to repurchase substantial number of our shares.
And finally, we expect that our almost complete conversion to being a high revenue growth, high adjusted EBITDA and high cash flow growth, subscription and subscription services business is likely to drive an increasingly SaaS-like valuation.
We're pleased to be achieving metrics at levels very similar to those being achieved by the strongest SaaS companies, which are trading at high multiples of revenue.
However, like Adobe and other companies who during their period of conversion to SaaS created a discount to smaller subscription start-ups.
We expect that as our conversion to subscription and subscription services to SaaS becomes nearly complete, the impressive quality of our subscription metrics is likely to drive a valuation more reflective of the high lifetime customer value we're creating.
And I'd like to turn to Steve to talk about guidance and our outlook.
So outlook and guidance.
Our guidance for FY '22 is that we expect to generate adjusted EBITDA of between 34 and $36 million.
The midpoint of this range would reflect an approximately 25% increase in adjusted EBITDA compared to the $28 million of adjusted EBITDA achieved in FY '21.
Underpinning this guidance are the following expectations.
First, the recognition that during FY '22, of a large portion of the $77 million of deferred revenue already on the balance sheet and the billing of a large portion of the $50 million of unbilled deferred revenue, which has been contracted.
This provides significant visibility into our FY '22 revenue and gross margin.
Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on our FY '22 results is also the one in which we have high confidence.
That is the strength of All Access Pass and related sales.
We expect that All Access Pass will continue to achieve one, strong growth in both sales and invoice sales, two, high revenue retention rates; three, strong sales to new logos; and four, continued growth in pass expansions and multiyear contracts.
We also expect that All Access Pass subscription services will continue to be strong.
Third, we expect that our revenue in Japan, China and among our licensees will continue to strengthen.
The increase in All Access Pass, which we expect to achieve in these countries will obviously result in a portion of the new sales being added to the balance sheet as deferred revenue.
And fourth, in Education, we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools.
Me schools beyond that achieved last year.
Now for our first quarter, we expect that adjusted EBITDA will be between 5.5 and $7 million compared to the $3.7 million in the first quarter of fiscal 2021, reflecting strong performance by All Access Pass in the U.S., Canada and government and the same general expectations just outlined for international operations and education.
Now, in addition to our guidance, we'll offer some insight into our targets for FY '22, '23 and '24.
Building on the $34 million to $36 million in adjusted EBITDA, we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass.
Our target is to achieve adjusted EBITDA increase by about $10 million per year, each year thereafter.
To be, as Bob said, around $45 million in FY '23 and around $55 million in FY '24.
These targets reflect our expectation of being able to achieve low double-digit revenue growth and approximately 40% of that growth in revenue to flow through to increase in adjusted EBITDA and cash flow.
Even after significant growth investments, in marketing, our sales force, technology and expansion into new content areas.
All of this, at least until we achieve an adjusted EBITDA to sales percentage margin of approximately 20% or approaching 20%.
While dramatic changes in the world environment could impact these expectations, we want to share that these are our current expectations and assumptions.
We all want to share that not only are these -- our targets and expectations.
But when you read our proxy statement, you'll see that the executive team's LTIP awards still depend on achieving these strong multiyear growth goals.
We feel great about our momentum and are pleased to be in a position to offer this guidance, and are looking forward to a great 2022.
| q4 sales rose 41 percent to $68.9 million.
|
We appreciate you joining us.
Joining me on the call is Byron Boston, Chief Executive Officer, and Chief Investment Officer and co-Chief Investment Officer; Smriti Popenoe, President and co-Chief Investment Officer, and Steve Benedetti, Executive Vice President, Chief Financial Officer, and Chief Operating Officer.
2021 continues to be a good environment for Dynex to deploy capital.
Our financing costs remain pegged at very low levels and has resulted in steady earnings in a wider net interest spread as shown on Slide 25.
We began this year believing we will get multiple opportunities to invest at attractive returns that the yield curve steepens or spreads widen.
As such we have raised capital, maintain lower leverage, and methodically deployed capital at attractive return levels.
As of mid-year, we are sticking with our strategy.
Nonetheless, we're in an evolving health and economic environment, and the capital markets have reflected this uncertainty.
As such, our book value has fluctuated this year from being up 5.2% in the first quarter, to declining 6.6% in the second quarter.
Our year-to-date performance remained solid as our total economic return deposited 2.4%.
Our tactical deployment of capital at attractive levels and our ability to out-earn our dividend has helped cushion our book value during this period of volatility.
Let me remind you that we managed Dynex Capital for the long term.
Our goal is to generate a cash return between 8% to 10%.
While maintaining book value at steady levels over time.
We will continue to create value for our shareholders by using a very disciplined top-down research-driven approach to develop strategies for multiple future scenarios in the short, medium, and long term.
This has been especially important since the global market environment changed in January 2020.
Most importantly, since this new era in history began last year, we have outperformed our industry and other income-oriented vehicles with a 28% total shareholder return as noted on Slide 5.
I will emphasize the fact that we have an experienced team and experience will be a major factor for creating value through these transitional times in the global capital markets and economies.
We will continue to emphasize liquidity with a balance sheet of high-quality assets.
For the second quarter, we reported a comprehensive loss of $0.98 per common share, and a total economic return of minus $0.93 per common share or a minus 4.6%.
We also reported core net operating income of $0.51 per common share, an increase of 10% over last quarter's $0.46 per common share, and well exceeding our $0.39 quarterly common stock dividend.
Book value per share declined $1.32 or minus 6.6%, principally from economic losses on the investment portfolio of $48 million or $1.49 per common share, driven in part by mortgage spread widening and in part due to the lower rate environment during the quarter versus our hedge position.
In terms of specific performance, TBAs and dollar roll specialness continue to be important contributors to results for the quarter, adding an incremental $0.06 per common share to core net operating income, which was partially offset by lower earnings from a smaller pass-through portfolio.
In addition, G&A expenses were lower by $0.02 on a per-share basis and preferred stock dividend on core earnings per share was lower by $0.04 per share.
Both reflecting the benefit of our capital management activities year-to-date.
As Smriti will discuss later, with the ongoing favorable conditions in the funding and TBA dollar roll markets, we expect continued sequential core net operating income growth in the third quarter.
Average interest-earning assets, including TBAs increased to $4.8 billion versus $4.3 billion, as we deploy the capital raised over the first half of the year.
At quarter end, interest-earning assets, including TBAs, were $5.4 billion versus $5.2 billion at the end of last quarter and leverage including TBA dollar rolls, was 6.7 times versus 6.9 times last quarter.
The lower overall leverage quarter-to-quarter primarily is due to the capital growth of the company and portfolio adjustments during the second quarter.
Adjusted net interest income was higher on an absolute dollar basis, given the growth in the investment portfolio during the quarter, inclusive of TBA securities, but was lower on a per-share basis, however, reflecting the new shares issued in the first half of the year and the conservative leverage posture of the company.
The increase in adjusted net interest income on an absolute dollar basis was due to the continued decline in repo borrowing cost and the increase in TBA dollar roll positions during the quarter, as previously noted.
Adjusted net interest spread increased eight basis points this quarter to 195 basis points, driven largely by the company's TBA position and a modest decline in repo borrowing cost.
The company's implied funding cost for its TBA dollar roll transactions was approximately 49 basis points lower than its repurchase agreement financing rate during the second quarter of 2021, an increase of 10 basis points in specialness relative to the prior quarter.
As a result, TBA dollar roll transactions contributed in eight basis point increase to adjusted net interest spread during the quarter.
Regarding Agency RMBS prepayment speeds, they were essentially unchanged at 19% CPR for the quarter versus 18.6% EPR for quarter 1.
Overall, total shareholders' capital grew approximately $25 million during the quarter.
This includes $68 million in new common equity raised through at the market offerings in the quarter.
Market conditions were favorable to issue equity and continue to unlock the operating leverage of the company.
Our capital issuances added $0.07 per common share to book value for the quarter.
I want to start by building on Byron's comments by describing the principles that have been consistent throughout our portfolio management history here at Dynex.
The first is a sound macroeconomic process and framework to assess the environment.
The second is a flexible mindset to be able to pivot when the environment shifts.
And finally, the right amount of patience in decision-making.
The environment we have been in since January 2020 has required all three of these principles in real-time, especially now, as the markets are still seeking a direction and level.
The most important principle for what we are in right now is patients.
While we continuously assess the environment because the passage of time, is what is now needed for the data and the market direction to become clear.
Even so, this remains a very favorable environment in which to generate long-term returns.
As shown on Slide 25, our repo financing cost declined seven basis points over the quarter.
Financing in the TBA market has continued to be strong, contributing 1% to 3% excess core ROE versus pools.
Since year-end, as Byron mentioned, we have used bouts of volatility to invest capital, and we did that late in the second quarter, and have done so into the third.
As spreads tightened in late April, we reduced our leverage by a full turn.
And as returns are now in the 10% to 12% core ROE range, we have reinvested a portion of that capital, growing the balance sheet from a low point of $4.5 billion in the second quarter to $5.6 billion thus far in the third quarter.
We allocated out of TBAs into specified pools as pay-ups declined substantially in May, and we added outright marginal investments in Fannie 2.5 specified pools as well as Fannie two TBAs with wider spreads in June and July.
Our total economic return year-to-date is 2.4%, with book value on June 30 at $18.75, relatively unchanged versus year-end.
In the third quarter thus far, MBS spreads are wider and as the yield curve has flattened dramatically in July, book value has fluctuated with yields in a range of flat to down about 5% versus quarter end.
To put the book value move in context, about half the book value decline in the second quarter was due to MBS spread widening, and the remaining half is attributable to our hedge position that is concentrated in the back end of the yield curve.
Post quarter end, MBS spreads are modestly wider, but the book value decline is directly attributable to our hedge exposure to the long end of the yield curve.
We have chosen to maintain a position with a portfolio structure hedged with the long end of the yield curve because we believe that the risk of a whipsaw in rates is substantial.
The catalyst for that whipsaw could be a turn in sentiment, realize fundamental data, or an easing of the technical nature of the recent move.
Any of which can happen rapidly.
We expect the book value to recapture much of the decline in these resteepening scenarios.
I will cover more on our thinking shortly when discussing the macroeconomic environment.
Leverage at the end of the quarter stood at 6.7 times, and we have the potential for two more turns from here.
At today's higher level of earning assets, which were added at wider spreads, we expect core earnings to continue to exceed the current level of the dividend.
We are on track for an 8% dividend yield on beginning book value for the year, with the excess core earnings providing a cushion to capital.
Shifting now to recent market moves, our macro opinion, and outlook.
The global economy is still evolving through the health crisis and corresponding economic situation from the pandemic, and the recovery is proceeding in fits and starts.
It will take time for the economic picture to become clearer.
In the absence of real data, technical factors like short-covering, overseas demand, and central bank activity have dominated recent market action.
This is leading many participants to arrive at conclusions on long-term fundamentals like inflation and growth, for which the data has been difficult to parse out and even to predict, but we expect that this will become clearer in the coming months.
In such an environment, our discipline, process, and framework play a key role in the management of our position.
We expect that front-end rates will remain low, close to 0 through 2022, providing a solid base from which to generate returns.
The long end of the yield curve, 10-year, 30-year will move based on the evolving economic situation.
The Fed's decision on tapering is a key event in our focus as is the fall reopening of schools as well as the debt ceiling.
In the short term, we expect choppy action in the markets to continue, and our current thinking is that 10-year yields will trade in a range between 1% and 1.5%.
In the medium term, there is room for 10-year yields to move to a higher range, 1.5% to 1.75%.
And this is as we transition globally to a more fully reopened economy, a higher percentage of vaccinated populations, more effective and available medication to treat Covid, stable or rising inflation, a rising supply of global sovereign bonds, both from tapering as well as deficit spending and fiscal stimulus.
Once again, this picture will evolve and become clearer over the summer and into the fall.
We are very respectful of a near-term scenario, resulting in yields remaining at the lower end of the 1% to 1.5% in the 10-year rate, as I mentioned earlier.
Agency RMBS are, of course, very much impacted by these factors.
In the near term, the fundamentals for agency RMBS point to greater levels of refinancing.
Mortgage rates are below 3%, originators are fully staffed and government policies favor broader access to refinancing and modifications.
This leaves higher coupons vulnerable to increasing prepayments and lower coupons susceptible to supply.
In the near term, the supply is balanced by powerful technicals.
Lower coupon MBS are still benefiting from strong demand from the Fed and banks.
Banks are investing in MBS because of the absence of loan demand.
And as MBS have widened, money managers are finding value there relative to corporates.
Tapering is also a key focus of the MBS market.
The recent spread widening, we believe, reflects some of this risk and spreads could widen further at the taper becomes more of a reality.
For Dynex, the tighter spreads in April represented a chance to reduce leverage and wider MBS spreads from here will continue to represent an opportunity to add assets at attractive long-term returns.
This is where the patience comes in.
And as we've shown, we have managed our leverage and our capital actively.
Ultimately though, we believe the Fed's balance sheet will create a powerful stock effect to limit spread widening.
Demand from money managers as mortgages become a high-quality alternative to corporate bonds and lower net supply from potentially higher rates will also provide a buffer against much wider spreads.
By holding a flexible, liquid, high credit quality position even as spreads widen, we can manage both sides of our balance sheet to position for solid long-term return generation.
As the markets are still seeking a direction and level, the most important principle for what we are in right now is patients.
While we continuously assess the environment as it will take time for the economic picture to become clearer.
Our macroeconomic view supports our current positioning, and we remain flexible and open to adjusting it as we see the facts change.
While booked value is lower due to spread widening and the curve positioning of our hedges, it is cushioned with our ability to continue to outearn the dividend at current levels of the balance sheet.
The investment environment is favorable.
Financing costs are fixed at low levels, providing us a strong foundation for returns and the TBA market continues to offer attractive returns.
We're entering a period where we anticipate having more opportunities to invest capital at wider spreads.
We're well-positioned for this.
We have relatively low starting leverage, over $400 million in liquidity and dry powder of two turns of leverage to drive future earnings power and total economic return generation well in excess of our cost of capital.
I want to leave you with three words: opportunities, patience and trust.
First, we continue to be in an evolving global environment that will give us opportunities to invest our capital at attractive long-term returns.
Our portfolio continues to be structured for a steeper curve and wider spreads.
We continue to operate with lower leverage and higher levels of liquidity, which will allow us to take advantage of these opportunities as they develop.
Second, our decades of experience in the business leads us to be very patient as the world and the capital markets continues to adjust to this evolving global environment.
Since this new era in history began in January of 2020, we have maintained patience in managing our balance sheet, effectively increasing our capital base and methodically investing money into wider mortgage spreads and higher yields.
We will continue with this mindset.
At Dynex Capital, we offer you two products to gain access to above-average dividend yield.
Our common stock offers a great monthly dividend yield with a book value that will fluctuate as the market environment continues to evolve.
On the other hand, our preferred stock offers less price fluctuations with a lower dividend yield than the common.
Finally, we want you to continue to trust us with your money.
Dynex Capital, our number 1 purpose is to make lives better by being good stewards of individual savings.
Over the past 14 years, since I joined Dynex, we have earned your trust as we have managed our business with an ethical focus, remained patient and looking for the right opportunities to invest your savings at attractive long-term returns.
We are consistent, and we will remain patient as we let the global environment evolve.
And we will continue to make wise decisions on behalf of our shareholders.
Please take a note, look at our long-term chart on Slide 13.
I love this chart.
Dynex continues to offer a great alternative to many larger financial institutions.
| compname reports q2 loss per share of $0.98.
q2 non-gaap core operating earnings per share $0.51.
q2 loss per share $0.98.
|
You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR Newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's president; and Chris May, AAM's vice president and chief financial officer.
Begin my comments today, I'll review the highlights of our fourth quarter and full year 2021 financial performance.
Next, I'll cover how we are pivoting to electrification while securing our core business.
Lastly, I'll discuss our 2022 financial outlook and our three-year new business backlog before turning things over to Chris.
After Chris covered the details of our financial results, we will open up the call for any questions that you may have.
AAM delivered solid operating results and cash flow performance in the fourth quarter and full year 2021 despite market dynamics and continuing challenges with the global supply chain.
Fortunately, our team did an outstanding job managing the areas under their control.
AAM's fourth quarter 2021 sales were $1.24 billion, and for the full year 2021, AAM's sales were approximately $5.2 billion.
In 2021, we experienced volume recovery from the impact of the 2020 global pandemic, but semiconductor supply chip shortages impacted AAM by over $600 million.
From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2021 was $164.6 million, or 13.3% of sales.
For the full year 2021, AAM's adjusted EBITDA was $833.3 million, or 16.2% of sales.
In 2021, we were negatively impacted by supply chain disruptions, namely semiconductors, and we received very little forewarning to changes in production schedules, which disrupted our operations and cost structure.
However, I'm proud to say the AAM team managed through these obstacles and delivered strong EBITDA margins and conversion for the full year.
AAM's adjusted earnings per share in the fourth quarter 2021 was a loss of $0.09 per share.
For the full year 2021, AAM's adjusted earnings per share was $0.93 per share, compared to $0.14 per share in 2020.
AAM continued to deliver strong free cash flow generation in 2021.
AAM's adjusted free cash for the fourth quarter of 2021 was $43.6 million.
And for the full year of 2021, AAM's adjusted free cash flow was $423 million.
This is a record adjusted free cash flow performance for AAM and I'm extremely proud of my team.
Our goal has been to strengthen the balance sheet, and last year we delivered.
We reduced our gross debt by approximately $350 million and a turn of leverage.
We will continue to work to improve our balance sheet strength going forward.
Chris will provide additional information regarding the details of our financial results in just a few minutes.
Let me talk about some key highlights for 2021 and the start of 2022, which you can see on Slides 4 and 5 of our slide deck.
We secured an agreement with REE on electric drive units.
We were named the sole supplier front and rear pickup axles for GM's Oshawa truck plant.
We won two new pace awards for our partnership and innovation for our electric drive line technology.
We secured Neo differential business for their electric vehicles.
We were selected to supply track rate differentials for the new GM Hummer EV program.
We were supplying PTUs for the all-new Ford Bronco Sport and Maverick programs.
We secured a traditional core axle business to fund our electrification future.
And we were selected as a GM Overdrive award winner and received multiple other customer awards for our performance, and we advanced our environmental sustainability and DEI initiatives.
And just most recently here in the beginning of the year, AAM was recognized as one of America's best large employers and top five in the automotive category.
Now let's talk about the first pillar of our two-pronged strategy, which is securing the core, which is fundamental to the transformation -- to our transformation to electrocution.
And earlier today, we announced that AAM has secured multiple next-generation full-sized truck axle programs with global OEM customers with lifetime sales valued at greater than $10 billion.
These replacement business awards are key developments as we leverage the cash flow generation to bring the future faster with our electrification technologies.
And on the electrification front, we continue to make significant progress with our three-in-one electric drive technology.
Recently, we displayed electric drive technology at CES.
The power, density, and compactness of our proprietary design was very well received.
The technology platform can accommodate the electric propulsion needs across all light-vehicle segments, from small cars to light commercial applications.
The flexibility and modularity provide legacy and start-up OEMs with many options from components, gearboxes, motors, power electronics to full systems, and EBM axles.
Our design was recently given the Altair Enlighten Award, the automotive industry's only award dedicated to lightweighting and sustainability.
Again, something we're very proud of.
That said, 2022 is an exciting year with multiple expectation launches on top of us, including our high performance e-Drive system for a premium luxury European OEM.
This system will be applied across multiple vehicle variants, proof that our technology is not only state-of-the-art but meet the high standards of this iconic manufacturer.
We will also be launching multiple electric propulsion components with several globally -- global OEMs this year.
In addition, we recently announced our investment in Autotech Ventures, which is an early stage venture capital firm.
This firm invests globally in mobility start-ups, and AAM is leveraging the relationship with Autotech to identify new opportunities with companies aimed at electrification and mobility.
The pivot to electrification is well underway, and we embrace this change to make the environment more sustainable.
Our engineering teams continue to develop game-changing electric mobility solutions and AAM is well positioned to support our customers with cutting-edge technology and a strong value proposition.
And on the ESG front, I'm also very happy to share that AAM was named to Newsweek's list of America's Most Responsible Companies.
We look forward to building on the positive momentum in 2022 as we advance our environmental sustainability and DEI initiatives.
Be on the lookout for our new sustainability report in April of this year.
At AAM, we believe in a strong ESG foundation and commitment are critical to running the business for long-term success.
AAM expects our gross new business backlog covering three-year period of 2022 through 2024 to be approximately $700 million.
We expect the launch case of this backlog to be $175 million in 2022, $325 million in 2023, and $200 million in 2024.
And as usual, our backlog factors in the impact of updated customer launch timing and our latest customer volume expectations and does not include the replacement business, only new and incremental business.
You can also see the backlog breakdown on Slide 6, with about 55% of this new business backlog related to global light trucks, including crossover vehicles, and most importantly, 35% stems from electrification.
This is more than double the 15% last year that we had.
Our approach to electrification from selling components and subsystems to full electric drive units is gaining traction in our book of business.
Currently, AAM is quoted on approximately $1.5 billion of revenue, but two-thirds of the quotes coming from electrification-based programs.
Now, let me turn to our financial outlook, which you can see on Slide 7.
And AAM is targeting sales in the range of $5.6 billion to $5.9 billion, adjusted EBITDA of approximately $800 million to $875 million, adjusted free cash flow approximately $300 million to $375 million.
And that assumes our capital spending in the range of 3.5% to 4% of sales.
And from a launch standpoint, we have 25 launches here in 2022, which should drive growth over the next several years.
And from an end market perspective, we forecast production at approximately 14.8 million to 15.2 million units for our primary North American market.
This represents about a 14% to 17% increase over last year's performance.
Going forward, an improving production environment stemming from strong demand and inventory replenishment will set up AAM nicely for the future.
In summary, 2021 was an unprecedented year filled with numerous challenges, but AAM delivered solid financial results.
In 2022 and beyond, we will continue to focus on securing our core business, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio, and position AAM for profitable growth.
I'm very excited about what lies ahead for AAM.
That concludes my remarks.
I will cover the financial details of our fourth quarter and full year 2021 results with you today.
I will also refer to the earnings slide deck as part of my prepared comments.
Before I begin to discuss the specific details, let me provide a macro overview of our fourth quarter.
On the surface, you will note our sales were down nearly $200 million on a year over year basis.
However, understanding the factors driving this change is crucial.
AAM's product sales were down more than $300 million on a year over year basis due to semiconductor shortages and overall market dynamics.
Partially offsetting the drop in product sales is a $100 million increase in an index-related metal market costs that we passed through to our customers at no margin.
As we talk through the details today, keep in mind that metal market pass-through has a significant adverse impact on the calculation of our margins.
However, when it's all said and done, you'll take away three key points about our fourth quarter results.
First, AAM sales and profits were impacted by lower industry volumes.
Two, AAM's margins were impacted not just by lower sales, but also by rising metal market pass-through recoveries.
And three, and most importantly, we continue to perform and optimize our business despite macro level headwinds.
So let's go ahead and get started with sales.
On Slide 10, it shows a walkdown of the fourth quarter 2020 sales to the fourth quarter of 2021 sales.
In the fourth quarter of 2021, AAM sales were $1.24 billion, compared to $1.44 billion in the fourth quarter of 2020.
We estimate that AAM was unfavorably impacted by the industrywide semiconductor shortage by approximately $137 million in the fourth quarter of 2021.
We note that high production volatility experienced in the third quarter continued well into October.
Although volatility improved some in November and December on a month-over-month basis, we still experienced shortly time production changes from our customers and reduced output.
Other volume and mix in pricing was negative by $200 million.
Overall, we experienced some lowered global light-truck volumes and lower overall component sales in several markets as customer schedules fluctuated and they rebalanced inventories versus a very different environment than we experienced in the prior year.
This brings us to the fourth quarter 2021 sales subtotal, which excludes recoveries for index-related metal market costs and foreign currency impacts.
We hedged this risk with our customers by passing through the majority, but not all of these index-related changes.
The middle portion of this column reflects these elevated pass-throughs on a year over year basis.
Metal markets and foreign currency accounted for an increase of approximately $94 million to our total sales in the quarter.
For the full year of 2021, AAM sales were $5.16 billion as compared to the $4.71 billion for the full year of 2020.
The primary drivers of the increase was a return of COVID-related volumes, an increase of over $300 million in index-related metal pass-throughs and foreign currency, partially offset by volumes lost due to semiconductor chip shortages that exceeded $600 million for 2021.
Now, let's move on to profitability.
Gross profit was $140 million, or 11.3% of sales in the fourth quarter of 2021, compared to $237 million, or 16.4% of sales in the fourth quarter of 2020.
Adjusted EBIDTA was $165 million in the fourth quarter of 2021 or 13.3% of sales.
This compares to $262 million in the fourth quarter of 2020, or 18.2% of sales.
You can see a year-over-year walkdown of adjusted EBITDA on Slide 11.
During the quarter, semiconductor sales disruptions and other volumes and mix had a negative impact of $39 million and $59 dollars, respectively.
This was partially offset by the benefits of AAM's continued productivity and restructuring programs and successful recoveries of some of the D&D costs.
As I just mentioned earlier in our sales discussion, we're facing year-over-year increases in index-related metal market costs.
The retained portion impacting this quarter plus FX was approximately $30 million.
You can see on our EBITDA walk the dynamic this has on our EBITDA margin calculations.
If you exclude this impact, our margins would have been meaningfully higher as noted on our walk.
For the full year of 2021, AAM's adjusted EBITDA was $833 million and adjusted EBITDA margin of 16.2% of sales.
Not I'll cover SG&A.
SG&A expense, including R&D in the fourth quarter of 2021, was $78 million, or 16.3% of sales.
This compares to $83 million in the fourth quarter of 2020, or 5.8% of sales.
AAM's R&D spending in the fourth quarter of 2021 was approximately $20 million, compared to $31 million in the fourth quarter of 2020.
The fourth quarter of 2021 includes higher ED&D recoveries as we prepare to launch multiple key new programs.
This activity drove a significant portion of the net year-over-year reduction in R&D.
As we head into 2022, we will continue to focus on controlling our SG&A costs while also capitalizing on the growing number of electrification opportunities that are before us.
And we would expect R&D to increase in 2022 by approximately $45 million to support these new multiple new opportunities.
This is in line with our previous R&D spend trajectory commentary.
Let's move on to interest, taxes, and pension.
Net interest expense was $42 million in the quarter of 2021, compared to $50 million in the fourth quarter of 2020.
We expect this favorable trend to continue in 2022 as we benefit from our debt reduction and refinancing actions.
In the fourth quarter of 2021, we recorded an income tax benefit of $2.3 million, compared to an expense of $13.9 million in the fourth quarter of 2020.
As we head into 2022, we expect our adjusted effective tax rate to be approximately 15% to 20%.
And lastly, during the fourth quarter, AAM completed the transfer of nearly $100 million of pension obligations to an insurance company.
This transaction was paid entirely through pension plan assets and continues our journey to strengthen AMM's balance sheet in this area.
As a result of this transaction, AAM recorded a non-cash pre-tax pension settlement charge of $42 million.
Taking all these aforementioned items into account, including the pension settlement charge, our GAAP net loss was $46 million or $0.41 per share in the fourth quarter of 2021, compared to an income of $36 million or $0.30 per share in the fourth quarter of 2020.
Adjusted lost per share for the fourth quarter of 2021 was $0.09, compared to $0.51 earnings per share in the fourth quarter of 2020.
For the full year of 2021, AAM earned adjusted earnings per share of $0.93 versus $0.14 in 2020.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the fourth quarter of 2021 was $102 million.
Capital expenditures, net of proceeds from the sale of property plant equipment in the fourth quarter, was $65 million.
And cash payments for restructuring and acquisition-related activity for the fourth quarter of 2021 were $9.8 million.
Reflecting the impact of these activities, AAM generated adjusted free cash flow of $44 million in the fourth quarter of 2021.
For the full year of 2021, AAM generated adjusted free cash flow of $423 million, compared to $311 million in the full year of 2020.
As David mentioned, this is a record for AAM.
As a team, we've been focused on free cash flow conversion, including tightly managing capex, and reducing restructuring charges.
Our results demonstrate success in these areas.
From a debt lover's perspective, we ended the year with net debt of $2.6 billion and LTM adjusted EBITDA of $833 million, calculating a net leverage ratio 3.1 times on December 31st.
This is a reduction in nearly a full term loan in 2021.
In 2021, we prepaid over $350 million of gross debt.
We utilized the free cash flow generating power of AAM, strengthened the balance sheet by reducing our debt and lowering our future interest payments.
AAM ended 2021 with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities.
And we continue to maintain a strong liquidity position and debt maturity profile.
Before we move into the Q&A, let me close my comments with some thoughts on our 2022 financial outlook.
In our earnings slide desk, we have included walks from 2021 actual results to our 2022 financial targets.
You can see those starting on Slide 13.
As for sales, we are targeting the range of $5.6 billion to $5.9 billion for 2022.
This sales target is based upon North American production estimates of 14.8 million to 15.2 million units, new business backlog launches of $175 million and attrition of approximately $100 million.
Given the market volatility, our sales guidance assumes a range of semiconductor recovery of approximately one-third at the low end and two-thirds at the high end versus what we experienced in 2021.
We continue to experience this issue in January and February of this year.
However, we do expect improvements throughout the year.
In addition, on a year over year basis, we expect a continued increase in index-related metal markets pass-throughs and foreign currency.
As noted on our fourth quarter walks, the 2021 exit rate on a year over year basis is the highest for the year.
From an EBITDA perspective, we're expecting adjusted EBITDA in the range of $800 million to $875 million.
As I would expect, you may have some questions in this area.
Let me provide some very direct comments on the key elements of our year-over-year EBITDA walk.
First, yes, we expect to convert our year-over-year product sales increases and expected contribution margins of approximately 25% to 30%, as shown on our year-over-year walk.
Two, yes, we intend to invest in our future through more in R&D as we continue to have growth opportunities with a variety of customers and products.
And yes, we are experiencing inflation.
By way of perspective, this net amount reflected on our walk represents only slightly more than 1% of our annual purchase component buy.
And yes, lastly, we expect AAM to continue to deliver operational productivity to mitigate some of these costs, as well as offset core cost pressures we are experiencing inside of our own operations.
You can see continued year-over-year performance on our walk of nearly $35 million.
From an adjusted free cash flow perspective, we are targeting approximately $300 million to $375 million in 2022.
And the main factors driving our cash flow change are as follows: we have slightly higher capital expenditures as we are coming upon some key launches.
However, our capex to sales ratio is still very low by our historical measures as we are targeting capex as a percent of sales of approximately 3.5% to 4%.
We also expect higher taxes and we would expect working capital outflows as our sales and related activity are increasing year over year.
And lastly, we estimate our restructuring payments to be in the range of $20 million to $30 million for 2022.
This is a year-over-year reduction by nearly half of our cash restructuring payments from the prior year.
We expect to use free cash flow generated in 2022 to continue to reduce leverage and further solidify our positional expectation and take advantage of select market opportunities to support growth.
So in conclusion, the tenets of our business approach are already yielding results.
As David mentioned, we've secured significant new awards with our legacy business with strong free cash flow potential.
Our new three-in-one electric drive platform and components are driving global interest, and as such, our backlog of electrification is now at 35%.
And we generated strong free cash flow, a company best in 2021.
And we look to generate solid free cash flow in 2022 while ramping up new business launches to drive growth.
We're looking forward to a great year for AAM and building value for all our stakeholders.
| compname reports q4 adjusted loss per share $0.09.
q4 adjusted loss per share $0.09.
q4 loss per share $0.41.
q4 sales $1.24 billion.
for 2022 targeting adjusted ebitda in range of $800 - $875 million.
for 2022 targeting sales in range of $5.6 - $5.9 billion.
for 2022 north american light vehicle production of approximately 14.8 - 15.2 million units.
targeting adjusted ebitda in range of $800 million - $875 million for 2022.
american axle & manufacturing - gross new & incremental business backlog launching from 2022 - 2024 estimated at about $700 million in future annual sales.
expects launch cadence of three-year backlog to be approximately $175 million in 2022.
|
The purpose of the call is to provide you with information regarding our third quarter 2021 performance in addition to our financial outlook for the balance of the year.
Our commentary today will also include non-GAAP financial measures, which we believe provide an additional tool for investors to use in evaluating ongoing operating results and trends.
These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
With that, I'll hand it over to Ari.
Continuing our positive momentum from last quarter, we once again surpassed our quarterly revenue and adjusted EBITDA targets.
Given the outperformance and our positive outlook for the balance of the year, we have also raised our full year outlook, which Jason will discuss in more detail shortly.
Before he does, I want to discuss three important things; UFC record performance year to date, the continuation of pent-up demand for entertainment, and the attractive prospects of sports betting.
UFC posted its best nine-month year-to-date period in the 28-year history in terms of revenue and adjusted EBITDA, and this despite lower event output in the third quarter versus third quarter 2020.
During the third quarter, UFC sold out all three Pay-Per-View events and UFC 264 became the third highest-grossing event in UFC history.
Gate revenues at all events were enhanced by our own VIP experience offering from our location that puts fans in the center of the action.
Meanwhile, commercial Pay-Per-View saw the highest worldwide grossing revenue quarter since the pandemic began, driven in large part by the many US restaurants and bars starting to open in full capacity.
We also saw strong performances across our consumer products and licensing and sponsorship categories.
UFC's sponsorship revenue is up 59% compared to third quarter 2019, the last non-COVID impacted year.
We're seeing similar sponsorship increases across the balance of our owned and operated sports and events portfolio.
In terms of international media rights, we've closed nine new deals throughout Asia Pacific during the period.
If you combine these nine with the prior five international rights deals we discussed last quarter, the aggregate average annual value is more than 80% over the prior deals.
Beyond UFC, our businesses continue to benefit from the pent-up demand for entertainment created by the pandemic.
While reopening rates continue to vary geographically, we are seeing increased activity across all lines of our business.
Linear and digital platforms are in a race for more content, creating an uptick in television and film productions.
And we have room for more optimism as Broadway recently reopened and music artists commencing multi-year tours in large venues.
On the sports side, fans are filling stadiums and sponsors are eager to spend dollars to reach those fans and make up for lost time.
If you look at Super Bowl 56, ticket sales from our location, they are pacing meaningfully ahead of 2019 sales for Super Bowl 54.
The average ticket price is up over 50% on a like-for-like basis.
Now turning to sports betting, a fast-growing complement to sports media rights and live events.
The combination of the pandemic's role as a catalyst for online sports betting, the increased betting legalization among US states, and the opening of new territories globally has laid the foundation for further growth of our IMG Arena and soon to include OpenBet sports betting business.
As it currently stands, IMG Arena is part of our events, experiences, and rights segment, upon closing of our OpenBet acquisition, which we announced at the end of the third quarter, and which is expected to close in the first half of '22.
IMG Arena and OpenBet will combine to form a fourth operating segment.
This will create greater transparency and enable us to better focus on this growing business.
IMG Arena is already a major global player in the sports betting market, serving more than 470 sportsbook brands by supplying data and video feeds from rights holders including PGA Tour, UFC, ATP, and MLS.
Layering in OpenBet's betting engine, which processed nearly 3 billion bets in 2020, and its modular suite of content offerings with IMG Arena's feeds and virtual products will create a unique end-to-end solution for sportsbooks and rights holders.
It's a fully integrated tech solution combined with a fan-first approach to content, a complete turnkey solution that we can take to existing rights holders within our broader media business is also making us more attractive to prospective clients.
We expect this integrated offering will help rights holders drive increased fan engagement and new modernization opportunities in turn increasing the sports betting handle.
As I mentioned, while we don't anticipate the acquisition to close until sometime in the first half of 2022, we've already received a high level of interest from sportsbooks and rights holders around the combined entity.
And we are extremely encouraged by the growth opportunity ahead.
Before we get to our revised guidance, I'll start by walking you through our financial results for the quarter and providing you with some additional color around what we're seeing in each of our segments.
Any comparisons I give will be in reference to last year, which was impacted by COVID.
For the quarter ended September 30, 2021, we generated approximately 1.4 billion in consolidated revenue, up 526.8 million or 60.9% over the prior-year period.
Adjusted EBITDA for the quarter was approximately 283.3 million, up 105 million or 58.9%.
Our own sports property segment generated revenue of 288.5 million in the quarter.
The segment is down 10.6 million in revenue in comparison to the prior-year quarter.
This is attributable in part to a 25 million contract termination fee recognized in the third quarter of 2020 that did not recur in 2021.
It is also due to more events being held in Q3 2020 as a result of events shifting from Q2 due to COVID-19.
The revenue decline was partially offset by UFC's continued strong growth across live events, residential and commercial Pay-Per-View, consumer products, licensing, and sponsorship, as well as additional PBR events held in the quarter.
The segment's adjusted EBITDA was 134.7 million.
UFC posted its best nine-month year-to-date period in history in terms of revenue and adjusted EBITDA.
Outside of its strong live event and Pay-Per-View performance, we signed several new licensing and sponsorship deals.
These included a partnership with Icon Meals, a healthy ready-made meals company, and multi-year sponsorships with Battle Motors and ZipRecruiter.
Internationally, as Ari mentioned, we also secured nine new media rights deals in Asia Pacific, significantly increasing our distribution throughout the region.
Meanwhile, live events on ESPN and ESPN+ continue to perform well with viewership across platforms.
The Return of The Ultimate Fighter also approved the tremendous success.
Viewership on ESPN+ indicates the season performed better than the last three seasons that aired on FOX Sports 1.
On the fan engagement front, where UFC continues to have one of the most engaged follower bases among all major US sports, social followers grew over 40% and YouTube subscribers grew over 30% year over year.
Lastly in this segment, PBR also continued its positive momentum, taking us right past streaming service to Pluto TV, bringing its linear and streaming content all under the ViacomCBS umbrella.
The company also signed several new national partnerships and licensing deals in the quarter and launched its first NFTs last month.
Now turning to events, experiences, and rights.
This segment recorded revenue of 446.3 3 million, an increase of 62.1 million or 16.2% year over year.
The increase was primarily driven by greater events and production revenue attributable to the return of live events in 2021, as well as the addition of the recently acquired NCSA.
This was partially offset by a decrease in media rights revenues, primarily due to the return to a normal schedule of European soccer matches in the quarter and the expiration of two European soccer contracts in the second quarter of 2021.
Adjusted EBITDA improved 94.6 million to 85 million compared to the third quarter of 2020.
This was primarily driven by the growth in revenue and a decrease in direct operating costs.
To give you a little color on the activity we're seeing in this segment, there were several major sporting events during the quarter in which the Endeavor flywheel was on full display.
The first was Wimbledon, a relationship that dates back over 50 years.
IMG produced the events' official TV and radio channels, showed the tournament in flight on its Sport 24 channel, secured 80% of its official partnerships and brokered a deal to launch a commemorative NFT.
At The Open Golf Championship, IMG served as a host broadcaster and the official commercial representative for the event showed the event on Sport 24 and ran hospitality.
Meanwhile, our experiential marketing agency 160over90 created the tournament's Spectator Village.
And lastly, at September's Ryder Cup, our location handled all consumer travel and ticket exchange program for the event, while 160over90 operated consumer experiences and hospitality programs across the event footprint.
IMG Arena packaged and delivered all official event data for sportsbook operators via its Golf Event Center and Sport 24 carried the event in flight.
Meanwhile, dozens of clients competed across all three events including Novak Djokovic, who played the men's single title at Wimbledon, while Patrick Cantlay and Jordan Spieth helped power the US to win at the Ryder Cup.
Across the rest of our event portfolio, we held one of the largest New York Fashion Week ever and several of our European festivals hit milestones.
The big [Inaudible] celebrated its 10th anniversary with 50,000 attendees.
And Taste of Paris saw record 32,000 guests attend the biggest food festival in France.
And lastly, Frieze London returned with its first in-person event since 2019.
We saw most productions and touring events come to a halt due to COVID.
Growth in this segment was primarily attributed to a significant increase in Endeavor Content project deliveries, agency-client commissions, and marketing and experiential activations.
Endeavor Content deliveries included See Season Two to Apple TV, Nine Perfect Strangers to Hulu in the US, and Amazon internationally.
The final four episodes each of Truth Be Told to Apple TV and The Wall Season Four to NBC, as well as docuseries McCartney 3,2,1 to Hulu.
Last quarter, we referenced that Endeavor Content revenues were impacted by a shift in content deliveries into Q3, which subsequently had a positive impact on this quarter.
Adjusted EBITDA for the quarter was 141.8 million, an increase of 100.1 million, primarily driven by the growth in revenue.
As mentioned last quarter, we continue to pace ahead on WME bookings for the second half of the year.
As concerts resumed in the quarter, WME have five of the six top tours and seven headliners at the Lollapalooza and Bonnaroo festivals.
On the film front, the agency was behind summer blockbusters such as Cruella, Jungle Cruise, A Quiet Place two, and Shang-Chi, the latter of which became the top-grossing film of the pandemic era in North America.
On the sports side, more than 50 clients competed in the Tokyo Olympics and nearly 20 broadcast clients covered it, while the men's, women's, and juniors' US Open singles titles were all won by clients.
On the brand side, IMG Licensing was named best licensing agency for its work with Goodyear and also launched a number of new product lines on behalf of talent and brands, including Shinola, Dolly Parton, Fortnite, Bugatti, Jeep, and Aston Martin.
Meanwhile, 160over90 continued gaining steam with its brand clients looking to activate at major sporting events with increased fan capacities.
At the summer's Olympic Games, the agency worked with several official partners, including managing the athlete relationships for Team Visa and Team Coca-Cola.
Finally, in this segment, we shared last quarter that we had initiated the sales process for a portion of Endeavor Content.
As a reminder, our plan is to divest the required portion of the WGA restricted business and retain the non-restricted businesses.
We continue to have positive conversations and are very bullish.
We've narrowed it down to a shortlist of potential buyers and we'll let you know when we have more to share on that front.
The updated guidance I'll share shortly assumes Endeavor Content is status quo for the balance of the year.
Now before I discuss guidance, I do want to briefly touch on our capital structure.
In Q2, we paid down a portion of debt under WME, IMG, and UFC credit facilities.
And in October, we raised 600 million of debt under our UFC facility.
We remain focused on strengthening our balance sheet and are on track to achieve or sub four times leverage target.
Now on to our updated guidance for the full year 2021.
As we've said before and will continue to say, we believe looking at our business on an annual basis is the best way to view it given the quarterly fluctuations related to timing of events, timing of business transactions on behalf of our clients, and timing of content deliveries.
As Ari mentioned earlier, we've been pleased with the pace of reopening, which has led to an uptick in productions and increase in attendance at events.
We, of course, continue to monitor vaccination rates and variants globally and plan for any potential impact.
As it currently stands, we remain generally positive on our outlook for the remainder of the year and into next.
We are, therefore, once again raising our revenue guidance from a prior range of between 4.8 billion and 4.85 billion to now between 4.89 billion and 4.95 billion.
And on adjusted EBITDA, we have raised the range from 765 million to 775 million to between 835 million and 845 million.
As a midpoint, this implies an over 17% margin, also in excess of our previous expectations.
Chris, can we take the first question, please?
| endeavor releases third quarter 2021 results.
q3 revenue $1.4 billion.
increased 2021 revenue guidance to between $4.89 billion and $4.95 billion.
increased 2021 adjusted ebitda guidance to between $835 million and $845 million.
|
These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
With me on the call today is Mimi Vaughn, board chair, president, and chief executive officer.
And Tom George, chief financial officer, will review Q3 results in more detail and provide guidance for Q4.
As we announced last month, and you just heard, I'm very pleased we've removed interim from Tom's title.
Tom brings almost 30 years of CFO experience and deep roots in brands and retail, most recently at Deckers Brands.
He has been a tremendous asset to the organization since joining us a year ago, helping guide the business through a period of significant recovery and growth.
We're excited he's part of our leadership team and will continue to benefit from his knowledge and expertise as we grow Genesco going forward.
Now onto recent performance.
Building off an extremely strong first half of the year, we delivered another record earnings per share that well exceeded our expectations, fueled by a very successful back-to-school selling season.
As expected, sales were up considerably from last year, but what's most exciting is the double-digit increase over pre-pandemic level.
We entered the pandemic in a position of strength, are navigating the pandemic well and will enter the post-pandemic phase even stronger.
While the current market conditions have presented a number of external challenges, including supply chain disruptions, labor shortages and wage increases, elevated freight expense, and other cost pressures, we are managing through them adeptly.
This quarter's performance highlights the differentiated competitive positions of our retail and branded concepts, strong consumer engagement, and the strategic advantages delivered through our footwear-focused strategy as we work to transform our business.
In particular, our results spotlight Journeys and Schuh as the leading destinations for teen and youth fashion footwear.
Customers view them as unparalleled fashion authorities, validating whatever brands they're currently selling and are increasingly turning to our concept for their branded footwear needs.
and the U.K. as students largely return to in-person classes in the U.S. for the first time.
Sales at Journeys and Schuh exceeded pre-pandemic level.
And while sales volumes typically moderate after the back-to-school rush, we were very encouraged that demand accelerated throughout the quarter and remained strong into October.
I'll call out for Q3 overall was the robust consumer appetite for in-person shopping even as the number of COVID cases spiked, which allowed us to drive a 30% increase in store sales over last year.
Although traffic is still below pre-pandemic levels, it improved across the board to the best levels we've seen.
Our ability to capitalize on the increased demand would not have been possible without the commitment and drive of our store teams who worked tirelessly to prepare and execute a successful back-to-school.
Congratulations to our entire field organization on a job well done.
These results reinforce our view that kids like to shop in person even if they begin their shopping journey online, making our stores a strategic asset working in tandem with our digital capabilities.
I'll now provide some key highlights from this important back-to-school quarter.
Third quarter revenue of $601 million increased 25% versus last year and 12% versus two years ago.
And revenue growth, better-than-expected gross margins, and expense leverage resulted in an operating income increase of almost 70% over pre-pandemic levels and record earnings per share of $2.36 compared with $0.85 last year and $1.33 two years ago, all on an adjusted basis.
Additional highlights include: the robust store sales I've already talked about plus another quarter of strong digital growth; digital sales, which come with double-digit operating margins, increased 11% year-over-year and 79% compared to fiscal '20.
With this, our e-commerce business now represents 18% of total retail sales and is approaching $0.5 billion; next, increasing gross margin by 210 basis points versus last year, driven primarily by higher full-price selling and price increases while being flat with fiscal '20 in spite of the changing mix of our business and some freight expense pressure; leveraging adjusted SG&A by 260 basis points compared to pre-pandemic levels, as we make progress on efforts to reshape our cost structure; and finally, restarting our share repurchase activity by buying back $31 million of Genesco stock, demonstrating our strong financial position, confidence in our future, and commitment to a strong track record of returning capital to shareholders.
As excited as we are about this quarter, we are even more excited about driving our strategy forward to deliver additional growth, profits, and shareholder value.
So, turning now to discuss each business in more detail.
Strong consumer demand for a variety of brands and styles drove continued momentum as Journeys achieved record third quarter revenue and operating profit, marking the fourth consecutive quarter of record profitability even while operating with inventory almost 30% below pre-pandemic levels.
Leveraging its industry-leading vendor partnerships and deep talent and experience, Journeys merchants selected and secured a compelling assortment of footwear most desired by its team customer.
The current fashion cycle, which I've been describing as shifting more into casual, plays into Journeys strength with a nicely diversified assortment.
However, for this back-to-school, performance was strong in several categories across both casual and fashion athletic.
Nine of the top 10 brands experienced year-over-year growth in the quarter.
In addition, the in-person back-to-school also drove a big pickup in non-footwear sales, like backpacks, with non-footwear up over 50%.
With consumers willing to spend more for full-priced items, coupled with higher footwear ASPs, Journeys also experienced a nice lift in gross margins.
Direct sales held on to most of last year's very strong gains as Journeys increased social media and digital advertising, driving an almost 30% increase in online conversion versus two-year-ago results.
Recent market research validated that our strategies are further building the strength of the Journeys brand as Journeys share of teen footwear purchases and likelihood to be considered as a go-to place for shoes have both increased nicely since the last time the research was conducted.
We were also very pleased with Schuh's back-to-school performance as Q3 constant currency sales increased almost 20% above pre-pandemic sales.
Although students attended school in person last year, this year, shoppers increasingly return to physical retail, and our store teams drove higher conversion and more multi-sales on the best traffic of the year.
The return to stores did not impede the growth of online with direct sales notching large gains on top of last year's meaningful growth as the e-commerce channel more than doubled on a two-year basis.
Fueling this growth were several back-to-school key marketing campaigns and increased spending.
The fashion trends driving Schuh's business are largely the same ones driving Journeys, and several of Schuh's top 10 brands experienced growth in the quarter as well.
Additionally, Schuh's success managing through COVID strengthened its key vendor partnerships, boding well for the future with even better access to products.
Turning now to our branded side.
Our plan to reimagine Johnston & Murphy for a more casual, more comfortable post-pandemic environment is delivering tangible results.
Hardest hit by COVID, J&M is tracking well ahead of its turnaround goals.
Sales improved further in Q3, both online and in stores but are still below two-year-ago levels due to the extended delays of return to the office and lower inventories from supply chain disruption.
Delayed deliveries and much stronger-than-expected demand put J&M's inventory almost 50% below two-year-ago levels.
We are especially pleased with the performance of J&M's new athletically inspired casual product.
Casual footwear now makes up more than 70% of DTC footwear product sales with casual athletic increasing 120% versus last year.
J&M's marketing strategy in which we highlight innovation and technology features new products such as the bags, which was presented in the September advertising campaign and resulted in an 80% sell-through by the end of the month.
In addition, J&M's apparel business, highlighted by printed woven shirts and knits, increased by over 30% versus two years ago, endorsing efforts to position J&M as a modern lifestyle brand with broader consumer reach.
Rounding out the discussion, Licensed Brands, unfortunately, saw the biggest challenges from supply chain disruption, which led, among other things, to much higher-than-expected freight costs.
On a positive note, there was strong demand for both Levi's and Dockers footwear in value and full-price channels, which positions the business for improved profitability and supply challenges subside.
Turning now to the current quarter.
We have trend-right assortments and are well-prepared for the holiday season, which many will celebrate together for the first time in two years.
We were very pleased with our results in November, as sales tracked nicely ahead of pre-pandemic levels, and the boot season is off to a good start with boots as a key part of our fourth quarter mix.
For the Black Friday weekend itself, we were also pleased with the results.
While supply chain issues will continue to require close management, we have taken many actions to best prepare our businesses to meet our holiday sales expectations.
Given the recovery and confidence we have, we are returning to giving guidance.
We expect adjusted earnings for fiscal '22 to be between $6.40 and $6.90 per share.
We regard this guidance as a range, but somewhere close to the middle reflects our best current belief of where we would come out, representing an increase of about 45% over fiscal '20.
Tom will give more guidance details later in the call.
Our footwear-focused strategy is delivering results.
COVID has provided the real opportunity to transform our business at a more rapid rate and we are on a very good pace delivering growth and improved operating margins and EPS.
This new direction leverages our strong direct-to-consumer capabilities across footwear retail and brands and the synergies between platforms.
Driving this strategy are six strategic pillars that emphasize continued investment in digital and omnichannel, deepening consumer insights, driving product innovation, reshaping our cost base, and pursuing synergistic acquisitions, all to transform our businesses and exceed the expectations of today's consumer whose needs have advanced.
I'd like to give a brief update about some of the work underway.
We have rolled out at Johnston & Murphy in the U.S., new point-of-sale hardware and software, along with new tablets advancing efforts to further digitize our stores and enhance the omnichannel shopping experience.
For consumers, tablets allow easier access to the full merchandise assortment anywhere in our network.
Mobile checkout allows consumers to skip the checkout line.
The new software enables new payment methods like Venmo, and we are able to upgrade our clienteling efforts.
For employees, the new technology creates efficiencies across in-store tasks, such as visual merchandising and new hire onboarding.
After the holidays, we will roll out this technology at Journeys and will benefit from these capabilities in our next fiscal year.
Journeys research shows that while our digitally native Gen Z customer interacts with us across several digital touchpoints, up to 75% intend to make their purchases in-store, requiring investment to provide a compelling store experience.
Journeys also brought online a bespoke e-commerce packing module with carton on-demand capabilities, which is helping speed fulfillment of online orders during this peak holiday period and keep up with a much higher digital demand.
An added benefit is we are able to keep our stores well stocked for in-person shopping.
Finally, Journeys piloted on its website and pleased with the conversion results plans to roll out augmented reality software, which enables customers to virtually try on and visualize what a pair of shoes would look like on their feet.
Building deeper consumer insights is another pillar where Journeys is dedicating substantial effort starting with first-party data.
Our methods for capturing first-party data and being able to identify Journeys' customers continue to improve.
Because of the trusted relationships we have with our team, consumer, and their parents, the efforts of our people to collect customer information in stores, combined with our notable online growth, has improved visibility.
And we're currently able to identify 80% of Journeys' customers.
Identified customers enter the Journeys' marketing ecosystem and depending on their preferred method of communication receive a combination of digital, email, SMS, social, and direct mail marketing.
In parallel, we're in the process of moving our customer database in-house, cleansing our existing data, and populating a data lake.
Along with the customer segmentation from our primary research, this will enable us to invest in differentiated marketing content that drives consumer engagement, whether we're speaking with the consumer who love shoes and wants to stand out or the consumer who cares a lot about fitting in and wearing shoes their friends were.
In a fragmented industry and knowing our teams enjoy wearing a variety of footwear brands, our aim is to drive loyalty, further consolidate their purchases and take a larger share of our customers' closets.
Touching now on ongoing initiatives of giving back to our communities.
In the fall, Journeys ramped up efforts across North America in partnership with a nonprofit candidate, Journeys employees in 73 cities came together to build and donate 1,500 skateboards to underserved use.
It was the largest employee-driven giveback campaign in our history, with more high-impact events to come.
We're advancing our ESG program on this and on other fronts, with the key milestone being the start of an enterprisewide carbon footprint assessment as we work toward publishing a comprehensive ESG report next year.
I'm continually inspired by the drive and the dedication of our people and saw so many examples over Black Friday weekend, as you're all going the extra mile to serve our customers so well.
We continue to execute well on our strategy.
Third quarter results exceeded our expectations in pre-pandemic fiscal year '20 levels.
We achieved better-than-expected sales, margins, and SG&A leverage, all on significantly lower inventory levels.
Before I get into the details of the quarter, I want to remind you, we believe that comparing to our pre-pandemic fiscal '20, two years ago provides the more difficult and often most meaningful assessment of our business.
However, when comparing to fiscal year '20, keep in mind how our strategy has changed our business.
E-commerce has become a larger percentage of sales along with wholesale sales for licensed brands.
These changes come with an overall lower gross margin rate due to the impact of direct shipping expenses and the expansion of our wholesale volume.
However, this should be more than offset with lower SG&A from these businesses.
While these changes are reshaping the P&L, they have a net positive impact on operating margins and an added benefit of a less capital-intensive business model.
In terms of the specifics for the quarter, consolidated revenue was $601 million, up 12% compared to fiscal '20.
Journeys grew 7% while Schuh grew 17% on a constant currency basis, and we doubled our licensed brands business.
Regarding J&M, we are pleased with the continued momentum we are seeing.
We were 8% below fiscal year '20 levels, and we continue to narrow the gap.
From a channel perspective, we experienced increases in all channels.
E-commerce was up 79% to fiscal year '20 and accounted for 18% of total retail sales, up from 11% in fiscal year '20.
With stores opened 99% of the possible days during the quarter, we are going back to providing comparable sales information versus last year for the stores open in both periods.
On a year-over-year basis, Journeys and Schuh drove positive overall comps of 15% and 23%, respectively, while J&M comps were positive 77%.
We were very pleased with gross margins, which were up 210 basis points to last year and flat at 49.2% versus two years ago.
Strong full-price selling and price increases offset the channel mix impact of increased e-commerce and wholesale and increased logistics costs.
Increased logistics costs put approximately 70 basis points of pressure on Q3 gross margin were the greatest drag in our branded businesses.
Journeys gross margin was up 140 basis points to fiscal year '20, driven by more full-price selling and higher footwear ASPs.
While Schuh's gross margin was down 180 basis points to fiscal year '20 due to a higher e-com mix and higher shipping expenses.
J&M's gross margin was up 230 basis points to fiscal year '20, benefiting from strong full-price selling, which also drove the release of slow-moving inventory reserves.
For J&M, additional logistics costs put 240 basis points of pressure on J&M's Q3 margins.
Finally, licensed brands gross margin was down 150 basis points to fiscal year '20, as we experienced 740 basis points of pressure on Q3 margins from additional logistics costs, which more than offset margin improvements in the business.
Adjusted SG&A expense was 41.6%, a 260 basis point improvement compared to fiscal '20 as we leverage from higher revenue and ongoing actions to manage expenses.
In addition, we experienced leverage in selling salaries and depreciation, partially offset by deleverage in marketing expenses.
As part of the SG&A discussion, I would like to provide a brief update on our $25 million to $30 million cost savings initiative.
I'm pleased to report we have identified the full amount of the target for this fiscal year.
A significant portion of the savings is from rent reductions with the remainder in several areas, including travel, conventions, inter-store freight, compensation, and other overheads.
The full effect of these savings will be realized by the end of fiscal year '23.
These savings are part of the ongoing multiyear effort of reshaping our cost structure by improving store channel profitability.
Regarding rent reductions, year to date through Q3, we have negotiated 129 renewals and achieved a 19% reduction in rent expense in North America on a straight-line basis.
This was on top of a 22% reduction or 123 renewals last year.
These renewals are for an even shorter term, averaging approximately two years compared to the three-year average we have seen in recent years.
With 40% of our fleet coming up for renewal in the next couple of years, this remains a key priority.
In summary, third quarter adjusted operating income was $45.2 million, a 7.5% operating margin compared to $26.7 million or 5% for fiscal year '20.
This quarter's profitability provides strong evidence of the operating margin expansion opportunity achievable with our footwear-focused strategy.
Our adjusted non-GAAP tax rate for the third quarter was 23%.
Turning now to the balance sheet.
Q3 total inventory was down 28% compared to fiscal '20 on sales that were up 12%.
As we remain vigilant in keeping pace with consumer demand in the face of delivery delays.
Our strong net cash position of $267 million and our confidence in the business enabled us to repurchase 522,000 shares of stock for $30.6 million at an average price of $58.71 per share.
We currently have $59 million remaining on our share repurchase authorization.
Regarding capital allocation, our first priority is to invest in the business then continued to return cash to our shareholders through opportunistic share repurchases.
Capital expenditures were $15 million, and depreciation and amortization was $10 million.
We closed five stores during the third quarter to end the quarter with 1,434 total stores.
Now, turning to our outlook.
Given the recovery and confidence we have, we are returning to providing annual guidance.
Based on the strength of our performance this year to date, current Q4 visibility, and expectations for a more normal holiday selling season, we expect fiscal year '22 sales to grow 9% to 11% compared to the pre-pandemic fiscal year '20.
For adjusted earnings, we expect a range of $6.40 to $6.90 per share.
Our best current expectation is that earnings will be near the midpoint of this range, an increase of 45% over fiscal year '20 pre-pandemic levels.
Note that our full year guidance does not anticipate any further significant supply chain disruptions nor increased negative consumer or economic impact from COVID, including new COVID variants.
Although our plan going forward is not to provide quarterly guidance, given the current timing of restarting formal guidance, we would like to provide insights into Q4.
Note that all the comparisons we make are to pre-pandemic fiscal '20 Q4.
Implicit in the annual guidance is an expectation for Q4 sales growth versus fiscal '20 at the midpoint to be in the mid-single digits.
Q4 adjusted earnings per share would range from $2.22 to $2.72 per share.
And again, our best current expectation is for earnings to be near the midpoint of this range.
We expect gross margin rates for Q4 to be relatively flat versus fiscal year '20 levels with a possible 30 basis point swing in either direction.
We believe the promotional environment will remain favorable, and this range represents the degree of full-price selling we could achieve.
Similar to Q3, we expect channel mix as well as increased logistics costs to pressure gross margins.
Increased logistics costs are expected to pressure gross margins by 130 basis points and will offset to some extent these improvements in full-price selling.
We expect Q4 adjusted SG&A as a percentage of sales to deleverage in the range of 180 to 200 basis points compared to fiscal year '20.
This is driven primarily by increased advertising and marketing costs, particularly in brand advertising and digital marketing related to cost per click and higher performance-based compensation associated with the expected improvement in annual results, partially offset by leverage in occupancy cost.
As a reminder, fiscal year '20 Q4 performance-based compensation was relatively low, and this year's level reflects the improved performance that we have experienced on a year-over-year basis.
One more factor worth mentioning on the Q4 SG&A rate is we are not expecting the same amount of onetime government relief or rent abatements we experienced in Q3 this year or last year in Q4.
Our guidance assumes no additional share repurchases for the remainder of the fiscal year, which results in Q4 weighted average shares outstanding of approximately 14.3 million.
Furthermore, for Q4, we expect the tax rate to be approximately 28%.
In summary, this all results in an expected Q4 operating margin below FY '20 levels in large part driven by cost pressures unique to the fourth quarter this year.
We have the right team and the right strategy to continue to drive shareholder value.
| q3 non-gaap earnings per share $2.36 from continuing operations.
q3 sales rose 25 percent to $601 million.
sees fy adjusted earnings per share $6.40 to $6.90 from continuing operations.
qtrly same store sales increased 25% over last year.
sees fy22 sales to be up 9% to 11%, compared to fiscal 2020.
|
These statements reflect the participants' expectations as of today, but the actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
And Tom George, our chief financial officer who will review our Q2 results in more detail and provide direction for Q3.
Following an incredibly strong start to fiscal '22 we delivered an outstanding second-quarter performance as our top line accelerated even further ahead of the pre-pandemic level and we produced record Q2 earnings per share that well exceeded our expectations.
With much stronger revenue highlighted by robust full-price selling and good expense management our second-quarter profit for our footwear businesses also set a new record.
The levels at which our business performed during the first half of the year following a challenging fiscal '21 reflect a strong competitive position of our retail and branded concepts, close connections with our customers, and the compelling execution of our footwear-focused strategy to transform our business and deliver these results.
We are a stronger company coming out of the pandemic.
Our results highlight the work we've done to accelerate online sales and enhance our store and omnichannel offerings, as we create and curate leading footwear brands to be the destination for our consumers' favorite fashion footwear.
Our teams continue to do a superb job providing the right product our customers are looking for combined with exceptional service and differentiated shopping experiences.
Our outperformance was driven by better than anticipated results across the board with all businesses exceeding pre-pandemic profit levels.
As excited as we are with the progress we are making, we are even more excited about our strategy and our future opportunity to build upon this foundation and drive growth, profits, and shareholder value.
I'll begin by providing some highlights from the quarter.
Both revenue and adjusted operating income exceeded pre-pandemic levels increasing 14% and 346%, respectively, over fiscal year '20 two years ago and higher operating profit delivered a record Q2 earnings per share of $1.5, compared with a loss of $1.23 last year and positive $0.15 two years ago all on an adjusted basis.
Additional highlights include delivering another strong quarter of digital results with double-digit operating profit to achieve a 19% digital penetration.
This was driven by a 97% increase in digital revenue compared to fiscal year '20 as we retained almost 80% of last year's volume, which was elevated due to store closures.
Next, driving much higher conversion and transaction size to deliver store sales that were almost at pre-pandemic level, increasing gross margin by 640 basis points versus last year and 50 basis points compared to fiscal '20, driven primarily by higher full-price selling, leveraging adjusted SG&A by 230 basis points compared to pre-pandemic levels and further strengthening of our already strong balance sheet and cash position, enabling a balanced approach of investing in our business while also returning capital to shareholders going forward.
As the vaccine rollout continued and economies on both sides of the Atlantic more broadly reopen, consumers aided by government stimulus stepped up their footwear purchasing in the quarter and chose to shop with our brands to satisfy their pent-up demand.
We were pleased that every channel contributed to the beat versus expectations.
Digital has been a key strategic initiative and the investments we've made have allowed us to double our e-commerce business in two years.
However, we've also talked about how much our customers enjoy our store experience and the important role of our stores as a strategic asset in a compelling omnichannel offering, which proved out once again this quarter.
So turning now to discuss each business in more detail beginning with Journeys.
The Journeys team once again did a tremendous job capitalizing on current market momentum and achieved record revenue and operating profit in the second quarter, marking the third consecutive quarter with record profitability.
Journeys performance, as we emerge from the pandemic, highlights the competitive advantage the business has built and how we are leveraging those advantages to further separate ourselves from the rest of the industry as the destination for fashion footwear for teens.
Leaning into decades of experience and its unparalleled vendor partnerships, Journeys definitely navigated global supply chain disruptions to secure a supply of the brands and styles most coveted by its customers.
The current fashion cycle, which has been shifting more to casual products, plays into Journeys' wheelhouse with strengthened the assortment across the board highlighted by the balance in its top 10 brands evenly split in the quarter between casual and fashion athletic.
On-trend merchandise assortments and effective consumer engagement through social and other channels fueled strong demand and full-price selling with particular strength in women's and kids.
Both store and e-com revenue were up compared to pre-pandemic levels with digital leading the way even with much higher conversion rates and transaction size driving store volumes.
Over in the UK shoe delivered a solid top-line increase compared to the second quarter two years ago.
As government-mandated lockdowns were lifted and the retail sector experienced its first quarter of mostly uninterrupted operations for the first time since before Christmas.
Schuh business rebounded steadily driven by pent-up demand and our successful efforts to drive sales of multiple pairs and even as consumers increasingly returned to physical shopping Schuh retained much of the online gains from a year ago.
Resulting in online contributing almost 45% of total sales.
The UK retail market is going through a highly disruptive phase with a strong consumer propensity to shop online and with many retail bankruptcies reshaping the landscape.
The Schuh team is taking advantage of this disruption utilizing its advanced digital offering to strengthen consumer connections during the lockdown and those efforts are paying off.
As the market reopens and shoppers once again have the choice to engage with the brand either online or in-store.
Many of the product and brand trends driving Schuh's performance, as usual, are the same as Journeys, but with a slightly heavier tilt toward fashion athletic.
Another highlight of the second quarter was the more rapid than expected pace of Johnston and Murphy's recovery boosted by an improving market environment and strong demand for many of the brand's newest product offerings.
With the number of social events and family gatherings increasing and more customers returning to in-person shopping retail traffic improved each successive month during the second quarter.
Building upon the gains in the first quarter.
At the same time, e-commerce revenue grew strongly increasing over 50% compared to pre-pandemic levels, as customers chose the digital channel to engage with the brand.
We were especially pleased with the performance of J&M's new athletically inspired casual assortment.
Sell-throughs were very strong with many new items selling out in both our direct-to-consumer channels, as well as in the wholesale channel where J&M gained significant market share.
These product launches accompanied by enhanced marketing campaigns are attracting a younger customer validating our efforts to reimagine the storied J&M brand beyond its dress-shoe roots into a modern lifestyle brand with broad consumer reach.
With second-quarter sales nearing pre-pandemic levels combined with strong full-price selling J&M's operating profit exceeded pre-pandemic levels.
A remarkable turnaround compared to last year.
These trends are adding to our optimism for continued improvement whenever America begins the return to office phase hopefully later this year.
Rounding out the highlights from the quarter, licensed brands revenue more than doubled versus a year ago reflecting the growing contribution from the Levi's footwear license we acquired in January 2020.
Operating profit improve versus pre-pandemic levels although not at the rate we expected due to higher freight costs, which are temporarily pressuring near-term margins.
We continue to be very pleased with how Levi's product is selling in accounts ranging from department stores to Journeys to Journeys kids to family footwear.
This has led to a strong order book for the back half and reinforces our excitement about the potential to create value by combining powerful brand licenses with our fully integrated footwear sourcing capabilities.
Turning now to the current quarter, we have been pleased with our results today as sales track ahead of pre-pandemic levels in August and we are several weeks into the all-important back-to-school selling season.
Last year back-to-school with like none before, since most children began the school year learning remotely.
This year, the vast majority of students are beginning the school year in person which is driving more robust sales while the Delta variant back to work timing and other factors will drive different patterns of consumption in the back half.
With a healthy and resilient consumer and the strength of our offerings, we remain confident in our ability to drive sales above the fiscal '20 level for the remainder of the year.
We will work hard to continue to successfully implement strategies to overcome the inventory, supply chain, labor, cost pressure, and other headwinds that are endemic in our industry today.
Tom will give additional details on our outlook.
Shifting gears, our footwear focus strategy is working and is delivering results.
This strategy was implemented before the pandemic leverages our strong direct-to-consumer capabilities across footwear retail and brands and the synergies between platforms.
Driving this strategy are six strategic pillars that emphasize continued investment in digital and omnichannel.
Deepening our consumer insights driving product innovation, reshaping our cost base, and pursuing synergistic acquisitions all to transform our business and exceed the expectation of today's consumers whose needs have rapidly advance.
In addition, COVID has provided us the real opportunity to transform our business at a faster rate and we are on a very good pace to deliver growth and improved operating margins.
While each of the six pillars is important to achieving our future objectives, I'd like to expand on just a few of our initiatives which are driving results while Tom will discuss reshaping the cost base.
Our strong digital growth highlights the progress we're making with this key strategic initiative.
Data-driven consumer insights, more robust CRM, and enhanced marketing are key to increasing consumer engagement and driving our next big wave of growth.
Schuh is taking advantage of the market disruption brought on by the pandemic to invest further in new customer prospecting through digital marketing designed to target weakened competitors' customers.
As well as geo-targeting where competitors' physical locations have closed.
These efforts have helped contribute to an increase of new online customers of more than 100% compared to pre-pandemic levels.
Journeys marketing efforts are gaining leverage by focusing on influencers who the team consumer viewed as more authentic creating a more organic experience that further builds upon the trust Journeys have established with this customer This content is being delivered through social media channel and SMS helping to drive a significant increase of 50 plus percent of new online customers.
In addition, Journeys continues to make progress implementing an upgraded integrated customer database with enhanced CRM capabilities, which will improve customer retention and acquisition and provide a clearer view of customer lifetime value.
To keep up with this increase in digital demand Journeys is wrapping up testing and bringing online another bespoke e-commerce fulfillment module, which doubled capacity ahead of the ramp-up of demand for online orders during the holiday.
We are underway rolling out North America new point of sale hardware and software along with new tablets advancing our efforts to digitize our stores and enhance the omnichannel shopping experience.
For consumers, tablets facilitate easy access to the full assortment anywhere in our system and upgrade our client telling effort and mobile checkout allows consumers to skip the checkout line.
For employees, this new technology creates efficiencies across a variety of in-store tasks such as new hire onboarding and employee training and communication.
With J&M's accelerating recovery, we can put greater focus on the next phase of reimagining the brand.
Product innovation and technology is at the center of differentiating J&M's casual products and commanding more premium price points.
Launches of the athletically inspired Amhurst and Activate collections and the expansion of the J&M golf collection were highly successful this spring and another major step moving the brand beyond its dress shoe origins.
J&M's design team is focused on expanding its technology toolbox with innovation including the access chassis system, which offers optimal support comfort and flexibility; TrueForm, which delivers superior cushioning and lightweight comfort; and Smart Degree, which is temperature regulation technology.
New product design and technology coupled with consumer insights and amplified marketing messaging will be the winning formula to grow J&M as a fresh lifestyle brand with a broader consumer reach.
Turning to ESG, we continue to advance these efforts including the establishment of our board's ESG subcommittee and we are working toward the publication of a comprehensive ESG report next year.
Again, these are just a few of the initiatives that are driving the positive transformation for Genesco.
We look forward to updating you on our continued progress and on other initiatives.
Before turning the call over to Tom.
We've continued to superbly navigate a dynamic and challenging environment with the health and safety of each other in mind and I continue to be amazed by your drive and determination.
Genesco's future is so bright because of you all.
Finally, our thoughts are with our neighbors to the west of us in Nashville affected by the devastating floods last week and those impacted this week by Hurricane Ida.
As Mimi mentioned, total Q2 results far exceeded our expectations and last year across the board.
For comparison purposes, we believe that comparing to two years ago our fiscal '20 provides the most meaningful assessment of current performance and the return of our business to pre-pandemic levels.
However, when comparing to fiscal '20 I would like to remind everyone how our strategy has changed our business.
E-commerce has become a larger percentage of sales and our license brands segment has become a larger piece of the total as well due to the acquisition of Togast and strong Levi's sales.
These changes come with an overall lower gross margin rate due to the impact of direct shipping expense and the expansion of our wholesale volume, which should be more than offset with lower SG&A from these businesses while these changes will reshape the P&L.
They have a positive impact on operating margins and an added benefit of a less capital-intensive business model.
Turning back to Q2 results, I'm pleased to report that not only did the second quarter continue, but it accelerated the sequential improvement of our operating results since the onset of the pandemic.
Higher revenue and gross margin combined with SG&A that remains well managed led to significantly higher operating income versus fiscal '20.
In Q2 adjusted earnings per share of $1.5 compared to $0.15 in fiscal '20.
In terms of the specifics for the quarter, consolidated revenue was $555 million up 14% compared to fiscal '20 driven by continued strength in the e-commerce, which is up 97% versus fiscal '20 taking overall digital sales to 19% of our retail business compared to 10% in fiscal '20.
Digital growth combined with much higher wholesale revenue drove strong sales improvements for Journeys, Schuh, and licensed brands compared to pre-pandemic levels while J&M made significant strides narrowing its revenue GAAP.
We did not provide overall or store comp results for Q2, as our comp policy removes any stores that are closed for seven consecutive days either this year or last year and therefore, we feel that overall sales is a more meaningful metric.
With stores open for 97% of the possible days in the quarter, overall store revenue was down only 1% versus fiscal '20.
Consolidated gross margin was 49.1% up 50 basis points from fiscal '20 driven by full-price selling partially offset by the mix shift toward licensed brands and higher shipping costs from higher penetration of e-commerce while e-commerce puts pressure on our gross margin rate.
As I mentioned it comes with a lower cost structure and double-digit operating income.
Journeys' gross margin increased 220 basis points driven by lower markdowns in both stores and online.
Schuh's gross margin decreased 200 basis points due entirely to the higher shipping expense from the shift in the e-commerce channel mix.
J&M's gross margin increased 570 basis points, benefiting from fewer markdowns taken on pack and hold inventory and higher full-price selling.
Finally the revenue growth of licensed brands typically our lowest gross margin rate negatively impacted the overall mix by 90 basis points.
Adjusted SG&A expense was 45.3% a 230 basis point improvement compared to fiscal '20, as we leverage from higher revenue and ongoing actions around expense management.
The largest year-over-year savings came from occupancy costs driven by the UK government program, which provides property tax relief, rent concession across our businesses, and ongoing rent savings on renewals.
These savings were partially offset by higher incentive compensation driven by improved profitability and increased marketing expenses needed to drive traffic in both stores and online.
As the multi-year shift in consumer traffic continues toward online and away from brick and mortar, our organization has been intently focused on the critical effort to right-size occupancy costs to be in line with store traffic.
The pandemic has exacerbated the transition to digital and we continue to have even greater traction on rent reductions.
Year to date through Q2, we have negotiated 75 renewals and achieved a 29% reduction in rent expense in North America.
This is on top of a 22% reduction for 123 renewals last year.
These renewals are for an even shorter-term average in approximately two years compared to the three-year average we have seen in recent years.
With over 40% of our fleet coming up for renewal in the next couple of years.
This will remain a key priority for us going forward.
In summary, the second quarter's adjusted operating income was $21.1 million versus fiscal '20s $4.7 million.
All operating divisions achieved higher operating income compared to fiscal '20 led by Journeys nearly 170% increase.
Our adjusted non-GAAP tax rate for the second quarter was 25%.
Turning now to the balance sheet, Q2 total inventory was down 27% compared to fiscal '20 on sales that were up 14%.
As we remain challenged keeping pace with the consumer demand levels and with delivery delays.
Our ending net cash position was $284 million, $70 million higher than the first quarter's level driven by strong cash generation from operations.
As a reminder we currently have $90 million remaining on our board authorized share-repurchase plan and we have a solid track record of returning cash to our shareholders.
Capital expenditures were $8 million as our spend remains focused on digital and omnichannel and depreciation and amortization was 11 million.
We closed eight stores and opened three during the second quarter.
We will not be providing guidance for the third quarter or full fiscal '22.
However, I would like to provide some color around our expectations using the pre-pandemic fiscal '20 as the reference point.
As we transition into Q3, thus far we have experienced a more normalized back-to-school selling season for Journeys and Schuh, but as expected the impact from the stimulus, has moderated and due to the spread of the Delta variant, there are more questions around when customers will begin returning to their offices, which will impact J&M's trend and whether Delta will disrupt in-store shopping.
Supply chain disruptions persist pressuring both the top line and product cost.
Now getting to more specifics of Q3 starting with revenue, we expect higher revenue compared to fiscal '20 levels given the strength of our assortment.
This is mainly due to constant continued strength from Levi's business and growth at Journeys and Schuh.
J&M will likely remain under the fiscal '20s level.
Directionally, the overall sales increase for Q3 compared to fiscal '20 could be up mid to high single digits.
From a channel perspective, the highest growth will once again come from wholesale and direct.
We expect gross margin rates for Q3 will be somewhat under fiscal '20 levels due to substantial pressure from import freight increases at J&M and license brands from supply chain disruptions.
We expect the retail promotional environment to remain favorable offsetting the ongoing pressure from higher e-commerce penetration in the higher shipping costs that come with it.
As well as the impact of licensed brands growth on our business model as previously discussed.
We expect that Q3 adjusted SG&A will be a little better as a percentage of sales than in fiscal '20.
Sequentially, we will not see the large SG&A leverage we saw in Q2 as revenue growth will be lower in the benefits from some government relief programs will be less than Q2.
That being said compared to fiscal '20, higher revenue will boost leverage in both occupancy and selling salaries partially offset by higher marketing and performance-based compensation as we anticipate higher bonus expenses than fiscal '20.
In summary, we expect the operating income to be similar to fiscal year '20 levels and the margin rate to be somewhat lower than fiscal year '20.
Due to these factors in particular the increased import freight in our branded businesses.
For taxes we expect the Q3 tax rate to be around the 25% we saw in Q2.
The annual tax rate is expected to be approximately 30%.
In addition, when comparing results we had some expense pick-ups like rent abatements in the back half of fiscal '21, particularly in Q4.
We don't expect to recur in the back half this year.
Next, I would like to provide a brief update on our cost savings initiative.
Given the shift of our business from stores to digital accelerated by the impact from the pandemic, we continue to make progress on reshaping our cost structure and allocating resources toward digital growth.
As a reminder, our target for the year is to identify savings in operating expenses of $25 million to 30 million on an annualized basis or approximately 3% of total operating expenses.
The entire organization is focused on this critical initiative and I am pleased to report that we've made significant progress toward our target.
The teams have identified over $20 million in savings with the largest amount coming from rent and the remainder in several areas, including increased, selling salary productivity, travel conventions, inner store freight, marketing compensation, and other overheads.
These savings benefit primarily the store channel and its profitability.
The cost savings initiative is a key pillar in our strategy to transform our business.
Designed to reflect the more capital efficient model focusing on driving further improvements, in return on invested capital, and allowing for improved flexibility in our operating model.
Going forward, we see opportunities to be less dependent on store capital expenditures, have lower lease obligations and continue to drive efficient use of inventory.
These results emphasize that we are the right team and the right strategy to continue to drive shareholder value.
| q2 sales $555 million versus refinitiv ibes estimate of $522.4 million.
qtrly e-commerce sales increased 97% from q2 two years ago.
|
References to margins and adjusted operating margins reflect the performance for the Americas and International segments.
We will refer to net service revenue or NSR, which is defined as revenue excluding pass through revenue.
As a reminder, we sold the Management Services business in January 2020 and we sold the Power and Civil construction businesses in October 2020 and January 2021 respectively.
The financial results of these businesses are classified as discontinued operations in our financial statements.
Lara Poloni our President, will discuss key operational priorities and Gaurav Kapoor, our Chief Financial Officer, will review our financial performance and outlook in greater detail.
We will conclude with a question-and-answer session.
I'd like to begin by acknowledging the continued great contributions of our teams globally.
In many parts of the world, day-to-day activities are beginning to resemble normalcy.
However, the pandemic and its variants continue to impact our teams and their families.
Against this backdrop, I'm proud of how we are collaborating to deliver for our clients and communities.
As the COVID-19 variant spread, we all need to remain agile until we reach a point where the threat from the virus is eliminated.
We have the best teams in the industry and our focus remains on keeping our people safe and enabling them to be successful in their careers.
Turning to a discussion of our performance.
Four themes are apparent across our business.
First, our third quarter results, extend our track record of delivering on our financial and strategic commitments.
And with our strong year-to-date performance, we are increasing our guidance for fiscal 2021 and we are increasingly confident in delivering our long-term financial targets including doubling adjusted earnings per share from fiscal 2020 to fiscal 2024.
Second, the success of our Think and Act Globally strategy and investments in our people and innovation are contributing to accelerating growth.
In fact our design business that accounts for approximately 90% of our profit, organic NSR, and backlog growth are at the top of the industry.
And our strengthening pipeline pretends well for continued leadership.
Third, we expect to deliver strong results into the future, built around secular growth themes centered on infrastructure and ESG-driven opportunities.
With our increased focused on advisory and Program Management, we are engaging with clients much earlier than their planning for large investments and we are advising them through the execution, which expands our addressable market.
And finally, we remain committed to creating shareholder value by investing in growth and innovation and enhancing per share value by allocating substantially all available cash flow to share repurchases.
We believe these are the highest returning uses of capital as compared to large scale M&A were today's deal multiples are elevated and the execution and integration risks are higher.
Turning to our results.
We exceeded our expectations on every key measure.
NSR increased for second consecutive quarter including accelerating growth in our design business.
In addition, backlog in the design business increased by 8% and included 7% growth in contracted backlog, which is a leading indicator of revenue growth.
Our adjusted operating margin reached a new high this quarter at 14.1%, an increase of 90 basis points from the prior year.
With this outperformance, we now expect to exceed our margin guidance for the full year.
This performance includes growth in higher margin projects and efficiencies in how we deliver and is creating the capital to invest in our teams and innovation.
As a result of this revenue and margin performance, adjusted EBITDA increased by 15% and adjusted earnings per share increased by 33%.
We are also continuing to convert our earnings to strong cash flow.
We delivered the highest third quarter and year-to-date free cash flow in four years.
And consistent with our capital allocation policy, we repurchased approximately 12% of our shares outstanding as compared to last September when we began our repurchase program.
Turning to our backlog and pipeline.
Funding across our markets is improving and our investments in growth are bearing fruit.
We delivered $3.7 billion of wins and we had a greater than one book to burn ratio for the enterprise for the first time since the pandemic began.
With the strong performance, backlog in the construction management business increased sequentially, albeit modestly for the first time in several quarters.
In addition, our pipeline of opportunities in our Americas design business has increased by double digits since the beginning of the year and the international pipeline increased by single digits.
These are great signs for the health of our markets and the success of our strategy.
The strength is before any material contributions from previously enacted stimulus funding and we do not include any benefit in our guidance from the proposed infrastructure bill in the US.
Please turn to the next slide.
Our accomplishments reflect the benefits our Think and Act Globally strategy and our focus on growth.
Over the past several quarters, we have prioritized investments in growth markets, simplified our operating structure and eliminated inefficiencies.
Today, we are a more agile organization and we are benefiting from stronger collaboration across the business.
We've also invested in our key account program to ensure we deploy the best practices to all of our clients.
This will be critical to outgrowing the industry.
All these efforts are resulting in strong NSR, backlog and pipeline growth.
Another key component of our strategy is leveraging our industry leading margins to invest in our people and innovation.
Demand is accelerating in the majority of our largest markets and AECOM and others in our industry will be increasingly challenged to attract and retain the strongest talent.
In fact, our growth this past quarter was constrained in some areas by the pace of hiring relative to increased demand.
And what is noteworthy is that this constraint is apparent even as our pace of hiring has doubled as compared to last year.
As a leader in our industry, we have certain advantages against this backdrop.
First, our workforce is global and we can draw on this global expertise to deliver anywhere in the world due to the investments we've made in technology to enhance collaboration.
Second, we also invest in professional development programs so our people can grow within AECOM.
Third, we are using technology to extend the capacity of our teams and to deliver a new and innovative ways.
And finally, we've implemented flexible work policies to provide our people even greater freedom to deliver for their clients in ways that work best for them and their teams.
All of these efforts are centered on creating a culture where the industry's top talent can begin and build meaningful careers.
As we look ahead, several trends support our confidence in growth.
First, we are winning and delivering critical projects that highlight our strong position in key growth markets.
Most recently, these include the first ever digital need for compliant environmental impact statement for a transportation client in the US, showcasing our investments in innovation and digital solutions.
Additional wins with major metros to advance more modern and equitable transit systems, key wins to advise clients on their long-term sustainability and resilience strategies, key wins in next generation energy, a smaller but rapidly growing practice within AECOM that includes a presence in the Northeast offshore wind market.
Wins in the healthcare sector that further broaden our client base and large program management wins from multi-billion dollar programs across the globe.
Second, through our sustainable legacy strategy and commitment to ESG, we are distinguishing ourselves in the market as our clients' advance complex, multi-decade initiatives.
In fact, year-to-date there have been a record number of corporate commitments to emission reduction targets, outpacing last year's total already.
And sustainable bond issuances are at an all time high.
AECOM is a leader in advising clients and delivering technical solutions to support ESG goals.
Today, we estimate approximately 70% of our revenue is directly related to ESG initiatives while nearly all of our revenue has at least some ESG element as a driver.
We are leaders in green advanced facilities design, energy efficiency, next-generation energy, sustainability, resiliency, environmental remediation, clean water systems and transit electrification.
Our services in these markets are in high demand and our leadership in these fast growing markets underpins our confidence inorganically outgrowing the market well into the future.
Finally, our public sector clients across the world are benefiting from strong budgets and investments in infrastructure markets where we lead.
In the US, strengthened state and local tax receipts, strong federal funding and ongoing stimulus measures are contributing to an improving environment for growth.
Similarly, our international markets are prioritizing infrastructure investments especially in our largest end market, transportation.
In Australia, the New South Wales government has advanced $130 billion package for four years of transportation spending.
Well, in Canada, there is more than $20 billion of public transit and green infrastructure spending.
And in Europe, the $1 trillion recovery fund requires 30% of spending to be dedicated to green and sustainable infrastructure.
These initiatives are before you factor in a potential US Federal Infrastructure Bill in our largest market.
As currently proposed nearly every line item in the current draft would be addressable by AECOM.
In conclusion, I want to remind, we are the Number one transportation design firm, the Number one facility design firm, the Number one environmental science and environmental engineering firm, have grown to Number two in water and lead in several other end markets all positioned for secular growth.
No firm is better positioned to capitalize on these opportunities.
Please turn to the next slide.
We are building momentum within the business as a result of our strengthened culture and strategic alignment.
One area where this is apparent is in growing demand for ESG-related services.
In April, we launched our Sustainable legacy strategy to ensure we embed sustainability and ESG into all elements of our business.
This included our commitment to achieving Science based net carbon zero by 2030, expanding diversity and inclusion across our company and advancing the impact we can have on the world by embedding carbon reduction principles into our work to clients.
Since launching Sustainable legacies, it has been exciting to see how passionate our people are to create a positive impact in their communities and what it means for us in the market.
For example, we were awarded a sizable transportation project in the quarter to modernize the transit line for clients in the US.
The ultimate determining factor in our selection was our Sustainable legacies strategy and the community building and ESG elements of our proposal.
This success underscores how we are of building stronger, competitive advantages.
We continue to advance our Think and Act Globally strategy to ensure we focus on the highest growth and margin opportunities while investing in our people and innovation.
With demand for our services is increasing, we are focused on bringing new talent to AECOM and investing in our teams to create the culture Troy spoke about earlier.
Going forward, we are focused on ensuring we have the strongest workforce, which will be critical to recapturing the full benefits from increased demand.
We also continue to make investments in our digital platforms and services to extend capabilities and enhance our teams productivity.
We can deploy innovation at scale to enable our people to use their hours most productively for their clients.
We already have several hundred digital consultants within AECOM that are helping clients progress their own digital transformations.
This is all part of the more than 1,000 digital practitioners we have across AECOM working to ensure we remain an innovator in our industry.
A great example of this is our plan engage platform that has enabled the first ever NEPA compliant and fully digital environmental impact statement in the US.
Our solution streamlines engagement process and provides higher value services for our clients.
Our investments in these digital solutions and innovation will continue to be key differentiators as demand accelerates.
Importantly, we know we are headed in the right direction as our people and our clients are responding favorably.
I am pleased to report that our client satisfaction scores reached the highest level in our company's history this quarter.
And I have no doubt that this will translate into a continued high win rate and growth going forward.
Please turn to the next slide.
Our third quarter results reflect another quarter of strong performance.
Revenue increased and included accelerating growth in our design business.
Our pipeline and backlog grew, margins reached a new high and continued to lead the industry and earnings increased by double digits.
Our year-to-date performance is at the upper end of the industry.
And looking ahead, our strategy inspires confidence that we will build on this lead.
I want to touch on the margin performance.
Compared to our fiscal 2018 margin, our third quarter segment adjusted operating margin of 14.1%, marks a 540 basis point improvement.
With increased delivery of higher margin work and our operational improvements, we expects to exceed our prior 13.2% margin guidance this year and we are confident in delivering our 15% by 2024 goal and longer term 17% aspirational target.
I'm equally pleased to report that we have delivered more consistent cash flow phasing.
This was a real focus of ours this year, and the organization has responded.
As a result, we already have been able to deploy substantial capital toward share repurchases and continue to take actions that improve our cost of debt and extended the duration of our debt maturities well into the future.
Please turn to the next slide.
In the Americas, design revenue increased for second consecutive quarter.
Total NSR declined slightly due to expected decline in Construction Management business, where we saw the deferral of a number of projects over the past 18 months.
However, this trend is improving as evidenced by our sequential backlog growth and growing pipeline of pursuits.
Importantly, backlog in the Americas design business increased by 8%.
Our investments in the development [Phonetic] are translating to a higher win rate on our work and our pipeline also increased by double-digits at start of the year.
Adjusted operating margin was 18.9%, a 100 basis point increase from the prior year to a new high.
Profitability in both the Americas design and Construction Management businesses was strong.
Please turn to the next slide.
Turning to the International segment.
Our NSR increased by 7%.
Our adjusted operating margin in the third quarter was 7.3%, a 160 basis point improvement from the prior year and more than 500 basis point improvement since the beginning of fiscal 2019.
This progression provides us confidence in our ability to achieve double-digit International margin target.
Please turn to the next slide.
Turning to cash flow, liquidity, and capital allocation.
Our third quarter free cash flow of $295 million marked the highest level in four years, putting us on a strong path to achieving our full year guidance of between $425 million and $625 million.
With our strong cash flow, we have executed stock repurchases at attractive prices.
Since September 2020, we have repurchased $930 million of stock, which represents nearly 19 million shares or 12% of our starting share balance.
In addition, we have strengthened our balance sheet through a number of actions taken to lower the cost of our debt and extend our maturity.
During the quarter we completed the tender and redemption of all 2024 senior notes.
We now have no maturities until at least 2026 and are operating with a high degree of financial certainty while driving a benefit to the bottom line.
Finally, while we have incurred costs related to the tender and redemption of the 2024 notes, the NPV of the transaction was very positive and accretive to earnings per share.
Please turn to the next slide.
With our year-to-date outperformance, we are raising our adjusted EBITDA guidance to between $810 million and $830 million or a 10% growth at the midpoint.
We are also increasing our adjusted earnings per share guidance for the full year to between $2.75 and $2.85 or 30% growth at the midpoint.
This is the third increase to our earnings per share guidance this year, despite the challenges posed by the pandemic and associated macroeconomic trends.
Our teams are [Indecipherable] this guidance does not contemplate any additional repurchases, although it is our plan to continue to buy back stock.
Finally, I should note that our fourth quarter comparisons will be impacted by the extra week we adjusted out of our growth rate in the prior year's fourth quarter.
This impact should be considered when modeling and analyzing year-over-year growth trends for the coming quarter.
An extra week is approximately 7.5% of our quarterly NSR.
| q3 revenue increased by 7% to $3.4 billion.
|
Today's call will feature commentary from Chief Executive Officer.
Ritch Allison and from the office of CFO, Jessica Parrish.
I ask that members of the media and others to be in a listen-only mode.
Both of these documents are available on our website.
Actual results or trends could differ materially from our forecast.
I'll request to our coverage analysts, we would like for you to accommodate that -- we would like to accommodate as many of you as time permits.
So we encourage you to ask only one one-part question on the call if you could, please.
Overall, I'm happy with our results this quarter, which once again demonstrated the powerful growth potential of the Domino's brand around the world.
The third quarter presented significant challenges related to COVID and specifically the rise in the Delta variant across the U.S. and around the world.
Our system had to pivot yet again in response to the resulting changes in public health guidance and requirements.
As this pandemic extends deep into its second year, I'm proud to say that our franchisees have continued to step up to meet the ongoing challenge in service to their customers, their communities and their team members.
Throughout the Domino's system, we'll remain committed to serving our customers with outstanding food through safe and reliable delivery and carryout experiences.
Now, you've heard me say it many times.
Global retail sales growth is the engine that drives our business model.
During the third quarter, we delivered 8.5% global retail sales growth, excluding foreign currency impact, driven by a combination of store growth and same store sales.
That 8.5% result was lapping a 14.8% from the third quarter of 2020.
The third quarter extended our unmatched streak of international same store sales growth to 111 consecutive quarters.
While our 41 quarter streak of positive same store sales in the U.S. ended during the quarter, I'm pleased that we still grew our U.S. retail sales during the quarter, while rolling over 21.3% retail sales growth in Q3 2020.
During the quarter, we also accelerated our pace of global store growth on a trailing four-quarter basis, we have opened 1124 net new stores, that's an increase of 500 relative to where we were in Q4 2020.
Over the last four quarters, we've averaged just a touch above three net new stores every day.
So, overall the Domino's brand continues to deliver.
She will take you through the details of the quarter and then I'll come back to share some additional thoughts about the business.
Jessica, over to you.
We are pleased to share our third quarter results with you today.
Overall, Domino's team members and franchisees around the world continue to generate healthy operating results, leading to a diluted earnings per share of $3.24 for Q3.
In Q3, we sustain our positive momentum in both our U.S. and international businesses, resulting in year-over-year global retail sales growth.
Global retail sales excluding the positive impact of foreign currency grew 8.5% in Q3 as compared to Q3 2020.
Breaking down total global retail sales growth, U.S. retail sales grew 1.1% rolling over a prior year increase of 21.3%.
International retail sales excluding the positive impact of foreign currency grew 16.5% rolling over a prior year increase of 8.5%.
During Q3, we continued our streak of 111 consecutive quarters of positive international comps.
Same store sales for our international business grew 8.8% rolling over a prior year increase of 6.2%.
The U.S. comp was negative in Q3 following 41 straight quarters of positive same store sales growth.
Same store sales in the U.S. declined 1.9% in the quarter rolling over a 17.5% increase in same store sales in Q3 of 2020, the highest quarterly U.S. comp we have ever achieved since becoming a publicly traded company in 2004.
Breaking down the U.S. comp, our franchise business was down 1.5% in the quarter, while our company-owned stores were down 8.9%.
We continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we historically observed, which we believe is a function of the heavily urban and higher income footprint of our company-owned store markets relative to a more diverse mix across our franchise base.
More aggressive purchasing in our company-owned store markets also contributed to the same store sales gap between our corporate store and franchise store businesses.
The decline in U.S. same store sales this quarter was driven by lower order counts.
Our U.S. order counts during Q3 were pressured by a very challenging staffing environment, which had certain operational impacts such as shortened store hours or customer service challenges in many of our stores.
Additionally, since the onset of the pandemic, our comps had also benefited from significant economic stimulus activity in the U.S., the effects of which largely tapered off in the third quarter, which we believe pressured our order counts as compared to Q3 2020.
Ticket growth partially offset the decline in order counts as we continue to see consumers or there are more items per transaction during Q3.
The ticket comp also benefited from increases to our transparent delivery fee as well as the mix of products we sell.
The international comp was primarily driven by order growth due to the return of non-delivery service methods across a number of international markets as well as the resumption of normal store hours in the reopening of stores that were temporarily closed in certain of our international markets in Q3 2020 due to the COVID-19 pandemic.
Shifting to unit count, we and our franchisees added 45 net stores in the U.S. during the third quarter, consisting of 46 store openings and only one closure.
Our international business added 278 net stores comprised of 287 store openings and 9 closures.
Turning to revenues and operating margins.
Total revenues for the third quarter were up approximately $30.3 million or 3.1% over the prior year quarter.
The increase was driven by higher retail sales, which generated higher international royalty, supply chain and U.S. franchise revenues.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $1.3 million in Q3.
Our consolidated operating margin as a percentage of revenues increased to 38.6% in Q3 2021 from 37.4% in the prior year, due primarily to higher revenues from our global franchise businesses.
Company-owned store margin as a percentage of revenues was flat year-over-year at 19.8%.
As a percentage of revenues, food and occupancy costs were higher year-over-year, offset by lower labor costs.
Recall that we incurred additional bonus pay in the third quarter of last year for frontline team members and although we did make investments in frontline team member wage rates during Q3, we continue to experience staffing shortages in certain of our company-owned stores.
Supply chain operating margin as a percentage of revenues increased to 10.7% from 10.2% in the prior year quarter.
While the market basket increased 2.1% year-over-year, higher product and supplies expenses related to certain COVID related safety and sanitizing equipment negatively affected the supply chain operating margin in Q3 2020, which did not recur in the current quarter.
This year-over-year decrease in product costs was partially offset by higher labor costs.
G&A expenses increased approximately $4.7 million in Q3 as compared to Q3 2020 resulting from higher travel and labor costs, including higher non-cash compensation expense, partially offset by lower professional fees.
Net interest expense increased approximately $7.1 million in the quarter, driven by a higher average debt balance due to our recent recapitalization transaction completed in Q2.
Our weighted average borrowing rate for Q3 decreased to 3.8% from 3.9% in Q3 2020 due to lower interest rates on our outstanding debt as a result of this recapitalization transaction.
Our effective tax rate was 10.7% for the quarter as compared to 19.9% in Q3 2020.
The effective tax rate in Q3 2021 included a 10.4 percentage point positive impact from tax benefits on equity-based compensation.
This compares to a 2.8 percentage point positive impact in Q3 2020.
This increase was due to more stock option exercises in Q3 of this year.
We expect to see continued volatility in our effective tax rate related to these tax benefits from equity-based compensation.
Combining all of these elements, our third quarter net income was up $21.3 million or 21.5% versus Q3 2020.
Our diluted earnings per share in Q3 was $3.24 versus $2.49 in the prior year quarter.
Breaking down that $0.75 increase in our diluted EPS, most notably, our improved operating results benefited us by $0.36.
Our lower effective tax rate, primarily due to higher tax benefits on equity based compensation positively impacted us by $0.34.
A lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.19 and higher net interest expense negatively impacted us by $0.14.
Shifting to cash, our strong financial model continues to generate significant cash flows.
During Q3, we generated net cash provided by operating activities of approximately $189 million.
After deducting for capex, we generated free cash flow of approximately $172 million.
Regarding our capital expenditures, we spent approximately $17 million on capex in Q3, primarily on our technology initiatives, including our next-generation point-of-sale system and our new supply chain center.
Our strong free cash flow generation allowed us to continue our long-term commitment to returning cash to shareholders.
As we discussed on the Q2 earnings call, we completed our $1 billion accelerated share repurchase transaction during Q3.
Subsequent to the settlement of the ASR, during Q3, we repurchased and retired approximately 153,000 shares for $80 million or an average price of $521 per share.
As of the end of Q3, we had approximately $920 million remaining under our current Board authorization for share repurchases.
We have continued to repurchase and retire shares subsequent to the end of the quarter and through October 12, we had repurchased and retired an additional 205,000 shares for approximately $100 million or an average price of $488 per share.
We also returned $35 million to our shareholders during Q3 in the form of a $0.94 per share quarterly dividend.
Shifting gears, as we look toward our fourth quarter, we wanted to provide an update on our annual guidance measures for full year 2021 provided earlier this year.
We previously provided guidance that our store food basket pricing in our U.S. system would increase approximately 2.5% to 3.5% over 2020 levels.
We previously provided guidance that foreign currency could have a $4 million to $8 million positive impact on royalty revenues as compared to 2020.
We previously provided guidance of $415 million to $425 million for G&A expense.
Based on our current outlook, we expect each of these three measures to come in at the high end of these current estimates.
We continue to expect that our full year capex investments will be approximately $100 million.
Keep in mind that these metrics can change based on economic and other factors outside of our control.
Our G&A expense is also affected by our own performance versus our plan, which affects variable performance-based compensation expense.
These estimates also reflect our normal 16-week Q4, which will be rolling over the 17-week Q4 we had in 2020 due to the inclusion of a 53rd week in our fiscal year.
Recall that the 53rd week last year contributed an incremental $0.39 to our earnings per share in Q4 2020 due to the additional week of revenues and the costs attributable to the 53rd week.
In closing, our business continued its solid performance during the third quarter and we are proud of the results our franchisees and team members around the world delivered.
I'll begin my comments with a look at our U.S. business.
Retail sales grew 1.1% in the third quarter, lapping a 21.3% increase from Q3 2020.
Our 1.9% same store sales declined during the quarter, was offset by the positive impact of 232 net new stores that we have opened over the trailing four quarters.
Now let's take a few minutes to further break down the U.S. retail sales growth into it's two components: store growth and same store sales.
Our 45 net new stores in Q3 was a sequential improvement over Q2, but still came in softer than we would like to see.
While cash on cash returns remain very strong and we continue to see a robust pipeline of future openings, we and our franchisees had a number of store openings delayed due to a variety of factors.
We and our franchisees saw delays in construction, equipment, utility hookups and inspections.
In addition, franchisee staffing challenges also resulted in some delays.
We remain very bullish on the unit growth potential in the U.S., but believe that we may continue to see some of these challenges in the months ahead.
Now let's turn to same store sales.
As we continue to experience COVID overlaps, we believe it's instructive to look at the cumulative stack of comparable U.S. same store sales anchored back to 2019 as a pre-COVID baseline and we'll continue to do so for as long as we believe it is useful in understanding our business performance.
At 15.6% for Q3, we saw a sequential decline of the two-year stack when compared to the second quarter, bringing us back more in line with the two-year stack we saw in Q1 of this year.
So what changed from Q2 to Q3.
Jessica highlighted several key drivers that I'll expand on here.
First, we believe that government stimulus had an impact on our sales in Q2 that waned in the third quarter as we moved further away from the spring one-time payments and as other enhanced benefits tapered off.
Second, we saw more pronounced staffing challenges across the country, resulting in reduced operating hours and service challenges in a number of stores across the network.
We believe these challenges posed a more significant headwind on orders and sales during the third quarter than they did during the first half of this year.
We and our franchisees are taking a number of actions to address the staffing issues.
A new applicant tracking system rolled out a few weeks ago that will make it easier for candidates to apply for openings and to be onboarded at both corporate and franchise locations across our U.S. system.
We are also sharing operational best practices to eliminate unnecessary time-consuming tasks in the operation of stores, like pre-folding boxes, for example.
They can drive both team member and customer satisfaction.
In our corporate stores, we have recently implemented meaningful increases in team member compensation and are also piloting new approaches to team member onboarding, training and development.
While I'm optimistic about the efforts that we and our franchisees have underway, we believe that staffing may remain a significant challenge in the near term as the labor market continues to evolve.
Now I'll share a few thoughts specifically about the carryout and delivery businesses.
We saw a positive carryout same store sales growth during Q3, as we continue to build awareness of Domino's car side delivery.
We are on air for several months with a fun campaign highlighting our car side delivery two-minute guarantee.
This campaign hits on two key elements of the Domino's brand.
I'm very pleased with our car side delivery performance as our franchisees and operators have enthusiastically embraced this new service method.
It's also bringing in new customers.
We have consistently averaged below two minutes out the door and on our way to the customer's cars.
In fact, we have many stores across the country that are consistently below 1 minute.
It's a great technology enabled way to serve our customers and will remain an important part of our long-term strategy to serve our existing carryout customers and to attract new QSR drive through oriented customers going forward.
I'm also excited to talk about our latest menu innovations.
Just this past Monday, we went on air to launch three great new products to support our signature $7.99 carryout offer.
We call them dips and twists and they hit the mark for great taste and consumer appeal with terrific economics for our franchisees.
I'm excited about the impact these can have on sales and on store level profitability.
I really hope you'll get out and try them.
We have one sweet and two savory dip options in this new product line.
Baked apple, five Cheese and my personal favorite cheesy marinara.
Turning to our delivery business.
Q3 saw a same store sales decline relative to 2020, but delivery sales remain significantly above 2019 levels.
During the quarter, we believe that the stimulus wind down and the staffing challenges that I referenced earlier, had a disproportionate impact on our delivery business.
Just a few weeks ago, we launched a new ad campaign to support the delivery business.
It plays on a key tension that consumers have with third-party delivery apps, the surprise fees that are often charged for service, for small orders or simply because you live in a certain zip code.
Consumers also tell us that they hate the fact that these charges are often confusing, hidden or buried in the receipt.
Domino's and our franchisees never charge surprise fees.
We charge one transparent delivery fee.
So, we decided to give our customers surprise frees instead of surprise fees.
During this campaign, one out of every 14 digital delivery orders receives a free item.
That item could be a pizza, stuffed cheesy bread, lava cakes or any one of a number of other great items.
Over the course of the campaign, Domino's and our franchisees will give away $50 million worth of surprise frees to delivery customers.
Now this campaign supports two of our key brand attributes: value and transparency.
I'll also share a few important milestones that occurred in the U.S. during the quarter.
First, we broke ground.
Just a few weeks ago on a new supply chain center in Indiana, which we expect to complete and open by the end of 2022.
And second, we are now running a pilot version of our new Pulse point-of-sale system in a live store environment and we will continue to invest in that multi-year project going forward.
So, as we look forward in the U.S. business, I remain optimistic about our ability to continue driving long-term growth.
We'll manage through the staffing and other challenges in the short term.
Frankly, that's what Domino's franchisees and operators do and have always done and will continue to leave the brand with a clear focus on long-term profitable growth for our franchisees and DPZ.
Now moving on to international.
It was another outstanding quarter of performance for our international business.
Our 16.5% international retail sales growth, excluding foreign currency impact, was supported by a very strong 8.8% comp.
When you look at it on a trailing four-quarter basis, excluding the impact of foreign currency and the 53rd week of 2020, Domino's International retail sales grew by 16.2%.
As I discussed earlier with our U.S. business, we are also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019.
Q3 represented a 15% two-year stack, which was very consistent with the second quarter.
International store growth was a highlight during the quarter.
Our international master franchisees opened 278 net new stores during the quarter, which increased the trailing four-quarter pace to 892 stores for the international business.
This acceleration and international store growth combined with our U.S. store growth has driven the global pace of store growth back into our two to three-year outlook range of 6% to 8% global net unit growth.
I was also very pleased to see that we had only nine closures in international and only 10 closures on a global basis during the quarter.
This low level of store closures is driven by two factors.
First, our outstanding unit level economics and second and very importantly, the strong commitment of our franchisees across the globe.
During the quarter, COVID continue to have a significant impact on many of our international markets and we expect COVID to remain a challenge in many parts of the world for some time to come.
At the end of the quarter, we estimate Domino's had fewer than 175 temporary store closures, with many of those located in India and New Zealand.
I'll highlight a few of the international markets that contributed significantly to our growth during the quarter.
We successfully converted 52 stores in Poland as Dominion pizza rebranded to become part of the Domino's family.
This provides important scale for us in Poland, fast-forwarding us to 119 total stores in the market at the end of the third quarter.
We now have 24 international markets with 100 or more Domino's stores.
We opened our 93rd international market during the quarter, officially welcoming Lithuania to the Domino's family.
We're off to a great start there with the first store opening and we have a second one coming very soon.
India resumed an impressive pace of store growth, while becoming the first Domino's market outside the U.S. to reach 1400 stores.
I could not be more proud of Jubilant, our master franchise partner, and the efforts they have made to fight through COVID, taking care of their people, while still growing their business.
Japan had another outstanding quarter, passing the 800-store milestone and continuing its impressive streak of growth.
The transformation of the market by master franchisee Domino's Pizza Enterprises has been remarkable.
China delivered double-digit same store sales growth, while continuing its strong pace of store growth.
With each passing quarter, we become even more confident about the long-term growth potential for the Domino's brand in China.
In addition to those markets, the U.K., Mexico, the Netherlands, Turkey and Colombia were additional large market highlights in a strong quarter of performance across our international business.
And along with those markets, we also saw robust regional growth across the Middle East and Northern Africa during the quarter.
I have long been convinced that we have the best international franchise partners in the restaurant business and they certainly prove me right during the third quarter.
So in closing, I'm pleased with our third quarter results.
Our outstanding franchisees and operators continue to battle through a challenging set of circumstances, while delivering strong growth for the Domino's brand around the world.
These passionate Dominoids combined with our outstanding unit level economics, position us incredibly well for the future.
There is no doubt that we will continue to experience challenges with COVID, with staffing, and other factors.
We also expect inflationary headwinds to continue impacting Domino's and the broader restaurant industry over the coming quarters.
But we will face all of these challenges and headwinds from a position of strength and with the unwavering commitment of our franchisees and team members who proudly wear the Domino's logo.
My team and I are proud to serve them each and every day.
| q3 earnings per share $3.24.
qtrly u.s. same store sales decline of 1.9%.
qtrly diluted earnings per share up 30.1% to $3.24.
qtrly international same store sales growth of 8.8%.
|
Today's call will feature commentary from Chief Executive Officer, Ritch Allison and from the office of the CFO, Jessica Parrish.
Both of these documents are available on our website.
Actual results or trends could differ materially from our forecast.
I'll request to our coverage analysts, we would like to accommodate as many of you as time permits.
With that, I'd like to turn over the call to our CEO, Ritch Allison.
Overall, I am very pleased with our results this quarter, which once again demonstrated the strength of the Domino's brand around the world.
We are still navigating through the COVID pandemic across the globe.
Throughout the last 18 months, our franchisees have continued to step up to the challenge in service to their customers, their communities and their team members.
I continue to be extremely proud of our global franchisees and their extraordinary efforts to provide outstanding food through safe and reliable delivery and carryout experiences.
You've heard me speak often about the importance of global retail sales growth and how that drives our business model.
During the second quarter, we delivered 17.1% global retail sales growth, excluding foreign currency impact, driven by a powerful combination of growth in US same-store sales, international same-store sales and global store counts.
The second quarter marked our 41st consecutive quarter of US same-store sales growth and our 110th consecutive quarter of international same-store sales growth.
We also reinforced our leadership position in the pizza category with a very strong quarter of global store growth, highlighted by the opening of our 18,000th store.
We celebrated this terrific milestone with the opening of a beautiful store in La Junta, Colorado.
The pace of net store growth has accelerated significantly during the first half of this year.
When you look at it on a trailing four-quarter basis, our pace of net store growth is increased from 624 in Q4 2020 to 884 in Q2 2021.
During the quarter, we also completed our $1.85 billion refinancing transaction, lowering the cost of our debt and giving us the capacity to return $1 billion to our shareholders through our recently completed accelerated share repurchase transaction.
Overall, the Domino's brand continues to deliver, as our strong same-store sales, store growth and resulting retail sales growth deliver great returns to our franchisees and our shareholders.
She will take you through the details of the quarter and then after that, I'll come back and share some additional observations about the quarter and some thoughts around how we are approaching the business going forward.
Jessica, over to you.
We are excited to share our strong second quarter results with you today.
Overall, Domino's team members and franchisees around the world generated impressive operating results, leading to a diluted earnings per share of $3.06 for Q2.
Our diluted earnings per share as adjusted for certain items related to our recapitalization transaction completed during the quarter with $3.12.
In Q2, we continued to see positive momentum in both the US and international businesses in both same-store sales performance and net unit growth, leading to strong global retail sales growth.
Global retail sales grew 21.6% in Q2, as compared to Q2 2020.
When excluding the positive impact of foreign currency, global retail sales grew 17.1%.
Breaking down total global retail sales growth, US retail sales grew 7.4% and international retail sales grew 39.7%.
When excluding the positive impact of foreign currency, international retail sales grew 29.5% rolling over a prior year decrease of 3.4%.
The prior year decrease in international retail sales, excluding foreign currency resulted primarily from temporary store closures, changes in store hours and service method disruptions in certain international markets as a result of the COVID-19 pandemic.
Turning to comps, during Q2, we continue to lead the broader restaurant industry with 41 straight quarters of positive US comparable sales and 110 consecutive quarters of positive international comps.
Same-store sales in the US grew 3.5% in the quarter lapping a prior-year increase of 16.1%.
Same-store sales for our international business grew 13.9% rolling over a prior year increase of 1.3%.
Breaking down the US comp, our franchise business was up 3.9% in the quarter, while our company-owned stores were down 2.6%.
As we noted on our Q1 call, we continue to observe a larger spread between the top line performance of our franchise stores and our company-owned stores than we have historically seen.
We believe this is primarily a function of the heavily urban and higher income footprint of our company-owned store markets relative to the more diverse mix across our franchise space.
The US comp this quarter was driven by ticket growth due to increases in items per order in our transparent delivery fee as well as the mix of products we sell.
Order count on a same store basis were consistent with Q2 2020 levels, which were higher than Q2 2019 levels, as a result of customer ordering behavior during the pandemic.
The international comp was driven by order growth due to the return of non-delivery service methods, the resumption of normal store hours and the reopening of stores that were temporarily closed in certain of our international markets in Q2 2020.
Shifting to unit count, we and our franchisees added 35 net stores in the US during the second quarter, consisting of 39 store openings and foreclosures.
Our international business added 203 net stores comprised of 217 store openings and 14 closures.
Turning to revenues and operating margins.
Total revenues for the second quarter were up approximately $112.4 million or 12.2% over the prior year quarter.
The increase was driven by higher global retail sales, which generated higher revenues across all areas of our business.
Changes in foreign currency exchange rates positively impacted our international royalty revenues by $4 million in Q2 2021 as compared to the prior year quarter.
Our consolidated operating margin as a percentage of revenues increased to 39.5% in Q2 2021 from 38.8% in the prior year, due primarily to higher revenues from our US franchise business.
Company-owned store margin as a percentage of revenues increased to 24.5% from 23.1% primarily as a result of lower labor costs, partially offset by higher food costs.
Recall that we incurred additional bonus pay in the second quarter of last year for team members on the front lines during the COVID-19 pandemic.
Supply chain operating margin as a percentage of revenues decreased to 11% from 11.9% in the prior year quarter, resulting primarily from higher insurance and food costs, as well as higher fixed operating costs driven by depreciation and our new supply chain facilities opened last year.
These increases were partially offset by lower labor costs.
G&A expenses increased approximately $12.3 million in Q2 as compared to Q2 2020, resulting from higher labor costs, including higher variable performance-based compensation and non-cash compensation expense, partially offset by lower professional fees.
Additionally, as we discussed on our Q1 call, we completed our most recent recapitalization transaction during the second quarter in April.
Net interest expense increased approximately $6.7 million in the quarter, driven by a higher average debt balance.
Our weighted average borrowing rate for Q2 2021 was 3.8%, down from 3.9% in Q2 2020.
Our effective tax rate was 19.6% for the quarter as compared to 4.7% in Q2 2020.
The effective tax rate in Q2 2021 includes a 2.3 percentage point positive impact from tax benefits on equity-based compensation.
This compares to an 18.5 percentage point positive impact in Q2 2020.
This decrease was due to significantly fewer stock option exercises in Q2 of this year.
We expect to see continued volatility in our effective tax rate related to these equity-based compensation tax benefits.
Combining all of these elements, our second quarter net income was down $2 million or 1.7% versus Q2 2020.
On a pre-tax basis, we were up $20.6 million or 16.5% over the prior year.
Our diluted earnings per share in Q2 was $3.06 versus $2.99 in the prior year.
Our diluted earnings per share as adjusted for the impact of the recapitalization transaction was $3.12, an increase of $0.13 or 4.3% over the prior year.
Breaking down that $0.13 increase in our diluted earnings per share as adjusted, most notably, our improved operating results benefited us by $0.53, net interest expense adjusted for the impact of the items affecting comparability I discussed previously negatively impacted us by $0.08, a lower diluted share count driven by share repurchases over the trailing 12 months benefited us by $0.12, and finally our higher effective tax rate, resulting from a lower tax benefits on equity based compensation negatively impacted us by $0.44.
Shifting to cash, our strong financial model continue to generate significant cash flow throughout the second quarter.
During Q2, we generated net cash provided by operating activities of approximately $143 million.
After deducting for capex, we generated free cash flow of approximately $126 million.
Regarding our capital expenditures, we spent approximately $17 million on capex in Q2, primarily on our technology initiatives, including our next-generation point-of-sale system.
As previously disclosed, during Q2, we also entered into an accelerated share repurchase transaction for $1 billion.
We received and retired approximately 2 million shares at the beginning of the ASR.
The ASR settled yesterday and we received a retired an additional 238,000 shares in connection with this transaction.
In total, the average repurchase price throughout the ASR program was $444.29 per share.
We also paid a $0.94 quarterly dividend on June 30.
Subsequent to the end of the quarter, our Board of Directors declared a quarterly dividend of $0.94 per share to be paid on September 30.
In closing, our business continued its strong performance during the second quarter and we are very pleased with the results our franchisees and team members around the world delivered.
And I'll begin my comments with a look at our US business.
For months now, many of you have been asking how we would lap the tough comparisons from Q2 of last year.
My answer has always been that we're not focused on managing to a 12-week quarter.
We are focused on building the business for the long term and that long-term focus on great product, service, image and technology is precisely why we were able to deliver a terrific quarter, highlighted by 7.4% US retail sales growth, lapping 19.9% from Q2 2020.
Turning to same-store sales, perhaps the thing I'm most pleased about when I look at the 3.5% US comp is the fact that we were able to hold orders flat while overlapping the big gains from Q2 2020.
I'm also pleased that our ticket growth was driven by a very healthy balance of more items per order and modest menu price and delivery fee increases.
We achieved positive comps in both our delivery and carryout businesses, with delivery driven by ticket and carryout driven by a balance of order count and ticket growth.
We continue to see strong growth across our business in the quarter.
You've often asked, if our sales growth might be weaker in markets that had more fully reopened, but to the contrary, the opposite trend emerged through the second quarter where we saw higher levels of sales growth in the second quarter in the markets with fewer COVID-related restrictions.
Similar to Q1, we saw the comp growth in rural areas outperformed urban areas, and less affluent areas outperformed more affluent areas.
These differences, combined with the impact of more aggressive fortressing, accounted for much of the same-store sales gap between our corporate store and franchise store businesses.
We saw sales benefits during the quarter from the federal government stimulus, particularly the checks that we delivered back in March.
It's difficult to quantify the magnitude of the impact of the one-time distributions and the ongoing unemployment and other government payments to consumers, but we believe that they do continue to have some positive sales impact on our business.
Due to the strong sales throughout the quarter, we once again elected not to run any of our aggressive boost week promotions, but instead remain focused on providing great service and offering great value to our customers every day.
As we continue to experience COVID overlaps, we believe it will be instructive to continue to look at the cumulative stack of comparable US same-store sales anchored back to 2019 as a pre-COVID baseline.
At 19.6% for Q2, we saw a material sequential improvement of the two-year stack when compared to the first quarter.
Beyond the comps, when you look at the absolute dollars, our second quarter same store average weekly unit sales in the US exceeded $27,000, another sequential uptick from the levels seen in the first quarter.
Now turning to the other critical component of our retail sales growth, new store openings, our addition of 35 net stores was softer than we expected.
We have a very strong pipeline of future openings, but had a number of stores delayed due to store level staffing challenges and construction, permitting or equipment delays.
We hope to accelerate the pace of openings during the second half of the year as some of the delays in unit growth may subside.
I'll turn and speak now about the carryout and the delivery businesses.
We saw the return of carryout order growth in Q2 and we continue to build awareness of Domino's car-side delivery.
We ran a brief 49% off car-side delivery awareness campaign during the quarter and just recently launched a campaign highlighting our Car Side Delivery 2-Minute Guarantee.
This campaign hits on two key elements of the Domino's brand, service and value.
Our franchisees and operators have fully embraced car side delivery and we are consistently averaging below 2 minutes out the door and on our way to the customer's cars.
This is a great technology enabled way to serve our customers and will remain an important part of our strategy as we continue to evolve the carryout experience, not only to enhance the loyalty of our current carryout customers, but also to reach a new different and largely untapped drive-through oriented customer going forward.
For the delivery business, I was also very pleased to see positive delivery same-store sales growth during Q2, while facing very difficult overlaps.
We brought back the noise to highlight our partnership with Nuro for autonomous delivery.
This campaign hits on our technology and innovation leadership, while having a little bit of fun with our old nemesis, The Noid.
We continue to learn as we pilot a true autonomous pizza delivery experience to select customers in the Houston market.
Now turning to staffing, I'll reiterate something I said back in April.
We continue to operate in a very difficult staffing environment for our stores and our supply chain centers.
The combination of COVID, strong sales, the accelerating economic growth across the country and the ongoing government stimulus continue to result in one of the most difficult staffing environments that we've seen in a long time.
And frankly, this led to higher margins in our corporate store business than we would like to see.
The reality is that we were operating during the quarter with fewer team members than we would like to have in many of our stores.
This puts pressure on our operators to meet demand, while continuing to deliver great service.
In the back half of the year, we expect to implement additional wage increases across certain corporate store markets and positions.
And as we look forward in the US business, we will continue to make the necessary investments to drive retail sales growth into the future.
We recently announced our plans to build another supply chain center in Indiana, which we expect to complete by the end of 2022.
We are making solid progress on the rewrite of our POS point-of-sale system and we'll continue that multiyear investment, along with additional investment in our enterprise systems to support the business.
We will continue to invest in technology, operations and product innovation to support our carryout and our delivery businesses.
We are continuing to raise wages and invest in our hourly team members and of course as always we will remain focused on value for our customers.
So I'll close out our discussion of the US business by simply saying that the Domino's brand has never been stronger and I remain confident in our ability to drive sustainable long-term growth.
Now let's move on to international.
It was an outstanding quarter of performance for our international business.
Our 29.5% international retail sales growth, excluding foreign currency impact was supported by an exceptional 13.9% comp, continuing the momentum we had in the first quarter.
As I discussed earlier with our US business, we're also watching the two-year comp stacks for international, anchoring back to pre-COVID 2019 and we'll continue to do so throughout 2021.
Q2 represented a 15.2% two-year stack, a sequential improvement over the first quarter.
I'm particularly pleased with our strong momentum on store growth as international provides a significant push toward our two to three-year outlook of 6% to 8% global net unit growth.
Our 203 net stores in Q2 increased our trailing four quarter pace of international store growth to 653 net stores.
Our accelerated store growth continues to be driven by our outstanding unit level economics and the strong commitment of our international master franchise partners.
During the quarter, COVID continue to have a significant impact on many of our international markets and we expect COVID to remain a challenge in many parts of the world for some time to come.
At the end of the quarter, we had fewer than 175 temporary store closures, with many of those located in India, which has been hit particularly hard by COVID.
The company mounted a series of initiatives to support their employees and families through this unprecedented crisis.
This included a cross-functional team that provided employee assistance 24/7 as well as several COVID isolation centers with oxygen concentrator banks.
Jubilant mounted a massive vaccination drive for all of their employees and dependent family members.
Challenging times always bring out the best in Domino's franchisees and I could not be more proud of our leaders in India and how they have responded to this crisis.
I'd also like to highlight a few international markets that drove terrific growth during the quarter.
China passed the 400 store milestone during Q2 and once again Dash, our master franchise partner delivered outstanding retail sales growth for the brand.
China is without question, one of the most exciting businesses in the Domino's system with significant long-term runway for growth.
Japan reached the 800 store milestone in the weeks following the close of our second quarter and continued the outstanding performance under master franchisee Domino's Pizza Enterprises ownership.
The UK, Germany, Mexico and Turkey were also large market highlights in a strong quarter of performance across our international business.
I am proud of our master franchisees and their operators for their great work thus far in 2021, and I remain optimistic about our international retail sales growth opportunity over the long term.
So in closing, I'm very happy with our Q2 results.
Great franchisees and operators, combined with outstanding unit level economics place us in an enviable position within our industry and give us a strong foundation for future growth.
There is absolutely no question that Domino's is the global leader in QSR pizza, but there is still so much opportunity ahead of us to drive global retail sales growth and to grow market share around the world in both our delivery and carryout businesses.
As we look to the back half of the year and beyond, you can be confident that we will remain focused on winning the long game.
| compname reports q2 earnings per share of $3.06.
q2 adjusted earnings per share $3.12.
q2 earnings per share $3.06.
qtrly international same store sales growth of 13.9%.
qtrly u.s. same store sales growth of 3.5%.completed $1.0 billion accelerated share repurchase transaction in july 2021.
given our current operating environment, we are watching our two-year sales trends anchored to pre-covid fiscal 2019 results.
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Our call will include remarks from our CEO, Roger Hochschild; and John Greene, our Chief Financial Officer.
After we conclude our formal comments, there will be time for a question-and-answer session.
During the Q&A session, please limit yourself to one question, and if you have a follow-up question, please get back into queue, so we can accommodate as many participants as possible.
Last April, if you told me that a year into the pandemic we'd be reporting excellent credit performance, positive sales trends, and solid earnings growth, I wouldn't have believed it.
While the pandemic is far from over and there may be twists and turns ahead, as a nation, we have made tremendous progress toward addressing the health crisis and reopening the economy.
This quarter, we earned $1.6 billion after-tax or $5.04 per share.
I'm very pleased with these results, which reflect our robust business model, strong execution, including a disciplined approach to managing credit, improving economic trends and the impact of federal support for US consumers.
Since the end of 2020, our view on economic conditions has improved.
The rapid pace of the recovery has lessened our concern of job losses spreading to the white collar workforce and there is also been substantial support for the US consumer through stimulus in January and in March.
Our current expectation is that credit losses in 2021 will be flat to down year-over-year.
This improved economic view, combined with lower loan balances and continued strong credit performance, were the primary drivers of $879 million reserve release in the quarter.
As discussed in previous quarters, the strong credit performance was accompanied by elevated payment rates that continue to put pressure on loan balances, which were down 7% year-over-year.
Payment rates were over 350 basis points higher than last year and at their highest level since the year 2000.
While the impact from stimulus payments should abate over the next few months, we expect payment rates will remain elevated for the rest of the year as household use savings to meet debt obligations and continue to benefit from payment relief programs, such as federal student loan and mortgage payment forbearance.
Despite this pressure, we still expect modest loan growth this year supported by several factors.
First, there has been a significant increase in sales volume, up 11% from a year ago and up 15% from the first quarter of 2019.
Improving trends in categories like retail and restaurants are positive signs for future growth.
Additionally, based on our credit performance in our current outlook for macro conditions, we have begun to migrate our credit standards back to pre-pandemic levels.
This is particularly true in card, where our value proposition centered on best-in-class customer service, valuable rewards and no fees continues to resonate strongly among consumers.
We're also expanding credit standards and personal loans, but not quite back to 2019 norms.
To offset the higher payment rate, as well as leverage these credit actions, we intend to increase our marketing spending through the rest of this year.
Outside of marketing, we expect that expenses will be relatively flat year-over-year as we remain committed to expense management.
We're reinvesting some of the benefits from our strong credit performance and efficiency gains into technology and analytics to further improve our account acquisition targeting, fraud detection and collections capabilities.
The rapid pace of the economic recovery and strong credit performance may provide additional opportunities to lean further into growth.
We intend to take advantage of these opportunities and may make additional marketing and non-marketing investments that will create long-term value.
On the payment side, we had continued strong performance in our PULSE business, with volumes up 23%, driven by stimulus payments in the first quarter and higher average spend per transaction.
We also continue to expand our global acceptance through network partnerships, and this quarter, we signed new partners in Jordan and Malaysia.
Our digital banking model generates high returns and we remain committed to returning capital to our shareholders.
This quarter, we restarted our share repurchase program with $119 million in buybacks, in line with the regulatory restrictions still in place.
Looking at our strong credit performance and robust earnings, we see an opportunity to revisit our capital return to shareholders in the second half of the year.
As I look toward the future, I'm excited about Discover's prospects.
Our products continue to bring value to our customers.
We remain flexible as we support our employees and their families through the pandemic.
And we are well positioned to continue driving long-term value for our shareholders.
Today is her birthday.
So I want to wish Wanji a very Happy Birthday.
With that, I'll now ask John to discuss key aspects of our financial results in more detail.
I'll begin by addressing our summary financial results on Slide 4.
As Roger indicated, the results this period reflects many of the same dynamics we've seen over the past few quarters.
The influence of stimulus resulted in elevated payment rates, which pressured loan growth.
It also contributed to the strong asset quality and our significant reserve release in the quarter.
Revenue, net of interest expense, decreased 3% from the prior year, mainly from lower net interest income.
This was driven by a 7% decline in average receivables and lower market rates, partially offset by a reduction in funding costs as we continued to manage deposit pricing and optimize our funding mix.
Non-interest income was 5% lower, primarily due to a $35 million net gain from the sale of an equity investment in the prior year.
Consistent with our excellent credit quality, lower loan fee income reflects a decline in late fees, while net discount and interchange revenue was up 12% from the prior year, reflecting the increased sales volume.
The provision for credit losses was $2 billion lower than the prior year, mainly due to an $879 million reserve release in the current quarter, compared to a $1.1 billion reserve build in the prior year.
Our improved economic outlook, lower loan balances and strong credit drove the release.
Additionally, net charge-offs decreased 30% or $232 million in the prior year.
Operating expenses decreased 7% year-over-year as we remain disciplined on expense management.
Other than compensation, all other expenses were down from the prior year, led by marketing, which decreased 33% year-over-year.
Looking ahead, we intend to accelerate marketing investments over the remainder of the year.
We'll go into details on our spending outlook in a few moments.
Moving to loan growth on Slide 5.
Total loans were down 7% from the prior year, driven by a 9% decrease in card receivables.
The reduction in card receivables was driven by two primary factors.
First, the payment rate remains elevated, driven by the latest round of stimulus and improved household cash flows.
Second, promotional balances have continued to decline, reflecting the actions we took at the onset of the pandemic to tighten credit.
As a result, these balances were approximately 300 basis points lower than the prior year.
Although we expect new account growth will cause promotional balances to begin to stabilize.
As the economy reopens further, we believe consumer spending and prudent expansion of our credit box should drive profitable loan growth going forward.
Looking at our other lending products.
Organic student loans increased 5% from the prior year and originations returned to pre-pandemic levels.
We continue to gain market share through mini peak season.
Personal loans were down 9%, primarily due to the actions we took early in the pandemic to minimize credit loss.
As we previously mentioned, we see opportunity to expand credit a bit given the strong performance of this portfolio.
Moving to Slide 6.
The net interest margin was 10.75%, up 54 basis points from the prior year and 12 basis points sequentially.
Compared to the prior quarter, the improvement in net interest margin was driven by lower deposit pricing as we cut our online savings rates from 50 basis points to 40 basis points during the quarter.
We also continue to benefit from the maturity of higher rate CDs and a favorable shift in funding mix.
Our funding from consumer deposits is now at 65%.
Future deposit pricing actions will be dependent upon our funding needs and competitor pricing.
Average consumer deposits were up 14% year-over-year and flat to the prior quarter.
Consumer CDs were down 7% from the prior quarter, while savings and money market increased 4%.
Loan yield was flat to the prior year.
Seasonal revolve rate favorability and a lower mix of promotional rate balances were offset by the impact of reduced pricing on personal loans.
Looking at Slide 7.
Total non-interest income was $465 million, down $25 million, or 5% year-over-year, driven by the one-time gain in the prior year that I previously mentioned.
Excluding this, non-interest income was up 2%.
Net discount and interchange revenue increased 12% as revenue from higher sales volume was partially offset by higher rewards cost.
The decrease in loan fee income was driven by lower late fees, which move in line with delinquency trends.
Looking at Slide 8.
Total operating expenses are down $78 million, or 7% from the prior year.
Marketing and business development decreased $77 million, or 33% year-over-year.
The reduction reflects actions we implemented in March of last year to align marketing spend with tightened credit criteria.
However, we accelerated our marketing spend late in the first quarter and plan to continue this through the year.
These investments will drive new account acquisition and loan growth.
The year-over-year decrease in other expenses was mainly driven by lower fraud volume to an -- due to enhanced analytics around disputed transactions and decreased fraud in deposits.
This improvement demonstrates a small part of the benefit we expect from the investments we've made in the analytics over the past few years.
Partially offsetting the favorability was a $39 million increase in employment compensation, that was driven by two factors: $22 million from a higher bonus accrual in the current year.
The remaining increase was driven by higher average salaries, reflecting the talent build in our technology and analytics team.
Moving to Slide 9.
We had another strong quarter of very strong credit performance.
The total charge-offs were 2.5%, down 79 basis points year-over-year and up 10 basis points sequentially.
The card net charge-off rate was 2.8%, 85 basis points lower than the prior year with the net charge-offs dollars down $209 million, or 31%.
Sequentially, the card net charge-off rate increased 17 basis points and net charge-off dollars were up $11 million.
The increase in card net charge-offs from the prior quarter was driven by accounts that had been in Skip-a-Pay and did not cure.
The program ended six months ago, and at this time, most of the accounts that were in Skip-a-Pay have returned to making payments.
Looking forward, we expect minimal impacts to charge-offs from this population.
The card 30-plus delinquency rate was 1.85%, down 77 basis points from the prior year and 22 basis points lower sequentially.
With the influence of the Skip-a-Pay group now largely complete, we think that delinquencies are the most clear indicator of our loss trajectory over the short-term.
Credit remained strong in private student loans.
Net charge-offs were down 15 basis points year-over-year and 18 basis points compared to the prior quarter.
The 30-plus delinquency rate improved 55 basis points from the prior year and 19 basis points sequentially.
In personal loans, net charge-offs were down 79 basis points year-over-year with a 30-plus delinquency rate down 47 basis points from the prior year and 24 basis points from the prior quarter.
The positive impact of additional stimulus, combined with an improved economic outlook, have shifted our expectation on the timing of losses.
We had previously expected losses would increase in the second half of this year and remain elevated into 2022.
That is no longer the case.
Based on our current delinquency trends, we believe losses are likely to be flat to down this year with the possibility of some increase in 2022.
That said, a material shift in the economic environment could offer the timing and magnitude of losses.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $879 million from the allowance.
This reflected several factors, including favorable changes to our macro assumptions, a moderate decrease in our loan balance, the continued decline in delinquencies, and lower losses.
Relative to our view in January, the economic outlook has continued to improve.
As we've done in prior quarters, we've modeled several different scenarios and took a conservative but more optimistic view.
Our assumptions on unemployment for a year-end 2021 rate of 6%, with a return to full employment in late 2023, we assume GDP growth of about 4.6%.
Our reserve assumptions did not contemplate any additional stimulus directed to consumers, but did anticipate broader economic benefits from infrastructure spending beginning in the second half of this year.
The modest increase to reserves in our student loan portfolio was driven by loan growth coming out of the mini peak season.
Looking at Slide 11.
Our common equity Tier 1 ratio increased 180 basis points sequentially to 14.9%, well above our internal target of 10.5%.
We have continued to fund our quarterly dividend at $0.44 per share and repurchased $119 million of common stock during the quarter.
Our Board of Directors previously authorized up to $1.1 billion of repurchases.
We will likely accelerate our share repurchases in the second quarter and we see the potential for capital returns to increase in the second half of the year.
As I mentioned earlier, we continue to optimize our funding mix and consumer deposits now make up 65% of total funding.
Our goal remains to have 70% to 80% of our funding from deposits, which we feel is achievable.
Though, we expect some quarter-to-quarter variability in this figure.
Moving to Slide 12.
Our perspectives on 2021 have evolved from last quarter.
We continue to anticipate modest positive loan growth for the year.
We are investing in new account acquisition and have already seen strong sales growth through the first quarter.
High payment rates will continue to pressure loan growth near-term but should become less of a headwind over the course of the year.
Versus the first quarter level, we expect our NIM to remain in a relatively narrow range over the rest of the year.
While we'll continue to benefit from improved funding cost and mix, we may experience modest yield pressure over the next few quarters from variability in the revolve rate.
Our commitment to expense management has not changed.
But as Roger mentioned, we believe there is an opportunity to drive long-term growth through increased marketing and further investments in data and analytics.
Excluding marketing, expenses should be near flat from the prior year.
Credit performance has remained stronger than originally anticipated, and we now expect credit losses to be flat to down compared to 2020.
Lastly, we remain committed to returning capital to shareholders through dividend and buybacks.
Given the level of reserve release and the strength of our fundamental performance, we plan to revisit our capital plan -- capital return levels for the second half of this year.
In summary, we're pleased with our first quarter results.
Our sales trend, credit expansion and marketing investments positioned us well for growth going forward.
We released $879 million of reserves.
NIM continue to improve, driven by lower funding costs, and expenses were down, but we'll invest in marketing and analytics that will drive revenue, as well as operating and credit cost improvements over the longer-term.
As the economy reopens, I'm positive regarding the opportunities for growth.
We have a strong value proposition that resonates with consumers and our digital banking model positions us well for strong returns going forward.
| compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
q1 earnings per share $5.04.
net interest income for quarter decreased $68 million, or 3%, from prior year period.
q1 of 2021 included an $879 million reserve release, compared to a reserve build of $1.1 billion in q1 of 2020.
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My name is Matt McCall, I'm Vice President, Investor Relations and Corporate Development for HNI Corporation.
Actual results could differ materially.
Our members delivered strong first quarter operating results, and we will come back to that in a moment.
I want to start with an update on the ongoing COVID-19 pandemic.
What we are experiencing, what we are assuming, and how we are currently responding.
Upfront, the two most important points I would like to emphasize are; first, we will prioritize the health and well-being of all HNI members during this pandemic.
And second, we will successfully navigate this pandemic.
With respect to my first point, the HNI culture again is rising to the occasion.
Our members are coming together to support our communities and doing what is necessary to move the business forward.
To help protect our teams, we have aggressively implemented measures consistent with CDC guidelines across our organization.
We have reorganized our production facilities to provide appropriate social distancing.
We have increased the frequency and depth of facility cleaning.
All members able to work remotely are currently doing so.
With these measures in place, we are currently operating in our major facilities.
Additionally, we are utilizing our facilities in Iowa, New York and North Carolina to produce personal protective equipment.
These efforts include the manufacture of washable cloth face masks, face mask coverings and protective gowns for used by healthcare professionals and the public in general.
We are donating these critical supplies to our first responders, healthcare systems and hospitals in our communities.
Let's talk about my second point, how we will successfully navigate this pandemic.
We have a strong balance sheet and have liquidity and cash flow to maintain our business and meet our obligations for a prolonged period.
With the sudden global economic shock -- while the sudden global economic shock has been felt across the majority of our businesses and geographies, we are responding accordingly and our teams are focused on three objectives.
Number one, we are adjusting to the current operating environment and staying vigilant in our short-term scenario planning.
Number two, we are maintaining our long-term strategic focus.
And number three, we are focused on emerging from this period with our business poised to hit the ground running.
Let me detail some of the actions we have taken to date to reduce cost and support our free cash flow.
First, we temporarily reduced salaries across the board.
Base salaries were reduced by 10% for all exempt salaried employees and by 15% for all executives.
My salary was reduced by 25%.
We plan to reevaluate these measures in six months.
Second, our board of directors elected to reduce by 25% both their cap retainers for the next six months and their annual equity award.
Third, to better match staffing levels with demand activity, various groups and/or members have been furloughed.
We are supporting our furloughed members by covering all health and dental insurance premiums during the furloughed period, both the company and member portions.
These furloughs are being continuously reevaluated as conditions evolve.
Fourth, we suspended our share repurchase activity.
As a point of reference, in recent years, buybacks have averaged approximately $55 million annually.
Finally, we reduced our capital expenditure budget for 2020 from approximately $65 million to $35 million.
Our planned growth investment spending for 2020 is being maintained at a reduced level of approximately 50%.
In total, we currently anticipate $60 million to $65 million of cost improvement during 2020 as compared to 2019 with the full run rate expected by mid-Q2.
In addition, from a cash flow perspective, savings associated with our buyback suspension and our capex reductions will add to our liquidity buffer.
Again, these measures are part of our balanced approach to address the impact of the pandemic and are aimed at supporting our members and our free cash flow in 2020 as we navigate through these unchartered waters.
I will now share some thoughts on the business and demand picture, what we are experiencing and currently assuming.
While the extent of the pressure from the crisis is still uncertain, we believe several data points indicate we will see near-term slowdown in our businesses.
The first data point is our recent order activity.
Not surprisingly, our orders over the last four weeks are trending down.
Domestic office furniture orders are down 35% versus prior year period.
That rate does not include e-commerce, which continues to show strong growth.
In fact, our e-commerce orders are up 120% versus the prior year levels, in large part due to a huge spike in demand for home office products.
Orders for our Hearth business during the same period are down 20%.
The second data point to consider is our experience in China.
Our Furniture business in China faced pressure from the pandemic in Q1.
Although China is a very different market compared to the U.S., our experience there may provide insight into the trend we could see domestically.
Demand dropped quickly as measures to counteract the pandemic were implemented.
Approximately eight weeks later, we started to see volume trends recover as businesses began to reopen.
While we are still well below normal levels, the trend has improved.
The third data point to look at is what happened to our markets in previous recessions.
We are not saying the current downturn will play out the same way, as this one is certainly unique, but looking at history gives more data points to consider.
In each of the last two downturns, the commercial furniture industry volume declined a little over 30%.
Building products and housing were hit hard in the last recession.
We are not expecting that level of severity this time.
Compared to the great recession, construction levels are lower, inventories are tighter and there is not an overhang of homes held by speculative buyers and subprime borrowers.
Based on these data points, we anticipate and we are seeing a significant near-term slowdown in our businesses.
Right now, we do not have good visibility on the depth and duration of the decline.
We have run and are prepared for a variety of scenarios.
Despite these near-term pressures, we see the potential for the post-crisis environment to positively impact our business segments in a couple of different ways.
In our Furniture segment, in addition to incremental demand tied to work from home trends, office floor plates will most likely see change to accommodate less dense configurations that better support social distancing.
In fact, in the last few weeks, we have already seen companies reconsider their plant layouts.
In addition, our architectural products platform is also well positioned for this trend.
The diverse product line-up can quickly create physical separation with minimal construction time, while maintaining natural light.
In our Hearth Products segment, we may see increasing benefit from a shift away from dense multifamily construction toward more single-family homes.
This will be a positive demand driver for our Hearth Products segment.
In addition, we believe the extended period of shelter in place could drive elevated remodel spending as consumers look to spend more money where they are spending more time.
I will then come back and highlight the key elements of our long-term strategic framework.
Our members delivered a strong first quarter.
Consolidated non-GAAP net income per diluted share was $0.21, which represented a substantial increase versus the $0.02 reported in the first quarter of 2019.
First quarter consolidated organic sales decreased 2.5% versus the prior year to $469 million.
Including the benefit of acquisitions, sales were down 2.2%.
In the Office Furniture segment, first quarter sales decreased 4.3% year-over-year.
We again generated strong profit growth in Office Furniture with first quarter non-GAAP operating income improving $4 million.
Sales in our Hearth Product segment increased 2.6% year-over-year organically or 3.5% when including acquisitions.
Within the Hearth segment, new residential construction revenue grew 3.2% organically and sales of remodel and retrofit products increased 1.9% year-over-year.
We also showed strong profit improvement in the Hearth segment.
Hearth non-GAAP operating profit increased 17% versus the prior year quarter.
For HNI overall, first quarter gross profit margin expanded 220 basis points year-over-year to 37.6%.
Non-GAAP operating profit grew 279% versus the prior year.
And non-GAAP operating margin in the first quarter expanded 220 basis points to 3% of net sales.
Our non-GAAP results exclude $37.7 million of charges related to intangible impairments and one-time items related to the COVID-19 crisis.
So overall, our first quarter results demonstrate the strength of our operating platform.
Our annual productivity and cost saving efforts again drove improved profitability.
Let's now talk about our liquidity and debt levels.
At the end of the first quarter, we had $230 million in total debt, representing a gross leverage ratio of 1.0.
This is well below the 3.5 times gross leverage covenant in our existing loan agreements.
Our first debt maturity is not until 2023.
Liquidity, as measured by the combination of cash and available capacity on our lending facilities, totaled more than $350 million at quarter end.
This is equal to approximately two years of recent free cash flow levels.
Let's shift to covering some of the scenario analysis we've done.
Let's start with emphasizing that we are not providing sales and earnings guidance.
That said, we have evaluated our earnings, cash flow and balance sheet under various scenarios.
The scenarios indicate the following.
First, we would be able to manage to a 25% deleverage or decremental margin with our cost actions.
Second, we would generate free cash flow at or above our current dividend level.
Third, year end debt levels would be similar or slightly above last year's ending balance.
And finally, we would remain well within our debt covenants.
They also indicate we should expect a sizable earnings loss in the second quarter.
In our scenarios, we do remain solidly profitable on a non-GAAP basis for the year, and we'll manage cost accordingly.
In addition to these scenarios, we thought we'd share the results of our stress test where we model the limits of our current capital structure.
What it showed is we can support nearly $270 million in debt with zero cash earnings.
This is due in part to the $77 million in annual depreciation and amortization we incur.
Please note, the stress test is not an outlook or scenario.
We are not providing color around what circumstances might drive us to this condition.
It has been solely to illustrate the financial flexibility of our business model.
In my letter to shareholders recently published in the HNI annual report, I introduced our three strategic priorities.
While HNI's unique member-owner culture remains our foundation, our corporatewide focus and members efforts going forward are centered on the following three pillars.
First, we will be laser-focused on the customer.
Customer journeys in our markets are changing and the impacts of the pandemic will create more change.
To capitalize on these changes and identify and take advantage of the new market dynamics, we are investing in new tools and capabilities in the areas of data analytics, digital assets, branding, e-commerce and expanded market coverage.
Second, we are simplifying the buying process.
Buying Office Furniture and Hearth Products can be complicated and time consuming.
There are large numbers of options and configurations to sort through, complicated installations to coordinate and tight timelines to manage.
And navigating the process can take multiple in-person interactions.
Customers today are less willing to go through that kind of process and they are upping their expectations.
We are focused on transforming the experience to reduce their effort.
Third, we will leverage our lean heritage.
HNI's long-standing and well established culture of rapid continuous improvement and our recent results demonstrate our capability to leverage that lean heritage.
We are doubling our efforts here in order to unlock our tool set in support of our first two pillars that I just referenced.
Again, while our near-term focus is on our members' health, safety and our overall cash flow, our strategic framework will help drive significant improvements over the long-term.
Later this year, as the pandemic-driven economy, economic uncertainty moderates, we plan to rollout a more detailed version of our framework.
| q1 non-gaap earnings per share $0.21.
q1 sales fell 2.2 percent to $468.7 million.
gaap operating profit was impacted by intangible impairments and one-time charges related to covid-19 crisis of $37.7 million in quarter.
base salaries for salaried exempt members were reduced by 10 percent; executive salaries were reduced by 15 percent.
ceo jeff lorenger's salary was reduced by 25 percent.
members have been furloughed.
reduced its capital expenditure budget for 2020 from approximately $65 million to $35 million.
board of directors reduced its cash and equity retainers by 25 percent.
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These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website, herbalife.com.
Additionally, when management makes reference to volumes during this conference call, they are referring to volume points.
Over the course of the global pandemic, we have delivered unprecedented business performance and growth.
Despite challenging comparisons in the third and fourth quarter, we remain on track for another record sales year.
The fundamental tailwinds driving the global nutrition industry, along with demand for our science-based nutrition products, continue to benefit the company.
In Q3, we reported worldwide net sales of $1.4 billion, a decline of 6% compared to the prior year period.
These results were in line with the updated guidance that we issued in September.
On a two year stack basis, net sales grew 15% compared to the third quarter of 2019.
For the third quarter, we reported earnings per share of $1.09 per diluted share and net income of $117.4 million.
Adjusted diluted earnings per share of $1.21 was above the top end of our revised Q3 guidance.
Adjusted EBITDA of $222.4 million also exceeded the high end of our guidance range.
Uncertainty in global markets fueled by the ongoing pandemic and the Delta variant has presented challenges in predicting behavior in our channel.
As we discussed at our recent Investor Day, we observed lower-than-expected activity rates during the month of August, which led to our revised Q3 and full year 2021 guidance.
The decrease in activity rates was primarily driven by fewer new distributors and preferred customers entering our channel.
This lower level of contribution from new entrants remained relatively consistent in the month of September and is reflected in our guidance for the remainder of the year.
For the quarter, the number of new distributors and preferred customers joining the business was down 19% compared to record numbers of new entrants in Q3 2020, but it was still up 28% compared to Q3 of 2019, excluding China.
Despite the slowdown in new entrants, we remain confident the foundation of our business is strong, and our long-term strategy is solid.
In Q3, the number of sales leaders actively selling in the channel was up 10% compared to the prior year period, excluding China.
Turning to our regional performance.
The Asia Pacific region had another quarter of double-digit net sales growth, up 11% compared to the prior year.
The region was led by continued strength in India, which grew 46%.
India set its fifth straight quarterly net sales record as well as a monthly net sales record in September.
Over 220,000 new preferred customers joined the business in India, a record number, and a reflection of the momentum that we are seeing in that market.
In Vietnam, government COVID restrictions forced our Nutrition Clubs to close for the quarter, which contributed to growth of 13%, which was lower than the growth rates we had recently experienced in that market.
Additionally, a third wave of COVID-19 throughout Indonesia resulted in community restrictions in all provinces, and impacted our nutrition club utilization, resulting in a sales decline of 10%.
Looking at North America.
We saw a decline in net sales of 11%.
This decline is up against an extraordinarily high prior year comparison period.
The two year stacked growth rate in the region increased 38% compared to Q3 of 2019.
We continue to see strength in our U.S. nutrition club business as many parts of the country returned to more in-person activities.
While we continue to closely monitor pandemic conditions, we kicked off a series of in-person distributor events in October, and are encouraged by the initial attendance and the excitement in the channel as we begin to once again meet face to face.
Similar to the North America region, EMEA experienced a challenging year-over-year comparison, resulting in a 4% decline.
However, in the region, we have seen a 16% year-over-year increase in the number of active supervisors, which reflects the continued strength and solid foundation of the EMEA business.
Looking at the two year stack in the region, EMEA grew 33% compared to the third quarter of 2019.
Although the combined new distributor and preferred customer numbers are lower than Q3 2020, we saw growth of 24% compared to the more normalized 2019 comparison period.
In China, net sales declined 30% compared to the third quarter of 2020.
During the second quarter earnings call, we outlined the actions that we're taking in the market.
Overall, we believe our strategic initiatives, which include a focus on our digital transformation and daily consumption at Nutrition Clubs, will improve the number of new entrants joining the business and create a more active base of service providers in the long term.
Although the impact of these initiatives is yet to be seen in our top line results, we remain confident, and expect these strategies will benefit our sales performance over time.
For the full year 2021, we are reiterating the outlook that we provided in September for the top and bottom line.
Alex will take you through our guidance in a bit more detail shortly.
We anticipate this to be our go-forward cadence, which will allow time for additional data to flow through our forecasting models.
Although the unpredictable and unprecedented nature of the pandemic and its economic impacts have resulted in near-term variability in our business, we remain firmly confident in the long-term growth strategy that we outlined in detail at our Investor Day.
One of the initiatives that we outlined at Investor Day to accomplish this growth was new product innovation.
And over the past several years, we have strategically built out our Herbalife24 sports nutrition brand through new products and global expansion.
And this has contributed to impressive growth in the energy, sports and fitness category, which has increased at an 18% three year CAGR from 2017 through 2020 and growth of 31% year-to-date.
We anticipate new products will be a long-term growth driver in our business, and accelerating new product development will be critical.
Currently, products introduced in the prior three years represent only 14.5% of volume points in 2020.
Our strategic objective is to increase sales attributable to new product development within the last three years to 25% over the next five years by localizing product development and improving speed to market.
We hope that you were able to attend our Investor Day where we outlined additional aspects of our growth strategy, and shared our vision on the future of the company.
For any of you that were unable to join, a full replay of the event is currently live on our Investor Relations website.
Third quarter net sales of $1.4 billion represents a decrease of 6% on a reported basis compared to the third quarter in 2020.
This was in line with updated guidance we provided in September, and a 15% increase on a two year stack basis compared to Q3 2019.
We had year-over-year net sales growth in three of our five largest markets, consisting of the U.S., which decreased 11%.
China, which was down 30%.
And Vietnam, up 13%.
Currency was a tailwind to net sales in the quarter, representing a benefit of approximately 165 basis points, excluding Venezuela.
Reported gross margin for the third quarter of 78.7% decreased by approximately 10 basis points compared to the prior year period.
The decrease was largely driven by unfavorable country mix, primarily from China, representing a smaller portion of our overall company sales.
The decreases were largely offset by the impact of routine price increases.
Third quarter 2021 reported and adjusted SG&A as a percentage of net sales were 34% and 33.6%, respectively.
Excluding China member payments, adjusted SG&A as a percentage of net sales was 27.6%, approximately 100 basis points unfavorable compared to the third quarter 2020.
Although this level of SG&A spend is still below our historical levels, it was an increase compared to the prior year where costs were significantly disrupted by the global pandemic.
For the third quarter, we reported net income of approximately $117.4 million or $1.09 per diluted share.
Adjusted earnings per share of $1.21 was above the high end of our Q3 guidance, and was an increase of approximately 5% compared to the prior year period.
Currency was a benefit of $0.04 in the quarter versus the prior year period.
Adjusted EBITDA of $222 million also exceeded the high end of our guidance range.
Over the first nine months of the year, the company has generated over $409 million of net income and $740 million of adjusted EBITDA.
Our adjusted diluted earnings per share and EBITDA figures continue to exclude items we consider to be outside of normal company operations and provide measures we believe will be useful to investors when analyzing period-over-period comparisons of our results.
This quarter, you will notice we have a new exclusion item for onetime expenses related to transformation initiatives.
Management has begun efforts to design and build to reorganize both front and back office operations.
We continue to assess scope, and will update investors in February.
We are reiterating our fiscal year 2021 guidance for the top and bottom line.
Across the guidance ranges, this implies annual records for net sales, adjusted earnings per share and adjusted EBITDA.
Our fiscal year 2021 capex guidance has been updated to a range of $145 million to $175 million.
Currency remains a tailwind, and we project an approximate 200 basis points tailwind due to currency for the full year compared to the expected 220 basis points benefit from a quarter ago.
For the full year, our guidance includes a projected currency tailwind of approximately $0.11 per diluted share, which is $0.04 lower than the currency benefit included in our prior guidance.
As John referenced, we are expecting to provide guidance for 2022 on next quarter's earnings call.
We will also be monitoring potential inflationary impacts on our business.
Like many other companies, we have started to observe higher-than-usual cost increases in our supply chain with respect to raw materials, shipping costs and labor at our manufacturing facilities.
Now we will turn to our cash position, capital structure and our share repurchase activity.
Through the first nine months of the year, we have generated approximately $375 million of operating cash flow.
During the third quarter, our cash flow was negatively impacted by timing on several working capital accounts.
Given this unfavorable timing, we no longer anticipate operating cash flow to be higher in 2021 than 2020.
However, we expect these items to net out in 2022, and results in a relatively more favorable cash flow environment next year.
At the end of the quarter, we had $678 million of cash on hand.
During the third quarter, we completed approximately $162 million in share repurchases.
Given the level of our share price, we were able to opportunistically accelerate our repurchases ahead of our initial expectation of $100 million for the quarter.
Our fully diluted share count as of the end of Q3 was approximately $105.3 million.
We expect to complete approximately $100 million of share repurchases during the fourth quarter, which will result in just under $1 billion of share repurchases for the full year 2021.
| q3 sales fell 6 percent to $1.4 billion.
q3 earnings per share $1.09.
reiterating fy 2021 outlook for top and bottom line.
q3 adjusted earnings per share $1.21.
|
This is Tim Argo, Senior Vice President of Finance for MAA.
Actual results may differ materially from our projections.
As detailed in our fourth quarter earnings report, MAA ended 2020 on a positive note, results were ahead of expectations, and we carry good momentum into calendar year 2021.
During the fourth quarter, leasing traffic was strong, and we captured 6% higher move-ins as compared to prior year.
And despite the normal seasonal slowdown during the holidays, we were able to capture positive blended lease-over-lease rent growth that equaled the prior third quarter with particularly strong renewal lease pricing averaging 5.2% in Q4.
Average physical occupancy also remained strong at 95.7% in the fourth quarter, a slight improvement from the performance in Q3.
We believe these trends supported by improving employment conditions and the positive migration trends across our footprint positions MAA for continued outperformance into the coming spring and summer leasing season.
Overall, conditions are setting up for a solid recovery cycle for apartment leasing fundamental across the Sun Belt over the next three years or so as demand recovers and supply levels moderate a bit into 2022.
I believe for several reasons that MAA is in particularly strong position as we head into the recovery part of the cycle.
First, we expect that our Sun Belt markets will continue to capture job growth, migration trends and demand for apartment housing that will be well ahead of national trends.
While there were clearly favorable Sun Belt migration trends by both employers and households prior to COVID, this past year the trends accelerated.
The primary reasons behind these favorable migration trends, including enhanced affordability, favorable business climates and lower taxes will still be with us well past the point we get the pressures associated with COVID behind us.
Secondly, the efforts we have under way this past year implementing change to a number of our processes involving new technology and web-based tools will continue to drive more opportunity for margin expansion.
Specifically, steps taken to automate aspects of both our leasing and maintenance service operations will drive more efficiency with personnel cost.
We expect to begin harvesting some of those early benefits later this year.
Our redevelopment operation aimed at upgrading and repositioning many of our existing properties continues to capture very attractive rent growth and returns on capital.
These higher levels of -- the higher levels of new apartment supply introduced into a number of markets over the past year will actually expand this redevelopment opportunity for us over the next couple of years.
Our external growth pipeline executed through in-house development, prepurchase of joint venture development projects and the acquisition of existing properties will continue to expand over the next year.
Finally, and importantly, our balance sheet remains in a very strong position with ample capacity to support both our redevelopment and our new growth initiatives.
Calendar year 2020 was certainly not the year we expected, but MAA's full cycle strategy with a uniquely diversified portfolio across the Sun Belt supported by a strong operating platform and balance sheet position the company to hold up well.
Our strategy is working and our platform capabilities are strong.
However, it's your intensity and passion for serving those who depend on our company that enables us to truly excel.
The recovery we saw beginning in May and June continued across the portfolio through the fourth quarter.
Leasing volume for the quarter was up 6%.
This allowed us to improve average daily occupancy from 95.6% in the third quarter to 95.7% in the fourth quarter.
In addition to the improvement in occupancy, we were able to hold blended rents in the fourth quarter, in line with the third quarter and an 80 basis point increase.
All in-place rents or effective rent growth on a year-over-year basis improved 1.3% for the fourth quarter.
As noted in the release, collections during the quarter were strong.
We collected 99.2% of build rent in the fourth quarter.
This is the same result we had in the third quarter of 2020.
We've worked diligently to identify and support those who need help because of COVID-19.
The numbers of those seeking assistance has dropped over time.
In April, we had 5,600 residents on relief plans.
The number of participants has decreased to just 491 for the January rental assistance plan.
This represents less than 0.5% of our 100,000 units.
We saw steady interest in our product upgrade initiatives.
During the fourth quarter, we made progress on our interior unit redevelopment program as well as the installation of our Smart Home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
For the full year 2020, we installed 23,950 Smart Home packages and completed just over 4,200 interior unit upgrades.
January's collections are in line with the good results we saw in the fourth quarter.
As of January 31, we've collected 98.7% of rent build which is comparable to the month end number for the third and fourth quarters of 2020.
Leasing volume in January was strong, up 4.9% from last year.
Blended lease-over-lease rent growth effective during January exceeded last year's results for the first time since March.
Effective blended lease-over-lease pricing for January was positive 2.2%, 40 basis improvement from the prior year.
Effective new lease pricing for January was negative 1.8%.
This is a 70 basis point improvement from January of last year.
January renewals effective during the month were up 6.3%.
Our customer service scores improved 110 basis points over the prior year.
This aids to our retention trends, which are positive for January, February and March, as well as lease-over-lease renewal rates for those months, which are in the 5.5 to 6.5 range.
Average daily occupancy for the month of January is 95.4%, which is even with January of last year.
60-day exposure, which is all vacant units plus notices through a 60-day period, is just 7.8%.
We're well positioned as we move into 2021.
Led by job growth, which is expected to increase 3.4% in 2021 versus the 6.1% drop we saw for our markets in 2020, we expect to see the broad recovery in our region and the country continue.
We expect Phoenix, Tampa, Raleigh and Jacksonville to be our strongest markets and expect Houston, Orlando and D.C. to recover at a slower rate.
They served and care for our residents and our associates, and they have adapted to new business conditions that drive -- and they drive our recovery.
While most buyers have returned to the market, the lack of available for sale properties continues to restrict transaction volume.
Investor demand for multifamily product within our region of the country is very strong.
And this supply/demand imbalance is driving aggressive pricing.
Due to the robust demand, supported by continued low interest rates, cap rates have compressed further and are frequently in the high 3% and low 4% range for high-quality properties in desirable locations within our markets.
We expect to remain active in the transaction market this year.
So based on pricing levels we're currently seeing, we're not optimistic that we will succeed in finding existing communities that will clear our underwriting hurdles in 2021.
While acquiring will be a challenge, as noted in the earnings guidance, we do plan to come to market with $200 million to $250 million of planned property dispositions this year.
We will redeploy those proceeds into our growing development pipeline, which currently stands at $595 million with eight projects in just over 2,600 units.
In the fourth quarter, we started construction on the MAA Windmill Hill in Austin, Texas as well as Novel Val Vista, a prepurchase in Phoenix, Arizona.
Both of these are lower density suburban projects that we expect to deliver stabilized NOI yields around 6%, well in excess of our current acquisition cap rates.
Despite increased construction costs as well as some supply chain issues related specifically to cabinets and appliances, our development and prepurchase projects remain on budget with no significant delay concerns at this point.
We have several other development sites owned or under contract that we hope to start construction on in 2021 and into 2022.
We are encouraged that despite facing some supply pressure, our Phase two lease-up property located in Fort Worth continues to lease up at our original expectations as does our soon to be completed Phase two in Dallas, where over 90% of the units have been delivered.
Turning to the outlook for new supply deliveries in 2021.
Based on our assessment and the projection data we have, new supply deliveries across our major markets are projected to remain flat with 2020 levels, at 2.8% of existing inventory.
Consistent with previous year's, we expect delayed starts, extended construction schedules, canceled projects and overall construction capacity constraints to continue to impact actual supply deliveries to some degree.
While clearly, new supply does have an impact on our business, it's just one side of the equation with demand playing a significant role as well.
And for reasons Eric mentioned in his comments, we believe the demand for multifamily housing within our region of the country will remain strong and improve this year as the economy continues to recover.
When looking at the ratios for expected job growth to new supply deliveries in 2021, we expect leasing conditions in our footprint to improve from last year.
Encouragingly, the data on permitting activity and construction starts for our region of the country continue to show activity below prepandemic levels.
This group -- this drop in activity will likely lead to a moderating level of new supply deliveries into 2022, setting up for what we believe will be an improved leasing environment beyond this year.
That's all I have in the way of prepared comments.
Core FFO of $1.65 per share for the fourth quarter produced full year core FFO of $6.43 per share, which represented a 2.7% growth over the prior year and is well above our internal expectations following the breakout of the pandemic.
Stable occupancy, strong collections and positive pricing performance were the primary drivers of continued same-store revenue growth for the fourth quarter, which is 1.8% and for the full year, which is 2.5%.
As expected, same-store operating expenses for the fourth quarter were impacted by growth in real estate taxes, insurance costs and the continued rollout of the bulk internet program, which is included in utilities expenses.
And though some of this pressure will carry into 2021, we expect overall same-store operating expenses to begin moderating this year, which I'll discuss just a bit more in a moment.
Our balance sheet remains in great shape.
We had no significant refinancing activity during the fourth quarter, but we continue to fund the development pipeline and internal redevelopment programs.
As Brad mentioned, our development pipeline has increased to eight deals with total projected costs of $595 million.
During the quarter, we funded $104 million of development costs, leaving less than half or another $259 million remaining to be funded toward the completion of the current pipeline.
Though still growing, our pipeline is still is only about 3% of our enterprise value, which is a modest risk, given the overall strength of our balance sheet and a diversified portfolio strategy.
As Tom mentioned, we also made good progress toward the -- during the quarter on our internal programs, funding a total of $40 million toward the interior unit redevelopments, Smart Home installations and external amenity upgrades, bringing our full year funding for lease programs to $76 million, which is expected to begin contributing to our growth more strongly late in 2021 and 2022.
We ended the year with low leverage, debt-to-EBITDA of only 4.8 times and with $850 million of combined cash and borrowing capacity under our line of credit.
Finally, we provided initial earnings guidance for 2021 with our release, which is detailed in our supplemental information package.
Core FFO for the full year is projected to be $6.30 to $6.60 per share, which is $6.45 at the midpoint.
The primary driver of earnings performance is same-store revenue growth, which is projected to be around 2% for the year.
This growth is based on the expectation of continued improving economic trends and job growth in our markets, as Tom outlined, and we believe these trends will support both stable occupancy levels, averaging around 95.5% for the year.
And modestly improving pricing trends through the year, driving effective rent growth for the year of around 1.7%.
An additional contribution of 30 to 40 basis points of projected revenue growth for the year is related to the final portion of our Double Play bulk internet program.
We do expect the first quarter to be our lowest revenue growth for the year as it will bear the full impact of 2020's pricing performance growing from there as the -- head from there as improving leasing trends take full effect.
Same-store operating expense growth is projected to moderate some as compared to 2020, will continue to be impacted by the rollout of Double Play and higher insurance costs with these costs combining for an estimated 1.4% of the same-store expense growth in 2021.
But excluding Double Play and insurance, all other same-store expenses are expected to increase in a more modest 2.5% to 3% range for the full year.
And this includes real estate tax growth of 3.75% at the midpoint, which is moderating, but still somewhat elevated.
Overhead costs for 2021 are projected to be more normalized, with total overhead expenses expected to be about $107 million for the year, which is a 2.8% increase over the midpoint of our original guidance for 2020.
Our forecast also assumes development funding of $250 million to $350 million for the year, primarily provided by projected asset sales of $200 million to $250 million.
And given our current forecast, we have no current plans to raise additional equity, and we expect to end the year with our debt-to-EBITDA just below 5 times.
So that's all we have in the way of prepared comments.
| sees 2021 core ffo per share – diluted $6.30 to $6.60.
|
[Technical Issues] meaning of the federal securities laws.
These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website herbalife.com.
Additionally, when management makes reference to volumes during this conference call, they are referring to volume points.
During the second quarter we delivered worldwide reported net sales of $1.6 billion, growth of 15% compared to the prior year.
Net sales grew by double-digits for the fourth straight quarter.
All three of our core product categories grew double-digits, led by the Energy, Sports and Fitness category, which increased 45% compared to the prior year.
All of our regions, except China, experienced net sales growth in the quarter with four of our six regions increasing by more than 20%.
We will discuss China in detail toward the end of my remarks.
The underlying fundamentals of our business remain strong.
For the third quarter we are guiding reported net sales to be in the range of down 1% to up 5%.
For the full year, we expect net sales growth to be within a range of 8.5% to 12.5% compared to the prior year.
In addition to our net sales and earnings per share guidance, this quarter we have initiated guidance for adjusted EBITDA.
For the full-year 2021, we expect to generate between $875 million and $935 million of adjusted EBITDA, which highlights the ongoing profitability and underpins the cash flow generation of our business.
Alex will provide detail on our new guidance and why we believe this incremental metric is valuable for investors as they analyze our business.
Now let me get into our Q2 performance in more detail.
The North America region grew by 7% in the quarter, primarily driven by continued strong momentum in the US.
It is important to note that the single-digit growth is up against an extraordinarily high prior year comparison period.
However, the two-year stack growth rate of 47% in the US accelerated compared to last quarter's two-year stack.
We have seen significant growth in our US Nutrition Club business as many parts of the country returned to more in-person activities.
Over the first half of the year, we have had an increase of over 2,000 Nutrition Club locations in the US, with the total club count now exceeding 11,000.
While we continue to monitor pandemic conditions, we are currently planning a return to some of our in-person training activities and sales events in the second half of the year, utilizing a hybrid format.
The Asia Pacific region had another quarter of powerful growth, up 38% compared to the prior year.
The region had notable strength in Vietnam, which grew 60%, Malaysia, which was up 45%, Taiwan, which increased 21% and South Korea, which returned to growth with a 19% increase.
Herbalife Nutrition India has emerged as the number one direct selling company in that country based on a recent market research store report.
Our Indian business grew 93% this quarter compared to Q2 of 2020.
Recall that in Q2 2020, our business in India was disrupted by the severe public health-related restrictions imposed in response to the onset of COVID-19.
Over the past year our business in India has adapted well to ongoing pandemic conditions, implementing several successful digital strategies, including a virtual nutrition club model.
Virtual nutrition clubs incorporate many elements of traditional in-person nutrition clubs, but are conducted through virtual platforms such as Zoom or Facebook Live.
Virtual clubs establish a sense of community and a personal sense of connection elements that proved incredibly important during the pandemic.
The virtual club strategy is now being shared as a model of success with other regions around the world.
The EMEA region set a second straight quarterly net sales record with year-over-year growth of 22%.
Strong performances continued to be seen in markets such as Turkey, which was up 63%, Italy, which grew 38%, Belgium, which was up 25%, and Spain, which increased 21% in the quarter.
The United Kingdom delivered 24% growth, which was on top of a challenging comparison of 73% growth experienced in Q2 of 2020.
Although combined new distributor and preferred customer numbers are lower than the peak of Q2 2020, we had significant growth of 56% compared to the more normalized 2019 comparison period.
We have also seen a 27% year-over-year increase in the number of active supervisors, which reflects the continued strength of the EMEA business over the past 18 months and helped drive the record performance.
Mexico grew 23% in the quarter, its first quarter of double-digit growth since 2013.
Net sales growth was aided by a currency tailwind in the quarter.
Our members in Mexico are beginning to adopt the preferred customer program, which was implemented in March.
We'll talk more about preferred customers in a moment.
Additionally, the South and Central American region grew 23% in the quarter.
The region was led by Chile, which grew over 200%, Bolivia, which was up 58%, Guatemala, which increased 57%, and Peru, which was up 20% compared to the prior year.
The region also benefited from the implementation of the preferred customer program, which is now live in eight of that region's markets.
Let me go a little deeper on the preferred customer program, which is one of our key strategic elements.
Segmentation, which for us means bifurcating our member base into two groups, distributors who intend to sell product and preferred customers or as they're known in the US, preferred members who are only product consumers.
The preferred customer program is now live in 25 markets around the world.
These markets represent approximately 70% of our total net sales.
The ability to identify and distinguish preferred customers from distributors provides us with a powerful dataset on each group.
We believe this primary customer data will be incredibly valuable.
We will talk more about our preferred customer program and segmentation in our upcoming Investor Day.
We're also seeing more interest in our business from young adults as approximately two-thirds of new distributors and preferred customers who joined Herbalife Nutrition during the second quarter were Millennials or Gen Z. The ability to run their business through digital platforms and to utilize social media to connect with consumers is appealing to this tech savvy demographic.
As we evaluate future product launches, we have Gen Z and their consumer preferences in mind.
This demographic is particularly interested in sports nutrition, clean label products, and offering such as our recently launched hemp cannabinoid products.
Now returning to China, in China net sales declined 16% compared to the second quarter of 2020.
This year-over-year decline for the quarter was below our expectations.
We'd like to speak about China in more detail to give you a sense of what we're seeing and more importantly, what we're doing about it.
China represented approximately 11% of global net sales and just under 6% of global volume in the second quarter.
We're intensely focused on two key metrics that have decreased recently in China.
One, the number of new service providers joining the business and two, the activity levels of our sales representatives and service providers.
We are taking a number of actions in the market to adapt our business and to turn these two metrics around.
First, we are continuing to invest in our digital platform.
We recognized in 2019 that our powerful digital platform was going to be a crucial component of our efforts for the China market.
Since we began our digital transformation, we have formed partnerships with Tencent and Alibaba to help support our efforts.
We are just now beginning to see the initial results through the increased usage of our tools.
Through the first half of the year, approximately 50% of our business was transacted through our recently launched digital platforms.
Second, many of our service providers are shifting their focus to a newer Nutrition Club model, which includes a smaller scale, more rural location with an increase in daily customer interactions.
This type of Nutrition Club more closely resembles the very successful Nutrition Club businesses we have in many other parts of the world such as our US market.
Third, with the goal of improving the activity and quality of our service providers in China, we elected to modify our qualification requirements.
Historically, in our business, we found that strategic changes to qualification methods often create short-term disruption, but eventually, lead to long-term positive results.
Fourth, beginning this month, we believe we've secured the ability to expedite the business licensing processes for our new service providers, where they can obtain their license significantly faster than getting their license on their own.
We anticipate this accelerated business licensing timeline will lead to incremental new entrants.
Overall, we believe these initiatives will improve the number of new entrants joining the business and create a more active base of service providers in the long term.
While below our expectations, China's volume has been more stable sequentially from month-to-month this year.
The China comparisons continue to be difficult for Q3, but they actually get much easier toward the end of 2021 and into early 2022.
And we expect China to be additive to the total company growth within the next year.
Lastly, let me add that although at its current level China is a relatively small part of our overall business, we believe it offers significant growth opportunity long term and we remain firmly committed to the market.
So we've set a date for our Virtual Investor Day, which will take place on September 14th at 8:00 AM Pacific Time.
We look forward to sharing a deep dive on our company, on our strategy and on many of the initiatives that we have underway to drive continued growth.
Second quarter net sales of $1.6 billion represents an increase of 15% on a reported basis compared to the second quarter in 2020.
This was the largest quarterly net sales result in company history.
The growth was broad-based as over 50 of our markets grew by double-digits or more.
We had net sales growth in four of our five largest markets, consisting of the US, which grew 6%, China, which was down 16%, India, up 93%, Mexico, up 23% and Vietnam up 60%.
Currency was a tailwind to net sales in the quarter, representing a benefit of approximately 520 basis points, excluding Venezuela.
Reported gross margin for the second quarter of 79.2% decreased by approximately 60 basis points compared to the prior year period.
The decrease was largely driven by unfavorable country mix, primarily from China representing a smaller portion of our overall company sales.
Second quarter 2021 reported an adjusted SG&A as a percentage of net sales were 32.6% and 32.9%, respectively.
Excluding China member payments, adjusted SG&A as a percentage of net sales was 26.6%, approximately 30 basis points unfavorable compared to the second quarter of 2020.
This was largely due to a return to more normal levels of advertising promotion and sales event spending, which was significantly disrupted during the second quarter 2020.
For the second quarter, we reported net income of approximately $144.2 million or $1.31 per diluted share.
Adjusted earnings per share of $1.52 was a beat of $0.15 above the top end of our Q2 guidance.
Our expected year-over-year currency benefit for the second quarter should have been approximately $0.10 lower than originally projected, which translates to our actual currency adjusted earnings per share exceeding the top end of our guidance range by $0.17.
This resulted in the largest quarterly adjusted EBITDA result in company history for the second quarter in a row, with adjusted EBITDA of approximately $262 million.
Combined with the prior record in Q1, we have generated over $500 million of adjusted EBITDA during the first half of the year.
We are issuing guidance for the third quarter 2021, as well as updating our full-year 2021 guidance.
For the third quarter, we estimate net sales to be in the range of down 1% to up 5%, which includes an approximate 200 basis points currency tailwind.
The third quarter 2021 represents the most challenging comparison period of the year as we are comping 22% growth in Q3 of 2020.
Looking back over the past four quarters, the two-year stack has range between approximately 19% and 28%.
This quarter's guidance implies a two-year stack of 21% to 27% growth.
Third quarter adjusted diluted earnings per share is expected to be in a range of $1.05 to $1.25.
Adjusted diluted earnings per share includes a projected currency benefit of $0.06 compared to the third quarter of 2020.
John described earlier the strategic initiatives we have in place to return China to growth.
With that said, our expectations for China have come down in 2021.
This is reflected in our updated net sales guidance of 8.5% to 12.5% growth on a reported basis.
Despite the reduction from China, the midpoint of our guidance still implies double-digit net sales growth for the year.
Currency remains a tailwind and we now project an approximate 220 basis point tailwind due to currency for the full year compared to the expected 200 basis points benefit from a quarter ago.
We are updating full-year 2021 guidance for adjusted earnings per share to a range of $4.70 to $5.10.
Despite the reduction to the midpoint of our sales guidance, the midpoint of our adjusted earnings per share range is increasing by approximately $0.05.
This raise to the midpoint of our adjusted earnings per share guidance is primarily driven by the Q2 beat, partially offset by lower sales expectations in China for the remainder of the year.
For the full year, our guidance includes a projected currency tailwind of approximately $0.15 per diluted share, which is $0.03 higher than the currency benefit included in our prior guidance.
Incrementally, we are initiating adjusted EBITDA guidance for the third quarter and full-year 2021 of $205 million to $235 million and $875 million to $935 million, respectively.
We believe this incremental metric will be helpful to investors as they analyze the profitability and cash flow generation potential of our business.
Now we will turn to our cash position, capital structure and our share repurchase activity.
Through the first half of the year, we have generated $287 million of operating cash flow.
This was lower than our cash flow generation in the prior year period.
However, for the full year we continue to anticipate cash flow will be stronger than the $629 million we generated in 2020.
At the end of the second quarter, we had $838 million of cash on hand.
During the second quarter, we completed approximately $98 million in share repurchases.
Our expectation is that we will complete approximately $200 million of share repurchases over the remainder of the year, resulting in over $900 million of share repurchases for the full-year 2021.
During the quarter, we completed a $600 million offering of 2029 senior notes at a rate of 4.875%.
We used a portion of the net proceeds from the offering to redeem all outstanding $400 million 2026 senior notes that paid a coupon of 7.25%.
Given the favorable rate differential of approximately 240 basis points, we were able to raise nearly $200 million more debt at effectively the same interest payment.
This transaction resulted in a charge of approximately $25 million from the loss on the extinguishment of the 2026 notes.
This one-time charge was excluded from our adjusted results.
Also, just last Friday, we announced a repricing and upsizing of our term loan A and revolver credit facilities.
The borrowing margins of both facilities were reduced by at least 25 basis points in a new pricing grid to 2.25% or lower.
The revolver was increased by approximately $48 million to $330 million with the term loan A increasing by approximately $41 million to $286 million.
The amendment and incremental commitment from our bank group demonstrates their confidence in our current and future business outlook.
We also incorporated into the term loan A and revolver facilities a sustainability linked pricing grid relative to certain ESG KPIs.
These KPIs include our use of virgin plastic materials, reductions in greenhouse gas emissions and female diversity in our senior management ranks.
Herbalife Nutrition is proud to demonstrate our commitment to an ESG strategy that is measurable through financial incentives.
| compname reports q2 sales of $1.6 bln.
q2 sales $1.6 billion versus refinitiv ibes estimate of $1.57 billion.
q2 earnings per share $1.31.
sees fy sales up 8.5 to 12.5 percent.
q2 adjusted earnings per share $1.52.
sees fy 2021 adjusted diluted earnings per share guidance range $4.70 - $5.10.
sees q3 adjusted diluted earnings per share $1.05 to $1.25.
|
On the call today are Jeff Jones, our president and CEO; and Tony Bowen, our CFO.
Some of the figures that we'll discuss today are presented on a non-GAAP basis.
Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our Form 10-K for fiscal 2020 and our other SEC filings.
When we last talked, we were in the middle of what was the most unique tax season in history.
The pandemic resulted in the first-ever extension of the filing deadline and changes to nearly every aspect of our operating model.
Throughout the season, our teams demonstrated agility and resilience.
We adapted to an ever-changing environment, and we delivered to our clients when they needed us the most.
The result was a strong finish, growing revenue 300% in the quarter and serving more clients than last tax season.
We've also made progress in other areas of our business.
Our results at Wave have steadily improved as they've returned to double-digit percentage revenue growth following the initial disruption caused by the pandemic.
After the close of the quarter, we also successfully issued long-term debt and signed an important agreement with MetaBank to be the provider of our suite of financial products.
These developments have resulted in a great start to our fiscal year as we continue to build positive momentum in the business.
First, I'll talk about the recently completed tax season, providing perspectives on both our performance and the overall industry.
Then I'll give some thoughts on the progress we are making on our strategic road map.
Tony will then discuss our Q1 results and share high-level thoughts on the balance of fiscal '21.
He'll also provide an update on our capital structure, including details on our recently completed debt offering, and we'll talk about our agreement with Meta.
I'd like to start with the tax season.
The majority of the season took place while the country was dealing with the pandemic.
We navigated the various state and local orders and took steps to promote the safety and well-being of our associates and clients.
A significant number of our offices were closed, and those that weren't moved to a drop-off model with a limited in-person interaction with our clients.
The reality is that from mid-March through the end of the season, there has been no such thing as business as usual in any of our offices.
This was especially true during the May through July time frame with around half of our offices closed, and those that were open, subject to various local orders.
And while this time has been challenging, we have looked at it as an opportunity to demonstrate our commitment to our clients and communities.
Additionally, we accelerated our efforts to transform our tax business as we innovate to deliver expertise to consumers in new and exciting ways.
The capabilities we've built to enable clients to digitally drop off their forms, interact with tax pros virtually, review their returns online and sign and pay remotely provide them with the expertise they wanted when they weren't comfortable with in-person service or when our offices were closed.
And these innovations helped us engage with our DIY clients in new ways, bringing our expertise to life within our software offering.
In total, our digitally enabled returns grew over 150%.
It's clear that consumers are taking notice of how the expanded H&R Block platform is bringing digital capabilities to those who want assistance and on-demand human help to those who prefer to use software to file.
Turning to category results.
I'll start with our assisted business.
We had a strong start to the tax season as we were tracking to our goals of improving our client trajectory and holding market share.
Because of the impact of the pandemic and the changes we made to our operating model, we anticipated a decline in volume as well as the loss of market share.
Our results, however, were strong as we finished with a small share loss.
This is attributable to the agility and resilience of our associates, tax pros and franchisees that I mentioned earlier as well as the digital efforts I just discussed.
In DIY, we also finished strong.
Online growth was 10.6%, which led the total DIY return growth of 8% as we held share in the category when excluding stimulus returns.
Our product continues to evolve and win accolades from third parties.
And our clients love the experience as well as Net Promoter Scores improved again, following a significant increase in the previous season.
We're also seeing this in our retention rates, which improved over two points.
Our strategy in DIY is working.
We're pricing competitively, providing tremendous value and people are taking notice as we continue to drive awareness.
Turning to the industry.
It's important to consider two key factors when reviewing the data.
First, there were millions of people who filed tax returns solely for the purpose of receiving stimulus payments.
We believe there are between seven million to eight million returns with $1 of income and are being tracked as stimulus filers.
However, there are likely more who filed solely for the purpose of receiving a stimulus payment but reported additional income, making the exact number of stimulus filers unknown.
The second factor to consider is paper filings, which fluctuated significantly during the last few weeks of the season, making that key piece of the puzzle unreliable.
Regardless of these two variables, there were a couple of significant learnings from this season.
The first is that the industry itself is strong.
The tax refund, which is typically the largest financial transaction for most Americans each year, became even more important to people as they were adversely impacted by the pandemic.
And second, the assisted category is resilient.
Given the various stay-at-home orders, mandates for business to close and the general fear of physical interaction caused by the virus, many expected a dramatic decline in assisted filings.
Instead, we saw just a 40 basis point decline in assisted e-files and a moderate change in mix between assisted and DIY when excluding the estimated number of onetime stimulus filings.
In fact, during the pandemic from mid-March through mid-July, assisted filings actually increased 50 basis points, which is telling considering the circumstances.
With this tax season behind us, I'd like to look ahead and provide some thoughts on our strategy.
As I mentioned earlier, the work of digitally enabling our business was a key enabler of our success this year.
In other words, the investments we made allowed us to adjust our operating model while still providing the expertise and service our clients expect, and these capabilities will continue to benefit us in the future.
Looking ahead, our strategy is evolving and will go beyond the digital efforts we've undertaken in our tax business.
We continue to evaluate and reprioritize our strategic imperatives and examine our cost structure as we remain focused on growing volume, revenue and earnings over time.
When we speak in December, we'll have more to share in addition to providing our outlook for fiscal '21.
With the strong finish to the tax season, our fiscal year is off to a great start.
Today, I'll share our results for the quarter; thoughts on the remainder of fiscal '21; an update on our capital structure; and finally, some color around our recent agreement with MetaBank.
Due to our seasonality, we typically report lower revenues and a net loss during our first quarter.
This quarter's results, however, improved due to the significant tax return volume during the month of May, June and July.
Before jumping into the financials, I thought it would be helpful to provide some context on our volume and net average charge performance, which we reported in late July, as well as an update on Wave.
for the third consecutive year with a 3.3% increase in returns.
This was led by continued strength in our DIY business with a 10.6% increase in online filings.
In assisted, given that we had approximately half of our total network open and those offices were operating under a modified model, we expected a decline in return volume and a loss of market share.
Our finish to the tax season was strong, however, resulting in a decline in returns of just 2.8% and a small share loss.
Regarding pricing, our net average charge in DIY declined due to mix as well as our decision to keep our free state filing promotion through the end of the tax season.
In assisted, we targeted flat net average charge coming into the year.
Those saw a slight decrease due to mix in our company offices, partially offset by improved pricing in our franchise network.
During last quarter's call, we talked about the impact that the pandemic has had on small businesses and consequently Wave's growth trajectory.
Following a couple of months of flat year-over-year revenue, I'm pleased to report that we've seen progressively better results in the subsequent months, resulting in year-over-year growth of nearly 20% during the quarter.
Considering the circumstances, this was a tremendous outcome and a positive sign that Wave's innovative platform continue to provide value to small business owners.
The increase in tax filing volume in Wave's contribution resulted in revenue of $601 million in the fiscal first quarter, an increase of $451 million or 300% compared to the prior year.
This improvement in revenue resulted in higher variable operating expenses, primarily in tax pro compensation and credit card transaction fees.
While we anticipated this increase, it was lower than expected, as we managed labor more efficiently.
In addition to the variable expenses, we spent more in marketing due to the tax season extension.
These increases were partially offset by other expense reductions, resulting in an overall increase in operating expenses of just 30% to $448 million.
Interest expense increased $11 million as a result of our line of credit being fully drawn, which I'll discuss later.
The net result of revenues increasing at a greater rate than expenses was pre-tax income from continuing operations of $124 million compared to last year's pre-tax loss of $207 million, which is typical for our fiscal first quarter.
GAAP earnings per share improved to $0.48 compared to a prior year loss of $0.72, while non-GAAP earnings per share improved to $0.55 compared to a loss of $0.66.
In discontinued operations, there were no changes to accrued contingent liabilities related to Sand Canyon during the quarter.
With that recap of the quarter, let me provide some perspective on our expectations for fiscal '21.
Before doing so, please note that our expectations assume next tax season is completed by the normal filing deadline of mid-April.
Overall, we expect to see a significant increase in revenue and cash flow this fiscal year, not just compared to fiscal '20, but also in comparison to a typical year.
This is due to both the carryover tax season '20 into our first quarter and our expectation for a normal tax season '21.
In addition to achieving these increases, we are also focused on driving cost efficiencies in order to fund our growth imperatives.
These reductions include a hiring freeze, the elimination of merit increases, examining vendor spend, renegotiating rent across our retail footprint and limiting capital expenditures.
So hopefully, that provides helpful context.
We will provide more details during our Q2 call in December.
I'll now turn to capital allocation and the balance sheet.
Despite the unique circumstances related to pandemic, our capital allocation priorities remain the same.
At the top of the list is maintaining adequate liquidity for operational needs.
We then look to make strategic investments back into the business to drive growth.
Finally, we returned excess capital to shareholders through dividends and opportunistic share repurchases.
Given our priorities are unchanged, there are four specific areas I'd like to provide additional clarity on given recent events: our line of credit, the recent issuance of long-term debt, our dividend and future share repurchases.
Let's start with our line of credit.
At the onset of the pandemic, we drew down the full balance of the line to maximize our liquidity given the uncertainty.
The draw had a six-month interest lock, which matures this month.
Given the strong finish to the tax season, we had a cash position of $2.6 billion at the end of the quarter, and as such, intend to pay down the full balance of the draw later this month.
We anticipate returning to our normal cycle of seasonal borrowings on our line of credit later this calendar year as we head into the upcoming tax season.
In addition, given the strength of our financial performance in the first quarter, we met our debt covenants and currently expect to be in compliance going forward.
Turning to our recent debt offering.
I'm pleased with our successful issuance of $650 million of 10-year notes at a coupon of 3.875%.
We intend to use the proceeds of these notes to retire existing debt that matures in October.
This was a positive result for us as we're replacing 5-year notes with 10-year notes at a lower interest rate.
It's also a sign that investors have confidence in our future.
Moving on to our dividend.
We have continued our streak of paying quarterly dividends consecutively since going public nearly 60 years ago.
As we shared in the past, we evaluate our dividend after each fiscal year, which we did in June.
This review resulted in us maintaining the dividend at its current level.
To be abundantly clear, we have no plans to change our dividend payout level for the balance of this fiscal year.
Our next evaluation of the dividend will be in June of next year.
And while we cannot guarantee future dividend payments with the level of dividend would be at that time, we do have a goal of increasing the dividend over the long term as evidenced by the 30% increase over the past five years.
Finally, turning to share repurchases.
We have decided to resume our practice of repurchasing shares to offset dilution from equity grants.
Consistent with prior practice, we will not discuss potential additional share repurchases other than mentioning they would be done opportunistically.
The last thing I'd like to discuss today is the agreement we reach with MetaBank to be the provider of our financial products, including refund transfer, refund advance, Emerald Advance and Emerald Card.
MetaBank is a leader in providing financial solutions to consumers and has significant experience in the tax preparation industry.
We worked with Meta in the past and know them to be an excellent partner.
Both of our teams are hard at work to make the transition as seamless as possible for our clients.
From a financial perspective, we expect this agreement to result in savings of $25 million to $30 million on a run rate basis.
Though that number will be approximately $10 million lower in fiscal '21 as we are transitioning midyear and will incur some onetime expenses.
In summary, we are off to a great start this fiscal year.
We recently had a successful debt issuance and are excited to be partnering with Meta for years to come.
I'm looking forward to sharing more with you regarding our expectations for the fiscal year in December.
They truly make H&R Block a special place and are why we were able to accomplish so much during such a difficult time.
We're now focusing on the future, and I'm looking forward to sharing an update with you in December.
| compname reports q1 adjusted earnings per share $0.55.
q1 gaap earnings per share $0.48 from continuing operations.
q1 revenue $601 million versus refinitiv ibes estimate of $617 million.
q1 adjusted non-gaap earnings per share $0.55.
|
I am Ian Hudson, the Company's Chief Financial Officer.
Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer.
These documents are available on our website.
In addition, we will file our Form 10-Q later today.
I'm going to begin today by providing some detail on our third quarter results before turning the call over to Jennifer to provide an update on our performance, current market conditions, recent acquisition activity, and our outlook for the remainder of the year.
In summary, our businesses were able to deliver meaningful year over year improvement in net sales and earnings and an adjusted EBITDA margin at the high end of our target range, despite the effects of higher material costs and widespread supply chain disruption.
Consolidated net sales for the quarter were $298 million, up $19 million or 7% compared to last year.
Consolidated operating income for the quarter was $34.3 million, up $300,000 or 1% compared to last year.
Consolidated adjusted EBITDA for the quarter was $47.4 million, up $1.5 million or 3% compared to last year.
That translates to a margin of 15.9% in Q3 this year compared to 16.4% last year.
Net income for the quarter was $29.2 million, up $3.9 million or 15% from last year.
That equates to GAAP earnings for the quarter of $0.47 per share, up 15% from $0.41 per share last year.
On an adjusted basis, earnings per share for the quarter was $0.48 per share, an improvement of 14% compared to $0.42 per share last year.
Both our GAAP earnings per share and adjusted earnings per share for the third quarter of this year included benefits from a tax planning strategy executed during the quarter, which resulted in approximately $3.3 million more in discrete tax benefits being recognized in Q3 this year compared to Q3 of last year.
In the aggregate, these higher tax benefits represented approximately $0.05 of our year over year earnings per share improvement.
Order intake for the quarter was again outstanding with orders of $350 million, representing an increase of $85 million or 32% compared to last year.
Consolidated backlog at the end of the quarter set another new company record of $487 million.
That represents an increase of $183 million or 60% from the end of last year.
In terms of our group results, ESG's net sales for the quarter were $249 million, up $18 million or 8% compared to last year.
ESG's operating income for the quarter was $30.8 million compared to $33 million last year.
ESG's adjusted EBITDA for the quarter was $42.7 million compared to $43.9 million last year.
That translates to an adjusted EBITDA margin of 17.1% in Q3 this year compared to 19% last year.
ESG reported total orders of $292 million in Q3 this year, an improvement of $72 million or 33% compared to last year.
SSG's net sales for the quarter were $49 million this year, up 1% compared to last year.
SSG's operating income for the quarter was $7.6 million, up from $7.4 million last year, while its adjusted EBITDA for the quarter was $8.5 million, up from $8.2 million last year.
That translates to an adjusted EBITDA margin for the quarter of 17.3%, up 50 basis points from last year.
SSG's orders for the quarter were $58 million, up $13 million or 27% compared to last year.
Corporate operating expenses for the quarter were $4.1 million compared to $6.4 million last year.
Turning now to the consolidated income statement where despite the year over year sales increase, gross profit decreased by $1.7 million.
Consolidated gross margin for the quarter was 23.8% compared to 25.9% last year.
With steel and other commodity costs continuing to increase and chassis constraints delaying certain shipments out of our backlog, we experienced a slightly higher unfavorable price cost headwind of around $5 million during the quarter, about $2 million higher than we had previously anticipated.
With the various pricing actions we have taken, including repricing of our backlog at a number of businesses, we are expecting to see improvement beginning in the fourth quarter with more price realization expected as our backlog turns.
As a percentage of sales, our selling, engineering, general and administrative expenses for the quarter were down 160 basis points from Q3 last year.
Other items affecting the quarterly results include a $200,000 increase in acquisition related expenses, a $200,000 increase in other income, and a $100,000 reduction in interest expense.
Tax expense for the quarter decreased by $3.3 million, largely due to the recognition of the tax planning benefits that I just mentioned.
Our effective tax rate for the quarter was 12.8% compared to 23.1% last year.
At this time, we expect our full year effective tax rate to be approximately 18%.
On an overall GAAP basis, we therefore earned $0.47 per share in Q3 this year compared with $0.41 per share in Q3 last year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for our unusual items recorded in the current or prior year quarters.
In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses and purchase [Technical Issues] On this basis, our adjusted earnings for the quarter were $0.48 per share compared with $0.42 per share last year.
Looking now at cash flow, where we generated $16 million of cash from operations during the quarter, up 8% from Q3 last year.
That brings the year to date operating cash generation to $55 million.
Towards the end of the quarter, we increased our borrowings in anticipation of the Ground Force acquisition, which we completed in early October for an initial payment of $43 million.
We ended the quarter with $164 million of net debt and availability under our credit facility of $240 million.
Our current net debt leverage ratio remains low.
With our financial position remaining strong, we have significant flexibility to pursue strategic acquisitions, invest in organic growth initiatives, and return cash to stockholders through dividends and opportunistic share repurchases.
On that note, we paid dividends of $5.5 million during the quarter, reflecting a dividend of $0.09 per share, and we recently announced a similar dividend for the fourth quarter.
We also funded share repurchases of $3.2 million during the quarter at an average price of $38.44.
Our teams again delivered growth in both the top and bottom line, while achieving an adjusted EBITDA margin toward the high end of our target range despite well documented widespread supply chain disruption and a very challenging commodity cost environment.
We entered the quarter with delivery commitment dates from our chassis suppliers that positioned us well to satisfy our sales and delivery expectations for the second half of the year.
However, as the quarter progressed, we began to experience significant delays in delivery dates from most of our chassis OEM partners with deliveries pushed out weeks or months with little notice.
In many circumstances, we received a week's notice of the delay.
Beyond chassis, we are experiencing some other supply chain tightness ranging from pumps to electronic components, but for the most part, we have to date been able to navigate through the difficulty, but it remains a challenging situation.
Chassis delivery delays are significantly disrupting our production schedules and hampering our ability to maximize production efficiencies and deliver products to our customers.
The team has worked tirelessly to mitigate the impact of this short term disruption by continuously adjusting production schedules in an effort to satisfy record customer demand, but we are not operating at our usual level of efficiency.
While the teams have performed admirably, we estimate the delays in chassis deliveries and various other part shortages along with the constant production schedule adjustments caused an adverse top line impact of approximately $30 million during the quarter.
Importantly, none of these orders are lost or canceled, but the shipment timing out of our backlog has been pushed out to reflect the revised chassis delivery dates.
As we did last year with the pandemic, so far this year our businesses have been able to navigate through a variety of supply chain related issues and deliver an EBITDA margin of almost 16% demonstrating that as a company we are more resilient than in the past, and we continue to believe that at this level of margin performance we would rank within the top decile of our specialty vehicle peers.
Performance at these levels during turbulent times is both a real testament to the efforts of our teams and the successful diversification of our revenue streams and end market exposures that has taken place over the last several years through a combination of organic growth initiatives and M&A.
As it was in Q2, our aftermarkets business was again an area of strength, providing a favorable shift in mix during a seasonally strong third quarter.
Overall, our aftermarket revenues in Q3 this year were up $12 million or 18% over last year, growing to represent a higher share of ESG's revenues for the quarter at around 30%.
Rental activity and demand for used equipment continues to be strong with rental income in Q3 up 29% year over year and used equipment sales exceeding $10 million for the third successive quarter.
As we approach the winter months, we expect that rental activity may be seasonally down in comparison to the peak periods of Q2 and Q3, but we expect used equipment demand to remain strong given the current tightness in the supply chain and longer lead time.
Demand for our product offering continues to be as strong as ever as demonstrated by our outstanding third quarter order intake of $350 million, contributing to another record backlog, reflecting strength across our end markets.
This settlement has been widely shared by our customers and dealer partners and seems to be further solidified by the economic stimulus package, which passed earlier this year.
In that package, approximately $350 billion was earmarked for state, local, and territorial governments for a variety of purposes including the maintenance of essential infrastructure such as sewer systems and streets.
As a provider of equipment used for these essential services like store cleaning and street sweeping, we stand to benefit meaningfully from any additional aid that may be provided to state and local sources for these purposes.
Conversations with our dealer channels suggest that the first $175 billion tranche has started to be distributed by the treasury in May with the second tranche expected next year.
This is supported by the ongoing strength of U.S. municipal orders, which were up 50% for both the quarter and year to date period with notably strong demand for street sweepers and sewer cleaners.
In fact, so far this year, our U.S. municipal orders for street sweepers are up $46 million or 84% over last year, while sewer cleaner orders are up $45 million or 64% over the same period.
We are also seeing strong municipal demand within SSG with most of its order improvement this quarter resulting from higher demand for public safety equipment in both domestic and international markets.
Within our industrial end market, we've also seen a 50% year over year improvement in domestic orders.
The improvement has been almost across the board, but notably for our TRUVAC safe digging trucks and for our Guzzler industrial vacuum motors, which collectively were up $45 million or 87% year over year.
Simply put, supply chains cannot keep pace with the momentum in demand that we are currently seeing in almost all of our end markets.
I would now like to spend a minute on our acquisition of Ground Force Worldwide, which we completed in early October.
Ground Force is headquartered in Post Falls, Idaho, and is a leading manufacturer of specialty material handling vehicles that support the extraction of metals with its current product portfolio, including fuel and lube trucks, water trucks, dump bodies, and rock spreaders.
Ground Force also supports the recurring aftermarket needs of its customers through parts and service offerings.
The acquisition further bolsters our position as an industry leading, diversified industrial manufacturer of specialty vehicles for maintenance and infrastructure markets with leading brands of premium, value adding products, and a strong supporting aftermarket platform.
Over the last 12 months, Ground Force generated revenues of approximately $34 million with an EBITDA margin within our group target range.
The acquisition augments our current materials' hauling portfolio by adding a range of specialty vehicles that support the extraction of metals, demand for which is expected to benefit from vehicle electrification and other green initiatives.
The transaction is also expected to provide opportunity for long term value creation through operational improvement and organic growth initiatives while also providing a platform for further acquisitions in this space.
Although it has only been one month, we are encouraged by the strong order demand that Ground Force has seen for its products.
Deist is the parent company of Switch-N-Go and Bucks Fabricating, both of which are located in Pennsylvania.
Like Ground Force to MRL, this was another proprietary deal underlying our strong reputation in the industry.
Through its Switch-N-Go business, Deist designs, manufactures and sells interchangeable truck body systems for Class three to seven vehicles in the work truck industry.
Depending on the application, this interchangeable system allows for the use of multiple bodies on a single chassis, helping customers to optimize their asset utilization and providing the potential to reduce their carbon input, footprint.
Bucks designs, manufactures, and sells a full line of waste hauling products including front, rear loading containers and specialty roll off containers.
Over the last 12 months, Deist has generated revenues of approximately $41 million with a double-digit EBITDA margin.
The Deist acquisition represents another attractive product line extension and expands our presence into new end markets such as tree care and waste hauling.
With many common partners within our existing distribution channels, the acquisition creates an attractive opportunity to develop and deliver innovative new products and solutions to our customers and optimize the distribution of our products.
We expect that both acquisitions will be accretive within the first year.
The acquisitions reiterate our expectation that M&A will continue to contribute meaningfully to our future growth.
Turning now to our outlook for the rest of the year.
We continue to see strong momentum in our markets as evidenced by the 50% improvement in both U.S. municipal and industrial orders so far this year.
With a record backlog, demand for our products is outpacing the current capacity of our supply chain.
When we raised our guidance last quarter, we assumed no significant delays in deliveries from our chassis suppliers.
However, during the quarter, such delays were more prevalent than we had anticipated causing increased disruption to our production schedules.
We expect that the volatile supply chain environment will continue for the rest of the year, and therefore, we are adjusting our full year adjusted earnings per share outlook to a new range of $1.68 to $1.78.
The size of our range is reflective of the highly volatile environment in which we are currently operating, but performance at that level would represent the company's second best year ever in terms of EPS.
Our new outlook range also excludes the impact of a one-time non-cash pre-tax pension settlement charge of approximately $11 million, which we expect to incur in the fourth quarter in connection with the defined benefit pension annuitization project.
We remain encouraged by the long-term opportunities for all of our businesses, which would be further bolstered by the infrastructure legislation recently passed by Congress.
We are already starting to see the benefits from the economic stimulus packages, which started to be made available to municipalities earlier this year.
And we also expect the Infrastructure Bill, with $550 billion in new spending, we could see capital equipment demand increase to support infrastructure investments in areas such as roads, bridges, electrification, broadband, clean energy and water, and public transportation buildup.
We are a leading manufacturer of specialty infrastructure and maintenance equipment and anticipate increased demand for the majority of our product offerings including equipment sales and rentals of dump trucks and trailers, safe digging trucks, road marking equipment, sewer cleaners, and street sweepers while also benefiting our new acquisitions, Ground Force and Deist.
With our recent capacity expansions, we are well positioned to respond once the current supply chain constraints improve.
Over the last several years, we have transformed our end market exposure and implemented a revenue diversification strategy that has enabled us to adjust as needed to market conditions.
With an ongoing focus on 80-20 principle, Federal Signal has become a more resilient business delivering a consistent level of EBITDA margin above many of our peers.
As Ian noted in his comments, our financial position and liquidity are strong, enabling us to pursue strategic acquisitions like Ground Gorce and Deist.
Our current M&A pipeline continues to be very active.
While we continue to make progress on our vehicle electrification road map and we'll soon be initiating customer trials and demonstrations of our hybrid three wheel Pelican Sweeper.
We have also solidified an agreement with a development partner for the hybrid system integrated into our plug-in, hybrid Broom Bear.
Our electrification road map also includes all electric versions of our truck mounted sweepers, and we are collaborating with more than one chassis OEM on designs that will provide uncompromised performance for our customers.
We anticipate field trials to begin in 2022.
Our ongoing commitment to environmental, social, and governance initiatives also position us well in the communities in which we operate and is a differentiating factor in our ability to attract labor at most of our facilities.
Recently, we took a survey, and in our three largest facilities, which comprise almost half of our U.S. hourly workforce, we currently have approximately 20 hourly job openings out of almost 1,000 positions.
On that note, we recently issued our second annual Sustainability Report, which highlights many of our accomplishments in this area including our project 85 initiatives to increase vaccination rates across the organization.
Although we continue to make progress on this initiative, we still are experiencing some COVID-related disruptions at certain facilities.
| compname reports q3 adjusted earnings per share $0.48.
compname reports third quarter results including 32% increase in orders and record backlog; signs definitive agreement to acquire deist industries, inc..
q3 adjusted earnings per share $0.48.
q3 gaap earnings per share $0.47.
q3 sales rose 7 percent to $298 million.
sees fy adjusted earnings per share $1.68 to $1.78.
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Mark will review our fourth-quarter and full year performance and provide our outlook for 2021 in the first quarter.
Andrew will provide an overview of select financial items.
Information presented represents our best judgment based on today's understanding.
Actual results may vary based upon these risks and uncertainties.
Today's discussion and the supporting materials will include references to adjusted earnings per share adjusted EBITDA, adjusted cash from operations, free cash flow and organic revenue growth, all of which are non-GAAP financial measures.
Please note that as used in today's discussion, earnings means adjusted earnings, and EBITDA means adjusted EBITDA.
A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website.
Let me start by saying the fourth-quarter was an unusually difficult one for our company and we are disappointed in our earnings results.
We exceeded the midpoint of our guidance on earnings per share and EBITDA for a long stretch of quarters principally because of the strength of our portfolio and our geographic balance, combined with strong execution in the face of extreme weather events and significant industry specific supply chain disruptions.
This quarter was an anomaly and we will be as transparent as always to explain what happened.
We experienced significant logistics and supply chain constraints in the US; reduced demand in the US on some lower value herbicides, lower demand in Brazil and Argentina following the drought related delay to the start of the season, and products that were held up in Argentina customs.
On the positive side, we saw strong growth in EMEA, and once again, broad growth in Asia.
We had a very strong quarter from a cash flow perspective, which led to full year free cash flow of $544 million, an 80% increase over 2019.
We also posted very solid 2020 overall results.
Despite numerous challenges related to the COVID-19 pandemic and $280 million in revenue headwinds from foreign currencies.
Our organic revenue growth of 7% and our 2% EBITDA growth shows how aggressively we manage costs and implemented price increases to offset as much of that FX headwind as possible.
The guidance for Q reflects our view of the environment in Brazil, as well as continued logistics and supply chain disruptions occurring around the world.
We believe these COVID impacts are perhaps severe as at any point over the last year.
In addition, our very strong Q1 2020 makes this quarter year-over-year comparison a particularly difficult one.
All of FMC's manufacturing facilities and distribution warehouses remain operational and fully staffed despite the ongoing pandemic.
However, one of our US toll manufacturers was disrupted in Q4 because of COVID related staffing issues, illustrating just one of the ongoing business risks during the pandemic.
We successfully completed the implementation of our new SAP system in November.
We now have a single modern system across the entire company for the first time in our history, which is enabling significant efficiencies in our back office processes.
And finally, we gave a thorough technology update to investors on November 17, highlighting the increasingly positive impact new synthetic and biological active ingredients will have on our business over the next decade and the ways in which we are driving to be the leader in crop protection innovation.
We plan to launch seven new active ingredients and four new biologicals this decade, which we expect will contribute a combined $1.8 to $2.1 billion in Incremental sales by 2013.
We recently announced a new collaboration with Novozymes, a world leader in enzyme discovery and production to research, co-develop and commercialize biological enzyme based crop solutions for growers around the world.
This adds to research collaborations and partnerships signed in 2020 with Zymergen and Cyclica and continues our trend of investing in new and innovative technologies that will enhance our long-term competitiveness.
Turning to our Q4 results on Slide 3.
We reported $1.15 billion in fourth-quarter revenue, which reflects a 4% decrease on a reported basis and 2% organic growth.
Despite those headwinds we posted double-digit sales growth in Asia, led by India, China, Japan and Australia, and in EMEA, with double-digit growth across a broad set of countries.
Adjusted EBITDA was $290 million, a decrease of 9% compared to the prior year period.
EBITDA margins were 25.2%, a decrease of 150 basis points compared to the prior year.
Adjusted earnings were $1.42 per diluted share in the quarter, a decrease of 19% versus Q4 2019.
This year-over-year decline was primarily driven by the decrease in EBITDA, an increase in tax rate compared to the very low tax rate in Q4 2019, and slightly higher D&A, partially offset by lower interest expense and lower non-controlling interests.
Moving now to Slide 4.
Q4 revenue decreased by 4% versus prior year, driven by a 5% FX headwind and a 3% volume decrease.
Price increases contributed a positive 4% impact, and offset 80% of the FX headwind, the highest in the past few quarters to deliver a positive 2% organic growth.
Volume growth in EMEA and Asia was more than offset by weakness in North America and Latin America.
Sales in EMEA increased 45% year-over-year and 42% organically.
We saw a particularly strong demand for our insect control applications for specialty crops as well as herbicides for cereals, especially in France, Spain, Russia and Germany.
We also had significant growth in the UK as customers secured orders in advance of Brexit.
In Asia, revenue increased 11% year-over-year, driven by broad volume growth in India, China, Japan and Australia.
India saw strong demand in rice and pulses in the south, and in sugarcane in the north, in addition to the growth from our recent market access expansion activities.
Last earnings call, we highlighted India as a key pillar of growth in Asia.
And the strength we saw in Q4, exemplifies this potential, with India growing over 20% organically in the quarter.
China so robust demand for diamide insecticides and fungicides on fruit and vegetables.
Growth in Australia was driven by demand in herbicides for cereals and oilseeds, while Japan's strength came from a variety of insecticides.
Moving now to Latin America.
Sales decreased 9% year-over-year, but grew 4% excluding significant FX headwinds.
Pricing actions across the region offset about 50% of the currency headwind at the earnings level in Q4, substantially more than in the prior 2 quarters.
The Brazil season was delayed by at least 30 days due to hot dry weather and this delay meant many numerous crops missed applications that will not return.
The drought persisted throughout Q4 resulting in lower than expected decline [Phonetic] across many crops, and it also impacted Argentina and other countries in the region.
For Latin America, overall we estimated the drought reduced sales by about $30 million.
In Argentina, we also had about $10 million of product held in bonded warehouses that was not released by customs officials in a timely manner.
Although these factors reduced Q4 growth in Argentina, 2020 was still our best year ever for the country.
In North America, sales decreased 34% year-over-year, roughly $40 million of this decline was due to supply chain disruptions, including COVID related factors associated with logistics and a toll manufacturing partner, impacting our ability to meet demand late in December.
An additional $30 million of the decrease was due to reduced volume and some lower value pre-emergent herbicides.
Our new herbicides such as Authority Edge, Authority Supreme and Anthem Maxx continue to add value and grow wealth.
We should also note, our biologicals business had a very strong Q4, with sales up in all regions by at least a high-teens percentage, including very strong sales of Quartzo in Brazil and successful launches of Accudo in EMEA and asset plan [Phonetic] and [Indecipherable] in South Korea.
Turning now to the fourth-quarter EBITDA bridge on Slide 5.
We had a $50 million contribution from higher pricing, which was nearly double what we realized in Q3.
We also aggressively managed costs to offset nearly all the $30 million year-over-year headwind we had anticipated.
However, the FX headwinds were more severe than expected and the late volume mixes in North America and Latin America were too large to overcome.
Moving to Slide 6 for a review of our full year results.
We reported $4.64 billion in revenue, which reflects a 1% increase on a reported basis and a 7% organic growth rate.
Adjusted EBITDA was $1.25 billion, an increase of 2% compared to 2019 even with nearly $270 million in headwinds from FX.
EBITDA margins were 26.9%, an increase of 40 basis points compared to the prior year.
2020 Adjusted Earnings was $6.19 per diluted share, an increase of 2% versus 2019.
This increase was driven by the increase in EBITDA as well as lower interest expense and lower share count, offset partially by a higher tax rate compared to the very low tax rate in the prior year and higher D&A.
Turning to Slide 7 for some of the drivers behind the full-year revenue growth.
Overall volume contributed 4% to revenue growth while price increased sales by 3%.
About $50 million of the 2020 revenue growth came from product launches within the year.
In Asia, sales increased 6% year-over-year and 9% organically, market expansion and share gains in India, coupled with a very strong market rebound in Australia were the primary drivers.
Our diamides were in high demand throughout the region in 2020 as we continue to grow in specialty crops such as rice and fruits and vegetables.
Sales in EMEA grew 4% versus in 2019% and 6% organically.
Demand was driven by diamides on specialty crops Battle Delta herbicide on cereals and Spotlight Plus herbicide on potatoes.
Latin America posted a 1% year-over-year revenue growth but high single-digit volume growth and solid price increases led to 17% organic growth.
Brazil had robust demand for our products for soybeans and sugarcane while there was reduced demand acreage for cotton.
North America sales decreased 8% as we had channeled destocking in the first half and then a tough Q4 as described earlier.
Of note, the Lucento fungicide launch had a strong second year and Elevest insect control had a good launch year.
Moving to Slide 8 where you can see our full-year EBITDA bridge.
Volume contributed 9% of the growth, while the combination of stringent cost controls and price increases offset 70% of the impact of foreign currencies.
Turning now to Slide 9 and I look at the overall market conditions for 2021.
We expect the global crop protection market will be up low-single digits on a US dollars basis.
Commodity prices for many of the major crops are higher and stock to use ratios have improved compared to this time last year.
All regions are seeing some benefit from better crop commodity prices, while the impacts from COVID on crop demand appear to be lessening.
Growth in Asia is expected to be in the low to mid single digits, driven by India, Australia and ASEAN.
Favorable weather should contribute in many countries.
The weather related recovery in Australia is expected to continue the other three regions are each projected to grow in the low single digits.
Growth in the Latin American market will be strengthened by price recovery from FX headwinds from 2020 in Brazil, continued strength in the soybean market, an increase of fruit and vegetable exports from Mexico and more normal weather patterns that are forecasted across the region.
In the EMEA market, we are seeing a solid market for cereals and specialty crops, which should be helped by improved weather in several parts of the region.
The market in North America is projected to have a firm foundation from crop commodity prices, but we are seeing a trend of distributors and retailers looking to strategically reduce their own inventory levels.
The specialty crop market is stable, but the most significant change in demand will depend on the pace of the economic recovery.
Taking all the above into consideration, we view 2021 as a more positive Ag macro environment than we did this time last year.
Having said that, we are all too well aware of the potential disruptions that COVID and the whether can cause in any one quarter.
Turning to Slide 10 and the review of FMC's full-year 2021 and Q1 earnings outlook.
FMC full-year 2020 earnings are now expected to be in the range of $6.65 to $7.35 per diluted share, a year-over-year increase of 13% at the midpoint.
Consistent with past practice, we do not factor in any benefit from planned share repurchases in our earnings per share estimates.
2021 revenue is forecasted to be in the range of $4.9 to $5.1 billion, an increase of 8% at the midpoint versus 2020%, and 9% organic growth.
We believe the strength of our portfolio will allow us to deliver this organic growth, continuing a multi-year trend of above market performance.
EBITDA is expected to be in the range of $1.32 billion to $1.42 billion, which represents a 10% year-over-year growth at the midpoint.
Guidance for Q1 implies year-over-year sales contraction of 7% at the midpoint on a reported basis and 5% organically.
We are forecasting an EBITDA decline of 15% at the midpoint versus Q1 2020, and earnings per share is forecasted to be down 18% year-over-year.
Turning to Slide 11 and full-year EBITDA and revenue drivers.
Revenue is expected to benefit from 7% volume growth with the largest growth in Asia and a 2% contribution from higher prices.
FX is forecasted to be a 1% top line headwind.
We are expecting broad growth across all regions, Asia has the best overall fundamentals.
But we're also seeing the benefit of better weather in Europe, strong soybean outlook for both Latin America and North America, and a cotton recovery in Brazil next fall.
Because of these factors, we are expecting a very strong second half of 2020, 2021 relative to the first half.
New products such as Overwatch herbicide in Australia based on our Isoflex active and Xyway fungicide in the US are expected to make meaningful contributions.
And we are also launching Fluindapyr fungicide in the US for non-crop applications.
We are focusing a strong year for each of our product areas.
In addition to continuing strength of Rynaxypyr and Cyazypyr insect controls, insecticides growth is also expected to come from products such as Talisman, Hero and Avatar.
Herbicides should see growth in several of our top brands including Authority, Gamit, Reata [Phonetic] and Spotlight Plus, in addition to the Overwatch launch.
And growth in fungicides is forecasted to be driven primarily by the Xyway launch in the US.
Our EBITDA guidance reflects strong volume and pricing benefits, offset partially by increases in R&D spending as well as the reversal of some of the temporary cost savings from 2020.
We are forecasting a $40 million increase in R&D to bring us to a level of funding that keeps all projects on a critical path to commercialization.
Additionally, we're making growth investments in our farm intelligence and the precision Ag initiatives, new product launches like Overwatch, as well as FMC Ventures.
We are also expecting some supply chain cost increases including logistics and pockets of raw materials.
These headwinds will be partially offset other realization of the final $15 million of SAP synergies which will give us a cumulative SAP synergies of approximately $65 million.
Moving to Slide 12 where you see the Q1 drivers.
On the revenue line, volume is expected to drive a 6% decline, while a 1% contribution from higher prices largely offset the FX headwind.
We expect the benefit of approximately $25 million in sales from Q4, supply and logistics delays to be captured in Q1.
This is about half of the Q4 impact.
In the US, this miss timing limits what we can recoup.
And in Argentina, ongoing customers delays and release in products could cause us to miss application windows.
There are several headwinds in Q1 revenue that more than offset the flow through from Q4.
First, we are facing a particularly difficult comparison in Latin America where sales increased 26% year-over-year and 38% organically in Q1 2020.
Brazil's cotton business is very strong for as a year ago, this will not be repeated this season as cotton acreage is down 15%.
In EMEA, we are facing continued headwinds from discontinued registrations, and the $15 million in Q4 sales related to Brexit that would normally have been sold in the first quarter.
Regarding EBITDA drivers reduced volume is the biggest factor.
While pricing is forecast to offset the FX headwind, costs are expected to be higher by $12 million, driven primarily by the increased R&D investments, we mentioned earlier.
FX was a 5% headwind to revenue in the quarter, as expected, with the impact of higher than anticipated local currency denominated sales in Brazil, offset in part by a modest tailwind in the Eurozone.
For full year 2020 FX was a 6% headwind to revenue.
The Brazilian Real represented by vast majority of the FX headwinds in 2020 followed by the Indian rupee, Pakistan rupee and a broad number of non-euro currencies in EMEA.
Pricing actions offset slightly half of the currency headwinds in the year.
Looking ahead to 2021, we expect a more stable FX environment with only a slight headwind to revenue [Phonetic].
We will continue to take pricing actions in Brazil to recover the FX impact from 2020.
But overall pricing will be somewhat dampened by price volume choices being made in our Asia business to drive higher growth.
Interest expense for the fourth-quarter was $34.2 million dollars, down $8.7 million from the prior year period, benefiting from lower debt balances and lower LIBOR rates.
Interest expense for full year 2020 was down $7.3 million from the prior year with the benefit of lower interest rates, partially offset by changes in debt outstanding.
Our effective tax rate on adjusted earnings for 2020 was 13.7%, well within our expectations and up from the very low 2019 rate due to shifts in the geographic mix of taxable earnings and inter-related impacts on the US minimum tax and [Indecipherable].
The tax rate in the fourth-quarter was 14.4% to true up with the full year actual rate.
Tax was a headwind to earnings in the quarter due to the very low tax rate in the prior year period.
We expect our effective tax rate to be in the range of 12.5% to 14.5% in 2021 similar to 2020.
Moving next to the balance sheet and liquidity.
Gross debt at year-end was $3.3 billion, essentially flat with the prior quarter with nearly $600 million of cash on hand.
We chose to hold cash on the balance sheet in advance of the seasonal working capital build we see in the first quarter to avoid having to take on as much commercial paper in the beginning of the new year.
As such, gross debt to trailing 12 month EBITDA was 2.6 times at the end of the year, while net debt to EBITDA was 2.3 times.
We are in the right leverage range given the excess cash at year-end.
We do not expect to carry this level of cash on a steady state basis going forward, so you should expect cash balances to decline through the coming year.
Moving to Slide 13 and a look at 2020 cash flow and the outlook for 2021.
Free cash flow for 2020 was $544 million with free cash flow conversion from adjusted earnings at 67%.
Both metrics up 80% percent from the prior year period.
Adjusted cash from operations increased by about $170 million in 2020 with growth in working capital, more than offset by lower non-working capital factors and increased EBITDA.
Capital additions were down $60 million due to project delays and deferrals related to COVID-19 pandemic.
Legacy and transformation spending was down $14 million with relatively stable legacy spending and transformation spending lower as we completed our SAP implementation.
We anticipate full year 2021 free cash flow to be in the range of $530 to $620 million, an increase of 6% at the midpoint, with free cash flow conversion 63% at the midpoint.
Growth in adjusted cash from operations and reduced legacy and transformation spending are expected to be partially offset by a significant year-over-year increase in capital additions.
This increase in capital additions comes as we catch up on projects that were delayed or deferred in 2020 due to the pandemic.
Turning to Slide 14, we are pleased with our strong free cash flow growth and improvement in free cash conversion.
There are a number of moving parts in our 2020 cash flow results and 2020 outlook that merits some further discussion and will help better explain this trajectory.
2020 free cash flow benefited from a planned real estate asset sale that will not repeat as well as the un-forecasted delay of a lump sum environmental liability payment we had expected to be paid in December.
Excluding these impacts, 2020 free cash flow would have been about $500 million, in cash conversion about 62%.
Similarly, 2021 free cash flow was negatively impacted by the timing shift of the environmental liability payment.
Adjusting for this timing shift, 2021 free cash flow would be about $600 million, in cash conversion 65%.
So, on a more comparable basis, free cash conversion steps up from 38% in 2019 to 62% in 2020, and 65% in 2021, getting closer to our 70 to 80% target range for 2023.
I know that this view [Phonetic] of cash flow, we've not made any adjustments for the abnormally low capital additions in 2020 or the catch up to a more normal level in 2021.
But this shift, is in large part, the reason why cash conversion steps up more slowly in 2021, as the increase in capital additions largely offsets the step down and transformation cash spending from the completion of the SAP program.
You should expect the capital additions to continue in a similar range to 2021 for the next several years to support our organic growth, including new capacity that support new active ingredient introductions.
Equally as important as growing our free cash flow is the discipline with which we deploy it.
As you can see on Slide 15, we continue our balanced approach to cash deployment.
We are fully funding our organic growth in making modest inorganic investments to enhance our growth.
We are then returning the excess cash to shareholders through dividends and share repurchases, while keeping debt at our targeted leverage levels.
In 2020, we deployed nearly $350 million of cash flow, while maintaining excess liquidity throughout the pandemic.
We deployed $65 million to acquire the remaining rights to the fungicide [Indecipherable].
We paid nearly $230 million in dividends and we repurchased $50 million in FMC shares in the fourth-quarter.
In 2021, we expect to accelerate cash deployment.
We are planning to repurchase between $400 and $500 million worth of FMC shares in the year with purchases in every quarter of the year, though more heavily weighted to the second half.
We expect to pay dividends approaching $250 million and we will continue to look for attractive opportunities to make additional modest inorganic investments to complement our organic growth and expand our technological capabilities.
I'd like to close with a final update on our SAP S/4HANA ERP system implementation.
We had a successful last go-live in November and are now operating on a single thoroughly modern system across the entire company for the first time in our history.
The go-live went better than expected and we have smoothly transitioned to operating the company in closing the books in the new system.
Our new SAP system has enabled significant efficiencies in our back office processes.
We captured over $50 million in synergies in 2020 having moved aggressively to accelerate $30 million in planned savings from 2021 to 2020.
We now expect to deliver $15 million in SAP enabled synergies in 2021, the benefit of which is reflected in our full year guidance for a total of $65 million in synergies from implementing the new system.
There will certainly be additional efficiency gains in 2022 and beyond as we further leverage this generational investments in our business process infrastructure, but we will drive them as part of our business as usual efforts to gain leverage on back office costs as we continue to grow the company.
We had a number of issues in late Q4 that we're having to address.
We do not expect all of them to results in Q1.
We do however see these issues as transitory and are focused on ensuring we can mitigate supply chain risks and continue to expand our market growth opportunities.
As you can see from our robust 2021 guidance, we are confident that 2021 will be another year of strong revenue and earnings growth for FMC.
We continue to renew our portfolio launching two new important products in Q1, we continue to invest in our R&D pipeline, and we remain fully committed to bringing new sustainable technologies to our customers.
Our overall agenda on sustainability continues to advance, with the recent appointment of our first Chief Sustainability Officer and through new partnerships like the one we recently announced with Novozymes.
We plan to return about $700 million to shareholders this year through dividends and buybacks.
And finally, with our 2021 growth rates above the long-range plan, we remain firmly on track to deliver our five-year plan commitments.
I very much appreciate his leadership and look forward to his continued involvement as non-Executive Chairman.
| sees q1 revenue down 7 percent.
sees fy revenue $4.9 billion to $5.1 billion.
qtrly revenue of $1.15 billion, down 4 percent versus q4 2019, up 2 percent organically.
q4 adjusted earnings per share $1.42.2021 adjusted earnings are expected to be in range of $6.65 to $7.35 per diluted share.
full-year 2021 free cash flow is expected to be in range of $530 to $620 million.
expects to repurchase $400 to $500 million of fmc shares in 2021, beginning in q1.
|
Actual results may vary materially from the assumptions presented today.
All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affects our business, including those discussed in our Form 10-K and other SEC filings.
These results exclude certain non-operating and non-recurring items including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
All adjustments in the quarter and for the full year 2020 are detailed in the reconciliations in the appendix.
Before we begin, I'd like to provide a brief overview of our fourth quarter GAAP results compared to prior year.
Q4 revenue decreased 1.5% to $709 million.
Segment operating income increased 11.6% to $120 million.
And reported earnings per share was a net loss of $0.16.
This is principally driven by a $137 million charge related to the successful termination of our U.S. pension plan and other items, including tax charges totaling $17 million, partially offset by $52 million asbestos insurance settlement benefit.
I truly hope that everyone is healthy and safe.
I'm humbled by the way this team continues to respond to the crisis and want to express my sincere gratitude for all you have done.
Your efforts to serve our customers and drive exceptional performance in a safe, fast and productive manner are a testament to the commitment, perseverance and your hard work.
Mark joined ITT in January of this year after a successful 13-year career at Honeywell and has hit the ground running.
I'm happy and excited to have Mark on the ITT team to drive our global investor Relations strategy.
As a result of our focus on the health of our people and our efforts, we delivered another strong performance in the fourth quarter.
Early last year, we took some difficult and swift actions to respond to the pandemic.
These actions ensured that ITT continued to outperform in 2020 and will emerge stronger in 2021 as the economic environment recovers.
Let me now highlight some key financial achievements for the quarter.
We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on a 4% organic sales decline.
And we improved our decremental margin every quarter in 2020.
For the full year, our decremental margin was 22% at the low end of our range.
As a result, we delivered adjusted earnings per share of $1.01, a sequential and as well as a year-over-year increase.
We generated free cash flow of $102 million for Q4 and $372 million for full year.
Throughout the year, we drove cash collections and optimized inventory, while applying strict control over capital investments.
These drove a free cash flow margin of 15% at the high end of our guidance that we increased just last quarter.
On capital deployment, in 2020, we increased our dividend by 15%.
We repurchased ITT shares totaling 73 million and we increased our majority stake in our Wolverine China joint venture as we continued to expand our market share in Asia.
Despite the restrictions posed by COVID, I was fortunate to safely visit many of our facilities around the globe, including in China, Europe, the Middle East and across the U.S. As you know, I consider this fundamental to identifying and executing the many operational and commercial opportunities we at ITT have around the globe.
In 2020, we reduced the number of recordable incidents by 25% and implemented safer workplace protocols globally.
This is an important element in ensuring the health of our people.
And it also contributed to a significant reduction in workers' compensation expense in the U.S. Safety is foundational for our operational excellence and all of us should expect a continued reduction in incidents in the future.
From a commercial perspective, sales in Friction outpaced global auto production rates by more than 600 basis points for the full year.
We increased market share by almost 400 basis points in North America, more than 200 basis points in China and almost 100 basis points in Europe.
And when it comes to EVs, we secured position on 42 new electric vehicle platforms during the year.
In Industrial Process, we continue to execute on our footprint rationalization projects.
We finalized our first consolidation in Europe this quarter and are progressing according to plan on our second project; this one in North America.
We are making progress in sourcing efficiencies through aggressive negotiations and supplier rationalization.
As I noted before, I believe there are still many opportunities to improve our purchasing performance, as well as further lean out our operations.
Industrial Process delivered 15.1% adjusted segment operating margins this quarter.
This is a milestone still in IP.
At the end of last year, I visited our industrial valve site in Amory, Mississippi.
I was impressed with the order management process implemented by Angie and her team that has resulted in best-in-class on-time delivery performance and unparalleled service for our customers.
This is also true from a project management performance standpoint where IP continue to drive near-perfect execution and on-time delivery, while driving margin expansion for many of our large projects.
While CCT's end markets remain challenged, we are deploying the same operational excellence playbook that we successfully executed in MT and IP.
We expect to reach pre-COVID margin levels at CCT in the next two to three years.
Today, I'm also pleased to provide our outlook for 2021 that reflects all that we have done to strengthen our operations, our people and our potential.
We anticipate full year organic sales growth of 2% to 4% driven by continued share gains in Motion Technologies, as well as the broader auto market recovery.
We expect the rest of our markets to be flat to slightly down.
We plan to expand adjusted segment margins by 130 to 180 basis points.
The increased sales volume and the carryover impact of our 2020 cost actions, coupled with the strong productivity from 2021 initiatives, we'll generate adjusted earnings per share in the range of $3.45 to $3.75%, which equates to 8% to 17% growth versus prior year.
Because of our strong free cash flow performance in 2020, we're well-positioned to deploy capital in 2021.
First, we would invest in our businesses with approximately $100 million of capital expenditures, up over 55% versus 2020.
Second, we will aggressively and diligently pursue acquisitions in our core markets to effectively put our cash to work and build on our strong businesses.
This is our ninth consecutive dividend increase.
And finally, we are planning to repurchase ITT shares totaling $50 million to $100 million reducing the full year weighted average share count by approximately 1%.
From a top-line perspective, Motion Technologies delivered a strong performance, growing over 10% organically, driven by continued share gains and double-digit growth in auto in North America and China.
This was offset by lower short-cycle demand in Industrial Process as we anticipated and the impact of commercial aerospace dynamics in CCT.
Our focus on operational excellence is producing strong results.
Motion Technologies expanded margins over 400 basis points to 19.5%.
Industrial Process grew margin 90 basis points to 15.1% despite a 10% organic sales decline.
The MT and IP performances more than offset Connect and Control Technologies' margin decline.
For the full year, I'd like to point out a few highlights in addition to those that we have already discussed.
First, working capital as a percentage of sales continues to decline and we saw 70 basis points of improvement in 2020, excluding the impact of FX.
Second, free cash flow increased 40% versus prior year despite the challenges posed by the global pandemic.
We hit the high end of our full year target for free cash flow margin, while also investing in the business through growth capex of more than $35 million for the year.
Third, we continue to effectively manage our legacy liability profile.
As I mentioned in our last earnings call, early in Q4, we successfully transferred our U.S. pension liability to a third party.
This will reduce our administrative costs and end all future funding requirements for the plan.
We also continue to successfully negotiate asbestos-related insurance settlements with our carriers.
And we drove an increase in our insurance assets of $52 million in the fourth quarter and $100 million for the full year.
As a result, our net asbestos liability that we have recently brought to a full-horizon valuation is now $487 million.
Years back, our Friction team developed a strategy to penetrate the growing EV segment, while continuing to gain share on conventional vehicle platforms.
We focused our technical expertise in addressing tighter noise and vibration requirements, while continuing to deliver a frictionless customer experience.
In China, our EV Brake-Pad Development Center continues to effectively partner with our customers in the largest EV market in the world.
And in 2020, we continued to see the results of our strategy by winning content on new electric vehicle platforms, including several platforms wins with The EV manufacturer.
We also won both the front and rear axle for a new U.S. performance crossover vehicle.
The strength of our Friction technology continues to be on display as we assist automakers in significantly reducing braking distance of heavier vehicles.
All of these is a testament to the innovation and the engineering prowess behind our brake-pad technology.
In Industrial Process, our redesigned between-bearing API pump has seen new orders increase over 50% this year.
Our customers are benefiting from improved hydraulic efficiency and performance with reduced lead times at a competitive price point.
In Q3, we further expanded and improved our hydraulic pump offering and have an active funnel of potential orders already.
Our new i-Alert remote monitoring offers diagnostic capabilities and tailored solution that predict customer equipment failure and improve asset up-time.
Finally, in Connect and Control Technologies our Enidine business is teaming with Bell Textron to produce passive vibration control technology for the 360 Invictus.
The Invictus is Bell's competitive prototype to the U.S. Future Attack Reconnaissance Aircraft or the FARA program.
Together with Bell, the Enidine team is developing technology for use in a mission-critical defense application suitable for the FARA program.
As we embarked on 2021, we remain laser focused on operational excellence and customer centricity.
These has been the ITT playbook for the last four years.
We continue to make significant progress and we, again, saw the benefits of this commitment in the results we delivered in Q4.
We will continue to be good stewards of ITT, driving performance for our customers, while searching for organic and inorganic opportunities to deploy capital and grow the business.
Our effective and comprehensive capital deployment strategy with clear priorities on organic investments, first and foremost, followed by close-to-core acquisitions and then return to shareholders will ensure that our cash is efficiently put to work.
Let me begin with Motion Technologies.
Our Q4 organic growth of 10% was primarily driven by strong performance in our Friction OE business.
We delivered 640 basis points of outperformance in 2020 on a global basis; further evidence that the MT machine continues to win in the marketplace.
For the quarter, Friction sales in North America were up 43% and sales in China, up 19%, while growth in our Wolverine business was over 12% with strength in Europe and Asia-Pacific as we gained market share in both brake shims and sealings.
Segment margins were incredibly strong again expanding 410 basis points on incremental margins of 46%.
This was mainly driven by higher volume and productivity that allowed us to continue to fund growth investments.
We are very pleased with the pace and the strength of the recovery in MT as we head into 2021.
For Industrial Process, sales were down, as we anticipated, with declines in short-cycle due to pandemic-related impacts that affected our previous two quarters' bookings.
Our project business, which encompasses most of our oil and gas exposure in IP, saw declines in pump bookings as large projects continued to shift to the right.
However, our short-cycle orders in the quarter were up 1%, driven by aftermarket demand.
IP margins expanded 90 basis points on 7% decremental margins.
The impact of the sales decline was almost entirely offset by productivity benefits, restructuring savings and price.
Furthermore, IP's working capital as a percent of sales improved 590 basis points versus prior year and we still see further opportunities to optimize inventory as we consolidate footprint and enhance materials planning.
IP finished the quarter with less than 20% working capital as a percent of sales.
Lastly, in Connect and Control Technologies, we continued to see weak demand across all major end markets.
Sales in aerospace and defense were down over 30%, driven by lower passenger traffic and lower build rates from airframers.
The de-bookings we saw in aerospace in the second and third quarters declined sequentially in the fourth quarter to minimal levels.
We expect that the sales weakness we saw this quarter in commercial aerospace will likely persist into the first half of 2021.
Connected sales were down over 10%, mainly due to North America aerospace and defense.
On a positive note, we are encouraged by the recovery in orders in defense and industrial connectors.
These contributed to a book-to-bill of more than 1 in Q4.
CCT margins were impacted mostly by lower volumes, partially offset by an aggressive cost reduction plan.
While this year was challenging for CCT, we are encouraged by the productivity, which was over 400 basis points this quarter and the full year.
I am now on Slide 7 to present a deeper look at the margin performance this quarter.
I want to highlight two main points.
First, we generated productivity of 230 basis points.
For the full year, that number was over 300 basis points.
This is the result of a multi-year approach to reduce ITT's cost structure by driving operational excellence across the enterprise and moving toward a leaner ITT in all three segments and at corporate.
We have successfully executed this playbook at Motion Technologies and we are in the early stages of the journey with Industrial Process.
At CCT, we're still laying the foundation and over time we expect results similar to what we experienced in Motion Technologies.
The second key takeaway is on strategic investments.
While we made necessary cuts to discretionary expense this year to manage through the pandemic, these did not come at the expense of growth investments.
We continued to selectively fund the most promising growth initiatives in key markets, including in EVs globally, to ensure we continue to win in the marketplace as we did with our successful launch of copper-free brake pads several years back.
For the full year, we achieved cost reduction savings in excess of $100 million, including $40 million in the fourth quarter.
This came from a combination of headcount reductions, reduced Executive and Board compensation and discretionary cost actions.
We delivered approximately $65 million of structural reduction in fixed costs for the full year, with the remainder comprising temporary savings, which will partially reverse in 2021.
We are continuing to drive footprint optimization at both IP and CCT, while remaining diligent with strong cost control and accelerated sourcing performance.
We expect that the carryover impact of actions in 2020 will generate approximately $10 million to $15 million of additional savings in 2021.
We also expect to fund and execute new footprint rationalization and cost reduction plans in addition to the normal productivity we will generate.
As a result of these measures, our decremental margins improved every quarter since Q2 and we finished the year at 22% at the lower end of our target, given the strong performance in Q4.
In 2021, we expect incremental margins north of 35% as volumes recover and we leverage our optimized cost structure.
Keep in mind, this will vary from quarter to quarter based on our quarterly performance in 2020 and the mix among our businesses.
Our end markets are showing signs of recovery.
Still, the full year economic outlook remains somewhat uncertain at this time.
We intend to remain flexible and manage our costs to coincide with the expected gradual recovery.
Despite the ongoing disruption from the COVID pandemic, we see general economic conditions continuing to improve throughout 2021, particularly in the second half of the year.
We expect total revenue will be up 5% to 7% versus 2020 and up 2% to 4% on an organic basis.
The strong organic growth we see in Friction, stemming from continued share gains and the resurgence in auto, will likely be offset by declines in industrial pumps as customer opex continues to be constrained and project activity remains weak.
Notably, we expect sales in Motion Technologies in 2021 to get back to 2019 levels.
In commercial aerospace, activity will slowly recover, starting in the second half of 2021 as inventory levels normalize and passenger air traffic begins to recover.
Defense should be relatively stable as the large order we won in the fourth quarter of last year will convert into revenue toward the end of 2021.
Finally, in oil and gas, we expect modest growth from downstream activity improvement.
However, the growth rate will be impacted by lower project bookings in 2020 as a result of the market downturn.
We expect to see stronger growth in the Middle East and Asia-Pacific in particular.
We expect adjusted segment margins to expand by a 150 basis points at the midpoint, driven by higher volumes, continued productivity and the incremental benefits from structural reductions to our cost structure in 2020.
All segments should deliver triple-digit margin expansion.
We're guiding to adjusted earnings-per-share growth of 8% to 17%.
This assumes an approximate 1% reduction in our full year weighted average share count from repurchases and an effective tax rate of 21.5%.
Free cash flow will be in a range of $270 million to $300 million and we expect free cash flow margin to be 10% to 12%.
This is lower than the 15% delivered in 2020 as we expect to increase capex spending, including $5 million to $10 million of investments into green projects and increase working capital dollars to support top-line growth.
However, we expect working capital to continuously decline as a percent of sales over the long term.
At these levels, adjusted free cash flow conversion will approximately be a 100% aided in part by working capital optimization.
On Slide 10 we show the walk to our 2021 adjusted earnings per share guidance.
The majority of our earnings growth will be generated by stronger volume and net productivity, partially offset by the reversal of temporary cost savings and the incremental investments for growth.
The reversal of temporary cost savings is due to a combination of higher compensation costs, travel expense and CARES Act benefits that will become a headwind to earnings in 2021.
Foreign exchange is expected to contribute positively to earnings and tax rate is expected to be slightly higher than 2020 at 21% -- 21.5% with a variance of 20 basis points around the mean, depending on the jurisdictional mix of our income.
Our planning rate currently implies a $0.02 earnings per share headwind.
Lastly, as Luca highlighted, we expect to repurchase $50 million to a $100 million in ITT shares, which will generate a $0.01 to $0.03 tailwind.
Before we wrap up, I also want to share some additional details on what we are seeing thus far in 2021 and what we expect in the first quarter.
Year-to-date, we are on track.
Our first quarter outlook assumes continued double-digit organic sales growth in Motion Technologies, offset by mid-to-high-teens declines in both Industrial Process and Connect and Control.
In Industrial Process, soft 2020 bookings will continue to weigh on revenue near-term, particularly in the chemical and oil and gas segments.
Our short-cycle business will decline due to customers maintaining tight operating expense controls and lower ending backlog.
However, we expect that IP short-cycle will improve sequentially in the second quarter and then grow in the second half of 2021.
In CCT, the declines will be driven by weak commercial aero demand.
This will be partially offset by growth in connectors, given the strong beginning backlog after over 30% sequential order growth in Q4.
The margin expansion will be driven by MT and IP, given the higher order volumes and the cost actions executed in 2020.
Despite progress, CCT's margin will be lower than last Q1, which was still largely unaffected by the pandemic.
While there remains a fair amount of uncertainty in some of our end markets, we're confident in ITT's ability to continue to execute and outperform the competition, which will likely generate Q1 adjusted earnings-per-share growth of mid-to-high-single-digits versus prior year.
Let me pass it back to Luca for closing remarks.
I'm proud of the results we delivered in 2020.
We focused on what we could control, acted quickly and continued to invest in our businesses.
Our Motion Technologies business is our springboard for growth.
Friction continues to win in the marketplace with a focus on capturing share in the fast growing EV segment.
We are progressing in our transformation at both Industrial Process and Connect and Control technologies with a lot of runway.
And finally, our financial health is strong entering 2021 with ample capacity to deploy capital.
We intend to fund high-return growth initiatives, aggressively and diligently pursue strategic acquisitions, pay a competitive dividend and systematically reduce our share count, while continuing to wind out our legacy liability exposure.
We have clear priorities, we are aligned and purposely committed and accountable and we are seeing the benefits of our rigor in our results.
With that, Maria, could you please open the line for Q&A?
| itt q4 loss per share $0.16.
q4 adjusted earnings per share $1.01 excluding items.
q4 loss per share $0.16.
compname announces a 30% increase in quarterly dividend to $0.22 per share.
initiates 2021 earnings per share guidance of $3.12 to $3.48, adjusted earnings per share guidance of $3.45 to $3.75.
qtrly organic revenue decreased 4%.
qtrly revenue $708.6 million, down 1.5%.
expect revenue growth of 5% to 7%, or up 2% to 4% on an organic basis in 2021.
sees free cash flow of $270 million to $300 million in 2021.
|
I'm Hallie Miller, Evercore's Head of Investor Relations.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it is important to evaluate Evercore's performance on an annual basis.
As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
It's hard to believe that when we reported our 2019 earnings at this time last year, everything was "normal".
The past 12 months, however, have been anything but normal.
So, please indulge me a brief review of the year.
When faced in mid-March with two simultaneous crises, a global pandemic and the sharpest economic downturn in decades, our entire business and way of life was disrupted.
Our clients' needs changed rapidly and many of their strategic initiatives, particularly their M&A plans, were placed on hold.
Corporate leaders and financial sponsors became focused almost exclusively on cost control, reducing capital spending, increasing liquidity, amending debt covenants and strengthening their balance sheets.
And while most previously committed M&A transactions were complete, this strategic M&A activity essentially stopped.
Later in the second quarter, as fiscal and monetary stimulus stabilized the debt and equity markets, we helped client capitalize on the opportunity to build liquidity and in certain cases to initiate large restructuring and recapitalization transactions.
These balance sheet and liquidity focused assignments, which drove demand for capital raising advice and execution in both the equity and debt markets, dominated our advisory services in the second quarter and into the beginning of the third quarter.
As the third quarter evolved, strategic and M&A discussions began to resume.
Despite the sharp decline in M&A activity, which lasted several months starting the beginning of March, our revenues were essentially flat year-over-year through the first nine months.
So, how did this happen?
First, over the last few years, we have made significant investments that have materially broadened the services that we can provide to our clients.
We acquired ISI, which materially enhanced our research, underwriting and distribution capabilities.
We greatly strengthened our restructuring team by adding five new SMDs globally, dramatically enhanced our equity underwriting team, we enhanced our private capital raising capabilities for both sponsors and public and private companies, we strengthened our debt advisory capabilities, we added the best activist defense and shareholder engagement team in our entire industry and we added best-in-class capabilities in corporate restructuring, split offs, spins, Morris Trust, reverse Morris Trust, etc.
, and best-in-class capabilities in SPAC capital raising and SPAC merger advice.
So, first, first nine months of 2020, we demonstrated that we have in place best-in-class capabilities to advise our clients in widely varied environments.
And second, we demonstrated that our team has the talent and the entrepreneurial spirit to deploy these capabilities rapidly in support of our clients.
In the latter half of 2020, the M&A market began to recover meaningfully.
Local and US M&A volume increased 92% and 163% respectively compared to the first half and the number of global and US deals increased 18% and 16% respectively.
Still, for the year, M&A volume was down [Technical Issues].
And in the US, the largest M&A market for all firms, and for Evercore particularly, M&A volume was down 21%.
The recovery in M&A, coupled with continued momentum in the broader advisory capabilities that I just described, led to a spectacular fourth quarter by any measure and fueled the many records that we achieved as a firm in 2020.
The point of this review is simple.
In 2020, we proved that while M&A is still our largest source of revenue, our capabilities to advise our clients and to be paid for that advice is much broader than many of our shareholders and many of our analysts -- and perhaps even we -- would have anticipated.
So, while there clearly is some cyclicality in various parts of our business, we truly are very much an all-weather firm that can advise clients on their most important strategic, financial and capital needs in widely varied environments and a firm that can generate significant revenues by providing that advice to our clients in widely varied environments, all the while sticking religiously to our fee-only, no capital risk business model.
As we begin 2021, M&A dialogs and strategic activity discussions are strong.
Growth companies continued to access the public markets for capital.
Financial sponsors and other private businesses are seeking capital and acquisitions in the private and public markets and institutional investors continue to value high quality research, investment analysis and advice.
So, as we enter 2021, our momentum continues to be significant in all of our businesses.
The level of activity of our teams is high and our backlogs remains very strong.
While there certainly still are challenges related to the pandemic and the economy and all of us at Evercore most certainly have enormous empathy for those in our society who have not been as fortunate as we have been, we begin 2021 in a very strong position.
As we look forward, we continue to focus on long-term and trusted relationships with both current and prospective clients determined to advise them on their most important strategic, financial and capital decisions.
We are planning for our eventual return to our offices globally, with the health and safety of our team paramount as we develop these plans.
We are focused on maintaining our strong culture that is grounded in our core values and in collaboration, both of which are hugely important contributors to our many accomplishments in 2020.
We, of course, are actively pursuing opportunities to add talent strategically throughout the firm and we are optimistic about our ability to recruit this talent.
We see significant opportunities to continue to grow our business, both by expanding our coverage of key sectors and geographies and by deepening our product capabilities.
And we are committed to continuing to operate with financial discipline, delivering strong returns to our shareholders, while maintaining a strong and liquid balance sheet and resuming our historical approach of returning any excess capital to our shareholders through dividends and share repurchases.
Let me now turn to our financial results.
We achieved record fourth quarter and full-year adjusted revenues, adjusted operating income, adjusted net income and adjusted EPS, driven by extremely strong revenue growth and good operating leverage.
Fourth quarter adjusted net revenues of $969.9 million grew 45% year-over-year and full-year adjusted net revenues of $2.33 billion grew 14% compared to 2019, the highest annual revenues in our history.
Fourth quarter advisory fees of $790 million grew 40% year-over-year and full year advisory fees of $1.76 billion grew 6% compared to 2019 and also were the highest in our history.
Based on current consensus estimates and actual results, we expect to maintain our number 4 ranking on advisory fees among all publicly traded investment banking firms and we also expect to grow our market share among these firms.
Importantly, our growth in 2020, combined with declining advisory revenues at the three top bulge bracket firms, resulted in a nearly 50% reduction in the gap between us and the number 3 ranked firm and we narrowed the gap between Evercore and the number 1 and number 2 firms as well.
Fourth quarter underwriting fees of $95 million and full-year underwriting fees of $276.2 million each more than tripled year-over-year.
This business experienced the true step up in 2020, in large part due to the expansion of our capabilities that allowed us to work on a variety of assignments for our clients, including IPOs, follow-ons, convertibles, SPACs and caps, as well as the more prominent role we play in virtually all transactions with which we were involved.
Fourth quarter commissions and related fees of $52.4 million increased 1% year-over-year and full year commissions and related fees of $205.8 million increased 9% compared to 2019.
Fourth quarter asset administration fees of $20.1 million increased 20% year-over-year and full-year asset management and administration fees of $67.2 million increased 11% compared to 2019.
Turning to expenses, our adjusted compensation rate for the fourth quarter is 52.3% and for the full year is 58.9%.
Fourth quarter non-compensation costs of $85.8 million declined 12% year-over-year.
And full-year non-compensation costs of $316.7 million declined 10% versus [Technical Issues].
Fourth quarter adjusted operating income and adjusted net income of $376.4 million and $277.4 million increased 110% and 113% respectively and adjusted earnings per share of $5.67 increased 108% versus the fourth quarter of 2019.
Full-year operating income and adjusted net income of $639.3 million and $459.6 million increased 28% and 23% respectively and adjusted earnings per share of $9.62 increased 25% versus 2019.
We produced a full-year adjusted operating margin of 27.5%, roughly 300 basis points of margin expansion compared to 2019.
Finally, we remain committed to returning excess capital to our shareholders.
Our Board declared a dividend of $0.61 and we will resume our normal annual reassessment of that dividend in April.
We remain committed to offsetting the dilution of our upcoming bonus RSU grants and RSU grants to new hires through share buybacks.
And we will resume our historical policy of returning excess earnings not reinvested in the business to our shareholders through dividends and share repurchases.
Bob will comment later on our GAAP results and provide additional detail on our balance sheet.
Our results demonstrate clearly that we are a leader in virtually every business in which we participate and our strength in the fourth quarter in particular contributed significantly to the many records we set for the full year as a firm.
We sustained our number one League Table ranking for volume of announced M&A transactions both globally and in the US among independent firms in 2020 and are advising on 4 of the 10 largest US M&A transactions in 2020.
In the fourth quarter, we realized revenues from many assignments that we started earlier in the year.
And we participated in a number of announced transactions that will close in the future.
This includes advising AstraZeneca on its acquisition of Alexion which was announced in the fourth quarter and is the largest healthcare deal and the largest cross-border deal since the onset of the pandemic.
Our restructuring team ranked number 2 in the League Tables for number of announced US transactions in 2020.
We believe that our restructuring franchise is even stronger than the League Table indicates due to our diversified business base of working with both debtor and creditor clients, as well as working on both in-court and out-of-court restructurings.
Our restructuring business can deliver service and advice far beyond the traditional Chapter 11 bankruptcy advice and many companies called on us in 2020 for our liability management and financing capabilities.
We believe activity levels will remain elevated as certain sectors and companies continue the slow and taxing recovery from the pandemic induced downturn.
Our equity capital markets business performed exceptionally well in 2020 and we expect to continue to benefit from the sustained strong market for equity issuance.
We continue to see strong results from our ongoing investment in this business, which has diversified our capabilities and has led to both fee-paying events and larger transactions.
In 2020, we participated in more than 100 equity and equity-linked transactions that raised nearly $70 billion in total proceeds.
Additionally, both sponsor and corporate clients increasingly have looked at Evercore to play a significant role in their capital raising.
We increased both the number of active book run and book run assignments in 2020 with our growth in active book run assignments outpacing our growth in book run assignments.
Our investments in SPAC capabilities have positioned us well to serve many new clients as they navigate this active market.
We are also encouraged by early results from our investment in convertible debt underwriting and sales and trading, including our first ever sole book run convertible transaction that took place just last week.
Our capital advisory group had a phenomenal year.
Our team advised on more than $30 billion of deals in GP and LP-led transactions, increased significantly in the second half of the year, and we continue to raise primary capital successfully for these clients.
In fact, the team has an impressive virtual fundraising track record, closing more funds virtually than anyone else in the industry.
We continue to see broad growth opportunities in these areas.
In defense and shareholder advisory where campaigns were down in 2020, we continued to experience very strong demand for our market-leading activism advisory practice.
We advised on the defense of the largest US hostile takeover attempt and successfully advised on the defense of two of the largest proxy fights.
Activist activity continues to build as activists increase their positions in companies.
In equities, our team of top institutional investor ranked macroeconomic and fundamental analysts provided valuable insights to our clients throughout this volatile year.
We also continue to make investments in our platform to support our ECM franchise, which enables us to execute at a very high level on a significant number of transactions, with increasingly important roles.
Finally, our wealth management business grew AUM past the $10 billion mark for the first time in 2020 and provided important investment advice to clients in a challenging environment.
We are pleased with these many accomplishments.
Yet, we remain focused on continuing this momentum in 2021 and beyond.
Let me now turn to discuss our opportunities for future growth.
Our expanded advisory and underwriting capabilities provide the foundation for our growth in the future and plenty of opportunity to grow remains.
We believe that there are two main elements to our future growth.
First, further expanding our coverage model, and second, deepening and broadening our capabilities.
Our continued efforts with the Evercore 100, our program to expand service to targeted large cap nationals and multinationals, our dedicated coverage of financial sponsors and investing in talent to grow in areas of whitespace with the addition of A plus talent will all facilitate our expanded coverage model.
There are many areas of untapped geographic and sector potential and we are actively seeking to add talent in those areas where we believe we can deepen our coverage, including TMT, FinTech, pharma, consumer, financial sponsors, large cap multinationals and Europe.
We continue to have many conversations with talented professionals to strengthen these important areas of coverage.
These additions enhance our advisory capabilities on complex, large cap corporate realignments and our capital markets [Indecipherable] business.
We look forward to additional talent announcements in 2021 as we resume a more normalized recruiting process.
Equally important to recruiting externally is our focus on long-term commitment to attracting recruiting and mentoring talented junior individuals and promoting from within.
These individuals contribute to our ability to be a self-sustaining from.
We are pleased to announce that we promoted three managing directors to senior managing director in January, strengthening our advisory coverage of healthcare and restructuring and our equities coverage of healthcare services and technology.
Deepening and broadening our capabilities, the second element of our growth plan further enables our bankers to collaborate with others across the firm to meet the strategic, financial and capital needs of our clients.
Evercore acted as a lead financial advisor and the sole debt advisor to this transaction.
In addition, people from M&A and advisory as well as equity capital markets and hedging all contributed to the advice.
We continue to focus on broadening and diversifying our capabilities, so that we can deepen client relationships, participate in a broader range of activities and earn a greater share of fees that clients pay to their advisor on any given transaction.
We've built a truly world-class ECM, underwriting and advisory business and we are excited to have Kristie join us to lead this business through its next stage of growth.
Our 2020 results demonstrate that the breadth and diversity of our capabilities drives deeper relationships with clients and helps with building new client relationships.
Our investments in both the SPAC and convertible markets are just two recent examples of investments that have enabled new opportunities to advise clients.
We believe that the significant opportunities remain to provide additional services to our current client base and to attract new clients.
Our broader capabilities have supported our industry-leading advisory SMD productivity.
We anticipate that, as these capabilities become more broadly utilized by our clients and our fee share increases, our market-leading productivity will be sustained or even enhanced.
The results and achievements that Ralph and I have summarized could not have happened without the dedication, teamwork, collaboration and commitment that our people demonstrated throughout one of the most uniquely challenging years many of us have ever experienced.
We are deeply grateful for their extraordinary effort.
Now, let me pass the call over to Bob.
Let's kick off with our GAAP results.
For the fourth quarter of 2020, net revenues, net income and earnings per share on a GAAP basis were $927 million, $220 million and $5.02 respectively.
For the full year, net revenues, net income and earnings per share on a GAAP basis were $2.3 billion, $351 million and $8.22 respectively.
As has been the case historically, our adjusted results exclude certain items related to the realignment strategy that began in the fourth quarter of 2019 and which was completed in the fourth quarter of 2020.
In total, we incurred separation and transition benefits and related costs of approximately $45 million, which reflect a modest increase in the costs from our prior estimate of $43 million.
During the fourth quarter of 2020, we recorded approximately $4 million of special charges, which are excluded from our adjusted results.
In the fourth quarter, we completed the sale of our broker-dealer business in Mexico to its management team and we completed the transition of our advisory business in Mexico to a strategic alliance with TACTIV, a newly performed strategic advisory firm founded by the former leaders of our advisory business.
There, there is a loss of approximately $31 million for the year included in other revenue that is related to our transition in Mexico.
Our adjusted results for the fourth quarter and full-year 2020 also exclude special charges of $1.3 million and $3.3 million respectively related to accelerated depreciation expense and $1.7 million related to the impairment of assets resulting from the wind down of our Mexico business.
Turning to taxes, our GAAP tax rate for the fourth quarter was 23.2% compared to 21.7% in the prior-year period.
Our GAAP tax rate for the full year was 23.7% compared to 21.2% in the prior period.
And on a GAAP basis, the share count was 43.9 million for the fourth quarter and 42.6 million for the full year.
Our share count for adjusted earnings per share was 48.9 million for the fourth quarter and 47.8 million for the full year.
Firmwide non-compensation costs per employee were approximately $47,000 for the fourth quarter and $172,000 for the full year, each down 9% and 11% on a year-over-year basis respectively.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related expenses.
As we continue to evolve toward more normal operations, costs associated with travel, recruiting and other expenses will begin to increase.
Finally, focusing on our balance sheet.
Our strong year-end balance sheet reflects the strength and momentum of the recovery in the latter part of the year.
As of December 31, we held approximately $830 million in cash and cash equivalents and $1.1 billion in investment in securities.
As is always the case at this time of year, a meaningful portion of our liquidity will be used to fund upcoming cash bonus payments, payments related to prior-year deferred compensation awards that are vesting currently, tax obligations related to compensation awards including relating to the net settlement of restricted stock units that vest in the first quarter.
Longer term, we are holding investment securities to fund payment obligations relating to deferred compensation awards that will vest in the future and to meet liquidity and regulatory capital requirements.
As of December 31, we have made commitments to pay more than $450 million related to future cash payment obligations under our long-term deferred compensation programs and these payment obligations exist at various dates through 2024.
These payments are, of course, subject to satisfaction of established investing requirements.
This number will change in the first quarter as prior awards will vest and be paid out and new awards relating to 2020 compensation will be granted.
The actions taken in 2020 strengthen our balance sheet significantly.
And as Ralph and John have noted, put us in a position to return free cash earnings generated from operations to investors, consistent with past practice.
| compname reports quarterly adj earnings per share of $5.67.
compname reports full year 2020 results; record fourth quarter and full year revenues; quarterly dividend of $0.61 per share.
evercore inc - q4 u.s. gaap and adjusted net revenues of $927.3 million and $969.9 million, respectively.
evercore inc - qtrly earnings per share $5.02.
evercore inc - qtrly adjusted earnings per share $5.67.
|
I'm joined by chairman and CEO, Larry Culp; and CFO, Carolina Dybeck Happe.
As described in our SEC filings and on our website, those elements may change as the world changes.
With that, I'll hand the call over to Larry.
Our team delivered another strong quarter as orders, margins and cash improved.
While the aviation market is showing continued signs of recovery and contributed to the quarter, our focus on continuous improvement and lean is driving broader operational and financial progress.
At the same time, we're managing through significant challenges that we'll discuss further today.
Starting with the numbers on Slide 2.
Orders were robust, up 42%, with growth in all segments in both services and equipment, reflecting continued demand for our technology and solutions and better commercial execution.
Industrial revenue was mixed.
We saw a continued strength in services, up 7% organically.
Aviation improved significantly, benefiting from the market recovery.
Equipment was down 9% organically, largely due to supply chain disruptions, the Ford ventilator comparison in healthcare, and as expected, lower power equipment.
Adjusted Industrial margin expanded 270 basis points organically, largely driven by operational improvement in many of our businesses, growth in higher-margin services at Aviation and Power, and net restructuring benefits.
Adjusted earnings per share was up significantly, driven by Industrial.
Industrial free cash flow was up $1.8 billion ex discontinued factoring programs due to better earnings, working capital, and the short-term favorable timing impact of aircraft delivery delays.
Overall, I'm encouraged by our performance, especially at Aviation.
Let me share what gives me -- gives us confidence there.
First, our results reflect a significant improvement in near-term market fundamentals.
Departure trends are better than the August dip and have recovered to down 23% of '19 levels.
We expect this acceleration in traffic to continue as travel restrictions lift and vaccination rates increase.
Our results also reflect operating improvements.
For example, at Aviation's overhaul shops, our teams have used lean to increase turnaround time by nearly 10% and decrease shop inventory levels by 15% since the fourth quarter of 2020.
These improvements are enabling us to get engines back to customers faster and at a lower cost.
No business is better positioned than GE Aviation to support our customers through the coming up cycle.
We're ready with the industry's largest and youngest fleet, while we continue to invest for the next generation with lower carbon technologies, such as the CFM RISE program.
This platform will generate value for decades to come.
We're also clearly navigating headwinds as we close this year and look to 2022.
We're feeling the impact of supply chain disruptions in many of our businesses, with the largest impact to date in Healthcare.
Based on broader industry trends, we expect companywide pressure to continue, at least into the first half of next year.
Our teams are working diligently to increase supply by activating dual sources, qualifying alternative parts, redesigning and requalifying product configurations, and expanding factory capacity.
We're also focused on margins as we deploy lean to decrease inventory and costs as well as implement appropriate pricing actions and to reduce select discounts.
Our C team -- our CT team in Japan, for example, has been experiencing higher customer demand, so we're making our production even more efficient to help offset the challenge of delayed inputs.
The team used value stream mapping, standard work and quarterly Kaizens to reduce production lead time once parts are received by more than 40% from a year ago.
And there's line of sight there to another 25% reduction by the end of the year.
While this is a single example within Healthcare, taken together with other efforts, and over time, these add up.
At renewables, we're encouraged by the U.S. administration's commitment to offshore wind development.
production tax credit extension is creating uncertainty for customers and causing much less U.S. market activity in preparation for 2022.
As we've shared, a blanket extension, while a well-intended policy, has the unintended consequence of pushing out investment decisions.
In our business, given the lag between orders and revenue, the impact will continue through the fourth quarter and into '22.
This environment, along with inflation headwinds picking up next year, makes renewables' ongoing work to improve cost productivity even more urgent.
Given these puts and takes, we now expect revenue to be about flat for the year, driven by changes to some of our business outlooks, which Carolina will cover in a moment.
Importantly, even with lower revenue, we're raising our margin and earnings per share expectations, underscoring improved profitability and services growth, and reflecting our strengthened operations.
And we're narrowing our free cash flow range around the existing midpoint.
Looking further out to next year, as our businesses continue to strengthen, we expect revenue growth, margin expansion, and higher free cash flow despite the pressures that we're managing through currently.
We'll provide more detail as usual during our fourth quarter earnings and outlook call.
Moving on to Slide 3.
Challenges aside, our performance reflects the continued progress in our journey to become a more focused, simpler, stronger, high-tech industrial.
The GECAS and AerCap combination is a tremendous catalyst, enabling us to focus on our industrial core and accelerate our deleveraging plan.
Just last week, GE and AerCap satisfied all regulatory clearances for the GECAS transaction.
And we're now targeting to close November 1.
We'll use the proceeds to further reduce debt, which we now expect to reach approximately $75 billion since the end of 2018.
This is enabling GE to look longer term even as we execute our deleveraging.
As we accelerate our transformation, lean and decentralization are key to improving operational results.
This quarter, we hosted our global Kaizen week in each of our businesses, with over 1,600 employees participating.
John Slattery, the CEO of GE Aviation, and I joined our Military team in Lynn, Massachusetts for the full week, while our business CEOs joined their teams across the globe.
Lean is fundamentally about going to Gemba, where the real work is done, and is best learned in operations where you can see it, touch it, smell it firsthand.
And in Lynn, we were there to serve those closest to the work, our operators.
Our mission was to improve first-time yield on midframes, a key subassembly of the military engines we produce in Lynn, whose stubborn variability has been directly and negatively impacting our on-time delivery.
By the end of the week, we had improved processes for welding and quality checks on midframe parts, improvements that we're convinced will help us reach our goals for military on-time delivery by the middle of next year, if not earlier.
And we can improve our performance on the back of these changes for years to come.
There are countless other examples of how our teams are leveraging lean to drive sustainable, impactful improvements in safety, quality, delivery, cost, and cash.
They reflect how we're running GE better and how we're sustaining these efforts to drive operational progress and lasting cultural change.
Our significant progress on deleveraging and operational execution sets us up well to play offense in the future.
Our first priority of course, is organic growth.
This starts with improving our team's abilities to market, sell, and service the products we have.
There are many recent wins across GE this quarter, but to highlight one, our Gas Power team delivered, installed, and commissioned four TM2500 aeroderivative gas turbines in only 42 days to complement renewable power generation for California's Department of Water Resources during peak demand season.
These turbines, using jet engine technology adapted for industrial and utility power generation, start and ramp in just minutes, providing rapid and reliable intermittent power, helping enhance the flexibility and sustainability of California's grid.
And we're bolstering our offerings with innovative new technology that serves our customers and leads our industries forward.
For example, at renewables, our Haliade-X offshore wind turbine prototype operating in the Netherlands, set an industry record by operating at 14 megawatts, more output than has ever been produced by any wind turbine.
From time to time, we'll augment our organic efforts with inorganic investments.
Our recently announced acquisition of BK Medical represents a step forward as we advance our mission of precision healthcare.
Bringing BK's intraoperative ultrasound technology together with the pre and postoperative capabilities in our Ultrasound business creates a compelling customer offering across the full continuum of care, from diagnostics, through surgical, and therapeutic interventions as well as patient monitoring.
Not only does BK expand our high-performing $3 billion Ultrasound business, but it also is growing rapidly with attractive margins itself.
We expect the transaction to close in '22, and I'm looking forward to welcoming the BK team to GE.
All told, we hope that you see that GE is operating from a position of strength today.
We delivered another strong quarter, and we're playing more offense, which will only accelerate over time.
We're excited about the opportunities ahead to drive long-term growth and value.
Our results reflect our team's commitment to driving operational improvement.
We're leveraging lean across GE and our finance function.
In addition to Kaizen week that Larry mentioned, over 1,800 finance team members completed a full waste work week, applying lean and digital tools to reduce nonvalue-added work by 26,000 hours and counting.
For example, at renewables, our team streamlined and automated account reconciliations, intercompany settlements and cash applications.
This type of transactional lean frees up time so we can focus more on driving higher-quality, faster operational insights and improvement, helping our operating teams run the businesses more efficiently.
Looking at Slide 4, I'll cover on an organic basis.
Orders were robust, up 42% year over year and up 21% sequentially on a reported basis, building on revenue momentum heading into '22.
Equipment and services in all businesses were up year over year, with strength in Aviation, renewables and Healthcare.
We are more selective in the commercial deals we pursue, with a greater focus on pricing in an inflation environment, economic terms and cash.
Together with targeting more profitable segments like services, we're enhancing order quality to drive profitable growth.
Revenue was up sequentially, with growth in services, driven by Aviation and Power, but down year over year.
Equipment revenue was down, with the largest impact in Healthcare and Power.
Overall, mix continues to shift toward higher-margin services, now representing half of the revenue.
Adjusted Industrial margins improved sequentially, largely driven by aviation services.
Year over year, total margins expanded 270 basis points, driven by our lean efforts, cost productivity, and services growth.
Both Aviation and Power delivered margin expansion, which offset the challenges in Healthcare and renewables.
Consistent with the broader market, we are experiencing inflation pressure, which we expect to be limited for the balance of '21.
Next year, we anticipate a more challenging inflation environment.
The most adverse impact is expected in onshore wind due to the rising cost of transportation and commodities, such as steel and resin, impacting the entire industry.
We are taking action to mitigate inflation in each of our businesses.
Our shorter-cycle businesses felt the impact earliest, while our longer-cycle businesses were more protected given extended purchasing and production cycles.
Our service businesses fall in between.
Our teams are working hard across functions to drive cost countermeasures and improve how we bid on businesses, including price escalation.
Finally, adjusted earnings per share was up 50% year over year, driven by Industrial.
Overall, we're pleased with the robust demand, evidenced by orders growth and our year-to-date margin performance.
While we're navigating headwinds caused by supply chain and PTC pressure, these have impacted our growth expectations.
We're now expecting revenue to be about flat for the year.
However, due to our continued improvement across GE, we are raising our '21 outlook for organic margin expansion to 350 basis points or more and our adjusted earnings per share to a range of $1.80 to $2.10.
A major focus of our transformation has been strengthening our cash flow generation through better working capital management and improved linearity, ultimately to drive more consistent and sustainable cash flow.
Our quarterly results show the benefits of these efforts.
Industrial free cash flow was up $1.8 billion ex discontinued factoring programs in both years.
Aviation, Power, and Healthcare all had robust free cash flow conversion in the quarter.
Cash earnings, working capital, and allowance and discount payments, or AD&A, driven by the deferred aircraft delivery payment, contributed to this significant increase.
Looking at working capital, I'll focus on receivables, where we saw the largest operational improvement.
Receivables were a source of cash, up $1.3 billion year over year ex the impact of discontinued factoring, mainly driven by Gas Power collections.
Overall, strengthening our operational muscles in billings and collections is translating into DSO improvement, as evidenced by our total DSO, which is down 13 days year over year.
Also positively impacting our free cash flow by about $0.5 billion in the quarter was AD&A.
Given the year-to-date impact and our fourth quarter estimate aligned with the current airframer aircraft delivery schedule, we now expect positive flow in '21, about $300 million, which is $700 million better than our prior outlook.
This year's benefit will reverse in 2022, and together with higher aircraft delivery schedule expectations, will drive an outflow of approximately $1.2 billion next year.
To be clear, this is a timing issue.
You'll recall that we decided to exit the majority of our factoring programs earlier this year.
In the quarter, discontinued factoring impact was just under $400 million, which was adjusted out of free cash flow.
The fourth quarter impact should be under $0.5 billion, bringing our full-year factoring adjustment to approximately $3.5 billion.
Without the factoring dynamics, better operational management of receivables have become a true cross-functional effort.
Let me share an example.
Our Steam Power team recently shifted to this from a more siloed approach.
Leveraging problem solving and value stream mapping, they have reduced average billing cycle time by 30% so far.
So only two quarters in, more linear business operations, both up and downstream, are starting to drive more linear billings and collections.
While we have a way to go, more linear business operations drive better and sustainable free cash flow.
Year to date, ex discontinuing factoring across all quarters, free cash flow increased $4.8 billion year over year.
In each of our businesses, our teams are driving working capital improvement, which together with higher earnings make a real and measurable impact.
Taking the strong year-to-date performance, coupled with the headwinds we've described, we're narrowing our full-year free cash flow range to $3.75 billion to $4.75 billion.
Turning to Slide 6.
We expect to close the GECAS transaction on November 1.
This strategic transaction not only deepens our focus on our industrial core, but also enables us to accelerate our debt reduction, with approximately $30 billion in consideration.
Given our deleveraging progress and cash flow improvement to date, plus our expected actions and better pass-through performance, we now expect a total reduction of approximately $75 billion since the end of 2018.
GE will receive a 46% equity stake in one of the world's leading aviation lessors, which we will monetize as the aviation industry continues to recover.
As we've shared, we expect near-term leverage to remain elevated.
And we remain committed to further debt reduction and our leverage target over the next few years.
On liquidity, we ended the quarter with $25 billion of cash.
We continued to see significant improvement in lowering GE's cash needs, currently at $11 billion, down from $13 billion in the quarter, taking this decrease due to reduced factoring and better working capital management.
This is an important proof point that we are able to operate with lower and more predictable cash needs, creating opportunities for high-return investments.
Moving to the businesses, which I'll also speak to on an organic basis.
Our improved results reflect a significantly stronger market.
Departure trends recovered from August.
It's early, but the pickup that began in September is continuing through October.
Better departures and customer confidence contributed to higher shop visits and spare part sales than we had initially anticipated.
The impact of green time utilization has also lessened.
We expect these positive trends will continue into the fourth quarter.
Orders were up double-digits.
Both commercial engines and services were up substantially again year over year.
Military orders were also up, reflecting a large Hindustan Aeronautics order for nearly 100 F404 engines along with multiple T700 orders.
For revenue, Commercial Services was up significantly, with strength in external spares.
Shop visit volume was up over 40% year over year and double-digits sequentially, with the overall scope slightly improved.
We continued to see higher concentration of narrowbody and regional aircraft shop visits.
Commercial Engines was down double-digits with lower shipments.
Our mix continues to shift from legacy to more NPI units, specifically LEAP, and lower production rates on GEnx.
We're also navigating through material fulfillment constraints, amplified by increased industry demand, which impacted deliveries.
Military was down marginally.
Unit shipments were flat sequentially, but up year over year.
Without the delivery challenges, Military revenue growth would have been high single-digits this quarter.
Given this continued impact, Military growth is now expected to be negative for the year.
Segment margin expanded significantly, primarily driven by Commercial Services and operational cost reduction.
In the fourth quarter, we expect margins to continue to expand sequentially, achieving our low double-digit margin guide for the year.
We now expect '21 shop visits to be up at least mid-single-digit year over year versus about flat.
Our solid performance, especially in services, underscores our strong underlying business fundamentals as the commercial market recovers.
Market momentum is driving very high demand while we navigate supply chain constraints.
Government and private health systems are investing in capital equipment to support capacity demand and to improve quality of care across the market.
Building on a 20-year partnership, we recently signed a 5-year renewal to service diagnostic imaging and biomedical equipment with HCA Healthcare, one of the nation's leading providers of healthcare.
Broadly, we're adapting to overarching market needs of health system efficiency, digitization as well as resiliency and sustainability.
Against that backdrop, orders were up double-digits, both year and versus '19, with strength in Healthcare Systems up 20% year over year, and PDx up high single-digits.
However, revenue was down with a high single-digit decline at HCS, more than offsetting the high single-digit growth we saw at PDx.
You'll recall that last year, the Ford ventilator partnership was about $300 million of Life Care Solutions revenue.
This comp negatively impacted revenue by six points.
And thinking about the industrywide supply shortages, we estimate that growth would have been approximately nine points higher if we were able to fill our orders.
And these challenges will continue into at least the first half of '22.
Segment margin declined year over year, largely driven by higher inflation and lower Life Care Solutions revenue.
This was partially offset by productivity and higher PDx volume.
Even with the supply chain challenges, we now expect to deliver close to 100 basis point of margin expansion as we proactively manage sourcing and logistics.
Overall, we're well positioned to keep investing in future growth, underscoring our confidence in profit and cash flow generation.
We're putting capital to work differently than in the past, supplementing organic growth with inorganic investments that are a good strategic fit.
These are focused on accelerating our precision health mission, like BK Medical.
And we're strengthening our operational and strategic integration muscles.
At renewables, we're excited by our long-term growth potential, supported by new technologies like Haliade-X and Cypress and our leadership in energy transition despite the current industry headwinds.
Looking at the market, since the second quarter, the pending PTC extension has caused further deterioration in the U.S. onshore market outlook.
Based on the latest WoodMac forecast for equipment and repower, the market is now expected to decline from 14 gigawatts of wind installments this year to approximately 10 gigawatts in 2022.
This pressures orders and cash in '21.
In Offshore Wind, global momentum continues, and we're aiming to expand our commitment pipeline through the decade.
And modernizing the grid is a key enabler of the energy transition.
And we saw record orders, driven by offshore, where the project-driven profile will remain uneven.
This leads to continued variability for progress collection.
Onshore orders grew modestly, driven by services and international equipment, partially offset by lower U.S. equipment due to the PTC dynamics.
Services was the main driver, largely due to fewer onshore repower deliveries.
Ex repower, onshore services was up double-digits.
Equipment was down to a lesser extent, driven by declines in the U.S. onshore and grid.
This was partially offset by continued growth in international onshore and offshore.
For the year, we now expect revenue growth to be roughly flat.
Segment margin declined 250 basis points.
Onshore was slightly positive, but down year over year.
repower volume, mix headwinds as new products ramp and come down the cost curve as well as supply chain pressure.
Offshore margins remain negative as we work through legacy projects and continue to ramp Haliade-X production.
At grid, better execution was more than offset by lower volume.
Due mainly to the PTC impact, we now expect renewables free cash flow to be down and negative this year.
Looking forward, where we are facing headwinds, we're intently focused on improving our operational performance, profitability, and cash generation.
Looking at the market, global gas generation was down high single-digits due to price-driven gas-to-coal switching.
Yes, you heard me right, gas to coal switching.
However, GE gas turbine utilization continues to be resilient as megawatt hours grew low single-digits.
Despite recent price volatility, gas continues to be a reliable and economic source of power generation.
Over time, as more baseload coal comes offline and with the challenges of intermediate renewables power, customers continue to need gas.
Through the next decade, we expect the gas market to remain stable, with gas generation growing low single digits.
Orders were driven by Gas Power services, aero, and steam, each up double-digits.
Gas equipment was down despite booking six more heavy-duty gas turbine as timing for HAs remain uneven across quarters.
We continued to stay selective with disciplined underwriting to grow our installed base.
And this quarter, we booked orders for smaller-frame units.
Demand for aeroderivative power continues.
For the year, we expect about 60 unit orders, up more than five times year over year.
Revenue was down slightly.
Equipment was down due to reduced turnkey scope at Gas Power and the continued exit of new build coal at steam.
Consistent with our strategy, we are on track to achieve about 30% turnkey revenue as a percentage of heavy-duty equipment revenue this year, down from 55% in 2019, a better risk-return equation.
At the same time, Gas Power shipped 11 more units year over year.
Gas Power services was up high single-digits, trending better than our initial outlook due to strong CSA volume.
We now expect Gas Power services to grow high single-digits this year.
Steam services was also up.
Margins expanded year over year, yet were down sequentially due to outage seasonality.
Gas Power was positive and improved year over year, driven by services growth and aero shipments.
We remain confident in our high single-digit margin outlook for the year.
Steam is progressing through the new build coal exit.
And by year-end, we expect our equipment backlog to be less than $1 billion compared to $3 billion a year ago.
Power Conversion was positive and expanded in the quarter.
Overall, we're encouraged by our steady performance.
Power is on track to meet its outlook, including high single-digit margins in '23 plus.
Our team is focused on winning the right orders, growing services, and increasing free cash flow generation.
Moving to Slide 8.
As a reminder, following the GECAS close in the fourth quarter, we will transition to one column reporting and roll in the remainder of GE Capital into Corporate.
Going forward, our results, including adjusted revenue, profit, and free cash flow, will exclude insurance.
To be clear, we'll continue to provide the same level of insurance disclosures.
At Capital, the loss in continuing operations was up year over year, driven primarily by a nonrepeat of prior year tax benefit, partially offset by the discontinuation of the preferred dividend payment.
At Insurance, we generated $360 million net income year to date, driven by positive investment results and claims still favorable to pre-COVID levels.
However, this favorable claim trends are slowing in certain parts of the portfolio.
As planned, we conducted our annual premium deficiency test, also known as the loss recognition test.
This resulted in a positive margin, with no impact to earnings for a second consecutive year.
The margin increase was largely driven by a higher discount rate, reflecting our investment portfolio realignment strategy, with a higher allocation toward select growth assets.
Claims costs curve continued to hold.
In addition, the teams are preparing to implement the new FASB accounting standard, consistent with the industry, and we're working on modeling updates.
Based on our year-to-date performance, Capital still expects a loss of approximately $500 million for the year.
In discontinued operations, Capital reported a gain of about $600 million, primarily due to the recent increase in AerCap stock price, which is updated quarterly.
Our priorities are to reduce functional and operational costs as we drive leaner processes and embrace decentralization.
The results are flowing through, with costs down double-digits year over year.
We are now expecting Corporate costs to be about $1 billion for the year, and this is better than our prior $1.2 billion to $1.3 billion guidance.
As you can see, lean and decentralization aren't just concepts.
They are driving better execution and cultural change.
They are supporting another strong quarter.
They are enabling our businesses to play more offense.
And ultimately, they're driving sustainable, long-term profitable growth.
Now Larry, back to you.
Our teams continued to deliver strong performance.
We're especially encouraged by our earnings improvement, which makes us confident in our ability to deliver our outlook for the year.
You've seen today that our transformation to a more focused, simpler, stronger, high-tech industrial is accelerating.
We're on the verge of closing the GECAS-AerCap merger, a tremendous milestone for GE.
Stepping back, our progress has positioned us to play offense.
We just wrapped up our annual strategic reviews with nearly 30 of our business units.
These complement our quarterly operating reviews, but have a longer-term focus as we answer two fundamental questions: What game are we playing?
And how do we win?
These reviews were exceptionally strong this year across the board, with the most strategic and cross-functional thinking we've seen in my three years, enabling us to drive long-term growth and value across GE, while delivering on our mission of building a world that works.
We're positioned to truly shape the future of flight with new technology for sustainability and efficiency, such as the recent Catalyst engine launch, the first clean sheet turboprop design entering the business in general aviation market in 50 years.
Touching one billion patients per year, we're delivering more personalized and efficient care through precision health and combining digital AI within our products, including our new cloud-based Edison TruePACS, to help radiologists adapt to higher workloads and increased exam complexity with improved diagnostic accuracy.
Through our leadership in the energy transition, we're helping the world tackle the trilemma of sustainability, affordability and reliability from launching new tech platforms at renewables, such as the Haliade-X and Cypress, to our recently announced flexible transformer project with the Department of Energy, to growth in the world's most efficient gas turbines.
To be clear, we still have work to do.
And as we do it, we're operating increasingly from a position of strength, serving our customers in vital global markets with a focus on profitable growth and cash generation.
Our free cash flow will continue to grow toward a high single-digit percentage of sales level.
And we have an opportunity to allocate more resources on capital deployment to support GE's growth over time.
Steve, with that, let's go to questions.
[Operator instructions] John, can you please open the line?
| quarterly revenues $18.4 billion down 1%.
narrowing '21 fcf guide.
sees 2021 earnings per share of $1.80 - $2.10.
quarterly aviation revenue $5.4 billion, up 10%.
sees 2021 free cash flow $3.75 billion - $4.75 billion.
sees 2021 ge industrial organic revenue about flat.
sees aviation market recovery beginning in 2h.
remain on track to deliver high single-digit free cash flow margins over time.
sees 2021 adjusted industrial profit margin expansion 350+ basis points.
expects revenue growth, margin expansion, and higher free cash flow in 2022.
post aercap close, expect to reduce debt by about $75b since 2018.
|
Also, the release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures.
The extent to which the COVID-19 pandemic impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence including the scope, severity and duration of the pandemic and the resulting economic recession and potential changes in customer behavior, among others.
Let me start by saying I hope you are all well and your family are safe and healthy.
As mentioned on our last call, the Highwoods teams across our markets have safely returned to our offices, which is allowing us to reap the benefits of collaboration and our company's unique culture.
Across our 27 million square foot portfolio, we estimate utilization is approximately 25% on average, which has increased since the end of the summer, but is below our first COVID revised outlook we provided in April.
We don't expect a sizable increase in utilization until at least early 2021.
It remains difficult to predict the duration and severity of the current recession and when leasing activity will recover.
While we're all hoping for a return to pre pandemic office fundamentals, we're still well positioned in the current environment given our lack of large customer expirations over the next few years, our ability to control opex and the built-in growth from our highly pre-leased development pipeline.
Plus, we further strengthened our fortress balance sheet this quarter by raising $400 million of 10.5 year bonds at an attractive rate.
We have ample liquidity to fund the remaining spend on our development pipeline and still have plenty of dry powder to capitalize on future growth opportunities.
In addition to having a high-quality portfolio and strong balance sheet, our markets continue to benefit from positive demographic trends, both population and job growth.
To this end, the Urban Land Institute's recently published 2021 Emerging Trends in Real Estate report listed Raleigh as the number one market for overall real estate prospects.
Nashville came in at number three, Charlotte number five, Tampa number six and Atlanta number 11.
These five markets constitute more than 75% of our NOI.
We're seeing this national story of jobs migrating to our footprint verified in the inquiries we're receiving.
We've hosted numerous out of town prospects seeking space, ranging from large to small, and our partners at the various economic development agencies across our markets indicate the pipeline of out of town users seeking relocations continues to be robust.
On a related note, the big elephant in the room for office landlords is obviously the long-term impact of work-from-home policies.
Brian will go into more detail about what we're seeing in our markets.
And while it's still early, work-from-home has not yet had any meaningful impact on leasing decisions by existing customers or prospects.
Thus far, we've only experienced a few small customers who elected not to renew based on their plan to work from home.
And some of these may be temporary solutions.
In the third quarter, we delivered FFO of $0.86 per share, which included a cumulative $0.05 impact from a debt extinguishment charge and noncash write-offs of straight-line rent due to the conversion of certain leases from fixed rent to percentage rent.
Adjusting for these items, our FFO would have been $0.91 per share, a solid performance given the challenging economic environment.
In addition to healthy FFO, our portfolio metrics were strong.
In-place cash rents are up 5.2% compared to a year ago, which helped drive same-property cash NOI of 2.2%, excluding the impact of temporary rent relief deals, even with average occupancy down.
This performance was consistent with last quarter's 2.4%.
As expected, occupancy dipped sequentially to 90.2%, driven predominantly by T-Mobile's expiration in Tampa.
We expect occupancy to hold firm around 90% in the fourth quarter.
We leased 660,000 square feet of second-gen office space with GAAP rent growth of 12.5% and cash rent growth of 5% and this was done with limited leasing capex, which drove net effective rents 7.2% higher than our prior 5-quarter average.
New leasing volume rebounded to 190,000 square feet.
And while still below our normal quarterly volume of 200,000 to 250,000 square feet, we're encouraged by the sequential uptick and improved level of prospect activity over the past month.
Since the start of the pandemic, our monthly rent collections have been consistently strong.
We collected 99.7% of our rents in the third quarter and have collected 99.7% of October rents.
Temporary rent deferrals equate to 1.2% of annual revenues, unchanged from last quarter, and repayments are occurring on schedule.
To date, we've received repayment of approximately 25% of total deferrals and remain on track to be largely repaid by the end of 2021.
We have made significant progress on Phase two of our market rotation plan to exit Greensboro and Memphis.
These sales will bring Phase two dispositions to $151 million for the year at prices that are in line with our pre pandemic expectations.
As reflected in our updated FFO outlook, these sales will be dilutive in the near term as we carry excess cash on our balance sheet, but we're confident we'll be able to replace this income as we redeploy the proceeds.
On the acquisition side.
For the few high-quality buildings that have come to market since the pandemic started, pricing has been very competitive, especially for buildings with high occupancy, limited near-term lease roll and creditworthy customers.
We're actively looking for opportunities to deploy capital, which is why we've kept our 2020 acquisition outlook range unchanged at $0 to $200 million.
However, we'll stay true to our mantra of being disciplined allocators of capital and only seek opportunities where risk-adjusted returns make sense for our shareholders.
Our 1.2 million square foot $503 million development pipeline remains on budget and on schedule.
We funded 73% to date and expect to fund most of the remaining $138 million by the end of next year.
Since our last call, we've signed leases at both of our spec projects, one at Midtown West in Tampa and the other at Virginia Springs II in Nashville.
These deals bring our overall pre-leased rate to 79%.
In addition to the signed leases, we have seen increased prospect activity at both these projects in the past several weeks.
The three other projects in our development pipeline are fully pre-leased and on schedule to meet their delivery dates.
Upon stabilization, our pipeline will provide more than $40 million of NOI, of which more than $32 million is already secured through signed leases.
New build-to-suit and anchor pre-lease conversations have slowed down compared to pre-pandemic levels.
We don't expect any new project announcements this year, and therefore, we took the possibility of new development announcements out of our updated 2020 outlook.
However, we're still having conversations with prospects that could lead to build-to-suits or highly pre-leased development announcements in 2021.
Now to our updated 2020 FFO outlook of $3.59 to $3.61 per share.
As I mentioned earlier, we incurred $0.05 of expenses this quarter due to debt extinguishment charges and noncash straight-line rent write-offs.
In addition, fourth quarter dispositions will be dilutive by $0.01 per share.
These items, which negatively impact our full year results by $0.06 in the aggregate were not in our prior outlook of $3.59 to $3.68.
Excluding these items, the midpoint of our updated range is up $0.025 compared to the last quarter.
As a reminder, potential lost rents from customer defaults and noncash straight-line credit losses for the remainder of 2020 are too speculative to project.
Finally, our performance the past few quarters demonstrates our ability to quickly adapt to changing macro conditions through reduced opex and meeting customers' needs with flexible and creative lease solutions.
Plus, our limited lease expirations puts us in good position to mitigate the impact from the recession.
We also have built-in growth from our development pipeline and have a balance sheet with plenty of capacity to pursue additional growth opportunities.
We're cognizant of the near-term challenges facing us from the current environment, but we're confident we have the ingredients to drive sustainable growth over the long term.
While leasing volume was lower in the third quarter than the second, we did see a sequential increase in activity levels.
During the quarter, we signed 660,000 square feet of second-generation leases with GAAP rent spreads of a positive 12.5%, cash rent growth of 5% and net effective rents that were 7% above our prior 5-quarter average, just short of the record set in the fourth quarter of 2019.
With regard to new leasing, activity picked up in the third quarter with 190,000 square feet of new deals and 8,000 square feet of expansions.
The renewal of the Federal Aviation Administration in Atlanta during the quarter finalized our last remaining expiration over 100,000 square feet during the next 2-plus years.
With this renewal in hand, we now have only 18% of our portfolio expiring over the next nine quarters, which is down over 500 basis points compared to this point a year ago and our long-term historical average.
As Ted discussed, rent relief deals held steady at 1.2% of our annual revenues.
With inbound relief requests slowing to a trickle, we're focused on rent collections and creative solutions for customers with needs-based requests.
To that end and as a testament to the quality of our customers, our collections are strong with 99.7% of all rents collected in the third quarter and for the month of October.
These few leases were done for customers whose businesses have been severely impacted by social distancing measures, and we preserved the potential to receive full rent over the life of the lease.
Let's now drill down and take a closer look at our markets where activity has picked up since Labor Day.
Across the board and specifically in Tampa, Raleigh, Nashville and Atlanta, tours are up.
New requests for proposals have come in, and we are seeing inbound interest from out of town prospects, looking to grow or relocate to our markets.
To this end, 25% of new deals in the quarter are new to market, coming from the West Coast, Midwest and the Northeast.
We've consistently touted our BBD location strategy, which contains a mix of highly amenitized urban and suburban locations across our footprint.
We've seen validation of this strategy in the superlatives provided in the recently released 2021 Emerging Trends in Real Estate report, published annually by ULI and PricewaterhouseCoopers.
Four of our markets place in the top six including our hometown of Raleigh, where we own and operate close to five million square feet, coming in at number one.
As one might expect, and consistent with previous recessions, the availability of sublease space is increasing.
However, in our portfolio, sublease space remains steady in Q3.
Price discovery on rents is limited due to the low volume and high proportion of short-term renewals.
But for the moment, face rates are holding steady, while we do expect downward pressure on net effective rents as concessions increase.
Vacancy increased 20 basis points across our markets for the quarter.
As Ted mentioned, we haven't seen work-from-home policies have a big impact on customer leasing decisions.
Specifically, in 2020, we've had seven customers ranging in size from 1,200 square feet to 4,300 square feet who did not renew leases in favor of working from home.
And several of these indicated, this decision may be temporary.
We believe the characteristics that made our markets centers of growth prior to the pandemic are receiving increased attention as organizations and individuals reevaluate their geographic plans and preferences.
Anecdotal evidence suggests the attractiveness of our markets could be an accelerant for inbound relocations for corporate users and individuals.
To Charlotte, where after five years straight of positive quarterly absorption, the market recorded its first negative quarter in Q3, with the footnote that rents are up 3% and major inbound announcements, such as Centene's one million square feet and 3,000 new job announcements are just now getting going.
While construction on major new offices for Honeywell, Lending Tree, Duke Energy and the Lowes Global Technology Center are still finishing up.
Markedly different from the previous recession, Charlotte is now recognized as a growing and stable tech hub, exemplified by its number one ranking atop of Robert Charles Lesser & Co's and CapRidge's STEM Job Growth Index.
In good company on the same index at number five for growth, and with an already established global reputation as a tech hub, the Raleigh market posted positive net absorption in the third quarter.
Our portfolio there held firm and we signed 167,000 square feet.
Let's now go down to the home of the Stanley Cup winners, the World Series competitors at the very least, Super Bowl hosters in Tampa, where rents have increased 4% year-over-year, and the market saw over 200,000 square feet of inbound inquiries from out of market prospects this quarter.
Labeled a boom market and a member of the Super Sun Belt by ULI's report, Tampa is highlighted as a metro area with less exposure to industries most affected by COVID-19, in addition to its low cost of living and business-friendly government.
Our talented Tampa team was busy in the third quarter.
The team signed 80,000 square feet of leases and toured several prospects through Avion and Midtown Tampa, where the mixed-use development is racing toward delivery next year and where our new 150,000 square foot office building is rising directly above an REI, next door to Whole Foods and luxury apartments and down the block from Shake Shack and two new hotels.
In closing, we wouldn't be where we are today without the tireless dedication of our amazing team.
From every maintenance tech, property manager and leasing agent, each Highwoods colleague adds their individual excellence in the pursuit of superlative results.
By developing, leasing, operating and maintaining our own portfolio, we do so as stewards entrusted with creating and sustaining the ideal environment for our customers to thrive in.
Doing so in normal times is exceptional.
Doing so throughout a pandemic is extraordinary.
Now let me hand it over to Mark.
In the third quarter, we delivered net income of $40.3 million or $0.39 per share and FFO of $91.7 million or $0.86 per share.
As Ted mentioned, the quarter included a debt extinguishment charge and noncash straight-line credit losses, which reduced FFO by $0.05 per share.
Neither of these items were included in our prior FFO outlook.
Excluding these two items, our FFO would have been $0.91 per share which compares favorably to $0.88 per share in last year's third quarter, also after excluding onetime items associated with the market rotation plan from a year ago.
To put this in context, clean FFO is up about 3.5% year-over-year, with leverage essentially unchanged, while we've entered Charlotte with a trophy building, exited the majority of our Greensboro and Memphis properties and operated during a pandemic and severe recession.
This growth was due to higher rents, reduced operating expenses, keeping tight control on G&A and taking advantage of the debt markets to reduce interest expense.
The macro environment remains challenging but we've been pleased with our ability to adapt quickly and deliver strong financial results.
Our balance sheet is in excellent shape.
We issued $400 million of 10.5 year bonds with an interest rate of 2.65%.
We used some of the proceeds to retire $150 million of our 2021 bonds early and repaid a $100 million term loan due in early 2022.
After repaying the balance outstanding on our revolving line of credit and continuing to fund development, we ended the quarter with $119 million of cash on hand.
Our net debt-to-adjusted EBITDAre ratio was steady at five times, and our leverage ratio including preferred stock is 36.6%.
We have $138 million left to spend to complete our development pipeline and no debt maturities until June 2021.
The combination of more than $700 million of current liquidity and projected fourth quarter disposition proceeds puts us in a strong position to fund our remaining capital obligations while leaving us ample room for future growth opportunities without the need to raise additional capital.
Turning to our outlook.
We've updated our FFO range to $3.59 to $3.61 per share.
This includes $6.5 million or $0.06 per share of dilution from the following items that weren't in our prior outlook: $3.7 million debt extinguishment charge, a $1.5 million noncash straight-line rent credit losses mostly due to conversion of leases from fixed rent to percentage rent and $1.3 million net impact of lower FFO from fourth quarter dispositions.
Excluding these items, our FFO outlook would have been up $0.025 at the midpoint.
Last quarter, we detailed $0.01 of dilution from items that weren't in our original FFO outlook.
When adjusting for these nonoperational or noncash items that were not in our original outlook, the midpoint of our revised range would be $0.01 per share above the midpoint of our original FFO outlook that we provided in early February.
Given the significant impact the pandemic and ensuing recession has had on the economy and our business, we believe our operating and financial results have been excellent.
Last quarter, we provided a list of projected impacts from the COVID-19 induced economic slowdown with the primary takeaway that parking revenues were expected to be low for the remainder of the year but this reduction would largely be offset by lower operating expenses.
We also continue to expect cash flow to improve in the near term due to lower leasing capex.
As Ted mentioned, we expect to close $123 million in dispositions before year-end, which will bring 2020 dispositions to $151 million, excluding the $338 million of phase one market rotation dispositions we completed in the first quarter.
We have maintained our original acquisition outlook of $0 to $200 million as we're currently evaluating certain opportunities.
We don't expect any development announcements this year and thus have eliminated this potential from our outlook.
However, here are a few noteworthy items to highlight as we get close to the new year: First, we're fortunate as we have ample liquidity and low leverage to deploy capital into potential growth opportunities.
Second, we're carrying more cash than normal on our balance sheet, following our debt issuance in the third quarter, which will be dilutive in the near term but should normalize as we pay off the remainder of the 2021 bonds in April and fund development expenditures.
Third, we expect $40 million of NOI from our development pipeline upon completion and stabilization.
Most of this is secured through signed leases.
GlenLake Seven will deliver in early 2021, while the other projects in the pipeline are expected to contribute more substantially in 2022.
Last, we've been able to quickly adapt to the current environment by reducing opex to offset lower parking revenues.
And while we expect opex will rise as portfolio utilization increases, we believe we'll be able to hold on to some of those savings even as utilization levels recover.
Looking forward, we continue to remain positive about the long-term outlook for Highwoods.
| compname posts qtrly net income per share of $0.39.
qtrly net income per share $0.39.
updates 2020 ffo outlook to $3.59 to $3.61 per share.
qtrly earned ffo of $0.86 per share.
|
danaher.com, under the heading Quarterly Earnings.
The supplemental materials describe additional factors that impacted year-over-year performance.
We may also describe certain products and devices, which have applications submitted and pending for certain regulatory approvals or are available only in certain markets.
As a result of the size of the Cytiva acquisition and its impact on Danaher's overall core revenue growth profile, we're presenting core revenue on a basis that includes Cytiva sales.
References to core revenue growth includes Cytiva sales and the calculation of period-to-period sales growth comparing the current period Cytiva sales to the historical period Cytiva sales prior to acquisition.
In the first quarter of 2021, we got off to a very strong start, delivering better-than-expected core revenue growth across our portfolio.
Our broad-based performance was driven by double-digit core revenue growth in our base business, our ongoing contributions to the development and production of COVID-19 vaccines and therapeutics and strong demand for Cepheid's point-of-care molecular diagnostic tests.
Our record top line performance also contributed to outstanding earnings-per-share growth and free cash flow generation.
Our well-rounded first quarter results are a testament to the unique positioning of our portfolio and our commitment to continuous improvement.
We have an exceptional collection of market-leading franchises and technologies all powered by the Danaher Business System, that serve attractive end markets with durable secular growth drivers.
We believe that this powerful combination differentiates Danaher and reinforces our sustainable, long-term competitive advantage.
So with that, let's turn to our first quarter results.
We generated $6.9 billion of sales in the first quarter with 30% core revenue growth.
All three of our reporting segments delivered better-than-expected growth, led by Life Sciences and Diagnostics.
We believe we continue to capture market share, particularly at some of our larger businesses, including Cytiva, Pall, Radiometer, Leica Biosystems, Hach and Videojet.
Over the last several years, we've prioritized high-impact growth investments in innovation, sales and marketing, to ensure that we're well positioned both near and long term.
Through new product introductions and the impact of our Danaher Business System growth tools, we've enhanced our competitive advantage and believe we've achieved notable market share gain.
Geographically, revenue growth was broad-based across both developed and high-growth markets.
We saw over 20% growth in the developed market, led by North America and Western Europe.
High-growth markets were up more than 45%, largely driven by the recovery in China.
Our gross profit margin increased 580 basis points year-over-year to 62% in the first quarter, largely due to higher sales volumes and the positive impact of higher-margin product mix.
Our operating profit margin of 29.1% was up 1,300 basis points year-over-year, including more than 900 basis points of core margin expansion as a result of higher gross margins and lower operating expenses as we continue to see limited travel and other related costs.
Adjusted diluted net earnings per common share of $2.52 were up 140% versus last year.
We generated $1.6 billion of free cash flow in the quarter, an increase of 135% year-over-year.
Now in the first quarter, we deployed more than $400 million of capital toward mergers and acquisitions across all three segments.
Most notably, IDT and Cytiva completed their first bolt-on acquisition with IDT adding Swift Biosciences, which brings complementary capabilities and a broad portfolio of next-gen sequencing library preparation and enrichment solutions for DNA, RNA and methylated DNA samples.
And Cytiva acquired Vanrx Pharmasystems, which provides innovative, automated aseptic tolling technologies used to fill vials, syringes and cartridges, a critical final step to complete the bioprocessing workflow.
We also continued to make significant organic investments and high-impact growth initiatives across all of Danaher.
Over the past six months, we've invested in a meaningful expansion of production capacity at Cepheid, Cytiva, Pall Biotech and Beckman Life Sciences.
Near term, these investments will support COVID-related demand, but they're equally important to support the long-term growth of these businesses, where we see tremendous runway ahead given the underlying growth drivers and the durability of the markets they serve.
Between these four businesses, we're investing more than $1 billion in 2021 to continue to meet our customers' needs today and well into the future.
So now let's take a look -- a more detailed look at our results across the portfolio.
Life Sciences reported revenue increased 115% as a result of the Cytiva acquisition, and core revenue was up 41.5%.
We saw strong double-digit core revenue growth across all of our largest operating companies in the platform, led by Cytiva, Pall Life Sciences, Beckman Life Sciences and IDT.
In our bioprocessing businesses, accelerating demand for COVID-related vaccines and therapeutic development and production drove a combined core revenue growth rate of more than 60% at Cytiva and Pall Biotech.
Excluding the impact of COVID-related activity, our underlying biopharma business grew in the low 20s range.
We believe that our ability to continue meeting customers' needs across their bioprocessing workflows enabled us to gain market share in the quarter, particularly within our cell culture media and single-use product line.
Reported revenue was up 34%, and core revenue grew 31%.
Each of our largest operating companies in the platform achieved high single digit or better core revenue growth, led by Cepheid, which achieved more than 90% core revenue growth.
In response to the unprecedented demand for Cepheid's rapid point-of-care molecular test, the team again increased production capacity and shipped over 10 million respiratory test cartridges in the first quarter.
Roughly half of the tests shipped were COVID-only tests, and the other half were 4-in-1 combination test for COVID-19 Flu A, Flu B and RSV.
We also saw increasing demand for nonrespiratory tests across Cepheid's market-leading test menu, including sexual health, hospital-acquired infections and urology, demonstrating the broad applicability of Cepheid's molecular diagnostic offering.
Moving to our Environmental & Applied Solutions segment.
Reported revenue grew 6.5% and core revenue was up 3.5%.
Our Water Quality platform was up slightly and product identification was up high single digits.
Our Water Quality businesses support customers' day-to-day mission-critical water operations, providing water testing, treatment and analysis across a variety of applications around the world.
We saw good underlying demand for our analytical chemistries and consumables during the quarter, and we're encouraged by the improvement in equipment sales, which returned to growth as customers got back up and running at more normalized levels.
In Product Identification, we saw mid single-digit core revenue growth in our marking and coding businesses and double-digit growth in packaging and color management.
Esko and X-Rite benefited from the underlying market recovery and saw good momentum from customers initiating new projects and investments in the first quarter.
So with that context from what we saw by segment during the quarter, let's take a look -- walk through some of the trends we're seeing across our end markets and geographies.
Customer activity around the world is approaching pre-pandemic levels as we all collectively adapt to working in this new environment.
We're seeing this in the form of strong sales funnels and order book growth.
Service levels at or near pre-pandemic levels and an uptick in equipment revenues.
While some of this dynamic is a result of pent-up demand in the wake of widespread lockdowns, we're starting to see underlying recovery across most of our end markets that were impacted.
Now if we take a closer look at these dynamics by geography, China appears to be the furthest along in terms of reopening, with activity levels largely back to normal.
The U.S. is not all the way back just yet, but is moving in the right direction.
And an increase in vaccination rates across the country appear to be driving some of this progress.
Europe is improving broadly.
And while certain areas have recently experienced setbacks in the process of reopening, we've not seen any material impact.
In Life Sciences, activity in the broader biopharma market remains robust.
There has not been any slowdown in the double-digit growth trend we've seen over the last several quarters across non-COVID-related biopharma activity.
Within COVID-related biopharma activity, the significant ramp-up of vaccines and therapeutics is driving record bioprocessing demand.
We're involved in the majority of COVID-19 vaccine and therapeutic projects under way around the world today, including all of those in the U.S. that are currently on the market or in later-stage clinical trials.
Our operating companies are playing a significant role in the development and production of new therapies and vaccines across the biopharma pipeline.
And given the breadth of our offering and the production capacity we're adding in 2021, we're uniquely positioned to support our customers in their mission today and well into the future, which is to make more life-saving treatment available to more patients faster.
In clinical diagnostics, we continue to see heightened demand for rapid point-of-care molecular testing.
As we look across the COVID-19 testing landscape and consider the durability of the demand that we're seeing, we believe that Cepheid's positioning is the strongest among the various testing modalities and settings.
Cepheid's leading presence at the point of care, combined with the speed, accuracy and workflow advantages of their molecular offering, uniquely positions the business to support customers' testing needs, not only for COVID-19, but beyond the pandemic as well.
Across hospital and reference labs, patient volumes are at or near pre-pandemic levels in most major geographies as elective procedures and hospital visits have rebounded from last year.
Consumables growth is accelerating as a result, and we're encouraged by the momentum of instrument placement.
Finally, in the applied market, consumables remain solid across essential business operations like testing and treating water and safely packaging food and medicine.
And growth is picking up on the equipment side as customers get back to more normal operations and initiate capital investments.
Now let's briefly look ahead to our expectations for the second quarter and the full year.
We expect to deliver second quarter core revenue growth in the mid-20s range.
We anticipate low double-digit core revenue growth in our base business and a low double-digit core growth contribution from COVID-related revenue tailwind.
Additionally, we expect to have operating profit fall-through of approximately 40% in the second quarter and for the remainder of 2021.
For the full year 2021, we now expect to deliver high teens core revenue growth.
We anticipate that COVID-related revenue tailwinds will be a high single-digit to low double-digit contribution to the core revenue growth rate.
This would include an estimated $2 billion of 2021 revenue at Cytiva and Pall Biotech associated with vaccines and therapeutics, which is higher than our previous expectation of $1.3 billion.
And at Cepheid, we'll continue ramping capacity through the year and now expect to ship approximately 45 million tests in 2021 compared to our prior estimate of 36 million tests.
And in our base business, we now expect that core revenue will be up high single digits for the full year.
So to wrap up, we had a very strong start to the year and feel good about the momentum we're seeing across all of Danaher.
Our first quarter results are a testament to the commitment and capability of our team and a durable, balanced positioning of our portfolio.
We believe this combination differentiates Danaher and sets us up well to outperform in 2021 and beyond.
In our pursuit of continuous improvement, we'll strive to keep building an even better, stronger company and to positively impact the world around us in meaningful ways for all of our stakeholders.
We see tremendous opportunities ahead to do just that.
That concludes our formal comments.
| q1 adjusted non-gaap earnings per share $2.52.
q1 revenue rose 58 percent to $6.9 billion.
for q2 2021, company anticipates that non-gaap core revenue growth will be in mid-20 percent range.
for full year 2021, company now anticipates that non-gaap core revenue growth rate including cytiva will be in high-teens percent range.
|
These statements and materials are based on many assumptions and factors that are subject to risk and uncertainties.
Our Chief Financial Officer, Ray Young, will review financial highlights and corporate results as well as the drivers of our performance and our outlook.
Vince Macciocchi, Senior Vice President and President of our Nutrition segment will give an update on our Nutrition business and its future growth.
Last night, we reported third quarter adjusted earnings per share of $0.89, up from $0.77 in the prior year quarter.
Adjusted segment operating profit was $849 million, up 11% year-over-year and our trailing four quarter adjusted ROIC was 8.3%.
Our strategic initiatives have continued to enable our teams around the world to demonstrate their expertise and skills.
And I'm proud of how our colleagues are supporting customers and driving strong results.
The team has done a great job of handling the daily and sometimes hourly challenges that have come our way in 2020.
That resiliency allows us to deliver outstanding results today, while we simultaneously continue our strategic work to make our company better and advance our growth and transformation.
Let me share with you some of our accomplishments.
In our optimized pillar, Ag Services & Oilseeds team continue this work to enhance returns, delivering another $100 million in invested capital reductions in the third quarter.
Since 2017, Ag Services & Oilseeds has improved its capital position by exiting from no longer strategic assets including 71 grain origination locations, six oilseeds facilities, 14 Golden Peanut and Tree Nuts locations, and seven oceangoing vessels.
We've also seen first-hand however improvement initiatives have helped drive business continuity.
In addition to the pandemic, in recent months, we've seen multiple hurricanes in the US Gold under the retro storm that swept across the Midwest.
In our drive pillar, we're continuing to accelerate our 1ADM business transformation, expanding the deployment of our procurement, contract labor and sales and marketing modules, which are helping us drive efficiencies and growth and will provide us with a trove of data to support enhanced analytics and decision making.
Our Decatur corn complex, ongoing strong performance from grind to gluten to workplace safety continues to demonstrate the benefits of our centralized operations organization.
Our Supply Chain Center of Excellence is delivering as well using our enhanced processes and tools, as well as integrated planning between commercial, supply chain and operations we recently piloted changes at the nutrition facility that are on track to unlock a 20 plus percent increase in production capacity at that location.
I have already resulted in enhancements in customer service, without additional capital spending.
We'll be rolling these kinds of improvements out to other locations.
In our expand pillar, we're continuing to harvest our investments.
For example, year-to-date, our Algar Agro acquisition has tripled its year-over-year operating profit.
In a very short time, Algar has grown to be an important component of the South American business.
We've successfully expanded production of high-quality USP grade alcohol in Peoria and Clinton to meet high demand for hand sanitizer.
We announced the construction of a new state-of-the-art production facility in Spain that will dramatically expand our ability to meet growing demand for probiotics and other consumer products to support health and wellness.
We also signed a long-term agreement with Japanese start-up Spiber Inc
This project taps into our innovative spirit and capabilities, creating value from across our supply chain from the corn we buy to the dextrose we make to the science and manufacturing technology we have invested in.
And it meets a critical need in the marketplace for both consumer and industrial products that come from sustainable sources.
Our transformation and growth and our confidence in the future will not be possible without readiness.
By the end of the third quarter, our team identified and executed on readiness initiatives that unlocked almost $1.2 billion in run rate benefits.
And now, I'm pleased to announce that we are on track to achieve $1.3 billion by the end of the year.
Readiness encompasses and supports our entire company.
It drives the strategic imperatives that help us fulfill our purpose, such as sustainability.
We are advancing our sustainability efforts on many fronts.
Such as our Strive 35 goals to improve our performance on greenhouse gases, energy, water and waste.
Readiness creates growth enablers.
For example, we're continuing to elevate our commercial excellence with innovative tools like our consumer insight programs and virtual customer technologies.
And of course, readiness is one of the key elements, powering the growth algorithm we laid out at the beginning of the year, because of its success, along with tremendous progress in our harvest and improved initiatives, we now expect to meet or exceed the high end of our $500 million to $600 million goal for targeted improvements in 2020.
In 2014, we started a new journey with the acquisition of WILD Flavors, and the launch of a full-service nutrition business, offering customers a broad array of products and services.
I could not be more proud of the growth we have seen since then.
Nutrition has delivered its fifth consecutive quarter of 20-plus percent year-over-year OP growth.
Revenue is up 5.7% on a currency-adjusted basis for the first nine months of the year.
And in the years since we acquired WILD, we are nearly tripled OP in the flavors business.
As we've been getting more and more questions about that business and its growth potential, we decided that it was the perfect time to update and explain the business further.
As Juan mentioned, adjusted earnings per share for the quarter was $0.89, up from the $0.77 in the prior year quarter.
Excluding specified items, adjusted segment operating profit was $849 million, up 11%.
And our trailing four-quarter average adjusted ROIC was 8.3%, 255 basis points higher than our 2020 annual lack.
Our trailing four-quarter adjusted EBITDA was about $3.7 billion.
Our cash flows are strong, as we generate about $2.3 billion of cash from operations before working capital for the first nine months of the year.
The effective tax rate for the third quarter was a benefit of approximately 13% compared to an expense of 19% in the prior year.
Our Q3 tax rate was impacted by our debt retirement actions as well as the sale of our Walmart shares, and higher year-over-year Walmart earnings and U.S. tax credits.
Absent the effect of earnings per share adjusting items, our effective tax rate was approximately 11%.
We expect our adjusted tax rate for Q4 to be similar to this adjusted Q3 effective tax rate.
As we announced at various points during Q3, we've taken several actions over the last few months to both utilize and enhance our strong balance sheet.
These actions were not about cash flow or liquidity as we had cash and available credit capacity at the end of the quarter of almost $10 billion.
They were about creating balance sheet optionality for future transactions, while maintaining a strong credit rating profile.
We monetized a portion of our Walmart investment through a block sale of Walmart stock, and issuance of bonds exchangeable for Walmart shares at a future date.
As we have indicated, we view our significant remaining Walmart stake as strategic, and we do not have any intentions to sell additional shares.
Leveraging our strong cash position, we also rebalanced our mix between long and short-term debt, economically retiring higher coupon debt through positive NPV transactions and reducing interest payments in the future.
Combined, these actions allow us the flexibility to make strategic investments, further bolt-on acquisitions or buyback shares when it makes sense to do so, all while continuing to make progress in deleveraging our balance sheet and maintaining our single A credit ratings.
These actions were also a significant driver of our tax rate.
Return of capital for the first nine months was $724 million, including around $115 million in opportunistic share repurchases, the vast majority of which were executed earlier this year.
We finished the quarter with a net debt to total capital ratio of about 27%, down from the 30% a year ago.
Capital spending for the first nine months was about $560 million.
We expect capital spending for the year to be around $800 million that we previously indicated and well below our depreciation and amortization rate of about $1 billion.
Other business results were lower than the prior year quarter, driven by lower ADM investor services earnings and captive insurance underwriting losses, including a $17 million settlement impact for the high water claim with Ag Services and Oilseeds.
In the corporate lines, unallocated corporate costs of $196 million were higher year-over-year, due primarily to variable performance-related incentive compensation accruals, which were low in the prior year.
Corporate results this quarter also included $396 million related to the early debt retirement charges that I referred to earlier, which is an earnings per share adjustment item.
Net interest expense for the quarter was similar to the prior year period.
Looking forward, we expect unallocated corporate expenses to be in line with our initial $800 million guidance for calendar year and Q4 net interest expense to be slightly lower than Q3.
We also expect a loss of about $50 million in other business in Q4 due to anticipated intercompany insurance claim settlements.
Ag Services and Oilseeds results were higher than the third quarter of 2019.
In Ag Services, we saw extremely good execution around the globe.
The North American team did well to capitalize on strong industry export margins and volumes, and the global trade team had another strong quarter as they continued their focus on serving customers.
Ag Services also benefit from a $54 million settlement related to the 2019 US high water insurance claims, which is partially offset by an expense in captive insurance.
The crushing team also did a great job executing in a solid demand environment.
Both Ag Services and Crushing saw expanding margins during the quarter resulting in around $155 million in total negative timing effects, which led to lower results.
Those timing impacts are expected to reverse in the coming quarters.
Refined Products and Other was significantly higher year-over-year, driven by improved biodiesel margins around the globe.
Equity earnings from Wilmar were substantially higher versus the prior year period.
Looking ahead, we expect to see strong North American exports in global crush margins in the fourth quarter, combined to contribute to a very strong Ag Services and Oilseeds performance.
With results significantly higher than the third quarter of this year, though lower than Q4 of 2019, which included a $270 million benefit for two years of the retroactive biodiesel tax credit.
Carbohydrate Solutions results were significantly higher year-over-year.
The Starches and Sweeteners sub-segment was substantially higher driven by strong risk management and improved net corn costs as well as a balanced ethanol industry supply and demand environment.
Reduced foodservice demand affected sweetener and flower volumes, but we're seeing good demand recovery for starches in North America.
The Vantage Corn Processors team did a good job executing on the wet mill fuel ethanol distribution and capitalizing on higher year-over-year industry margins, while managing the fixed costs from the two temporarily idled dry mills, increased volumes and margins on USP grade industrial alcohol to support the hand sanitizer market also contributed to higher year-over-year profits.
Looking ahead, we expect the fourth quarter for Carbohydrate Solutions to be close to Q3 of this year and substantially higher than the fourth quarter of 2019, driven by improved year-over-year fuel ethanol margins and higher industrial-grade sales.
While Sweetener and Flower volumes will still be impacted by weaker food service demand, we expect the year-over-year percentage decline to be smaller than it was in Q3.
On slide eight, Nutrition delivered its fifth consecutive quarter of 20-plus percent year-over-year profit growth.
Human Nutrition results were substantially higher versus the prior year quarter, with strength across the entire pantry, including flavors, plant-based proteins, and probiotics.
Animal Nutrition was also higher year-over-year, driven by continued delivery of Neovia synergies, strengthen livestock and year-over-year improvement in amino acids, partially offset by softer aquaculture feed demand as well as negative foreign currency impacts.
Looking ahead to the fourth quarter, we expect nutrition to deliver another quarter of 20-plus percent year-over-year OP growth with a typically seasonally weaker Q4 in human nutrition, offset by seasonally stronger animal nutrition.
I'd now like to transition to Vince Macciocchi, President of our Nutrition business for an update and overview of the business.
Vince, congratulations to you and your team for not just a great quarter, but for consistent delivery of strong growth.
I'm proud of the team who have delivered in so many ways.
When I reflect upon the growth we've made in the journey we are still taking, I keep coming back to our purpose, to unlock the power of nature, to enrich the quality of life.
I think it's remarkable how these few words sum up, not just what we do, but why our work is so important.
The global population is growing, and consumer behavior is shifting in ways we couldn't have predicted only 10 or 15 years ago.
The scale of the change and the opportunity for ADM is enormous.
Global sales of specialty ingredients across both human and animal nutrition are as much as $85 billion and growing at a rate of 5% to 7% per year.
These specialty ingredients, which represent the majority of the nutrition portfolio aside from fee going to the full array of consumer nutrition products for humans and animals, many of which are projected to grow significantly in the coming years.
For example, global market for functional beverages could be as large as $190 billion in 2024.
The global dietary supplement market could be worth more than $77 billion in that same time frame.
Global retail sales of alternative proteins are already a $25 billion market today, with a projected growth rate of 14% per year.
Global retail sales of pet food are projected to grow at 4% per year, reaching $120 billion by 2024.
These aren't just numbers.
They're indicators of significant long-term trends in how people choose food, drink and other products, driven by a global population that cares deeply about health and sustainability.
And based upon the portfolio, footprint, capabilities and talent we've built, no other company is positioned to meet these needs and lead in these industries like ADM.
It's been six years since we started on this journey.
In that time, we built or expanded more than 16 facilities from our pea protein complex in the US through our network of free mix plants in China.
We've enhanced our science and technology capabilities, invested in market research and consumer insights and built new interactive ways to engage with customers.
From our more than 50 global customer innovation centers to daily virtual innovation and tasting sessions.
We've made platform acquisitions, and we've added bolt-ons.
All in all, we have invested just over $6 billion to build our global leadership position in nutrition.
These investments are delivering results.
Since 2014, we've increased our annual revenue by $3 billion.
And by the end of this year, we'll have grown operating profits by more than $300 million over those six years, more than double.
Our human nutrition business can offer customers ingredients, flavor systems or turnkey product development solutions, supporting them every step of the way to take their ideas from concept to prototype to market in record time.
In Animal Nutrition, only 1.5 years after we completed our Neovia acquisition, we can look back on a successful integration in which we exceeded our synergy goals and built a global business that offers a full portfolio of on-trend items from pet treats to enzymes to ingredients for aquaculture to meet evolving customer needs.
In our health and wellness business, which is part of our human nutrition subsegment, our scientists are expanding the universe of pro, pre and post biotics and other functional products to meet growing demand from stand-alone supplements to ingredients that help enhance our array of human and animal solutions.
Taken together, our extremely broad portfolio of ingredients and solutions can add value for customers across both human and animal nutrition.
For instance, taste and color are just as important for animal nutrition customers today, as they are for food and beverage customers.
Functional ingredients matter in both Human and Animal Nutrition & so on across our entire pantry.
Then we add the rest of ADM's capabilities.
In plant-based protein, for example, we have the unique advantage of ADM's broad and integrated value chain from sourcing and transporting the soybeans and peas to transforming them into high-protein ingredients at our own facilities.
To adding the colors, flavors, oils and other key elements to create just the right taste, appearance, juiciness and sizzle for delicious finished plant-based products.
We're proud to have come this far in six short years, but our eye is on the future.
We are confident in continuing our growth story.
It starts with the global category trends I outlined earlier.
It continues with our extensive and ongoing research into consumer behavior and needs.
Earlier this week, we released our latest view of the top consumer trends of 2021 based upon research that includes our proprietary outside voice consumer insights program.
Our findings show that the events of the past year are accelerating and deepening fundamental market shifts, including consumers taking a more proactive approach to nourishing body and mind, the microbiome as the gateway to wellness.
Continued growing demand for plant-based foods.
Sustainability is a key driver of purchasing decisions and transparency as a building block of consumer trusts.
The last piece of the equation is how our team brings it all together for our customers combining unmatched customer support and service with our vast value chain to deliver ingredients, systems and solution that align perfectly with market trends and needs.
These are the reasons we expect to continue to lead the industry outpacing the market and operating profit growth, and we remain confident in reaching $1 billion in OP in the medium-term future.
And congratulations to you and the entire ADM team for another outstanding quarter.
Across the enterprise, we are continuing to advance our work to enrich the quality of life and meet key needs for consumers around the globe.
At the time of heightened concerns around food security, ADM's bust global value chain is helping ensure that countries and families can continue to put nutritious, delicious foods on the table.
As consumers focus more and more on proactive approaches to health, we're expanding the frontier in groundbreaking, functional ingredients and supplements for people with conditions like migraine and atopic dermatitis.
And we're paving the way to a new world of precision nutrition personalized for every individual.
And as sustainability becomes a key driver of consumer decisions and business success, we're playing a leading role in the transition to a low-carbon economy for our industry.
We are committed to our purpose, and our team is continuing to deliver for our customers, our shareholders and all could depend on us.
And that is why we are confident in a strong finish to 2020 and a positive momentum continuing through 2021.
| compname reports third quarter earnings of $0.40 per share, $0.89 per share on an adjusted basis.
q3 adjusted non-gaap earnings per share $0.89 excluding items.
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My name is Aaron Howald and I'm LP's Director of Investor Relations.
I'm joined today by Brad Southern, LP's Chief Executive Officer and Alan Haughie, LP's Chief Financial Officer.
All of these materials are available on LP's Investor Relations website www.
Rather than reading these statements, I will refer you to these supplemental materials.
As you all know, the housing and repair and remodel markets that LP serves continue to show remarkable resiliency despite the ongoing COVID-19 pandemic and demand for our products has remained very strong.
Q4 was another record for SmartSide as sales increased by 30% to $259 million and Siding EBITDA nearly doubled over -- year-over-year to $77 million.
OSB prices remained exceptionally high throughout the quarter, resulting in $250 million in EBITDA for the OSB segment.
All business segments continue to demonstrate outstanding cost control.
As a result, LP ended 2020 with $2.8 billion in sales, $781 million in EBITDA, $660 million in operating cash flow and $4.31 in earnings per share.
It was a very strong ending to a uniquely challenging year that leaves LP well-positioned for continued growth.
Two years ago, we introduced a strategic transformation plan for LP.
That plan included a three-year target of $165 million in cumulative EBITDA improvements from growth, operating efficiency and strategic sourcing.
Today, I am proud to announce that we have exceeded this target a year ahead of schedule with $177 million in cumulative impact delivered in only two years.
I want to stress that we measure these results choosing normalized OSB and raw material prices.
So this achievement is not merely an artifact of unusually high OSB prices or favorable movements in the cost of logs or resins.
Rather, it is a result of the incredible dedication, creativity and grit of our sales, operations, logistics and sourcing teams.
Having to chase significantly greater efficiency, we will not only hold those gains but raise the bar as we continue to drive our growth and value-creation strategy.
Today, to build real progress and to accelerate LP's transformation, I am pleased to announce a series of interconnected strategic initiatives.
First, in order to supply growing demand, we are announcing a two-phase capacity expansion strategy for SmartSide.
Phase 1 will be the conversion of our mill in Houlton, Maine from production of Laminated Strand Lumber and OSB to SmartSide.
Houlton is ideally located for SmartSide production because of its access to an ample and sustainable Aspen wood basket and its proximity to the large and under-penetrated repair and remodel market along the East Coast of the United States.
Houlton will add roughly 220 million square feet of SmartSide capacity with production beginning early in 2022.
With LP converting to SmartSide, we will cease LSL manufacturing there sometime this year; the change that has contributed to a broader reevaluation of our product portfolio.
Due to the loss of LSL from our EWP portfolio, coupled with our inability to consistently earn the cost of capital in EWP, we have decided to evaluate strategic options for our remaining Engineered Wood Products business.
Phase 2 of the SmartSide capacity expansion strategy will be the conversion of our OSB mill in Sagola, Michigan.
Sagola is currently producing OSB and will continue to do so until it is converted to SmartSide manufacturing.
Although the precise timing is yet to be determined, if demand for SmartSide continues to grow at historic rates, we will need to begin to work on the Sagola conversion soon after Siding production begins at Houlton.
This will require OSB production at Sagola to cease sometime in mid-to-late 2023.
These two new facilities will add roughly 520 million square feet of additional SmartSide capacity and remove roughly 670 million feet of OSB capacity.
There is still a long runway for further Siding growth after these conversions with several potential expansions of existing facilities, as well as other conversion opportunities.
In addition to serving our growing customer demand, these conversions will also position the mills for years of growth and improved stability, which will benefit Houlton's and Sagola's employees, their families and the broader communities.
Finally, since we idled our Peace Valley OSB mill in Fort St. John, British Columbia, we have kept the mill ready with the intention to reopen it when we were confident that sustainable market demand would be sufficient to absorb its capacity.
The consensus for 2021 housing starts has climbed for the past several months and is now, in the year, 1.5 million.
On a seasonally adjusted basis, December starts were at 1.6 million and permits were 1.7 million suggesting continued strength in new residential construction.
At these levels of starts, with channel inventories extraordinarily has been, it is clear that our customers need additional volume.
Looking further into the future, long-term demographic data and a structural under-supply of housing suggest continued tailwinds for demand.
As a result, we have begun the process to restart production of OSB at Peace Valley.
Our goal is for Peace Valley to become a low cost leader in the industry.
Our flexible and disciplined operating strategy remains unchanged.
Restarting Peace Valley increases our ability to meet intense customer demand and will add to our strategic options for balancing OSB supply and demand with discipline, agility and efficiency.
With its production of TechShield and long lengths, Peace Valley will also help us reach our goals for Structural Solutions as a percentage of total volume.
As we have been keeping the mill ready for an eventual restart, the cost to resume production shall not exceed $12 million.
We've begun the necessary engineering, capital and rehiring planning to support the restart.
Our least expectation for first press load is sometime in Q3, full production capacity about a year later.
We will continue to monitor the housing outlook, OSB demand and channel inventories to gauge proper timing for the restarts.
As I said previously, continued Siding growth will require more frequent mill conversions.
As a result, as Peace Valley resumes full production as a low-cost leader, it enables our phased capacity expansion plans for SmartSide, while maintaining our current OSB market share.
The blue and orange line show LP's expected OSB in SmartSide capacity over time in millions of square feet.
Houlton's shutdown, its conversion to SmartSide and its ramp up to full capacity are shown as A, C and E on the graph.
Peace Valley will begin production at point B sometime after Houlton ceases making both LSL and OSB in preparation for conversion.
Sagola, Michigan will be the next Siding mill after Houlton.
Sagola's conversion will add roughly 300 million square feet to SmartSide capacity and remove roughly 420 million square feet of OSB capacity.
While the exact timing of Sagola's conversion to SmartSide is still to be determined, the graph illustrates initial SmartSide production in the second half of 2023, which is consistent with an annual demand growth rate of 11%.
Timing for all these steps is based on the assumption that OSB demand and SmartSide growth continue and that the capital projects are completed on schedule.
Should demand slow, which we do not currently anticipate, any or all of these steps can be delayed with minimal costs.
There is little room to significantly accelerate the Houlton conversion or the Peace Valley restart as both of these projects are already under way.
The Sagola conversion, on the other hand, could be brought forward somewhat, should demand growth accelerate.
The plan, once fully implemented, will increase total SmartSide capacity by roughly 520 million square feet or a little over 30%.
The net effect of Houlton and Sagola's conversion and the Peace Valley restart will increase LP's OSB capacity by less than 100 million feet.
More importantly, each of these initiatives will accelerate LP's ongoing transformation, grow our portfolio of SmartSide and Structural Solutions and improve our operational agility as we meet increasing customer demand.
2020 was a year of incredible hurdles that uniquely tested our ability to adapt and work together.
However, I'm incredibly proud of how LP employees came together to not only survive but thrive as a company.
In the face of adversity, LP delivered strong results.
As we turn our attention to a new year, we are focused on meeting customer demand for LP products.
We are excited to share our plans to execute a multiple years' SmartSide capacity expansion project and restart Peace Valley as part of our discipline and agile approach to OSB operations.
This acceleration of our growth and value-creation strategy will build on LP's growing momentum as we transform into a Building Solutions later.
Slide 8 shows summarized results for the quarter, which are very clean and straightforward.
Net sales increased by 60% to $860 million, primarily due to 30% growth of SmartSide and $246 million of higher OSB prices.
The resulting EBITDA of $328 million is 7 times last year's result and translated nearly dollar for dollar to operating cash flow of $321 million with the benefit of $45 million in tax refunds.
We further lowered our year-end share count to 106 million shares after spending $171 million in the quarter to buy back a little over 5 million shares, and with taxes as the only meaningful adjustment to net income, adjusted earnings per share was $2.01 compared to U.S. GAAP earnings per share of $2.34.
Slide 9 is the same data for the full year and is much of the same story, just with bigger numbers.
Net sales increased by 21% to $2.8 billion and EBITDA increased to $781 million, which is 4 times last year's result.
We grew SmartSide revenue by 15% and $481 million of revenue and EBITDA from higher OSB prices and generated $659 million in operating cash flow.
Capital spending of $77 million ended up being about half our original pre-COVID guidance for 2020.
The vast majority of this $77 million was spent on sustaining maintenance, which typically runs in the $80 million to $100 million range per year.
As a result, we ended the year with $535 million in cash after paying $65 million in dividends and $200 million to repurchase shares.
Slide 10 adds detail to the EBITDA impact from growth and efficiency through LP's ongoing strategic transformation.
As Brad said, we exceeded our three-year target of $165 million in cumulative EBITDA impact a year early with $107 million from growth and $71 million from efficiency.
And this is a result of truly remarkable performance by our sales, operations and sourcing teams, especially given the challenges of 2020.
But this is a race with no finish line.
So, we intend to hold these gains and add to them in 2021 and beyond.
Slide 11 shows an ultra-high level roll forward of revenue and EBITDA for the fourth quarter compared with 2019.
The main takeaway here is that higher OSB prices and 30% SmartSide growth tell us all we need to know about the quarter.
Everything else basically nets to zero.
Having said that, and while not shown here, our South America segment had a record quarter with $50 million of sales and $13 million of EBITDA, representing increases of 32% and 62%, respectively even after adverse currency movements.
The waterfalls on Slides 12 and 13 detail the year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter.
Slide 12 covers Siding.
In broad strokes, the 30% revenue growth for the quarter reflects a 95% increase in retail revenue and a 20% increase in distribution revenue.
And with an incremental margin of $0.51 on each additional dollar of revenue, this $59 million of SmartSide growth produced $30 million of additional EBITDA.
With low SG&A and higher OEE more than offsetting the discontinuation of Fiber, the Siding segment EBITDA margin increased by 12 percentage points to 30%.
I should mention here that 2021 will be a year of increased investment in both selling and marketing and preventative maintenance to support future growth.
So this margin is probably something of a high watermark.
However, given the operating leverage and pricing power inherent in the business, we are raising our long-term target for the Siding EBITDA margin by 5 percentage points to 25%.
On Slide 13, very high market demand for OSB pushed prices to record levels adding $246 million of revenue and EBITDA in the quarter which rather overshadows both the continued excellence of our cost control and the growth of Structural Solutions, which rose to 49% of total OSB volume.
We are, therefore, raising our long-term target of Structural Solutions volume as a percentage of total OSB volume by 5 percentage points to 55%.
However, during the fourth quarter, we experienced interruptions in the supply chain for MDI, the primary resin used in the manufacture of SmartSide, OSB and LSL.
These issues were triggered by the impact of severe weather on MDI manufacturers in the U.S. Gulf Coast area.
While MDI supply remains constrained, we are prioritizing MDI to SmartSide, substituting alternate phenolic resins for OSB and curtailing LSL production until availability improves.
The use of phenolic resins in OSB lowers line speeds which we estimate lost us $8 million of potential revenue and $3 million of potential EBITDA in the fourth quarter.
Turning to Slide 14 and some commentary on 2021.
As you might expect, given our capacity and growth plans, this will be a year of investments.
The Houlton conversion will cost about the same as the Dawson conversion in 2018, that is about $130 million.
Roughly $80 million to $85 million of that $130 million will be spent in 2021, with the remainder in 2022.
We have other strategic growth projects totaling $30 million to $35 million that will enable us to accelerate our rollout of new products and we have our typical base level of about $100 million in sustaining maintenance.
And as Brad mentioned, the capital required for Peace Valley restart should be around $10 million at most.
As a result, we expect capital expenditures for the year to be in the range $220 million to $230 million.
A word now about capital allocation.
Our strategy remains unchanged.
We will continue to return to shareholders, which is 50% of cash from operations in excess of capital expenditures required to execute our strategy once that cash has been generated.
So, given that we ended the year with $535 million in cash with a $300 million share buyback authorization from our Board, we will be reentering the market to continue buying back shares in a matter of days.
Now I concluded my comments last quarter by saying that absent unexpected reversals in demand or the general housing outlook, the fourth quarter would look a lot like the third.
Given accelerating SmartSide growth and rebounding OSB prices, that turned out to be a bit conservative.
But we have similar visibility into our order file today, so I can share the following.
Halfway through this first quarter of 2021, OSB prices are at least 15% higher than the fourth quarter of 2020 on similar volumes.
SmartSide revenue is trending seasonally higher than the fourth quarter, on pace for at least 35% growth compared to the first quarter of 2020.
Should these trends continue and absent COVID outbreaks or sudden reversals in logistics, raw material availability or OSB prices, we expect EBITDA for the first quarter of 2021 to be at least $380 million.
| louisiana-pacific q4 earnings per share $2.34.
q4 adjusted earnings per share $2.01.
q4 sales $860 million versus refinitiv ibes estimate of $784.9 million.
q4 earnings per share $2.34.
sees smartside sales in q1 of 2021 to be more than 35% higher than q1 of 2020.
sees osb sales in q1 to be sequentially higher than q4 by more than 15% on similar volumes.
sees adjusted ebitda for q1 of 2021 to be greater than $380 million.
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Before we move to questions, I want to provide an update on our York wastewater acquisition.
On October 29, we received a formal Pennsylvania Public Utility Commission acceptance of Pennsylvania American Waters application for the acquisition of York Wastewater.
We remain on schedule to close in the second quarter of 2022.
York is another great example, providing solutions to water and wastewater challenges where we can leverage our scale and drive efficiencies.
It should also be the case in Chester, Pennsylvania where as you know, Pennsylvania American Water offered the highest purchase price for that system.
We believe our submitted superior offer, which was the highest by $15 million, will provide the most benefit for that community.
We eagerly await the receivers decision as we would remain in competition to acquire the system.
Also, Cheryl spent some time in our accelerated capital plan as it relates to the resiliency of our systems.
I just want to highlight that again.
You saw the incredible photos of how our flood wall protected our plant, enabling us to continue to provide water service for more than 1 million people in Central New Jersey during Hurricane Ida.
Proper planning and key investments in projects like the flood wall are critical to our business.
This is fundamental to our capital planning process and has been for decades.
Time and time again, we've seen the benefit of our resiliency investments and how they allow us to continue to provide essential services even during significant weather events.
| american water affirms 2021 guidance range.
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Once again, the employees of American Water delivered solid results as we continue to execute on our low-risk profile and predictable growth story.
Let's move to Slide five to cover the highlights of our second quarter and six-month results.
Our second quarter 2021 earnings per share increased 17.5% compared to the second quarter of 2020.
Included in the results is a $0.03 per share benefit from weather primarily in the Northeast, where we saw a moderate impact from warmer and drier-than-normal conditions.
In the first six months of 2021, we invested $782 million with the majority dedicated to needed infrastructure improvements to better serve our customers.
We continue to work hard to minimize the bill impacts of these investments by focusing on capital and operating efficiencies, constructive regulatory outcomes and by leveraging the size and scale of our business.
As a reminder, we previously announced an O&M efficiency target of 30.4% by 2025.
We also continue our disciplined approach to regulated acquisitions.
We've added approximately 11,200 customer connections to date through closed acquisitions and organic growth and look forward to welcoming an additional 86,900 customer connections through pending acquisitions.
I'll provide more detail on growth in a moment.
Moving to Slide six.
The foundation of our earnings growth continues to be the capital investment we make in our regulated operations.
We plan to spend $1.9 billion in 2021 and about $10.4 billion over the next five years.
The continued investment is critical to improving and maintaining distribution and treatment infrastructure, including improving water quality, fixing leaks and providing water for fire hydrants.
These efforts help our communities remain strong and attractive to residents and businesses.
With a strong first half of 2021 and continued execution of our strategies, we're affirming today our 2021 earnings guidance range of $4.18 to $4.28 per share.
We're also affirming our long-term earnings per share compound annual growth rate range of 7% to 10%.
Turning to Slide seven.
Let's go through some of the regulatory and legislative highlights of the second quarter 2021.
On June 28, the Iowa Utilities Board issued an order approving an increase in annual base revenue of $1 million for Iowa American Water.
The company's investment of almost $87 million in water system improvements was the primary driver behind the rate adjustment request.
We also have pending cases in West Virginia and California.
We cover California American Water's general rate case as well as the cost of capital application on the last call and both cases are progressing as expected.
Let me spend a few minutes on California's drought emergency.
As you've likely heard, Governor Newsom expanded the state's drought emergency declaration in 50 out of 58 counties.
Currently, our water supplies in California are in good shape, but we're activating mandatory conservation measures for our customers in Sonoma County.
We're also conducting extensive outreach to our highest water users and encouraging our customers to voluntarily reduce their water use across our entire service area.
The drought once again highlights the need for the Monterey Peninsula Water Supply Project.
As we previously discussed, California American Water refiled its application to the Coastal Commission on November 6, 2020.
On December 3, 2020, the Coastal Commission sent a notice requesting additional information.
California American Water provided the requested responses in March 2021.
The Coastal Commission then requested additional information on June 18.
Our California team is working on this additional request.
Once we provide that information and staff deems the application complete, by statute, the Coastal Commission would have 180 days to process it.
Additionally, on July 29, The New Jersey Board of Public Utilities issued a final order denying approval of acquisition adjustments and rates associated with the purchase of Shorelands and Haddonfield in 2017 and 2015, respectively.
The order is not the outcome we've been working toward, and we continue to evaluate next steps.
However, we had a counter for this possibility and the decision will not have an impact on our financial results.
Moving to state legislation.
We continue to engage with states as they take action to help address water and wastewater challenges.
In New Jersey, legislation that strengthens the state's Water Quality Accountability Act has passed both houses unanimously and is awaiting the governor signature.
The enhancements include additional enforcement requirements for reporting data, stronger cybersecurity requirements and asset management plans and requirements for the sale of systems with prolonged violations.
New Jersey was the first state to pass the Water Quality Accountability Act, and we're pleased to see the act strengthen on behalf of all water customers in New Jersey.
Also in New Jersey, the Governor signed a lead service line replacement bill that includes O&M expenses and interest accrued on customer-owned lines as recoverable items.
As you know, American Water is long advocated for full service line replacement versus a partial replacement to address lead issues.
In Missouri, the governor signed the Water and Sewer Infrastructure Act, which will become effective on August 28, 2021.
This act establishes a new statewide infrastructure system replacement surcharge program that broadens the list of eligible projects.
It also increases the cap from 10% to 15% of Missouri American Water's revenue requirement for these eligible projects.
Additionally, customer-owned lead service line replacements are excluded from the cap.
Finally, as we mentioned last call, at a national level, we remain supportive of investments in water and wastewater infrastructure.
The proposed bipartisan package supported by the administration includes $55 billion for water infrastructure.
We believe the proposed additions to state revolving funds for drinking water and the possible expansion of a water LIHEAP type program for all water customers would help improve our nation's water infrastructure.
Moving to Slide eight.
Customers remain at the center of every decision we make.
This means smart investments balanced by efficient operations and capital deployment.
For the 12-month period ending June 30, 2021, our O&M efficiency ratio was 33.9% compared to 34.3% for the 12-month period ended June 30, 2020.
As we note each quarter, our adjusted O&M expenses are just slightly higher today than they were in 2010.
During that period, we've added approximately 333,000 customer connections while expenses only increased at a compound annual growth rate of just over 1%.
On the subject of cost, inflationary pressures and scarcities of some supplies in certain sectors of the U.S. economy, let me remind you that our company does have the advantage of volumetric purchases and economies of scale.
By leveraging our national size and scale and working closely with our suppliers in the water sector, we've been able to shield ourselves for the most part from these effects.
At this time, we've not experienced and do not anticipate any material negative impacts on our supply chain.
Before we move to growth, let me provide a quick update on the sale of New York American Water.
Both American Water and Liberty remain committed to closing the sale and continue to work through the regulatory process.
As noted by 8-K filing on June 29, both parties agreed to extend the closing end date in accordance with the terms of the stock purchase agreement.
We remain confident that the sale will be completed.
Assuming progress continues as expected, we believe that the net impact from New York in 2021 results won't materially impact our 2021 guidance range.
Further, we don't anticipate any impact on the expected timing of our previously discussed future equity needs.
Moving to Slide nine.
We've announced multiple acquisitions in the first half of 2021, including our largest acquisition in York, Pennsylvania, which will add an equivalent customer connection total of more than 45,000.
We continue to make progress on that acquisition, most recently filing an application with the Public Utility Commission on July 1.
As I mentioned earlier, so far in 2021, we've closed on eight acquisitions in four different states, adding approximately 3,000 new customer connections.
We've also added approximately 8,200 customer connections to organic growth in the first six months.
We look forward to adding another 86,900 customer connections through 37 currently signed agreements in eight states.
These new agreements reflect our commitment to provide water and wastewater solutions in communities where we can leverage our scale and expertise.
We know that many communities are facing unprecedented challenges, and we're well positioned to provide them solutions.
Our growth is also a direct result of our commitment to customer service.
I want to congratulate both our New Jersey and Illinois subsidiaries for earning J.D. Power awards for ranking highest in customer satisfaction among large utilities, large water utilities in the Northeast and Midwest.
This is the second year in a row that our Illinois subsidiary, ranked highest.
We're proud of our teams and the way they put our customers first every day.
Let's start on Slide 11 with a review of results.
Second quarter 2021 earnings were $1.14 per share compared to $0.97 per share in the second quarter of 2020.
As Walter mentioned, included in earnings is an estimated $0.03 per share favorable impact from weather, primarily in the Northeast, where we saw conditions warmer and drier than normal through the quarter.
Results for the Regulated Business segment were $1.18 per share, an increase of $0.21 per share compared to 2020 earnings.
Results for the market-based business were $0.11 per share, a decrease of $0.02 per share.
And finally, parent company results decreased $0.02 per share in the second quarter of 2021 as compared to the same period last year.
Our 2021 earnings through June 30 were $1.87 per share, an increase of $0.22 per share compared to the same period last year.
Results for the six-month period include the estimated $0.03 per share favorable impact from weather in the second quarter of '21.
Regulated business results increased $0.27 per share compared to 2020 earnings, and our market-based business results decreased $0.05 per share and parent company results were unchanged year-over-year.
Moving on to Slide 12.
Let me provide just a few more details by business.
As I noted earlier, regulated results increased $0.21 per share.
And we saw a $0.30 per share increase in revenues from new rates in effect from acquisitions and from the lower demand in the second quarter of 2020 from the COVID-19 pandemic.
As a reminder, we saw the 2020 full year impact on demand due to the pandemic to be nearly zero, and we see no real lingering impact on demand in 2021.
Also, as I mentioned previously, results reflect an estimated $0.03 per share increase from warmer and drier-than-normal weather, primarily in the Northeast.
Partially offsetting these results, O&M expense increased by $0.09 per share and depreciation expense increased $0.03 per share in support of growth in the regulated business.
The Market-Based Business results decreased $0.02 per share in the second quarter of '21 as compared to the second quarter of 2020.
The lower results reflect increased claims in 2021 in the Homeowner Services Group.
The parent results decreased $0.02 per share in the second quarter of '21 compared to the second quarter of 2020, largely driven by higher interest expense to support regulated growth.
While on the topic of results, I'd like to also reiterate what we told you last quarter with regard to the company's lower effective income tax rate.
This results from an increase in the amortization of excess, accumulated deferred income taxes as agreed to through the regulatory process and is largely offset with lower revenue, resulting in no material impact to earnings, and we will continue to see this impact as that amortization continues.
Moving on to Slide 13.
Consolidated results increased $0.22 per share for the year-to-date period compared to the same period last year.
Results for the regulated operations increased $0.27 per share for the year-to-date period.
We saw a $0.50 per share increase from additional revenue -- additional authorized revenue from acquisitions and from the lower demand in the second quarter of '20 attributable to the pandemic.
Year-to-date results also reflect the estimated $0.03 per share favorable weather benefit.
Offsetting these increases were increases in O&M expense of $0.18 per share and depreciation of $0.08 per share, all as a result of growth in the business.
The Market-Based Businesses results decreased $0.05 per share due to higher claims in 2021 in Homeowner Services Group, including the extreme cold weather across the country during the first quarter of '21, primarily in Texas and Illinois.
And parent results were flat compared to the same period in '20 as higher interest expense to support regulated growth was offset by a number of small items that increased expenses in 2020.
Moving on to Slide 14.
The continued successful execution of our regulatory strategy is a key element of our ability to consistently deliver financial results.
And to date, the regulated business has received $146 million in annualized new revenues in 2021.
This includes $100 million from general rate cases and step increases, excluding the agreed reduction in revenue from the amortization of excess accumulated deferred income taxes and $46 million from infrastructure surcharges.
We have also filed requests and are awaiting final orders on the two rate cases previously mentioned by Walter and two infrastructure surcharge proceedings for a total annualized revenue request of $71 million.
I'd also like to add that generally, we have received favorable regulatory decisions addressing our incremental financial impacts of the COVID-19 pandemic.
We have received favorable deferral orders in most jurisdictions, including cost recovery orders approved by our regulators in Illinois, Missouri and Iowa.
In Pennsylvania, the administrative law judge issued a recommendation that would allow us to defer our incremental, uncollectible expense resulting from the pandemic, but would exclude other financial impacts, such as waive delayed fees and additional interest costs.
Our Pennsylvania subsidiary has filed exceptions to the ALG recommendation -- recommended decision, highlighting among other things, the favorable decisions we have received in other jurisdictions.
We expect a final Pennsylvania deferral order addressing these matters later in the third quarter.
Moving on to Slide 15.
I want to provide a few details of the very favorable debt offering we executed in May.
The company successfully completed a $1.1 billion debt offering in support of our $10.4 billion five-year capital plan and to refinance approximately $327 million of high coupon debt.
We issued $550 million each of 10- and 30-year debt with coupon rates of 2.3% and 3.25%, respectively.
These are the lowest rates American Water has ever achieved on a public debt offering and is representative of the company's healthy balance sheet and strong credit profile, and we're pleased to have achieved such favorable rates to the benefit of our customers.
Moving on to Slide 16.
I'd like to reiterate Walter's comments earlier because of our strong performance and continued focus on execution, we are affirming our 2021 earnings guidance range of $4.18 to $4.28 per share.
We are also affirming our long-term earnings per share, compound annual growth rate of 7% to 10%.
As shown on Slide 17, and as our results demonstrate, we continue to deliver on our earnings commitment.
We believe that delivering on results, combined with our strong earnings growth and superior dividend growth expectations provides excellent value for our shareholders.
We continue to outperform our peers.
And as you can see on this slide, measured currently, we have delivered a total shareholder return of 126% over the last five years, outpacing our peers in the Philadelphia Utility Index as well as the S&P 500 Index.
We've been hearing from stakeholders if they'd like to receive more ESG data on an annual basis.
We've published two new documents on our website.
First, we made our environmental policy more visible by posting it on our ESG page.
We also posted an ESG data summary, which we'll update annually.
We also continue to implement best practices and respond to surveys and reports.
For example, just last week, we submitted our annual CDP climate change response which highlights American Water's efforts to address greenhouse gas emissions and risks associated with climate variability.
As we've discussed previously, since 2007 through year-end 2020, we've reduced our greenhouse gas emissions by approximately 36%.
This means we're close to our goal of a 40% reduction by 2025.
I also want to mention our recent recognition as a top score in the Disability Equality Index for a third year in a row.
We firmly believe we're more successful when our workforce reflects the communities that we serve.
We're proud to be recognized by DEI and to be an ally to those with different abilities.
Finally, as a reminder, we'll be publishing and posting our 2019 to 2020 sustainability report this fall.
| american water works company q2 earnings per share $1.14.
q2 earnings per share $1.14.
compname says affirms its 2021 earnings per share guidance range of $4.18 to $4.28.
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This is Michael Haack.
Let me start my comments today by stating that this was another very good quarter for Eagle Materials.
From a market perspective, we are well-positioned U.S. Heartland cementitious materials producer, and we are a national scale U.S. Gypsum Wallboard producer.
From the people perspective, we have a talented team that understands their markets and make great decisions.
Simply put, this is a very good time to be in each of our businesses.
This is not just due to current conditions, but because the outlook for both businesses looks favorable.
I'll spend some time today on the macro backdrop as it provides some context to our favorable outlook.
COVID vaccination hesitancy, lingering supply chain issues and federal budget uncertainties and have weighed on economic momentum.
Offsetting these issues are job growth and consumer spending.
In 2021, we are seeing some of the strongest job creation in U.S. history and strong consumer spending growth.
Supply side headwinds are likely to pose less of a challenge in 2022, allowing for healthy industrial production growth as a monumental backlog of orders are gradually cleared.
Housing construction, which is an important driver for both of our businesses, and especially for Wallboard, continues to enjoy strong demand.
With healthy household balance sheets, low interest rates and relative affordability by historical standards, we see good headroom for continued trend growth.
In this regard, it should be noted that housing activity is especially strong in the Southern U.S.
This is important for Eagle as this is where most of our plants reside, and this region represents more housing starts than all other regions in the U.S. combined over this past year.
There is a positive knock-on effect from robust housing demand for repair and remodeling, which we expect will continue to grow at a mid- to high single-digit pace through 2022.
In Cement, the key wildcard remains infrastructure spend.
Most of the funding today comes from the states.
The states in our footprint generally have healthy balance sheets, driven by increased receipts from property and sales taxes.
The national discussion has focused on federal infrastructure spend.
Federal infrastructure funding will happen someday and is certainly necessary.
When it does happen, it will intensify the supply demand dynamics of Cement.
Commercial construction activity looks promising for pickup.
And again, regional strength in leading indicators favor the Midwest in the South, aligned with our U.S. Heartland footprint.
It is also worth noting that the U.S. shift toward renewables is very constructive for Eagle.
Wind farm construction is concrete intensive.
If you look at the map of planned wind projects and advanced development for projects under construction, it aligns well with our Cement plants.
Cement imports will be increasingly required this cycle to meet demand as strong market conditions are leading to very high effective rates of capacity utilization in domestic plants.
These imports will come at a cost in both our higher intensity carbon footprint and in price as the Baltic Dry Index is up 135% from a year ago and is at a 10-year high.
Now let me speak to volume, pricing and cost trends for each of our two businesses.
First, let's discuss volume.
Fortunately, we still have some capacity headroom in Wallboard.
However, the recent supply chain disruptions experienced by homebuilders is no doubt delaying the construction of some homes and pushing the demand up to the right.
Once these log jams clear, we expect to be even busier.
Our high cement utilization has been well chronicled.
We are virtually sold out and operating full tilt.
We are working closely with customers to meet their needs.
As demand increases, there are limits to how much more volume growth we can squeeze out of our cement system, unless, of course, we could expand our system through acquisitions.
Quality U.S. cement plants that meet our strategic criteria are admittedly hard to come by, and we are patient investors, which is why a balanced approach to share repurchases when quality assets are not available makes so much sense for a company like Eagle.
You can see in this quarter, we purchased approximately $185 million of Eagle stock.
We know our assets and know their value.
To reduce our carbon intensity at the cementitious product level and to service our customers with additional volume, it is our ambition to ramp up our limestone cement product offerings.
Over time, this has the potential of literally creating another cement plant worth of product for sale for us, when fully implemented across our system.
Some aspects in realizing this ambition are not within our control, such as DOT approvals, but we are seeing good progress here and are encouraged.
Over the next three years, we expect to move the needle meaningfully on this initiative.
Moving on to pricing.
Cement prices have not yet recovered as much as most of other building materials in this cycle.
We have announced double-digit cement price increases effective January one across the majority of our network.
As for Wallboard, pricing is most strongly driven by demand, and demand has been strong as evidenced by our 33% year-on-year increase in Wallboard prices.
I suspect it may raise the question in some people's minds as to whether we are nearing the peak for this cycle.
If our demand outlook is correct, I think we are not.
There has been a lot of discussion about cost headwinds, in many cases, exaggerated by supply chain disruption.
Let me put this in perspective for Eagle.
We own and control virtually all of our raw materials.
In some sense, one might say we already purchased the raw material with our investments and reserves decades ago, and by doing so, have mitigated a supply chain issue concerning raw material.
Energy inputs are important.
We often get asked about hedging.
We are currently hedged for approximately 50% of our natural gas needs through the remainder of our fiscal year at slightly under [$4 per million], which should help us manage our cost swings.
Natural gas is the primary fuel used in our Wallboard business.
The spike in OCC costs this summer were material this last quarter.
But as we've said many times, pricing mechanisms in our sales contracts allow us to pass on higher OCC prices, albeit on a lag of one to two quarters.
Outbound freight in Wallboard is also important, and we saw a 14% increase in freight costs this quarter.
However, the good news is that freight costs seem to have plateaued during the summer.
Let me close my remarks with an update we are proud to share as it aligns with our environmental and social disclosure report we published on our website.
It is a recent noteworthy development on one of our long-term initiatives that has to do with carbon capture.
We were notified on October seven that Chart Industries, a technology development leader in this area, has received a significant funding award from the U.S. Department of Energy to conduct an engineering scale test to advance point source carbon capture, with a specific mandate to conduct this research at our Sugar Creek cement plant.
Chart Industries' cyrogenic carbon capture technology was recognized by researchers at MIT and Exxon as the most cost competitive among highly effective carbon capture systems.
Our role in this endeavor is to provide technical support and operational data during the development and execution of the project.
I want to emphasize that even with successful outcome, there are many other dates and hurdles to ultimate adoption, including transport and storage.
But this is an important and significant step on the path to net carbon zero future.
Second quarter revenue was a record $510 million, an increase of 14% from the prior year.
The increase reflects higher sales prices and sales volume across each business unit.
Second quarter diluted earnings per share from continuing operations was $2.46, a 14% increase from the prior year.
And adjusting for our refinancing actions during the quarter, adjusted earnings per share was $2.73, a 26% improvement.
Turning now to our segment performance.
This next slide shows the results in our Heavy Materials sector, which includes our Cement and Concrete and Aggregate segments.
Revenue in the sector increased 5%, driven by the increase in cement sales prices and sales volume.
The price increases range from $6 to $8 per ton and were effective in most markets in early April.
Operating earnings increased 13%, reflecting higher cement prices and sales volumes as well as reduced maintenance costs.
Consistent with the comments we made in the first quarter, and because we shifted all of our planned cement maintenance outages to the first quarter, our second quarter maintenance costs were about $4 million less than what they were in the prior year.
Moving to the Light Materials sector on the next slide.
Revenue in our Light Materials sector increased 28%, reflecting higher Wallboard sales volume prices.
Operating earnings in the sector increased 39% to $67 million, reflecting higher net sales prices, which helped offset higher input costs, mainly recycled fiber costs and energy.
Looking now at our cash flow, which remains strong.
During the first six months of the year, operating cash flow was $262 million, a 27% year-on-year decrease reflects the receipt of our IRS refund and other tax benefits in the prior year.
Capital spending declined to $27 million.
And as Michael mentioned, we restarted our share repurchase program and our quarterly cash dividend this year and returned $259 million to shareholders during the first half of the year.
We repurchased approximately 1.7 million shares or 4% of our outstanding.
At the end of the quarter, 5.6 million shares were available for repurchase under the current authorization.
Finally, a look at our capital structure.
Eagle maintains a strong balance sheet, access to liquidity and a well-structured debt maturity profile.
During this quarter, we completed the refinancing of our capital structure, which included issuing $750 million of 10-year senior notes with an interest rate of 2.5%.
We extended our bank credit facility five years, paid off our bank term loan and retired our 2026 senior notes.
We'll now move to the question-and-answer session.
| compname reports q2 earnings per share $2.46.
q2 adjusted earnings per share $2.73 from continuing operations.
q2 earnings per share $2.46.
q2 revenue rose 14 percent to $510 million.
q2 adjusted earnings per share $2.73.
|
We'll jump right into it, while most of us in the Northeast still have power and Wi-Fi service.
The Kimco management team participating on the call today includes Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; Dave Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call.
Reconciliations of these non-GAAP financial measures can also be found on the Investor Relations area of our website.
Today, I'll give you an update on how we are confronting the challenges posed by COVID-19 and how we plan to move forward as parts of the country continue to struggle with the virus, while other parts really come back.
We'll also give an update on the transaction market, and Glenn will follow with a recap of the numbers for Q2 and our enhanced liquidity position.
The COVID virus is a challenge to our entire industry and one that we're addressing head on.
At Kimco, our great team, high-quality assets and strong balance sheet are helping us weather the pandemic and prepare for the future.
We have an effective strategy for dealing with COVID-19 and have made significant progress since our last call.
First, I would like to applaud the entire Kimco team for their tireless efforts in ensuring that our centers remain open and operating.
Our people are smart, passionate, dedicated and determined.
Simply put, they are the best at what they do.
And together, we continue to provide our shoppers, our tenants, our employees, our extended Kimco family and our local communities with a safe experience.
It is also worth noting that as a result of our national footprint, our best practices and lessons learned from the challenges faced early on in the Northeast are now being employed to help those areas in the Southeast and West in their time of need.
Our portfolio continues to withstand the pandemic's impact.
We have reached deferral modification agreements with the vast majority of our top 100 retailers who we deem nonessential and are forced to close in some capacity.
We believe our retailer partnerships are differentiators for Kimco.
And in these challenging times, tenant relations matter more than ever.
While working with our tenants to help them get to the other side, they have worked with us to remove certain lease restrictions that will enhance redevelopment opportunities and create long-term value for our shareholders.
Ironically, many of our tenant relationships have actually strengthened during the pandemic, which bodes well for our future success including the potential for opportunistic investments similar to the successful investment we made in Albertsons.
The operating metrics reported today for our repositioned portfolio reflect its quality and resiliency.
And in times of stress, quality is critical.
We continue to lease space even in these uncertain times.
In Q2, we executed 52 new leases totaling 256,000 square feet at a positive 22.9% spread and renewed 180 leases, covering 959,000 square feet at a positive 10.7% spread.
Combined, our spreads were a strong plus 12%.
New leasing and tenant retention efforts helped occupancy finish at 95.6% for the quarter.
Anchor occupancy was even stronger at 98.2%, and small shop occupancy was 88%.
Year-over-year, our anchor occupancy was flat, which, again, represents a strong result in the current environment and a further testament to our team and portfolio.
We continue to extend assistance to our small shop tenants who need help in these challenging times.
Our Tenant Assistance Program, or TAP, is a multi-pronged approach to provide valuable resources free of charge.
This program provides our small shop retailers with a free legal advisor to help navigate the numerous state and federal programs available for small businesses, which, by our account, has potentially resulted in over $20 million of PPP funding for our small shop tenant.
Our TAP program is also helping tenants activate outdoor areas to continue operations.
The national Kimco Curbside Pickup Initiative has been well received, and customers are utilizing the service more and more.
Retailers have told us that our curbside program stands as the best they've encountered and has had a positive impact on their operations.
We have also helped our restaurant tenants activate sidewalk cafes and green spaces to help with capacity constraints.
All of our efforts and initiatives to help our tenants are paying off.
For the month of April, we collected cash-based rent totaling 68%.
In May 66%, June 76%, and July is currently at 82%.
We are currently trending above our internal forecast for rent collection.
While this is encouraging, we remain mindful of the rollbacks occurring in certain hotspots and the simple reality is that the impact of the virus inhibits our industry's ability to forecast for the sense of confidence.
During the second quarter, we granted rent deferrals totaling 18.5% of base rent.
We fielded rent deferral requests for July that amounted to only 8% of scheduled rent and have worked out deferral plans for four basis points of total rent.
This is a significant improvement from the start of the pandemic when in April, we fielded deferral request that amounted to 39% of ABR.
At the end of July, our weighted average repayment period for deferrals is approximately nine months.
Currently, 94% of our tenants are open with only 3% of ABR subject to mandated closures.
Our development and redevelopment pipeline activity is currently focused on achieving multiple entitlement master plan approvals across the country.
Our goal is to entitle an additional 5,000 multifamily units in the next five years that will provide us with a total of 10,000 units by 2025.
While we are closely controlling our project expenses, our goal is to be ready to move forward with several projects when market conditions are right.
As for our Signature Series projects, we just received the temporary certificate of occupancy for the new Shoprite grocery anchor at The Boulevard Project on Staten Island.
We anticipate opening this fall, with the majority of other retailers opening in the spring of 2021.
At Dania Pointe, we recently completed construction and now 15 tenant fit-outs under way, including Urban Outfitters and Anthropologie.
The first multifamily building, the Avery Dania Pointe, which is on a ground lease, has begun moving in the first residence.
Our portfolio strategy is focused on having our grocery, home improvement and mixed-use anchored assets clustered in strong economic MSAs that serve the last mile.
These dense areas create significant barriers to entry and a favorable balance of supply and demand.
Our sophisticated retailers are utilizing these last mile stores as indispensable fulfillment and distribution centers.
This is a differentiator for Walmart, Costco, Target, Home Depot, Lowe's and all of our grocery anchors who continue to serve their customers in multiple ways: in-store shopping, buy online, pick up in store, curbside pickup and home delivery.
These services and conveniences are all part of what the consumer is now demanding.
And those with stores close to dense populations are outperforming pure e-commerce players on delivery times and cost efficiency.
We are witnessing a blurring of lines between the distribution, fulfillment and last mile stores.
We have also seen an uptick in demand from our essential retailers who are also looking for more last mile location.
Clearly, we are experiencing retail Darwinism play out in an expedited manner, and we believe we are well positioned to take advantage of the future of retail.
Finally, in addition to our team and portfolio, we continue to prioritize liquidity.
Glenn will give the details on how we bolstered our balance sheet by issuing our first green bond at an attractive rate, paid back our term loan and continue to push out our maturity profile.
We have our entire untapped $2 billion line of credit at our disposal, limited maturities on the horizon and received a further cash infusion from our Albertsons investment.
We believe our ongoing efforts to enhance our balance sheet and cash position will enable us to prosper and be opportunistic at a time of tremendous dislocation and well into the future.
While the current unpredictability of the virus and government action is making forecasting a challenge, we can continue to monitor the environment daily.
We meet regularly with our Board members to keep them up to date, review our cash projections and determine how and when to reinstate our dividend.
To be clear, it is our intention to pay an additional cash dividend in 2020, which, at a minimum, will cover our taxable income.
As I said at the outset, the companies that stand out in this environment are those with superior talent, superior asset quality and the superior balance sheet.
In these unsettled times, we believe we have the right combination to weather this storm and will be among the best positioned to preserve and succeed over the long term.
I would first like to echo Conor's sentiments on the Kimco team and the incredible efforts put forth during these challenging times.
It has been nothing short of inspirational.
On the business side, our strategy has been fairly straightforward, ensure the maximum amounts of liquidity and balance sheet strength to enable us to be opportunistic at the appropriate time.
We are confident that we have successfully accomplished the first part of the equation, and now we remain patient and ready for the latter.
Thus far, the transaction market has been fairly limited with most owners and lenders biding as much time as possible before deciding on a path forward with their assets.
Multi-tenant strip center transactions were down by 80% to 90% from April through July.
This is coming off a vibrant and active January and February, which was up 30% and 16% year-over-year.
The majority of the deals that did close from April to June were pre-COVID deals that were pushed over the finish line with both sides of the deal willing to compromise to get it done.
Post-COVID deals hitting the market have been sparse, with a few exceptions being smaller essential retailer anchored centers that have a very specific reason to consider a sale.
There has been very little capitulation between buyers and sellers in the bid-ask at this point.
We anticipate that come the fourth quarter and into the early parts of 2021, there may be some private owners and operators that ultimately make the decision to be market sellers.
That being said, we are starting to see investment opportunities loosening up in two distinct categories.
First, with our existing retailers.
Liquidity is more important than ever regardless of what category they operate within.
And all are looking to bolster cash and strengthen their balance sheets.
We have a proven history of unlocking value and working with retailers to weather a crisis and have started having multiple discussions around mutually beneficial ways to work with those companies that are real estate rich.
Between owned stores and distribution centers, there is substantial value in their holdings that can be used to enhance value for their business while providing a solid growing income stream for us.
The second category is with existing owners in need of offensive growth capital.
In many cases, the traditional sources of financing have dried up for retail property owners.
With the exception of down the fairway, neighborhood grocery-anchored or very strong credit junior lineups, lenders have become extremely cautious during this pandemic.
For those like Kimco with liquidity already raised, it presents the option to invest rescue capital to those in need.
And this is not specific to distressed or struggling properties.
This includes major market centers with growth opportunities that need capital to execute on the vision.
Whether coming in as a joint venture partner or a lender, there are excellent real estate locations that require investment capital, which we can assist with, and we're having those conversations regularly.
As for an update on our exploration of an investment vehicle, we have had productive conversations with multiple outside capital sources that are interested in partnering with Kimco on unique opportunities.
Because the set of opportunities are wide and varied, we continued to evaluate different structures that best reward Kimco shareholders.
We will have more updates as the PLUS business pipeline unfolds.
While we will be thoughtful and opportunistic with where we place that capital, we are starting to build a potential pipeline for these initiatives.
We believe it will take time and patience, but given our knowledge of the sector and broad relationships, we anticipate being able to unlock value for our shareholders in the coming years with this investment approach.
Now let me pass the call off to Glenn for the financial details of the quarter.
I'm going to focus my comments on second quarter results, including accounts receivable reserves, capital markets activities and our strong liquidity position.
For the second quarter 2020, NAREIT FFO was $103.5 million or $0.24 per diluted share as compared to $151.2 million or $0.36 per diluted share for the second quarter last year.
The reduction was mainly due to an increase in credit loss reserves of $51.4 million as compared to the second quarter last year, resulting from the ongoing COVID-19 pandemic.
On a positive note, we delivered incremental NOI of $1.9 million from our recently completed development projects at Lincoln Square, Grand Parkway, Mill Station and Dania Pointe.
We also reduced our financing costs by $3.5 million, achieved with $8.2 million of savings from the previous redemptions of $575 million of preferred stock, offset by higher interest expense of $4.7 million due to increased debt levels.
It is worth noting, although not included in NAREIT FFO but included in net income, we recognized realized gains totaling over $190 million or $0.44 per diluted share from the partial monetization of our Albertsons investment and an unrealized gain of $524.7 million on our remaining ownership stake in Albertsons.
We received over $228 million in cash from these transactions and used the proceeds to reduce debt.
As expected, our second quarter results were negatively impacted by the forced and voluntary closures of many of our tenants during the second quarter due to the ongoing COVID-19 pandemic.
Those most affected were tenants deemed nonessential and included many of our small shop tenants.
We have been working diligently to help as many tenants as possible with deferrals, but collectability for many is questionable and requires us to place those tenants on a cash basis.
So those tenants now on a cash basis, we reserved 100% of their outstanding accounts receivable.
We are continuing to monitor the situation closely.
Now let me provide some additional detail regarding the credit loss reserve for the second quarter of 2020.
We recorded a $40.1 million credit loss reserve against accrued revenues during the quarter and an additional $11.6 million reserve against noncash straight-line rent receivables.
As of June 30, 2020, our total uncollectible reserves stand at $56.1 million or 32% of our pro rata share of accounts receivable.
Of the total credit loss reserve, $22.5 million is attributable to tenants on a cash basis.
At the end of 2Q 2020, approximately 6.4% of our annual base rents are from cash basis tenants.
Any collections of the reserve amounts will be included in revenues in the period received.
In addition, we have a reserve of $21.6 million or 12.5% against straight-line rent receivables.
Turning to the balance sheet.
Our liquidity position remains strong with over $200 million of cash and $2 billion available on our recently closed revolving credit facility with a final maturity in 2025.
During the second quarter 2020, we obtained a fully funded $590 million term loan, further enhancing our liquidity position.
We subsequently repaid $265 million of this term loan with proceeds from the partial Albertsons monetization during the second quarter.
We finished the second quarter 2020 with consolidated net debt to EBITDA of 8.6 times and 9.4 times on a look-through basis, which includes our preferred stock outstanding and pro rata JV debt.
The increase is attributable to the credit loss reserve, which reduced EBITDA.
However, if we include the realized gains from the partial monetization of the Albertsons investment, the consolidated net debt to EBITDA would be 6.5 times and the look-through metric would be 7.3 times, the level similar to first quarter 2020 results.
Our weighted average debt maturity profile as of June 30, 2020, was 10.6 years, one of the longest in the REIT industry.
Subsequent to quarter end, we issued a 2.7%, $500 million green bond.
Pending investment in eligible green projects, the proceeds were used to repay in full the remaining $325 million outstanding on the April 2020 term loan and the early redemption of $200 million of the $484.9 million of bonds due in May of 2021.
We will incur an early redemption charge of approximately $3.3 million during Q3 2020.
Our consolidated debt maturities for 2021 of $425 million and our joint venture debt maturities of $195 million are quite manageable, given our liquidity position and availability on our $2 billion revolver and availability on the $150 million revolver in our KIR joint venture.
In addition, we continually monitor the bond market for opportunistic entry points.
As a result of the ongoing impact from the COVID-19 pandemic, we are not comfortable providing FFO or same-site NOI guidance at this point.
Regarding our common dividend, during 2020, we have so far paid dividends of $0.56 per common share.
It remains our intention during 2020 to take cash dividends at least equal to our taxable income.
We continued to evaluate the business in economic landscape and have monthly dialogue with our Board regarding the timing and the level of the common dividend.
Although these are challenging times with our abundant liquidity position, highly experienced and motivated team, along with our well-positioned portfolio, we are built to withstand the impact of the pandemic and thrive when we get to the other side of this unprecedented situation.
| q2 ffo per share $0.24.
qtrly nareit funds from operations (ffo) $0.24 per diluted share,.
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The Kimco management team participating on the call today include Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; David Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call.
Reconciliations of these non-GAAP financial measures can be found in the Investor Relations area of our website.
Today, I will give updates on how, as one of America's largest owners and operators of open air, grocery-anchored shopping centers and mixed-use assets, our strategy is enabling us to successfully navigate and actively manage our portfolio to offset the impact of COVID-19, how we see the evolving retail landscape, and how we are keeping focus on our longer-term objectives for creating sustainable growth and shareholder value.
Ross will cover the transaction market and Glenn will discuss our performance metrics.
Both our short- and long-term strategies shared two overlapping principles within the evolving retail landscape.
First and foremost, Kimco's product type, open air, grocery-anchored shopping centers and mixed-use assets in well-located markets are where retailers want to be and consumers want to go.
We see it in our traffic data, our leasing pipeline, and highlighted as the product of choice by retailers on their respective earnings calls.
This reality has become even more pronounced during the pandemic, where, as I will discuss shortly, the open-air format is so conducive to both online and physical delivery.
Second, but no less important, is that the last mile store is more critical than ever to the retailer supply chain, acting as a hub for profitable distribution and fulfillment as the demands and needs of the consumer continue to evolve.
With these core principles in mind, our short-term strategy is simple, block and tackle, collect and lease, assist our tenants, and tenaciously stay on top of our costs.
The good news is that we have been focused on this strategy for quite some time, well before the onset of the pandemic.
So our team has been ready, tireless and efficient in executing on it.
And our results reflect these efforts.
While Glenn will provide more detail, our portfolio has remained resilient during the pandemic, with occupancy currently at 94.6%.
We are seeing a pickup in leasing demand, and our leasing pipeline is starting to build to a level we experienced pre code.
We anticipate a faster recovery for anchor occupancy versus small shops and for essential retailers versus nonessential ones.
Of particular note, our strategy to focus on grocers has been spot on, as grocery anchor demand for space is surging.
Over the past five years, we have upgraded Kimco's portfolio from 64% to 77% grocery-anchored and have outlined the strategic plan to reach 85% to 90% grocery-anchored over the next five years, with over 10 new grocery opportunities currently in negotiation.
In addition to growth in grocery demand, e-commerce sales across our retailer Rolodex has exploded and created a powerful halo effect on our existing store locations.
Driven by changing consumer demand, the need to improve margins in data analytics, our tenants are transforming their store operations and expansion plans to include shipping and fulfillment.
Tenants like Target, Costco, Walmart, Best Buy, Home Depot, Lowe's, Dick's, and many others continue to expand omnichannel programs like buy online, pick up in store and curbside pickup.
These programs have proven the most cost efficient way to deliver goods to consumers while, satisfying the customers' desire for quick and safe access to products.
This is worth emphasizing.
We don't believe there is a one-size-fits-all solution to the last mile challenge, and we need to recognize how each retailer determines how best to serve their customer base.
For Kimco, helping our tenants to the last mile is one of our highest priorities, and that's why our portfolio and our team are well positioned to retain tenants by helping them optimize their stores to provide for shopping, shipping and pickup.
Our dedicated team is also focused on identifying new opportunities and location voids for certain retailers and redevelopment potential.
These experienced personnel employ a mix of old school networking and market research and new school data analytics to help tenants find opportunities for profitability and growth.
Our overriding philosophy is that retailers are our partners.
By listening to their concerns, engaging with them and helping them maximize the profitability of their space, Kimco continues to be their partner of choice.
Perhaps hit the hardest are small shop tenants who often simply do not have the resources to hang on.
That's where Kimco continues to step up.
Unwilling to wait to see who will stay or go, we are in daily dialogue with our retailers to listen to their needs and challenges, and to see how we can partner to help them navigate the situation.
Whether we help tenants pay for legal costs, provide health and financial information on our website, locate vendors to facilitate tenant acquisitions of outdoor heaters or expand our national curbside pickup program, we are letting our tenants know we are in this together as they fight to continue for success.
We can't save every tenant, but we can do our part to make sure we help those that want or need a fighting chance.
In times of crisis, we want to make sure our retailers know which landlord picked up their call and which landlord called them.
We are confident in our portfolio, our team, our improving rent collections, our liquidity position and our balance sheet.
At a time when many are looking for rescue capital to help carry them through this disruption or to bolster their balance sheet, Kimco's sector-leading liquidity puts us in a unique position.
Our ability to monetize a portion of our investment in Albertsons, which currently sits as a marketable security worth over $550 million, is a clear differentiator and gives us tremendous optionality in the future.
I continue to be humbled and impressed with how our team at Kimco has rallied around our strategy to navigate the COVID challenge and how they are also able to focus on the long-term as we position Kimco for the future.
As for the long term, we continue to add to our war chest of entitlements and believe downturns are often a great opportunity to expedite them as local governments are often more willing to accommodate these projects.
We believe our five-year goal of securing 10,000 apartment units is certainly achievable and that these entitlements can provide future opportunities to unlock embedded value.
Our development and redevelopment pipeline is now at a five year low.
Similarly, in the transaction market, we continue to witness a wide disconnect between the public and private valuations for well-located grocery and home improvement anchored open-air shopping centers.
Open air centers in our well located areas of concentration continue to trade at a cap rate range of 5% to 6%, which is clearly at odds with our current valuation.
While purchasing our core product does not make economic sense given our current cost of capital, we also outlined our capital allocation strategy for the next year and how we plan to invest accretively by taking advantage of the lack of liquidity in the commercial lending market.
In closing, our consumers are comfortable with the shopping center experience.
Together with our tenants, we make the shopping center a safe and easily accessible destination for goods and services.
We know we have the right assets, a diverse tenant geographic mix, a strong balance sheet and the entrepreneurial spirit to not only survive but thrive during this pandemic.
Following up on Conor's commentary, we continue to see aggressive pricing for high-quality, primarily grocery-anchored product, albeit at a much lower transaction volume.
Multiple trades occurred in the third quarter throughout the country at sub minus 6% cap rates in Pennsylvania, Northern California and Florida, with another high-quality asset trading in Los Angeles at a sub-5% cap rate.
For the right location and tenancy, there is still strong demand and an abundance of capital available.
The biggest impediment to deal volume is the continued pullback in the market from the traditional lending sources.
With cash flow uncertainty and general concerns stemming from the pandemic, it has never been more important to have strong sponsorship, quality tenancy and substantial liquidity.
And as Conor alluded to, we see that as a tremendous differentiator and opportunity for Kimco.
With our cost of capital elevated and institutional quality property cap rates remaining at all-time lows, there is a clear disconnect between public and private pricing, making it difficult for us to identify and acquire traditional retail centers accretively.
So for now, we will continue to remain disciplined.
However, we do expect the pricing dislocation to eventually change.
And when it does, we will be opportunistic where we can invest capital at a spread to our cost, while getting our foot in the door on prime locations that match our view of quality and downside protection.
While the traditional acquisition market remains stalled, we are seeing and evaluating opportunities to provide either preferred equity or mezzanine financing on infill core MSA locations with strong tenancy and existing sponsorship.
These owners need value-add capital to either redevelop the asset with signed replacement leases in place or bridge the gap on refinancing an asset that has a near-term debt maturity.
Historically, this would have quickly and easily been funded by traditional lenders or CMBS.
In this environment, finding that additional financing is not as easy, and we have sourced a few great assets where we can provide assistance.
As part of our investment approach in this area, we seek a right of first offer or right of first refusal in the event the owner looks to sell the property.
If the asset performs as expected, we collect a double-digit return and get paid off in a relatively short hold period.
If the downside scenario occurs, we ensure that we have conservatively underwritten the properties so that we're very confident stepping in and owning or operating the asset at a comfortable basis of less than 85% current loan-to-value.
Given current market conditions and the expectation that it will remain this way into 2021, we anticipate this deal structure will become a key component of our investment strategy next year.
While the instances of these deals are still infrequent as we sit here today, our expectation is that the opportunity set will substantially increase into next year, as lenders start to realistically assess their existing collateral and prepare to take necessary impairments on their balance sheets.
As always, we will be judicious with our capital and selective with how we deploy it.
That said, we do believe this program can unlock attractive yields and potentially add desirable properties to the future Kimco portfolio.
With that, I will pass it along to Glenn for the financial summary.
Our third quarter operating results have improved as compared to the second quarter, with higher rent collections and lower credit loss.
We are also opportunistic in the capital markets and have further extended our debt maturity profile.
For the third quarter 2020, NAREIT FFO was $106.7 million or $0.25 per diluted share, meeting first call consensus, as compared to $146.9 million or $0.35 per diluted share for the third quarter 2019.
The change was mainly due to abatements and increased credit loss of $28.3 million as compared to the third quarter last year.
Credit loss recognized in the third quarter 2020 was a significant improvement from the second quarter 2020 credit loss of $51.7 million.
Our third quarter FFO also includes a onetime severance charge of $8.6 million or $0.02 per share, related to a voluntary early retirement program offered and the organizational efficiencies from merging our southern and mid-Atlantic regions.
We also incurred a charge of $7.5 million or $0.02 per share from the early redemption of $485 million of 3.2% unsecured bonds, which was scheduled to mature in 2021.
A year earlier, in the third quarter 2019, we had a preferred stock redemption charge of $11.4 million or $0.03 per share.
Although not included in NAREIT FFO, we did record a $77.1 million unrealized loss on the mark-to-market of our marketable securities, which was primarily driven by the change in our Albertson stock.
We also sold a significant portion of our preferred equity investments, which generated proceeds of over $70 million and net gains of $8.4 million, which were also not included in NAREIT FFO.
With regard to the operating portfolio, all our shopping centers remain open and over 98% of our tenants are open and operating.
Collections have continued to improve from the second quarter 2020 levels.
We collected 89% of base rents for the third quarter, including 91% collected for the month of September.
This compares to second quarter collections, which improved to 74%.
In addition, we collected 90% for October so far.
Furloughs granted during the third quarter were 5%, down from 20% from the second quarter.
Our weighted average repayment term for deferrals is approximately eight months, and will begin to be repaid meaningfully during the fourth quarter 2020.
Thus far, we have collected 87% of the deferrals that were billed in October.
Now let me provide some additional detail regarding the credit loss for the third quarter 2020.
We recorded $25.9 million of credit loss against accrued revenues during the third quarter, which included $17.1 million related to tenants on a cash basis of accounting.
There was also an additional $4 million reserve against noncash straight-line rent receivables.
As of September 30, 2020, our total uncollectible reserves stood at $74.8 million or 39% of our total pro rata share of outstanding accounts receivable.
Total uncollectible reserve of $45.8 million is attributable to tenants on a cash basis.
At the end of third quarter 2020, 8.4% of our annual base rents were from cash basis tenants.
During the third quarter, 51% of rent due from cash basis tenants was collected.
In addition, we also have a reserve of $25.8 million or 15% against the straight-line rent receivables.
Turning to the balance sheet.
Our liquidity position is very strong, with over $300 million of cash and $2 billion available on our revolving credit facility, which has a final maturity in 2025.
We also own 39.8 million shares of Albertsons, which has a market value of over $550 million based on the closing price of $13.85 per share at the end of September.
Subsequent to quarter end, Albertsons declared a dividend of $0.10 per common share, and we expect to receive $4 million during the fourth quarter.
We finished the third quarter with consolidated net debt-to-EBITDA of 7.6 times.
And on a look-through basis, including pro rata share of JV debt and preferred stock outstanding, the level is 8.5 times.
This represents essentially a full turn improvement from the 8.6 times and 9.4 times levels reported last quarter, with the improvement attributable to lower credit loss.
We expect further improvement next quarter as well.
We were active in the capital markets during the quarter as we issued a 2.7% $500 million 10-year unsecured green bond and a 1.9% $400 million 7.5 year unsecured bond.
Proceeds were used to repay the remaining $325 million on the term loan obtained in April 2020, fund the early redemption of the 3.2% $485 million bonds due in May of '21 and fund the repayment of two consolidated mortgages totaling over $70 million.
It is worth noting that our credit spreads have continued to tighten since the issuance of these bonds, with the 10-year bond trading more than 40 basis points tighter.
As of September 30, 2020, we had no consolidated debt maturing for the balance of the year and only $141 million of consolidated mortgage debt maturing in 2021.
Our next unsecured bond does not mature until November of 2022.
Our consolidated weighted average maturity profile stood at 11.1 year, one of the longest in the REIT industry.
Regarding our common dividend during 2020, so far, we have paid $0.66 per common share, including a reinstated common dividend of $0.10 per common share during the third quarter 2020.
It remains our expectation to pay cash dividends at least equal to 2020 REIT taxable income.
As such, we expect our Board of Directors will most likely consider declaring and paying an additional common dividend during the fourth quarter.
| compname says q3 ffo per share $0.25.
q3 ffo per share $0.25.
collected approximately 89% of base rents for q3 highlighted by a 91% collection rate for month of september.
collected 90% of october's rents.
qtrly net loss $0.10 per diluted share.
|
You can obtain the release by visiting the Media section of our website at cnoinc.com.
We expect to file our Form 10-K and post it on our website on or before February 26.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
And unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2019 and fourth quarter 2020.
I'm going to start with a discussion of the DirectPath acquisition, we announced last night.
I'll then provide brief commentary on our fourth quarter and full year performance, before turning it over to Paul to discuss our financial results and outlook in more detail.
Turning to Slide 4.
We are very excited about this transaction and the enhanced worksite capabilities it brings to CNO.
The transformation that we announced last year created a Worksite division dedicated to this market.
Growing our Worksite business is the next step in our strategy.
We are significantly expanding our Worksite business to position CNO as a full service provider of Worksite solutions.
DirectPath is a leading national provider of employee benefits management services to employers and employees.
It brings three primary new revenue sources to CNO; employee education services, employee advocacy and transparency services and employer benefits communications and compliance services.
DirectPath operates directly nationwide through approximately 7,000 benefit broker partners.
It serves 400 employers of all sizes from small businesses to Fortune 100 companies, which reflects a covered employee base of more than 2.5 million individuals.
Prior to COVID, Worksite was one of the fastest growing higher multiple businesses for us and in the industry.
We expect that dynamic to resume over the next year or so.
DirectPath builds out our capabilities and gets us deeper into the employer value chain.
It will also create extensive cross-selling and referral opportunities for us.
Through its fee-based structure, DirectPath will diversify our Worksite revenue base.
It adds to our existing high return fee-based businesses that will help drive expansion in our overall ROE.
The purchase price of $50 million was funded out of holding company cash.
There is an additional earn-out, if certain financial targets are achieved.
The transaction is expected to add $0.01 per share to our earnings beginning in 2022.
This transaction aligns well with the M&A playbook we've been executing against, and is reflective of the types of opportunities we may consider again in the future.
Turning to Slide 5 and our full year performance.
We reported operating earnings-per-share growth of 37% for the full year, $387 million of free cash flow or 107% of our operating income and we returned $330 million to shareholders in the form of buybacks and dividends, which reflects 12% of our market cap at the beginning of 2020.
End results underscore the continued strength and resiliency of our diverse product portfolio and distribution channels.
Despite the COVID backdrop, we achieved many important operational accomplishments during 2020.
Within the Consumer division, we've continued to build upon success with our direct-to-consumer life business and cross-channel collaboration efforts.
Integrating these channels has led to significant improvements in overall lead conversion rates and per customer acquisition cost.
Leads generated from our D2C business have become an increasingly important source of new business for our exclusive field agent force.
In 2020, these leads drove two-thirds of the increase in life sales generated by our exclusive field agents.
This year we recognized the opportunity to create a similar multi-channel sales and service experience for the Medicare market.
We launched our new digital health insurance marketplace myHealthPolicy.com.
Our objective is to take the strength of our face-to-face distribution, couple it with our growing online strength and use our unique offerings to become a significant player in the online health insurance market.
This is a competitive space.
The depth and strength of our agent force is the key differentiator.
Just as we successfully scaled and became a top five provider of direct-to-consumer life insurance, we intend to profitably grow the direct-to-consumer healthcare business.
Within the Worksite division, despite COVID, we saw modest growth in our employer client base.
Of course, we faced significant restrictions accessing workplaces to complete employee enrollments.
In response, we focused extensively on building out our virtual and online enrollment capabilities.
For the full year, virtual sales comprised 23% of total production.
Continued premium persistency was another key driver of our Worksite business this year.
Persistency was actually up modestly over historical levels, reflecting the critical value of our -- our consumers' attribute to our protection products and the mix of stable industries we serve.
While we intentionally slowed our agent recruiting efforts in 2020 to align with the softer demand for on-site enrollment due to COVID, we retained our core managers who are critical to rebuilding our sales force and driving our ultimate recovery.
As I've shared in previous quarters, in 2020, we made significant investments in supporting the safety, wellness and financial well being of our associates, customers and agents in response to the pandemic.
We expanded our commitment to diversity, equity and inclusion and named a senior director to support our ongoing initiatives to develop and embed ENI practices across our organization.
We also made progress in our ESG efforts, the principles of which are central to our overall business strategy.
CNO is now a signatory to the United Nations principles for responsible investment, which commits us to incorporating ESG principles in our investment analysis and reporting framework.
We expect to formally adopt the SASB and TCFD reporting frameworks this year when we publish our updated corporate social responsibility report.
Turning to Slide 6 and our results for the quarter.
Our fourth quarter results benefited from the ongoing deferral of medical care which drove continued strong health margins.
Our performance was also boosted by a particularly robust alternative investment earnings.
Operating earnings per share were up 17%.
Our book value per diluted share excluding AOCI was up 8%.
During the quarter, we saw continued improvement in several key metrics.
However, the wave of COVID late in the fourth quarter created a headwind to certain sales and agent metrics.
Premium collections remained strong across both divisions, but reflect the impact from weaker health sales in recent periods.
Expenses were higher in the quarter and higher than we signaled on previous calls, driven primarily by the acceleration of spending on growth initiatives.
This was a conscious decision.
The strength of our business and cash flow in 2020 enabled us to capitalize on opportunities to support the continued growth of our franchise beyond the pandemic.
We saw this as an opportunity to build capabilities for future growth and differentiation.
Paul will provide more details.
Fee income was down, reflecting solid growth in fee revenue, offset by spending related to the development and marketing of myHealthPolicy.com.
Our capital and liquidity positions remained solid.
We issued $150 million in subordinated debt in November and ended the quarter with an RBC ratio of 411% with $388 million in cash at the holding company.
Turning to our growth scorecard on Slide 7.
Three of our five metrics were up year-over-year.
Life sales were up 6% for the quarter and 12% for the full year, fueled by both continued strong direct-to-consumer growth and a sharp increase in sales from our exclusive field agents.
Collected life premiums were up 3%, reflecting solid growth in NAP in recent quarters and the continued strong persistency of our customer base.
Collective health premiums were down 4.7%, largely resulting from the impact of softer in-person health sales in recent quarters.
Annuity collected premiums were up 6% for the quarter, reversing the trend in recent quarters.
Client assets under management grew 18% to nearly $1.8 billion.
Of this growth, approximately half was driven by new client assets.
Fee revenue was up a healthy 19% to $36 million, reflecting growth in third-party sales and growth within our broker-dealer and registered investment advisor.
Health sales remained challenged, down 22% over the prior year, driven by a 29% decline in Medicare supplement sales.
As we've discussed previously, we're in the midst of a secular shift away from Medicare supplement toward Medicare Advantage.
Helping customers navigate the complex Medicare landscape has been a core strength of our exclusive field agents.
Our approach to the shift in consumer preferences is to leverage the strength of both our field agents and our new digital health marketplace to capture incremental Medicare Advantage sales.
At the same time, we will continue to maintain a strong presence in the Medicare supplement market, which consistently delivers a compelling loss ratio and provides a meaningful contribution to our health margin.
It's also a key differentiator.
Very few peer companies manufacture and sell Medicare plans.
As a reminder, Medicare supplement sales are reflected in the new annualized premium, while Medicare Advantage sales are reflected in the fee revenue.
Turning to our Consumer division on Slide 8.
Sales of life insurance remained strong, up 17% for the quarter and up 19% for the full year.
Direct-to-consumer life sales, which comprised about half of our total life sales, were up 10%.
Life sales generated by our exclusive field agents were up 26% supported by leads shared from our direct-to-consumer channel.
This cross-channel dynamic has resulted in improved productivity metrics, such as lead conversion rates and customer acquisition costs.
Again, this underscores the value of our unified distribution model as growth in one channel is able to feed growth in the other.
As I mentioned earlier, we are working to create the same dynamic on the health side of our consumer business.
During this year's Medicare annual enrollment period, consumers were able to purchase Medicare products from us online or from one of 2,800 tele-sales and local exclusive field agents certified to sell Medicare plans.
With the launch of myHealthPolicy.com marketplace, we created pathways for our tele-agents to refer consumers to local agents and for field agents to refer consumers to a tele-agent or the platform itself.
As a result, our Medicare Advantage policies sold in the fourth quarter increased 3% over the prior year and total third-party policies were up 5%.
myHealthPolicy.com accounted for 14% of our third-party health sales in the quarter.
Our producing agent count was down 3%, which makes our sales momentum and productivity even more impressive.
Due to the resurgence of the pandemic, COVID-related quarantines kept a number of our exclusive field agents and clients from engaging in face-to-face appointments.
COVID restrictions also remain more stringent in the areas of the country where our agents are more concentrated.
As a reminder, to be counted as producing, our agents need to sell at least one policy each month.
Our total exclusive agent count, which includes our field and tele-sales agents was actually up 3% for the full year.
We continue to grow the number of securities licensed financial representatives, which is core to how we are evolving our field force and changing the relationship with our clients.
Turning to Slide 9 and our Worksite division.
Collected premiums remained strong as the profile of our existing employer groups has translated to continued healthy levels of employee persistency.
We saw continued sequential improvement in our Worksite sales in the fourth quarter with sales up 61% over the third quarter.
Relative to the year ago period, however, sales were down 41%.
Given recent increases in COVID infection rates across the country and workplaces opening up more slowly, we continue to expect a steeper recovery path in the Worksite business.
We launched a new group product in the fourth quarter called monthly income protection group term life.
This is a unique group life product that is designed to replace monthly income rather than paying a lump sum death benefit.
Web Benefits Design delivered solid results in 4Q, including a 3% increase in the average per employee per month charge.
WBD cross-selling activities drove 5% of overall NAP in the quarter.
The division will be co-managed by current Worksite President, Mike Hurd and by DirectPath, Chairman and CEO, Mike Byers.
Both will report to me and Mike Byers will join our executive leadership team.
Turning to Slide 10.
We returned $117 million to shareholders in the fourth quarter, including $100 million in share buybacks.
For the full year, we deployed $263 million on buybacks at an average price of $18.17.
Our capital allocation strategy remains consistent.
We intend to deploy 100% of our excess capital to its highest and best use over time.
While share repurchases form a critical component of our strategy, organic and inorganic investments also play an important role.
It's worth noting that most of our organic investments in the fourth quarter flowed through our income statement as operating expenses rather than as capital expenditures.
These investments remain mission-critical to our future success.
Paul will provide more color in his remarks.
Turning to Slide 11.
Over the past two years, we've also been making minority investments in various InsurTech and FinTech companies.
Through CNO ventures, we seek to generate attractive returns, develop relationships, source and track opportunities, and ultimately invest in various companies that are disrupting the insurance and financial space.
We fully expect these investments to stand on their own merits and deliver attractive returns.
They also serve as important vehicles for us to collaborate and innovate.
We seek out companies that are strategically relevant, particularly those we can partner with, to help us improve our digital engagement with consumers, accelerate our speed to market with new products and services and/or enhance our technology.
To date, we have invested a total of $21 million in five companies, including HealthCare.com, Human API and Kindur.
We expect to complete a few similar transactions per year.
The portfolio will remain small relative to our total invested assets, but impactful in other ways.
Turning to the financial highlights on Slide 12.
Operating earnings per share were up 17% in the fourth quarter and up 21% excluding significant items, benefiting from favorable health insurance product margins, driven by continued customer deferral of care related to COVID and by strong net investment income, resulting from significant outperformance of our alternative investments.
Earnings per share also benefited from our share repurchases, which reduced our fourth quarter weighted average share count by 7%.
We deployed $100 million of excess capital on share repurchases in the fourth quarter and $263 million for the full year.
Partially offsetting the increase in insurance product margin and investment income in the quarter was an increase in expenses and a decrease in fee income, both driven by our decision to fast track spending on growth initiatives in the second half of 2020 in the context of accelerating trends relating to all things virtual and digital and supported by strong earnings in the period.
These initiatives included spending related to myHealthPolicy.com, which flows through as an expense in our fee income line as it relates to activities supporting our fee revenue.
Other examples of growth initiatives in the period include spending on virtual sales and service capabilities, market access, data analytics and various initiatives designed to improve our policyholder customer experience.
All of these investments flowed through our income statement on the expenses allocated to products line.
In the 12 months ended December 31, 2020, we generated operating return on equity excluding significant items of 12%, which compares to 10.4% in the prior year period.
The favorable impact was driven by our lower initial portfolio rates, which manifested from asset turnover in the annuity portfolio in the third quarter of 2020.
Those lower rates drove a favorable adjustment to the embedded derivative reserve related to our fixed index annuities.
Separately, as part of the assumption update, we lowered the new money rate assumption to 3.5% in 2021 and 3.75% in 2022, but that did not create material unlocking impacts.
Turning to Slide 13 and our product level results.
Our overall margin in the fourth quarter was up $30 million or 15%.
Excluding significant items, it was up $9 million or 4%.
This included a net favorable COVID impact of $18 million, driven by the deferral of care in our healthcare products and reflects modest spread compression in our annuity product and generally stable results in our life and health products ex-COVID.
Turning to Slide 14 and our investment results.
Investment income allocated to products was essentially flat in the period as the favorable impact of the 4% increase in net insurance liabilities was largely offset by a 19 basis point year-over-year decline in the average yield on those investments to 4.83%.
Sequentially, the average yield declined five basis points consistent with our prior guidance.
Investment income not allocated to products increased $32 million year-over-year to $58 million driven by strong alternative investment performance.
This translates to an annualized return on our alternative investments of 24% as compared to a mean expectation of between $7 million and 8%, reflecting outperformance driven by private equity realizations and strong private equity -- excuse me, private credit results.
Our new money rate of 3.58% was down 50 basis points both year-over-year and sequentially with the sequential change driven primarily by tighter credit spreads.
Turning to Slide 15.
At quarter end, our invested assets were $27 billion, up 9% year-over-year.
Approximately 95% of our fixed maturity portfolio is investment-grade rated with an average rating of single A. The BBB allocation comprised 42% of our investment-grade holdings, up slightly from the prior quarter.
Turning to Slide 16.
We continue to generate strong free cash flow to the holding company in the fourth quarter with excess cash flow of $122 million or 142% of operating income this quarter and $387 million or 107% of operating income on a trailing 12-month basis.
Turning to Slide 17.
At quarter end, our consolidated RBC ratio was 411%, down from 428% at September 30.
This represents approximately $55 million of excess capital relative to the high end of our targeted range of 375% to 400%.
Our Holdco liquidity at quarter end was $388 million, which represents $238 million of excess capital relative to our target minimum Holdco liquidity of $150 million or approximately $185 million of excess net of the capital deployed this quarter on the DirectPath transaction.
We had intentionally maintained a more conservative posture in the context of ongoing COVID-related uncertainty.
Turning to Slide 18 and our outlook for the remainder of the year.
We continue to run base and adverse case scenarios that are generally aligned with certain rating agency assumptions regarding COVID-19 infection rates, death rates and related economic impacts.
From a top-line perspective, in our base case, we expect the continuation of the positive momentum that we experienced in the second half of 2020.
From an earnings perspective, we expect two sets of headwinds in '21 relative to 2020.
The first relates to COVID where we expect to trend toward more normal claims experience in our healthcare products as consumers and healthcare providers continue to become more accustomed to COVID-related protocols and/or as the benefits of vaccines take hold.
In our base case, we expect this will translate to net mortality and morbidity impacts that are modestly favorable in the first half, modestly unfavorable in the second half and neutral for the full year.
It's also worth noting that the decline in sales in 2020 due to COVID will reduce insured product margin in 2021 and beyond, all else equal.
The second set of earnings headwinds in 2021 relate to investment income, particularly a potential for reduced income from alternative investments and from opportunistic trading as compared to significant outperformance in 2020.
Lastly, continued pressure from low interest rates generally, which has lately been coupled with tighter spreads, will continue to pressure earnings.
We expect this will translate to flat net investment income allocated to products within our insurance product margin as growth in the asset base will likely be offset by a decline in the yield on those assets.
These headwinds notwithstanding we expect a modest offset from a slight decline in expenses, mostly in the second half of the year as we continue to drive operational efficiencies, while also continuing to invest in growth initiatives.
Regarding free cash flow and excess capital, we exhausted our life NOLs in 2020, which will put modest pressure on our free cash flow conversion rate in 2021.
Nevertheless, still healthy levels of free cash flow generation in our base case scenario on top of our excess capital position at year end 2020 should result in share repurchase capacity, exceeding our actual share repurchase activity in 2020.
Importantly, even in our adverse case, which is intended to capture scenarios far out in the tail, we expect to be able to manage RBC Holdco liquidity and debt leverage within our targeted levels, pay our dividends to shareholders and still had a modest amount of share repurchase capacity, albeit at much reduced levels compared to our base case.
Turning to Slide 20 -- to Slide 19.
2020 was an incredibly challenging year on many fronts.
Our pandemic response and financial results demonstrated the resilience of our organization and proved that we can emerge from the crisis even stronger while continuing to support our associates, agents, customers and communities.
There's no question that difficult and uncertain conditions remain.
In many respects, we have less visibility into 2021 than we had in 2020.
The lack of short-term clarity should not detract from the long-term view of our prospects.
Our franchise remains strong and our financial position is robust.
Longer term I couldn't be more optimistic about the future of this company and our ability to capitalize on the opportunity before us.
Please continue to stay healthy and safe.
| qtrly book value per share was $40.54, up 28% from 4q19.
|
These items will be archived, and our call will be available for replay.
In our earnings supplement, we refer to certain non-GAAP measures.
We believe our non-GAAP measures are more reflective of our cash operations and core business performance.
You'll find a reconciliation to the equivalent GAAP terms in the earnings materials.
Please see the explanatory notes on the second page of the earnings supplement for additional details regarding the definition of certain items.
With us on the call today are Jeff Sprecher, Chairman and CEO; Warren Gardiner, Chief Financial Officer; Ben Jackson, President; and Lynn Martin, President of Fixed Income and Data Services.
I'll begin on slide four with some of the key highlights from our third quarter results.
Adjusted earnings per share totaled $1.30, up 34% year-over-year, marking the best third quarter in our company's history.
Net revenues totaled a record $1.8 billion and, on a pro forma basis, increased 11% versus last year, with all three of our business segments contributing to the strong year-over-year growth.
Total transaction revenues grew 13%, while total recurring revenues, which accounted for nearly half of our business, increased by 10%.
Third quarter adjusted operating expenses totaled $755 million, including $35 million related to Bakkt, which, after successfully completing its merger with Victory Park, recently began trading on the NYSE.
Adjusting for Bakkt, third quarter operating expenses would have been $720 million, in the middle of our guidance range, while operating -- or while our adjusted operating margin would have been 60%, up over 100 basis points year-over-year.
Looking to the fourth quarter, we expect adjusted operating expenses to be between $737 million to $747 million.
Relative to the full year outlook provided on our second quarter call, the fourth quarter is now expected to include approximately $10 million related to the Bakkt stub period and $10 million to $15 million of performance-related compensation as we expect to reward our employees for their contribution to the strong results we are once again on track to achieve in 2021.
Record year-to-date free cash flow has totaled nearly $2 billion.
These strong cash flows, along with the divestment of our $1.2 billion stake in Coinbase, has enabled us to reduce leverage to under 3.25 times at the end of September, nearly a full year ahead of schedule.
As a result, we expect to resume share repurchases, including up to $250 million in this year's fourth quarter.
We anticipate updating you on our 2022 capital return plans early next year.
In addition, we announced in October that we have agreed to sell our stake in Euroclear for EUR709 million or approximately $820 million.
We expect to determine the use of Euroclear proceeds as we approach closing, which we expect will be -- will occur in 2022.
Now let's move to slide five, where I'll provide an overview of the performance of our Exchange segment.
Third quarter net revenues totaled $959 million, an increase of 16% year-over-year.
This strong performance was driven by a 30% increase in our interest rate business and a 38% increase in our energy revenues, including 34% increase in our oil complex, a 73% increase in European natural gas revenues and a 72% increase in revenues related to global environmental products.
Importantly, total open interest, which we believe to be the best indicator of long-term growth, is up 18% versus the end of last year, including 11% growth in energy and 28% growth across our financial futures and options complex.
Recurring revenues, which include our exchange data services and NYSE listings, increased 6% year-over-year, including 10% growth in our listings business.
This acceleration in growth was driven by an increasing number of operating company IPOs choosing the NYSE, particularly in the technology and consumer sectors.
Looking to the fourth quarter, we expect recurring revenues in our Exchange segment to be between $330 million and $335 million.
Turning now to slide six, I'll discuss our Fixed Income and Data Services segment.
Third quarter revenues totaled $477 million, a 6% increase versus a year ago.
Recurring revenue growth, which accounted for nearly 90% of segment revenues, also grew 6% in the quarter.
Within recurring revenues, our fixed income, data and analytics business increased by 5% year-over-year, including another double-digit growth in our index franchise, while other data and network services grew 9% driven by continued customer demand for additional network capacity.
Looking to the fourth quarter, we expect that our recurring revenues will improve sequentially to a range of $415 million to $420 million and that full year revenue growth will be approximately 6%, at the high end of our guidance range.
Let's go next to slide seven, where I will discuss our Mortgage Technology segment.
Please note that my comments on revenue growth are on a pro forma basis.
Despite a double-digit decline in industry origination volumes, our Mortgage Technology business grew 7% year-over-year and achieved record revenues of $366 million.
While third quarter transaction revenues declined slightly, they were more than offset by a 33% growth in our recurring revenues, which, at $143 million, once again exceeded the high end of our guidance range and accounted for nearly 40% of total segment revenues.
Our outperformance relative to industry trends continues to be driven by increased customer adoption of digital tools across the workflow.
While these secular growth trends have been a clear tailwind for our recurring revenues, there is also opportunity to drive accelerating adoption across our transaction-based businesses such as our closing solutions, where revenue increased by 30% in the third quarter.
Looking to the fourth quarter guidance, we expect that recurring revenues will once again grow sequentially and be in a range of $147 million to $152 million.
At the midpoint, this represents growth of approximately 25% year-over-year, which is on top of 20% growth achieved in last year's third quarter.
In summary, we once again had strong contributions from each of our businesses and across the asset classes in which we operate.
We delivered double-digit growth in revenue, operating income and earnings per share.
We also generated strong cash flows, reduced leverage to under 3.25 times, announced the divestment of our stake in Euroclear and successfully took back public on the NYSE.
As we look to the end of the year into 2022, we remain focused on meeting the needs of our customers, continuing to drive growth and create value for our shareholders.
Our strong third quarter results were driven in part by interest rate volatility, global energy supply shortages and the continued adoption of our mortgage technology even amid a decline in origination volumes.
But more importantly, underpinning that performance are long-term, secular tailwinds that will continue to drive growth across asset classes and macroeconomic environments.
And with data and technology at our core, we have strategically positioned the business to benefit from these tailwinds across our platform.
In energy, the globalization of natural gas and the evolution to cleaner energy are trends that we began investing in over a decade ago.
And today, cleaner energy sources, including global natural gas and environmentals, make up approximately 40% of our energy revenues and have grown 12% on average over the past five years.
With the rise of LNG, natural gas markets are becoming more global in nature.
In our European gas benchmark, TTF is emerging as the global gas benchmark.
Revenues in our TTF markets have grown 38% on average over the last five years, including 84% growth in the third quarter.
The supply shortages and price volatility that we saw in the third quarter are a peek into the future of what the energy transition could look like.
Energy consumption is expected to double over the next 30 years, yet carbon emissions are expected to be reduced by half.
This imbalance in supply and demand will introduce additional complexity and volatility to energy markets, which will drive greater demand for our risk management.
Our global environmental markets, alongside our global oil, gas and power markets, provide the critical price transparency across the energy spectrum that will enable participants to navigate this evolution.
Complementary addition to the risk management that our technology provides is our growing suite of associated data products.
Leveraging our leading environmental markets, we built a suite of carbon indices which allow global investors to access market-based carbon prices through a single investment instrument.
And today, there are a growing number of ETFs benchmarking to our carbon indices and environmental markets.
Turning now to fixed income.
The electronification of fixed income is a data-driven trend.
We recognized this in 2015 when we acquired IDC and continue to invest and innovate in data and technology to further enable this trend.
Our leading evaluated prices provide critical price transparency for nearly three million securities daily.
By combining our proprietary pricing data with our comprehensive reference data, we've built innovative tools and analytics that will facilitate the continued electronification and automation of the fixed income markets.
Solutions like our continuous evaluated pricing, best execution and liquidity indicators, for example, provide pre-trade transparency needed to determine fair value.
We also see the electronification of fixed income within the ETF ecosystem.
Our quality pricing and reference data, combined with four years of history, serves as the foundation of our growing index business.
We not only offer benchmark indices but also calculation services, analytics and unique solutions like our custom indices.
By servicing the entire ETF ecosystem through data and technology, we've been able to grow our index business double digits for the past four years.
And finally, turning to our mortgage business.
In the third quarter, we were once again able to grow our revenues even with industry volumes down double digits.
This continued outperformance is a result of executing against our strategy of leveraging our mission-critical technology and data expertise to accelerate the analog-to-digital conversion happening in the industry.
Part of that strategy is intentionally shifting more business to recurring revenue, particularly within our origination technology and data and analytics business.
While we only recently began this transition, we've already seen strong client adoption.
Another opportunity that we're executing on today is in our closing solutions.
The demand for automation in the closing of a real estate transaction is increasing.
We see this evidenced by the continued onboarding of new customers to our electronic closing room and hybrid solution that we launched in the second quarter.
This month, we further advanced the automation of our eClose solution, which can save lenders hundreds of dollars per loan by leveraging additional technology and automation by adding eNote and eVault.
Our comprehensive offering and the efficiencies that it delivers positions us well to execute on what we believe to be a $1 billion opportunity.
Within data and analytics, our AIQ solution leverages AI, machine learning and proprietary data from our origination platform to automate the steps in the loan manufacturing process.
This automation could save lenders thousands of dollars per loan by reducing manufacturing time and complexity.
Today, only a fraction of Mortgage Technology customers take our AIQ solution, and we continue to have strong sales success cross-selling to existing customers even if they're not on our loan origination system, including one of the largest depositories in the U.S. And while still an early opportunity at under $100 million in revenue today, the efficiencies that our data analytics provide position us well to continue executing against what we think is a $4 billion opportunity.
Flywheel effect that our leading technology and data provides, combined with the cross-sell that our broad connectivity offers, generates an array of opportunities for us to grow a business that at $1.4 billion today is only a fraction of the $10 billion opportunity.
The third quarter extends our track record of growth.
We once again grew revenues, grew adjusted operating income and grew adjusted earnings per share with strong growth from all business segments, across asset classes and amid a dynamic macro environment.
These results are a testament to the strength of our business model, positioning the company at the center of some of the largest markets undergoing an analog-to-digital conversion and which together make ICE an all-weather name that generates growth on top of growth.
The diversity of our platform positions us to benefit not only from near-term cyclical events but also longer-term, secular growth trends.
We've expanded into new asset classes, grown our addressable markets and broadened our expertise, making our network significant and providing the opportunity to unlock additional growth by collaborating across businesses.
We recently announced another new product from the collaboration between ICE Data Services and ICE Mortgage Technology called the ICE rate lock indices.
Leveraging anonymized and aggregated data from ICE Mortgage Technology's leading origination platform, this suite of indices provides a more comprehensive, accurate and timely reflection of residential mortgage rates.
Building on this innovation, like we've done in other asset classes, these indices provide an opportunity to create additional products like rich analytics and better pricing tools for lenders.
The opportunity to turn raw, unstructured data into actionable insights abounds across our business.
By taking alternative datasets and marrying them with our proprietary data, we've built solutions that offer unique insights into the market.
Our climate analytics, for example, leverage our strength in the fixed income market with third-party geospatial data to help market participants better manage climate risk as a part of their overall investing and risk management processes.
As ESG is increasingly becoming a component of investment portfolios, our technology and data expertise positions us well to deliver solutions that meet these evolving customer needs.
We have strategically assembled a portfolio to drive growth across asset classes and macro environments.
And part of this strategy is capturing value by thoughtfully repositioning businesses.
This year alone, we harvested our gain in Coinbase, announced an agreement to do the same with our stake in Euroclear and unlocked Bakkt via our New York Stock Exchange listing.
These transactions expose billions of dollars in value creation and position us well to return capital to shareholders while continuing to invest for our future growth.
It's collaborative efforts, innovative solutions and strategic capital allocation like this that have driven our growth for the past 20 years and which lay the foundation for continued growth well into the future.
| compname reports q3 revenue of $1.8 billion.
q3 adjusted earnings per share $1.30.
q3 revenue $1.8 billion.
expect to resume share repurchases in q4.
q3 exchange net revenues were $959 million.
exchanges q4 2021 total recurring revenues are expected to be in a range of $330 million to $335 million.
fixed income & data services q4 2021 total recurring revenues are expected to be in a range of $415 million to $420 million.
mortgage technology q4 2021 total recurring revenues are expected to be in a range of $147 million to $152 million.
|
These statements are based on our current beliefs, as well as certain assumptions and information currently available to us and are discussed in more detail in our quarterly report on Form 10-Q for the quarter ended September 30, 2021, which we expect to be filed tomorrow, November 4.
I'll also refer to adjusted EBITDA and distributable cash flow, or DCF, all of which are non-GAAP financial measures.
You'll find a reconciliation of our non-GAAP measures on our website.
I'd like to start today by looking at some of our third quarter highlights.
We generated adjusted EBITDA of $2.6 billion and DCF attributable to the partners of Energy Transfer, as adjusted, of $1.3 billion.
Our excess cash flow after distributions was approximately $900 million.
On an incurred basis, we had excess DCF of approximately $540 million after distributions of $414 million and growth capital of approximately $360 million.
Operationally, our NGL transportation and fractionation and NGL refined products terminals volumes reached new records during the quarter largely driven by growth in volumes, beating our Mont Belvieu fractionators and Nederland Terminal.
As the market continues to recover, we are well-positioned to benefit from increasing demand and higher margins.
Switching gears to an update on the acquisition of Enable Midstream Partners, which will provide increased scale in the Mid-Continent and Ark-La-Tex regions and improved connectivity for our natural gas and NGL transportation customers.
We expect the combination of energy transfers and enables complementary assets to allow us to provide flexible and competitive service to our customers as we pursue additional commercial opportunities utilizing our improved connectivity and increased footprint.
As a reminder, we expect the combined company to generate more than $100 million of annual run rate cost synergies, and this is before potential commercial synergies.
We continue to believe that the transaction will close before the end of the year.
I'll now walk you through recent developments on our growth projects, starting with our Cushing South pipeline.
In early June, we commenced service to provide transportation for approximately 65,000 barrels per day of crude oil from our Cushing terminal to our Nederland terminal, providing access for Powder River and DJ Basin barrels to our Nederland terminal being an upstream connection with our White Cliffs Pipeline.
This pipe is already being fully utilized.
And as we mentioned on our last call, we are moving forward with Phase 2, which will increase the capacity to 120,000 barrels per day.
Phase 2 is expected to be in service early in the second quarter of 2022 and is underpinned by third-party commitments.
As a reminder, minimal capital spend is required for this phase.
Next, construction on the Ted Collins link is progressing and is now expected to be in service late in the first quarter of 2022.
The Ted Collins link will give us the ability to fully load and export unblended low-gravity Bakken and WTI barrels out of the Houston market, showcasing Energy Transfer's unique ability to provide a net Bakken barrel to markets along the Gulf Coast.
Now turning to our Mariner East system.
We have commissioned the next significant phase of the Mariner East project, which brings our current capacity on the Mariner East pipeline system to approximately 260,000 barrels per day.
Year-to-date, NGL volumes through the Mariner East pipeline system and Marcus Hook terminal are up 12% over the same period in 2020.
We are awaiting the issuance of a permit modification for the conversion of the final directional drill to an open cut, which will allow us to place the final segment of Mariner East into service in the first quarter of 2022.
Our Pennsylvania Access project, which will allow refined products to flow from the Midwest supply regions into Pennsylvania, New York and other markets in the Northeast, will begin moving refined products this winter.
Now for a brief update on our Nederland terminal.
As a reminder, with the completion of the remaining expansions of our LPG facilities at Nederland, earlier this year, we are now capable of exporting more than 700,000 barrels per day of NGLs from our Nederland terminal.
And when combined with our export capabilities from our Marcus Hook terminal, as well as our Mariner West pipeline, which exports ethane to Canada, our total NGL export capacity is over 1.1 million barrels per day, which is among the largest in the world.
At our expanded Nederland terminal, NGL volumes continued to increase during the third quarter, including export volumes under our Orbit ethane export joint venture, which has remained strong.
Year-to-date through September, we have loaded more than 16 million barrels of ethane out of this facility.
And in total, our percentage of worldwide NGL exports has doubled over the last 18 months to nearly 20%, which was more than any other company or country for the third quarter of 2021.
Looking ahead, we expect our total NGL export volumes from Nederland to continue to increase throughout next year.
In addition, demand for supply to refineries remain strong, and our crude oil storage at Nederland is fully contracted.
At Mont Belvieu, we recently brought on a 3 million-barrel high-rate storage well, which takes our NGL storage capabilities at Mont Belvieu to 53 million barrels.
And our Permian Bridge project, which connects our gathering and processing assets in the Delaware Basin with our G&P assets in the Midland Basin was placed into service in October and is already being significantly utilized.
This project allows us to move approximately 115,000 Mcf per day of rich gas out of the Midland Basin and to operate existing capacity more efficiently while also providing access to additional takeaway options.
In addition, it can easily be expanded to 200,000 Mcf per day when needed.
Lastly, in July, we announced the signing of a memorandum of understanding with the Republic of Panama to study the feasibility of jointly developing a proposed Trans-Panama gateway pipeline.
We believe this project would create the most liquid and attractive LPG supply hub in the world and are excited about the opportunity it presents.
Now for an update on our alternative energy activities, where we have continued to make progress on a number of fronts.
In September, we entered into a 15-year power purchase agreement with SB Energy for 120 megawatts of solar power from its Eiffel Solar project in Northeast Texas.
This is the second solar project we are participating in and these agreements provide a good fixed price per megawatt hour on a generated basis.
So we only pay for power actually generated and delivered to us.
We're also continuing to explore several opportunities for solar, wind, and forestry carbon credit projects on our existing acreage in the Appalachian region.
In particular, we're continuing to jointly pursue solar and wind development on the Energy Transfer track in Kentucky with a large utility company, and we are in discussions with other large renewable energy developers.
On the carbon capture front, our Marcus Hook project looks financially attractive based upon preliminary cost estimates and design feasibility studies.
This project would involve capturing CO2 from the flue gas and delivering it to customers for industrial applications and is used in food and beverage industries.
We're also pursuing several carbon projects related to our assets, including projects involving the capture of CO2 from processing plants for use in enhanced oil recovery or sequestration.
We continue to believe that our franchise will allow us to participate in a variety of projects involving carbon capture or other innovative uses as we continue to reduce our carbon footprint.
Lastly, we expect to publish our annual corporate responsibility report for our website shortly.
Now let's take a closer look at our third quarter results.
Consolidated adjusted EBITDA was $2.6 billion, compared to $2.9 billion for the third quarter of 2020.
DCF attributable to the partners as adjusted was $1.31 billion for the third quarter, compared to $1.69 billion for the third quarter of 2020.
While we saw higher volumes across the majority of our segments, including record volumes in the NGL and refined products segment, these benefits do not offset the significant optimization gains in the third quarter of 2020 related to our various optimization groups, as well as the onetime $103 million gain in our midstream segment.
In addition, the third quarter of 2021 included higher utilities and other winter storm Uri-related expenses.
On October 26, we announced a quarterly cash distribution of $0.1525 per common unit or $0.61 on an annualized basis.
This distribution will be paid on November 19 to unitholders of record as of the close of business on November 5.
Turning to our results by segment, and we'll start with the NGL and refined products.
Adjusted EBITDA was $706 million, compared to $762 million for the same period last year.
Higher terminal services and transportation margins related to the increased throughput on our Nederland and Mariner East pipelines in the third quarter of 2021 were offset by a $55 million decrease in our optimization businesses at Mont Belvieu and in the Northeast, as well as increased opex and G&A.
NGL transportation volumes on our wholly owned and joint venture pipelines increased to a record 1.8 million barrels per day, compared to 1.5 million barrels per day for the same period last year.
This increase was primarily due to increased export volumes feeding into our Nederland terminal from the initiation of service on our propane and ethane export projects, higher volumes from the Eagle Ford region, as well as increased volumes on our Mariner East and Mariner West pipeline systems.
And our fractionators also reached a new record for the quarter with an average fractionated volumes of 884,000 barrels per day, compared to 877,000 barrels per day for the third quarter of 2020.
Throughout 2021, we have continued to add volumes to our system and are well-positioned to capture additional volumes and capitalize on new opportunities as demand improves.
For our crude oil segment, adjusted EBITDA was $496 million, compared to $631 million for the same period last year.
The improved performance on our Bakken and Bayou Bridge pipelines as a result of recovering volumes in the third quarter of 2021 did not offset approximately $100 million of onetime items in the third quarter of 2020.
In addition, we had approximately $20 million in other optimization reductions, as well as increased opex and G&A expense year-over-year.
For midstream, adjusted EBITDA was $556 million, compared to $530 million for the third quarter of 2020.
This was largely the result of a $156 million increase related to favorable NGL and natural gas prices, as well as volume growth in the Permian and the ramp-up of recently completed assets in the Northeast, which were partially offset by a decrease of $103 million due to the restructuring and assignment of certain contracts in the Ark-La-Tex region in the third quarter of 2020.
Gathered gas volumes were 13 million MMBtus per day, compared to 12.9 million MMBtus per day for the same period last year due to higher volumes in the Permian, Ark-La-Tex and South Texas regions.
Permian Basin volumes continue to be strong and Midland inlet volumes remained at/or near record highs.
As a result, we are already utilizing our Permian Bridge project to enhance the efficiency of our processing in the area by moving some volumes over to our Delaware Basin processing plants.
In our Interstate segment, adjusted EBITDA was $334 million, compared to $425 million for the third quarter of 2020 primarily due to contract expirations at the end of 2020 on Tiger and FEP, as well as a shipper bankruptcy on Tiger and lower demand on Panhandle and Trunkline partially offset by an increase in transported volumes on Rover due to more favorable market conditions.
And for our intrastate segment, adjusted EBITDA was $172 million, compared to $203 million in the third quarter of last year.
This was primarily due to lower optimization volumes as a result of third-party customers shifting to long-term contracts from the Permian to the Gulf Coast and lower spreads, as well as an increase in operating expenses, which were largely offset by increased transportation volumes out of the Permian and an increase in retained fuel revenues and storage margin.
While it impacted us over the comparison period, the additional long-term contracting of third-party customers from the Permian to the Gulf Coast is expected to benefit us going forward as the Waha to Katy basis differential has tightened significantly.
To reduce volatility within our earnings and protect us from falling basis differentials, like we saw from the third quarter of 2020 to the third quarter of 2021, we have strategically taken steps to lock in additional volumes under fee-based long-term contracts, which are exceeding current differentials.
Now turning to our 2021 adjusted EBITDA guidance.
Our full year 2021 adjusted EBITDA remains $12.9 billion to $13.3 billion.
As a reminder, this range excludes any contributions from the announced Enable acquisition.
And moving to a growth capital update, for the nine months ended September 30, 2021, Energy Transfer spent $1.08 billion on organic growth projects, primarily in the NGL refined products segment, excluding SUN and USA Compression capex.
For full year 2021, we continue to expect growth capital expenditures to be approximately $1.6 billion, primarily in the NGL refined products, midstream, and crude oil segment.
After 2022 and 2023, we continue to expect to spend approximately $500 million to $700 million per year.
Now looking briefly at our liquidity position.
As of September 30, 2021, total available liquidity under our revolving credit facilities was approximately $5.4 billion, and our leverage ratio was 3.15 times per the credit facility.
During the third quarter, we utilized cash from operations to reduce our outstanding debt by approximately $800 million.
And year-to-date, we have reduced our long-term debt by approximately $6 billion.
We have done a lot of heavy lifting over the last few years as we work to accelerate our debt reduction, improve our leverage, and best position ourselves to return value to our unitholders.
We expect to generate a significant amount of cash flow in 2022, and paying down debt continues to be our top priority.
Additionally, our strong performance in 2021 opens the door for the potential to begin returning value to our unitholders in the form of distribution increases and/or buybacks beginning next year.
During the third quarter, we continue to see volumes recover across several of our systems, as well as improve fundamentals.
In addition, our Nederland and Mariner East expansion projects drove record volumes in our NGL and refined products segment, and we expect total NGL exports to grow throughout 2022.
Overall, our assets continued to generate strong cash flow, which allowed us to internally fund our growth projects and further reduce debt in the third quarter.
We remain committed to maintaining and improving our investment-grade rating and continue to place a significant amount of emphasis on capital discipline, deleveraging, and maintaining financial flexibility.
We continue to be excited about the acquisition of Enable, and we believe we will be able to use our enhanced footprint to improve efficiencies and pursue new commercial opportunities.
How we participate in the evolving energy world is a key focus, and we continue to make progress on a number of our alternative energy projects, which we can enhance and effectively grow our energy franchise with preliminary cost estimates looking favorable.
Operator, please open the lineup for our first question.
| for full year of 2021, et expects its adjusted ebitda to be $12.9 billion to $13.3 billion.
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You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR Newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.
To begin my comments today, I'll review the highlights of our fourth quarter and full year 2020 financial performance.
Next, I'll cover some highlights from 2020, including some updates on the technology and innovation front.
And lastly, I'll review our 2021 financial outlook and our three-year new business backlog before turning things over to Chris.
After Chris covers the details of our financial results, we will open up the call for any questions that you may have.
AAM delivered solid operating financial results and cash flow performance in the fourth quarter and full year of 2020, as global production continue to recover, resulting in a strong EBITDA conversion.
AAM's fourth quarter 2020 sales were $1.44 billion compared to $1.43 billion in the fourth quarter of 2019.
Recall, last year, we were impacted by the GM work stoppage and we sold our US casting business.
For the full year 2020, AAM's sales were $4.7 billion.
During the year, we experienced slower sales coming from a decline in global production due to the COVID-19 and the sale of our US casting business.
From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2020 was $261.5 million or 18.2% of sales, a fourth quarter record for AAM.
AAM concluded a strong second half of 2020 with a solid fourth quarter financial performance, which I'm very, very pleased about.
For the full year 2020, AAM's adjusted EBITDA was $720 million or 15.3% of sales.
For the full year, we were impacted by COVID-19 production shutdowns and lower volumes.
However, we also managed through a difficult operating environment, delivering strong EBITDA margins in the second half, as production rebounded and our cost structure initiatives took hold.
AAM's adjusted earnings per share in the fourth quarter of 2020 was $0.51 per share.
And for the full year 2020, AAM's adjusted earnings per share was $0.14 per share.
AAM continued to deliver strong free cash flow performance in 2020.
AAM's adjusted free cash flow in the fourth quarter 2020 was $173 million.
And for the full year 2020, AAM's adjusted free cash flow was $311 million.
This is a fantastic result, considering the challenges that we faced during the year.
We also reduced our gross debt by nearly $200 million in 2020, paying down approximately $100 million just in the fourth quarter alone.
Furthermore, we are committed to reducing our debt and strengthening our balance sheet in 2021.
Chris will provide additional information regarding the details of our financial results in just a few minutes.
Let me wrap up 2020 with a look back on some of the key highlights, which you can see highlighted on Slide 4 of our slide deck.
The automotive industry faced significant challenges, but AAM worked through it with the dedication of our associates.
Operationally, we completed 17 program launches.
We received 13 customer quality awards and multiple Supplier of the Year awards from customers such as General Motors and Hyundai.
We flexed our cost structure in quick response to pandemic and generated robust EBITDA results throughout the year.
And generating significant free cash flow has strengthened our financial profile through gross debt paydowns.
From a technology perspective, we have benefited from a growing and expanding relationship with Inovance Automotive, a leading provider of automotive power electronics and powertrain systems in China.
Back in the second quarter of 2020, we won our first eDrive award with them for a new Chinese OEM.
Already this year, we announced three additional OEM programs with Inovance.
Our alliance with them has created significant value for us by enhancing customer relationships within the swiftly growing Chinese electrification Market.
In addition, and even more exciting, we've recently signed a technology agreement with Inovance to accelerate the development and delivery of scalable next-generation three-in-one integrated electric drive systems, which integrates the inverter, the electric motor and the gearbox.
By leveraging the partner's complementary expertise in electric propulsion technology, this collaboration will seek to enhance the power density, efficiency and cost-effectiveness of the electric driveline technology offered in the global electrification market.
Our cooperation with Inovance Automotive will add an exciting new offering to AAM's fast growing portfolio of scalable three-in-one electric drive systems and accelerate our ability to bring new cost-competitive technologies to the market.
We are excited to join forces with such a highly accomplished and innovative provider of power electronics technology.
At AAM, our goal is to be at the forefront of electrification technology.
We're also working together with REE Automotive, a leader in electric platform technology.
The company's core innovation includes integrating traditional vehicle components into the wheel, allowing for a flat and modular platform.
We have a small financial investment in REE, and we look forward to further opportunities to drive value from this partnership, utilizing our technology leadership and our operational excellence.
In addition to these exciting partnerships, we continue to make great progress in innovation -- in innovative electric driveline solutions.
As we mentioned earlier, we were awarded not only the Automotive News PACE Award for electric drive technology in the Jaguar I-Pace, but also a second award for our outstanding collaboration with JLR.
These awards further validate not only our technology, but also our commitment to our customers.
In addition, we have several important electrification launches in 2021, including our high-performance eDrive unit for a premium European OEM that we can't wait to tell you more about, as well as multiple electric powertrain component launches, including one for electric pickup trucks and also one for a commercial truck.
We are excited about our prospects in electrification as the industry has begun to pivot in that direction.
AAM is ready to support our customers with cutting-edge electrification products, and we look forward to keeping you up to date with our new developments.
On a separate note and ICE-related, we are also pleased to share that we have secured the next-generation Ram heavy-duty pickup truck business with Stellantis into the next decade.
Stellantis has been a great partner to AAM over the years, and we look forward to extending our mutually beneficial relationship.
This award, coupled with the current business that we enjoy today with Stellantis, exceeds several [Phonetic] billion dollars in sales and is a key foundational program for AAM.
This program, along with other customer next-generation program awards, will support solid cash flow performance for many years to come for AAM.
These are all key developments as we leverage our strong core business to support our electrification technologies as we work to bring the future faster.
I'm also very proud to share that AAM was named on Newsweek's List of America's Most Responsible Companies and to the annual Forbes list of the World's Best Employers for 2020.
We look forward to sustaining this positive momentum in 2021 to support our sustainability priority topics and diversity, equity and inclusion initiatives.
AAM expects our gross new business backlog, covering the three-year period of 2021 through 2023, to be approximately $600 million.
We expect the launch cadence of this backlog to be $200 million in 2021, $150 million in 2022, and $250 million in 2023.
And this also factors in the impact of updated customer launch timing and the latest customer volume expectations that we've received from our customers.
You can also see the breakdown of our backlog on Slide 7.
About 70% of this new business backlog relates to global light trucks, including crossover vehicles, and another 15% relates to hybrid electric powertrains.
Nearly half of this will be realized outside of North America, continuing our trend of diversifying geographically on an organic basis.
I'd like to turn to AAM's 2021 financial outlook, which can be seen on Slide 8, and is as follows.
AAM is targeting full year sales between $5.3 billion and $5.5 billion in 2021.
AAM is targeting adjusted EBITDA of approximately $850 million to $925 million in 2021.
And AAM is targeting adjusted free cash flow in 2021 of approximately $300 million to $400 million, which contemplates capital spending of approximately 4.5% of sales.
While launch activity decreases in 2021, there are still some key new programs we will be focused on during the year, including launching a number of our new electrified products that I mentioned to you earlier.
From an end market perspective, we see production at approximately 15.5 million to 16 million units for our primary North American market.
As it relates to our specific North American programs, we continue to expect favorable mix weighted toward pickup trucks, SUVs and crossover vehicles.
Light trucks made up 74% of the production in North America in 2020, and we see no signs of that changing or slowing down in 2021.
Clearly, 2020 was an unprecedented year, laid with numerous challenges and obstacles.
However, I am extremely proud of the AAM team in managing through these speed bumps and instituting protocols to keep our associates safe and healthy, while effectively supporting our customers throughout the year.
As we turn our focus on 2021 and beyond, our core business is solidly intact and well protected for years to come, yielding significant free cash flow generation, which will allow us to strengthen our balance sheet and invest in advanced propulsion technologies to drive profitable growth.
Needless to say, I'm very, very excited about the about the future for AAM.
I will cover the financial details of our fourth quarter and full year 2020 results with you today.
I will also refer to the earnings slide deck as part of my prepared comments.
So, let's go ahead and get started with sales.
In the fourth quarter of 2020, AAM sales were $1.44 billion, compared to $1.43 billion in the fourth quarter of 2019.
Slide 11 shows a walk down of fourth quarter 2019 sales to fourth quarter 2020 sales.
First, we stepped cut down our fourth quarter 2019 sales by $119 million to reflect the sale of the US casting business unit that was completed in December of 2019.
Next, we add back the impact of the GM work stoppage from the fourth quarter of last year.
Then we account for the unfavorable impact of COVID-19 on our fourth quarter of 2020 sales, which we estimate to be approximately $40 million.
At this point, our estimated sales impact from COVID is only for our India and Brazil locations, which have not recovered to pre-COVID levels for us.
On a year-over-year basis, we are also impacted by GM's exit of its Thailand operations by approximately $10 million.
And the transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV impacted sales by about $35 million in the quarter.
We will have one more quarter of the year-over-year impact for this transition in the first quarter of 2021.
Other volume and mix was positive by $38 million, mainly driven by strong light truck mix in North America.
Pricing came in at $19 million on year-over-year impact.
And metal market pass-throughs and foreign currency accounted for increase in sales of about $7 million year-over-year.
For the full year of 2020, AAM sales were $4.71 billion as compared to $6.53 billion in the full year of 2019.
The impact of COVID-19 and the sale of the US casting business was the primary drivers of this year-over-year decrease.
Now, let's move on to profitability.
Gross profit was $236.5 million or 16.4% of sales in the fourth quarter of 2020 compared to $183.4 million or 12.8% of sales in the fourth quarter of 2019.
Adjusted EBITDA was $261.5 million in the fourth quarter of 2020 or 18.2% of sales.
This compares to $193.5 million in the fourth quarter of 2019 or 13.5% of sales.
As David mentioned, this was AAM's best fourth quarter adjusted EBITDA margin in our company's history.
You can see a year-over-year walk down of adjusted EBITDA on Slide 12.
We benefited from higher sales and from our strong cost reduction actions we implemented this year.
For the full year of 2020, AAM's adjusted EBITDA was $720 million and adjusted EBITDA margin was 15.3% of sales.
Let me now cover SG&A.
SG&A expense, including R&D, in the fourth quarter of 2020 was $83 million or 5.8% of sales.
This compares to $90 million in the fourth quarter of 2019 or 6.3% of sales.
AAM's R&D spending in the fourth quarter of 2020 was $31.1 million compared to $39.8 million in the fourth quarter of 2019.
For the year, SG&A expense was down about $50 million, due mainly to our cost reduction actions, both temporary and structural.
As we head into 2021, we will continue to focus on controlling our SG&A costs.
Equally important, we will further our investment in key technologies and innovations with an emphasis on electrification, including shifting resources from traditional product support to new technology development in a cost-effective manner.
Let's move on to interest and taxes.
Net interest expense was $52.3 million in the fourth quarter of 2020 compared to $53.4 million in the fourth quarter of 2019.
We expect this favorable trend to continue in 2021, as we benefit from continued debt reduction.
In the fourth quarter of 2020, we recorded income tax expense of $13.9 million compared to a benefit of $11.5 million in the fourth quarter of 2019.
As we head into 2021, we expect our effective tax rate to be approximately 20%.
Taking all of these sales and cost drivers into account, our GAAP net income was $36 million or $0.30 per share in the fourth quarter of 2020 compared to a loss of $454.4 million or a loss of $4.04 per share in the fourth quarter of 2019.
Adjusted earnings per share for the fourth quarter of 2020 was $0.51 per share versus $0.13 per share in the fourth quarter of 2019.
Let's now move to cash flow and the balance sheet.
Net cash provided by operating activities in the fourth quarter of 2020 was $208 million.
Capital expenditures, net of proceeds from the sale of property, plant and equipment, for the fourth quarter was $69 million.
Cash payments for restructuring and acquisition-related activity in the fourth quarter of 2020 were $33.6 million.
Reflecting the impact of this activity, AAM generated adjusted free cash flow of $172.7 million in the fourth quarter of 2020.
For the full year of 2020, AAM generated adjusted free cash flow of $311.4 million compared to $207.8 million in the full year 2019.
AAM was able to offset the impact of lower EBITDA through lower capital expenditures, lower tax payments and working capital benefits, including leveraging the AAM Operating System to reduce inventory levels.
From a debt leverage perspective, we ended the year with net debt of $2.9 billion and [Indecipherable] adjusted EBITDA of $720 million, calculating a net leverage ratio of 4 times at December 31.
In the fourth quarter of 2020, we prepaid over $100 million of our term loans.
We were pleased to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt and lowering our future interest payments.
We expect to continue this trend in 2021.
AAM ended 2020 with total available liquidity of $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities.
We continue to maintain a strong liquidity position and debt maturity profile.
Before we move to the Q&A, let me close out my comments with some thoughts on our 2021 financial outlook.
In our earnings slide deck, we've included walks from 2020 actual results to our 2021 financial targets.
You can see those starting on Slide 14.
As for sales, we are targeting a range of $5.3 billion to $5.5 billion for 2021.
This sales target is based upon a North American production of 15.5 million to 16 million units, a new business backlog of $200 million and attrition of approximately $100 million.
We have begun to experience some limited downtime in the first quarter due to supply constraints attributable to the semiconductor chip shortage.
We have contemplated what we know today in our guidance, and our target range allows for some variability.
From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $850 million to $925 million.
At the midpoint, this performance would represent EBITDA margin growth of over 100 basis points versus last year.
As you can see on the walk-down on Page 15, we expect volume and mix to positively contribute as well as continued productivity benefits.
As we stated previously, some of our 2020 cost initiatives were temporary in nature, but our focus has been to replace those with more structural savings.
We also expect approximately $40 million in pricing and $15 million in higher R&D spending, as we continue to invest in electric propulsion.
From an adjusted free cash flow perspective, we are targeting approximately $300 million to $400 million in 2021, and the year-over-year walk is very simple.
The main factors driving our cash flow change is higher EBITDA, a return to more normalized income tax payments and a higher working capital associated with revenue growth.
And while on a dollar basis, capex is slightly higher than 2020, we are targeting capex as a percent of sales of approximately 4.5%.
You can clearly see AAM's ability to deliver free cash flow on full display, not only in 2020 actual results but ahead for 2021.
The strong free cash flow number for 2021 is a reflection of the benefits we are realizing from our restructuring and cost reduction actions.
We are experiencing year-over-year margin growth and continued cost optimization, capex as a percent of sales at the lowest levels in AAM's history, and inventory optimization delivering significant cash flow benefits.
We expect to use this free cash flow as well as our enhanced EBITDA to fund our R&D and new product expansion, and at the same time, reduce leverage this year by a full turn or more.
Our resilience in restructuring activities in 2020 is fueling our 2021 performance, and we are very excited to continue to strengthen our financial profile and focus on the growing of the business.
That said, we are well positioned for 2021 and beyond.
We have and will continue to optimize our business to generate meaningful cash flow and invest in our future product development.
This position is driving growth opportunities in electrification and other areas of our business.
You can see this in the third year of our backlog and it is the strongest heading into the mid-decade timeframe.
We are being awarded next generation of key products that will position our businesses to drive cash flow for many years to come.
In the near and mid-term, we see customers adding production facilities for products we support.
This is allowing us to leverage our light truck franchise to contribute to strong cash flow generation capabilities and thus invest and grow our electrification product portfolio.
And lastly, our cost optimization is focused on driving future margin growth opportunities.
So, couple all that with our flexible operations, variable cost structure and ample liquidity and solid debt maturity profile, and you have a good framework for long-term success.
As for now, we expect 2021 to be about operational excellence, margin expansion, free cash flow generation and propulsion innovation.
We are looking forward to a great year for AAM.
| q4 adjusted earnings per share $0.51.
q4 diluted earnings per share $0.30.
qtrly sales of $1.44 billion.
q4 sales $1.44 billion versus refinitiv ibes estimate of $1.36 billion.
aam is targeting sales in range of $5.3 - $5.5 billion for full year 2021.
expects launch cadence of 3-year backlog to be about $200 million in 2021, $150 million in 2022 and $250 million in 2023.
aam is targeting adjusted ebitda in range of $850 - $925 million for full year 2021.
aam is targeting adjusted free cash flow in range $300 - $400 million for full year 2021.
sees 2021 north american light vehicle production in range of 15.5 - 16 million units.
sees 2021 european light vehicle production of approximately 19 million units.
gross new, incremental business backlog launching from 2021 - 2023 estimated at about $600 million in future annual sales.
|
Joining today's call, our Bob Blue, chair, president, and chief executive officer; Jim Chapman, executive vice president, chief financial officer, and treasurer; and other members of the executive management team.
I'll start by outlining Dominion Energy's compelling shareholder return proposition.
We expect to grow our earnings per share by 6.5% per year through at least 2026, supported by our updated $37 billion five-year growth capital program, resulting in an approximately 10% total return.
Our strategy is anchored on a pure play, state-regulated utility operating profile that centers around five premier states, as shown on Slide 4.
All share the philosophy that a common sense approach to energy policy and regulation puts a priority on safety, reliability, affordability, and sustainability.
Next, I want to highlight what a successful year 2021 was in the continuing execution of our strategy.
For example, we continue to provide safe, reliable service to our customers, ensuring that safety remains our top priority when it comes to our employees, our customers, and our communities.
We reported our 24th consecutive quarterly financial result that normalized for weather meets or exceeds the midpoint of our guidance range, a reflection of our focus on continuing to provide consistent and predictable financial results.
We successfully concluded substantial rate cases in Virginia, South Carolina, and North Carolina, in each case, demonstrating our ability to deliver constructive regulatory results for both our customers and our shareholders in these fast-growing premiere and business friendly states.
And we significantly advanced our clean energy growth plans on a number of fronts.
For instance, we received our Notice of Intent from BOEM for our regulated offshore wind project in July as planned and filed our rider application with the Virginia State Corporation Commission on schedule in November.
And we propose new solar and energy storage projects in our second annual clean energy filing in Virginia, the largest such group ever proposed.
Looking ahead, we've rolled forward our five-year growth capital plan to capture the years 2022 through 2026.
We now expect to invest $37 billion on behalf of our customers.
The investment programs are highlighted on Slide 5, with over 85% focus on decarbonization.
As meaningful as these near-term plans are, consider, on Slide 6, how they compare to the long-term scope and duration of our overall decarbonization opportunity.
Our initiatives extend well beyond our five-year plan.
We now project $73 billion of green investment opportunity through 2035, nearly all of which will qualify for regulated cost of service recovery.
This is as far as we can tell, the largest regulated decarbonization investment opportunity in the industry.
Our fourth quarter 2021 operating earnings, as shown on Slide 7, were $0.90 per share, which included a $0.03 hurt from worse-than-normal weather in our utility service territories for the quarter.
Weather-normalized results were again above the midpoint of our quarterly guidance range.
Positive factors as compared to last year include growth from regulated investment across electric and gas utility programs, higher electric sales due to increased usage from commercial and industrial segments, and higher margins that contracted assets.
Other factors as compared to the prior year include a slight catch-up in COVID-deferred O&M and weather.
As Bob mentioned, this is our 24th consecutive quarter.
So six years now of delivering weather-normal quarterly results that meet or exceed the midpoint of our guidance ranges.
We believe this historic consistency across our results is worth highlighting and is a track record we're proud of and one which we're absolutely focused on extending.
Full year 2021 operating earnings per share were $3.86 above the midpoint of our guidance range even in the face of a $0.05 from weather for the year.
Turning now to guidance on Slide 9.
As usual, we're providing an annual guidance range, which is designed primarily to account for variations from normal weather.
We're initiating 2022 operating earnings per share guidance of $3.95 to $4.25 per share.
The midpoint of this range is in line with prior annual earnings per share growth guidance of 6.5% in 2022, when measured midpoint to midpoint.
As I think it's been expected as part of our roll forward to a new five-year forecast period, we are once again extending our long-term growth rate by one more year.
We now expect operating earnings per share to grow at 6.5% per year through at least 2026.
Finally, we expect first quarter 2022 operating earnings per share to be between $1.10 and $1.25.
Positive drivers for the quarter as compared to last year are expected to be normal course regulated rider growth continued, modest strengthening of sales, and return to normal weather.
Other drivers, as compared to last year, are expected to be O&M and tax timing.
We expect our 2020 full year dividend to be $2.67, reflecting our target payout ratio of approximately 65%.
We're also extending the long-term dividend per share growth rate of 6% per year through 2026.
Slide 10 provides a breakdown of five-year growth capital plan, which Bob introduced.
For more detail on all of this, I would point to the very comprehensive appendix materials, but just a couple of items I'll note here.
We continue to forecast a total five-year rate base CAGR 9% broken out here by segment, a major driver; and over 75% of its planned growth capex is eligible for rider recovery.
Of course, capital invested in underwriters allows for timely recovery of prudently incurred investment and costs.
Turning to Slide 11, we've updated our financing plan, which reflects a combination of internally generated cash flow and debt issuances to fund the majority of our growth and maintenance capex.
Our plan assumes we issue programmatic equity of just 1% to 1.5% of our current market cap annually through our existing DRIP and ATM equity programs in line with prior guidance.
No change to our 2022 equity issuance plans and no block or marketed equity is contemplated.
We view this level of steady equity issuance under existing programs as prudent, earnings per share accretive, and in the context of our sizable growth capital spending program, appropriate to keep our consolidated credit metrics within the guidelines for our strong credit ratings category.
To that point, as shown on Slide 12, our consolidated credit metrics have remained steady and our pension plans have increased their funded status.
We're very proud of these results.
We continue to target high BBB range credit ratings for our parent company and A range ratings for our regulated operating company.
Our long-standing focus on achieving and maintaining these ratings is important for our ability to continue to secure low-cost capital for our customers.
As is the norm, our financing plan reflects our ongoing efforts to efficiently redeploy capital toward our robust, regulated growth programs.
As I've mentioned in the past, as part of our capital allocation process, we undertake constant analysis to find the most efficient sources of capital to fund our attractive utility growth programs in our key states, all while maintaining our operating earnings per share growth and credit profiles.
The transaction is expected to close late this year, subject to customary closing conditions, including clearance under HSR, and approval from the West Virginia Public Service Commission.
Proceeds will be used to reduce parent-level debt.
The transaction value achieved through a competitive sale process represents approximately 26 times 2021 net income and two times rate based.
As a reminder, Hope Gas operates only in West Virginia and serves about 110,000 customers.
Bob will address this transaction a bit more in a moment.
Turning now to electric sales trends, fourth quarter weather-normalized sales increased 1.4% year over year in Virginia and 2.3% in South Carolina.
In both states, consistent with the trends seen last quarter, we've observed increased usage from commercial and industrial segments, overcoming declines among residential users as the stay-at-home impact of COVID wanes.
Full year 2021 weather-normalized sales increased 1.4% year over year in Virginia and 1.6% year over year in South Carolina.
Looking ahead, we expect electric sales growth in our Virginia and South Carolina service territories to continue at a run rate of 1% to 1.5% per year.
No changes from our prior communications.
Next, let me discuss what we're seeing around input prices.
As discussed on prior calls, we're continuing to monitor raw material costs, and it seems to be the case across a number of industries right now.
We're observing higher prices, although we've seen a moderation in the upward pressure over the last few quarters.
As it relates to our regulated offshore wind project, we remain confident in our ability to deliver the project in line with our budget, as outlined in our filing to the SEC in November.
Also, no changes here from prior communications.
As was disclosed at that time in November, we've entered into five major fixed cost agreements, which collectively represent around $7 billion of the total capital budget.
Within those contracts, only about $800 million remain subject to commodity indexing, most of it steel.
And this component of the budget already reflects commodity cost increases we all observed in 2021 leading up to our filing date in November.
And our capital budget, of course, includes contingency.
On the solar side, we're seeing what others seem to be seeing.
Supplies tight, prices for certain components are up, but our 2021 projects were completed with no material impacts to cost or schedule, and our '22 projects remain on track.
Beyond '22, we've been generally successful in contracting, etc.
, but it's still early.
So again, we're watching but no material financial impacts to share at this time.
So to summarize, we reported fourth quarter and full year 2021 operating EPS, which is above the midpoint of our guidance ranges, extending our track record to six years of meeting or exceeding the quarterly midpoint on a weather-normal basis.
We initiated 2022 full year operating earnings per share guidance that represents a 6.5% annual increase midpoint to midpoint.
We affirmed the same 6.5% operating earnings per share growth guidance through 2026.
We introduced a $37 billion high quality decarbonization-focused, five-year growth capex plan that drives an approximately 9% rate based growth.
We continue to expect the vast majority of our spending across our segments to be in rider form.
And finally, our balance sheet and credit profile remain in very good health.
Starting with safety, Dominion Energy finished 2021 with its second best performance ever.
Additionally, the company was the top performer in the 2021 Southeastern Electric Exchange ranking.
We take pride in our relentless focus on safety, and it's the first of our company's core values.
While our safety performance relative to industry is very good, our goal has been and continues to be that none of our colleagues get hurt ever.
Our customers highest priority is reliability.
They expect their power will come on when they need it, period.
In the past year, our customers in our electric service areas in Virginia, South Carolina, and North Carolina had power 99.9% of the time, excluding major storms.
Where major storms approach, we stage equipment and people to be ready so crews can spring into action as soon as it is safe to do so.
As we did for the first winter storm of 2022, the damp, wet, heavy snow on most of the northern, central and western regions of Virginia, interrupting service to over 400,000 customers.
Over 87% of those customers had service restored after two days of restoration and 96% within four days.
Our crews worked around the clock in frigid temperatures and treacherous icy travel conditions to safely restore service to our communities.
Our gas distribution business knows that safe and reliable service is the priority, especially when exigent circumstances exist.
When an emergency notification is received, we typically have a crew on site twice as quickly as the industry expected response time.
Last month, we had the highest ever flow of gas at our Utah system and the highest ever daily throughput across our Ohio system, higher even than the polar vortex in 2019.
And in both cases, our service never missed a beat and our customers would never have known we were setting all time records.
I'm proud they're not surprised at the way in which our Dominion Energy team members have responded on behalf of our customers.
Now, I'll turn to updates around the execution of our growth plan.
In Virginia, the SEC approved the Comprehensive Settlement Agreement for our first triennial review in November.
We're very pleased to be extending our track record of constructive regulatory outcomes.
On top of that, we are incredibly excited about what Dominion Energy is working to accomplish, specifically our green capital investment programs on behalf of our customers in Virginia, which I will touch on in a few minutes, nearly all of which will grow earnings under regulated rider mechanisms.
Since the Virginia rider investment programs are reviewed and trued up annually, they are not included in the Virginia Triennial review process.
Based on these trends, the Virginia-based investment balance as a percentage of total Dominion Energy declined to about 13% by 2026 and is expected to continue to decline as a percentage in the future.
Turning to offshore wind, the country's only fully regulated offshore wind project is very much on track.
As it relates to the SEC rider application, we're currently in the discovery phase.
And to date, this process very much conforms with what we typically expect during a rider proceeding of this type.
Major project milestones are listed on Slide 15.
We expect to receive a final order from the SEC in August this year.
A few items to reiterate here.
First, this project will provide a boost to Virginia's growing green economy by creating hundreds of jobs, hundreds of millions of dollars of economic output, and millions of dollars of tax revenue for the state and localities.
It will also propel Virginia closer to achieving its goal to become a major hub for the burgeoning offshore wind value chain up and down the country's East Coast.
Second, unlike any other such project in North America, this investment is 100% regulated and eligible for rider recovery in Virginia.
Finally, the VCA provides very specific requirements on the presumption of prudency for investment in the project, which we are confident that we have already met.
Our Jones Act compliant wind turbine installation vessel is being constructed and is on track for delivery in late 2023 as originally scheduled.
The project is currently about 43% complete.
We expect the vessel will be in a central resource city EV, as well as to the overall domestic offshore wind industry, and will be entering service with plenty of time to support the 2024 turbine installation season.
Our other clean energy filings in Virginia are also progressing well.
Last month, we were very pleased to see the SEC approve phase two of our grid transformation plan for projects that we plan to deploy in 2022 and 2023.
These projects will facilitate the expected increase in distributed energy resources like small scale solar and expand electric vehicle infrastructure, as well as enhance grid resiliency and security.
Our clean energy and nuclear or rider filings remain on track.
Final orders are expected later this year, as outlined on Page 18.
Through 2020, we have successfully reduced our enterprisewide CO2 equivalent emissions by 42%.
That's great progress, but it's not enough.
By 2035, we expect to improve that reduction to between 70% and 80% versus baseline on our way to meet net zero by 2050.
As shown on the right side of Slide 19, the transition to a clean energy future means reduced reliance on coal-fired generation.
Back in 2005, more than half of our company's power production was from coal-fired generation.
By 2035, we project that to be less than 1%.
We show our timeline for transitioning out of coal on Slide 20.
By the end of the decade as part of our ongoing resource planning, we expect to be coal free in South Carolina and have only two remaining facilities at Dominion Energy Virginia for reliability and energy security considerations.
While our IRP is our informational filings and do not provide approval or disapproval for any specific capital project, we look forward to continuing to work with stakeholders, including the Commission, to drive toward an increasingly low-carbon future.
From an investment from an investment-based perspective, which is a rough approximation of earnings contribution, you can see on Slide 21 the diminished role coal-fired generation plays in our financial performance, driven by facility retirements and non-coal investment.
We're mindful that this shift has the potential to be disruptive to employees and communities, and we were being purposeful in our efforts to ameliorate any such negative consequences.
We believe in a just transition.
We have and will continue to consider the needs of impacted communities and our entire workforce during this clean energy transition.
You'll also note that zero carbon generation grows significantly, such that by 2026, over 65% of our investment base will consist of electric wires and zero carbon generation.
Moving on to South Carolina.
As part of our ongoing resource planning, Dominion Energy South Carolina is planning to replace several of our older generation peaking turbines with modern, more efficient units.
These peaking units, which often operate seasonally during certain times of day when the demand for energy is at its highest, play an important role in our generation fleet with their ability to go from idle to producing energy quickly.
Modernizing this equipment will lower fuel cost to customers, improve environmental performance, and provide reliability and efficiency benefits.
These will become even more important as additional intermittent fluctuating resources, such as solar, are added to our system.
Last quarter, the Public Service Commission of South Carolina approved a settlement, allowing the company to move forward with two of the proposed sites, and we'll hold an RFP for a third.
Turning to gas distribution.
In North Carolina, the commission approved a comprehensive settlement last month for our gas operations with rates based on a 9.6% ROE.
As a reminder, the agreement included three new clean energy programs, a new hydrogen blending pilot, a new option to allow our customers to purchase RNG attributes, and a new and expanded energy efficiency programs.
This is a prime example of the role that supportive regulation can play in meeting our decarbonization objectives.
Hope Gas is a valuable business with tremendous people.
At the same time, compared to the other larger state-regulated utilities across our five premier states, Hope Gas is relatively a small stand-alone operation.
Our talented employees have consistently delivered safe, reliable, and affordable energy to Hope's customers.
We're pleased that these best-in-class employees are now joining another excellent organization in the form of Ullico, who has agreed to provide significant protections for employees and honor existing union commitments.
Ullico is operating expertise and financial resources will also ensure that Hope's customers will continue to receive the high level of service to which they have grown accustomed.
Slide 24 provides a summary of several important steps we took in 2021 that enhanced our industry leading ESG profile.
Just a couple of items I'll highlight here.
In July, we published our updated climate report, which included disclosure of scope one, two, and three emissions, an important step as it relates to our net zero commitment as I will expand on in a minute.
In November, we issued our inaugural Diversity Equity and Inclusion Report, which highlights our progress toward building a more diverse and inclusive workforce.
As part of that report, we also published our EEO 1 data.
This enhanced external reporting builds upon our commitment to increase our total workforce diversity by 1% each year with the goal of reaching at least 40% by year end 2026.
We're very much on track to meet that goal.
These and other ESG-oriented efforts have been recognized by leading third-party assessment services, as shown on Slide 25.
By each measure, our performance exceeds the sector average.
We've been recognized as part of the leadership band by CDP for our climate and water disclosure for the second year in a row as Trendsetters, the highest categorization for the fourth consecutive year by the CPA-Zicklin report on political accountability and transparency.
And most recently, MSCI increased our rating from A to AA, which designates us a leader in the field.
Turning to Slide 26, I'm pleased to announce an expansion of our net zero commitments.
In addition to our current commitment to achieve enterprisewide net zero scope one carbon and methane emissions by 2050, we now aim to achieve net zero by 2050 for all Scope 2 emissions and for Scope 3 emissions associated with three major sources, LDC customer end-use emissions, upstream fuel, and purchase power.
These new commitments formalize our continued focus on helping our customers and suppliers decarbonize.
Reducing emissions as fast as possible and achieving net zero emissions companywide requires immediate and direct action.
That's why the company continues to take meaningful steps to address Scope 3 emissions.
We formalized our support for federal methane regulation, and we're working toward procurement practices that encourage enhanced disclosures by upstream counterparties on their emissions and methane reduction programs.
Further, we encourage suppliers to adopt a net zero commitment, and we were started to receive quotes for responsibly sourced gas, which are evaluated consistent with our reliability, service, and cost criteria for natural gas supply.
For downstream emissions, we expect to increase our annual spend on energy efficiency over the next five years at our LDCs by nearly 50%, and to provide our customers with access to a carbon calculator and carbon offsets.
For example, in both Utah and North Carolina, we offer GreenTherm, a voluntary program that provides customers with access to renewable natural gas.
While initially being offered on a voluntary basis, we are working with policymakers and regulators to increase access to RNG for our customers.
And finally, we continue to pursue innovative hydrogen use cases, including our blending pilot in Utah, which based on early assessment, confirms the ability to blend at least 5% and potentially up to 10% without adverse impacts to appliance performance, leak survey, system safety, or secondary emissions.
Over the long term, achieving these goals will require supportive legislative and regulatory policies and broader investments across the economy.
This includes support for the testing and deployment of technologies.
For example, we support efforts to research and develop new technologies through collaborations such as the Low Carbon Resource Initiative, of which we're a founding sponsor.
And we will never lose sight of our fundamental responsibility to the customers providing safe, reliable, affordable, and sustainable energy.
With that, let me summarize our remarks on Slide 27.
Our safety performance was our second best ever.
We reported our 24th consecutive quarterly result that normalized for weather meets or exceeds the midpoint of our guidance range.
We affirm the same 6.5% operating earnings per share growth guidance through 2026 and affirmed our existing dividend growth guidance through 2026.
We're focused on executing project construction and achieving regulatory outcomes that serve our customers well, and we're aggressively pursuing our vision to be the most sustainable, regulated energy company in the country.
| sees q1 operating earnings per share $1.10 to $1.25.
q4 operating earnings per share $0.90.
initiates 2022 operating earnings guidance of $3.95 to $4.25 per share.
|
As many of you know, we pre-released limited results for the first quarter, ahead of our investor day hosted here in Dallas on October 20.
During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
It's good to be back with you all again.
It was great seeing some of you in Dallas and many of you virtually during our investor day a couple of weeks ago.
What you should have taken away from that was this, we're very optimistic about where the business is going.
We're managing for long-term success and we're confident in the strength of our brands and the levers we have yet to pull to continue to grow the business.
From a top-line perspective, we're sitting in a good spot.
Sales numbers are solid and traffic numbers are extremely good.
Our near-term challenge is not creating demand but rather it's working through the latest pandemic-driven staffing and supply chain issues that are impacting our cost structure.
As you know, there are -- these are the same challenges impacting the industry as well as much as the economy.
But after 40 years in this business, I'll take managing costs over searching for sales and traffic any day.
Those are good problems to solve because they're largely within our control.
Our operators are working extremely hard every day to train our new team members, deliver great guest experiences and tying up the middle of the P&L.
We've taken some additional price during the quarter to help offset our structural labor and cost of sales increases.
As I mentioned during investor day, we're not going to price to buy a quarter.
But as we closely monitor the issues, we've layered in incremental pricing to offset what we believe are the structural labor and cost of sales increases.
And Joe will give you more detail on that.
Moving forward, if we discover that what we thought was transitory, it turns out to be more structural, we'll deal with that from a pricing perspective with a disciplined approach that protects our traffic performance and keeps our brands strong.
We know we have pricing power if we need it, particularly in the delivery in virtual brand channels and we're committed to maintaining our margins and our business model.
And that's what we wanted you to hear.
We're also working hard to remove transitory costs from the system with full recognition that the headwinds are notable and persistent, especially around labor.
And while it takes some time, we're confident with the progress we're making and we will significantly reduce these costs by the back half of the year.
The spike in turnover we experienced during the quarter created short-term pressure on the business as we trained our new team members to run our systems.
The good news is we are quickly building staff and have as many team members now as we did pre-COVID, though there are markets that are still not fully staffed, which is limiting their capacity.
This is particularly true in the Midwest, where it's taking longer to reach these optimum levels.
The impact of these staffing challenges cost us 3% to 4% in first quarter in sales, which we view as upside as we -- as we get those restaurants staffed and trained over the coming months.
Our top talent is engaged in these markets to solve these issues as quickly as possible.
Meanwhile, the base business is strong, especially where dining rooms are fully open.
When we look at the totality of the business, Chili's is running positive sales and traffic and maintaining a sizable traffic gap to the industry, most recently at 9% on a two-year look as measured by NAFTrack.
And we've got sales leverage around virtual brands and deliveries that we're holding in reserve until our operations teams are stabilized and fully trained.
And while the last quarter was more challenging than we expected, we're making great progress and my expectation is we will end the year strong.
And as we shared with you during investor day, we've got exciting initiatives and innovation we're working on and we're confident in our future growth opportunities.
Let me continue our prepared comments by providing some additional insight to the first quarter results and then share some guidance on our current expectations for the balance of fiscal year 2022.
During first quarter, top-line sales performed well and outpaced pre-COVID levels by a very respectable amount despite COVID-related constraints.
For the first quarter, Brinker reported total revenues of $860 million with consolidated comp sales of 17%.
Keeping with our ongoing strategy, the majority of these sales were driven by traffic up 11% for the quarter, a 9% beat versus the industry on a two year look.
The top-line increase resulted in an adjusted earnings per share of $0.34, up from $0.28 in the previous fiscal year.
It will come as no surprise, our most significant challenge during the quarter came in the form of industrywide headwinds from both commodity costs and labor-related spend, which negatively impacted our margins and bottom-line flow through.
We experienced commodity inflation in the mid-single-digit range, with significant price from pork and chicken driving the increase.
As Wyman mentioned, with a greater-than-normal influx of new team members, we experienced outsized costs in training and overtime.
We do consider the portion of these costs above our normal operating levels to be transitory, approximately 130 basis points in the quarter, 60 of which are incremental training and overtime costs.
I Anticipate these costs working their way out of the system over the course of the next couple of quarters.
In the near term, I expect a significant portion of these transitory costs to remain in the system for the second quarter.
We are taking thoughtful incremental price increases to help offset these higher costs.
Our third price action of this fiscal year is scheduled with our next Chili's menu update in two weeks.
Following this increase, Chili's will be carrying a total of 3% of incremental price compared to last year.
Of course, the mid-quarter price action will not fully impact the total price reported for the quarter.
Due to the timing of price actions and the fact that Maggiano's will evaluate its menu pricing after the holiday season, we expect the second quarter blended Brinker price to be closer to 2%.
Our cash flow for the first quarter remained strong, with cash from operating activities of $40 million and EBITDA of $69 million.
When compared to first quarter last year, our strength in operating performance and lower level of outstanding debt have combined to improve our balance sheet and leverage position.
Our total funded debt leverage was 2.6 times and our lease-adjusted leverage ended the quarter at 3.7 times.
As indicated during our recent investor day, we are targeting to move these leverage ratios below two times and three times respectively over the course of the next two years.
Now, turning to our outlook for fiscal year '22.
We provided some guidance metrics for certain items during our last call and we are reiterating those levels as of this report.
Specifically, annual revenues between $3.75 billion and $3.85 billion and annual adjusted earnings per share between $3.50 and $3.80.
This incorporates our current view of the casual dining operating environment, which assumes continuing challenges in the near term, especially related to supply chain and labor issues.
This guidance, both reiterated and new, assumes no additional meaningful top-line COVID-related disruptions.
While guidance is for our fiscal year performance, I can provide some directional thoughts related to the second quarter.
With the exception of banquet sales at Maggiano's, we expect sales to exhibit closer to normal holiday seasonality, although impacted by labor shortage constraints in certain markets.
As mentioned earlier in my comments, restaurant operating margins for the second quarter will again be impacted by higher food and beverage and labor costs.
We do expect restaurant operating margin to improve when compared to both the recently completed first quarter as well as the second quarter of last year, ending the quarter at a level comparable to the pre-COVID second quarter of fiscal year '20.
Clearly, these are unique times for our industry, creating a variety of short-term challenges to work through.
Challenges we can and will solve.
We firmly believe our strategic initiatives focused on driving traffic in organic top-line growth will differentiate our performance over time with the overall benefit to our team members, our guests, and importantly, our shareholders.
| sees fy earnings per share $3.50 to $3.80 excluding items.
q1 earnings per share $0.34 excluding items.
q1 gaap earnings per share $0.28.
sees fy revenue about $3.75 billion to $3.85 billion.
sees fy total revenues approximately $3.75 billion to $3.85 billion.
sees fy net income per diluted share excluding special items, in range of $3.50 and $3.80.
|
We hope everyone is well.
I think earnings for the quarter were right in line with our expectations and impacted by the same influences the past several quarters.
Margin continues to be a headwind, but deposit fees, the strength of our financial services businesses, and credit tailwinds and we saw that this quarter.
The bigger story for us in the quarter was loan growth.
We had growth in every one of our portfolios this quarter ex-PPP and our pipelines and market activity continue to be very strong.
We're encouraged by these trends and have really good momentum right now across all of our credit businesses.
We also increased our securities book in the quarter given the market opportunity and that will be additive to future earnings as well.
I think Joe will provide more detail on that.
The recent strength of our financial services businesses continued in the quarter with revenues up 17% and pre-tax earnings up 22% over 2020.
We also closed on the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota.
Their performance out of the gate has been exceptional.
So we expect that will be a productive addition to our benefits business.
Our benefits wealth and insurance businesses are all performing extremely well right now in what is a very productive growth, pricing, and M&A environment for those businesses.
On the human capital front, as we previously announced, I'm delighted that Maureen Gillan-Myer has joined us as Executive Vice President and Chief Human Resources Officer.
She previously held the same role for HSBC USA and will bring tremendous experience, expertise, and business judgment to Community Bank System and we look forward to her contributions to our continuing human capital efforts.
Lastly, earlier this month, we announced an agreement to acquire a Elmira Savings Bank, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions of New York State.
It's a very nice franchise with a very good mortgage business that we expect will be $0.15 per share accretive on a full year basis excluding acquisition expenses.
So a very productive low risk transaction.
We have targeted a closing date in Q1 of next year.
Looking ahead, we like our current momentum across the company in all of our businesses.
As Mark noted, the third quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.83.
The GAAP earnings results were $0.04 per share or 5.1% higher than the third quarter 2020 GAAP earnings results, but $0.02 per share or 2.4% below the prior year's third quarter on an operating basis.
The decrease in operating earnings per share is driven by decrease in net interest income and higher operating expenses as well as increases in income taxes and fully diluted shares outstanding, offset in part by lower credit-related costs and an increase in non-interest revenues, particularly in the company's non-banking financial services businesses.
Comparatively, the company recorded fully diluted GAAP in operating earnings per share of $0.88 in the linked second quarter of 2021.
The company recorded total revenues of $156.9 million in the third quarter of 2021, an increase of $4.3 million or 2.8% over the prior year's third quarter.
The increase in total revenues between the periods was driven by a $6.9 million or 16.9% increase in financial services revenues, offset in part by a $2.2 million decrease in banking-related non-interest revenues and a $0.4 million or 0.4% decrease in net interest income.
Total revenues were up $5.4 million or 3.5% from the second quarter 2021 results driven by a $0.5 million or 0.5% increase in net interest income, a $1.4 million increase in banking-related non-interest revenues, and a $3.5 million or 8% increase in financial services revenues.
Total non-interest revenues accounted for 41% of the company's total revenues in the third quarter.
Although net interest income was down only slightly from the same quarter last year, the results were achieved in a significantly lower net interest margin outcome.
The company's tax equivalent net interest margin for the third quarter of 2021 was 2.74% as compared to 3.12% one year prior, a 38 basis point decrease between the periods.
Comparatively, the company's tax equivalent net interest margin for the second quarter 2021 was 2.79% or 5 basis points higher than the third quarter.
Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low yield cash equivalents being maintained on the company's balance sheet.
The tax equivalent yield on earning assets was 2.83% in the third quarter of 2021 as compared to 2.89% in the linked second quarter and 3.28% one year prior.
During the third quarter, the company recognized $4.3 million of PPP-related interest income including $3.7 million of net deferred loan fees.
This compares to $3 million of PPP-related interest income recognized in the same quarter last year and $3.9 million in the linked second quarter of 2021.
On a year-to-date basis, the company has recognized $15.1 million of PPP-related net interest income.
The company's total cost of deposits remained low however, averaging 9 basis points during the third quarter of 2021.
Employee benefit services revenues for the third quarter of 2021 were $29.9 million, $4.8 million or 18.9% higher than the third quarter of 2020.
The improvement in revenues was driven by increases in employee benefit trust and custodial fees as well as incremental revenues from the acquisition of Fringe Benefits Design of Minnesota during the quarter.
Wealth management revenues for the third quarter 2021 were$8.3 million, up from $6.9 million in the third quarter of 2020.
The $1.4 million or 20.8% increase in wealth management revenues was primarily driven by increases in investment management and trust services revenues.
Insurance services revenues of $9.2 million were up $0.6 million or 7.6% over the prior year's third quarter driven by organic growth factors and the third quarter, acquisition of a Boston-based specialty lines insurance practice.
Banking non-interest revenues decreased $2.2 million or 11.5% from $19.1 million in the third quarter of 2020 to $16.9 million in the third quarter of 2021.
This was driven by a $3.5 million decrease in mortgage banking income offset in part by $1.3 million or 8.3% increase in deposit service and other banking fees.
On a linked quarter basis, financial services revenues were up $3.5 million or 8%, reflective of the organic and acquisition-related momentum in these businesses and banking non-interest revenues were up $1.4 million or 8.7% [Phonetic].
During the third quarter of 2021, the company recorded a net benefit in the provision for credit losses of $0.9 million.
This compares to a $1.9 million provision for credit losses recorded in the prior year third quarter.
The company's net loan charge-offs were only 7 basis points annualized in both periods.
During the third quarter of 2021, economic forecasts were more favorable than the third quarter 2020 economic forecast driven by the post-vaccine economic recovery, which in combination with elevated real estate and vehicle loan collateral values drove down the expected life of loan losses.
On a September 2021 year-to-date basis, the company recorded net charge-offs of $1.1 million or 2 basis points annualized.
The company recorded $100.4 million in total operating expenses in the third quarter 2021 as compared to $97 million of total operating expenses in the third quarter of 2020, an increase of $3.4 million or 3.6% between the periods.
Operating expenses exclusive of litigation and acquisition-related expenses increased $7.2 million or 7.7% between the comparable quarters, $5.6 million of which was driven by an increase in salaries and employee benefits due to acquisition-related staffing increases, merit and incentive-related employee wage increases, higher payroll taxes, and higher employee benefit-related expenses.
Other expenses were up $0.9 million or 8.7% due to the general increase in the level of business activities.
Data processing and communication expenses were also up $0.9 million or 7.2% due to the company's implementation of new customer-facing digital technologies and back office systems between the comparable periods.
Occupancy and equipment expense decreased slightly due primarily to branch consolidation activities between the periods.
In comparison, the company recorded $93.5 million of total operating expenses in the second quarter of 2021.
The effective tax rate for the third quarter of 2021 was 21.1% up from 20.3% in the third quarter 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income taxes that were enacted in the second quarter of 2021.
The balance sheet crested the $15 billion total asset threshold during the third quarter due to the continued inflows of deposits, which increased $384.8 million or 3.1% from the end of the second quarter.
The company's low yielding cash and cash equivalents remained elevated totaling $2.32 billion at the end of the quarter despite the company purchasing $536.9 million of investment securities during the quarter.
Ending loans at September 30, 2021 were $7.28 billion, $38.4 million or 0.5% higher than the second quarter 2021 ending loans of $7.24 billion and $176.1 million or 2.4% lower than one year prior.
Excluding PPP activity, ending loans increased $154.1 million or 2.2% in the third quarter.
This increase was driven by growth in all five loan portfolio segments: consumer mortgages, consumer indirect loans, consumer direct loans, home equity, and business lending excluding PPP.
As of September 30th, 2021, the company's business lending portfolio included 1,386 PPP loans with a total balance of $165.4 million.
This compares to 2,571 PPP loans with a total balance of $284.8 million at June 30th, 2021.
The company expects to recognize its remaining net deferred PPP fees totaling $6.3 million over the next few quarters.
The company's capital ratios remained strong in the second quarter.
The company's net tangible equity [Phonetic] to net tangible assets ratio was 8.59% at September 30th, 2021.
This was down from 9.92% a year earlier and 9.02% at the end of the second quarter.
The company's Tier 1 leverage ratio was 9.22% at September 30th, 2021, which is nearly 2 times the well capitalized regulatory standard of 5%.
The company has an abundance of liquidity.
The combination of the company's cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $6.18 billion of immediately available sources of liquidity at the end of the third quarter.
At September 30th, 2021, the company's allowance for credit losses totaled $49.5 million or 0.68% of total loans outstanding.
This compares to $51.8 million or 0.71% of total loans outstanding at the end of the second quarter of 2021 and $65 million or 0.87% of total loans outstanding at September 30th, 2020.
The decrease in the allowance for credit losses is reflective of an improving economic outlook, very low levels of net charge-offs, and a decrease in specific reserves on impaired loans.
Non-performing loans decreased in the third quarter to $67.8 million or 0.93% of loans outstanding, down from $70.2 million was 0.97% of loans outstanding at the end of the linked second quarter of 2021, but up from $32.2 million or 0.43% of loans at the end of the third quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non-accrual status between the periods.
Loans 30 to 89 days delinquent totaled 0.35% of loans outstanding at September 30th, 2021.
This compares to 0.36% one year prior and 0.25% at the end of the linked second quarter.
Management believes the low levels of delinquent loans and charge-offs has been supported by extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
During the third quarter of 2021, the company increased its quarterly cash dividend a $0.01 or 2.4% to $0.43 per share on its common stock.
This increase marked the company's 29th consecutive year of dividend increases.
Looking forward, we remain focused on new loans generation and will continue to monitor market conditions to seek the right opportunities to deploy our excess liquidity.
Our loan pipelines are robust and asset quality remains very strong.
We also expect net interest margin pressures to persist to remain well below our pre-pandemic levels but also believe our abundance of cash equivalents represents a significant future earnings opportunity.
We're also fortunate and pleased to have strong non-banking businesses that have supported and diversified our streams of non-interest revenue.
And lastly, to echo Mark's comments, we are pleased and excited to be partnering with Elmira Savings Bank.
Elmira has been serving its communities for 150 years and will enhance our presence in five counties in New York's Southern Tier and Finger Lakes regions.
At June 30th, 2021, Elmira had total assets of $648.7 million, total deposits of $551.2 million and net loans of $465.3 million.
We expect to complete the acquisition in the first quarter of 2022, subject to customary closing conditions including approval by the shareholders of Elmira Savings Bank and required regulatory approvals.
| community bank system q3 revenue up 2.8% to $156.9 mln.
q3 revenue rose 2.8 percent to $156.9 million.
qtrly earnings per share $0.83 per share.
|
I'm joined by John Plant, Executive Chairman and Co-Chief Executive Officer; Tolga Oal, Co-Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer.
After comments by John, Tolga and Ken, we will have a question-and-answer session.
In addition, we've included some non-GAAP financial measures in our discussion.
I'll start with an overview of Howmet's second quarter performance then pass to Tolga, who'll talk more to our markets, and then Ken will provide further financial detail.
I also plan to talk to ESG, and we'll do so in about once a year going forward and then provide guidance and talk to guidance for the third quarter and the full year 2021.
So let's move to slide number four.
Let me start with some commentary on the second quarter, which was the first comparable quarter for Howmet post separation with no pro forma numbers.
Revenue was $1.2 billion and in line with expectations, while EBITDA, EBITDA margin and earnings per share exceeded our expectations.
Adjusted EBITDA was $272 million, and adjusted EBITDA margin was on par with Q1 2021 and Q4 2020 at 22.8% despite the addition of costs to prepare for the second half ramp-up in commercial aerospace production.
Earnings per share, excluding special items, was $0.22 and ahead of our expectations.
Historically, the first half has been a cash outflow for the company.
The increased operating performance focus of Howmet has led to improved margins, enhanced working capital control and capital discipline, which generated $160 million of cash in the first half of the year.
We expect continued cash generation in the third and fourth quarters.
Year-to-date, we have reduced debt by approximately $835 million by completing the early redemption of the 2021 notes in Q1 and the 2022 notes in Q2 with cash on hand.
These transactions reduced 2021 interest expense by approximately $28 million and approximately $47 million on an annual run rate basis.
This helps with increased 2022 free cash flow.
In the second quarter, we continue to return money to shareholders with the completion of a $200 million share buyback program.
The weighted average acquisition price was $34.02 per share for approximately 5.9 million shares.
The second quarter end cash balance was $716 million.
Lastly, we continue to focus on reducing legacy liabilities.
Year-to-date, we have reduced our pension and OPEB liabilities by approximately $160 million.
Moreover, full year pension and OpEx expense is expected to improve approximately 50% compared to last year.
Now let's move to markets and performance on slide five.
Q2 revenue was 5% less year-over-year and in line with our expectations.
On a year-over-year basis, commercial aerospace was 31% less, driven by lower aircraft builds, spares and the lingering effects of customer inventory corrections.
Commercial aerospace continues to represent approximately 40% of total revenue compared to pre-COVID levels of 60%.
The commercial aerospace decline is partially offset by our continued strength in other markets.
The industrial gas turbine business continues to grow and was up 13% year-over-year, driven by new builds and spares.
The commercial transportation business was up 89% year-over-year as it rebounds from customer shutdowns in Q2 of 2020.
Truck demand remains strong as our customers manage through their own supply chain issues with several components which are in short supply.
At the bottom of the slide, you can see the progress on price, cost reduction, margin expansion and cash management.
Price increases are up year-over-year and continue to be in line with expectations as they are tied to long-term agreements.
Structural cost reductions are also in line with expectations with a $37 million year-over-year benefit which reflects the decisive actions we started in the second quarter of 2020 at the onset of the pandemic and continued through last year.
Year-to-date structural cost reductions are $98 million, which have essentially achieved already our target of approximately $100 million.
The aerospace decremental operating margins continue to be very good at only 19%, while the Wheels segment had an incremental margin of 47%.
EBITDA margin expanded by 310 basis points year-on-year, driven by price, variable cost flexing and fixed cost reductions.
The team delivered strong margin expansion despite a reduction in revenue.
Capital expenditure was $36 million for the quarter and continues to be less than depreciation and amortization, resulting in a net source of cash.
Lastly, free cash flow was $164 million for the quarter, resulting in a record first half.
Now let's move to slide six.
Adjusted EBITDA margin for the quarter was 22.8% and consistent with the last couple of quarters on approximately $43 million of less revenue.
The margin results overcame both the effects of the low revenue and the cost of many additional employees to meet the increasing production demand coming in the third quarter.
Q2 revenue at $1.2 billion was in line with expectations.
You can see the benefit of our actions since the start of the pandemic in Q2 with a solid 310 basis points EBITDA margin expansion, while revenue was approximately $58 million less in the same period.
Now let me hand it over to Tolga to give an overview of the markets.
Please move to slide seven and some more details about our year-over-year revenue performance.
Second quarter revenue was 5% less, driven by commercial aerospace, which continues to represent approximately 40% of total revenue in the quarter.
Commercial aerospace was 31% less year-over-year, in line with our projections as expected inventory corrections continued.
Defense aerospace was essentially flat in the second quarter as we are on a diverse set of programs with the Joint Strike Fighter being approximately 40% of the total defense business.
Commercial transportation, which impacts both the Forged Wheels and the Fastening Systems segments, was up 89% year-over-year as second quarter of last year was significantly impacted by customer shutdowns.
Finally, the industrial and other markets, which is composed of IGT, oil and gas and general industrial, was up 13%.
IGT, which makes up approximately 45% of this market, continues to be strong and was up a healthy 13% year-over-year.
Let's move to slide eight for the segment results.
As expected, Engine Products year-over-year revenue was 7% less in the second quarter.
Commercial aerospace was 17% less, driven by customer inventory corrections and reduced demand for spares.
Commercial aerospace was partially offset by a year-over-year increase of 13% in IGT.
The IGT business continues to be strong as demand for cleaner energy continues.
Decremental margins for engines were 12% for the quarter as we hired back approximately 300 workers to prepare for the anticipated growth in the second half of this year.
Now let's move to Fastening Systems on slide nine.
Also was expected, Fastening Systems year-over-year revenue was 20% less in the second quarter.
Commercial aerospace was 42% less.
Like the Engine segment, we continue to experience inventory corrections in commercial aerospace.
The industrial and commercial transportation markets within the Fastening Systems segment were both up approximately 45% year-over-year.
Decremental margins for Fastening Systems were 31% for the second quarter, and segment operating profit margin was approximately 19%.
Please move to slide 10 to review Engineered Structures.
Engineered Structures year-over-year revenue was 30% less in the second quarter.
Commercial aerospace was 45% less, driven by customer inventory corrections and production declines for the Boeing 787.
Defense aerospace was relatively flat year-over-year.
Decremental margins for Engineered Structures were 12% for the quarter.
Lastly, please move to slide 11 for Forged Wheels.
Forged Wheels revenue doubled year-over-year as last year's results were impacted by customer shutdowns.
On a sequential basis, volumes were down approximately 7% due to customer supply chain issues.
Reported revenue was essentially flat sequentially, driven by a 20% increase in aluminum prices.
Although higher metal costs were passed through to customers to avoid a profit impact, you will see a reduction in EBITDA percent resulting from the pass-through.
Segment operating profit margin was approximately 27%, and year-over-year incremental margin was 47%.
Improved margin was driven by continued cost management and maximizing production in low-cost countries.
Please move to slide 12.
We continue to focus on improving our capital structure and liquidity.
In the first half of the year, we completed the early redemption of our 2021 and 2022 bonds with cash on hand.
Gross debt stands at approximately $4.2 billion.
All debt is unsecured, and the next maturity is in October of 2024.
Finally, our $1 billion 5-year revolving credit facility remains undrawn.
Before turning it back to John to discuss ESG and 2021 guidance, I would like to point out that there's a slide in the appendix that covers special items in the quarter.
Special items for the second quarter were a net charge of approximately $22 million, mainly driven by the costs associated with the early redemption of the 2022 bonds completed in early May.
Moving to ESG, I'd I encourage you to read our sustainability report found at howmet.com in the Investors section.
For Howmet Aerospace, environmental, social and governance is about generating meaningful change for a more sustainable future, improving our diversity and inclusion inside our company and in the communities in which we operate.
Regarding employee safety, we are maintaining attention on safety through and certain operational conditions presented by COVID-19.
Total recordable incidents continue to be significantly better than the aerospace and defense industry average.
For 2020, we had a 20% year-over-year improvement in rate to 0.71.
Additionally, 84% of our locations worldwide were without a lost workday incident.
This is a tremendous testament to the dedication and focus of our workforce.
We continue to underscore the importance and power of diversity, equity and inclusion in our company.
We value the rich diversity of expertise, backgrounds and viewpoints that fuel our innovation, and we are committed to improving diversity of employees at all levels.
Recently, we were recognized by the 50/50 Women on Boards organization for our commitment to board diversity.
In addition to gender diversity, we also partnered with key external organizations, including the Human Rights Campaign, the National Hispanic Corporate Council and Diversity Best Practices, to review and continuously improve our initiatives.
With respect to sustainability, nowhere is this more evident than in the products that we provide to our customers.
Our proprietary technologies help reduce fuel consumption and carbon emissions contributing to the aerospace industry's goal of a smaller carbon footprint.
Five specific areas are at the bottom left of the slide.
For commercial aerospace, next-generation jet engine technology reduces fuel consumption by approximately 15%.
Moreover, Howmet's increased content on composite aircraft of 2 times contributes to lightweighting solutions and reduces fuel use as composite aircraft are approximately 20% more fuel efficient than comparable metallic aircraft.
For Forged Wheels, Howmet's aluminum wheels are 5 times stronger than steel while being 47% lighter.
Customers can realize up to 1,400 pounds of weight savings from retrofitting an 18-wheeler Class eight truck of steel to aluminum wheels.
For IGT, Howmet's products continue to enable higher operating temperatures in the turbine and also pressures, which increase the load efficiency toward approximately 64% and reduce nitrogen oxide emissions by approximately 40%.
Lastly, for renewables, Howmet's Fastening Systems used with solar panels improve strength and clamping by 5 times to 10 times and reduce installation time by up to 80%.
Moving to STEM education and inclusiveness.
Howmet is dedicated to increasing STEM opportunities and education in the local community through the Howmet Aerospace Foundation with grants to institutions and schools.
Also, we renewed our commitment to support our six employee resource groups with strategic focus on community, culture and careers.
Let me now move to slide 14 for our third quarter and annual guidance.
The leading indicators for air travel continue to show improvement, notably for domestic travel.
This includes online searches for air tickets, increases in flight schedules across most of the world and beginnings of some international travel.
Orders for aircraft by airlines and assembly partners are increasing rapidly.
The expectation that Howmet will transition into revenue growth in the third quarter continues with growth of approximately 15% in commercial aerospace and total revenue growth of approximately 9%.
We look forward to managing and leading this exciting growth phase for Howmet after the devastation of the pandemic on the industry.
Growth is expected to continue into Q4 and into 2021 -- sorry, 2022 and beyond.
The sequence of our business is that we expect increases in the Engine business, notably starting in the third quarter, followed by Structures in the fourth quarter; and Fastener, starting in the first quarter of 2022.
In terms of specific numbers, we expect the following: for the third quarter, revenue of $1.3 billion, plus or minus $20 million; EBITDA of $295 million, plus or minus $10 million; EBITDA margin of 22.7%, plus or minus 40 basis points; and earnings per share of $0.25, plus or minus $0.02.
And for the year, we expect revenue to be $5.1 billion, plus or minus $50 million; EBITDA baseline to increase to $1.17 billion, plus or minus -- plus $15 million, minus $25 million; EBITDA margin to increase to 22.9%, plus 10 basis points and minus 20 basis points; earnings per share increase to $0.99, plus or minus $0.03; cash flow baseline increase to $450 million, plus or minus $35 million.
Moving to the right-hand side of the slide, we expect the following: second half revenue to be up approximately 12% versus the first half, driven by commercial aerospace, defense and IGT; second half year-over-year incremental margins of over 50% compared to the prior year.
Price increases will continue to be greater than 2020.
The cost reduction carryover of $100 million is already achieved with some potential modest upside.
Pension and OPEB contributions of approximately $120 million.
We are reducing cash pension contributions by approximately $40 million based upon the American Rescue Plan Act.
capex should be in the range of $200 million to $220 million compared to depreciation of approximately $270 million.
Adjusted free cash flow conversion continues to be in excess of net income at approximately 100%.
Lastly, as announced last month, we have reinstated the quarterly dividend of $0.02 per common stock, starting in the third quarter.
Now let's move to slide 15 for a summary.
The second quarter was solid, and it's described as a quarter to get through while we look for the volume lift in the third quarter.
It was better than expectations with improved margins and excellent cash flow.
The net recruitment of production operators in the second quarter was approximately 300 people, principally in our Engine business.
And we, of course, will continue to manage costs very carefully during this recovery phase.
In the second half, we plan to recruit another net 500 people.
Liquidity is strong, and we have healthy cash generation.
The third quarter outlook is for revenue to be approximately $100 million higher than the second quarter with margins somewhere between 22.3% and 23.1%.
For the second half, we expect extra costs.
However, year-over-year incremental margins are expected to be over 50%.
Consolidated EBITDA margins for the second half are expected to be 22.6% to 23.2%, setting a platform for a healthy 2022 And overcoming the drag of the increased labor costs from the recruitment I talked about and the cost of net -- the net effect of the metal recoveries.
| howmet aerospace q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.22 billion.
q2 earnings per share $0.22 from continuing operations excluding items.
q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.22 billion.
sees fy earnings per share excluding special items $0.95-$1.02, versus prior $0.91-$1.02, with an increased outlook of $0.99.
sees q3 earnings per share excluding special items $0.23-$0.27 with an outlook of $0.25.
|
I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer.
After comments by John and Ken, we will have a question-and-answer session.
In addition, we've included some non-GAAP financial measures in our discussion.
First, let's summarize the headline numbers, starting on slide number four.
Revenue was $1.28 billion, adjusted EBITDA $292 million and EBITDA margin was 22.8%.
Each number was within the guidance range provided.
More importantly, year-over-year revenues increased for the first time.
The revenue was led by Commercial Aerospace, up 15% year-over-year, and contributing to a total increase of 13%.
Of note, the Howmet segment leading the increase was Engine Products as previously forecasted.
The company was also able to overcome the challenges once again of the Boeing 787 build rate declines and the supply chain issues limiting commercial truck production, the 787 affecting Fastening Systems and Engineering Structures in particular.
Aluminum prices continued the upward surge with aluminum and regional premiums increasing by over $400 per metric ton sequentially and impacting the margin rate by 20 basis points.
Adjusted earnings per share, excluding special items, was $0.27, and cash generated in the quarter was $115 million.
AR securitization was unchanged at $250 million.
On a sequential basis, Third quarter revenue and adjusted EBITDA were up 7% and adjusted earnings per share up 23%.
Moving to the balance sheet and cash flow.
Adjusted free cash flow for the quarter was strong at $115 million, which results in a Q3 year-to-date free cash flow at a record $275 million.
Ken will provide further details of our debt actions in the quarter, which included a bond tender refi finance to fundamentally lower interest costs and thereby improve future free cash flow yield.
The combination of debt actions in the third quarter, combined with our first half results and actions, will reduce annual interest expense by approximately $70 million.
In the quarter, we also repurchased approximately 770,000 shares of common stock for $25 million, which increases share repurchases year-to-date to approximately seven million shares for $225 million.
The net result of all these actions plus the reinstatement of the common stock dividend and the $115 million cash inflow resulted in a cash balance of $726 million, similar to that at the end of Q2.
Lastly, we continue to focus on legacy liabilities and have reduced pension and OPEB liabilities by approximately $180 million year-to-date.
Moreover, year-to-date pension and OPEB expenses have reduced by approximately 50% compared to last year.
Please move to slide number five.
Revenue for the quarter increased 13% year-over-year and 7% sequentially.
As expected, Commercial Aerospace was up 15% year-over-year and 16% sequentially, driven by the Engine Products segment and narrow-body aircraft production.
commercial transportation, namely Wheels, was up 38% year-over-year.
Volume was impacted by supply chain constraints, limiting the Commercial Truck production.
The volume reduction in the Wheels business was offset by metal recovery dollars.
The industrial gas turbine business continues to grow and was up 26% year-over-year and 6% sequentially, driven by new builds and spares.
Defense Aerospace was down 11% year-over-year, driven by reductions in the Joint Strike Fighter builds, but was up 3% sequentially from the second quarter.
At the bottom of the slide, you can see the progress on price, cost reduction and cash management.
Price increases are up year-over-year and continue to be in line with expectations.
Structural cost reductions have exceeded our annual target of $100 million.
Q3 structural cost reductions were $23 million year-over-year and $121 million year-to-date.
Every segment achieved a strong year-on-year margin expansion as revenue increased for the first time in the year in aggregate.
In the third quarter, Engine Products had an incremental operating margin of approximately 70%, and Forged Wheels had an incremental operating margin of approximately 45%.
Fastening Systems and Engineering Structures both had a higher EBITDA on lower revenue.
Fasteners had an operating margin expansion of some 630 basis points, while structures was up 210 basis points.
As a result, Howmet's adjusted EBITDA margin expanded a full 800 basis points year-on-year, driven by volume, price and structural cost reductions.
Adjusted free cash flow for the quarter was $115 million and year-to-date, $275 million.
And as I said previously, AR securitization is unchanged from the start of the year.
Lastly, we have lowered our annualized interest cost by $70 million through a combination of paying down debt and refinancing into low-cost debt.
Please move to slide number six.
Adjusted EBITDA margin for the quarter was 22.8%, representing an 800 basis point improvement compared to the third quarter of 2020.
The margin for the third quarter was consistent with the last few quarters, despite the cost of adding employees to meet the increasing production demand and the effect on margins of the higher aluminum prices.
In the quarter, Engine Products added approximately 500 employees net, which now brings the total to 800 net additional employees hired for that segment during the second and third quarters.
We continue to review the headcount required in our other segments to adjust for future demand requirements.
Please move to markets on slide seven.
Third quarter total revenue was up 13% year-over-year and 7% sequentially.
Commercial Aerospace increased to 42% of total revenue, which is an improvement sequentially, but far short of pre-COVID levels of 60%.
The third quarter marked the start of the Commercial Aerospace recovery, with commercial aerospace revenue up 15% year-over-year and 16% sequentially.
Defense Aerospace was down 11% year-over-year, driven by the Joint Strike Fighter and up 3% sequentially.
Commercial Transportation, which impacts both the Forged Wheels and Fastening Systems segment was up 38% year-over-year, however, flat sequentially after we adjust for the increase in aluminum prices.
Finally, the Industrial and Other Markets, which is composed of IGT, oil and gas and general industrial was up 14% year-over-year and down 2% sequentially.
IGT, which makes up approximately 45% of this market continues to be strong and was up a healthy 26% year-over-year and 6% sequentially.
Let's move to slide eight for the segment results.
As expected, Engine Products year-over-year revenue was 24% higher in the third quarter.
Commercial Aerospace was 50% higher, driven by the narrow-body recovery.
IGT was 26% higher as demand for cleaner energy continues.
Defense Aerospace was down 8% year-over-year, but up 7% sequentially.
Incremental margins for Engine Products were approximately 70% for the quarter despite hiring back approximately 500 workers to prepare for future growth.
Operating margin improved 1,200 basis points year-over-year.
Please move to slide nine.
Also as expected, Fastening Systems year-over-year revenue was 6% lower in the third quarter.
Commercial Aerospace was 25% lower as we saw continued production declines for the Boeing 787 and customer inventory corrections.
The commercial transportation and industrial markets within the Fastening Systems segments were approximately 55% and 19% year-over-year, respectively.
Year-over-year Fastening Systems was able to generate $14 million more in operating profit, while revenue declined $17 million.
As a result, operating margin improved 630 basis points.
Please move to slide 10.
Engineered Structures year-over-year revenue was 3% lower in the third quarter.
Commercial Aerospace was 13% higher as the narrow-body recovery was partially offset by production declines for the Boeing 787.
Defense Aerospace was down 21% year-over-year, but was flat sequentially.
Year-over-year, Engineered Structures was able to generate $4 million more in operating profit on $7 million of lower revenue.
As a result, operating margin improved 210 basis points.
Finally, please move to slide 11.
Forged Wheels year-over-year revenue was 34% higher in the third quarter.
On a sequential basis, revenue and operating profit were essentially flat.
The segment was able to overcome a 4% decrease in volume due to customer supply chain issues, limiting commercial truck production, and a 13% increase in aluminum prices to maintain a healthy operating margin of approximately 27%.
Year-over-year incremental margins for Forged Wheels were approximately 45% for the quarter.
Improved margins were driven by continued cost management and maximizing production in low-cost countries.
Now let's move to slide 12.
We continue to focus on improving our capital structure and liquidity.
I would highlight three actions.
First, in the first half of the year, we paid down approximately $835 million of debt by completing the early redemption of our 2021 and 2022 bonds with cash on hand.
The annualized interest expense savings with this action is approximately $47 million.
Second, in the third quarter we tendered $600 million of our 6.875% notes due in 2025 and issued $700 million of 3% notes due in 2029.
The annualized interest expense savings with this action is approximately $20 million.
Third, with cash on hand, we repurchased $100 million of our 2021 notes through an open market repurchase in Q3 and in October, which neutralized the gross debt impact of the tender and refinancing.
The annualized interest expense saving with this action is approximately $5 million.
As a result of these actions, we have lowered annualized interest costs by approximately $70 million and smoothed out our future debt maturities.
At the end of Q3, gross debt was approximately $4.2 billion, which is similar to Q2.
Net debt to EBITDA improved from 3.5 times in Q2 to 3.2 times despite the deployment of cash for debt refinancing, share buybacks and dividends.
All debt is unsecured, and the next maturity is in October of 2024.
Finally, our $1 billion revolving credit facility remains undrawn.
Before turning it back to John to discuss guidance, I would like to point out that there's a slide in the appendix that covers special items for the quarter.
Special items for the third quarter were a net charge of approximately $93 million, mainly driven by the costs associated with the bond tender and refinancing completed in the quarter.
The leading indicators for air travel continue to show improvement, notably for domestic travel.
But also we note the sort of revised requirements or these restrictions being lifted for, certainly, transatlantic travel starting this month.
As expected, Howmet transitioned to revenue growth in the third quarter, and we expect year-over-year revenue growth will continue into the fourth quarter and to 2022, with a growth of approximately 12% in commercial aerospace and total revenue growth in the fourth quarter of approximately 6%.
Growth is expected to continue in 2022.
As expected, the Engine Products business began to grow notably in the third quarter.
We expect modest sequential growth in Q4 for Engineered Structures despite continued delays with the 787.
Fastening Systems is expected to show growth in the first half of 2022.
In terms of specific numbers, we expect the following: In terms of guidance for Q4, I'll just call out the midpoints, as you can read the slide: Revenue, $1.315 billion; EBITDA, $300 million; EBITDA margin, 22.8%; earnings per share of $0.29.
And for the year, we expect revenue to be $5 billion, plus or minus; EBITDA at $1.135 billion; EBITDA margin at 22.7%; earnings per share increased to $1 per share; and cash flow of $450 million.
Moving to the right-hand side of the slide, we expect the following: Second half revenue to be up approximately 8% versus the first half driven by Commercial Aerospace, Commercial Transportation and IGTT; Q4 sequential segment incremental operating margins, we expect to be in the order of 28%.
Price increases will continue to be greater than 2020, the cost-reduction carryover of $100 million, as already commented, is exceeded.
Pension and OPEB contributions of approximately $120 million and capex should be in the range of $180 million to $200 million compared to depreciation of approximately $270 million.
Adjusted free cash flow compared to net income continues to be approximately 100%.
I'd now like to preview some initial thoughts regarding 2022.
An early approximate total revenue guide would be for an increase in annual revenues of 12% to 15%, led by recovery in Commercial Aerospace.
In aggregate, our current view is that we see an acceleration during the course of the year, following a fairly flat first quarter compared to the fourth quarter this year, except for increased revenues due to metal recovery.
We'll refine this view and provide guidance at our earnings call in February 2022.
Now let's move to slide 14 for the summary.
We delivered strong performance in the third quarter, which was in line with guidance.
Growth was very healthy, year-on-year and sequentially.
Incrementals were truly exceptional, and the company's margin is in the top decile in aerospace.
Q3 started -- or marked the start of the Commercial Aerospace recovery.
Moreover, we delivered sequential improvements in both EBITDA and earnings per share.
We'll continue to manage costs very carefully during this recovery phase.
Liquidity is strong, and we have very healthy cash generation.
The fourth quarter, for our -- revenue outlook is $30 million higher than the third quarter, with margins of approximately 23%, which sets a platform for a healthy 2022.
Adjusted earnings per share guidance was increased, reflecting lower interest costs.
| howmet aerospace delivers third quarter 2021 sequential revenue growth.
howmet aerospace delivers third quarter 2021 sequential revenue growth; raises adjusted earnings per share guidance1.
q3 earnings per share $0.27 from continuing operations excluding items.
q3 revenue rose 13 percent to $1.28 billion.
|
Hope you're all well.
I'll start with a brief comment on earnings and Joe will provide more detail.
The quarter was about as we expected with the reported earnings strength, driven by a reserve release.
Beyond that, the margin continues to be a headwind but credit [Phonetic], overall deposit fees and the strength of our financial services businesses are tailwinds.
From a business line perspective, commercial is flat, ex-PPP and muni loans, but the pipeline is growing back post-COVID quicker than we expected; that's good news.
The mortgage business is strong with the biggest pipeline we've ever had.
The payoffs are elevated also.
So the book is growing more slowly than it might otherwise.
The indirect lending business had a great Q2 with outstandings up 8% over Q1.
Deposit service fees continue to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020.
And like the entire industry, deposits are up.
Our financial services businesses were the star performers of the quarter with combined revenues up 14% and pre-tax earnings of 25% over 2020.
We are also pleased to announce, earlier this month, the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota.
The benefits space is very active right now in terms of opportunities and we expect more to come.
The benefits of a diversified revenue model have never been so apparent.
As we announced last week, our Board has approved a $0.01 per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases and we think a validation of our disciplined and diversified business model.
As we announced in March, we have appointed Dimitar Karaivanov as our Executive Vice President for Financial Services and Corporate Development and he began in this role in June.
He joined us from Lazard, where he was a Managing Director in the Financial Institutions Group and has over a dozen years of experience in investment banking, serving clients in the banking benefits and FinTech space.
I've known and worked with Dimitar for nearly his entire career and am thrilled to have him on board supporting our growth initiatives.
Looking ahead, we will be doing our best to manage the changing winds.
We have the headwind in margin pressure but growth, credit, the momentum of our financial services businesses and liquidity deployment are all tailwinds.
As Mark noted, the second quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.88.
The GAAP earnings results were $0.22 per share or 33.3% higher than the second quarter of 2020 GAAP earnings results, and $0.12 per share or 15.8% better on an operating basis.
The improvement in earnings per share was led by lower credit-related costs and a significant increase in non-interest revenues, particularly in the company's non-banking businesses.
Comparatively the company recorded GAAP earnings and operating earnings per share of $0.97 in the linked first quarter of 2021.
The company reported total revenues of $151.6 million in the second quarter of 2021 a $6.7 million or 4.6% increase over the prior year's second quarter revenues of $144.9 million.
The increase in total revenues between the periods was driven by a $5.3 million or 13.7% increase in financial services business revenues and a $1.2 million or 8.6% increase in banking-related non-interest revenues.
Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter 2020 results.
Total revenues were down $0.9 million or 0.6% from the linked quarter first quarter driven by a $1.9 million decrease in net interest income, offset in part by higher non-interest revenues.
Although net interest income was up slightly over the same quarter last year, the results were achieved on a lower net interest margin outcome.
The company's tax equivalent net interest margin for the second quarter of 2021 was 2.79%.
This compares to 3.03% in the first quarter of 2021 and 3.37% one year prior.
Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low-yield cash equivalents we maintain on the company's balance sheet.
The tax equivalent yield on earning assets was 2.89% in the second quarter of 2021 as compared to 3.15% in the linked first quarter and 3.56% one year prior.
During the second quarter, the company recognized $3.9 million of PPP-related interest income, including $2.9 million of net deferred loan fees.
This compares to $6.9 million of PPP-related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees.
The company's total cost of deposits remained low, averaging 10 basis points during the second quarter of 2021.
Employee benefit services revenues were up $3.4 million or 14.2% over the prior year's second quarter, driven by increases in employee benefit trust and custodial fees.
Wealth management revenues were also up $1.9 million or 29.2%, driven by a higher investment management advisory and trust services revenues.
Insurance services revenues were consistent with prior year's results.
The increase in banking-related non-interest revenues was driven by a $2.3 million or 17.6% increase in deposit service and other banking fees, offset in part by a $1 million decrease in mortgage banking income.
During the second quarter of 2021, the company reported a net benefit in the provision for credit losses of $4.3 million.
This compares to a $9.8 million provision for credit losses reported in the second quarter of 2020, $3.2 million of which was due to the acquisition of Steuben Trust Corporation with the remaining $6.6 million largely driven by pandemic-related factors.
During the second quarter of 2021, the company reported 3 basis points of net loan recoveries and the post-vaccine economic outlook remain positive.
In addition, at the end of the second quarter, there were only 12 borrowers representing $2.4 million in loans outstanding and that remained in the pandemic-related forbearance.
This compares to 47 borrowers in pandemic-related forbearance representing $75.6 million at the end of the first quarter, and 3,700 borrowers with approximately $700 million of loans outstanding one year earlier.
These factors drove down the expected loan losses resulting in the recording of a net benefit in the provision of credit losses for the quarter.
The company recorded $93.5 million in total operating expenses in the second quarter of 2021 as compared to $87.5 million in the second quarter of 2020, excluding $3.4 million of acquisition-related expenses.
The $6 million or 6.9% increase in operating expenses was attributable to a $3.2 million or 5.8% increase in salaries and employee benefits, a $1.9 million or 17.8% increase in data processing and communications expenses, and a $0.7 million or 7.7% increase in other expenses and a $0.5 million or 5.3% increase in occupancy and equipment expense, offset, in part, by a $0.3 million or 7.9% decrease in the amortization of intangible assets.
The increase in salaries and employee benefits expense was driven by increases in merit-related employee wages, higher payroll taxes, including increases in the state-related unemployment taxes, higher employee benefit-related expenses and the Steuben acquisition.
Other expenses were up due to the general decrease in the level of business activities, including increases in business development and marketing expenses.
The increase in data processing and communications expenses was due to the second quarter 2020 Steuben acquisition and the company's implementation of new customer-facing digital technologies and back office systems between the comparable periods.
The increase in occupancy and equipment expenses was driven by the Steuben acquisition.
In comparison, the company recorded $93.2 million of total operating expenses in the first quarter of 2021, $0.3 million or 0.3% lower than the second quarter 2021 total operating expenses.
The effective tax rate for the second quarter of 2021 was 23.1%, up from 20.3% in the second quarter of 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.
The company closed the second quarter of 2021 with total assets of $14.8 billion.
This was up $181.1 million or 1.2% from the end of the linked first quarter and up $1.36 billion or 10.1% from a year earlier.
Average interest earning assets for the second quarter of 2021 of $13.37 billion were up $680.6 million or 5.4% from the linked first quarter of 2021, and up $2.27 billion, or 20.4% from one year prior.
The very large increases in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben and margin flows of government stimulus-related deposit funding PPP originations.
The company's ending loan balances of $7.24 billion were down $124.2 million or 1.7% from the end of the first quarter.
Excluding the net decrease in PPP loans of $126.1 million and the seasonal decrease in municipal loans totaling $41.2 million, ending loans increased $43.1 million or 0.6%.
As of June 30, 2021, the company's business lending portfolio included 317 first draw PPP loans with a total balance of $72.5 million and 2,254 second draw PPP loans with a total balance $212.3 million.
The company expects to recognize, through interest income, the majority of its remaining first draw net deferred PPP fees totaling $0.9 million during the third quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $9.2 million over the next few quarters.
On a linked quarter basis, the average book value of the investment securities portfolio increased $290.2 million or 7.9% from $3.67 billion during the first quarter to $3.96 billion during the second quarter.
With this said, the company has largely remained on the sidelines with respect to deploying excess liquidity and for market interest rates to become more attractive.
During the second quarter, the company's average cash equivalents of $2.07 billion represented approximately 16% of the company's average earning assets.
This compares to $1.67 billion in average cash equivalents during the first quarter of 2021 and $823 million in the second quarter of 2020.
The $408 million or 24.5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds and the origination of second draw PPP loans and first draw PPP loan forgiveness.
The company's capital reserves remained strong in the second quarter.
The company's net tangible equity to net tangible assets ratio was 9.02% at June 30, 2021.
This was down from 10.08% a year earlier, but up 8.48% at the end of the first quarter.
The company's Tier 1 leverage ratio was 9.36% at June 30, 2021, which is nearly 2 times the well-capitalized regulatory standard of 5%.
The company has an abundance of liquidity with the combination of company's cash and cash equivalents.
Borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available-for-sale investment securities portfolio provides the company with over $6.1 billion of immediately available sources of liquidity.
At June 30, 2021, the company's allowance for credit losses totaled $51.8 million or 0.71% of of loans outstanding.
This compares to $55.1 million or 0.75% of total loans outstanding at the end of the first quarter of 2021 and $64.4 million or 0.86% of total loans outstanding at June 30, 2020.
The decrease in the allowance for credit losses is reflective of an improving economic outlook, the very low levels of net charge-offs and a decrease in delinquent loans and loans on on pandemic-related forbearance.
Non-performing loans decreased in the second quarter to $70.2 million or 0.97% of loans outstanding, down from $75.5 million or 1.02% of loans outstanding at the end of the linked first quarter of 2021, but up from $26.8 million or 0.36% of loans outstanding at the end of the second quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non-accrual status between the periods.
The specifically identified reserves held against the company's non-performing loans totaled only $2.8 million at June 30, 2021.
Loans 30 to 89 days delinquent totaled 0.25% of loans outstanding at June 30, 2021.
This compares to 0.37% one year prior and 0.27% at the end of the linked first quarter.
Management believes the low levels of delinquent loans and charge-offs has been supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
We remain focused on new loan origination and we'll continue to monitor market conditions to seek the right opportunities to deploy excess liquidity.
Our pipeline -- loan pipelines increased considerably during the second quarter and asset quality remains very strong.
We also expect net interest margin pressures to persist and remain well below our pre-pandemic levels but also believe our abundance of cash equivalents represent a significant future earnings opportunity.
We're also fortunate and pleased to have a strong non-banking businesses that supported and diversified our streams of non-interest revenue.
| compname posts q2 2021 net income of $0.88 per fully-diluted share.
q2 revenue $151.6 million versus refinitiv ibes estimate of $151.7 million.
q2 2021 net income of $0.88 per fully-diluted share.
net interest income of $92.1 million in q2 of 2021 versus $92.0 million of net interest income recorded in q2 of 2020.
|
I'm joined by our President and CEO, Joe Raver; and our Senior Vice President and CFO, Kristina Cerniglia.
These statements are not guarantees of future performance and our actual results could differ materially.
I'd like to begin by acknowledging the continued dedication of Hillenbrand's employees in managing the business through the COVID-19 pandemic.
We remain vigilant in our commitment to ensure the health and well-being of our employees and their families, to meet the needs of our customers, and to execute strategic initiatives that we believe will position Hillenbrand well now and into the future.
This past quarter we marked the one-year anniversary for the close of Milacron acquisition.
Over the past year, our teams have made rapid progress integrating the business and capturing synergies.
We also continue to adapt successfully to the challenges brought about by COVID-19.
We ended fiscal year 2020 in a strong position and in the first quarter of fiscal 2021, continued to build on that momentum, delivering strong results.
Each segment exceeded our top line expectations in Batesville and the Molding Technology Solutions segment also achieved meaningful margin expansion by driving the benefit of higher volume to the bottom-line.
In addition to our solid operating performance in the quarter, we made significant progress against our previously announced plan to exit the Flow Control businesses, Red Valve and ABEL, and we remain on track with our plan to divest TerraSource Global.
Overall, I'm pleased with our execution in the first quarter.
And while uncertainty regarding the pandemic remains, we are focused on navigating the environment to drive profitable growth in our large platform businesses, capture the full benefits of the Milacron acquisition, and strategically deploy cash flow to drive long-term shareholder value.
Before I get into the highlights of the quarter, let me spend just a few minutes on the execution of our strategy as outlined on Slide 5.
As we've consistently communicated, we are focused on executing four key strategic pillars as we work to build Hillenbrand into a world-class global industrial company.
The first is to strengthen and build business platforms, both organically and through M&A.
The Milacron acquisition represented a major step in the execution of the strategic pillar.
With Milacron, we added industry-leading and complementary hot runner and injection molding product lines to the Hillenbrand portfolio, further strengthening our customer offering, increasing our global scale, and enhancing our capabilities across the entire plastics value chain from base resin production all the way through recycling.
Given that we have materially improved our balance sheet over the past year, we expect to continue to increase growth investments, both organically and inorganically with a focus on strengthening and building our large business platforms in APS and MTS.
Our second strategic pillar is to manage Batesville for cash.
Batesville has a long history of manufacturing excellence in burial caskets with solid and predictable cash flow that we can invest to grow our industrial platforms.
Batesville's outstanding cash flow over the past several quarters, which we used to pay down debt, underscores the important role Batesville plays in our portfolio.
The third pillar of our strategy is to build a scalable foundation for growth using the Hillenbrand operating model.
The acquisition of Milacron is providing a unique opportunity for us to transform and scale many of our shares back-office functional business processes in areas such as IT, HR, health and welfare benefits and finance.
We believe that our efforts, to standardize processes and services and to leverage best practices across our operating companies globally, will drive meaningful efficiencies, improve effectiveness and quality and provide a scalable foundation for future growth.
We're also driving efficiencies and best practices in operations by leveraging our combined spend through the Global Supply Management Group and driving lean business practices, which really are the core of the Hillenbrand operating model to improve safety, quality, delivery, cost and working capital.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We have a track record of maintaining a flexible balance sheet, so we can grow through strategic acquisitions and a history of quickly reducing leverage following acquisitions.
This past quarter, we reduced our leverage ratio by approximately 0.5 turn to 2.2 times net debt-to-EBITDA.
We are confident in our ability to continue to generate robust free cash flow, maintain a strong balance sheet and grow our company, both organically and inorganically while returning capital to shareholders.
Today, given our current leverage, we are lifting the temporary suspension of our share repurchase program and we will resume consideration of strategic bolt-on acquisitions.
As always, we will remain disciplined in our approach to deploying cash.
Now, let me turn to some highlights for the quarter.
Total company performance exceeded our expectations led by higher burial casket demand at Batesville associated with the COVID-19 pandemic and strong hot runner systems growth in the MTS segment, driven by medical and packaging demand.
Additionally, we drove productivity and synergies across all of our segments.
The 30% growth at Batesville in the quarter was well above our expectations.
While this significant increase in burial casket demand is both unfortunate and unprecedented, we were well positioned to handle this increase in volume at Batesville.
And the results for the quarter reflect that.
Over the past few years, the team has made significant progress in simplifying operations, reducing costs and improving the supply chain.
And that was evident in the way Batesville responded to the spike in demand and drove the benefits of operating leverage to the bottom line.
The mental and physical challenges associated with the pandemic over the past year have been significant, and I continue to be proud of the Batesville team for their resilience and their ability to execute at a high level in such a demanding environment.
This is a company that is truly living its mission of helping families honor the lives of those they love.
In the Advanced Process Solutions segment, sales came in higher than we expected when we spoke to you last quarter.
This is despite lower year-over-year revenue due to continued delays on specific large polyolefin projects in our backlog.
The large project delays in the quarter were partly offset by faster delivery for smaller and mid-sized equipment.
We've had no cancellations of large projects from our backlog and demand for this type of project continues to be strong overall, particularly in China, which is offsetting lower North American demand for large polyolefin projects.
The strength we saw in the food and pharmaceutical end markets at the end of fiscal 2020, continued into the first quarter of this year.
Other industrial end markets continue to remain challenged.
In Molding Technology Solutions, sales and margins were strong with hot runner system sales up in all regions and injection molding strength in India.
We saw an uptick in several end markets, including medical packaging, consumer goods and electronics.
Sales within automotive were up modestly sequentially, but continued to be soft compared to historical levels.
Parts and service revenues were lower compared to the prior year.
Our MTS backlog increased 100% year-over-year on a pro forma basis, driven primarily by continued strength in orders for injection molding equipment.
Total company backlog increased over 32% year-over-year on a pro forma basis, to a new record of $1.4 billion a real sign of continued strong demand for our highly engineered solutions and applications expertise.
We continue to take the appropriate steps to convert our backlog to revenue, while following all necessary COVID-19 safety protocols and managing customer-induced schedule changes.
Overall, I believe we executed well in the quarter and the businesses are well positioned for the future.
As some of you may have seen in our recently released annual report, sustainability is an important topic and one that we've been working on for a number of years at Hillenbrand.
In 2018, we took a big step forward in our efforts by forming a cross-functional sustainability steering committee, that's been effective in guiding our actions in a more coordinated way across the entire enterprise.
In 2019, we conducted a materiality assessment to identify the sustainability-related topics most important to our stakeholders, including employees, customers and investors.
In that same year, we also signed on to the United Nations Global Compact, because we believe that incorporating sustainability in our business activities will improve all aspects of our company, including the impact we have on society and the environment.
And in the summer of 2020, we issued our first sustainability report, which shares some of the activities that we've undertaken.
One particularly impactful program is our global community engagement initiative that we call the One Campaign.
In the past years, the Hillenbrand One Campaign has focused on the UN Sustainable Development Goals, or SDGs, of quality education, reduced inequalities with a focus on diversity and inclusion and responsible consumption and production.
Leveraging the results of our recent materiality assessment has been instrumental in identifying the SDGs most important to our stakeholders and focusing our efforts in areas that can have the greatest impact to our company and society.
In 2021, the One Campaign is focused on the SDG good health and well-being.
In fact, currently, a number of our employees are volunteering to support a vaccination clinic in our local Batesville community.
Given the impact of the COVID-19 pandemic in the communities in which we operate and across the nation and world, this is an initiative we feel strongly about lending our time and talents too.
Throughout my section, I will be referencing pro forma results which exclude Red Valve in the APS segment and the Cimcool business which was divested on March 30, 2020, in the MTS segment.
It also assumes the Milacron acquisition closed on October 1, 2019.
We believe these pro forma results provide a better comparison of our ongoing operations and you will find a comparison of as-reported and pro forma results on Slide 19 of the earnings slide deck.
Turning to the quarter, our teams sustained their strong momentum, with continued revenue growth, significant margin expansion and solid free cash flow.
We finished the quarter with results that were better than we anticipated, particularly given uncertainties caused by the pandemic.
We delivered total revenue of $693 million, an increase of 22%.
Excluding the impact of foreign exchange, total revenue increased 19%.
On a pro forma basis revenue increased 6%, driven by strong burial casket demand at Batesville and hot runner systems sales in MTS.
Adjusted EBITDA of $138 million increased 50% and adjusted EBITDA margin of 19.9%, increased 370 basis points.
On a pro forma basis adjusted EBITDA of $137 million, increased 51% and adjusted EBITDA margin was 20%.
With the benefit of additional volume along with the actions, we've taken to contain costs across all segments we expanded our adjusted EBITDA margin, 600 basis points over the prior year on a pro forma basis.
We reported GAAP net income of $76 million or $1.01 per share, an increase of $1.06 over prior year, primarily driven by a decrease in acquisition and integration costs related to Milacron, the gain on the sale of Red Valve and higher volume within Batesville.
Adjusted net income of $72 million resulted in adjusted earnings per share of $0.96, an increase of 28%, mainly driven by strong Batesville and MTS performance.
The adjusted effective tax rate for the quarter was 28.5%, an increase of 650 basis points from the prior year.
The increase is primarily due to the prior year tax benefit recognized for the reduction in India's statutory tax rate.
And, an increase in the deferred taxes associated with foreign un-remitted earnings this quarter.
Hillenbrand generated cash flow from operations of $66 million, an increase of $48 million compared to the prior year.
This increase was primarily due to lower acquisition and integration costs associated with Milacron and the strong cash generated by MTS from advanced payments on strong orders.
Capital expenditures were approximately $6 million in the quarter, slightly lower than anticipated.
We also paid down $157 million of debt and returned $16 million to our shareholders, in the form of cash dividends.
We recognized $6 million of incremental synergies in the quarter.
And we expect to deliver $20 million to $25 million of synergies this year.
We remain on track to achieve the three-year $75 million total run rate synergies, related to the Milacron acquisition.
Moving to segment performance Batesville's revenue of $165 million, increased 30% year-over-year, driven by higher volume, as a result of increased deaths associated with COVID-19 and higher average selling price, partially offset by an estimated increase in the rate at which families opted for cremation.
With the commitment of our Batesville employees, our manufacturing capabilities and distribution footprint, we were able to respond to the elevated volume to meet our customers' needs.
Batesville's first quarter execution was outstanding.
And the benefits of the Hillenbrand operating model are evident in the results.
Strong operating leverage and productivity initiatives, contributed to exceptional margin performance.
Adjusted EBITDA margin of 31.7%, improved 1,360 basis points over the prior year and more than offset inflation in the quarter.
Turning to Advanced Process Solutions, APS revenue of $291 million decreased 5%.
On a pro forma basis, revenue of $283 million also decreased 5%.
Excluding the impact of currency, revenue decreased to 9%.
The revenue decline was primarily driven by a decrease in large polyolefin system sales, due to customer-driven delays on certain projects, and lower parts and service revenue driven by delays associated with the COVID-19 pandemic.
We continue to see field service and aftermarket softness exacerbated, by COVID-19 travel restrictions.
But the aftermarket business has begun to stabilize, and we've continued to innovate to provide service remotely.
Longer term, we continue to see opportunity for growth in this area, as the installed base for our large systems, continues to grow.
Adjusted EBITDA margin of 16.7% was down 10 basis points, and down 30 basis points on a pro forma basis.
The decrease was due to lower volume and adverse mix from a couple of lower margin strategically important plastics projects, partly offset by cost containment actions and productivity improvements.
Order backlog excluding Red Valve reached a new record high of $1.1 billion at the end of the first quarter, an increase of 21% year-over-year on a pro forma basis.
Excluding the impact of foreign currency exchange, backlog increased to 12%.
Sequentially backlog increased to 10% on a pro forma basis from the previous record high.
We continue to see solid demand in the pipeline for new large plastics projects during the quarter primarily from Asia.
These projects are expected to contribute to revenue over the next several quarters including about 28% of the backlog expected to convert to revenue beyond the next 12 months.
MTS revenue of $237 million increased 78% and 7% on a pro forma basis in comparison to the prior year.
Excluding the impact of foreign exchange, revenue increased 5%.
Sales of hot runner systems increased double digits on continued solid demand in medical and packaging end markets and sales of injection molding and extrusion equipment were roughly flat year-over-year, but improved 20% on a sequential basis.
India in particular continues to rebound on strong demand across all end markets particularly medical and consumer goods.
Adjusted EBITDA of $48 million increased 84% and 47% on a pro forma basis with adjusted EBITDA margin of 20.4% increasing 560 basis points compared to the prior year on a pro forma basis.
The improvement was driven by higher volume, productivity initiatives including cost synergies and favorable mix of higher margin hot runner systems.
We're encouraged with these results and remain focused on leveraging the Hillenbrand operating model to drive sustainable operational improvements.
Order backlog of $292 million increased 100% compared to the prior year on a pro forma basis and 20% sequentially, primarily driven by an increase in injection molding equipment orders.
Activity was strongest in the medical, consumer goods, packaging and electronics end markets.
We saw a slight uptick in automotive orders in the quarter and remain cautiously optimistic about future demand.
Turning to the balance sheet; net debt at the end of the quarter was $1.1 billion and the net debt to adjusted EBITDA ratio fell by half a turn sequentially to 2.2 times.
As of the quarter end, we had liquidity of approximately $1.1 billion including $266 million in cash on hand and the remainder available under our revolver.
In the quarter, cash proceeds from the sale of Red Valve were $59 million.
We paid down $157 million of debt including prepayment of our term loan due in 2022 with cash on hand and revolver borrowings.
We have no near-term debt maturities and we'll continue to leverage the Hillenbrand operating model to drive greater efficiency across the business.
We continue to focus our efforts on improving working capital efficiencies particularly in the MTS segment.
Turning to capital deployment, we are pleased with our aggressive deleveraging progress, which gives the company greater flexibility to grow both organically and inorganically.
While our focus will still be to pay down debt, we are now more comfortably within our leverage guardrails.
We will continue to focus on reinvesting in the business with strategic investments and high-return opportunities.
And as Joe mentioned earlier, we will reinstate our share repurchase program as well as begin to consider strategic bolt-on acquisitions.
Amid continued uncertainty we are providing guidance only for the second quarter of fiscal 2021 under the assumption that we'll continue to see gradual stability in the global economy without any new broad-based COVID related disruptions.
We expect Hillenbrand's total second quarter revenue to increase year-over-year in a range of 12% to 16%.
We expect adjusted EBITDA in the range of $126 million to $137 million and adjusted earnings per share in the range of $0.85 to $0.95 for the second quarter, an increase of 29% on a year-over-year basis at the midpoint of the range.
Starting with Batesville; in the second quarter, we expect revenue to increase 20% to 25% year-over-year based on a continued trend of elevated burial casket volumes due to the pandemic.
We expect strong margin performance in the second quarter, driven by operating leverage and continued efforts to drive productivity.
However, we are experiencing higher commodity inflation and transportation cost, including premiums paid to expedite shipments.
We're targeting adjusted EBITDA margin of 29% to 30%, an increase of 590 to 690 basis points over the prior year.
In Advanced Process Solutions, which includes mid and long-cycle capital systems equipment and aftermarket parts and service, we expect second quarter revenue in a range of flat to down 4% year-over-year, primarily due to customer-driven delays with the timing of long-cycle, large polyolefin projects.
Partly offsetting that is the demand momentum we have seen in a couple of areas for our mid-cycle capital equipment within plastics and food end markets and stabilization in parts and service.
We expect adjusted EBITDA margin of 17.5% to 18% to be modestly lower from a year-over-year perspective, down 60 to 110 basis points, as the headwind from lower volume, project mix and certain targeted investments is partially offset by our continued cost containment and productivity initiatives.
Turning to Molding Technology Solutions, which includes mid-cycle injection molding equipment, short-cycle hot runner systems and aftermarket parts and service, we expect strong second quarter revenue growth in a range of 37% to 40% over prior year as demand continues to be strong in both hot runner and injection molding product lines.
Last year, we had COVID-related shutdowns in China that we do not expect will repeat.
We are targeting adjusted EBITDA margin of 18.8% to 19.2%, an improvement of about 320 to 360 basis points, as the benefit of higher volume and continued productivity improvements flow to the bottom line.
On a sequential basis, margins will be lower than the first quarter due to a mix impact from higher injection molding sales, which typically carry a lower margin.
Higher commodity inflation and transportation costs and targeted investments we are making to drive growth.
Now turning to our expectations for the full year.
In terms of the outlook for the Batesville segment in the second half, we are not providing specific guidance, given the uncertainty that remains due to the pandemic.
The impact of the newly identified strains of the coronavirus and the speed and effectiveness of the vaccination rollout continue to make longer-term demand for Batesville hard to predict.
In the second half of the year, we expect Batesville's revenue and margins to be lower on a year-over-year basis, due primarily to the impact of lower volume from fewer COVID-related deaths, along with higher commodity inflation.
In the Advanced Process Solutions segment, we are expecting revenue to increase low single digits on a pro forma basis for the full year.
We expect increased revenue in large plastics projects and stabilization of the aftermarket business during the second half of the fiscal year.
We also expect EBITDA margins to be slightly down year-over-year on a pro forma basis, due to unfavorable project mix and investments in the business.
Turning to the Molding Technologies segment.
For the year, we expect revenue to increase in the mid-teens year-over-year on a pro forma basis, driven by continued strength in end markets, such as medical, packaging and consumer goods and gradual improvement of automotive.
We expect moderate EBITDA margin improvement year-over-year on a full year basis, as additional volume leverage and productivity are partially offset by unfavorable mix and inflation.
We expect pressure on margins in the second half of the fiscal year versus prior year, due to unfavorable injection molding mix and additional investments in the business.
Overall for the portfolio, we recognize that there is still a high degree of volatility and uncertainty around the world.
Having said that, our team has demonstrated the ability to execute through challenging circumstances, and I have confidence in our ability to achieve these results and continue our momentum.
We executed well and delivered strong performance across the board in the quarter.
In particular, we achieved robust growth at Batesville an exceptional EBITDA margin in Batesville and MTS.
The acquired Milacron businesses are beginning to accelerate their performance and we remain bullish on the deal's long-term strategic and financial benefits.
We're on track to deliver $20 million to $25 million in year two synergies, and we remain confident in achieving year three run rate synergies of $75 million.
Continued strong free cash flow performance in the quarter has enabled us to delever at an accelerated pace despite the ongoing backdrop of the COVID-19 pandemic.
We further focused our portfolio by divesting Red Valve and signing an agreement to divest ABEL.
And finally, we ended the quarter with a record backlog and a robust project pipeline.
We believe we will remain well positioned to overcome any near-term macro challenges and are confident in our strategy to drive profitable growth over the long-term.
| compname reports q1 gaap earnings per share $1.01.
q1 gaap earnings per share $1.01.
sees q2 adjusted earnings per share $0.85 to $0.95.
q1 adjusted earnings per share $0.96.
q1 revenue rose 22 percent to $693 million.
qtrly gaap earnings per share of $1.01.
fiscal q2 2021 total quarterly revenue expected to increase 12% to 16% year over year on a pro forma basis".
believe we are well positioned for remainder of fiscal year 2021 with a solid balance sheet and healthy backlog".
|
Today's discussion is being broadcast on our website at atimetals.com.
Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Donald Newman, Senior Vice President and Chief Financial Officer.
For today's call, we will not display or advance slides as Bob and Don speak.
Their comments will focus on highlights and key messages.
The slides provide additional color and details on our results and outlook.
They are available on our website at atimetals.com.
It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market.
Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic.
First, how we're taking control of what we can control, thus accelerating cost savings and strengthening our position.
Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth.
So first, where we are today.
Our customer connectivity continues to give us the insights to assess market dynamics in the moment.
From this, we gain conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations.
We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond.
As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance.
We accelerated benefits from our cost savings initiatives through aggressive implementation.
This included capacity up, gold dark and quiet facility islands reduced our fixed costs, minimized variable costs with execution on our restructuring programs, eliminated costs to align with demand declines, reduced overhead.
We've intensely reviewed every administrative and nonproduction related expense continuing only what was critical.
Overall, we've significantly variabilized our cost structure.
Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs.
This will be a lasting impact of the actions we've taken during the crisis.
Through it off, our people have been extraordinary.
First and foremost, they're keeping each other safe, while efficiently and consistently delivering critical materials and components to our customers.
The frequent production adjustments we made in response to demand shifts and end market forecasts have not been easy for them.
Growing levels and shift schedules have fluctuated as a result.
I sincerely appreciate the entire team's effort and dedication and personal economic sacrifices.
Their continued actions demonstrate a shared commitment to ATI's future success.
The deliberate actions we've taken and will continue to take are crucial to our ability to emerge a stronger company as the economy recovers.
Looking ahead, we're confident demand will eventually recover.
We expect these difficult times to continue for several quarters to come, but we do believe we're reaching the bottom with some signs of upcoming stability.
Secondly, let's talk about our balance sheet and the solid position it puts us in.
We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule.
Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth.
We're fueling growth in three ways: first, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021.
Next, organically expanding our presence in adjacent high-value markets, where our material science expertise is valued.
And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities and capture profitable core market opportunities.
As we accomplish our growth goals, we'll intensify our presence in aerospace and defense, materials and components.
We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace like margins in adjacent markets along the way.
Looking forward, we're confident that the demand for commercial aerospace products will recover.
We see it as growth deferred, not lost.
No matter what form you believe the coming economic recovery will take, it could be a leak, could be a U, it could be L-shaped.
When you're at the bottom, it's difficult to predict when you'll reach the other side.
But we know we'll get there.
We're positioning ATI to emerge stronger, leaner and more efficient, no matter how the recovery comes.
There are some examples of how I believe we're doing just that.
We're expanding our presence in growth markets like defense.
We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability.
Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term.
Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn.
Defense remains a notable positive exception.
A little more color on our view of what we expect going forward.
Let's start with commercial aerospace.
Both jet engine and airframe continued to decline significantly versus the prior year.
Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with: quarantines, travel restrictions and low 737 MAX production.
Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand.
Fourth quarter jet engine product sales will remain relatively weak as quarantines began to slowly recover.
Specialty materials will likely lag for an additional couple of quarters.
API sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain.
In 2021, ATI will benefit from engine market share gains and new airframe business.
The positive impact from these wins will increase over time as aerospace industry volumes recover.
Our second core market, defense, remains a source of strength.
Excluding titanium armor, ATI's diversified defense sales were up more than 20% year-over-year, led by naval nuclear and military aerospace growth.
Titanium armor plate sales were down significantly due to timing for both a domestic and an international program.
We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect.
Near term, we expect continued growth in the fourth quarter and into 2021.
Next, let's talk about my thoughts on three important adjacent end markets.
Third quarter sales were down significantly in the energy and medical markets and up in electronics.
When it comes to energy's oil and gas submarket, we saw a lack of end-customer demand and a resulting inventory glut, reducing exploration and downstream processing activities worldwide.
We expect this market to remain weak in the fourth quarter.
A bright spot within energy is the specialty energy submarket, including solution control, nuclear and renewables.
These sales grew year-over-year.
And we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects.
Our medical market is principally comprised of biomedical implants and MRI materials.
Sales versus prior year were lower to customers in both categories, mainly due to the challenges presented by COVID.
Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers.
Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter their medical facilities, either due to an effective COVID vaccine or disease treatment protocols.
Finally, electronic sales moved higher year-over-year.
This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales.
We anticipate modest growth trends to continue in the fourth quarter.
I'll spend the next few minutes sharing highlights in three key areas: one, our better-than-expected third quarter financial performance; two, our strong balance sheet and cash position; and three, a look at our Q4 and 2021 expectation.
From a performance standpoint, the adjusted earnings per share loss of $0.38 per share in Q3 is significantly better than our previous guidance of a loss of between $0.62 and $0.72 per share.
Our Q3 performance reflects accelerated cost reductions and an improved mix in portions of our business.
First and foremost, we are managing decisively.
We are making the most of external demand despite market headwinds, and we're controlling what we can, our costs and capital deployment.
Consider this, our third quarter revenue dropped by more than 40% versus prior year, including a 60% decline in our high-value commercial aerospace business.
The revenue drop was largely due to market factors that were not within our control.
When market declines became clear earlier this year, we responded quickly, focusing on cost containment.
Benefits of those efforts can be seen in our Q3 results.
Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin in Q3.
That's a meaningful improvement from the 28% decremental margins captured in Q2, clear improvement resulting from quick action.
Our cost actions are having meaningful impact and they're accelerating.
As Bob described it, we have significantly variabilized our cost structure.
Costs once considered fixed are now variable.
This means we are better prepared to deal with future demand fluctuation.
Also keep in mind that structural cost savings will accelerate profitability in the recovery, expanding margins and increasing our cash conversion.
Looking beyond the income statement, our efforts to preserve free cash flow are producing results as well.
We expect to be free cash flow positive in 2020.
This is made possible through capital spending discipline and our ability to convert working capital into cash.
They took quick actions to protect cash in the near term while maintaining our ability to grow and be recovery ready.
We ended the quarter with approximately $950 million of total liquidity, including $572 million of cash in the bank.
Our debt maturity profile also adds strength to our financial position.
Our next meaningful debt maturity does not occur until 2023, three fiscal years away.
We are focusing on three key levers to drive cash generation: cost structures, inventory levels and capex.
Expect to see continued focus on these three areas in 2021 as we adapt our business to fit dynamic end market demand.
At the same time, we'll continue to protect our strong balance sheet.
These actions will enable us to manage through the down cycle and capitalize on opportunities in the coming up-cycle.
In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing demand stabilization in commercial aerospace.
This starts with jet engine OEMs working to better align production and demand levels.
Airframe OEM inventory destocking is expected to persist in the fourth quarter.
Beyond aerospace, some industrial markets are seeing modest recovery.
Others, namely oil and gas, will likely remain at low levels.
As a result, we expect a fourth quarter adjusted earnings per share loss in the range of $0.36 to $0.44 per share, similar to our third quarter's adjusted EPS.
Moving to our free cash flow guidance.
Our consistent efforts to generate and preserve cash have produced tangible results.
We reduced managed working capital by $115 million in the third quarter in the midst of the steep economic decline.
We expect to further reduce inventory in Q4.
Just as the team quickly pivoted to cost reductions, we managed our capex spending to better match demand.
To that end, we're again lowering our capital spending target for the full year.
Our updated capex forecast range is $125 million to $135 million, about 60% of the original 2020 projections.
We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contribution.
We're able to do this because of the successful achievements in working capital, capex and cost structures, a great accomplishment in the midst of a very challenging environment.
Looking beyond the fourth quarter, we will stay diligent to preserve or even improve on the gains that we made in 2020.
First, we believe that working capital represents an opportunity for further cash flow improvement.
At the end of the third quarter, managed working capital was approximately 50% of revenue.
This compares to 30% at the end of 2019.
We understand what it takes to get back to those 2019 levels, and we plan to make further improvements in 2021.
Next, we'll continue to keep a close eye on our capital spending.
We'll balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels.
Finally, we will stay disciplined on costs.
We will carefully preserve our structural reductions and minimize additions as volumes return to the business.
The way we operate today is fundamentally different than how we used to work.
We will strive to maintain the hard-fought gains.
Your points were right on.
It's been a real team effort in a very uncertain time and much appreciate the contributions of everyone who's part of ATI, our customers and our suppliers.
Our comments today focused on what matters most to our shareholders and to us.
These priorities are at the core of how we lead on a daily basis.
First, we're managing decisively in times of great market uncertainty.
That includes quickly and effectively adjusting our cost structures and inventories to match demand, and we're keeping our people safe.
Secondly, we're preserving cash and maintaining liquidity.
We're preserving our ability to deploy cash accretively for our shareholders.
We'll be recovery ready, capitalizing on industry volume growth as well as our strategic share gains and new business awards.
Finally, we're working with our customers, new and long standing, who value our material science capabilities and advanced process technologies.
Our goal is to be integral to their success, helping them grow, solving even greater challenges together, in so doing, earning an ever-increasing share of their business.
We're taking the actions necessary to emerge from this crisis a stronger, leaner and more focused ATI.
Scott, back to you.
Operator, we are ready for the first question.
| q3 adjusted loss per share $0.38 excluding items.
expect q4 to be negatively affected by the ongoing pandemic.
|
Today, we will discuss our operational and financial results for the three months ended September 30, 2020.
As in prior quarters, my remarks will focus on our operational results and key performance indicators.
Avi Goldin, our Chief Financial Officer, will follow with a deeper dive into the quarter's financial results.
Genie Energy added 21,000 net RCEs and 22,000 net meters during the quarter.
Inclusive of Orbit Energy, we ended the third quarter with the largest global customer base in our history, 442,000 RCEs and 558,000 meters.
Our continued expansion has been driven by our long-term investment in customer acquisition and geographic diversification across our REP business.
This quarter, we again delivered growth in our global customer base while returning cash to our stockholders and reporting improved bottom line results.
Let's start with our domestic retail supply business, Genie Retail Energy.
GRE added 7,000 net RCEs and 1,000 net meters during the quarter.
GRE's gross domestic meter adds in the third quarter totaled 44,000, a 4,000 meter increase from the previous quarter but still a 32,000 meter decrease from the pre-COVID-19 level we achieved in the third quarter of last year.
The relaxation of some public health measures over the summer enabled us to resume modest levels of in-person customer acquisition programs in some markets.
We should be able to return to more robust growth in upcoming quarters as we begin marketing in a few new utility territories, provided that governments continue to relax COVID-related selling restrictions.
Monthly average churn fell to 3.7% from 3.9% last quarter and from 5.3% in the year ago quarter.
The decreases reflect our internal efforts to enhance customer retention, the slower pace of gross meter adds since COVID-19, the pandemic-related reductions on customer acquisition efforts by our competitors and the migration of our book toward fixed rate plans, which typically experience lower churn rates than variable rate plans.
GRE's third quarter financial results were keyed by a surge in average electricity consumption per meter, which more than offset modest margin declines.
Midsummer's warm weather and the transition to stay at home during the pandemic both significantly boosted residential demand.
At Genie International, we again delivered strong customer base expansion despite the challenges of the COVID-19 impacted environment.
We added 14,000 net RCEs and 21,000 net meters during the quarter.
At September 30, our International book held 92,000 RCEs and 182,000 meters, contributing 1/5 of our global RCEs and 1/3 of our global meters.
International growth was led by our businesses in Scandinavia and the U.K., while pandemic restrictions severely constrained our ability to market in Japan.
Lumo Energia, our Helsinki-based supply business, delivered an especially strong quarter and entered a significant new market, Sweden.
In the U.K., where we operate through our Orbit Energy joint venture, our meter and RCE counts both increased more than 70% compared to the third quarter a year ago and generated revenue at an annual rate of more than $50 million.
In light of Orbit's rapid growth and promising potential, we bought out our JV partner's interest for $1.7 million last month.
And beginning in the fourth quarter, we will consolidate Orbit's results as a wholly owned subsidiary.
Given the vast size of the U.K. market, the capable local management team in place and the favorable return on investment we've experienced to date, Orbit is on track to become EBITDA accretive within the next two years and to be a significant contributor to Genie's growth for many years to come.
At Genie Oil and Gas, we were able to begin our testing at Afek Ness 10 drilling site in Israel's Golan Heights last week.
The well's initial results were ambiguous, and it is the last site in GOGAS' exploratory program where we could still find clear-cut evidence of a commercially viable resource.
We could have test results this month, and if there's material news to share, we will share it.
Our continued progress would not be possible without their dedication and flexibility.
Take it away, Avi.
My remarks today cover our financial results for the three months ended September 30, 2020.
Throughout my remarks, I compare the third quarter of 2020 results to the third quarter of 2019.
Focusing on the year-over-year rather than the sequential comparisons removes some consideration of the seasonal factors that are characteristic of our Retail Energy business.
Results this quarter were again very strong.
We delivered significant top and bottom line improvements from the year ago quarter, primarily due to strong domestic electricity demand and growth in our international markets.
By the end of the quarter, we enjoyed a significantly fortified balance sheet with enhanced liquidity.
Consolidated revenue increased in the third quarter of 2020 by 12% to $96 million.
Revenue at Genie Retail Energy, or GRE, our domestic REP segment increased 10% to $89 million on a significant increase in average per meter electricity consumption that Michael mentioned.
Strong electricity demand more than compensated for decrease in profit per kilowatt hour sold.
At Genie Retail Energy International, the segment that comprises our REP operations outside of the U.S., revenue increased 92% to $5.8 million on meter growth and higher average revenue per meter.
Consolidated gross profit, predominantly generated by GRE, increased 4% to $27 million as the increase in kilowatt hour sold offset a decrease in gross profit per kilowatt hour sold.
Gross margin decreased 240 basis points to 28.4% on the decrease in gross profit per kilowatt hour sold at GRE.
Our consolidated SG&A spend decreased 3% to $19 million, as domestic restrictions on face-to-face customer acquisition programs during the pandemic slowed the pace of gross meter adds, which was only partially offset by higher spending on customer acquisition internationally.
Equity and the net loss in equity method investees was $146,000 this quarter compared to $238,000 in the year ago quarter, reflecting our share of the results at Atid in Israel.
We did not put additional cash into our U.K. joint venture in the quarter nor in the year ago quarter.
As Michael mentioned, following quarter end, we acquired our partner's stake in the U.K. venture for $1.7 million.
As a result, we will be reporting our U.K. financials as part of our consolidated results going forward.
Consolidated income from operations increased 22% to $8.5 million, while adjusted EBITDA increased 19% to $9.5 million.
The increase has resulted primarily from higher average consumption per meter and decreased domestic customer acquisition spend.
At GRE, income from operations increased 14% to $12.3 million, and adjusted EBITDA increased 13% to $12.6 million.
The loss from operations at Genie International was $1.6 million, and adjusted EBITDA loss came in at $1 million, both unchanged from levels in the year ago quarter.
Consolidated earnings per diluted share increased to $0.24 from $0.18 in the year ago quarter.
Cash generated by GRE further strengthened our balance sheet.
Cash, cash equivalents and restricted cash increased to $49 million at September 30, 2020, from $42 million at the close of the second quarter, while working capital increased to $55 million from $49 million.
To wrap up, Genie delivered another very strong quarter and remains well positioned to continue delivering on its plan.
That concludes my discussion of our financial results.
Now operator, back to you for Q&A.
| compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24.
|
I'm joined today by Ron Tsoumas, our Chief Financial Officer.
Let's begin on Slide 4 with a brief summary of our financial results for our fiscal second quarter, which ended on October 31.
Methode's second quarter sales increased 17% to nearly $301 million.
Our net income increased 62%, and our diluted earnings per share increased 60%.
Ron will provide more detail on financial results a bit later.
Turning to the business highlights on Slide 5.
The $301 million in net sales, as well as our $45 million in income from operations, were both records for Methode.
The resulting operating income margin was 15%.
These record results -- these record results are validation of our strategy and the product of the relentless efforts and commitment of our global team.
In the quarter, we saw significant rebound in automotive demand as compared to the first quarter, which has been impacted by the pandemic and created uncertainty in OEM production schedules.
The Automotive segment sales for the quarter were also a record at $216 million.
It was another strong quarter for our EV businesses, as well.
Sales for EV applications were over 9% of our total consolidated sales.
We also saw continued strength for EV bookings during the quarter with the annual expected sales from those awards totaling over $28 million.
As many of you know, much of Methode's historical growth came from our user interface products.
With our move into vehicle LED lighting and with our long-standing reputation and capabilities in power distribution, in conjunction with user interface, Methode is uniquely qualified as a three-pronged solution provider for electric vehicles.
We are globally well positioned and anticipate continued growth in this market.
Regarding our balance sheet, we continued to generate strong free cash flow and reduced our net debt in the quarter.
We have ample liquidity and our net leverage ratio continues to be low.
The strength and flexibility to our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and shareholder return.
On COVID-19, I continue to take pride in our employees' incredible commitment to Methode and supporting our efforts to provide a safe work environment.
All of our facilities are currently open and we are making prudent use of work-from-home where possible.
We do anticipate seeing some level of uncertainty from COVID-19 throughout the remaining fiscal year.
However, as I stressed since the beginning of this pandemic, we will continue to invest in our businesses for long-term growth.
Moving to Slide 6.
During the second quarter, Methode booked a number of awards capitalizing on the strategic trends in vehicle electrification, LED lighting and data centers.
The awards identified here represent a cross-section of the business wins in the quarter and represent over $40 million in the annual business.
In vehicle electrification, we won awards for ambient and functional lighting, overhead console and busbar programs totaling over $28 million annually.
As I highlighted last quarter, we continued to win programs with OEMs in the US, Europe and Asia.
EV is a global growth driver for Methode.
In non-EV LED lighting, we were awarded programs for several auto applications.
We also continued to participate in the growth of the data centers driven by cloud computing with programs for busbars and pluggable modules.
Lastly, we experienced a bounce in aerospace with defense program award.
Of note, in the first half of the fiscal year, Methode booked awards approximately $100 million in annual sales.
Looking forward, we are providing sales and earnings per share guidance for only the fiscal 2021 third quarter due to the market risk and uncertainty from the ongoing pandemic.
Turning to Slide 7.
We recently presented at an investor conference, and I would like to share our key messaging from it.
Our strategic focus is on diversification, growth and financial improvement.
Given the progress that we've made, diversifying our product portfolio into power, lighting and sensors, we are now actively capitalizing on key market trends like EVs, commercial vehicles and cloud computing.
With our technology solutions portfolio, we are able to address customer needs while increasing content per vehicle, penetrating non-auto markets and cross-selling into existing customers.
This will allow us to drive organic growth, something we were clearly demonstrating in fiscal 2020 until forwarded by the UAW strike at General Motors and COVID-19.
At the same time, we expect to continue to augment our technology and product portfolios through acquisitions that build on our strategy.
We believe these actions will further improve our product mix, and combined with operational efficiencies, will help to drive margin expansion.
Lastly, through our lean manufacturing capabilities, we are targeting further improvement in working capital.
Moving to Slide 8.
As I mentioned earlier, much of Methode's historical growth came from our user interface products.
With our move into vehicle interior and exterior LED lighting, and with our long-standing experience and capabilities in power distribution, Methode has become uniquely qualified as a three-pronged solution provider for electric vehicles.
In addition to our user interface offerings such as overhead consoles, integrated center consoles and switches, for our second prong, we are leveraging the powerful combination of our auto grade manufacturing operations, our auto pedigree, and our distribution expertise to supply various busbars, connectors and battery disconnect units to the EV OEMs. Our third prong in our approach to the EV market is lighting.
We are able to supply our Pacific Insight ambient lighting technology and our Grakon LED technology to provide both interior and exterior lighting solutions.
Our energy-efficient led is an ideal fit for EVs and their need to minimize power consumption.
Turning to Slide 9.
With the growing shift from internal combustion engines to electric vehicles, method has a clear opportunity to grow our content per vehicle.
Additional content in an EV could range from 20% to over 100% above our current content on internal combustion vehicle.
We expect EV applications to be a high-single-digit percentage of our current fiscal year total sales, and we have an order pipeline that should easily drive that to low-double-digit percentage in our next fiscal year.
EV is a clear tailwind for Methode.
Next, I'd like to comment on our new five-year long-term incentive plan, as described in our September 8-K filing, which includes time based and performance-based awards.
The performance-based awards may be earned based on fiscal 2025 EBITDA with threshold target and maximum performance goals.
On Slide 10, you can find the EBITDA target performance.
As some of you know, the Methode team concluded two such plans, when ending in fiscal year 2015 and the other in fiscal year 2020.
The more recent plan resulted in over 7% annual EBITDA growth, and our new plan targets just under 8% annual growth.
While we always have to contend with programs going end of life, and we may exit businesses for strategic reasons, we are confident that we have a path via organic growth, operational improvements and acquisitions to achieve the target of $300 million in EBITDA in fiscal year 2025.
To conclude, given the recent macroeconomic and pandemic situations, I am extremely pleased that our strategy and team were able to deliver record results, generate significant free cash flow and win additional EV awards in the quarter.
Second quarter sales increased 17% or $43.6 to $300.8 million in fiscal '21 from $257.2 million in fiscal '20.
The sales in the second quarter were positively impacted by the increased demand in all of our reporting segments as we recover from the lower first quarter production levels due to the COVID-19 pandemics.
The year-over-year quarterly comparisons benefited from the $32 million impact of the UAW strike on General Motors in the second quarter of fiscal '20.
In addition, the favorable impact of foreign currency on sales was $6.5 million in the current quarter.
The company generated year-over-year organic growth.
Second quarter net income increased $14.8 million to $38.6 million, or $1.01 per diluted share, from $23.8 million or $0.63 per diluted share in the same period last year.
In addition to the flow-through from higher sales and leveraging of SG&A expenses, second quarter net income also benefited from other income from foreign governmental COVID-19 assistance of $3.3 million, partially offset by $4.2 million of restructuring costs.
Second quarter gross margins were slightly higher in fiscal '21 as compared to fiscal '20, mainly due to higher sales volumes.
Fiscal '21 second quarter margins were 26.9% as compared to 26.7% in the second quarter of fiscal '20.
From a sales growth perspective, segment growth mix was unfavorable as a 4% increase in sales in the highest margin industrial segment was partially muted by the 19.8% and 37.8% increases in the automotive and interface segments, respectively.
These segments have a lower gross margin profile as compared to the industrial segment.
The fiscal '21 second quarter gross margins included $2.7 million of restructuring expense and the second quarter of fiscal '20 gross margins included $200,000 of restructuring costs.
Second quarter selling and administrative expenses as a percentage of sales decreased 270 basis points year-over-year or 10.2% compared to 12.9% in the fiscal '20 second quarter.
The fiscal '21 second quarter figure was attributable to leverage gained from increased sales, lower stock-based compensation expense, lower wages and associated benefits due to the COVID-related salary reduction and shorter work weeks, and much lower travel expense, partially offset by restructuring expense of $1.5 million.
There was $300,000 of restructuring expense in the second quarter of fiscal '20.
Regarding our restructuring activities, the company continues to monitor market factors and trends and will continue to evaluate possible additional actions to reduce overall costs and improve future operational profitability, especially in the current COVID-19 environment, which has seen an alarming increase in cases globally.
The company currently expects an additional restructuring expense of $700,000 in fiscal '21 resulting from the second quarter actions.
The company may take additional actions in the future based on conditions as required.
Net income was $38.6 million in the second quarter of fiscal '21 as opposed to $23.8 million in the second quarter of fiscal '20.
The main drivers between the fiscal periods were higher sales, receipt of $3.3 million of foreign government assistance due to COVID, lower selling and administrative expenses, partially offset by higher restructuring costs.
Shifting to EBITDA, a non-GAAP financial measure.
Fiscal '21 second quarter EBITDA was $60.2 million versus $43.6 million in the same period last year.
EBITDA was positively impacted by increased sales, foreign governmental COVID assistance and the benefit from restructuring actions taken in prior fiscal years.
A few other financial items to review.
In the second quarter of fiscal '21, we invested approximately $3.6 million in capex as compared to $13.6 million in the second quarter of fiscal '20.
The fiscal '21 year-to-date second quarter investment represents an approximately $30 million run rate for the current fiscal year.
The lower second quarter capex was simply due to timing as opposed to a conscious effort to curtail capex.
We have a strong balance sheet and intend to utilize it during this COVID-impacted fiscal year to make continued investments in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Our intent is to emerge from the COVID pandemic stronger than we went into this crisis by judiciously using our strong balance sheet to our long-term advantage.
Income tax expense in the second quarter of fiscal '21 was $7.6 million as compared to a tax expense of $5.2 million in the second quarter of fiscal '20.
The fiscal '21 second quarter tax rate was 16.5% as compared to 17.9% in the same period last fiscal year.
This relatively minor difference in effective tax rate was due to jurisdictional earnings and not discrete income tax activity.
We deleveraged gross debt by $2.2 million in the second quarter.
Since our acquisition of Grakon in September of 2018, when adjusting for the $100 million precautionary credit facility draw in March of 2020, we have reduced gross debt by $110 million.
Net debt decreased by $29.5 million in the second quarter of fiscal '21 as compared to the fiscal '20 year-end from $134.8 million, to $105.3 million.
We ended the second quarter with $242.3 million in cash, which includes the $100 million precautionary draw on the credit facility in March.
In November, we repaid $50 million of the March precautionary draw, and we'll continue to evaluate the landscape in the third quarter and may pay down the precautionary draw even further.
Our debt to trailing 12 months EBITDA ratio, which is used for our bank covenants, is approximately 1.7.
This figure includes the impact of the precautionary $100 million draw we initiated in March.
Without the draw, the ratio would have been approximately 1.2.
Our net debt to trailing 12 months EBITDA ratio was a strong 0.5.
Free cash flow, a non-GAAP financial measure, which effective in fiscal '21 is defined as cash provided from operating activities minus capex.
Prior to fiscal '21, it was defined as net income plus depreciation and amortization less capex.
For the fiscal '21 second quarter, free cash flow was $36.7 million as compared to $35.1 million in the second quarter of fiscal '20.
As Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the third quarter, which is subject to disruption at any time due to a variety of factors including the ongoing COVID-19 pandemic situation.
Please note that the third quarter of fiscal '21 contains 13 work weeks, whereas the third quarter of fiscal '20 had 14 work weeks.
The revenue range for the third quarter is between $265 million and $285 million.
Diluted earnings per share range is between $0.69 and $0.85 per share.
Don, that concludes my comments.
Operator, we are ready to take questions.
| compname posts q2 earnings per share $1.01.
q2 earnings per share $1.01.
q2 sales $300.8 million.
sees q3 earnings per share $0.69 to $0.85 including items.
sees q3 sales $265 million to $285 million.
|
These statements are subject to change due to new information or future events.
In a successful third quarter of 2021, Assured Guaranty's new business production generated $96 million of PVP.
This is our second highest result for a third quarter in the last decade.
At the nine months mark, our year-to-date PVP totaled $263 million, which puts us on pace with last year's outstanding production.
The business was well distributed across our U.S. public finance, international infrastructure and global structured finance markets for both the third quarter and nine months.
In terms of shareholder value as of September 30, 2021 on a per share basis, shareholders' equity, adjusted operating shareholder's equity and adjusted book value all reached record highs of $88.42, $82.89 and $122.50 respectively.
Year-to-date Assured Guaranty is earned $197 million of adjusted operating income, about the same as in last year's first three quarters notwithstanding a $138 million after-tax loss on debt extinguishment.
This accelerated recognition of an expense resulted from the voluntary early redemption of certain senior notes.
These redemptions and the issuance of lower coupon debt will reduce next year's debt service by $5.2 million.
Rob will provide more detail on the debt issuance later.
During the third quarter total municipal bond issuance was strong with $121 billion of new par issued, the second highest third quarter volume in a dozen years.
For the first three quarters, new par issue of $343 billion exceeded that of the comparable period in 2020 which was a record year.
Insurance penetration continued its upward trend, reaching 8.5% for both the third quarter and nine months, the highest level for a third quarter in any nine month period in more than a decade.
This was achieved even though the interest rate environment remained challenging, although benchmark yields moved a bit higher during the quarter, they remain low by historical standards and credit spreads compressed to the tightest levels in a decade.
In this environment, Assured Guaranty continue to lead the municipal bond insurance industry with the third quarter market share of almost two-thirds of the insured par sold in the primary market as we guarantee 270 transactions for a total of $6.7 billion in insured par.
At the nine month mark, we would guarantee more than 60% of insured new issue par sold this year.
The $17.9 billion we insured in the primary market was 90% higher than in the first nine months of 2020 and 88% more than in the first nine months of the most recent pre-pandemic year 2019.
It was in fact our highest primary market insured par for the first nine months in a decade.
We have continued to benefit from institutional investors preference for Assured Guaranty's insurance on larger transactions.
During the third quarter, we insured 17 transactions with $100 million or more in insured par, which brings our total year-to-date transaction count in this category to 38 just one deal short of the number we insured in all of 2020.
Also in the third quarter, we continue to add value on AA credits ensuring $836 million of par on 27 deals, that each has at least one rating in AA category from either S&P or Moody's.
The 83 municipal issues we insured in this category through September of this year aggregated to more than $3 billion of insured par compared with $2 billion in the first nine months of last year.
It was public finance usually generates a large percentage of our PVP each quarter and it's $55 million of third quarter PVP is no exception.
But we have a uniquely diversified approach to producing new business.
Our international infrastructure business has been a reliable contributor to our production in every quarter for more than five years.
It produced $17 million of PVP in the third quarter of 2021.
One significant transaction was a GBP113 million student accommodation issued by the University of Essex.
We have a substantial pipeline of high and medium probability transactions for the rest of this year and the first half of next.
In the transaction inquiries we are receiving our increasingly diverse.
Over the longer term, we believe infrastructure will continue to be a significant international market for us.
In the U.K. alone, the government has put out a paper anticipating as much as GBP650 billion of public and private infrastructure spending over the next 10 years.
In Global Structured Finance, third quarter PVP was very strong $24 million bringing the year-to-date total to $35 million.
We closed on a large insurance securitization in the third quarter and our CLO activity has been accelerating.
We guaranteed two euro denominated CLOs in the quarter, our guarantees of CLOs attract new investors, which might otherwise be discouraged by the higher capital requirements on uninsured CLOs, and we are seeing more opportunities to help investors reduce the capital consumed by both existing structured finance exposures and new investments.
Overall, the quality of our insured portfolio continue to improve as a below investment grade portion of our insured portfolio declined by $300 million during the quarter as within sight of falling below 3% of net par exposure.
Puerto Rico issues account for almost half of our below investment grade net par outstanding, and there have been important positive developments in the efforts to complete debt restructurings under PROMESA.
Negotiated agreements with these restructurings apply to 95% of our par exposures to Puerto Rico entities with the balance of our exposures remaining current on debt service payments.
The large end was broken on October 28 when the oversight Board agreed that the recently passed Commonwealth Legislation intended to authorize issuance and new exchange securities as part of the Commonwealth restructuring met the Board's condition and a revised plan of adjustment could move forward to the confirmation hearing, which is scheduled to start in November 8th, three days from now.
Meanwhile, the Commonwealth revenues have exceeded expectations and billions more have been received or are expected from Federal Coronavirus Relief and Disaster Relief allocations.
And the other may benefit further from pending federal physical infrastructure bill and build back better reconciliation bill.
On our last call, I mentioned SPs affirmation in July were AA stable outlook.
Financial strength ratings decides to our insurance subsidiaries.
This has been followed in October by KBRA's affirmation of a AA plus rating of AGM, Assured Guaranty U.K. and Paris Assured Guaranty Europe.
Importantly it also upgraded AGC to AA plus based on AGC's strength and capital position relative the KBRA's conservative stress loss modeling along with separate analysis of AGC's Puerto Rico, RBS and certain other exposures.
KBRA also noted AGC's decreased insurance leverage, the substantial de-risking of its insured portfolio and the positive movement toward resolution of Puerto Rico's Title 3 process.
All the ratings have stable outlooks, by the way the Puerto Rico settlement agreements were also deemed credit positive by Moody's in its credit opinion about AGM published in July.
On the asset management side of our business, we have been participating in a very active CLO market.
We increased fee earning CLO assets during the third quarter largely by launching one CLO which brought the number of CLOs we issued during the first nine months to four.
These new CLOs were responsible for a $1.7 billion of the one -- of the $3.8 billion increase in fee earning CLO assets since the year began.
The remaining $2.1 billion of the increase resulted primarily from selling CLO equity previously held in AssuredIM Funds and converting AUM from non-fee earning to fee earnings during the year.
We have shared virtually all of the CLO equity held by AssuredIM legacy funds and 96% of our CLO AUM is fee earning now.
We expect the CLO market to remain strong through year-end.
We reset or refinance three CLOs in the United States this quarter, adding up to the total of four CLOs in the U.S. and three CLOs in Europe that were reset or refinanced for the year through third quarter.
For these transactions are managed on a sub-advisory basis.
After the third quarter end, in October we closed a new CLOs in the United States.
In addition, we currently have two open CLO warehouses, one in the U.S. and one in Europe, we are planning to open one additional CLO warehouse in the U.S. before the end of the year.
Those CLOs and ongoing AssuredIM Funds overall have performed well.
I look forward to a successful finish for Assured Guaranty this year.
Our track record proves that our company is built to stand severe disruption in the financial markets.
And our recent results strongly suggest that a great number of investors appreciate the resilience of our business model, understand our value proposition and recognize our financial strength.
Those investments will be a source of our success for years to come as we continue to protect our policyholders and create value for our clients and shareholders.
This quarter, we continue to make great progress on our capital management strategies.
After issuing $500 million of 10-year senior notes at a rate of 3.15% in May, I'm pleased to report that AGUS Holdings issued another $400 million of 30-year senior notes in August at an attractive rate of 3.6%.
Most of the proceeds of these debt offerings were used to redeem $600 million of long-dated debt obligations, and the remaining proceeds were designated for general corporate purposes including share repurchases.
The redemptions included $430 million of debt we assumed in 2009 as part of the FSAH acquisition with coupons ranging from 5.6% to 6.9% and remaining terms of approximately eight years, as well as $170 million of AGUS 5% senior notes due in 2024.
These debt refinancings had several benefits to the company.
First, we reduced the average coupon on redeemed debt from 5.89% to 3.35% which will result in a $5.2 million annual savings until the next debt maturity date.
We expect continual annual interest savings after that.
So the amount of such savings will depend on the interest rate environment and the refinancing decisions we make at the time.
Second, we reduced our 2024 debt refinancing need from $500 million to $330 million.
And lastly, the debt proceeds, we borrowed in excess of those used for redemptions will provide flexibility to execute other strategic priorities including share repurchases without significantly affecting our leverage or interest coverage ratios.
These debt redemptions resulted in a pre-tax loss on debt extinguishment of $175 million or $138 million on an after-tax basis, consisting of two components.
First, $176 million acceleration of unamortized fair value adjustments that were originally recorded in 2009 as part of the FSAH acquisition, and second, a $19 million make whole payment to debt holders of the redeemed AGUS 5% senior notes.
It is important to note that $156 million of the $175 million loss was a non-cash expense.
The amortization of these purchase adjustments had been slowly amortizing into interest expense since 2009 and we're scheduled to continue to amortize into interest expense for another eight years.
The redemption of this debt merely accelerated the timing of that expense.
Despite this charge, our third quarter 2021 adjusted operating income was $34 million or $0.45 per share.
The loss on debt extinguishment reduced adjusted operating income by $1.87 per share.
In the Insurance segment however, adjusted operating income was significantly higher at $214 million for the third quarter 2021 up from $81 million in the third quarter of 2020.
The increase is primarily due to favorable loss development, which was a benefit of $94 million in the third quarter of 2021.
The largest component of the economic benefit was attributable to a $65 million benefit in U.S. RMBS exposures that was mainly related to a benefit from a higher recoveries and second lien charged-off loans in deferred first lien principal balances.
In addition, there was a $31 million benefit on public finance transactions due to mainly the refinement of the mechanics of certain terms of the Puerto Rico support agreements.
The economic development attributable to changes in discount rates across all transactions was not significant in the third quarter of 2021.
Other components of the Insurance segment also performed well in third quarter 2021.
The investment portfolio generated total income of $102 million, an increase from $95 million in third quarter 2020.
The increase was mainly due to the performance of the alternative investment portfolio including AssuredIM funds which collectively generated $33 million in the third quarter of 2021 compared with $20 million in the third quarter of 2020.
Since the establishment of AssuredIM, the insurance subsidiaries have invested $380 million in AssuredIM Funds which now have a net asset value of $465 million and have produce inception to-date return of almost 20%.
As a reminder, equity in earnings of investees is a function of mark-to-market movements attributable to the short IM funds and other alternative investments.
It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period-to-period.
Our fixed maturity and short-term investments account for the largest portion of the portfolio generating net investment income of $69 million in third quarter 2021 compared with $75 million in third quarter 2020.
The decrease in net investment income was primarily due to lower average balances in the loss mitigation investment portfolio.
As we shift fixed maturity assets into alternative investments, net investment income from fixed maturity securities may decline.
However, over the long term, we are targeting enhanced returns on the alternative investment portfolio of over 10%, which exceeds the projected returns on the fixed maturity portfolio.
In terms of premiums, scheduled net earned premiums were consistent relative to third quarter 2020.
And accelerations due to refundings and terminations were $15 million in third quarter 2021 compared with $18 million in the third quarter of 2020.
In the Asset Management segment, we have continued to make great progress in advancing our strategic goals.
This quarter, we increased fee earnings CLO AUM with the issuance of $598 million in new CLOs.
We continue to liquidate assets and wind down funds and now have less than $1 billion of legacy AUM in those funds.
And using a short IM's investment management expertise, we have expanded investment strategies in the insurance segment.
To-date, we have recorded strong mark-to-month results on the fund established by short IM.
In the Asset Management segment, adjusted operating loss was $7 million in the third quarter 2021 compared to an adjusted operating loss of $12 million in the third quarter of 2020.
However, asset management revenues increased 38% in third quarter 2021 compared with third quarter 2020 due mainly to the increase in CLO fee earning AUM and the recovery of previously deferred CLO fees in 2021.
The COVID-19 pandemic and downgrade in loan markets had triggered overcollateralization provisions in CLOs in the second and third quarters of 2020, resulting in the deferral of CLO management fees.
However, as of September 30, 2021, none of the short IM CLOs were triggering over collateralization provisions, and therefore, none of the short IM CLO fees were being deferred.
Fees from opportunity funds were also up as AUM increased to $1.6 billion as of September 30, 2021 from $1 million as of September 30, 2020.
Fees from the wind-down funds decreased as distributions to investors continued, and as of September 30, 2021, the AUM of the wind-down funds was $809 million compared with $2.3 billion as of September 30, 2020.
The corporate division typically consists mainly of interest expense on U.S. holding company's debt and corporate operating expenses.
This quarter, it also includes a debt extinguishment charge, which brought third quarter corporate results to a net loss of $169 million.
In third quarter 2021, the effective tax rate was a benefit of 57% and compared with the benefit of 33% in the third quarter of 2020.
The overall effective tax rate on adjusted operating income fluctuates from period to period based on the proportion of income in different tax jurisdictions.
The loss on extinguishment of debt in the third quarter 2021 reduced income in the U.S. compared to other jurisdictions, resulting in the low rate for the quarter, while third quarter 2020 benefited from the release of a reserve for uncertain tax positions.
Turning back to our ongoing capital management strategies.
We repurchased 2.9 million shares for $140 million in third quarter of 2021 at an average price of $47.76 per share.
This brings year-to-date repurchases to $305 million as of September 30, 2021.
The continued success of this program helped to drive our per share book value metrics to record highs.
Subsequent to the quarter close, we repurchased an additional 1.5 million shares for $77 million.
Since the beginning of our repurchase program in January 2013, we have returned $4 billion to shareholders under this program, resulting in a 67% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of over $33 in adjusted operating shareholders' equity per share and $58 in adjusted book value per share, which helped drive these metrics to new record highs of more than $82 in adjusted operating shareholders' equity per share and $122 in adjusted book value per share.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $272 million, of which $86 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to expand our business or repurchase shares to manage our capital.
As of today, we have $220 million of remaining share repurchase authorization.
| q3 adjusted operating earnings per share $0.45 including items.
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If you'd like copies, please visit the investor information section of our website, axiscapital.com.
This was a strong quarter for AXIS in a year where we demonstrated meaningful progress in strengthening all aspects of our business and in enhancing the value proposition that we deliver to our customers.
I'm grateful to my access colleagues for their tenacity and commitment in serving our brokers and clients as well as supporting one another, as we collectively navigated to a dynamic environment that included another tough cat year, continued curve balls thrown at us by the COVID pandemic, and rising inflation.
To the credit of our team in 2021, AXIS advanced its efforts to reposition the portfolio, manage down volatility, and drive profitable growth while capitalizing on a favorable market.
We began 2022 as a stronger company than we were just a year ago, committed to further increasing the value that we deliver to all of our stakeholders, and we're confident that we'll continue to build on our progress in the year ahead.
In a few minutes, people will walk us through the fourth quarter results, but I'd like to take a moment to step back and put our annual results in the context of a multiyear transformation.
Let me get to some of the specifics of the evident progress in our performance.
Comparing our results in 2017, we've taken our attritional ratio down by nine points to 55.1 this year and brought our current year ex-cat combined ratio by 10 points to 88.7, the best since 2007.
All the while, we reduced our PML by over 50% across the curve.
The improvement in our performance is attributable to more proactive reshaping of the portfolio, reduction of limits, and modification of attachment points, in addition to good growth in selected lines once they reached rate adequacy.
In 2021, industry cat losses are up about 40%, and but our cat loss ratio stayed flat at nine and a half.
This is still higher than we target, even in a $100 billion-plus cat year, and we're actively continuing our disciplined actions to reduce our cat exposure and deliver more consistent earnings.
Importantly, we continue to build a very successful specialty insurance franchise, which produced $4.9 billion of gross premium in 2021, making up 63% of our writings, up from 50% in 2017.
We expect that number to approach 70% this year as we capitalize on our already well-established presence in some of the most attractive P&C markets today.
Our insurance business is producing excellent results, growing production by 20%, generating record new business and total premiums, while at the same time, strengthening the overall portfolio.
Our insurance segment delivered a combined ratio of 91.6 this year, the best since 2010 and a parent year ex-cat combined ratio of 85.9, the lowest since 2006.
We're confident that the business is on pace to establish its place among the top carriers in the specialty insurance sector.
We continue to be focused on actively growing this business by enhancing the customer experience, and investing in capabilities and services that will increase the value that we deliver to our customers and the greater specialty sector.
Our reinsurance business also delivered improved performance and it's an encouraging sign of progress that in a very high cat year for the industry, it produced a combined ratio below 100.
In addition, the current year ex-cat combined ratio of 86.3 was the best since 2012.
This progress demonstrates the work our team has done to improve the quality and resilience of our reinsurance portfolio.
And as I noted earlier, we're fully committed to driving even more progress.
Indeed, during the recent January 1 renewals, where we write more than 50% of our reinsurance business, we advanced our corporate objectives to reduce volatility, allocate capital rigorously, and produce the most optimized portfolio for the current market.
As such, we took decisive action and reduced our reinsurance property and property cat premiums by 45%.
Our performance over the last few years tells us that our plan is generating tangible results, but we're still not done.
We won't be satisfied until we consistently deliver top quintile performance.
I've said this before, but it repeating, we know exactly what we need to do to sustain this momentum and profitably grow our business.
We'll continue to grow a franchise that leverages our broad global capabilities to deliver value-added products and services that meet our customers' needs.
We'll continue to intelligently grow our portfolio while reducing exposure to catastrophe events.
We're focused on achieving a competitive expense ratio that can support continued investment in long-term profitable growth, and we will continue to invest in our culture, our people, and then making a positive impact in our communities as well as in advancing our ESG objectives.
We're excited to begin 2022 and looking to the future with optimism and enthusiasm.
We're confident in what we can achieve and believe there's significant runway to further grow the business, deliver consistent profitable results, and enhance the value that we provide to all our stakeholders.
And with that, I'll now pass the floor to Pete, who will walk us through the fourth quarter and year and I'll come back to discuss market trends, and we'll have our Q&A.
This was an excellent quarter for AXIS in what was another good year of progress for the company.
During the quarter, we generated net income available to common shareholders of $197 million and an annualized ROE of 16.4%.
Operating income was 182 million, and annualized operating ROE was 15.1%.
The combined ratio for the quarter was 93.1%, with core underwriting results continuing to show improvement.
The company produced a consolidated current accident year combined ratio ex-cat and weather of 89.5 points, or 2.3 points better than the prior year quarter.
The improvement was attributable to both segments.
The consolidated current accident year loss ratio ex-cat and weather was 54.3%, a decrease of more than three points over the prior year quarter.
This was driven by improvements in the insurance segment.
The quarter's pre-tax cat and weather-related losses net of reinsurance were $54 million or 4.3 points.
This compares to 198 million or 18.4 points in 2020.
2020 did include 125 million or 11.6 points attributable to the COVID-19 pandemic.
There was no change in the total net loss estimate of 360 million established in 2020 for the COVID pandemic.
We reported net favorable prior year development of $9 million in the quarter, and this compared to 7 million in the fourth quarter of 2020.
The consolidated acquisition cost ratio was 20.4%, a decrease of 0.9 point over the prior year quarter, and that was attributable to both segments.
The consolidated G&A expense ratio was 14.8%, an increase of 1.7 points compared to the fourth quarter of '20.
The G&A ratio was impacted by year-over-year increase in performance-related compensation costs as well as an increase in personnel costs, partially offset by an increase in net premiums earned.
The personnel costs were largely associated with increased headcount in our insurance segment.
We are really pleased to continue to attract talented individuals to join our team and support the growth.
especially considering the favorable market conditions we see in this sector.
Normalizing the G&A ratio, which was primarily impacted by performance-related compensation.
The fourth quarter '21 ratio was 13.5%, and this would compare to a normalized 4Q 2020 of 13.8%.
We continue to focus on expense efficiency and expect to achieve a mid-13 G&A ratio going forward.
And lastly, on a consolidated basis, fee income from strategic capital partners was 27 million for the quarter, compared to 13 million in the prior year, largely associated with an increase in our investment manager of performance fees.
Now we'll discuss the segments.
I'll start with insurance, where once again, we had continued improvement across the underwriting metrics.
The current accident year combined ratio ex-cat and weather decreased by over five points, reflecting the underwriting actions we have taken to strengthen the portfolio.
Gross premiums written increased by 19% to 1.3 billion, making it our highest fourth quarter ever.
I would also note that the year-to-date gross premiums written of 4.9 billion, was also a record for the insurance segment.
The increase in gross premiums written in the quarter, primarily related to new business and favorable rate changes centered in the professional lines, liability, property, and marine.
The current accident year loss ratio ex-cat weather decreased by 5.3 points, resulting from not only the impact of favorable rate over trend but also driven by improved loss experience in several lines of business.
Pretax catastrophe and weather-related losses net of reinsurance were 23 million.
These were primarily attributable to the Quad-State tornadoes and other weather-related events.
The acquisition cost ratio decreased by over a point in the fourth quarter compared to 2020.
This was mainly related to an increase in ceding commissions due to growth in professional lines.
This is consistent with what we've been discussing throughout the year.
Now let's move on to the reinsurance segment.
During the quarter, our current accident year combined ratio ex-cat weather decreased by a point due to the repositioning of this portfolio.
The reinsurance segment's gross premiums written was essentially flat compared to the prior year quarter.
I would note that the fourth quarter is the smallest quarter for gross premiums written for reinsurance representing less than 10% of their annual gross premiums.
If we look at the full year, gross premiums written increased by a modest half a point as we continue to make changes in the portfolio, to improve balance and profitability of the book.
The current accident year loss ratio ex-cat weather increased by 0.2 point, resulting from the change in business mix as we increased writings in accident and health and liability along with a decrease in premiums earned in catastrophe and credit surety businesses.
This mix impact was offset by favorable rate over trend in all lines of business.
Pretax catastrophe and weather-related losses net of reinsurance were 32 million.
This was primarily attributable to December convective storms, the Quad-State tornadoes and other related events.
The acquisition cost ratio decreased by 0.4 points compared to the prior year quarter.
This was primarily due to the impact of retrocessional contracts.
Net investment income was 128 million for the quarter, and this compared to net investment income of 110 million for the fourth quarter of 2020.
The increase in net investment income was primarily attributable to positive returns from our alternative assets, principally related to private equity funds as well as a positive return on our privately held investment.
This was partially offset by a decrease in income from fixed maturities attributable to lower yields on the portfolio.
With respect to yields, at the end of the year, the fixed income portfolio had a book yield of 1.9% and a duration of three years, and our new money yield was 1.7%.
As we sit here today, given the movements we've seen in rates, our current new money yield is virtually equivalent with our book yield.
It's good to see these two yields coming together so that we can avoid any more headwind to our fixed income portfolio yield going forward.
Diluted book value per share increased to $55.78.
This was principally driven by net income generated, partially offset by a decrease in net unrealized gains related to increased treasury rates, and the widening of credit spreads as well as common share dividends declared.
Overall, the continued improvement in most operating metrics and positive momentum in our core underwriting book, this was a very strong quarter for AXIS.
That summarizes our fourth quarter results.
Market conditions remain quite strong.
Within our insurance segment, this represents the 17th consecutive quarter of rate increases and the 7th consecutive quarter of double-digit increases.
The average rate increase in our insurance book was more than 14% for the fourth quarter.
For the full year, rates also averaged up 14%, which was nearly identical to the increases that we saw in 2020.
Average rate increases were generally equivalent across both our North American and London International businesses.
By class of business, professional lines once again saw the strongest pricing actions with average rate increases of close to 24% for the quarter and nearly 22% for the year.
Continued rapid pricing escalation in cyber remains the key driver.
For the quarter, Cyber increased nearly 80% and averaged 50% for the year.
Excluding cyber, other professional lines are averaging 13% for the quarter and 14% for the year.
Breaking it out further, London is averaging more than 18% for the quarter and the year, Canada is averaging more than 30% for the quarter and 24% for the year, while in the U.S., rates are averaging about 9% for the quarter and about 11% for the year.
Liability, primary casualty, and excess casualty are all averaging increases in the high single digits for the quarter and the low double digits for the year.
Property rates increases were close to 10% for both the quarter and the year.
Among our other specialty lines, we saw high single-digit to low double-digit increases across the portfolio.
This included renewable energy, where we're a global leader at 13% for the quarter and the year.
While in marine and political risks, those increased 11% for the quarter, with an annual average just shy of 8%.
During the quarter, 96% of our insurance portfolio renewed flat to up and about half of the increases were double digit.
As mentioned earlier, we're achieving record new business production and we continue to see new business pricing metrics at least as strong, if not better, than renewal pricing.
In this market, we have terrific positioning and the ability to add value to our customers and partners and distribution while growing quite profitably.
The question on everyone's lips is how long will it last.
Looking forward, we expect that after many years of unsatisfactory performance, the industry will sustain a rational approach to pricing.
And there are enough uncertainties and pressures on loss costs and profitability as well as higher reinsurance costs to bear, that we expect disciplined pricing through 2022 and potentially into 2023.
Let's look at our reinsurance segment.
We estimate that for the full year 2021, we averaged reinsurance rate increases of about 11%.
As Pete just noted, the fourth quarter is a relatively small renewal period for Access REIT.
My comparison, just over half of our reinsurance business renews at January 1.
So I'll focus my comments on 1/1.
There's been a lot of talk already in the industry about 1/1 and there's no doubt that pricing is making further progress.
At AXIS, during the January 1 renewals, we saw average rate increases of about 9%.
Our international book renewed at average increases of more than 10%, while our North American book generated increases of 9%.
By and large, professional lines, casualty, and A&H came in, in the high single to low double digits, and other specialty lines, including marine, aviation, and credit and surety in the low to mid-single digits.
On property cat pricing, you'll have heard that global rates average in the 10-ish percent range.
but pricing was not uniform across the book.
Lower layers of reinsurance towers and aggregate treaties where supply was more constrained, exhibited the strongest pricing increases, especially if they were loss impacted.
In those loss impacted treaties, you would have seen increases in the 25% to 50% range.
As one moves up the towers to layers that are further removed from frequency and where supply was more plentiful, rate increases were more subdued.
As I noted earlier, we took meaningful action to reshape our cat portfolio and reduce our overall earnings volatility.
This was evidenced by a 70% reduction in gross premiums for aggregate treaties and a 75% reduction in gross premiums on low-attaching treaties among our various actions, leading to a 45% reduction in property and property cat reinsurance premiums at the 1/1 renewals as compared to the prior year.
This is consistent with our commitment to build the portfolio that we believe will drive the economic performance that we target.
Given the changes expected to our portfolio to reduce both frequency and severity, our average rate increase on profit was 7%.
With the reduction in profit and deposit [Inaudible] [Technical Difficulty] I'm sorry, my line was going down so I'm replacing it.
So with reduction to the property and catastrophe exposure, these two lines represented about 17% of our 1/1 renewal premiums, down from 27% in the 1/1 renewal portfolio last year.
I'm pleased that despite this meaningful shift in business mix and reduction in property cat lines that generally model well.
We continue to expect an improvement in overall technical ratios, but with much lower volatility.
Our general view of the reinsurance market is that while it's still running overall behind primary pricing, the market is heading in the right direction, but must continue to do so to adequately compensate reinsurers for the risk and volatility they assume.
In the year ahead, with the outlook that we have for the market, we will push for continued growth of our specialty insurance business.
We remain disciplined in our capital allocation to those lines in markets that provide the best balance of both short-term and longer-term opportunity, while working in partnership with our customers and brokers to ensure we maintain transparency on our ongoing support as we help them solve their risk management needs.
We see a bright future for AXIS.
We have a great team that's fully engaged and committed to building on our progress, generating consistent and sustained profitability, and enhancing the value that we deliver to our customers and shareholders.
| compname reports fourth quarter net income available to common shareholders of $197 million.
compname reports fourth quarter net income available to common shareholders of $197 million, or $2.31 per diluted common share and operating income of $182 million, or $2.13 per diluted common share.
|
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We are pleased with our second quarter results and continue to be grateful to our associates for their dedication to fulfilling our mission of serving others.
Despite what remains a challenging operating environment, including additional uncertainties brought on by the Delta variant and pressures on the global supply chain, our teams continue to successfully adapt and deliver for our customers.
Because of their efforts, during the quarter, we saw an improvement in customer traffic as compared to Q1.
And once again increased our market share in highly consumable product sales as measured by syndicated data.
Looking ahead, we remain focused on controlling the things we can control and believe we are well positioned to navigate the current inflationary environment and global supply chain challenges.
As always the health and safety of our employees and customers is our primary focus, while meeting the needs of the communities we serve.
And with more than 17,500 stores located within 5 miles of about 75% of the US population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience.
To that end, we recently hired our first Chief Medical Officer.
Going forward, our plans include further expansion of our health offering, with the goal of increasing access to affordable healthcare products and services, particularly in rural America.
Overall, we remain focused on our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.
Turning now to our second quarter performance.
As we continue to lap difficult quarterly sales comparisons from the prior-year, net sales decreased 0.4% to $8.7 billion, followed by a 24.4% increase in Q2 of 2020.
Comp sales declined 4.7% compared to the prior-year period, which translates into a robust 14.1% increase on a two-year stack basis.
Our Q2 sales results include a year-over-year decline in customer traffic, which was partially offset by the growth in average basket size.
From a monthly cadence perspective, comp sales were lowest in May, with July being our strongest month of performance.
And I'm pleased to report that Q3 is off to a great start.
Importantly, we continue to be very pleased with the retention rates of new customers acquired in 2020, underscoring the broadening appeal of our value and convenience proposition.
We believe we will ultimately exit the pandemic with a larger, broader and more engaged customer base than when we entered it, resulting in a even stronger foundation from which to grow.
Overall, our second quarter results reflect strong execution across many fronts as we continue to strengthen our position while further differentiating and distancing Dollar General from the rest of the discount retail landscape.
We operate in one of the most attractive sectors in retail, and we believe our unique store footprint further enhanced through our multiyear initiatives provides a distinct competitive advantage and positions us well for continued success.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock significant growth opportunities as we move forward.
In short, I feel very good about the underlying strength of the business and we're confident we are pursuing the right strategies to enable balanced and sustainable growth while -- while creating meaningful long-term shareholder value.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless we specifically note otherwise, all comparisons are year-over-year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit.
As a reminder, gross profit in Q2 2020 was positively impacted by a significant increase in sales, including net sales growth of 41% in our combined non consumables categories.
For Q2 2021, gross profit as a percentage of sales was 31.6%, a decrease of 80 basis points, but an increase of 87 basis points compared to Q2 2019.
The decrease compared to Q2 2020 was primarily attributable to increased transportation costs, a higher LIFO provision, a greater proportion of sales coming from the consumable categories and an increase in inventory damages.
These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales.
SG&A as a percentage of sales was 21.8%, an increase of 138 basis points.
This increase was driven by expenses that were greater as a percentage of sales, the most significant of which were retail labor and store occupancy costs.
Moving down the income statement, operating profit for the second quarter decreased 18.5% to $849.6 million.
As a percentage of sales, operating profit was 9.8%, a decrease of 219 basis points.
And while the unusual and difficult prior year comparison created pressure on our operating margin rate, we're very pleased with the improvement in our profitability on a two-year basis.
Our effective tax rate for the quarter was 21.4% and compares to 21.5% in the second quarter last year.
Finally earnings per share for the second quarter decreased 13.8% to $2.69, which reflects a compound annual growth rate of 27.7% or 24.3% compared to Q2 2019 adjusted earnings per share over a two-year period.
Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders.
Merchandise inventories were $5.3 billion at the end of the second quarter, an increase of 20% overall and 13.7% on a per store basis, as we continue to cycle unusually low levels of inventory in Q2 2020 which were driven by extremely strong sales volumes in that quarter.
Similar to Q1, we strategically pulled forward certain inventory purchases during the quarter, particularly in select non-consumable categories in anticipation of longer lead times.
As a result, we were pleased with our strong inventory position for the back-to-school shopping season and our teams continue to work closely with suppliers to ensure delivery of seasonal and other goods in the remaining back half of the year.
Year-to-date through Q2 we generated significant cash flow from operations totaling $1.3 billion.
Total capital expenditures for the quarter were $518 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 3.3 million shares of our common stock for $700 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $98 million.
At the end of Q2, the remaining share repurchase authorization was $979 million.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning excess cash to shareholders through anticipated share repurchases in quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of about 3 times adjusted debt-to-EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economic recovery, global supply chain, consumer behavior and our business.
Despite continued uncertainty, including additional pressure throughout the supply chain and cost inflation, we are updating our full year sales and earnings per share guidance, which reflects our strong first half performance.
For 2021, we now expect the following.
Net sales growth of 0.5% to 1.5%; a same-store sales decline of 3.5% to 2.5% which reflects growth of approximately 13% to 14% on a two-year stack basis and earnings per share in the range of $9.60 to $10.20, which reflects a compound annual growth rate in the range of 20% to 24% or approximately 19% to 23% compared to 2019 adjusted earnings per share over a two-year period.
Our earnings per share guidance assumes an effective tax rate in the range of 22% to 22.5%.
With regards to share repurchases, we now expect to repurchase approximately $2.4 billion of our common stock this year, compared to our previous expectation of about $2.2 billion.
Finally, we are increasing our expectations for capital spending in 2021 to a range of $1.1 billion to $1.2 billion to reflect higher equipment costs for store projects in the pull forward of select supply chain investments.
Let me now provide some additional context as it relates to our outlook.
In terms of sales, we remain cautious in our 2021 outlook given the current continued uncertainties arising from COVID-19 pandemic and the impact of the expected end of additional federal unemployment benefits.
Turning to gross margin, please keep in mind, we will continue to cycle strong gross margin performance from the prior year where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates.
Much like our Q2 results, we expect continued pressure on our gross margin rate in the second half, due to a less favorable sales mix compared to prior year, an increase in markdown rates as we cycle the abnormally low levels in 2020 and higher LIFO provisions as a result of cost of goods increases.
We also anticipate higher supply chain costs in the second half compared to our previous expectations.
Like other retailers, our business is seeing the effects of higher cost due to transit and port delays as well as elevated demand for services at third-party carriers.
However, despite these challenges, our team was able to meet strong customer demand during the quarter and we're confident in our ability to continue navigating these transitory pressures.
Finally, please keep in mind that the third quarter represents our most challenging lap of the year from a gross profit rate perspective, following an improvement of 178 basis points in Q3 2020.
With regards to SG&A, we now expect about $70 million to $80 million of incremental year-over-year investments in our strategic initiatives as we further their rollouts.
This amount includes $40 million in incremental investments made during the first half of the year.
However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021 driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
In closing, we are proud of our second quarter results, which are a testament to the performance and strong execution by the entire team.
As always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long-term.
We remain confident in our business model and ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
The team continues to drive strong execution against a robust portfolio of growth initiatives.
Let me take you through some of our more recent highlights.
Starting with our non-consumables initiative or NCI.
The NCI offering was available in more than 8,800 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance we are seeing across our NCI store base.
In fact this performance is contributing to an incremental 1% to 2.5% total comp sales increase in NCI stores and a meaningful improvement in gross margin rate as compared to stores without the NCI offering.
Overall, we remain on track to expand this offering to a total of more than 11,000 stores by year-end, including over 2,100 stores in our light version, with the goal of completing the rollout of NCI across nearly the entire chain by year-end 2022.
Moving to our newer store concept, pOpshelf, which further builds on our success in learnings with NCI.
POpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter we opened eight new pOpshelf locations, bringing the total number of stores to 16, including four conversions of a traditional Dollar General store into our pOpshelf concept.
And while still early, we remain extremely pleased with our results, which continue to exceed our expectations for both sales and gross margin.
We also recently opened our first two store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger Dollar General market stores, and we are encouraged by the initial results including positive reaction from customers.
For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts as we continue to lay the foundation for future growth.
Overall, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.
Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of frozen and refrigerated goods.
I'm very pleased to report that during the quarter, we completed the initial rollout of DG Fresh across the entire chain and are now delivering to more than 17,500 stores from 12 facilities.
Notably the rollout was completed about six months ahead of our initial rollout schedule.
As a reminder, the primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items and we continue to be very pleased with the savings we are seeing.
In fact DG Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher inventory markups and we expect additional benefits going forward as we continue to optimize our network and further leverage our scale.
Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of additional products, including both national and private brands.
For example, we recently introduced about 25 new and exclusive items under the Armor [Phonetic] brand, as we continue to optimize our assortment, while further differentiating our product offering from others.
And while produce was not included in our initial rollout plans, we believe DG Fresh provides a potential path to accelerating our produce offering in up to 10,000 stores over time as we look to further capitalize on our extensive self-distribution capabilities.
Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative.
During the first half, we added more than 34,000 cooler doors across our store base and remain on track to install approximately 65,000 cooler doors this year.
Notably, the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection, all enabled by DG Fresh.
In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
Our proven high-return low-risk real estate model continues to be a core strength of our business.
In the second quarter, we completed a total of 772 real estate projects, including 270 new stores, 477 remodels and 25 relocations.
For the full year, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores.
In addition, we now have produce in more than 1,500 stores with plans to expand this offering to a total of more than 2,000 stores by year end.
As a reminder, we recently made key changes to our development strategy, including establishing our larger 8,500 square foot format as our base prototype for nearly all new stores going forward.
We're especially pleased with the sales productivity of this larger format, as average sales per square foot continue to trend well above an average traditional store.
In total, we expect to have nearly 2,000 stores in this format by the end of the year, as we look to further enhance our value and convenience proposition particularly in rural America.
Next our digital initiative, which is an important complement to our brick and mortar footprint, as we continue to deploy and leverage technology to further enhance convenience and access for customers.
Our efforts remain centered around building engagement across our digital properties including our mobile app, which continues to grow in popularity.
In fact, we ended Q2 with nearly 4 million monthly active users on the app, a 28% increase over prior year.
Importantly, as we continue to drive higher levels of digital engagement, our DG Media Network, which we launched in 2018 has become an increasingly more relevant platform for connecting our brand partners with our customers.
Of note, during the first half, the number of campaigns on our platform increased 65% compared to the prior year period, and we are very excited about the growth potential of this business as we look to further enhance the value proposition for both our customers and brand partners.
Overall our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient frictionless and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions.
This zero-based budgeting approach internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset.
Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
The first phase of Fast Track consisted of optimizing our rolltainers in case pack sizes, resulting in the more efficient stocking of our stores.
The second component of Fast Track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Self checkout was available in approximately 4,300 stores at the end of Q2, and we continue to be pleased with our results, including customer adoption rates and higher overall satisfaction scores in stores that include this offering.
Our plans consist of a broader rollout this year and we remain focused on introducing self checkout into the vast majority of our stores by the end of 2022 as we look to further extend our position as an innovative leader in small-box discount retail.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we continue to create new jobs in the communities we serve.
As evidenced, we recently launched a national hiring event with the goal of hiring up to an additional 50,000 employees by Labor Day, and I am pleased to note that we are on track to meet our goal.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent, and because over 75% of our store associates at or above the lead sales associate position were internally placed, employees who joined Dollar General know, they have an opportunity to grow their career with us.
We also continue to innovate on the development opportunities we can offer our teams, including continued expansion of our private fleet and those associated with DG Fresh as well as pOpshelf.
Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by a robust internal promotion pipeline in staffing above traditional levels.
We also held our annual leadership meeting earlier this month, resulting in a rich and virtual development experience for more than 1,500 leaders of our company.
This is one of my favorite events every year and I was once again inspired by the incredible talent and dedication of our people.
In closing, I am proud of our team's performance as we continue to advance our operating priorities and strategic initiatives.
Overall, we are very pleased with our position as we head into the back half of the year.
And I'm excited about the significant growth opportunities ahead.
| compname posts q2 earnings per share of $2.69.
q2 earnings per share $2.69.
sees fy sales up 0.5 to 1.5 percent.
q2 sales $8.7 billion versus refinitiv ibes estimate of $8.61 billion.
qtrly same-store sales decreased 4.7%; increased 14.1% on a two-year stack basis.
sees fy same-store sales decline of 3.5% to 2.5%.
sees fy diluted earnings per share in range of $9.60 to $10.20.
as of july 30, 2021, total merchandise inventories, at cost, were $5.3 billion compared to $4.4 billion as of july 31, 2020.
same-store sales in q2 included a decline in each of consumables, seasonal, apparel, and home products categories.
|
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Despite, what continues to be a challenging operating environment, including elevated cost pressures and broad-based supply chain disruptions, our teams remain focused on controlling what we can control, and they are delivering for our customers.
We are grateful for their efforts.
Looking ahead, we believe we are well positioned to navigate the current environment.
And although we've experienced higher-than-expected costs, both from a product and supply chain perspective we're very confident in our price position.
As our price indexes relative to our competitors and other classes of trade remain in line with our targeted and historical ranges.
And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important for our customers and they will continue to have a significant presence in our assortment.
In fact, approximately 20% of our overall assortment remains at $1 or less.
And moving forward we will continue to foster and grow this program where appropriate.
As the largest retailer in the US by store count, with over 18,000 stores located within five miles of about 75% of the US population, we believe our presence in local communities across the country provides another distinct advantage and positions us well for continued success.
Overall, we remain focused on advancing our operating priorities and strategic initiatives.
As we continue to strengthen our competitive position, while further differentiating and distancing Dollar General from the rest of the discount retail landscape.
To that end, I'm excited to share an update on some of our more recent plans.
First, as you saw in our release, we expect to execute a total of nearly 3,000 real estate projects in 2022, including 1,100 new store openings as we continue to lay and strengthen the foundation for future growth.
Of note, these plans include the acceleration of our pOpshelf concept, as we expect to nearly triple our store count next year, as compared to our fiscal '21 year-end target of up to 50 locations.
In addition, given the sustained performance of our pOpshelf concept, which continues to exceed our expectations, we plan to further accelerate the pace of new store openings as we move ahead.
Targeting a total of about 1,000 pOpshelf locations by fiscal year-end 2025.
Importantly, we anticipate these new pOpshelf locations will be incremental to our annual Dollar General store opening plans, as we look to further capitalize on the significant growth opportunities we see for both brands.
We are also now at the early stages of plans to extend our footprint into Mexico, which will represent our first store locations outside the Continental United States.
We believe Mexico represents a compelling expansion opportunity for Dollar General given this demographics and proximity to the US, and we are confident that our unique value and convenience proposition will resonate with the Mexican consumer.
While our initial entry in the Mexico is focused on piloting a small number of stores in 2022.
We expect to seize -- we plan today will ultimately turn into additional growth opportunities in the future.
Finally, as previously announced, we recently introduced our digital services by partnering with DoorDash to provide delivery in under an hour, in over 10,000 locations.
Further enhancing our convenience proposition, while broadening our reach with new customers.
Jeff will discuss these updates in more detail later in the call.
But first let's recap some of the top line results for the third quarter.
Net sales increased 3.9% to $8.5 billion following a 17.3% increase in Q3 of 2020.
Comp sales declined 0.6% to the prior year quarter, which translates to a robust 11.6% increase on a two-year stack basis.
From a monthly cadence perspective, comp sales were lowest in September, with October being our strongest month of performance.
And I'm pleased to report that Q4 sales to-date are trending in line with our expectations.
Our third quarter sales results include a year-over-year decline in customer traffic, which was largely offset by growth in average basket size, even as we lap significant growth in average basket size last year.
In addition, during the quarter, we saw an improvement in customer traffic, as compared to Q2 of 2021.
And we continue to be pleased with the retention of the new customers acquired in 2020.
We're also pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories.
And even as our market share in total highly consumable product sales decreased slightly in Q3, we feel good about our overall share gains on a two-year stack basis.
Collectively, our third quarter results reflect strong execution across many fronts.
And further validates our belief that we are pursuing the right strategies to enable sustainable growth, while supporting long-term shareholder value creation.
We operate in one of the most attractive sectors in retail.
And as a mature retailer in growth mode, we continue to lay the groundwork for our future initiatives, which we believe will unlock additional growth opportunities as we move forward.
Overall, I've never felt better about the underlying business model and we are excited about the significant growth opportunities we see ahead.
Now that Todd has take you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless we specifically note otherwise all comparisons are year-over-year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit.
As a reminder gross profit in Q3 2020 was positively impacted by a significant increase in sales, including net sales growth of 24% in our combined non-consumable categories.
For Q3 2021, gross profit as a percentage of sales was 30.8%, a decrease of 57 basis points, but an increase of 121 basis points, compared to Q3 2019.
The decrease compared to Q3 2020 was primarily attributable to a higher LIFO provision, increased transportation costs, a greater proportion of sales coming from our consumables category and an increase in inventory damages.
These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales.
SG&A as a percentage of sales was 22.9%, an increase of 105 basis points.
This increase was driven by expenses that were greater as a percentage of sales in the current year period, the most significant of which were retail, labor and store occupancy costs.
The quarter also included $16 million of disaster-related expenses attributable to Hurricane Ida.
Moving down to income statement.
Operating profit for the third quarter decreased 13.9% to $665.6 million.
As a percentage of sales, operating profit was 7.8%, a decrease of 162 basis points.
And while the unusual and difficult prior year comparison create pressure on our operating margin rate, we're very pleased with the improvement of 78 basis points, compared to Q3 2019.
Our effective tax rate for the quarter was 22.2% and compares to 21.6% in the third quarter last year.
Finally, earnings per share for Q3 decreased 10% to $2.08, which reflects a compound annual growth rate of 21% over a two-year period.
Turning now to our balance sheet and cash flow which remain strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders.
Merchandise inventories were $5.3 billion at the end of the third quarter, an increase of 5.4% overall and a decrease of 0.1% on a per store basis.
And while we're not satisfied with our overall in-stock levels, we continue to make good progress and are focused on improving our in-stock position particularly in our consumables business.
Looking ahead, we are pleased with our inventory position for the holiday shopping season and our teams continue to work closely with suppliers to ensure delivery of goods for the remainder of the year.
Year-to-date through [Phonetic] the third quarter, we generated significant cash flow from operations totaling $2.2 billion.
Capital expenditures to the first three quarters were $779 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 1.6 million shares of our common stock for $360 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million.
At the end of Q3, the total remaining authorization for future repurchases was $619 million.
We announced today that our Board has increased this authorization by $2 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continue to operate in a time of uncertainty regarding the economic recovery from the COVID-19 pandemic, including any changes in consumer behavior and the corresponding impacts on our business.
Despite continued uncertainty, including cost inflation ongoing pressure throughout the supply chain, we are updating our sales and earnings per share guidance, which reflects our strong performance through the first three quarters, as well as our expectations for Q4.
For 2021, we now expect the following: Net sales growth of approximately 1% to 1.5%; a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a two-year stack basis; and earnings per share in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24% or approximately 21% to 23%, compared to 2019 adjusted earnings per share over a two-year period.
Our earnings per share guidance now assumes an effective tax rate of approximately 22%.
Let me now provide some additional context as it relates to our outlook.
In terms of sales, we remain cautious in our outlook over the next couple of months, given the continued uncertainties arising from the COVID-19 pandemic, including additional supply chain disruptions and the impact of the end of certain federal aid such as additional unemployment benefits and stimulus payments.
Turning to gross margin.
Please keep in mind, we will continue to cycle strong gross margin performance from the prior year where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rate.
Consistent with Q2 and Q3, we expect continued pressure on our gross margin rate in the fourth quarter, due to a higher LIFO provision, as a result of cost of goods increases, a less favorable sales mix, compared to the prior year quarter, and an increase in markdown rates as we continue to cycle the abnormally low levels in 2020.
We also anticipate higher supply chain costs in Q4 compared to the 2020 period.
Like other retailers our business continues to be impacted by higher costs due to transit and port delays, as well as elevated demand for services at third-party carriers.
However, despite these challenges we are confident in our ability to continue navigating these transitory pressures.
With regards to SG&A, we continue to expect about $70 million to $80 million, an incremental year-over-year investments in our strategic initiatives.
This amount includes $56 million in incremental investments made during the first three quarters of 2021.
However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
Finally, our updated guidance does not include any impact from the proposed federal vaccine and testing mandate, including potential disruptions to the business or labor market or any incremental expense.
In closing, we are pleased with our third quarter results, which are with testament to the strong performance and execution by the team.
As always we continue to be disciplined and how we manage expenses in capital with the goal of delivering consistent strong financial performance, while strategically investing for the long-term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
The team did a great job this quarter, executing against a robust portfolio of growth initiatives.
Let me highlight some of our more recent efforts.
Starting with our non-consumables initiative or NCI.
The NCI offering was available in nearly 11,000 stores at the end of Q3, and we continue to be very pleased with the strong performance we are seeing across our NCI store base.
Notably, this performance is contributing an incremental 2.5% total comp sales increase on average in NCI stores along with a meaningful improvement in gross margin rate, as compared to stores without the NCI offering.
Overall, we now plan to expand this offering to a total of more than 11,500 stores by year-end, including over 2,000 stores in our light version.
And we expect to complete the rollout of NCI across nearly the entire chain by year-end 2022.
Moving to our pOpshelf concept, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a unique in-store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter we added 14 new pOpshelf locations, bringing the total number of stores to 30.
Opened our first 14 store within a store concepts and celebrated the one-year anniversary of our first pOpshelf store opening.
For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end, as well as up to an additional 25 store with an in-store concepts, which incorporate a smaller footprint pOpshelf shop into one of our larger format Dollar General market stores.
Importantly, as Todd noted earlier, we continue to be very pleased with the performance of our pOpshelf stores, which have far exceeded our expectations for both sales and gross margin.
In fact, we anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%.
We believe this bodes well for the future as we move toward our goal of about 1,000 pOpshelf locations by year-end 2025.
Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of frozen and refrigerated goods.
As a reminder, we completed the initial rollout of DG Fresh across the entire chain in Q2, and are now delivering to more than 18,000 stores from 12 facilities.
The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items.
And we continue to be very pleased with the savings we are seeing as DG Fresh remains a meaningful contributor to our gross margin rate.
Another goal of DG Fresh is to increase sales in these categories.
And we are very happy with the performance on this front, as overall comp sales of our frozen and refrigerated goods outperformed all other product categories in Q3, even against a difficult prior year sales comparison.
Going forward, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network, further leverage our scale, deliver an even wider product selection and build on our multi-year track record of growth in cooler doors and associated sales.
With regards to our cooler expansion program, during the first three quarters we added more than 52,000 cooler doors across our store base.
In total, we expect to install approximately 65,000 additional cooler doors in 2021.
The majority of which will be in high capacity coolers.
Turning now to an update on our expanded health offering, which consist of about 30% more feet of selling space and nearly 400 additional items, as compared to our standard offering.
This offering was available in nearly 800 stores at the end of Q3, with plans to expand to approximately 1,000 stores by year-end.
Looking ahead, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services overtime, particularly in rural America.
In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
We recently celebrated a significant milestone with the opening of our 18,000 stores, which reflects the fantastic work of our best-in-class real estate team, as we continue to expand our footprint and further enhance our ability to serve additional customers.
Through the first three quarters, we completed a total of 2,386 real estate projects, including 798 new stores, 1,506 remodels and 82 relocations.
For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total.
In addition, we now have produce in approximately 1,900 stores with plans to expand this offering to a total of over 2,000 stores by year-end.
For 2022 we plan to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations.
We also plan to add produce and approximately 1,000 additional stores next year with the goal of ultimately expanding this offering to a total of up to 10,000 stores over time.
Of note, we expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot new store prototype, allowing for a more optimal assortment and room to accommodate future growth.
Importantly, we continue to be very pleased with the sales productivity of this larger format, as average sales per square foot continue to trend about 15% above an average traditional store.
Our 2022, real estate plans also include opening approximately 100 additional pOpshelf locations, bringing the total number of pOpshelf stores to about 150 by year-end, as well as, up to an additional 25 store with in-store concept.
As Todd noted, we are also very excited about our plans to expand our footprint internationally for the first time, with plans to open up to 10 stores in Mexico by year-end 2022.
As we look to extend our value and convenience offering to even more communities, while continuing to lay the foundation for future growth.
Overall, our proven high-return, low-risk real estate model continues to be a core strength of our business.
And the good news is, we believe we still have a long runway for new unit growth ahead of us.
In fact, across our Dollar General, pOpshelf and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the Continental United States alone.
Although, these opportunities available to all small box retailers, we expect to continue capturing a disproportionate share as we move forward.
And while still early, we expect our entry into Mexico will ultimately unlock a significant number of additional new unit opportunities in the years to come.
When taken together, our real estate pipeline remains robust and we are excited about the significant new store opportunities ahead.
Next, our digital initiative, which is an important complement to our physical store footprint, as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
Of note, we ended Q3 with over 4.4 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings.
As Todd noted, our partnership with DoorDash is another example of meeting the evolving needs of our customers, by providing the savings offered by Dollar General, combined with the convenience of same-day delivery in an hour or less.
And while still early, we are pleased with the initial results, including better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base.
Our DG Media Network, which we launched in 2018 is also seeing strong results, including significant growth in the number of campaigns on our platform.
Overall, we remain very excited about the long-term growth potential of this business.
And we look to better connect our brand partners with our customers in a way that is accretive to the customer experience.
Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of customer engagement across our digital ecosystem.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions.
This zero based budgeting approach internally branded as safe to serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset.
Our Fast Track initiative is a great example of this approach, where our goals include, increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Looking ahead, our plans now include expanding this offering to over 6,000 stores by year-end 2021, and to the majority of our store base by the end of 2022, as we look to further extend our position as an innovative leader in small box discount retail.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we continue to create new jobs in the communities we serve.
As evidenced in 2022, we plan to create more than 8,000 net new jobs.
In addition, our growth also fosters an environment where employees have opportunities to advance to roles with increasing levels of responsibility and meaningful wage growth in a relatively short timeframe.
In fact, over 75% of our store associates at/or above the lead sales associate position were internally placed.
And we continue to innovate on the development opportunities we offer our teams.
Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by our robust promotion pipeline, healthy applicant flows and staffing above traditional levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also recently completed our annual community giving campaign, where our employees came together to raise funds for a variety of important causes.
And I was once again inspired by the generosity and compassion of our people.
Our mission of serving others is deeply embedded in the daily culture of Dollar General.
And I'm so proud to be a part of such an incredible team.
In closing, we are making great progress against our operating priorities and strategic initiatives.
And with the actions and multi-year initiatives we have in place, we are confident in our plans to drive long-term sustainable growth and shareholder value creation.
| compname reports q3 earnings per share of $2.08.
q3 earnings per share $2.08.
sees fy sales up about 1 to 1.5 percent.
q3 sales rose 3.9 percent to $8.5 billion.
|
This is Ramesh Shettigar, Vice President of Investor Relations and Corporate Treasurer.
On the call today to present our second quarter results are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer; and Sam Hillard, Senior Vice President and Chief Financial Officer.
These statements speak only as of today, and we undertake no obligation to update them.
Glatfelter delivered positive overall results versus expectations despite entering the quarter anticipating softer demand and market-related downtime associated with customer destocking for the Airlaid segment.
These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly.
Also, consistent with the execution of our ongoing transformation and growth strategy, we announced the pending acquisition of Jacob Holm, a leader in the nonwoven sector.
I'll provide more details about this important acquisition throughout the call.
As for second quarter results, we reported adjusted earnings per share of $0.18 and adjusted EBITDA of $28 million.
slide three of the investor deck provides the highlights for the quarter.
Airlaid Materials performed above expectations driven by a rebound in the tabletop category as in-person dining began to recover globally.
Mount Holly contributed favorably to the quarterly results following the team's excellent execution in closing the transaction, standing up a new integrated system and restarting production and shipping, all within 48 hours after closing.
We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Glatfelter portfolio.
While overall volume growth was healthy, we did experience lower-than-anticipated demand in hygiene products as customers continued to destock from elevated inventory levels maintained during the pandemic.
We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year.
Composite Fibers results were below expectations as unfavorable mix and higher-than-anticipated energy prices negatively impacted profitability.
And while shipping volume was up meaningfully, inflationary headwinds proved to be challenging for this segment.
The pricing actions announced in the first quarter helped to address some of the raw material input cost pressures, but not enough to offset the higher-than-anticipated energy prices and logistics costs during the second quarter.
We expect a more meaningful benefit from the price increases to take effect in the third quarter.
At an enterprise level, our focus remains on the health and safety of Glatfelter people.
Our efforts continue to keep all facilities operational as they did in the quarter, while ensuring uninterrupted supply of essential products to our customers despite the current evolving nature of the pandemic.
It goes without saying that 2021 has been a momentous year thus far in executing Glatfelter's ongoing transformation and growth strategy.
In May, we closed on the acquisition of Mount Holly, which has strategically positioned us to more fully benefit from the long-term growth in the health and hygiene category, while also being immediately accretive to earnings.
I'll provide additional commentary on the Jacob Holm acquisition after Sam completes his review of our second quarter results.
Second quarter adjusted earnings from continuing operations was $8 million or $0.18 per share, a decrease of $0.04 versus the same period last year driven by pandemic-related softness in our Airlaid Materials segment reflected in our guidance last quarter.
Also noteworthy is that Q2 results include the acquisition of Mount Holly, reflecting six weeks of ownership during the quarter.
slide four shows a bridge of adjusted earnings per share of $0.22 from the second quarter of last year to this year's second quarter of $0.18.
Composite Fibers results lowered earnings by $0.01 driven by higher inflation in raw materials and energy.
Airlaid Materials results lowered earnings by $0.06 primarily due to softness in the hygiene category and lower production as customers continued to destock from pandemic-driven elevated inventory levels.
Corporate costs were $0.03 favorable from ongoing cost control initiatives.
And interest, taxes and other items were in line with the second quarter of last year.
slide five shows a summary of second quarter results for the Composite Fibers segment.
Total revenues for the quarter were 7.1% higher on a constant currency basis driven by higher selling prices of $2 million and the near doubling of our wallcover volume from the trough of the pandemic in 2020.
Excluding metallized, shipments in the quarter were approximately 26% higher driven by strong growth in wallcover, technical specialties and composite laminates.
The food and beverage category, however, was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter.
The strong demand overall required increased levels of production, driving a $3 million benefit to earnings.
Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for this segment.
We continue to implement announced pricing actions, but during the quarter, selling price realization only partially offset the higher input costs.
And currency and related hedging activity unfavorably impacted results by $600,000.
Looking ahead to the third quarter of 2021, we expect shipments in Composite Fibers to be 2% to 3% higher sequentially, favorably impacting results by approximately $400,000.
We expect higher selling prices to fully offset raw material, energy and logistics inflation when compared to the second quarter.
And operations are expected to be in line with the second quarter.
Slide six shows a summary of second quarter results for Airlaid Materials.
Revenues were up 5% versus the prior year quarter on a constant currency basis, supported by the addition of Mount Holly and a strong rebound in tabletop demand as in-person dining began to recover globally.
Demand for hygiene products, however, was lower for the quarter as customers continued to destock from high inventory levels maintained during the pandemic.
As previously stated, we believe this decline is transitory.
And as a result, we are projecting meaningful growth in Q3 in all product categories.
As evidence, demand for wipes has picked up materially in July, and hygiene has started to improve.
We expect more normalized buying patterns in all of our categories to return in the second half of the year.
Selling prices increased from contractual cost pass-through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800,000.
Operations lowered results by $1.9 million mainly due to lower production in the quarter to manage inventory levels and better align with customer demand.
And foreign exchange was unfavorable by $300,000 versus the second quarter of last year.
For the third quarter of 2021, we expect shipments in Airlaid Materials to be approximately 15% to 20% higher.
Selling prices and input prices are both anticipated to be higher, but fully offsetting each other.
Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrade.
The increased production is expected to favorably impact operating profit by approximately $1 million to $2 million sequentially in addition to the increased volume.
slide seven shows corporate costs and other financial items.
For the second quarter, corporate costs were favorable by $1.9 million when compared to the same period last year driven by continued spend control.
We expect corporate costs for full year 2021 to be approximately $23 million, which is an improvement from our previous guidance of $25 million to $26 million.
Interest and other income and expense are now projected to be approximately $11 million for the full year, lower than our previous guidance of $12 million.
Our tax rate for the quarter was 33%.
And full year 2021 is estimated to be between 38% and 40%, lower than our previous guidance of 42% to 44%.
The lower overall tax rate is driven by changes in the jurisdictional mix of pre-tax earnings, slightly offset by an increase in the U.K. rate.
slide eight shows our cash flow summary.
Second quarter year-to-date adjusted free cash flow was lower by approximately $6 million mainly driven by higher working capital usage after adjusting for special items.
We expect capital expenditures for the year to be between $30 million and $35 million, with the reduction being driven largely by our better-than-anticipated execution on Mount Holly integration costs.
Depreciation and amortization expense is projected to be approximately $60 million.
slide nine shows some balance sheet and liquidity metrics.
Our leverage ratio increased to three times at June 30, 2021, mainly driven by the Mount Holly acquisition we completed in May 2021, which increased our net debt by approximately $175 million.
Even after this acquisition, we continue to maintain liquidity of approximately $200 million.
These figures do not include the recently announced pending acquisition of Jacob Holm, which Dante will cover more shortly.
We also have additional financing details located in the appendix of our investor deck.
Looking ahead, we remain very optimistic about the prospects for the second half of the year and beyond as we continue building momentum for the company.
Demand for Composite Fibers products is robust, and we expect that to continue for the foreseeable future.
Our pricing actions are taking hold and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures.
We will continue to work to mitigate the effects of input cost inflation and global supply chain constraints in order to optimize operations and deliver on strong customer demand.
Airlaid Materials demand is strengthening across all categories.
Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in-person dining.
July was very strong for wipes, and we believe we are exiting the period of demand weakness associated with destocking that took place during the first half of the year.
Additionally, demand in the hygiene category is beginning to recover with the second half of the year expected to return to more normalized levels.
Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.
And Glatfelter people are performing exceptionally well, responding to challenges, seeking new opportunities for growth and delivering on the Mount Holly integration and synergy realization.
From a strategic perspective, I'm pleased with the accelerating pace of execution of our business transformation and growth initiatives.
As noted, we signed a definitive agreement to purchase Jacob Holm for $308 million.
We're very excited about this new addition to the portfolio, which will add meaningful scale, new technologies and product diversification and will expand Glatfelter's growth platforms and global footprint.
Jacob Holm is a leading producer of spunlace materials and sustainable nonwoven fabrics, providing access to new customers in the personal care, hygiene, industrial and medical categories.
Headquartered in Basel, Switzerland, the company has four manufacturing facilities, two in the United States and one each in France and Spain.
The company is organized in three operating units: Sontara Professional, a former DuPont business; Health & Skin Care and Personal Care.
As you can see from slide 12, their operating units offer an expansive product portfolio, covering diverse applications with a prominent customer base.
In the 12 months ending June 30, the Jacob Holm business generated revenue of approximately $400 million and EBITDA of approximately $45 million.
Of these earnings, we believe $10 million to $15 million could be attributed to COVID-driven demand that is expected to normalize.
We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all Glatfelter stakeholders.
Through product line optimization, operational improvements, strategic sourcing savings and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing.
The estimated cost to achieve these synergies is $20 million.
The acquisition is subject to customary antitrust regulatory review and is expected to close later this year.
While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond.
With the Jacob Holm transaction, Glatfelter's net leverage is expected to increase from approximately three times to four times pro forma at closing when reflecting the COVID-adjusted EBITDA and synergies.
This acquisition will create an exceptional portfolio of premium quality, sustainable engineered materials with opportunities for the long-term growth that aligns well with post-COVID lifestyle changes.
It will also increase Glatfelter's global scale with pro forma annual sales of approximately $1.5 billion.
As you can see, these are exciting times at Glatfelter.
slide 13 provides a brief snapshot of the breadth and depth of the company's evolution and recent transformation actions and outcomes.
Our near-term priorities and value creation focus will be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging; accelerating innovation by fully utilizing our growing portfolio of technologies, assets and intellectual property; and exploring the next wave of growth investments, both organic and inorganic with continued balance sheet discipline.
We are truly generating momentum and accelerating the pace of execution as we build a new Glatfelter.
This concludes my closing remarks.
| compname posts q2 earnings per share $0.03.
q2 earnings per share $0.03.
|
They will be joined by Scott Oaksmith, Senior Vice President, Real Estate & Finance.
As you'll hear today, we believe that the deliberate set of strategic decisions we've made in recent years and our targeted actions during the pandemic, along with the dedication and hard work of our franchise owners to navigate the impact of the pandemic, drove impressive results that position us well to further capitalize on growth opportunities in 2021 and beyond.
Throughout my remarks today, I'll provide comparisons not only to prior year, but also to 2019, which we believe are more meaningful in analyzing performance trends as the prior year's quarter results were impacted by the pandemic.
In the first quarter of 2021, we once again delivered results that significantly outperformed the industry, our chain scale segments and local competition, and we expanded our adjusted EBITDA margins to 69%.
Our domestic systemwide year-over-year RevPAR change surpassed the industry by 23 percentage points, declining 4.4% and 18.7% as compared to the same quarters of both 2020 and 2019 respectively.
And we continued to achieve sequential quarter-over-quarter improvement.
In addition, we generated steady month-over-month growth in our choicehotels.com and other proprietary digital channels revenue contribution mix throughout the quarter.
We also benefited from our most loyal customers, Choice Privileges Diamond Elite members, who contributed an even higher percentage of overall revenue for the quarter as compared to 2020 and 2019.
These results have helped us increase RevPAR index versus our local competitors by over 6 percentage points in the first quarter as compared to 2019.
We achieved that through notable lifts in both weekday and weekend RevPAR index and up significantly across all location types as reported by STR.
For over a year, we've observed significant RevPAR share gains against the competition as compared to 2019 giving us further optimism about our future revenue trajectory.
However, our April RevPAR results are truly remarkable, marking near returns to 2019 levels.
Aided by our strong value proposition and continued outperformance, demand for new franchise contracts grew significantly in the first quarter.
Likewise, our franchise owners are remaining with Choice as seen in our industry-leading voluntary franchisee retention rate and owners who choose to build and develop hotels in the current environment increasingly seek our brands.
For the first quarter we awarded nearly 90 new domestic franchise agreements and over 50% increase over the same period of 2020.
Of the total new domestic agreements, over 80% were for conversion hotels.
These hotels historically open about three to five months after contract execution.
Throughout the first quarter, we also continued to grow our effective royalty rate, a reflection of the continued strengthening of the value proposition we provide to our franchise owners.
These results and our optimism for the future led us to reinstate the dividend at the pre-pandemic level and resume our share repurchase program.
Underpinning our first quarter success are the deliberate decisions and strategic investments that we've made in our product portfolio, our value proposition, our platform capabilities and other franchisee facing tools.
These investments allowed us to not only capitalize on demand that historically has driven our core business, but also enabled us to attract new travel demand to new market locations and our key segments such as extended stay and upscale.
In fact, we believe we are now better positioned to increase our share of travel demand in the years to come than we were prior to the onset of the pandemic.
We pride ourselves on investing in our high-quality well segmented portfolio of brands and this sets us apart with our franchise owners.
We constantly monitor changing consumer preferences and strategically manage our portfolio to ensure we are building the brands of tomorrow in key strategic segments that provide a compelling return on investment.
Last year we launched our newest mid-scale extended stay brand Everhome Suites to provide franchisees with another opportunity to capitalize on this fast-growing segment in the hotel industry and help drive returns in practically any economic environment.
As hotel financing starts to rebound, we anticipate developers increased demand for this new product.
In fact, in April, we met with over 25 developers and toward the new model room for this exciting brand and interest is very high.
We also proactively reinvested into the future of our product portfolio with Comfort's Move to Modern refresh program, which has been recently completed and the launch of the new Comfort prototype this quarter to help the brand family maintain its leadership position in the upper mid-scale segment for years to come.
And we remain focused on growing our strategic conversion brands specifically, Clarion Pointe, a relatively new brand extension to the Clarion brand has experienced a five-fold increase of its portfolio and the Ascend Hotel Collection has increased the number of its domestic rooms by over 25% since the end of 2019.
Based on our strong track record of organic growth, we believe these internal investments will continue to drive attractive returns for years to come.
At the same time, we continue to invest in our value proposition capabilities.
We enhanced our pricing and merchandizing tools to further enable our franchise owners to reach their target customers and effectively drive top line revenue to their hotels while reducing their total cost of ownership.
These tools are contributing to the outperformance our brands are experiencing.
We also provided our guests with additional travel options by signing strategic agreements with new travel partners such as Penn National Gaming.
Finally, the decisions we've made to better align our cost structure in the post-pandemic environment that are here to stay, position us well to capitalize on opportunities as travel demand recovers, while allowing us to continue to invest for the long-term.
We have maintained competitive share gains since the onset of the pandemic and we expect our momentum to continue, while uncertainty remains we are observing positive signs of recovery that give us confidence for 2021 and beyond.
With the vaccine rollout pace accelerating and consumer confidence at its highest level since the pandemic began, Americans are feeling more optimistic about the prospect of traveling again.
Indeed recent studies point to a significant uptick in consumers intent to travel in the next six months.
We've observed that throughout the first quarter and particularly in the month of April, our customers are planning their travel further in advance as witnessed by the lengthening of average booking windows.
We are also pleased to see that our first quarter experienced over 400 basis points weekday occupancy index share gains as compared to 2019.
As discussed on our prior calls, we believe the share gains are partially driven by long-term consumer trends, such as remote work, virtual learning and early retirements which afford more Americans flexibility in where and when they travel for leisure.
Additionally, we are seeing sequential quarter-over-quarter improvements in our business travel booking trends.
As a matter of fact, even our group travel is showing signs of recovery with the sports segment bookings expectations for this year already exceeding 2019 levels.
We continue to observe positive trends and rising outlooks across most key domestic economic indicators.
Additionally stimulus checks from the recent financial relief package, high household savings and business reopenings all point to a continued recovery for our small business franchise owners and middle class consumers, our core customers.
I'll now provide a brief update on our key segments where are all of our brands achieved RevPAR index gains as compared to 2019 versus their local competitors through the first quarter.
Our Extended Stay segment is a significant growth engine for the company.
The acquisition of the WoodSpring Suites brand in 2018 and our strategic investments in the Extended Stay segment, allowed us to nearly quadruple the size of the portfolio over the past five years, with the segment now representing 10% of our total domestic rooms.
In the first quarter the Extended Stay segment rapidly expanded by 44 units year-over-year from the first quarter of 2020 and now stands at nearly 455 domestic hotels with a domestic pipeline of 310 hotels.
We expect this Extended Stay unit growth rate to further accelerate in the future.
Once again, our purpose-built brand tailored for long-term guests outperformed the competition in this cycle resilient segment.
The WoodSpring Suites brand is our first brand to experience RevPAR levels that exceeded our 2019 results.
For the first quarter as compared to 2019, WoodSpring reported over 3% RevPAR growth, driven by a more than 4% increase in average daily rate and an average occupancy rate of 74%, a truly remarkable achievement.
The brand's pipeline continues to expand year-over-year and reached nearly 150 domestic hotels at the end of March 2021.
Our Suburban Extended Stay brand experienced 10% year-over-year domestic unit and pipeline growth.
At the same time our MainStay Suites mid-scale extended stay brand captured over 13 percentage points in RevPAR index gains versus its local competitors as compared to 2019.
The brand's portfolio expanded to over 90 domestic hotels open a 26% increase year-over-year.
The increased developer interest we are seeing reaffirms that our strategic commitment and continued investments in this highly cycle-resistant segment are driving a competitive advantage.
Given these results, we remain optimistic about the growth potential of our Extended Stay portfolio.
Our mid-scale brands represent over two-thirds of our total domestic portfolio and over half of the total domestic pipeline.
As we celebrate Comfort's 40th anniversary this year, the brand's continued growth and performance success is proved positive that we invest for the long-term.
Our efforts to transform the brand are paying off, specifically the Comfort Family achieved RevPAR index gains versus its local competitors of nearly 10 percentage points and a RevPAR change that was nearly 11 percentage points more favorable than the upper mid-scale chain scale in the first quarter as compared to 2019.
In March, we officially launched the much anticipated rise and shine prototype which maintains Comfort's low cost to build advantage over its competition and is designed to meet guest expectations for an elevated experience.
The Comfort brand family reached over 260 hotels in its domestic pipeline, over one quarter of which are hotels awaiting conversions, which we believe will fuel the brand's growth in the near term.
And finally, Clarion Pointe, ended the first quarter by achieving a milestone of the 30th hotel opened in the United States and more than 20 additional hotels awaiting conversion in the near term.
Our upscale portfolio achieved impressive year-over-year growth in the first quarter, where we increased our domestic upscale room count by 22% and marked the highest number of openings in a given quarter, matching the company's all-time record.
In addition, developer interest in our upscale brands remained high as we more than quadrupled the number of domestic franchise contracts in the first quarter year-over-year.
The Ascend Hotel Collection leads the industry as the first and largest soft brand.
The brand grew its domestic room count by nearly 26% year-over-year and expanded to nearly 380 hotels open around the globe.
Ascend Hotels achieved the following performance in the first quarter as compared to the same period of 2019.
The brand outperformed the upscale segment RevPAR change by 19 percentage points.
It achieved RevPAR index gains of 12 percentage points against its local competitors and it recorded average daily rate index gains of 11 percentage points.
This performance further enhance the brand's attractiveness to developers looking for a smart conversion opportunity which was showcased in the brand's strong franchise agreements activities for the quarter.
Our upscale Cambria Hotels brand continues its positive momentum, growing its portfolio size by 14% to 57 units with 18 projects under active construction at the end of March.
The brand continues to build on its success with four hotels already opened year-to-date and five additional planned to open through the end of the summer.
Consumer confidence in Cambria Hotels drove the brand RevPAR share gains versus its local competitors to 16 percentage points in the first quarter as compared to 2019.
These results are proof of Choice Hotels value proposition in the upscale segment for our current and prospective owners.
We're also committed to enhancing our value proposition by growing our platform business.
In the first quarter, we further expanded our attractive upscale platform and successfully on-boarded 22 Penn National Gaming Casino resort properties, representing nearly 7,000 rooms joining our Ascend Hotel Collection.
This strategic agreement will offer our more than 48 million Choice Privileges members the opportunity to earn and redeem points at these Penn properties by booking their stays directly on choicehotels.com.
We are proud of everything we've accomplished this quarter, but we certainly could not have done it without the dedication of our associates and the strength of our award-winning culture, focused on diversity, equity and belonging.
I'm especially pleased to say that Choice was recently named by Forbes as one of the best employers for diversity and one of America's best mid-size employers, as well as one of the best places to work by comparably.
Our strategic approach, resilient business model, high quality well segmented portfolio brands and strong balance sheet will help us to further capitalize on growth opportunities in 2021 and beyond.
With that, I'll hand it over to our CFO, Dom?
I hope you and your families are all well.
Today, I'd like to provide additional insights around our first quarter results, update you on our liquidity profile and approach to capital allocation and finally share our thoughts on the outlook for the road ahead.
Taking a closer look at our results for the first quarter 2021, total revenues excluding marketing and reservation system fees were $91.4 million.
Adjusted EBITDA totaled $63.1 million driven by improving RevPAR performance and our ability to realize adjusted SG&A savings of 20% and our adjusted EBITDA margin expanded to 69%, a 330 basis point increase year-over-year.
As a result, our adjusted earnings per share were $0.57 for the first quarter.
Let's take a closer look at our three key revenue levers, beginning with RevPAR.
Our domestic systemwide RevPAR outperformed the overall industry by 23 percentage points for the first quarter, declining 18.7% from 2019, compared to 2020, our first quarter 2021 RevPAR declined only 4.4%.
At the same time, our first quarter results exceeded the primary chain scale segments in which we compete as reported by STR, by over 8 percentage points versus 2019.
Our domestic systemwide occupancy rate has seen significant improvement since mid-March 2021.
In fact, starting in mid-March, we've experienced our highest occupancy levels since the start of the pandemic, with systemwide occupancy rates exceeding 70% on numerous days.
We are optimistic that these demand trends will remain elevated, especially throughout summer and will further strengthen the financial health of our franchisees.
The trends of improving RevPAR performance have continued into the second quarter.
Our April performance was significantly stronger with a RevPAR decline of approximately 4% and an occupancy rate increase of 80 basis points versus 2019 levels.
These trends give us even greater optimism for our 2021 performance.
We've long focused our brand strategy on driving growth across the higher value and more revenue intense upscale, extended stay and mid-scale segments and the investments we've made are paying off.
In the first quarter, these strategic segments helped us achieve material RevPAR change outperformance against our respective industry chain scales and drove gains versus our local competitors.
Specifically when compared to first quarter 2019, our upscale portfolio increased its RevPAR index relative to its local competitive set by 14 percentage points.
Our extended stay portfolio outperformed the industry's RevPAR change by an impressive 38 percentage points and grew versus its local competitive set by 10 percentage points.
And finally the RevPAR change for our mid-scale and upper mid-scale portfolio exceeded these segments by 9 percentage points.
For the first quarter 2021 versus the same period of 2019, all of our brands achieved RevPAR index gains versus their local competitors.
In fact, we were able to increase our overall RevPAR index against local competitors by over 6 percentage points, notably through our franchisees' ability to maintain rate integrity.
More specifically, our average daily rate improved from the prior quarter and our average daily rate index increased 3.7 percentage points as compared to 2019.
We've also observed firsthand that our investments in pricing optimization capabilities for our franchisees are paying off.
At the same time, we continue to grow the overall size of our franchise system and open the highest number of hotels in any first quarter in the past 10 years.
Across our more revenue intense brands in the upscale extended stay and mid-scale segments we observed stronger unit growth, increasing the number of hotels by 2.4% year-over-year and improving the growth from fourth quarter 2020.
For full year 2021, we expect our overall unit growth trend to continue.
Furthermore, we expect the unit growth of the more revenue intense segments to accelerate versus 2021 and range between 2% and 3%.
Aided by our strong value proposition and outperformance, demand for our brands continue to gain momentum since the beginning of the year with over half of the domestic agreements executed in the month of March.
Specifically, we saw an increase in demand for our conversion brands with domestic conversion contracts up 76% year-over-year.
Our royalty rate remains a significant source of our revenue growth, which is driven by the attractive value proposition we provide to our franchisees, their continued desire to be affiliated with our proven brands and our pipeline.
The company's domestic effective royalty rate exceeded 5% for the first time ever in a quarter and increased 7 basis points year-over-year for the first quarter compared to the prior year.
We expect to maintain the historical growth trajectory of this lever in 2021 as owners seek Choice Hotels proven capabilities of delivering strong top line revenues to their hotels, while helping them maximize return on investment.
I'd now like to turn to our liquidity profile and share capital allocation update.
Our strong results have led to an even stronger liquidity position for the company.
At the end of first quarter 2021, the company had approximately $823 million in cash and available borrowing capacity through its revolving credit facility, even though our cash generation tends to be weaker in the first quarter, due to the seasonality of our business and other cash outlays.
Given the continuing improvements in our operations, our strong liquidity and credit profile and our increasing optimism for 2021 and beyond, our Board has approved the reinstatement of our quarterly dividend at the pre-pandemic level beginning in July 2021.
Additionally, the Board has also approved the resumption of the company's share repurchase program.
Both actions highlight the confidence we have in our business to continue generating strong levels of cash and are a testament to our impressive results, while reflecting our continued commitment to driving long-term shareholder value and returning excess capital to our shareholders.
Nevertheless, our capital allocation philosophy remains unchanged.
We will continue to be disciplined stewards of capital and take steps that we believe will maximize shareholder value.
Choice's primary objective in this area has always been to increase organic growth by strategically investing back into the business.
We will continue to monitor the environment for other investment opportunities and evaluate capital returns in the context of our leverage levels, market conditions and our overall capital allocation strategy.
I'd like to offer some thoughts on what lies ahead.
While we are not providing formal guidance today, we currently expect RevPAR change for the remainder of the year to be stronger than first quarter 2021 results versus both 2020 and 2019.
Our view is reinforced by the following: First, we continue to see consumers' desire to travel climbing aided by the vaccine rollout and improving domestic economic environment and higher levels of consumer savings.
Second, we are pleased that our domestic RevPAR change has continued the pattern of sequential improvement with significantly stronger April RevPAR results versus 2019 and trends continuing into May.
We currently expect strong travel demand trends to continue.
Finally, we continue to be optimistic given other positive trends such as demand increases in key urban locations and our share gains in business travel, combined with the continued resilience of leisure demand.
We will continue to evaluate the impact of COVID-19 across the business and we'll provide further updates in August during our next earnings call.
In closing, we remain optimistic that Choice Hotels is well positioned to succeed in 2021 and beyond.
Our resilient, primarily asset light franchise-focused business model which has historically delivered stable returns throughout economic cycles and provided a degree of cushion from market risks will continue to benefit us in the long run.
Our investments for the long-term that propel our future forward coupled with our strategic approach, disciplined capital allocation strategy and strong balance sheet will allow us to continue to capitalize on opportunities during the recovery and drive outsized returns for years to come.
At this time, Pat and I would be happy to answer any questions.
| compname posts q1 adjusted earnings per share $0.57.
q1 adjusted earnings per share $0.57.
not providing formal guidance for q2 or full year 2021.
choice hotels international - currently expects revpar change for remainder of 2021, as compared to both 2019 and 2020, to outperform q1 2021 results.
|
During today's call we will reference non-GAAP metrics.
We had an excellent finish to a strong year.
We achieved another quarterly sales record and earnings per share was up 32% in fourth quarter, resulting in full year sales and earnings per share that were both near the high end of our guidance ranges.
As we look ahead, conditions will likely become more challenging, particularly in the first half of fiscal '22.
We are already facing supply chain disruptions primarily due to labor shortages in the Americas and raw materials inflation puts significant pressure on gross margin.
While the magnitude of these issues are greater than what we have experienced in recent years, our playbook for addressing them is time-tested.
We are pursuing growth opportunities in our Advance and Accelerate businesses, we are raising prices to mitigate the impact of cost increases and we are leveraging our strong relationships to remediate and overcome the current supply chain challenges.
When we roll these things together, we feel good about where we land.
Our plan reflects continued progress on our strategic initiatives and we expect to deliver record levels of sales and record profit in fiscal '22.
We will share more details about that later in the call.
So I will now provide some context on fourth quarter sales.
Total sales were $773 million, which is up 25% from last year as we compare it against the toughest patch from the pandemic.
If you normalize the trend with a two-year stack comparison, fourth quarter is right in line with what we had in the third quarter, suggesting we are maintaining sales momentum.
In Engine, total sales were up 28% and the increase was again led by our first-fit businesses.
Fourth quarter sales in Off-Road were up 58%, including about 15 points of growth from Exhaust and Emissions.
We won a significant amount of new business over the past few years in anticipation of a new emission standard in Europe.
These programs were slower to launch due in part to COVID and we are now seeing a dramatic ramp-up in demand.
It is worth noting, these sales create mix pressure for us.
We are enhancing the Exhaust and Emissions cost structure to reduce the impact on margin, but based on the nature of this business that will only get us part of the way.
Staying with Off-Road, we continue to have strong growth in our innovative razor to sell razor blade products.
These products make up about one-third of Off-Road filter sales and they grew substantially faster than their non-proprietary counterparts in fourth quarter.
This trend continues to reinforce that our strategy is working.
We develop value-added products that drive aftermarket retention for our customers and us.
We are experiencing similar trends in On-Road.
Fourth quarter sales were up 36% from prior year and innovative products, which make up nearly half the business, grew twice as fast as the non-proprietary counterparts.
In the US, fourth quarter On-Road sales continued to benefit from higher Class 8 truck production and there was also an impact from a strategic choice we made.
During the quarter, we stopped selling some directed-buy equipment to a large OEM customer.
If we adjust our current and prior-year sales to exclude these products, the like-for-like growth in the US is about 35% and we are left with a more profitable business that allows us to focus on what we do best, technology-led filtration.
I also want to call out Latin America where fourth-quarter sales of On-Road tripled versus the year ago.
The growth was from large OEM customers in Brazil.
And although it is exciting to see the sharp growth, I want to note that is on a very small base.
In Engine aftermarket sales were up almost 26%.
In fact, fourth quarter sales of $376 million were the highest ever, beating the record we set last quarter.
Supplier constraints are one of the more challenging parts of the aftermarket business right now and those issues seem to be more severe in the Americas.
Despite that pressure, independent channel sales grew in the high 20% range and fourth-quarter sales in the aftermarket OE channel were up in the low 20% range.
Innovative products remain a strong contributor to growth in aftermarket.
These razor blade products accounted for more than a quarter of total aftermarket sales and they grew in the mid 20% range during fourth quarter.
I would be remiss if I did not mention PowerCore.
We launched the brand almost 20 years ago and sales of these products have grown every year since at least 2010.
We finished fiscal '21 at another record and we anticipate a long runway for continued growth.
We are compounding aftermarket growth with share gains in less-developed markets like Latin America, Russia and South Africa.
These were some of our fastest-growing markets and we believe our strong distribution and comprehensive product offering position us for long-term success in these regions.
In Aerospace and Defense fourth quarter sales declined 8%.
Commercial aerospace remains under pressure from the pandemic, particularly in Europe.
That decrease was partially offset by higher sales of ground defense equipment.
As always Aerospace and Defense sales can be lumpy quarter to quarter, but we are optimistic about returning to growth in the new fiscal year.
Before turning to the Industrial segment, I want to make a point about our Engine business in China.
One year ago, Engine sales in China were up almost 25%, while the rest of the region suffered through the pandemic.
Fourth quarter Engine sales were up again this year by about 2%.
The strategy in China continues to do well as we win new programs with local manufacturers, but it's the one place in the world where we face the tough comparison from last year, so I wanted to point that out.
The Industrial segment also had a solid quarter with total sales growing 19.5%.
Sales in Industrial Filtration Solutions, or IFS, were up more than 23% in fourth quarter, reflecting strong growth in new equipment and replacement parts.
New equipment makes up nearly half of IFS sales and these products grew in the mid-teens last quarter, which builds on the recovery that began six months ago.
There is still a cautious tone in the market, but we see some signs of improvement and our order intake trends add to our confidence.
The replacement parts of dust collection are a more optimistic story with fourth quarter sales up nearly 40%.
Activity continues to accelerate factories and we continue to gain share with our proprietary dust collection products.
Another growth engine within IFs is Process Filtration, which serves the food and beverage market.
Fourth quarter sales were up almost 20%, reflecting growth in new equipment and replacement parts.
The market opportunity for Process Filtration is fantastic and new high-growth areas like plant-based food and beverages only increase our opportunities.
Consequently, we will continue to expand the team and look for another year of strong growth in fiscal '22.
Sales of Special Applications grew 27% in fourth quarter with strong contributions from both Disk Drive and Venting Solutions.
Disk Drive benefited from timing and Venting Solutions continued to make ground with automotive customers.
Fourth quarter sales of venting products grew 50% with almost two-thirds of the increase coming from Asia-Pacific.
With our high-tech powertrain and battery vents, we are winning new programs and expanding with existing customers across the world, resulting in another year of growth for Venting Solutions.
Fourth quarter sales of Gas Turbine Systems, or GTS, were down 11%.
The decline came from the US, which is typically our largest GTS market as sales to small turbines were under pressure.
We continue to operate this business with discipline.
So our focus in GTS remains squarely on growing replacement parts, while being selective in which new turbine projects we pursue.
Overall, the theme of discipline comes into everything we do and that gave us a significant advantage during the pandemic.
We achieved record sales in each of the last two quarters and our full year earnings per share is an all-time high.
We did that work safely.
We focused on our people.
We implemented protocols that made sense based on local conditions and our employees acted as one team to deliver outstanding results.
We plan to follow that up with another year of record sales and record profit in fiscal '22 and I'm excited about what we can accomplish.
Every way you look at it, fiscal '21 was a solid year.
We generated strong sales despite the pandemic hanging over us and margin growth contributed to record full year EPS.
What was more impressive was how our people operated.
The level of teamwork was unbelievable and I am inspired by the commitment they showed.
Before getting to the details of the new year, let me share some 2021 highlights.
Fourth quarter sales grew 25%, operating income was up 36% and earnings per share of $0.66 was 32% above the prior year.
As I know you've heard me say, we are committed to increasing levels of profitability on increasing sales and we did that in 2021.
I want to add a short disclaimer that commitment is over time and it won't be easy to achieve in the first half of fiscal '22.
I'll touch on that in a few minutes.
So back to the fourth quarter recap.
Fourth quarter operating margin was 14.5%, an increase of 110 basis points from the prior year.
Most of the increase was from gross margin, which grew 70 basis points to 34.4%.
Strong volume leverage and initial pricing benefits more than offset the impact from higher raw material costs and mix headwinds.
The impact from raw materials increased throughout the quarter, as inflation has begun coming through in full force.
We were in front of this impact of price increases in certain businesses, while increases in areas with supply agreements that had index clauses tend to lag the market.
That's true when prices go up or down so it works out over time.
Leverage and pricing also accounted for higher fourth quarter gross margin in both segments.
However, challenges from inflation and an unfavorable mix will likely be the themes in fiscal '22.
Operating expenses at a rate of sales was favorable at 40 basis points driven primarily by volume leverage.
That was true in both segments with industrial gaining a lot of improvement from leverage.
The strong volume leverage was partially offset by higher incentive compensation due in part to a soft comparison last year and incremental investments in our strategic growth priorities, which will continue in fiscal '22.
I also want to touch on corporate and unallocated line in our segment reporting.
The fourth quarter increase of almost $10 million reflects a couple of factors [Indecipherable] expense, which includes additional incentive compensation and higher benefit costs and a much easier comparison in the prior year.
Moving down the P&L, fourth quarter other income was $5 million.
While the amount itself is not material, I bring it up because we ended the year above our guidance.
So in case there are questions, the favorability reflects a handful of non-recurring items including a tax settlement in Brazil and lower loss on foreign exchange.
In terms of our other financial metrics, fourth quarter was in line with expectations.
Therefore, our full year interest expense and tax rate were both consistent with guidance.
Fiscal '21 capital expenditures were also in line with our forecast and way down from 2020 as we took a planned pause following the investment cycle over the past three years.
We directed about $0.25 billion to shareholders in fiscal '21.
We repurchased 1.9% of our outstanding shares for $142 million and we paid dividend of $107 million, including the 5% increase we announced earlier this year.
We are on pace for more than 25 years in a row of annual dividend increases, which is a trend we are extremely proud of.
I also want to highlight the fiscal '21 adjusted cash conversion of 116%.
Our DSO and DPO metrics were both favorable versus the prior year.
Inventory churns improved and capex was down.
While strong net income obviously helped our cash conversion, I am pleased with the way we managed our balance sheet.
We continue to have the flexibility we need to invest in our strategic priorities, including organic and inorganic growth.
That's the setup for fiscal '22.
We begin the year on solid ground and we are well positioned to deliver our objectives.
Based on that we use wide ranges for total and segment-level guidance to reflect the realities.
Of course, we will tighten things up as the year progresses.
With that, fiscal '22 sales are expected to grow between 5% and 10% with currency translation being negligible.
Engine is also planned to up between 5% and 10% and Industrial is a bit higher at 6% to 11%.
Within Engine, sales of our first-fit businesses are expected to remain healthy, particularly in the first half of the year.
Fiscal '22 On-Road sales are planned up in the low single digits, while Off-Road sales are projected up in the low double digits.
The Off-Road first-fit growth also includes benefits from new programs in Exhaust and Emissions, which gives us top line leverage and gross margin mix headwinds.
For Engine aftermarket, we expect full year sales growth in the mid-single digits with equipment utilization being complemented by share gains from our innovative products and under-penetrated markets.
We anticipate low double-digit growth in Aerospace and Defense due in large part to comparing against the challenges of fiscal '21.
Sales of Industrial Filtration Solutions are firm [Phonetic] up in the low double digit range, reflecting a few things.
We expect a rebound in sales of new equipment, particularly for dust collection and continued growth in dust collection replacement parts.
We also expect another year of strong growth in process filtration, which reflects benefits from further investments to expand the team.
Fiscal '22 sales in GTS are planned up in the high single digits, while sales of Special Applications are planned down in the low single digits.
Within Special Applications, we expect lower sales of disk drive filters to be partially offset by growth in Venting Solutions.
In terms of operating margin, we expect a full year rate between 14.1% and 14.7%.
This range implies an increase of 10 basis points to 70 basis points from the fiscal '21 adjusted operating margin and we expect the improvement to come from expense leverage.
Gross margin is expected to be flat to slightly down from the prior year with raw materials being the single biggest headwind.
At today's prices, we expect to pay 8% to 10% more for our raw materials this year and that translates to a gross margin impact of nearly three full points in fiscal '22 margin.
There is still a lot of variability and where prices have come down some, it is only a modest change relatively to the massive run-up over the past few months.
So we do not yet have signs of meaningful release.
And one final dynamic to keep in mind is that we had raw materials favorability during the first half of fiscal '21.
Consequently, we expect substantial pressure on our first-half gross margin and then moderating pressure as the timing of our price increases roll in and catch up to the current market pricing.
Importantly, we have already taken action to limit the impact.
We implemented several off cycle pricing actions over the past few months and we have more plan for this fiscal year, but those will take time to roll in.
As benefits from pricing compound and costs stabilize, we anticipate gross margin in the second half of fiscal '22 should be up versus '21.
Restructuring action we initiated in fiscal '21 will help reduce the impact a bit.
We continue to expect annualized savings of about $8 million, with about $5 million to $6 million landing in fiscal '22.
A large portion of these savings benefit operating expense and there are a handful of other puts and takes we considered in our operating expense budget.
For example, we anticipate savings from incentive compensation as we reset our annual bonus plans and we expect to increase travel and expense as the pandemic-related restrictions subside and we get back to visiting customers.
We are also making incremental investments in our Advance and Accelerate businesses, including another 10% increase in research and development spending.
Altogether, we expect total operating expenses will be up from the prior year, but to a lesser extent than sales, resulting in net leverage that drives year-over-year growth in operating margin.
In terms of other key financial metrics, fiscal '22 interest expense is planned to be about $14 million, other income is projected between $7 million and $11 million and the tax rate is expected between 24% and 26%.
Capital expenditures are planned up in fiscal '22 with a full-year estimate of $100 million to $120 million.
We are expanding PowerCore capacity, primarily in North America and [Indecipherable] with our new programs and cost reduction initiatives.
At the same time, we will further optimize and leverage the investments we made a few years ago with the goal of growing ROI again this year.
Additionally, we expect to repurchase about 2% of our shares in fiscal '22, keeping with our multi-decade trend and reaffirming our commitment to shareholders.
Finally, we will maintain a strong balance sheet to allow us to act on any acquisition opportunities in the life sciences space.
Based on these forecasts, we plan for a new earnings per share record between $2.50 and $2.66 and implying an increase from last year's adjusted earnings per share of 8% to 15%.
To help with modeling, I want to also offer a few comments about the anticipated cadence of results in fiscal '22.
It's actually pretty straightforward.
The first half has an easier sales comparison, meaning we plan for more of our full year increase to come from the first half than the second.
The reverse is true for operating margin.
As I said a moment ago, gross margin will be under substantial pressure in the first half.
While we pursue expense leverage all year, it won't be enough in the first half.
Then as things normalize and pricing takes hold, operating margin should be up year-over-year in the second half.
Overall, our Company has a long history of solid expense management and we have responsible leaders across the world that will invest where appropriate.
What we need to do is achieve pricing and that takes a global coordinated response.
We talked about it a lot during our planning process and I know every level of the organization is committed to protecting gross margin and delivering another year of strong profit improvement.
I think we are in an excellent position to deliver on our strategic and financial goals in fiscal '22 due to the dedicated employees around the world.
While there is a lot to consider in our fiscal '22 plan, our priorities are straightforward, gain share and outperform our markets, protect gross margin, deliver best-in-class levels of service and continue to invest in our team and Company culture.
Let me share a few of the ways we are attacking these priorities.
The best tactic for growing our share is continued investment in our Advance and Accelerate portfolio.
We are adding staff and developing tools to help these teams deliver strong growth again in fiscal '22.
Areas like Process Filtration, dust collection replacement parts and Engine Aftermarket are all positioned to have another very successful year.
We will also drive above-market growth by capitalizing on the market recovery related to new equipment.
We seek opportunities to plan first-fit seeds in both segments from Engine products to new industrial equipment and we must take advantage of this moment to capture future aftermarket growth.
We have a strong value proposition for every customer and this year we have aggressive plans to get back into the field and drive selling.
Additionally, we remain committed to growth through acquisitions.
We continue to work a robust pipeline of potential targets with the primary focus on expanding into life sciences and supporting our Industrial segment growth.
While there is no update to share today, I'm confident that our strong balance sheet, laser focus and disciplined adherence to our long-term strategy gives us an excellent opportunity for success.
Another priority of fiscal '22 is protecting our gross margin.
At our Investor Day two years ago, we talked about our plans to improve gross margin.
Since then we have executed.
Compared with fiscal '19, fiscal '21 sales are about flat and gross margin is up 90 basis points.
We acted with speed and fiscal '22 will be no different.
We proactively took price increases when we saw early signs of inflation and we planned for additional increases to catch up with the massive acceleration we saw in raw material costs.
Given the magnitude of the incremental headwind, especially in the first half of fiscal '22, we will stay vigilant and continue to pursue margin-accretive price and cost reduction opportunities.
We are also closely monitoring our supply chain to improve the situation.
With labor shortages now superseding raw materials availability as a top concern, our global operations team is having to adapt quickly.
With our global footprint and strong relationships with customers and suppliers, I'm confident we will navigate the situation and deliver the best-in-class service Donaldson is known for.
Finally, we will continue to invest in our team as part of our multi-year journey to further strengthen our human resources processes.
This year our focus is on global alignment around career, planning and development.
We are also expanding our diversity, equity and inclusion efforts, which will be part of how we continue to build out and strengthen our ESG program.
We turned 106 years old this year.
So we clearly value long-term thinking.
Our investments in supporting our team and embracing the positive changes in society are critical parts of how we will succeed in advancing filtration for a cleaner world.
I've been with the Company for 25 years and this team continues to find new ways to impress me.
| q4 gaap earnings per share $0.66.
fiscal 2022 sales forecasted to increase between 5% and 10%; earnings per share projected at $2.50 to $2.66.
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Participants on the call are Mr. Randall C. Stuewe, our Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. John Bullock, Chief Strategy Officer; and Ms. Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations.
Now I'd like to hand the call over to Randy.
Our core business continues to perform very well.
For the third quarter, we reported combined adjusted EBITDA of approximately $290 million, of which $230 million was directly from our Global Ingredients business.
Like many companies around the world, we continue to face the challenges others are facing when it comes to labor, transportation and higher cost of operations.
Our team continues to execute our business strategy and operate our facilities with great efficiency while improving our gross margin year-over-year and sequentially from the second quarter this year.
As it has been well stated, Hurricane Ida took a big bite out of DGD's performance in Q3.
For the first time in eight-plus years of operating, DGD was shutdown to protect the employees and the assets of the facility from this significant storm.
The great news is there was little damage to the facility, which it took a direct hit from Ida.
With the days of shutdown and the restart process, we lost approximately 17 days of renewable diesel production.
Also, on the great news front, the DGD Norco expansion is running well and is closing in on reaching its production capacity, putting DGD on track to sell 365 gallons or more in 2021.
We also believe DGD could sell over 700 million gallons of renewable diesel in 2022 as the engineering team continues to fine tune the performance of this expansion.
The achievement of Diamond Green Diesel is only possible because of the hard working employees, contractors and service providers at the facility.
While many of these fine people suffered damage to their personal property and disruption to their daily lives from the hurricane, their resiliency to return to work and get the plant back into operation and finish the construction of DGD II was extremely important and exceptional.
We truly appreciate their tenacity for getting the job done.
Also, during the quarter, Darling repurchased approximately $22 million of common stock.
And for year-to-date, we have purchased approximately $98 million worth of stock.
On a year-to-date basis, our Global Ingredients business has earned approximately $628 million of EBITDA, putting us at an annualized run rate of approximately $850 million for 2021.
With that, now I'd like to hand it over to Brad to take us through the financials, then I'll come back and discuss a little bit of our outlook and some -- how things are going to finish up for 2021.
Net income for the third quarter of 2021 totaled $146.8 million or $0.88 per diluted share compared to net income of $101.1 million or $0.61 per diluted share for the 2020 third quarter.
Net sales increased 39.4% to $1.2 billion for the third quarter of 2021 as compared to $850.6 million for the third quarter of 2020.
Operating income increased 61.4% to $205.7 million for the third quarter of 2021 compared to $127.5 million for the third quarter of 2020.
The increase in operating income was primarily due to the $114.1 million increase in gross margin which was a 53.8% increase in gross margin over the same quarter in 2020.
Our operating income improvement was impacted by the lower contribution of our 50% share of Diamond Green Diesel's net income, which was $54 million in the third quarter of 2021 as compared to $91.1 million for the same quarter of 2020.
As Randy mentioned earlier, Hurricane Ida impacted gallons sold in Q3, resulting in lower earnings for DGD during the quarter.
Our gross margin percentage continues to improve year-over-year and sequentially.
Q3 2021 gross margin was 27.5%, which is the best result we have had in the last 10 years.
For the first nine months of this year, our gross margin percentage was 26.8% compared to 24.9% for the same period a year ago or a 7.6% improvement year-over-year.
As you can see on Pages four and five of our IR deck, gross margins have continued on a positive trend for the last four years as our management team across the business has worked to increase the profitability of their operations.
Depreciation and amortization declined $7.9 million in the third quarter of 2021 when compared to the third quarter of 2020.
SG&A increased $7.3 million in the quarter as compared to the prior year and declined $1.9 million from the previous quarter.
The main causes for the higher cost in the quarter compared to a year ago related to labor, travel and other.
Interest expense declined $3.4 million for the third quarter 2021 as compared to the 2020 third quarter.
Now turning to income taxes, the company recorded income tax expense of $42.6 million for the three months ended October 2, 2021.
Our effective tax rate is 22.3%, which differs from the federal statutory rate of 21%, due primarily to biofuel tax incentives, the relative mix of earnings among jurisdictions with different tax rates and certain taxable income inclusion items in the U.S. based on foreign earnings.
For the nine months ended October 2, 2021, the company recorded income tax expense of $126.3 million and an effective tax rate of 20.2%.
The company also has paid $36.9 million of income taxes year-to-date as of the end of the third quarter.
For 2021, we are projecting an effective tax rate of 22% and cash taxes of approximately $10 million for the remainder of the year.
Our balance sheet remains strong with our total debt outstanding as of October two at $1.38 billion and the bank covenant leverage ratio ended the third quarter at 1.6 times.
Capital expenditures were $65.6 million for Q3 2021 and totaled $191.7 million for the first nine months of 2021.
As a reminder, this capex spend does not include our share of the capital spend at Diamond Green Diesel, which continues to be substantially funded by internal resources at DGD.
There is strong momentum for our global platform as we finish out our best year in our history and look to build on that energy going into 2022.
I want to spend a few minutes on capital allocation.
Over the last couple of years, we have discussed our best use of cash at Darling through five points, and those really have not changed.
Those five points are: Investing in DGD, growing our core business, reaching an investment-grade debt rating, meaningful share repurchases and potentially starting a dividend policy for our shareholders.
And we continue to work on the execution of this plan as our free cash flow generation continues to grow.
I do not need to point out that we did make the decision earlier to accelerate the construction of DGD Port Arthur, Texas, which puts a big capital spend on DGD in 2022.
That does push out the potential size of distributions from the venture in 2022, but increases the potential for 2023.
I do also want to add that our M&A funnel of opportunities to grow our low CI feedstock footprint around the world and grow our green bioenergy production capabilities is rising.
This may adjust priorities in our capital allocation plan, but not limit our ability to execute on all of the points I already mentioned.
So with that, Grant, let's go ahead and open it up to Q&A.
| compname reports q3 sales of $1.2 billion.
q3 sales $1.2 billion.
|
Now, I would like to hand the call over to Randy.
It's great to have everybody here.
Over the trailing 12 months, Darling's Ingredients business has generated in excess of $4 billion in sales and now more than $1 billion of combined adjusted EBITDA.
To us, this is a significant breakthrough for all of our stakeholders and puts us on an accelerated path to continued growth across all of our business segments in the coming months and years.
Darling opportunistically repurchased approximately $76 million of common stock during the second quarter because we believe that our Diverse Green Global business will continue to appreciate in value in the near future.
We saw many records in Q2 in all segments and including our joint venture Diamond Green Diesel.
In total, our Global Ingredients business generated approximately $222 million of EBITDA and DGD produced $132 million, which is our half, making our combined adjusted EBITDA just shy of $354 million for the second quarter.
We are very excited about the anticipated start-up of the new 400 million gallon renewable diesel expansion in Norco.
We are approximately 60 days from the largest project of its kind to begin producing, one of the greenest hydrocarbons on the planet.
Also, we are pleased that the start-up of the 470 million gallon renewable diesel plant located in Port Arthur, Texas has now moved through the first half of 2023 for start-up.
Once Port Arthur is online, the DGD platform will have 1.2 billion gallons of renewable diesel production capacity and 50 million gallons of Green gasoline capability.
With that, now I'd like to hand it over to Brad to take us through the financials, then I'll come back and discuss our outlook and why we're raising our guidance for the balance of 2021.
We'll take a look at the income statement first, briefly.
Net income for the second quarter of 2021 total a $196.6 million or $1.17 per diluted share compared to net income of $65.4 million or $0.39 per diluted share for the 2020 second quarter.
Net sales increased 41.2% to $1.2 billion for the second quarter of 2021 as compared to $848.7 million for the second quarter of 2020.
Operating income increased 152.4% to $268.3 million for the second quarter of 2021 compared to $106.3 million for the second quarter of 2020.
The increase in operating income was primarily due to the $104.3 million increase in gross margin, which was a 48.2% increase in gross margin over the same quarter in 2020.
Adding to our operating income improvement was our 50% share of Diamond Green Diesel's net income, which was $125.8 million as compared to $63.5 million for the second quarter of 2020.
A quick comment on gross margin percentage as it continues to improve year-over-year and sequentially.
For the first six months of this year, our gross margin percentage was 26.5% compared to 24.8% for the same period a year ago, which comes out to a 6.8% improvement year-over-year.
We continued to experience higher protein and fats prices in the second quarter compared to the same period a year ago, while at the same time maintaining historically high volumes.
This better pricing environment and strong volumes are driving the improved results for the first half of 2021 and that trend, we believe, will continue for the balance of this year.
Depreciation and amortization declined $4.1 million in the second quarter of 2021 compared to the second quarter of 2020.
This decline is primarily in our Food segment where certain assets became fully depreciated and/or amortized by the end of 2020.
SG&A increased $8.9 million in the quarter as compared to the prior year.
The main drivers for the higher cost in the quarter were related to FX, travel and insurance increases.
Interest expense declined $2.7 million for the second quarter 2021 as compared to the 2020 second quarter.
Now turning to income taxes, the Company recorded income tax expense of $55 million for the three months ended July 3, 2021.
The effective tax rate is 21.7% which differs from the federal statutory rate of 21% due primarily to biofuel tax incentives, the relative mix of earnings among jurisdictions with different tax rates, and certain taxable income inclusion items in the U.S. base on foreign tax -- foreign earnings.
For the six months ended July 3 2021, the Company recorded income tax expense of $83.7 million and an effective tax rate of 19.2%.
The Company has also paid $25.3 million of income taxes as of the end of the second quarter.
For 2021, we are projecting an effective tax rate of 22% and cash taxes of approximately $20 million for the remainder of this year.
Our balance sheet remains strong with our total debt outstanding as of July 3 at approximately $1.44 billion and the bank covenant leverage ratio ended the second quarter at 1.71 times.
Capital expenditures were $65.3 million for Q2 2021 and totaled $126.1 million for the first six months of 2021, which is in line with our planned spend of approximately $312 million on capital expenditures for fiscal 2021.
As a reminder this capex spend does not include our share of the capital spend at Diamond Green Diesel, which continues to be funded by internal resources at DGD.
As our Global Ingredients business and Diamond Green Diesel continues to perform well, we are, once again, updating our combined adjusted EBITDA guidance for 2021.
Through the first half of 2021, we have produced $638.5 million of combined adjusted EBITDA and we believe based on what we see in our markets at the present time, the second half performance of 2021 will be as strong as the first.
DGD has sold 162 million gallons of renewable diesel in the first half of 2021 and with DGD II starting up in Q4, we should see over 200 million gallons sold in the back half of 2021.
I do want to point out that we would expect the EBITDA margin per gallon for DGD to normalize back into the original guidance range that we gave you of $2.25 to $2.40 per gallon over the next six months.
And, I would also add, that's not a bad thing.
Earning $2.97 EBITDA per gallon in the first half was well above our expectations.
And with margins normalizing in the second half, DGD can still put up EBITDA per gallon north of $2.50 per gallon during all of 2021.
Remember that our focus at DGD is to improve our efficiencies, lower our carbon index scores and innovate production of renewable diesel and other renewable products that we can make like renewable naphtha, and soon, sustainable aviation fuel.
With the largest platform in North America, DGD will continue to take full advantage of its first-mover position for a long time to come.
Now that we are less than five months away from 2022, we think it might be time to frame up our expectations for the next calendar year.
With our current Global Ingredients business approaching $800 million of EBITDA for 2021, we believe that our base business could grow in the range of 5% to 10% for 2022.
Our assumption for this growth is continued higher demand for animal proteins and fats and continued growth of Peptan product sales around the globe.
We anticipate that DGD will earn $2.25 per gallon in 2022 and at a 700 million gallon sold rate that puts Darling's half of DGD EBITDA at approximately $800 million.
Our DGD outlook for 2022 is based on DGD's ideal location, our incredibly flexible logistical platform, our processing capabilities, and the fact that we have by far the most experienced and capable team of people, which makes DGD the lowest cost producer of renewable diesel in the world.
Adding it all up, Darling Ingredients combined adjusted EBITDA for 2022 should be in the range of approximately $1.6 billion to $1.7 billion.
For a quick comparison, last year we reported $841.5 million of combined adjusted EBITDA.
Where we stand today, the 2022 estimate is double what we earned in 2020.
Yes, our team needs to execute to deliver this performance next year.
And I am very confident that they will, because for the last half-year and -- year-and-a-half, our 10,000 employees have delivered stellar results in what has been one of the most challenging environments a business or a community or our people and people around the world have ever faced with the ongoing pandemic.
With that, let's go ahead and open it up to Q&A, Andrea.
| compname posts q2 earnings per share of $1.17.
q2 sales $1.2 billion versus refinitiv ibes estimate of $1.11 billion.
q2 earnings per share $1.17.
|
With me here today are Jenna Foger, Peter Moglia, Steve Richardson, and Dean Shigenaga.
As Michael Jordan once said, some people want it to happen, some people wish it to happen, others make it happen.
Alexandria makes it happen.
For a moment, keys to the second quarter, historic high demand for Alexandria's lab space and our critical lab operations, which go along with that.
Alexandria is at the vanguard of meeting the historic and high unprecedented demand from many of our more than 750 tenants for growth needs now and a critical path for future growth very importantly.
Fundamental drivers of demand are the strongest we've ever seen.
Rental rate growth continues unabated and no excess supply on the horizon at this time.
We're very proud that we've got almost 7% quarter-to-quarter per share FFO growth, more than 40% rental rate growth, almost 18% NOI growth, almost 8% same-store NOI growth and a $1.3-plus billion annual NOI run rate, not to mention about $545 million in incremental revenue in our development and redevelopment pipeline.
Alexandria truly has a demonstrable pricing power advantage in each of our cluster markets.
And when life science tenants choose, they almost always prefer Alexandria's lab space and our operational excellence based on our critical lab operations.
Nature Biotechnology, a magazine back in April wrote the following: 2020 was a year that smashed many records.
Biotech saved your role and the pandemic attracted a stampede of private and public investors alike.
The pandemic apparently reinforced the requirement for long-term value-based investors of any kind to have exposure to life sciences.
And life science demand has in fact hit an all-time high as the world has recognized the importance of next-generation therapies to solve current and future really difficult healthcare challenges.
And Jenna will talk a bit more about it.
I'm going to highlight just a couple of things for the moment.
The pandemic has underscored the support for the National Institutes of Health and investment in basic science, which are keys to ensuring that the U.S. maintain its leadership position in life science and maximizing national preparedness to address current and future healthcare challenges.
There is a proposal right now to increase the fiscal year '22 NIH budget up to $51 billion, nearly a 20% boost over fiscal year '21.
The FDA Center for Drug Evaluation and Research, better known as CDERS approved 23 new molecular entities in the first half of 2021, putting it on the pace to exceed 2020's near-record approval high of 53.
Following a historic year of 2020, venture capital in Life Science continues at a very strong pace of almost $36 billion already raised in the first half of 2021, on pace to eclipse 2020's all-time high of $46 billion.
This unprecedented level is likely to continue throughout the year due to substantial dry powder available to life science funds and increased investment from institutional, generalists and traditional life science investors.
Following a record 2020 for IPOs and follow-on offerings, the first half of this year have continued to reach new highs, with over $8 billion raised in 52 IPOs and over $17 billion raised in many follow-ons, positioning 2021 for an all-time record year of public market investment in life science.
R&D continues with amazing productivity and resilience through COVID, enabling the industry to expediently deliver novel vaccines and therapies to combat the global pandemic.
New biology, drug discovery platforms and increasing focus on complex medicines as the future therapeutic innovation have all demonstrated the life science industry's ability to effectively drive solutions to current and future healthcare challenges and yield strong returns to investors.
And maybe a final comment would be as Project Warp Speed did in bringing a historic public private partnership together of the government on the one hand and the private industry, biotech and pharma companies on the other hand, at a warp speed rate to bring research and development and commercialization of the COVID vaccines in record time as well as ensure a timely manufacturing supply.
We really do need a 21st infrastructure package, not a 20th century package like the one Congress is now debating.
We need to make the U.S. self-sufficient in semiconductors.
We only produce now about 11% to 13% and self-sufficient in next-gen manufacturing of complex medicines.
As Joel highlighted last quarter and continues to be reaffirmed by the fundamental he just shared is the tremendous paradox of this pandemic moment for the life science industry.
Despite the challenges of these past many months, COVID has illuminated the power of science and the industry's ability to transform the future of human health.
Not only are so many of our tenants in the industry, as Joel mentioned, risen to the challenge of combating global pandemics, but R&D and bioinnovation broadly have persisted with amazing productivity, resilience and experiences throughout this time.
And we cannot stress not how critical it is for us a halt to preserve and prioritize and continue to catalyze this groundbreaking innovation that has and will continue to save so many lives.
So turning to COVID-specific update for a few moments.
A total of 3.7 billion vaccine doses have been administered worldwide with nearly 10% of these doses in the U.S. alone.
Roughly 57.5% of the vaccine-eligible population in our country, that's 12 and over have been fully vaccinated by either tenant Pfizer or Moderna's 2-shot mRNA-based vaccine or tenant Johnson & Johnson's single shot.
This is just over 49% of the total U.S. population, and we hope this number of fully vaccinated individuals will continue to steadily rise.
These numbers are astounding.
And before we get into the where are we now, I want to emphasize that despite the COVID fatigue, we all continue to fuel even despite some relief from the easing of restrictions over the past few months, albeit with the likely return of some new ones, none of where we are in the recovery process can be taken for granted.
The fact that the biopharma industry spearheaded by many of our tenants was equipped with the know-how, resources and technology to create safe and effective vaccines to combat a novel viral pathogen would have been unimaginable just a few decades ago.
The fact that our tenants Pfizer, Moderna and Johnson & Johnson were able to develop, run robust clinical trials, manufacture and distribute billions of vaccines at scale in less than 12 months is absolutely unprecedented.
These vaccines achieved such astounding safety and efficacy in the 90-plus percent range when the FDA has set the original bar at 50%, with an amazingly low incidence of side effects reported from the millions of people who have now received that is truly astounding.
The fact that the biopharma industry, government and many other public and private agencies came together to ensure all of the above transpired at a pace and level sufficient to provide adequate vaccine supply to inoculate the entire U.S. population as we now have, unlike most nations around the world, is not to be undervalued.
And the fact that we have a regulatory agency in the FDA that has worked around the clock to review thousands of COVID-19-related applications to maximize the availability of high-quality testing and safe and effective vaccines and therapies against COVID-19 cannot go unrecognized.
So where are we now?
It's been just over 18 months since the first U.S. COVID case was reported on January 21, 2020.
Yet despite all of the progress with vaccines, etc.
, countries around the world are still very much combating new COVID-19 surges, driven most recently in part to the increasing prevalence of the so-called Delta variant.
In the U.S., this highly continuous Delta variant, approximately 50% more transmissible with 1,000 times higher viral load account for at least 83% of COVID cases.
Average daily confirmed COVID case count now exceed 50,000, which is guide x that of the mid-June lows with hospitalization and deaths rising as well.
However, as worrying is this trend may seem breakthrough infections, those are infections that occur in vaccinated people are still relatively uncommon.
And the vast majority of these breakthrough cases have not caused serious illness, hospitalization or death.
More than 95% of people hospitalized for COVID-19 are unvaccinated, and the vaccine still remain effective even against the Delta variant.
So while they may not entirely prevent transmission, they do seem almost entirely able to prevent severe disease and death.
With regards to vaccine safety.
There have been very few adverse events, less than seven per million reported overall with nearly all cases resolving and without long-term side effects reported.
As such, the strong safety and efficacy profile will likely garner full FDA approval for mRNA-based vaccines for Pfizer and Moderna this fall.
With regards to pregnancy and women of childbearing age, though data is more limited, based on the safety data generated to date and how we know vaccines work in the body, the CDC does encourage pregnant women to get vaccinated, especially given that pregnant and recently pregnant women are at increased risk for severe illness from COVID-19.
With regards to children, Pfizer has an emergency use authorization for children over 12, and the FDA is urging Pfizer and Moderna to expand their studies in children aged five to 11.
So what's next and where are we headed?
The evolving data and the duration of immunity and COVID-19 variants of concern suggests that COVID-19 and the need for vaccines and boosters will likely persist long term.
However, the faster we can vaccinate the population in this country and increase access to vaccines in the rest of the world, the more effectively we can slow the emergence of new variants and the sooner we can turn this virus into a less deadly pathogen even if still contagious.
And given that COVID will likely remain on the planet for the foreseeable future, therapies are going to continue to be important in mitigating the severity of COVID-19, such as recently authorized to our tenant Bayer and GSK for their new antibody.
Equally as important, is continued COVID testing, of course, for active virus in symptomatic individuals as well as surveillance testing across the population to detect new outbreaks, sequence emerging variants and track overall transmission.
The last point I want to make is regarding the FDA, which has received somewhat unyielding flack over the past several months despite the herculean COVID efforts while maintaining a near all-time record high pace of new drug approvals, as Joel highlighted.
This criticism has been mounting on account of several factors, including the lack of a fully appointed FDA commissioner, the growing backlog of review requirements for new investigational drug applications given the strong pace of innovation of our industry, the lack of fully approved vaccines despite their being authorized under the emergency use authorization pathway and most recently, the historic and highly controversial approval of Biogen's Aduhelm to treat Alzheimer's disease.
This was the first approval in nearly two decades for this chronic neurodegenetive disease affecting over six million people in the U.S. alone.
I will save commentary on all of this for another time, but it needs to be said that without the FDA's steadfast and tireless work throughout COVID to maximize the review of the immense COVID-relating testing, therapeutic and vaccine applications will try to keep up pace with the record numbers of submissions from the industry, we as a nation would fall way behind.
It is nothing short of astounding and worthy of the utmost recognition.
The FDA is critical for ensuring the safety of all drug products that are available in the U.S. while balancing efficacy and expediency.
The future productivity and leadership of the agency, which will be announced by November of this year is of the utmost importance to all of us.
As the FDA is instrumental in ensuring the continued pace and vitality of biomedical innovation in our country.
Biopharma is emerging from COVID as a dawn of historic new era for biotech and scientific innovation.
The world recognizes the value of this industry and the potential for next-generation medicines as evidenced by Moderna and Pfizer's next-generation vaccines to address current and future healthcare challenges.
And clearly, the paradox of this pandemic moment has only reaffirmed why Alexandria has dedicated our business, our passion and our purpose to help drive this mission-critical industry forward.
I'd like to take a step back at the start of my comments and provide some historical context for the accelerating demand which really translates into leasing at warp speed for Alexandria's mega campuses.
At Alexandria's Annual Investor Day during December 2017, we presented a bold framework to nearly double the company's annual rental revenues from a little more than $800 million to $1.5 billion by the end of 2022.
We are pleased to share those annualized revenues for Q2 2021 are, in fact, in excess of $1.5 billion.
And so the Alexandria team has accomplished this lofty goal in an accelerated time frame more than one year sooner than anticipated.
The company has also grown from a mission-critical operating asset base and development pipeline of 29 million square feet at the end of 2017, to a total of 62 million square feet at the end of Q2 2021.
Truly exceptional growth, more than doubling the footprint of the company, and importantly, concentrated in our core clusters with disciplined execution, enabling the continuation of high-quality cash flows.
And as we fielded questions during the 2020 as to whether the healthy leasing activity for Alexandria's mega campus platform was perhaps a short-term blip driven by COVID-19, the second quarter of this year's leasing volume of more than 1.9 million square feet, the highest quarterly leasing volume in the history of the company is again evidence of the company's unique position as a trusted partner to the growing life science industry, providing a durable and sustainable competitive advantage in the market.
I'll go ahead and review a few of the exceptional highlights, including the following: leasing outperformance.
As we just stated, the 1.9 million square feet lease represents the highest quarterly leasing activity during the 27-year history of the company.
Truly leasing at warp speed.
I'll direct you to page two of the supplemental, where it indicates the 3.4 million square feet under construction is 80% leased and the additional 3.6 million square feet anticipated to commence construction during 2021, 2022 is 89% leased and negotiating.
So robust leasing and our growth pipeline provides exceptional clarity, and these projects in total will drive incremental revenues in excess of $545 million.
We also have exceptional core results.
Cash increases this quarter of 25.4% and GAAP increases of 42.4%.
Occupancy remained very solid at 94.3% and the operating portfolio, which would have been 98.1% if were not for the 1.4 million square feet of vacancy in recently acquired properties, which provide for near-term incremental annual rental revenues in excess of $55 million.
In market health, demand, as we've outlined, continues to accelerate, and Alexandria's branded and highly desirable mega campuses and supply does continue to be restrained during 2021 across all of our markets, and we do not see any disruptive large-scale projects delivering 2022, '23.
We're closely evaluating Greater Boston's ground-up pipeline, which is 56% leased.
And in the San Francisco area, we are monitoring leasing activity at two or three ground-up lab projects.
And as we've stated before, there have been no significant lab sublease spaces put in the market for several quarters now.
So in conclusion, the first half of 2021 continues the very strong outperformance by Alexandria and our intent focus on operational excellence has positioned the company very well to enhance its industry-leading brand.
With that, I'll hand it off to Peter.
I'm going to update you all on our development pipeline and construction cost trends, comment on our recent asset sales and report on a couple of comps that reflect that the private market appetite for life science assets is still very healthy.
As Steve and Joel both noted, we're experiencing historic demand and have responded by executing our differentiated life science strategy at an accelerated pace through expanding our collaborative campuses and asset base in each of our cluster markets.
A significant sign of the health of the underlying life science industry is that we're expanding significantly in almost all of our markets.
In many of our submarkets, the supply and demand imbalance has been exacerbated by a lack of near-term opportunities to expand, leading Alexandria to push the boundaries of those markets.
Examples of this are successful forays into Watertown and Seaport in Greater Boston, new mega campuses in Sorrento Mesa, and expansion of San Diego Science sector to the north and east, and a highly successful mega campus underway in San Carlos.
This high demand paired with our highly experienced development teams resulted in another very productive quarter for Alexandria.
In the second quarter, we delivered 755,565 square feet, spread over five assets located in South San Francisco, San Carlos, Long Island City, San Diego and the Research Triangle.
This is double what we delivered in the first quarter, and these deliveries will provide more than $31 million in annual rental revenue over the next year.
In addition, this historic demand has led to improved quarter-over-quarter leasing and leases under negotiation numbers despite adding two new assets that have had little marketing time.
Assets contributing notably to this outcome include 840 Winter Street and Waltham Mass, which is a testament to our ability to capture demand from companies needing facilities for next-gen manufacturing.
3160 Porter Drive in Palo Alto, a joint effort with Stanford to commercialize the University's most innovative science.
And 5505 Morehouse in Sorrento Mesa, which is benefiting from Alexandria's place-making expertise and strong demand drivers in San Diego.
In addition, we expect to have another 3.6 million square feet in 19 properties commenced construction this year, and next that are already 89% leased or under negotiation.
As Steve also mentioned, these properties will cumulatively add approximately $545 million of annual rental revenue once fully delivered.
I felt it necessary to remind everybody of that.
Construction costs remain elevated from trade -- from some trades and commodities holding study and others continuing to be unexplainable and unprecedented levels.
Lumber is a positive story and could be a microcosm for what will happen with other commodities.
A year ago, lumber was $500 per thousand board feet, which was about $100 above its historical norm.
It climbed to $1,700 per thousand board feet in early May, but has since dropped back down to $600 per thousand board feet, and is still dropping.
The reason for the drop was a large number of residential projects were put on hold due to the price of lumber.
With this pullback in demand, the mills have been able to catch up, leading to stabilization in pricing.
A correction due to a decrease in demand is essentially what's going to eventually normalize all construction commodities.
Copper has shown signs of dropping, but it's still two times above historical norms.
Alternatives such as aluminum are being considered to alleviate the pricing pressures.
And if there's enough adoption, it could lead to a stabilization in pricing.
Despite the promising news with lumber and copper, rolled steel remains very volatile and is not showing any signs of stabilizing.
Rolled steel is used for things such as metal decks, metal studs and ductwork.
So it's very impactful on multilevel buildings with large HVAC needs such as lab buildings.
So we have to keep our cost escalation assumptions on the high end despite the noted drop in some commodities.
The reason being reported is both a commodity and labor issue at the shops that create the products from raw materials.
COVID caused many to shut down.
And then when demand exploded, the shops had a hard time getting the labor to come back.
The shops try to solve this by scheduling longer shifts, but the amount of rolled steel showing up was not enough to support those shops.
Thus, prices remained very high with metal studs up 75% since January.
We want to assure you that we're keeping a very close eye on commodities and have been developing strategies to counter these increases.
And together with our prudent underwriting, we will continue to deliver our projects on time and on budget as we always have.
I'll conclude by commenting on our recent sales and provide a couple of comps that were announced recently.
I discussed our record 4% cap rate at 213 East last quarter, but I want to add that in addition to achieving that cap rate, we also achieved an unlevered IRR of 9.6%.
And a value creation margin, which is calculated by dividing our gain by gross book value of 56%.
We achieved a 12% unlevered IRR on this sale and a value creation margin of 61%, a truly remarkable outcome, and it's very reflective of the high-quality assets we've developed and continue to develop in the Seattle region and elsewhere.
Outside of those Alexandria transactions, there are a couple of transactions of note in our submarkets that reflect the high value that private investors are putting on life science assets today.
In Sorrento Mesa, an asset known as The Canyons, which contains a little over 1/3 of lab and manufacturing space with the balance being office, sold at a 4.48% cap rate and a value of $575 per square foot.
The cash flow is from a credit tenant and there is no near-term upside, so the cap rate really reflects the yield a private investor was willing to pay in a submarket that a couple of years ago would have commanded a cap rate with a six handle.
In a similar vein, the other comp we're reporting comes from Rockville, Maryland, which was received to be a seven cap rate submarket by some analysts not too long ago.
9615 Medical Center Drive, located in the Shady Grove submarket and adjacent to a number of Alexandria properties was sold to a U.S. insurance company for a 5.18% cap rate and a valuation of $610 per square foot.
The asset is a leasehold interest subject to a long-term ground lease that happens to be owned by Alexandria.
And with that, I'll pass it over to Dean.
We reported exceptional operating and financial results for the first half of '21 and provided a very strong outlook for the remainder of the year.
Revenue and net operating income for the second quarter was up 16.6% and 16.8% over the second quarter of 2020, respectively.
And NOI for the second quarter was up 6.9% over the first quarter of '21.
Now venture investment gains included in FFO per share were $25.5 million for the second quarter and was consistent with the first quarter of '21.
Now looking back over the last two quarters, we raised our outlook for FFO per share, $0.03 when we reported first quarter results.
And during the second quarter, we raised our outlook for FFO per share again by another $0.02.
Now this $0.02 increase was announced in connection with our Form 8-K filing date at June 14, when we were substantially through the second quarter and had solid visibility into the strength of core results for the quarter.
Same-property NOI growth for the first half of '21 continue to benefit from our high-quality tenant roster, with 53% of our annual rental revenue from investment-grade rated or large-cap publicly traded companies.
Same-property NOI growth for the first half of '21 was very strong at 4.4% and 7.4% on a cash basis.
High rental rate growth on lease renewals and releasing the space was the key driver for the improvement in our outlook for 2021 same-property net operating growth to 2% to 4% and 4.7% to 6.7%, an increase of 30 basis points and 40 basis points, respectively.
Now while the primary focus of our acquisitions for 2021 has been driven by strong demand from our tenant relationships for both current and future development and redevelopment projects, certain acquisitions have also included operating properties with opportunities to drive growth and cash flows through lease-up of vacancy.
Now these operating properties have contributed to NOI growth in the first half of '21.
It's important to highlight that the lease-up of 1.4 million rental square feet of vacancy at these properties will provide further growth in annual rental revenue in excess of $55 million.
Now occupancy that we reported for June 30 was 94.3% and 98.1% on a pro forma basis, excluding vacancy from recently acquired properties.
And it's also important to highlight that if we set aside recently acquired properties, our occupancy is on track to improve by 100 basis points in 2021.
Now we believe it's important to highlight the strategic benefits of having the team with tremendous experience and expertise with designing, building and operating sophisticated laboratory office buildings and the team with decades of trusted partnerships with our highly innovative tenants.
As mentioned earlier, we have one of the highest credit tenant rosters in the REIT industry.
We have one of the highest adjusted EBITDA margins in the REIT industry at 69%.
We reported our lowest AR balance since 2012 at $6.7 million, truly amazing when you consider that our total market capitalization was over $26 billion as of June 30.
And we continue to consistently report high collections at 99.4% for July.
We reported record leasing velocity at over 3.6 million rentable square feet executed in the first half of this year.
And this run rate is significantly exceeding the strong leasing volume for 2020 and on track for exceptional rental rate growth in the range of 31% to 34% and 18% to 21% on lease renewals and releasing the space the last figures on a cash basis, by the way.
Now as a trusted partner with access to over 750 tenants in our portfolio, we are well positioned to capture the tremendous demand from our tenant roster and life science industry relationships.
We have a super exciting pipeline of projects under construction, aggregating 3.4 million rentable square feet, 80% lease negotiating.
Near-term projects starts 89% leased were under negotiations, aggregating 3.7 million square feet.
Now this aggregates about 6.9 million square feet, 90% of which is related to space requirements from our existing relationships.
These projects will generate an amazing amount of incremental annual rental revenue exceeding $545 million or a 34% increase above the second quarter rental revenues annualized of $1.6 billion.
Now importantly, we also expect to start additional projects between now and December of 2022.
Our venture investments portfolio continue to highlight the exceptional talent of our science and technology team for underwriting high-quality innovative entities.
As of June 30, unrealized gains were $962 million on an adjusted cost basis of $990 million.
Realized gains on our venture investments for the second quarter were $60.2 million, including $34.8 million of realized gains excluded from FFO per share.
Now for the first half of '21, we realized gains aggregating about $57.7 million that related to significant gains in three investments that were excluded from FFO per share as adjusted.
Now we're pleased that the venture investment program is generating capital exceeding our initial forecast for 2021, and we hope this will be in the range of about $100-plus million for the entire year.
Now continuing on to our very strong and flexible balance sheet to support our strategic growth initiatives.
We continue to be very pleased to have one of the best balance sheets in the REIT industry, providing us access to attractive long-term cost of capital.
We remain on track for net debt to adjusted EBITDA of 5.2 times by year-end.
Our fixed charge coverage ratio for the fourth quarter has increased to greater than five times.
We continue to maintain significant liquidity of $4.5 billion as of June 30.
We're in a solid position with debt maturities with our next maturity representing only $184 million comes due in 2024.
And while it's challenging to predict when owners of real estate will decide to sell, two to three transactions drove most of the amount of acquisitions and accounted for about half of our target for 2021.
For the remainder of the year, our goal is to remain very selective with acquisitions.
Our team is advancing a number of important dispositions primarily focused on partial interest sales in high-value, low cap rate properties for reinvestment into our strategic value creation development and redevelopment projects.
Now to date, in 2021, we have completed $580 million at cap rates in the 4% to 4.2% range.
And we have about $1.4 billion in process at various stages and expect to move along other dispositions that will push us well above the top end of our range for dispositions, which are currently at $2.2 billion.
Now we are targeting about $1 billion in dispositions to close in the third quarter and the remainder in the fourth quarter.
Importantly, each of these key pending transactions will continue to highlight the tremendous value we have and continue to create for our stakeholders.
This guidance is an update to our guidance for the year that was disclosed on our Form 8-K dated June 14.
We narrowed the range of guidance from $0.10 to $0.08 for both earnings per share and FFO per share.
EPS was updated to a range from $3.46 to $3.54 and FFO per share as adjusted was updated to a range from $7.71 to $7.79 with no change in the midpoint of FFO per share diluted as adjusted of $7.75.
Now as a reminder, since our initial FFO per share guidance for 2021, we have increased the midpoint of our guidance by $0.05 for growth in 2021, representing an increase of 6.1% over 2020.
I also wanted to express our team's appreciation for continued recognition by an independent panel of judges for a six NAREIT Gold Award for Communication and Reporting Excellence to the investment community.
Operator, we can go to questions, please.
| sees 2021 funds from operations per share, as adjusted $7.71 to $7.79.
|
Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used.
Core means designated financial metrics excluding the impact of the recent s::can and ATi acquisitions.
We believe this reference point is important for year-over-year comparability.
I couldn't be more pleased with the dedication and execution demonstrated by our team supporting our customers and delivering record sales in the face of widespread supply chain inflation and logistics challenges.
Our strong order momentum from the first quarter continued into the second, and even with that strong execution, our backlog reached another record high as we exited the second quarter.
Our two water quality acquisitions s::can and ATi delivered strong top line performance above our expectations with solid earnings per share accretion.
Overall, it was a great quarter, due in large part to the activity in the trenches day in and day out.
As you can see on Slide 4, total sales for the second quarter were $122.9 million compared to the coronavirus impacted trough of $91.1 million in the same period last year, an increase of 35%.
Overall utility water sales increased 38%.
Excluding the approximately $12 million of sales from s::can and ATi acquisitions, core utility water revenues increased 22% year-over-year.
Comparing back to the pre-COVID impacted second quarter of 2019, core utility water sales increased 11%.
As Ken noted, we continue to experience robust orders, however supplier allocations of certain electronics and other components along with logistics challenges again limited manufacturing output in deliveries.
We did experience growth in overall meter sales and BEACON software as a service revenue and we benefited from strategic value-based pricing actions.
We exited the quarter with another record high backlog, which bodes well for our sales expectations moving forward.
As anticipated, the flow instrumentation product line sales rate of change returned to growth with a 22% year-over-year improvement, stabilizing demand trends across the majority of global end markets and applications as well as an easier comp influenced the increase.
We were pleased with the operating profit margins generated in the quarter in light of the significant and varied inflationary forces.
The quarter's operating margin was 15.2%, an increase of 130 basis points year-over-year.
Gross margin for the quarter was 40.8%, an increase of 150 basis points year-over-year.
Margins benefited from favorable acquisition mix as well as the higher volumes and positive product sales mix, namely higher SaaS revenues, along with favorable value-based pricing realization.
Combined, these drivers tempered the cost headwinds from higher brass and other component and logistics inflation.
Taking a closer look at copper, prices have settled back down into the $4.30 range after escalating to about $4.80 earlier in the quarter.
This is generally in line with our most recent year-over-year headwind estimate, which was approximately $7 million to $8 million on a full year basis unmitigated.
As our margins demonstrate, we have executed well in implementing appropriate pricing mechanisms to offset this inflation and we will continue to actively monitor pricing in light of the inflationary pressures.
Turning to SEA expenses.
The second quarter spend of $31.4 million was sequentially in line with the $31.6 million from Q1 2021 and represents an increase of $8.2 million from the prior year.
You may recall, the prior year included the benefit of various cost reduction actions taken at the onset of COVID-19 including temporary furloughs.
The SEA run rate includes both the s::can and ATi along with the higher level of acquired intangible asset amortization, and is in line with our ongoing expectations of normalized SEA leverage in 25% to 26% range over time.
The income tax provision in the second quarter of 2021 was 25%, slightly higher than the prior year's 24.3% rate.
In summary, earnings per share was $0.48 in the second quarter of 2021, an increase of 45% from the prior year's earnings per share of $0.33.
Working capital as a percent of sales was 24.3% on par with the prior quarter-end.
Inventory increased due to the manufacturing output constraints as well as commodity inflation as described earlier.
Free cash flow of $11.9 million was lower than the prior year, the result of higher cash tax payments and the increase in inventory.
On a year-to-date basis, free cash flow conversion of net earnings is sitting at 147%.
We took the opportunity to upsize the facility to $150 million and to add additional flexibility in the form of leverage covenants and an accordion feature among others.
Our strong cash flow combined with our borrowing capacity provides us with ample liquidity to fund our ongoing capital allocation priorities.
Turning to Slide 5.
We updated the chart we introduced last quarter with actual second quarter data.
Given the number of different variables at play in both the current year and prior year comparables, we think this chart can be helpful in understanding the uneven results we have and we'll continue to see in our sales.
The robust growth rate we experienced this quarter excluding the acquisitions was the result of continued strong order rates as well as the record high backlog with which we started the quarter.
Not surprisingly, it was also due in part to the easier comp from the most significantly COVID-19 impacted second quarter last year.
As we enter the back half of the year, the strong order momentum and record high backlog will be supportive of our growth outlook.
The third quarter will see a difficult comp, both in terms of sales and profitability based on the post-COVID lockdown recovery in both manufacturing output and orders last year.
Our supply chain team continues to work tirelessly at [Indecipherable] with the varied electronic and other component shortages.
While we don't expect to be back to normal, we do expect further backlog conversion as the year moves ahead.
We are very pleased with the results from the last two water quality acquisitions this quarter contributing just over $12 million of revenue in the quarter, a pro forma growth rate in the double-digits.
Their underlying performance along with the integration work underway to establish and cross-trained sales resources and harmonized product offerings within water quality validates our confidence in the underlying strategy of combining water quantity with quality in order to accelerate our customers' digital transformations.
In summary here on Slide 6, the step change in order rates over the past several quarters confirms the fundamental market demand for intelligent water solutions to monitor, manage and support operational efficiencies throughout the water distribution system.
We are uniquely positioned with a full line of smart water offerings encompassing both water quantity and quality to serve utility and industrial customers alike.
A record backlog is one of those good problems to have and the challenge we expect will persist for some time as we migrate through the second half of the year and beyond.
Electronic and other component suppliers are making good progress in restoring and building capacity, however, the rate of recovery is fluid and will continue to be uneven until inventory levels are able to be -- to fully meet demand.
Despite the component availability, inflation and logistics challenges, our teams are working hard to build supply chain resiliency and actively communicate to suppliers and customers to proactively manage expectations.
Our effective sourcing strategies, market driven innovation and operational agility are supporting Badger Meter's profitable business growth and delivering value for shareholders.
Finally, I want to highlight several additional ESG related disclosures that we've added to our website.
One is an outline of how Badger Meter works to align our ESG efforts with the United Nations Sustainable Development Goals, notably Goal 6, 3 and 11 that focus on water, health and safety and sustainable cities.
The second is a stand-alone SASB focused report providing annual metrics and other information for 2020, which is cross-referenced to GRI.
Badger Meter continues to advance its ESG journey as we work to understand and mitigate the most material and impactful risks of climate change and preserve and protect the world's most precious resource.
| compname reports q2 earnings per share $0.48.
q2 earnings per share $0.48.
q2 sales $122.9 million versus refinitiv ibes estimate of $118.4 million.
|
As always, we appreciate your interest.
Brent Wood, our CFO, is also participating on the call.
We hope everyone is enjoying their fall.
They continue performing at a high level and reaping the rewards of a very positive environment.
Our third quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
Some of the results the team produced include, funds from operations coming in above guidance up 14% compared to third quarter last year and ahead of our forecast.
This marks 34 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long-term trend.
Our quarterly occupancy averaged 97.1%, up 50 basis points from third quarter 2020 and at quarter end, we're ahead of projections at 98.8% lease and 97.6% occupied.
Our occupancy is benefiting from a healthy market with accelerating e-commerce and last mile delivery trends.
Quarterly releasing spreads were at record levels at 37.4% GAAP and 23.9% cash and year-to-date, those results are 31% GAAP and 18.5% cash.
Finally, cash same-store NOI rose 5.2% for the quarter and 5.6% year-to-date.
In summary, I'm proud of our team's results, putting up one of the best quarters in our history.
Today, we're responding to the strength in the market and demand for industrial product by both users and investors by focusing on value creation via development and value-add investments.
I'm grateful we ended the quarter at 98.8% leased, our highest quarter on record and to demonstrate the market strength, our last four quarters marked the highest four quarterly rates in our company's history.
Looking at Houston, we're 96.7% leased.
It now represents 12% of rents, down 140 basis points from a year ago and is projected to continue shrinking.
As we've stated before, our development starts are pulled by market demand.
Based on the market strength we're seeing today, we're raising our forecasted starts to $340 million for 2021.
This represents an annual record level of starts for our company.
To position us for this market demand, we've acquired several new sites with more in our pipeline along with value-add and direct investments.
More details to follow as we close on each of these opportunities.
And Brent will now review a variety of financial topics, including our 2021 guidance.
Our third quarter results reflect the terrific execution of our team, strong overall performance of our portfolio and the continued success of our time-tested strategy.
FFO per share for the third quarter exceeded our guidance range at $1.55 per share and compared to third quarter 2020 of $1.36 represented an increase of 14%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly occupancy and rental rate growth.
From a capital perspective, during the third quarter, we issued $49 million of equity at an average price over $176 per share.
In July, we repaid a maturing $40 million senior unsecured term loan.
And in September, we closed on the refinance of $100 million unsecured term loan that reduced the effective fixed interest rate from 2.75% to 2.1%, with five years of term remaining.
In our ongoing efforts to bolster our ESG efforts, we incorporated a sustainability-linked metric into the amended terms.
That activity combined with our already strong and conservative balance sheet, kept us in a position of financial strength and flexibility.
Our debt to total market capitalization was below 17%, debt-to-EBITDA ratio at 4.7 times and our interest and fixed charge coverage ratio increased to over 8.5 times.
Our rent collections have been equally strong.
Bad debt for the first three quarters of the year is a net positive $346,000 because of tenants whose balance was previously reserved but brought current, exceeding new tenant reserves.
This trend continues to exemplify the stability, credit strength and diversity of our tenant base.
Looking forward, FFO guidance for the fourth quarter of 2021 is estimated to be in the range of $1.54 to $1.58 per share and $6.01 to $6.05 for the year, a $0.15 per share increase over our prior guidance.
The 2021 FFO per share midpoint represents a 12.1% increase over 2020.
Among the notable assumption changes that comprise our revised 2021 guidance include: increasing the cash same-property midpoint by 8% to 5.6%, decreasing reserves for uncollectible rent by $900,000, increasing projected development starts by 24% to $340 million and increasing equity and debt issuance by combined $95 million.
In summary, we were very pleased with our third quarter results.
We will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to carry our momentum through the year.
Now Marshall will make some final comments.
In closing, I'm excited about where we stand this far into 2021.
We're ahead of our initial forecast and adhering that momentum into 2022.
Our company, our team and our strategy are working well, as evidenced by the quarterly results.
And it's the future that makes me most excited for EastGroup.
Our strategy has worked well the past few years.
We're further seeing an acceleration and a number of positive trends for our properties and within our markets.
Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets.
These, along with the mix of our team, our operating strategy and our markets has us optimistic about the future.
| q3 ffo per share $1.55.
eastgroup - qtrly same property net operating income for same property pool excluding income from lease terminations increased 5.2% on a cash basis.
|
Joining us today will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and Chief Financial Officer.
All of our core businesses are producing strong financial results and we are optimistic that 2021 will be an outstanding year for First American.
Today I will focus my comments on the progress we are making on a number of key strategic initiatives, and Mark will then provide details on our second quarter results.
The process of buying a home is complex and involves multiple parties.
First American sits at the center of the transaction, coordinating among realtors, lenders and consumers to protect the integrity of the process.
As the transactions become increasingly digital, First American is focused on leveraging our unique property data and technology to enhance the customer experience which make the process more efficient and secure for all parties.
First American's data assets and process expertise provide a unique competitive advantage.
Last quarter, we announced our initiative to expand our title plants from 500 to 1500.
By building an additional 1000 plants our databases will cover approximately 80% of all real estate transactions.
We've made significant progress since our launch, we are currently up to 850 plants and are on track to achieve our goal of 1500 by the year end.
These additional plants are currently being built on a go-forward basis and will accrue significant benefits to us in the years to come as our historical content becomes deeper and richer.
Due to our patented extraction process, First American is in a unique position to build these plants at a fraction of our historical cost.
Plus we are now capturing virtually every data point on 7.5 million documents per month up than 5 million last quarter, data that can be leveraged to automate title underwriting decisions and geographic areas that were previously done manually.
In addition to our data leadership, we are focused on developing digital solutions to improve the customer experience.
Across the enterprise, we are developing next-generation cloud-based technology to make it even easier for our customers to do business with us.
For example, our direct division recently launched IgniteRE, a platform that provides real estate professionals with enhanced productivity tools and enables them to manage transactions from open to close with buyers, sellers and settlement agents with secure environment.
IgniteRE and ClarityFirst, which we discussed last quarter, are two examples of technology investments we've made to strengthen our competitive edge and more will follow.
Both platforms make it easier to work with us and expand our customer relationships.
To support our technology initiatives, we acquired a 130 product managers, designers and engineers so far this year.
These critical hires reflect our commitment to expand our position as the industry leading innovator.
Turning to our venture strategy.
Since 2019, we've invested $260 million in venture-backed companies in the proptech ecosystem.
These investments give us insight into a high growth technology companies, most of which have become strategic partners.
In addition to providing strategic benefit they are contributing to profits as well.
Venture investments will continue to be a component of our capital allocation strategy.
In closing, I'm confident that 2021 will be another strong year for First American.
All of our core divisions are performing well and we have a healthy pipeline of business heading into the second half of the year.
Our balance sheet is strong and our strategy of focusing on data and technology to enhance the customer experience will continue to succeed.
We're pleased to report excellent results this quarter.
We earned $2.72 per diluted share.
Included in this quarter's results were $0.59 of net realized investment gains.
Excluding these gains, we earned $2.13 per diluted share.
I'll start with our title business.
Revenue in our Title segment was $2.1 billion, up 44% compared with the same quarter of 2020 due to the strength of the purchase and commercial markets.
Purchase revenue was up 66% driven by a 43% increase in the number of closed orders coupled with a 16% increase in the average revenue per order.
Commercial revenue was $223 million, a 104% increase over last year.
Large transactions have resumed as we closed 54 transactions in the U.S. with premiums greater than $250,000, up from just 12 last year.
This year, we expect a record year in our commercial business.
Refinance revenue declined 23% relative to last year as the rise in mortgage rates that occurred during the first quarter put pressure on second quarter closings.
On the agency side, revenue was a record $905 million, up 51% from last year.
Given the reporting lag in agent revenues of approximately 1 quarter, we are experiencing a surge in remittances related to Q1 economic activity.
Our information and other revenues were $298 million, up 31% relative to last year.
Revenue growth was primarily due to higher demand for the Company's title information products in our data and analytics, commercial and loss mitigation business lines.
Investment income within the Title Insurance and services segment was $47 million, up 10%, primarily due to higher interest income from the company's warehouse lending business and higher average balances in the company's investment portfolio, partially offset by the impact of the decline in short-term interest rates on the company's tax deferred property exchange and escrow balances.
In our Title segment, pre-tax margin was a record 19.1% excluding the impact of net realized investment gains, pre-tax margin was 15.3%.
Turning to the Specialty Insurance segment.
Pretax earnings totaled $20 million, up from $7 million in 2020.
Revenue in our home warranty business totaled $108 million, up 10% compared with last year.
Pretax income in our home warranty business was $14 million, a decline of 13% in part due to elevated claims expense.
Our property and casualty business generated a pre-tax income of $6 million this quarter.
Included in this quarter's results were the $12 million gain on the sale of our agency operations.
At the end of the second quarter our policies in force have declined by 22% at the beginning of the year and we expect a 70% decline by year-end.
The full wind down of the property and casualty business is on track to be completed in the third quarter of 2022.
The effective tax rate for the quarter was 24% in line with our normalized tax rate.
Cash flow from operations was $253 million in the second quarter, down from $344 million in the prior year, due primarily to the deferral of estimated tax payments allowed by taxing authorities during the height of pandemic in 2020.
With respect to this information security incident, as we previously disclosed, we reached a settlement with the SEC for $487,616.
The New York Department of Financial Services matter remains ongoing.
We continue to believe that it along with all other matters relating to the incident will be immaterial.
As Dennis mentioned in his remarks, we've invested a total of $260 million in venture-backed companies.
This quarter we recorded a $44 million gain related to our investment side, a real estate SaaS company that serves real estate agents, teams and brokers.
Our largest investment has been in OfferPad an iBuyer that is now party to a merger with the SPAC, which recently announced that the value of the aggregate equity consideration to be paid to OfferPad stockholders and option holders will be equal to $2.25 billion.
At that valuation, we would expect to book a gain of approximately $237 million on our $85 million equity investment.
We expect this merger to close later this year.
Due to the growth of our venture portfolio, we have expanded disclosures in our Form 10-Q, which we expect to file later today.
These disclosures will include the cost, unrealized gains and carrying amount of our non-marketable equity securities, as well as information on concentration of these securities.
We remain optimistic about our 2021 outlook.
Although refinance orders have declined corresponding to an increase in mortgage rates, the purchase and commercial markets remain strong.
Our claims experience is favorable and the general improvement in economy to tailwind into our business.
| first american financial q2 earnings per share $2.72.
q2 earnings per share $2.72.
|
As always, we appreciate your interest.
Brent Wood, our CFO is also participating on the call.
We refer to certain of these risks in our SEC filings.
We hope everyone is enjoying their summer.
They continue performing at a high level and reaping the rewards of a very positive environment.
Our second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
Some of the results the team produced include, funds from operations, coming in above guidance, up 10.5% compared to second quarter last year and $0.03 ahead of our guidance midpoint.
This marks 33 consecutive quarters of higher FFO per share, as compared to the prior year quarter, truly a long-term trend.
Our second quarter occupancy averaged 96.8%, up 20 basis points from second quarter 2020.
And at quarter end, we're ahead of projections at 98.3% leased and 96.8% occupied.
Our occupancy is benefiting from a healthy market, with accelerating e-commerce and last-mile delivery trends.
Quarterly releasing spreads were among the best in our history at 31.2% GAAP and 16.2% cash.
And year-to-date, those results are 28% GAAP and 16% cash.
Finally, cash same-store NOI rose by 5.6% for the quarter and 5.8% year-to-date.
In summary, I'm proud of our team's results, putting up one of the best quarters in our history.
Today, we're responding to the strength in the market and demand for industrial product, both by users and investors by focusing on value creation via development and value-add investments.
I'm grateful, we ended the quarter at 98.3% leased, matching our highest quarter on record.
To demonstrate the market strength, our last three quarters were the highest three quarterly rates in the company's history.
Looking at Houston, we're 96.5% leased, with it representing 12.3% of rents, down 150 basis points from a year ago and is projected to continue shrinking.
Brent will speak to our budget assumptions, but I'm pleased that we finished the quarter at $1.47 per share in FFO and are raising our 2021 forecast by $0.09 to $5.88 per share.
As we've stated before, our development starts are pulled by market demand.
Based on the market strength we're seeing today, we're raising our forecasted starts to $275 million for 2021.
This represents a record annual level of starts for the company.
And to position us following the pandemic, we've acquired several new sites with more in our pipeline along with value-add and direct investments.
More details to follow as we close on each of these opportunities.
And Brent will now review a variety of financial topics, including our 2021 guidance.
FFO per share for the second quarter exceeded our guidance range at $1.47 per share and compared to second quarter 2020 of $1.33, represented an increase of 10.5%.
The outperformance continues to be driven by our operating portfolio performing better than anticipated, particularly the quick releasing of vacated space during the quarter.
From a capital perspective, during the second quarter we issued $60 million of equity at an average price over $162 per share, and we issued and sold $125 million of senior unsecured notes, with a fixed interest rate of 2.74% in a 10-year term.
In June, we amended and restated our unsecured credit facilities, which now mature July 2025.
The capacity was increased from $395 million to $475 million, while the interest rate spread was reduced to 22.5 basis points, and our ongoing efforts to bolster our ESG efforts we incorporated a sustainability-linked metric into the renewal.
That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strength and flexibility.
Our debt-to-total market capitalization was 17%, debt-to-EBITDA ratio at 4.9 times, and our interest and fixed charge coverage ratio increased to over eight times.
Our rent collections have been equally strong.
Bad debt for the first half of the year is a net positive $90,000, because of tenants whose balance was previously reserved that brought current exceeding new tenant reserves.
Looking forward FFO guidance for the third quarter of 2021 is estimated to be in the range of $1.46 to $1.50 per share and $5.83 to $5.93 for the year, a $0.09 per share increase over our prior guidance.
The 2021 FFO per share midpoint represents a 9.3% increase over 2020.
Among the notable assumption changes that comprise our revised 2021 guidance, include: increasing the cash same-property midpoint by 18% to 5.2%, increasing projected development starts by over 30% to $275 million and increasing equity issuance from $140 million to $185 million.
In summary, we were very pleased with our second quarter results.
We will continue to rely on our financial strength, the experience of our team, and the quality and location of our portfolio, to carry our momentum through the year.
Now, Marshall will make some final comments.
In closing, I'm excited about our first half of the year.
We're ahead of our forecast and are carrying that momentum into the back half of the year.
Our company, our team, and our strategy are working well as evidenced by our quarterly statistics, and it's the future that makes me the most excited for EastGroup.
Our strategy has worked the past few years, and we're seeing an acceleration, and a number of positive trends for our properties, and within our markets.
Meanwhile, our bread and butter traditional tenants remain and will continue needing last-mile distribution space in fast-growing Sunbelt markets.
These along with the mix of our team, our operating strategy and our market has us optimistic about the future.
And we'll now open up the call for any questions.
| compname announces q2 ffo per share $1.47.
q2 ffo per share $1.47.
|
We have provided the user-controlled slides on our investor relations website.
We are joined here today by Bill Meaney, president and CEO, and Barry Hytinen, our EVP and CFO.
Today, we plan to share a number of key messages to help you better understand our performance, including how we are continuing to respond and adapt to the COVID-19 pandemic; continuing to demonstrate top line resilience in our physical storage business, continuing to see strength in our data center business, progressing on our transformation program with Project Summit, and how we are remaining committed to funding innovation and new product development.
We have noted the impact from COVID-19 on our expectations of how that may impact our operations and financial performance in 2020.
We have also noted our expectations for Project Summit as well as certain other comments on our expectations for the remainder of the year.
In addition, we use several non-GAAP measures when presenting our financial results.
We have included the reconciliations to these measures as required by Reg G in our supplemental financial information.
With that, Bill, would you please begin?
Let me start by saying, I hope you and your families are safe and well.
The third quarter provided us with a great opportunity to demonstrate the significance of the measures we have taken over the last few months in response to the pandemic and set a marker for outperformance through top line resilience in our physical storage and growing data center businesses, adjusted EBITDA margin expansion and by maintaining our strong cash generation track record all while continuing our investment in innovation and new product development.
Despite lingering uncertainty related to the global COVID-19 pandemic, we have seen improvements, albeit gradual in key U.S. and international markets as it relates to our service activity levels, while showing continued strong performance in both our physical storage business and our global data center business.
I continue to be inspired by the tireless efforts of our teams as they support and care for our customers, each other in our communities, while accelerating progress on our strategic priorities.
From the start, we set out our priorities to deal with the situation clearly and take care of the health and safety of our people and work hard to honor the commitments we have made to our customers.
In April, we had up to one-third of our workforce out on furlough or other temporary leaves.
I'm happy to report that we have brought a significant number of these mountaineers back to work to serve our customers, and we now have over 90% of our employees working regularly.
Whilst this has been a very difficult time, we have proven to be very resilient.
We are financially healthy with strong and reliable cash flow, driven in part by our brand and customer loyalty.
This is evident in how we've managed the heightened uncertainty of the past eight months.
We quickly aligned on the right mix of priorities to maintain strong near-term momentum while continuing our investments in innovation and new products as we execute our plan for long-term value creation.
This, combined with the benefits from Project Summit has allowed us to continue to invest in transforming and modernizing our company.
As demonstrated by our year-on-year constant currency year-to-date adjusted EBITDA and storage revenue growth, we can already see the evidence supporting our belief that we will emerge from this pandemic as a stronger company on all dimensions.
Clearly, there are still many uncertainties around COVID in terms of the development of the pandemic and how the government's worldwide will continue to respond with varying degrees of restrictions as infections rise.
However, in the third quarter, we saw signs of improvement in customer trends, and as a result, the decline of our service revenue moderated.
In addition, there is clear evidence that as and when the restrictions lift customers do come back to us with needs from both a physical and digital document storage perspective.
And while some elements of our business may have changed forever, our positioning with the communities we serve remain strong.
Throughout the pandemic, we have continued to adapt and transform our business model and solutions to changing customer needs due to challenges created by COVID-19.
Our customers are evaluating their real estate needs, business processes and ways to increase digitization in a remote workplace setting.
We have been focused on helping them navigate these challenges and have tasked ourselves with accelerating our response to our customers' needs.
One thing is certain, the pandemic has created opportunities for us to help our customers in new and innovative ways.
The fact is we're a different company than the one most people know.
The strategic journey we have been on has driven this change.
And to remind folks, our focus remains on three pillars.
First, continued growth in physical storage revenue through pricing as well as new volume growth achieved from record growth in emerging markets and are in consumer storage in developed markets.
Second, utilizing our global scale as well as 70 years of customer trust to deliver a differentiated data center offering.
And third, new products and services that allow our customers to achieve reliable and secure information management in a more complex regulatory environment and one in which hybrid, physical and digital solutions are the norm.
Further expanding on the product and services pillar, most know us for protecting highly regulated records.
But over the years, our relationships have evolved to help customers manage a broader set of assets and to help them solve a broader range of problems.
As customers' needs evolve, their expectations of us evolve.
For this reason it is important we continue to invest in creating solutions that unlock value for our customers.
A great example of this is a solution we just provided for a U.S. credit union who needed a faster, more efficient method for processing new members' mortgage loans after closing.
Their old process was too manual and it could no longer support the volume of work, much less scale to meet the credit Union's 30% year-over-year growth projection.
And it didn't satisfy increased regulations, the organization must now meet when selling their loans.
We rebuilt the customer's workflow to better integrate their mix of paper and digital loan materials.
This included mailroom services, document scanning and private vault with bio-resistant safeguards in defensible, secure disposition.
We also applied machine learning to automate how the credit union access data, verified its accuracy and resolve missing or incorrect items.
With these changes, the credit union can now process post-close mortgage loans much faster, more than doubling their capacity while reducing their costs by 25%.
This example speaks to what we see as our differentiation and why customers ultimately call us when they need help.
For some time, we have talked about our opportunity to enable our customers' digital transformation journeys.
Initially, much of this work was going on behind the scenes, especially as Project Summit got under way, putting in place the systems and structures to support this transformation.
The benefits of this work are now becoming more evident with notable improvements to our customer experience at a time when demand for our solutions has never been greater.
This materialized in the third quarter and high-single-digit growth in our digital solutions business.
If you look at our physical storage business, this remains a key foundation for Iron Mountain.
Customers have long trusted us to secure their information and their assets that matter most to them.
They needed us to service their lock, if you will.
But over time, while their needs expanded beyond security and compliance, their jobs grew more complex as they now had to store, use and extract value from growing amounts of information that was in both physical and digital form.
The hybrid nature of their data was preventing them from achieving speed, compliance, efficiency and ultimately growth.
A lock was no longer enough.
They now needed a key to solve for this hybrid environment.
Uniquely, Iron Mountain offers both the lock and the key that organizations need in order to realize competitive advantage from their paper and digital information.
Plenty of companies offer a secure home for valued assets, when they offer technology services so customers can better use those assets, but this over specialization falls short of the needs of most customers.
We hear from our customers that they want partners who can help them build singular solutions capable of solving for multiple demands of speed, cost savings, revenue opportunities and security.
This is Iron Mountain's distinctive position.
We serve as the lock and the key.
Now, let's take a closer look at business trends during the third quarter.
At a high level, we are pleased with the stabilization and early recovery we're beginning to see across our service business.
Service activity levels have shown a gradual improvement from the second quarter.
However, similar to what we discussed last quarter, the shape of the recovery will be dependent on macro factors.
The recent increases in COVID-19 cases in many parts of the world has focused states and countries to implement new restrictions to mitigate the spread of COVID-19.
Whilst these factors will make the recovery uneven, our experienced management team is prepared to confidently manage the volatility.
Turning now to our physical storage business.
Total organic storage rental revenue growth accelerated modestly from last quarter, up 2.5%.
This once again was driven by strong revenue management results as well as growth in our emerging markets in consumer.
We continue to be very encouraged with the levels of organic storage revenue growth, underscoring the durability of the physical storage business and supporting strong cash generation.
Total global organic volume increased 2 million cubic feet sequentially.
Contributing to this was 3 million cubic foot increase in consumer and other and fine art storage, partly offset by a decrease in records management volume.
Looking more specifically at records management organic volume, this was down 1.1 million cubic feet compared to the second quarter.
While still a decline, this is a significant improvement from the 3.9 million cubic foot decline last quarter, again, reflecting the early signs of recovery.
We continue to expect the full-year organic volume to be down 1 to 1.5% and up 2.5% in terms of organic revenue based on current visibility.
Turning now to our global data center segment.
We are very encouraged by another strong quarter of bookings.
In Q3, we leased 12.3 megawatts, bringing the year-to-date total to just over 51 megawatts.
The strong leasing this year, particularly among smaller deployments, has resulted in increase in our utilization by more than seven points to nearly 92%.
Given the need for additional capacity, we have increased our development pipeline to approximately 50 megawatts, consisting of both greenfield development and further build out of existing facilities.
Moreover, in excess of 50% of our development is pre-leased, resulting in a strong backlog.
Let me now provide a brief update on Project Summit.
Our transformation program is progressing well, and we are on track to realize our permanent structural cost savings of $375 million per year exiting next year.
Most notably, these ongoing initiatives should not only significantly reduce our cost base, but also make it easier for our mountaineers to get work done, enabling them to focus on a more customer centric approach.
Some examples include: driving global standardization in IT, replacing cumbersome manual processes with reliable automation and improving the user experience while reducing process cycle time.
We are as excited about the systems and process improvements that our Project Summit as we are about the bottom line improvement and believe the end result will be an enhanced value proposition for our customers and communities.
As we shared with you last quarter, we are strongly committed to all of our stakeholders.
We are focused on our culture, especially our purpose to inspire and build better lives and communities.
I would also point out that we are committed at the executive level to continue on our path and accelerate improving our diversity and inclusion.
In order to be a sustainable and successful company, we need to attract the best talent to drive maximum creativity through diverse and innovative thinking.
I am proud to say we achieved a perfect score of 100 on the Human Rights Campaign Foundation's 2020 Corporate Equality Index.
This recognition reinforces the important work we are doing and supports our goal of building and promoting an inclusive culture that encourages our employees to bring their whole authentic cells into the workplace.
As we look at our business going forward, we see opportunities as well as risks and we are making every effort to ensure we are well placed to maximize the opportunities.
We are cautious about our expectation of the pace of market recovery as we progress through 2021.
In our own business, as we've shared with you in previous calls, we expect a gradual recovery in our service business to continue as economic activity recovers, leading 2021 to look similar to 2020, just in reverse in terms of quarterly progression.
The work we are doing and have done to address the challenges posed by COVID-19, gives us confidence that we will come out of this position to consistently deliver long-term sustainable growth.
In summary, we are leveraging the opportunity in this rapidly changing environment to reaffirm our commitment to our strategy of growth through increased product offerings in the physical storage area as well as continued rapid growth in our data center and digitization areas.
At the same time, we continue to exercise prudent cost control and drive further efficiency across the organization through our transformation activities.
We are proud of the progress we have made toward our transformative shift during this crisis.
We are now even more enthusiastic about the speed of our future transformation given the lessons we have learned during the pandemic.
I hope you all remain well.
We are pleased with our third quarter and year-to-date performance.
In a challenging macro environment, our team delivered solid performance across each of our key financial metrics.
Revenue of $1.04 billion declined 2.4% on a reported basis year on year, which includes a 30 basis point impact from foreign exchange.
Total organic revenue declined 3.4%.
Organic service revenue declined 13.5%, reflecting the continued COVID impact on our activity levels.
While the pace of recovery continues to be dependent on many factors, overall, we continue to see service declines moderate, reflecting an improving trajectory since the April, May time frame.
For the full quarter, service trends were generally consistent with the July levels we discussed on our last call.
Despite the macro headwinds, total organic storage rental revenue grew 2.5%, driven by three points of revenue management and data center growth partially offset by a 30-basis-point decline in global organic volume on a trailing 12-month basis.
This is 30-basis-point improvement as compared to the second quarter on a trailing 12-month basis.
Adjusted EBITDA was $370 million.
Adjusted EBITDA margin expanded 30 basis points year on year to 35.7%.
The improvement reflects progress on our Summit transformation, revenue management and favorable mix while partially offset by fixed cost deleverage on lower service revenue and higher bonus compensation accrual.
In addition, in the third quarter, we incurred incremental cost to keep our teams safe, for example, specialized cleaning of our facilities as well as purchases of personal protective equipment.
We included these expenses in our adjusted EBITDA.
Adjusted earnings per share was $0.31, down $0.01 from last year.
AFFO declined 5.4% to $213 million.
As compared to adjusted EBITDA, the decline in AFFO was primarily driven by timing of cash taxes consistent with our outlook.
Turning to segment performance and starting with the global RIM organization.
In the third quarter, our global RIM business experienced declines in service revenue, albeit at moderating levels compared to earlier in the year.
This was partially offset by storage volume growth in our faster-growing markets and revenue management, which led to a total organic revenue decline of 3.9%.
Back, together with better than planned project Summit benefits resulted in adjusted EBITDA margin expansion of 110 basis points.
In the service business, we experienced year-on-year declines of approximately 31% for new boxes inbounded and 39% for retrievals and refiles.
We also continue to see a slowdown on the outgoing side as permanent withdrawals declined to 28% and destructions were down 22%.
In our thread business, activity declined approximately 17%.
For the third quarter, our average realized paper price was 20% higher than the prior year, which was more than offset by a decline in paper tonnage, leading to a net $3 million reduction in adjusted EBITDA.
As we projected on our last call, after the temporary spike in recycled paper prices in April and May, prices have taken a step down.
And by October, paper prices have now returned to the low levels experienced at the end of 2019.
Our consumer storage business has maintained momentum and continues to be a more meaningful contributor to our overall physical storage volume growth.
In the third quarter, we continued cost reduction actions, including furloughs and reduced work hours, albeit at much lower levels than earlier in the year.
As service revenue expectations improve, we want to ensure we are staffed to the appropriate level so we can fully support our customers.
As we have discussed before, this does tend to cause incremental cost deleverage as we bring back employees ahead of demand.
We think this is the right investment to service our customers.
Turning to global data center.
The business delivered organic revenue growth of 12.1%, driven by prior period leasing and strong service revenue growth.
This was partially offset by a moderate churn of 160 basis points, in line with our target of 1 to 2% per quarter.
In the fourth quarter, we are expecting slightly elevated levels of churn compared to our normal target range.
In the quarter, we booked a nonrecurring revenue adjustment of $1.8 million.
Adjusted EBITDA margin of 45.8% was consistent with our first half trend.
As Bill noted, our data center team continued to deliver strong bookings momentum, signing over 12 megawatts of new and expansion leases, bringing year-to-date bookings of 51 megawatts.
This commercial success resulted in us exceeding our previous full-year target through the first nine months.
For the full year, we expect to deliver more than 55 megawatts of new and expansion leasing, representing bookings growth of 45%.
Of course, that includes the significant hyperscale lease in Frankfurt.
And excluding that, we would expect bookings growth of about 23%.
This compares to our original guidance of 15 to 20 megawatts or mid-teens bookings growth.
We believe we are growing considerably faster than the broader market.
Going into next year, we feel good about the state of our pipeline, both from a hyperscale perspective as well as our core retail co-location business supporting rich ecosystems across our platform.
We believe we can lease in excess of 20 megawatts next year, which would result in mid-teens annual bookings growth.
In October, we announced the formation of our joint venture with AGC Equity partners, a greater than EUR 300 million partnership for our fully pre-leased data center in Frankfurt.
This venture represents an important strategic step toward our goal of identifying alternative sources of capital to fund accelerating growth as we expect proceeds will be redeployed into higher return development opportunities.
As we have previously disclosed, the venture will be reflected as an unconsolidated joint venture and therefore, will not flow through to revenue and EBITDA.
Turning to Project Summit.
In the third quarter, we recognized $48 million of restructuring charges as well as an adjusted EBITDA benefit of $48 million.
Through the first nine months, we have delivered $113 million of benefit.
This is ahead of our prior expectations as we accelerated certain initiatives in 2020 with a particular focus on the highest return activities in response to COVID 19.
As Bill referred to, we now expect the program to deliver adjusted EBITDA benefits of $165 million in 2020, approximately $150 million more in 2021 with the full program generating $375 million exiting 2021.
In terms of costs related to Project Summit, we now expect to spend closer to $200 million in 2020.
We continue to expect the cost to implement the full program to be approximately $450 million.
Turning to cash flow and the balance sheet.
We are operating from a position of significant balance sheet strength.
In the third quarter, our team did a nice job delivering further cash cycle improvement, with solid performance in both payables days and days sales outstanding.
On a sequential basis, cash cycle improved by a full day as a result of continued DSO improvement.
In August, the team executed another successful bond refinancing, issuing $1.1 billion to redeem our most restrictive outstanding debt and pay down a portion of the outstanding balance under our revolving credit facility.
The continued strong support received from the fixed income community provided us the opportunity to upsize our transaction while printing the lowest coupon for 10-year notes in the company's history.
Taken together with our bond offerings in CIN, we issued $3.5 billion of new debt on a leverage-neutral basis, increased our weighted average maturity by over two years to nearly eight years, while only modestly increasing our weighted average cost of debt.
Additionally, these new bonds are more in line with our REIT peers as they include a fixed charge coverage ratio as opposed to a debt-to-EBITDA covenant.
Also, I think it is worth noting that we have eliminated all of our six and a half times leverage covenant bonds, meaning our most restricted bond covenant is now seven times debt-to-EBITDA.
At quarter end, we had $1.7 billion of liquidity.
As a reminder, at the end of the second quarter, we had elevated levels of cash on our balance sheet due to the timing of the payoff of one of our notes from the June bond offering.
We paid off the notes in early July, leaving us with a cash balance at September 30 $152 million.
We ended the quarter with net lease-adjusted leverage of 5.3 times, which takes into account adjustments as described in our credit facility.
Looking ahead, we expect to end the year with leverage of approximately 5.3 times, which would represent an improvement year on year as we made progress toward our long-term leverage range.
With our strong financial position, our board of directors declared our quarterly dividend of $0.62 per share to be paid in early January Turning to capital expenditures.
Our full-year expectation is now approximately $450 million, or a decrease of $75 million, reflecting development capital for our FIFO data center that will now be a part of our venture with AGC.
Now, let me share a few thoughts as to our capital allocation strategy.
First, we are committed to our dividend at this sustainable level.
And over time, we expect to glide into our targeted AFFO payout ratio of mid-60s percent.
Second, we are committed to our target long-term leverage range of four and a half to five and a half times on a net lease-adjusted basis.
This year, the team has made good progress toward our target.
As investors know, we have been allocating significant capital to our data center business for several years.
And as our pipeline continues to build with high-return investment opportunities, our strategic intent is to increase the amount of capital we dedicate to the business.
With that, we have considered options to generate incremental funds for investment.
We view capital recycling as a good means to monetize certain assets, particularly industrial real estate to increasingly invest in our development pipeline.
Industrial cap rates are at historically low levels, and we have the opportunity to structure long-term leases on favorable terms that effectively allow us to have control of the facilities, whether we lease or own.
With that, in the third quarter, our team accessed the market and monetized two facilities for proceeds of approximately $110 million.
This brings our year-to-date proceeds to nearly $120 million, ahead of our full-year target of $100 million.
With the highly favorable market backdrop, together with our development pipeline, we are planning to recycle relatively more going forward, albeit what will amount to a small portion of our total industrial assets.
Similarly, we view selling stabilized data center assets into a joint venture as analogous to monetizing industrial real estate assets.
It represents another source of capital to redeploy into development projects.
Of the joint venture we just announced in Frankfurt is a good example of this strategy.
The JV provides us with an opportunity to boost returns on stabilized assets and provides incremental capital to allocate to projects in the development phase.
Turning to our outlook for the remainder of the year.
While we are not issuing official guidance today, I would like to provide an update as to our expectations, excluding any material and unforeseen changes.
With the continued impact of COVID, we are planning for the fourth quarter to be generally in line with the third quarter for revenue and adjusted EBITDA on a dollar basis.
Therefore, for the full-year 2020, this would lead to a low single-digit revenue decline and flat to slightly positive adjusted EBITDA growth as compared to last year.
This outlook includes a full-year headwind from foreign exchange rates approaching $60 million for revenue and $20 million for adjusted EBITDA.
This outlook reflects our solid year-to-date performance, benefits from revenue management, accelerated project Summit savings and incorporates a cautious view for the fourth quarter.
Given our favorable results, we now expect AFFO growth to be up low single digits for the full year.
Our full-year expectations for tax rate and shares outstanding remain unchanged from our prior commentary.
When we look ahead to 2021, as you expect, until we get COVID-19 behind us, naturally, it is difficult to provide guidance.
But we are committed to providing the investment community with additional commentary on our trajectory and underlying business trends, just as what we've been doing throughout this year.
While the challenges for our service business persist, we remain confident in its resiliency and the continued durability of our storage business.
I'm proud of how the team has responded to these challenges and the strong results we've delivered.
We look forward to sharing further progress with you on our 0earnings call.
And with that, operator, please open the line for Q&A.
| compname says q3 revenue fell 2.4% to $1.04 billion.
q3 revenue fell 2.4 percent to $1.04 billion.
adjusted earnings per share for q3 was $0.31.
expects project summit will generate $165 million in adjusted ebitda benefits in 2020.
no change to overall scope and size of total summit program.
continues to expect project summit to generate $375 million of adjusted ebitda benefits exiting.
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On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
We hope your holidays were enjoyable and safe for you and your families.
We finished 2020 strong, producing fourth quarter results that include remarkable net order growth and gross margin expansion.
As we continue to rotate into a high-quality mix of communities, effectively manage our costs and reduce our amortized interest, we are generating significantly higher margins, and our balanced approach to optimizing price and pace in this robust demand environment is providing further support.
We begin 2021 with momentum with our backlog value up over 60% year-over-year and the potential to generate as much as $6 billion in housing revenues this year as we focus on building our scale.
We are poised for profitable returns-focused growth, given the composition of our backlog, a strong lineup of community openings and our leaner, more efficient cost structure, all contributing to an expected double-digit operating margin this year.
As for the details of the quarter, we generated total revenues of $1.2 billion, and diluted earnings per share of $1.12.
While our deliveries and revenues were down year-over-year, this was expected, reflecting the COVID-related disruption in our second quarter net orders and housing starts.
Having said this, we earn more on a per unit basis with a housing gross margin of 21%, excluding inventory related charges, up 110 basis points year-over-year.
The strength of our gross margin was the key factor driving improvement in your operating income per unit to over $44,000, a sequential increase of $7,000 per home.
Our balance sheet is in excellent shape and we are clearly in a solid position [Indecipherable] expansion of our scale.
Investing in land acquisition and development remains our top priority for deploying the substantial operating cash flow we are generating.
In the fourth quarter, we increased our land investments by over 60% year-over-year to $650 million.
With disciplined execution, we grew our lot position by 7,000 lots since the third quarter to end the year with over 67,000 lots owned and controlled.
Our lot position is well-diversified both across and within our regions, with our own lots representing 3.8 years of supplies and a higher level of option lots now comprising 40% of our total.
We own all of the lots that we need for the sizable increase in delivery volume anticipated for 2021 and owner control all of the lots we need for further delivery growth in 2022.
In addition to investing in our future, we continue to focus on increasing shareholder return with another substantial increase in our quarterly cash dividend implemented in the fourth quarter.
This is the second consecutive year we have meaningfully increased our dividend which is now six times its level from two years ago.
Our goal with respect to expanding our scale is to increase our market position in each of our served markets.
While we expect our growth to come primarily from our existing markets we're also selectively entering new markets.
Seattle is a good illustration of our organic approach to growth.
We began with a small start-up operation, less than three years ago, which turned profitable by the end of year two.
This division is now on a path to more than double its profit this year and contribute more significantly to our overall performance.
We are encouraged by the success we've had in Seattle and we are extending our market strategy in the Carolinas, an area that we already know well.
With the improved execution in our Raleigh business over the past couple of years we have now reentered Charlotte, with a similar start-up approach.
Charlotte is a top 10 homebuilding market and we hired an industry veteran with deep roots and an extensive network to lead this effort, which has allowed us to move quickly on three land deals.
We expect first deliveries in Charlotte in 2022.
Our top priority is to expand our community count and we successfully opened 38 new communities in the fourth quarter, including 4 communities that opened ahead of schedule.
As of '21, we expect a low point in our ending community count to occur in the first quarter with sequential growth in each quarter thereafter, resulting in year-over-year community count expansion in our third and fourth quarters.
Looking beyond 2021, we are well-positioned with the lots we own and control to sustain its growth sequentially throughout 2022 and we are committed to growing our community count a minimum of 10% next year; a target that we believe is realistic, given our balance sheet, cash-flow, level of profitability and the infrastructure already in place.
Our monthly absorption pace per community accelerated to 5.6 net orders during the fourth quarter representing a year-over-year increase of 51%.
We achieved this higher pace, even as we increased prices in over 90% of our communities, balancing pace and price in each community to optimize our assets and returns.
Our absorption pace has consistently ranked among the highest in the industry for many years.
We believe our success is driven by choice and personalization, delivered at an affordable price point, which are the cornerstones of our Built-to-Order model.
Given the increased focus that investors have had with respect to affordability, in the past few months, let me spend a moment sharing our thoughts on this point.
Our long-standing approach to product positioning is to target the median household income in each submarket, and to remain flexible in adjusting our products offerings, through higher density and slightly smaller footprint to stay close to the median income levels.
By doing so, we believe we make homeownership attainable for the largest demand segments, the millennials and Gen Z. Our divisions are executing well on our product strategy, enabling us to generate solid margin at our targeted absorption rates with our average selling price in nearly every division, below the median new home price and in many cases, below the median resale price as well.
This last point is particularly resonant, as resale is our largest competitor.
Given these dynamics, we believe that our homes remain affordable.
The prices continue to rise, we are well-positioned.
During the buyer pause of late 2018, and early 2019, when in fact they're both rising home prices, and rising interest rates hindered affordability, we proactively took steps to reposition our product offerings.
We quickly entered in smaller square footage plans from our product series as modeled.
We expanded the choices available to our buyers across the square footage band, and lowered the specification levels for standard features in most of our communities.
Together, these steps reduce the starting base price in many of our communities, thereby broadening our affordability.
Today, we continue to offer these smaller square footage plans, with nearly 60% of our communities offering plans below 1,500 square feet.
Moving just a little off the footage plans, above 75% of our community offer plans that are below 1,600 square feet.
Floor plans in this 1,500 to 1,600 foot range are well suited for millennials.
In addition to offering more choice in the size of our floor plan, the flexibility in our Built-to-Order model, whether an extra bedroom with a full bathroom, a Home Office or a den provides options that meet the needs of today's buyers.
With respect to the macro environment, as I've already mentioned, housing market conditions remain robust, as the pandemic has helped to fuel demand for homeownership.
The existing single-family home inventory has been, and continues to decline, now sitting at just 2.3 months supply and below that level in many of our markets, particularly at our price points.
This limited level of resale inventory and an underproduction of new homes over the last decade, together with favorable demographic trends, especially with respect to first time buyers, should continue to drive demand for the foreseeable future.
We believe this last point is very favorable for us given our experience in serving first time buyers, who accounted for 61% of our delivery in the fourth quarter, an increase of eight percentage points year-over-year.
At the time of our last earnings call in September, our net orders were on 32% for the first three weeks of our fourth quarter.
Demand remained strong throughout the quarter, resulting in year-over-year net order growth of 42% to nearly 4,000 homes.
While we experienced some seasonality in the quarter, it was negligible as November's order activity held close to October's levels, which is atypical, illustrating the depths of demand for our homes.
Geographically, our strength extended across our footprint with healthy year-over-year growth in each of our four regions.
Similar to the trends we experienced in the third quarter, the underlying buyer data for our orders in the fourth quarter remain favorable.
Millennial buyers continue to lead our buyer cohorts, representing 57% of our net orders, increasing six percentage points year-over-year.
In addition, buyers continue to demonstrate a preference for Built-to-Order homes, which represented over 90% of our net orders, compared to just under, 70% in the prior-year period.
Net order growth in the fourth quarter drove a 50% year-over-year increase in our net order value, which in turn fueled the expansion of our backlog value to $3 billion, an increase of 63% year-over year on roughly 7,800 units.
Given this higher backlog, we are confident in our increased revenue expectations for this year.
We accelerate our pace and home starts in the fourth quarter by 40% year-over-year and that's continued to do so in the first quarter, as we line our starts to net orders.
Given our strong net order trends throughout the fourth quarter, our backlog continues to be more heavily weighted to the early stages of construction, either un-started or a foundation with those two buckets comprising roughly 55% of our backlog, as compared to about 44%, in the year-ago quarter.
This will affect our backlog conversion, relative to historical first quarter levels.
Although, we are expecting a sequential increase in deliveries, in our first quarter, for the first time in my KB Home career.
As the net orders in the first quarter of 2021, they are up 44% for the first six weeks over the comparable prior year period.
Demand remains solid through the holidays and into the New Year.
As a result, we expect our note order growth to moderate by the end of the quarter from its current level.
On the mortgage side, our joint venture KBHS Home Loans, wrapped up another very productive year.
The growth in the JV's capture rate to 81% in the fourth quarter produced a 20% year-over-year increase in its income, despite the lower deliveries in the quarter, reflecting a more profitable business.
The JV is steadily increasing its contribution to our overall performance and for the full year, generated year-over-year income growth of over 70% to $21 million.
In closing, we finished 2020 strong and we are poised for a tremendous 2021, and the resumption of our growth into a larger more profitable company.
While we remain very mindful that the pandemic is not over, and that it retains the potential to disrupt our business until it's brought under control, we are also confident in the strength of our position.
We will expand our scale with our considerable backlog, together with continued robust market conditions contributing to the potential for as much as $6 billion in revenues in 2021.
We have multiple factors supporting our higher gross margin this year, including the composition of our backlog, overhead leverage from a higher revenue, effective cost management and lower amortized interest, as well as margin enhancements specific to our Built-to-Order model, such as lot premium and studio revenue.
As a result, we're expecting our operating margin to hit double digits, thereby driving our projected return on equity to above 17% compared to roughly 12% in 2020.
Simply put, we are in the strongest position we have been in over a decade with an experienced dedicated team, solid balance sheet, the healthy lot position, the cash flow to invest in community count growth and a business model that generates high customer satisfaction and has demonstrated appeal to homebuyers.
We are excited about 2021 and look forward to sharing our results as the year unfolds.
I will now cover highlights of our financial performance for the 2020 fourth quarter as well as provide our 2021 first quarter and full year outlook.
During the fourth quarter, we continued to produce sequential improvement in our key profitability and credit metrics and generated outstanding growth in our net orders, which contributed to a significant year-over-year increase in backlog value to its highest level in 15 years.
In the fourth quarter, our housing revenues of $1.19 billion were down 23% from a year ago, reflecting a decrease in homes delivered that was partially offset by a 5% increase in the overall average selling price of those homes.
The lower delivery volume was due to the negative impact, the onset of the COVID-19 pandemic and public health control measures had on our second quarter net orders and housing starts.
Looking ahead to the 2021 first quarter, we expect to generate housing revenues in a range of $1.14 billion to $1.22 billion.
For the 2021 full year, we are forecasting housing revenues in a range of $5.5 billion to $6 billion, up $450 million at the midpoint as compared to our prior guidance.
Having ended our 2020 fiscal year with a backlog value of approximately $3 billion, we believe we are well-positioned to achieve this topline performance.
In the fourth quarter, our overall average selling price of homes delivered increased to approximately $414,000.
For the 2021 first quarter, we are projecting an average selling price of approximately $390,000 due to a regional mix shift of homes delivered.
We believe our overall average selling price for the 2021 full year will be in the range of $400,000 to $410,000.
Homebuilding operating income for the fourth quarter totaled $115.7 million compared to $162.5 million for the year earlier quarter.
The current quarter included inventory related charges of $11.7 million versus $4.1 million a year ago.
Our homebuilding operating income margin was 9.7% down 80 basis points from the 2019 fourth quarter.
Excluding inventory related charges, our operating margin was 10.7% for both periods as the gross margin improvement in the current year quarter was entirely offset by an increase in our SG&A expense ratio that reflected reduced operating leverage from lower housing revenues.
For the 2021 first quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges will be in the range of 9% to 9.3%.
For the 2021 full year, we expect this metric to be in the range of 10.4% to 11%, which represents a year-over-year improvement of 230 basis points at the midpoint.
Our 2020 fourth quarter housing gross profit margin improved 40 basis points to 20%.
Excluding inventory related charges, our gross margin for the quarter increased by 110 basis points to 21% from 19.9% for the prior year quarter.
This improvement primarily reflected the impact of higher selling prices, shifts in the geographic and community mix of homes delivered and lower amortization of previously capitalized interest.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021 first quarter in a range of 20% to 20.3%, up more than 200 basis points as compared to the prior year period.
We expect our 2021 full year gross margin, excluding inventory related charges to be in the range of 20.5% to 21.1% with margins of 20% or above in each quarter.
Our selling, general and administrative expense ratio of 10.3% for the fourth quarter was up 120 basis points from a year ago, mainly due to the unfavorable impact of decreased operating leverage from lower housing revenues, partly offset by the effects of our ongoing focus on reducing overhead costs.
We are forecasting our 2021 first quarter SG&A expense ratio to be in the range of 10.8% to 11.2% as we continue to prioritize containing overhead costs and expect to realize favorable leverage impacts from an anticipated year-over-year increase in housing revenues.
We expect that our 2021 full year SG&A expense ratio will be approximately 9.9% to 10.3%.
Our income tax expense of $20 million for the fourth quarter, which was favorably impacted by $8.6 million of federal energy tax credits represented an effective tax rate of approximately 16%.
We currently expect our effective tax rate for both the 2021 first quarter and full year to be approximately 24%.
In December, federal legislation was enacted which, among other things, extended the availability of energy tax credits for building energy efficient homes through December 31, 2021.
With our industry leadership and sustainable home building and energy efficiency, the extension of the tax credits will favorably impact of 2021 effective tax rate and is reflected in our first quarter and full year estimates.
Overall, we reported net income of $106.1 million or $1.12 per diluted share for the fourth quarter compared to $123.2 million or $1.31 per diluted share for the prior year period.
For the 2020 full year, our net income of $296.2 million or $3.13 per diluted share rose 10% compared to 2019.
Turning now to community count, our fourth quarter average was 234 -- of 234 was down, 8%, from 253 in the corresponding 2019 quarter, primarily due to accelerated close-outs in the second half of the year, driven by strong net order activity in both the third and fourth quarters.
We ended the year with 236 communities, down 6% from a year ago with approximately half of this decline, due to a reduction in the number of communities that were previously classified as land held for future development.
We expect our community count to decrease sequentially in the first quarter to what we believe will be the low point for 2021 as close-outs resulting from expected continued strong net orders outpace openings for the period.
On a year-over-year basis, we anticipate our 2021 first quarter average community count will be down by a low double-digit percentage.
We expect a quarter end community count to increase sequentially starting in the second quarter and continuing through the remainder of the year.
We anticipate ending the year with a mid to high single-digit percentage increase in our community count, supporting additional topline growth in 2022.
As Jeff mentioned, our goal is to drive an increase in community count of at least 10% in 2022 to support further market share gains and growth in housing revenues.
During the fourth quarter, to drive future community openings, we invested $651 million in land and land development with $376 million or 58% of the total representing land acquisitions.
In 2020, we invested nearly $1.7 billion in land acquisition development and generated $311 million of net operating cash flow.
At year-end, total liquidity was approximately $1.5 billion including $788 million of available capacity under our unsecured revolving credit facility.
Our debt-to-capital ratio was 39.6% at year end and we expect further improvement in 2021 given our anticipated earnings growth.
We expect to generate significant cash flow in the current year to fund levels of land investment sufficient to support our targeted 2021 and 2022 growth in community count and housing revenues.
Our year-end stockholders' equity was $2.67 billion as compared to $2.38 billion at the end of the prior year, and our book value per share increased by nearly 10% to $29.09.
Given our current community profile and backlog, along with expected continued strength in the housing market, we are very confident in our ability to significantly improve our profitability, credit and return metrics in 2021.
During the year, we plan to further execute on the principles of our returns-focused growth strategy, with an emphasis on significantly increasing our returns by expanding our community count and top line, while continuing to improve our operating margin.
In summary, using the midpoints of our guidance ranges, we expect a 39% year-over-year increase in housing revenues and significant expansion of our operating margin to 10.7%, driven by improvements in both gross margin and our SG&A expense ratio.
These anticipated scale and margin improvements, should drive our return on equity to above 17%, up over 500 basis points year-over-year.
These expected results reflect our view that our continued emphasis on a returns focused growth strategy will enable us to further enhance long-term stockholder value.
Devin, please open the lines.
| q4 earnings per share $1.12.
q4 revenue $1.2 billion versus refinitiv ibes estimate of $1.14 billion.
expects to achieve significant growth in its scale and profits in 2021.
expect meaningfully higher revenue and earnings in 2021 to drive significant expansion of return on equity.
backlog value increased 63% to $3.0 billion at quarter end.
inventories increased 5% to $3.90 billion as of november 30, 2020.
net order value rose 50% in quarter.
|
These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may differ materially.
Factors that could cause results to differ include factors described in our third quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K and other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
I'm pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities.
We continue to drive underwriting excellence across our portfolio.
We're executing on AIG 200 to instill operational excellence in everything we do.
We are continuing to work on the separation of life and retirement from AIG.
And we're demonstrating an ongoing commitment to thoughtful capital management.
I will start my remarks with an overview of our consolidated financial results for the third quarter.
I will then review our results for general insurance, where we continue to demonstrate market leadership in solving risk issues for clients while delivering improved underwriting profitability and more consistent results.
I'll also comment on certain market dynamics, particularly in the property market, as well as recent CAT activity and related reinsurance considerations as we approach year-end.
Next, I'll review results from our life and retirement business, which we continue to prepare to be a stand-alone company.
I will also provide an update on the considerable progress we're making on the operational separation of life and retirement from AIG and our strong execution of AIG 200.
I will then review capital management, where our near-term priorities remain unchanged from those I have outlined in the past: debt reduction, return of capital to shareholders, investment in our business through organic growth and operational improvements.
Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term.
These appointments were possible due to the strong bench of internal talent and significantly augment the leadership team across our company.
Starting with our consolidated results.
As I said, AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021.
Against the backdrop of a very active CAT season and the persistent and ongoing global pandemic, our global team of colleagues continue to perform at an incredibly high level, delivering value to our clients, policyholders and distribution partners.
Adjusted after-tax income in the third quarter was $0.97 per diluted share compared to $0.81 in the prior-year quarter.
This result was driven by significant improvement in profitability in general insurance, very good results in life and retirement, continued expense discipline and savings from AIG 200 and executing on our capital management strategy.
In general insurance, global commercial drove strong top line growth.
And we were especially pleased with our adjusted accident year combined ratio, which improved 280 basis points year over year to 90.5%.
These excellent results in general insurance validate the strategy we've been executing on to vastly improve the quality of our portfolio and build a top-performing culture of disciplined underwriting.
One data point that I believe demonstrates the incredible progress we have made is our accident year combined ratio for the first nine months of 2021, which was 97.7%.
This represents a 770-basis-point improvement year over year, with 600 of that improvement coming from the loss ratio and 170 from the expense ratio.
In life and retirement, we again had solid results primarily driven by improved investment performance and increased call and tender income.
This business delivered a return on adjusted segment common equity of 12.2% for the third quarter and 14.3% for the first nine months of the year.
And we recently achieved an important milestone in the separation process by closing the sale of a 9.9% equity stake in life and retirement to Blackstone for $2.2 billion in cash.
We continue to prepare the business for an IPO in 2022 and we'll begin moving certain assets under management to Blackstone.
We ended the third quarter with $5.3 billion in parent liquidity after redeeming $1.5 billion in debt outstanding and completing $1.1 billion in share repurchases.
Year-to-date, we have reduced financial debt outstanding by $3.4 billion and have returned $2.5 billion to shareholders through share repurchases and dividends.
We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year-end to complete the $2 billion of stock repurchase we announced on our last call.
Through these actions, we've made clear our continuing commitment to remain active and thoughtful about capital management.
Now, let me provide more detail on our business results in the third quarter.
I will start with general insurance, where, as I mentioned earlier, growth in net premiums written continued to be very strong and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio.
Adjusting for foreign exchange, net premiums written increased 10% year over year to $6.6 billion.
This growth was driven by global commercial, which increased 15%, with personal insurance flat for the quarter.
Growth in commercial was balanced between North America and International, with North America increasing 18% and International increasing 12%.
Growth in North America commercial was driven by excess casualty, which increased over 50%; Lexington Wholesale, which continued to show leadership in the E&S market and grew Property and Casualty by over 30%; financial lines, which increased over 20%; and Crop Risk Services, which grew more than 50% driven by increased commodity prices.
In international commercial, financial lines grew 25%, Talbot had over 15% growth and Liability had over 10% growth.
In addition, gross new business in global commercial grew 40% year over year to over $1 billion.
In North America, new business growth was more than 50% and in International, it was more than 25%.
North America new business was strongest in Lexington, financial lines and retail property.
International new business came mostly from financial lines and our specialty businesses.
We also had very strong retention in our in-force portfolio, with North America improving retention by 200 basis points and International improving retention by 700 basis points.
Strong momentum continued with overall global commercial rate increases of 12%.
In many cases, this is the third year where we have achieved double-digit rate increases in our portfolio.
North America commercial's overall 11% rate increases were balanced across the portfolio and led by excess casualty, which increased over 15%.
Financial lines, which also increased over 15% and Canada, where rates increased by 17%, representing the 10th consecutive quarter of double-digit rate increases.
International commercial rate increases were 13% driven by EMEA, excluding specialty, which increased by 22%.
U.K., excluding specialty, which increased 21%.
Financial lines, which increased 24% and Energy, which was up 14%, its 11th consecutive quarter of double-digit rate increases.
Turning to global personal insurance.
We had a solid quarter that reflected a modest rebound in net premiums written in travel and warranty, offset by results in the private client group due to reinsurance cessions related to Syndicate 2019 and non-renewals in peak zones.
Shifting to underwriting profitability.
As I noted earlier, general insurance's accident year combined ratio ex CAT was 90.5%.
The third quarter saw a 150-basis-point improvement in the accident year loss ratio ex CAT and a 130-basis-point improvement in the expense ratio, all of which came from the GOE ratio.
These results were driven by our improved portfolio mix, achieving rate in excess of loss cost trends, continued expense discipline and benefits from AIG 200.
Global commercial achieved an impressive accident year combined ratio ex CATs of 88.9%, an improvement of 290 basis points year over year and the second consecutive quarter with a sub-90% combined ratio result.
The accident year combined ratio ex CAT for North America commercial and international commercial were 90.5% and 86.8%, respectively, an improvement of 370 basis points and 210 basis points.
In global personal insurance, the accident year combined ratio ex CATs was 94.2%, an improvement of 220 basis points year over year driven by improvement in the expense ratio.
Given the significant progress we have made to improve our combined ratios and our view that the momentum we have will continue for the foreseeable future, we now expect to achieve a sub-90% accident year combined ratio ex CAT for full year 2022.
After three years of significant underwriting margin improvement, we believe that the sub-90% accident year combined ratio ex CAT is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years.
As I said earlier, the third quarter was very active, with current industry estimates ranging between $45 billion and $55 billion globally.
We reported approximately $625 million of net global CAT losses with approximately $530 million in commercial.
The largest impacts were from Hurricane Ida and flooding in Europe, where we saw net CAT losses of approximately $400 million and $190 million, respectively.
We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility, including strategic purchases for wind that we made in the second quarter.
Reinsurance recoveries in our International per occurrence, private client group per occurrence and other discrete reinsurance programs also reduced volatility in the third quarter.
We expect any fourth quarter CAT losses to be limited given that we are close to attaching on our North America aggregate cover and our aggregate cover for rest of the world, excluding Japan.
We have each and every loss deductibles of $75 million for North America wind, $50 million for North America earthquake and $25 million for all other North America perils and $20 million for international.
Our worldwide retention has approximately $175 million remaining before attaching in the aggregate, which would essentially be for Japan CAT.
Since 2012 and excluding COVID, there have been 10 CATs with losses exceeding $10 billion.
And nine of those 10 occurred in 2017 through the third quarter of this year.
Average CAT losses over the last five years have been $114 billion, up 30% from the 10-year average and up 40% from the 15-year average.
And through 2021, catastrophe losses exceed $100 billion and we're already at $90 billion through the third quarter.
This will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold.
I'll make three observations.
First, while CAT models tended to trend acceptable over the last 20 years, that has not been the case over the last five years.
Second, over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods.
If you add in wildfire, those numbers dramatically increase.
Third, industry losses compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect the significant increase in frequency in CATs.
To address these issues, at AIG, we've invested heavily in our CAT research team to develop our own view of risk in this new environment.
wind, storm surge, flood as well as numerous other perils in international.
We will continue to leverage new scientific studies, improvements in vendor model work and our own claims data to calibrate our views on risk over time to ensure we're appropriately pricing CAT risks.
Across our portfolio, our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs while aligning within our risk appetite, which takes into consideration terms and conditions, strategic deployment of limits and a recognition of increased frequency and severity.
The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding CATs.
Now, turning to life and retirement.
Earnings continue to be strong and in the third quarter were supported by stable equity markets, modestly improving interest rates relative to the second quarter and significant call and tender income.
Adjusted pre-tax income in the third quarter was approximately $875 million.
Individual retirement, excluding retail mutual funds, which we sold in the third quarter, maintained its upward trajectory with 27% growth in sales year over year.
Our largest retail product, Index Annuity, was up 50% compared to the prior-year quarter.
Group retirement collectively grew deposits 3% with new group acquisitions ahead of prior year but below a robust second quarter.
Kevin and his team continued to actively manage the impacts from a low interest rate and tighter credit spreads environment and their earlier provided range for expected annual spread compression has not changed as base investment spreads for the third quarter were within the annual 8 to 6 points guidance.
With respect to the operational separation of life and retirement, we continue to make considerable progress on a number of fronts.
Our goal is to deliver a clean separation with minimal business disruption and emphasis on speed execution, operational efficiency and thoughtful talent allocation.
We have many work streams in execution mode, including designing a target operating model that will position life and retirement to be a successful stand-alone public company, separating IT systems, data centers, software applications, real estate and material vendor contracts and determining where transition services will be required and minimizing their duration with clear exit plans.
We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter, subject to regulatory approvals and market conditions.
As I mentioned on our last call, due to the sale of our affordable housing portfolio and the execution of certain tax strategies, we are no longer constrained in terms of how much of life and retirement we can sell on an IPO.
Having said that, we currently expect to retain a greater than 50% interest immediately following the IPO and to continue to consolidate life and retirement's financial statements until such time as we fall below the 50% ownership threshold.
As we plan for the full separation of life and retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time.
With respect to AIG 200, we continue to advance this program and remain on track to deliver $1 billion in run rate savings across the company by the end of 2022 against a cost to achieve of $1.3 billion.
$660 million of run rate savings are already executed or contracted, with approximately $400 million recognized to date in our income statement.
As with the underwriting turnaround, which created a culture of underwriting excellence, AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG.
Before turning the call over to Mark, I'd like to take a moment to discuss the senior leadership changes we announced last week.
Having made significant progress during the first nine months of 2021 across our strategic priorities and in light of the momentum we have heading toward the end of the year, this was an ideal time to make these appointments.
I'll start with Mark, who will step into a newly created role, global Chief Actuary and Head of Portfolio Management for AIG on January 1.
As you all know, over the last three years, Mark has played a critical role in the repositioning of AIG.
He originally joined AIG in 2018 as our chief actuary.
And this new role will get him back into the core of our business, driving portfolio improvement, growth and prudent decision-making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program.
Shane Fitzsimons will take over for Mark as chief financial officer on January 1.
Shane joined AIG in 2019 and his strong leadership helped accelerate aspects of AIG 200 and instill discipline and rigor around our finance transformation, strategic planning, budgeting and forecasting processes.
He has a strong financial and accounting background having worked at GE for over 20 years in many senior finance roles, including as Head of FP&A and chief financial officer of GE's international operations.
Shane has already begun working with Mark on a transition plan and we've shifted his AIG 200 and shared services responsibility to other senior leaders.
We also announced that Elias Habayeb has been named chief financial officer of life and retirement.
Elias has been with AIG for over 15 years and was most recently our Deputy CFO and Principal Accounting Officer for AIG as well as the CFO for general insurance.
Elias has deep expertise about AIG.
And his transition to life and retirement will be seamless as he is well known to that management team, the investments team that is now part of life and retirement, our regulators, rating agencies and many other stakeholders.
Overall, I am very pleased with our team, our third quarter results and the tremendous progress we're making on many fronts across AIG.
I am extremely pleased with the strong adjusted earnings this quarter of $0.97 per share and our profitable general insurance calendar quarter combined ratio, which includes CATs, of 99.7%.
The year over year adjusted earnings per share improvement was driven by a 750-basis-point reduction in the general insurance calendar quarter combined ratio, strong growth in net premiums written and earned and a related 280-basis-point decrease in the underlying accident year combined ratio ex CAT.
life and retirement also produced strong APTI of $877 million, along with a healthy adjusted ROE of 12.2%.
The quarter's strong operating earnings and consistent investment performance helped increase adjusted book value per share by 3% sequentially and nearly 9% compared to one year ago.
The strength of our balance sheet and strong liquidity position were highlights in the period as we made continued progress on our leverage goals with a GAAP debt leverage reduction of 90 basis points sequentially and 350 basis points from one year ago today to 26.1%, generated through retained earnings and liability management actions.
Shifting to general insurance.
Due to our achieved profitable growth to date, together with demonstrable volatility reduction and smart cycle management, makes us even more confident in achieving our stated goal of a sub-90% accident year combined ratio ex CAT for full year 2022 rather than just exiting 2022.
Shifting now to current conditions.
The markets in which we operate persist in strength and show resiliency.
AIG's global platform continues to see rate strengthening internationally, which adds to our overall uplift unlike more U.S.-centric competitors.
As you recall, international commercial rate increases lagged those in North America initially.
But beginning in 2021, as noted by Peter in his remarks, International is now producing rate increases that surpass those strong rates still being achieved in North America and in some areas, meaningfully so.
These rate increases continue to outstrip loss cost trends on a global basis across a broadband of assumptions and are additive toward additional margin expansion.
In fact, for a more extensive view, within North America over the three year period, 2019 through 2021, product lines that achieved cumulative rate increases near or above 100% are found within excess casualty, both admitted and non-admitted.
Property lines, both admitted and non-admitted and financial lines.
We believe these levels of tailwind will continue driving earned margin expansion into the foreseeable future.
In the current inflationary environment, it's important to remember that products with inflation-sensitive exposure bases, such as sales, receipts and payroll, act as an inflation mitigant and furthermore are subject to additional audit premiums as the economy recovers.
Last quarter, we provided commentary about U.S. portfolio loss cost trends of 4% to 5% and in some aspects were viewed as being near term.
We believe that this range still holds but now gravitates toward the upper end given another quarter of data.
And in fact, our U.S. loss cost trends range from approximately three and a half percent to 10%, depending on the line of business.
From a pricing perspective, we feel that we are integrating these near-term inflationary impact into our rating and portfolio tools.
And we are not lowering any line of business loss cost trends since lighter claims reporting may be misconstrued as a false positive due to COVID-19 societal impacts.
It's also worth noting that all of our North America commercial Lines loss cost trends, with the exception of workers' compensation, are materially lower than the corresponding rate increases we are seeing.
This discussion around compound rate increases and loss cost trends collectively give rise to the related topic of current year loss ratio picks or indications and the result in bookings.
The strong market that we now enjoy, in conjunction with the significant underwriting transformation at AIG, has driven other aspects of the portfolio that affect loss ratios.
In many lines and classes of business, the degree that cumulative rate changes have outpaced cumulative loss cost trend is substantial.
And these lead to meaningfully reduced loss ratio indications between 2018 and the 2021 years.
Unfortunately, this is where most discussions usually cease with external stakeholders.
However, in reality, that is not the end of the discussion but merely the beginning.
Some other aspects that can have material favorable implications toward the profitability of underlying businesses are, one, terms and conditions, which can rival price in the impact.
Two, a much more balanced submission flow across the insured risk quality spectrum, thereby improving rate adequacy and mitigating adverse selection.
Three, strategic capacity deployment across various layers of an insurance tower, which can produce preferred positioning and ongoing retention with the customer.
And fourth, reinsurance that tempers volatility and mitigates net losses.
Accordingly, even if modest loss ratio beneficial impacts are assigned to each of these nuances, they will additionally contribute to further driving down the 2021 indicated loss ratio beyond that signaled by rate versus loss trend alone.
And these are real and these are happening.
So why are product lines booked at this implied level of profitability by any insurer?
Well, there is at least four reasons.
First, insurers assume the heterogeneous risk of others and each year is composed of different exposures, rendering so-called on-level projections to be imperfect.
Second, most policies are written on an occurrence basis, which means the policy language can be challenged for years, if not decades, potentially including novel series of liability.
Third, many lines are extremely volatile and even if every insured is underwritten perfectly -- even if every insured is underwritten perfectly.
And fourth, booking an overly optimistic initial loss ratio merely increases the chance of future unfavorable development.
Therefore, these types of issues require prudence in the establishment of initial loss ratio picks for most commercial lines of business.
Shifting now to our third quarter reserve review.
Approximately $42 billion of reserves were reviewed this quarter, bringing the year-to-date total to approximately 90% of carried pre-ADC reserves.
I'd like to spend a little time taking you through the results of our quarterly reserve analysis, which resulted in minimal net movement, confirming the strength of our overall reserve position.
On a pre-ADC basis, the prior-year development was $153 million favorable.
On a post-ADC basis, it was $3 million favorable.
And when reflecting the $47 million ADC amortization on the deferred gain, it was $50 million favorable in total.
This means that our overall reserves continue to be adequate, with favorable and unfavorable development balanced across lines of business, resulting in an improved yet neutral alignment of reserves.
Now, before looking at the quarter on a segment basis, I'd like to strip away some noise that's in the quarter so we don't get overly lost in the details.
One should think of this quarter's reserve analysis as performing all of the scheduled product reviews and then having to overlay two seemingly unrelated impacts caused by the receipt of a large subrogation recovery associated with the 2017 and 2018 California wildfires.
The first of these two impacts is the direct reduction from North America personal insurance reserves of $326 million, resulting from the subrogation recoveries.
As a result, we also had to reverse a previously recorded 2018 accident year reinsurance recovery in North America commercial Insurance of $206 million since the attachment point was no longer penetrated once the subrogation recoveries were received.
These two impacts from the subrogation recovery resulted in a net $120 million of favorable development.
So excluding their impact restates the total general insurance PYD as being $70 million unfavorable in total rather than the $50 million of favorable development discussed earlier.
This is a better framework to discuss the true underlying reserve movements this quarter.
This $70 million of global unfavorable stems from $85 million unfavorable in global CAT losses together with $50 million favorable in global non-CAT or attritional losses.
The $85 million unfavorable in CAT is driven by marginal adjustments involving multiple prior-year events from 2019 and 2020.
The $15 million non-CAT favorable stems from the net of $255 million unfavorable from global commercial and $270 million of favorable development, predominantly from short-tail personal lines businesses within accident year 2020, mostly in our International book.
Consistent with our overall reserving philosophy, we were cautious toward reacting to this $270 million favorable indication until we allow the accident year to season.
North America commercial had unfavorable development of $112 million, which was driven by financial lines' strengthening of approximately $400 million with favorable development and other lines led by workers' compensation with approximately $200 million, emanating mostly from accident years 2015 and prior and approximately $100 million across various other units.
North America financial lines were negatively impacted by primary public D&O, largely in the more complex national accounts arena and within private not-for-profit D&O unit, in addition to some excess coverage mostly in the public D&O space, with 90% emanating from accident years 2016 to 2018.
International commercial had unfavorable development of $143 million, which was comprised of financial lines' strengthening in D&O and professional indemnity of approximately $300 million led by the U.K. and Europe, but the accident year impacts are more spread out.
Favorable development was led by our specialty businesses at roughly $110 million with an additional favorable of approximately $50 million stemming from various lines and regions.
Now, as Peter noted, the changes we've made to our underwriting culture and risk appetite over the last few years, coupled with strong market conditions, are now showing through in our financial results.
U.S. financial lines, in particular, through careful underwriting and risk selection has meaningfully reduced our exposure to securities class actions or SCA lawsuits over the last few years.
Evidence of this underwriting change is best seen through the proportion of SCAs for which the U.S. operation has provided coverage.
In 2017, AIG provided D&O coverage to 67 insurers involved in SCAs, which represents 42% of all U.S. federal security class actions in that year.
Whereas in 2020, that shrunk to just 18% and through nine months of 2021 is only 15 insurers or 14%.
This is significant because roughly 60% to 70% of public D&O loss dollars historically emanate from SCAs.
The North America private not-for-profit D&O book has also been significantly transformed.
The policy retention rate here between 2018 and 2021, which is a key strategic target, is just 15%.
And yet it should also be noted that the corresponding cumulative rate increase over the same period is nearly 130%.
This purposeful change in risk selection criteria away from billion-dollar revenue large private companies and nonprofit universities and hospitals to instead a more balanced middle market book will also drive profitability substantially.
International financial lines has implemented similar underwriting actions with comparable three year cumulative rate increases, along with a singular underwriting authority around the world as respect U.S.-listed D&O exposure through close collaboration with the U.S. Chief Underwriting Office.
In summary, our reserving philosophy remains consistent in that we will continue to be prudent and conservative.
This is evidenced by our slower recognition of attritional improvements in short-tail lines from accident year 2020 and from the sound decision to strengthen Financial Line reserves, even though there are some interpretive challenges stemming from a difficult claims environment, changes within our internal claims operations over the last couple of years and potential COVID-19 impacts on claim reporting patterns.
All of these underwriting actions we've taken over the last few years make us even more confident in our total reserve position across both prior and current accident years.
Moving on to life and retirement.
The year-to-date ROE has been a strong 14.3% compared to 12.8% in the first nine months of last year.
APTI during the third quarter saw higher net investment income and higher fee income, offset by the unfavorable impact from the annual actuarial assumption update, which is $166 million pre-tax, negatively affected the ROE by approximately 250 basis points on an annual basis and earnings per share by $0.15 per share.
The main source of the impact was in the Individual retirement division associated with fixed annuity spread compression.
life insurance reflected a slightly elevated COVID-19-related mortality provision in the quarter.
But our exposure sensitivity of $65 million to $75 million per 100,000 population deaths proved accurate based on the reported third quarter COVID-related deaths in the United States.
Mortality exclusive of COVID-19 was also slightly elevated in the period.
Within Individual retirement, excluding the Retail Mutual Fund business, net flows were a positive $250 million this quarter compared to net outflows of $110 million in the prior-year quarter largely due to the recovery from the broad industrywide sales disruption resulting from COVID-19, which we view as a material rebound indicator.
Prior sensitivities in respect to yield and equity market movements affecting APTI continue to hold true.
And new business margins generally remain within our targets at current new money returns due to active product management and disciplined pricing approach.
Moving to other operations.
The adjusted pre-tax loss before consolidations and eliminations was $370 million, $2 million higher than the prior quarter of 2020, driven by higher corporate GOE primarily from increases in performance-based employee compensation, partially offset by higher investment income and lower corporate interest expense resulting from year-to-date debt redemption activity.
Overall net investment income on an APTI basis was $3.3 billion, an increase of $78 million compared to the prior-year quarter, reflecting mostly higher private equity gains.
By business, life and retirement benefited most due to asset growth, higher call and tender income and another strong period of private equity returns.
general insurance's NII declined approximately 6% year over year due to continued yield compression and underperformance in the hedge fund position.
Also, general insurance has a much higher percentage allocation to private equity and hedge funds, which is likely to change moving forward.
As respect share count, our average total diluted shares outstanding in the quarter were 864 million and we repurchased approximately 20 million shares.
The end-of-period outstanding shares for book value per share purposes was approximately 836 million and anticipated to be approximately 820 million at year-end 2021 depending upon share price performance, given Peter's comments on additional share repurchases.
Lastly, our primary operating subsidiaries remain profitable and well capitalized, with general insurance's U.S. pool fleet risk-based capital ratio for the third quarter estimated to be between 450% and 460%.
And the life and retirement U.S. fleet is estimated to be between 440% and 450%, both above our target ranges.
Operator, we'll take our first question.
| compname reports qtrly adjusted after-tax earnings per share $0.97.
qtrly total general insurance net premiums written increased 11% to $6.6 billion from prior year quarter.
qtrly total general insurance underwriting income was $20 million compared to an underwriting loss of $423 million in prior year quarter.
qtrly earnings per share $1.92; qtrly adjusted after-tax earnings per share $0.97.
as of sept 30, 2021, book value per common share was $77.03, an increase of 1% fromdecember 31, 2020.
repurchased $1.1 billion of aig common stock and redeemed $1.5 billion of debt in quarter.
as of sept 30, 2021, adjusted book value per common share was $61.80, an increase of 8%from december 31, 2020.
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To follow along with the slides, please visit jabil.com within our investor relations section.
At the conclusion of today's call, the entirety of today's session will be posted for audio playback on our website.
These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31st, 2021, and other filings.
I appreciate everyone taking time to join our call today.
To begin with, our hearts go out to everyone impacted by the war in Ukraine.
When I think about our team, along with their families, what comes to mind are words like admiration, courage, and heart.
Please know, we're in constant communication with those on the ground, and we continue to provide resources and financial assistance, as the safety and security of those in Ukraine is our top priority.
At Jabil, we're one corporate family with people located all over the world.
And despite the physical distance between us, we'll always face difficult situations together.
Q2 was another strong quarter, both top line and bottom line, driven by double-digit revenue growth year on year and exceptional execution, respectively.
Altogether, the team delivered core earnings per share of $1.68 and revenue of $7.6 billion, resulting in a core operating margin of 4.6%, a 40 basis point increase year on year.
All in all, I'm pleased with the quarter, as our performance during the first half of the year gives us positive momentum as we push toward the back half of fiscal '22 and into fiscal '23.
And when I think about a key catalyst driving our momentum, what comes to mind is the makeup of our commercial portfolio, which I'll now address on the next slide.
Slide 7 is a wonderful picture, which shows the construct of our portfolio today.
Jabil's large-scale diversification serves as a solid foundation from which we run our business.
The team has built this foundation over the past five to six years, as we target new end markets and optimize our legacy business.
The output of this effort is twofold: one, a higher level of resiliency across the company; and two, a substantial presence in secular end markets, markets that include 5G, electric vehicles, personalized healthcare, cloud computing, and clean energy.
If we dissect the pie chart a bit differently with an emphasis on financial contribution and economic relevance, we see a terrific blend of reliable margins and sustainable cash flows, again, a real tribute to the diversified nature of our business today.
Lastly, if we look at a third dimension of our portfolio, we find a library of essential capabilities, capabilities that allow us to simplify the complex for many of the world's most notable brands.
And when done correctly, our unique set of capabilities offer Jabil a real competitive advantage, as we lean into a massive market where things need to be built and supply chains need to be developed or modified.
Moving on to Slide 8.
You'll see management's outlook for the year.
We've increased core earnings per share to $7.25, an increase of nearly 30% year on year.
As for revenue, FY '22 now looks to be in the range of $32.6 billion, up more than 10% year on year.
In addition, we remain committed to delivering a minimum of $700 million in free cash flow for the year, while increasing core operating margin to 4.6%, a 40 basis point improvement year on year.
For me, this is a positive testament on how the team is managing the business as our strategy has been consistent, and what needs to be done is well understood throughout our company.
With that, let's move to my final slide, where I'd like to start with the importance of our purpose.
At Jabil, with purpose comes expectations, expectations around certain behaviors, behaviors such as keeping our people safe; servant leadership; protecting the environment; giving back to our communities; and offering a workplace, which encompasses tolerance, respect and acceptance.
Within Jabil, these behaviors have never been more important than they are today.
I'm proud of our team as they fully grasp our purpose.
And in doing so, their conduct is exceptional.
In closing, our improvement is steady commercially, financially, and operationally.
Quite simply, here at Jabil, we build stuff, and we do it really well.
One factor that makes good companies great is having a value set, a culture, if you will, that enhances the way in which they solve problems.
As a team, we embrace this as we take on the challenges put forth by our customers each and every day.
I'm really pleased with the resiliency of our diversified portfolio and the sustainable broad-based momentum underway across the business, as several of our end markets continue to benefit from long-term secular trends.
As Mark just summarized, our Q2 results were very strong.
During the quarter, revenue, core operating income, core EPS, and free cash flow all exceeded our December expectations.
Given the higher revenue, I'm particularly pleased with our ability to drive an extra 30 basis points of margin improvement compared to our expectations in December mainly through broad-based strength in several key end markets benefiting from long-term secular trends as well as outstanding execution by our business, operations, and supply chain teams.
For the quarter, revenue was approximately $7.6 billion, up 10.6% over the prior-year quarter and ahead of the midpoint of our guidance from December.
The additional upside was mainly driven by our 5G and cloud businesses, while our automotive, healthcare, and retail end markets remain very strong.
Our GAAP operating income during the quarter was $313 million, and our GAAP diluted earnings per share was $1.51.
Core operating income during the quarter was $344 million, an increase of 21% year over year, representing a core operating margin of 4.6%, up 40 basis points over the prior year.
Core diluted earnings per share was $1.68, a 32% improvement over the prior-year quarter.
Now turning to our second quarter segment results on the next slide.
Revenue for our DMS segment was $3.8 billion, an increase of 4% on a year-over-year basis.
The solid year-over-year performance in our DMS segment was broad based, with strength across our healthcare, automotive, and connected devices businesses.
Core margin for the segment came in at 5.1%.
Revenue for our EMS segment came in at $3.8 billion, an increase of 19% on a year-over-year basis.
The stronger year-over-year performance in our EMS segment was also broad based, with strength across our digital print and retail, industrial and semi-cap, and 5G wireless and cloud businesses.
Core margin for the segment was 4%, up 90 basis points over the prior year, reflecting improved mix and solid execution by the team.
Turning now to our cash flows and balance sheet.
In Q2, inventory days came in at 86 days.
The sequential increase in days was driven largely by two factors.
Firstly, the ongoing tightness in the supply chain continues to weigh on our inventory balances.
It's worth noting that we've offset a portion of these increases with inventory deposits from our customers, and these deposits reside within the accrued expenses line item on the balance sheet.
Net of these inventory deposits, inventory days was 71 in Q2.
And second, at the end of the quarter, we experienced a timing difference on the sell-through of finished goods within our DMS segment.
I anticipate this timing difference to reverse in Q3.
In spite of these two factors impacting inventory, our second quarter cash flows from operations were very robust, coming in at $246 million, and net capital expenditures totaled $201 million.
From a total debt to core EBITDA level, we exited the quarter at approximately 1.3 times and with cash balances of $1.1 billion.
During Q2, we repurchased approximately 2.3 million shares for $145 million.
And for the year, we've repurchased 4.4 million shares for $272 million, as we remain committed to returning capital to shareholders.
Turning now to our third quarter guidance on the next slide.
DMS segment revenue is expected to increase 17% on a year-over-year basis to approximately $4.2 billion, while the EMS segment revenue is expected to increase 11% on a year-over-year basis to approximately $4 billion.
We expect total company revenue in the third quarter of fiscal '22 to be in the range of $7.9 billion to $8.5 billion.
Core operating income is estimated to be in the range of $300 million to $360 million, representing a core margin range of 3.8% to 4.2%.
At the midpoint, this is an improvement of 20 basis points over the prior year and down sequentially, reflecting planned investments in our Q3 quarter.
It's also worth noting, sequentially in Q4, we expect robust core margins driven by our scaling automotive business, along with typical seasonality in our mobility and EMS businesses.
In Q3, GAAP operating income is expected to be in the range of $276 million to $336 million.
Core diluted earnings per share is estimated to be in the range of $1.40 to $1.80.
GAAP diluted earnings per share is expected to be in the range of $1.24 to $1.64.
The core tax rate in the third quarter is estimated to be approximately 21%.
Next, I'd like to take a few moments to highlight our balanced portfolio of businesses by end market.
Today, the outlook for our business is strong, with end markets across both segments continuing to benefit from multiyear secular trends.
We believe these markets will continue to drive our growth, as we concentrate our efforts on long-term secular growth markets with strong margin and cash flow dynamics, markets such as electric vehicles, personalized medicine, and healthcare, semi-cap, clean and smart energy infrastructure, cloud, 5G infrastructure, and the associated connected devices.
Our electric vehicle business, in particular, continues to outperform, in spite of global supply chain issues as the transition to EV accelerates.
We've seen this rapid acceleration manifest in top-line revenue growth in excess of 50% this year alone in our automotive end market.
We're also expecting double-digit growth from the healthcare, automotive retail, industrial and semi-cap, and 5G wireless and cloud end markets.
And importantly, the broad-based growth associated with these secular trends is expected to drive solid year-over-year core operating margin and free cash flow expansion.
All in all, our performance during the first half of the year gives us excellent momentum as we look to close out another strong year.
We're now anticipating core earnings per share will be in the neighborhood of $7.25 per share on revenue of approximately $32.6 billion.
Notably, this incremental revenue will improve mix and drive operating leverage, thereby giving us the confidence to raise our core margin by 10 basis points to 4.6% for FY '22, as we continue to drive the organization to 5% and beyond.
Importantly, for the year, we also remain committed to generating in excess of $700 million in free cash flow, in spite of the higher revenue and associated working capital.
We've been working extremely hard as a team to expand margins and drive strong cash flows.
I am very pleased with our team's exceptional execution of our strategy on all fronts.
Before we move into the Q&A portion of the call, I'd like to remind our participants that we cannot address customer-specific or product-specific questions.
Operator, we're now ready for Q&A.
| q2 non-gaap core earnings per share $1.68.
q2 gaap earnings per share $1.51.
q2 revenue $7.6 billion.
raises financial outlook for fiscal year 2022.
now expect fy22 to deliver revenue in range of $32.6 billion and core earnings per share of approximately $7.25.
sees q3 net revenue $7.9 billion to $8.5 billion.
sees q3 u.s. gaap diluted earnings per share $1.24 to $1.64 per diluted share.
sees q3 core diluted earnings per share (non-gaap) $1.40 to $1.80 per diluted share.
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I will start today's remarks in an overview of AIG's outstanding consolidated financial results for the second quarter.
Then I will review results for General Insurance and Life and Retirement in more detail.
And following that, I will provide an update on the progress we're making on AIG 200 and the operational separation of Life and Retirement from AIG.
Next, I will provide details on our strategic partnership with -- we announced with Blackstone in July, which represents a significant milestone for AIG and a major step forward toward the IPO of Life and Retirement.
Lastly, I will provide you an update on our capital management strategy where our near-term priorities remain the same as what I've outlined in the past: debt reduction, return of capital to shareholders in the form of share repurchases, and investment in organic growth.
Mark will provide additional details on the quarter and we'll then take questions.
Starting with the consolidated results, I'm pleased to report that AIG had an outstanding second quarter.
We have sustained the significant momentum we had coming into 2021 through the first half of the year and that we delivered exceptional performance in General Insurance with strong top line growth and this significant improvement in our combined ratios.
Our pivot to growth and focused on demonstrating our leadership in this marketplace accelerated through the second quarter as we continued to prioritize underwriting discipline, portfolio optimization, reducing volatility and growing in segments where our market conditions are really favorable in fall and within our risk appetite.
We also saw very good results in our Life and Retirement business, primarily driven by improved investment performance.
Life and Retirement's adjusted pre-tax income increased 26% year over year and the business delivered a return on adjusted segment common equity of 16.4%.
We continue to advance the AIG 200 with transformation remaining on track to deliver $1 billion in run rate savings across our company by the end of 2022 against a cost to achieve of $1.3 billion.
And turning to our financial results, I'll start with General Insurance.
Growth in net premiums written was strong in the second quarter, accelerating from the first quarter and continuing the trend that began in 2020 as the heaviest remediation efforts we've -- that's nearing completion.
Net premiums written increased 24% year over year to $6.9 billion or approximately 20%, excluding foreign exchange.
Growth was strong across both Global Commercial and Personal.
Our Global Commercial net premiums written increased 13%, excluding foreign exchange, reflecting growth in areas with attractive risk-adjusted returns, improving renewal retentions and really more than that 25% increase in the new business compared to the prior-year quarter and overall rate increases of 13%.
North America Commercial net premiums written increased 15%, excluding foreign exchange, including our strong growth in Excess Casualty, Financial Lines, Retail Property, AIG Re and Lexington.
New business increased 25% from the prior year quarter, led by Financial Lines and Lexington wholesale.
Renewal retentions also improved in 300 basis points over this same period.
It's worth noting that Lexington had its strongest quarter of new business since we fully repositioned its operating model to also focus on the wholesale distribution of Excess & Surplus Lines.
This business has significant momentum, which we expect will continue for the foreseeable future.
Shifting to International Commercial.
Net premiums written grew 10%, excluding foreign exchange, and primarily driven by Financial Lines across the U.K., EMEA and Asia Pacific, global specialty, particularly marine and energy, and Talbot, our Lloyd's syndicate.
New business increased 26% from the prior year period, led by Financial Lines, marine, energy and Talbot.
And renewal retentions increased by 500 basis points over this same period.
It's important to emphasize that the growth we are achieving across Commercial is also aligned in our risk appetite that we have been executing against over the past three years.
We continue to prudently deploy limits, including with respect to the new business with an intense focus on risk aggregation.
And in addition to strong retention, growth is being driven by exceptional new business, which in Global Commercial was $1 billion in the second quarter.
With respect to Personal Insurance, as we discuss this on last quarter's call, the unusually high growth in net premiums written was largely reflective of the creation of the Syndicate 2019 in second-quarter 2020 and the reinsurance cessions associated with creating that syndicate.
Momentum continued with overall Global Commercial rate increases of 13%.
North America Commercial rate have increased 13% with the most notable improvements in Excess Casualty, which was up 20%; Lexington Casualty, which was up 19%; and Lexington wholesale property, which was up 15%.
International Commercial rate also increased 13%, driven by Financial Lines, which was up 21%; property, which was up 18%; and energy, which was up 16%.
Across the global portfolio, the largest rate increases were in cyber, where rates were up almost 40% and the strongest rate increases in North America.
We continue to carefully reduce cyber limits and are obtaining tighter terms and conditions to address increasing cyber loss trends, the rising threat associated with ransomware and the systemic nature of the cyber risk.
Generally, underwriting excellence, thoughtful risk selection, tighter terms and conditions and improving rate adequacy have been core areas of focus as we transformed our portfolio.
The General Insurance accident year combined ratio ex CAT improved for the 12th consecutive quarter coming in at 91.1%, an improvement of 380 basis points for the second quarter of 2020 and an improvement of 990 basis points from the second-quarter 2018.
This improvement was comprised of 160-basis-point improvement in accident year loss ratio ex CAT and a 220-basis-point improvement in our expense ratio at AIG 200 and the benefits of premium growth continued to contribute to profitability.
Global Commercial achieved an accident year combined ratio ex CAT of 89.3%, an improvement of 500 basis points year over year.
This is the best result Commercial has reported in the last 15 years.
In Personal Insurance, the accident year combined ratio ex CAT was 95.1%, a 70-basis-point improvement over the prior-year quarter.
Now with just a quick comment on reinsurance purchased across General Insurance, we continue to evolve our reinsurance program to reflect our significantly improved underlying portfolio.
And in the second quarter, we were very active in the market with 25 specific layers on a variety of treaties placed.
Notably, in nearly every instance, we were able to enhance our terms and the conditions of our placements were at equivalent or improved pricing in a reinsurance market that is experiencing tighter terms and conditions and rate increases.
So with respect to property CAT program in particular, we took this opportunity in the second quarter to further reduce the per occurrence attachment point of North America through several buy-down CAT layers for peak zone exposures.
Lastly, on General Insurance, we remain confident we will achieve a sub-90% accident year combined ratio ex CAT by the end of 2022.
Based on the progress that I've now seen in our underwriting, the ongoing efforts in optimizing our portfolio, the terrific execution of AIG 200 and the significant momentum we've developed, I'm optimistic we'll get there sooner.
And as we move through second half of the year and get further into AIG 200 in separation execution, we will provide you further comments on our combined ratio expectations.
Now let me turn to AIG Re, which oversees our global assumed reinsurance business.
Net premiums written across all lines increased more than 30% of -- the second quarter compared to the prior-year period.
Writings were balanced across multiple lines of business with risk-adjusted returns and underwriting ratios improving across the portfolio.
property CAT, we saw rate improvements across all U.S. property business sectors; increases range from the mid-single digits to upwards of 25%, and depending on geography and loss-affected accounts; in Florida, Validus Re net limits at June 2021 were reduced by more than 40% in coordination with AlphaCat.
Since the acquisition of Validus Re in 2018, we reduced the overall limit in Florida of more than 65% or approximately $400 million of annual limit, demonstrating that Validus Re's continued discipline and focus on volatility reduction.
Further, Florida-specific firms represent less than 2% of Validus Re's total premiums written.
Our focus remains on regional and nationwide firms in the U.S. as well as international diversification.
And in addition to 2020 and through the second quarter of 2021, less than 25% of AIG Re's net premiums written came from property lines.
Building on our retrocessional purchase on 1-1 of worldwide aggregate protection, Validus Re secured further retrocessional protections in June.
Specifically, we purchased more peak zone coverage for U.S. wind, Asia wind and California earthquake for the 2021 season.
Overall, we have also substantially enhanced the portfolio despite the heightened competition, and we're really pleased with how AIG Re has evolved.
We have exceptionally strong intermediary market support as well as strong client relationships, which have resulted in the significant renewal retention and signings we have.
In addition, we've upgraded talent across the board and have broadened skill sets of our leaders.
We believe this business is much more prepared now to assess and opportunistically respond to the market conditions.
Turning to Life and Retirement, this business once again delivered very strong results.
Life and Retirement's broad leadership position across products and channels has enabled us to take advantage of significant rebound in retail annuity sales with our -- with total annuity sales of significantly across our entire annuity offering.
Our strong sales resulted in positive Individual Retirement annuity net flows during the quarter.
Group Retirement deposits were higher compared to the first-quarter 2021 levels.
Second-quarter 2021's new planned participant enrollments also increased 20% year over year, as demonstrated regularly in recent quarters.
Our high-quality investment portfolio is well positioned to navigate these uncertain environments.
Our variable annuity hedging program has continued to perform as expected, providing downside protection during prolonged periods of volatility.
And finally, this strategic partnership with Blackstone further positions Life and Retirement to expand its distribution relationships, enhance its product offerings, and the business will benefit from Blackstone's significant capabilities.
Now let me turn to AIG 200 in our global multiyear effort to position AIG for the long term.
AIG 200 is continuing with a sense of urgency for all 10 of the operational programs deep into execution mode.
We're 18 months into this transformation and we have a clear execution path to $1 billion in run rate cost savings of $550 million already executed or contracted, $355 million of which has been recognized already to date in the income statement.
AIG 200 continues to build a strong foundation across the company and instill a culture of operational excellence.
Turning now to the separation of Life and Retirement, we made considerable progress in the second quarter with a focus on speed execution with minimal business disruption.
Separation management office has identified day 1 requirements for Life and Retirement to become a stand-alone company and multiple work streams are underway.
This work also includes the alignment our investments unit with Life and Retirement and preparing the Blackstone partnership close.
With the speed with which our colleagues have moved -- would not have been possible without the foundational work that's been done as part of AIG 200.
And as I've discussed on prior calls, our IPO of up to 19.9% of Life and Retirement was our base case since we announced our intention to separate this business from AIG last October.
We continue to believe that an IPO will maximize value for our stakeholders and the position of the business for additional value creation as a public company.
I also noted on our last call that following our announcement, we have received several credible inquiries from different parties that are interested in purchasing a minority stake in Life and Retirement as well as our entire investment management group.
One of those parties with Blackstone.
We've decided not to pursue this original proposed transactions because we determined that selling the entire investment management group was not in the long-term interest of Life and Retirement.
Some of the proposals also contemplated significant reinsurance transactions ahead of an IPO, which we didn't believe would optimize this outcome for our shareholders at this stage in the process.
In June, Blackstone reengaged with us to determine if we could find a mutually beneficial way to partner that would further our goals for the separation of Life and Retirement.
These discussions have led to the announcement of our strategic partnership with -- we entered into in mid-July.
We continue to work with a sense of urgency toward an IPO of the Life and Retirement business.
Following the 9.9% equity investment by Blackstone, this IPO will likely be the first in the quarter of 2022 event, subject to required regulatory approvals and market conditions.
We previously viewed the fourth quarter of this year as the earliest in IPO would occur within the first quarter of 2022 as our more likely outcome.
So our timeline is essentially unchanged even if -- with the announcement of the Blackstone transaction.
Additionally, the gain on sale of Affordable Housing, coupled with other factors, provides us with great flexibility to sell beyond the 19.9% as we now expect to fully utilize our foreign tax credits in 2022.
This development facilitated our partnership with Blackstone and, as a result, made it more compelling compared to structures we considered since our separation announcement last October.
We believe we are better positioned to accelerate with this operational separation.
And as a result, Life and Retirement will be more comprehensively established as an independent company when the IPO occurs.
Now let me provide additional detail on the Blackstone partnership, which represents this significant milestone for AIG and provides meaningful momentum for the IPO of Life and Retirement.
As I mentioned, this partnership represents the culmination of discussions that took place over the last year on several strategic initiatives, which we view it as very beneficial for AIG and Blackstone.
Blackstone's leadership has indicated this for some time that insurance is a key strategic priority for their firm.
The investment Blackstone is making in our Life and Retirement business is the single largest corporate investment the firm has made in its 35-year history.
And Life and Retirement is now Blackstone's single largest client.
This substantial commitment by Blackstone highlights the strength of Life and Retirement's business, Blackstone's belief in the value of the investment, its validation of Life, and Retirement's market-leading position.
Furthermore, Jon Gray, President and COO of Blackstone, was directly involved in the negotiations.
He has been a great partner throughout and will join the board of directors of the IPO entity at the closing of our equity investment, which we expect to occur in September.
Let me recap some of terms of the transactions and how we're thinking about this future for capital structures for AIG and Life and Retirement as stand-alone businesses.
Blackstone will acquire a 9.9% cornerstone equity stake in the holding company for AIG's Life and Retirement business for $2.2 billion in an all-cash transaction.
The purchase price is equivalent to a multiple of 1.1x target pro forma adjusted book value in $20.2 billion.
Our adjusted book value also reflects that the combined book value of our Life and Retirement business and a majority of our investments unit as well as the financing arrangements to be undertaken and the amounts to be paid from that entity to AIG just prior to the IPO.
As we look to the structure of the IPO entity, we will raise debt at this entity, consistent with its ratings and peer leverage ratios.
The new debt will be used to pay down AIG debt such that debt stack at AIG and the IPO entity will both be in line with each of the companies' firm and what we view as the optimal debt-to-total capital ratio for each company.
Life and Retirement will also enter into separately managed account agreements, or SMAs, with Blackstone -- whereby we at Blackstone will manage $50 billion of specific asset classes with that amount growing to $92.5 billion over a six-year period.
Lastly, and as I alluded to earlier, we sold some -- certain of Affordable Housing assets to Blackstone Real Estate Income Trust for $5.1 billion in an all-cash transaction, which is expected to close by year-end 2021.
Turning to capital management, we ended the second quarter with $7.2 billion of parent liquidity.
The net proceeds from the Blackstone transactions resulted in an additional liquidity of $6.2 billion to AIG by year-end 2021.
Through the remainder of this year, we plan to pay down the $2.5 billion AIG debt and buy back about -- at least $2 billion of the common stock.
So together, these capital management actions demonstrate our commitment to delever and return capital to shareholders.
In addition, the strength of our overall capital position leaves us with ample capacity to continue to invest in growth, and particularly in General Insurance, where our market conditions continue to be extremely favorable.
For the second quarter of 2021, AIG reported adjusted pre-tax income, or APTI, of $1.7 billion and adjusted after-tax income of $1.3 billion.
We produced an annualized return on adjusted common equity of 10.5% for AIG, 12.3% for General Insurance and 16.4% for Life and Retirement.
The annualized return on adjusted tangible common equity was 11.6% to the quarter.
On a GAAP basis, AIG reported $91 million of net income with principal difference between GAAP and adjusted after-tax income of $1.3 billion being the accounting treatment of Fortitude, net investment income, and associated realized gains and losses.
Before I move to General Insurance though, I'd like to add to Peter's remarks on the Blackstone SMA that this arrangement incorporates specific specialty asset classes, comprised mostly of private credit, alternatives and structured products, where Blackstone is a world leader in sourcing and origination and has a demonstrated track record of delivering yield profit and not public fixed-income securities.
The fee structure is 30 basis points on the initial $50 billion of AUM, increasing to 45 basis points for the annual new AUM of $8.5 billion, starting four quarters later as well as for the reinvested run-off AUM.
Therefore, fee should rise from 30 basis points initially toward 43 basis points by the end of the initial six-year contractor for Blackstone's share of the assets.
For this part of our portfolio, it's fair to expect that fees will somewhat precede the benefits of the impact of enhanced origination and differentiated asset classes and recognition of related yield uplift.
We believe this SMA arrangement is unique and that L&R maintains control over its overall asset allocation, asset liability management, liquidity and credit profile, and the nature of individual investment structures.
In addition, Life and Retirement has the opportunity to enhance overall investment management, focusing on improving efficiencies and asset classes that are not part of the SMA as well as optimizing performance across our whole portfolio.
We believe the combination of these efficiencies, together with the Blackstone focus on maximizing the performance of SMA assets and growth opportunities on the overall AUM, should drive net yield uplift.
Before leaving the Blackstone transaction, I want to note that a GAAP loss on sale is anticipated with a 9.9% equity purchase by Blackstone as well as with subsequent IPO sell-downs due to the inclusion of OCI and GAAP book value.
Given that OCI in future periods is also subject to some market fluctuations, the impact cannot be fully estimated at this time.
As respects Affordable Housing, note that the $5.1 billion purchase price translates to an approximate $3 billion after-tax gain on sale, which will benefit book value and provides approximately $4 billion of cash to parent with the minority proportion held back in a regulated Life and Retirement entity to further strengthen an already historically strong RBC level.
This transaction is expected to close by year-end 2021.
Moving to General Insurance, second-quarter adjusted pre-tax income was $1.2 billion, up $1 billion even year over year, primarily reflecting increased pre-tax underwriting income of over $800 million, along with $200 million and change of increased pre-tax net investment income, driven primarily by equity returns.
Catastrophe losses of $118 million were significantly lower this quarter, compared to $674 million in the prior-year quarter.
Prior-year development was $51 million favorable this quarter, compared to the favorable development of $74 million in the prior year quarter.
This included $58 million of net favorable development in North America and $7 million of net unfavorable development in International, both of which reflect some marginal changes in the underlying operations.
As usual, there is net favorable amortization from the adverse development cover, which amounted to $49 million this quarter.
It's important to note in context, though, the recent strength of the property and casualty market and how General Insurance has executed within this environment.
And as Peter mentioned in his remarks, the book has had nearly three turns at correction since 2018.
Risk appetite and risk selection have been materially sharpened, complementary and properly evolving reinsurance programs have been implemented.
Certain lines and segments were exited or massively reduced.
Clearer and broader distribution has been embraced.
Lexington has stood up as a major E&S platform, all of this was accomplished while simultaneously achieving the significant rate in excess of lost cost trends with materially better terms and conditions.
These actions formed the foundation as to why General Insurance has shown material improvement in the underlying accident year ex CAT combined ratios in both the historically underperforming North America Commercial segment in the International Commercial segment as well.
North America Commercial has shown a 620-basis-point improvement in the accident year ex CAT combined ratio over the prior-year quarter.
The International Commercial segment has continued to improve profitability with 370 basis points improvement compared to the prior-year quarter.
This shows demonstrable margin improvement stemming from the totality of the actions enumerated earlier.
And this level of Global Commercial improvement is also noteworthy Global Commercial made of 71% of worldwide net premiums written through the first half of 2021.
Additionally, the Global Commercial book is increasingly becoming a global specialty book comprised of below-frequency, high-severity coverages.
As a result, General Insurance Commercial, although large and global in scope, it's not a mere index of the market, but instead an underwriting company, where risk selection and business mix are important factors in achieving profit and growth while mitigating volatility.
Turning to Personal Insurance.
As we noted on our first quarter earnings call, our year-over-year net premium written comparison for the second quarter would improve, given the timing of the initial COVID-19 impact and distortions from Syndicate 2019 that's being reflected also during the second quarter of 2020.
Global Personal Lines net premiums written grew by approximately 45% or 41% on a constant dollar basis, aided by the Syndicate 2019 comparison.
Elsewhere within this segment, the second quarter of 2021 North America Personal Insurance saw premiums in travel and warranty business increase.
This was driven by a rebound in travel activity and increased consumer spending but not yet back to the pre-pandemic levels.
Our outlook for net premiums written for the next six months in North America Personal Insurance is between the $450 million and $500 million per quarter.
We continue to anticipate earned margin expansion throughout 2021 and into 2022, resulting from AIG's favorable underwriting actions we've taken in global market conditions involving the strong rate increases well above loss trend, improved terms and conditions and a more profitable, less volatile mix.
Given the specific market dynamics of where we choose to play, we don't foresee any material slowing-down in the cheaper rate levels throughout the balance of the year.
And now I'd like to comment a bit on inflation, which one needs to think about in terms of both economic and social inflation.
Based on the Consumer Price Index and the Producer Price Index, headline inflation that indicates an annualized runrate of about 5.5% to 7.5%, which has accelerated in March.
Some components of the indices have become worrisome, such as used cars and trucks being up about 45% and energy commodities being north of 40%.
But medical care services, whose impact now stretches across most casualty, auto, workers' compensation and excess placements, although higher, are much more tame than the headline inflation that would indicate with physician services up about 4% recently and hospital services up about 2.5%.
Costs involving labor, materials, construction and related services are up and will impact property coverages and CAT claim costs in the near term.
These indications demonstrate that the inflationary impact on any given insurer is a direct function of the products and the mix they write and where they play within our insurance program.
Social inflation, however, is much more of a U.S.-centric phenomenon, driven by a highly litigious culture.
Some social inflation also has correlations to the social change initiatives that are -- including income inequality and changing sentiments toward business, to name a few.
Being further away from risk though is a meaningful inflation counter.
And AIG's General Insurance has taken strong pre-emptive action in that regard by minimizing lead umbrellas in favor of higher positions within insurance programs.
For example, our Excess Casualty average attachment points for national and corporate U.S. accounts have also increased approximately 3.5 times and 5.5 times, respectively, since 2018.
This significantly increased distance from attaching is a key overall portfolio benefit.
view toward the total inflation rate of 4% to 5% is arguably reasonable for the near to medium term.
Our second-quarter rate increases, together with our view of pricing for the rest of the year provide continued margin in excess of this loss cost trend.
Now turning to Life and Retirement.
When compared with the prior year, favorable equity markets drove higher alternative investment returns, principally higher than private equity returns, which reflect the impact of the one quarter lag on the period.
Life Insurance continues to reflect the COVID-19-related mortality provision that has dropped relative to the prior quarters.
We estimate our exposure to the population is approximately $65 million to $75 million per 100,000 population deaths.
Mortality, however, exclusive of COVID-19 continues to be favorable compared to pricing assumptions.
Within Individual Retirement, excluding the Retail Mutual Fund business, net flows were positive for the quarter and favorable by over $1.2 billion when compared within second-quarter 2020, led by the Index Annuities rebounding to be higher by approximately $700 million with Variable Annuity net flow of about $365 million stronger year over year.
Group Retirement premiums and deposits were up with net flows being relatively flat while also experiencing an improved surrender rate sequentially.
The Life business has seen consistent premiums and the lower lapse [Inaudible] rates over the last four quarters than prior.
And for Institutional Markets, premiums and deposits were up compared to the prior year and sequentially.
GIC issuance was also higher but sequentially and year over year.
And we executed several large pension risk transfer transactions during the quarter.
The pipeline for pension risk transfer opportunities, both direct and through reinsurance, we remain very strong in both the U.S. and in the U.K.
We continue to actively manage the impacts from the low interest rate and tighter credit spread environment.
In our earlier provided range for expected annual spread, compression has not changed as our base investment spreads for the second quarter were within our annual eight to 16-point guidance.
Further, new business margins have generally remained within our targets at current new money returns due to active product management and a disciplined pricing approach.
Lastly, post June 30th, we closed on the sale of our Retail Mutual Fund operation.
As you are aware, Retail Mutual Funds has contributed to he negative flows over the last two years.
And the drag from this will now cease.
Moving to Other Operations.
The adjusted pre-tax loss was $610 million, inclusive of $94 million from consolidation and elimination entries, which principally reflect adjustments offsetting investment returns in the subsidiaries, which are in alignment at Other Operations.
Before consolidations and eliminations, the adjusted pre-tax loss was $516 million, $184 million worse than the second quarter of 2020.
But that quarter included two months of Fortitude Re results of $96 million.
And in addition, during the second quarter of 2021, we also increased prior-year legacy loss reserves by a net $65 million that's driven mostly by Blackboard exposures.
And we increased our incentive program accrual to reflect the strong performance year-to-date, whereas in 2020, we began adjusting our incentive program accrual in the third quarter.
After applying for these adjustments, we -- the comparison is actually favorable year over year.
Shifting to investments, our overall net investment income on APTI basis was $3.2 billion.
That's virtually flat from the second quarter of 2020 but again, adjusting the second quarter of 2020 for Fortitude net investment income of over that two-month period, this quarter's net investment income was $362 million higher than the prior year, reflecting our strong private equity returns at an annualized 27% return rate for the quarter.
And hedge fund results at a 21% annualized return rate for the quarter, along with stable interest and dividend income.
Turning to the balance sheet, at June 30th, book value per common share was $76.73, up 7% from one year ago.
Adjusted book value per common share was $60.07 per share, up 7.5% from one year ago, driven primarily by strong operating performance.
Adjusted tangible book value per common share was $54.24, up 8.1% from a year ago.
As Peter noted, at quarter end, AIG parent liquidity was $7.2 billion.
Treasury in connection with some certain tax settlement agreements emanating from pre-2007 as well as completed debt tenders for an aggregate purchase price of $359 million.
Our debt leverage at June 30 was 27% even, down 140 basis points from the end of 2020 and down 360 basis points from June 30th of one year ago.
Our primary operating subsidiaries remain profitable and well capitalized.
pool fleet risk-based capital ratio for the second quarter to be between 460% and 470% and Life and Retirement is estimated to be between 440% and 450%, both in -- above the target range.
Lastly, as respect to tax, I want to reiterate that the remaining net operating loss or NOL portion of AIG's DTA at the time of deconsolidating L&R for tax purposes will still then be available for offset of future General Insurance and/or AIG taxable income through their natural expiration.
As of June 30, that portion of the DTA totaled $6.3 billion and is available to offset up to $30 billion of taxable income.
So upon tax deconsolidation, what we'll see is the ability to utilize up to 35% of Life Insurance company income against NOLs or any remaining FTCs.
Operator, we'll go to question and answer.
| qtrly total general insurance net premiums written $6.86 billion , up 24%.
qtrly gi accident year combined ratio, as adjusted, excluding catastrophe losses and related reinstatement premiums, was 91.1 versus 94.9.
as of june 30, 2021 book value per common share was $76.73 versus $ 71.68.
as of june 30, 2021 adjusted book value per common share was $ 60.07 versus $ 55.90.
in h2 2021, expect to repurchase at least $2 billion in common stock and reduce debt outstanding by $2.5 billion.
|
I'm Andy Simanek, head of investor relations for Hewlett Packard Enterprise.
Also, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website.
Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency.
It is hard to comprehend everything that has transpired around the world over the last year.
The world we knew pre-pandemic has changed forever, and the need to use innovative technologies to advance the way people live and business operate has never been greater.
Improving the health of our communities from educating our children to digitizing our economy and enable its recovery creates an enormous opportunity.
I believe we are entering a new era, the age of insight, fueled by the amount of data around us.
The arrival of safe and effective COVID-19 vaccines is a marvel of innovation and good news for us all, bringing hope and optimism for what lies ahead.
I am personally very excited about the future of innovation and impact it will have.
I am very pleased with HPE's Q1 results.
Our revenue exceeded our outlook and represents a stronger-than-normal sequential seasonality.
We significantly expanded our gross and operating margins, driving strong profitability across our businesses ahead of pre-pandemic levels.
Our non-GAAP earnings per share exceeded the high end of our guidance, and free cash flow was a record Q1 performance.
These results give us confidence to raise our fiscal-year '21 earnings per share and free cash flow outlook, which we will address in more detail later on the call.
The global pandemic has brought a renewed focus on digital transformation as businesses are rethinking everything from remote work and collaboration to business continuity and data insights.
As the work recovers, our customers are looking for the agility and simplicity of the cloud-native world with the flexibility and control of a hybrid business model.
This is where we have a unique and differentiated value proposition.
HPE acted intentionally and quickly last year to become a more agile organization and enable our ability to innovate faster.
Our Q1 results demonstrate our progress in enhancing our position to accelerate what comes next for our customers.
I am very grateful for our dedicated, passionate and resilient team members.
They have been laser-focused on delivering for our customers and executing our strategy to drive long-term sustainable profitable growth for our shareholders.
We are strengthening our core businesses, doubling down in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud platform as-a-service choice for our customers and partners.
Our total revenue of $6.8 billion was down 3% from the prior year.
When normalized for the backlog from last quarter, this is better-than-expected sequential seasonality.
We saw solid order linearity intake across all of our businesses throughout the quarter.
We are executing on multiple growth opportunities, and we are particularly pleased with strong revenue growth in our Intelligent Edge business and growth in our as-a-service orders and revenue.
Going forward, we expect to see gradual improvement in customer spending as we progress through fiscal-year '21, giving us the confidence in our ability to deliver on our long-term revenue growth guidance.
Importantly, our non-GAAP gross margin of 33.7% is up 30 basis points year over year and 300 basis points sequentially.
Our non-GAAP operating profit of 11.3% is up 130 basis points year over year, and our non-GAAP earnings per share of $0.52 is up 4% year over year and significantly above the high end of our outlook.
We generated a record Q1 free cash flow of $563 million, the highest achieved in the first fiscal quarter in the history of Hewlett Packard Enterprise.
These are impressive results made possible through disciplined execution, strong expense management and critical investment prioritization.
Based on the strong start to fiscal-year '21, we are raising our fiscal-year '21 non-GAAP earnings per share outlook to $1.70 to $1.88 and free cash flow to $1.1 billion to $1.4 billion.
Tarek will discuss the financial results and outlook in greater detail, but let me first give you some additional context around our business segment performance and innovation highlights for the quarter.
To emerge and recover from the global pandemic, enterprises require secure connectivity, data insight and a cloud experience to accelerate their digital transformation, all of which further reinforces the significance of HP's differentiated edge-to-cloud platform as-a-service vision.
In our prioritized areas of growth, our Intelligent Edge business had an outstanding quarter, with revenue of $806 million, up 11% year over year.
We again expect to take market share in both campus switching and wireless LAN segments of the market.
We are seeing continued traction from our investment at the edge, including rich software capabilities like our Aruba ClearPass security, our cloud-native Aruba Central and most recently, Aruba ESP, our edge services platform.
Our Aruba SaaS revenue grew triple digits year over year.
The first full quarter following our Silver Peak acquisition reinforces that we are on track to grow high-margin recurring revenue with technology that accelerates our ability to capture the high-growth SD-WAN market opportunity.
Our Silver Peak SaaS offering provide customers the ability to connect all their edges and all their clouds in a fully automated and autonomous way.
We launched new SD-WAN capabilities to centrally monitor, manage and automate connectivity from branch location to AWS, adding support for the AWS Transit Gateway Connect solution.
And early today, you may have seen our announcement introducing new solutions from deeper integration between our Aruba ESP and Microsoft Azure, which will simplify IoT device connectivity and bring Aruba Central to Microsoft Azure.
Finally, we introduced a new class of cloud-native and fully automated data center switching products specifically designed for the edge cloud data centers, which represents a $12 billion TAM expansion opportunity for Hewlett Packard Enterprise.
These new offerings also enable us to accelerate the delivery of workload optimized solutions for our HP GreenLake Cloud services offerings.
Aruba's innovations is why customers like Santander, SKECHERS USA and L3 Harris are choosing Aruba.
We have multi-growth drivers in our Intelligent Edge business, and we believe we are well-positioned to outgrow the market.
High-performance compute and mission-critical solution is inherently a lumpy business due to the timing of deals and customer uncertainties because we can only recognize revenues once customer workloads are in production.
In Q1, revenue was down 9% from the prior year.
We remain very confident in this high-growth segment based on our backlog of our awarded business, which now exceeds well over $2 billion of exascale contracts and a robust pipeline of multimillion-dollar sized deals.
We are on track to deliver the 8% to 12% annual growth rate communicated at our Security Analyst Meeting last fall.
We have a market-leading and differentiated portfolio of technologies that will power the new age of insight.
We recently introduced HP GreenLake Cloud Services for HPC to accelerate enterprise Main Street adoption or high-performance computing, targeting a $3 billion to $4 billion TAM.
Enterprises are running analytics on increasingly large data sets and are adopting new techniques such as artificial intelligence, deep learning and machine learning.
And then now we have access to HPC technologies that were historically out of reach.
In Q1, we won two major HPC awards, one with the National Center of Atmospheric Research, a contract worth $35 million, to build a supercomputer for extreme weather research; and another that expands NASA's HP Akin Supercomputer.
We also completed the installation of the Dammam 7 supercomputer for Saudi Aramco, which immediately became one of the top 10 supercomputers in the world.
Finally, on February 20, you may have seen that HPC Spaceborne Computer 2 was launched into orbit for use on the International Space Station.
This system is enabling real-time data processing with advanced commercial edge computing in space for the first time as NASA prepares for future missions.
Today, I want to share the news that Pete Ungaro has decided to leave the company in April.
Pete joined HP with Cray -- with the Cray acquisition and ensured the successful integration of the two companies.
He has made significant contribution and has grown the business despite the complications and backlog brought by the global pandemic last year.
Pete will stay on with the company in a consulting capacity for six months.
And I'm really grateful for him -- to him for his leadership.
I am pleased to announce that Justin Hotard, a seasoned HP leader, will take over the leadership of the HPC MCS business and also Hewlett Packard Labs reporting to me.
Justin has brought an extensive experience across the company that includes leading our HPE Compute business, where he transformed the x86 compute portfolio and delivered revenue growth, profitability and market share expansion.
I'm excited about what Justin will bring to the business.
In the core businesses of Compute and Storage, our strategy to grow in profitable segments and pivot to more as-a-service solutions is paying off.
We drove strong profitability and cash flow in both businesses.
In Compute, our operating margins of 11.5% increased 80 basis points year over year and 490 basis points quarter over quarter.
Our revenue declined 2% from the prior year but was up low single digits sequentially when normalized for the backlog in Q4.
We are encouraged by the sequential growth in new orders intake, taking into account our normal Q2 seasonality.
Just last week, we launched our new HPE 5G open run solution stack for telecommunications companies to accelerate the commercial adoption of open run in 5G network deployments.
This is a transformative technology, featuring the industry's first server optimized for 5G open run workloads with our HP ProLiant servers.
This complements the HPE 5G core stack and build last year in March.
Orange, one of the world's largest mobile network operators, is currently working with HPE to test a full 5G core stack in preparation for broader commercial deployment.
In Storage, revenue was down 6% from the prior year, with operating margins of 19.7%, which is above the target profitability range we discussed at SAM.
We continue to see strong revenue growth in our own IP software-defined portfolio, where we have been investing.
Our HPE Primera business grew triple digits year over year and soon will be bigger than our 3PAR business.
This is the fastest revenue ramp ever achieved in our HP storage portfolio.
Our overall HPE All Flash Array portfolio grew 5%, driven by both HPE Primera and HP Nimble storage.
Our hyper-converged strategy continued to gain traction.
Our HP Nimble dHCI next-generation technology, powered with artificial intelligence, give customers a cloud-native experience in their own data centers, where they also have the ability to control costs while maintaining data compliance and security.
Our focus on our own IP software-defined portfolio also improves our ability to attach rich services to our product offerings.
Our storage operational services attach intensity is up double digits year over year.
We're also integrating cloud-native software technologies to empower our field and accelerate sales velocity.
Just last week, we completed the acquisition of CloudPhysics.
This deal provides us with a SaaS-based tool that analyzes IT environment to provide a quick return on investment recommendations for cloud migrations, application modernization and infrastructure.
I am very excited about this new addition to our set of capabilities, which we will expand across our entire HP portfolio.
Our pivot to as-a-service continues its strong momentum.
Our annualized revenue run rate of $649 million was up 27% year over year.
And we had our highest first quarter ever with HP GreenLake Cloud services.
The customer adoption continued to be very strong.
In Q1, we gained more than 70 new HP GreenLake cloud services logos.
Lineas, Europe's largest private rail freight operator, selected HP GreenLake Cloud services to support its transformation from a conventional freight company into a high-performing, efficient and sustainable transport system for the European logistics industry.
We remain very confident in our unique approach and differentiate the portfolio to capitalize on the rapidly growing on-premises as-a-service market.
Our new HPE software portfolio and our HP GreenLake manage services offerings enable a true consumption-based experience.
Our HP GreenLake Cloud services customer retention rates are above 95%, and the average customer usage of our cloud services currently running at 120% of original commitment, driven by customer expansion in their capacity utilization.
We are excited about this long-term opportunity, and I'm very confident in our 30% to 40% CAGR target by fiscal-year '22.
HP continued to benefit from capabilities and services that enable growth in our core business segments.
HP Pointnext operational services had a solid quarter.
Order trends are improving and revenue has stabilized to flat year over year with expanded operating profit margins.
HP Financial Services provide significant value to our customers as they rebuild and rethink their IT transformation requirements.
Q1 revenue stabilized with improved collections to deliver a return on equity of 16.5%.
Overall, I'm pleased with how we started fiscal-year '21.
Because of our strong start, we are raising our outlook for both earnings per share and free cash flow.
I talk to customers and partners almost every day.
And while there continue to be some level of uncertainty, one thing is clear.
Customers are looking to accelerate their transformations and in a partner with the right technology, expertise and financial flexibility.
Our distinctive and industry-leading portfolio of edge-to-cloud solutions and unique capabilities is resonating with customers.
And I believe our team is one of the best in the industry.
I'm impressed with our team members' commitment to make bold moves and ensuring we stay true to our service.
For the third year in a row, HP has been named one of the world's most ethical companies by the Ethisphere Institute.
And just last week, HP received the terms of Reuters Foundation's Top Slavery Enterprise Award for our leadership in limiting the risk of slavery in our supply chain and operations.
With this unstoppable team and our portfolio leading solutions, we are well-positioned to capture the tremendous opportunity ahead in fiscal-year '21 and beyond.
I'll start with a summary of our financial results for the first quarter of fiscal-year '21.
Antonio discussed the key highlights for this quarter on Slide 1.
And now let me discuss our financial performance and KPIs, starting with Slide 2.
I am delighted to report that our Q1 results were marked by continued momentum in revenue, substantial gross and operating margin expansion and robust cash generation.
We delivered Q1 revenues of $6.8 billion, down 3% from the prior-year period, but better than our typical historical sequential seasonality when normalizing for Q4 backlog.
I am particularly proud of the fact that our non-GAAP gross margin returned to above pre-pandemic levels and was up 30 basis points from the prior-year period and up 300 basis points sequentially.
This was driven by strong pricing discipline, the absence of backlog-related headwinds, cost takeouts and an ongoing favorable mix shift toward higher-margin software-rich offerings.
Our non-GAAP operating margin was 11.3%, up 130 basis points from the prior year, which translates to an 11% year-over-year increase in operating profit.
As a result of our strong execution, we ended the quarter with non-GAAP earnings per share of $0.52, which was up 4% from the prior year and significantly above the higher end of our outlook range.
Q1 cash flow from operations was close to $1 billion, driven by better profitability and strong operational discipline, as well as working capital timing benefits.
Q1 free cash flow was $563 million, which was up approximately $750 million from the prior year and a record level for any first HPE first quarter.
Finally, we paid $155 million of dividends in the quarter and are declaring a Q2 dividend today of $0.12 per share payable in April 2021.
Now let's turn to our segment highlights on Slide 3.
In Intelligent Edge, we accelerated our momentum with rich software capabilities, delivering 11% year-over-year growth, our third consecutive quarter of sequential growth.
Switching was up 5% year over year with double-digit growth in North America.
And wireless LAN was up 11% year over year with double-digit growth in both North America and APJ.
Additionally, the Aruba SaaS offering was up triple digits year over year and is now a significant contributor to HPE overall ARR.
Based on our solid performance, we expect to take share again this quarter in both campus switching and wireless LAN.
We are also seeing the significant operating profit potential of this business with operating margins in Q1 of 18.9%, up 680 basis points year over year as we drove greater productivity from past investments and operational leverage benefits kick in.
Finally, I am pleased to say we recognized our first full quarter of revenue from the acquisition of Silver Peak, the premium growth SD-WAN leader, which contributed approximately 500 basis points to the Intelligent Edge top-line growth.
In HPC and MCS, revenue declined 9% year over year, primarily due to the inherent lumpiness of the business, which is linked to the timing of deals and customer acceptance milestones.
We remain very confident in the near-term and longer-term outlook for this business and are reaffirming our full-year and three-year revenue growth CAGR target of 8% to 12%, respectively, as highlighted at SAM.
We have an extremely strong order book of over $2 billion worth of awarded exascale contracts with another $5-plus billion of market opportunity over the next three years.
Finally, we announced the launch of our HPC as a Service offer, which we expect to gain traction later this year and become a further contributor to our overall growing ARR profile.
In Compute, revenue stabilized to a 2% year-over-year decline, but was up low single digits sequentially when normalizing for Q4 backlog, which attest of a strong order momentum in the quarter.
Gross and operating margins were up meaningfully quarter over quarter due to the absence of any backlog-related margin impact, improved supply chain execution and the rightsizing of the cost structure of this segment.
We ended the quarter with an operating profit margin of 11.5%, up 80 basis points from prior-year period and at the high end of our long-term margin guidance for this segment provided at SAM.
Within storage, revenue declined 6% year over year, driven by difficult prior-year compare, but with strong growth in software-defined offerings.
We are extremely well-positioned in Storage with Primera and Nimble dHCI.
Our most software rich platforms, they are both growing triple digits year over year.
They are absolute winners in the market, and Primera is on track to surpass 3PAR sales as early as next quarter.
We also saw notable strength in overall Nimble, up 31% year over year, and total all-flash arrays were up 5% year over year.
The mix shift toward our more software-rich platforms helped drive storage operating profit margins to 19.7%, well above our long-term outlook for this segment presented at SAM last October.
With respect to Pointnext operational services, including Nimble services, revenue stabilized and was flat year over year, driven by the increased focus of our BU segments on selling products and services as bundles, improved services intensity and are growing as-a-service business, which I remind you, involves service attach rates of 100%.
This is very important to note because all of our services -- all of our OS revenue is recurring with three-year average contract length, and OS remains the highest operating margin contributor to our segments.
Within HPE Financial Services, revenue stabilized and was slightly down 1% year over year.
As expected, we are seeing sequential improvements in our bad debt loss ratios, ending this quarter at approximately 0.9%, which continues to be best-in-class within the industry.
We have also seen strong cash collections well above pre-COVID levels.
As a result, our non-GAAP operating margin was 9.8%, up 110 basis points on the prior year.
And our return on equity is back to a pre-pandemic high teens level of 16.5%.
Slide 4 highlights key metrics of our growing as-a-service business.
Similar to last quarter, we are making great strides in our as-a-service offering this quarter with over 70 new GreenLake logos added in Q1.
I am very pleased to report that our Q1 21 ARR came in at $649 million, representing 27% year-over-year reported growth.
Total as-a-service orders were up 26% year over year, driven by very strong performance in Europe and Japan.
Our HPE Aruba Central SaaS platform also contributed to grow revenues strong triple digits year over year.
Based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing toward achieving its ARR growth targets of 30% to 40% CAGR from fiscal-year '20 to fiscal-year '23, which I am reiterating today.
Slide 5 highlights our revenue and earnings per share performance to date, where you can clearly see the strong rebound from our Q2 trough.
Revenue returned back to near pre-pandemic levels last quarter.
And with the operational execution of our cost optimization and resource allocation program, we have nearly doubled earnings per share from the trough and are now growing year over year.
Turning to Slide 6.
We delivered a non-GAAP gross margin rate of Q1 -- in Q1 of 33.7% of revenues, which was up 300 basis points sequentially and 30 basis points from the prior-year period.
This was driven by strong pricing discipline, the absence of backlog-related headwinds we had in the second half of last year, operational services, margin expansion from cost takeout and automation and a positive mix shift toward high-margin software-rich businesses like the Intelligent Edge and Storage.
Moving to Slide 7.
You can also see we have expanded non-GAAP operating profit margins, which is up 280 basis points sequentially and 130 basis points from the prior-year period.
We have done this by driving further productivity benefits while simultaneously maintaining our investment levels in R&D and field selling costs, which are critical to fuel our innovation engine and revenue growth targets.
Q1 operating expenses also benefited from delayed hiring and a pushout of select investments that we will be making to drive further growth.
Turning to Slide 8, we generated record levels of first-quarter cash flows.
Cash flow from operations was approximately $1 billion, and free cash flow was $563 million for the quarter, up approximately $750 million from the prior-year period.
This was primarily driven by the increased profitability, strong operational discipline and some working capital in year timing related benefits.
Now moving on to Slide 9.
Let me remind everyone about the strength of our diversified balance sheet, liquidity position, which are a competitive advantage in the current environment.
As of our January 31 quarter end, we had approximately $4.2 billion of cash on hand.
Together with an undrawn revolving credit facility of $4.75 billion at our disposal, we currently have approximately $9 billion of liquidity.
Finally, I would like to reiterate that we remain committed to maintaining our investment-grade credit rating, which was recently reaffirmed by the rating agencies.
Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity to run our operations, continue to invest in our business to drive growth and execute on our strategy.
Now turning to outlook on Slide 10.
Today, I'm pleased to announce that we are raising our fiscal-year guidance for fiscal-year '21 once again to reflect our strong operational performance to date and confidence in our outlook.
We now expect to grow our fiscal-year '21 non-GAAP operating profit by over 20% and expect to deliver fiscal-year '21 non-GAAP diluted net earnings per share between $1.70 to $1.88, which is a $0.10 per share improvement on the midpoint of our prior earnings per share guidance of $1.60 to $1.78.
From a top-line perspective, we are pleased with the momentum we saw in Q1.
And while we continue to see gradual improvement, we remain prudent as we and the rest of the world continue to navigate the pandemic and related macro uncertainties.
More specifically for Q2 '21, we expect revenue to be slightly better than in line with our normal sequential seasonality of down mid-single digits from Q1.
This still represents double-digit year-over-year growth from the $6 billion trough of Q2 of fiscal-year '20.
Now with respect to supply chain, I would like to remind everyone that we exited Q4 of fiscal-year '20 with higher levels of inventory to protect against the risk of a short-term supply squeeze and address improved customer demand.
With these actions and other proactive steps that we've taken in Q1, we do not expect any meaningful impacts on our supply chain in the near term.
We are now turning our attention to working on strengthening our inventory supply for the second half of fiscal-year '21 as we see improved levels of demand, recognizing also that we have entered an inflationary environment for memory components.
For Q2 '21, we expect GAAP diluted net earnings per share of $0.02 to $0.08 and non-GAAP diluted net earnings per share of $0.38 to $0.44.
Additionally, given our record levels of cash flow this quarter and raised earnings outlook, I am very pleased to announce that we are also raising fiscal-year '21 free cash flow guidance from our SAM guidance of $900 million to $1.1 billion to a revised outlook of $1.1 billion to $1.4 billion, a $250 million increase at the midpoint.
So overall, Antonio and I are proud of these results.
We have navigated well through unprecedented challenges in the last fiscal year and have started the new fiscal year strong out of the gate.
We saw significant acceleration and customer demand in our Intelligent Edge business and the order pipeline, and our HPC MCS business remains robust.
Our core business of Compute and Storage revenues are stabilizing with improved margins, and our as-a-service ARR continues to show strong momentum aligned to our outlook.
As a result of our cost optimization and resource allocation program, we are emerging from an unprecedented crisis as a different company, one that is much leaner, better-resourced and positioned to capitalize on the gradual economic recovery currently at play.
We are already seeing the benefits of our actions in our improved margin profile and free cash flow outlook.
| q1 revenue $6.8 billion versus refinitiv ibes estimate of $6.71 billion.
hewlett packard enterprise - raises fiscal 2021 gaap diluted net earnings per share outlook to $0.48 to $0.66 and non-gaap diluted net earnings per share outlook to $1.70 to $1.88.
estimates q2 gaap diluted net earnings per share to be in range of $0.02 to $0.08.
hewlett packard enterprise - raises fiscal 2021 free cash flow guidance to $1.1 to $1.4 billion.
sees q2 non-gaap diluted net earnings per share to be in range of $0.38 to $0.44.
qtrly compute revenue was $3.0 billion, down 1% year over year or down 2% when adjusted for currency.
|
And Scott Wells, Chief Executive Officer of Clear Channel Outdoor Americas, will participate in the Q&A portion of the call.
These statements include management's expectations, beliefs and projections about performance and represents management's current beliefs.
There could be no assurance that management's expectations, beliefs or projections will be achieved or that actual results will not differ from expectations.
During today's call, we will provide certain performance measures that do not conform to generally accepted accounting principles.
They provide a detailed breakdown of foreign exchange and non-cash compensation expense items as well as segment revenues and adjusted EBITDA, among other important information.
For that reason, we ask that you view each slide as William and Brian comment on them.
This is our third quarter conducting the call remotely.
And once again, we ask that you bear with us in case there are any technical issues during the call.
It has certainly been an unprecedented year for many of us and like you, I'm sure we continue to feel the impact of the COVID-19 pandemic on our business.
But in the past quarter, we've also seen how robust our business is and how strongly it recovers as and when some kind of normality returns.
We delivered better than expected consolidated revenue in the third quarter with reported revenue down 32% compared to the prior year, a substantial improvement compared to the 55% decline we reported in the second quarter.
Excluding China and FX, the decline would have been 27% better than the low 30% decline guidance we have provided in early August.
Our performance in Europe was better than anticipated and well demonstrated the resilience of our medium.
As audiences returned to the streets, our advertisers returned to our medium.
US performance also showed sequential improvement and was in line with our expectations.
At the same time, we continue to implement initiatives to align our operating expense base with revenues.
As a whole and in the context of the pandemic, the results in the third quarter, especially in Europe were certainly encouraging.
We are continuing to leverage our investments in digital screens, in technology and in our footprint to manage through the crisis and ensure we have the flexibility to deal with the uncertainty as governments across all our markets deal with the ongoing challenges of COVID-19.
Our focus on continued investment for long-term growth is well as demonstrated by the recent announcement of our winning the contract for the rights to advertise in the New York and New Jersey airports.
We are proud and excited to have won this significant tender and I congratulate Scott Wells and his team in securing it.
I'll talk later in more detail about the contract and our confidence in its value to our business.
Now as we look ahead, based on the information we have as of today, we expect a slight sequential improvement in the Americas revenue and adjusted EBITDA margin in the fourth quarter.
However, we are not able to provide fourth quarter guidance for our European segment.
The recent mobility restrictions in our European markets, most notably in the UK and France in the past 10 days have created volatility in customer booking activity significantly limiting our visibility.
I'm proud of the incredible work our team has done and continues to do to reinforce our solid foundation and drive operational efficiencies in the face of rapidly changing business conditions.
Moving on, I'll provide an overview of our business, the current environment and views on where we see the out-of-home market going from here.
So please turn to Page 4.
In the Americas segment, year-over-year revenue was down 32% in the quarter, which is an improvement compared to the 39% decline reported in the second quarter.
Our Americas business is centered around the top 20 markets, which contributed to the significant growth we were delivering up to and including the first quarter of this year prior to COVID-19.
However, even though our audience levels are returning to normal, the largest markets in the top 20 are those most impacted by advertisers pulling back on our out-of-home spending, especially on the East and West Coast, where national advertisers are most likely to be focused.
Please turn to Page 5.
Europe supported revenue was down 13% against prior year and excluding foreign exchange adjustment was down 18%, which as I noted at the beginning of my remarks is a substantial improvement compared to the 62% decline we saw in the second quarter.
The improvement in digital, which accounts for approximately 30% of European revenue and declined 17% excluding FX impact was even larger due to the speed at which advertisers were able to launch campaigns as business quickly returned once lockdowns were eased.
As I've stated in the past, our investment in digital is a key component of our strategy.
Our digital network is a dynamic medium, which enables our advertisers to engage in real time, tactical, contextual and flexible advertising.
I'd call out the strength of our sales team across Europe, we've done an excellent job responding with agility.
As markets opened up, our audiences were moving around again and advertiser interest returned.
We also benefited from our strategic focus on roadside locations, which historically account for about two-thirds of our total European revenue and are far less affected by COVID-19 driven restrictions than the transit environment which account for approximately 10% of our European revenue.
Our UK business was a great example of this, where about 80% of revenue is historically from roadside inventory.
Since mid-July, up until the recent announcements of new restrictions, our customer booking activity actually exceeded bookings made in the same period last year.
Moving on to Page 6, and the Americas business.
With the outlook in the Americas improving, we remain cautiously optimistic for the near term.
Our longer-term focus remains on returning to growth, which we believe we can achieve in 2021.
As we enter the fourth quarter, our visibility remains limited.
However, we have shifted from playing defense to playing offense, leveraging the investments we've made, and continuing to make in technology.
Even with the uncertainty created by the recent COVID-19 spikes, we believe our organization is in a stronger position to manage through the instability in the market.
In light of that instability, we have expanded our client direct selling initiatives.
Our focus is on selling creative ideas as opposed to specific billboard locations.
As advertisers work to realign their advertising campaigns, we have found that CMO's are more willing to jump on a Zoom call to hear a great idea.
Our ability to get a foot in the door is improving all the time.
We continue to demonstrate to advertisers how our RADAR suite of solutions can help us help them.
The audience levels are returning to normal, but travel patterns have changed.
Audiences are spending more time close to home and less time in city centers, but they're still out and about.
With RADAR, we're able to quickly to adjust to these new travel patterns to help our customers understand the best inventory and roadways on which to reach their customers, we target those customers via our mobile ad and measure the success of the campaign.
More specifically, in the fourth quarter, we are seeing continued sequential improvements in our business.
For the first time since March, we've beaten comps in the number of weeks so far this quarter.
In our national business, the number of RFPs is improving and is close to 2019 levels.
Local continues to improve and we are seeing continued strength in our perm [Phonetic] inventory.
We're currently in the renewal season and most are keeping their locations.
That said, we are still waiting for more data to better understand the strength of the holiday season relative to previous years as advertisers continue to delay buying decisions.
Our largest category business services is holding up well, and is performing at levels equal to last year.
We are seeing increases in beverages, with the continued weaknesses in amusements and entertainment.
Additionally, our revenue generated by our programmatic platform has rebounded faster than the rest of our business, although programmatic is still a small percentage of total revenue.
Moving on to Page 7 for a review of the Americas technology initiatives and new contracts.
During this past quarter, we continue to invest in technology and our digital footprint in America.
We added 19 new digital billboards this quarter for a total of 57 new digital billboards this year, giving us a total of more than 1,400 digital billboards.
We also partnered with Tremor Video to enhance our RADAR offering, which now provides advertisers a coordinated out-of-home and all screen video solution that seamlessly extends into TV, digital or social video campaigns that reach consumers when and where they're ready to engage with brands.
This is just the latest of enhancements to the RADAR suite, and we expect to continue to add customer friendly capabilities to RADAR in the coming months.
In addition, our data analytics capabilities expanded with our recently announced rollout of a new audience impressions methodology for airport adverstising, developed in partnership with the industry measurement body Geopath, this innovation provides advertisers a more precise understanding of consumers advertising Journeys and behaviors as they traverse airports.
The new methodology marks a shift from measuring campaign fully based on passenger count toward a more robust understanding of audience behavior and consumers' likelihood are being exposed to advertising in airports, using the same Geopath data that is used to measure audiences in the traditional roadside out-of-home sector.
The data will become available to advertisers through Geopath as well as through RADAR.
As I mentioned at the start, we are also delighted that the Port Authority of New York and New Jersey Board has awarded us the largest airport advertising contract in the US to transform JFK, LaGuardia, Newark and Stewart airports into world-class digital media platforms.
This is a landmark win for us and demonstrates our confidence in the underlying fundamentals of our business and our focus on long-term profitable growth opportunities beyond the temporary impact of the pandemic.
The contract is for 12 years and is contingent upon execution by both parties, which we expect to occur in mid-November.
We anticipate the contract will go into effect December 30, 2020.
We worked with the Port Authority to align our interests with contract terms that set the stage for both parties to achieve their goals under the current conditions and for years to come and it has the potential to become the new industry model.
The deal contains a two-year transition period to account for the impact of COVID-19 and the traffic recovery at Port Authority airport.
The actual MAG due each year, as well as capex spend after the two-year transition period will be dependent upon total passenger traffic.
The Port Authority of New York and New Jersey airports are gateways to the world.
And as the region and travel recover, we believe our team is best used to lead its historic transformation.
With the addition of these high-value marquee airport assets to our footprint, brands will have the unique one-stop shop ability to execute campaigns that reach consumers as they drive, walk or fly throughout at the New York and New Jersey metro area.
Moving on to Page 8.
In Europe, where we are seeing a range of performances within our markets due to the resurgence of COVID-19 cases.
As I noted earlier, historically about two-thirds of our revenue in the region is generated by our roadside displays.
In October, we continue to see strength in our street furniture and billboard inventory, given the audiences were still on the street.
In contrast to continued weakness in transit, our largest categories FMCG and retail improved sequentially.
In addition, fashion and beauty are benefiting from the holiday season.
However, our visibility into November and December has been impacted by the spike in new cases and new restrictions, which have led some advertisers to pause their activity.
Of course, we are keenly aware of the recent developments around the second wave of COVID-19 in Europe and we are monitoring these closely.
While the new restrictions and the uncertain environment will impact our business in the near term, they are not expected to last as long nor are they as limiting in terms of movement as those we saw back in March and April.
As a result, we believe the second wave will have a much smaller impact on revenue in the fourth quarter than it did in the second quarter.
More importantly, the resilience of the business is clear.
When audiences return, out-of-home business comes back strongly.
And as I said earlier, in the UK and elsewhere, we've seen booking equal or better to the prior year in many weeks during the past quarter.
Turning to our European technology investments on Page 9.
In Europe, we continue to help brands navigate the audience and environmental impact of changing COVID-19 restrictions through the application of smart data.
For example, the UK's Return Audience Hub has become a go-to planning portal for advertisers.
As I mentioned last quarter, the hub monitors a huge anonymized mobile data set to learn and openly share how the portfolio is delivering audiences compared to pre-lockdown levels.
Clear Channel RADAR is now operational in both Spain and the UK and has further strengthened our ability to help brands engage audiences effectively as mobility patterns evolve.
We are seeing early benefits from our implementation of RADAR.
For example, in Spain, we've booked campaigns for PepsiCo using proximity to stores and more targeted audience demographic and behavioral data being able to respond to new audience behaviors and mobility patterns through the changes we are seeing as a result of COVID-19.
We continue to expand our digital footprint this year, adding 383 digital displays in the third quarter and 699 year-to-date for a total of over 15,000 screens now live.
As we continue to expand our digital reach across European cities, we are well positioned to deliver increased flexibility and enhanced contextual relevance at scale, improving our abilities in the brands' needs.
This is evidenced by the improving digital revenue trend in the third quarter.
Throughout our digital transformation, we are committed to making Clear Channel inventory more accessible to both new and existing advertisers.
As in the US, we are developing our programmatic capabilities at an increased pace while securing and expanding partnerships with a number of the leading supply side platform partners.
Most recently, in Spain, we successfully ran our first fully programmatic campaign to car brand Cupra in partnership with SSP Broadsign Reach.
Broadsign Reach is already live across Holland and Switzerland.
In the UK, we just announced the new programmatic partnership with SSP high stack.
Across Clear Channel outdoor, we strive to create products and provide services that excite and engage our consumers, communities, advertisers and business partners.
As a result, we believe we are well positioned to return to growth in 2021.
At the same time, we recognize the pressures of the current environment and we will continue to take steps to preserve liquidity, including balancing the need to defer capital expenditures, and reduce costs while still investing in strengthening our platform.
Please turn to Page 10.
Before I review our third quarter results, I want to remind you that during our GAAP results discussion, I'll also talk about our results adjusting for foreign exchange, which is a non-GAAP financial measure.
We believe this improves the comparability of our results to the prior year.
Additionally, as you know, we tendered our shares in Clear Media on April 28, and therefore our Q3 results in 2020 do not include Clear Media.
However, our results in Q3 of 2019 did include Clear Media's results.
Consolidated revenue for the quarter decreased 31.5% from last year to $448 million.
Adjusting for foreign exchange, it was down 33.1%.
If you exclude China and adjusted for foreign exchange, the decline in revenue was 27%, which was better than the low 30% decline we had projected in early August.
Our better than expected results are due to a stronger than anticipated rebound in Europe.
Consolidated net loss declined $77 million to $136 million in the third quarter of 2020 as compared to $212 million in the third quarter of 2019.
Adjusted EBITDA was $31 million in the quarter, down 78.4% and excluding FX, was down 78.9%.
Now on to Page 11 to discuss the Americas results.
The Americas revenue was down 31.8% during the third quarter from $328 million in 2019 to $224 million.
As William mentioned, this is an improvement over the second quarter results, which were down 39%.
Revenue declines and national and local, as well as digital, improved relative to the second quarter, while the decline in airports increased.
In general, our airport inventory is considered premium space.
So while advertisers did not immediately reduce the airport advertising campaigns in the beginning of the second quarter, they began pulling ads in the back half of the quarter, and into the third quarter.
Local, which accounted for 64% of revenue was down 27.6%, and national, which accounted for 36% of revenue was down 38.2%.
Digital accounted for 30% of revenue and was down 34.8%.
This compares to a 53.7% decline in the second quarter.
Our long-term contracts for print large format billboard, which we refer to as perms, continue to hold up well, even though total print ad revenue was down.
Both direct expenses and SG&A were down 19% in the quarter, primarily due to lower site lease expenses and lower compensation costs, as a result of the decline in revenue and cost reduction initiatives.
Adjusted EBITDA was $71 million, down 48% from the prior year.
As we have stated in the past, our business is a high fixed cost business, and although we are working on reducing expenses throughout the organization, the decline in revenue resulted in a larger reduction in adjusted EBITDA.
Please move on to Page 12 to review Europe.
Europe revenue was down 13.4%.
Excluding foreign exchange revenue, was down 17.9% in the third quarter.
This is a substantial improvement from the 62% decline reported in the second quarter, with all markets contributing to the improvement.
France was up in the quarter due to the new Paris street furniture contract in addition to a partial rebound in the underlying market.
Digital revenue accounted for 30% of total revenue that was down 16.6%, excluding FX, slightly less than the overall decline.
Adjusted direct operating expenses and SG&A expenses were down 8.9%.
The decline is due to lower site lease expense, in addition to lower compensation expense, primarily related to the decline in revenue, in addition to cost reduction efforts.
Adjusted EBITDA was a loss of $8 million, due to the decline in revenue and high fixed cost base.
In August, we issued senior secured notes through our indirect, wholly owned subsidiary, Clear Channel International BV, which we refer to as CCI B.V. Net proceeds from the note offering provides incremental liquidity for our operations.
Our European segment consists of the businesses operated by CCI B.V. and its consolidated subsidiaries.
Accordingly, the revenue for our Europe segment is the revenue for CCI B.V. Europe segment adjusted EBITDA does not include an allocation of CCI B.V.'s corporate expenses that are deducted from CCI B.V.'s operating income and adjusted EBITDA.
As I just discussed, Europe and CCI B.V. revenue decreased $34 million during the third quarter of 2020, compared to the same period of 2019, $217 million.
After adjusting for an $11 million impact from movements in foreign exchange rates, Europe and CCI B.V. revenue decreased $45 million.
CCI B.V. operating loss was $38 million in the third quarter of 2020, compared to operating loss of $16 million in the same period of 2019.
On to Page 13 for a quick review of other.
Our other segment includes Latin America and Clear Media.
The 2019 results include Clear Media, which was sold in Q2 of 2020.
Latin America revenue was $7 million in the third quarter, down $15 million from the prior year.
The spike in COVID-19 in Latin America started later in the year, and it is taking longer to control the spread of the virus in Latin America.
Direct operating expenses and SG&A were $13 million in the third quarter, down $4 million from the prior year.
Adjusted EBITDA was a loss in the quarter.
Now on to Page 14 to discuss capex.
Capital expenditures totaled $26 million in the third quarter, down $34 million from the prior year, as we proactively reduced our capital spend to preserve liquidity and sold our stake in Clear Media.
Even with this substantial reduction, we did continue to invest in digital in key locations with 19 new digital billboards in the US, and 383 new digital displays in Europe.
Please move to Page 15.
Clear Channel Outdoor's consolidated cash and cash equivalents, as of September 30, 2020, totaled $845 million, including $417 million of cash held outside the US by our subsidiaries.
During the third quarter, we transferred a portion of the proceeds from the sale of Clear Media to the US.
Our debt was $5.6 billion, an increase of just over $500 million during the year, as a result of our drawing on our cash flow revolver at the end of March, and issuing the CCI B.V. notes in August.
Cash paid for interest on the debt during the third quarter was $147 million, up slightly from the prior year, due to the timing of interest payments, partially offset by lower interest rates.
The company anticipates having approximately $21 million of cash interest payments in the fourth quarter of 2020, and $350 million in 2021, including the interest on the new CCI B.V. secure notes, with the first interest payment in April of 2021.
Moving on to Page 16.
As William touched upon, we continue to focus on managing our cost base and strengthening our liquidity and financial flexibility, while driving improvements in the top line trends that will return the business to its pre-COVID trajectory.
This includes our proactive steps to right-size the business.
In addition to the temporary cost saving plans we enacted in the second quarter, we've also initiated restructuring plans throughout the company.
Plans are expected to generate annualized pre-tax savings of approximately $32 million upon completion, with total charges for the plans in the range of $23 million to $26 million to achieve these savings.
While we remain confident the business will return to pre-COVID levels, we still don't have the visibility yet on timing.
Given the uncertainty, we felt it was prudent to take the appropriate steps to work to align the cost base with the current business environment.
Additionally, during the third quarter, as previously discussed, we issued $375 million in senior secured notes in August through our indirect wholly owned subsidiary CCI B.V.
We continue our site lease contract negotiations with landlords and municipalities to better align fixed site lease expenses, with reductions in revenues.
We generated rent abatements of $24 million during the third quarter and $53 million year-to-date.
We continue to benefit from compensation cost reductions through actions enacted in the second quarter, the majority of which are temporary.
We obtained European government support and wage subsidies of $7 million in the third quarter and $15 million year-to-date.
We eliminated and reduced certain discretionary expenses.
We deferred capital expenditures, as I just mentioned, and we deferred site lease expenses and other payments to optimize working capital levels.
From a liquidity standpoint given what we know today, we believe that we have sufficient liquidity, including the $845 million of cash at the quarter end, to fund the needs of the business as the economy and our business recover.
Please move to Page 17.
As William mentioned, in the Americas, we expect to see a slight improvement on a sequential basis in revenue and adjusted EBITDA margin.
In Europe, we saw a strong sequential improvement in the third quarter.
However, our visibility in the fourth quarter has been impacted by the recent mobility restrictions put in place in some of our largest European markets, most notably in the UK and France.
These restrictions have created volatility in customer booking activity, significantly limiting our visibility and ability to provide guidance.
As I mentioned, our team continues to work exceptionally hard through the challenging environment and we are seeing the results of our efforts.
We're encouraged by the way we've seen advertisers return to our inventory in the last quarter, demonstrating the resilience of our medium and the value of our locations.
They're benefiting from our continued investments in technology and expansion of our digital footprint and are proud of securing new contracts most especially winning the New York and New Jersey Port Authority airports.
We remain focused on the strong, medium, and long-term opportunities within our sector and are confident Clear Channel is well positioned to capitalize on these improving trends.
As I conclude my remarks, I want to reiterate a few things.
First, as Brian mentioned, the actions we took earlier in the year give us what we believe to be sufficient liquidity to manage through the pandemic, even with the spikes we've seen in the US and Europe.
Second, we will continue to identify both temporary and permanent costs reductions to better align our expenses with the current economic environment and expand on our restructuring plans.
Third, in the third quarter, we delivered better than expected results, with a strong rebound in Europe demonstrating the underlying resilience of our business.
In recent weeks, in both some European markets and the US, we have at times equaled or bettered prior year performance.
When infection rates decline and restrictions are lifted and our audience return, our markets come back.
Looking ahead, the course of the pandemic is still unclear with the second wave in Europe and continued uncertainty in the US.
Although, we expect the next few quarters to remain challenging, we believe in the underlying fundamentals of our industry and our business.
As both Brian and I said, given the resilience of our team, investments in our business, and strength of our platform, we expect to deliver a slight sequential improvement in Americas revenue and adjusted EBITDA margin in the fourth quarter.
We are not providing fourth quarter guidance for Europe, given the recent mobility restrictions creating significant volatility in our booking activity.
However, we remain cautiously optimistic that we will return to growth in 2021.
Lastly, as we've stated before, we always remain open to dispositions and opportunities that accelerate our path to creating enhanced value for shareholders.
However, given the current economic environment, our focus remains on continuing to own, operate and enhance the value of the current portfolio of assets in order to drive shareholder value as the economies rebound.
I look forward to providing updates regarding our progress.
| q3 revenue fell 31.8 percent to $223.7 million.
clear channel outdoor - committed to restructuring plans to reduce headcount with expected pre-tax annual cost savings of about $32 million.
|
We appreciate you participating in our conference call today to discuss Flowserve's third quarter 2021 financial results.
These statements are based upon forecasts, expectations and other information available to management as of October 28, 2021, and they involve risks and uncertainties, many of which are beyond the company's control.
There are two key messages that we want to cover today.
First, we are confident that Flowserve is on the path to growth after a dramatic pandemic-driven downturn.
We are optimistic about the future, the positive inflection we are seeing in the cycle and our opportunities through energy transition.
Second, we experienced a number of challenges in the third quarter with our supply chain, logistics and labor availability.
These problems had an impact on our revenue and profitability in the quarter, but we believe that we will work through the issues and restore our revenue to a more normal conversion rate in the quarters to come.
As I just indicated, the third quarter presented a number of challenges, which we continue to navigate, including supply chain, logistics and labor availability.
These issues were truly global in nature and have had an impact on Flowserve and other global industrials in the quarter.
Flowserve had been largely successful in mitigating these issues in the first half of the year, but the confluence of events and the combined impact of the challenges had an adverse effect on our third quarter results.
It is important to note that we remain encouraged by the healthy underlying demand that we see across many of our end markets and by the fact that many of the headwinds we experienced in the third quarter are primarily timing related.
We expect that our business will return to growth and that the Flowserve team will work diligently to resolve the issues that we faced in the quarter.
Let me now turn to our results.
Third quarter reported and adjusted earnings per share were $0.38 and $0.29, respectively.
The combination of supply chain, logistics and labor availability shifted approximately $60 million of expected revenue out of the quarter.
Our backlog remains secure, and we are confident in our ability to recognize the backlog at a more normal revenue conversion rate in the coming quarters.
Our third quarter bookings of $912 million represented a 13% increase over prior year, continuing this year's trend of strong year-over-year quarterly growth.
Aftermarket and MRO bookings during the quarter were consistent with first half levels, while larger award activity continues to remain below pre-pandemic levels.
Aftermarket orders of $495 million increased 16% and are at pre-COVID levels.
The aftermarket business is benefiting from the increased utilization rates of our customers' assets being driven by improved mobility and increasing GDP levels around the globe.
Original equipment bookings increased 9% year-over-year to $417 million.
Our project or original equipment business continues to lag in the recovery with less than a handful of larger projects awarded in the quarter with only two project orders in the $10 million to $20 million range.
Some of the same macro issues around logistics and supply chain are also impacting the progress of these global projects moving toward award.
We remain confident in our pipeline of opportunities, and we expect project work to increase from this point forward.
Each of our core end markets delivered year-over-year growth in the third quarter, with oil and gas up 33%, while chemical and power were both up 17%.
Water bookings were also particularly strong, up 46% and included a $10 million desalination award.
From a regional perspective, bookings growth was driven primarily from North America and the Middle East and Africa.
Some of these markets were up over 30%.
COVID continues to negatively impact Flowserve's and our customers' operations in Asia Pacific, which was the only region not returning to growth thus far in 2021.
We do expect our overall bookings to recover more toward our first half 2021 quarterly run rate of approximately $950 million in the fourth quarter.
We saw bookings growth in each of the three months during the third quarter, and we believe that September's exit rate can restore our bookings levels to those in the first half of the year.
Project timing will be the key variable for fourth quarter bookings levels.
We believe full year bookings will grow year-over-year in the 10% range.
This level of bookings growth positions Flowserve well for revenue growth and solid financial performance in 2022.
I would now like to return to the operational challenges that we faced in the third quarter.
Approximately $60 million of revenue and $20 million in gross profit that we had previously expected to recognize in the period was deferred from the third quarter due to supply chain issues, global logistics and labor availability.
We were largely successful in mitigating these types of items during the first half of the year, but as the quarter progressed, we faced significant issues on all three fronts.
Historically, challenges like these might affect a few locations in any given period, but in the third quarter, we saw a very large number of our global manufacturing facilities and QRCs impacted by the logistics supply chain labor issues.
On the supply chain front, we are facing disruption and inflation across the entire value chain.
We have done a good job managing our critical vendors for procured items such as castings, forgings, machining and large motors.
And we are seeing the benefits from the supplier consolidation and the quality work that was completed in the Flowserve 2.0 transformation.
However, the broad issues and extension of lead times across the central components like base materials, coatings, small motors, consumables and electronics have impacted our ability to deliver product to our customers.
We have now identified and are mitigating these extended lead times, but there is no immediate fix, and we expect further disruption in the coming quarters.
To address the accelerating inflation that we saw during the third quarter, we have now announced our fourth price increase of the year, which will go into effect at the end of this year to continue our efforts to offset the increased costs on purchase items and logistics in the marketplace.
We are in a difficult environment with inflation and cost pressures, but I feel that we have done a nice job balancing enhanced pricing and our pursuit of growth.
With logistics, we are getting impacted in three different ways.
First, our supply chain is predominantly out of Asia, and the ability to ship product from that region to Europe and the Americas is now more costly and less predictable than ever before.
Second, it is also difficult to reliably coordinate and schedule product shipments from our factories to our customers.
And third, in some cases, our customers are unwilling or unable to schedule pickup or delivery of our products, which impacts the timing of revenue recognition.
While we believe the situation with our customers is getting better, we are the most impacted in the latter weeks of the third quarter.
Finally, it is hard to maintain staffing and productivity levels in certain parts of the world in the current environment.
For example, in China, we're having to hire a significant number of new associates to keep up with demand and to satisfy the emerging local laws.
In Europe, labor is especially tight in certain areas.
While in the Americas, we saw a large COVID quarantine rate during Delta's rise, and it is also a very tight labor market.
We are pleased that the heightened COVID cases and related quarantines we saw in the third quarter across our business have consistently declined through October, and we are encouraged by this continuing downward trend.
We will, of course, continue to focus on the safety of our associates as we have been since the start of the pandemic.
We are actively working through each of these disruptions, and we expect it will take a few quarters for us to adjust to extended supplier lead times, the disruption in logistics and the issues with labor availability before we return to the more normal operating model.
Additionally, we have not seen, nor do we expect an increase in cancellations from our backlog.
So our revenues are there for us to deliver in the coming quarters.
Following our third quarter results and with the assumption that these issues will impact Flowserve in the fourth quarter and likely into 2022, we adjusted our 2021 full year guidance metrics yesterday.
Looking at Flowserve's third quarter financial results in greater detail.
Our reported earnings per share of $0.38 exceeded our adjusted earnings per share of $0.29 due to a $16.6 million discrete tax adjustment from the reversal of certain deferred tax liabilities.
Partially offsetting the $0.13 gain on taxes, our adjusted earnings per share also excludes $0.04 of items, including realignment expenses, below-the-line FX impact and certain costs incurred in our debt refinancing.
During the third quarter, we took advantage of the favorable debt markets to solidify our liquidity and financial flexibility for years ahead by prefunding upcoming debt maturities.
We amended and restated Flowserve's senior credit facility by extending the maturity of our revolving credit facility by two years and enhancing the financial flexibility we have under it as well as lowering the ongoing commitment fees and including sustainability-linked options to enable further cost reductions as we progress our ESG objectives.
In addition to the revolver, we also obtained a $300 million fully drawn term loan, which included participation from a minority-owned depository institution in addition to most of the syndicate banks in the revolver.
We sincerely appreciate the support of our historic and new banking partners in both facilities and look forward to working closely with them in the years ahead.
In September, we also accessed the debt capital markets and issued $500 million in new 2.8% 10-year senior notes.
We value the confidence of investors in this offering as well.
In October, we used all the proceeds from the term loan and senior notes in addition to some excess cash, together totaling $842 million, to fully redeem our senior notes with maturities in 2022 and 2023.
Now I'd like to return to our third quarter financial results.
As Scott mentioned, the third quarter was impacted by supply chain, logistics and labor headwinds that delayed roughly $60 million of expected revenue out of the quarter.
These issues primarily occurred late in the third quarter.
Revenue decreased 6.3% to $866 million, largely due to the deferred revenue I just mentioned.
All in, we had an 11% decline in original equipment, or OE, sales, driven by FPD's 20% decrease, but partially offset by FCD's 2% increase.
Beyond the challenges in the third quarter, FPD continues to be impacted by its 2021 beginning OE backlog, which was down roughly 25% versus the start of 2020.
Aftermarket sales remained relatively resilient in total, down roughly 1%, where FCD's 12% increase was offset by FPD's 3% decline.
Our third quarter adjusted gross margin decreased 190 basis points to 29.6%, primarily due to the OE sales decline and the related under-absorption particularly at our engineer-to-order sites in both segments, the other previously mentioned disruptive impacts as well as higher logistics costs, which increased 25% year-over-year.
These headwinds were partially offset by a 3% mix shift toward higher-margin aftermarket sales.
On a reported basis, the gross margin decreased 160 basis points to 29.3% was driven by the factors previously mentioned and were partially mitigated by the $3 million decrease in realignment charges versus prior year.
Third quarter adjusted SG&A increased $7.4 million to $200 million versus prior year, primarily due to a $3 million increase in expense related to our incurred but not reported potential reserves, increased R&D spending and the return from travel costs which were a temporary benefit in 2020 as well as headwinds from foreign exchange.
Reported SG&A was flat to the prior period, and these increases were offset by a $7 million decrease in adjusted items and disciplined cost control offset the return of some of last year's temporary cost benefits.
Third quarter adjusted operating margins of 7% decreased 390 basis points year-over-year as did FPD's adjusted operating margin, primarily due to increased under-absorption related to a 20% OE revenue decline.
FPD's adjusted operating margin decreased 170 basis points year-over-year to 10.5% due to sales mix and slightly higher SG&A as a percent of sales.
We expect that sales volume normalize, that margins will improve.
And to that point, had Flowserve not experienced the $60 million revenue deferral, our adjusted operating margins would have been flat to modestly up on a sequential basis.
Third quarter reported operating margin decreased 280 basis points year-over-year to 6.6%, where the previously discussed challenges more than offset the $10 million reduction of adjusted items.
Our third quarter adjusted tax rate of 15.2% was driven by our income mix globally and favorable resolution of certain foreign audits in the quarter.
The full year adjusted tax rate is expected to normalize in the 20% range.
Turning to cash and liquidity.
Our third quarter cash balance of $1.5 billion reflected the debt refinancing discussed earlier as well as solid cash flow performance in the quarter.
Our net debt position of $652 million at the end of the third quarter has declined by over $300 million in the last three years.
We believe a bright spot in our third quarter financial results is our continued progress on cash flow.
On a year-to-date basis through the third quarter, operating cash flow of $151 million is up nearly $37 million versus the prior year, while free cash flow of $117 million has increased 73% or $49 million over the prior year.
In the third quarter, we delivered $78 million or approximately 67% of our year-to-date free cash flow total.
This third quarter performance is up versus the comparable period in 2020 despite voluntary funding of a $20 million pension contribution during the quarter compared to no funding a year ago.
We are pleased with our improved cash flow performance year-to-date.
And with our typically seasonally strong fourth quarter ahead, we are confident in our ability to stay on pace to deliver a free cash flow conversion of over 100% of our adjusted net income once again in 2021.
Working capital was a cash source of $56 million in the third quarter and a $47 million increase versus last year.
Accrued liabilities, prepaid expense and continued improvements in our accounts receivable process were the major contributors this quarter.
As a percentage of sales, primary working capital saw a modest 40 basis point sequential increase to 29.8% due primarily to the market disruptions in the quarter.
Both DSO and inventory turns were roughly flat sequentially.
I would also like to highlight our disciplined inventory management.
For the third consecutive quarter, our combined balance of inventory and contract assets and liabilities decreased while backlog continued to increase and despite holding elevated work in process and finished goods inventory at quarter end due to the logistics challenges.
Since year-end 2020, backlog has increased $115 million, while inventory and contract assets and liabilities have declined $16 million.
Major uses in the third quarter include dividends and capex of $26 million and $11 million, respectively.
As I just mentioned, we also contributed $20 million to our U.S. cash balance pension plan to keep it largely fully funded.
In the fourth quarter, major uses expected include the completed retirement of the 2022 and 2023 senior notes, the $26 million October dividend and a higher level of capex spend.
Turning now to our outlook for the remainder of 2021.
Based on the supply chain and logistics challenges that arose and accelerated late in the quarter, its impact on our third quarter earnings and the expectations that these conditions will persist, Flowserve revised our full year 2021 revenue and earnings per share guidance ranges.
We now expect a full year revenue decline of 3.5% to 4.5% and reported an adjusted full year earnings per share of $1.05 to $1.10 and $1.40 to $1.45, respectively.
To briefly cover our thought process, we expect the revenues and income that were deferred out of the third quarter to be largely realized in the fourth quarter.
However, we expect the challenges of the third quarter to continue industrywide for the next few quarters.
So we are assuming the fourth quarter has a similar deferred revenue impact to what we just experienced.
This, coupled with the impact of the strengthening dollar on our non-U.S. denominated sales, particularly the euro, resulted in us lowering our expectations for full year 2021 revenue.
We do expect that the fourth quarter will have the traditional Flowserve fourth quarter seasonality with strong revenue conversion.
However, we do not expect that revenue and the associated profit will be fully caught up at year-end.
Our adjusted earnings per share range continues to exclude expected realignment expenses as well as below-the-line foreign currency effects and the impact of other potential discrete items which may occur during the year, such as the premium and fees incurred to retire the notes.
In terms of other guidance metrics, our net interest expense remains unchanged at $55 million to $60 million and we modestly lowered our full year adjusted tax rate guidance to approximately 20%.
From a bookings standpoint, we now expect full year 2021 bookings to increase in the 10% range year-over-year.
Additionally, we continue to expect the majority of this increase will come from our aftermarket and shorter-cycle MRO original equipment products.
The major categories of our full year cash usages include the October debt retirement, dividends and share repurchases of roughly $120 million, capital expenditures in the $65 million range, the third quarter's pension contribution and the funding of our now modest realignment programs.
In conclusion, while our third quarter was impacted by supply chain, logistics and labor headwinds, we view these primarily as transitory.
The backdrop for our traditional markets looks positive.
There is an increasing interest in our energy transition offerings, and we continue to build momentum in our operational and cash flow progress.
With a solid and growing backlog and expected progress by the broader industry in managing the supply chain and logistics headwinds, we believe that Flowserve is well positioned to deliver earnings growth in 2022.
Before addressing our outlook for the remainder of the year and some early thoughts on 2022, let me first provide an update on our strategic initiatives.
While current conditions are increasingly favorable for our traditional energy markets, we are taking steps to best position the company for the energy transition that is already underway and which presents a significant long-term opportunity for Flowserve, our shareholders and all stakeholders around the world.
To support our efforts, we have increased our strategic focus on three major themes: decarbonization, digitization and diversification to accelerate our growth in 2022 and beyond.
We continue to identify significant energy transition opportunities in applications where we have been supporting our customers for decades.
As we focus on lower carbon energy production, we are investing in technology to advance our customers' aspirations, including additional capabilities within carbon capture, hydrogen and energy storage.
We are still in the early innings of tapping into this growing market, and our third quarter bookings included over $25 million of energy transition work, including biodiesel conversions, solar power projects and energy efficiency upgrades.
Our project funnel for energy transition continues to grow, demonstrating we have the flow control products and expertise to support our customers today and through their energy transition journey.
I'd like to highlight a few examples of our third quarter bookings success stories.
Flowserve was selected to provide pumps and seals for a sustainable aviation fuel project in the Netherlands.
The facility will produce sustainable aviation fuel that when compared to fossil jet fuel has the potential to cut life cycle emissions from aviation by up to 80%.
Additionally, we will remain active on the facility for years to come, ensuring the lowest total cost of ownership with the inclusion of Flowserve's LifeCycle Advantage aftermarket solutions.
Our pumps and seals were also chosen recently for a biodiesel conversion project in the United States.
Flowserve helped compress the engineering and approval time from a normal 12-week -- 12-month cycle to seven months, supporting an earlier plant start-up and delivering a faster payback.
The project is expected to reduce CO2 emissions from diesel production by up to 600,000 tons per year.
In addition, our vacuum pump technology was selected to support a leading provider of thin-film technology for the production of solar power panels.
Flowserve will provide equipment for new facilities in the U.S. and in India, reducing the overall power consumption, maintenance downtime and the floor space required.
Finally, let me update you on the progress of RedRaven, our IoT offering launched earlier this year, which instruments pumps, valves and fuel systems to provide the capability to assist our customers with a data-driven approach on how to improve their operations, increase asset uptime and reduce associated energy emissions.
We continue to expand the RedRaven instrumentation across product portfolio in the quarter and further increased access for our customers while developing the distribution channel.
We are currently working with over 40 customers and have connected nearly 5,000 assets.
While we are still relatively early in the rollout, customer interest continues to increase.
Turning now to our outlook for the remainder of the year and our positioning as we think about 2022.
With bookings continued to improve in October, we are confident in the market outlook as we close out the fourth quarter and plan for 2022.
As I indicated earlier, we expect fourth quarter bookings to be roughly $950 million, depending on the level of project activity.
By achieving this level, our 2021 bookings would deliver a 10% year-over-year growth rate.
Based on current market conditions, we also expect year-over-year bookings growth to continue in 2022 based on our discussions with our customers, EPC backlogs and our project funnel.
We believe that the lessening impact of the pandemic, combined with increased energy demand, growing decarbonization and energy transition opportunities and global economic growth, create a compelling view of our markets.
Additionally, with increased utilization, coupled with energy prices that are well above pre-pandemic levels, we expect that our customers will continue their aftermarket and MRO spending as well as return to their capacity expansion plans across our served markets.
Our project funnel remains well above prior year levels, providing confidence that while the timing of the return of these larger projects remains uncertain, we expect that many will ultimately move forward in 2022.
All of this gives us increased confidence in the flow control markets, driving bookings growth throughout 2022.
Additionally, we believe that our added focus on decarbonization, digitization and diversification will only enhance our growth outlook.
Looking both near and longer term, energy transition investment will provide strong opportunities for Flowserve.
While we continue to support our customers' traditional applications, we believe we are well positioned to support our customers' energy transition initiatives.
Operationally, I'm confident that we have the team and the tools to work through the third quarter challenges.
Flowserve 2.0 has provided the visibility and business processes to address these issues, and our teams are currently working to resolve and mitigate the issues that arose in the third quarter.
Longer term, we expect the opportunities from our served end markets, combined with our improved operational execution and an embedded continuous improvement culture, will enable Flowserve to deliver on the longer-term targets we introduced during our last Analyst Day.
In closing, we believe that with the expected return to growth and continued execution improvements, Flowserve will be well positioned to deliver stronger incremental margins and overall financial results.
We believe in the company's long-term ability to achieve our original targets, including operating margins in the 15% to 17% range, ROIC of 15% to 20% and to continue free cash flow conversion in excess of 100%, which we've already demonstrated.
Our focus remains on supporting our customers, execution and capitalizing on improved markets to drive long-term value for our shareholders and our stakeholders.
| flowserve corporation sees fy 2021 revenues down 3.5% to 4.5%.
q3 adjusted earnings per share $0.29.
q3 earnings per share $0.38.
revised full-year 2021 financial guidance metrics, including revenue and adjusted eps.
sees fy 2021 revenues down 3.5% to 4.5%.
sees fy 2021 reported earnings per share $1.05 - $1.10.
sees fy 2021 adjusted earnings per share $1.40 - $1.45.
|
Before we begin, I'd like to review the Safe Harbor statements.
During the call today, we may also discuss non-GAAP financial measures.
Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date of this earnings call.
We do not undertake and specifically disclaim any obligation to update or revise this information.
I will now turn the conference over to our CEO and chief investment officer, Mohit Marria.
Joining me on the call today are Choudhary Yarlagadda, our president and chief operating officer; Rob Colligan, our chief financial officer; and Vic Falvo, our head of our capital markets.
This quarter we took many proactive steps toward portfolio optimization and the expansion of Chimera's core earnings.
Key drivers of our performance include recirculation of mortgage loans and the refinancing of credit at lower interest rates.
The housing market continues to be robust across America.
And though longer term interest rates have risen since year end, the interest rates available for residential mortgage remain very low by historical measures.
Home prices are increasing at their fastest pace since the first quarter of 2006 and on a year-over-year basis the S&P Case-Shiller index reported 11.2% increase in home price appreciation.
Strong housing demand coupled with a limited supply of homes available for sale provide strong tailwinds in housing finance.
Home price appreciation is an important metric when evaluating future mortgage credit performance.
Interest rate on 10-year U.S. Treasuries rose 83 basis points this quarter, while short term interest rates remain near zero.
The yield curve deepened over the period with a spread between two-year and 10-year treasury notes doubling to 158 basis points on market concerns of future inflation expectations.
Federal Reserve policy remained unchanged this quarter, and the Fed indicated it's believed that recent signs of inflation are expected to be short term in nature and are elevated due to pandemic related issues.
Credit spreads on fixed income products tightened as investors continue to seek higher yielding investments for their portfolios.
The BMO's high yield index ended the quarter tighter by 57 basis point while spreads AAA rated securitized reperforming loans tightened by an approximately 15 basis points.
The current market conditions have presented a unique opportunity to optimize Chimera's liability structure, locking in low cost financing for many quarters into the future.
As part of our call optimization strategy, this quarter we exercise our call rights on six outstanding deals representing $4.1 billion of residential mortgage loans.
In February, we issued $2.1 billion CIM 2021-R1 and $233 million CIM 2021-NR1.
The mortgage loans for both securitizations were from call and the termination of three CIM securitization previously issued in 2016.
These securitizations created $1.9 billion of new securitized debt at a weighted average cost of 2.04%.
The terminated debt had $1.7 billion outstanding with the previous cost of 5.2%, a savings of more than 300 basis points.
In March, we issued $1.5 billion CIM 2021-R2 and $240 million CIM 2021-NR2.
The mortgages for both securitizations from the call and termination of three CIM securitizations.
previously issued in 2017 and 2018.
The March securitizations created $1.5 billion of new securitized debt, at a weighted average cost of 2.24%.
The terminated debt had $1.2 billion outstanding, with a previous cost of 4.22%, a savings of about 200 basis points.
The high advance rate on these four securitizations enabled us to release equity, locked in from the prior securitizations and lower our costs of securitized debt by 265 basis points.
The retained tranches from those securitizations were financed with non mark-to-market repo.
We expect to see the full benefits of all four securitizations in the new quarter.
For the month of April we issued $860 million CIM 2021-R3 and $117 million CIM 2021-NR3.
The mortgages for both securitizations were from the call and termination of three CIM deals previously issued in 2017.
The April securitizations created $813 million of new debt at a weighted average cost of 2.12%.
The terminated debt had $682 million outstanding, with a previous cost of 4.14%.
a savings of 200 basis points.
The R3 and NR3 deals closed in late April.
Securitizations of assets is a critical component of Chimera's business model.
It provides low cost, long term non-recourse debt for mortgage assets on our balance sheet.
Securitized debt represents nearly 70% of Chimera's liabilities structure.
We expect all the new securitizations issued this year to provide durable portfolio income for many years to come.
At the end of March, Chimera paid off $4 million, 7% secured financing, and retired for cash the associated warrants on approximately 20 million shares.
The cash cost on the warrants came at a 10% discount to the value of our common stock and then eliminated any future equity dilution on these shares.
The equity recaptured from our first quarter of securitizations enabled us to terminate this debt early and rebalance our liability structure.
Our secured financing now stand at $4 billion down for $4.6 billion at quarter end.
The weighted average rate on our secured financing at the end of March was 2.7%, down 70 basis points from 3.4% at year end.
The optimization of our securitized debt combined with a continued improvement in our secured financing positions Chimera's portfolio to reap long term benefits, while maintaining little recourse leverage.
On the asset side of the balance sheet, this quarter Chimera purchase and securitized NR CIM 2021 J1 and J2 deals, a total of $884 million prime jumbo loans.
Separately, through a series of transactions, we purchased $166 million high yielding business purpose loans.
The weighted average coupon on these loans was 8.5% and has an expected portfolio yield of 7%.
These loans are short duration and are currently being financed in our loan warehouse.
Our agency CMBS portfolio continues to perform well as expected, as increased rate volatility during the quarter we proactively managed to our agency CMBS portfolio.
This quarter we sold $182 million Ginnie Mae project loans, generating $14 million in realized gains.
In addition, seven Ginnie Mae project loans were called during the quarter totaling $146 million.
Unlike traditional agency pass-throughs, Ginnie Mae project loans carry explicit call protection, and due to this feature we collected approximately $14 million in interest income through P-pay penalties.
As we look forward into the second quarter, the housing market remains strong and provides added benefit for improved credit performance.
Chimera's portfolio with seasoned low loan balance loans continue to generate solid top-line performance, while demonstrating little sensitivity to prepayments.
Through the end of April, we have re securitized $5.1 billion loans, lowered our cost of financing and freed up capital to help pay down higher cost debt.
And over the remainder of 2021, we have eight additional deals with approximately $1.7 billion unpaid balance for potential resecuritizations.
Chimera's portfolio is currently structured to offer shareholders an attractive dividend relative to our low recourse leverage.
As we near the post pandemic world, Chimera is well positioned to grow our portfolio with additional income opportunity.
I'll review Chimera's financial highlights for the first quarter of 2021.
GAAP book value at the end of the first quarter was $11.44.
GAAP net income for the first quarter was $139 million or $0.54 per share.
On a core basis.
net income for the first quarter was $87 million or $0.36 per share.
Economic net interest income for the first quarter was $136 million.
For the first quarter, the yield on average interest earning assets was 6.4%.
Our average cost of funds was 3.3%.
And our net interest spread was 3.1%.
Total leverage for the first quarter was 3.6:1, while recourse leverage ended the quarter at 1.1:1.
For the quarter, our economic net interest return on equity was 15%.
And our GAAP return on average equity was 17%.
Expenses for the first quarter, excluding servicing fees and transaction expenses were $18.6 million, up slightly from last quarter.
That concludes our remarks.
| compname reports q1 earnings per share of $0.54.
q1 gaap earnings per share $0.54.
q1 core earnings per share $0.36.
qtrly book value of $11.44 per common share.
|
Gary will discuss asset quality and provide further detail on our loan portfolios.
Vince will address our financial results and cover relevant trend.
I will then provide an update on our digital platforms and physical operation and, finally, discuss our organization's $250 million commitment and continuing initiative to address economic and social inequity in our community.
As a company, and on a personal level, we've endured significant challenges and change this year.
Our thoughts are with those who have been impacted by the pandemic and unrest in our community.
I am proud of how our company has rallied in support of our customers and neighborhoods where we operate.
The resolve to work together to emerging stronger and united in our demand for a more successful future for all of our constituents.
F.N.B. second quarter results increased significantly.
Operating earnings per share increased 53% to $0.26, which included an additional $17 million or $0.04 per share of COVID-19 reserve bill in the quarter.
PPNR increased to $130 million.
Core revenue trends remained solid throughout a challenging interest rate environment with total revenues increasing 6% annualized to $306 million.
And total assets growing nearly $3 billion to end June at $38 billion.
Compared to the first quarter, loans and deposits increased $2.3 billion and $3.6 billion or 10% and 15% respectively.
On a linked quarter basis, double-digit second quarter loan and deposit growth were supported by organic commercial production and originating nearly 20,000 PPP loans totaling $2.6 billion.
Our fee-based businesses performed exceptionally well with capital markets and mortgage banking establishing revenue records of $13 million and $17 million respectively.
Our efficiency ratio was 53.7% and operating expenses were well controlled, down 3% from the first quarter.
Even though there has been disruption across our footprint due to COVID-19, we've still seen good commercial loan origination activity across most of the footprint.
This is a testament to our team to continue to serve our clients and meet their borrowing needs, while dealing with the challenging operating environment.
The strength in our balance sheet and ample liquidity enabled F.N.B. to support our clients' capital needs.
We continue to apply our consistent underwriting standards aligned with our strategy and overall risk profile as we evaluate business opportunities in the current climate.
On a linked quarter basis, total average loans increased 9%, largely driven by growth in commercial loans of 14%.
Commercial line balances when compared to historical levels contracted as we saw much lower line utilization of 36%.
The utilization rate decreased as PPP funds were utilized to support working capital needs by many existing clients and economic activity declined during the period.
Commercial loan balances were also impacted by large corporate borrowers paying down bank credit facilities with increased liquidity in the bond market.
Average deposits increased 11% as we had solid organic growth in customer relationships.
The large inflow of deposits for PPP funding in government stimulus activities also occur.
As part of our business strategy, we have been focused on reducing the level of wholesale borrowings by continuing to gain depositors and expand existing relationships.
As a result, we were able to fully eliminate our overnight borrowing position, replacing it with customer deposit.
Non-interest bearing deposits were up $2.1 billion or 33% from the prior quarter-end.
Looking at June 30 spot balances, our loan to deposit ratio was 92%, including the funded PPP loans.
which positions us more favorably in the current rate environment.
Growing non-interest-bearing deposits has been integral -- has been an integral part of our long-term strategy, and we've consistently been able to grow organically through various interest rate environment, further strengthening our overall funding mix.
In fact, transaction deposits have increased $4 billion or 20% from March 31 and now represent 85% of total deposits, which compares very favorably to 79% five years ago.
With the Fed taking near-term rate increases off the table, there is opportunity to offset net interest income headwind by continuing to reduce deposit costs.
As we have stated previously, continuing to grow our fee-based businesses is essential to diversifying our revenue sources and to mitigate pressure on net interest income in an extended low rate environment.
With interest rate expectations now reflecting lower for longer, it is important we continue to build on our recent success in capital markets, mortgage banking, wealth management and insurance.
This quarter's record mortgage banking income of $17 million better reflects the fundamentals in the results without MSR impairment as the mortgage banking business set a new production record for the quarter of $869 million.
Turning to our participation in the Paycheck Protection Program.
I would first like to recognize our teams for their support of our customers and communities throughout these extraordinary circumstances.
Our employees have worked tirelessly to ensure businesses receive critical funding during a time when regions within our footprint experienced extended shut down, particularly in our metro markets in Pennsylvania and the Mid-Atlantic, and when many borrowers turned from larger banks to F.N.B. to accommodate their needs.
As part of the PPP origination process, each borrower opened an F.N.B. account, which supports our efforts to bring in new households.
Looking ahead, we are optimistic that borrowers will be able to deploy these funds in businesses around the footprint we open.
As an organization, we leveraged our technology infrastructure and expertise already in place to quickly adapt and accommodate our customers in a challenging remote environment.
Coupled with significant financial aid and employee volunteerism in our communities, our efforts have helped tens of thousands of small businesses during the pandemic, and supported the retention of hundreds of thousands of jobs.
From the beginning of the COVID-19 crisis, F.N.B. has upheld consistent volumes of total transactions -- deposit transactions by providing customers with a seamless transition from physical to online and mobile engagement.
This was made possible from the significant investment we've committed to digital -- our digital and online platforms over the last decade.
In fact, the appointment setting feature on our new website that went live in January enabled F.N.B. to continue serving clients safely in our branches throughout the crisis.
We grew from 26 monthly appointments in January to 2,700 appointments in April.
the rapid shift to remote services accelerated the enhancements to our digital strategy, and we're already under way, and minimized disruption for our customers.
But the operating environment remains in a constant state of change, we will continue our innovative approach to better serve our customers.
I will now share some updates regarding our operations and delivery teams.
Together with the uptick in online appointment setting, our websites increased -- our website increased traffic by millions of daily visitors.
As we are deepening relationships with customers throughout our digital capabilities, we are also generating significant opportunities.
By synchronizing physical and digital customer experience, we can take customers to utilize a single product and broaden the relationship to improve products such as savings, credit card, private banking, mortgage, wealth management and insurance.
At the end of the day, it provides tremendous value to the customer to have multiple product relationships within F.N.B. on a single platform connected through digital capabilities.
Overall, the acceleration of digital and remote banking volume demonstrates our versatile and integrated multi-channel strategy.
Customers have been more active in F.N.B.'s mobile and online channels with monthly average users up by 50,000 in both categories compared to the average for 2019.
While our customer adoption rates for online and mobile have accelerated, our customers have still expressed the strong desire to conduct business within our branches.
As an essential business, it is important for F.N.B. to remain available and accessible.
Our business continuity team in collaboration other units, including data science, human resources and retail banking, developed a monitoring system in which we can evaluate data related to the healthcare prices on a locational basis.
On July 13th, 2020, we reopened the majority of our branch lobbies customers adhering to the most stringent safety measures, including social distancing and cleaning protocols as we begin to move forward to the next phase of operation.
During the second quarter, our credit portfolio continued to perform in a satisfactory manner as the COVID-19 global pandemic continues to evolve.
Our credit metrics have held ground in this challenging economic environment, which I will cover with you in greater detail on both a GAAP as well as a non-GAAP basis, exclusive of our loan volume funded under the PPP program.
I'll also provide some updates on the status of our loan deferrals and the steps we are taking to manage our book, particularly those borrowers tied to COVID-sensitive industries.
Let's now review the quarterly results.
The level of delinquency ended the second quarter at 92 basis points on a GAAP basis, down 21 bps over the prior quarter as early stage delinquencies returns to more normalized levels.
On excluding PPP loan volume, level of delinquency would have ended the quarter at 1.02%, down 11 bps from the prior quarter.
Level of NPLs and OREO totaled 72 basis points at June, an 8 basis point increase linked quarter, while the non-GAAP level was 80 bps, excluding PPP.
The migration was due primarily to a few previously rated credits that were further impacted by the current COVID environment that we've proactively moved to non-accrual during the quarter.
Of our total NPLs at June, 48% of these borrowers continue to pay as agreed and are current.
Net charge-offs remained at a good level at $8.5 million for the quarter or 13 basis points annualized, resulting in a year-to-date level of 12 basis points.
Provision expense totaled $30 million in the quarter, which includes additional build for macroeconomic conditions tied to COVID-19.
Inclusive of the Q1 economic-driven build, our COVID-related provision for the first half of the year totaled $55 million.
Our ending reserve stands at 1.4% and, excluding PPP volume, the non-GAAP ending ACO totals 1.54%, representing a 10 basis point increase over the prior quarter, resulting in NPL coverage of 215%.
When including the acquired unamortized loan discounts, our coverage, excluding PPP volume, is 1.87%.
Under the preliminary severely adverse DFAST scenario, the current reserve position, inclusive of unamortized loan discounts, would cover 78% of stressed loss.
As the pandemic continues to pressure the global economy, our approach to managing the book in this COVID environment remains in line with what I communicated on last quarter's call.
We continue to conduct thorough borrower level reviews within our commercial book to attract key performance indicators.
For those that operate in economically sensitive industries or that have otherwise been impacted by the pandemic.
These ongoing targeted portfolio reviews allows our credit teams to quickly identify and proactively address emerging risks at the borrower, industry or overall portfolio level.
Additionally, we continue to conduct a series of scenario analysis and stress test models under our existing allowance and DFAST frameworks as we work through this challenging environment.
As it relates to our borrowers requesting payment deferral, 10% of our loan portfolio, excluding PPP loans, were approved during the initial deferment request window.
Of these deferments, 98.4% were current and in good standing prior to the pandemic.
Of the remaining 39 million, 12 million is already on non-accrual.
Our request for initial deferrals are essentially non-existent, and we have only seen a small amount of second request for payment deferral at this time.
That said, we are carefully monitoring our credit portfolio and remain vigilant to identify borrowers that could face further pressure during uncertain economic conditions.
This approach allows us to quickly identify and manage risk in the portfolio, while still meeting the credit needs of our customers.
The composition of the portfolio remains diverse and well balanced across several product lines, geographies and industries.
As shown on Slide 10, our exposure at the highly sensitive industries remains low at 3.8% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services and energy space.
And the level of payment deferrals granted to these borrowers remains at 38%.
Additionally, we have been tracking our retail-secured IRE portfolio closely to assess the emerging challenges on this asset class, as well as the nature of the tenants' operations and insulation from certain economic strain as essential businesses.
Our weighted average LTV position in this book remains strong at 65%.
In summary, we continue to manage our credit portfolio through this difficult economic environment by drawing on our strong credit fundamentals and our risk management strategies, which we continue to enhance as the COVID situation plays out.
Considering these challenges, our portfolio is in a satisfactory position entering the second half of the year.
Realizing the uncertainty of the economic environment as we look ahead, we continue to draw on the strength of our experienced banking teams to manage through this environment as we move into the latter half of the year.
I would like to recognize our teams for their tireless efforts as we continue to work through this challenging environment.
Today I will review the second quarter results and trends in our operating environment, and then discuss our capital management approach and current position.
I'll note that our tangible common equity levels entered the year at strongest position we've had in nearly two decades, and we are comfortable with our current capital position.
Looking at Slide 5, GAAP earnings per share for the second quarter is $0.25, excluding $0.05 related to significant or outsized items.
This included $17.1 million of COVID-19 reserve build and $2 million of COVID-19-related expenses.
The TCE ratio ended June at 6.97%, reflecting these items as well as a 52-basis-point temporary impact for the $2.5 billion in net PPP loan balances at June 30th.
Without the PPP balances, the TCE ratio would have been 7.49%.
Additionally, our CET1 estimate ended the quarter at 9.4% compared to 9.1% at March 31st and 9.4% at the end of 2019, as PPP loans carry a 0% risk weighting for risk-based capital purposes.
Pretax pre-provision earnings increased to $130 million, providing more than adequate earnings power as we declared our third quarter dividend of $0.12 earlier this week.
With a dividend payout ratio of 48% in the second quarter, they're well below historical levels of previous payout ratios.
I'll touch on our capital management approach in more detail later on my comments.
Turning to the balance sheet on Slide 14, the key theme is the impact of $2.5 billion in net PPP loan, as high as [Phonetic] 9.5% of total loans and leases at June 30th.
PPP was the primary driver in the linked-quarter average increase of $2.1 billion or 9% as well as strong organic activity across most of the commercial footprint.
Our commercial line utilization ended June at 36%, below historical levels, and down from the mid-40%s spot utilization rate at the end of the first quarter as we clearly saw some customer borrowing activity shift over to the PPP and our large corporate borrowers access to capital markets to reduce their bank debt.
Average consumer loans were essentially flat with direct installment loans increased $65 million from 14% annualized and residential mortgage increased 6% annualized, two bright spots to continue to perform well.
The increases in direct installment mortgage loans were offset by continued declines in indirect auto loans and consumer lines, two loan classes heavily affected by the pandemic.
Continuing down to Slide 14, average deposit increased to $2.7 billion or 11% on a linked quarter basis, led by $2.9 billion or 15% of transaction deposit growth.
Transaction deposits equaled 85% of total deposits.
As our managed decline in CDs continued, transaction deposit balance has benefited from stimulus programs and PPP customer-driven inflows.
Non-interest-bearing, interest-bearing demand, and savings account balances each increased significantly, up $1.8 billion, $854 million, $226 million respectively.
Now focusing on the income statement on Slide 15.
Compared to the first quarter, net interest income totaled $228 million, a decrease of $4.7 million or 2% as loan and deposit growth mostly offset the impact from lower rates.
The net interest margin narrowed 26 basis points to 2.88%, primarily driven by a full quarter impact from March action, the lower the target Fed fund range to zero to 25 basis points.
Additionally, average one-month LIBOR fell to 36 basis points from 141 in the prior quarter.
Total yield on average earning assets declined 58 basis points to 3.54%, reflecting lower yield on variable and adjustable rate loans due to the lower interest rate environment and the impact of the PPP balances.
Total cost of funds decreased to 67 basis points from 101 basis points as cost on interest-bearing deposits were reduced 37 basis points.
Slide 16 and 17 provide details for non-interest income and expense compared to the first quarter.
Non-interest income totaled $77.6 million, increasing $9.1 million or 13.3% as mortgage banking operations increased $17.6 million on a reported basis or $10.2 million excluding MSR impairments of $300,000 and $7.7 million respectively.
Mortgage production established a new quarterly record at $869 million, increasing $306 million or 55% from the prior quarter with large contributions from North Carolina and the Mid-Atlantic region.
Capital markets also set a new record of $12.5 million, increasing $1.4 million or 12.6% with strong contributions from interest rate derivative activity across the footprint.
As expected, service charges decreased $6.2 million or 20.5% due to noticeably lower transaction volumes in the COVID-19 environment.
Turning to Slide 17, non-interest expense totaled $175.9 million, a decrease of $19 million or 9.7%, including $2 million of expenses associated with COVID-19 in second quarter 2020, $15.9 million of outsized, unusual or significant expenses occurring in the first quarter.
On an operating basis, expenses declined $5.1 million or 2.9% compared to the first quarter of 2020 as we have realized lower variable expenses such as travel and business development and increased FAS 91 benefits, given the amount of loans originated in the second quarter.
Additionally, we recognized an impairment of $4.1 million from a second quarter renewable energy investment tax credit transaction.
The related tax credits were recognized during the quarter as a benefit to income tax.
The efficiency ratio improved significantly 53.7% compared to 59%.
Turning to recent trends on Slide 18, we continue to observe daily changes in external factors, including multiple aspects of potential economic recovery, changes in government programs and regulation changes over current programs.
Saying that, we are providing our current directional outlook for the third quarter based on what we know today, which is subject to change, as we all know.
We expect period end loans to increase low-single-digits from June 30th, assuming no forgiveness of PPP loans, given the SBA's current expected time for processing forgiveness applications.
While we expect deposits to decline from the second quarter 2020 levels based on an expectation that customers increase the deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits.
We expect third quarter net interest income to reflect the full impact of lower one-month LIBOR rates and variable rate loans, partially offset by a full quarter benefit of higher commercial loan balances, continued reductions in the cost of interest bearing deposits.
We expect positive trends in capital markets and mortgage banking, although lower than the record levels this quarter.
We expect service charges to increase and recent transaction volume trends continue.
We expect expenses to be stable, up slightly from the second quarter.
Lastly, we expect the effective tax rate to be around 17% for the full-year 2020.
For the remainder of my comments, I would like to discuss our risk-based capital position and overall management philosophy, given the current environment beginning on Slide 20.
We continue to be very comfortable with our capital ratios as they stand today with the benefit of entering this crisis from a position of strength.
As demonstrated in the new capital slides we have added to the deck, we have ample internal capital generation cushions for all of our capital ratios in relation to well-capitalized thresholds.
For example, for the total risk-based capital ratio fall below 11%, total capital would have to drop by $258 million, 7.9% of total capital of $3.3 billion.
Our risk-weighted assets will have to increase by $2.3 billion, which is 8.5% of total risk-weighted assets of $27.5 billion.
I could comment also that $258 million is in after-tax dollars.
On top of our capital position, we have a conservative bias in how we build reserves, especially given the consistent underwriting philosophy that's been in place for well over a decade.
With CET1 of $2.6 billion and an allowance for credit losses of $365 million and a remaining PCD discount of $77 million, we have a substantial base available to absorb credit losses.
To put that in context, our reserves plus remaining discount on previously acquired loans would cover 62 quarters of net charge-offs that averaged $7.1 million per quarter in the first half 2020.
This is before considering the $2.6 billion in CET1.
Another way to look at this is relative to severely adverse charge-offs in our last stress test.
Again, using $442 million in reserves plus remaining discount, we covered 75% of $586 million in charge-offs projected under the severely adverse scenario for a nine-quarter period.
If we put the $586 million in context, that compares to $64 million over nine quarters using the first half of 2020 net charge-offs or 9.2 times the current levels.
As far as dividend sustainability, we are governed by the Federal Reserve and the OCC.
From a Fed perspective, we currently pay out $39 million in common dividends and $2 million in deferred dividend for a total of $41 million per quarter.
The Fed fourth quarter test currently shows in excess of $153 million after paying out the third quarter dividend just declared.
From an OCC perspective, there are significant cushions to support the $46 million the bank is projected to pay up to the holding company.
Three-part [Phonetic] test shows a cushion of $913 million relative to net divided [Phonetic] profits, $517 million relative to net profits for the current year combined with retained net profits for the prior two years, cushions are both well-capitalized levels ranging from 228 basis points to 384 basis points.
In addition to looking at our capital position, it's important to consider PPNR generation.
Year-to-date PPNR of $236 million more than supports the incremental reserve build through the first six months of the year.
We generated ample capital to cover the preferred and common dividend, and our CET1 ratio was consistent with where we ended 2019 at 9.4%.
Earlier this week, we announced our third quarter dividend of $0.12.
Given the earnings level through the first half of 2020, you can see there is capacity to continue the return capital to shareholders.
Overall, our capital management philosophy is grounded in a conservative and consistent underwriting and credit management philosophy throughout varying economic cycles, supplemented with robust and comprehensive enterprise risk management, including very active credit monitoring processes.
Looking at everything we've managed through over the last few months, the efforts of our team has been nothing short of exceptional, through assisting our clients and communities in which we serve.
Recent events highlighting persistent inequities in our country have affirmed our important mandate to support those who are vulnerable and traditionally underserved.
As an organization, we continue to place a strong emphasis on being inclusive and demonstrated by our recent $250 million commitment to address economic and social inequity and low and moderate income and predominantly minority communities.
As we continue to deploy these investments, our shareholders will benefit as we have continued to prudently manage risk, liquidity and capital action to better position our company.
During the quarter, F.N.B. originated nearly $500 million in Paycheck Protection Program loan in low to moderate income in rural neighborhoods, assisting thousands of small businesses and employees.
Our success is a direct result of our banker's proactive outreach to over 100 organizations and non-profit entities that work directly with these communities.
This is just an example of how committing our resources this way leads to good business results.
As we look ahead to move into the next phase of COVID-19 recovery, we will continue to focus our response on four key pillars to meet the needs of each of our constituent.
The pillars are employee protection and assistance, operational response and preparedness, customer and community support, and risk management and actions taken to preserve shareholder value given the extreme challenges presented.
Due to these unprecedented conditions, our employees have consistently delivered superior experience for our customers.
In June, F.N.B. was ranked among the best banks in Ohio and North Carolina by Forbes and AdvisoryHQ respectively, a testament to the consistency of our customer-centric culture across our footprint.
The company was again named the Top Workplace in Northeastern Ohio for the sixth consecutive year by the Cleveland Plain Dealer.
This recognition, which is based solely on employee feedback, joined the list of nearly 30 such awards received over the past decade.
All of this has been made possible by our dedicated employees.
Our dedication to cultivating a superior culture directly translates into a better customer experience, greater financial performance and higher returns for our shareholders.
| compname reports second quarter 2020 earnings per share of $0.25.
compname reports second quarter 2020 earnings per share of $0.25, a 79% increase from prior quarter.
q2 earnings per share $0.25.
q2 operating earnings per share $0.26.
|
Today I'll provide third quarter highlights and an update to our strategic initiatives.
Gary will discuss asset quality and Vince will cover the financials.
Third quarter operating earnings per share of $0.26 reflects strong fundamental performance as we continue to have success across many business units, despite a challenging operating environment and provision expense totaling $27 million.
This quarter's performance reflects growth in average loans and deposits of 2% and 4% respectively, as well as continued strength in our fee-based businesses with strong contributions from capital markets activity and record mortgage banking income of $19 million.
On a linked-quarter basis, tangible book value per share increased $0.18 to $7.81, as we continue our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week.
In addition, our CET1 and TCE ratios increased meaningfully.
And after adjusting for the indirect loan sale CET1 improves almost 20 basis points to the strongest level in the Company's history.
Our bolstered capital base should provide us with increased flexibility to deploy capital in the best interest of the shareholders.
Return on tangible common equity was again peer leading at 14% and the efficiency ratio equaled 55%.
These results illustrate the resiliency of FNB's business model and are truly remarkable given the challenges presented and unique circumstances the industry is facing, amid the global pandemic.
I'm extremely proud of our team for going above and beyond to support our customers in this challenging macroeconomic environment.
Their hard work was critical to providing timely assistance to our impacted customers through the Paycheck Protection Program, by offering loan deferral options and consumer relief, as well as other programs to help clients manage their finances during these difficult times.
Customer feedback has been overwhelmingly positive, and we are encouraged by the low-single digit level of second loan deferral requests as a percentage of total loan as of October 15th, 2020.
Lower demand for second deferral request is indicative of the quality of our customer base, our consistent approach to credit risk management, and FNB's dedication to disciplined underwriting standards throughout various business cycles.
Our bankers and credit teams will continue to actively evaluate and work with COVID-19 impacted borrowers as they manage through their pandemic related disruption.
Earlier in the third quarter, our organization was recognized as a 2020 Standout Commercial Bank by Greenwich Associates, with FNB being one of only 10 banks in the country to be recognized for its response to the COVID-19 pandemic.
If you look at the credit metrics on FNB's COVID-19 sensitive sectors, we are favorably positioned to peers on a relative basis.
Our disciplined approach to underwriting and portfolio management ensures granularity, diversification and appropriate credit structure within our loan portfolio.
On the deposit side, organic growth and government programs have resulted in increased liquidity in our customer base.
Looking at the recent FDIC data compared to 2019, FNB has successfully gained share and fortified top market share position in Pittsburgh, Baltimore, Cleveland, Charlotte, Raleigh and the Piedmont Triad, with our largest market, Pittsburgh, surpassing the $8 billion mark in total deposits.
Additionally, as of June 30 2020, FNB ranked in the top 10 in retail deposit market share across seven major MSAs, and when looking at our footprint in total, FNB has a top 10 market share in more than 80% of the 53 markets categorized by the FDIC.
Compared to June 2019, FNB continued to gain market share as total deposits increased nearly $5 billion or over 20% overall.
If you look back over the last six months, we've added thousands of new households and more than $4 billion in total deposits.
Diving deeper by examining the regional market share trends, FNB has five MSAs with greater than a $1 billion in deposits and 16 MSAs with greater than $500 million in deposits.
These market positions reflect successful execution of our deposit gathering strategy centered on attracting low cost deposits through household acquisition and deepening commercial relationships, thereby enabling FNB to eliminate our overnight borrowing position.
The surge in core deposits have strengthened our overall funding mix as the loan-to-deposit ratio further improved to 89.1%.
We continue to be absolutely focused on generating non-interest bearing and transaction deposit growth, given the impacts of the expected lower for longer interest rate environment.
To complement our deposit gathering strategy, we are focused on supporting our customers and expanding our relationships as their primary capital provider with value-added products and services, while staying true to our credit culture.
Looking ahead to the fourth quarter, we are encouraged by the current position of the balance sheet with ample liquidity to support growth opportunities and an expanded capital base.
Additionally, with our PPP efforts, we've added more than 5,000 prospects for non-customer PPP lending to pursue as long-term relationships.
Given our success and the quality of our bankers, we have firmly established ourselves as a formidable competitor across our seven state footprint, providing competitive financial products and services supported by technology, investment and the best personnel.
During the third quarter, our credit portfolio continued to perform in a satisfactory manner as we continue to work through this challenging economic environment.
Our key credit metrics have held up well with some slight increases noted during the quarter related to the COVID environment that is largely tied to borrowers in the hardest hit industries, which we have built loan loss reserves for accordingly.
I will now walk you through our results for the third quarter followed by an update on our loan deferrals and some of the proactive steps we are taking to manage the book.
Let's now discuss some key highlights.
During the third quarter, delinquency came in at a good level of 1.07%, an increase of 15 bps over the prior quarter that was predominantly COVID related tied to mortgage forbearances, while the commercial portfolio remained relatively level with the prior quarter.
When excluding PPP loan volume, delinquency would have ended the quarter at 1.18%.
The level of NPLs and OREO totaled 76 basis points, a 4 basis point increase linked-quarter, while the non-GAAP level excluding PPP loans stands at 85 bps.
This slight migration is attributable to some COVID impacted credits that were placed on non-accrual during the quarter, which is in line with our proactive risk management measures that we have in place to help identify potential pockets of softness.
Of our total non-performing loans at September 30th, 50% continue to pay on a current basis.
Net charge-offs came in at $19.3 million for the quarter, or 29 basis points annualized with the increase largely due to write downs taken against a few COVID impacted credits that were already showing weakness entering the pandemic.
On a year-to-date basis, our GAAP net charge-offs stood at 18 basis points through the end of the third quarter.
Provision expense totaled $27 million, which includes additional build for COVID related credit migration, driven by the hotel and restaurant portfolios, bringing our total ending reserve to 1.45%.
When excluding PPP loan volume, the non-GAAP ACL stands at 1.61%, a 7 basis point linked-quarter increase.
Our NPL coverage remains favorable at 210% at quarter-end, which reflects the reserve build for the COVID driven credit migration during the quarter.
When including the acquired unamortized loan discounts, our reserve position excluding PPP loan volume is 1.87%.
We continue to conduct a series of scenario analyses and stress test models under our existing allowance and DFAST frameworks as we work through this COVID impacted environment.
Under the final 2020 severely adverse DFAST scenario, the current reserve position, inclusive of unamortized loan discounts, would cover 77% of stressed losses, which does not include losses already incurred year-to-date.
As it relates to our borrowers requesting payment deferral 3.4% of our total loan portfolio, excluding PPP balances were under a COVID related deferment plan at quarter-end with remaining first requests representing 1.4% of the portfolio, and 2% being second deferrals.
As of October 16th, total deferrals have further declined by approximately $100 million to stand at 2.9%.
We continue to carefully monitor the credit portfolio as the pandemic evolves and borrowers work to overcome the uncertainty and challenging conditions that many currently face.
Our exposure to highly sensitive industries remains low at 3.5% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services, and energy space with deferrals granted to these borrowers totaling 29%, driven primarily by the hotel portfolio as we continue to work through these hardest hit sectors.
During the quarter, we conducted another thorough deep dive credit review of our commercial borrowers operating in these economically sensitive industries, which was led by our seasoned and experienced credit officer team.
Our portfolio review covered over 80% of our existing credit exposure in COVID sensitive portfolios, including travel and leisure, food services and retail related C&I and IRE.
As part of our review process, we assess the adequacy of cash flow, strength of the sponsors backing the deals, the collateral position and direct feedback from borrowers about their expected short and long-term outlooks.
This level of review has helped us to quickly identify potential credit deterioration and take appropriate action as we did during Q3 to better position us for the quarters ahead should this challenging economic environment continue.
In closing, we are pleased with the position of our portfolio entering the final quarter of 2020 relative to where we are in this COVID impacted economic environment.
Our credit metrics have held up well and continue to trend at satisfactory levels as we remain focused on proactively identifying risk in the portfolio and aggressively working through it.
The experience and depth of our credit and lending teams have been paramount to our success, and I would like to recognize these groups for their tireless efforts each and every day as we work through these challenging conditions.
Now I'll discuss our financial results and review the recent actions taken that have enhanced our overall balance sheet positioning, reduced interest rate risk and boosted capital levels.
As noted on Slide 4, third quarter operating earnings per share totaled $0.26, consistent with the prior quarter.
The level of PPNR remains solid and we continue to proactively manage our overall reserve position with provision expense totaling $27 million.
We feel good about the strength of the balance sheet and our current level of reserves based on what we know today after a comprehensive review of our loan portfolio.
Additionally, the quarter's results reflect the continued execution of our strategies focused on prudent risk management, supported by our recent actions.
For example, during the third quarter, we took proactive measures to strengthen capital and reduce credit risk.
We signed an agreement to sell $508 million of lower FICO indirect auto loans, closing Q4 with the proceeds being used to pay down a similar amount of high cost federal home loan bank borrowings, of which $415 million with a rate of 2.59% was prepaid this quarter for breakage fee of $13.5 million.
We also sold Visa Class B shares at a $13.8 million gain to fully mitigate the capital impact for the FHLB breakage costs.
Resulting transactions should add roughly 17 basis points to CET1, improve credit risk and be neutral to run rate earnings.
We continue to strengthen risk-based capital levels with our CET1 ratio increasing to 9.6% at the end of the quarter.
As I just noted, the pro forma CET1 ratio would increase by another 17 basis points after considering the impact of the upcoming loan sale.
The pro forma CET1 ratio marks the highest level in our history and will be in line with peer median levels from the most recent filings.
Our improved capital levels give us additional flexibility that is important at this stage of the economic cycle.
Looking at our TCE ratio, we ended September comfortably above 7%, increasing to 7.2%, which translates into 7.7% when excluding PPP loans.
On the expense front, we are progressing well toward achieving our 2020 cost savings goal, reducing run rate expenses via optimizing our branch network and reducing operational costs through ongoing vendor contract renegotiations.
On the revenue front, we are leveraging our new geographies to drive market share gains and fee-based businesses, notably mortgage banking, capital markets, wealth and insurance to offset net interest margin pressure in the current low rate environment.
Let's now shift to the balance sheet.
Limiting [Phonetic] spot balances, total loans were relatively flat compared to the prior quarter, excluding the transfer of $508 million of indirect auto loans to held for sale.
Looking ahead, it's important to focus on the position of the balance sheet after the loan sale and excluding PPP.
We remain focused on driving organic growth as the $2.5 billion in PPP loans enter the forgiveness process and those balances wind down in the future.
Compared to the second quarter, average deposits increased 4%, primarily due to 6% growth in interest bearing deposits and 7% growth in non-interest-bearing deposits.
It was partially offset by 6% planned decrease in time deposits.
As Vince noted, core deposit growth generated by building on our commercial and consumer relationships remains a focus for us, as we eliminated our overnight borrowing position and have ample liquidity to fund future growth objectives.
Let's now look at non-interest income and expense.
Non-interest income reached a record $80 million, increasing 3% linked-quarter, primarily due to significant growth in mortgage banking as well as strong contributions from wealth, insurance, and capital markets.
Mortgage banking income increased $2.3 million as sold production increased 9% from the prior quarter with sizable contributions from the Mid-Atlantic and Pittsburgh regions and a meaningful improvement in gain on sale margins.
Wealth management and insurance revenues each increased 10%.
These segments benefiting from increased organic commercial growth and greater activity in the Mid-Atlantic and Carolina regions.
Capital markets revenue, while down from a record level last quarter, was again at a very good level at $8.2 million with these products continuing to remain an attractive option for borrowers, given the environment.
Termination of $415 million of higher rate Federal Home Loan Bank borrowings resulted in a loss on debt extinguishment and related hedge termination costs of $13.3 million reported in other non-interest income.
Offsetting these charges was the $13.8 million gain on the sale of the bank's holdings of Visa Class B shares also reported in other non-interest income.
Turning to Slide 9, non-interest expense totaled $180.2 million, an increase of $4.3 million or 2.4%, which included $2.7 million of COVID-19 expenses in the third quarter compared to $2 million in the second quarter.
Excluding these COVID-19 related expenses, non-interest expense increased $3.6 million or 1.9%, primarily related to higher salaries and employee benefit expense; higher production related commissions; lower loan origination salary deferrals, given the significant PPP loan originations in the prior quarter; and an extra operating day in the third quarter.
FDIC insurance decreased $1.3 million due primarily to a lower FDIC assessment rate from improved liquidity metrics.
The efficiency ratio equaled 55.3% compared to 53.7% which is reflective of the higher production related expenses, noted previously.
Looking at revenue, net interest income totaled $227 million, stable compared to the second quarter as loan and deposit growth mostly offset lower asset yield on variable rate loans tied to the short end of the curve.
The net interest margin decreased 9 basis points to 2.79% as the total yield on earning assets declined 20 basis points to 3.34%, reflecting lower yields on fixed-rate loans originated at lower rates given the interest rate environment and the impact of a 19 basis point decline in one month LIBOR.
The benefit of our efforts to optimize funding cost was evident in a 17 basis point reduction in the cost of interest bearing deposits which helped to reduce our total cost of funds to 56 basis points, down from 67 basis points.
We're very pleased with the performance of our fee-based businesses as they have supported revenue growth amid the current low interest rate environment, demonstrating the importance of having diversification.
Turning to our fourth quarter outlook, we expect period-end loans to be generally flat at September 30th, assuming no forgiveness of PPP loans, given the current timing expectations for the SBA for process requests.
While we expect deposits to decline from third quarter levels, that's based on an expectation that customers increase their deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits.
I'll note that our assumptions do not include any further government stimulus programs or actions.
We expect fourth quarter net interest income to be down slightly from third quarter, inclusive of the impact of the loan sale.
We are not assuming any PPP forgiveness in the fourth quarter.
Absent the loan sale, we would have expected net interest income in the fourth quarter to be flattish.
We expect continued strong contributions from fee-based businesses with a similar level in capital markets and some reduction from record levels of mortgage banking.
We expect service charges to increase, continuing to rebound, given recent transaction volume trends.
Looking at fee income overall, we expect total non-interest income to be in the mid to high $70 million range.
We expect expenses to be stable to up slightly from the third quarter excluding COVID-19 expenses of $2.7 million.
We expect the effective tax rate to be around 17% for the full year of 2020.
Lastly, we are in -- we are currently in the early stages of budgeting for 2021.
Similar to 2019 and 2020, we will, again, seek to have meaningful cost saving initiatives, building on consecutive years of taking $20 million out of our overall cost structure to support strategic investments and manage the impact of the low interest rate environment.
It's taking considerable effort to bring our efficiency ratio down from over 60% in the past to the low-to-mid 50% levels we have been operating at currently.
In addition to the scale gain from prior acquisitions, we have consolidated close to 95 branches in the past five years, which is about 25% of our current branch network.
We have always been disciplined managers of costs, and it will be an important driver to return us to a position of generating positive operating leverage and mitigate growth and expenses in 2021.
We will share more details when we provide 2021 detailed guidance in January.
Overall, we are pleased with the performance of the quarter in a very challenging environment.
Next, Vince will give an update on some of our strategic initiatives in 2020.
Now, I'd like to focus on our progress regarding key strategic initiatives, since our last call.
In our Consumer Bank, we continue to focus on optimizing our delivery channels.
The deployment of our new website has translated into higher digital adoption through increased website traffic, increased mobile deposits, and exponential growth in the number of online appointments.
In the current environment, customer activity trends continue to shift toward digital channels with mobile enrollment up 40% compared to 2019 averages.
In fact, we have seen both monthly average mobile and online users increase by 50,000 each compared with the 2019 average levels.
Regarding website traffic, monthly visitors are up nearly 70%.
Looking at our physical delivery channel, we continue to execute our established Ready program to optimize our branch network, which included more than 60 consolidation since May of 2018 making FNB one of the more active banks for branch consolidation.
We will continue to thoroughly evaluate additional consolidation opportunities as well as select de novo expansion across our footprint as consumer behaviors evolve.
We recently announced plans to develop additional de novo locations, which will enhance our retail strategy and support our corporate banking efforts in these attractive new markets.
For example, our Charleston branches are performing exceptionally well with nearly $50 million of deposit growth compared to 2019 and these branches are currently ranked among the upper quartile for performance compared to FNB's entire retail network.
This consumer growth works in tandem with our successful corporate banking efforts, as the Charleston region has grown nicely with our South Carolina commercial loan balances approaching $200 million at the end of September.
We recently brought the Wholesale Bank and respective credit teams back into the offices on a rotational basis as we remain steadfast in supporting our customers while building momentum to carry into the next year.
Given the impact from the government stimulus programs, customers have increased liquidity with lower commercial line utilization rate, a more normal environment offers upside moving into 2021.
Our model is built on local decision-making and high touch relationship-based approach, coupled with consistent investment in technology.
This has served us well during the pandemic where our local bankers are in the market and working closely with our customers.
As we built out certain high value fee-based businesses such as treasury management and capital market we've embedded local specialists across all markets to support our commercial banker's efforts.
During this pandemic where travel, physical mobility, and face-to-face interaction is limited, having well informed decision makers directly located in our markets enables FNB to best support our customers.
Together with our efforts in the wholesale bank, FNB has also benefited from our long-term consumer strategy Clicks-to-Bricks, by investing heavily in our digital platform.
One key element necessary for FNB to continue to deliver attractive returns for our shareholders is our commitment to our employees.
I'm pleased to share that FNB was included for a tenth consecutive year as a Greater Pittsburgh Area top workplace by the Pittsburgh Post-Gazette, signifying the strength of our culture with a decade of excellence and consistency.
These results benefit our shareholders and we would like to recognize the hard work and dedication of all of our employees who have made these results possible.
| q3 non-gaap earnings per share $0.26 excluding items.
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Also on the call are other members of the management team.
Materials supporting today's call are available at www.
Actual results could differ materially from current expectations.
Important factors that could cause different results are set forth in our SEC filings.
Please read these carefully.
I hope of all you and loved ones are staying healthy safe.
Edison International reported core earnings per share of $0.94 compared to $1 a year ago.
However, this comparison is not meaningful because SCE did not receive a final decision in track 1 of its 2021 General Rate Case during the quarter.
As many of you are aware, a proposed decision was issued on July 9th.
The utility will file its opening comments later today and reply comments on August 3rd.
While Maria will cover the PD in more detail, our financial performance for the quarter, and other financial topics, let me first give you a few observations, which are summarized on page 2.
The PD's base rate revenue requirement of $6.9 billion is approximately 90% of SCE's request.
The primary drivers of the reduction are lower funding for wildfire insurance premiums, vegetation management, and depreciation.
The main reduction to SCE's 2021 capital forecast was for the Wildfire Covered Conductor Program.
Excluding wildfire mitigation-related capital, the PD would approve 98% of SCE's 2021 capital request, much of which was uncontested.
The PD also notes that wildfire mitigation is a high priority for the state and the Commission.
The PD supports critical safety and reliability investments and provides the foundation for capital spending and rate base through 2023.
We believe it is generally well-reasoned, but it has some major policy implications that are fundamentally inconsistent with where the state is headed.
SCE's CEO, Kevin Payne, addressed these implications well during oral arguments earlier this week, and the utility will elaborate on them in its opening comments, which are outlined on page 3.
The largest area of concern is the significant proposed cut to SCE's Wildfire Covered Conductor Program.
This is SCE's paramount wildfire mitigation program and the utility's comments will focus on ensuring the program's scope is consistent with the appropriate risk analyses, state policy, and achieving the desired level of risk mitigation.
The proposed reductions would deprive customers of a key risk reduction tool, so SCE is advocating strongly for a balanced final decision.
We believe additional CPUC-authorized funding for SCE's covered conductor deployment is warranted to protect customers' and communities' vital interests and achieve the state's objective for minimizing wildfire risk.
As noted in prior discussions, SCE has prioritized covered conductor and other wildfire mitigation activities to urgently reduce wildfire risk.
A scorecard of SCE's wildfire mitigation plan progress is on page 4 of the deck.
We believe that through the execution of the WMP and other efforts, SCE has made meaningful progress in reducing the risk that utility equipment will spark a catastrophic wildfire.
Page 5 provides a few proof points of how SCE believes it has reduced wildfire risk for its customers.
First, circuits with covered conductor have experienced 69% fewer faults than those without, which demonstrates the efficacy of this tool.
In fact, on segments where we have covered the bare wire, there has not been a single CPUC-reportable ignition from contact with objects or wire-to-wire contact.
Second, where SCE has expanded vegetation clearance distances and removed trees that could fall into its lines, there have been 50% fewer tree or vegetation-caused faults than the historic average.
Lastly, since SCE began its high fire risk inspection program in 2019, it has found 66% fewer conditions requiring remediation on the same structures year-over-year.
These serve as observable data points of the substantial risk reduction from SCE's wildfire mitigation activities.
The utility will use the tools at its disposal to mitigate wildfire risk.
This includes deploying covered conductor at a level informed by the Final Decision, augmented by using Public Safety Power Shutoffs, or PSPS, to achieve the risk reduction originally contemplated for the benefit of customers.
The PD also included comments on the topic of affordability.
We agree that affordability is always important and must be weighed against the long-term investments in public safety.
I will highlight that SCE's rates have generally tracked local inflation over the last 30 years and have risen the least since 2009 relative to the other major California IOUs.
Currently, SCE's system average rate is about 17% lower than PG&E's and 34% lower than SDG&E's, reflecting the emphasis SCE has placed on operational excellence over the years.
While we recognize that the increases in the next few years, tied to the investments in safety for the communities SCE serves are higher than this historical average, SCE has demonstrated its ability to manage rate increases to the benefit of customers.
Underfunding prudent mitigations like covered conductor is penny wise and pound foolish, as it may ultimately lead to even greater economic pain and even loss of life for communities impacted by wildfires that could have been prevented.
An active wildfire season is underway right now, and I would like to emphasize SCE's substantial progress in executing its WMP.
Through the first half of the year, SCE completed over 190,000 high fire risk-informed inspections of its transmission and distribution equipment, achieving over 100% of its full year targets.
The utility also continues to deploy covered conductor in the highest risk areas.
Year-to date, SCE installed over 540 circuit miles of covered conductor in high fire risk areas.
For the full year, SCE expects to cover at least another 460 miles for a total of 1,000 miles deployed in 2021, consistent with its WMP goal.
Additionally, SCE is executing its PSPS Action Plan to further reduce the risk of utility equipment igniting wildfires and to minimize the effects on customers.
SCE is on target to complete its expedited grid hardening efforts on frequently impacted circuits and expects to reduce customer minutes of interruption by 78%, while not increasing risks, assuming the same weather conditions as last year.
To support the most vulnerable customers living in high fire risk areas when a PSPS is called, the utility has distributed over 4,000 batteries for backup power through its Critical Care Back-Up Battery program.
We believe California is also better prepared to combat this wildfire season.
The Legislature has continued to allocate substantial funding to support wildfire prevention and additional firefighting resources.
Just last week, the state announced that CAL FIRE had secured 12 additional firefighting aircraft for exclusive use in its statewide response efforts, augmenting the largest civil aerial firefighting fleet in the world.
SCE is also supporting the readiness and response efforts of local fire agencies.
In June, SCE contributed $18 million to lease three fire-suppression helicopters.
This includes two CH-47 helitankers, the world's largest fire-suppression helicopters, and a Sikorsky-61 helitanker.
All three aircraft have unique water and fire-retardant-dropping capabilities and can fly day and night.
In addition, a Sikorsky-76 command and control helicopter, along with ground-based equipment to support rapid retardant refills and drops, will be available to assist with wildfires.
The helitankers and command-and-control helicopter will be strategically stationed across SCE's service area and made available to various jurisdictions through existing partnerships and coordination agreements between the agencies through the end of the year.
We also appreciate the strong efforts by President Biden, Energy Secretary Granholm, and the broader Administration.
I was pleased to join the President, Vice President, cabinet members, and Western Governors including Governor Newsom for a virtual working session on Western wildfire preparedness last month.
The group highlighted key areas for continued partnership among the Federal government, states, and utilities, including land and vegetation management, deploying technology from DOE's national labs and other Federal entities, and enabling response and recovery.
Let me conclude my comments on SCE's wildfire preparations for this year by pointing out a resource we made available for investors.
We recently posted a video to our Investor Relations website featuring SCE subject matter experts discussing the utility's operational and infrastructure mitigation efforts and an overview of state actions to meet California's 2021 drought and wildfire risk, so please go check it out.
Investing to make the grid resilient to climate change-driven wildfires is a critical component of our strategy and just one element of our ESG performance.
Our recently published Sustainability Report details our progress and long-term goals related to the clean energy transition and electrification.
In 2020, approximately 43% of the electricity SCE delivered to customers came from carbon-free resources, and the company remains well-positioned to achieve its goal to deliver 100% carbon-free power by 2045.
SCE doubled it's energy storage capacity during this year, and continues to maintain one of the largest storage portfolios in the nation.
We have been engaged in Federal discussions on potential clean energy provisions and continue to support policies aligned with SCE's Pathway 2045 target of 80% carbon-free electricity by 2030.
However, electric affordability and reliability must be top of mind as we push to decarbonize the economy through electrification.
The dollars needed to eliminate the last molecule of CO2 from power generation will have a bigger impact when spent instead on an electric vehicle or heat pump.
For example, the utility is spending over $800 million to accelerate vehicle electrification across its service area, that's a key component to achieve an economywide net zero goal most affordably.
Recently, SCE opened its Charge Ready 2 program for customer enrollment.
This program is going to support 38,000 new electric car chargers over the next 5 years, with an emphasis on locations with limited access to at-home charging options and disadvantaged communities.
We are really proud that Edison's leadership in transportation electrification was recently recognized by our peers with EEI's Edison Award, our industry's highest honor.
SCE has been able to execute on these objectives, while maintaining the lowest system average rate among California's investor owned utilities and monthly residential customer bills below the national average.
As we grow our business toward a clean energy future, we are also adapting our infrastructure and operations to a new climate reality, striving for best-in-class operations, and importantly we are aiming to deliver superior value to our customers and investors.
With that, let me turn over Maria for the financial report.
My comments today will cover second quarter 2021 results, comments on the proposed decision in SCE's General Rate Case, our capital expenditure and rate base forecasts, and updates on other financial topics.
Edison International reported core earnings of $0.94 per share for the second quarter 2021, a decrease of $0.06 per share from the same period last year.
As Pedro noted earlier, this year-over-year comparison is not meaningful because SCE has not received a final decision in its 2021 General Rate Case and continues to recognize revenue from CPUC activities based on 2020 authorized levels.
We will account for the 2021 GRC track 1 final decision in the quarter SCE receives it.
On page 7, you can see SCE's key second quarter earnings per share drivers on the right hand side.
I'll highlight the primary contributors to the variance.
To begin, revenue was higher by $0.10 per share.
CPUC-related revenue contributed $0.06 to this variance, however this was offset by balancing account expenses.
FERC-related revenue contributed $0.04 to this variance, driven by higher rate base and a true-up associated with filing SCE's annual formula rate update.
O&M had a positive variance of $0.11 and two items account for the bulk of this variance.
First, cost recovery activities, which have no effect on earnings, were $0.05.
This variance is largely due to costs recognized last year following the approval of costs tracked in a memo account.
Second, lower wildfire mitigation-related O&M drove a $0.02 positive variance, primarily because fewer remediations were identified through the inspection process.
This continues the trend we observed in first quarter.
Over the past few years, SCE has accelerated and enhanced its approach to risk-informed inspections of its assets.
Inspections continue to be one of the important measures for reducing the probability of ignitions.
For the first half of the year, while we have maintained the pace of inspections and met our annual target, we have observed fewer findings of equipment requiring remediation.
Lastly, depreciation and property taxes had a combined negative variance of $0.10, driven by higher asset base resulting from SCE's continued execution of its capital plan.
As Pedro mentioned earlier, SCE received a proposed decision on track 1 of its 2021 General Rate Case on July 9.
If adopted, the PD would result in base rate revenue requirements of $6.9 billion in 2021, $7.2 billion in 2022, and $7.6 billion in 2023.
This is lower than SCE's request primarily related to lower authorized expenses for wildfire insurance premiums, vegetation management, employee benefits, and depreciation.
For wildfire insurance, the PD would allow SCE to track premiums above authorized in a memo account for future recovery applications.
The PD would also approve a vegetation management balancing account for costs above authorized.
In it's opening comments, SCE will address the PD's procedural error that resulted in the exclusion of increased vegetation management labor costs driven by updated wage rates.
Vegetation management costs that exceed a defined cap, including these higher labor costs, would be deferred to the vegetation management balancing account.
The earliest the Commission can vote on the proposed decision is at its August 19 voting meeting.
Consistent with our past practice, we will provide 2021 earnings per share guidance a few weeks after receiving a final decision.
I would also like to comment on SCE's capital expenditure and rate base growth forecasts.
As shown on page 8, over the track one period of 2021 through 2023, rate base growth would be approximately 7% based on SCE's request and approximately 6% based on the proposed decision.
In the absence of a 2021 GRC final decision, SCE continues to execute a capital spending plan for 2021 that would result in spending in the range of $5.4 to $5.5 billion.
SCE will adjust spending for what is ultimately authorized in the 2021 GRC final decision, while minimizing the risk of disallowed spending.
We have updated our 2021 through 2023 rate base forecast to include the Customer Service Re-Platform project.
SCE filed a cost recovery application for the project last week.
I will note that this rate base forecast does not include capital spending for fire restoration related to wildfires affecting SCE's facilities and equipment in late 2020.
This could add approximately $350 million to rate base by 2023.
Page 9 provides a summary of the approved and pending cost recovery applications for incremental wildfire-related costs.
SCE recently received a proposed decision in the CEMA proceeding for drought and 2017 fire-related costs.
The PD would authorize recovery of $81 million of the requested revenue.
As you can see on page 10, during the quarter, SCE requested a financing order that would allow it to issue up to $1 billion of recovery bonds to securitize the costs authorized in GRC track 2, 2020 residential uncollectibles, and additional AB 1054 capital authorized in GRC track 1.
SCE expects a final decision on the financing order in the fourth quarter.
Turning to page 11, SCE continues to make solid progress settling the remaining individual plaintiff claims arising from the 2017 and 2018 Wildfire and Mudslide events.
During the second quarter, SCE resolved approximately $560 million of individual plaintiff claims.
That leaves about $1.4 billion of claims to be resolved, or less than 23% of the best estimate of total losses.
Turning to page 12, let me conclude by building on Pedro's earlier comments on sustainability.
I will emphasize the strong alignment between the strategy and drivers of EIX's business, and the clean energy transition that is underway.
In June, we published our sustainable financing framework, outlining our intention to continue aligning capital-raising activities with sustainability principles.
We have identified several eligible project categories, both green and social, which capture a sizable portion of our capital plan, including T&D infrastructure for the interconnection and delivery of renewable generation using our grid, our EV charging infrastructure programs, grid modernization, and grid resiliency investments.
Shortly after publishing the framework, SCE issued $900 million of sustainability bonds that will be allocated to eligible projects and reported on next year.
Our commitment to sustainability is core to the company's values and a key element of our stakeholder engagement efforts.
Importantly, our approach to sustainability drives the large capital investment plan that needs to be implemented to address the impacts of climate change and to serve our customers safely, reliably, and affordably.
That concludes my remarks.
As a reminder, we request you to limit yourself to one question and one follow up.
So everyone in line has the opportunity to ask questions.
| qtrly core earnings per share of $0.94.
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Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Yesterday, we reported record earnings of $1.06 a share compared with $0.67 in the prior year's quarter and $0.94 sequentially.
Revenue was a record $154.3 million for the quarter compared with $111.4 million in the prior year's quarter and $144.4 million sequentially.
The increase in revenue from the second quarter was primarily attributable to higher average assets under management across all three investment vehicles and one additional day in the quarter, partially offset by a sequential decline in performance fees from certain institutional accounts.
Our implied effective fee rate was 57.5 basis points in the third quarter compared with 58 basis points in the second quarter.
Excluding performance fees, our third quarter implied effective fee rate would have been 57.3 basis points compared with 57 basis points in the second quarter.
Operating income was a record $70.4 million in the third quarter compared with $44.2 million in the prior year's quarter and $62.6 million sequentially; and our operating margin increased to a record 45.6% from 43.4% last quarter.
Expenses increased 2.6% compared with the second quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio, which included a cumulative adjustment to lower the incentive compensation accrual was 33.19% for the third quarter and is now 34.5% for the trailing nine months.
The increase in expenses related to distribution and service fees was primarily due to higher average assets under management in U.S. open-end funds, partially offset by a favorable change in share class mix.
And the increase in G&A was primarily due to higher travel and entertainment expenses as well as costs attributable to preparation for a new closed-end fund that combines public and private real estate with preferred and debt securities.
Our effective tax rate, which was 25.93% for the quarter, included a cumulative adjustment to bring the rate to 26.5% for the trailing nine months.
The reduction in the effective tax rate from the second quarter was primarily due to the diminished effect of the non-deductible portion of executive compensation on a higher than previously forecasted pre-tax base.
Our firm liquidity totaled $241 million at quarter-end compared with $185.6 million last quarter and we continued to be debt free.
Total assets under management were $97.3 billion at September 30, an increase of $1 billion or 1% from June 30.
The increase was due to net inflows of $1.3 billion and market appreciation of $469 million, partially offset by distributions of $718 million.
This marks our ninth straight quarter of net inflows.
Advisory accounts, which ended the quarter with $22.8 billion of assets under management had net outflows of $311 million during the quarter.
We recorded $1.1 billion of inflows, the majority of which were from existing accounts.
Offsetting these inflows were $1 billion of outflows from an unexpected account termination after a client decided to eliminate its allocation to multi-start real assets as well as $300 million of client rebalancings.
This account termination is unrelated to the one noted on previous calls.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan Subadvisory had net outflows of $52 million during the quarter, compared with net outflows of $272 million during the second quarter.
Distributions from these portfolios totaled $295 million compared with $309 million last quarter.
Subadvisory, excluding Japan, had net outflows of $253 million, primarily from a client that decided to convert its global listed infrastructure portfolio to passive.
Open-end funds, which ended the quarter with a record $45.6 billion of assets under management had net inflows of $2 billion during the quarter.
Net inflows were primarily into U.S. real estate and preferred funds.
Distributions totaled $276 million, $225 million of which was reinvested.
Let me briefly discuss a few items to consider for the fourth quarter.
With respect to compensation, we continue to refine our estimates as we approach year-end.
Given our double-digit year-over-year growth in assets under management, revenue and operating income, driven by our leading organic growth and strong investment performance, we reduced the compensation to revenue ratio from the previous quarter's guidance of 35.25% by 75 basis points to 34.5%.
All things being equal, we expect our compensation to revenue ratio for the fourth quarter to remain at 34.5%.
We now project that our G&A will increase by about 9% from the $42.6 million we recorded in 2020.
And finally, we expect that our effective tax rate will remain at approximately 26.5%.
Today, I will review our investment performance, discuss the macro environment and its impact on our asset classes and talk about certain key priorities for our investment department.
The third quarter felt like a transitory phase in the markets with the S&P 500 up 0.6% and low dispersion across sub-sector performance.
The markets are evaluating several important macro shifts, including stabilization of virus trends after the variant scares, deceleration in the economic recovery, potential for a transition from monetary easing to tightening and gridlock in Washington DC regarding stimulus and potential tax increases.
The one trend that continued to gain traction was the likelihood that inflation will be more persistent.
Reflecting that, commodities reached a seven-year high and were up 7% in the quarter, one of the top-performing asset classes.
The commodities rally has been broad-based with spot prices positive year-to-date for 80% of commodities.
Looking at our performance scorecard, in the third quarter and for the last 12 months, eight of nine core strategies outperformed their benchmarks.
International real estate, which is global ex-U.S. was the one strategy that underperformed for both time periods.
Measured by AUM, 79% of our portfolios are outperforming benchmarks on a one-year basis compared with 99% last quarter.
On a three and five-year basis, 100% of AUM is outperforming.
The one-year figure declined primarily due to global real estate, where our batting average declined from 99% last quarter to 25% in Q3.
Our core global real estate accounts are outperforming year-to-date.
So if we at least break even in the fourth quarter, our figures will improve next quarter.
We believe the macro environment is favorable for most of our strategies in terms of both fundamentals and investor demand.
We expect above trend economic expansion and more persistent inflation.
If the pandemic continues to subside and the recovery broadens, some of the most negatively affected sub-sectors in real estate and infrastructure should continue to recover and help sustain the fundamental recovery.
In terms of investor demand, the need for income is acute as is the need for equity-like returns with diversification.
Adding inflation to the picture should increase demand for more of our strategies.
As we said last quarter, our reading of the factors contributing to inflation supports a phase of higher for longer inflation.
U.S. real estate returned 0.2% in the quarter and we outperformed in all of our sub strategies.
Year-to-date, U.S. real estate is up 21.6%, outperforming the S&P 500's 15.9%.
The powerful recovery in real estate security prices has been driven by a return of overall demand and increased market need for effective inflation hedges and the ongoing search for income.
So far in 2021, $13 billion has flowed into REIT, mutual funds and ETFs, the largest inflow since 2014.
We continue to see increased adoption of listed REITs by institutional investors as a core component of their real estate allocations.
Investors better understand and can tolerate short-term volatility, knowing that over the long-term, REITs are highly correlated to the fundamentals of their underlying real estate.
And the long-term record of listed REITs compared with core private real estate is undeniably compelling.
REITs have outperformed by nearly 400 basis points annually for over 40 years, while providing liquidity.
These dynamics are powerful in terms of potential flows as REIT allocations get right-sized higher based on merit.
Global real estate returned negative 0.7% in the quarter.
While our core strategies outperformed slightly, our international strategy underperformed, primarily due to the Asia sleeve of our portfolios.
Global listed infrastructure returned negative 0.25% in the quarter and we outperformed in all of our sub-strategies.
The downward trajectory of the virus spread and return of travel and global commerce has made marine ports and airports some of the best performing sectors in the quarter.
The big news for infrastructure was what didn't happen that being passage of infrastructure legislation in Washington, DC.
The longer the process takes, the more it underscores the need for infrastructure capital investment and generates interest in the asset class.
Institutionally, infrastructure as an asset class is understood and accepted, and we see strong search activity.
The dry powder amassed by private equity infrastructure managers reached a record $300 billion and provides fuel for our investment thesis that private equity capital will find its way into the listed markets to buy companies and assets with the latest example being the announced privatization of Sydney airport.
In terms of the wealth channel, we need to continue to educate on how infrastructure best fits into allocation strategies.
Notwithstanding that, we've seen strong inflows into our open-end infrastructure fund in part based on the headlines related to significant infrastructure spending.
Preferred securities returned 0.6% for our core strategy and 0.2% for our low duration strategy.
We outperformed in both.
Preferreds continue to look attractive in the fixed income world with yields of 4.8% for investment-grade preferreds in our core strategy and 4.2% for our low duration strategy.
For context, corporate bonds yield 2.25%, municipals yield 1.75% and high-yield yields 4.75%.
Our portfolios are positioned defensively relative to interest rates and we continue to guide incremental allocations to our low duration strategy, which by design has a duration of less than three years and is the only one of its kind.
The benchmark for our multi-strategy real assets portfolio returned 1% in the quarter and we outperformed.
As a reminder, this strategy combines real estate, infrastructure, commodities, resource equities, gold and short duration credit with an asset allocation overlay.
Over the past year, the real assets portfolio returned 32.5% compared with the S&P 500 at 30%.
This strategy is designed to provide protection from unexpected inflation and produce equity-like returns with a low correlation to financial assets.
Somewhat surprisingly, we haven't seen a significant increase in demand for this portfolio, but with a long history of head fakes on inflation, it simply may be early and the demand for this strategy may follow rather than lead inflation.
We continue to expand our investment department, including the addition of a Portfolio Manager and Head of Multi-Asset Solutions, who will join us next month to oversee asset allocation, strategy research and macroeconomic research.
This is a strategic role that will expand our real assets and real estate solution investment capabilities and enable us to engage with clients at a higher level.
We've made tremendous progress preparing strategies for our private real estate business, including a strategy with a capital appreciation objective.
We have commenced the investment process and are evaluating acquisition opportunities.
In addition, for our closed-end real estate funds, we will pursue an income strategy to capitalize on mispriced property sectors.
This will expand our investment universe for our closed-end funds and supplement these funds' primary focus on listed real estate with higher income generation and rifle shot opportunities in the private market.
These are examples of our broader vision using both listed and private real estate to broaden our opportunity sets and provide investors with optimized allocations to real estate by tilting portfolios to where the best values are.
Looking into 2022, we will be developing other vehicles for the wealth channel and we expect to add a real estate strategist to further enhance our asset allocation and advisory capabilities.
Meantime, commercial real estate has a positive outlook with fundamentals strong or recovering, compelling income generation, and particularly in this environment, attractive inflation sensitivity.
Finally, we're looking forward to the next phase of our return to office plan whereby everyone will be in the office three days a week beginning next week.
While we have performed well working remotely as our operations and investment performance attest, we want to get back to in-person interaction, debate and decision-making on the investment team and across the firm.
The creativity, innovation and cross-team collaboration our business requires is best done in person.
Current indicators point to the general containment of the pandemic, thereby allowing us to return safely as we transition to being together once again as a team while having the best of both worlds with some work model flexibility.
As you heard from Matt and Joe, we had a very strong quarter.
Continued excellent investment performance across the board, record AUM, revenues, earnings and profit margins.
For the first time in several years, we benefited from strong, absolute and relative market returns.
We believe this is significant because fundamentals indicate that this is the beginning of a new trend, not the end.
An inside joke here at Cohen & Steers is how often I use the metaphor of how important it is to skate to where the puck will be and not stare at where it is now.
Where the puck is now is only useful in helping to see where it's going.
Broad-based, demand-driven inflation will persist and is most definitely not transient, but the bond market, like most investor portfolios is where the puck was.
The latest inflation measures have all moved broadly higher.
September CPI increased 5.4% year-over-year and the core CPI was also up 4%.
In a surprise announcement, the Social Security Administration last week disclosed that future payments will be increased by 5.9%, the largest such increase in over 40 years.
Consumer spending surged 11.9% in the second quarter and 13.9% in the month of September.
But the real story beyond these surging spot indicators is the steady increase of the more persistent and heavily weighted components of these inflation measures.
Rent is a key category as it makes up over 30% of CPI.
Tenant rent jumped 0.5% in September which was the biggest monthly increase in 20 years.
Owners' equivalent rent, which is the accepted measure of what homeowners would pay if they had to rent their homes rose 0.4%, the most since 2006.
Lastly, as these persistent measures of inflation continue to rise, it can cause expectations to become self-fulfilling.
According to the New York Fed, consumers' median inflation expectations for the next three years is 4.2%.
So where the puck is today isn't bad as we saw this quarter, but to get to where the puck is going, will require investors to reposition their portfolios to hedge against or even benefit from the shift to a more enduring inflationary environment.
All real asset classes and especially infrastructure and real estate have historically provided investors with the solutions that they'll be looking for.
At the risk of being repetitive and with the benefit of strong, absolute and relative returns from our real asset strategies, we achieved record AUM of $97.3 billion and over $100 billion intra-quarter; record open-end fund AUM of $45.6 billion and $1.3 billion of net inflows in the quarter.
As has been the case, recently, the wealth channel led the way with $2 billion of net inflows, representing 18% organic growth and our third best quarter on record.
Both the BD and RIA verticals were strong and DCIO fund flows were positive for the 13th straight quarter.
From a product standpoint, we saw strength in preferred security strategies, which generated net inflows of $1.1 billion, and in real estate which had net inflows of $755 million.
Looking forward, as inflation and interest rates move higher, we anticipate that flows into our low duration infrastructure and multi-strategy real asset portfolios will all benefit.
In addition, we have filed with the SEC to launch a closed-end fund offering in the first quarter of next year that will combine public and private real estate in one actively managed listed portfolio.
In the advisory channel, due to a planned design change, we had an unexpected $1 billion termination of a high performing multi-strategy real asset portfolio, which resulted in $311 million of net outflows in the quarter.
Gross inflows remained strong, totaling $1.1 billion with U.S. real estate accounting for over two-thirds of that amount.
The pipeline of awarded but unfunded mandates is at $900 million and we recorded $550 million of mandates, which were both won and funded in the quarter, our second best result on record.
Japan Subadvisory net outflows were $52 million pre-distributions and totaled $347 million, including distributions.
All things being equal, we are optimistic that flows, especially for our U.S. real estate portfolios, may shortly begin to improve.
First, the portfolios are performing extremely well, especially after currency adjustments.
Second, we are approaching the 12-month mark for the last distribution cut, which typically coincides with flows turning positive.
Lastly, the end of COVID restrictions -- with the end of COVID restrictions in Japan, our teams have been asked to resume a significant number of in-person sales seminars.
Subadvisory ex-Japan had net outflows of $253 million as well, primarily driven by the termination of an offshore global listed infrastructure portfolio and modest outflows elsewhere.
We did bring on a new $83 million global real estate mandate in the quarter.
We believe that the next several years will witness a generational shift in the economy and capital markets.
Higher growth rates sustained by unprecedented monetary and fiscal stimuli have produced demand-driven supply/demand imbalances resulting in asset price inflation, which is becoming self-fulfilling.
Real estate values and rents, labor costs and commodity prices are rising with no current end in sight.
Many investors have never experienced this set of economic variables.
We believe that as investors begin to extrapolate these trends, allocations to real assets, especially infrastructure and real estate will substantially increase.
Our traditional range of products is well positioned to capture this shift.
In addition, we recently commenced the marketing process for our private real estate strategies that we discussed last quarter.
And as I've said, we hope to launch our first public-private real estate closed-end fund this February.
Given the favorable outlook for real assets, we are committed to adding new capabilities and products that will provide the solutions that investors need when they ultimately see where the puck is going.
| cohen & steers inc - qtrly diluted earnings per share of $1.05; $1.06, as adjusted.
|
As we have navigated the last two years, we have learned to operate in highly uncertain and volatile environment.
And we have done it with success on almost any metric.
We've had to accomplish our mission while keeping our people safe.
Our company values of Mission First People always have served us extremely well throughout these unprecedented times.
We had an exceptional third quarter at EMCOR, especially against a very difficult comparison in the prior year.
As you may recall, in the third quarter of last year, we were bringing about a third of our company back to full operations.
We had projects poised and ready to resume or start, delay service that needed to be completed.
And buildings, campuses and production facilities that we helped our customers reopen as they resumed operations.
Further, we had yet to bring back our full complement of staff that we need to sustain and build our operations.
Said simply, we had an abundance of work had all the materials and a lower cost base, as we were still returning to full operations after the extreme cost reductions we had taken in response to the pandemic.
Against that backdrop in comparison for the third quarter of 2021, we were able to post $1.85 and earnings per diluted share, versus $1.76 of adjusted diluted earnings per share in the year ago period.
We grew revenues to $2.52 billion, with 14.5% overall revenue growth and 12.2% organic revenue growth.
We posted 5.4% operating income margins despite strong headwinds from supply chain issues and labor disruptions caused by the Delta Variant.
I believe this is very good performance considering the operating conditions we faced in the quarter.
We grew remaining performance obligations or RPOs 18.7% from the year ago period to $5.38 billion.
We generated operating cash flow of $121 million, despite the strong organic revenue growth.
All-in-all, we had a very successful quarter that continues to show the strength and diversity of our business.
But more importantly, the outstanding leadership provided by our teams at the subsidiary, segment and corporate level.
Our electrical and mechanical construction segments had excellent performance in the third quarter of 2021.
Both segments posted strong operating income margins, and had strong organic revenue growth.
Through careful planning on our large projects, and excellent supplier relationships we mitigated a lot of the supply chain disruptions facing our operations.
However, we have seen cost increases of 10% to 20% and anticipate that such increases will continue in the near future.
And that is only part of the issue, as we have seen lead times increased by two to three times their normal levels.
Our success in the quarter points to the continued resiliency of our teams, the ability to navigate these issues, deliver for our customers and continue to keep our workforce productive and safe.
We continue to have a robot pipeline of data center, warehousing and healthcare projects.
And we had strong bookings with our manufacturing clients in the quarter.
Building Services had the most difficult comparison a quarter as a deep cost cuts taken at the height of the shutdown were most severe in the segment.
We still post a decent operating income marked as a 5% against the year ago period of 6.9%.
However, we were most affected in this segment by supply chain issues and diminished productivity.
Although demand for our retrofit project work is very strong, we had some issues with a synchronization of our supply chain with our labor planning, resulting in reduced productivity.
To mitigate these issues, it has become a common practice that daily communications on deliveries and price changes on our quick term project and service work.
Further, this segment also bears the brunt of the dollar per gallon increase in the fuel, which gasoline and diesel year-over-year due to its large fleet and this had an impact of 20 to 30 basis points on operating income margins.
We can pass some of this increase on our customers that had just repriced into our time and material rates in June.
We will do so again between now and January across the majority of our building services operations.
This is the second increase this year, which is not our usual practice of executing which is once a year, usually in June.
Demand remained strong and we will continue to improve our planning over the next quarter or two.
Industrial Services continue to operate as we expected.
We improved on a year-over-year basis with respect to revenue and operating income.
We had some impact with respect to the storms in the Gulf Coast.
But that mainly just pushed out work to later in the year or into next year.
And we did have some disruption to our shop work in Louisiana.
Demand for our services continues to build.
Refinery utilization is at a very high level.
And we expect to and we expect to execute a better fourth quarter turnaround season this year versus the year ago period.
We also anticipate much improved demand as we exit the year and move into the first quarter of 2022.
The U.K. continues to execute well for its customers with double digit revenue growth and good operating income margins.
Demand remained strong for our services.
But like in the United States, we are also battling supply chain issues for our quick term project work in the United Kingdom.
We'll leave the quarter with a pristine balance sheet, strong fundamentals and record RPOs.
Over the next several slides I will augment Tony's opening commentary on EMCOR's third quarter, as well as provide a brief update on our year-to-date results through September 30.
So let's revisit and expand overview of EMCOR's third quarter performance.
Consolidated revenues of $2.52 billion are up $320 million or 14.5% over Quarter 3, 2020 and represent a new all-time quarterly revenue record for EMCOR.
Each of our reportable segments experienced quarter-over-quarter revenue growth.
Excluding $50.3 million of revenues attributable to businesses acquired, pertaining to the time that such businesses are not owned by EMCOR and last year's quarter, revenues for the third quarter of 2021 increased nearly $270 million or a strong 12.2% when compared to the third quarter of 2020, which was still somewhat impacted by the effects of the COVID-19 pandemic.
The specifics of each reportable segment are as follows: United States Electrical Construction revenues of $527.9 million increased $55.9 million or 11.8% from 2020s third quarter.
Excluding acquisition revenues within the segment of $29.5 million this segment's revenues grew organically 5.6% quarter-over-quarter.
Increased project activity within the commercial healthcare and institutional market sectors were the primary drivers of the period over period improvement.
United States mechanical construction segment revenues of $999.6 million increased $108.1 million or 12.1% from Quarter 3, 2020.
The results of this segment represent a new quarterly revenue record.
Revenue growth during the quarter was driven by increases within the manufacturing, healthcare and commercial market sectors.
With respect to the manufacturing market sector, we are in the early phases of construction on several food processing plants, which will accelerate further as we move into 2022.
From a healthcare market sector perspective, there continues to be greater demand for our services, as we are engaged in a number of projects ranging from mechanical system retrofits to complete installations in both new and existing healthcare facilities.
Lastly, within the commercial market sector, we continue to see strong demand for data center project work given growth in digital storage and cloud computing across the United States.
And we continue to assist our e-commerce customers with the build out of the warehouse and distribution network through both traditional mechanical as well as fire protection services.
Third quarter revenues from EMCOR's combined United States construction business of $1.53 billion increased $164 million or 12%, with 9.9% of such revenue growth being organic.
This combined revenue performance eclipses the quarterly revenue record established by this group during the second quarter of this year.
Despite this record revenue performance, each of our construction segments have increased the remaining performance obligations both year-over-year as well as sequentially.
United States Building Services Quarterly revenues of $632.5 million increased $75.9 million or 13.6%.
Excluding acquisition revenues of $20.8 million the segment's revenues increased at 9.9% organically.
Revenue gains were reported within our mobile mechanical services division due to increase project, service repair and maintenance activities.
Our commercial site based services division as a result of new contract awards, and our government services division given an increase in indefinite delivery indefinite quantity project volumes.
EMCOR's industrial services segment revenues of $232.2 million increased $60.7 million or 35.4% due to improve demand for both field and shop services, as we are beginning to see some resumption of maintenance and small capital spending in the energy sector.
United Kingdom Building Services revenues of $129.5 million increased $19.4 million or 17.6% from last year's quarter.
Revenue gains for the quarter resulted from the continuation of strong project demand from the segment's maintenance customers who previously deferred such work during 2020 as the result of the COVID-19 pandemic in the related prolonged U.K. government lockdown measures.
Additionally, the segment's revenues were positively impacted by $8 million, a favorable foreign exchange rate movements within the quarter.
Selling, General, Administrative expenses of $243.9 million represent 9.7% of third quarter revenues and compared to $226.8 million or 10.3% of revenues in the year ago period.
The current year's quarter includes approximately $5.3 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $11.9 million.
Consistent with my commentary during our second quarter earnings call, the prior year period benefited from substantial cost reductions resulting from our actions taken in response to the COVID-19 pandemic.
A significant percentage of such savings pertained to employment costs, including furloughs, headcount, reductions, and temporary salary reductions.
Conversely, EMCOR's considerable revenue growth in 2021 has necessitated an increase in headcount in the current year.
Additionally, our SG&A for the current period reflects an increase in healthcare costs, as the result of a normalization in the level of medical claims, as well as greater travel and entertainment expense due to a partial resumption of certain business activities by our workforce, when compared to the same timeframe in 2020.
The reduction in SG&A as a percentage of revenues as a result of the aforementioned increase in quarterly revenues without a commensurate increase in certain of our overhead costs, as we were able to successfully leverage our cost structure during this period of strong organic revenue growth.
Reported operating income for the quarter of $137.4 million or 5.4% of revenues, compares to operating income of $135.9 million or 6.2% of revenues in 2020's third quarter.
The 80 basis point reduction in operating margin loss due to reductions in gross profit margin within several reportable segments due to a less favorable revenue mix, which I will elaborate on during my individual segment commentary.
Despite this reduction in quarter-over-quarter operating margin, EMCOR's $137.4 million of operating income represent a new third quarter record.
Specific quarterly performance by segment is as follows: Our U.S. Electrical Construction segment operating income of $44.1 million decreased $1.9 million from the comparable 2020 period.
Reported operating margin of 8.3% represents a reduction from the 9.7% margin reported in 2020's third quarter.
The decrease in both operating income and operating margin is due to a decline in gross profit within the commercial and transportation market sectors given a change in the composition of project work performed quarter-over-quarter.
In addition, and as disclosed in last year's third quarter, the results from the prior year period benefited from the settlement of final contract value on two projects, which favorably impacted this segments Q3, 2020 operating income and operating margin by $4.4 million and 70 basis points respectfully.
Third quarter operating income for U.S. Mechanical Construction Services segment of $82.3 million represents a $2.3 million increase from last year's quarter, while operating margin of 8.2% represents an 80 basis point reduction from the 9% earned in 2020's 3rd quarter.
From an operating margin perspective similar to our Electrical Construction segment the reduced profitability can be attributed to a less favorable mix of work during the quarter.
Most notably, this segment experienced a decrease in gross profit margin within the manufacturing market sector, as the results for the period include increased revenues from certain large food processing projects, for which we are for which we are acting as the construction manager and carry lower than average gross profit margins when compared to our traditional subcontractor arrangements with our customers.
Further, the results for the year ago period benefited from the favorable close out of several manufacturing projects, which resulted in incremental operating margin contribution.
To be clear, the impacts within the quarter for both our Construction Segments relate to discrete projects or events.
Our combined U.S. Construction business is reporting $126.4 million of operating income with an 8.3% operating margin.
This level of operating income represents a new third quarter record for our combined construction business.
I would like to add that though below that of the prior year, the operating margins today in 2021 for each of our Electrical and Mechanical Construction segments exceed both their three year and five year average margins.
Operating income for U.S. building services is $31.6 million or 5% of revenues.
This represents a reduction of $6.9 million and 190 basis points of operating margin quarter-over-quarter.
Growth and operating income within the segment's commercial site based and government services divisions was not enough to offset the clients within its mobile, mechanical and energy services divisions.
As I commented during last quarter's call, our Mobile Mechanical Services Division has a large number of fixed price capital projects currently in process, which traditionally have a lower gross profit margin profile than the segments call out service and small project work.
In addition, during the quarter, we experienced some productivity issues partially due to the delayed receipt of certain equipment and materials, which has impacted our profitability both in terms of dollars and margin.
Lastly, growth in the segment's SG&A expenses due to headcount additions to support revenue growth, as well as incremental amortization expense related to businesses acquired further compressed operating income and operating margin.
Our U.S. Industrial Services segment operating loss of $3 million represents a $5.9 million improvement from the $8.9 million loss reported in 2020's 3rd quarter.
Development improvement, this segment continues to be impacted by difficult market conditions within the oil and gas industry.
Additionally, though, not as severe as in the prior year quarter, this segment experienced lost workdays due to both temporary plant and certain customer site closures, resulting from named storm activity in the Gulf Coast region during the 2021 quarter.
U.K. Building Services operating income of $6.6 million or 5.1% of revenues represents an increase of $1.3 million and a 30 basis point improvement and operating margin quarter-over-quarter.
Approximately $400,000 of this period-over-period improvement is due to positive foreign exchange movement, with the remainder attributable to an increase in project activity primarily within the commercial market sector.
We are now on slide nine.
Additional financial items of significance for the quarter not addressed in the previous slides are as follows: Quarter three gross profit of $381.3 million is higher than the comparable quarter by $18.2 million or 5%, gross margin of 15.1% as lower than the 16.5% and last year's third quarter due to the shift in revenue mix in each of our U.S. Electrical and Mechanical Construction segments as well as their U.S. building services segment as I just referenced during my segment operating income discussion.
Diluted earnings per common share of $1.85 represents a new quarterly record for the company and compares to $1.11 per diluted share in last year's third quarter.
Adjusting 2020's earnings per share for the negative impact and our prior year income tax rate resulting from the non-deductible portion of last year's non-cash impairment charges recorded during 2020 second quarter.
Non-GAAP diluted earnings per share for the quarter ended September 30, 2020 was $1.76 when compared to our current quarter's performance, we are reporting a $0.09 or 5.1% quarter-over-quarter earnings per share improvement.
With my quarter commentary complete, I will touch on some high level highlights with respect to EMCOR's results for the first nine months of 2021.
Revenues of $7.26 billion represent an increase of $747.8 million, or 11.5%, of which 9.4% of such revenue growth was generated by organic activities.
Operating income of $387.8 million or 5.3% of revenues represents a significant increase from reported operating income for the first nine months of 2020 and a double digit increase from the corresponding adjusted non-GAAP operating income figure for that period.
Year-to-date diluted earnings per share is $5.17 and represents an increase of approximately 14% over 2020's adjusted non-GAAP earnings per share for the nine month period.
Although not shown on the slide, my last comment on our year-to-date results is with respect to operating cash flow.
For the first nine months of 2021, we have generated approximately $114 million of operating cash flow, which is well below 2020s record performance.
As I commented last quarter, our substantial organic revenue growth has required increased working capital investment.
This contrast to 2020 where for a large part of the year, we were liquidating our balance sheet due to the revenue declines resulting for the from the COVID-19 pandemic.
Further, it is important to note that last year's nine month operating cash flow was favorably impacted by $82.3 million due to government stimulus measures that allow for the deferral of certain tax payments in both the United States and the United Kingdom.
As previously communicated, my expectation for full year 2021 was operating cash flow in excess of $300 million.
With our upward revision in 2021 revenue expectations, I am still targeting the same level of operating cash flow performance, but it is possible that we may not eclipse the $300 million target should our working capital investment be greater than expected during the fourth quarter.
EMCOR's balance sheet remains strong and liquid.
Cash on hand is down from year-end 2020 driven by cash used in financing activities are approximately $213 million, inclusive of $183 million used for the repurchase of our common stock and cash used in investing activities of $137.5 million, most notably due to payments for acquisitions that have cash acquired totaling approximately $114 million.
These uses of cash were partially offset by cash provided by operations of $114 million as I noted just a few moments ago.
Working capital has increased by nearly $20 million.
Increases in accounts receivable on contract assets resulting from our substantial organic revenue growth during the period were partially offset by the decrease in our cash balance just referenced as well as our increase in contract liabilities.
The increase in goodwill is predominantly a result of the five businesses acquired during the first nine months of this year.
Net identifiable intangible assets increased by $19 million as the impact of additional intangible assets recognize the connection with the previously referenced acquisitions which was largely offset by $48 million of amortization expense during the year-to-date period.
As a reference point, on a full year basis we anticipate depreciation and amortization expense, including both depreciation of property, plant and equipment, as well as amortization of intangible assets to be approximately $112 million for 2021.
Total debt exclusive of operating lease liabilities is fairly consistent with that of December 2020.
And EMCOR's debt-to-capitalization ratio has reduced to 11.4% from 11.9% at year-end, 2020.
EMCOR remains well positioned to capitalize on available opportunities as our balance sheet, combined with the borrowing capacity available to us under our credit agreement provides us with great flexibility and pursuing numerous organic and strategic investments.
I would like to give a call back to Tony, Tony?
And I'm going to be on page 12 remaining performance obligations by segment and market sector.
We had another strong project bookings quarter here at EMCOR.
Each of our five reporting segments are RPO growth year-over-year, while as we mentioned earlier, simultaneously increasing revenue over the same period.
We also saw RPO growth in seven of the eight market sectors in which we report.
So it's fair to say that we're currently seeing strong future demand across all of our segments and market sectors.
While September 30, is a single point in time, and project certainly ebb and flow, we are well positioned moving into 2022.
As mentioned earlier, total company RPOs at the end of the third quarter were just under $5.4 billion, up $849 million or 18.7% when compared to the year ago level of $4.5 billion.
Organic RPO growth was strong 15.6%.
Year-to-date for the nine months completed in 2021 total RPOs have increased $784 million, or just over 17%.
The strong booking activity across the company trends related to a book-to-bill ratio well over one, despite the company generating record revenues.
Our two domestic construction segments experienced strong construction project growth in the quarter, with RPOs increasing $606 million or 16.5% from the same period last year.
RPOs were lifted slightly by two Midwestern Electrical Construction Services acquisitions completed this year.
Building Services or RPO levels increased 180 million or almost 29% from the year ago quarter, 142 million and 180 million was organic.
We continue to see widespread small and short duration project demand and believe this will remain active through the end of the year and into 2022 as workers returned to buildings, campuses, factories and institutional facilities across the country post COVID and as the Delta variant hopefully continues to subside.
Our Industrial Services segments, our RPO increase of $53 million from September 2020.
Work within our heat exchanger shops has been building and while still are lower than historical levels, pricing appears to be improving a bit.
Further, we continue to build capability, execute fixed price contract work, in both our electrical and mechanical trades in this segment.
While this segment remains challenged due to macroeconomic forces, we are starting to see signs of increased activity, much as we expected as we move into 2022 and that is good news.
In summary, we continue to see strong momentum in our core markets and our scale, diversity of demand, and ability to pivot to more resilient sectors has allowed us to continue to have strong bookings in RPO growth, but also very strong organic revenue growth.
I'm now going to finish our discussion on pages 15 and 16.
We are closing in on yet another record year performance at EMCOR despite a very difficult operating environment.
At the beginning of the year, we expected that margins would be under some pressure.
But we believe that we would have the necessary revenue growth to offset any margin compression.
We foresaw the supply chain issues, but quite frankly, they are worse than we expected.
We not only have seen increasing and volatile pricing, but lead times that extend through two to three times normal levels.
Energy prices, especially gasoline and diesel costs have increased by more than we anticipated.
We also expect COVID to be much less impactful than it was as a Delta variant caused disruption on some job sites and send some key supervision into quarantine.
Working in this challenging environment, we continue to deliver in a no excuses manner and execute well for our customers while keeping our employees safe.
Despite such headwinds, we are raising our guidance.
Our new guidance is diluted earnings per share of $6.95 to $7.15 and we now expect our revenues between $9.80 billion and $9.85 billion.
As we close on 2021, we do expect to continue to be challenged by supply chain and productivity issues.
But we will work through them as we are resilient.
We expect the non-residential market to show mid-single digit growth in 2021 and expect that momentum to continue into 2022.
We, like all large employers will have to navigate complying with the pending emergency temporary standard or ETS with respect to mandatory vaccination and testing and the executive order mandating vaccination on federal contracts.
The ETS has not been released and therefore the related costs to comply and the impact to our productivity are unknown.
We expect to energy generate additional operating cash flow in the fourth quarter.
And we expect to continue to be balanced capital allocators.
To date into 2021, we have repurchased $183 million in EMCOR stock, paid $21 million in dividends and invested $114 million in acquisitions that will continue to position EMCOR for long term and sustained growth.
Our board of directors just authorized a new and our largest share repurchase authorization of an additional $300 million.
We continue to have a very active acquisition pipeline.
| emcor group q3 revenue rose 14.5% to $2.52 billion.
q3 earnings per share $1.85.
q3 revenue rose 14.5 percent to $2.52 billion.
sees fy earnings per share $6.95 to $7.15.
sees fy revenue $9.8 billion to $9.85 billion.
authorizes additional $300 million share repurchase program.
|
Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Yesterday, we reported record earnings of $0.94 per share compared with $0.54 in the prior year's quarter and $0.79 sequentially.
Revenue was a record $144.4 million for the quarter compared with $94 million in the prior year's quarter and $125.8 million sequentially.
The increase in revenue from the first quarter was primarily attributable to higher average assets under management across all three investment vehicles, the recognition of performance fees and one additional day in the quarter.
Our implied effective fee rate was 58 basis points in the second quarter compared with 57.3 basis points in the first quarter.
Excluding performance fees, our second quarter implied effective fee rate would have been 57 basis points.
No performance fees were recorded in the first quarter.
Operating income was a record $62.6 million in the quarter compared with $35.5 million in the prior year's quarter and $53.2 million sequentially.
Our operating margin increased to 43.4% from 42.3% last quarter.
The second quarter included a cumulative adjustment to reduce the compensation to revenue ratio.
Expenses increased 12.6% compared with the first quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio, which included the just mentioned cumulative adjustments to lower the incentive compensation accrual, was 35.03% for the second quarter and is now 35.25% for the six months ended.
The increase in distribution and service fee expense was primarily due to higher average assets under management in US open-end funds, and the increase in G&A was primarily due to higher professional and recruitment fees as well as an increase in travel and entertainment expenses.
Our effective tax rate, which also included a cumulative adjustment, was 26.51% for the second quarter and is now 26.85% for the six months ended.
The reduction in the effective tax rate from the first quarter was primarily due to the diminished effect of the non-deductible portion of executive compensation on a higher than previously forecasted pre-tax base.
Our firm liquidity totaled $185.6 million at quarter-end compared with $124.3 million last quarter.
Total assets under management was a record $96.2 billion at June 30th, an increase of $9.2 billion or 11% from March 31st.
The increase was due to net inflows of $2.6 billion and market appreciation of $7.4 billion, partially offset by distributions of $769 million.
Advisory accounts, which ended the quarter with a record $23.1 billion of assets under management, had net inflows of $1 billion during the quarter.
We recorded $300 million of inflows from five new mandates and a record $1.2 billion of inflows from existing accounts.
Partially offsetting these inflows were $493 million of outflows resulting from client rebalancing.
Net inflows were evenly a portion between US real estate, Global real estate, Preferred and Global listed infrastructure portfolios.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan Subadvisory had net outflows of $272 million during the quarter, compared with net outflows of $204 million during the first quarter.
As mentioned on last quarter's call, in January of 2021, our distribution rate cut was made to one of the funds we subadvised.
Encouragingly the rate of net outflows in this fund decelerated throughout the quarter and we actually recorded net inflows for the month of June.
Subadvisory excluding Japan had net outflows of $375 million primarily from a single client who decided to bring the portfolio management for a portion of the assets we manage for them in-house.
Open-end funds, which ended the quarter with record assets under management of $43.5 billion, had net inflows of $2.1 billion during the quarter.
This marks the 10th straight quarter of net inflows into open-end funds, and the first time we have recorded net inflows into each of our 11 US mutual funds.
Net inflows were primarily into US real estate and preferred funds.
Distributions totaled $312 million, $260 million of which was reinvested.
Let me briefly discuss a few items to consider for the second half of the year.
With respect to our outlook for compensation, the double-digit sequential growth in our assets under management and revenue, driven by our industry-leading organic growth rate and our strong investment performance, is tempered by the fact we still have half a year ago.
As a result, we reduced the compensation to revenue ratio by 25 basis points to 35.25% for the six months ended, and we expect that our compensation to revenue ratio will remain at 35.25%.
As we resume certain business activities that have been restricted during the worst of the pandemic, we expect G&A will increase by about 12% from the $42.6 million we recorded in 2020, but only by about 3% from the $46 million we recorded in 2019.
As was the case last quarter, the increase is primarily attributable to incremental investments in technology and global marketing as well as higher recruitment costs associated with the hiring of certain key investment and distribution personnel.
We expect that our effective tax rate will remain at 26.85%.
And finally, during the second quarter, in response to a client requests, we converted the fee structure on two portfolios from a performance-based fee structure to a base fee-only.
This conversion resulted in the realization of the year-to-date outperformance.
The increase in the base fee for these portfolios is not expected to have a meaningful impact on our overall effective fee rate.
Today, I will review our investment performance and discuss related key themes such as our near record, our perfect record of outperformance, what we are doing to sustain and enhance performance, the impact of accelerating inflation on our asset classes and how our major asset classes are performing versus expectations at the beginning of the year.
As we all know, in the second quarter, the US economy reopened from the pandemic and surged powerfully, driving appreciation and positive returns in virtually all asset classes.
A good portion of our AUM did better than the S&P 500, which was up 8.6%.
And we continued to post stellar outperformance versus our benchmarks.
One surprising development was that, treasury yields declined in the quarter against the backdrop of accelerating economic growth and rising inflation.
In fact, inflation surprised on the upside, something that hasn't happened in a long time.
Looking at our performance scorecard, in the second quarter, eight of nine core strategies outperformed their benchmarks.
For the last 12 months, all nine core strategies outperformed.
99% of our AUM is outperforming benchmarks on a one-year basis compared with 93% last quarter, driven by improvements in global listed infrastructure and certain global real estate portfolios.
On a three-year basis 100% of AUM is outperforming, and for five years 99% is outperforming, essentially the same as last quarter.
US REITs returned 12% in the quarter, lifting the year-to-date return to 21.3%.
We outperformed our benchmark in the quarter and for the last 12 months.
Going into this year, we believe 2021 would be a good, so called vintage year for real estate investing starting first with listed and then followed by private, consistent with a long history of the listed market leading the way, particularly during turning points.
The reopening in the US economy has created greater visibility into the turnarounds and demand for space, leasing activity and tenant credit and assorting out of rent deferrals, all of which restrained REIT share prices last year, while investment sales activity resumed including some major portfolio and Company sales.
While fundamentals and share prices for many property sectors have reached or eclipsed pre-pandemic levels, some of the most impacted sectors such as hotels, office and healthcare have loan recovery runways.
We believe that inflation in prices for building materials, such as steel and copper, labor, housing and land have contributed to rising real estate values and share prices.
This is different than in past periods where the replacement cost dynamic has taken a development cycle to kick in.
Global real estate returned 9.2% in the quarter compared with global stocks at 7.7%, lifting the year-to-date return to 15.5%.
For both the quarter and the last 12 months, we have outperformed in all three of our regional strategies as well as in our global and international strategies.
Global listed infrastructure returned 2.9% in the quarter, lifting the year-to-date return to 7%.
We outperformed for the quarter and for the last 12 months.
Similar to real estate, we believed that 2021 would be a good vintage year for infrastructure investing as infrastructure depreciated last year in part due to the sub-sectors that were uniquely impacted by the pandemic.
This year, the sectors hardest hit by the pandemic such as airports, ports and toll roads are still wrestling with concerns about the spread of coronavirus variance and levels of cross-border travel.
And utilities have been flat for the second year in a row, left back in a strong technology-led bull market.
That infrastructure performance, while positive, has not been stronger likely represents an opportunity in our view.
Preferred returned 2.9% in the quarter, helped by the 10-year treasury yield falling 30 basis points to 1.4%.
The year-to-date return is 2.4%.
We outperformed in the quarter and for the last 12 months in both our core and low duration preferred strategies.
Going into this year, we believe that the flat yield curve with the potential for a transition in the rate environment to higher long-term yields suggested investors should pivot toward our low duration strategy.
Notwithstanding the surprise and inflation this year, concerns about the coronavirus variants and global central bank yield management, have resulted in a very orderly interest rate market.
The risks of higher bond yields are on our watch list.
The inflation surprise has helped some of our strategies performance wise and has stimulated investor demand, particularly in our real estate strategies.
Going into this year we believe that inflation risks arising and that our multi-strategy real assets portfolio would see greater investor interest, while conversations have increased, they have yet to translate into flows.
Our real assets multi-strategy benchmark returned 8.5% in the quarter, lifting the year-to-date return to 14.5%.
We outperformed for both the quarter and the last 12 months, driven by excess returns in every strategy sleeve, real estate, infrastructure, commodities, resource equities, gold and high-grade low duration credit, and through top down asset allocation.
In the quarter commodities returned 13.3%, with 25 of the 27 commodities in the index producing positive spot price returns.
On the topic of whether higher inflation is temporary or not, we believe that many factors, including unprecedented fiscal and monetary stimulus, trade bottlenecks, labor markets, housing prices and consumer psychology have come together to support a phase of higher and longer inflation.
If so, the conversations about inflation solutions should turn into more allocations.
In terms of inflation beta or the sensitivity to surprise inflation, the most sensitive of our strategies in descending order are commodities, resource equities, multi-strategy real assets, infrastructure and real estate.
At the same time, the macro environment for real assets is improving.
Real assets are the cheapest versus equities in nearly 20 years.
While we have a near-perfect record of outperformance, we are by no means complacent.
Our goal is to sustain our current level of outperformance, while continuing to innovate, identify alpha sources, put process in place to harvest that alpha and widen our excess return margins versus benchmarks.
The longer our outperformance persist, the better our ability to realize returns on the investments we've made and new vehicles and distribution.
We continue to devote resources to our investment department.
We've talked previously about our initiatives to integrate quantitative techniques and IT efficiencies into our fundamental processes.
Those initiatives are producing positive results and our investment teams are now asking for more.
We've added analysts and are identifying our next group of emerging leaders through our annual talent review process.
We recently added a Head of ESG, who will help our teams take our current ESG integration framework to the next level, contribute to the development of explicit strategies and help address the increasing demands of clients and consultants.
We see many opportunities for innovation and real estate investing.
There is an acute need for next generation real estate strategies to help investors reorganize and rebalance existing allocations, which are heavy in private, heavy in core property types and are not set up to be nimble to pivot to where the best deal is.
We have developed next generation, new economy property type strategies for the listed market.
In April, as we discussed on the last call, we announced the formation of our Private Real Estate group.
Our imperative is to innovate at the intersection of private and listed real estate investing to tilt to where the best returns are and harvest the alphas at those intersections.
Meantime, the pandemic has created change in demographic and business trends, which we believe creates opportunity by geographic market, property sector and business model.
Our private team is organized, our allocation and research processes between listed and private are established and we are commencing efforts to raise capital in institutional vehicles and in closed-end fund strategies.
In closing, we are in a unique phase of the economic and market cycles from an investor's perspective or what we do.
The setup that I've talked about before is how to achieve in a risk-managed fashion, a return bogey of 7% from a 60-40 blend of stocks and bonds.
For a long while now, the 40% in fixed income on a current basis has not been able to meet the return goal.
Now introduce inflation and the exercise becomes more difficult.
The fixed income dilemma is tougher.
There is higher risk for equities and the need to fit real assets into portfolios is greater.
Our strategies offer attractive total returns, current yield, diversification, inflation protection and for the taxable investor, tax advantages.
We have organized our teams to engage with clients to help solve these portfolio challenges.
We are excited about the opportunity.
First off, it's great to be back at work in my office, and I'm 100% healthy.
Also, I'd like to recognize Joe Harvey and our entire Executive Committee, who stepped up seamlessly in my absence, which underscores the quality and depth of our leadership team.
As I look back on the quarter and the year-to-date, it's apparent that we're in an environment that's very favorable for real assets.
The historically strong cyclical recovery that we've experienced this year has fostered a dramatic rebound in fundamentals for real assets ranging from real estate and infrastructure to resource equities and commodities.
The rebound and prospects for real assets versus 2020 is stark.
As Joe just pointed out, whereas the performance of virtually all real asset strategies badly lagged the broader equity markets last year, the reverse has been the case so far this year, especially for our real estate and diversified real asset strategies.
We believe this is a unique point in time for real assets and CNS, one that will not be transient in nature, and is supported by secular trends.
First, this cyclical recovery is historic and underpinned by unprecedented fiscal and monetary stimuli, which are supportive of real asset fundamentals.
Second, investor psychology is shifting toward real assets.
The forces behind this shift are both fundamentals, including growing demand for hedges against unexpected inflation, and technical also including expectations of massive capital flows into public and private infrastructure.
We believe our strong brand and investment performance have put us in a unique position to capitalize on these trends as evidenced by our $2.6 billion in net inflows and the 12% organic growth in this latest quarter.
That said, we're working hard to expand our breadth and depth of capabilities in the real asset space by developing unique and valuable new space [Phonetic].
In addition, we're continuing our work to enhance and improve the results in all distribution channels, especially our US Advisory segment.
Last quarter's net flows in the wealth channel were a near-record $2.1 billion, and just shy of the first quarter record of $2.2 billion.
The organic growth rate in this, our largest channel was 22%.
Importantly, the strong growth in assets was well diversified by channel and product.
We saw strong flows for each of the broker dealer, RIA and independent channels.
DCIO also delivered a $163 million of net inflows, which marks the 12th consecutive quarter of positive net flows for this vertical.
Flows by strategy were diverse as well.
The preferred securities fund led the way with $665 million of net inflows, and our low duration preferred securities fund also generated $205 million of net inflows.
Consistent with the growing interest in real estate, our global real estate securities fund achieved a record $370 million of net inflows in the quarter, and year-to-date has generated a 62% organic growth rate.
Net flows into our three US real estate funds were strong as well at $390 million.
Our non-US funds experienced $61 million of net inflows, which marks the fourth consecutive quarter of positive inflows.
These flows, which have been accelerating, are the result of our expanding network of platforms and relationships throughout the EMEA region.
We expect these results will continue to improve over time.
The advisory channel delivered a solid $1 billion of net inflows in the quarter, also with strong demand across a range of strategies.
US real estate led the way with $443 million of net inflows, followed by preferred securities at $314 million.
Global real estate and global infrastructure also experienced net inflows of $227 million and $162 million, respectively.
$860 million of the $1.4 billion beginning institutional pipeline was funded during the quarter.
In addition, $479 million of new mandates was both won and funded in the quarter, and thus, never even made it into the pipeline.
Our end of quarter pipeline stands at $925 million.
As you may remember, less than one year ago, the advisory group under the leadership of Jeff Sharon was reorganized into a regional team approach, and we are very encouraged by these early results.
The subadvisory channel had net outflows of $375 million, which was attributable to one client who took $381 million of US and global real estate mandates in-house as a cost-saving measure.
Similarly, Japan subadvisory saw $272 million of net outflows, and $309 million of distributions, which reflect the continuing effects of a distribution cut in a large US REIT fund.
Looking ahead, the economy and equity markets appear to be at a tipping point, either the economic activity slows materially and inflation pressures turn out to be transitory or not.
As Joe alluded, the indicators that we follow strongly suggest that economic activity and inflation will remain higher for longer than expected.
In this environment, real assets will be highly sought after for their return and diversification characteristics.
Current fundamentals and stock market momentum appear to confirm this view.
We believe that this is a time to step-up new product initiatives to capitalize on what we expect will be strong vintage years ahead of us.
The launch of our first private real estate fund will be an important milestone for us.
Related to this, we are also growing our multi-strat asset allocation team.
And this, together with our listed and unlisted capabilities, will position us at the intersection of what is now for us a $16 trillion real estate universe.
The opportunity as we see it is to advise investors on how to tilt their real estate portfolios between listed and unlisted investments continuously to generate alpha and maximize returns.
This will open a range of opportunities for us from open and closed-end funds and separate accounts to non-traded vehicles.
Separately, we expect to recognize improved results from our EMEA, wholesale and US institutional teams, both of which are benefiting from new leadership and additional resources.
Only time will tell, but our excellent track record, strong cyclical tailwinds and proven distribution make us as excited about our growth prospects as ever.
| qtrly diluted earnings per share of $0.95; $0.94, as adjusted.
quarter ending aum of $96.2 billion; average aum of $92.9 billion.
qtrly net inflows of $2.6 billion.
|
I'm Cynthia Hiponia, Vice President, Investor Relations.
On the call today we have Aaron Levie, our CEO; and Dylan Smith, our CFO.
However supplemental slides are now available for download from our website.
We also posted the highlights of today's call on Twitter at the handle, @boxincir.
The timing and market adoption of and [Phonetic] benefits from our new products, pricing and partnerships.
The impact of our acquisitions on future Box product offerings, the impact of the COVID-19 pandemic on our business and operating results.
The KKR-led investment in Box and any potential repurchase of our common stock.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
In addition, during today's call, we will discuss non-GAAP financial measures.
These non-GAAP financial measures should be considered and in addition to, not as a substitute for or in isolation from our GAAP results.
Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.
Lastly, while we recognize, there has been news around our upcoming Annual Meeting on September 9.
The purpose of today's call is to discuss our financial results.
With that now let me hand the call over to Aaron.
We achieved strong second quarter results across all metrics, marking our fifth consecutive quarter of achieving both revenue and non-GAAP earnings per share above our guidance.
We delivered second quarter revenue growth of 12% year-over-year, a second consecutive quarter of accelerating revenue growth, billings growth of 13% and RPO growth of 27%.
From our business performance and building momentum, it's clear that enterprises are increasingly making strategic, long-term decisions on how to support a remote workforce and digital processes while still maintaining a high level of security and compliance policies.
As a result, more customers are turning to the Box Content Cloud to deliver secure content management and collaboration built for this new way of working.
Our strong momentum is best illustrated by our customer deal metrics in the second quarter.
Our net retention rate was 106%, up from 103% in the prior quarter.
We had 74 new deals over $100,000, up 16% year-over-year.
And we had a 73% attach rate of Suites on deals over $100,000 in the quarter, up from 49% in the prior quarter and up from 31% in Q2 fiscal '21.
We view these strong customer metrics is evident that we are executing on the right product strategy, one that is well aligned with the three major changes happening around the future of work and the enterprise.
First, hybrid work is going to be a necessity going forward; second, digital transformation is driving significant change across all industries; and third, cyber security and privacy threats are increasing at a growing rate as we've seen with recent ransomware attacks.
These trends have major implications for how companies work with their content.
Today enterprises have to purchase and integrate a mix of solutions from disparate vendors to solve the entire content management lifecycle.
This leads to broken processes for users, security risk due to the gaps between tools, fragmented data and increased cost for enterprise customers.
Our vision for the Box Content Cloud is to integrate, empower the complete content lifecycle from the moment content is created through the entire content workflow.
By leveraging our product leadership and content management, our Content Cloud will continue to extend in the key elements of this lifecycle including e-signature, content publishing, deeper content workflows, new collaboration experiences, analytics, data privacy and advanced security.
Critical to our success is our ability to execute on our product roadmap which expands our total addressable market and adds value to our core platform with new product innovation.
This is why we were pleased to deliver on our product road map with the launch of Box Sign to select customers in late July, capitalizing on the trend of more transactions moving from paper-based manual workflows to the cloud, while also addressing an incremental multi-billion dollar market.
Box Sign was developed through the acquisition of SignRequest, a leading cloud-based electronic signature company and a good example of our disciplined approach to M&A.
Our decision to acquire this particular technology versus developing internally was driven by time-to-market with e-signature being the number 1 requested feature from customers last year.
Initial response from customers has been very positive and we are rolling our Box Sign to all business and enterprise customers throughout this fall with a significant roadmap of innovation ahead.
Also over the quarter, we made meaningful updates to our governance functionality to help support customers' legal hold and document retention needs as well as new features within Box Shield to protect the flow of content with advanced machine learning based security features.
Our security, compliance, data governance and privacy capabilities remain one of the most critical reasons customers choose the Box Content Cloud and our innovation here is only accelerating.
In addition to these and many other product updates in the quarter, we continue to integrate deeply across the SaaS landscape, a key part of our content product value proposition, interoperability and strong partnerships with leading technology companies.
This is critical to our success at scale, building on the great work we've done with so many amazing partners, including Slack and Microsoft.
In the second quarter, we announced a new integration with ServiceNow legal service delivery application to modernize legal operations which benefit customers by bringing together ServiceNow's advanced workflow expertise to minimize manual processing while ensuring confidential legal content is secured on Box's Content Cloud.
And we also announced new and deepened integrations with Box for Cisco Webex and make it easier for customers to work securely and effectively in the cloud.
And we're just getting started to address our $50 billion plus market opportunity, we are building the end-to-end platform for managing the lifecycle of content and continue to be regarded by customers and analysts as the leading independent vendor for Cloud Content Management.
Of course, evolving our product strategy to meet today's enterprise, remote and hybrid workforce needs and strengthening our partnerships with leading technology companies are only part of our strategy to drive growth.
We have also been methodically enhancing our land and expand go-to market model to deliver our full platform to our customers.
To accelerate growth, over the past couple of years, we've been actively implementing a number of strategic go-to-market initiatives including optimizing pricing and packaging, improving sales segmentation and territory planning, driving efficient marketing programs and pipeline generation, increasing sales enablement and doubling down our focus on key verticals such as life sciences and financial services in the federal government and the success of our go-to-market initiatives and the growing demand for our more advanced capabilities drove our strong Suites adoption in the second quarter.
This is why we've been working aggressively to sell the full Box platform through our Suites' offering to bring all the Box has to offer to our customers.
We know that when a customer adopts our multi-product offerings, we see greater total account value, higher net retention, higher gross margin and a more efficient sales process.
Building on the success of Suites, in late July, we also announced a new simplified product addition for our enterprise customers called Enterprise Plus which includes Shield, Governance, Relay, Platform, Box Sign, the ability for large file uploads and enhanced important consulting credits.
You can see the success of our go-to-market efforts most clearly when looking at our Q2 customer expansion.
For instance, one of the largest banks in the world purchased a seven figure deal with multiple products including KeySafe, Governance, Relay, Shield and Platform to support new use cases for Box including claims processing and loan origination in a more secure virtual environment.
The bank has also standardized on Box for internal and external collaboration.
An innovative biopharmaceutical company did a six figure expansion with Box to support its growing workforce following multiple acquisition to help power its mission to transform the way the drugs are manufactured in the US.
With Box, the company's workforce is able to improve collaboration, security and GST compliance providing with them with a scalable and secure foundation that allows them to work faster.
And finally, a global leader in energy services that has been a Box customer since 2017 expanded its use of Box with a six figure ELA and the purchase of Enterprise Plus.
This will enable them to have a proactive approach to internal threat detection on content, be more prescriptive with security controls around content and automate more than a dozen critical business workflows.
These deals showcase the simplicity and power of our business model.
We are focused on expanding our customers through additional seed growth by going wider within organizations, as well as adding more value through additional feature enhancements and new products that drive up customer value and retention.
Over the past year, we have been executing on our strategy to reaccelerate growth while also driving continued operating margin improvements and our results in the second quarter demonstrate that our strategy is working.
As a result, we have raised our guidance for the full fiscal year 2022 and are reiterating our long-term target for the 12% to 16% revenue growth and 23% to 27% non-GAAP operating margin in FY '24.
Our strong second quarter results and our confidence in our outlook for this fiscal year and beyond are the direct result of the leadership of our board and the hard work and execution we've been driving as a company.
I could not be prouder of the team at Box and while we still have so much we want to accomplish, I am confident that we have the right team and leadership to execute on our strategy and targets going forward as well as a world-class Board of Directors that is focused on and committed to driving enhanced value for shareholders.
As Aaron mentioned, we are proud to have delivered strong top and bottom line results in Q2.
We drove an acceleration across key metrics, revenue growth, net retention and operating profit, clearly demonstrating strong business momentum as we build on our Content Cloud vision.
Revenue of $214 million was up 12% year-over-year, an acceleration from our Q1 revenue growth of 11% and above the high end of our guidance.
Our Content Cloud offerings are increasingly resonating with our customers as shown by the strong Suites traction and net retention rate we achieved in Q2.
As our customers are increasingly adopting products with more advanced capabilities, 61% of our revenue is now attributable to customers who have purchased at least one additional product, up from 56% a year ago.
In Q2, we closed 74 deals worth more than $100,000, up 16% year-over-year, a record 73% of the six-figure deals were sold as a Suite, up from 49% in Q1 and from 31% in the year-ago period.
Suites have enabled us to streamline our sales process and drive greater adoption of multi-product solutions, resulting in customers who are larger, stickier and have a greater propensity to expand over time.
We couldn't be more encouraged by our traction here.
We ended Q2 with remaining performance obligations or RPO of $922 million, up 27% year-over-year, an acceleration from the prior quarter's RPO growth rate of 20% and exceeding our revenue growth by 1,500 basis points.
Q2's RPO growth is comprised of 16% deferred revenue growth and 37% backlog growth demonstrating Box's stickiness as we continue to sign longer term agreements to support our customers' content strategies.
We expect to recognize more than 60% of our RPO over the next 12 month.
Q2 billings of $213 million were up 13% year-over-year and well ahead of our previous expectations to deliver a growth rate in the mid-single-digit range.
This billings result reflects the strong sales execution that we saw in the enterprise and SMB with both teams generating double-digit year-over-year sales productivity improvement.
Our net retention rate at the end of Q2 was 106%, up 300 basis points from 103% in Q1.
This result was driven by strength in customer expansion and a stable annualized full churn rate of 5% based on the strong momentum we're seeing in customer expansion and retention, we expect to deliver additional improvement in our net retention rate over the course of this fiscal year.
Gross margin came in at 74.5%, up 100 basis points from 73.5% a year ago.
Q2 gross profit of $160 million was up 13% year-over-year, exceeding our revenue growth rate.
We continue to benefit from both our ongoing shift to cloud data centers and the hardware and software efficiencies we're generating in the infrastructure we manage.
Our gross margin expectations for the full year of FY '22 continue to be approximately 74%.
Our ongoing efforts to improve profitability are paying off as we continue to unlock leverage in our operating model.
Q2 operating income increased 47% year-over-year to $44 million which in turn drove a 500 basis point improvement in Q2 operating margin to 20.6%.
We continue to deliver profitable growth and disciplined expense management.
This year, we've made significant progress in building out our Engineering Center of Excellence in Poland, which will help us drive additional operating leverage and efficiencies over time as we transition certain engineering functions away from higher cost California locations.
This resulted and are delivering $0.21 of diluted non-GAAP earnings per share in Q2 above the high end of our guidance and up from $0.18 a year ago.
I'll now turn to our cash flow and balance sheet.
In Q2, we delivered cash flow from operations of $45 million, up 39% from the year-ago period.
We also generated free cash flow of $30 million, a year-over-year improvement of 124%.
Capital lease payments, which we include in our free cash flow calculation were $13 million down from $14 million in Q2 of last year.
For the full year of FY '22, we continue to expect capex and capital lease payments combined to be roughly 7% of revenue.
As a result, we ended the quarter with $779 million in cash, cash equivalents and restricted cash.
We completed our modified Dutch Auction Tender Offer at the end of June for an aggregate cost of approximately $238 million and our Board subsequently authorized a $260 million share repurchase program.
As of August 24, 2021, we had repurchased 2.9 million shares of Class A common stock at a weighted average price of $23.89 for a total of $70 million.
Combined with the modified Dutch Auction tender, we have repurchased a total of 12.2 million shares for a total of $308 million.
With that, I would like to turn to our guidance for Q3 and fiscal 2022.
As we announced a few weeks ago, based on our strong Q2 results and our continued business momentum, we raised our full year revenue, operating margin and earnings per share guidance.
Note that our share count and earnings per share expectations factor in only the shares that we have already repurchased to date.
While we expect to opportunistically purchase additional shares through the remainder of the year under our ongoing share repurchase program, the amount could vary significantly based on market conditions and other factors.
Therefore, we're taking a prudent approach and not assuming any future repurchases in our Q3 or FY '22 outlook.
For the third quarter of fiscal 2022, we anticipate revenue of $218 million to $219 million, representing 12% year-over-year growth and a third consecutive quarter of revenue growth acceleration at the high end of this range.
We expect our non-GAAP operating margin to be approximately 20%, representing a 200 basis point improvement year-over-year.
We expect our non-GAAP earnings per share to be in the range of $0.20 to $0.21 and GAAP earnings per share to be in the range of negative $0.09 to $0.08 on approximately 162 million and 154 million shares respectively.
We expect our Q3 billings growth rate to be roughly in line with our revenue growth for the full fiscal year ending January 31, 2022, we have raised our full year revenue guidance and we expect FY '22 revenue to be in the range of $856 million to $860 million, up 11% year-over-year.
This is an increase from last quarter's guidance of $845 million to $853 million and represents an acceleration from last year's revenue growth.
We expect our non-GAAP operating margin to be approximately 19.5%, representing a 410 basis point improvement from last year's result of 15.4% and a sizable increase over our previous guidance of 18% to 18.5%.
Due to our strong top and bottom line momentum, we now expect our FY '22 non-GAAP earnings per share to be in the range of $0.79 to $0.81 on approximately 166 million diluted shares.
Our GAAP earnings per share is expected to be in the range of negative $0.34 to $0.32 on approximately 158 million shares.
We continue to expect our billings growth rate to be above our revenue growth rate for the full year of FY '22 and for RPO growth to outpace both revenue and billings growth for the full year of FY '22.
We will provide further details into our Q4 expectations on our Q3 earnings call.
Finally, our FY '22 revenue growth rate combined with FY '22 free cash flow margin is now expected to be at least 32%, an increase over our previous guidance of at least 30%.
Box today is not the Box of 2019.
Our strong Q2 performance is the result of the business transformation we began two years ago.
This year, we're delivering both revenue acceleration and increased operating leverage for our shareholders, proving that our Content Cloud platform is resonating with customers.
We are well on our way to delivering against our previously stated target of 12% to 16% revenue growth and 23% to 27% operating margin in FY '24, two years from now.
In FY '24, we're also committed to delivering revenue growth plus free cash flow margin of 40%.
Before we conclude, I'll hand it back to Aaron for a few closing remarks.
Before we open it up to questions, we wanted to share that on October 6, we will be hosting 10s of thousands of attendees at BoxWorks which will be an all digital event for the second year in a row.
This year will be another incredible event where we'll share more on our vision for the Content Cloud and we'll showcase major product advancements.
Attendees will also be hearing from an outstanding slate of speakers including the CEOs of Okta, Slack and Zoom as well as IT [Phonetic] leaders from enterprises like Lionsgate, State Street, USAA and World Fuel Services among many others.
Q2 was a strong quarter, not only in terms of achieving quarterly revenue and non-GAAP operating results that were above our original guidance, but also in our metrics that show the power of our Content Cloud platform.
Net retention rate, billings and RPO growth are all leading indicators that show the success of our strategy, not only retaining customers, but expand our solutions, within our existing customer base to drive revenue growth and operating margin improvements and ultimately shareholder value.
| q2 revenue was $214.5 million, up 12%; q2 billings were $213 million, up 13%.
qtrly loss per share $0.08; qtrly non-gaap earnings per share was $0.21.
q2 remaining performance obligations of $922.4 million, up 27%.
remain confident in our ability to execute on long-term financial targets for fy24.
fy22 revenue guidance expected to be in range of $856 million to $860 million.
sees q3 revenue in range of $218 million to $219 million.
fy22 gaap net loss per share expected to be in range of $0.34 to $0.32; fy22 non-gaap earnings per share is now expected to be in range of $0.79 to $0.81.
box - q3 gaap net loss per share expected to between $0.09 to $0.08; q3 non-gaap diluted net income per share expected to be between $0.20 to $0.21.
|
We expect the call to last roughly an hour.
In addition, during our call today, we will refer to certain non-GAAP financial measures that we believe provide additional information to enhance the understanding of the way management views the operating performance of our business.
Our third quarter performance reflects continued momentum across our business.
Global Client top line performance, which grew at 11% on a constant currency basis was once again driven by strong demand for Transformation Services, made up of analytics, digital and consulting.
Our strategic investments over the years in capabilities and talent, including the continuous training and development of our global workforce positions us well to address the pressing challenges and opportunities our clients are facing.
This quarter, we achieved the milestone of crossing the threshold of $1 billion in quarterly total revenue for the first time.
For the third quarter 2021, we delivered: total revenue of $1.02 billion, up 8% on a constant currency basis; Global Client revenue of $921 million, up 11% on a constant currency basis; adjusted operating income margin of 16.6% compared to 17.1% during the third quarter of 2020; and adjusted diluted earnings per share of $0.66 per share, up 18% year-over-year.
Global Client revenue growth in the quarter cut across almost all of our industry verticals with double-digit growth in consumer goods and retail, life sciences and healthcare, high-tech and manufacturing and services.
As expected, banking and capital markets growth continued to be muted due to the restructured relationship with one client that resized its asset management business in late 2020.
Our pipeline remains healthy with a mix of both large and regular-sized deals.
We continue to scale our revenue and bookings from existing relationships and add new logos, which sets the stage for future growth.
During the third quarter, we signed four large deals across life sciences, CPG, banking and capital markets and high-tech services.
As we deepen our role as a trusted advisor to our clients, we have seen sole-sourced deals, which was, for many quarters, above 50% of our bookings, now rising above 60%.
We are also seeing great traction build up in fintech, digital banking and other fast growth tech companies where our domain strength and agile development and deployment is helping them scale rapidly.
Global Client Transformation Services continues to grow at a 30%-plus rate and now accounts for more than 35% of total Global Client revenue, including the contribution from the Enquero acquisition.
Year-to-date, approximately 70% of Global Client bookings include a component of analytics, digital or consulting in them.
As a reminder, approximately half of Transformation Services bookings are annuity-based and often lead to large long-term intelligent operations engagements.
Analytics is not only the largest component of Transformation Services, contributing more than half of its revenue over the last several quarters, but is also its fastest-growing component, consistently growing well above 30%.
Many of our analytics solutions are deeply connected to high-growth areas where we are strategically focused, such as sales and commercial, supply chain, financial crimes and risk and SG&A.
Our sharp differentiation is our ability to orchestrate data and analytics in the cloud with deep industry and process knowledge.
The availability of high-quality data and the ability to derive actionable insights with analytics to drive decision-making is now more critical than ever.
It is at this insight to action level where we differentiate ourselves the most.
Our intelligence platform, Genpact enterprise 360 enables clients to do just that.
Genpact enterprise 360 harnesses the power of data and insights from our operations built on proprietary metrics and benchmarks we have deployed and developed over the past 20 years in our digital Smart Enterprise frameworks.
This enables clients to have radical transparency in their businesses.
The platform then uses AI to generate connective insights.
This further empowers clients to take actions, either themselves all through our work with them to deliver better outcomes today and to point transformation opportunities to unlock future growth.
Another differentiator for us is our ability to drive outcome-oriented value for clients beyond just cost and productivity, such as increased growth, lower receivables and inventory, lower losses in fraud and better pricing.
This is one of the key reasons why our Transformation Services solutions resonate so well with our clients.
Some examples include, for a large global CPG client, leveraging our experience and design thinking methodologies, we are using analytics to help them with better sales targeting and automating processes such as contract management and payment reconciliations.
This enables its sales teams to focus on much higher proportion of their time on business development.
For a large fintech client, we have designed, implemented and are now running a best-in-class anti-money laundering and transaction monitoring process to improve their regulatory risk compliance as they experience hyper growth.
For a large high-tech client using our Cora sales assist solution, we are leveraging data and analytics to proactively generate and prioritize advertising leads for small and medium business segment to grow the client's top line.
For a large client in the semiconductor ecosystem, we are using digital and analytics solutions to improve supply and demand forecasting, diversify their supplier base for greater resilience, conduct global inventory analysis and run spot price forecasting to optimize the timing of purchases.
These examples reflect the five trends we continue to see in every CxO conversation.
The five trends are: one, a significant shift from off-line to online across every industry; two, the virtualization of all technology services and solution delivery; three, an accelerated consumption of cloud-based services and solutions; four, an exponential growth in real-time predictive analytics; and five, the move to human-centered design that creates superior experiences for customers, users and employees.
Clients continue to tell us that our approach of bringing together our expertise in digital and cloud-based analytics solutions with our deep industry and process depth to drive actions that deliver outcomes is different.
We continue to see momentum in driving commercial models linked to these outcomes versus traditional input-based models that focus on the cost of FTEs.
These commercial models ensure goal alignment between us and our clients.
For example, being paid for the outperformance of predefined metrics, consumption of transaction-based models or fixed fee models.
As the world continues to adapt to the changes that I've seen over the last 18 months, companies across every industry are intensely competing for talent across the globe.
While this hot talent market presents challenges for our kind of a business, it certainly creates an interesting set of opportunities for us.
We see many engagements where we can help our clients access and nurture global talent, given our ability to scale across a range of skill sets and geographies as well as our focus on reskilling.
We are using our investments in our online on-demand learning platform, Genome, to build the critical skills businesses are looking for across digital, data and analytics.
Specific industry and process knowledge, use of Lean and Six Sigma as well as soft skill and personal development.
As an example, our data and analytics certification program equips our employees with the skills necessary to generate impact immediately after course completion by deriving insights from complex data sets.
To date, Almost 70% of our employees are enrolled with more than 43,000 fully trained and tested.
This is analytics at scale for our clients.
At the height of the pandemic in 2020, we saw historically low attrition rates.
In the third quarter, as expected, our attrition rate increased above our historical average.
This is a global trend that is impacting our peers and clients alike.
However, given our talent management practices to date, we have had no impact on our client engagements or our ability to convert new bookings.
This reflects the strength of our culture of curiosity, innovation and learning as well as the countless learning, development and career opportunities we provide for our employees, enabled by investments like Genome and our redeployment platform, Talent Match.
We are delighted to have had a state of recent recognitions for being a great destination for talent in the market, such as: Forbes 2021 World's Best Employers List; the Refinitiv's 2021 diversity and inclusion top 100; a total of 28 excellent awards from Brandon Hall Human Capital Management; International SOS' Duty of Care award for diversity and inclusion; Aptar's top 10 best companies for women in India.
And earlier today, Forbes 2021 America's Best Employers for Veterans.
We are also being recognized for the work we are doing to improve our communities.
For example, being named to Fortune's Change the World List as one of 100 companies celebrated for having a positive societal impact.
We are deeply committed to our environmental, social and governance initiatives and are proud to have been recently awarded a gold medal from EcoVadis, recognizing our efforts across environment, labor and human rights, ethics and sustainable procurement.
We also recently concluded our annual green-a-thon event with more than 25,000 participants to sponsor the planting of more than 14,500 tree saplings, underscoring our commitment to environmental sustainability.
ESG is not only an important focus for us internally as a company, but also for what we do with our clients.
Given our industry knowledge, strength in data and analytics, and deep familiarity with our clients' processes, we are in a meaningful position to help our clients achieve progress on their own ESG agenda through areas like responsible sourcing, supply chain optimization, financial crimes, climate footprint of equipment usage and many others were able to help our clients generate positive social and environmental impact.
We are very excited about the work we are doing on our pursuit of a world that works better for people.
Lastly, as our teams are beginning to return to the office globally and travel more frequently to collaborate in person or meet with clients.
We are taking every precaution to continue to ensure the health and safety of our own employees and their families.
We are happy to report that a large and increasing number of our employees are getting vaccinated globally.
For example, in our largest delivery ecosystem, India, approximately 80% of our workforce has received at least one dose of a COVID vaccine, and we continue to encourage participation for the rest of our population.
Today, I'll review our third quarter results and provide our latest thinking regarding our full year 2021 financial outlook.
Total revenue was $1.02 billion, up 9% year-over-year or 8% on a constant currency basis.
Global Client revenue that expanded to 91% of total revenue increased 12% year-over-year or 11% on a constant currency basis primarily driven by ongoing movement in Transformation Services led by analytics that grew more than 30% in the quarter as we continued underlying strength in our Intelligent Operations business.
Total Global Client growth included approximately one point contribution from revenue related to certain divested GE businesses that we began including in our Global Client portfolio as of January one.
During the quarter, we continued to expand the size of our Global Client relationships.
For example, during the 12-month period ended September 30, we grew the number of Global Client relationships with annual revenue over $5 million from 129 to 142 or a 10% year-over-year increase.
This included clients with more than $25 million in annual revenue, increasing from 23 to 26 or 13% year-over-year.
GE revenue declined 15% year-over-year driven by our delivery of committed productivity and the overall macroeconomic impact on GE.
Excluding the effect of revenue related to divested GE businesses I mentioned earlier, GE revenue would have declined 6% during the quarter, which is in line with our expectations.
Adjusted operating income margin at 16.6% declined from the first half of the year largely due to the increase in investment activity that we discussed with you last quarter as well as higher travel expenses.
As we move into the latter part of the year, we expect travel-related activity to increase as the macro environment continues to stabilize.
Gross margin in the quarter was 35.6% compared to 35.2% during the same period last year largely due to increased productivity from higher revenue and a more favorable mix.
We continue to expect our full year gross margin to expand 70 to 75 basis points year-over-year.
SG&A as a percentage of revenue was 21.3%, up 10% year-over-year and 60 basis points sequentially as we dialed up investment activity to be able to take advantage of long-term growth opportunities.
Adjusted earnings per share was $0.66, up 18% year-over-year compared to $0.56 in 2020.
This 10% -- $0.10 increase was primarily driven by higher adjusted operating income of $0.04, lower taxes of $0.03, a $0.02 impact related to FX remeasurement and a $0.01 impact related to lower year-over-year share count.
Our effective tax rate was 17.3% compared to 22.6% last year largely due to discrete benefits in the quarter as well as a nonrecurring prior period tax refund-related items.
Excluding this onetime tax benefit that equates to $0.03 per share, our effective tax rate for the quarter would have been 21.4%.
Turning to cash flow and balance sheet.
During the third quarter, we generated $210 million of cash from operation that corresponds to free cash flow being almost two times higher than net income.
As a reminder, during 2020, we experienced a lower-than-normal working capital impact to our cash flow given improved days outstanding as lower revenue growth related to the pandemic.
This helped drive cash flow from operations of $252 million during the third quarter last year.
Our days outstanding have remained in a consistent range with third quarter 2021 at 84 days.
Cash and cash equivalents totaled $922 million compared to $753 million at the end of the second quarter of 2021, and includes $350 million related to the 1.75% bond that we issued in the first quarter.
We continue to closely monitor market conditions for the optimum timing of the pay down of our 3.7% bond that is scheduled to mature in April 2022.
Our net debt-to-EBITDA ratio for the last four rolling quarters was 1.1 times.
With undrawn debt capacity of approximately $500 million and existing cash balances, we continue to have ample liquidity to pursue growth opportunities and execute on our capital allocation strategy.
While we continue to invest to drive organic top line growth, we have a solid M&A pipeline, and we remain vigilant in searching for companies that can strengthen our capabilities in our chosen service lines.
As our track record demonstrates, to the extent capital is available, we expect to repurchase shares, particularly when the valuation is attractive in comparison to our view of the intrinsic value of the firm.
As expected, capital expenditures as a percentage of revenue increased from levels we saw during the first half of the year due to investments related to deal ramp-ups and the measured pace of our global workforce return to office.
Given our year-to-date spending, we now anticipate capital expenditures as a percentage of total revenue for the full year to be in the range of 1.5% to 2%.
Let me now turn to an update of our full year outlook.
We continue to expect total revenue between $3.96 billion and $4 billion, representing year-over-year constant currency growth of 5.5% to 6.5%.
For Global Clients, the expected growth remains in the range of 10.5% to 11.5% or 9% to 10% on a constant currency basis.
There is also no change to our full year GE outlook of approximately 20% year-over-year decline.
Excluding the effect of approximately $40 million in revenue related to the GE divested businesses, we continue to expect GE full year revenue to decline 10% to 12%.
We continue to expect our adjusted operating income margin to expand to 16.5% for the full year.
Factored into this outlook is the impact of continued ramp-ups in investment activity in both sales and marketing, research and development, higher fourth quarter travel, and a higher level of transaction costs related to recent large deal signings.
To be clear, our approximate 16.5% adjusted operating income full year margin remains the baseline for which we think about our trajectory for 2022.
As a result of the nonrecurring tax benefit in the third quarter I referred to earlier, we now expect our full year 2021 effective tax to be approximately 22.5% to 23.5%, which compares to the prior year range of 23.5% to 24.5%.
Given the outlook I just provided, we now expect full year adjusted earnings per share to be in the range of $2.40 to $2.43, up from the prior $2.36 to $2.39 range due to the favorable impact of the nonrecurring tax benefit as well as the balance sheet remeasurement gains during the quarter.
Additionally, given our year-to-date performance, we can now expect our full year operating cash flow to be at least $550 million, up from our earlier outlook of $500 million, and we continue to anticipate free cash flow from operations of approximately 1.2 times to 1.3 times net income, above our historical 1:1 ratio.
Our results for the third quarter are a reflection of the focused long-term strategic choices we have made, the capabilities we have built organically and added inorganically over the years are resonating well in the market.
We are pleased with our performance that we believe reinforces our medium- to long-term trajectory of double-digit to low teens Global Client revenue growth driven by continued momentum in Transformation Services, particularly analytics with an expanding adjusted operating income margin and adjusted diluted earnings per share growing ahead of total revenue, all supported by strong cash flow generations.
Clients across all industries are increasingly looking to leverage data and analytics for predictive insights to drive actions and position themselves to compete in this new world.
This secular trend plays to our strengths in Transformation Services that continues to power our revenue growth led by its largest segment analytics that have been consistently growing more than 30%.
The majority of our Transformation Services engagements are longer-term annuity-based work that often leads to larger intelligent operations engagements that are, of course, annuity based by definition.
Our outcome-oriented solutions are resonating well with clients as we focus on generating value beyond just cost and productivity, which is helping us win many sole-source opportunities, both with existing client relationships that are growing as well as with new logos.
We are at the forefront of developing new ways of working.
We are conducting many experiments across the globe with and for our clients in a variety of hybrid flexible models that allows our talent to get the benefits of being able to work from home while coming together as a team in a set rhythm to collaborate, innovate and build on a strong team culture that we are known for.
Our clients value us for our talent practices and our ability to reskill globally and at scale.
These strengths differentiate us even more in the talent market we are today.
This is opening doors to many opportunities to help clients transform their business models with new cloud-based digital solutions that leverage newer commercial constructs given the changing nature of work away from traditional FTE modes.
I'm very proud of the work we are doing and the impact our global teams have for our clients, our colleagues, our shareholders and the communities we live in, and I'm very excited about the opportunities ahead of us.
Nika, can you please provide the instructions?
| compname reports adjusted earnings per share of $0.66.
q3 adjusted earnings per share $0.66.
q3 revenue rose 9 percent to $1.02 billion.
sees fy revenue $3.96 billion to $4.0 billion.
sees 2021 adjusted diluted earnings per share of $2.40 to $2.43.
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