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2016 | MDC | MDC
#Sounds like four questions and a follow-up, so I'll try to answer a couple of them and maybe <UNK> will talk a little bit more on the product.
Our land spend is consistent with what we've done as a basic business.
That is our goal is approximately a three-year supply of land and we've done that for decades because we believe that's a risk factor in the balance sheet when people speculate on land and we don't do that.
The issues of cost, there's a good side and a bad side of cost.
The good side, it lends for higher employment in the industry.
It would not surprise me that in the entire country that almost every major builder or even minor builders could use 20% more labor and that's both a problem and an opportunity.
It's an opportunity for the country and it's not really a problem.
It's what you manage to.
I would rather have stronger demand and be looking for expanding our subcontractor base than having less work and having that not be an issue.
The land spend will over future periods reflect our desire and our intent to increase the work we're doing.
The other builders that you've commented on, and I'm not familiar with which ones you're speaking about, contraction in gross profit because of land cost, I think you can go back to the last cycle.
One of the things MDC demonstrated is that we were able to make a reasonable gross profit at that time without speculating in land and we made our profit by building and selling homes, not speculating in land.
The market that we're in now we believe that there's a reasonable balance between cost and expected market value of your inventory and with good management you should be able to develop a reasonable rate of return for your shareholders, which of course is what we focus on, is creating value for our shareholders.
Now, <UNK> maybe you ---+ <UNK> will answer your follow-up question, since I answered the three, about the Seasons to give <UNK> and everyone on the call a little more color of what it is and where we've done it and our expectations in it.
I'll comment on a couple areas.
First of all, the land spend that's coming through this quarter, it's not necessarily the more affordable stuff.
It reflects AMC approvals, our asset management approvals, from a few quarters ago.
I think we are seeing increasingly that what we are approving are those more affordable deals and that will contribute more significantly to land spend in future periods.
As for the ---+ just the Seasons product itself, that's one way that we're addressing affordability.
First of all, the incidence of sales of that product went from about 1.5% of our sales to 3% of our sales from Q1 to Q2.
Still a very small part of what we're doing but it's starting to grow pretty quickly for us.
Initially, we had built that product on subdivisions that we already had in place, land that we already owned, as a complement to product we already had there.
<UNK>, you asked, well, how do we combat increased costs, fees that are associated with some of these areas that are obviously a bigger piece of the pie when you're talking about a more affordable product.
I think really it's being innovative about what we're doing.
Colorado is really our biggest market for Seasons right now and we did something that most builders don't do and we didn't build a basement in this product.
Most homes in Colorado have a basement.
We said you know what, in order to drive the affordability we think maybe this first-time consumer can do without.
We think that still hits the mark.
We're able to take out quite a bit of cost by doing some of those things that maybe aren't the norm in a given market and drive affordability that way despite, some of the other costs that become a bigger percentage of our overall costs.
Hopefully that helps a little bit as well, <UNK>.
Right.
In terms of how we look forward, whether it's Seasons or other more affordable product, we have seen that our first-time buyer, the percentage of our overall pie of kind of true entry-level buyers has decreased to roughly 20% of our overall closings.
I think over time if you look in our history, that piece of our overall pie has been closer to a 40% type of number.
I think that's really the order of magnitude that we're thinking about provided that we do see this consumer continue to come back in a significant way.
That's how I'd answer that one.
With regard to market commentary, the stronger markets that we have seen, Colorado is certainly up there.
It's our home market but it continues to perform very well for us, absorption rate higher than the Company overall.
I think the same can be said for Washington.
California is our highest absorbing market right now.
I think it speaks to just overall how low of a level of production goes on in California relative to the rest of the market, but also the fact that we have ---+ we have stayed relatively affordable, I would say, in that market.
I think that has struck a pretty decent cord in that market.
The other one I would highlight is Las Vegas.
We have a very strong operation out there.
Even though we did see the absorption rate come down a little bit year over year in Las Vegas, it has consistently performed above the Company average from an absorption rate perspective.
On the other end of the spectrum, the one that I would say is on the lower end of performance would be our Mid-Atlantic market, both Virginia and Maryland.
I say it with a caveat.
It's one of our lower performers, but that performance has improved over the last year.
I think at this point last year it really seemed pretty depressed for us.
It's up year over year but I don't think we're out of the weeds yet.
We are focusing on that market constantly and of course we're mindful that we're in a political season here and that probably doesn't help things in the greater DC area.
Thanks.
Yes.
We've talked a lot about it in the past and as you heard from some of the comments that I had in the call, we're de-emphasizing gross margin a little bit.
If you look at gross margin before things like impairments and warranty adjustments, over the past five quarters it's been relatively stable.
There's I think been only a 70 basis point difference separating the high and low.
While I think there is room for improvement in gross margin over time, for the short term my outlook would be for really just continued stability.
I don't think there's anything significant to report on that front.
With the competitive land market and limited subcontractor availability driving our costs higher, achieving margin expansion is an uphill battle.
We have been able to offset the higher cost by raising prices where sales velocity justifies it but there's not a guarantee that we can continue raising prices in the future.
For now, we're really focused on hitting our internal goals for unit volume.
That's why you've heard us talk a lot on this call about the drivers of unit volume, absorption rates, backlog conversion, production levels, cycle times.
That focus on volume is really what gives us the best opportunity to improve our returns which, as <UNK> noted earlier, have already moved higher alongside our revenue gains in the second quarter.
I would say there's not a whole lot of difference sequentially.
Maybe still a little bit more in Denver, but if you look at our cycle time overall, sequentially it was stable from Q1 to Q2.
I think that's actually encouraging.
I mean, there's not a whole lot we do on the entitlement front.
We don't take entitlement risk on balance sheet, so it's not as big of a concern for us, but from what we kind of hear out there in the market and from people who are doing entitlement work for us, I don't ---+ nothing sticks out to me.
It always seems like it's a matter of the cities and just how busy individual jurisdictions might be in getting that processed.
Sure.
I think it's been pretty consistent, in line with what we're experiencing.
If we're able to find opportunities as you have seen by looking at our balance sheet, we have substantial liquidity.
We have substantial unused line of credit.
We're always opportunistic and you should assume that whatever is good, reasonable business judgment, we will continue to execute on and that should give you the comfort of knowing that we're always looking to the future and judging the present.
I think that you've got fixed and variable and I think our fixed is ---+ has legs to expand on the fixed and you'll be able to leverage into hopefully continued reduction in that number, at least in the short term, we can see an ability as our gross revenues increase.
Other than the variable expenses, the fixed should be kind of constant and that's a reasonable opportunity to look at.
Yes, I guess first of all, I think you could see some increase in the third quarter for Colorado.
There's a lot of subdivisions that we have.
Some of them have already opened.
Some of them are on the verge of opening.
A little bit of it depends on just the timing of when those occur and how much initial velocity that we get.
I think there's a chance for it in Q3 but to give ourselves a little bit of extra room, we've just really talked about the second half of the year.
As far as orders go, as I noted with an earlier caller, we didn't see any reason why ---+ we didn't see anything within the quarter, I should say, that would indicate that things were slowing down from a year-over-year perspective and that, that month of June was actually up a little bit more year over year than the other two months.
We actually saw a little bit of acceleration throughout the quarter when you're talking about the year-over-year comparatives.
No, no.
I think in and of itself, just that product is much better from a cycle time perspective.
Just early on, the product that we've built might be a three to four month cycle time versus overall.
For the Denver market, you're closer to a 9 or 10 month cycle time.
Just by virtue of the fact you can build it quicker, we don't feel the pressure to necessarily spec build it and that's even beyond just our overall feelings about the spec building strategy.
I think the more we're able to achieve higher unit volumes, higher absorption rate, that's one of the side effects, one of the very good side effects of that occurring is you can actually have some improvement to your margin by virtue of better leveraging that interest, better leveraging construction overhead.
I think that's a possibility to the extent we continue to see pace expansion as well as revenue expansion.
I guess first of all, with regard to regional margins we don't provide a whole lot of color there.
I don't want to get a whole lot into the regional margin picture.
With regard to asset allocation, community allocation, yes, I think you did see a little bit more of an increase in the East.
I think it's really a function of last year, we were still trying to get a lot of communities going in the east and they finally came to fruition and resulted in that increased count.
You're seeing a similar thing here in Colorado now, as already commented, came down a little bit because some of the communities are just now coming online and haven't reached that ---+ our magic number for active subdivisions, which is five sales to be active.
It's not indicative of a shift in strategy when you talk about the shift between East and Mountain, or I guess Mountain to East, in this case.
I don't think there's any huge shifts that would lead you one way or the other.
You can certainly kind of look at backlog and see how that's shifted.
I don't think there's anything that necessarily drives me one way or the other when I look at backlog and the direction backlog's gone over the last year on a market-by-market basis.
Relatively consistent going forward.
The only thing I will say is Mid-Atlantic did bump up just a little bit here, sequentially.
It went from 8% to 13% of closings.
You might see that moderate a little bit, come down just a little bit.
All right.
We appreciate everyone joining us on the call today and we look forward to talking with you again after we disclose the results of our third quarter.
| 2016_MDC |
2015 | BID | BID
#Thank you, Nicole.
Good morning and thank you for joining us today.
With me here is Bill <UNK>, Sotheby's Chairman, President, and Chief Executive Officer; and Patrick <UNK>, Chief Financial Officer.
GAAP refers to generally accepted accounting principles in the United States of America.
In this earnings call, financial measures are presented in accordance with GAAP and also on an adjusted non-GAAP basis.
An explanation of the non-GAAP financial measures used in this earnings call, as well as reconciliations to the comparable GAAP amounts, is provided as an appendix to the outline of this call which can be found on the Investor Relations section of the Company's website.
Also during the course of this call, the Company may make projections or other forward-looking statements regarding future events or the future financial performance of the Company.
We wish to caution you that such projections and statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions.
We refer you to the documents the Company files periodically with the Securities and Exchange Commission, specifically the Company's most recently filed Form 10-Q and 10-K.
These documents identify important factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements.
Please also see our investor webpage for a slide presentation which outlines Sotheby's full year financial results.
Now I will turn the call over to Patrick.
Thank you, Jenny.
Good morning, everyone.
Thank you for joining us and for your interest in Sotheby's.
I want to begin by thanking my colleagues here at Sotheby's for a job well done in the fourth quarter and now into the new year.
In the fourth quarter, the team flawlessly executed landmark sales such as the property of Mrs.
Paul Mellon, the record-setting Impressionist and Modern Auction in New York, and the Collection of Winston Churchill's daughter, Mary Soames.
As Bill will discuss, the team is right back at it in 2015, with market-leading sales in Old Masters in New York and both Impressionist and Contemporary in London.
Ours is the best team in the business and they are executing at a high level for our clients and our shareholders.
Now on to the results.
With a strong global art market and increased sales worldwide, we achieved a 20% improvement in adjusted operating income in 2014.
Importantly, in a growing market, costs were very well controlled and are ahead of our prior guidance.
This time a year ago, we announced we expected a decrease in professional fees, other general and administrative costs, agency direct costs and marketing expenses totaling $22 million, assuming a similar level of net auction sales to 2013.
We have succeeded in realizing a decrease of $33 million in these areas, a 50% improvement over our original projection.
As a result, total adjusted expenses in 2014 are flat with the prior year.
Moving to the detailed financial information on slide 3, and beginning with our overall results, 2014 adjusted net income is $142.4 million and adjusted diluted earnings per share is $2.03, in comparison to $130.8 million and $1.89 per diluted share a year ago.
The adjusted net income figures exclude restructuring and special charges, as well as CEO separation costs.
Now let's look at each of our main operating segments.
Starting with the agency segment on slide 4, we continue to see growing revenues on strong auction sales.
In 2014, agency gross profit increased $30.5 million or 4% to $729.6 million.
A $70.4 million or 10% increase in auction commission revenues resulted from a 19% increase in net auction sales over the year.
Auction commission margin decreased from 15.9% to 14.7% in 2014, due to competitive conditions for winning high-value consignments as well as sales mix, as 2014 saw a shift in the proportion of properties sold to the higher-priced bands of our buyer's premium rate structure.
Keep in mind that 2014 included our successful execution of high-profile sales in the fourth quarter, such as the series of sales from the Mellon Collection, which came with margins consistent with highly competitive consignments.
So far in 2015, we are seeing more normalized auction commission margins.
In order to enhance revenue and strengthen auction commission margins and fund innovation, we enacted a new buyer's premium rate structure that became effective February 1.
Offsetting the gains in auction commission revenues, private sale commissions decreased $28 million or 32% in 2014, when compared to the prior year.
2014 did not experience the significant level of individual high-value transactions we saw in 2013.
Favorably affecting agency gross profit is a significant reduction in auction direct costs as a percentage of net auction sales, from 1.78% in 2013 to 1.55% in 2014.
We established a goal to reduce this cost by 10 basis points for the full-year 2014, when compared to 2013.
As a result of increased efficiencies and spending controls implemented throughout 2014, we exceeded this goal and achieved a reduction of 23 basis points.
Turning to slide 5, the increase in principal revenues and cost of principal revenues in 2014 is largely due to sales of property acquired from a potential consignor in lieu of the agency segment providing an auction guarantee.
Moving to slide 6, we are pleased with the growth of Sotheby's Financial Services and our ongoing process of debt funding this business.
The finance segment average loan portfolio balance for 2014 was $583.3 million, a 35% increase from the prior year.
Finance segment revenues increased $10.8 million or 35% in 2014, reflecting the growth of the portfolio.
Finance segment gross profit, which is net of borrowing costs, increased $3.1 million or 10% in 2014.
As previously announced, we have established a separate capital structure for the finance segment that provides for the debt funding of loans through a dedicated revolving credit facility.
Debt funding the one portfolio reduces the finance segment's cost of capital and enhances returns.
Recently, management reduced targeted return on equity for the finance segment from 20% to 15%, to allow for additional investment to drive growth.
We have added staff to this segment to drive business and increase growth of the loan portfolio.
We also have certain foreign loans and loans that are ineligible for borrowing under our revolver, which affect the overall returns of the portfolio.
Slide 7 is an update of a chart we used last quarter.
I mentioned earlier that at this time last year, we identified opportunities for savings of $22 million in certain categories of expense, and we ultimately delivered $33 million in savings or 50% more than originally expected.
Salaries and related costs increased $13.5 million or 5% in 2014, as compared to the prior year.
This is partly due to a $7.6 million or 5% increase in full-time salaries due to the impact of midyear strategic headcount, salary increases in 2013, as well as targeted salary increases in 2014; and was marginally offset by headcount reductions carried out in the second half of 2014, as a result of the 2014 restructuring plan.
Also contributing to the increase in salaries and related costs is a $5.1 million or 9% growth in incentive compensation expense, principally due to the higher level of earnings as measured by adjusted EBITDA relative to the prior year.
As you can see on slide 8, incentive compensation as a percent of adjusted EBITDA was 21% in 2014, which is a bit below the 23% to 24% ratio in 2010 and 2013.
Sotheby's effective income tax rate was 39.2% in 2014, compared to 30% in 2013.
This increase in 2014 effective income tax rate over the prior year was caused by two income tax benefits that were recognized in 2013, for which there were no comparable benefits in 2014.
Based on our recently completed financial planning process, we are announcing a number of expense estimates for 2015, which are outlined on slide 9.
Direct costs as a percent of net sales is expected to grow approximately 5 basis points in 2015 as compared to 2014, in order to support new middle-market auction sales.
Therefore, we are keeping 18 basis points of the improvement we delivered in 2014.
For marketing expenses, an approximate 10% increase was targeted net of revenues from advertising, primarily for a revamped marketing strategy to increase brand preeminence and accessibility.
For full-time salaries, a 4% to 5% increase from 2014 is currently expected, largely due to investments in collecting categories and activities with the highest potential for growth, as well as inflationary salary increases.
This is net of savings from the restructuring plan initiated in 2014.
Staff reductions and unfilled vacancies associated with the restructuring plan will result in annualized savings of approximately $13 million, of which $11 million is being reinvested through the addition of new staff in support of growth.
We expect professional fees to increase 3% to 4% compared to 2014, due to senior-level recruitment expenses including the cost of recruiting a new CEO, and consulting fees associated with certain board level strategic initiatives, among other items.
Lastly, other general and administrative expenses are estimated to grow 2% to 4% due to facilities-related expense as well as higher travel and entertainment expense from increased business getting activities.
Sotheby's and RM Auctions, the world's foremost collector car auctioneer, recently announced the formation of a new strategic partnership which is branded RM Sotheby's, as Sotheby's acquired a 25% ownership stake for just more than $30 million.
This long-term investment comes as the more than $2 billion market for the finest collectible automobiles continues to grow, presenting increasing opportunities for both companies.
Over time, Sotheby's will have the ability to expand its ownership stake as the partnership evolves and grows.
Work between the two teams is well underway and is going smoothly as we head into a busy spring season for Sotheby's and RM Sotheby's.
Rob Myers and his entrepreneurial team built the best team in the sector, and we are very pleased to partner with them.
At this time, I would like to hand the call over to Bill <UNK> for his remarks.
Thank you, Patrick.
We have experienced exceptional auctions and continued strong global demand in our sales year to date.
Competition for the best works is robust in this strong market, and we are certainly winning our share of those and, of course, this keeps commission margins under some tension.
But as Patrick said, those margins appear to be stabilizing year to date.
2014 saw double-digit sales growth in many important categories: Impressionist, Modern, Contemporary, Jewelry, Old Masters, American art, among others.
More than a third of our categories had the highest level of sales in our history.
Across Sotheby's worldwide auctions, one-third of our buyers in 2014 were new to us, accounting for about a fifth of global sales.
Sotheby's dominated in Asia where we had over $900 million in sales, and Chinese buyers purchased more than $1 billion and did it across our sales rooms globally.
On the digital front, some figures offer important vantage points.
We saw 25% more buyers online in 2014 than the previous year.
The number of digital catalogs being reviewed is now four times what we see people reviewing in print, a complete reversal from only a few years ago.
And in our key categories like Contemporary and Impressionist paintings, even more catalogs are being reviewed digitally.
Stay tuned for the eBay partnership where we will be experiencing truly large audiences interacting with authentic works of art for the first time later this spring.
2015, as I've indicated, is off to a good start.
Our January Old Masters week in New York totaled over $79 million, and our February sales of Impressionist and Contemporary art brought well over $0.5 billion.
We are leading the market in all three of these categories this year.
We have an important Contemporary sales this week in New York and another important Contemporary sale next week in London.
Later this month in New York and next month in Hong Kong, we have our Asian sales series.
Also next month, we're offering a perfect 100-carat emerald cut diamond with a presale estimate of $19 million to $25 million in our New York Magnificent Jewelry sale.
Our friends at RM Sotheby's have a sale on March 14th in Amelia Island, Florida, with a presale estimate of $58 million, which is an increase of 61% compared to their same sale last year.
We wish them great success.
As is usual this time of year, we are very much in the middle of property gathering for our spring sales, and those efforts are progressing well.
These sucesses really highlight the breadth and depth of Sotheby's expertise and demonstrate our ability to deliver results for stakeholders.
In short, we are reaching more collectors in more corners of the world through more channels.
We'll look forward to your questions now.
That concludes our prepared remarks.
Sure, so I think there was two questions.
First was just on 2015, and what we've seen so far.
And it sounded like the second was asking for a little more clarity on the marketing comments.
On 2015, it's still early in the year, obviously.
But what we've seen so far with our sales, we've had an Impressionist sale and a Contemporary sale in London.
We did an Old Masters sale here in New York.
And what we've seen, as Bill commented, the margins have been consistent with what we've seen in previous periods.
So we haven't seen what we saw in the fourth quarter of last year, which was very successful sales, high profile collections that ended up coming with relatively skinnier margins.
This year is more of a return to the more normalized environment.
In terms of the marketing plan, what we were intending to communicate there was simply that ---+ and you saw this last fall when we launched our new advertising campaign for our sales ---+ we are continuing to that.
We are broadening the scope of that.
We are trying to make sure that we continue to support the sales, and that we're also putting our best foot forward in terms of our overall brand.
And we think it's a smart investment this year, and to make sure that we're continuing to push on that.
It doesn't represent a change in strategy, <UNK>, to your question.
It's continuing to support that marketing plan that we launched in the second half of last year.
Sure.
In terms of capital return, I would just point you to the press release that we put out a couple of weeks ago.
Where the Board stands right now is they're very focused on the CEO transition, and at this time it makes sense to hold off on capital return.
In terms of how we are thinking about liquidity, and there will be disclosure, obviously, on all of this in the 10-K, and that will go through where we stand in terms of borrowing availability.
But currently, we don't have anything borrowed on the revolving credit facility in support of the agency business.
We still have some availability on the Financial Services side.
That portfolio has continued to grow.
And all the new ones that we've put in place are eligible for the credit facility, so we have fully funded those and that's what we will continue to do in 2015.
And we've still got some headroom in that facility to further grow that portfolio.
Thanks, <UNK>.
I will start with the, particular, the February sales in London.
We are against a backdrop of some instability in Russia and questions about Chinese growth.
You could have seen in those high-profile Impressionist and Contemporary sales some hesitance or reticence to bid on those quality offerings.
In fact we saw just the opposite.
Strong demand, strong commitment towards wanting to acquire great works of art leading to, among other things, the highest price for a Gerhard Richter in, I believe, living artist in the marketplace.
So whenever you are saying strong demand, that tends to facilitate discussions with people who are thinking about selling works of art, because the market is clearly open and demand is strong.
So as is the case of this business with very limited visibility, all I can say about deals, what's been announced and what's underway, is that there's a bunch of very active discussions and opportunities which we are engaged in.
I'd point you in particular to a sale next week in London of Contemporary art from an individual collector which I am hearing good things about, and think is promising as a sale event for the Company.
I think that the guarantee book is remarkably opportunistic in terms of what flow we see and what the particular appetites of those sellers are.
I think you will see in the filings which will be out right after this call that we've got an unhedged guarantee position at present of I think quite a modest between $40 million and $50 million, and so we will see what comes forward.
There's a bunch of opportunity.
Some of it we hedge, some of it we hold, and sometimes our decisions are extremely rewarding and sometimes they're not.
I think as the Company sees opportunity that it's confident in, it will continue to deploy capital.
But I can't give you a rising or a declining tide narrative that's on point, because it's so responsive to the deal flow which we are presented with.
What we've said is when you look at the ---+ we look at the guarantee portfolio in the aggregate.
So it includes, obviously, what we make in terms of buyer's premium, the objects that are sold.
And it includes what we either make or lose on the principal side.
And when you look at it in the aggregate, the guarantee portfolio is profitable.
So the third question was growth; the second question was just a change in philosophy in terms of the restructuring.
What was the first one.
Well, the plan was announced in July of 2014, and we began execution shortly after that.
So there's some benefit that's reflected in the fourth quarter of 2014m but the lion's share of it will show up in 2015.
We haven't disclosed the specific number that hit in 2014.
In terms of philosophy, no, there's no change at all.
We had always talked about what it made sense to do was dial down the levers in certain areas so that we could dial them up in other areas where we saw opportunities to grow.
So that has been very consistent philosophy throughout.
And that leads to the third question in where are we thinking about growing.
I think a clear example is the middle market, and we mentioned that we expect to see our auction direct costs go up a little bit in 2015, because we will be investing in supporting those sales.
And it's a similar story when we think about people, and we need to have the right people in place both on the consignment side and in some cases the client management side to make sure that we can go ahead and source that property and effectively sell it.
So what we try to do is think about our strong categories where we see further opportunities for growth, and go out and make sure that we've got the team in place to continue to push on that.
We study it.
As I think you may recall, we did a very significantly larger number of transactions privately in 2014 than we did in the prior period.
But indeed, the aggregate value of the works and a number of the highest dollar lots were not included in 2014 as they had been in prior periods.
I don't see a meaningful shift in seller mindset.
Certainly big auctions and successful outcomes tempt people towards auctions, and those opportunities to pit bidders against one another are buffered in some circumstances by some individuals' appetite for privacy and certainty around a transaction.
So how those get put in the blender and how they all are expressed on a quarter-to-quarter basis is uncertain to us, as well as to you as investors.
What I said, <UNK>, is a 25% increase in the number of buyers of works of art at Sotheby's through online.
We had ---+ I'm not going to dig out the statistic in terms of works of art, very high value works of art, that were sold through an online channel.
I think it's in the press release for the year.
Let me see if I can find it.
It's that 10 lots were sold for more than $500,000 to online bidders across the sales room and categories, and we had a 20% increase in new bidders online in 2014 compared to the prior period.
And as I said, 25% more buyers online in 2014 compared to the prior period.
The high point for us in terms of a formula that was very successful, both in terms of an offering and a form of online engagement, was the collection of Mrs.
Paul Mellon where we had 71% of the lots having bids placed for them online, and 30% of the buyers were online.
So here was a large sale that included a number of reasonably priced and midmarket lots, a famous seller with a recognized name, a beautiful set of catalogs; and all that aggregated to a very large number of people wanting to participate online.
So we are continuing to see traction there.
Yes, consistent with what we talked about last year.
We are now targeting something in the high 30s.
The way we think about it, if you look at the business working down the income statement, we've produced $300 million of EBITDA in 2014, just short of that, $278 million of EBIT.
And when you get to the net income line, obviously the change in tax rate is a meaningful issue there.
But from a profitability standpoint, we think we've got the business performing well.
We have expanded our operating margins this year compared to last year.
Again, if you look at the EBITDA margin, that has gone up by close to 300 basis points; it's similar on the EBIT margin.
So we are seeing an expansion in operating profit.
We are seeing a return to having operating leverage in the business.
And as we continue to drive growth, we'd expect to see more of that.
So we do think that from a margin standpoint, the business is performing well and headed in a good direction.
Thank you all very much for your ongoing interest in Sotheby's.
Wish us a good next couple of weeks, in particular in the Contemporary marketplace and in the Asian sales as we end the quarter and begin the second quarter.
Thanks very much and have a good spring.
| 2015_BID |
2015 | ICUI | ICUI
#Thanks.
I'm looking at <UNK>, <UNK>.
I think when we recast the numbers we'll put out there then.
We just don't want to call it out right now.
It's not humongous.
Yes.
You will see that when we recast the numbers as <UNK> mentioned.
It's well, you will see it when we.
Yes.
Never enough.
We still are, yes.
That's what we said when we did the deal a couple of weeks ago, but some of that will be direct, and some of that will be OEM, right.
And we're kind of working through that right now, as we figure out the distribution channels.
No, no, no.
The minority goes into the OEM bucket.
I think on the last call we said we got a dual source award, and I think the thing that's changed is now we've been able to talk to those customers.
That's just starting, I don't know if we were in an inning yet.
We're at an anthem.
We're still at the anthem, but they are just one customer, even if we got all of them, that's still not our ambition, we still have to fight and compete to get that business in the market.
They're only one of piece of what can be a really interesting market.
Yes.
I think that's an okay assumption.
Actually, we didn't record it.
The transaction finalized in October.
No, no.
He is talking about---+
Nothing material.
No.
Yes.
I mean, and I don't think it's exactly the ChemoClave situation that you described there.
So what's happened is we had a product out in the market to make sure the design and specs were what we should they should be, we iterated, it's been a long iteration since I got here, but I think we have locked down a design, and now we're moving it into production.
That will take some more time, but we're talking about it with more confidence than we used to talk about it, I mean we think it will make some impact at some point in next year.
The goal of that product is not to cannibalize our existing business, or anybody else's existing business.
The goal of that product is to convert unconverted market into using a closed system.
Independent of where price would be, the bigger opportunity is getting people who aren't using these important technologies today to adopt them.
That's more valuable to us.
Not really.
It might in the next quarter or two, as we transition some of the stuff in Asia.
Thanks <UNK>.
| 2015_ICUI |
2017 | HPQ | HPQ
#Thank you, <UNK>
Good afternoon, everyone, and thank you for joining us today
It was great to see so many of you at our recent Security Analyst Meeting here in Palo Alto
Our results today echo what you heard from us, HP is strong and getting stronger
And my message to all of you is we’re just getting started
As I look at our performance in the quarter and for the full fiscal year, I’m pleased with our consistent execution, ability to grow revenue, generate cash flow, and invest in our future to create sustainable growth over time
It’s results like these that give us confidence in the trajectory of our business moving forward
It was just two years ago that we began our reinvention journey
We committed to compete and win in our core, into new growth markets and natural adjacencies, and invest in our future where we can disrupt industries and create new categories
We’re also committed to a relentless focus on productivity, to take cost out of the business
We did what we said we’d do, and I’m proud of the substantial progress we have made
There is more work to do, but we’ve never been more competitive, more fixated on the customer, more innovative, and more focused on operational excellence than we’re today
Let me review the highlights
We drove impressive topline growth with net revenue up 11% year-over-year to $13.9 billion including double-digit growth and share gains across the Americas, EMEA, and APJ
Both, Personal Systems and Printing grew year-over-year, together for the third consecutive quarter
We grew non-GAAP diluted net earnings per share year-over-year, delivering $0.44 for the quarter
We delivered $0.5 billion of free cash flow in the quarter, taking us to $3.3 billion for the full year
And we returned 69% of our FY17 free cash flow to shareholders through share repurchases and dividends
Now, let me turn to segment performance
In quarter four, Personal Systems had another stellar quarter, driving growth, gaining profitable share, and delivering impressive innovations
This team is hitting their stride with truly outstanding performance
Personal Systems net revenue grew 13% year-over-year, which came on top of last year’s 4% growth in quarter four
For the full year we grew 11% year-over-year with double-digit growth in each of the past four quarters
Growth in Personal Systems continued to be broad-based with double-digit year-over-year revenue gains in consumer and commercial and across all three regions
We also saw consistent growth across product categories led by notebooks, and strong performance in desktops and workstations
Our regional leaders and sales partners are doing an incredible job of driving growth and delivering value for our customers
In calendar quarter three, the overall PC market returned to year-over-year growth both in units and revenue
We once again outperformed the PC unit market growth and increased our market share to 22.5%, up 1.2 points year-over-year
We saw year-over-year share gains continuing in each region in both consumer and commercial
In quarter four, we continue to surprise and delight the market with innovation
We announced our biggest premium launch across consumer and commercial, introduced the world’s most powerful and first detachable PC workstation, unleashed our most powerful OMEN X laptop for gaming athletes
And as you heard from us at SAM, we are doubling down on security with the world’s most secure and manageable commercial PCs
Security is built into our systems from the BIOS level and up, securing at, below, and above the operating system
As customer demands to services grows and the market transitions towards an on-demand based economy, we are gaining steady traction with enhanced devices or service offerings for the fleet management
We are seeing strong wins by our channel partners and a healthy pipeline for the future
Shifting to Printing
This business continues to make significant progress with year-over-year growth in revenue, operating profit and market share
In quarter four, total revenue was up 7% year-over-year with growth across all three geographic regions
We delivered year-over-year revenue increases in consumer hardware, commercial hardware and supplies
Quarter four supplies revenue grew again, demonstrating the huge progress we’ve made with this business during the year
Hardware units grew both year-over-year and sequentially, driven by consumer
This is our fifth consecutive quarter of year-over-year unit growth
Total print unit market share was 40% in calendar quarter three, and we gained share in both our office and home businesses
The graphics business continues to grow, even without the positive uplift that we experienced last year from the industry-wide drupa event
And as highlighted at the Security Analyst Meeting, we signed the single largest deal in our graphics history with Lightning Source
It’s a multimillion dollar, multiyear deal to deploy 24 PageWide digital presses to five printing sites on three continents
Lightning Source prints roughly 40% of the books sold through Amazon and this deal is going to help transform the distribution and sales model for book publishers all over the world
In A3, we continued to onboard new partners and gain market share, both year-over-year and sequentially
And I’m excited that on November the 1st, we closed the acquisition of Samsung’s Printing business
This creates a combined team, focused on innovation, acceleration and print excellence
Together, we are building on more than 30 years of print leadership and innovation, and now we have an unmatched portfolio and amazing technologies that will enable us to drive growth over time
As our two teams become one, we will preserve the best, the best talent, the best culture and the best technology to become better, stronger and faster
We’ve gained critical IP and now have a broad portfolio of laser and ink offerings that better positions us to attack the overall $55 billion A3 growth opportunity
And that also strengthens our A4 business
2017 was a great year for 3D
We turned out 3D printing initiative into a business with global reach, repeat customer orders and expanding partner and materials ecosystem and revenue
This quarter, we continued to grow our business with new customers such as Medtronic, one of the largest medical device and service companies in the world
As previously highlighted, we As previously highlighted, we added more than 20 new partners including Henkel, our first worldwide reseller, and announced partnerships with Deloitte and Siemens to digitally transform manufacturing
Looking to 2018, we plan to introduce a new, lower cost full color system, allowing us to expand into new markets
We believe that Multi Jet Fusion will be the only 3D printing technology in the industry that can make mechanically robust, fully functional, color parts
Not only, are we leaders in polymers but we’re going to disrupt 3D printing with metals
Stay tuned for more news about this in the coming year
Overall, we’ve done what we said we would do
We’re growing the business, top line and bottom line, and generating strong cash flow
We’re delivering returns for our shareholders and investing in the future to create long-term value
I’m very pleased with our Q4 and FY17 results, but we always have more work to do for our customers, partners, employees and investors
Our markets remain highly competitive and our year-over-year compares are now much tougher, but we’re ready for it
I’m optimistic about our future and excited that we’re just getting started
I will now turn the call over to Cathie to provide more details on our performance and our financial outlook
Second question was around margins over time
And Katy just to reiterate the point that Cathie made to <UNK>’s question, the rate was slightly down this quarter but we did place sequentially many more units than we ordinarily would
And of course that bring the razorblade business model, generates returns over time, positive NPV units and a good deal for our investors
I think it’s always important to remember, <UNK>, we’re executing across our entire strategy, which is to cross three pillars of our core business
It generates the vast majority of our revenue and operating profit today
The growth initiatives around A3, our graphics business, everything is a service which will obviously provide growth opportunities for us over the next two to three years and then further out into the future over the next five to ten years, the work we’re doing around the most of computing and 3D printing, really crates an opportunity for long-term growth for our shareholders
Well, let me start sort of long-term, and Cathie might want to weigh in a little more than that
I’d still remind everybody this is still a $333 billion market that one in five machines got an HP logo on it, means four out of five don’t; that represents opportunity for us
I’ve said consistently that the market is consolidating; the top four grew 3.5%
We grew at 2.5-point premium to that
So, certainly, the big is getting bigger and we are growing much faster than the big four
And that’s really off the back of strong innovation to this lineup, I think we have ever had, we are getting incredibly positive reviews consistently
It’s a continuous transformation of the business to more profitable subcategories, finding where the heat is into the market and where we can get value for the innovation that we are creating
And in quarter four, that paid off yet again
We saw topline ---+ strong topline growth, sequential growth in operating profit
We saw year-over-year share gains
But those share gains, I’ll remind everyone and not an objective but rather an outcome of all of this work
There is no single magic pill that was all categories, all regions
The channel inventory was well under control
We aged inventory was well-managed
I think really kudos to the team both regionally within the business units, the supply chains and the functions
I think we are in a very good position to compete as we go forward in this market
Why don’t I sort of stop, because I know, we’ve got some new investors that have come into the stock and I think it’s important to reiterate and recall why this transaction was important to us, given that we’ve just closed the transaction, and then Cathie can talk specifically to those numbers
First of all, we welcome the Samsung print team to our family
And for our new investors, we bought this business for three primary reasons
Firstly, the A3 market is a $55 billion market and we are underpenetrated in that market relative to the A4 market where we have very strong market leadership
The traditional A3 players operate very complex machines, if you were to break those machines down, they would ---+ you would see thousands of parts on the ground
The Samsung technology really disrupts those traditional copiers with copier level performance but significantly less complex machine, the thousands of parts, when you were to break a Samsung down would be hundreds of parts
And this lowers the cost to operate and that translates to increased margins for our partners and/or lower cost per page for our customers
So, we have an extremely strong portfolio when you put our technology together with the Samsung technology now, HP technology in both the A4 and A3 spaces in Ink, in PageWide, and in Laser, the second reason is that we integrated it, the A3 and the A4 portfolio which really increases our managed print services capability, there’re certain customers and tenders that would come out, that had a requirement for a mixed deployment of both A3 and A4 and were often excluded from those A4 deals
Now having a very full portfolio, actually opens up A4, new A4 opportunities for us
And the third is, we now have incredible thing, we inherited more than a 1,000 top class engineers, industry-leading R&D team in laser space, includes go-to-market capability more than 6,500 patents being added to our core
And I think this newly combined team is increasingly diverse and industry-leading
And so with that we have a lot of confidence in our ability to attract at least 12 points ---+ or 12% of A3 market share in the next three years
The other thing to remember Toni on Samsung is that still the largest portion of the composition of the revenue today is A4. You’ll recall that we acquired these assets, so the A3 capability which was still largely in an investment mode
And so, as we move more and more into the A3 market and we shift the business from transactional to contractual, that generally comes with the higher supplies attraction
And so the composition of supplies over time is indeed going to change
Thanks, <UNK>
Of course, we were competitors up until that sort of 20 days ago
And so, you can imagine, this is somewhat of a tricky acquisition in terms of exactly how much information that we had leading into the closure
I would say, still very early days
The integration is going incredibly well; the team is incredibly focused on our customers, doing all the right things
But, we’re learning every day as we get under the covers of this business
We would expect that as our team looks at best industry practice that’s got us to the position where we are today that there will indeed be opportunities to capture those synergies
But, I would just say, it’s a little too early, not more than 20 days into the acquisition, to give you a lot of specifics around that
Well, I think you’ve actually summarized it really well
We focus incredibly on cost, it’s table stakes
You have to be in the right cost position
If you’re not on the right cost position, you don’t have the opportunity to make investments
As it relates to investments, we feel good about the investment choices ahead of us
We believe we can create significant shareholder value
As we outlined at the Security Analyst Meeting, we have confidence in our ability to execute and hope that we’ve dropped $1 or $2 in the trust bank over the course of the last couple of years to demonstrate that we can execute
I would say that our investment thesis and process that we follow is that we identify investment opportunities across the business, we weigh them all against one another
We’re very targeted to ensure that the investments that we do make advance our strategy, so that we don’t surprise anyone with the investments that we’re making
We’re very disciplined about establishing and hitting the milestones that we lay out
And ultimately, generating profitable growth is what it’s all about
Growth for just growth sake is not particularly fascinating
I think segment by segment, we’re demonstrating that those investments are good choices, investment systems, broadly in premium and specifically in gaming are great examples of investments that we made that are paying dividends right now
Same is true for graphics and the very targeted unit placements that Cathie talked about, NPV positive units and print
3D printing has gone from a business that was nonexistent a year ago to a real business today, 65 channel partners around the globe in every single region and ecosystem that we’ve developed, partners in Deloitte and Siemens, more than 50 materials partners that are starting to look at making materials for the platform, plus the technology announcements that we made at the Security and Analyst Meeting around a lower cost color platform and the technology announcements we’ll make around metals in 2018. So, we’re feeling good about our ability to execute in the core, in the growth areas that we outlined, as well as the future
We don’t break it down at a segment level
And I think there are better sources of data to look at how much share we’ve taken in that particular space
And I wouldn’t want to make our analysts redundant
I would just say that this has been a material business for us that’s grown up over the last 18 months from nothing to a sizable portion, not only in terms of revenue but the gross margin that it drives, as well as the halo effect that it has on the overall brand, which I think is lifting our premium segment as well as every other segment that we had within the PC business
This is an incredible franchise; it’s a growing franchise; the airier is growing
And there is more people that are tuning in to these battlegrounds than game 7 of the NBA
So, we like being in this business and we see the growth continuing
I think it’s really worth reiterating why we acquired this asset
It was not to buy revenue
And I’m being pretty clear about that as is Cathie
We don’t chase share for share’s sake
And whilst the revenue is interesting, it’s not fascinating
What’s fascinating for us is the incredible disruptive technology that this team invented to take on a pretty unconsolidated A3 $55 billion copier market with a better mousetrap that enables our partners to earn more money and enables a lower cost per page for our customers with a very different value proposition from a servicing perspective
More than a 1,000 engineers of very rich portfolio of patents
It’s all of those reasons that we’ll pay dividends over time that we’re incredibly interested in and why we acquired this asset and we’re just kind of getting started in this space
So, with that, I want to take the opportunity to thank you all
I have been Americanized and I understand, it is a season of Thanksgiving, and we’re between you and a turkey
So, I want to thank you for following us through the course of our reinvention journey
Our results give us real confidence in the trajectory of our business going forward
We’re leading in our core markets, we’re entering new growth markets and natural adjacencies and at the same time investing in the future
We’ve never been more competitive
We remain humble and focused
We’re proud of the results that we’re delivering and proud that we’ve been very open and transparent and dependable
We think it’s been a great year of reinvention and we’re just getting started
Have a great Thanksgiving
| 2017_HPQ |
2015 | IBKR | IBKR
#Well, the issue is that if we ever went into one of these places like Turkey, there is, we will not see that we would be able to generate sufficient commissions to pay for the cost of going in there because there is not enough volume there.
But I do not quite see how that is connected with your idea of entering into the custody business.
I see what you're saying.
So it's not the esoteric regulations.
It is that we look at the cost and then we look at not only the cost of going in there but the cost of maintaining the operation and look at the potential revenue of how many executions we would do in that country and it doesn't balance.
Korea is a currency issue.
South Africa, you are correct, and we have been looking at the possibility.
Thank you.
So the, we derive our largest income from sophisticated individual traders and that is the most lucrative for us.
Secondly, the financial advisors and thirdly, introducing brokers.
The issue with the introducing brokers and the financial advisor is that they are more likely to have the Schwab kind of a customer.
The kind of customer that very rarely trades and as a result, it is not so lucrative for us.
So we like the folks, the individual traders, or people who trade in a group, or, obviously, hedge funds.
That's right.
Yes.
That is going well.
We are told that they are going to put more and more customers in our way and that they will begin to advertise our facilities, hopefully.
| 2015_IBKR |
2017 | CPF | CPF
#Good day, ladies and gentlemen.
Thank you for standing by, and welcome to the Central Pacific Financial Corp.
2017 First Quarter Earnings Conference Call and Webcast.
(Operator Instructions) This call is being recorded and will be available for replay shortly after its completion on the company's website at www.centralpacificbank.com.
I would now like to turn the call over to <UNK> <UNK>, Executive Vice President and Chief Financial Officer.
Please go ahead, sir.
Thank you, William, and thank you all for joining us as we review our financial results for the first quarter of 2017.
With me this morning are <UNK> <UNK>, President and Chief Executive Officer; and <UNK> <UNK>, Executive Vice President and Chief Credit Officer.
During the course of today's call, management may make forward-looking statements.
While we believe these statements are based on reasonable assumptions, they involve risks that may cause actual results to differ materially from those projected.
For a complete discussion of risks related to forward-looking statements, please refer to our recent filings with the SEC.
And now, I'll turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
Net income for the first quarter of 2017 was $13.1 million or $0.42 per share compared to net income of $12.2 million or $0.39 per share reported last quarter.
Return on average assets in the first quarter was 0.96%, and return on average equity was 10.24%.
Net interest income increased by $1.6 million in sequential quarter and our net interest margin rose by 8 basis points to 3.30%.
The sequential quarter increases in net interest income and net interest margin were primarily the result of $1 million in interest recoveries on nonaccrual loans and a $0.7 million decrease in premium amortization on investment securities.
Excluding the nonrecurring loan interest recoveries, the normalized first quarter 2017 net interest margin was 3.22%.
During the first quarter, we recorded a credit to the provision for loan and lease losses of $0.1 million compared to a credit of $2.6 million recorded in the prior quarter.
Net charge-offs in the first quarter totaled $1.2 million.
At March 31, our allowance for loan and lease losses was $55.4 million or 1.56% of outstanding loans and leases.
First quarter 2017 other operating income totaled $10 million.
The first quarter results included $0.6 million in debt benefit income on bank-owned life insurance.
Other operating expense for the first quarter totaled $31.5 million.
The reported efficiency ratio for the first quarter was 61.4%.
Normalizing for the nonrecurring loan interest recoveries and bank-owned life insurance proceeds would result in efficiency ratio for the first quarter of 63.3%.
In the first quarter, our effective tax rate was 34.2% versus 34.5% in the fourth quarter.
We expect our normalized effective tax rate to approximate 34% to 36% going forward.
During the first quarter of 2017, we repurchased 113,750 shares of common stock at an average cost per share of $31.03.
We've also repurchased an additional 60,000 shares of common stock month-to-date in April at an average cost of $29.94.
That completes the financial summary.
And now, I'll return the call to <UNK>.
Thank you, <UNK>.
I believe we are well-positioned to sustain our financial performance with a clearly defined business plan for 2017, as with the continued focus on strengthening customer relationships, growing quality assets and improving operational efficiencies.
I would like to take this opportunity to thank our employees, customers and shareholders for their continued support and confidence in our organization as we work towards achieving our 2017 goals.
At this time, we will be happy to address any questions you may have.
So I'll start at a high level, and then, turn it to <UNK> for some detail.
But as far as what you can expect to see in the coming quarters, I would plan on, quarterly, $31 million to $33 million for other op expense.
Yes.
I can answer that, Aaron.
The first quarter, it was a clean quarter, so the $31.5 million was a clean number.
However, there were some expenses that came in a little lumpy like, say, advertising expense.
That line was a little light in the first quarter.
So that's why we're sticking with the guidance of $31 million to $33 million.
And I think, for the full year, it's going to probably work out to something relatively flat to the normalized full year 2016 number.
<UNK>.
Yes, as you know, the balance sheet is positioned in a relative ---+ in a slightly asset-sensitive fashion, so we do expect some benefit from the rising rate environment.
It's been rather muted as a result of ---+ we have seen some deposit cost increases, so we do have some short-term CDs that have been repricing rather quickly.
But we do expect some flow through on the interest-earning asset side to help us going forward.
Yes, we did have a large customer deposit.
So the government balances were relatively flat sequential quarter, but we did have a good relationship that we've been working with, and they did bring in a sizable CD deposit at relatively reasonable cost.
Sure.
So <UNK>, this is <UNK>.
The growth in the first quarter was strong in our Hawaii portfolio.
So if you look at the lines in the Hawaii portfolio, we saw growth at virtually across all asset classes.
And so for the quarter, we saw a, for Hawaii, we saw a 1.4% growth, but that was offset by a decline in our mainland portfolio, and the primary driver for the decline in the mainland portfolio was in the C&I line.
As far as for the year, we continue to see good loan demand here in Hawaii, so I would expect to see that continued kind of growth at the pace that we saw in Q1.
As far as the mainland portfolio goals, we do expect as there are paydowns in the SNCs and other purchase portfolios, we will look at opportunities to replace that rundown.
So by the end of the year, you still will see that mainland portfolio in the 11% range.
So this is <UNK> again, <UNK>.
The resi production in Q1 was in the $140 million range.
We do expect that production level to increase in the second quarter, it would probably be more in the $175 million to $200 million range.
And as far as the gain on sale, in Q1, it was about $1.3 million, and then, for the second quarter, I would see that moving up to the $1.7 million range.
That's correct, Jackie.
Jackie, this is <UNK>.
I would say that, yes, we have hit an inflection point.
We have, obviously, in the many several quarters in the past years, have made large provision credit.
We are expecting going forward for this to be normalized and, of course, at some point, to start seeing additions again to the provision reserve.
Thank you, William, and thanks to all for participating in our earnings call for the first quarter of 2017.
We look forward to future opportunities to update you on our progress.
| 2017_CPF |
2017 | PFS | PFS
#Thank you, Steven.
Good morning, ladies and gentlemen.
Thank you for joining us on this fourth Friday in April.
Presenters for our first quarter earnings call are Chris <UNK>, Chairman, President and CEO; and Tom <UNK>, our Executive Vice President and Chief Financial Officer.
Before beginning their review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call.
Our full disclaimer can be found in the text of this morning's earnings release, which has been posted to the Investor Relations page on our website, provident.
bank.
Now it's my pleasure to introduce Chris <UNK> who will offer his perspective on our first quarter financial results.
Chris.
Thank you, <UNK>, and good morning, everyone.
Provident is off to a strong start in 2017 with record net income and earnings per share for the quarter.
The margin improved as asset repricing exceeded portfolio yields, while our funding costs remained relatively constant.
And on average, loans increased, however, quarter-end footings were slightly lower than year-end due to repayments in the CRE and construction loan portfolios and continued run-off in residential loans.
The pace of loan prepayments has exceeded our forecast as commercial real estate loan customers sell their properties or refinance them with life companies or the agencies after the construction is completed.
Deposit loans were also lower due to seasonal activity, but the loan and deposit pipelines remained robust, and we anticipate a return to balance sheet growth in the second quarter.
And we continue to project mid-single-digit loan growth for the year.
Return on average assets for the quarter was 1% versus 94 basis points for the first quarter of 2016, while return on average tangible equity was 11.33% versus 10.76% from Q1 2016.
The efficiency ratio stayed flat at approximately 58% versus 59% in the prior year quarter.
And during the quarter, we closed one underperforming branch location and consolidated another as we continue the ongoing discipline of branch rationalization.
In this regard, we have recently undertaken an initiative to pursue sale-leaseback arrangements for a number of our owned branch locations.
We continue to see improved pricing in our loan originations, although competition remains fierce.
We see selective instances of competitors allowing extension of loan terms, longer rate locks with no fees, aggressive loan to values and no guarantees.
And we do not see adequate returns on many of these prospects, so we pass on these credits.
We're able to maintain stable deposit and funding cost for the quarter and project only gradual modest increases.
We do not envision more than 2 more rate hikes from the Fed in 2017.
Many of our clients who borrow from us also bank with us, and those relationships bring loyalty and consistency.
The credit trends in our loan portfolio remained favorable.
Our nonperformers were down, again, to $40.5 million or 0.58% of total loans.
And sales of foreclosed assets continue to be resolved as expeditiously as the court system allows.
As the cost of regulatory compliance and the management of enterprise risks continue to increase, there is a growing need to leverage technology to improve processes and efficiency.
We anticipate that our new 3-year strategic plan formulation, which begins in earnest in the second half of 2017, will incorporate automating processes and deploying new systems to meet the ever-changing demands of our clients.
We continue to evaluate fintech offerings to assess the benefits of early adoption and ensure that our customers benefit both now and in the future.
And as we approach the $10 billion asset level in 2018, we've implemented a new asset liability management model that has the capacity to facilitate DFAST stress testing when applicable.
Our capital remained strong, which provides us with the flexibility to grow organically through acquisitions and increased cash dividends.
From an M&A perspective, we continue to seek out accretive deals in whole bank and wealth management firms.
Suffice it to say, we remain steadfast in our conservative valuation metrics when evaluating any opportunity.
We are expending a significant amount of time and energy seeking some regulatory relief in Washington relating to the hurdles associated with reaching the $10 billion mark, but anticipate that any material change to Dodd-Frank will get caught up in partisanship in the Senate, likely pushing any change out to 2018.
With that, I'll give the call over to Tom.
He can add some more color on the quarter.
Thank you, Chris, and good morning, everyone.
As Chris noted, our net income for the first quarter was a record $23.5 million compared to $22.6 million for the trailing quarter.
Earnings per share were $0.37 compared with $0.35 for the trailing quarter.
This was a $2.5 million or $0.04 per share increase compared with the first quarter of 2016.
The change in accounting guidance related to the recognition of benefits from share-based transactions reduced our income tax expense by $1.2 million for the quarter, contributing to the improvement in earnings.
Net interest income also reached a new quarterly high of $67 million, as our net interest margin expanded 4 basis points versus the trailing quarter to 3.11%.
Average earning assets increased $48 million with average loans up $67 million or 3.9% annualized.
Loan growth was tempered by run-off in home equity and residential mortgage loans and pay-offs in our commercial real estate and construction loan portfolios, partially offset by increased C&I lending.
Looking ahead, the loan pipeline remained strong, and for the first time in the long time, the pipeline rate exceeds the loan portfolio rate at 4.18%.
The margin benefited from stable funding costs, stable repricing of variable rate assets, the deployment of excess liquidity held during the trailing quarter and reduced premium amortization on mortgage-backed securities.
We anticipate modest additional expansion of the net interest margin throughout 2017.
We provided $1.5 million for loan losses this quarter, an increase from $1.2 million in the prior quarter, as net charge-offs increased slightly to $1.2 million on an annualized 7 basis points of average loans.
Asset quality metrics were stable versus the trailing quarter with nonrecurring loans decreasing $1.9 million to $40.5 million or 0.58% of total loans.
The amounts for loan losses to total loans increased slightly to 89 basis points at March 31 from 88 basis points at year-end.
Noninterest income was $2 million less than in the trailing quarter, as volatile interest rates resulted in the credit valuation adjustment related to swap loans reversing from a $1.3 million favorable mark in the trailing quarter to $225,000 expense in the current quarter.
In addition, loan prepayment fees were $517,000 lower than in the trailing quarter.
And wealth management income, including tax preparation fees, was $259,000 lower than in the trailing quarter.
These items were partially offset by increases in gains on sales of loans in REO.
Noninterest expense decreased by $1 million in the trailing quarter to $46.1 million as seasonal increases in occupancy expense and payroll taxes were more than offset by reduced incentive accruals, stock-based compensation and benefits expense and legal and consulting costs.
Income tax expense increased $1.8 million from the trailing quarter to $8.4 million.
And our effective tax rate decreased to 26.3% from 31.1%, largely due to the previously discussed change in accounting for tax benefits on share-based payments.
We currently project an effective tax rate of approximately 29.75% for the remainder of 2017.
That concludes our prepared remarks.
We'd be happy to respond to questions.
Well, I'll let Tom talk about the incremental cost, Mark, but I'd certainly say that we've had a steering committee of our group here with our risk and our management team.
We are very down ---+ very long down the process.
We are implementing certainly some steps and some expenses to be prepared for DFAST stress testing.
We're yet to hire a couple of quants to help out within that process.
In between, I think we are continuing down the road that even the regulators that we meet with the regulators to talk about our process.
We will be running a dry run of the stress test in 2018, even though we probably don't need to, and then meet with regulators yet again.
And I think infrastructure and compliance wise, we've implemented and are continuing to implement some of the things that ---+ when we anticipate a CFPB type of review.
And we meet with our mid-sized bank.
(inaudible) have gone through this and make sure we compare notes and have taken some of their experiences and be able to really try to figure out where the ---+ any kind of black holes are.
In terms of cost, Mark, we were looking at about $1.6 million for the year 2017.
Not a whole lot was incurred in Q1, expect to see an increase in consultancy cost in Q2 as we've entered into some engagements there.
In a broader sense from a noninterest expense run rate kind of look, I think we're going to still be around $46.5 million to $47 million.
That's inclusive of the cost expected to be incurred for $10 billion already in this next quarter.
Well, I certainly would love to return it to shareholders in some form.
I think we like growth the best.
We still have a lot of capacity.
The volumes and pipelines are there.
You're right, we continue to accumulate capital.
That mitigates some of the CRE exposure with the guidelines that we have.
M&A, even though we'd love to put that money to work in some context, we want to make sure it meets the hurdles and the equity in this very type of transaction.
So it's a good problem to have, but we'd certainly like to leverage it And in a rising rate environment, it might make it a little easier without taking on a lot of extension risk.
I would think in the ---+ in this time frame, probably more in the wealth management side, though, we wouldn't say no to looking at any other good combination with other banks.
I think as we go through the balance of the year into next year, if we ever did get an opportunity that makes sense for both companies, it would make a closer to the time frame when we would be going over $10 billion, which would be a real good way to go about getting over there either organically and with the deal combined.
So it'll open up an opportunity to not just not look at larger deals, but even maybe some bolt-on acquisitions of good people and good markets.
To add to that, Mark, given our expectation of crossing $10 billion organically in the second quarter of next year, there's no reason to hold back from an acquisition if the opportunity arises.
Well, I would think that the cost of compliance and things that are going on, you want to not really probably overpromise on that front.
I think with our review with our regulators, they like our approach, they like our credit analysis.
Everything else related to DSA and otherwise.
I think it's really ---+ it's going to be tough to move that needle.
And I guess, in line with the brethren out there, they realize it's the same thing.
We're going to have to spend a little more money.
On the other hand, if we all work together to get a better tenure and tone in Washington and with the regulators to say the pendulum has swung one way, I think it should come back a little bit to say, yes, well, it's doing a decent job of risk assessment, Dodd-Frank aside.
I would think that the ---+ it could go a little bit lower, but not materially different without changing your risk profile.
Once you get through the initial cost of crossing the threshold, you do benefit from scaling, and I hope to see some reduction there.
Yes.
We had modeled that in case of a deal.
I certainly would make it a little more cumbersome.
But we\
And Matt, we started planning for crossing the threshold over a year ago, and the timeline is always been accelerateable.
It's kind of dependent on trying to spread out the cost pending a deal.
But if we got one that got us there sooner, we could definitely accelerate our time line.
Well, I think our own global view is that it had been a little hot.
I think it's slowing down slightly.
It might be hoping that something in Washington could reduce some of the burden and change the rules.
That might be wishful thinking on some people's parts.
But I think everybody is looking at their approach to shareholder value and making sure that they are fulfilling their fiduciary duty.
It is tougher.
We're not a huge company.
But it's certainly ---+ I would say, if it's tough for us and others and we're pretty efficient, it's got to be getting tougher for those that are smaller that can't absorb some of these costs and the risk attached to it.
But I think that's kind of their assessment of what's going on.
Maybe they think there's some relief.
I don't see it in the near term.
So that would, I think, keep a steady flow, but I don't think there's going to be a rush to the exits by any stretch.
Well, it certainly is the C&I side, which ---+ I know everybody's focused on that with all focus by the regulators on CRE.
And we ---+ so we're ---+ we've been going that route for a long time.
It's just the C&I loans that we're doing are not as big certainly as the commercial real estate loans.
We have seen a pickup in our ABL Group as the base lending group.
SBA loan volume, we think, will pick up in the second quarter.
We also ---+ CRE ---+ we have multi-family.
We're very specific of who we do business with and where.
As we've mentioned before on the other calls, we do not use the broker network nor we do things in the boroughs, nothing against that volume, it's not something we do.
But we certainly have very substantial borrowers that are doing things a lot in the transit villages, such as right near the train lines where everybody wants to be in the ---+ and that's kind of where we are seeing some opportunities.
But I think we balance it all along to say we go where the volume is, but we also are very, I think, conservative in our approach in any asset class we lend to.
It's approximately 12 branches, <UNK>, and they were in 3 different sections of the state.
The reason we would do this type of transaction was to: one, reduce maybe ---+ maybe our inability to lease out other parts of that building such as there may be a second floor and/or the space may be very large, we only need a portion of it.
So it's really to reduce some of our ownership expenses that we would deal with.
And we think it's an opportunity for us look down the road of where we might be going.
It still would be ---+ we'd still be about 40% owned and 60% leased.
It's ---+ a cost opportunity plus I think to monetize some of the real estate value and reduction of branch sizes is something that we have been looking at for a long time.
It's just you can do that without having somebody else maybe own it.
We just sent that package out.
We're getting a lot of bids coming in.
We want ---+ we're just starting to evaluate that.
So we do not have it.
I mean, we have some branches that are going to be probably above market and then more newer ones that maybe not going to appraise out as much.
On the other hand, we have some that have stored value from being on our books for a long time.
So our blend is really not just to be a gain situation, it's more of an operational change.
Yes.
I would expect it to be fairly neutral, <UNK>.
And given that we're taking space in the buildings, I think the pricing is kind of balanced with the regular pay on the rent to a large extent.
The challenging thing is the swap valuation adjustment.
That was like $1 billion ---+ I'm sorry, $1.5 million change quarter-over-quarter because of rate movements.
So other than that, things were pretty constant.
Now prepayments fees were down, but that's just ---+ that's always going to be volatile, but it's never as larger a number because of the number of loans that pay off and where they are in the cycle relative to the terms of the prepayment agreement.
So I mean, you're probably looking in $13 million kind of range is a normal, and that's subject to plus and minus $1 million or so pretty much.
Well, I think certainly ---+ this is Chris.
There's certainly an amount of fees that will have the construction loan pays off, we don't get the permanence for the most parts.
There's not many prepayments attached to that.
I would say as rates rise, <UNK>, there's probably going to be less pay-offs and/or sales unless somebody is exiting a property.
So from a commercial real estate perspective, I don't see it getting robustly greater.
I hate to sound coy on this.
We budgeted that with the expectation of rising rates in the past.
And then it's all very deal specific, though.
So certain contractions happen regardless of rate environment.
So you ---+ we're still going to see it bounce around.
| 2017_PFS |
2017 | EXPO | EXPO
#Thank you, <UNK>.
Thank you for joining us today for our discussion of Exponent's First Quarter 2017 Financial Results.
Exponent's first quarter results were better than our prior outlook and benefited from continued growth in our human factors, construction consulting and polymer science practices.
With continued softness in the fuel industry sectors and a difficult year-over-year comparison, we are pleased to have delivered growth in the first quarter.
Net revenues were $80.5 million, a 2% increase as compared to the $78.9 million for the same period last year.
Net income was $16.6 million or $0.61 per diluted share in the first quarter of 2017 compared to $15.4 million or $0.56 per diluted share in the same period last year.
This net income is inclusive of a $6 million or $0.22 per share tax benefit realized in the first quarter compared to a $4.5 million or $0.16 per share tax benefit realized in the same period last year.
Our engineering and other scientific segments, which represented approximately 79% of the company's first quarter net revenues, grew 4% year-over-year.
In the first quarter, we performed a large project for a client in the consumer products industry that contributed to the strength of our human factors practice.
This project represented approximately 5% of our net revenues in the first quarter, and we anticipate a contribution of approximately 3% to 4% of net revenues in the second quarter.
For purposes of context, we had a similar project of approximately half the size in the first quarter of 2016.
We expect to return to a more normal project portfolio in the second half of the year and are, therefore, reiterating our expectations of modest top line growth for fiscal year 2017.
We believe that we are well positioned to capitalize on our clients' needs to better understand what happens as people intersect with complex products and processes.
We have assembled a unique human factors team, which includes staff with Ph.
D.
level degrees in a variety of disciplines, including experimental psychology, cognitive neuroscience, industrials and systems engineering and kinesiology.
We continue to expand our international construction disputes work with current mining, gas terminal and power plant projects.
We also saw increased demand from the medical device industry for our multidisciplinary team of material scientists and mechanical engineers to support product development and litigation matters.
Our environmental and health segments, which represented approximately 21% of the company's first quarter net revenues, declined 5% year-over-year.
Exponent's food and chemicals practice expanded as it assisted clients with regulatory issues around the world.
Lower revenues from oil and gas and the industrial chemicals industries have created a challenging year-over-year comparison for this segment.
While our results continue to be impacted by softness in a few industry sectors, we are confident in the strength and long-term financial health of the company.
This year, we are proud to celebrate Exponent's 50th anniversary, a testament to the strength of our multidisciplinary team and the resiliency of our business model.
We held our Biannual Managers Meeting <UNK>h 31 and April 1, where we gathered for 2 highly productive days, to plan for the future and focus on improving our growth.
In the first quarter, we paid $5.4 million in dividends, repurchased $1.3 million in common stock and ended the quarter with $154.9 million in cash equivalents.
Today, we announced another quarterly dividend payment of $0.21 per share and reiterated our intent to continue to pay dividends going forward.
We believe that our long-term value proposition, along with our regular quarterly dividend payments and stock repurchase program, demonstrates our continued commitment to deliver shareholder value.
Now I will turn the call over to Rich for a more detailed review of our financial performance and business outlook.
Thanks, <UNK>.
For the first quarter of 2017, revenues before reimbursements or net revenues, as I will refer to them from here on, were $80.5 million, up 2% from $79 million in the first quarter of 2016.
Total revenues for the first quarter were $84.1 million, up 1% from $83.2 million a year ago.
Our revenue continued to be impacted by softness in a few industry sectors, but benefited from the large project that <UNK> previously mentioned.
Net income was $16.6 million or $0.61 per diluted share in the first quarter of 2017 as compared to $15.4 million or $0.56 per diluted share in the same period last year.
In the first quarter of 2016, Exponent early adopted a new accounting standard for the classification of tax adjustments associated with share-based awards.
The tax benefit realized in the first quarter of 2017 was $6 million or $0.22 per diluted share as compared to $4.5 million or $0.16 per share in the first quarter of 2016.
For comparison purposes, excluding the tax benefit, net income declined 3% to $10.6 million.
EBITDA for the first quarter was $18.7 million, down 1% from 2016.
For the first quarter, billable hours were 296,000, a slight increase as compared to the same period last year.
Our utilization was 74.2% in the first quarter, up from 74.0% in the same period last year and better than our previous expectations.
The utilization benefited from the major project engagement and international construction consulting.
This was partially offset by the New Year holiday, which was a first quarter event this year, and the Managers Meeting that <UNK> discussed.
While we expect utilization in the second quarter to be better than the same period last year, it will be down as compared to the first quarter of 2017 by approximately 2 percentage points as the activity on the large human factors project will continue, but at a lower level.
For the full year 2017, we continue to expect utilization to be flat to slightly up as compared to the 70% achieved in the full year 2016.
Technical full-time equivalent employees in the first quarter were 767, up 2% from year-end, but was approximately even with the first quarter of 2016.
With a strong first quarter headcount growth, we would expect FTEs to remain at the same level in the second quarter and then grow approximately 1% per quarter in the second half of the year.
In the first quarter, the realized bill rate increase was approximately 2.5%, but was partially offset by 0.6% from translating foreign currency for consolidated financial statements.
For the remainder of 2017, we expect to realize a rate increase of 2% to 2.5% and the impact of FX to be approximately 0.3% based on current rates.
EBITDA margin for the quarter was 23.3% of net revenues, down from 24.1% in the same period last year.
For the first quarter, compensation expense, after adjusting for gains and losses and deferred compensation, increased 2%.
Included in total compensation expense is a gain in deferred compensation of $1.9 million as compared to a gain of $430,000 in the same quarter 1 year ago.
As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line.
2017 salary increases were effective April 1.
The rises in salaries will be similar to the rise in bill rates.
Stock-based compensation expense was $5.7 million in the first quarter as compared to $5.2 million in 2016.
For the remainder of 2017, we expect stock-based compensation to be approximately $2.7 million to $3 million per quarter.
Other operating expenses increased 3% to $7.2 million in the first quarter.
Included in other operating expenses is depreciation expense of $1.6 million.
For the remainder of 2017, we expect other operating expenses to be approximately $7.4 million to $7.6 million per quarter.
G&A expenses were $4.2 million in the first quarter, up 20% from $3.5 million last year, due primarily to our Managers Meeting and marketing materials, which leverage our 50th anniversary.
Half of these expenses were realized in the first quarter and the remainder will be expensed in the second quarter.
As such, we expect the second quarter G&A expenses to be $4.8 million to $5 million.
And for the second half of the year, G&A expenses are expected to be $4 million to $4.4 million per quarter.
As I previously mentioned, we realized a tax benefit of $6 million in the first quarter.
The tax benefit is primarily a first quarter event for Exponent.
As a reminder, our issues from our annual compensation program are granted in <UNK>h of each year and are issued 4 years later.
The tax deduction for the gains realized upon issuance generated the tax benefit.
Our first quarter tax rate was 4.8%, which was reduced significantly by the adoption of the new accounting standard we implemented 1 year ago.
For comparison purposes, exclusive of the tax benefit, our tax rate would have been 39.4% in the first quarter.
We expect a tax rate of approximately 39% during the remainder of 2017.
For the first quarter, operating cash flow were a negative $1.8 million as a result of paying bonuses, dividends and taxes in the quarter.
DSOs did increase, but we believe this will be temporary.
Capital expenditures were $1.3 million.
We repurchased $1.3 million of common stock for a total of 23,000 shares at an average price of $57.63 during the first quarter.
We still have approximately $56 million authorized and available for repurchases under our current repurchase program.
Additionally, we distributed $5.4 million to shareholders through dividend payments and today, announced another quarterly dividend payment of $0.21 for the second quarter of 2017.
After repurchases, dividends and annual bonuses, we ended the quarter with $155 million of cash and short-term investments.
While our first quarter results were better than expected, we continued to expect modest top line growth due to the adjustments in headcount during the second half of 2016 and market conditions in a few industry sectors.
As we previously discussed, we expect 2017 revenues before reimbursements to grow in the low to mid-single digits and EBITDA margin to decline by approximately 25 to 75 basis points as compared to 2017.
I will now turn the call back to <UNK> for closing remarks.
Thank you, Rich.
Exponent continues to be retained by a diversified portfolio of marquee clients for an engagement spanning a wide range of industry sectors.
Our unique multidisciplinary team provides solutions to improve the reliability and safety of technologically complex products and processes.
We are optimistic about our opportunity to leverage our unique market position on a more global basis and are confident in our ability to generate long-term growth.
While our 2017 growth will be modest, our value proposition remains strong and our long-term financial goals remain the same: to produce organic revenue growth, improved profitability and maintain a solid balance sheet.
Operator, we are now ready for questions.
So Joe, it was right around 5% for the quarter.
And I think you know that in the past, we've indicated when projects are more than in the sort of 2% to 3% range, which is normally the size of a typical large project.
When they get to 4% or 5%, we've indicated we would let the investor community know.
And so this was right around 5%.
And so we wanted to alert everybody to that.
We do have some visibility with regard to the second quarter for this.
And that's why we've indicated that we think that it will be of the order of 3% to 4% of our revenues in the second quarter.
We don't have any visibility beyond that.
And we think it's reasonably likely that it could end, although it's possible it could continue.
The one thing I would just say about this, this is a proactive engagement.
It's not a litigation-based engagement.
And as such, it's a ---+ it's work in that vein, so it's not something that we anticipate will extend for a very long time.
Well, first of all, in the oil and gas area, the core part of that, we did see some growth in that, and it was only related to the fact that we had one of our international construction consulting jobs that was in the oil and gas industry.
We had mentioned before that we were seeing that our business in oil and gas was approximately 5% of our business that is closer to ---+ it's in the 6% to 7% range because one of these projects is ---+ sort of ---+ couple of the projects are in that range, they brought that up to the ---+ about the 7% level.
But it hasn't really been a change in overall demand, though, from that industry, because this is a disputes-related project.
It's a project that the client had obviously going for years before we got involved.
And as such, it's not an indication of any real change in our ---+ in what we're seeing in the market for our ---+ in demand for our services in oil and gas.
As far as the automotive industry, that remains at around 9% to 10% of our business.
It has been flat on a year-over-year basis.
And at least at this point in time, there is some pretty exciting things going on in the broader automotive industry around autonomous vehicles and such and electric vehicles that we are getting engaged on.
But at this point in time, it has not led to a significant change in that business or growth in that business for us yet.
Yes.
Go ahead, Joe.
No.
The other industry that we've commented on before is really in the broader chemicals area, which, again, we haven't seen really a change in that environment yet.
I think a number of the larger mergers that are going on appear to be progressing through the regulatory approval process.
And as they go through that, and these organizations begin to go through their integration, we would expect to be able to get a better read on how work ---+ that we might ---+ that we might provide services and will flow through those new organizations.
Yes.
As far as the margins go, I mean, we ---+ our margins were still down here in the first quarter about 77 basis points.
So at the sort of low end of that range on our 25 to 75 basis points.
We still expect our utilization to be flat to slightly up for the year, that hasn't changed much.
I mean, this was just 1 quarter of utilization being a little bit better than we'd expected.
We don't, at this time, believe that that's going to push us out of the range that we were expecting coming into the quarter.
And as such, we aren't looking ---+ expecting to change that range at this time.
Yes.
Tim, let me describe the broad area that we operate in, in these ---+ on these kinds of studies.
They range from ---+ everything from sort of kids interaction with toys and appliances and washing machines and things at sort of one end of the scale all the way through to issues with regard to sort of health-orientated type things at the other end of the scale interacting with various technology and so forth.
There's a very broad range of things.
Unfortunately, the thing that is most confidential in our business are our large proactive projects.
Because it's not just the client that's ---+ that is confidential, but the type of work we're doing for the client is extremely confidential because these obviously relate to potential new products.
And so from that standpoint, Tim, I'm sorry, but I really can't describe more.
No, it wasn't the same project.
I just said, we had a similar kind of project last year that was about half the size.
What I really want to sort of explain in that in a sense is, we do get these projects from time to time.
This particular one being of the 5% revenue was one that we felt we needed to flag as we've told you that we will do that when we get something up in the 5% kind of range.
But we've had a number of these projects in the past that would be less than that from, let's say, 2% to 3% down to 1% down to much smaller projects.
And so it wasn't that we have not ---+ I didn't want you to feel like we had a 5% project in this quarter in an area that we never had a project even similar to it before; that's not the case.
We have these projects quite frequently, but this one just happened to be a lot bigger.
So we knew we had the project.
We didn't know it was going to be this size.
That was the average for the quarter.
We ended right about at that number.
It might have been ---+ I think, we were 7 ---+ we were probably down by 1 from that.
So I think we average 767, I think we were 766 at the quarter-end.
Yes.
I mean, Tim, I think there's a couple of things going on.
I think one is where we are in headcount.
We're not in a position where we're lapping headcount at the rate of growth that we would expect in a normal environment.
We've been in this situation as you recall that second quarter of last year was very poor for us.
As a result, we had actually a falling headcount as we rolled out the rest of last year.
We ended, I think, lower than our peak.
And so now we're turning that around, and we're coming back.
But trying to lap where we were there, we haven't had sort of 4 quarters of normal headcount growth to get back to enough distance above that to get the growth numbers where we'd like them to be.
So I think there's a headcount lapping situation that we need to continue to work on.
There are also other sectors that are just not doing as well as we would like.
I mean, oil and gas is certainly one of them.
Automotive is certainly flat, but we have a lot of optimism around automotive with regards to some of the new technologies.
Well, a couple of things.
I mean, I think what we knew was, I said it was going to be a pretty good size project, but we just didn't know it was going to be at the level that we have a history now of sort of letting the investor community know when we have a project of around 5% and that's what we do.
In terms of the profitability of the project, we don't see this as being different profitability.
I think we've described in the past that all of our consultants in the firm have one bill rate that they use for all of the different work they do.
And therefore, when we have work in one type of field versus another type of field or sort of one client versus another client, we don't see that as having an impact on our profitability.
The impact on the profitability comes when the utilization obviously goes up, but not because it's a particular type of work.
Yes, it was.
And when we're giving guidance around what level of utilization we expected to be at in the quarter, we had indicated that we thought that utilization would be down about 2% versus where it was in the same quarter last year, primarily because of the additional holiday and our Managers Meeting in the quarter.
Clearly, this project made up for that delta there, which was that sort of 2% difference in utilization.
So I would say that ---+ I will talk in generally and then I'll give you sort of more specific answer.
But relative to this project, I think that, in general, there is sort of 2 ways that things convert.
There is where you have a particular project on why something failed.
And then as a result, you, for example, get follow-on work to try to help make sure it doesn't happen again.
And so the proactive work comes virtually immediately following the reactive work and is often in the same kind of area.
But the other scenario simply is that you do some piece of proactive work for a client and sometimes, years later, they come back to you because they've got another issue they want us to look at before they end up in trouble again.
And so they bring us back in.
There isn't often ---+ there isn't always a nexus between when we do the proactive work versus when we do the reactive work.
The reactive work often leads just in terms of from a reputation standpoint.
However, there are other clients where the majority of our work we do is more proactive in nature.
And this particular client is a client we do other work with.
And it didn't really result from some specific project that we had done before ---+ some reactive project we had done before.
Well, I certainly would hope we can ---+ we've obviously given guidance for this year.
And we don't currently expect us to be able to achieve that this year.
We've talked about low- to mid-single-digit growth rather than high-single-digit or above growth.
So obviously, we're not projecting that for this year.
I think what we do need to do is we need to get to a point where we aren't trying to overcome some setback.
The setbacks traditionally have been more, you have a big project when that comes off, then you've got to overcome that.
We had the unusual situation in the second quarter of last year, where for a number of different reasons we talked about at the time, we had a particularly bad quarter, which did lead to a challenge from the standpoint of growing headcount.
And so we're still trying to get that history behind us.
And I think that's why, I think, it's going to take through this year before we can start looking to the following year.
No.
I think that this is sort of in the middle.
There isn't another sort of obviously project that is beyond our 2% to 3% range.
But I think the portfolio looks similar to what it has in the past, when we take out the unusually large jobs.
Well, I think it is disproportionally driven by consumer products broadly, including consumer electronics.
But it also, I think, the other area of growth that we talk about on the proactive side is the regulatory work that we do in the food and chemicals practice, which continues to grow.
And now part of that, you don't see quite as much growth there.
There is a little bit of offset on that because of foreign exchange, because the majority of that work is run out of the U.K. But those are the areas, along with medical devices, that are probably continue to be the strongest areas on the proactive side.
So I mean, I think ---+ first of all, I guess, the comments that I have made before with regard to this election, I think still hold true, which is that we, as a firm, have been successful in administrations with Democrat presidents and Republican presidents.
I think that the wheels of government change or turn very slowly.
The idea that we're going to have some dramatic change in government in spite of all the rhetoric and all the news, I guess I don't quite see it that way.
What I see is that the direction we're going in, the slope has changed a little bit or is likely to change a little bit.
In other words, I don't think regulations have done nothing but get more strict, if you want to call it that ---+ use that term over time through Democrat and Republican administrations.
And we have a kind of a little bit of a love-hate with that, because on the one hand a lot of our work comes out of those regulations and that's good.
On the other hand, if they're so severe that they choke business, then that's bad.
So we're in that ---+ in sort of inflection point as well.
And I think it may very well turn out to be the case that there just aren't as many regulations put in place during the current administration.
But in terms of the main things that we work on or the main things that drive a lot of the regulatory work we do, we think it's unlikely that there's going to be a significant change.
There is no ---+ what we do, I think, as you know, from the food and chemicals side, we do a lot of work in the regulatory area around pesticides.
We don't see any move to change any of those regulations.
You look at the new head of the EPA.
He doesn't talk about that at all.
We don't think that's a changing environment.
So I think these changes are likely to be slow and a little bit different to discern.
I think the one thing the change sometimes does is puts a halt to things.
People who are thinking about going forward to the project that they think the rules might change, maybe they delay.
And so I think you can get some of that.
It's a little bit the same effect that Rich talked about earlier with regard to mergers in the industrial chemicals area.
If a merger is going on, that's not the time you kind of get the next project from and they're trying to sort out who is in charge and what division is going to do that and so on.
So I think you can get into that kind of a situation.
But we don't ---+ certainly we don't sit here worrying that all of our regulatory practices will come to an end, because we don't think they will at all.
No.
<UNK>, we don't ---+ our view of that has not changed, both management and the board.
We have always said that it's a longer-term approach to get to that $50 million to $70 million level over a 4- to 5-year period of time.
So we're trying to be patient and take the right opportunities to utilize the cash, may it be for repurchases, increases in dividends, appropriate capital uses for the business otherwise.
But overall, there hasn't been a change.
Yes.
It's a little bit difficult, because this does spread across a number of our practices.
We have a construction consulting practice that is running, let's see, it's running about a little over 6% of our revenues, that is purely around construction consulting.
I'd say about half of that business for them is proactive in nature.
They involved in project management activities, clients.
And the other half is really around the disputes area.
But the really unique market position we've been in is that, that team has been able to leverage people from other practices and bring in specialized discipline for different projects.
So it's a very different team that is working on a project at a power plant than at a LNG terminal, than at a mine location.
So it is a mixture of people across our firm that are coming together on these projects.
But again, this is still overall something that is less than 10% of our business that's around this area.
Yes.
Well, that's kind of a timely question because we ---+ at the end of <UNK>h or beginning of April, we just recognized that we've been in business for 50 years.
And we're using that as a kind of a lever point or an opportunity to go out with some new materials.
We have a kind of a book that highlights a lot of our work that I think people find is a very interesting book for ---+ that we give to our clients.
We did the similar thing when we turn 40 years.
And so that is sort of driving a new thrust of our folks going to meet with clients and continue to tell the story.
As I think I've sort of explained in the past, I mean, the kinds of services that we offer to clients are not ones that are typically sold through a ---+ what I'll call a sales staff.
They really need to be sold through our experts because that's who we are really selling.
And we're not sort of in the commodity work business.
And so through that, I think this is an opportunity for us to sort of leverage client engagement in that.
| 2017_EXPO |
2016 | TGI | TGI
#At this point, as we've talked before, we have a defined contract that takes us out through a specific ship set.
That said, we've also been working with Boeing on defining the transition to their facility in Macon, Georgia, as well as supporting their efforts of moving other elements through the supply chain.
I'd like to comment as well, <UNK>.
We have a strong partnership with Boeing.
They represent some 7 out of the top 10 programs at our Aerostructures group, and many of our Systems group as well.
I've been on the phone with senior leaders at Boeing over the last few weeks, as I started my new role, and we've talked about the Boeing partnership for success.
And they understand that we want to make a decision that is in the interest of Boeing, their customer, and Triumph, and we would like to invest our discretionary funds in helping them win new business.
I like the level of dialogue we're having.
And while there is working teams that are assessing the best plan to make the transition on 747, we are having a broader discussion with Boeing about how we can partner in the future.
It's really a couple of things.
We are seeing a little bit increased spending on the development programs, as we are applying the resources required to ensure that we are driving success on those programs.
We're also seeing shifting in some of the working capital improvement that we have been targeting that I would generally define more as timing than anything else.
The answer is yes, from what I've seen.
Granted, I still want to see all the sites, and finish the forensic, but we have a number of sites with sort of a common capability or addressing a similar market, and this is where we need to look at whether we can gain both cost and go-to-market synergies.
I don't think it's a matter of centralization, <UNK>; I think it is more a matter of standardization.
There are a number of things that occur out in the businesses that I think are duplicative, and I really want my businesses to be outward-facing, engaging customers, developing solutions, and executing on their commitments.
And a lot of sort of the back-office infrastructure processes, I think, can be made common, and achieve both higher quality of service and more affordability.
This is a bit of a shift in the operating philosophy.
It is something I'm going to be engaging all of my leaders in talking about and moving forward on.
I think we reached a point where we have grown, and we have the scale or the size, but we don't have all the benefits of scale.
So, that is what I'm after.
Sure ---+ as mentioned, facts and data.
When we have the information on all of the companies, all of the sites ---+ we are looking at utilization, occupancy costs, whether or not they're in markets that are growing or contracting.
What's been their performance on programs.
It is a really rich data set, so that we make the decisions that take the Business in the right direction.
We'll have this data in the March time frame, and be working towards recommendations to the Board in the April time frame.
We have the data.
It's a matter of bringing it into focus, and then doing the trades in terms of which areas have the potential for the highest returns and which divisions are the most competitive in their markets.
That's the way I intend to approach it.
And having met with my senior leadership team at our first off-site after the first week here, they are on board and already thinking about the best way to reshape the Company.
So, <UNK>, the $3.9 billion is at the bottom end of the range that we have been providing during the year.
It is reflective of the continued softness we have seen in commercial rotorcraft, as well as in broader aftermarket, primarily seeing it in our third-party aftermarket business, where we thought we would see more growth there and recovery during the year.
We've also seen some impact, although it's not as significant within our Business, in non-aviation sales, which primarily is a direct impact with oil and gas.
So, those things, all combined, are driving us to the lower end of the range.
We are seeing a strong fourth quarter, which is historically in line with what we've seen, where you'll have roughly $1.1 billion brought in during the fourth quarter.
<UNK>, I'll only add that this is why I made increasing our organic growth one of my top three imperatives, because we can do better.
We have been contracting in that category.
We have a lot of great capabilities, and the overall market that we participate in does have a positive growth rate.
We ought to be growing as well, so you will see a laser focus on that.
I don't see a multi-year headwind on organic growth.
There is some process improvements that we can make in defining opportunities, shaping the pipeline, doing very rigorous capture reviews, and then making sure we start programs on the right foot.
But the first path to growth is through execution.
And we have a number of programs that we need to improve our performance; and when we do, these customers have follow-on work to give us.
I have met with the head of procurement at Airbus, at Boeing, my counterparts at Gulfstream, Northrop Grumman, and they all want to see Triumph deliver on our commitments and have more work for us.
And of course, acquiring new customers or going to farther adjacencies is always more difficult than just working and partnering with the customers you've got.
So, that's my initial focus, and there is work out there to be captured.
It starts with performance.
It's all about execution on the development activity.
As I look at it, we are completing a number of the milestones on both the Bombardier and Embraer program, one of which we announced with the delivery of the first joint fuselage in Embraer.
It is paying close attention to the progress, to the completion through a number of checks through the process.
And I think, as we go forward, we're going to be paying very close attention to it.
And at the same time making sure that we bring the right resources to bear, so that we get it right on those programs.
They are both roughly neutral from a spend being offset by milestones from customers.
We are a large Company with ---+ generating good op margins, so we are not a broken company.
But what I will say is that, after the Vought acquisition, the Company had a great three-year run as some of those programs came to completion.
There hasn't been a rapid enough replacement of that revenue, and that has contributed to some of the sales and margin pressure that Jeff has outlined.
Having said that, we have good franchises in Aerostructures.
The transition out of Jefferson Street to Red Oak was the right thing to do.
It is a very modern plant.
We are putting in new practices there that allow us to be more efficient.
The programs that we are going through are more in the development phase, so we have had a mix change from the traditional 747, C-17, V-22 production work, towards development programs like Bombardier, G7000 and Embraer.
So, it is natural that there is some margin pressure there.
But we are excited about our role on the 7000.
I don't know if you have looked at any of the marketing data on that platform, but it is an amazing aircraft that is really going to change that segment, and we're glad to have the key role of producing the wing on that.
Similarly with the Embraer E2, I walked the line, looked at all the initial hardware on that, and we are excited to be on that platform.
But we have got to do more to grow that business.
I also view that the Company has now matured, now some 22 years on, and created this very broad set of capabilities, that we have the opportunity to create some synergies that maybe didn't exist before.
This is my change in the operating philosophy to really drive a one-company approach, drive out some cost, and start to win together, rather than to go into customers as separate divisions.
I think it's more a matter of bringing the Company into alignment, as opposed to fixing it.
It's a fair question.
What are the synergies within our three segments today.
And we are looking at that closely.
Today, they have different customer sets in some of the aftermarkets from maybe the Systems and Aerostructures, which have more of a common customer set.
And we'll look for opportunities to do cross-selling, to do more aftermarket support to systems, but this will be part of the strategic review and I'll provide more comment on that on our next earnings call.
But my first focus, <UNK>, is to make sure that they're performing to their potential.
Then we assess their markets, and then we will make the right decisions on portfolio after we've got them running properly and we have a good outlook of the future.
I think we are pretty well lined out with Gulfstream as to projections on rates going forward.
We've been experiencing a year-over-year decline there, and we've also built that into our forward view of the Business.
Matt, we haven't guided to cash for FY17.
But specific to forward-looking cash tax rates, we will burn through the NOLs during FY16, and become a full cash tax payer in FY17, which we still believe is a rate between 28% and 30%.
On the pension side, any contributions to the pension plan currently would be discretionary.
There are no required payments.
This year, we had looked towards a potential contribution, but it's all driven by the cash generation and other parts of the Business.
We'll take the same approach next year.
And depending on the strategic evaluation of the Business, how we're deploying capital, pension is one of those things that ---+ it's a choice we can make of whether to contribute or not, if it makes more sense than other deployments.
<UNK>, first, maybe a clarification: Aftermarket within Aerospace Systems was stronger year over year, where we saw total revenue of roughly 18.4% of the total versus prior year, which was in the 17%s.
So, year over year, we did see a little bit more volume there within the aftermarket.
That does benefit the margin.
But it's also definitely benefiting from some of the cost reduction initiatives that we've been undertaking through the year.
And as we continue down that path, I think we'll continue to see opportunities to expand margin across the Business.
Sure.
Even though the product sets are different between building gear systems, hydraulics, fuel systems, whatnot, compared to some of the large structures, the underlying processes of business development, of doing engineering development and design, supply chain management, factory efficiency ---+ those processes convey.
And one of the initiatives that I've launched is building what I call the Triumph Operating System that will capture the standardized best practices on how we will operate through the whole value stream.
And today I'm seeing best practices at some locations that I think we can lift, as mentioned.
And even though Aerostructures might apply that to the production of a Global Hawk wing or an E2 fuselage or the Bombardier 7000 wing, the underlying operating process can be the same.
This is something that has not been the case.
All of these companies have different heritages.
They required a different timeline, and there hasn't been a singular push to drive standardization, and I think that is a real upside for the Business.
I certainly saw it at Raytheon.
Raytheon had, I think, one of the tightest operating systems of the tier 1 primes.
I feel very fortunate to have worked there, and been immersed in it and contributed to it, and I see parallels with the Triumph Group.
Good morning.
Sure.
It is a mixed scorecard.
I will be straight with you, <UNK>.
Some of the customers that got on my calendar right away have concerns of things they want us to address head-on.
There's a reason why I traveled on my first trip to Aerostructures to make sure we are doing the things necessary to recover on red programs there.
Some of the calls were very encouraging.
Gulfstream is very happy with the transition of the wing in Tulsa, even though we have a few challenges on one of our Airbus programs.
They have additional work that they would like to partner on us with.
Honeywell was very complimentary of our support.
So, it is a mixed scorecard, and that is directly to my point about getting all parts of Triumph to fire on all cylinders.
It's been my experience that you can make your most difficult and disappointed customer your biggest advocate if you'll perform to your commitments and adopt their agenda.
And for some of our big OEM customers, their agenda is quality with no traveled work and supporting their ramp-up rates.
For others, it's providing high reliability of the components that we provide in the aftermarket.
So, we are going to get aligned with these customers, and we are going to measure it.
It's not just going to be based on sort of a qualitative assessment.
I have a process I use to measure customer engagement and support on a quantitative scale, and the breadth and depth of that relationship.
But it does start with performance.
I'm optimistic.
Most of the customers I've talked to have said ---+ we like Triumph; we want to work with Triumph; you can do better on a number of programs.
One of my first acts was to do a call for all red and yellow programs across the Business, so that we know what they are and we can begin to triage them.
And I'm personally reviewing about 10 red programs every week.
We are doing 30-minute run-throughs to make sure that the recovery plans are in place, the dates for return-to-green are partnered with the customer, and we're taking the actions required.
And I think that's a new operating approach for the Company.
It will help me learn more about where the strengths and weaknesses are.
It will also set the tone of how I want to operate, and my expectations on accountability.
Certainly, many of our contracts have terms and conditions that require us to coordinate with customers, should we choose to transition the work.
But they all understand this is a dynamic market.
And as we did with a recent conversation with Airbus on one product transition, we explained to them that we're going to create a true center of excellence for that product, and invest in a new building and new equipment.
So, they can expect higher performance out of that division.
And we've got to manage the transition and mitigate the risks, but they were on board with it, and I expect to have those kind of conversations with a number of customers.
As far as Airbus in the US, it's been a great conversation because their Head of Procurement has an automotive background, and we've talked about what BMW and other companies have done in the US ---+ what we can learn from commercial supply chain management techniques.
So, I think we will learn from our customers and from some of our suppliers.
I don't have the notion that I or the Triumph Company has the corner on all the best practices, and so we will learn from other industries, and quickly incorporate them into our habits.
Through the interview process, I got to know the Board.
We have a really strong and capable Board that has run organizations much larger than Triumph.
And we talked about culture, and where the legacy Triumph Group has been, where the Vought division acquired in 2010 has been.
What I'm excited about is building a new culture that builds on the best elements of both, but is not the same as either.
This will be part of this Triumph Operating System that we'll deploy.
There are things happening in both businesses that are areas of strength, but there are also areas that both can improve.
So, culture will be part of it.
I've worked in both decentralized and more centralized cultures.
There is no perfect model; it really does relate to the unique circumstances of the business.
But it's pretty clear that Triumph has been more towards the decentralized model.
I view that as an opportunity, <UNK>.
If I came into the Business and they had already done some of the things that we are going to do, I'd be in a much more difficult spot.
But the fact that there is opportunity to build on what has already been created, which is quite remarkable, because you look at Triumph Group growing from $60 million in 1993, 40 acquisitions, a 25% CAGR, and all the amazing capabilities under one roof, it's a great Company.
But it can be better, and that is why I'm emphasizing capturing the benefits of our scale.
I don't think feather in maybe is the right term.
I would say accelerate and expand.
And we will be looking at the decisions that we need to take over the next few quarters to favorably impact our future.
And some of these have been discussed in prior earnings calls; things that we have been waiting to see how certain programs played out.
So, many will not be a surprise to you.
But we are going to go broader and deeper with the change.
And we'll be disclosing the cost and timing of any restructure-related charges with you over time, as well as the anticipated benefits.
So, I think it's more building on what's been done, and going farther.
Rob, it's all about getting past a lot of the headwinds we've experienced over the past few years.
And part of what we're doing through the T-3 effort is really looking at all of the levers that we should be pulling to generate cash in the Business.
And definitely driving towards a much higher conversion rate, as we get out to a run-rate basis.
We don't have a number yet, Rob.
As you know, there are some implied nuances with some of the fair value of accounting running through revenue and earnings.
So, there are some difficulties to get to 100% there, but we are going to drive and pull all the levers that we see in front of us to get that number as high as possible.
And I'll add that we've done some benchmarking on how Triumph compares to our peers in accounts payable, accounts receivable, cash-to-cash conversion, and we lag.
One of the work streams within the Triumph Transformation Team is improving our cash management and margin, so you can expect to see progress in that regard.
Our largest content on those programs is in our Aerospace Systems business.
And we believe we are fully supportive of both Airbus and Boeing on achieving their rate desires within those facilities, with little or no additional capital required.
It's a good question.
The facts are: Airbus, especially the A330 and the A340 ---+ it represents a substantial part of our backlog in Aerostructures.
So, we are a player.
They have given us some additional work now in the A350.
And in my conversations with their senior leaders, they want to give us more.
They do want to see lower cost, but certainly competitive expectation.
But they are also looking for areas where they leverage some of our design capabilities.
Maybe unlike some of the military platforms where you either get in at the beginning, and there's not much of an opportunity to get on the platform, Airbus has the strategy of multi-sourcing many assemblies to reduce risk, to increase capacity.
I'm traveling to Toulouse in the next few weeks to meet with their senior leaders.
I'm optimistic that we can build on what we have, and grow more.
Thanks, Cat.
Thank you, everybody, for your insightful questions and your interest in Triumph.
I'd just like to reinforce a couple of points.
Triumph really has demonstrated an amazing growth rate over the last two decades, and now we are focused on right-sizing and capturing the benefits of our scale.
You heard my top three priorities: delivering on commitments, improving our financial performance, and accelerating organic growth.
And we're going to do this with a focus on the highest-return opportunities.
All of these are driven towards our goal of predictable profitability.
We're going to build on the improvement initiatives already under way.
And as part of our top-to-bottom review of our markets and our businesses, we'll provide the insight we need to transform the Triumph Group and position the Company for the next decade of growth.
My leadership team and I look forward to providing updates in the coming months on the changes we will be making to better serve our customers and shareholders.
Thanks for dialing in.
Have a great day.
| 2016_TGI |
2015 | R | R
#I think ---+ I mentioned it in the script.
We are seeing strong rental reservations from our seasonal customers as you might imagine, the guys that are ramping up for the holiday, the parcel-type companies, for November and December.
So as we get into that season, the units are available, we would expect to have those units rented out to those folks.
So I would tell you what we're seeing is good, strong reservation activity from those customers.
If anything, it might have been ---+ the only thing maybe different from last year, some of it might be a little bit later than we saw last year but ---+ which last year they picked them up sooner in the quarter, but we're looking at November and December.
Some of it is seasonal.
Like this time of year you got the parcel company that's going to pick up more of the straight trucks than the tractors but it could be various things.
I think what we're doing is we're kind of viewing it as an opportunity to really de-fleet and get ourselves prepared for the first quarter.
So we're in the process of doing that with the rental lease program and then also with some of the things that we're doing around out servicing vehicles and putting them at the used truck lots.
Good morning.
Yes, I do.
I think we've said high single-digit generally on the top line and I would expect to get some leverage and get double-digit growth on the bottom line.
Obviously, if you've got some headwind on the gains line, that's going to put some pressure, maybe bring it down, maybe bring it down to the low end of the double digit, maybe even high single digit, but I would expect over the cycle clearly to have double-digit earnings growth along with that high single-digit top line growth.
I think there's ---+ I'll let <UNK> kind of elaborate on that a little bit but I think clearly on the ---+ wherever there's trucks needed, we can play a role on the FMS side and with all the different product offerings that we have which eCommerce, certainly all the deliveries to homes is a big part of that.
On the logistics side, I think there's a lot of stuff.
If you think about the offerings that we have running distribution centers, our ability to manage orders from customers and really what is called the omni-channel, our ability to actually execute that for customers that need it, we've got great expertise and capabilities there, but I'll let <UNK> elaborate a little more on that.
I would just add, we do that today for many of our customers across multiple verticals.
We have the capability to not only deliver into retail DCs but into store fronts through (inaudible) networks and last mile as well as to consumers' homes.
So, I think we've got a really good model right now for our key customers and we're going to continue to focus on additional capabilities to expand that.
Thanks, <UNK>.
Hello.
Well, the ---+ what I would tell you is the number over the last several years has actually grown as we've improved productivity.
You're getting more trucks per technician on our base fleet.
On the on-demand stuff, you're right.
It's a little trickier, but you have a general idea of where the trucks are.
And you also ---+ the amount of work that a technician does in an on-demand truck is typically a lot ---+ significantly less.
So that's where you're able to leverage some of the capabilities.
When we get a large on-demand customer though, we have an idea ---+ we'll have a contract and we'll know where the vehicles reside and when we need to staff up, then we staff up and we can adjust that as needed.
<UNK>, do you want to add anything to that.
Yes, I would just add that as we're viewing it, as we bring a technician on, if the on-demand revenue, if the truck doesn't come in, we're looking at the technician running more road calls, which our customers like versus using a third party.
We're looking at rather than sending work down the road to a vendor keeping it in-house.
We're looking at increasing our PM currency even more.
We're looking at lowering overtime.
So the point, is you can bring the technician on.
There's a lot of work to be done, which then you can free that up if the on-demand truck comes in.
You have other ways of flexing.
Right.
To be able to utilize the tech.
Yes, I think obviously this quarter has taught us a lesson, so we're obviously looking at the modeling, but I don't see an issue with where we're going of maintaining the staffing and the work is there to flex as more on-demand comes in.
So we see real opportunity to continue growing this product line.
Thank you.
Okay.
Is Nicole on.
Okay.
Well, sorry about that, Nicole.
Maybe we'll pick up your question later.
Well, listen, I think that concludes the call.
We're about 15 minutes past the top of the hour.
I wanted to make sure we got everybody's call ---+ everybody's question in considering the type of quarter that we had.
So look forward to our call again in a few months as we discuss 2016.
Anyway, have a safe day and we'll see you on the road.
| 2015_R |
2016 | HUBB | HUBB
#No.
I think everything is tracking right to that actually.
So that's ---+ they compare to last year, but reasonably flat sequentially, quarter over quarter.
One thing that has become interesting is as the business has shrunk, the projects can create some lumpiness that moves things around a little bit.
Versus that used to be when there was more projects out there a little bit easier to predict.
That certainly is our expectation ---+ exactly how you described it.
I don't know of any.
That is set to expire in December, as you know.
Hello, Chris.
I think, Chris, we had a little bit on the light side of industrial, which was a little bit softer, and then I think the pricing on lighting is the other thing you will find creating that.
First of all, it was spread between our resi and C&I product lines, kind of across the whole suite of products there.
And I think it's, from our perspective anyway, more of a like to like phenomenon, Chris.
But remember, Chris, on that like for like, some of that is attributable to product that we said earlier in the year, and even late last year, was product that we identified was way out of line with the market; it was not competitive, which is what prompted us to have to take some more aggressive actions in some of the facilities that were providing those products.
Because our pricing was based on those costs.
We need to be much more aggressive in taking those costs out.
It was really reacting to what was already in place in the market, and certainly not driving and creating the market.
I think the bulk of the difference, especially if you go back to reported, we had some of the expenses that were going into our reclassification, were not tax-deductible last year.
That created an easy compare.
So return to provision items, which are not of the nature you are describing.
There is a little bit, I would say, Chris, of more activity economically in geographies that have some better tax rates.
A little bit of that, I think, can be saved, but the bulk of the change you have seen is more discrete, I would say.
I think we are thinking in the 32% range is a decent operating run rate for us.
I think one of the challenges is the material inflation that we are seeing is a little bit isolated within the steel commodity.
If you look across, at our copper and aluminum and a bunch of the other metals that we buy, we're not seeing that headwind.
I'd frankly like to see a little bit more broad inflation, that would be a better sign to support growth in industrial markets and et cetera.
I think the more isolated the commodity stays in steel, the harder it is to pull price, but there are some products that we have that are most obviously steel.
Think of some of the steel boxes that we do in our rough-in electrical, and Chris, there it is more obvious that is the steel product, and you can ask for some price.
I would rather see a little more broad-based inflation before I think we can start to ask broadly for price.
Good morning, Jeff.
No, I would say, Jeff, that the decrementals we experienced over the last six quarters, has been in the 35% range, which, given that the margins were attractive, has still brought them down.
That being said, the margins are still an attractive part of our portfolio.
It has not dragged it below that.
But decrementals have been what would you would have expected, I would say, rather than worse than you could have imagined.
So price and power was sort of neutral.
Very slightly positive.
I would say neutral, and across all of Hubbell, particularly because of the lighting price, it was negative, half a point, actually a little bit more than that.
I think we have, Jeff.
Our issue, from my perspective, in our volume being a little bit lighter from what we would have expected, and what might be in the market, is really as we work through the service issues that come with some of the restructuring actions and closing facilities, which were more of an impact early in the year, and we've started to work through those.
I think we have got some ---+ when I'm out with customers and some of our newly-signed agents, I hear both the negatives and positives.
I think the trend is all positive and very optimistic.
So I think that's ---+ that seems to be indicative to me that our pricing is right, and we have to make sure we get the product where it needs to be, when it needs to be.
Hello <UNK>, how are you.
Are you saying electric utility.
Yes.
I think I would describe it as stable in totality.
We did see a little bit of transmission strength in the first half of the year that tapered off in the third quarter.
But we also saw some distribution flatness in the first half that started to grow.
Those two seem to be providing this low growth organic out of the utility right now, <UNK>.
I think so.
We are certainly working toward that.
It's a question of whether the headwind can overtake us.
The team is working very hard to get ahead of that.
We have a bit of a head start, I think, with the actions that we've been taking over the last couple years, and that's a mindset that has really gotten into practice.
But those are the things that we can control.
The uncertainty will be the things we cannot control ---+ market demand and pricing ---+ and even pricing, we are going to be as disciplined as we always are, for as long as we can, and we hope that the market continues to be disciplined as well.
Okay.
Good morning.
Certainly, Josh, we have pretty a extensive database of projects and RFPs, and some of those things have multi-year lead times on them.
And so, I would say certainly our conversations with customers have encouragement that there is going to be spending going forward, but it's hard for us to say that there will be some kind of sharp improvement as early as 2017.
But I do think the conversations, the kinds of projects that are being contemplated, are all ---+ suggests a healthy, medium-term outlook for the business.
I certainly look at it in similar terms, namely the longer we fight through it, the better that it is.
And yet, I think our business folks on the power side are still a little bit anxious about that dynamic.
I do agree with you, the longer we fight through, the better.
This concludes today's call.
Thank you for joining us.
<UNK> and I will be available following the call for any other questions you have.
| 2016_HUBB |
2016 | CPLA | CPLA
#<UNK>, this is <UNK>.
You have it essentially correct that the major change is the accounting change which was about 1.5 in revenue.
When you look at the first versus the second quarter you can have shifts that happened related to starts, monthly starts as well as this mix shift.
I would say for the second quarter, the one you are referring to, is that yes, we have the accounting change.
We still have this mix shift because we're not expecting doctoral to turn positive from a total in growth perspective for awhile here yet.
What's being offset by that mix shift is our price increases that we have.
So that 2% increase is offsetting some of the mix shift you have.
Yes, I think that will be pretty much when we are in line.
It is going to be continuing this trend line of making sure that we have the long-term trends of that gap between growth at the doctoral level that negative growth dissipates.
So that is really going to be the headwind that we have got.
But I think overall on a basis we would expect revenue per learner to be down about one and a half maybe up to a couple of this point and half maybe up to a couple of points for 2016 just mainly relating to that accounting change.
It was a little bit more related to the accounting change.
So it was 3% last year and (Inaudible) this year so that 120 basis points was a little bit more weighted toward the accounting change side of it.
I don't know if you are going to quite see that differential going forward.
I think that is going to dissipate a little bit as we come in, but we do obviously expect the improvement year-over-year until we lap this accounting change in first quarter of next year I guess.
That's okay.
No, it doesn't.
And the reason it is higher in the second quarter is just related to our annual grant periods happen in the first quarter and just from the way we do our accounting related to when somebody is retirement eligible we accelerate the expensing of those costs.
So you saw the same thing I think last year that we had higher in the first part of the year than the second part of the year.
So that will start coming down throughout the rest of the year.
Yes, <UNK>, it is <UNK>.
So I would say we actually see it as a big market.
Woman aresignificantly under represented in IT.
And we know from our diligence and our interaction with Hackbright that employers are actively seeking ways to increase women's participation in their companies.
So, A, we see a big market.
I would say, secondly, I think coding and software engineering is a growth segment but at some point will mature and you are going to need differentiation, and we see Hackbright as a highly differentiated model both in terms of what they offer because they go beyond coding into the fundamentals of software engineering which I think provides more career currency for their graduates, and we think they are well positioned with their user experience.
I think what Hackbright discovered is that an immersive experience, an immersive culture to give their learners in this case women the tools and confidence to be successful in that environment.
I think they have discovered there are challenges in that environment and their model directly addresses those need.
And the proof is in the pudding, they are having great success.
So I can tell you in the case of Hackbright thus far most of their students and graduates have a degree and what they are looking for is a pathway into technology careers and Hackbrightis providing that.
They are not only providing the content and the training but they are providing the cultural support to do that as well.
In the case ofRightSkill our initial product was mobile web development.
And the folks that were attracted there were people that had some web development skills but couldn't do mobile.
And there it was a mixed bag I would say of some people with degrees and some not.
As we expand depending upon the segment I think ---+and RightSkill is really a discreet skill set that we are trying to give people in a relatively short period of time that allow them to take that next step.
So I would say RightSkill is definitely not replacing degrees at all.
It is more about increasing people's portfolio to help them be competitive for a job that their current skilldoesn't allow them.
I would say in the case of Hackbright I don't know that it is necessarily a replacement for a computer science degree, but it begins to approach that in some cases.
This is <UNK>.
So related to the course cost for Hackbright they have two basic programs; one is there immersive full time fellowship program and the tuition for that is around 16,000.
And then they have a part time program which is really mainly related to people who already have jobs but are getting some introductory into programming.
That pricing is consistent with others that are in the San Francisco Bay marketplace for coding software engineer schools.
I'm sorry.
I didn't understand the question.
Well, I said it is consistent with what the market is in the Bay area.
The current model is obviously immersive in person, intensive studying there.
Some day some road down the future there could be certain components of it that you might have as pathways into the fellowship program.
I think it is really important to note that the experience that she receives within the fellowship program is very, very unique, and that the mentorship that is provided, the community support that is provided things of that sort would be more challenging to go ahead and replicate online.
So we have no intentions here in the front end to convert that into an online program.
It was meant for the sort of model they have.
But down the road there are aspects of it that you could go ahead and migrate.
That is a question we get a lot and we will probably get that even more now that we have donean acquisition.
I would say that our capital allocation has not changed from what we have said in prior calls.
Obviously the first thing that we look at is to invest in our core business to increase its differentiation and innovation in to new models so what we do in the competency based learning area and FlexPath things of that are important to us.
Beyond that we obviously have significant liquidity in our balance sheet and doing the acquisition of Hackbright doesn't significantly alter that.
We continue to look for others opportunities in the 21st century skills marketplace for other offerings that are out there to get into access to other markets, but nothing in a large transformational way.
It would be more modest from that perspective.
This doesn't really alter the way we look at our dividend policy or even related to share repurchases.
We continue down that particular path because we do generate a significant amount of free cash flow.
We are very mindful of the liquidity we have and have been very shareholder friendly in returning that back to the shareholders.
I would also mention in our allocation process part of the divestiture of Arden University the analysis was redirecting some of our resources from the international marketplace into theU.S. domestic 21st century skills, so that was part of the our analysis as well.
And as you know we are in the process of divesting of Arden that we would expect that to be completed here sometime in2016.
This is <UNK>.
If I could just jump in here, because I want to make sure that the larger point around all of this is not missed in today's discussion, and that is that we have avery strong position in our core business but we are looking to accelerated our growth.
And we are trying to position theCompany to take advantage of changing demand patterns and new models that are unlocking new forms of growth.
So whether we're talking aboutFlexPath or RightSkill or Hackbright or some other model we may choose to invest in the future all of that is around positioning the Company for accelerated growth and positioning ourselves to take advantage of changing demand patterns in the market place.
So when the question is asked would we consider additional acquisitions, our answer is we are always looking for investment opportunities that make strategic sense that will enhance both our growth rate and our ability to create shareholders value.
I just want to make sure it is clear that this is about positioning the portfolio for accelerated growth.
And there is more work to do is the point I'm making here.
The expectations was in the disposition that it is going to be we're going to have cashproceeds coming to Capella.
<UNK>, it is <UNK>.
So I wouldn't say they stopped.
I think what we are seeing is that both the department and the creditors are being deliberate and we understand that.
We have to keep in mind a direct assessment programs are new to everybody and the creditors and the regulators they want to get it right.
And so we support that, that they are being deliberate in their approach.
And I would expect that at some point as they get more experience with it we see the cycle times improve.
So that is how I would characterize the environment.
In terms of Capella we're waiting for approval on our FlexPath BSN program.
But in the mean time we have a lot to work with.
So we are focusing on growing the programs that are improved.
By the way we are seeing very good growth on our BSN FlexPath without federal financial aid.
I think that indicates the potential of that market.
So it is a process that we are working through and as we ---+ and I think what it is going to do is it is going to make for a healthy category which is really key to the long-term sustainability of this growth for Capella and anybody else that is going to be in this category.
<UNK>, this is <UNK>.
I think it is going to come across mostly from the probably in the marketing and general administrative line.
Yes.
Okay.
Thank you, Zach.
I just want to thank everyone for being on the call this morning.
To wrap up I would like to remind you of our goal is to outperform the education market, and as I said earlier accelerate our growth trajectory to deliver long-term sustainable shareholder value.
I think we are uniquely positioned with our competency based infrastructure and direct assessment capabilities to build accelerated growth in the job ready skill market and we are excited about our progress.
We are off to I think off to a good start.
Thank you for joining us today and if you have follow up questions be sure to contact <UNK> <UNK>.
Thanks again, and hope everyone has a great day.
| 2016_CPLA |
2016 | ENTA | ENTA
#Thank you, <UNK>.
Good afternoon, everyone, and thank you for joining us today.
I'm pleased to report on Enanta's results, and to update you on our progress, and our R&D efforts.
Enanta remains in a very strong position to expand and to execute on our pipeline.
Our cash position of $246 million, and a recurring revenue stream from our successful HCV collaboration with AbbVie, allows us to fund our business operations and R&D initiatives for the foreseeable future.
Our HCV protease collaboration with AbbVie continues to progress, with Enanta participating in AbbVie's lead HCV regimens, with our protease inhibitor paritaprevir, and also contributing a second protease inhibitor ABT-493 to AbbVie's latest investigational HCV regimen currently in Phase 3 trials.
AbbVie's initial HCV regimens continue to provide substantial royalty flow to Enanta.
Enanta received $30 million in royalties for the first half of our fiscal year, and we continue ---+ and continuing royalty payments flowing to Enanta this year.
Let's shift to ABT-493, our second protease inhibitor.
ABT-493 is advancing toward an NDA filing, as part of AbbVie's next-generation HCV co-formulated regimen made up of ABT-493 and ABT-530, which is AbbVie's second NS5A inhibitor.
This pan-genotypic all-oral once-daily ribavirin-free HCV treatment continues to demonstrate very high cure rates in HCV patients, often in as little as eight weeks of treatment.
Last month, exciting new data from the SURVEYOR 1 and 2 studies using this 2-DAA co-formulation were reported during the EASL meeting in Barcelona.
Data demonstrated that 97% to 98% SVR12 was achieved with only eight weeks of treatment in genotypes 1, 2 or 3 HCV patients without cirrhosis.
In patients with genotype 3 HCV with compensated cirrhosis, also known as Child Pugh-A, one of the most difficult to treat populations, 100% SVR12 was achieved with 12 weeks of treatment in patients new to therapy.
And in genotypes 4, 5 or 6 HCV patients without cirrhosis, 100% SVR12 was achieved with 12 weeks of treatment, and further study with eight week treatment is ongoing.
In all this 2-DAA next-gen combination is being evaluated in over 2,000 patients in multiple registration trials that cover genotypes 1 through 6, with Phase 3 data reading outs starting later this year.
AbbVie has guided toward marketing approvals of this new 2-DAA therapy in the US in 2017.
Commercialization, regulatory approval in major markets would make Enanta eligible for up to $80 million in milestone payments, as well as additional tiered double-digit royalties from 50% of the net sales of this product.
I'd now like to discuss our pipeline of wholly-owned assets focused on our four disease areas, HCV, HBV, RSV, and nonalcoholic steatohepatitis also known as NASH.
Our most advanced wholly-owned asset is EDP-494, our cyclophilin inhibitor for HCV, now in Phase 1 clinical studies.
We are developing EDP-494, which is a host-targeted approach in anticipation of resistance arising to DAA HCV therapy.
EDP-494 has a high barrier to resistance mechanism that targets human host protein, cyclophilin, which is essential for HCV replication.
Many of the drugs on the market today, and currently in development have some level of reduced activity, when they encounter many of the known HCV mutations that exist today.
However, to date, EDP-494 suffers no loss against any of the major HCV DAA mutations, because it's a host target.
Since the human cyclophilin protein is not part of the virus, and therefore not directly subject to viral mutation, we've been pleased to find that our cyclophilin inhibitor has consistent activity across many variants of the hepatitis C virus.
Earlier this year, and most recently at EASL, we presented excellent preclinical data demonstrated pan-genotypic activity and uniform activity of EDP-494 against many of the known RAVs across all the DAA classes, mainly NS5A very, NS5B both nuc and non-nuc, and NS3A protease RAVs.
The Phase 1 study in healthy volunteers is ongoing, and next quarter we expect to initiate proof-of-concept studies in patients with HCV genotype 1, the largest patient population, and genotype 3 considered the hardest to treat genotype.
If these studies demonstrate good results, we would expect to study EDP-494 in combination with one or more DAAs in a pan-genotypic once-daily treatment to target RAVs, DAA failures and other hard to treat HCV patient populations.
Our second most advanced wholly-owned program is for NASH and PBC, where we recently announced our development candidate EDP-305, which is an FXR agonist.
NASH is reported to be the number one cause of liver disease in Western countries, and is associated with diseases related to diabetes, insulin resistance, obesity and hyperlipidemia and hypertension.
The progression of NASH increases the risk of cirrhosis, liver failure, and hepatocellular carcinoma, and is a large problem within the US with the prevalence estimated to be 9 million to 15 million individuals.
We have spent the last couple of years generating several promising FXR agonist leads.
And earlier this year, we presented preclinical data comparing EDP-305 to Intercept's OCA, which is the only clinically validated FXR agonist, and the most advanced NASH candidate in development today.
Preclinical data demonstrate the EDP-305 is a highly selective FXR agonist with more ---+ excuse me ---+ with more potent activity in a variety of in vitro and in vivo models compared to OCA.
This and other data gives us the confidence to move ahead with EDP-305, and we remain on track to initiate clinical development in the second half of calendar 2016.
We are also investigating additional series of FXR agonist, and we expect to have further information on these later this year.
Our earlier stage pipeline involves our initiatives in RSV and HPV.
We have made significant progress in discovering, characterizing, and seeking patent protection for new core inhibitors for HBV, and for new non-fusion inhibitors for RSV, and we expect to have some initial preclinical data later this year, consistent with our plan to initiate Phase 1 clinical development in at least one of these new programs in 2017.
In summary, we continue to execute on our business strategy, and have made progress in advancing our wholly-owned programs.
During 2016, we plan to complete our Phase 1 study, and to initiate a proof-of-concept study next quarter, with our cyclophilin inhibitor EDP-494 in genotype 1 and genotype 3 HCV patients.
We remain on track to initiate Phase 1 study with EDP-305, our FXR agonist for NASH and PBC later this calendar year.
Looking forward to 2017, as several leads advance with our HBV and RSV programs, we anticipate a Phase 1 start in 2017, in at least one of these programs.
Also in 2017, we look forward to US regulatory approval of AbbVie's pan-genotypic next gen HCV regimen containing our second protease inhibitor ABT-493.
I want to remind you that commercialization regulatory approvals in major markets would generate up to an aggregate of $80 million in milestone payments to us, as well as tiered double-digit royalties on 50% of net sales.
Additionally, our financial resources will allow us to keep our options open for future business development opportunities.
I'd like to pause here, and have <UNK> <UNK> discuss our financials for the quarter.
<UNK>.
Thank you, <UNK>.
I'd like to remind everyone that Enanta reports on a fiscal year schedule.
Our fiscal year end is September 30, and today we are reporting results for our second fiscal quarter ended March 31, 2016.
Enanta ended the quarter with approximately $246 million in cash and marketable securities, as compared to $209 million at our September 30, 2015 fiscal year-end.
We expect that these cash resources will be sufficient to meet our anticipated cash requirements for the foreseeable future.
Revenue consisted of $13 million of royalty income earned on AbbVie's net sales of paritaprevir containing regimens.
Milestone payments, royalties, and other payments from collaborations have varied significantly from period to period, and we expect that variability to continue.
I do want to note that this quarter is the first in our new royalty year under our AbbVie agreement, for purposes of determining applicable royalty tiers.
The amount of Viekira sales allocated to paritaprevir, particularly whether they are sales of 3-DAA or 2-DAA regimens containing paritaprevir, as well as the net sales adjustments, and the annual royalty tiers under our agreement are all factors that contribute to the amount of actual royalties we earn on AbbVie's HCV sales.
If any of these factors could change in subsequent quarters ---+ any of these factors could change in subsequent quarters.
For example, if AbbVie's sales include a higher percentage of 2-DAA regimen sales such as those in Japan, then our royalties would increase, even if AbbVie's total HCV sales stayed the same.
Moving onto expenses, research and development expenses were $9.1 million and $5.4 million for the second fiscal quarters ending March 31, 2016 and 2015, respectively.
The increase in the recent three-month period was due primarily to increased preclinical and clinical costs associated with our wholly-owned R&D programs.
We expect that our R&D expenses will continue to increase in fiscal 2016, as we continue our cylcophilin inhibitor clinical trials, advance our NASH program into the clinic, and increase our R&D capabilities.
General and administrative expense was $4.4 million for the quarter ended March 31, 2016, and $3.4 million for the comparable quarter in 2015.
The increase in G&A in the three-month periods is due primarily to higher stock-based compensation expense, as well as additional expenses to support our expanding operations.
We incurred a net loss for the second quarter of $1.6 million, as compared to a net income of $28.7 million in the second quarter of 2015.
During the three months ended March 31, 2016, the Company increased its estimate of its annual effective tax rate for fiscal 2016 from 27% to 31.5%, primarily due to a lower projected research and development tax credits.
This resulted in an income tax provision of $1.55 million, despite a pretax loss for the quarter, as the entire catch-up is recorded in the current quarter.
Further financial details will be available in our Form 10-Q for this fiscal quarter.
I'd now like to turn the call back to the operator, and open the lines up for Q&A.
Operator.
Well, the guidance doesn't particularly bear on host factors, with regards to some of the words that were in there.
Again, it is a draft guidance.
I think where it might potentially apply to us down the road, would be, if we're in combinations with other DAAs.
Well, we ---+ when you say with regard to Scripps ---+.
Yes, I don't have that information right in front of me.
I know they did have a poster, I think, that talked about some effects on the ability to reinfect cells, after they had been exposed to cyclophilin inhibitors and so forth.
But that's a little bit different than our molecules, and what we have been pursuing.
I can't specifically make a comparison between the two.
We haven't tested the other agent.
But what we have shown pretty convincingly, is really interesting pan-genotypic activity, very uniform pan-genotypic activity from a potency perspective across TT-1 through 6, and amazingly good activity against all the RAVs.
In fact, you can see a little bit of that data in the corporate presentation that we posted last week, showing on NS5A Resistant-Associated Variants, which is where many of the problems with current therapies are ---+ their current therapies encountering with the NS5A RAVs.
So we wind up, pretty much every NS5A that's on the market or in development, line them up and compared all the resistance mutations that they have issues with, and our cyclophilin inhibitor pretty much knocks them down, as though they were wild-type, across every mutation that we've seen.
So whether that's NS5A or NS5B or also protease.
So what we've been really focusing on, is establishing that really strong high barrier to resistance mechanism.
We've been fleshing it out with regards to being pan-genotypic.
And again, we are pretty much done with Phase 1, we're just nearing the end of that, and we're on track to again, get in patients next quarter.
So we're very excited to get going on that, so that we can get some combinations to really prove that principle that we've seen preclinically.
Thank you.
Okay.
Yes, thanks, <UNK>.
So the ---+ there are other head-to-heads.
So the Japanese studies that you mentioned are head-to-head trials, comparator trials, Endurance 3 in genotype 3 is also a comparative study.
So again, and AbbVie's had extensive discussions with FDA, all along the way into Phase 2 meetings, and throughout the design of Phase 3, and they feel pretty comfortable with those discussions.
And the fact that, again, the comparator trials that are ongoing.
Yes.
So not a lot of learnings, I would say, from that AdCom.
It was obviously a fairly straightforward one for Intercept.
There didn't seem to be a lot of controversy, and there was a unanimous vote, at least in PBC going forward, so at least recommendations.
So I think what we continue to do, is focus on the potency in selectivity.
Again, with our first agent, we've tried to make it very, very selective across all other nuclear receptors, and really dialed out TGR5 which is another receptor that FXR agonists can sometimes bind to.
It has been that we've implicated preclinically in pruritus, I don't know if that is a situation.
I think people are going to be sorting a lot of that out clinically.
But we've been doing a lot of characterization.
Not a lot of it unfortunately yet has been put out there into the public domain for some ---+ a variety of reasons.
Some of it is competitive, and some of it's we're still working up final data out of several different models.
So we will be putting out more information later this year, and we are reiterating our target of being in the clinic later this year, as well.
Sure.
So we actually have looked at combinations with every mechanism of action, and have generated a lot of interesting data combination-wise, showing additivity to mild synergy, depending upon the mechanism and the combination.
So we feel like every combination partner is possible.
As you know, we have a Phase 2 ready NS5A ourselves called EDP-239, that we finished a proof-of-concept study on.
But we're actually thinking that to marry our cyclophilin inhibitor with another really high barrier mechanism would be one of the most intriguing things, I think, in terms of new combinations to come forward.
So to that end, we do like the nuc mechanism, which also has a pretty high barrier.
I think cyclophilins are probably higher.
But ---+ so to state it another way, if we could achieve what we wanted to achieve, without having an NS5A in the regimen, I think that's what we'll try to do, if we can make it as simple as a 2-DAA regimen.
If we need extra horsepower as it turns out, once we do the clinical studies, and determine we could use a little bit more power, then we certainly have an NS5A that we can add to the mix.
But right now, we want to try to make it as simple as possible, and as high a barrier to resistance as possible.
I think that's very likely.
Yes, we'll be aiming to put some data out later this year.
You're welcome.
| 2016_ENTA |
2017 | AET | AET
#Thank you, <UNK>, and good morning, everyone
Earlier today, we reported full-year 2016 operating earnings of $2.9 billion, a 7% increase over 2015 and operating earnings per share of $8.23. Aetna's operating results represent solid earnings per share growth despite the lack of any share repurchases in the year and the significant pressure from our ACA-compliant products, continue to be supported by solid top line growth and operating margins, and are consistent with our long-term growth framework
I'll begin with some comments on our full-year 2016 performance
From a top line perspective, we ended the year with 23.1 million medical members
We grew operating revenue by nearly 5% over 2015 to $63 billion, driven by higher health care premium yields and membership growth in our Government business and Large Group Commercial Insured products, partially offset by membership attrition in our Small Group and international Commercial Insured products
From an operating margin perspective, our portfolio of businesses performed quite well
Our full-year pre-tax operating margin was 8.3%, a very strong result and consistent with our target operating margin range
Our full-year Total Health Care Medical Benefit Ratio was 81.8%, a better result than our previous projection
Our full-year adjusted operating expense ratio was 18.1%, an 80 basis point improvement over 2015. This year-over-year improvement speaks to our disciplined focus on managing our operating costs as we continue to grow our top line
Looking at our fourth quarter results, operating revenue of $15.7 billion was steady versus the third quarter
Our pre-tax operating margin was 6.4% for the quarter, a 40 basis point improvement over the prior year quarter
Our Total Health Care Medical Benefit Ratio was 82.1%, a 20 basis point increase year-over-year
This result was better than our previous projections as medical cost trend remained moderate in the fourth quarter of 2016. Our adjusted operating expense ratio was 19.8%, a 70 basis point improvement compared to the fourth quarter of 2015 and consistent with our previous projections
From a balance sheet perspective we remain confident in the adequacy of our reserves
We experienced favorable prior period reserve development in the quarter across all of our core products primarily attributable to third quarter dates of service
Days claims payable were 54 days at the end of the quarter, slightly down from the prior year quarter
Sequentially, this metric decreased three days, driven by the decreased claim processing times and the reduction of the premium deficiency reserve
Turning to cash flow and capital, operating cash flows remained strong
Our full-year Health Care and Group Insurance operating cash flows were 1.4 times operating earnings and 1.8 times GAAP net income
We did not repurchase shares during 2016 as a result of the pending Humana acquisition
We did, however, distribute $88 million during the fourth quarter through our quarterly shareholder dividend, bringing our full-year distribution to $351 million
In summary, we are quite pleased with the strength of our full-year results, as core operations were able to more than offset the drag from ACA-compliant products
I will now discuss the key drivers of our fourth quarter performance in greater detail
Beginning with our Commercial fee based business, where our fourth quarter results capped off another strong year
We grew by 68,000 ASC members in the quarter, achieved positive fee yields, and generated solid year-over-year operating earnings growth
In our Commercial Insured business, our membership declined by roughly 139,000 members in the quarter, directionally consistent with our expectations
This change is the result of attrition in our Individual and Small Group membership, partially offset by growth of nearly 50,000 Large Group Commercial Insured members
Our Commercial Medical Benefit Ratio was 83% for the quarter, a result that was better than our previous projections
Underlying this result in the quarter was continued moderate medical cost trend in our core Large Group products and some improvement relative to our previous projections in our Small Group insured products
Consistent with our fourth quarter MBR performance, we estimate that our full-year 2016 non-ACA Core Commercial medical cost trend was at the low end of our guidance range of 6% to 7%
Partially offsetting the fourth quarter out-performance in our group Commercial Insured business was the continued pressure in our Individual Commercial ACA-compliant products
Underlying medical costs and estimates of 3R reimbursements drove continued losses in the quarter pushing full-year pre-tax operating losses in our Individual ACA-compliant products to $450 million
As you are aware, we have made changes to our footprint to reduce our risk exposure to these products for 2017. Based on our current view of open enrollment, we project our first quarter Individual Commercial membership will decline from approximately 965,000 members at year-end 2016 to 240,000 made up of mostly on-exchange members
Consistent with past years, there was a fair amount of churn in this product, resulting in approximately 50% of our Individual Commercial membership being new to Aetna
Given the high churn in membership combined with our fourth quarter experience and fixed cost deleveraging as we shrink our membership, we project losses on our Individual Commercial ACA-compliant products in 2017. However, we expect these losses to be meaningfully lower in 2017 as compared to 2016. Shifting to our Government business, which had yet another strong quarter, we grew medical membership by 60,000 members in the quarter including growth of 16,000 Medicare members and 44,000 Medicaid members
As a result of strong medical membership growth throughout the year, we grew our fourth quarter 2016 government premiums by nearly 13% compared to the prior year period to $6.5 billion
Government premiums now represent nearly 50% of our total health care premiums
Our fourth quarter Government Medical Benefit Ratio was 81.2%, a very strong result driven by year-over-year improvement in Medicare
Moving on to the balance sheet, our financial position, capital structure, and liquidity all continue to be very strong
At December 31st, we had a debt to total capitalization ratio of approximately 53.6%, which reflects the debt financing that we completed in June to fund the pending Humana acquisition
Looking at sources and uses of cash and investments at the parent, we started the quarter with approximately $2.3 billion, excluding funds raised from our June debt financing
Net subsidiary dividends to the parent were $317 million
We paid a shareholder dividend of $88 million, and after other sources and uses, we ended the quarter with approximately $2.2 billion of cash at the parent
Including the funds from the June debt financing, we ended the quarter with approximately $15.1 billion
Our basic share count was approximately 352 million at December 31st
Shifting to 2017, this morning we provided an initial standalone 2017 operating EPS projection of at least $8.55. This guidance excludes the impact of prior year's reserve development
While we are still considering our options in an effort to provide as much transparency as possible, this guidance presents a standalone scenario assuming there is no Humana transaction
Our baseline view of Aetna's 2016 operating EPS of $7.77 reflects our 2016 operating EPS of $8.23 less 2016's prior year's reserve development of approximately $0.46. Our initial 2017 operating earnings projection of at least $8.55 represents at least 10% growth over this baseline view
While there are many puts and takes in our initial outlook, our projected 2017 operating EPS growth off of our 2016 baseline reflects growth in Commercial Insured operating earnings led by a reduced level of losses on our Individual products, suspension of the health insurer fee, continued Medicare top line growth powered by continued strong growth in Individual MA, and the resumption of share repurchase activity
Partially offsetting these dynamics are a number of challenges in 2017 including the projected impact of the previously disclosed Medicaid contract losses and lower projected Group Insurance operating earnings
Our 2017 operating EPS guidance is further influenced by the following drivers: We projected our first quarter 2017 membership will be in the range of 22.2 to 22.3 million medical members
This projection includes continued growth in our Medicare products of approximately 120,000 members and Commercial ASC membership growth of between 75,000 and 100,000 members more than offset by Individual Commercial declines of approximately 725,000 members related to previously disclosed changes to our footprint, Medicaid membership declines of approximately 150,000 members primarily associated with our exit of the Nebraska contract, Small Group Commercial Insured declines of approximately 125,000 members reflecting our continued repositioning in these products
We project 2017 operating revenue to be in the range of $60 billion to $61 billion
This top line projection reflects our previously discussed ACA-compliant product decisions, the net impact of the previously disclosed Medicaid contract losses, and the suspension of the health insurer fee, partially offset by growth in our Government business, primarily Medicare products and higher premiums in our Large Group Commercial Insured products
We project our 2017 non-ACA Core Commercial medical cost trend to be in the range of 6% to 7%, an approximately 50 basis point increase over 2016 at the midpoint of this range
This projection reflects an increase in health care utilization, partially offset by one less calendar day
We project our full-year Total Health Care Medical Benefit Ratio will be in the range of 84% to 85%, representing a 270 basis point increase at the midpoint of the range
This projected increase is driven primarily by the suspension of the health insurer fee, the exclusion of prior year's reserve development from our initial guidance, and experience rating pressure in our Group Commercial and Group Medicare Advantage products, partially offset by projected improvement in our Individual Commercial Insured products
Our current view is that our full-year adjusted operating expense ratio will be 16.5% plus or minus 25 basis points, a 160 basis point improvement at the midpoint over 2016, primarily reflecting the impact of the 2017 suspension of the health insurer fee
Absent this impact, at the midpoint of this range, our operating expense ratio is projected to be essentially flat year-over-year, an excellent result given the previously disclosed revenue headwinds
We project our pre-tax operating margin to be approximately 8%, consistent with our high single-digit target with operating earnings of at least $2.9 billion
We project that net subsidiary dividends for the year will be approximately $2.9 billion
We project excess cash at the parent of approximately $4 billion after funding all Humana and Molina transaction-related fees and expenses
In closing, I am very pleased with the strength of our fourth quarter and full-year 2016 results which exceeded our projections despite the challenges we experienced in our ACA-compliant products
As we begin 2017, the fundamentals of Aetna's business remain strong and we are confident that we can achieve our initial standalone 2017 operating EPS projection of at least $8.55. I will now turn the call back over to <UNK>
<UNK>?
So, <UNK>, a couple things
As you think about capital deployment, there's – in addition to share repurchase, there's one other thing that you need to think about that we have assumed here, and that is $2.7 billion of the deal debt is non-callable
So at some point, that will come back above the line, if you will, and we will have to bear the interest expense on that debt above the line
That's worth a little bit more than sort of a $0.10 item
But going back to the main thrust of your question, what I would say is we have largely assumed the $4 billion for the purpose of this guidance does go into repurchase
But the one area where we still have some uncertainty as we work through our final decision-making is the timing of that and the application of that throughout the year
So for this guidance we have assumed I think cautiously that that's more back-end weighted than it ultimately could turn out to be
But I think given where we are in the process, that's the prudent decision right now
Yeah, so what this would largely assume is that we would get to a debt-to-cap that would be between 35 and 40 by the end of the year
We may go a little bit higher than that
And certainly something like an ASR is on the table
Again, the timing of when we would pull the trigger on that is something that we're still working through as we work through sort of the final steps in our decision-making process
Okay, <UNK>
Thanks, <UNK>
We first of all believe that Medicare and Medicaid will be growth markets for us and continue to be even in spite of our procurement losses in Medicaid, we still have a strong pipeline and have had good growth
And so we think we've got that figured out and worked through, and part of it was related to exchange departicipation
So, I think we've worked our way through those issues
So, Government, clearly a strong growth market
In the Commercial market, underlying our results, if you pull out what happened with the exchanges we've had strong growth starting up for the first time in quite a while, and particularly around our Small Group AFA or alternative funding arrangement products
And in our Large Group business
So we feel good about the approach to our group market on the Commercial side
More importantly, though, I think as we see the evolution on this next step of health reform, there is an opportunity for a retail market that is much more stable than the ACA has been as a way for us to grow
And so we are actively engaged in those discussions of understanding how we can preserve the good parts of the ACA but also bring forward ideas around funding mechanisms that stabilize the market for all the people in it and encourage younger people to get in
And more to come on that as we move ahead, but we think that's a strong opportunity and could move retail market in healthcare much faster than even people would assumed would happen with the Cadillac tax
Yeah, the comment specifically was lower Group Insurance operating earnings, not Commercial group
I can let <UNK> comment a little bit about what's going on in that business
The simplest way to think about it is that the $0.10 is, quote, the early recovery of the 2018 HIF as we work that into pricing
So that's largely a Commercial concept for 2017 because most of the Government business is on a one-one
So, that's really what that represents
No
I mean, we have largely in our bids given where our margin profile is, any relief, if you will, from the HIF for 2017 has been largely incorporated into benefit design
I think you probably can see that to some extent in our strong growth in Individual
But it's really not a meaningful margin concept for MA for us
Yeah, so what we said in the prepared remarks is that we anticipate after we settle termination and deal-related expenses that we would have $4 billion of parent cash to deploy
That is inclusive of some non-callable debt that we will bring above the line in that circumstance so there will be some added interest rate expense that comes with that
So, but $4 billion is the gross number
Yeah, so on Individual, obviously we had a very poor margin result in 2016, and we anticipate, as I mentioned, that we'll continue to lose a meaningful amount in 2017 but not as much
One way to think about that is if you looked at our earnings bridge and you thought about the $0.75 that's identified there for core growth and Individual improvement, somewhere in the ballpark of two-thirds of that is probably driven by the Individual business, and that will give you from a $450 million loss some sense of at least where we stand today for guidance purposes
Small Group actually did improve 2016 actually versus 2015. We definitely – we actually saw favorability in Commercial across all segments, but it was nice to see in Small Group
This is really a repositioning story, as you know we continue to have some insured markets where the ACA business is pressured, we will likely continue to lose membership in those markets in 2017. And as <UNK> alluded to, we have some alternate funding products that are selling in here, and those will have a bit of a difference
So at the end of the day, I don't think that Small Group itself is a big part of the earnings move from year to year
It continues to be a repositioning year for us for that segment
I mean, I think over time, that's certainly a possibility
I mean we've always viewed this somewhat as like a mid single-digit insured sort of pre-tax margin business, and we clearly haven't been there
So I think over time, there is that potential
But as <UNK> alluded to, there's a lot that has to play out here in both Individual and Small Group, I think, before we could take a lot of comfort that that's coming
Well, what I would say – and this will ultimately take greater shape and improved clarity as the quarter matures, but generally as the year goes on, we have good insight into unit cost
So, variations in trend tend to be updates on utilization
I know for example in the fourth quarter we had a couple of good months, anyway, of pharmacy experience in the fourth quarter
But generally these will usually play out as improvements into the utilization baseline
The outlook is a fairly detailed process we go through, sort of category-by-category looking at contracts, looking at the trends that we see
And, sometimes those end up with the same number, but the pathway there obviously looks different from year to year
I mean, I think, we continue to assume that we see a modest uptick in trend from year to year as we have, and that's continued to be our go-forward pricing position
| 2017_AET |
2017 | GMED | GMED
#Thank you, <UNK>, and good evening, everyone.
Worldwide sales for the third quarter of 2017 were $152 million, an increase of 11.9% over the third quarter of 2016.
We also generated non-GAAP diluted earnings per share of $0.30 and 35.2% in adjusted EBITDA.
In the third quarter, we saw a further acceleration in our U.<UNK> business, continued growth in the Japan market, FDA clearance of our Excelsius GPS robotic and navigation system and industry-leading profitability and cash flow.
As we've discussed on the last several calls, growth in our U.<UNK> implant sales bottomed out in Q3 2016.
Since that time, we have taken steps to ramp up our recruiting efforts, correct certain issues that led to unwanted attrition and made invested ---+ investment into a long-term sales development program.
The year-over-year growth has increased in each quarter since that time, reaching 6.2% in Q3 2017 on a date-adjusted basis.
The pace and trajectory of this improvement has been very encouraging and positions us well for a strong finish to 2017 and positive momentum heading into 2018.
We remain highly focused on competitive recruiting and expect to begin seeing fruit from our development efforts in the back half of 2018.
International sales grew by 70.1% in Q3, including the acquisition of the Alphatec International business.
The business in Japan continues to grow and contribute meaningful profitability.
Since the acquisition, we have made significant investments in sales reps and sets in Japan.
We have launched our first 2 Globus systems in Japan, and the feedback from surgeons has been extremely positive.
We expect the impact of our investments and the introduction of new technology to produce strong growth into 2018.
As we discussed on prior calls, our core international business has struggled in several key markets.
While there was some improvement in the third quarter, we still experienced a 5.2% decline compared to the third quarter of 2016.
We have made several organizational changes to address these issues.
We have realigned executive management to increase our operational focus, we have made key hires in important markets, and we are finalizing plans to invest additional resources into inventory and education in larger markets.
While these are the right steps to drive growth in our international business, the impact will not be immediate.
We expect to see steady top line improvement as these changes are implemented in 2018.
In spine, we launched 2 new products in Q3, bringing our year-to-date total to 7.
Today, I'd like to highlight ELSA-ATP, a recent addition to our growing portfolio of expandable products.
Globus has pioneered the development of expandable interbody devices and is the unquestioned market leader in this category, having completed over 120,000 surgeries to date across 20 different implant systems.
ELSA-ATP is an expandable lateral lumbar interbody fusion device with integrated fixation that can be implanted through an anterior to psoas approach.
This first of its kind device is inserted at an oblique angle to reduce the need for trans-psoas resection and potentially decrease reliance on neuromonitoring.
The product allows for post-expansion introduction of bone graft and includes integrated screws for enhanced fixation in addition to supplemental fixation.
Like all of our expandable technologies, it enables a surgeon to safely place the device at a minimized height, reducing the impaction force and retraction needed for insertion.
This helps to preserve endplate integrity, which may result in less subsidence.
While ELSA-ATP is in its initial rollout period, we are very excited by the potential impact on our lateral business.
As previously announced, we received 510(k) clearance for the Excelsius GPS robotic and navigation system in mid-August.
While we did not book any revenue in Q3, we continue to see tremendous interest in this product from surgeons and expect to report meaningful revenue in Q4.
Excelsius GPS is the only product that combines robotics and navigation in a single platform.
It is designed to work with 3 different imaging modalities, and it has an optimized workflow that fully integrates with our implant technologies.
In trauma, we have received FDA clearance for 5 product lines, with several more filed with FDA.
We also previously announced that we had done our first cases using our distal radius technology several weeks ago.
This is a milestone event for Globus as our first foray outside the spine in our 15-year history.
We are building sets and aggressively hiring sales reps in anticipation of a full commercial launch in Q1 of 2018.
The sets and inventory needed for this launch are unprecedented in our history, involving literally hundreds of sets and thousands of distinct SKUs.
And I'd like to acknowledge the great work of our engineering and manufacturing teams to undertake this massive effort.
Turning to profitability.
We delivered 35.2% in adjusted EBITDA margins in Q3, which includes significant expenditures related to Emerging Technologies.
We believe we are at the apex of the investment stage of Emerging Technologies.
In Q3 2017, our investment in Emerging Tech reduced EPS by $0.05 and was a 4.7% drag to adjusted EBITDA margins.
In other words, the spinal implant portion of our business produced $0.35 in non-GAAP diluted EPS and 39.9% adjusted EBITDA margins.
As we begin to generate revenue in robotics, the negative impact should lessen, offset somewhat by incremental investments in robotics as well as a large ramp in the expenses associated with the trauma commercial launch.
As these businesses grow to scale, we expect them both to contribute materially to our bottom line as well.
This strategy was part of our commitment when we went public 5 years ago: to invest in new areas of growth while maintaining a mid-30s adjusted EBITDA, and I'm proud of our ability to execute on this commitment.
In summary, we had a very solid Q3 performance, exhibiting continued improvement in our U.<UNK> spine business while maintaining our focus on profitability.
As we enter into full commercialization of our Emerging Technologies, we are very excited about our prospects in Q4, in 2018 and beyond.
I will now turn the call over to Dan.
Thanks, Dave, and good evening, everyone.
We are pleased with the strong financial results in Q3, the continued improvements in the U.<UNK> business performance, driven by record recruiting, the significant international growth and the progress in commercializing our emerging technology opportunities in robotics and trauma, in line with our long-range strategic plan.
For Q3, sales were $151.7 million, growing 11.9% as reported, with GAAP net income of $25.6 million and non-GAAP net income of $29.3 million, delivering $0.30 fully diluted non-GAAP earnings per share and adjusted EBITDA of 35.2% and $22 million of cash flow.
Focusing on sales.
U.<UNK> sales for the quarter were $125.9 million, 4.5% higher than Q3 '16 or 6.2% higher when adjusted for 1 less day in Q3 '17.
We continue to see growth acceleration and sequential improvements in the U.<UNK> business, with year-over-year organic growth rates improving from negative 4.1% in Q3 '16 to positive 6.2% in Q3 '17 on a day-adjusted basis.
This is driven by stronger competitive rep recruiting and other structural improvements we have made to the business that we believe have and will drive continued momentum and quarterly improvements to revenue into 2018.
While sales were impacted by hurricanes in Q3, we saw increased procedures in the subsequent weeks that netted the overall exposure to less than $1 million for the quarter.
International sales for the quarter were $25.8 million, growing 70.1% as reported or 69.7% in constant currency, driven by continued market penetration in Japan, gains in key distributor markets and improved momentum in the core international business.
September marked the anniversary of the Alphatec acquisition, and we remain pleased with the top line and bottom line contribution of this successful acquisition and the long-term growth potential it offers in international markets.
Disruptive Technology sales for the quarter were $71.5 million or 6.5% growth, with continued strength in our expandable technologies, integrated spacers, biologics and CREO MI<UNK>
Innovative Fusion sales for Q3 were $80.2 million or 17.1% growth, driven by international business, cortex and CREO.
Turning to the rest of the P&<UNK>
Q3 gross profit was 75.7% compared to 76.8% in Q3 '16.
The change versus prior year is driven by negative mix, with growth in international markets in U.<UNK> biologics resulting in a planned margin decline, partially offset by continued gains from in-house manufacturing, which contributed $2.2 million in the quarter.
Research and development expenses for the third quarter were $10.9 million or 7.2% of sales compared to $10.3 million or 7.6% in Q3 '16, reflecting an increase in investments for robotics and trauma.
SG&A expenses for the third quarter were $63.4 million or 41.8% compared to 40% in Q3 '16.
The increase is driven by the inclusion of pre-revenue robotics and trauma commercial organization builds and increased investments in the U.<UNK> sales force.
Provision for litigation expense in Q3 was $2.5 million, impacting GAAP EPS by approximately $0.02.
The income tax rate for Q3 was 31.5% versus 32.5% in Q3 '16.
The change in the effective tax rate is driven by gains from foreign tax credits in Q3 and the ongoing benefit for the adoption of new stock compensation accounting regulations that began in Q1 '17.
GAAP third quarter net income was $25.6 million and GAAP diluted earnings per share were $0.26.
Non-GAAP net income was $29.3 million, and non-GAAP diluted earnings per share were $0.30.
Investments in Emerging Technologies negatively impacted Q3 '17 EPS by approximately $0.05.
Excluding the investment impact of Emerging Technologies in both years, the non-GAAP net income growth in the U.<UNK> and international businesses would be 14.5% in Q3.
We ended the quarter with $396.5 million of cash, cash equivalents and marketable securities.
Net cash provided by operating activities in Q3 was $35.3 million, and free cash flow was $22 million.
The company remains debt-free.
The company reaffirms guidance for full year 2017 sales of approximately $625 million and non-GAAP diluted earnings per share of $1.27.
We will now open the call for questions.
<UNK>, this is Dave.
I didn't hear the second part of your question.
Could you repeat it.
Sure.
So overall, I think the growth rate in our international business should be higher than our overall growth rate.
We're still underpenetrated in several markets, so I think the upside potential is much stronger there.
As I mentioned in my prepared remarks, we're doing really well in Japan.
Some of the offsets to that would be we are still working through the integration of overlapping distribution in certain markets, and we expect to see some drag next year for that.
But most of the major markets at least are on a good path towards ---+ we're not finalized, we're on a good path towards that.
Sure.
I'll answer the second part first, and then I'll ask Dan to address the sort of the guidance and revenue expectations.
But we consider the Excelsius to be a platform technology.
So today, it's assisting in navigating and placing pedicle screws, but we are actively working on projects to expand that, to work in cranial applications.
We also anticipate a rod-bending process that would be associated with the machine.
We have a navigation ---+ a stand-alone navigation project on the books.
And then we see further on down the line that beyond pedicle screws, we think there's opportunities to really expand the utility of the platform and go into sort of discectomies, decompression, rod placement, really encompassing the entire procedure.
Dan.
<UNK>, for the first part of your question with guidance, as we get to the $625 million, we feel pretty good about that in many respects.
Certainly, we see the anticipated seasonality lift that we're already experiencing as we had planned for Q4 in the spine.
Dave had mentioned we see a lot of activity with robotic quoting.
We think that we will have some meaningful revenues there.
In general, we feel strongly that we can achieve that $625 million.
I think I'll refrain from anything going forward.
Your question was more about the outer years of 2018.
And we'll provide some of that guidance in January, as we normally do, as how that looks.
Thanks, Matt.
So I'll go at that a couple of different ways.
The first thing is we're really pleased with the results on the-day adjusted basis.
It's exactly where we would have called it for Q3.
I'm not looking at a stacked comp because we're going from a negative inflection point in Q3 of '16 to a positive in this Q3.
So just in general, almost 10.5-point spread between those 2 factors, I think that shows momentum, which is more important.
I think that is driven by us doing competitive recruiting, surgeon conversions, going deeper into existing businesses in the U.<UNK> that are the main driver that way.
As we signaled, we thought that we would get through Q4 and the rest of this year exiting around that same rate and bring that forward.
That was always the plan of 2017 being the recovery year.
And we would hit the high points in Q3, Q4 and carry that into what we think would be 2018 based on what we know.
So 2 things.
We had always signaled that Q2 and Q3 would be the heavier investments as we carry both robotics and trauma pre-revenue.
I would never shy away from a 35% EBITDA.
I think I'm pretty proud of that being market-leading by anyone's standards.
Nothing else comes close, to be honest.
And as always, we would encourage The Street to look at that mid-30s EBITDA, between 33% and 37%, at any given time as we continue to invest and grow for the future.
Thanks, <UNK>.
In terms of the impact, I think it's a safety and a comfort factor.
So the other pure robotics systems out there, you're essentially driving the screw in or driving the k-wire in blindly.
And this ---+ the navigation, the integrated navigation enables you to visualize, at least digitally, where the instruments are and where the implants are throughout the procedure.
And we've gotten a great feedback from surgeons that, that's really essential to a lot of them adopting robotic technology so that the integration there ---+ and to your question about what the competition will do, I think it's highly informative that we are aware that they are planning to add that feature to their offering.
So we clearly think we're on the right path.
And as I mentioned in <UNK>'s question, we are working on ways to enhance the functionality of the platform moving forward.
So we're not going to stand still.
It's both.
It's certainly, the ones that use computer-assisted technology today are already believers that, that can improve their ability to treat patients.
But I think the functionality that we've built into Excelsius has attracted an entirely new group of potential users who are considering using technology to help them treat their patients as well.
Jon, yes, we'll fine-tune, obviously, guidance for 2018 in January, as we said before.
But the way I would look at this is, depending on what you see or read, you're looking at a spine market that's currently considered between 0 and 2%.
And I think what we're signaling is that we are 2 to 3x growth rate of that.
And as you always know, we strive to be a share taker.
So we think that we're still going to look at that mid-to upper single digits as a main driver for us to capture share in the market.
So, Rich, when I was using that number, to answer Jon's question, I was referring to core spine.
An addition to that would be, of course, the trauma business and the robotic business.
They would come as additional growth beyond that number.
Thanks, Rich.
I mean, we're not going to get into all of our intricacies of our selling strategy.
But I think the most obvious impact to our implant business is that the robot works much more efficiently if you use our implant.
It's fully integrated with about 10 of our implant systems right now.
So there's a natural inclination for surgeons to want to utilize our implants because their procedures are going to go better and faster.
Yes.
Sure, <UNK>.
Thanks.
So the first thing is, you're right, it was about 2 years ago that we had, had that Analyst Day and we had declared about $1 billion as we got to 2020.
I would tell you, everything we look at now, we still see that as a realistic approach and certainly feasible.
In that, the key signal was that we are a spine company and would remain a spine company even then.
So back to our point, 80% to 85% of sales in that $1 billion would remain as the core spine.
And we had, had about $150 million that would be Emerging Technologies.
During that meeting, we simply cut it in half, having had no real data, just to say this is what we think.
If you ask me today, I'm still guessing.
But I would tell you that I would be heavier on the robotics side than the trauma that way.
The number is truly a guess, but I would probably be more in the 100 to 125 for the robotics and the difference being trauma right now.
But it's really more of a gut feel than any data or science there.
<UNK>, we're really not prepared to discuss anything regarding the fourth quarter or any details of our sales on this call.
We're hiring right now.
We've got our field sales management team in place, and we're hiring reps as we speak.
They're coming through here every day.
Was that answering your question, <UNK>.
<UNK>, this is <UNK> <UNK>.
So we started ---+ as Dave mentioned, we've got a handful of systems cleared for sale in Japan.
Obviously, we started initially with the products that target the biggest segments there, so primarily pedicle screws at this point.
But we are in the process of looking at the entire portfolio and figuring out what makes sense to launch in Japan and are working with the regulatory team there to get products submitted and registered as quickly as we can.
<UNK>, it's Dan.
It's a great question.
And I would tell you that it probably is going to track in line so far.
There's a couple of reasons for that.
We have been investing in our in-house manufacturing capabilities in order to produce trauma as well as grow spine.
And so this year, you're carrying a lot of machine expenditures that would probably diminish somewhat into next year and be replaced with that build of trauma sets.
Keep in mind, we're sitting with $396 million of cash, so converting that into profit-generating sets is something we're equipped to do.
Thanks, <UNK>.
We have seen a modest impact.
It's more anecdotal at this point, where a few surgeons have utilized some of our competitors' products in 3D printing.
And we are actively developing products in that space at this point.
It's going quite well.
I think as we mentioned last quarter, we had already exceeded our previous record in terms of the number of competitive reps that we've hired.
And our pipeline is very full and very active at this point.
There's a lot of buzz about our ---+ the robotics opportunity and the impact that may have on the implant business.
And we continue to see people that are interested in carrying our portfolio.
So we've got an extensive pipeline, looking forward to continuing to build the sales force that way.
Thanks, Matt.
Well, the difference is our competitors ---+ you need to use a k-wire, which means you're agnostic to the implant that you're going to use.
As long as it's a cannulated screw, you can use anybody's implant.
Ours also offers that option.
You can use a k-wire and other folks' implants, but the system itself is ---+ functions much better if you integrate it with our technology.
So we think there'll be a natural pull-through as surgeons want to do the cases as efficiently and safely as possible if they use our implants.
Yes, we traditionally don't disclose actual numbers of hires and that sort of thing.
But just to clarify my comments, I was referring to the developmental program that we had instituted late last year, early this year.
We're bringing folks who don't have experience in the industry up to speed, getting them comfortable and confident in the spine world.
They will start becoming ready to take over territories towards the back half of next year.
| 2017_GMED |
2016 | LOCO | LOCO
#Thank you, Operator, and good afternoon.
By now, everyone should have access to our second quarter 2016 earnings release.
If not, it can be found at www.elpolloloco.com in the Investor Relations section.
Before we begin our formal remarks, I need to remind everyone that our discussion today will include forward-looking statements.
These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them.
These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We expect to file our 10-Q for the second quarter of 2016 tomorrow and will encourage you to review that document at your earliest convenience.
During today's call we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
The presentation of this additional information should not be considered an isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in our earnings release.
With that, I'd like to turn the call over to <UNK> <UNK>.
Thanks, <UNK>.
Good afternoon, everyone, and thank you, all, for joining us on the call today.
We are pleased to report 2016 second quarter results that included our 20th consecutive quarter of system-wide comparable store sales growth and pro forma net income of $0.19 per share.
More importantly, we believe our second quarter results displayed continued progress as a result of the value, operational, and service initiatives that we have implemented during the past year.
System-wide comparable store sales increased 2.4% including a 2.7% increase at franchise restaurants and a 2.0% increase at Company-operated restaurants.
We're particularly pleased that transactions at Company-operated restaurants increased 2.7% during the quarter and believe this is an indicator that we are making headway with our more value-focused guests and heavy users.
Restaurant contribution margin for the quarter was a healthy 22%, which was 40 basis points better than the second quarter of 2015.
The primary driver of margin performance was lower food cost driven by commodity deflation and a favorable marketing calendar which more than offset higher labor costs.
As we discussed last quarter, sales continue to run below our expectations in Houston.
While the soft Houston economy is likely a headwind, we are focused on building a deeper relationship with consumers to drive repeat purchases and build frequency.
To that end, we are enhancing our local store marketing initiatives including focusing our efforts on our core menu offerings.
On the operations side, we are adding employee training resources to improve our customer service and better educate customers about our food.
We believe that as we continue to attract new customers in our restaurants and they experience the taste and the quality of our food, we can turn them into repeat customers.
It's also important to note that the things we've learned with regard to our entry into Houston will be valuable as we enter new markets in the future.
Switching now to development.
During the second quarter, we opened two new Company-operated restaurants.
Additionally, franchisees opened three new restaurants including our twelfth El Pollo Loco in Houston.
For the full year 2016, we continue to expect to open 17 to 20 new Company-operated restaurants and expect our franchisees to open between 10 and 15 new restaurants.
We remain pleased with the progress of our development plan in Dallas where together with our franchise partner we expect to open approximately seven restaurants this year, including two that are scheduled to open this month.
With regard to franchise restaurant growth, we remained focus on accelerating development and continue to seek new franchise candidates with the resources and capability to develop in new markets.
During the second quarter, we announced the signing of a development agreement with a new franchise partner, PLM Restaurants, who will open six new restaurants in the Tucson, Arizona, area by August of 2019.
In addition to opening new restaurants, PLM Restaurants completed the acquisition of two existing El Pollo Loco restaurants in the Tucson market, one of which was a Company-operated restaurant and the other a franchised unit.
PLM Restaurants currently operates over 80 Burger King restaurants, and we're very excited to have them join the El Pollo Loco system.
Finally, I'd like to provide a quick update on our new Vision prototype, a design that we feel better reflects the quality of our food and QSR-plus positioning.
We continue to receive favorable consumer feedback from our initial remodel in Fullerton, California, and plan to complete more remodels with a new design by early next year.
In addition, all new Dallas restaurants, both Company and franchise, will open with the new design as will all new Company-operated restaurants outside of Dallas which have not already begun the permitting process.
We expect to have a total of between 8 and 12 restaurants operating with the Vision design by the end of the year including new builds and remodels.
With that, I'd like to turn the call over to <UNK> for a detailed discussion of our second quarter results and 2016 guidance.
<UNK>.
Thanks, <UNK>.
For the second quarter ended June 29, 2016, total revenue increased 9% to $97.5 million from $89.5 million in the second quarter of 2015.
The growth was largely the result of the increase in Company-operated restaurant sales which rose 8.7% in the second quarter to $90.9 million.
This increase in Company-operated restaurant sales was largely driven by the contribution from the 18 new restaurants opened during and subsequent to second quarter of 2015 combined with a 2% increase in comparable restaurant sales.
The increase in Company-operated comparable restaurant sales was comprised of a 2.7% increase in transactions offset by a 0.7% decline in average check.
The decline in average check was the result of a 1.4% increase in pricing offset by 2.1% in unfavorable mix, which was largely anticipated as we [left] last year's higher priced Carne Asada promotion and remain focused on delivering great value to our customers.
Franchise revenue increased 12.2% in the quarter to $6.6 million from $5.9 million in the second quarter of 2015.
This increase was driven largely by the contribution from nine new restaurants open during and subsequent to the second quarter of 2015, comparable restaurant sales growth of 2.7%, and higher revenue related to our point of sale system.
Turning to expenses.
Food and paper costs as a percentage of company restaurant sales decreased 270 basis points year over year to 29.7%.
The improvement was predominantly due to lower commodity costs, particularly lower contracted chicken prices and favorability in our promotional calendar.
As a reminder, for the remainder of the year prices for all of our chicken needs are locked in, and we expect commodity deflation of around 4% for the year.
Labor and related expenses as a percentage of Company restaurant sales increased 160 basis points year over year to 26.8%.
The increase in labor expenses was primarily driven by increases in California minimum wage and incremental labor required [for] 11 restaurants opened in the fourth quarter of 2015 and 5 restaurants opened during the first half of 2016.
Occupancy and other operating expenses as a percentage of Company restaurant sales increased 70 basis points compared to the prior year second quarter to 21.5%.
The increase was primarily due to rent expense on new and renewed restaurant leases and the incremental cost related to opening new restaurants in the fourth quarter of 2015 and the first quarter of 2016.
General and administrative expenses increased by approximately $1.9 million year over year in the second quarter to $8.3 million.
As a percentage of total revenue, G&A expenses increased 130 basis points to 8.5%.
The increase included $340,000 of legal costs related to the securities class action litigation.
Excluding costs associated with the securities litigation, G&A expenses in the second quarter of 2016 would've increased approximately $1.5 million or 100 basis points as a percentage of total revenue.
This increase resulted primarily from increases in headcount, a higher accrual for the Company's annual bonus program, restaurant pre-opening expenses, travel expenses, a dead site cost associated with new restaurant location the Company chose not to continue pursuing.
Depreciation and amortization expense increased to $4 million from $3.2 million in the second quarter of last year.
As a percentage of total revenue, depreciation and amortization increased 50 basis points year over year.
The increase was primarily driven by our new store development, as well as by our remodeling program.
Prior to our IPO, we entered into a tax receivable agreement that calls for us to pay our pre-IPO shareholders 85% of the tax savings realized as a result of utilizing our pre-IPO net operating losses and other attributes.
We recorded a provision for income taxes of $5.3 million in the second quarter of 2016 reflecting an estimated effective tax rate of 42.4%.
This compares to a provision for income taxes of $5.1 million in the prior year second quarter.
We reported GAAP net income of $7.3 million or $0.19 per diluted share in the second quarter compared to a net income of $7.2 million or $0.18 per diluted share in the year ago period.
In addition to our GAAP net income, we have calculated pro forma results adjusting for one-time or unusual items.
To arrive at pro forma net income, we have made adjustments for expenses and gains on the recovery of insurance proceeds related to a fire in one of our restaurants in 2015, expenses associated with the tax receivable agreement, gains or losses on disposable assets, asset impairments, closed store costs, gain on disposition of restaurants, professional fees incurred as a result of the block trade of 5.96 million common shares in the second quarter of 2015, and legal expenses associated with a securities class action lawsuit.
We've added back a provision for income taxes and (inaudible) a 40% income tax rate.
Included in our earnings release is a reconciliation of our GAAP results to our pro forma results.
We believe that the pro forma results provide a useful view of our business and cost structure.
Accordingly, pro forma net income from the quarter was $7.6 million as compared to $7.4 million in the second quarter of last year.
Pro forma diluted earnings per share were $0.19 for the second quarter of 2016 compared to $0.19 in the prior year period.
In terms of our liquidity and balance sheet, we had $9.5 million in cash and equivalents as of June 29, 2016 and $117.1 million in debt outstanding.
For the foreseeable future, we expect to finance our operations, including new restaurant development and maintenance capital through cash from operations and borrowings under our credit facility.
We continue to expect our capital expenditures to total $35 million to $39 million for the full year of 2016.
Turning to our 2016 guidance, based on current information, we are updating our guidance for fiscal 2016.
We now expect pro forma diluted net income per share of $0.68 to $0.72.
This compares to pro forma diluted net income per share of $0.71 in 2015.
Our pro forma net income guidance for 2016 is based in part on the following annual assumptions: We expect system-wide comparable restaurant sales growth to be in the low single digits.
We expect to open 17 to 20 new Company-owned restaurants and expect our franchisees to open 10 to 15 new restaurants.
We expect restaurant contribution margin of between 20.8% and 21.2%.
We expect G&A expenses of between 8% and 8.2% of total revenue excluding legal expenses related to securities class action litigation.
We expect adjusted EBITDA of between $67 million and $69 million, and we are using a pro forma income tax rate of 40%.
With that, I'll turn the call back over to <UNK> for closing remarks.
Thank you, <UNK>.
Let me close by saying that we continue to focus on delivering against our four brand pillars: great food, excellent service, a warm and inviting atmosphere, and a good price.
We believe this will strengthen the foundation of our business and drive results over the long term.
Along these lines, despite a challenging external environment, we continue to see improvement in our core business driven by the value, service, and operations initiatives that we have put in place during the last year.
In Houston, we are very focused on driving trial and continuing to educate consumers about our great food as we look to steadily grow our user base and increase frequency.
Lastly, our development remains on track, and we continue to make progress attracting new franchisees with the skill, resources, and capability to partner with us in our future development.
Thank you for joining us today.
We appreciate your continued interest in El Pollo Loco, and we'd be happy to answer any questions that you might have.
Operator.
Yes, <UNK>.
So, versus last time, like I said, we had a pretty solid second quarter but as I look out the balance of the year, we still expect that we will be making greater incremental investment in Houston and Dallas.
They're probably the biggest drivers of why we dropped both the margin and the EPS estimates.
As we look out ---+ I mean, as we've highlighted the Houston restaurants, sales are still below our target but we've made a decision here that the one thing we're not going to do is cut back on labor and some of the other expense items, so we're going to continue investing and make investments in labor and even on the food cost line.
As we look to bring customers into our restaurants in Houston, we decided we're going to be a little more aggressive in how we do that, so that's an investment on the food cost line.
So when we look at that and then the idea that we'll probably translate that and do some of that also in Dallas, as we enter Dallas, those are really the biggest drivers of why we dropped our full year EPS and margin percentages.
From the Q1 forecast, not really, no.
Yes, sure, <UNK>.
Glad to.
Recently, we've implemented a number of actions really to drive trial and have deeper relationships with the consumer: driving repeat purchases and build awareness.
To that end, we focused on kind of switching our direct mail.
We've increased the circulation to help build awareness.
We're sending it out to a larger area around the restaurants, and also it's focused on the menu comprehension and inducing trial.
We shifted our media spend to a highly-targeted social media advertising, and we think that's the future.
We've also added upgrading of field marketing position as well as our calendar as now we're focusing on the core menu items in Houston versus focusing on the LTOs.
So those are just a few, <UNK>, of the things we've done, but as <UNK> mentioned, we're continuing to give Houston that support on labor to ---+ when people come in and the trial is there we're doing sampling programs.
So, they have a great experience.
[We'll continue using] that support a little bit longer out after the store is open from their initial increase labor for training.
So, we see that as a positive, and we'll also include that into Dallas where we feel very good about the Dallas, which we think the economy there is stronger.
Probably open, as we mentioned at the beginning of the call, seven units this year along with our franchise partner, the Harper Group, so we think that will be stronger there.
Yes, <UNK>, obviously as you've said, it's early.
But certainly we are feeling pretty good about the situation.
I mean, I think corn actually hit a ---+ certainly year over last ---+ a lower last year and I think it was even low over the last two years, so with corn prices at a very low point at this point, and certainly we see chicken supply looks to be pretty good.
I think we feel good about entering into 2017 that we'll see ---+ I mean, I'm cautiously optimistic that we'll be flat on the chicken front plus or minus 1%, but you'll certainly feel pretty good about where we are right now on chicken costs heading into next year.
This is <UNK>, <UNK>.
We're ---+ as you know, we use Market Force and monitor that very closely.
We're seeing continued strong scores both Q1 and through Q2.
Also our NPD metrics for Q1.
We haven't gotten our Q2 metrics yet, but we're very strong as well.
So we continue to focus on all of those, including last visit excellence.
We monitor some of the initiatives that we did last year to improve speed of service on the inside.
Those seem to be resonating with consumers ---+ monitoring drive-thru speed, which are improving our LVE, last visit excellence.
Well, mix is basically flat right now given our promotional calendar.
Now, our transactions, as we mentioned, are positive and continue positive into the first part of the third quarter, and then, of course, the pricing that we took.
Hey, <UNK>, in terms of mix, what really drove the mix differential year on year was the fact that last year remember we were promoting steak with an underlay of shrimp, both of which were at significantly higher prices, and so when we last [add] that was a mix impact of this year.
As I look out at the next couple quarters, I expect mix to be flat to slightly negative, so you're not going to see another Q2 in terms of mix in Q3 and Q4 because, again, our promotional items are pretty ---+ are much more similar versus this year when we had what we promoted versus steak and shrimp last year which, of course, were very high check items.
And as <UNK> just highlighted, one of the things we wanted to bring out was we talk about transactions and the fact that we feel great about the 2.7% transaction growth, and what we're seeing so far in Q3 is we are again positive to date on transactions and expect to be positive for the quarter in transactions.
Yes, just to add to that on price, <UNK>, we're currently at 1.5%.
We took 70 basis points in April, and that was on top of an eight-tenths of a percent increase last November, and we'll look at that again this November and determine what's proper.
No, we're very happy with the initial hacienda program that we started years ago.
In fact, 70% plus of the system is now either new in the hacienda or the hacienda remodel.
We did what we call our Vision design prototype in our Fullerton store here in California, and that was really the next phase of the design development.
It's really ---+ more reflects a QSR-plus.
Our positioning is really the inside matches what Ed and I talk about as the food now matches the quality of the food, and we're getting ---+ and we've done some research on it and we're getting very good customer feedback from the research that we've done.
We are going to have between 8 and 12 of those done either in new stores this year or remodel into the Vision design, and we're kind of, actually, at a lull in our ---+ we were kind of at a lull in our hacienda, the timing of our hacienda remodel, so this is really a perfect time for that.
All of the Dallas stores will be ---+ both Company and franchise ---+ will be in the Vision design as well as in any new Company store right now that is beyond ---+ that's not in permitting right now.
So, we look forward to that for the balance of this year and getting your input on that, but the initial feedback from the consumers is it's resonating very well.
Yes.
That is correct, and the biggest driver of that is a basically lower bonus.
Hi, <UNK>.
This is <UNK>.
You know, we think the California market seems to be holding well for us.
We've heard some talk that you're referring to, but if you look at the burger chains, you've got a lot of discounting going on in the burger chains and very competitive there, but we think we're ---+ our current strategy is right on and we believe that that's really what's delivering our results now and we believe over the long term because we think it really differentiates us, and a lot of the initiatives that we put in place last year focusing on speed of service, through-put, improvements in service aspect.
We've always had our food quality there, but really also being very cautious on price increases.
We think with kind of the hard work we did last year is resonating and holding very well for us this year.
So, we think the strategy's right and we think we're fortunate and, <UNK>, I'll let you add anything on top of that about the California consumer.
No.
I mean, we're not seeing it as we highlighted good Q2 on transactions.
Q3 continues at this point to be positive, expect to be positive, so maybe there's a headwind there, but I can't say as we can point to it as seeing it having a big impact on our transactions or sales.
So, I guess we're a little different than some of the concepts.
Yes, so as <UNK> highlighted, I mean one of the things we're really focused on in Houston is a driving trial, and so we are doing some I'll call it more aggressive discounting and things to get people in the restaurant to try our food.
Obviously when they try our food we believe they'll become permanent customers.
So, if I look at Houston in terms of magnitude of what we expect to run on food costs, I'm going to say it's going to be probably a 5 percentage point difference versus, say, our base business.
That kind of magnitude.
Thank you, Operator, and thank you, everybody, for joining us today.
We appreciate your following El Pollo Loco, and have a good evening.
| 2016_LOCO |
2016 | DFS | DFS
#We are working off of an operative assumption of one or two rate increases this year, as opposed to the four we were looking at on the forward curve toward the very end of last year.
I would say we have not yet seen the benefit really of repricing in the card book fully from the fed rate increase.
Because we don't reprice card customers until cycle date, so you will get some lift from that coming in.
So I think what we're trying to say in NIM is, there's an upward bias in NIM.
We are well-positioned right now.
We may choose to invest some of that increase in NIM in marketing dollars, some promotional dollars and other places to really drive the growth that I think is the key thing we understand the market wants to see from us.
So we may take some of that excess and reinvest it.
Absent doing that, you would have more NIM expansion than you are likely to actually see.
I would just say that the mix between balance transfer and sales can impact payment rates along with credit.
So certainly credit is great, and so that tends to relate to a bit higher payment rates than one would otherwise have.
But as we have shifted to a little more transaction volume turning into loans versus and a little less balance transfer on new accounts, that is going to impact the payment rates.
So people will tend to pay more of their sales down than they will of their balance transfer down.
I don't think that we are forecasting a big change in that relationship.
I think, <UNK>, some of the one-time expenses or some of the revenue reductions you see in the fee line actually are accretive to the P&L.
So for example, we called out I think $74 million in lost revenue next year from the mortgage business.
I would remind everybody when we exited the mortgage business, we said the reason we were doing it or one of the reasons we were doing is it was not P&L accretive.
So I think that's a very good point there.
If I think about the expense base generally right now, I think we are very lean, we are very efficient today as evidenced by that efficiency ratio.
We are always looking to find further efficiencies to get operating synergies and drive even greater returns on that.
As I said earlier, we do have some levers we can pull if we get there.
But I think those are the kind of levers you pull when you are in a turn in the credit cycle and you see things.
Right now, we're still trying to drive growth.
And I don't think you drive growth by coming in and trying to whack the heck out of expenses.
Especially when you are already as efficient on that as we are.
So we are trying to balance prudent investments and growth, maybe investing some of this additional NIM to drive that going forward.
No, I think there was a little bit of elevated fraud costs to the fourth quarter, and a little bit of EMV costs.
So I think as you continue to push the cards out, there's a costs associated with that.
On the flipside of the equation, I think the fraud was actually up a little bit as you have the fraudsters trying to get in that one last hit before ---+ well swiping is still very prevalent.
So I think there's a combination of both sides of the same coin that you're seeing show up in that line item.
Remember on EMV, the rollout for the industry is still in process.
So there's a lot of retailers that have not activated it yet.
I will tackle the reserving question, and <UNK> can tackle the strategic element of the question.
I would say, <UNK>, what's driving it really is seasoning of the portfolio.
You think you've seen double-digit growth rates there over the course of a number of years.
Personal loans don't season radically differently than credit card loans do.
There's a little bit of a change in the shape of the curve and it's not exactly the same, but they tend to season after origination.
You don't get a lot of first payment defaults when you do it prudently, thankfully.
So I would say it's just seasoning.
<UNK>'t expect any major deterioration of any kind in that portfolio, and the seasoning we are seeing is in line with expectations.
And what I would say on the strategic side is, we had record originations this year in that business.
Even with literally hundreds of marketplace competitors entering and buying for share.
And I think that part of the reason is that our ---+ the people that we're targeting tend to be very different than the credits that most of those are targeting.
Our average FICO score is 750, 760.
The figures I've seen from the leading companies in the marketplace space is sub 700 average.
And that's ---+ when every 20 points of FICO means a doubling of credit losses, that is a very big difference in target market.
So we think that we are still the leader in prime originations in the space.
In terms of whether there will be a shakeout, I'm sure there will be a shakeout.
I'm sure some people will survive, but I don't think that there will be hundreds of competitors, and it is an unproven model through the cycle.
I believe that our model of originating and holding versus just a originate and sale that relies solely on growth, and is you stop originating you don't have revenue.
I believe that a relationship owning the credits, being able to finance it on our balance sheet, and not having to rely on securitization markets that we have seen can completely dry up in a crisis.
I think is a more sustainable model, and so I really like our position in that business.
Answering your third question I guess first.
We think that Ariba is going to continue to produce a lot of volume growth in the short term.
It will be a while before it becomes a material contributor profitability wise.
We also think there may be some ancillary services that may provide some revenues that having that product, we are working on adding some additional functionality that may produce some revenue potential.
On student loans, I'm not sure I fully understood your question on the student loans.
No, I expect to originate more this year than we did last year.
But I don't expect a dramatic acceleration, but I do think that the credit trends look great.
The needs continue from customers, and I expect us to originate a bit more.
And, <UNK>, it is helpful to look at the organic book versus the acquired book, because we bought it a number of years ago is essentially in run off.
Sure.
| 2016_DFS |
2017 | OLLI | OLLI
#With regards to the trend in May, we are not going to comment on the current quarter that we are in, other than to say that the trends in Q1 ended nicely and we are very comfortable with where we sit today.
With regard to the seasonal business, seasonal was a little choppy, just like the rest of the quarter was when we first started out.
Our largest seasonal business does occur in Q2, which we are in currently today.
So we were pretty comfortable where we came out in the quarter for the seasonal categories and we feel pretty good where we stand.
And we believe we'll be in pretty good shape by the end of the second quarter with the inventory we have and the offerings we have for our customers.
And also <UNK>, I will add that that choppiness in the first quarter ---+ there were three major things that happened and we're just pleased the way it all fell out.
And that's certainly the tax refunds and we bounced nicely; Winter Stella ---+ Winter Storm Stella.
And then the change in the Easter holiday changed our advertising cadence as well.
But overall, we are very, very ---+ we are pleased with our performance and we are quite happy.
Well, I think it's our overall ---+ the thing that drives our business is the deals, and I know you get that.
So obviously we have really, really good deals and we have what America wants, which is brand names at drastically reduced prices.
I'm really pleased with our locations that we are opening up.
I don't think that there is a remarkable difference between stores that we opened up this year, last year, three years ago, four years ago, other than Florida.
Florida has been doing very, very well and we are very pleased down there.
But so has Rhode Island and so has Pennsylvania with the new store here in Pennsylvania.
So overall, we are just ---+ we are pleased with the new store performance.
I think that the overall visibility of the Company.
And as we have opened up, in particular, perhaps, down in Georgia and Alabama and Mississippi and Florida, more people from the north were more familiar with us.
They see, they hear, they know a lot more about us.
And that's ---+ it's a good double-edge sword because we are getting the benefit from the consumer and we are also getting the benefit from the exposure to be able to get deals.
I think this is two plus two equals about six.
Yes, <UNK>, with regards to the overall guidance and cadence that we are looking at right now, we are obviously holding to the 1% to 2% comp on a full-year basis coming off the 1.7% for Q1.
We ---+ from a modeling perspective, I'd probably tell you Q2, I'd probably guide to the higher end of the 1% to 2%.
On Q3, probably in the midpoint and then Q4 on the lower end of the 1% to 2%.
I will start with that and Mark or John can chime in.
But obviously, the deal flow has been very strong, as Mark alluded to.
And really the increase in the inventory year over year is strictly timing.
We've got a lot of good deals coming in.
We think we are well positioned for the quarter ahead.
<UNK>, from our perspective, the freight rates and the way that they look like they are coming in for us from a contractual perspective, which is ---+ our contract starts May 1 of each year ---+ is pretty much right in line with what we budgeted and what our expectations were from a freight perspective.
So one could say we might have been a little aggressive with the rates coming down and we had expected them to come down, but they are right in line with what we were thinking.
And we don't think that there's going to be any benefit or a detriment on the freight rates as we look at them for the full-year basis.
Yes, well, it depends on the deal.
And we go after our leases just like we do our merchandise.
So we do have a couple of stores that we opened in the low 40,000s or high 30,000s down in Florida and that's because it was a more beneficial deal for us to get whatever we got on the lease.
But that being said, we have not changed our prototype of the belly size to be 30,000 to 33,000 square feet.
We've also opened up a store or 2 probably in the mid-20,000s.
But that's because perhaps we wanted ---+ we did like that site and that is one of the smaller stores.
But our belly size remains the same of 30,000 to 33,000 square feet.
Thank you.
With regards to the SG&A for Q1 especially, we were actually very pleased being able to lever it 70 bps better than last year on an apples-to-apples basis.
So we thought that was pretty strong leverage on a 1.7% comp for the quarter.
And with regards to on a full-year basis, we are probably looking at a slight leverage to LY on the SG&A perspective, assuming a 1% to 2% comp range.
So our model would tell you it would be pretty comparable to last year, maybe slightly lower on an SG&A perspective in Qs 2, 3, and 4.
We haven't struggled at all.
We just returned from the shopping center show in Las Vegas and we are already working diligently on 2018.
2017 stores are all virtually locked up, all but executed.
We are almost at the very, very finish line.
So there is no issue there.
And we saw a lot of great sites, a lot of towns that would be really, really good Ollie's Bargain Outlets.
There's just simply no shortage for us in those ---+ and I think a lot of it has to do with our flexibility.
Because we can go down to 25,000 square feet and we can go up to 40,000 or 45,000 square feet if we choose so.
And if we think ---+ so it doesn't have to be the 30,000 to 33,000.
We can go up, we can go down, and that flexibility allows us to have more availability and more choices on the real estate size.
With regards to our ability to retain and attract new employees, I believe we are very successful at doing so.
We are not seeing any real struggles in doing either one of the two of those.
So I think with the work environment we give, the pay that we offer for the associates, we are a pretty good preferred employer for folks to come work with.
So we are not seeing any major issues or any wage pressures as well, outside of what we are normally used to paying.
From our perspective, and we have levered SG&A pretty well since going public, but we've had some pretty robust comp years as well.
In 2014, we had a 4.4% comp and then a 6% comp and then 3.2% comp.
So we've come out with our long-term algorithm that we need about a 1% to a 1.5% comp store increase in order to maintain or slightly lever our SG&A expenses.
And we have outperformed that significantly since becoming public.
So the way we model our business and we grow it is to basically budget a 1% to 2% comp and then we are able to slightly lever our SG&A expenses.
If we're able to do better on the sales front, we'll actually lever heavier than that.
So that's kind of the algorithm we've built into the model and we believe we can continue that on a long-term basis and continue to slightly lever the SG&A with modest comp growth.
Well, I think you pretty much gave the answer.
I think that if in particular, Ed, that you come in and you see ---+ the difference is that if you come into our store and you see a name-brand shampoo, our customer knows that it's here today and it's gone tomorrow.
When it's gone, it's gone.
So you might not find that same shampoo in our store next week.
But you might find another shampoo that that major manufacturer makes or another competitive CPG company would make.
I think that we've become more meaningful to these companies.
I think that the product offerings have become and grown and become larger.
And while its product that people want every day, there's still that great consistency about Ollie's that you never know what you're going to find.
And you better buy it because it's here today, gone tomorrow.
I think that what it has done is ---+ and you will see because we have reaped some pretty good results ---+ is more of a consistency because we are concentrating more and more on those categories.
And we mean more to these major manufacturers.
So there will be a consistency I believe you'll see within the HBA and/or chemicals, consumables, that kind of thing within the stores.
There would most likely ---+ and to be honest with you, I kind of hope a great inconsistency on the product.
Because that part of the charm of Ollie's is it's here today and gone tomorrow.
Ed, we have not made any real final, final decisions.
As you know, we just paid down $65 million of incremental debt during the first quarter and used some excess cash we'd built up from last year.
The Board continues to review all of our options for excess cash that we have, which include paying down debt, buying back stock, or paying a dividend.
Right now, we've made the decision today to pay down additional debt and we are going to keep our options open.
From a stock buyback perspective, we are paying a dividend.
But right now, we've not made any additional or further determinations of where we are going to go with the cash we build up in the future years.
Yes, I will answer the second one first.
And then I might need help on the ---+ because that was a pretty long question on the ---+.
But the first answer is, <UNK>, nothing has changed at Ollie's.
We are consistent.
We would have taken the same store five years ago as we did this year as we did two years ago as we did three years ago.
We have not jumped the state.
We have contiguous geographic growth.
There is absolutely nothing that has changed with our philosophy, our negotiations.
Nothing has changed, except that I believe that we are more attractive to the landlord because we are a publicly traded company and people can see our financials.
And it means something to them for their financing and their leverage capabilities.
As far as ---+ I believe it was the merchandise, Jay.
Going into more footwear and apparel.
And opportunities of what's available.
Okay, yes.
Would we ---+ if that was the question, would we buy footwear, would we buy apparel.
Very selectively, but it's not our main business.
Our main business is hard goods.
As far as the flexibility of scaling down a department or two based on a smaller store, a bigger store, we do that all the time.
That's no different than what we've done.
I've had a 25,000-square-foot store for probably 20 or 25 years, and I've had a 50,000-square-foot store since August of 2003.
So we go up or we go down.
That's what's so cool about the model is that we are so flexible, we can shrink or grow and take advantage of these opportunities.
And that's probably one of the reasons why we're not struggling in getting the real estate.
So Pat, did I hit all your answers ---+ the questions.
With regards to the direct marketing, and as we said earlier, we are not planning to have any impact in our modeling from the overall efforts that we have on the digital marketing side of the business.
We continue to run small tests, as we had mentioned on our last call.
We continue to try to learn and understand the data a little bit better.
And that's what we are working on more diligently today in terms of the BI tool that we are implementing and trying to get our hands around that piece of the puzzle.
But we believe for 2017, no impact on the business.
And then long term, we are still trying to figure out how do we motivate that customer to come in the stores more frequently without making it a discount-driven communication.
We want to be able to drive them in the store more frequently with the deals and get them motivated that way.
So we are still doing a little bit of testing and figuring out there as we move forward.
We are real, real careful and sensitive to this, because we don't want anybody running Shanghai on us here.
Because this is ---+ we are talking to these people in a tip sense.
So we are not giving them a discount when we are attempting to do this.
What we are trying to do is let them know we got a deal.
So we are really, really guarded on this; we are really, really protective.
We don't want to ---+ we work really, really hard to not go into spam and not go into junk mail.
And we just want to make sure that we are letting the consumer know that we got a product.
And if we offer them the product or let them know we've got the product, we are not upset if they don't come in at that week as long as they come in.
If they don't come in, then I'm kind of upset.
But it's a tip sense; it's to let them know we got the deals.
So it's really, really important to us, our protective nature of Ollie's Army.
These are ---+ these people account for nearly I think 65% of our business now.
So we are really, really ultrasensitive to it.
Okay, thank you very much to everyone for listening to our first-quarter earnings call.
We are off to a strong start to the year, and we look forward to speaking to you again on our next earnings call in late August.
| 2017_OLLI |
2016 | CINF | CINF
#Thank you, <UNK>.
Good morning and thank you for joining us today to hear more about our second-quarter results.
We are pleased to report satisfactory operating performance, despite second-quarter catastrophe loss effects that were slightly higher than our long-term average.
Thanks to the steady efforts of our associates to support their local independent agents who represent Cincinnati Insurance, we still managed to generate a modest underwriting profit in the second quarter and our first-half 2016 consolidated property-casualty combined ratio of 95.4% is within 0.5 point of the first half of last year.
We are encouraged by improving underwriting results before the effects of catastrophes and believe we will see ongoing benefits from our various initiatives focused on profitability.
Rising investment income and robust portfolio valuations at quarter end were another bright spot for recent performance.
Higher investment income for the first half of 2016 offset a small decrease in property-casualty underwriting profit, leading to a 3% increase in operating income.
<UNK> <UNK> will comment further on that in a moment.
First, I will highlight some important points about our insurance operations.
Each of our segments continued to grow satisfactorily as we earned quality new business produced by our agencies.
Pricing was generally consistent with the first quarter; however, personal auto was an exception, with average renewal rate percentage increases moving from the mid single-digit range to the high single-digit range.
We believe that improved pricing for both our personal and commercial auto, along with other initiatives, will improve our results for those lines of business.
Expansion of our reinsurance assumed operation, known as Cincinnati Re, also continues to progress nicely.
Cincinnati Re generated an underwriting loss of just under $1 million for the second quarter as a result of a $4 million estimated share of losses from the Fort McMurray, Canada, wildfire affecting the industry, plus what we believe is appropriate reserving for a diverse portfolio of reinsurance treaties.
We are also satisfied with the progress of expanding the personal lines products and services we offer to our agency's higher net worth clients.
Nearly one-quarter of the total $59 million in personal lines new business written premiums for the first six months of 2016 came from high net worth policies.
We reported an underwriting profit for each of our property-casualty segments in the first half of 2016.
As in most years, we anticipate the second half to better than the first.
The commercial lines segment produced a combined ratio just over 95% for the first half of the year, while that ratio for our excess and surplus segment was just under 75%.
Our life insurance subsidiary, including income from its investment portfolio, also experienced another good quarter and first half of the year.
For the first six months of 2016, earned premiums grew 11% and net income for our life insurance subsidiary rose 10% compared with last year.
Our primary measure of financial performance, the value creation ratio, was again strong at 4.6% for the second quarter and 10.5% for the first half of 2016.
Generally higher valuations in securities markets augmented the contribution of our operating performance.
While we are pleased with ongoing good performance, we understand the need to remain focused on underwriting profitability and growth.
We will do that as we seek to continually improve performance.
I will now ask our Chief Financial Officer, <UNK> <UNK>, to share his highlights for other areas of our financial performance.
Great.
Thank you, <UNK>, and thanks for all of you for joining us today.
I will open with highlights of second-quarter investment results.
It was another stellar quarter for investments, including 6% growth in pretax investment income and 7% on an after-tax basis.
We also experienced increases in the fair value and unrealized gain positions of both our equity and bond portfolios.
We ended the second quarter of 2016 with a net unrealized gain of nearly $2.7 billion before taxes, including more than $2 billion for our common stock portfolio that reached more than $5 billion in fair value.
For our bond portfolio, interest income again grew 4%, in part due to net purchases of $309 million over the past four quarters.
The bond portfolio's pretax average yield, reported at 4.64% for the second quarter and 4.65% for the first half of 2016, matched the year-ago periods.
Taxable bonds purchased during the first six months of 2016 had an average pretax yield of 4.5%, 8 basis points higher than we experienced a year ago.
Tax exempt bonds purchased averaged 3.01%, 33 basis points lower than a year ago.
Our bond portfolio's effective duration at June 30 was 4.8 years, up slightly from 4.7 years at year-end.
Cash flow from operating activities continued to fuel the investment income growth.
Funds generated from net operating cash flows for the first half of 2016 rose 4% compared with a year ago to $490 million and helped generate $292 million of net purchases of securities for our investment portfolio.
As always, we work to carefully manage our expenses at the same time of strategically investing in our business.
Our first-half 2016 property-casualty underwriting expense ratio rose 0.2 percentage points compared with a year ago.
Our loss reserves continue to experience favorable development as we apply a consistent approach to setting overall reserves.
For the first six months of 2016, favorable reserve development benefited our combined ratio by 5 percentage points compared with 4.4 points for the same period last year and similar to the 5.2 point rolling average for the prior four quarters.
Reserve development so far in 2016 continued to be spread over most of our major lines and over recent accident years, including 55% for accident year 2015 and 22% for accident year 2014.
Overall reserves, including accident year 2016 and net of reinsurance, rose $229 million in the first half of 2016, including $133 million for the IBNR portion.
Our capital strength, liquidity, and financial flexibility continued at healthy levels.
Our capital remains ready to support future profitable growth of our insurance operations and other capital management actions, such as returning capital to shareholders.
As usual, I will conclude with a summary of contributions during the second quarter to book value per share; they represent the main drivers of our value creation ratio.
Property-casualty underwriting increased book value by $0.04.
Life insurance operations added $0.07.
Investment income, other than life insurance and reduced by noninsurance items, contributed $0.47.
The change in unrealized gains at June 30 for the fixed income portfolio net of realized gains and losses increased book value per share by $0.72.
The change in unrealized gains at June 30 for the equity portfolio net of realized gains and losses increased book value by $0.59, and we declared $0.48 per share in dividends to shareholders.
The net effect was a book value increase of $1.41 during the second quarter to a record $42.37 per share.
Now, I will turn the call back over to <UNK>.
Thank you, <UNK>.
As you can see, we have a lot of positive trends carrying us into the second half of the year.
Our focus on incremental improvements is adding up and delivering great results that are worth noticing.
In the last few months, Moody's, S&P, and Fitch have all affirmed our strong financial strength ratings maintaining their stable outlooks.
Fortune Magazine also took notice of our progress this year as we joined the ranks of the Fortune 500 in June.
As we work together with our agency partners to maintain this momentum, we are confident that we will continue to produce value for shareholders in the near-term and for the long-term.
We appreciate this opportunity to respond to your questions and also look forward to meeting in person with many of you during the remainder of the year.
I will also note that many of you know Eric Mathews, who we announced last fall will be retiring on July 29 after nearly 40 years with the Company.
We thank Eric for his leadership of our accounting operations and wish him the best.
Senior Vice President Theresa Hoffer will participate in future earnings conference calls instead of Eric.
As a reminder, with <UNK> and me today are Jack Schiff, Jr.
, Ken Stecher, J.
F.
<UNK>, <UNK> <UNK>, and <UNK> Hollenbeck, in addition to Eric Mathews.
Shannon, please open the call for questions.
<UNK>, this is <UNK> <UNK>.
That's a great question.
Hopefully ---+ you mentioned whipsaw; I'm not sure I probably would have defined it that way.
We do follow a consistent approach with our actuaries.
Not changing how we do the reserves and look at them, but from time to time we will have I will call them refinements to the process as more information becomes available and so forth.
I think probably your comment might be specifically related to the personal lines and how maybe that fluctuated a little bit from the first quarter of this year to the second quarter and how maybe the second quarter was probably a little bit more in line with 2015 and 2014.
Really, as we noted in our first-quarter 10-Q, and I think I may have made some comments in there, we did have a slight refinement on our personal lines business which was really related to what we call the AOE reserves.
And so there were some expenses there that we refined.
It moved about $9 million, $10 million worth of reserves from the personal line side to the commercial lines side.
Had we not made that refinement, you would've actually probably seen the personal lines prior-year development in the first quarter really be flat.
So because we did that you saw some favorable development there and now, in the second quarter, really what's running the temperature is personal auto as well as commercial auto when you look at prior-year reserve development.
So absent some refinements, I think we are fairly consistent.
We are consistent in the process and I think the numbers really show that.
I don't know if <UNK> or anyone else has any additional comments, but that might have been a little long-winded for you.
<UNK>, this is J.
F.
In existing territories we have always taken the approach with the relatively low number of agencies we have to really appoint as few as possible in a particular area.
Now with the M&A activity that is occurring, a lot of consolidation in agencies, from time to time we would run into a case where, if we needed to augment our agencies in any particular area, the group from which we can choose might be smaller.
But, fortunately, the desire for agencies that don't represent us to have a contract with us is still high.
We rarely are turned down when we prospect for agencies and so I'd say consequently ---+ and the fact is that there are a lot of agencies that don't represent us in a lot of territories.
That's not a big concern for us.
We have been able to find agencies to appoint.
30%, 40% of the volume in an agency is an ambitious target.
We certainly want to be consequential to the agency.
As you know, we talk about being number one or number two after we have been in an agency for five years, but we're not seeing any lack of opportunity for us to do that.
It has worked out pretty darn well.
In newer states, particularly with what Will Van Den Heuvel is doing in the high net worth area, between the very good reputation that our agencies have earned for our company and they talk to agencies in some of these newer states for us, the door is pretty wide open for us to appoint agencies, for example, in lower New York, Manhattan, Long Island.
We just recently opened New Jersey.
California is soon to be opened and really no shortage of agencies to appoint there.
Fortunately, I think across the board, new states and existing states, we're in pretty good shape.
Well, the opportunities are a result, as everyone knows, from the consolidation of carriers in that line.
And so agencies, more than anything, want options they can offer to their policyholders.
I just happened to see one come through this morning; it was from a direct writer, but we actually wrote the business that, frankly, hadn't ---+ that particular business hadn't been very well attended to.
But it's coming across the board.
Actually the direct writer's write a tremendous percentage of that business, so it's not at all uncommon to see that.
And then from the usual carriers; we are competing pretty favorably against anybody right now.
I think what's happening is that agencies, when they take a contract with us, they know as part of the approach we take to them is that if we will agree to appoint fewer agencies than perhaps brand X might appoint, in return for that we ask that the agency concentrate on making the relationship with us work.
So we are very pleased with the number of at-bats we are getting.
I think that's the most important thing.
Those agencies aren't forced to put any business with us, but if they are giving us the opportunities, which we are pleased that they are, we are very pleased with the result.
Paul, this is J.
F.
I think, in terms of the rate increases that we are getting on renewals, we are reasonably pleased with what we are seeing.
In auto, both in private passenger and commercial autos, those are healthy and getting healthier.
So we think that between the underwriting actions that we are taking in those two lines of business, plus the rate increases ---+ as you know, we have been pretty aggressive about raising reserves on prior years and pretty conservative this year.
We think that things are going in the right direction on auto.
Relative to loss cost in all the other lines, there's still a lot of initiatives that are in the works here ---+ loss control inspections, more specialization by line of business, as well as by industry ---+ that we think ---+ and then, of course, the segmentation and the analytics that we are employing.
We just think we are being better selectors of risk and we are also addressing loss mitigation issues that is helping with our loss costs.
As it is right now, the improvement you are seeing in the accident year, excluding cats, would be exactly what we would expect to have happened.
We are pleased with ---+ really everything is kind of falling into place.
Still a lot more to do, frankly; we think there's a lot of improvements we can continue to make in those areas.
Paul, this is <UNK> and I agree 100% with J.
F.
He just nailed that answer.
Maybe just putting it in a little bit of quantitative terms, we are getting rate increase.
I think the segmentation that J.
mentioned is working well.
So that's helping us on the premium side.
Then there's also, as J.
mentioned in terms of trend, which we look at as being future trend in terms of rate-making being prospective, so we're looking out trying to anticipate where loss trends are going in the prospective rating period or pricing period.
And the points that J.
made about the things that are going on on the underwriting side, especially in loss control, (technical difficulty) the Company being up we think is making us optimistic about the future of continuing to make improvements.
So I think from everything that we can see, in the near term anyway, we feel pretty good about our prospects.
This is <UNK>.
Thanks for the question.
We really weren't surprised because it really was falling in line, when you are looking at five-year, 10-year averages.
The largest catastrophe and, maybe <UNK> might be able to talk about that, really was in San Antonio, Texas, and having that run up.
We don't have personal lines there; it's only commercial lines.
So that might have caught maybe some of the analysts I'll say off guard a little bit, having that being in there, because that was running about $55 million, $56 million.
There were some other ones in there that were in the ---+ I will call it in the $15 million to $25 million range, but probably not necessarily a surprise when we look at the five-year, 10-year averages and so forth.
But the last couple years we have had pretty good catastrophe loss ratios and so this one being elevated a little bit.
So maybe if I turn it over to <UNK> for some of the details of some of our cats.
Sure, thanks, <UNK>.
The comment on San Antonio is accurate.
It's about a $56 million end of the second quarter loss for us and all commercial.
Everything you read ---+ San Antonio was not on the map in Texas as far as being a hail risk for the industry.
It was supposed to be an area that really wasn't very prolific as far as previous hail events and so I think it caught everybody by a little bit of a surprise to the extent that the hailstorm hit San Antonio.
As a result of that, I think the losses were a little greater in the industry than probably were anticipated for us.
We certainly took our share of those commercial losses.
That actually was twice the size of any other cat we had for the quarter.
The other ones were mainly Midwestern storms related to particular hail losses in several states over several days.
Other than that, there really wasn't anything unusual in the quarter as far as those events.
<UNK>, this is J.
F.
again.
Similar to what we mentioned with <UNK>, and I think Paul as well, I think there's a momentum going right now for a variety of areas.
One of the things we are very pleased with is the predictive modeling and analytics that we have employed, both in personal lines and in commercial lines.
That's continues to get more and more refined.
We are segmenting our book of business better than we ever have.
I think we've done a good job of integrating it with more of standard underwriting (technical difficulty), a little of the art and the science combination that we talked about in the past.
Our agents have been great in cooperating with that.
(technical difficulty) for an agent to explain the science part of this to policyholders, but I think we've done a good job there.
And agencies have come through for us.
We've expanded our loss control significantly over the last five years, really that last six or seven years.
We're inspecting risks that we hadn't inspected in the past.
The inspections that we are making are much more in depth than we have in the past.
We are discovering things, both good and bad, that allow us to make a more informed decision.
We've gotten off risks that we should've gotten off of.
We've said yes to risks that maybe in the past we would've thought were a little tough in terms of their industry classifications, so that's working out real well.
I'd say, in particular, in personal lines the inspections have also afforded a lift in the area of insurance to value, so we are increasing premiums there.
Getting a better ratio of premium to risk for ourselves there.
It's not one thing; it's a lot of things that are working well.
I don't think there's anything particularly unique to what we're doing as to what other companies are doing.
I just think we have probably executed pretty well so far in this process.
And as <UNK> said a few minutes ago, there's still I think a lot of optimism moving forward we can continue to improve.
I think so.
With the plans that we've laid out and that we've been working towards, like J.
F.
just mentioned, we always wanted to be, I will say, in that 95 to 100 combined range.
But with interest rates where they're at today on the investment side, we've always been striving to be below 95 combined and really driving everything we can on a current accident-year basis, ex-cat basis.
We are really having to drive it to where we are at today and to keep the momentum going.
I would just add to that an example would be, that we are pleased with, is the introduction of high net worth to our personal lines book of business.
That segment of personal lines in the industry has always been much more profitable.
For us, though we weren't writing very high net worth, I would say our book of business previous to Will Van Den Heuvel joining the Company was more mass affluent than it was high net worth.
But it performed 10 points better than our middle-market personal lines book of business.
So as you can tell from the weighting of new business in high net worth this quarter versus middle-market, we are increasing the proportion of high net worth.
And so there've been a lot of deliberate steps that we have taken to position our book of business to perform better than the 95 to 100 that <UNK> mentioned.
Thank you, Shannon; excellent job.
And thanks for all of you for joining us today.
We look forward to speaking with you again on our third-quarter call.
Thank you.
| 2016_CINF |
2018 | PETS | PETS
#Thank you.
I would like to welcome everybody here today.
Before I turn the call over to Mendo <UNK>, our President and Chief Executive Officer, I would like to remind everyone that the first portion of this conference call will be listen only until the question-and-answer session, which will be later in the call.
Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties.
These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us.
Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions.
Actual future results may vary significantly based on a number of factors that may cause the actual results or events to be materially different from future results, performance or achievements expressed or implied by these statements.
We have identified various risk factors associated with our operations in our most recent annual report and other filings with the Securities and Exchange Commission.
Now let me introduce today's speaker, Mendo <UNK>, our President and Chief Executive Officer of 1-800-PetMeds.
Mendo.
Thank you, <UNK>.
Welcome, everyone, and thank you for joining us.
Today, we will review the highlights of our financial results.
We'll compare our third fiscal quarter and 9 months ended on December 31, 2017, to last year's quarter and 9 months ended on December 31, 2016.
For the third fiscal quarter ended on December 31, 2017, our sales were $60.1 million compared to sales of $52.9 million for the same period the prior year, an increase of 13.7%.
For the 9 months ended on December 31, 2017, sales were $206.5 million compared to sales of $186.1 million for the 9 months the last year, an increase of 10.9%.
The increases in sales were due to increases in new order and reorder sales.
The average order value for the quarter was approximately $86 compared to $81 for the same quarter the prior year.
For the third fiscal quarter, net income was $9.1 million or $0.44 diluted per share compared to $4.8 million or $0.24 diluted per share for the same quarter the prior year, an increase to net income of 88%.
For the 9 months, net income was $27.1 million or $1.33 diluted per share compared to $16.3 million or $0.80 diluted per share a year ago, an increase to net income of 66%.
The accelerated increase in net income was mainly due to higher gross profit margins.
In addition, the new tax law helped boost our earnings for the quarter by approximately $1.7 million or $0.08 diluted per share.
New order sales increased by 15.5% to $9.2 million for the quarter compared to $7.9 million for the same period the prior year.
For the 9 months, the new order sales increased by 12.7% to $36 million compared to $31.9 million for the same period last year.
Reorder sales increased by 13.4% to $50.9 million for the quarter compared to reorder sales of $44.9 million for the same quarter the prior year.
For the 9 months, the reorder sales increased by 10.6% to $170.5 million compared to $154.2 million for the same period a year ago.
We acquired approximately 106,000 new customers in our third fiscal quarter compared to 99,000 for the same period the prior year.
And we acquired approximately 408,000 new customers in the 9 months compared to 388,000 for the same period a year ago.
For the quarter, approximately 84% of our sales were generated on our website compared to 83% for the same quarter last year, which resulted in a 15% increase in online sales.
The seasonality in our business is due to the proportion of flea, tick and heartworm medications in our product mix.
Spring and summer are considered peak seasons, with fall and winter being the off-seasons.
For the third fiscal quarter, our gross profit as a percent of sales was 36.5% compared to 31.5% for the same period a year ago.
For the 9 months, our gross profit as a percent of sales was 35.3% compared to 30.7% for the 9 months a year ago.
The shift in sales to new-generation medications with higher margin, the trend we have seen in the prior 3 quarters, continued in the December quarter.
Our general and administrative expenses as a percent of sales was 9.7% for the quarter compared to 10.1% for the same quarter of the prior year.
And for the 9 months, it was 8.8% compared to 9.2% for the same period a year ago.
We were able to leverage the G&A with increased sales.
For the quarter, we spent $4.1 million in advertising compared to $3.2 million for the same quarter the prior year, an increase of 30%.
For the 9 months, we spent $14.9 million for advertising compared to $13.3 million for the 9 months a year ago, an increase of 12%.
We increased advertising to stimulate new order sales.
Advertising cost of acquiring a customer for the quarter was $39 compared to $32 for the same quarter the prior year.
And for the 9 months, it was $37 compared to $34 for the 9 months the prior year.
The increase is mainly due to increases in advertising costs.
We had $81 million in cash and cash equivalents and $21.9 million in inventory, with no debt as of December 31, 2017.
Net cash from operations for the 9 months was $35.1 million compared to $31.6 million for the 9 months last year.
Due to the Tax Reform Act of 2017, we are anticipating an effective income tax rate of approximately 34% for the March 2018 quarter and approximately 24% for the next fiscal year.
This ends the financial review.
Operator, we're ready to take questions.
During our off-peak season, typically gross margins are higher in the off-peak season than the peak season.
So the comparisons are going to get tougher as we go along.
So our gross margins increased in the last 4 quarters like 500 basis points, I guess, for the year.
So it'll be tougher to continue that going forward.
That is correct, yes.
In the flea and tick category, there is a shift in sales from low-margin topicals to higher-margin, next-generation medications.
And that's really the main reason for increase in the gross profit margins.
Yes, there is a cost increase per impression, so I would anticipate that there's going to be some increase compared to the last year.
Sure.
I mean, as you know, we were a full 35% federal taxpayer.
What we had been applying has been a 35% rate for the first half of the year, for the first 6 quarters.
Once the tax law was enacted, we were allowed to prorate that rate, so we had 9 months at 35%, 1 month at 21%, which was a prorated 31.5%.
We were able to apply that to the 9 months, and that's going to be the federal rate moving forward for the fourth quarter.
Once our fiscal year ends at March 31, 2018, we'll then apply for that full year of fiscal '19 a 21% federal rate.
Right.
That's the blended effective rate that includes state tax as well.
And that includes state income tax.
It's similar to the, I would say, prior 2 quarters.
It's impacting our cost in advertising a little bit.
That's one of the reasons the cost is up in advertising.
Our relationships with our vendors are very good, I would say.
There is some changes happening, but we may disclose that in our 10-K in May.
Direct relationships.
As far as access to products, I mean, we're ---+ we carry a full line of all the most popular pet medications.
So, I mean, access isn't the sole issue.
You're just talking about more direct relationships.
With higher margins, we can afford to pay more to acquire a customer.
So our thresholds have changed a little bit due to the higher margins.
We are in maintenance stage now as far as capital deployment is concerned, as far as our infrastructure is concerned.
But during normal course of business, we do look at opportunities.
So if something happens, obviously, you guys will hear about it.
I wouldn't call it an active.
I would just say during normal course of business, we always looked at opportunities, and we'll continue to do that.
We do have some sense, but I'm not going to share that with you.
So I think the shift probably will continue for another couple years.
We are working on the second generation of the app, which should go live, I believe, within the next 6 weeks.
It's growing, but it's still not ---+ it's ---+ still it's in the infancy.
But as the consumer using more and more of the mobile phones, we think it's going to be important for the future.
Thank you.
For the remainder of fiscal 2018, we'll continue to ---+ focusing on increasing sales and improving our service levels.
This wraps up today's conference call.
Thank you for joining us.
Operator, this ends the conference call.
| 2018_PETS |
2016 | INCY | INCY
#I think you have to put it from our needs standpoint.
I mean we have already a very large portfolio of projects in our pipeline.
I think we have a strong discovery team for small molecule.
It has been very productive over a number of years.
So our discussions were very much about what we need and we don't have, which is an organized European platform with infrastructure, with medical teams across the different countries, commercial teams and market access.
I think it just happened that it was strategically something that ARIAD was interested in discussing for the reason I was explaining.
And I think for the reasons I have also communicated this morning that they are trying to concentrate their resources in the US to be ready to not only grow Iclusig but also some of the pipeline products that may be coming soon.
That's where the discussion was centered, in fact.
I see it as a deal that has a lot of win-win qualities for both organizations and where we get really what we were looking for which is related to our European infrastructure on being able to maximize our products there.
That will be over ---+ it's Dave speaking, <UNK> ---+ it will be over the life of the patent and it will be straight line.
The patents end in 2026.
I can speak with the territory that we have organized this transaction around.
It's approved at the European Union level, so that's where the technical authority is taking place.
Then there's a reimbursement that is done country by country.
So in terms of the European Union, the reimbursement is obtained now in some of the large countries like Germany.
But it's still work in Italy which is obviously a very fast-growing country for Iclusig.
But it's still not fully obtained.
As you know, in France there is a situation where you can have an ATU.
You can basically sell the product before it is fully reimbursed but there is a claw-back that is taking place at the time of reimbursement.
It's anticipated to be happening relatively soon.
Some of the other countries are still in the process of getting reimbursement inside the EU.
And then in our agreement there are countries outside of the European Union, like Russia is one of them, where we would have to find a partner, which is probably what we would be doing to go through the entire process of approval and reimbursement.
I can take care of some of that.
In Germany the price went through the entire review, and is a price that is approved by the government.
In the UK most of the usage is funded through the cancer fund.
It's not a NICE reviewed kind of situation, it's a cancer fund.
Remember, it's a relatively rare form of CML because the product is approved for two groups of patients, the ones who are resistant to or refractory to nilotinib or Sprycel, and a group of patients with 315I mutation.
The 315I mutation is relatively rare in the first-line setting but the incidence of 315I mutations is increasing with the lines of treatment that you are receiving.
So it becomes more and more frequent on the smaller number of patients as the patients are going from first-line to second-line to third-line.
In the UK it's going through the cancer fund.
In Germany it went through the entire process.
It's ongoing in France, and we are anticipating ---+ or ARIAD is anticipating the resolution of the negotiation in France.
It's already approved and reimbursed in Italy and the other countries still in the reimbursement process now.
Yes, thank you, thank you all for your time today and for your questions.
I think it's a day today where we show that we have made three big steps.
One is you see the growth of Jakafi in the US because it's important to see that now we are a year after the launch in PV and we are still growing very dynamically, both in PV and in MF.
We spoke about the several big steps which is the progress of our pipeline.
We are planning to initiate two pivotal studies soon or over the next few months with epacadostat in first-line melanoma and with ruxolitinib in GVHD.
I think it's really important that you see the third big step was now establishing Incyte firmly as a trans-Atlantic Company with an organization in Europe.
As I said at the beginning, our goal with that organization is really to mirror the powerful and successful organizations that we have in the US we've established now five or six years ago, and be able to make sure that we maximize our launches when our products are maturing.
And also grow Iclusig, that has a lot of potential to grow, as it's still in a phase of the launch that is relatively early.
I think it was a very exciting few weeks and months for us in the beginning of the year.
I'm looking forward to sharing our progress with you later this year with the Q2 call by mid-year.
Thank you.
| 2016_INCY |
2016 | PFS | PFS
#Thank you.
| 2016_PFS |
2016 | FMBI | FMBI
#Good morning, everyone, and thank you for joining us today.
Following the close of the market yesterday, we released our earnings results for the first quarter of this year.
If you have not received a copy of this press release, it is available on our website or you may obtain it by calling us at 630-875-7463.
During the course of the discussion today, our comments may include forward-looking statements.
These statements are not historical facts and are based on our current beliefs.
Our comments also are subject to certain assumptions, risks and uncertainties and are not guarantees of future performance or outcomes.
The risks, uncertainties and Safe Harbor information contained in our most recent 10K and other filings with the SEC should be considered for our call today.
Lastly, I would like to mention that we will not to be updating any forward-looking statements following this call.
Here this morning to discuss our first-quarter results and outlook are <UNK> <UNK>, President and Chief Executive Officer of First Midwest; <UNK> <UNK>, our Senior Executive Vice President and Chief Operating Officer; and <UNK> <UNK>, our Executive Vice President and Chief Financial Officer.
With that, I will now turn the floor over to <UNK> <UNK>.
Thanks, <UNK>.
Good morning, everyone.
As always thanks for joining us today.
As is typically my practice, it would be my intent to cover the highlights for the quarter and then turn it over to <UNK> and <UNK> who then can offer select additional color on the quarter's activities.
As we look at the quarter, it was really a very solid quarter for us on a number of key fronts with our performance across business lines, either right in line with or frankly exceeding our expectations.
This performance, combined with our mid-March close of our acquisition of National Bank & Trust of Sycamore has us off to really a very strong start for 2016.
Earnings per share for the quarter was $0.23 per share or $0.27 after you allow for the acquisition and integration costs related to our NB&T acquisition.
Again these expenses were largely in line with the expectations that we would have shared with you all last quarter.
Contrasted to this time last year, EPS of $0.27 represents an increase of about 4% year-over-year and as is typically the case, the linked quarter core EPS was down about, a marginal amount largely due to the seasonality of the first quarter that comes with having fewer days in the quarter and generally a softer start that we would typically see in our fee revenues to kick off a year.
As we think about the quarter, there is a number of highlights that as I said will serve us well as we progress through the year that I want to emphasize.
First as I mentioned, we closed on NB&T in mid-March that further strengthened our presence in DeKalb County in the western portion of Metro Chicago.
It added about $600 million in deposits, $400 million in loans to our balance sheet and an additional $700 million in assets under management to our wealth management business.
With a great team in place there in both operating and wealth management system conversions behind us, we are very excited to move forward and grow our business in these markets.
We think we've got some great opportunities there.
Away from NB&T's contribution for the quarter, our legacy lending teams also had a particularly strong quarter largely led by growth in corporate lending.
Our total loans were up 3.7% since year-end.
If you annualize that, that is pushing 16% in annualized growth, so a very, very strong quarter out of those teams.
When combined with balance sheet expansion late in the fourth quarter, our period end or interest-earning assets increased about 10% from the fourth quarter.
Now on an average basis, they were up about 2.5% and our margin improved by 7 basis points to 3.66%.
Because this growth was relatively balanced, weighted frankly more heavily to floating rather than fixed, our overall rate sensitivity really wasn't materially changed and continues to be very solid and in line with where we have been over the last several quarters.
So we think we are pretty well positioned there both from the standpoint of having expanded our balance sheet but also in terms of retaining what we think is a very strong interest rate sensitivity position.
As we have talked about it, we have consistently emphasized our drive to expand and diversify our revenues.
Away from margin, our fee-based revenue growth continues to highlight those efforts.
Our fee sources were up 17% from the first quarter of 2015 with linked quarter comparisons influenced by the typical seasonality that comes with fewer days.
So as you look at that, you will oftentimes see our fees down in different card categories, you will see various deposit service charge categories influenced both by the number of days and typical seasonality here.
So posting that strong linked quarter growth is really an outstanding effort over the course of year-to-year.
So if you compare it to this time last year, our wealth management business weathered an extremely volatile start to the year with revenues almost up 8%, versus a year ago.
We expect the addition of NB&T to add some 15% in additional revenue to this business and further strengthen our position as the third largest among the Illinois based institutions in our markets.
At the same time, investments in our equipment financing and derivative sales platforms continue to drive improved results.
These businesses largely contributed to an additional $2.3 million in our other commission and fee items also versus the year ago.
Moving away from fees and revenue, credit was also in line with both non-performer and charge-off levels improved from last year.
In allowing for today's historically low levels and growth year over year, we were generally in line on a metric basis with last quarter.
As we suggested, last quarter higher comparative provisioning simply reflects the fact that we are growing our loans.
So all positives and all boding well for future revenue streams.
Finally from a ---+ revenue contributions rather than streams.
Finally from an expense standpoint away from acquisition costs, our core operating efficiency remains consistent and reflective of today's operating environment.
Our progress on the property initiatives we announced last quarter are right on track in terms of both the sale of targeted properties as well as our newest ---+ the opening of our newest locations in downtown Naperville and on LaSalle in downtown Chicago.
So with that as a high-level backdrop, let me turn it over to <UNK> for some additional color on the business.
Thanks, <UNK>, and as <UNK> highlighted, we had a strong quarter in all of our revenue producing areas.
Let me start with loans.
Our annualized organic growth of around 15% was led by commercial banking, most notably our commercial real estate and specialty businesses.
This growth was entirely driven by in market relationships and was in line with our existing portfolio mix.
Commercial real estate had a particularly strong quarter as our slightly higher level of new loan production, which actually followed several strong quarters, was not offset by significant pay offs as occurred throughout most of 2015.
Our growth year was spread across office, retail, industrial and construction segments with that latter category largely centered on multifamily.
This diversity in production is purposeful as we look to maintain our existing credit profile across these various real estate sectors.
Specialty growth was also generated from multiple areas most notably healthcare, structured finance and equipment finance.
Our investments in these segments over the last few years have provided measured growth in line with our expectations and we believe that we are still in the early innings of these efforts.
We also saw a modest increase in our legacy C&I businesses in this very competitive landscape.
We are holding to our risk tolerance and profile so our diverse offerings elsewhere are crucial in allowing us to meet our growth objectives overall.
In retail banking, we also saw measured growth in our home equity and installment loan categories as a result mostly of our increasing online activity, another trend we see continuing in the future.
Given all of this, we remain comfortable with our full-year loan growth guidance of mid to high single digits.
We believe production will remain at favorable levels but we anticipate some volatility in certain segments the remainder of the year based on specific property sales and some refinance activity.
So turning to fee income.
Results in Q1 were consistent with our strong history and guidance.
As <UNK> highlighted, in total our fees grew $5 million from last year's first quarter or 17%, actually a little above our expectations.
We saw continued solid growth in wealth management and card income of 4% to 5% organically year-over-year.
Our mortgage business saw an improved run rate in accordance with our efforts to garner our fair share of in footprint business.
And we had a terrific quarter in swap sales as well as continued gains from the sale of leases which together resulted in a 150% increase in the other fee category.
We remain optimistic about fee income growth opportunities broadly across our businesses for several reasons.
First, we saw a modest level of fees from our NB&T acquisition in Q1 given the timing of that closing but we expect that to be more meaningful going forward.
Our new colleagues have a very strong wealth business and we also anticipate expanding various other services to their solid core, retail and commercial businesses.
Across our legacy teams, we have delivered on growth objectives in wealth management, treasury management and cards for several years yet we think there is room for further expansions to existing and new clients in all three of these areas.
Lastly, our mortgage, swaps and leasing income streams have outsized growth potential albeit not linear quarter to quarter.
As a result of all this, we still feel good about meeting or even exceeding our full-year fee growth guidance.
Turning to credit for a moment, our Q1 results again overall were favorable to plan.
As stated in previous calls, we believe normalized charge-offs for us are in the range of 25 to 40 basis points and we have forecasted results in this range for the last several quarters.
While charge-offs this quarter came in slightly better than guidance at 22 basis points, we continue to believe that full-year levels will be in the lower half of that range.
With NPAs at 90 basis points of loans and adverse performing credits at manageable levels, we feel confident in this forecast.
So now <UNK> will walk us through some further income statement detail.
Okay, thank you, <UNK>, and good morning, everyone.
Let me cover net interest income and expenses that I usually do.
Net interest income was up $3.9 million or 5.1% from the first quarter a year ago and $2.7 million or 3.5% from the linked quarter which is in line with where we ---+ our expectations a quarter ago.
The increases from the first and fourth quarters of last year were due to growth in average earning assets of 7.1% and 2.5% respectively led by an improved mix as evidenced by the average loan growth that <UNK> talked about.
In terms of average loan growth, we were up 9% year-over-year and 4.7% from those same periods.
Plus, we saw the benefit of the Fed's February ---+ I'm sorry December ---+ I wish February ---+ December 2015 rate hike.
These more than offset the $2.6 million comparative drop we saw in accretion from acquired and covered loans from the first quarter of 2015.
The linked quarter margin improvement of 7 basis points was right in line with our expectations and reflected the benefit once again of the Fed's rate hike as well as earning asset growth I just described.
Compared to a year ago, the margin declined 13 basis points, substantially all due to the decline in loan accretion.
Otherwise the margin would've been essentially unchanged from a year ago.
We continue to expect low to mid double-digit year-over-year growth in net interest income.
Obviously this will depend on the pace and timing of future earning asset growth and interest rate movements.
As we look to the second quarter, we expect margin to be similar to the first quarter with the increase in linked quarter net interest income commensurate with the increase in earning assets which will be aided by the full quarter's impact of NB&T as well as the substantial loan growth that <UNK> alluded to and the securities we added in the first quarter.
So let me turn to non-interest expense for just a moment.
First quarter expenses excluding integration costs, totaled $77.6 million and stripping out the unusual costs from the fourth quarter, the increase was approximately 3% from the fourth quarter largely reflecting the impact of annual salary increases, the normal seasonal increase in weather-related occupancy costs and some level of operating costs from the two banking centers acquired from the People's transaction for our full quarter and the operating costs associated with the 10 former NB&T banking centers as well as the commercial wealth management sales staffs we brought on for the month of March.
Our efficiency ratio was steady at 64.8% essentially unchanged from the prior period quarters.
As we look forward, we expect expense of the second quarter to be largely in line with the first quarter plus approximately $3.5 million from the NB&T acquisition, obviously less the $5 million of first-quarter integration expenses and subject to perhaps some seasoning higher marketing spend.
As another comment, we do not expect any further material integration costs related to NB&T.
And with that, let me turn it back over to <UNK>.
Thanks, <UNK>.
Before we open up for questions, just some further remarks.
You know as I look at the first quarter, we are off to a really good start for the year.
Execution across that quarter has really left us confident in our plan and confident in our positioning here as we go forward.
NB&T's integration has gone very well, we will provide further leverage and by extension, it is going to add to our earnings momentum.
Margins are solid, our rate sensitivity is supported by an even stronger core deposit foundation that provides us, in my view, with an operating advantage few can enjoy as we navigate the course of future interest rates.
Our credit positioning remains strong, with expectations that we have shared previously for a relatively benign environment this year but also recognizing the reality that credit essentially is going to normalize.
As such, we have talked about for the last couple of quarters growth in our lending will continue to be prudently accompanied by reserve provisions.
Most importantly, our ability and willingness to invest in our infrastructure and our talent really leaves us well-positioned to operate as a larger company and grow our business and the ability to do that without sacrificing the focus on really what drives the value and that is helping our clients be ---+ achieve financial success.
So I fully expect growth opportunities to be there as <UNK> had shared before, first and foremost driven by our ongoing investment in talent.
And secondly where it makes sense, through line consolidation opportunities that we would expect to see over the forward environment.
And we have a long-standing philosophy and culture of client and community service and really a business ethic that appeals to many of our peers as we operate in that environment.
Combined with the strength of our balance sheet and our funding base, our investments and our infrastructure and as I shared most importantly an aged team of colleagues, those are tremendous advantages as we go forward.
With NB&T really on pace for successful execution, we are really excited about our future, feel we are well positioned to grow and continue to enhance shareholder return.
So with that, that would conclude my remarks.
Now let's open it up for questions.
You know, the way I would look at it, <UNK>, is consistent with <UNK>'s guidance there.
Generally charge offs are going to flow within the range that he outlined, we think we will be on the lower end there.
I think our raw reserve levels plus or minus a few percentage points as those move through that are going to stay roughly in about the same level.
So if you look at that combined with where the loan growth we were guiding toward, you can get a reasonable sense of where provisioning might ultimately run.
I think this quarter was particularly strong in terms of loan growth, which then obviously came with it a greater level of provisioning as that loan volume and growth would decelerate from really very strong levels today.
You would see some lessening of that as opposed to an increase, all things being equal.
Hopefully that helps.
Not really, <UNK>, it's <UNK>.
They've held up pretty well over the last really several quarters.
So our net margin and our new and renewed spreads over I'll say the last four quarters has been pretty stable quarter to quarter.
Yes, I think it would be 81 to 81.5 somewhere in there.
When we say a starting point, so our fee income last year, <UNK>, the total was $127 million.
We gave guidance previously that we would grow high single digits off of that base.
I would say at this point we think we will meet or exceed that high single-digit number.
Is the base, exactly.
I think the response there where probably you will see earning asset growth more closely parallel loan growth.
Keep in mind, and <UNK> certainly could add additional color to this, remember the seasonality that you see typically over the second and third quarter that comes from municipal tax inflows.
So excluding that, you would see earning asset growth largely track off the loan growth as you go through it.
But keep in mind as well, one of the things we were trying to highlight and that I would emphasize, we closed the quarter with earning asset growth up about 10% period end versus period end, 2.5% was the average growth so on average you should see some not quite 10% earning asset growth but some level slightly below that that will drive second-quarter growth.
The tax rate really I don't think it is going to change a whole lot in the second quarter from the first quarter.
Maybe go up slightly.
It was what at 32 and change.
It would probably be still right in that same range.
Sure, sure.
Well fundamentally the efficiency that we have is by definition the calculation of it is simply the ratio of expense to revenue (technical difficulty) From our perspective, last quarter we took on an initiative to grow and kind of optimize our operating base from an occupancy and channel standpoint.
We think there will be more opportunities there to drive further efficiency within that.
And then the other avenue that is continued expansion on the revenue side away from higher interest rates, the investments that we have made and what <UNK> has referred to in the fee-based businesses really start to kick and contribute as we move through that and we think there is some real opportunity there.
So our efficiency as it stands at 64, 65 as it is today, we think we can continue to drive down here over the course of the year and certainly out into the future.
And all I would add was, as we have talked about in the past, Brad, the investments we have made in talent while we will continue to selectively and opportunistically look, we have made a lot of investments over the last few years.
So the leveraging of that talent and getting more out of it, if you will, I think is still ---+ has room to run here.
If I could real quickly, the question on the tax.
I think it was 32 and change in the first quarter.
I think it will be roughly around 33 for the second quarter, just to correct that.
No, I think for the most part they are in our run rate and in the guidance as we have out there.
We have made investments in prior years as <UNK> alluded to in terms of talent and infrastructure here.
We have made system investments that are already reflected in our run rate.
So I don't anticipate significant alteration from our guidance here as we go forward.
So our track record on customer retention and loans and deposits is very good and we have exceeded our plans there in our past acquisitions and we certainly expect to do that in NB&T as well.
I think part of it is it is just a good comfortable fit with NB&T.
So as we have talked to the colleagues and then obviously been talking to clients actively prior and after close, just I think folks, for lack of a better term, feel good about the opportunities with First Midwest.
We are looking to grow their business as an efficiency play.
And so I think we are expecting very high customer retention rates and early indications, early, would say that we are well on track.
Thank you for that.
We feel good about a number of areas, wealth management, treasury management.
We see measured growth in card and merchants so we see some good opportunities there as well.
But I would say the largest would be in treasury management, wealth management and then leasing.
Leasing and sales of equipment finance paper we still have ---+ we have a good plan there in terms of what we think we can grow that business as we did last year.
Mortgages will be a sequential kind of an incremental build where we should have a bigger mortgage business than we have right now, frankly.
So I don't think it will be overly robust but I think you will see favorable comparisons quarter to quarter there as well.
So the service charge income incorporates the two largest drivers there, our NSF and treasury management are the two largest categories within that.
We have been facing declines in our NSF income streams over the course of the last several years of 3%, 4% annually.
We have grown our fees nicely in the face of that challenge because treasury management has more than offset that.
Treasury management largely to commercial clients and to our smaller business banking clients as well.
So in total that is a line item given the NSF.
While I will say that that shrinkage is lessening, it still is not a growing area NSF.
And yet as I say, treasury management should be more than able to offset that.
Well, we have talked fairly consistently and certainly NB&T and the acquisition there puts some short-term decline in the capital metrics that we have.
But we, as we have guided to before we are in a higher earnings level and contribution that comes from NB&T actually sees that recover very quickly.
So that is not so much of a concern as just a reality that contribution will happen very quickly on that end.
As we look to go forward, we continue to run our capital plan as we have over the last several years.
Our focus is continue to generate strong overall earnings, which is continuing to generate higher levels of capital.
We've been focused on deployment of that capital through both our dividend, which has expanded here over the last several years.
And then likewise through the focus of deploying that for organic growth and then to the extent that it makes sense, through what I would call prudent strategic pursuit of opportunities from an M&A standpoint.
So (multiple speakers)
I was going to say ---+ I'm sorry, <UNK>, I was going to say we continue to talk about that regularly.
We discuss our capital plans and what our view is going forward every quarter and have active discussions with our shareholders about that as well.
Yes I would say, so again not to pick on words, but as you think about rebounding, we actually year over year in the first quarter were up about 50% in our mortgage business in terms of our closed loans.
So again first quarter is a little bit softer in that business as well.
You know, January and February are not really great months in Chicago-land to be out looking for a house.
And so we expect to have nice growth year-over-year in the quarterly year-over-year comparisons all the way through out to 2016.
So when I talk about just to be clear, $127 million is straight off of our 10-K fee based revenues not including other income categories that are in total non-interest income.
So our fee-based revenues in 2015 were $127 million.
When I give guidance I try to incorporate - so when I gave that mid-single digits, that growth guidance incorporated NB&T within it.
Again I think we will meet or exceed that high single digits.
But that high single digits was probably about half from acquisitions and half organic.
Does that make sense.
Yes, as expected we are and a good question.
We are starting to see a little bit of stress.
We are seeing a little bit of elevated risk.
We are comfortable with those exposures and are actively monitoring it.
Frankly, proactively we have been talking to our clients as you would expect.
The farm industry had several great years leading into this down part of the cycle.
So they are having a couple tough years right now with where commodity prices are and so we have seen some elevated risk.
But we feel really good about that book still.
Great, thank you.
As always, thank you for joining us today.
We thank you for your interest and First Midwest Bancorp and have a great day, everybody.
| 2016_FMBI |
2015 | LL | LL
#We sent out close to about 27,000, I believe.
That's approximately translates to about 13,000 households.
It depends on size of home and size of the room where the flooring may be.
That's about where we are right now.
It's a pretty significant number to be processed and administrated, if you can imagine, getting customers sent to the lab, kits sent to the customer, the customers executing the kit in their home, following instructions and getting it back in and the lab processing and all that.
<UNK>, it is in the way that big sale fell, it's difficult.
Let me give you a little bit of color.
The number that we were at last year at this time, I think roughly about $57 million, would fall to about $50 million by the end of April.
So, there would be about a $7 million decline in that open order balance in the last few days of the month.
That kind of impact has already occurred this year.
As <UNK> said, the sale shifted, so we've already had a chance to invoice out a lot of that open order balance.
I would anticipate that our open order balance is going to wind up 3% to 5% higher than the prior year, once we get to the end of April.
As we said on our sales, that total sales were down about 2% in April.
On a compound growth rate, they are up about 1.3 months to date.
So, you're seeing some decent return in samples.
The open order balance is still slightly higher than the invoiced sales, but you are seeing the invoiced sales slowly recover.
I think they are all pointing in the right direction, but you're right.
There's a lot of math and a lot of numbers to watch out for.
That's one reason we are, one, trying to give you additional information to be more transparent, but there's always some factors to consider in those numbers.
<UNK>, I don't have that number.
This is <UNK>.
Over the last three years, we've been diversifying our sourcing across all categories.
In fact, even within the laminates, in the last three years we shifted ---+ if you look at the percentage of our laminates from China, we've reduced it, probably in the last three or four years, from about 80% down to less than 50%, actually, even before any of these issues came up.
Again, that was just mainly around diversification of supply and sharing availability of our value proposition and having the best looks and colors out there.
What we are doing now, it's all about the customer.
Where's demand.
What do they want.
What types of colors and styles do they want.
Country of origin, as well.
Obviously, there's a lot of concern right now about that.
For now, what we mentioned is, we are not adding to our purchases of those products.
We are going to continue to look and see, as time goes by, on what the customer wants.
We're going to make sure that we give the customer the products that they want.
What we did say is we are expanding the mix.
We are going to be shifting and expanding our existing mix that we're pulling from Europe, now, and the USA, within laminates.
Obviously, as you mentioned, value is such a key part of our value proposition.
As we came into the year and got back in stock of some of our constrained products, it was important for us to really live up to that part of our value proposition and ensure that we lead the market from a price perspective.
So, that's what a lot of what we're doing right now, obviously what we were doing before the event and we're continuing through with that.
I would tell you that, over time, we are contemplating how that impacts us and if and when we would want to start stepping that backup.
Right now, it's really about taking care of the customer, ensuring our brand is relevant out there.
That they see and we really live with our value proposition relative to value.
We're doing it across all categories.
Right now, we have an event going on which is basically what the Company was founded on, is getting a real solid or engineered product for the price of lesser products at the competition.
Even for laminate, you can get an engineered or solid at Lumber Liquidators.
That's what the Company was built on.
We are reinvesting in that.
It's good for customers.
It's good for our associates.
We want to keep them selling and keep them motivated and compensated effectively.
The good thing is that our business model and our direct-sourcing model allows us to do that in times like this.
I would say it's something we're going to stick to in the short term.
As we move forward and things get past us, we definitely don't want to be giving away ---+ we're always going to be looking and being conscious of where the competition is and making sure that we're maximizing the returns, as well.
There is room, obviously, there's going to be room to step that back up down the road, if and when we decide to.
Actually, I got praise the field organization.
As everybody knows, that was one of our gross margin drivers the last three or four years, where we're focusing on the ad hoc discounting and getting better operational execution in the field.
I got to tell you, our level of performance against our reduction of ad hoc discounting and that metric is the best as it's been since I've been here, even in the midst of all of what's going on right now.
We're absolutely ---+ the pricing is driven strategically, nationally, so that we're getting the full return on that perception across the entire marketplace that's to drive traffic into the stores and the stores are not ad hoc discounting.
We pretty much locked it down completely across most categories.
During the April sale we did loosen up a little bit.
On a lot of odd lot and deleted inventory we wanted to cleanse out, but that's about it.
We've got ---+ our disciplines in the field are better than they've ever been on ad hoc discounting.
It's all being driven nationally.
I'll tell you operationally, we did ---+ back to my previous answer, we did have a goal with the folks in the field to, again, with the Bellawood transition, it would allow the obsolete transition categories that we have out there.
We did open the spigot for the stores to sell through a lot of their ---+ we had obsolete identified by store and gave the stores a lot of flexibility to clear that out, and they did a very good job and, I think, relatively speaking, better than years past.
We raised the reserves by $1.7 million in total, the inventory reserves in the first quarter versus last year's $400,000, so that was $1.3 million.
That included an analysis of all flow moving.
Obviously, we had a lot of returns that came right after the broadcast in March, so we had to assess stranded inventory.
Those reserves, we feel adequate at the end of the first quarter.
Certainly, we've been running additional liquidation deals and whatnot during April.
That's all included in the 31% to 32% for April.
Reserves are that $1.3 million step up at the end of the first quarter.
Okay, let me try and answer all those.
Relative to laminates and your question on the dollar, that's one of the things we've been looking at the last couple years.
With the strengthening dollar versus the euro, it's helped us we ---+ prior to the current issue that hit us in March, we were transitioning some over there, and that was opening the doors for us with some really great factories in and across Europe.
This is why we were doing it.
It's also ---+ it continues to be a benefit.
As we look to even transition more of it.
That's a positive.
It helps us from a margin perspective.
Part of the reason we're doing that, by the way, was to really to try to, from a constrained inventory perspective that we were hit with last year, is to make sure we have duplication of supply and we have multiple suppliers and they're spread out geographically, so that we mitigate risk of any constraint issues in a particular country.
That's another reason why we had stepped up on the migration and the diversification of some of our top sellers, particularly laminates.
Like I said, the dollar is helping us to ensure that that impact is not too dramatic.
Now, what's hurting us right now, significantly, is obviously the mix.
I think as we do transition and broaden that assortment, particularly within some of the higher-margin 12-millimeter laminates and what have you and get more of them coming as well from Europe, that's going to help us overall with a mix, getting the back up to where it needs to be.
Dave, just real quick, the transition, I think, will take place throughout the summer, probably completed late August into September.
You had a question about the margin on laminates, and it's still higher than the Company average, even with the discounted ASP that we've been running in March and April.
It certainly got a potential to improve.
From here, obviously, yes.
Also, because of the mix and the ASP, the advance point.
If you did a SKU-by-SKU comparison, that may be difficult to actually get it exactly there.
To your point, with this trend to the dollar and then some of the availability over there in some really efficient factories that we've identified, that's going to be up to us to try to maximize the margin.
Nothing significant.
The West and the Pacific Northwest, they'll perform really well.
Texas is a little bit slower.
Obviously, that's had some well-publicized issues related to the oil rigs shut down and whatnot.
Nothing significant, obviously, we are loath to mention the weather word this year, but certainly, certain areas of the country had some difficulty.
Nothing we see as long term.
The Northeast, probably more than any.
Other than that, really not a significant difference across the rest of the country.
It's been interesting.
It's a very good question because instinctively, you would think that maybe the West Coast, California, would've been more impacted, but it was the opposite.
Thanks, Dave.
<UNK>, on the sequential, I don't have the numbers right in front of me, but April was the strongest month in the next three or four.
We were progressively weaker in May, in June and July of 2014 versus the same period in 2013.
I don't have them with me, but relatively speaking, April the strongest then each month was progressively weaker through July and then you started to see a turn in August and September.
<UNK>, I'll answer the question on the field.
Field morale is really good, very high.
I continue to get out there as much as I can, travel the stores.
We've done ---+ I think what's going on, as we are really, I think, reaping some benefits of our focus on the stores and the culture the last four years, our annual LLU events.
Again, our flattened organization and our culture putting the stores first.
They are in a great place, relatively speaking, considering the issues we've all been faced with.
Obviously, it's impacted them.
I will tell you, I'm so proud of the entire organization in terms of the corporate staff, our call center, our customer care department in terms of the amount of phone calls they've had to handle and deal with in terms of upset customers.
Really, it's a testament to the culture of the Company in terms of doing the right thing and taking care of the customer.
To your point about the stores, the metric I had mentioned earlier, it is really is a good barometer of where the field is.
Because given our long-purchase cycle, the fact that the customers have responded and the stores have also done an extremely good job of handling customers in the store, eyeball to eyeball, with their questions and their concerns that were raised.
We did a very good job of training and having conference calls.
We've had several all-store conference calls, where me and the senior team have been on with the stores talking with them, transparently, about what's going on and arming them with the right information so that they can help take care of the customers, and then they actually ---+ they have.
Day in and day out, out there, the field has, with support from the corporate office, has done an incredible job.
I'm so proud of them.
They are in a great place, and they continue to take care of our customers and keep selling.
That's what they're doing.
This is <UNK>.
What I can say is that for the last several years, we've been working with CARB, cooperating with them.
I've actually been out there to several of their workshops as they've been working on amendments to the regulation.
We've been present with them, in communication with them, even before any of these issues popped up.
We continue to do that.
To your question about what they're doing, what we believe and as much as we can tell from what they've told us or what they've communicated, they have been looking at deconstructive testing.
They have been looking at our products and other folk's products out there across different industries, not just within flooring.
They are doing work on that, and I don't have much specifics about that.
All I can tell you is what we disclose, is that we're working with them; they are conducting tests.
We had no further action from them since they've been doing this, at all.
Again, the dialogue and the transparency and the working and cooperating continues.
Thank you, <UNK>.
Appreciate it.
You are, <UNK>.
The one thing I would point out, is the $2.3 million included a $1.8 million for the kits and a $500,000 reserve and then there was another $1.6 million related to the transportation costs as we moved product from the old East Coast DCs.
We had four buildings there and finished the consolidation into one facility by March 31.
There was another $1.6 million and roughly 60 basis points, 62 basis points in there, as well.
For the quarter, right.
As we look forward into April, the main difference between 2014 and 2015 is going to be in the retail price and in the sales mix to generate traffic.
A lot of these one-off items that went through in the quarter, some of them in March, the quarterly margin was stronger than it would have been because prior to the March 1 broadcast, the margin was much stronger.
Roughly about 700 basis points of impact as you look into April.
Dave, this is <UNK>.
What I would tell you is given the amount of tests and how unprecedented a study like this is, it's too early in the process for us for to provide information, but we are anticipating to be able to do that pretty soon.
In general, what I can tell you is, based on the input from our third-party experts, from a number of sources, the test is administrating based on expectations.
The return rates, the results are all basically in line in terms of what was expected and modeled going into it.
Really, it's about all the demand metrics.
Overall, we're encouraged, given where we were, given the impact to our business, given that all we do is flooring.
This is not 300 SKUs amongst 30,000 in a big box store.
Given the relative impact on our business and how non-diversified we are across our product categories, I'm very encouraged with the Company's reaction to the issues, the response to the customers, across the corporate office, customer care and down into the stores and how we are responding.
Each day since March 1, I've been pleased with how the field is responding, the customers are coming back, the net returns and adjustments, we feel really good.
So, I anticipate to continue to feel that way as we go forward.
Back to <UNK>'s questions about the morale, and morale is strong in the field.
They're supported extremely well by the entire organization here, and they are doing their job.
As we continue to get stabilized and be confident in that 100-day cycle, the demand metrics underneath, the open order build, I think it's really a matter of time as we get back to where levels of performance and expectations that we were performing at prior.
I can't tell you when, but I think that the effort and that's a goal and that's our 100% focus is on our customers, on our stores, and getting the business back to where it needs to be.
<UNK>, as we see customer demand trends develop and information that we think is going to be meaningful, definitely, we will give more frequent information.
It's difficult for us, obviously, to look so far ahead.
Until we can, until we get better visibility, we'll certainly give more frequent updates.
Thank you, everyone, for joining us on today's call.
As we look forward, our team remains energized and dedicated to delivering strong results in growth that we believe is achievable, long term, for Lumber Liquidators.
I want to thank our Lumber Liquidators team for their hard work over the last few quarters.
What you do every day out in the field matters.
Every time you help a customer, you reflect our core values and you make us better and stronger.
I also want to thank our customers for their support.
We have been working with many of you for years and we plan to do so for years to come.
We look forward to speaking with everyone again on the next earnings call to report on our continued progress and executing our strategic initiatives to achieve our long-term objectives.
Thank you.
| 2015_LL |
2015 | RDC | RDC
#Yes, we don't discuss the terms of our contract, for obvious reasons.
We don't discuss the terms of how we structure rate reductions, otherwise we'd go out of business pretty quickly, if we did that.
But fundamentally, we've offered and was accepted a one-year reduction, and it's not contingent on any specific indices.
And that isn't necessarily a bad idea, I don't think, but it wasn't the case on these.
That is in the three buckets of the various opportunities that we look at, and we like having that lever, should our leverage look to rise if the environment deteriorates.
So it's something that we look at, just as we will share buybacks and investments.
And again, we haven't made a decision yet, but that's definitely an option for us.
thank you.
I think a lot of the customers, when we think about ---+ there's two things going on.
One is, we see contracts, as we have contracts rolling over, the customers have a perspective that obviously they can read the same information that we can, and we're looking to negotiate lower.
But also, a lot of customers want to keep rigs, but their budgets have been slashed, so they're trying to work out how they keep the rigs, but also conform to their new lower budgets that may have gone through 10, 12, 15 rounds of budgeting.
So I would say that the first quarter was quiet as far as new contracts being awarded.
It certainly wasn't quiet as far as what was going on inside Rowan, and I'm sure other drillers, where we were up to really moving back and forth with customers.
It was quiet from the new contracts and fixtures perspective, but there is a lot going on, internally.
I think to echo what <UNK> said, almost every customer in the world is trying to reduce his costs.
Some of those rigs are on term basis, and some of them aren't.
But we've had discussions with virtually every operator that we're contracted with, and as <UNK> mentioned in his opening remarks, we're just not really interested in transferring wealth from our shareholders to theirs.
We try to work with them because we're a relationship-based company.
We've been here over 90 years because of those relationships, and we take a lot of pride in them and we take it seriously, so we listen to them and we try to work out the best commercial deal that we can.
So there are some challenges, but as you've seen in the Aramco reductions, we believe our shareholders will benefit from that long term.
But answering your question, are we going to see it going forward.
I think we are.
We're only some 90 days ---+ the end of the first quarter was only 90 days into the year.
So I think we will see more fixtures come out, but obviously they will be at lower rates, adjusting to a lower market.
Thank you.
| 2015_RDC |
2017 | SWN | SWN
#Yes, specifically to the performance revisions, as you look at the SEC pricing, rearward pricing, you have a lot of those wells come off of the reserve deck.
So as you go forward, there's a mechanism that brings those back on.
They come back on as PDP, and so that's the basis of some of those performance revisions.
The performance revisions we continue to in Northeast Appalachia have to do with the production mechanisms that we've got.
Those wells continue by their production regime to outperform our decline base that we've got in the reserve system.
And so those are the continued performance revisions that you see to the positive up there.
Sure, the vast majority of those are performance-based.
The price-based were negative in periods.
So those were against your performance revisions to the positive.
Other pieces of revision that we have that you might be seeing is we had significant operating expense benefits on the performance that were rolled up to a performance revision.
The big driver of those in West Virginia had to do with improved gathering processing fees that we gained at the beginning of last year, and then we had also talked about an aggressive assault on margin improvement there, that has yielded quite a bit of success in driving costs out of our system; re-forecasting those wells with that lower operating expense is a significant gain on not only additional value created in period but an extension of tail reserves, that those wells have longer lives.
Economic success.
Without a doubt, our best well we've ever drilled in the Fayetteville is the Moorefield well, as far as EUR.
We're looking, we've got some very long laterals.
We're just looking to prove up areas.
We've moved out a few that I would call step-out areas, but just testing to see the economics of the play there.
We're very confident that the Moorefield works.
We've determined which is where to land the well optimally, and we've added more and more sand trying to make better and better wells just like we've done everywhere else, again, with the idea of creating economic value.
We can usually tell within 100 days of production, get an early indication of EUR.
Initial rate does give us, the 30-day rate will give us the amount of water that comes back to Moorefield generally has more water.
We're able to determine fairly quickly about economics and whether we're going to expand the program based on the rates that we have after we bring the wells on.
And <UNK>, you're probably seen some of the public data we have on that but the Moorefield as <UNK> said has outperformed a standard Fayetteville well on rate, reserves, little bit higher cost but not significant, so that is driving those economics, and an actual number, a 30-day test or 180, all just depends on where we are and what those costs are.
But it's really back to <UNK>'s point, it's all driven by economics and whether that's an initial rate or overall value driven based on the EURs and overall costs, that's what we're driving towards ultimately.
And there's a flow-through improvement because those gas gets gathered by our midstream business and taking on to market, so the benefits continue through all the way to the market.
And one of the things about having a program in the Fayetteville this year that's more extensive that really lowers our cost by able to reuse the water that does come out of these Moorefield wells, and so that improves the economics even more.
This is <UNK>, <UNK>.
We use PVI as a metric and it's bringing the value forward, if we got no additional reserve, adds anywhere from $0.10 to $0.12 of PVI just by again bringing on a well that's averaging 17 million a day versus a well that would average 5 million a day and stay flat for quite a while.
The big change in EUR and partial in the rates but even more on EUR that we expect is the fact that we're putting more sand, tighter stage spacing, and touching more rock.
That's why we think the EURs, we're confident they will increase.
Bringing the value forward through our flow techniques again adds, it's accretive and it just brings value forward, it helps our PVI metrics.
Sure, <UNK>, this is <UNK>.
On the natural gas macro, clearly the 2017 curve was negatively impacted by primarily weather-related influences, extremely warm winter again.
That being said, there's an emerging consensus that the supply/demand balance normalized for weather is tightening year over year, somewhere to the tune of three to five Bcf a day.
And I believe there's actually a reason to have some positive outlook that we will go back to a storage position maybe middle of the year that's closer to the five-year curve.
And so it portends some strengthening there.
NGL prices on the macro level, again, there's a positive outlook really on the basis of the anticipated demand coming online in the Gulf Coast, Mont Belvieu area, to the tune of 600,000 barrels a day or so.
That coupled with some of the export capacity that's come on has really lifted the NGL complex year over year.
Our NGL realizations for the first quarter this year is going to be double what they were the quarter before, or the year before.
And so with our access to the Belvieu area with the capacity out of Southwest Appalachia, we fully intend to ride that and capture some of that uplift.
Yes, hi, <UNK>, this is <UNK>.
We've got $40 million of bonds due in 2017, and if you add up the midpoints of cash flow guidance that we've given plus that equity raised, that's a number that's above our capital investments, so certainly could be sourced from that.
But just an overall theme is we're not going to do any harm to the balance sheet on leverage or anything like that with outspend or whatnot.
So we're going to source from cash flow and the cash we have on hand, but for that $40 million, we can easily take care of that within our cash flow balance or cash flow generation for the year.
And then certainly we've got some bonds, sometime in January, February of 2018 comes most of them, some later in the year.
And we'll think about those and think about our 2020s.
We've got, between bank debt and bonds, we've got a lot of flexibility is the point.
A lot of options on how we can address that.
We'll look at the overall complex as we go through, and to the extent we change our capital program based on economic factors, any of that cash flow can be utilized for debt, and we'll just manage that throughout the year.
Yes, those PDP F&Ds certainly have seen the benefit of those coming down over the last couple years.
And you see that with continued focus and really the lion's share of our capital allocation going to our Appalachian assets.
We lay out a magnitude of what those look like between the different types of wells we can drill in West Virginia and then Northeast Appalachia as well.
Certainly see that in, just call it in the $0.40 to $0.60 range, $0.40 to $0.70 range for those assets in particular.
So certainly continue to focus on that, as that drives those economics.
The second part of your question I missed at this point.
Yes, those breakevens as <UNK> mentioned with NGL pricing looking to be maybe two times of last year, certainly that has a big driver on the economics of the West Virginia assets.
A significant increase there, or that type of increase really pushes down that breakeven from a natural gas perspective and that better well performance along with just the pricing we are at today, drives up our inventory as well.
It does reflect the company's guidance on an in-service date for midyear 2017.
And then as <UNK> had mentioned earlier, we do have an active hedging program now that will ensure that we're able to lock in differentials consistent with the plan.
Thank you, and thanks for all the questions and we're happy to answer any other ones along the way.
Before I go through my closing comments, I do want to say that I trust that we've cleared up any concerns about any outspend of capital and any concerns about our commitment to the discipline that we have delivered and shown throughout this entire year of 2016 through some very tough times.
But we've emerged from that, with that same level of rigor and discipline.
2016 was a transformational year for our Company and as you can see, we have much to be excited about, from that work and for 2017 and beyond.
We've already begun building our momentum created through our lower cost structure, again, economic and capital allocation discipline, operational and technical excellence that's growing by the day, and ability to reach all key high-value markets for our products, and the focus on economics ahead of production growth from our vast assets.
We are one of the nation's largest suppliers and we take a lot of pride in that, and therefore managing our business with rigor and discipline around economics and driving economic value lets us stay in that position.
Our relentless focus on creating long-term economic value for our shareholders drives everything we do, and I hope that we've been able to give you some color on that, and we look forward to sharing more of these results, and I know the wells that everyone's excited about especially, we look forward to getting those out as well.
And we look forward to continue to talk to you about other areas where we've reached to add value [plus] and increase our performance.
So thanks to all of you for joining us on our call today and we hope you have a great weekend.
| 2017_SWN |
2016 | HCI | HCI
#Okay.
So I think in terms of trying to rationalize that, you have three things that would explain this.
One is strengthening, two is the actual issues that you have with AOB occurring, so there is loss ratio points increase because of AOB and lawsuits and everything else, yes.
And the third item is weather, as in weather as in any unusual events, kitty cats that might have occurred during the quarter, yes.
The one kitty cat that occurred during the quarter was Tropical Storm Colin, which was like in early June, okay.
And what we were saying to <UNK> and so let me say it even more clearly, hopefully, is if you just look at those three items, some of the increase, the $3 million or so was reserve strengthening.
The bulk of the rest of the money would probably have more to do with just losses increasing because of the activity that's going on in development and everything else.
And then there is a small component that will have come in from Tropical Storm Colin because as I said it was about 120 claims, but when you look at it across $26 million, we didn't want to mischaracterize it that, oh my God, because of Colin we're here, right.
That would be a ---+ that's why we were trying to minimize the weather effects, yes.
Two things, is because we manage ---+ not even manage, we have to acknowledge every lawsuit that comes our way.
So we count how many lawsuits you've got year-over-year in Tri-County, et cetera and I think as <UNK> rightly pointed out, our lawsuit count year-over-year is down.
So that's an interesting development in a world where everybody is talking about increasing AOB and increasing lawsuits.
So that's ---+ as I also stated in response to that, whether that's a temporary respite or whether it's a trend that will continue on, it's just too early to tell, but that deviation is there and it's almost a public record.
So we have that going on, the other kinds of things that we also see a leveling off is in terms of claims coming in and how many AOB, lawsuits, et cetera that are coming in and AOB non-lawsuit claims that are coming in.
It is sort of ---+ it's looking like it's leveling off now.
I'm not saying it's going away, I'm not saying it's (inaudible) or anything else, I'm just telling you that whatever the elevated level is, it seems to be leveling off because we measure this week after week, month after month, yes.
That's a nebulous question, I don't know what everybody else is or isn't doing, what I can tell you is because we monitor a number of lawsuits filed across a large cross section of the Florida insurance market, what we're seeing is this trend seems to be leveling off across the industry, if you look at it on a cumulative basis.
Now, there are a few outliers, there is a handful of carriers, the only one I am willing to name is Citizens, who may still be seeing an increased claim and lawsuit activity, it seems to be there's a few places ---+ a few carries that seem to be still seeing increases month over month, but as an industry, at least for whatever reason the last couple of months, the lawsuit activity seems to have leveled off, it's still way too high, but it's leveled off, yes.
Very simple answer, Citizens new policy language went into effect July 1, obviously too early to see what effect it would have on it.
Homeowners' Choice policy language went into effect on August 1, one month later and again it's too early to tell, but policy language is there and done.
Yes.
<UNK>, I am an optimistic person.
I hope it will have the desired effect and lead to the improvements that we are seeking.
We really want that to happen because we are trying desperately to not increase rates or charge any more premiums to people who have done nothing wrong in this situation.
Having said that, it's just too early to tell whether my optimistic viewpoint will actually be met or whether somebody will discover a new loophole or something or the other around it, it's just too early to tell, yes.
So I guess my answer is going to be slightly different than what most people would like to hear on this call.
But we've tried to be straightforward and explain this, we are trying very, very hard not to raise rates at all on anybody.
And from what we see, we see that a handful of people are gaming the system and passing the cost on to everybody else and we are trying to see what steps we can do and see if you can do the best that we can do for the vast majority of our customers who have ---+ basically are just trying to pay their bills, raise their kids, go through life and we are trying to do what we can to avoid have a rate increase, either file for a rate increase or have one approved.
And to put this into perspective, it's been ---+ the last time we actually applied for a rate increase, it was 2012.
So we'd like to keep that record going.
And especially as we just reduced rates last year, we're always in this for the long-term, so we don't look at this that you go increase rates at the drop of a hat just because you can.
And I think our policyholders appreciate that, yes.
Yes, absolutely.
I think because of the sentiment that I just ---+ question, the last answer to the last question, what's happening out there is our high retention rates actually seem to be getting even higher.
So we are looking at projections ---+ compared to the projections we had, we are seeing the retention be even higher than we had anticipated.
The part above that is I think partly because this is going on, agents, people out there are talking to policyholders and saying, do you want to be with a company that looks for any reason to raise rates or be with Citizens who has raised rates every year for the last umpteen years or do you want to be with a company who is trying very hard not to raise rates.
I'd note that about 15 companies or 16 companies may have filed for rate increases under this whole AOB thing, we are not one of them.
Okay.
So I will tell you one other item.
Yes, retention has probably gone up by a couple of points, because it ---+ from 88%, 90%, it can't go up much, because then it will be over 100%, so it can't go up by much, it's only a couple of points.
But what we are also doing and to my earlier conversations about trying to manage the business in challenging times is that we are non-renewing and we are shedding business in ---+ on a very targeted basis of policies that we think are likely to develop over the next few years and past rate increases on all the other policyholders.
So we are using the elevated retention rate to actually shrink the business a little bit, if you like.
Tri-County and the Orlando area.
Again, it just worked out that way.
We're looking through the numbers and where we see these things, we're trying to hold down rates for the vast majority of customers requires us to take the actions that we have to take.
And there are some AOB trends in the Orlando area, yes.
Shoot.
Yes, funny enough, we've been so busy doing other things (inaudible) I figured maybe around the 155,000 mark, give or take a couple of thousand.
155,000.
Yes, I think if you were to consider flood policies, TypTap already has more flood policies than Homeowners' Choice does, yes.
It depends, right.
And what it depends on is how great a deal or lack of a deal people are getting from the NFIP.
And what we are doing is, we are taking advantage of dislocations in risk and what happens with it also is that we are doing, in terms of flood policy, the same thing that we did with wind policies in Citizens all those years ago, yes.
So we are basically trying to take good risk and underwrite the matters out of NFIP.
Some of the risks we take, you'd be amazed as to how much money they saves up, it can be as easy as 15%, sometimes it's high as 50%.
Yes, some of those places, it gets as high as that, right.
I don't want to put out a slogan, 13 seconds could save you 50% or something, but they'll have seen those kinds of savings, yes.
Because as we have done ---+ in our entire history and we continue to do so, we charge a fair price for a great product and people look at the stuff and it comes out the ---+ and they make their choices as to whether they want come with us or they want to stay with the NFIP.
All we're doing is we're depopulating in a profitable manner with a good spread of risk.
Again, these are all things that we've done on the wind side for years and continue to do so.
So we're applying the same basic business principles to the flood side.
Really it consists of two books, the books those a set of policyholders who have to buy flood insurance and these are the ones that are in the A and the V zones and then there's a whole different set of people who don't have to buy ---+ the guys have to buy it because of mortgage issues, et cetera and as all the folks in the X zones who buy because they choose to buy.
And basically, how this is working out, it's on average working out to be about $375 per policy in the X zones, about $1,400 to $1,500 in the A zones and about $33,000 or so in V zones.
It's averaging at about $1,400 or so.
I think we are doing what we do and trying pick what we can out of all three zones.
What you have to keep in mind is that it's not like the three zones have equal numbers of the policyholders in them.
So we are trying to make sure we build the balance book.
(multiple speakers) people out there.
What the X zone stuff is our people who are not required by their mortgage to buy flood insurance.
That does not mean that he isn't imprudent buy flood insurance and that people shouldn't buy flood insurance or anything else of that nature, it just says, if you're in X zone, it is not a condition of your mortgage that you're required to buy a flood insurance, usually, yes.
That we're seeing or that ---+ the NFIP.
Okay.
So look, this is where ---+ you're going to love my answer, because if you think about Florida and the NFIP, Florida has about 2 million policies in NFIP, about 1.3 million of them are X zone policies, about 700,000 are A zone policies probably about 30,000, 40,000 are V zone policies, something in that ---+ those kinds of numbers.
So if you get an enamored with PIF counts, obviously the X zone is the biggest opportunity, right.
As you know, we've never been always about PIF count, we look at where the opportunities lie and where there's good risk and where there isn't.
What balance we're going to do, we are not exactly disclosing at this point because again I suspect lots of competitors are going to be listening to this call.
We have gone to great lengths to figure out what would be a balanced book and how to get it and time will tell.
It's a mix of agents and policyholders and and neighbors telling each other.
We are seeing quotes and people jumping on to TypTap all over the place and it's spreading virally.
On behalf of the entire management team, I would like to express our appreciation for the continued support we receive from our shareholders, employees, agents and most importantly, our policyholders.
We look forward to updating you on progress in the near future.
| 2016_HCI |
2015 | MAN | MAN
#Yes, I think the other key market I would call out is the US where we have seen the trend through the quarter get a little bit weaker.
And I think that does coincide with what you have seen from the ISM manufacturing side.
Indexes that are out there the last five months have gotten progressively a little bit softer.
And if you look at the IMF had said last week was they expect global growth to be the same.
However, they expect US growth to be a little bit weaker and Europe growth to be a little bit stronger, so I think that probably coincides.
I think exactly what is hitting the manufacturing side could be the stronger dollar, could be a few other elements.
We are still seeing some good opportunities there, but as we look to the second quarter, our view on the US market specifically is for growth in the flat to up 2% range.
So that is the other market beyond France.
The other markets, of size anyway, I don't see any notable decline.
Yes, I think it's more of an aberration this quarter.
I think I do see opportunity to continue to leverage SG&A.
One of the things that is happening here as the currencies move, the mix of our business on a weighted basis is moving.
So when you see the our SG&A as a percentage stable at 14.1%, in fact, we did have some leverage underlying that.
But some of our Lord SG&A markets, if you will, are less weight and France would be one to look to.
So given that the euro is weaker, there's less weight there in terms of proportional.
Usually I say currencies do not impact the overall margin.
They don't from an underlying business perspective, but they can from a proportional weighting perspective when we put the mix of countries together, and that's exactly what you've seen.
So there was a little bit of leverage in Q1.
I do expect a little bit of SG&A leverage in Q2, and I do think there continues to be opportunity there.
Well, when you think about the solutions business, you have a number of global offerings.
Recruitment Process Outsourcing, RPO, is one; and TAPFIN, our MSP offering is another.
And those are areas where we've made investments in capabilities really for some time now.
And what you are seeing here are two effects.
Number one, markets that previously were not heavy users of those kinds of solutions are now coming into the fray, notably Europe, but also some markets ---+ in some emerging markets that are very mature are now starting to parachute in and leapfrog for those solutions.
So that is one of the drivers.
The second driver is that we are seeing an increase in cross country, cross regional and global deals.
So the size and scope of these deals is increasing for a number of big organizations that want to have visibility of their hiring of tens of thousands of people on a permanent basis or their management or their contingent spend across multiple geographies.
And both of those trends, of course, speak very, very strongly to our assets and to our capabilities.
And that in combination with some very strong sales effort means that we have seen some very good growth and I would say both of those underlying factors should give us an outlook that looks positive.
I would also say that, in some markets, such as France, we have seen some very nice evolution on our business ---+ on our talent-based outsourcing business where we take over parts of the activity that, for some client, is no longer a core activity.
So in France under our Proservia brand, we see some very strong growth.
We see opportunities of that kind in other parts of Europe in particular as well and we have seen that part of the business, which is primarily a local business, but Proservia is also a European activity.
We think that that will continue as companies become much more focused on what they consider is core versus non-core.
And if the non-core involves a lot of talent and process and workforce agility, we are extremely well-placed to help them with that and to drive that and that's why you have seen in particular our global offerings, RPO and MSP, become market-leading offerings and we are very focused on continuing to drive that part of the business because it helps our clients win and it also adds a nice contribution in terms of gross profit and the [BLC].
Well, you saw the ---+ you heard from <UNK>'s comments that we really have three main components of the business.
Clearly, the strength and the rapid growth of the solutions business has been very helpful.
Manpower has also seen some very nice additional perm and we had strong growth in the quarter on perm under the Manpower brand.
Although, as you heard <UNK> say, our activity, which is a big part of the Manpower activity within the manufacturing sector, fell back a bit from what we saw in the fourth quarter.
And then Experis, we have really done a lot of work there to make sure that we drive higher margin, higher value skills, which is why despite a reasonably weak top line, with which we are still not satisfied, you can see our Experis IT business is stable between the quarters.
Our margins have gone up well over 100 basis points in the first quarter, so we keep getting higher bill rates for higher value skills and higher margins.
And the mix of the business is weighted between big projects within Experis, big projects that come to an end, so we have that kind of book of business to balance and then an SMB market where we still believe we have some good opportunities.
But what hasn't really kicked in for us in Experis yet is strong perm growth because we have been very focused on driving higher value project skills on the consultant side.
So we still have upside on the perm in Experis.
I still believe that the market is very healthy from a demand perspective on the IT skills side and from an engineering side outside of the oil and gas sectors and the energy sectors, there should still be opportunities, as well as in the finance sector.
So all in all, there should still be room to improve there.
Sure.
So in terms of overall revenue growth, as I mentioned in the call, we did see things tail off a little bit as we got into March.
So if I just go month by month, which I know you are always interested in, <UNK>, so January was about 4% growth year-on-year, February 5% and then March 3%.
And so clearly there was a little bit of a spurt and then it seems to have tailed off.
I think overall there still does seem to be some positive view, I think, optimism in the market overall, but certainly it has slowed down a little bit.
I think we do know we have some clients that built up inventory a little bit and then backed off a little bit, so that could be part of the reason of what we are seeing there overall in terms of where things are moving.
From a leverage standpoint, I think our business continues to do a very nice job.
They are driving overall top line and finding the opportunities that are there.
Also taking advantage of the perm and then <UNK> mentioned earlier the solutions business under Proservia is doing quite well.
So I think they are doing a very good job managing the opportunities and we are getting some leverage.
We continue to refine our delivery model in France and they've been able to drive some good leverage there.
So as I look to the second quarter, I do anticipate we are going to see some good margin expansion as well there in the second quarter as we had in the first quarter overall.
And then I think you had one other question just in terms of SMB versus key accounts.
And I think what we have seen over time on the SMB front, I think we have seen that they have been maybe a little bit more quick to price in some of the [CICE] and some of the responsibility pack in general over the last several quarters.
So I think pricing there has maybe moved a little bit more quickly.
I think generally now we are seeing, as we get into this year, I think across the business, we are seeing some of our larger accounts negotiate a little bit more aggressively from a pricing standpoint in terms of the responsibility pack subsidies that are coming through as well.
Overall, I think the marketplace is healthy and pricing is healthy considering where our direct costs are at the moment.
So we feel pretty good about France and where it sits right now.
Yes, you are looking at a little bit more than two-thirds of the solutions business overall with those two, so they do comprise ---+ they are certainly an important part of the overall mix within solutions and growing overall, so they are driving quite well.
More aggressive, I don't know.
But clearly we find that there is a good market opportunity for us and we have built some very good national coverage of skills and capabilities that are very useful for clients that are within in particular the tech and the telco part of the market where there is a lot of people and process involved, but very difficult to get national coverage.
And with what we have done, we have built a very nice center-based, as well as last mile delivery capability that suits those kinds of industries very well as they go through some of the changes and as they are trying to become more competitive and improve their profitability.
So I think that you will see us grow that business also going forward quite substantially because, as an industry trend, there will be a need for those kinds of workforce solutions.
Now having said that, it is still quite small relative to our size in France.
So you shouldn't expect to think about this in terms of being half of the business in France in any way, shape or form.
But it's a good business and within the solutions business, we see some good opportunities there, at least.
We have time for one more question, please.
Yes, <UNK>.
I don't think there's any markets that we see a dramatic change in trend overall.
I think the comparables get a little bit more difficult in the UK market and that is moving things a little bit.
I think when you go through the other markets in the Netherlands, we begin to anniversary one of the acquisitions and ---+ but overall I don't really see a dramatic change in trends overall.
I think it is more maybe the mechanics of what we are seeing in terms of anniversarying some tougher comps in a few markets, but I don't see it as a dramatic shift in terms of direction.
Sure, yes.
I think it's always a good question and a question I get often and it does become a little bit difficult and it depends a little bit upon what we are seeing.
When you get to growth levels of where we're at now, 3%, 4%, 5%, depending upon how the markets are moving and moving together, I like to say at single-digit revenue growth, we are going to see some operating leverage.
We did see a little bit of that in Q1 and I expect that in Q2 as you would've seen from the guidance overall.
So I think as we get to that mid-single digit, you start to see some operating leverage.
Clearly when you get north of 5% and up into the upper single digits, then I think you are going to see some better operating leverage and better incremental margins as you get a little bit more acceleration.
So we are squeezing it out at these levels, but I think if the economies work in our favor, I think there is more opportunity going forward.
In terms of overall goals, we have talked for some time about our overall 4% EBITDA margin.
We were in at 3.6% last year and so we've been making very good progress toward that goal.
Once we get to the 4%, we will talk about what our overall financial goals are beyond that.
So we don't see 4% as the end of game, of course, but clearly until we get to that level, we won't talk about ---+ we will save our discussion until we get to that level, but certainly we can see that in our sites and I think we are progressing well toward that overall goal.
Excellent.
Thank you, everybody.
Look forward to speaking with you again next quarter.
| 2015_MAN |
2017 | DHX | DHX
#Thank you, Keith.
Good morning everyone.
With me on the call today is Mike <UNK>, President and Chief Executive Officer of DHI Group Inc.
and <UNK> <UNK>, Chief Financial Officer.
This morning we issued a press release describing the company's results for the fourth quarter of 2016.
A copy of that release can be reviewed on the company's website at dhigroupinc.com.
Before I hand the call over to Mike, I would like to note that today's call includes certain forward-looking statements.
Particularly statements regarding future financial and operating results of the Company and its businesses.
These statements are based on Management's current expectations or beliefs, and are subject to uncertainty and changes in circumstances.
Actual results may vary differ materially from those expressed or implied in the statements here, due to changes in economics, business, competitive, technological and/or regulatory factors.
The principal risks that could cause our results to differ materially from our current expectations are detailed in the Company's SEC filings, including our annual report on Form 10-K and quarterly report on Form 10-Q in the sections entitled Risk Factors, Forward-Looking Statements and Management's Discussion and Analysis of Conditions and Operations.
The Company is under no obligation to update any forward-looking statements except where it is required by federal security laws.
Today's call also includes certain non-GAAP financial measures, including adjusted EBITDA, adjusted revenues, net income excluding impairment of good will, diluted earnings or loss per share excluding impairment of goodwill, adjusted EBITDA margin, free cash flow and net debt.
For details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release and our form 8-K that has been furnished to the SEC, both of which are available on our website.
Now I will turn the call over to Mike.
Great, thanks <UNK>, and good morning everyone.
And welcome to DHI Group's fourth-quarter earnings call.
Today, I will start off with an overview of our performance in the fourth quarter, and update on our tech-first strategy.
Then I will turn it over to <UNK>, who you may recall joined our company as CFO in November.
We will provide a financial update and discuss key operational metrics and our outlook for the business.
First, a brief update on the strategic alternatives process we announced with our third-quarter results.
In November, we engaged Evercore to explore strategic alternatives for our Company.
The process is progressing as we had originally planned and we're right in the middle of it now.
Of course, there is no assurance that will result in a transaction but with that said we remain committed to the interest of our shareholders and believe the tech-first strategy we are embarking on will benefit our shareholders regardless of ownership structure.
Turning to our business, 2016 was certainly a challenging year for us as the continued evolution of talent acquisition services, competitive industry dynamics and a few unfavorable macro trends pressured our financial results.
At the same time there were many positive developments going on behind the scenes that made it a critically important and beneficial year for us from a long-term strategic perspective.
We took a deep assessment of our company and industry and devised our tech-focused strategy that we began implementing in the fourth quarter.
So as we enter 2017, we're in a better position than where we stood a year ago.
Let me take a few minutes to elaborate on our tech-focused strategy.
Last quarter, we talked about why a tech-focus makes sense.
In summary, it is a big, growing, global, cross-industry professional function and happens to be where we are strongest.
Almost all companies have tech needs at some levels, so the market opportunity is substantial.
The degree to which skills evolve and morph, and the need for companies to identify and source those professionals with the specific skill sets, continues to be incredibly important and to grow.
We've identified four tech-focused initiatives with growth opportunities: social sourcing, mobile solutions, assessments and curated search in addition to our next-generation solutions with candidate pipelining, CRM and recruitment marketing.
We've already driven many of these initiatives forward and we're executing excellent strategy in full force, renewing our focus on the tech-talent market.
At Dice, we made significant progress in both of the key pillars of our business, engaging with professionals and enhancing the efficiency and effectiveness of our services with recruiting customers.
I will touch of professional engagement first.
While it sounds obvious, our expensive, strategic review highlighted how in the evolving, social media ecosystem, having an ongoing interaction and engagement with professionals is more critical than ever to be successful.
The value of specific information about the skills and online behavior professionals continues to rise.
To gain new and consistent information about professionals, we need to offer evaluated services that will encourage professionals to engage with us on an ongoing basis.
And that is precisely what our Dice Careers mobile app does.
The Dice Careers app continues to push forward our professional-engagement strategy.
Monthly active users on the app are up nearly 80% in the fourth quarter year over year.
We rolled out new elements of the service in Q4 and will be adding more new features in 2017.
All of which leverage our specialized data to provide tailored career insights to professionals.
The focus on the professional be an increasingly important initiative as we build our tech-first strategy.
As professionals learn which skills to focus on to propel careers forward and better understand salary opportunities in the market, Dice will be there as the trusted partner for tech professionals everywhere.
Dice has long been rooted in helping employers find the most highly skilled, and the most qualified tech professionals.
Our continued focus on being the best-in-search is one way to create efficiency for employers and candidates looking for ideal positions.
In November, we announced a new working relationship between Google and Dice.
We are excited to be selected as the specialized launch participant for Google's new Cloud Jobs API.
The API response to queries to provide relevant job search results for candidates.
Combining the depth of our tech-specific knowledge with the breath of Google's user data could bolster our already robust search technology with machine learning.
The relationship with Google further positions Dice as a tech leader in the recruitment industry and validates our best-in-class search capabilities.
As part of our strategy to place a stronger focus on helping employers find qualified candidates, we have partnered with HackerEarth, a skills-assessment service provider to offer Dice customers customized talent assessments and hackathon services.
There's long been a gap in the market for employers to find an efficient way to assess the skills of tech professionals.
While there are a variety of sources across the web, a recruiter can search to gain insight into a tech pro's proficiency.
Dice Careers partnership with HackerEarth will have this in one place as a value aid for customers.
We view offering these towered reports of a key differentiator for Dice in the future.
When employers make a good hire, everybody wins.
With respect to engaging with customers, becoming part of the daily habits of recruiters is essential to the success of our services.
We're launching a number of initiatives within the recruiter workflow to accelerate a search API integrations and an upgraded Chrome extension to improve performance attribution, engagement and client retention.
Our go-to-market strategy has recently been refocused towards a bundling of pricing model that is accelerating adoption.
As we bring additional products together to offer a suite of solutions, we're implementing pricing that better satisfies our clients' needs.
We have made solid traction with our bucket view model which bundles proprietary database access together with Open Web, increasing our value to our customers as well as renewals.
The bundled approach has proven successful with staffing agencies early on we expect to see similar traction with direct-hire clients.
Driven by this new sales approach of putting Open Web first, nearly a quarter of our Dice Recruitment Package customers have Open Web today.
Open Web added about 600 net new customers during the year up nearly 60%.
Renewals increased 46% year over year.
In the market broadly, it has been a long road of adoption for customers spending time on social sourcing.
From my perspective, working with this industry for over a decade it was a concept that had fits and starts, but was long recognized as a necessity for recruitment services to meet employers' needs.
We have now seen it come to fruition with Open Web usage, as well as through excitement from potential customers around getTalent.
GetTalent is our staff-based candidate pipeline tool designed to be utilized in any industry.
There are so many companies who have applicant tracking systems that are either out of date, difficult to manage, or not robust enough to create efficiency for recruiters and hiring managers.
GetTalent is a tech solution to cultivate and nurture candidate leads working together with, or in addition to, clients' ATS systems.
We are discovering new and meaningful ways customers in every industry can leverage the product to build, organize and engage with candidates.
Lingo, our targeted recruitment-marketing service, has experienced continued momentum and seen some early wins, particularly with customers outside the US.
We're working on ways to bring this to market-at-scale.
Our eFinancialCareers and Dice teams in Europe have both launched employment branding campaigns for international and UK-based customers.
Customers often ask us whether we use our services ourselves, and we do.
We recently used Lingo to source a development role in our London operation and filled that role at a relatively nominal cost.
The financial services industry is a leader in tech innovation.
Wall Street's firms are always looking for products and services which gain a competitive edge, and technology is at the core of how they get there.
Even in a challenging year, including the impact of Brexit, revenue increased for the full year on a constant currency basis at eFinancial careers.
We see a clear path of this business as demand for fin tech talent grows globally.
Our brands have traditionally been siloed; however, as our tech-first strategy evolves we're discovering ways for our brands to more seamlessly collaborate.
So we have long specialized in a number of verticals, technology works across all of them and therefore we feel we are ready ---+ already ahead of the game with the rich products and services that we have.
ClearanceJobs, which is already heavily tech-centered with about 75% of jobs on the site technology-related, continues to perform well and is benefiting nicely from a combination of external market conditions, like high demand for security-cleared professionals, the government slowing of granting and renewing security clearances, and our own initiatives around pricing models.
ClearanceJobs grew over 20% last year, and we expect it to continue on this growth trajectory into the year and in the near future.
We made good progress in 2016, yet it became even clearer in the past year that we're better positioned for success by focusing on our strengths.
Which is providing value to hiring managers with technology needs and engaging technology professionals.
Moving on to Health eCareers, its core business of traditional job postings have struggled a little, but new projects are gaining traction and stronger partnerships with key healthcare channels are widening our addressable market.
The demand for healthcare professionals continues to be strong and employers are looking for avenues to stand apart from competitors, like to our Spotlight service.
Custom-designed employment landing pages from Health eCareers account for the bulk of Spotlight sales; however, we are expanding and intend to have new offerings in 2017.
The SHIFT product, which connects leading healthcare providers with temporary talent, has great potential and is a clear interest among professionals.
There is a concerted effort to improve here, including partnering with established players in the market who are focused on credentialing.
The pay-per-qualified application model at Health eCareers remains an opportunity area and there is a place where we will continue to prioritize in the year ahead.
As we transition DHI for future focused on tech, our long history and solid foundation together with new services in the pipeline reinforce that we are the trusted partner for employers with tech needs.
Optimizing resource allocation is a primary objective of our strategy both from a financial- and human-capital perspective.
To this end, will be allocating most of our growth investments on initiatives that focus on tech.
As our next-generation products evolve, and our core business improves, we're well-positioned to return our business to growth over the long term.
So before I turn it over to <UNK>, I just want to address the issue of providing short-term specific financial guidance.
I know investors in our Company have become accustomed to us providing a short-term business outlook with very specific financial estimates across all of our businesses.
While I am not underestimating the value of very specific guidance, at this time we don't believe it to be the best approach.
We're in the middle of our strategical service process.
In the outcome of that process we'll have an impact on how we choose to execute our tech-first strategy.
There are a range of potential outcomes, and some outcomes could have different organizational and operational implications for the company in terms of level of investment and business-focus across the portfolio.
Therefore, we don't believe specific numerical guidance would be meaningful at this time.
However, <UNK> will discuss the broader trends and insight into the business for color and for context.
So with that, let me turn it over to <UNK>.
Thank you Mike.
Hi everyone.
I am thrilled to be here and I'm looking forward to working with many of you over time.
Today, I'll review the key points of our fourth-quarter financial performance, and then provide some directional insight into how we view our tech-focused strategic initiatives impacting 2017.
Note that all of my comments today exclude the results of Slashdot Media which we sold in early 2016.
So starting with the fourth quarter, we saw progress for the organization, in spite of continued headwinds and energy in foreign-exchange.
And in the midst of carrying out our tech-first strategy and our strategic alternatives process, financial results did meet our expectations.
Our tech-first initiatives continue to show positive results and we believe will help us to grow ---+ return to growth.
Some of the key drivers of the fourth quarter include the measurable influence of Open Web in our consumption-based finals at Dice and double-digit growth at ClearanceJobs highlighting our strong value proposition in a tight labor supply environment.
Fourth-quarter total Company revenue declined 11% year over year and 8%, excluding the impact of foreign-exchange, which has hit eFinancialCareers hardest since the Brexit vote.
Overall revenue declined 5% on a constant currency basis excluding energy, which continues to suffer from low oil prices.
Fourth quarter Company billings declined 8% against last year, 6% on a comparable currency basis.
Looking at our tech-focus brands, Dice US revenue declined 9% year over year due to a 7% decline in Recruiting Package customers, which ended the quarter at 7,050 which was down 3% from the end of the third quarter, 2016.
At the end of Q4, 95% of our Recruitment Package customers were under annual contract compared to 93% last year.
Our monthly average revenue-per-Recruitment Package customer was 1,117 for the fourth quarter, which was in line with the prior year and the third quarter, 2016.
On a constant currency basis Dice Europe's revenue declined 9% year over year in Q4, primarily due to our exit from (Ben LX).
ClearanceJobs' revenue in Q4 increased 22% year over year driven by the strong adoption of our pay-for-performance products and ongoing favorable market dynamics for that business.
Tech & Clearance billings declined 7%, or 6% on a constant currency basis with Dice billings down 8%, but ClearanceJobs up 29%.
For eFinancialCareers, Q4 revenues declined 1% against last year in constant currency, but was down 13% on a nominal basis.
In a post-Brexit environment eFinancialCareers showed resiliency with fourth-quarter billings up 2% versus last year on a constant currency basis, but down 10% on a reported basis.
Moving on to healthcare, fourth-quarter revenue in billings were flat year over year as the uptake of our new application-based model was offset by a reduction in job postings.
Our energy revenues declined 52% year over year and we're not yet seeing changes in recruiting patterns in the global oil market.
Revenue for Hcareers was down 8% year over year due to increasing competition.
Deferred revenue increased $84.6 million at the end of the fourth quarter compared to $83.3 million last year, mainly due to an increase of $3.2 million in Tech & Clearance, which was driven by ClearanceJobs' growth and slightly longer Dice contracts.
Partly offset by a reduction of $1.7 million at (inaudible) due to Rigzone.
Now turning to fourth-quarter spending, excluding last year's impairments, operating expenses declined 9% against last year, driven by lower amortizations, sales-related expenses and marketing costs.
The fourth-quarter adjusted EBITDA for the Company was $13.9 million for a margin of 25%.
While this slightly topped our expectations it does represent a 4-point margin reduction against last year, due primarily to the impact of energy and exchange rates on revenue in our GIG brands which saw a 10 point margin decline.
Fourth-quarter net income was $5.5 million or $0.11 of diluted earnings per share, which topped our expectations but was relatively in line with last year's numbers, excluding impairments.
Our fourth-quarter effective tax rate of approximately 26.5% came in the low expectations of 36% to 37%.
This was primarily the result of implementing tax-planning strategies and the resolution of some unrecognized tax benefits in the quarter.
In the fourth quarter, we generated $8 million in operating cash flow and $4.7 million of free cash flow compared to $11.4 million and $9.1 million respectively in the prior year.
That was $86 million at quarter end.
Now turning to 2017, I will give some direction for our main business drivers which can provide some context regarding potential financial performance.
We expect revenue will continue to decline in 2017, but at less than half the rate of our 2016 decline.
Which should slow gradually throughout the year and flatten near year end.
This is due to the expected gradual improvements in Dice from our go-to-market initiatives which have been consistently showing positive results since launch and the continued growth of ClearanceJobs.
Albeit at a more modest pace than the 21% growth we achieved in the full year of 2016.
Healthcare should see a slight acceleration in growth as our new products continue to scale.
We expect the trends at gate to continue in view of the weaker pound, and the uncertainty around Brexit affecting eFinancialCareers, as well as the adverse impact of continuing low oil prices at Rigzone.
Moving on to 2017 expenses, we plan to increase our spending in order to support our tech-first strategies, with a view to return the tech-focused business to top line growth next year.
Quarterly spending will grow gradually against a corresponding period in 2016 as we increase our tech-focused product development and sales headcount.
Ongoing cost controls and GIG brands will help partially offset these increases.
Other costs should remain relatively in line compared to 2016 after adjusting for last year's one-time cost.
In summary, giving a slowing decline in revenue, and modest increases and expenses we expect some margin compression in 2017 compared to 2016.
Finally, we expect our tax rate to be about 39% and a share count of about 50 million shares.
Thank you for listening.
I will now turn the call back over to Mike.
Great, thanks <UNK> and welcome aboard.
It's good to have you as part of the Team.
Before we turn it over to questions, I just want to recognize and thank our 800 employees around the world.
We are a company going through a fair amount of change and we have such a great group working with us.
And I want to acknowledge the contributions of the entire DHI workforce as we move the Company forward.
I think we are all excited about our opportunity and the focus and we are ready to get going.
With that, we will turn it over to questions.
Sure.
<UNK>, this is Mike.
On the ARPU, the addition of Open Web, which people have to pay separate for with the bundled pricing products, we are testing some lower-priced entry-level products.
So that has a slight impact on the overall revenue per customer.
We have said for years, actually, we thought it would flatten, and it started to flatten last year.
Now, it actually has flattened.
It took a lot longer for it to flatten, over time, but I think we're finally there.
And it is really about mix of products.
he entry-level, which historically has been 6,500 for one user and five job slots, we're playing with that pricing at the bottom level.
$1,100 a month gets you in excess of $12,000 a year on an average, so we finally got there from a flattening standpoint.
From a Dice Careers engagement standpoint, right now, we do not have plans to monetize directly the engagement on Dice Careers.
But it certainly will improve the interaction with the site.
Some of the elements that we have in the Dice Careers app, we plan to bring on to the site itself.
It is all about improving the interaction and ongoing relationship with professionals that will improve our service over time from a customer retention standpoint and from a new customer acquisition standpoint.
Having said that, we do have an incredible amount of proprietary data based on skills and usage and employment and information we get from Open Web, which we believe, over time, we can monetize.
It is not the primary focus today.
I don't think pricing goes down.
I think as we attempt to get newer customers and new types of customers, there may be entry-level pricing for new customers.
But the pricing level itself, we do not believe will change.
Hi, Randy, <UNK> <UNK>.
The currency really impacted most at eFinancialCareers at about 1 point of exchange impact on Dice Europe, so very little impact from that exchange standpoint.
One of the things that <UNK> pointed out earlier is that we did make a decision toward the end of the third quarter to exit Belgium and the Netherlands from a Dice Europe standpoint.
The revenue impact was relatively small on a broad basis, since Dice Europe, itself, is only about 10% ---+ less than 10% of Dice in total.
That did have an impact year over year because we exited in the fourth quarter, beginning of the fourth quarter.
No, there has not been any change to that trend.
Sure.
I think if you boil it down, we have a tremendous amount of information, proprietary information, about skills and skill specificity.
If you think about the tech market, in general, so much of it is based on skills and the evolution of skills, which nobody else has.
There is generalist players who certainly have tech pieces of their business, but they don't have the skill specificity that we have.
When you think about recruitment for highly-skilled professionals, whether they are tech or anything else, efficiency and effectiveness and speed and accuracy and specificity are certainly the elements that they look for and that is how we compete.
W use examples all the time about somebody looking for a person, a professional with Python what that means if you use a generalist versus a specialist like us, or Pig or Chef.
For laymen in the world they have no idea what those terms mean, but if you're a tech professional, you know exactly what Python and Pig and Chef are.
The efficiency with which we help companies find those individuals, both through the proprietary database and by sourcing others through Open Web, is unique in the business.
One of the reasons why we're so focused on tech first is because we think that's the place with skill specificity and the ever-growing need where we really shine.
If you look at the US specifically, today, there is roughly half a million or so unfilled tech positions.
The BLS estimates by 2020 it will be a million.
Now part of that is because there just are not enough people and part of it is the ever-evolving skill specificity that companies and recruiters need.
That really is where we compete and where we can be effective.
Then we can leverage that into other services like a recruitment marketing service, an employer-branding service, where you are reaching people.
As we do through our Lingo service, which is built on Open Web, where you can reach specifically targeted people with specific skill sets or specific employers and former employers or specific interests.
Our ability to combine all of those things is unique in the market.
Sure.
The app has existed for a couple of years, first in iOS and then Android.
Originally, it was purely a job search app as most employment-related apps are.
What we have done is started to evolve it ---+ and its early days.
We just launched the new version in the spring of last year, and we added certain elements to it, all designed around ongoing engagement: career path, salary information, skills information.
We take the proprietary database we have in terms of relationship of skills and we can show an individual: Here are the skills you have.
This should be your compensation, and here are the next set of skills that people like you have.
And here is what the compensation would be for you to help you chart how you get it.
Then eventually we'll start to add other elements to how you can develop those skills and refer you to places where you can get the skills or learn those skills.
That is in its early stages, so yes, I think from a feedback standpoint, that feedback, some of which is quite dated, reflects the original app.
We are really just in the early stages of developing these new sets of services.
Having said that, the number of downloads has increased dramatically.
The level of engagement, as I mentioned earlier, has increased almost 80% year over year.
We're just getting going, but so far we have seen tremendous increase in usage.
Sure.
Overall employment in the tech market has hovered between 2% and 3% for years now, which economists would say is full employment or greater than full employment.
Which, by the way, is not ideal for us, so full employment from a marketplace standpoint is not the most ideal set of circumstances.
And slightly greater unemployment, which creates many more openings, which creates more velocity of change, which is what benefits our business, would be more ideal for us.
There are a number of openings, even if they are not posted, and helping companies identify sources of talent over a period of time is how we think we win, not purely when the job is open.
So one of the things that we focus on quite a bit is employer branding and pipelining, which is why we created the getTalent product to help companies identify people so that they have a roster of candidate prospects that they can engage with over time to serve the needs and not purely wait for having a job opening at a specific point of time.
Thank you all for your interest in DHI Group Inc.
If you have follow-up questions you can call 212-448-4181 or email [email protected].
| 2017_DHX |
2015 | NWN | NWN
#Thanks, Bob.
Good morning, everyone, and welcome to our fourth-quarter and year-end review.
I'll begin today with an overview of 2014, and then turn it over to <UNK> to provide financial details for the quarter and the year.
I'll wrap up the call with a look forward.
For Northwest Natural, 2014 was a year of both opportunity and challenge.
Last year, our utility performance was solid with improvements in customer growth and margin.
However, those results were offset by losses associated with our gas cost-sharing mechanism and the impact of higher natural gas prices.
We also continued to see weakness in the California storage market, hampering the financial returns from our Gill Ranch storage facility.
In the midst of these varying factors, we delivered earnings of $2.16 per share in 2014, while providing a total shareholder return of approximately 22%.
On the growth front, the northwest economy made positive gains last year, with Oregon's employment rebounding to pre-recession levels and unemployment rates continuing to fall.
In 2014, we saw a healthy increase in commercial margins and an uptick in commercial new construction activity.
The housing sector also improved with Portland home sales up nearly 4% and the average sale price up 7% last year compared to 2013.
In addition, United Van lines ranked Oregon as top moving destination last year, a positive indicator for future housing sector growth.
In Clark County, Washington, the fastest growing county in our service territory, home sales increased 8% with the average sale price increasing about 10%.
These improvements helped drive up our customer growth rate to 1.4% last year.
In the process, we reached a new milestone adding our 700,000th customer.
We believe last year's housing market improvements, coupled with our substantial price advantage over electricity and oil put us in a strong position for additional customer growth going forward.
In 2014 we made significant investments in safety and in reliability of our system.
We completed several system reinforcement and facility upgrade projects, and we continued our aggressive pipe replacement efforts.
In fact, we plan to remove the last three miles of bare steel pipe in 2015, making us one of the first utilities in the nation to eliminate both cast iron and bare steel pipe throughout our distribution system.
In 2014, we reaped the advantages of having a more modern robust system when extreme winter weather put us to the test.
Last February we set a Company record with a send-out volume hitting 9 million therms in a 24-hour period.
That's almost double the normal send out for a typical winter day.
I'm pleased to report our pipeline system and storage facilities performed very well.
I'm also pleased to report that for the fifth time in eight years we ranked First in the West in the annual J.
D.
Power Gas Utility Residential Customer Satisfaction Study.
Last year also marks the seventh time in eight years that we were among the two highest scoring gas utilities in the nation.
Now let me shift the status of a regulatory agenda.
Last year we continued to work through three remaining dockets carried over from our 2012 Oregon rate case.
Just last week, the OPUC issued its decision regarding how the Company's environmental site remediation and recovering mechanism would be implemented.
In the final order, the Commission found that all but $33,000 of the $114 million of environmental remediation expenses incurred from 2003 through March of 2014 were prudent.
However, due to the application of an earnings test from 2003 to 2012, the OPUC disallowed recovery of expenses totaling $15 million.
At the same time, the order specifies that insurance settlements totaling over $150 million were entered into prudently by the Company.
<UNK> will provide more details on how the mechanism works, but let me just say that while the write-down is disappointing, we view our ability to fully recover future environmental cleanup costs as the key issue in a very complex and tough docket.
We are pleased the environmental spend and insurance settlements were deemed prudent.
We do have some questions and implementation issues that we will be working on with the Commission, but overall we believe the order provides us with a reasonable path forward.
We expect the last two proceedings from our 2012 rate case to also be decided on this year.
These are the interstate storage, sharing and pension dockets.
As you know, last year we amended our gas reserves agreement with Encana in response to their sale of the Jonah field.
While the new arrangement ended the original drilling program, it also increased our working interest in Jonah and allows us to continue to invest in the field on a well-by-well basis.
Under the new agreement, in 2014 we invested in seven wells.
Yesterday, we filed with the OPUC to recover those costs as part of our utility hedge portfolio.
Our final important regulatory milestone last year was the filing of our integrated resource plan in Oregon and Washington.
The plan covers a variety of issues associated with our ability to serve customers, including the need for additional system investments in Clark County, Washington, at our Newport LNG plant in Oregon.
Just a few days ago we received acknowledgment on the IRP from the Oregon Commission.
We expect to receive notification from the Washington Commission by this summer.
With that, let me turn it over to <UNK>.
Thank you, <UNK>.
Good morning, everyone.
In 2014, we made significant progress on a number of fronts, including operational improvements and some important long-term growth initiatives in both the utility and gas storage businesses.
Additionally, as you heard earlier, we received an order from the OPUC on how we would recover future environmental costs, which was a significant financial issue carried over from our last rate case in 2012.
I\
Thanks, <UNK>.
In 2014 our utility performance was solid with improvements in customer growth and added rate-based returns on gas reserves and other system investments.
We also made progress on our other growth initiatives.
Earlier this month we received approval from Portland General Electric to move forward with the permitting and land acquisition work required for a potential expansion project at Mist, our underground gas storage facility.
The project would be designed to provide no-notice storage services to PGE's natural gas-fired generating plants at Port Westward in Oregon.
Potential expansion would include a new reservoir providing up to 2.5 billion cubic feet of available storage, an additional compressor station with design capacity of 120,000 dekatherms of gas per day, and a 13-mile pipeline to connect to PGE's gas plants at Port Westward.
In 2015, our team will be working to obtain all the required permits and certain property rights.
Assuming successful completion of those necessary elements, the current estimated cost of the expansion is approximately $125 million with a potential in-service date in the 2018/2019 winter season.
Depending on, I should say, the permitting process and construction schedule.
As you may recall, Oregon passed a bill, effective last year, that allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions.
We've viewed the legislation as an exciting opportunity to make a positive environmental impact while potentially serving our customers and communities in new ways.
In 2014, we worked through a rule-making effort with the OPUC staff and customer advocates.
The rules, for what we are referring to as the carbon solutions program, were then passed by the Oregon Commission this past December.
In parallel to that rule-making effort, last year we began assessing a number of possible projects spanning several areas.
Examples of potential projects involve reducing methane emissions during pipeline maintenance and repair, a residential oil conversion program, and distributed generation projects that use natural gas to increase energy efficiency.
At this point, we are refining concepts and meeting with interested stakeholders to discuss our ideas, including the OPUC staff, customer advocates and energy efficiency crews.
Our goal this year, is to file several projects for the Oregon Commission to consider and hopefully to approve.
In my view, the carbon solutions program offers an excellent opportunity for us to demonstrate our spirit of innovation, to showcase the important role natural gas can play in helping our region meet its environmental goals, and to add to the Company's bottom line.
In the months ahead, we intend to make progress in a number of areas, as I've said, continuing to grow our utility customer base, completing the last two remaining dockets from our 2012 rate case proceeding, advancing the North Mist expansion project, and doing all this while continuing to provide safe and reliable service to our customers.
Thanks again for joining us this morning.
Now I'd be happy to open it up for questions.
It's hard to believe we're that clear on all of this stuff, but it doesn't appear there are any questions.
We will wait another few seconds ---+ here we go.
Yes, it does in most instances were we spend more than what is in the tariff rider and the insurance, so if we're spending more than that amount, which is $10 million, it will limit going above our allowed return on equity.
As I said in the remarks, we do have the ability to drill on a well-by-well basis.
The way that works, though, is that Jonah Energy Inc.
proposes wells to us, and then we get to evaluate and make a decision about, on a well-by-well basis, whether we're going to proceed with those wells.
Right now, there haven't been any proposed to us, not exactly certain if there will be this year.
Again, we take them on a well-by-well basis.
I don't expect that there will be, even if they do propose wells, that they will be large.
Again, last year there were 10 that were proposed to us, so I don't think that's going to be a very large amount if there are wells proposed.
The other part of it is that we continue to look at a second overall gas reserves deal, as part of a discussion we're having with the Commission on, what's the right amount of gas reserves to have.
We call that our hedging docket, which is going to be open this year and hopefully completed this year.
That will tell us whether we've got the right amount of gas reserves in our portfolio or not.
Hopefully, we'll get through that this year and it will give some direction on a future deal.
Maybe just a little bit more follow up on the first part of your question, <UNK>, which was about over-earning.
It does, in those cases where we're, as I said, spending more than $10 million, prevent us from over-earning in those years, but I would also say that the important part of this docket, I want to underscore, was the costs of this are large for the Company in the future.
Our goal here was to make sure we got full recovery and the order does do that.
We really believe that this is a very reasonable path forward for us.
Any other questions.
Well, if there are no other questions, thank you all for joining us this morning.
We really do appreciate your interest in our Company and look forward to seeing you down the road.
Thanks.
| 2015_NWN |
2015 | KMB | KMB
#I will take the first one, and I will throw <UNK> the second one on Halyard.
So on adult care trends, we have ---+ we would probably say we have successfully defended and Procter will probably say later this week they have successfully launched.
And so we have lost less than our fair share.
If you look sequentially, I think we were down about 0.5 points overall.
I think if you looked year-over-year, <UNK>, we are down what.
We are down about 4 points.
A little bit more on the Poise side, less on the Depends side.
We're launching more innovation this year, and are aggressively competing and promoting, as is our primary competitor.
So I think private label and the other small branded player have lost more than their fair share.
And in the meantime, the category growth has picked up.
So we saw solid high single-digit category growth, which may be a little overstated because of the amount of couponing that's out there in the marketplace, but it is still a strong performance.
<UNK>, on Halyard, that 3% impact which we reported as mix and other in KCP is less than half of their organic growth for this quarter.
So it was an important component, but it wasn't really the underlying driver.
And the agreement will run for two years.
And I'm sure there is a small markup on that.
I'm sure the Halyard team is looking for alternative supplies as quickly as they can, but the agreement commitment is two years.
All right.
We'll see you at Powers Lake.
Are you talking about any market in particular.
North America is essentially a club ---+ is the biggest non-scan channel, and are probably underweight historically in club on tissue products.
And so that has been an area that we have been trying to crack into with Cottonelle, and Viva, and Scott tissue and things like that.
So we had some success in the first quarter, and that enabled some of that growth.
If you looked more broadly, particularly in Asia, e-commerce is probably by far the biggest non-track channel that I would say outperforming in relative to the track channels.
So Korea and China, in particular, would be places where we would see better growth than the track channel.
It is a tough competitive marketplace out there, <UNK>, as you have noted.
Pretty much everybody wants to eat our lunch somewhere, so we have got strong global competitors, we've got some strong local competitors.
And so we have got to have good innovation, and be competitive on price, and execute well every day to keep it going.
So we see that with some of the things that Procter is doing on diaper pants, but we'd also would say Unicharm and Kao in many ways have some of the best performing products that we benchmark against.
And so we're up against those guys in lots of different places.
And I am really proud of the way the teams have executed and got better performing products with good execution in market.
I would say, <UNK>, that our categories are largely local.
Our stuff doesn't ship long distances.
So you might get some currency change like on commodity inputs and things, but largely the battle is fought locally.
I think with our motto, we're set up to do that as well as anybody.
It is tough.
I think if you look sequentially, I think our city comp didn't change much.
If you looked versus first quarter last year, we were at [105%] versus [90%] last year.
But I would also tell you, e-comm probably was the bigger growth factor than the city comp change.
So some of that is category penetration or channel growth that is helping those consumers get products in a different way.
But, <UNK> was just in China about a month ago, so he's probably got a more relevant snapshot of what you saw when you were over there.
So maybe you can give us some local color.
I would say, <UNK>, too, that the market is still growing at very healthy rates.
It is down from where it was, but our team still is very excited and executing well in bricks and mortar.
But e-comm is a place where we have invested a lot and we are over indexed.
And as <UNK> said, that is probably the place where we have driven more of the relative share gains.
I think the category is still growing at high single to low double-digit.
And double digits this year.
So we are growing at a multiple of that.
And city expansion is a piece of it, but I would say e-comm and channel expansion is the bigger component.
Yes.
Our China team is working with our big e-comm customers to figure out ways to take costs out of the whole supply chain.
So we have done some of that in larger cities as well.
I will let <UNK> get into the SG&A overall.
The top line, on an advertising spend standpoint we were down 10 basis points as a percent of sales versus prior year.
But we were basically 10 basis points higher than the average of advertising spend for the full year of last year.
So it was in the ballpark of what we would expect normally around 4% of sales.
On the SG&A, you probably had a little bit of currency benefit that would affect it.
But maybe <UNK> has got some additional color on that.
<UNK>, I think currency ---+ when you look at the absolute dollars, currency is a big shift.
We have obviously ---+ if you'll look at the difference between gross margin and operating margin, we have got some between the lines efficiencies that the businesses are driving.
But currency is probably the biggest impact.
Like I said, we have been getting the distribution which started in mid-March, and we should be in about 80% of the channels by late April.
And that is really when you will start to turn on more of the marketing effort at that point in time.
We're probably seeing a little bit better consumption data than I would say you're quoting from the data you are saying.
But it is still early days on the relaunch at this point.
Two factors.
I would say probably two-thirds of it was or 25% of it was volume, and balance of 30% of it was price.
So some big price increases.
Some of the volume was buy-in ahead of an April 1 price increase.
But I think if you talk to that team, they'd double-digit volume growth in Eastern Europe is the right way to think about what they are aiming at for the year.
And then, they are attempting to get as much price as they can to offset the currency impact.
Eastern Europe you would see less volume growth, but we'll get the benefit of the price increase that went in.
So I wouldn't necessarily assume that you will see a big deceleration.
55% is probably higher than you would typically expect to see going forward.
So you'll see some deceleration in Eastern Europe overall, but I think emerging markets should still have another strong quarter.
Let me take the cost savings one first.
<UNK>, I think it's just how the math works and a little bit of programming.
So typically, we will work out an annual budget cycle and the teams are focused on annual incremental programs.
And you are exactly right.
The programs that we had in place last year don't stop.
They are delivering.
But we also launch and think creatively about new programs to help us hit our near-term target.
And so I think it is just a matter of the phasing as we go.
The underlying programs roll into your base, and then you are looking to build on top of that as we go.
So you look at cumulative cost savings over time, it is a pretty big number.
But they build on each other over time.
It is just the way the planning process goes and how the businesses behave.
Switching to adult care, we have known for a long time that a lot of women that have light bladder leakage issues.
And one in three women at some point in their life experience light bladder leakage, that they've used fem care as a solution.
And so given that we have a much larger share with our Poise brand in that space than we do in fem care, we would love to shift them into that space.
It is a better solution, and it's a place where we are going to get more than our fair share of those new consumers.
So you are seeing a little bit of that of the growth in Poise has been a bit of a decline in the fem care category.
And overall, we should benefit from that and consumers will get a better solution for the issues that they are trying to treat.
We thank everyone for their questions, and I will turn the call back to <UNK>.
Well usually I give the last word on these calls, but since this is <UNK>'s last call, I am going to throw it to <UNK> and let <UNK> have the last word today.
I'm just grateful to work for Kimberly-Clark.
I have a cold today, so I have the world's softest facial tissue right at hand, and also have antivirals so I don't transmit my germs to my fellow conference call mates.
I have had the good fortune to build a career at a great company like Kimberly-Clark, and work with great leaders like <UNK> who always got the best out of me.
Work with great people like our investors and our Board of Directors, the leadership team that <UNK> has, my leadership team.
And it is it has been a very good run.
I'm really proud of what we have accomplished.
But I'm also optimistic about the future.
<UNK> has made a great selection for my successor.
Maria is fantastic.
And she is going to see opportunities that, quite frankly, being around for a long time I just didn't see.
So I am optimistic about the future, and committed to helping Maria and the new GSLT get started up.
So thanks for your support, and thanks as always for your support of Kimberly-Clark.
Thank you very much.
| 2015_KMB |
2017 | SPOK | SPOK
#Thanks, <UNK>, and good morning.
We're pleased to speak with you today regarding our first quarter operating results and what we believe was a strong quarter for Spok and a great start to 2017.
During the quarter, we made further progress toward our goal of transitioning Spok from a telecom-based wireless company to a software provider that delivers industry-leading unified health care communication solutions.
We saw strong year-over-year performance in a number of key operating measures, including software bookings and backlog levels, as well as wireless subscriber retention.
We achieved these results as we increased our investment in our business by enhancing and upgrading our product development team and tools, as well as our sales infrastructure and management.
As we've previously outlined, we believe these investments will yield significant future benefits in the form of our improved, integrated communication platform, Spok Care Connect, as well as higher future booking levels, supported by an enhanced and upgraded sales team.
Overall, we continue to operate profitably as a debt-free company while enhancing our product offerings.
We executed against our capital allocation strategy by continuing to make key strategic investments in our business while returning cash to our stockholders during the quarter in the form of dividends.
We were particularly pleased with our strong software bookings levels, as we posted the largest first quarter results in our company's history.
We also set records for our highest bookings month and highest single day of software bookings.
Our new logo bookings, which have historically represented in the 30% range of operations bookings, were over 50% for the quarter, and the average contract value of our new logo bookings, which has traditionally been in the $100,000 and below range, almost doubled to just over $190,000.
While one quarter does not represent a trend, we were nevertheless happy with these results.
Additionally, we continue to see a more than 99% renewal rate on software maintenance contracts.
Similar to our wireless revenue stream, software maintenance revenue is largely a recurring revenue stream that provides the company with a more stable revenue base.
Late in the quarter, we also took a major step in our transition.
On March 27, we announced that <UNK> <UNK> had joined the company as Spok's new Chief Financial Officer.
He succeeds <UNK> <UNK> in that position, who has remained with the company and assumed the role of Chief Accounting Officer.
Mike joined us from Intermedix, a global leader in health care revenue cycle practice management and data analytics solutions, where he was Executive Vice President and CFO since August of 2013.
He brings with him a proven ability to manage the finance function in a rapidly growing and changing environment, as well as implementing strategies for improving revenue and profitability.
Mike is an industry veteran who brings deep experience in medical diagnostic services, software development, digital interactive marketing and regulatory compliance.
I believe that Mike and the entire team will continue our commitment to Spok's core values of putting the customers first, providing solutions that matter, innovation and accountability, while managing the investments that we are making in our software solutions, operating platform and infrastructure to drive profitable, long-term, organic growth.
I'm excited to welcome Mike to Spok's management team.
I'd also like to take this opportunity to thank <UNK> <UNK> for his dedication and loyalty to Spok.
<UNK>'s commitment has been vital to everything this company has achieved during the time he served as CFO.
However, we mutually agreed that the time was right to transition the CFO role to someone with deeper software industry experience.
In his new role, <UNK> will help us address regulatory and compliance changes as well as tackle the many opportunities to improve the efficiency and performance of our financial platform.
Now, before I turn the call over to Mike and his team to provide details on our financial performance and operating activity, I want to briefly review some other key results for the quarter.
First, bookings of $19.8 million included record highs for our first quarter in both operations and maintenance, and our related software backlog of $40.6 million on March 31 was up more than 10% from the prior year quarter.
Growing software bookings is critical to growing revenue, as there is the delay in the time from the actual sale to revenue recognition.
Our sales team will continue to be laser-focused on generating activity throughout the remainder of the year.
We are encouraged this bookings included sales to both new and current customers, with existing customers adding products and applications to expand their portfolio of communication solutions.
Customer demand remains strongest for upgrades to call center solutions, health care applications to increase patient safety and improve nursing workflow.
We continue to see growing demand for our software solutions for smartphone communications, secured texting, emergency management and clinical alert.
Second, wireless subscriber and revenue trends continue to improve.
Spok posted solid results for wireless products and services in the first quarter.
Gross paid replacements of 28,000 and gross disconnects of 48,000 were in line with the earlier year quarter.
As a result, annual net pager losses declined to an historical low of 5.4% on a 12-month trailing basis and were 1.8% in the first quarter, in line with the prior year quarter results.
Also contributing to the slower-than-anticipated wireless revenue decline was a more stable ARPU, or average revenue per unit.
In the first quarter, it averaged $7.56, virtually unchanged from the prior quarter.
We were pleased to see the continuation of these positive trends, especially in our top-performing health care segment, which now comprises approximately 80% of our paging subscriber base.
And finally, we generated sufficient cash flow again in the first quarter to return capital to stockholders in the form of dividends.
During the quarter, the company paid cash dividends to stockholders totaling $2.6 million or $0.125 a share.
We also paid the $0.25 special dividend that we declared in December of 2016 to stockholders in January of 2017, and that was $5.1 million.
All in all, the company posted solid operating results in the first quarter, and we believe this provides a strong base for 2017.
I'll make some additional comments on our business outlook in a few minutes, but first, Mike <UNK>, our Chief Financial Officer, will review the financial highlights of the quarter.
And then after that, <UNK> <UNK>, President of our operating company, will comment on our first quarter sales and marketing activities.
Mike.
Thanks, Vince, and good morning.
Before I begin, I really want to express my appreciation to Vince and the board for bringing me on to Spok as the Chief Financial Officer.
I'm extremely happy to be here and working with an exceptional group of professionals as I have made my way through the company during my first month.
My first month has confirmed that there is not a more exciting time to join Spok.
Our transformation and the investments that we are making in our systems, people and marketing programs is the right strategy to position the company to capture the large market opportunity ahead of us and drive sustained, long-term growth.
Our team clearly recognizes and appreciates the importance of Spok's mission, which is to deliver clinical information to care teams when and where it matters most, to improve patient outcomes, and I am certainly delighted to be part of it.
Now let me give you a little more detail on our financial performance in the first quarter.
And again, I would encourage you to review our first quarter Form 10-Q, which we expect to file later today, as it contains far more information about our business operations and financial performance than we will cover on this call.
As Vince noted, we were pleased with our overall operating performance in the first quarter.
Key drivers of our financial performance during the quarter were software maintenance renewal rates that continue to exceed 99%, coupled with a lower-than-anticipated level of churn in both paging units and wireless revenue.
Continued operating expense management has allowed us to mostly migrate the impacts of our planned investments in products, research and development expenses.
We also continue to make steady progress toward our long-term business goals that Vince mentioned earlier.
But overall, we believe we are off to a great start in 2017.
This morning, I will review four key areas that influenced our first quarter financial performance.
They include, one, factors related to first quarter revenue; next, selected items which influenced first quarter expenses; third, a brief review of the balance sheet, including deferred tax assets; and finally, an update on our financial guidance for 2017.
As usual, if you have specific questions about these items or any of our quarterly financial results, I will be happy to address them during the Q&A portion of this morning's call.
With respect to revenue for the first quarter, consolidated revenue totaled $41.4 million.
Of that total, software revenue contributed $15.6 million, while wireless revenue comprised $25.9 million.
Our software revenue represented 37.6% of our total revenue in the first quarter of 2017, which is in line with the composition in the first quarter of 2016.
Our first quarter software revenue reflected an increase of more than 5% in maintenance revenue to $9.5 million compared to the first quarter of 2016.
And software operations revenue totaled $6 million in the first quarter, and as noted on previous calls, software operations revenue is now largely recognized on a ratable basis.
The increase in maintenance revenue reflects our continuing maintenance renewal rates in excess of 99% from our installed software solution base and the increase in new logo accounts with attached maintenance contracts during 2016.
Turning specifically to wireless revenue.
It was $25.9 million in the first quarter, down only 2.5% from the fourth quarter of 2016.
This was driven by 3 factors: strong performance of our sales team, solid retention and stable ARPU contributed to this result.
Also please note the additional schedule that we have included in the news release, detailing the components of our software and wireless revenue.
Looking at operating expenses.
We maintain our focus on creating efficiencies in our expense base in order to offset some of the planned increases in our product research and development category.
During the first quarter, we reported consolidated operating expenses which excludes depreciation, amortization and accretion of $36.8 million, only a slight increase from $36.3 million in both the year-earlier quarter and fourth quarter of 2016.
In the first quarter of 2017, total research and development cost totaled $4.1 million.
This represents a 41% increase from the first quarter of 2016 and is $400,000 higher than the fourth quarter.
This year-over-year increase reflects Spok's planned expansion of our operations in Minneapolis.
Earlier in the year, we had announced that Spok would be increasing its presence there by approximately 45%, with the addition of more than 60 employees over the next 2 years.
These strategic investments will enhance our Spok Care Connect product, a unique health care communications platform which is transforming how hospitals coordinate care.
With regards to headcount.
Full-time equivalent employees, or FTEs, increased to 599 at the end of the first quarter compared to 587 FTEs at December 31, 2016, as we continue to adjust employee levels to meet the changing requirements of our business and continue our expansion in the Minneapolis office.
Looking ahead, we expect recurring payroll and related expenses will reflect the level of our investments to grow software revenues and bookings and to support the company's goal for wireless revenues and infrastructure.
Our capital expenses in the first quarter were approximately $2.9 million and in line with the guidance we had provided last quarter.
Capital expenses are incurred primarily for the purchase of pagers and infrastructure to support our wireless customers.
We do not expect any significant changes to the level of our capital expense requirements for the balance of 2017, and expect to be within the guidance range for the year.
Looking at our deferred tax assets or DTAs.
We had approximately $72.8 million of DTAs at March 31, 2017, with no valuation allowance.
These DTAs allow us to shelter virtually all of our regular federal taxable income, although we are required to pay a minimal amount in federal alternative minimum tax.
These DTAs primarily consist of net operating losses that will expire in the years 2021 through 2029.
Based on the availability of these DTAs, we do not expect to pay a significant amount in federal income taxes for the foreseeable future.
Turning to the balance sheet and other financial items.
The company generated approximately $3.7 million in cash from operating activities during the first quarter of 2017, and this was used to fund the increased rate of capital expenses.
We ended the quarter with a cash balance of $118.9 million, down approximately $6.9 million from the prior year-end.
Cash used during the quarter was utilized to pay the regular quarterly dividend as well as the special dividend that was declared in December 2016 but paid in January of 2017.
Finally, with respect to our financial guidance for 2017 and based upon our performance in the first quarter, we are maintaining the guidance we've previously provided, which projects consolidated total revenue to range from $161 million to $177 million; consolidated operating expenses, excluding depreciation, amortization and accretion, of $153 million to $159 million; and capital expenditures to range from $8 million to $12 million.
I would remind you that our projections are based on current trends and that those trends are always subject to change.
With that, I'll turn the call over to our President, <UNK> <UNK>, who will update you on the first quarter's sales and marketing activities.
<UNK>.
Thank you, Mike, and good morning.
During the first quarter of 2017, our sales and marketing team delivered software bookings of $19.8 million.
This is up 31% year-over-year.
Our forward momentum is building, and our strategy is resonating with our customers.
Market recognition and appreciation for the value of our enterprise health care communications platform is increasing, demonstrated by the level of conversations we have with customers and prospects, the volume of activity we see on our website and most notably are the stories behind our quarterly bookings.
Maintenance renewal rates remain strong at 99%, and we welcomed two dozen new Spok customers to the Spok family, primarily in the health care and government sectors.
Health care remains a key part of our growings, comprising ---+ of our growth, comprising 77% of overall bookings in the United States for the first quarter.
While much of that business is our present customers who are expanding their enterprise communications and adding more of our services and solutions, 40% in the first quarter came from new hospitals and health systems that have never worked with us before.
These organizations joined a prestigious list of customers that includes all of U.S. News & World Report's 2016, 2017 Best Hospitals Honor Roll.
These 20 adult hospitals and 11 children's hospitals rely on our solutions to help them provide the best care.
Our solutions continue to resonate with all segments of the market.
Among our new customers this quarter is a large health system with multiple hospitals around the country.
This customer is looking to enhance scheduling coordination with HIPAA compliance communications while maintaining the flexibility to send messages to a variety of staff devices, including pagers, smartphones and WiFi phones.
This health system also wants to support communications on a centralized platform that can meet high performance availability and reliability requirements.
After completing a thorough market evaluation, this customer selected us because Spok Care Connect is the only proven solution in the market today that can meet all of these expectations.
Another one of our new health care customers in the first quarter is a small regional hospital in the Western United States with a world-class reputation in orthopedics.
This customer wants to unify their multiple communication technologies into a single consolidated platform.
Working with Spok, they plan to simplify their on-call scheduling methods, streamline [code call] processes and increase contact center efficiency by reducing or eliminating many manual tasks.
They will also standardize their myriad of messaging technologies and promote a single, secure solution to improve care team communications.
Secure workflows are top of mind for many hospital leaders, and we are seeing an overall rise in demand for our messaging solutions.
For example, a large health system customer in the Eastern United States was looking to enhance the security of hospital communications of staff who use their personal mobile devices while improving the workflows and efficiencies for clinicians and patients.
This customer already relies on us to support their contact center emergency notification processes and secure text messaging for many of their solutions.
With positive feedback from the doctors currently using our secure messaging solution, this customer is expanding it across the enterprise to all clinical and many nonclinical staff who support patient care.
We continue to see utilization of mobile devices and solutions vary by roles within our customer environments.
In fact, in a recent survey with CHIME that we will publish in the coming weeks, CIOs reported that the top reason for using pagers is appropriateness of the device for specific employee groups or departments.
In addition to a secure messaging solution, this customer is adding thousands of encrypted pagers to their solution mix to help ensure no protected health information is sent accidentally to an unsecured device.
All 3 of these examples are six-figure deals that demonstrate the strategic, enterprise-level investments hospitals are making to capture the value that our unified health care communication platforms makes possible.
Health care comprises the largest percentage of our business, but public safety remains an important part of our strategic plan.
Public safety customers around the world rely on our solutions to support critical communications as well as emergency call handling at the 911 dispatch centers.
Our largest deal of the quarter came from a public safety coalition in the Southern United States that has been a paging customer for over 15 years.
This correlation of agencies wants to expand the capabilities of their communication among all personnel, regardless of whether they have a pager.
The customer needs a messaging solution that can send individual or group messages, emergency notifications and keep all contact information in a centralized directory.
This customer also wants to accomplish these goals with a single vendor.
Spok is the only company that could meet all of these needs.
After an organization purchases Spok solutions, our highly skilled professional services group gets to work delivering an exceptional experience and setting the customer up for success.
For example, in first quarter, these experts helped a large hospital in Southeastern United States implement emergency notification and secure messaging capabilities.
Our services team offered continual guidance to this customer during clinical workflow design, data collection, planning and change management activities to promote end user adoption.
Equally important, our team helped this hospital identify measurable criteria that will be used to evaluate the success of their project at decreasing average door-to-balloon time for heart attack patients, improving user satisfaction scores and reducing IT costs.
Overall, the satisfaction scores of our professional services group continue to trend upward, and 93% of customers rate our services as good or excellent, testifying to the exceptional caliber of this team.
Before turning things back over to Vince, I want to provide an update on our marketing activities.
Our marketing team is responsible for expanding our global content and web development, lead generation and event planning efforts.
Ongoing investment and activities in these areas help us drive leads and fill the sales pipeline.
A highly visible example is our new website that launched in January.
This was a yearlong project for the team and includes changes to improve our visibility in searches, provides a better experience for visitors on mobile devices and further promotes our Spok Care Connect story.
These efforts are proving to be effective, and already we have seen a 17% increase in traffic in the first 2 months following the site launch, which has been driven largely by stronger rankings on search engines.
Marketing is also responsible for planning and coordinating Spok's presence at a large number of trade shows throughout the year.
There were 2 notable shows for us in the first quarter.
HIMSS is one of the largest health care conferences in the United States and a great opportunity for us to demonstrate our capabilities.
This year in Orlando, we increased our engagement with clinical audiences by demonstrating the powerful integration and clinical context Spok provides.
Our solution was featured in the interoperability showcase as well as in booth presentations by our Chief Medical Officer and our Chief Nursing Officer.
Two customers also joined us to share their success stories with visitors in our booth.
Our media coverage following this event more than doubled over last year, and our conversations with those visiting our booth have reached new levels of strategic vision for enterprise-wide communications on hospitals.
The qualified leads identified from this show increased by 25% over 2016.
We also felt the growth of our brand recognition at AONE, a show we attend in Baltimore at the end of March that attracts nursing executives from all around the country.
Our Chief Nursing Officer led conversations about clinical workflows at this show, including a focus group to encourage in-depth discussions with key members of this audience.
She has been showing how Spok can help nurses improve communication and workflows, and our message is resonating.
We had multiple people stop by the booth to share with us how Spok solutions were making a difference at their hospitals.
Lastly for marketing, our social reach is showing significant growth.
Year-over-year, our following has increased by 80%.
Engagement with our audience, such as likes, retweets and comments, is up 117%, and unique views of our Spokwise Healthcare blog grew by 17%.
Looking forward, we expect continued market demand for integrated communications, especially in health care.
As mentioned on our last call, investments in research and development are ongoing.
We are hiring skilled professionals in our Minnesota location to help us accelerate product development, meet the demand for Spok Care Connect and enhance our solutions for clinical workflow improvements and better patient care.
And our customers are reinforcing that an enterprise-wide communication platform fulfills their needs and is the right strategy for Spok.
With that, I'll pass it back to Vince.
Thanks, <UNK>.
Before we open the call up for your questions, I want to comment briefly on a couple items.
First, I want to update you on our current capital allocation strategy.
And second, I want to review our key goals and business outlook for 2017.
With respect to our current capital allocation strategy, our overall goal is to achieve sustainable, profitable business growth while maximizing long-term stockholder value.
Toward that end, the allocation of capital remains a primary area of focus.
Our multi-faceted capital allocation strategy includes dividends and share repurchases, as well as key strategic investments that include augmenting our product, development, operating platform and infrastructure.
It also includes the potential for acquisitions as we have discussed in the past.
Even though we have not been satisfied with valuation expectations for most of the targets we have reviewed, we continue to explore M&A opportunities and conduct business due diligence.
Yesterday our board authorized a $10 million share repurchase basket for the balance of 2017.
Also, as we have previously stated, we are committed to continue paying our $0.125 per share quarterly dividend this year while we aggressively increase our investments in our company to benefit the future and create long-term stockholder value.
We're a company in transition, and management and our board believes that financial flexibility over the long term is important to the success of the strategy.
We review our capital allocation posture on a quarterly basis and remain comfortable that we are striking a reasonable balance in serving the longer-term interest of shareholders.
We will continue to evaluate our capital allocation strategy and communicate our plans to you with respect to dividends, share repurchases and other uses of capital each quarter when we report earnings.
Finally, with regard to our key goals and business outlook, we believe our first quarter activities and investments have positioned us well for a successful 2017.
In order to take advantage of the large opportunity in our chosen markets, our business goals for the year are simple and straightforward.
They include accelerating the development of our products and services, building a stronger infrastructure, aligning resources and focusing where most needed, and increasing Spok's long-term growth potential.
We'll do all this with the ultimate goal of creating long-term stockholder value, fulfilling our commitments.
Wrapping up, Spok continues to build an industry-leading reputation.
We remain committed to our core values of putting the customer first, providing solutions that matter, innovation and accountability.
We believe our past results and future plans reflect those values and beliefs.
At this point, I'll ask the operator to open the call up for your questions.
We'd ask you to limit your initial questions to one and a follow-up.
Then after that, we'll take additional questions as time allows.
Operator.
One of the things, Steve, that happened this quarter, one of our salespeople came to us, and he had gotten a big six-figure deal and said, gee, look at this, they bought everything from us.
He went right down line and said, one, two, three, four, five, every single thing we offer, he bought in the platform in our Care Connect Suite.
And <UNK>'s comment to him was ---+ and to our product team is we need to come up with something else because we've got these large customers and we've got this blue-chip customer base, we need to add functionally to our suite.
So there's a number of things we can do to do that, Steve.
One of them would be an acquisition.
And again, I think you've known us long enough to know that we're not going to be crazy about valuations that don't make sense and multiples that are in the stratosphere, particularly multiples of revenue when the companies are losing money.
But another way to do it would be to do another project catapult internally, do some more investment.
But we wouldn't do that until we see success with the first investment.
So we look at this on a quarterly basis.
We talk about it longer-term, but we look at it on a quarterly basis.
For this quarter, we decided that we continue the dividend, we institute a $10 million basket for share purchases, and we'll review that as we go forward.
Our goal right now is to be successful prosecuting the business plan that we have right now and delivering on that business plan.
And then in the future, if we're successful at that, I think there will be other opportunities to leverage that success and create even more opportunity for bookings and profitability over the long term.
Yes, so here's the thing, and we don't really give, like, guidance on bookings.
And bookings in any software company are always going to be lumpy.
Some companies don't even report their quarterly bookings; they just wait until the end of the year and report it all at once.
We do.
What we did today is we reiterated our guidance for 2017.
Our revenue guidance, our operating expenses, our CapEx.
Embedded within that guidance is our expectations for booking.
So when we sit around and we do our management report and we report to the board like we did yesterday and we look at our latest thinking forecast, right now, we are showing that we are making our plan this year.
And in fact, in some cases, we're doing better than our plan this year.
And so that doesn't mean that you can't have a big quarter of bookings, then a smaller quarter of bookings and then a big quarter of bookings, or maybe you could have 3 quarters that are fairly equal.
When you're doing these pipelines and you're looking at some of these larger deals, particularly the six-figure deals, they take longer.
You're going to committees, you're meeting with CIOs, you're meeting with CFOs, and they can take longer.
And then sometimes, all of a sudden, you can have a bunch hit, and then sometimes you can be a little dry on it.
I will tell you that when we go through the pipeline with our sales team now, compared to, say, how we did it a year ago and we're looking at the size of the deals, there is a marked difference in the size of the deals in the pipeline.
Now we are seeing multiple, multiple.
I mean, we looked yesterday at pages full of large deals, whereas in the past, you'd have a couple six-figure deals and then there'd be $70,000, $60,000, $50,000 and add-on type things.
So as we've pivoted to the suite approach, we're training our people to sell the enterprise suite, we're recruiting and hiring sales management and sales talent more comfortable in that environment, talking to the suits, going in there and doing the buyer process map and getting to the right folks, we're seeing larger deals populate in that pipeline.
That's the good news.
Bad news is sometimes larger deals just take a little bit longer to bring in.
But you're more effective when you do larger deals as a software company, and so that's what the goal is.
So hopefully, that helps you.
If not, bookings in softwares are never going to be ---+ it's not like the paging business where things are recurring and you can implement ---+ incrementally up or down each month.
It's always going to be a little bit lucky, but we consider all of that within our forecast and within our guidance.
Any other questions.
CHIM<UNK>
It's C-H-I-M-E, stands for College of Healthcare Information Management Executives.
It's a forum for essentially CIOs in health care to get together.
Yes, those from the health care organizations.
Okay, if there's no other questions in the queue, then we're going to wrap up.
So thank you very much, everyone, for joining us this morning.
We look forward to speaking with you again when we release our second quarter results, which will be in July.
And everybody, have a great day.
Thank you.
| 2017_SPOK |
2017 | TRMK | TRMK
#Good morning.
I would like to remind everyone that a copy of our second quarter earnings release as well as the slide presentation that will be discussed on the call this morning is available on the Investor Relations section of our website at Trustmark.com.
During the course of our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
We would like to caution you that these forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission.
At this time, I will turn the call over to Gerry <UNK>, President and CEO of Trustmark.
Thank you, Joey, and good morning, everyone, and thanks for joining us.
With me this.
morning are <UNK> <UNK>, our Chief Credit Officer; <UNK> <UNK>, our Chief Financial Officer; and Tom <UNK>, our Bank Treasurer.
We had a very solid quarter in the second quarter.
Although I'll tell you there was a little bit of noise and hopefully, we can help clarify that as we go through this presentation.
We've reported net income of $24 million or $0.35 per share in the second quarter.
There were several nonroutine items I'd like to call to your attention.
First, we terminated our defined benefit pension plan during the quarter, which reduced after-tax income by about $11 million.
Second, we had charges related to our merger with Reliance Bank in Huntsville, Alabama, and that reduced our net income by about $2 million.
And then, in addition, we received nontaxable proceeds related to a life insurance policy we acquired as part of a previous acquisition that increased net income by about $5 million.
Adjusting for these 3 items, our net income in the second quarter was $32 million or $0.47 per diluted share.
I'd like to briefly provide you with an update on our strategic priorities, which are on Page 3 of our presentation.
We continue to make advancements regarding profitable revenue generation.
Loans held for investments increased $291 million or 3.6% from the prior quarter and $891 million or 12% year-over-year.
Revenue, excluding interest income on acquired loans and the life insurance proceeds, totaled $141 million, up 1.9% from the prior quarter and 6.4% from the prior year.
FTE, net interest income, excluding acquired loans, totaled $100.7 million, up 3.5% from the prior quarter.
We completed, as I mentioned earlier, our merger with Reliance Bank on April 7, and had a seamless operational conversion and integration process.
The estimated fair values of loans and deposits acquired were $117 million and $166 million, respectively.
Our efforts to manage expenses and improve profits, these were clearly evident in the quarter as core deposits ---+ core expenses, which exclude ORE expense, intangible amortization, merger charges and pension plan termination expense remained well controlled.
Core noninterest expense in the second quarter totaled $99.3 million and compares favorably to the $98.7 million in the prior quarter, particularly when you consider the additional ongoing operating expense from the Reliance merger that closed on April 7.
We did experience an increase in nonperforming loans during the quarter.
The increase was primarily the result of a single health care related credit moving to nonaccrual status.
Other real estate, however, continued to decline.
And recoveries exceeded charge-offs.
I'd now like to call on <UNK> <UNK> to maybe discuss loan growth and credit quality in a little bit more detail.
Thank you, Gerry.
Looking on Page 4, you can see that we had continued strong diversified loan growth during Q2 as well as you can see year-over-year both from a type and a geographical standpoint.
We're very excited about that and pleased.
The year-over-year growth kind of breaks down along the lines of CRE, it's about 53% of that growth; C&I, 19%; public finance, about 15%; and then some owner-occupied real estate was about 4%.
So as indicated, it's well diversified as it relates to the various product types.
Our energy book was pretty steady during the quarter.
We had a reduction in the exposure, couple of loans paid off and moved out of the company.
From an outstanding standpoint, it was fairly flat.
It still remains a modest part of our overall book at about 3% of outstandings.
Looking on to page 5.
As Gerry indicated, we did have one large new nonperforming credit of roughly $14 million.
So, therefore, all of the increase of $12.8 million is attributable to that one credit.
It is in the health care area and specifically, it's in the long-term acute-care hospital, management and owning type of entity.
We unexpectedly had a Chapter 11 bankruptcy filing.
Therefore, once we dug into that a little bit, we made the determination that the credit should be a nonaccrual.
Therefore, we moved it there.
From a reserving standpoint, we still have the pool reserves associated with that credit as a substandard credit, and then we'll go ahead and true that up as we get into the latter part of Q3, once we get some updated values.
As it relates to ORE, that's a very positive story that we had a reduction of $6 million during Q2.
We sold $8 million worth of property, and had a ---+ and we had a gain on sale of roughly $1 million on those $8 million worth of properties we sold.
We're very pleased with that.
Gross charge-offs, obviously, are benign, had some nice recoveries.
Therefore, we're net recovered for the quarter.
Overall loan loss reserve remains adequate, picked up 1 basis point this quarter, but it just remains in line with what we believe to be the risk embedded in the portfolio today.
If we look over on Page 6, you can see on our acquired loans, we had a yield of 7.96%.
A little bit of that is produced by a few recoveries we had of 1.2% of that 7.96%.
We do expect to see our yields going forward in the Q3 to be in that 5.5% to 6.5% range for our acquired book.
During Q3, we also expect to return back to may be a $20 million to a $30 million reduction in outstandings.
We did, obviously, trend up this quarter by $97 million as a result of the Reliance acquisition, which added in a $170 million at the time of the consolidation.
But we also continue to see some paydowns and payoffs, and that netted out to be $97 million increase for the quarter.
Gerry.
<UNK>, thanks for the update on the ---+ on loan growth and credit quality.
One of our greatest strengths is our low-cost core deposit franchise.
And I believe that it will be a distinguishing factor in a rising rate environment and thought we would go into a little bit more detail about where we are with our deposit base.
So I'd ask Tom <UNK> if he could talk about our deposits and the net interest margins.
I would be happy to Gerry.
Turning to Page 7.
Total deposits increased $319 million or 3.2% during the quarter.
Excluding the Reliance merger, deposits increased $153 million or 1.5% from the prior quarter.
We continued to maintain a favorable mix of deposits with 30% noninterest-bearing deposits and roughly 60% of deposits are in checking accounts.
Our cost of deposits rose 4 basis points during the quarter to 20 basis points, which represents an effective deposit data of about 16% relative to the Fed's March rate hike.
Let's turn our attention to revenue on Page 8.
FTE, net interest income, totaled $107 million in the second quarter, up $4.5 million or 4.4% from the prior quarter, which resulted in a net interest margin of 3.49%, unchanged from the prior quarter.
Excluding acquired loans, the net interest margin was 3.37%, down 1 basis point from the prior quarter.
<UNK> will provide an update on noninterest income.
<UNK>, thank you.
At this time, first the discussion we've had to go over the second quarter results has been helpful.
But at this time, we'd like to open it up for any questions that you might have.
Yes, thanks, Brad.
So essentially what we experienced ---+ let me back up, we think about the guidance we gave back in January for the year where we were projecting very modest compression in core net interest margin, call it mid-single-digit basis points.
And we talked about how there may be some upside to that to the extent that our realized deposit betas came in lower than modeled.
That is essentially what you've seen year-to-date.
And so basically whether you look at it year-over-year or on a linked-quarter basis, you see increases in loan yields basically being offset by increase in deposit cost.
I can tell you that as you would intuitively expect as far as realized betas, personal, consumer betas are very low; commercial, larger accounts are somewhat higher; and then the largest betas, we're actually experiencing are in public fund deposit category, although that's a relatively small portion of the deposit base.
So in terms of guidance going forward, not much has changed in terms of the composition of the balance sheet.
So it continued to be the case.
We're projecting it relatively flat to modest decline in core net interest margin.
But again because of earning asset growth of mid- to high-single-digit core earning asset growth year-over-year, you should expect to continue to see mid- to high-single-digit core NII, net interest income, growth year-over-year.
<UNK>, this is <UNK>.
Let me give you a little bit more of color on the credit itself.
Here again, this is a private company who's in the business of managing and owning these long-term acute care hospitals.
We were monitoring their credit, obviously, like all the credits in the portfolio very carefully.
This was very much something that came out of the blue for us.
We know they're ---+ we're very familiar with the regulatory changes in the environment, the various areas within the health care industry are facing, and their challenges and benefits to changes are all different.
But in this particular case, this was one where there was really no early indicators from a financial standpoint of any distress and, therefore, the filing was a little bit of a surprise to us.
It is a participation we got 4 of the banks ---+ 3 of the banks besides ourselves involved.
And when the filing occurred, we just got to the bottom of what we could find out about why it happened.
Now we're moving to the bankruptcy process and there will be hearings, as you can imagine, starting up next month.
And we'll be very actively involved in that and it ---+ and then we'll just see where it goes from there.
We will be getting updated values on all of our real estate as part of the impairment process that will formally be done in Q3.
And as I mentioned earlier, we did retain all of our reserves that came through our pooling process as a substandard credit.
So we feel like we were in pretty good shape from a valuation standpoint, but as we get the updated values, we'll be able to determine for sure where we are and, of course, either release reserves or use reserves as we right ---+ as we adjust the credit to the appropriate size.
As it relates our health care book from an outstanding standpoint, we're about $547 million and that's going to be about 41% of risk-based capital.
Having said that, it's very diverse in terms of the types of health care customers we have from nursing home facilities to physician offices, just your routine typical, general medical and surgical hospitals, specialty hospitals similar to ones we just talked about there, and they want particular credit.
Then there's going to be a number of other type of emergency-type centers that are involved in that mix.
So some of those have been held by changes that have occurred over the last several years, some of them have been impacted more, but most ---+ all of our customers have done a really good job.
Just like in the energy space, our health care customers have done a good job of adjusting their expense base relative to the changes in reimbursement and things of that nature.
So we're very comfortable.
We took a little look into the portfolio, specifically after this one popped up, looked at about 55% of the exposure, about 58% of the outstandings on the higher larger credits.
Didn't see anything that concerned us, didn't make any great changes, didn't make any accrual status changes.
So we did look at it to see if there was something we were missing as it related to the one that popped up, and we didn't see anything to that effect.
What we saw was companies who were running their business and taking the appropriate actions based upon changes in their industry just like we have in the banking industry as well as the energy sector.
So we felt very comfortable with our health care book.
<UNK>, I want you to comment on loan growth, and I'll comment on the additional FT<UNK>
Sure.
I'd be glad to, Gerry.
And as mentioned earlier, <UNK>, what we are very pleased about especially this quarter and even year-over-year and really since we started seeing some real uptick and growth back the very beginning of '14 is the diversity in the portfolio.
This ---+ in Q2, we saw, on the C&I side, about $94 million worth of growth.
That's an area where, like all banks, we would love to see growth in that category and preferably well priced, but you can't always have both.
But nonetheless, we have ---+ we did see good solid growth on the C&I side.
On the CRE side, we continue to see good opportunities.
We continue to be very selective, and especially in certain categories.
Obviously, multifamily is one as well as hospitality that we're very selective and ---+ but the quality of the deals remain very solid.
The pricing is actually improving on the ---+ in the CRE opportunities we're seeing.
So we're very pleased with that, and we're pleased with the diversity of the geographical makeup of the increases we saw in Q2 as well as year-over-year.
We are seeing some opportunities in some public finance areas throughout Mississippi and Alabama, and then we're continuing to see opportunities on the construction side as well as the existing side of CR<UNK>
And then <UNK>, as far as the FTE hedge, you're exactly right.
The hedge has been in revenue-producing areas.
3 areas primarily.
First, the mortgage company.
We've added new originators and some processors, but primarily originators in the Alabama and the Florida markets.
Next, in the insurance area, we've been adding new producers and existing producers in terms of bringing them in to the company.
And as you know, in that business, most businesses, most insurance agencies are setup with some noncompete, so it takes a couple of years to get through that.
But as we look at pricing multiples for insurance agencies out there, they are relatively high if you compare them on a historical basis.
So we've chosen to grow through adding and hiring both existing and new brokers to that business.
And then the third area is in the lending area, where we have continued to add CRMs in certain markets where we see growth possibilities that we just don't have the lenders in our existing area.
So those are the 3 areas.
On the other side of the fence, we'll continue to try to find ways to improve productivity and improve our processes, so that we can reduce some of the operating expense areas.
And then also continue to look at our branch distribution network to see if there are opportunities to improve that, yet continue to protect this customer ---+ this customer and deposit base we have.
The anomaly was caused by the life insurance proceeds, which was tax exempt that we had in revenue.
So that's what the drop it for the quarter.
Yes.
In addition, Gerry, I think we reinvested in tax credit and added to that reduction in the effective tax rate as well.
I think we have tax credit benefited by couple of hundred thousands.
But it seems going back up in the low 20s.
<UNK>, this is <UNK>.
It was a combination.
We did see some ---+ we did see quite a bit of new opportunities that were fully funded as they came on the books, and then we did see some funding up of some other credits that we ---+ that were already existing facilities.
But it was well diversified in terms of industries, industries that we do routine business and are very familiar with.
So it was pretty much Mississippi, Tennessee and Alabama on the C&I side that drove the growth that we experienced.
But we were very pleased to see that pickup.
First quarter, we didn't see a lot of growth on the C&I side and that really was the same in the fourth quarter of '16.
So to see it pick up, we were very pleased with that and hope that trend will continue.
And, I guess, from that perspective, what we see and what we've kind of always looked at is that net number being in that $5 million range.
So far this year, we've seen about $2.2 million worth of net ORE expense.
In this particular quarter, Q2, we saw a little reduction in expenses, and we saw a little pickup in the gain on sale versus Q1.
So between the combination of the 2, that resulted in the ---+ basically the improvement by about $1.3 million, $1.4 million quarter-over-quarter.
We would continue to expect to see some opportunities for some gains on sale as we go out through the rest of the year, and we're very hopeful that the expense side as we began to continue to lower the amount of ORE recurring the expense side will come down as well.
So I think we got it in the past around a net ORE expense of around $5 million.
We're about $2.2 million, $2.3 million through the first 6 months.
So I think we still feel comfortable with that, but we, obviously, are going to work hard to see if we can pick up some additional gains on sale and keep reducing the expense side.
Thank you.
This is Gerry <UNK>, and let me say thank you to everyone who joined us this morning.
We appreciate your interest in Trustmark and our opportunity to review our second quarter results.
We look forward to discussing third quarter results in late October.
So until then, again, thank you for your interest in Trustmark, and we will see you there.
| 2017_TRMK |
2016 | DIN | DIN
#Thanks, <UNK>, and good morning, everyone, thank you for being on the call today.
Here are the headlines for the second quarter.
We delivered year-over-year growth in second-quarter adjusted EPS despite soft comparable sales at Applebee's and IHOP.
We also generated free cash flow of $56 million in the first half of the year.
IHOP's second-quarter comp sales increased by 0.2% while lapping over the brand's highest quarterly sales increase in over a decade.
At Applebee's we saw a decline of 4.2% in comp sales for the quarter and I will elaborate on this shortly.
As a result of the sales performance at Applebee's and IHOP during the first half of the year and our outlook for the back half, we are revising our 2016 comp sales guidance downward for each brand.
We still expect come sales improvement in the second half, but given the year-to-date results we think it is prudent to reset the ranges.
<UNK> will elaborate on these revisions in his remarks.
Applebee's has been number one in casual dining for nine consecutive years as measured by total system sales.
Our brand remains strong and we continue to drive brand differentiation for the long-term while testing and implementing short-term traffic driving initiatives.
In May we announced the nationwide launch of certified USDA choice hand cut steaks on a wood fire grill using real American oak.
Over 40% of our menu items are now being cooked on the wood fire grill from steaks and chicken, salmon, pork chops and vegetables all now have that smoky flavor guests love.
We are well aware of changing consumer needs and demands, so we are testing several revitalization initiatives to address them.
To give you a sense, they include items such as value messaging, revitalizing the bar, Carside To Go and delivery options, the remodels and new prototype programs, leveraging social and digital media to interact with guests in real-time, and simplifying the menu which includes the deletion of 22 menu items this year alone to make room for new menu innovation.
In addition, with an average check of under $14, Applebee's is still near the low end of the scale for casual dining and provides guests with great value which we define as more than just a price point.
And we have become more relevant to the younger generation, almost doubling the percentage of millennials in our restaurants in the last four years.
As I said before, changing perceptions of Applebee's and revitalizing the brand will not happen overnight.
However, we are already beginning to see a change.
And there is more good news, we conducted proprietary research after the launch of hand cut wood fire platform and discovered that 95% of guests that purchased an entree prepared on the wood fire grill said they would repurchase it again, due to the overall taste and quality of the item.
This is the start of changing the Applebee's story which takes time.
However, this quality improvement was met head on by consumers looking for value.
Based on what we have learned our best hypothesis is that the platform's performance was impacted by not communicating its value proposition.
We are currently working very closely with many of our franchisees to test and validate various value messages to help with short-term traffic.
In addition to testing several different value messages with TV, we are also launching local promotional activity across the country to assist with short-term traffic needs.
And more good news, while all of this additional traffic generating work is underway, we have made real progress with improved service at Applebee's.
Overall satisfaction scores have increased 500 basis points since the launch of hand cut wood fired and 64% of our restaurants are now rated A or B operationally.
To recap, we are changing the story at Applebee's and revitalizing the brand.
This will not happen overnight.
A major step in our journey was the introduction of the new wood fired cooking platform which, as I said earlier, impacts over 40% of our menu and it doesn't end there.
We are testing and validating several revitalization initiatives while laser focused on enhancing our service to the guest, a key component of price value.
And we are testing several value related messages to give guests reasons to visit our restaurants and come back more frequently in the short-term.
We are number one in casual dining and we serve over 1.25 million people a day, we will not be deterred.
Our franchisees are supportive and want to be part of the revitalization.
Now let's switch gears to IHOP.
Despite achieving its 13th consecutive quarter of positive comp sales, IHOP sales performance wasn't what we had hoped for either.
However, it is worth noting that in the second quarter we lapped over the brand's strongest results in over 10 years, a 6.2% increase.
Additionally, we believe that consumer sentiment shifted during the quarter and caused guests to be more conservative and value driven.
On sustaining and building on IHOP's momentum, we are reinforcing our breakfast heritage and leadership position through everything that we do.
We are testing additional platforms but there is more work to be done.
We are streamlining our menu to make it easier to execute in the back of the house while continuing to build a pipeline of innovative and unique menu items.
Evolving our breakfast strength to other dayparts with IHOP's unique ability to provide a personalized offering to consumers will be a key aspect of these exciting changes.
We are driving a significant and exciting remodel program, as we have said before, and we are on track to have approximately 350 restaurants completed in 2016.
The cost of the remodel ranges from approximately $100,000 to $175,000 depending on the extent of the remodel.
We are placing a greater emphasis on our food which is made fresh to order with the use of fresh ingredients and certainly differentiates us from fast food restaurants.
As I said earlier, there are parallels with Applebee's.
IHOP also needs a compelling long-term value message, so we are communicating an even more pointed value message going forward.
One proven fact of how we'll accomplish this is by bringing back Kids Eat Free This Month.
This will be the centerpiece on our new valued strategy which we expect to drive traffic.
How we communicate these initiatives in the coming months and years is just about as important as what we are communicating.
We have a continued focus on the use of technology including social and digital media to engage with our consumers.
To this end one-on-one daily engagement is central for our social media strategy and we are capitalizing on real-time content opportunities to keep the brand relevant.
We are also challenging ourselves to raise the bar and continually strive to take our advertising to the next level.
To achieve this our new ad agency of record will assist with developing a new creative message.
The new direction we have taken will be reflected in the campaign that kicks off at the end of September to support the introduction of new innovative seasonal items.
Now turning briefly to development which is also a key part of our strategy.
As you read earlier in our guidance, we are going to guide on the lower end and suggest that we may overall open five less restaurants.
Our analysis suggests there is ample headroom to continue developing Applebee's and IHOP restaurants in the US and internationally.
We are working with our franchisees, both existing and new, to expand our footprint in rural, suburban, urban and nontraditional locations.
Additionally, we are currently assessing our longer-term international development projections and will provide an update on our progress next quarter.
And with that I will turn the call over to <UNK> to discuss briefly the quarterly results.
<UNK>.
Thanks, <UNK>.
Good morning, everyone.
I will provide a brief recap of the second-quarter's financial results starting with the income statement.
Adjusted EPS in the second quarter was $1.59 compared to $1.53 in the same quarter of 2015.
The increase was mainly due to fewer weighted average shares outstanding, lower income taxes, higher gross profit and a decline in cash interest.
These items were partially offset by higher G&A.
Regarding gross profit for the second quarter, the slight year-over-year increase was mainly driven by development by IHOP franchisees over the last 12 months and favorability in IHOP royalties and dry mix.
These were partially offset by lower Applebee's royalties and the decline in financing interest income.
Turning to G&A, on an adjusted basis to exclude nonrecurring consolidation charges second-quarter G&A was approximately $36 million compared to roughly $35 million in the same quarter of last year.
The increase was primarily due to higher personnel-related costs.
When including roughly $500,000 of consolidation cost, G&A was $36.5 million.
Please note that G&A for the second quarter also reflects lower incentive compensation accruals due to the comp sales performance of both brands in the first half of the year.
And as a reminder there is some seasonality to our G&A and the back half of the year related to our annual franchise conferences which are both scheduled for the third quarter this year compared to the fourth quarter in 2015.
For the full year we reaffirm our G&A guidance range of between $154 million and $158 million.
And please note that this includes a total of approximately $4 million of nonrecurring costs related to our restaurant support center consolidation.
And I would like to highlight that these costs do not have an impact on adjusted EPS.
We continue to closely manage our G&A.
Now I would like to provide a brief update on the restaurant support center consolidation.
The process is nearly complete and is going as planned.
Year to date we have taken approximately $5 million in charges.
Of this roughly $2.6 million hit G&A primarily for relocation and recruiting related to the consolidation.
We also incurred a charge of approximately $2.5 million in lease termination costs related to the facility in Kansas City which were included in closure and impairment costs.
We initially estimated that we would incur approximately $8 million in pretax consolidation costs solely related to the facility in Kansas City.
Our original assumption was based on the entire facility being subleased.
We now estimate that we will incur a total of approximately $5 million as a result of terminating our lease on two floors of the Kansas City building.
Our team members will be moved to one floor that we will retain.
On our tax rate, the tax provision in the second quarter of 2016 was lower due to our adjustment on state deferred taxes as a result of the restaurant support center consolidation.
Now a few comments on the cash flow statement.
Cash flow from operating activities were $54 million for the first six months of 2016 compared to $48 million for the same period last year.
The increase in cash from ops was primarily due to favorable net changes in working capital due to having paid less interest on our long-term debt and an increase in advertising funds and marketing accruals.
As a reminder, the initial interest payment on our securitized debt in the first quarter of 2015 represented five months of accrued interest through March of 2015.
All subsequent quarterly payments, including the payments made in the first and second quarters of this year, represented three months of accrued interest respectively.
The increase in cash from ops and the favorability in CapEx were partially offset by slightly lower net receipts from notes and equipment contracts receivables resulting in free cash flow of approximately $56 million for the first six months of 2016 compared to nearly $50 million for the first six months of last year.
In the second quarter we returned a total of $32 million to shareholders, which includes $17 million in cash dividends and $15 million to repurchase roughly 181,000 shares of our common stock.
Turning to our performance guidance for fiscal 2016, I would like to highlight a few revisions, so please see our press release for details on the complete guidance.
We now expect Applebee's comps to range between negative 3% and negative 4.5%.
The previous range was between negative 2% and positive 2%.
We currently expect IHOP comps to range between positive 0.5% and positive 2%.
The previous range was between positive 1% and positive 4%.
We are also making incremental investments over the next few months for testing additional marketing programs at Applebee's as part of our plan to generate traffic.
We expect this to result in a decrease of approximately $2.5 million in Q3 franchise segment profit.
Combined with the revised comp sales guidance, we now expect franchise segment profit to range between approximately $342 million and $352 million for the fiscal year.
The original franchise segment profit guidance was between $345 million and $360 million.
We will continue to review our performance guidance on an ongoing basis and with that I will now turn the call back over to <UNK> for her closing remarks.
Thanks.
And thanks, <UNK>.
To recap we delivered growth in adjusted EPS despite comp sales being below our expectations.
We also continue to generate strong free cash flow.
A significant part of our story is that we have two iconic brands: IHOP is the leader in the industry's only growing daypart and we are in the early stages of revitalizing Applebee's, one of the world's largest casual dining chains.
Getting both brands firmly back on track is our top priority.
We are taking steps to drive positive and sustainable sales and traffic with a renewed focus on value at each brand.
We also continue on thoughtfully exploring a strategic acquisition.
Finally, the consolidation of our headquarters is nearly complete.
And we are seeing the benefit of real synergies across the organization which has facilitated more effective collaboration.
The consolidation resulted in approximately 100 new hires and has brought our two strong brands under one roof.
In closing, we are confident in our plans and the strategic steps we are taking to drive the business forward.
And now <UNK> and I would be pleased to answer your questions.
Operator.
No.
It hasn't.
It hasn't made any significant ---+ real significant adjustments to our free cash flow when you look at it in totality.
And so, we have been doing what we have been doing for the last while and we are not probably going to be making any changes to that.
Sure.
So in the middle of second quarter we began the advertising that talked about the fact that we have this wood fired platform and also that we were hand cutting our new USDA choice certified steaks, so ---+ on the American oak, which is ---+ that was the major thrust.
So for the balance of the year you will see more of it about both the value messaging, but it also relates to other products that go on the wood fired platform.
So the only thing we talked about in the initial launch was about steaks.
But over 40% of the menu at this point is affected by the wood fired platform.
So the balance of the year you will see that.
So, for instance, right now we are in the middle of salads, which has ---+ many of them are on the protein that is on the salad is on the wood fired platform and also making dressing in-house.
So, it continues those quality cues, but a lot of it related to wood fired.
The reason I mentioned the testing is we think there is an opportunity to bring in a stronger value message.
So that was the marketing, if you will, and then there was PR and there was additional in-store re-messaging that we did as well with the launch.
Yes, it is very interesting.
I think you have heard me say for some time that the consumer is lumpy and bumpy and I would continue to say that.
I think in general terms there hasn't been a huge shift in market share.
What you saw a couple of quarters ago in terms of independents versus chain is very similar.
I mean we are so big to make a change in that category mix shift would take a lot.
So in general you are seeing very much the same in terms of market share and so forth that we saw, I would say even three quarters ago.
So it's not huge changes and shifts.
I think you are going to see that it would reflect probably over several quarters.
Sure.
Millennials are now over 40% of the mix at Applebee's, that is significantly higher than many of our close in chain competitors.
I don't have the way to get at the independents, but that is through the work that we have been doing both in revitalizing the brand ---+ and clearly there is no question the social and digital strategy has made a significant inroad as well.
And the bar, that is one of the advantages we have at Applebee's.
The bar does attract the millennial and we have programs to enhance it.
I think you heard in my prepared remarks about the revitalization of the bar.
Well, I will start by saying that we only have 32 franchisees in the Applebee's system who own almost 2,000 restaurant.
So this is a very well healed, sophisticated, thoughtful group of franchisees who have over the years invested millions and millions of dollars in this business.
Just like our IHOP franchisees bleed blue our Applebee's franchisees bleed Applebee's.
They care deeply about it, it is their primary business and they want to see it as successful as we do if not more so.
So they are highly committed and, as I said, they have been willing to test all along with us and continue to do so because they too believe that consumers' expectations and demands are changing.
When you have 40% or more of your consumer base is millennials, their expectations are different than a baby boomer's, if you will.
I am grossly simplifying but you get the gist.
So the needs have shifted and the franchisees I think are ---+ because they are so savvy, are willing to move with us.
If that means a closure here and there as it has over time then we figure it out and we work with our franchisees.
But I think you are also seeing more and more franchisees willing to realize if the shift of the trade area moves they move with that new trade area.
So it is not just about closures, it is about moving to new areas of growth and development and they are very focused on that.
So they have been terrific partners in that whole arena.
Yes, as you know, we announced ---+ gosh it has probably been two years ago that we thought Applebee's could do a couple hundred more restaurants and that was over the old modeling work that we have done.
But Jim has been with us for a year and has done even new and more sophisticated modeling and that number is still very relevant.
So that work is in progress.
The mapping that he does individually by DMA and we ---+ each franchisee is a very thoughtful review of where they are, where they could grow and what the map suggests as either trade areas develop or grow or move.
And that work is going to be in progress ---+ well really the end of this year and the beginning of next year to really hone in on that sophisticated level of development and where we might be able to go.
What will be interesting in that work, and I've really never talked about this before, much similarly to the work we are doing at IHOP is whether there are fill in opportunities in existing markets where you use a smaller footprint or you look at different ways to outlay that marketplace.
That is the work that Jim and his team actually have been working on, will be finalizing and then literally sitting down with each individual franchisee.
These are ---+ all of these franchisees are sophisticated developers, but they want that additional mapping work, which we are in the process of finalizing.
So, that will be an opportunity for them to really stretch their wings and can look at the growth potentials by DNA.
Some have more potential than others.
I think you will always ---+ and I have been saying this for years on both businesses.
There is always buyers and sellers, that is no different this year than it has been any other year.
You will always see a couple of transactions from an existing franchisee to a new franchisee, whether they are in the system today or not.
Our recruiting efforts this year, just like any other year, have produced a handful of interested parties who would like to become franchisees.
So, I think that buying and selling, if you look over the last, gosh, I will say five years, in any given year you have had a handful of franchisees sell and a handful of either new franchisees or existing franchisees buy.
I don't see that as any different this year.
Yes.
A little bit higher than that mid-4s.
So let me start off with saying we have said for several quarters when asked that question that we are very comfortable with where our leverage ratio is today, we feel very good about it.
But I will let <UNK> answer in terms of the [refi] specifics.
No, I think that is fair.
We can't really refinance the securitization for a while anyway and it runs out ---+ the total period of it is seven years and it runs through 2021.
And so, there is no urgency to do that.
We feel pretty good about where we are and as it stands now don't propose to make any significant changes to it.
There is some room to borrow more under the securitization potentially, but we will have to evaluate that as needs arise.
And then just to refresh your memory, we do have the revolver, which is $100 million, we have that revolver as well.
And (inaudible) drawn against the revolver like [5].
About 5.
Yes, it is really tied up in the letters of credit, but we always have the revolver as well.
Sorry, I didn't mean to interrupt.
Well, a fair bit of that money is advertising and gift card related and all that.
So what you should look at is a metric that we talk about when we talk about our annual free cash flow and the amount we return to shareholders.
And that has been pretty consistent over the last couple years and that is sort of the way to kind of look at it.
Yes, so great question, really good question.
I think there is two things to remember.
In the casual dining space you have a lot of light user base.
And so, we recognize, and we have said this repeatedly, that it takes time for people to try the items, come in and actually do it.
We have a huge ---+ as in all of casual dining there is a huge light user base, so it does take time.
So I don't want to underestimate the importance of ---+ people make it clear, when they are ready to go in they will try at it and they can't wait, that type of thing.
So we know that.
The other thing I mentioned is it is less about the price that actually franchisees are charging for it, it was the fact that we didn't put a price point on television.
So our hypothesis is some people may have thought, gosh, this is going to be expensive.
So, we have a way to counter that with the work that we are doing for the balance of the year.
But I think those two things combined are an important factor to remember.
Yes, great question.
And we continue to do well and the brand is, as you might well imagine, iconic in so many ways.
I think as I said in my prepared remarks, we recognize there is probably an opportunity as we think about messaging the brand to the consumers to be a little stronger in terms of reminding people what we do differently and better than everyone else.
That is the notion of a new ad agency, that is the notion of being a lot more focused on ---+ I wouldn't say aggressive, that is probably not a fair word, but being a lot more targeted in our approach about the things we do that virtually no one else can do and talking about them in a more meaningful way.
I think I sort of tongue-in-cheek talked about the fact that we have been serving breakfast all day for 57 years and we have been scratch cooking forever and the like.
So, there is probably a bit more of a targeted approach we can do to the messaging that we think we need to get after.
The brand is certainly solid and iconic and brings back memories for anybody and everybody.
But I think there is an opportunity in the messaging and that is really the focus that I was trying to get across in my prepared remarks.
I think that is fair, but I would also say ---+ and I think I mentioned this a couple of quarters ago, there is no question you have significantly more people in the breakfast space today than you did five years ago.
That is why it becomes so important how you message what we do differently than everybody else.
We just have to be more laser like in that communication.
I think the dynamic is that you have existing guests who know and love us coming in a lot more frequently.
The opportunity is to get that infrequent and light user to come in, thus everything I talked about today about really focusing on the value pieces and driving it home to that light or infrequent user that may be either shopping or just needs to be reminded of what we have got that is new and different.
Well, there is lots of things.
And I mentioned it early on, that over 40% of the menu now being impacted by wood fired grill we have a real opportunity to talk about some of those other items.
It is not just about steak.
I challenge you to go have that pork chop and tell me that is not the best pork chop in America, or the salmon or the grilled vegetables.
I mean, they are really fabulous products and thus this notion of now that we have gone an air talking about salads.
But we have a real opportunity not just to talk about the platform but ---+ and the innovation doesn't stop there.
All the things I mentioned to you early on about all the new initiatives that really are focused on the revitalization.
It is not just that wood fired platform but it is a great beginning and there is a lot more to talk about related to that.
And this value messaging.
Because I always have to remind people we play at the low end of casual dining and there is a real opportunity there to take advantage and optimize that.
Well, thank you all again for joining us on the call today.
We are scheduled to report results for the third quarter on November 1, so if you have any questions in the interim, as always feel free to contact <UNK> or <UNK> or myself and thanks again.
| 2016_DIN |
2016 | PNR | PNR
#Yes, so let me go back to that seasonality.
I agree that we put that up.
I think we have two elements that I'd draw attention to.
One is our corporate costs are going to be significantly higher in Q1 than the rest of the year.
That's related to vesting schedules of options and restricted stock ---+ directors, officers, chairman ---+ as well as just general corporate spending.
And that's about $0.04, <UNK>, to that level.
And that is different this year than it has been in prior years.
The other element is that we feel that the shippable backlog, and the ability to do better than the shippable backlog in Q1 in Valves & Controls, is at its weakest opportunity in Q1.
And those are the only two things that we're reflecting differently than the normal seasonality schedule that we shared with you.
Yes, I think it all reflects.
And if you think about the front log of what I say the projects that we're looking at, or the opportunities before we're even quoting, you should think about that being down at least 25% versus normalized levels.
We then have to then quote, and we're going to get our fair share of products where we are automatically specced in, or we're the likely player.
And that's what represents the quote log, and then the orders are an output of that.
And as you can imagine, that is a moving funnel of opportunities, where every single quarter you are converting each of those.
So, I think the news that we are sharing today is that we still think we're going to get our fair share of what our opportunities are, but the opportunities are lower.
And we think that continues through 2017.
I would say so.
Right now, cash flow and our focus on our balance sheet is number one.
And the Board and management are unified in that.
Yes, I think we gave out seasonality before.
And we took a look at what Q1 is.
And as we mentioned, there's a reason ---+ two reasons that Q1 is slightly lower.
But we would then expect that our normal seasonality, which is reflected in last year's delivering of that EPS, to be appropriate.
Ramping throughout the year, as we suggested, our year-over-year comparisons get a little easier in Q3 and Q4.
So we have the trends out of Q4 continuing through Q1 and into 2Q.
And then we begin to get a little easier comparisons in Q3 and Q4.
Yes.
I get that.
I'm sorry.
We had some projects that are running out, and those are in the Technical Solutions side.
And so absent the Technical Solutions projects, my point is that Q2 is our seasonal quarter, and then Q3 is down due to the fact that we tend to have the August.
But on a year-over-year basis, everything other than the projects in Q3 and Q4 are about the same.
And <UNK>, I'm just not going to give you Q2 EPS guidance on this call today.
That's where I'm going with this.
No, I appreciate that.
Thank you.
Okay.
Thank you all for your interest and questions.
And I will turn it back over to you for the replay, operator.
| 2016_PNR |
2018 | OI | OI
#Thank you, Angel.
Welcome, everyone, to O-I's Earnings Conference Call.
Our discussion today will be led by <UNK> <UNK>, our CEO; and <UNK> <UNK>, our CFO.
Today, we will discuss key business developments and provide a review and outlook of our financial results.
Following our prepared remarks, we'll host a Q&A session.
Presentation materials for this earnings call are available on the company's website at o-i.com.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
Unless otherwise noted, the financials we are presenting today relate to adjusted earnings and adjusted cash flow, which exclude certain items that management considers not representative of ongoing operations.
A reconciliation of GAAP to non-GAAP items can be found in our earnings press release and in the appendix to this presentation.
Now I'd like to turn the call over to <UNK>.
Thank you, Dave, and good morning, everyone.
Let me start by saying that we are doing what we say, delivering 9 consecutive quarters of meeting or beating the key financial targets and performance in an uptrend as shown through the rising profits and margins in Europe and the Americas, which account for 90% of the business.
And Asia Pacific will improve in the back half of this year, as we are already more than halfway through the intensive investment program to improve the fit-to-market of their assets.
This is the same type of program that was done before and is now facilitating results in Europe and the Americas.
While <UNK> will dig into a detailed financial review and outlook in a moment, let me provide an overview of the first quarter of 2018, which unfolded as expected across the world in terms of external conditions, sales and shipments as well as both operational and nonoperational performance.
Sales were solid and at high single digits reported by a stronger Europe and a constructive price-cost inflation environment across the world.
Shipments were essentially on par with the prior year, just as we expected.
And we continue to see a stronger shipments from our joint venture with CBI that supports the fastest growing beer segment in the U.<UNK> Our cost position was right in line with expectations.
Total system cost and footprint actions added to the bottom line.
Meanwhile, as we previously mentioned in prior calls, investment in assets and key capabilities are temporarily putting pressure on our earnings.
More on this in a moment.
In the immediate term, as we assess how the business is performing and the solid results we have delivered in the first quarter, I am confident that we are on track to deliver our financial targets for full year 2018.
Now let's turn to Slide 4.
But I want to focus on sustainable value creation.
Consumer trends are starting to turn towards glass.
This is reflected in the high level of new product introductions around the world.
As an example, we launched glass for milk in 6 different countries recently.
Today, milk is selling glass in countries like the U.<UNK> and the U.K., something unthinkable until just recently.
We are further building key capabilities in areas such as sales and marketing, innovation, integrated business planning, end-to-end supply chain and talent and organization.
In fact, we have been actively rolling out many of these capabilities around the world, and the benefits are starting to be visible in our 2 largest regions.
For instance, Europe has been through 4 cycles of IBP, integrated ---+ integrating the product demand, supply and finance dimensions in a 3-year rolling horizon.
It is an ideal planning process to support growth in an intensive asset industry like glass with a long capital cycle.
This is very timely considering renewed interest in glass by consumers, customers and channels to market as well as other important stakeholders.
The Americas is now launching the program and the Asia Pacific region will do so early next year.
Separately and within end-to-end supply chain, TSC is deployed and several of our plants are now adopting a new operating system that will allow for much better efficient operations by applying the standard work and continuous improvement methodologies.
We've been investing in new product innovation and process technology to significantly improve O-I's position within the glass container industry and the packaging industry as a whole.
Within the people dimension, we are working in much more collaborative and productive ways.
Cross-functional teams are bringing together insights from marketing, sales, manufacturing, supply chain, engineering and finance across the world, all driving towards the execution of practical solutions to impact the top and bottom line and leveraging O-I's truly global enterprise.
Our end-to-end supply chain teams are singularly focused on improving assets and enhancing their flexibility and reliability, while also making prudent and strategic investments in our footprint that will dramatically enhance our ability to meet rising and changing customer needs at a more sustainable, value-generating cost point.
And this is a key linkage to how we are strategically investing in our assets.
We continually review our footprint, seeking ways to redeploy supply from higher cost-to-serve assets into more productive, efficient assets.
In 2017, we did this in The Netherlands.
While in 2018, Colombia is already in the works.
These are projects with a very favorable return on investment.
As we noted in previous earnings calls, we are deeply engaged in a really intensive asset investment program through the first half of 2018 in Asia Pacific.
Over the past year or so, it has become evident that while there is good growth in this region, our assets have not been fully matched to evolving customer product needs.
So in the fourth quarter of last year, we opted to earnestly begin the process, improving the assets fit-to-market in order to drive long-term value.
This is similar to what we've done before in the Americas and Europe, with very positive results as evidenced by rising segment operating profit and margins over the past 2 years.
This illustrates that efforts to improve our assets are a strong catalyst to lift margins and earnings.
Good assets that are more productive and are better fit to market will drive margin expansion when properly leveraged by cross-functional teams.
This is what we are increasingly doing.
So now it is Asia Pacific's turn.
We have a finite set of projects that we know well how to manage from start to finish, all in a way to meet current and future customer needs.
In fact, we are presently ramping up furnaces that were in the initial part of the asset improvement program.
Bringing all the regions together, clearly we are firmly on the path to increase shareholder value.
Now let me turn the call over to <UNK>.
Thanks, <UNK>.
Let's turn to Slide 5.
Beginning this year, we have consolidated North America and Latin America into one segment, named The Americas.
This allows us to better leverage critical resources and competencies across a larger geography to replicate best practices and to realize cost synergies.
Trends across the Americas are as expected.
Sales revenue was up with gains reported in price, currency and volume.
Overall shipments were up low single digits.
Continuing trends that we saw exiting last year, Brazil was the strongest performer in the region, where private consumption is recovering and our new product introduction activity enabled a 30% increase in sales volume year-over-year.
For instance, we are helping a major nonalcoholic beverage company successfully launch soda in glass in Brazil, and introducing glass packaging into the fast-growing fruit juice and coconut water segment among many other new product introductions across all end users.
And cross-functional teams across the region are generating new business in glass: premium olive oil in Colombia; tuna in Ecuador; fruit juices in Mexico; and new pasta sauces in the U.<UNK>, to just name a few in this region.
Within the U.<UNK>, solid growth in premium and super premium beer, spirits, food and nonalcoholic beverages helped once again to largely offset the overall declining trend driven by mega beer.
On our last earnings call, we mentioned that the use of O-I containers in the U.<UNK> has been at record levels in recent years when taking into account volumes from our JV with Constellation Brands.
I'm happy to say that the situation is now even better.
Use of O-I containers in the U.<UNK> market is higher year-on-year, when including results of the JV, which ramped up its fourth furnace in the quarter.
And in the first quarter of 2018, we have seen continued traction on total systems cost results.
In all, the Americas is performing solidly with price and volume growth plus margin expansion.
Turning to Europe, the team is driving exceptional improvement.
Sales revenue was up 16%, driven by both price and currency.
Shipments were essentially flat, which is quite solid and in line with expectations in light of a strong comparable period in the prior year.
Price-cost spread was modestly favorable, consistent with our view of the constructive dynamics we've discussed.
After layering in the benefits from the plant closure in the Netherlands and total systems cost, you can see margins improved a healthy 60 basis points.
Good results, and we expect these positive trends to extend into the rest of the year.
Let's turn to Asia Pacific.
<UNK> already mentioned the asset investment program, which is the cause of the temporary, lower profit and margin in the region.
While this is dampening earnings through the first half of 2018, it's the right thing to do, to sustainably improve the region's earnings profile going forward.
As a result, we expect that Asia Pacific will emerge in the second half of this year with a solid and profitable foundation upon which to continue to grow for years to come, leveraging favorable demand in Australia, New Zealand as well as healthy growth in emerging markets.
Let's turn to Slide 6.
Overall, segment operating profit in the first quarter was right in line with our guidance.
Currency, primarily from the stronger euro, was favorable year-over-year.
The impact of sales volume and mix also helped segment operating profit due to the volume growth in the Americas.
Price was up about 2% with gains in all regions.
With respect to operating cost, there are several elements in this rather broad bucket.
Cost inflation is over half of it, plus higher engineering activity compared with prior year led to lower production volume and higher manufacturing spend in the quarter.
On the positive side, total system cost performance and benefits from the plant closure continued to drive sustainable improvements in our cost base.
You know we are passionate about and committed to driving margin expansion.
In this quarter, top line gains didn't all drop to the bottom line as I just mentioned.
So simple math leads to lower year-over-year margins within the quarter.
We anticipate less pressure in the second half of 2018, as the costs associated with asset enhancements returned to a more normal level and while the favorable price-cost spread and TSC continue to support growth in the bottom line.
For the full year then, we are confident that we are on track to deliver solid margin expansion of at least 40 basis points.
Turning to Slide 7.
Well, our business operations have several moving parts: sales, TSC, asset improvements and price-cost spread, to name a few.
The year-over-year impact on EPS is relatively modest in the quarter.
Segment operating profit in total added $0.02 to EP<UNK>
The effective tax rate in the quarter was in line with our annual guidance.
However, since it is about 100 basis points higher than prior year, tax was a $0.01 headwind.
While those 2 items together sufficiently explained the $0.01 increase in adjusted EPS, I'd like to pause on interest expense, share count and currency.
Flat interest expense is a great outcome as we faced a stronger euro and rising variable interest rates in the U.<UNK> We have essentially offset these pressures through deleveraging, smart capital structure planning and efficient global cash management.
We repurchased 2 million shares of our stock in the quarter, all in March.
This had no appreciable impact on our average shares outstanding in the quarter and, therefore, no impact on earnings per share yet.
Lastly, currency was a $0.02 tailwind overall, which is not quite as favorable as the expected $0.03 to $0.05 I mentioned on our fourth quarter call.
In all though, we delivered earnings on the upper end of our guidance range.
And looking at Slide 8, our second quarter outlook feels a lot like first quarter results, albeit from a $0.75 base.
There are many moving pieces, which largely offset one another, leading to second quarter 2018 adjusted EPS outlook of about $0.75.
Here's a breakdown of the key pieces.
We expect currency will continue to contribute a few pennies, and we anticipate a modestly favorable price-cost spread in the second quarter, while shipments are likely to be flat overall.
Similar to the first quarter, the impact of engineering activity should be partially offset by global total systems cost efforts plus continued footprint benefits in Europe.
And lastly, interest in taxes will be higher than prior year, entirely consistent with the full year outlook.
From a regional perspective, the Americas should be about flat in the quarter.
While the region is running very well, it won't have the benefit of a minor sales of nonstrategic assets that we completed in the second quarter of 2017.
Segment operating profit for the other regions is expected to be directionally consistent with the year-over-year performance as in the first quarter, but perhaps more muted.
Europe should still benefit from favorable FX and price-cost spread.
Asia Pacific is expected to be lower year-over-year, but not as much as in the first quarter because some of the assets are coming back online in this quarter.
Considering the high level of investments in the first half of the year, EPS on par with the prior year would be a solid outcome and a testament to our resiliency.
In all, we are setting the stage for substantial earnings improvement in the back half of 2018.
Turning to Slide 9, I trust you can see that we are making steady progress through our comprehensive transformation.
I've been here for over 2 years now.
In my assessment, the O-I team has come a long way: improving our financial performance, rebuilding our credibility and establishing a solid foundation for the future.
The Americas and Europe are performing better year-over-year: sales, profit and margins.
<UNK> mentioned that Asia Pacific assets are a key focus.
We'll get that behind us midyear, really working as an organized, simplified, effective and efficient global enterprise.
Said differently, we are hitting our earnings and cash flow targets, even with APAC's temporarily limited contribution.
Clearly the Americas and Europe are delivering strong results.
As APAC rebounds and Americas and Europe continue to improve, there is quite some runway ahead of us.
While we will have more to say about the longer-term outlook at our Investor Day later this year, you can expect discussions about how we anticipate that solid volume growth and the continued impact of our strategic actions will lead to higher margins, earnings and cash flow.
Let's turn to capital allocation on Slide 10.
We will continue to invest in our business, as our CapEx activity will reach about $500 million for the first year ---+ full year and we will see an increase in our cash contributions to joint ventures.
For example, we continue to invest in our joint venture with CBI.
The fifth furnace is expected to come online in 2019.
We will continue to look for bolt-on acquisitions that complements our global footprint and product portfolio.
And while we continue to manage our legacy liabilities and debt structure, we have just recently begun to slow the pace of deleveraging by repurchasing shares.
Over the course of 2018, we plan to execute about $100 million in share repurchases.
With the review and outlook complete, let me turn the call back to <UNK>.
Thanks, <UNK>, and let's turn to Slide 11.
We are excited about the financial path we are on as well as our strong commitment to sustainability.
At the end of the day, it's about the prosperity we bring to our shareholders, customers and employees as well as our communities, along with the impact on the planning.
There is an ever-increasing expectation from consumers, customers, government and NGOs for companies to provide responsible packaging.
We are proud to make a product, glass, that has multiple benefits: it's reusable; it's infinitely recyclable; it's pure and doesn't decompose into harmful chemicals in the earth or oceans; and glass is preferred by health-conscious consumers.
You see, consumers get it.
There is no mass of glass floating on the open seas.
We continue to see a resurgence of premium products returning to glass.
There is yogurt, mayonnaise, ketchup, fruit juices, coconut water, milk, among others.
This is really good news for quality premium products and for the environment.
O-I's commitment to sustainability goes beyond the glass products we make and includes how we make them.
We endeavor to use as much recycled glass as possible.
In some plants in Europe, recycled glass amounts to more than 80% of our raw material, that is leveraging new technology in which we are investing.
We envision that our improved glassmaking process will lower energy use, reduce carbon emissions, minimize waste and respond better to changing customer needs.
Let me highlight a project dealing with energy conservation management.
We developed significantly more advanced algorithms in our glass melting and glass conditioning control system that reduce energy consumption and enhance productivity.
The payback on the investment is about 1 year, and we are in the earlier stages of replicating this across the global footprint.
Externally, we have begun to gain recognition for our efforts in health and sustainability.
O-I is the first food and beverage packaging company to achieve a gold rating in material health on the Cradle to Cradle Product Scorecard, one of the premier sustainability certifications for products around the world and across industries.
MSCI recently upgraded our ESG rating to A, elevating O-I into the top 10% for containers and packaging.
And due to efforts in corporate social responsibility, O-I will, this year, receive the Vision for America Award from Keep America Beautiful.
For O-I, sustainability is not only the right thing to do, but also a competitive advantage and growth driver that will fuel our business for years to come.
We plan to share more on our sustainability business and financial strategies at Investor Day on November 14 in New York City.
To finalize, I would like to thank our employees for their high level of engagement, energy and ownership in this transformation.
Their discipline and rigorous execution is taking O-I to rapidly advance and perform.
And now, we will open the lines for your questions.
Given the progress you've made in Asia Pac, do you have any kind of early sense where operating margins could be exiting 2018.
Or where they might be on kind of a more normalized basis.
And then when you think about your footprint in Asia Pac, are there opportunities to potentially add capacity in the region, maybe in Southeast Asia where it seems like demand is growing pretty strongly.
Yes.
Let me start with your second question.
So we see a stable market in Asia Pacific and in some places growing quite steadily.
So the step we're taking at this point in time, which is working on the assets to set them in a way that they can, in fact, fit the market well is the precursor to what you just described.
There are opportunities in the APAC region to add capacity.
And as we complete this phase and we move into the following year, then we can evaluate those opportunities and make the best decision for the company.
When it comes to margins, we expect that as we go into the second half, margins will gradually normalize.
And as we go into the first half of next year, we're going to be running in normal conditions as we did in our best times in this region in the recent past.
Yes.
We'll see consistent improvement in the margins quarter-over-quarter this year.
Exiting this year could be around 15% or 16%.
So for next year, as <UNK> said, we'll see something more normal of what they had been prior to all this activity level.
So let me start by reviewing the volume.
So the reason why the volume is down in this quarter is because we had limited capacity to serve the market.
And also we had some impact in Indonesia coming from lower sales in returnable containers.
Now when we look at the second half and onwards, we see several positive effects that are going to help improve margins in this region and earnings in the region.
One is we're going to improve sales volumes because we're going to have enough capacity to supply the market the way it should be.
We're going to see an improved mix because of the changes we're making in the footprint.
We're going to see improvement of factory costs, warehouse and logistics cost and, therefore, we're going to see improved earnings and margins.
Okay, yes.
So we were about 2% up versus prior year.
When we look at the U.<UNK>, mega beer is in the same trends we've seen before.
However, we're seeing growth in food, spirits, NAB, wine and premium and super premium beer, and we've been introducing new products in this market too.
Now when we look at imported beer, it is the fastest growing segment in the market.
It is driven primarily by the Modelo brands by CBI.
And you know that O-I presence in this segment is very large through the joint venture, or IBC.
Now something that will give you an idea of magnitude is this volume from IBC.
Even though we don't consolidate it in our sales volume, it has a quite large impact.
So it goes up to 150 basis points, a growth for the total company.
So please take that one into consideration when you're looking at the U.<UNK> market because the presence of O-I containers in the U.<UNK> market today is larger than it has ever been in recent years, because you combine the local supply from ---+ with this supply that we are having in Mexico for the imported beer.
Now when we look at Brazil, we were up 30% in the market for the quarter and beer was up 35%, 3-5.
Now when we look at the beer analysis by Nielsen, looking at liters of beer being sold by packaging type in the country, this is what we see: one-way glass is up 11% in the total market.
This is the only package that grows in Brazil when you look at that analysis by Nielsen.
Now when you look at mainstream, one-way glass is 4% up.
And when you look at premium, it is 13% up.
Then when you look at returnable glass, it is up 31%, 3-1, in premium.
Now returnable glass drops in mainstream in Brazil, but that has very little impact in units for O-I.
Now that returnable glass drops because there is low on-premise demand.
It's been that way since the economic crisis in Brazil, I mean, it doesn't recover.
Now the unit impact in our volumes of one-way growth in ---+ as I just described before, is very large, therefore the 35% growth that we see in the quarter.
Now there is a lot of new product introduction activity in Brazil.
So as we mentioned before, we're working on fruit juices and on coconut water, soft drinks and beer as well as other categories.
Mexico was fairly flat for the quarter.
However, we see a very healthy demand in this country.
And then when we look at the Andean countries, they were low to mid-single digits, up year-on-year, and this is driven by all categories that we serve in this territory.
Again, new product development and introduction is very large in this area of the world too.
And when we look at APAC, we see a flat market for Australia, New Zealand.
Important to have in consideration that our capacity has been limited.
But the market, in fact, is pretty solid over there.
And the American markets are growing at mid-single digits, which is also something that we can benefit from once we finish this work with the assets.
So that's pretty much an overview of demand.
If you want a little bit more color in Europe, we're seeing very solid demand over there.
You see Q1 being in line with prior year.
Now we are comparing with a quarter that was very strong in 2017.
U.<UNK> up 4% when compared to 2016.
Beer consumption in Europe is up ---+ is at the highest levels in 9 years, so that's very solid.
And wine volumes are very good, even though there was a poor harvest in the previous year.
So at this point in time, we are expecting, for this year, 40 basis points of margin expansion.
There are a few factors that are influencing our margin at this point in time is constructive pricing across the world.
We haven't seen that in quite a few years.
Mixed management.
We're doing a lot of work in that dimension through the sales and marketing team and that contributes to margins.
TSC is fully embedded in the organization and is gaining momentum, and we expect TSC to go up into the following years also contributing to the bottom line.
And the structural cost with option investments we're working on.
So we did some last year.
We're doing some this year.
There are more opportunities going forward.
So as the benefits of those investments kick in, we expect ---+ and in combination with everything we described before, we expect the margins to continue to increase going into '19 and onwards.
<UNK>, maybe I can elaborate a little bit on the cadence of the margin enhancements for this year.
You saw the performance in the first quarter and the second quarter, we expect margins to be, in general, flat to slightly down perhaps in the Americas.
We would ---+ we're seeing EBITs relatively flat, but revenue will be up.
So we expect to see the Americas performance be relatively flat year-over-year.
In Europe, we're seeing continued strength and improvement.
So I would say they should be equally as good, if not a little bit better than the first quarter performance on a margin improvement basis.
And in APAC, while still negative for the second quarter, will be substantially not as negative as the first quarter.
So it'll be better quarter-to-quarter.
And we'll see that improvement for APAC continue a lot in the second half as we get through these asset repairs and the cost ---+ both logistics cost and the asset repair costs are less in the second half of the year.
So we'll have good carryover as we go out of this year for 2019 for margins and EBI<UNK>
And we'll be happy to talk about that in a lot more detail as well during our upcoming Investor Day in November.
Sure.
So, let ---+ that's a good question and I can clarify that for you.
I think in total, we should expect roughly around $0.03 in 2018 for share repurchases after considering that we typically have about 1 million shares of dilution for the 401(k), in executive compensation in any given year and after the fact that we've purchased a little less than half of those shares in the latter part of the first quarter.
And then depending on how the timing of the balance of the shares are repurchased during the rest of the year, we'll determine if it's $0.03 or a little more or a little less.
We have not included this in our guidance as of yet.
But as typical in the mid-part of the year, we'll update or refine our range on guidance for share repurchase, for FX rates, for the ups and downs as we see them throughout the mid-part of the year.
So you'll hear more about that probably in our next earnings call as well.
Okay.
So when we look at the volumes and in line with the previous question on volumes, we're seeing a very solid environment in Europe.
And we're seeing a renewed interest in glass.
That renewed interest in glass also applies to the Americas and applies to Asia Pacific.
The new product activity that I mentioned earlier in the call is creating new volume.
And in fact, that's a pretty significant part of the growth that we're seeing year-on-year ---+ over the last 3 years of 100 basis points.
Now when we look at the Americas, and as Brazil comes back and the Andean countries continues to grow, that is a very good source for growth.
We're setting up things in Mexico in a way that we can serve incremental demand because we are approaching to be maxed out in capacity over there.
So overall, we see a positive environment about ---+ around the world for glass.
We see more interest by consumers, by customers, by channels, et cetera.
When it comes to M&A, we mentioned before that we are ---+ we continue to look at opportunities.
There are opportunities out there.
We are evaluating them and when it comes the right time and if we find the right opportunity, we're going to materialize that.
There is nothing as big as we had before like Vitro acquisition, but there are some that can be fairly accretive and strategic for the company.
They will be primarily in glass, so we are not looking at this point in time other segments.
There are plenty of opportunities in glass.
We said before, we're in 60% of the glass market around the world.
We are not in 40% of it.
So there are plenty of opportunities for O-I to grow over time.
So when we look at inflation, that is in line with what we expected coming into the year with exception of the fuel and freight inflation in the U.<UNK> Now we described before that we've been able to recover inflation in the first quarter.
We see a constructive price environment around the world.
So we are confident we're going to be able to recover inflation across the world in 2018.
When it comes to the fuel and freight in the U.<UNK>, which has been a very punctual situation, very specific to this country, we had increased inflation in the first quarter.
It's primarily driven by the freights.
Now when it comes to the fuel, we passed through that fuel in a monthly and quarterly basis, so that one we can recover fairly quickly.
The freight, we pass it through in a yearly basis, annual basis.
Now we're seeing a moderation of that inflation in the second quarter and we expect that, that will pretty much fade away as we go into the second half.
So we don't have a major concern with that at this point in time and we're expecting that we're going to be able to recover inflation across the world in 2018.
So when we look at the CBI volume, it equates to around 150 basis points of growth for the total O-I, so it's a very sizable volume.
As you know that we don't consolidate it.
However, we have equity earnings that come from that business to us.
So it's a very healthy volume with very healthy growth.
It has a lot of runway because we just started furnace 4, which is going to generate growth this year and the following year.
And we're building furnace 5.
And the combination of the two is going to ---+ are going to drive ---+ is going to drive growth going into 2020 and 2021.
Okay.
And then just to clarify your question on free cash flow, we have $400 million of adjusted free cash flow.
And then from that, we make investments in our JV, such as Constellation Brand.
Our JV with them should be about $25 million to $30 million this year and then a bit in RMBC.
Okay.
So a few things.
The first one is, we see the entire market moving towards high value segments and it is for all categories.
And in that space, glass does really well, helping to yield brands.
As we invest in innovation ---+ in product innovation, which we are doing, we're going to support the presence of glass in that ---+ in the high-value segments.
Margins are higher in those segments.
So as we grow, we will tend to improve our mix because of the larger presence in high-value segments.
Now there will be capital required at that point in time to be able to support those businesses.
Nevertheless, that capital will have very high return.
So it is a very positive investment, highly accretive as we move forward.
And, <UNK>, all of that is included in the $500 million that we're anticipating for CapEx for this year.
And just to elaborate a little bit on <UNK>' prior discussion about returns, we look at all of these investments that we do in a variety of ways.
First, of course, we have our strategic kind of investments that might include things like the closure of our Netherland plants ---+ the plant in Netherlands.
And this year, the closure of one of our plants in Colombia, those footprint-type actions.
And those are highly, very positive type returns for the company, 20% or greater type returns.
We also reached investing in ourselves in some of our areas, such as procurement and supply chain that you've heard us talk about a lot, which also bring high returns and sustainable long-term value to the company.
That would be one kind of area, strategic area.
And then another type, I don't know, classify it maybe as WAC plus growth.
So things that are better than our average cost of capital, but allows for growth for the company ongoing, like our joint venture with Constellation, like the Vitro acquisition a few years ago and some of these fit-to-market type investments that <UNK> has been talking about too, especially in APAC this year.
So we can be more responsive to the needs of our customers.
And all of these allow for future growth.
And then maybe the last category would be things better than weighted average cost of capital, such as in the maintenance area where we're investing in our assets to continually drive greater efficiency and improvement in our manufacturing plants.
So those, I think, are important to understand in how we really look at investments and returns for this company.
Let me add a couple of comments too, when it comes to margin improvement.
You're very familiar with the TSC efforts.
Our efforts in global supply chain, which are fully embedded now in the total organization, process technology that we are investing on, those things will contribute to margin.
They are gaining momentum.
And as we go into the following years, they will continue to contribute.
We are saying that we highlight in the call is IBP, Integrated Business Planning.
This is very important.
We covered a couple of questions today about growth.
In order to support growth in this industry, this 3-year horizon, rolling, planning, is a very important process for the glass industry.
This is already fully implemented in Europe.
It's going to be implemented in the second half in the Americas and will be implemented in APAC early next year.
So we are designing a systematic solution, a systemic solution for O-I, that's what we're designing.
So we can, in fact, support growth, earnings and higher margins over time.
Yes.
Our leverage ratio went up from about 3.5x to 3.6x quarter-over-quarter, which is not only well within our covenants and guidelines, but is very typical of the seasonality that we show as well.
Our debt levels under the ---+ under our bank credit agreement excludes certain seasonal working capital borrowings, as I think I explained on the prior earnings call.
And we expect to be at year-end roughly about 3.2, 3.3.
So we are continuing to deleverage throughout the year, albeit at a little bit smaller pace than we had in the past.
And this is because we have instituted the share repurchase program, but also I think more importantly, because we're looking at capital allocation in a little bit different way now, a little bit more balanced approach.
We are approaching that 3x leverage that we put out there a few years ago.
We think that the prudent thing to do is to balance this a little bit more with share repurchase, with looking at perhaps some M&A opportunities, as <UNK> mentioned, but continue to deleverage through the process.
Good.
So we're seeing a very solid demand in Europe and that goes across categories.
Beer consumption is highest ---+ at its highest point in 9 years.
We're seeing that reflected in our demand.
Wine is remaining strong.
Even though coming into the year, we were expecting a little bit of a slowdown because of the poor harvest season, but it didn't really materialize.
The new product development activity across the region, across the end users is also important.
It's very solid.
So we expect a year that will be flat to slightly up, but we are comparing with a very strong year, last year.
So that's the situation for Europe.
When it comes to Americas, mega beer trends are the same as they've been.
However, we're seeing very good growth in food, in spirits, in NABs, in wine, in premium, super premium, everything else grows quite well.
And we ---+ our presence in those segments is very good, is very solid.
So ---+ and at the same time, we are highly focused on new product development in all those segments.
So the ---+ we're seeing this year a slower overall decline in the U.<UNK>, for example, because the growth in all these categories is, in fact, partially offsetting that decline.
So we are in a better position than we've been in previous year as a consequence of that growth.
Yes.
On the share buyback, the $0.03 was the full year impact of the $100 million repurchase, just to clarify that.
But of course, it's dependent on when we execute the balance of those shares.
It'll be slightly higher than that if we execute more in the second quarter and slightly less if we do it toward year-end.
And at FX, yes, the currency for the second quarter guidance is based on the March-end rates, which is typical of what we would do.
And then, of course, you've seen strengthening of the dollar since there.
The Brazilian real, the euro, the Mexican peso have all moved.
And so maybe that takes back $0.01 or $0.02, I'm not sure, but this moves daily.
So we don't adjust our guidance daily.
You know us, we try to offset minor changes when we can.
And as I mentioned in Debbie's question, we will update and further refine our guidance as we go throughout the year and we'll add in for the share repurchase and we'll adjust if we need to for other items.
And we'll do that as more like maybe the second quarter rolls out.
Yes.
So the situation we're seeing in the U.<UNK> this year is better than what we've seen in the previous years, even though mega beer decline continues.
And our efforts, as we said before, have been focused on improving the performance of every one of the categories, like food, spirits, NAB, wine and the premium and super premium beer.
And we're also supporting our customers in the mega beer so they can perform their best within the circumstances.
Now we've been adapting our footprint to that.
There is more remaining supply in between some of the local production and what now IBC is producing.
So there are quite a few moving parts when it comes to demand and capacity and the balance and the influence in the footprint.
So we are constantly analyzing that.
We don't have any major plans at this point in time.
Our focus is in developing the market that is out there for glass, which is very relevant, and making sure we respond properly to increased interest in glass that we're seeing around the world and, obviously, it all ---+ it is also present in the U.<UNK>
Thanks, <UNK>.
So let me start with pricing in Europe.
What we are seeing is what you can expect for the balance of the year.
That environment continues to be very constructive.
We already went through all the negotiation season, so it is all said and done.
So we're confident we are in a good place when it comes to recurring inflation in Europe.
And we are in the best place we've been when we compare to the previous year.
When we look at APAC, the volume that we have seen in the fourth quarter and the first quarter has been influenced by the activity that we have in the assets.
Should we have all the assets in the condition we'll have them in the second half, our demand in the fourth quarter and in this quarter and the second quarter will be higher.
So there is a little bit of an impact in volume there.
But overall, volumes are solid in that region as well as mix, because as we change the footprint, mix is going to improve too because we're going to be a better fit to market.
Now when it comes to the program that we have, first, this is the same thing we've done with Americas and Europe over the last few years with very positive impact.
It's been helping earnings, it's been helping margins and it's been helping growth too, because we can get to markets or serve markets in a better way.
We are making very good progress in that.
This is a very finite activity.
It's something that we know very well that is in our control and that is going to be behind once we get into the second half of the year.
So we're very confident performance in this region is going to come up.
I mentioned before that there are many things that will be impacted.
Sales volume will be better because of that.
Manufacturing cost will be better too.
Warehouse and logistics cost is going to be better.
So we're going to see several variables moving in the right direction as we go into the second half and 2019.
Thanks, <UNK>.
Yes, very good question.
It is very different.
Let me just go back in time for a minute.
So when you look at a period, perhaps 2009 all the way to 2018, I will say that there are 2 major things that created a number of side effects that are related to what you're describing.
The first thing was the price over volume approach of the company, which had a significant impact on losing sales volume along the years.
And as you know, when we started the newest strategy of this company back in early '16, we said very clearly, stability is paramount in this business.
And we've been protecting that and we will.
However, as you look at ---+ you look back, many actions were taken as a consequence of losing volume because of that.
Now the other big thing is the Australian dollar strengthening at that point in time.
It became a very strong currency and that had many impacts.
One is imports of empty glass started to go up.
The second thing is, it accelerated conversion to bulk wine at that point in time.
The third thing is, it dropped the Australian wine exports.
And the fourth thing related to the Australian dollar is, local beer slowed down because the imported beer started to grow.
When you combine all those 4, plus the price over volume, there was a significant excess capacity in that region that forced very drastic capacity reductions over time.
So when you look back, you hear ---+ you see all those various events happening at that point in time.
The other thing that was very significant is the China growth strategy.
We've created a number of issues, and those were described in the past, all of that is behind us.
Now what we're doing today is very different.
We are improving the fit-to-market of those assets.
We are improving the condition of those assets to be able to perform.
This is the same we've done with Europe and the Americas with excellent results.
So we are very happy that we are able to do this.
Americas and Europe are in a very strong run at this point in time.
Earnings are going up.
Margins are going up.
So it is the right time to do APAC, and it was the last that we needed to go through.
It is also important to do it at this point in time because of seasonality.
So this is very different.
I'm glad you asked the question because understanding the evolution of those years is not easy if you don't live through them.
But we're dealing with a very different situation right now.
It's a good market.
It is growing.
APAC is changing with the balance of the company.
This company is changing quite dramatically.
Culturally, how our mentality, how we approach the business is changing.
Our people are engaged.
The ownership is very high.
We're very focused on execution and results.
So it's a very different moment.
And this region is not the exception.
So I think we are on the right path here.
Thank you, everyone.
This concludes our earnings conference call.
Please note that our second quarter conference call is currently scheduled for July 24.
We appreciate your interest in O-I, where we are growing bold, distinctive and infinitely recyclable glass packaging that is good for brands, consumers and the planet.
Thank you.
| 2018_OI |
2017 | TRST | TRST
#Thanks, Phil.
As the host said, I'm Rob <UNK>, President of the bank.
As usual, joining me on the call are Mike <UNK>, our Chief Financial Officer; and <UNK> <UNK>, our Chief Banking Officer.
Also in the room is Kevin Timmons, who a lot of you deal with regularly.
Welcome all of you to the call, and appreciate the opportunity to tell you a little bit more about our company.
As worked in the past, so we continue the process before I hit the highlights, giving you an overview.
Then Mike will detail the numbers, and <UNK> will give some color on our operations, especially the loan portfolio, delinquencies or problems.
Let's get started.
We actually closed a branch office during the quarter.
An irresponsible landlord in Nyack caused a mold infestation in our branch.
Rather than risk the health and well-being of our employees and considering the cost for remediation, we decided to close to branch.
We are in the process of seeking a replacement.
We're now operating 144 branches, and our average deposit per branch grew again last quarter.
We give the detail on the branches because they are the source of the vast majority of the business we do.
Our deposit growth has been good, about $60 million year-over-year.
The best part of the growth has been our ability to reduce our dependence on higher-cost time and money market accounts while still posting decent overall growth.
Our residential mortgage loans grew by over $190 million year-over-year, and our total loan growth was almost $150 million year-over-year.
Our commercial loans are down from the first quarter last year, and our home equity loans were down as well.
We're pretty sure at least some of that home equity runoff is being captured in our residential portfolio.
We also see some stabilization in our commercial loan portfolio.
Overall, loans hit another all-time high at quarter-end.
Our nonperforming loans and assets were both down from the same period last year to 0.77% and 0.61%, respectively.
We're also encouraged by our early-stage delinquencies.
We ended the quarter with total assets of $4.9 billion, up over $100 million from the same period last year.
All this rolls up to a net income of $10.9 million, which compares favorably to last quarter and the same quarter last year.
Our efficiency ratio is 56%, approximately the same from year-end and the same quarter last year, also still better than our peer group.
Our capital ratio was almost 9% at quarter-end, up from both year-end and the same quarter last year.
Most of you know we maintain a large cash position, almost $700 million and about the same size investment portfolio.
We try to keep maturities as short as possible, leaving us the ability to move on our feet.
We continue to operate under a formal agreement with the OCC.
While not much can be said about the agreement, we believe to be in a ---+ the validation phase.
Our first quarter here at the bank was a great start to the year.
Now Mike will give you some detail on the numbers.
Thank you, Rob, and good morning, everyone.
I will now review TrustCo's financial results for the first quarter of 2017.
As we noted in the press release, net income remained solid.
It increased to $10.9 million in the first quarter of 2017 or 5.2% compared to $10.4 million for the first quarter of 2016 and $10.8 million in the fourth quarter of 2016.
Net income yielded a return on average assets and average equity of 0.91% and 10.17% compared to 0.89% and 9.98% in the first quarter of 2016.
Now let's start with the changes in the balance sheet.
We saw continued loan growth during the first quarter of 2017, which is typically slow by seasonal weather conditions in the northeast markets.
As is expected, the growth continues to be concentrated in the residential real estate portfolio.
The residential mortgage loan portfolio increased by $42.2 million or 1.5% on average during the quarter compared to last quarter and $185.2 million or 6.8% from the first quarter of 2016.
This continues the positive shift in the balance sheet from lower-yielding overnight investments to higher-yielding core loan relationships.
Total average investment securities, which include the AFS and HTM portfolios, increased $7 million during the quarter or 1% and $41.1 million or 6.4% from the first quarter of 2016.
As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable us to produce consistent earnings.
In regards to our investment portfolio, we will continue to take advantage of opportunities as they present themselves during the remainder of 2017 and beyond.
Keeping in mind the current environment that has seen rate hikes back in December and again in March, there's a strong likelihood of more to come.
As a reminder, we continue to carry $641 million of overnight investments as well as a cash flow generated of $300 million to $500 million of loan payments coming in over the next 12 months, along with approximately $140 million to $150 million of investment securities cash flow during the same time period, all of which would be able to be reinvested at higher rates.
This continues to give us significant opportunity and flexibility as we continue into 2017.
During the quarter, we did take the opportunity to invest in $45 million of agency securities at a yield of approximately 2.11%.
On the funding side of the balance sheet, total average core deposits were $4.2 billion for the first quarter of 2017, an increase of $74.8 million from the first quarter of 2016.
During the same period, our cost of interest-bearing deposits decreased 4 basis points to 35 basis points.
We are proud of the ability to reduce the cost of interest-bearing deposits during the same period we saw multiple rate hikes.
We feel this continues to reflect our pricing discipline with respect to CDs and non-maturity deposits.
For the quarter, our net interest margin increased to 3.14% from 3.13% compared to the fourth quarter of 2016.
This increase in the net interest income comes from both the asset side of the balance sheet, as a result of the continued growth in the loan portfolio, and the continued decrease in funding costs just mentioned over the past 4 quarters.
The impacts of the growth of the balance sheet, coupled with the changes in net interest margin, have had a positive impact on the taxable equivalent net interest income.
For the first quarter of the year, our taxable equivalent net interest income was $37.4 million or approximately $492,000, greater than it was in the fourth quarter of last year.
This increase was largely the result of the recent fed interest rate changes as we continue to retain $641 million on average during the quarter of overwrite investments.
That is a sizable increase on a quarter-to-quarter basis.
It represents a core increase in earnings for the future.
The provision for loan losses remained flat compared to last quarter at $600,000 and decreased $200,000 compared to $800,000 in the first quarter of 2016.
Asset quality and loan loss reserve measures improved versus first quarter of 2016 or were mixed as compared to year-end 2016.
The slight increase in NPAs was due to residential real estate nonperforming loans in the New York region.
Prior experience has shown us that this slight uptick in NPLs is seasonal and not unusual in the first quarter of the year coming out of the holiday months.
We would expect the level of provision for loan losses in 2017 will continue to reflect the overall growth in our loan portfolio, trends in the loan quality and economic conditions in our geographic footprint.
Noninterest income came in at $4.7 million for the first quarter, up compared to the $4.5 million in the fourth quarter 2016.
During the quarter, we saw an increase of ---+ in our Financial Services income.
As you remember, included in other noninterest income in the first quarter of each year includes the fees earned on tax return preparation services to our Financial Services customers.
Our Financial Services division continues to be most ---+ continues to be the most significant reoccurring source of noninterest income, which had approximately $846 million of assets on our management as of March 31, 2017.
Now on to noninterest expense.
Total noninterest expense net of ORE expense came in at $23.5 million, up $876,000 from the fourth quarter of 2016.
This came in directly with our ---+ within our expected range for the first quarter of $23.2 million to $23.7 million.
The primary increase in noninterest expense during the first quarter of 2017 was in salaries and benefits expense, which was $10.2 million for the quarter, up $634,000 compared to fourth quarter of 2016 and $1.2 million over the same period last year.
This was a result of a few items.
First, and something we have discussed in prior calls, we have continued to see an increase in the salary and benefits expense line as new hires replace consultants related to the formal agreement.
Second, the first quarter of the year always bears the cost of increased employee, federal and state payroll taxes.
And lastly, the bank also saw an impact of the increased health care costs as the new contracted raise for 2017 took effect.
ORE expense came in at $499,000 for the quarter, which is down approximately $200,000 for the fourth quarter of 2016.
ORE expense has consistently stayed within our expectations for the last 5 quarters.
We continue to expect ORE expenses to stay in the range of approximately $500,000 to $1 million per quarter going forward.
All the other categories in noninterest expense were in line with prior quarters and our expectations.
Moving forward into 2017, we will continue to expect total reoccurring noninterest expense, net of ORE expense, to remain in the area of $23.2 million to $23.7 million per quarter.
The efficiency ratio in the first quarter of 2017 came in at 55.81% compared to 56.22% in the first quarter of 2016.
As we have stated in the past, we will continue to focus on what we can control while working to identify opportunities to make the processes within the bank more efficient.
And finally, the capital ratios continue to remain solid.
The consolidated tangible equity to tangible assets ratio was 8.97% at the end of the first quarter, up from 8.87% compared to the same period in 2016.
Now <UNK> will review the loan portfolio and nonperforming loans.
Okay.
Thanks, Mike.
For the first quarter, overall net loan growth totaled $18.5 million.
This compares to net growth of $8.1 million in the first quarter of last year.
Year-over-year loans have increased $148 million or 4.5%.
Residential loans increased by $25.7 million on the quarter with commercial loans decreasing by 6.8%, which included some significant paydowns on existing lines of credits.
All regions posted increases although Florida totaled over 80% of the net residential growth in the quarter.
We were pleased the quarter's loan growth was increased over 2016, and we had a solid loan backlog as of March 31.
The backlog is up over 10% from both year-end and the first quarter of last year.
Although it is early in the season, we feel we are well positioned to post solid growth for this year.
After climbing just marginally, interest rates have settled back down, and our current 30-year fixed rate is at 3.99%.
Nonperforming loan measures continue to be solid.
Nonperforming loans totaled $26.4 million at quarter-end or 0.77% of total loans.
This compares to $30.4 million and 0.92% of total loans to prior year.
Net charge-offs levels remained very low, totaling only 0.05% on an annualized basis for the first quarter.
The coverage ratio or allowance for loan losses versus nonperforming loans was 167% on March 31 versus 146% the prior year.
Rob.
Thanks, <UNK>.
We're happy to respond any questions you have.
We shop rates every week, Alex, and more frequently, as needed.
And again, people ---+ none of our competitors have moved on rates either.
So ---+ and we also feel very confident in the fact that we've been able to kind of back off the CDs and money market account and focus more on our core growth.
Also, the cash position we have and the liquidity and capital positions we have, we think, gives us greater flexibility to, again, move on our feet and take that the appropriate deposit action.
And I would hope that the increases in deposits wouldn't match the fed funds increases.
I would hope that they'd be less than the fed increases.
Guess, everyone.
Alex, when we take a look at it, over the last ---+ we look at it, obviously, on a month-to-month basis.
But even on a quarters, we're getting a tick or 2, 1 or 2 basis points per quarter, maybe a little bit more.
So that compression, it will come down, but we're going to be above that 4% mark.
We are; we're getting there.
There's not much left to refinance at that point ---+ at this point.
It's up just a little bit.
It's up around $200,000 or a little more for that.
Thanks for taking the time today.
Have a great week.
Thanks.
| 2017_TRST |
2016 | BKNG | BKNG
#I think we like our model compared to the other models out there.
We have a scale customer base that is used to doing business with us on these terms.
And I think we are doing a good job of building relationships and the business processes and the automation to enable us to deliver the experience to the user when they are booking a non-hotel accommodation or a property that is not being managed by a professional owner.
So we like that business model; we like that hand of cards that we have been dealt.
I think that HomeAway's customer base and their owners are chafing a little bit at substantial increase in fees.
And ultimately in a competitive marketplace for these types of properties, consumers have been shopping around for hotels for 15, 17 years now.
And it is probably the case that over time they will shop around for vacation rentals.
And ultimately it will be about finding the best value.
And I am hopeful that we will be able to provide the best value.
I am not going to get into a conversation about if they do this will you do that.
That is between us and the hotels.
And judging by the questions I just want to underscore that we have great long-term relationships with the hotel chains.
We have been in business with them since I started in the business in 2000.
And I would expect those relationships to continue to be strong.
And we provide a lot of business for the hotel chains and we provide business in languages and in destinations that it is hard for them to access directly.
But we have a unique benefit that we provide and we absolutely value the inventory that we are getting from our partners here.
So, I wouldn't express it as if they do this we will do that kind of a situation.
This is a partnership.
On the first question, <UNK>, we have seen some relative strength in the South.
Spain and Portugal have been very strong markets.
Turkey has not, Turkey has been an impaired market between terrorist attacks and then the attempted coup.
Some of the other markets that have been strong like Ireland and Germany.
So people shying away from some of the markets where terrorist attacks have been taking place in the past and where maybe they have more of a fear of safety for traveling there at the moment.
And, <UNK>, I wouldn't ---+ there is nothing that we can see from our results that indicates a major trend of corporations pulling back travel because of safety concerns.
I am certain there are some business travelers who have canceled trips in the immediate aftermath of some of these events.
But broadly speaking a major pullback is at least not obvious in the numbers we are looking at.
Well, Spanish ADRs have been very strong, so all of that demand shifting there is actually having a positive impact on the ADRs in those markets.
And overall you can see our ADR trend has been roughly stable, down slightly less than a percent.
So nothing really to call out there.
So, KAYAK has had a good run of performance here this year.
They have done a very nice job of not only building query demand in the United States and elsewhere, but they are doing also a good job of continually innovating with respect to their product and with respect to mobile in particular, which helps with the flow-through of the economics.
So, they are doing a very nice job.
And their international expansion continues.
I don't have anything to tell you particularly about this market or that market, but KAYAK continues to I would say in a measured way build its footprint internationally.
We don't see any major impact one way or the other on that event, so we didn't call anything out, we didn't build anything specifically in there.
<UNK>, the CEO search continues and the normal way with a committee of our Board and a recruiting firm and they are right in the middle of it.
Thank you all very much for participating in the call.
| 2016_BKNG |
2015 | HAE | HAE
#I think what you are referring to is scenarios that we build on on the web which are within our original guidance ranges.
I think if you go back to the script last quarter is exactly what we said 48% to 49% and 15% to 16%.
Let me ask <UNK> to answer that question for you, <UNK>, as he just came back from Russia just last month.
I would remind all of us that this is a business that had declined from $34 million to $26 million last year and our plan for this business this year is $26 million so flat to last year but with more revenue in the back half versus the front half as we knew the distributor was going to be working down some inventory that had increased as a result of the slowing market.
So we think we have a pretty good idea of what is taking place there, we have a good team of people on the ground in Russia and we have had very, very good and open discussions with our primary distributors.
I would add as well on top of that, <UNK>, that this is a market, unlike whole blood, we had only entered the whole blood market in fiscal 2012.
We invented double red cell separation technology.
This is something we continue to invest in.
The automation part of our business is an area where we continue to invest.
You have seen now what we have done with plasma automation.
We have certainly indicated we are making some very significant investments in the remainder of our automation platform.
We will continue to do that going forward but this is a part of our business that we have greater confidence in as we come to the markets.
There is going to be an impact both in terms of pricing and in terms of share.
We recognize that so we will make those decisions.
But we remain confident.
The biggest player in that space is the American Red Cross.
We feel good about the discussions that we are having with them today.
Two things I would add to that, <UNK>, is it doesn't take a lot to move the needle in selling HaemoBank.
This is an expensive device with software that our customers have to buy but significantly reduces cost well beyond that expense and our pipeline in that respect is growing.
There is a significant amount of interest in this new product.
Yes, correct.
So the installed base is around 4800 for TEG and that is primarily obviously it is 5000
---+ and that is a worldwide number.
Worldwide number, yes.
About 2000 in the US.
I think you asked a US number.
But our strategy is not one of necessarily replacing 5000s in every case.
It is a strategy that is driven by the relatively low penetration of the product against its market opportunity and the opportunities for growth in places that haven't yet even tried TEG.
Where we expect to see that change out, <UNK>, of a TEG 5000 to a TEG Success is where the clinicians need flexibility in the location of the testing.
In other words, an operating theater, a clinical area where rapid results and turnarounds are critical.
The TEG Success allows that testing to move from the laboratory environment to that clinical environment.
But where that doesn't need to happen, we don't expect those customers to change those out, we expect them to continue to move forward as they are with the TEG 5000 at least for the time being.
Well, the majority of our businesses is in the US and China and if you recall last year, that business grew 27%.
For us to achieve the targets we have outlined this year we have to have a growth rate of approximately 30%, a little over 30%.
So not a huge jump that needs to take place.
In fact with this impending launch, we are encouraged with growth rates at 23% in the quarter.
So when you think about you've got two very, very well established markets growing rapidly, US and China, with a number of new geographies coming on that are beginning to accelerate interest in the technology, we are pretty excited about with this represents.
Jumping from 27 to 30 isn't a big jump so we feel very, very optimistic about the outlooks for this product.
Let me just jump in on that one and then ask <UNK> for any additional color he might add.
But you will recall at our May investor conference, I thought Jonathan did a really nice job and that material still lies on our website about the explaining where we would go next with the expansion of the clinical applications of the testing.
Trauma being the first one up that we would see clearance for next.
But let me ask <UNK> to provide any additional color there.
One more point that I would emphasize there, <UNK>, and important for everyone to understand and we talked about this.
While the question was asked about our expenses and our spending for expenses, very consistent throughout the year but we continue to reevaluate what we spend and where we spend it and we have been very clear about our expectation that as we make decisions about spending, we are going to continue to accelerate our investments in R&D in the coming years with a focus on TEG clinical spending as well as spending in our apheresis platform.
So that focus will continue.
<UNK>, it is a question that I think many people are seeking answers on.
What I would tell you, what do I first mean by moderating.
We are looking at two years of decline of double digits around 10% fiscal 2014, fiscal 2015.
Our customers guided us this year to a decline of about 5% to 8%.
We are seeing a decline, we are seeing growth in other markets, international markets which are moderating our US declines.
But we are seeing declines in the US that are moderating closer to the low end of the range than the upper end of the range.
It is one quarter.
This is a market that I think has a better understanding of what is taking place but still it is a pretty fragmented market and so fully understanding that market is somewhat of a backwards look than a forward look.
But I think we are starting to understand it a little better than maybe we have in the past but that is what I mean by moderating.
In terms of growth, I think this is a global market with about half of the world's population lying in geographies where demand for blood is still yet to be met.
When the world catches up to that is anyone's guess but you are starting to see economies emerge and trying to address these healthcare needs.
We typically see that in platelets first before whole blood.
And the good news is that our focus with our technology which is a cheaper technology and an easier to use technology we typically get a first glimpse of that.
I think it is something that will happen slowly and is probably not anything that is imminent in the near term.
What I think we saw in the whole blood scenario is that price was far more sensitive than anything else.
There is still the need for solutions but that is really being driven by hospital decision-making versus blood center decision-making.
Our blood center customer numbers remain very, very focused on price and technology.
We like where we are.
We like what we are doing to invest in the future, both near-term and longer-term and we are encouraged by what we are seeing.
But it is going to be a market that will see price declines and share shifts like we saw in whole blood.
The plant is complete, it is up and running and we are assembling product in that location as we speak.
We continue to shift production.
The plan is to shift production from our Bothwell, Scotland facility to the Penang facility is what is up next.
The currency headwinds are a little stronger in the back half of the year and we will continue to see strength from plasma which is obviously a very large number and it has relatively lower gross margins.
Especially, <UNK>, when you consider the Solutions contract in the back half that will really start to accelerate.
As we have talked about, that is a lower margin product.
Yes, we have a view of it in fiscal 2017, yes.
Yes, I think we did at the Investor Day.
It is ---+ if you think about the headwind to growth rates in operating income that we disclosed at our Investor Day range, it will be up out the same nominal amount in fiscal 2017 and obviously a lower percentage because we will be coming off of a higher base.
Thanks.
We see continued progress with our identified growth drivers.
At the same time, most of the headwinds that caused declines in our US whole blood business will be behind us by midyear.
And early signs are indicating that the US whole blood market declines are moderating and Russia orders are beginning to rebound.
Our US plasma franchise continues to enjoy above market growth leveraging software advances and sodium citrate and saline solutions capabilities.
And our CBMS offering is demonstrating real value to our customers based on the foundation of new software products and connected devices.
Our VCC initiatives are providing expected savings and our investment in VCC is approaching completion.
Our business fundamentals remain strong with an expanding global footprint, a very strong customer base, a steady flow of differentiating new software and devices, a solid R&D pipeline, an improving cost structure and the broadest array of products and services in the blood industry.
We believe we have an increasing demand for our comprehensive blood management solutions offering throughout fiscal 2016 and CBMS will become much more meaningful in fiscal 2017 and beyond.
Thank you for your attention this morning.
| 2015_HAE |
2017 | LPT | LPT
#So yes, I'm sorry.
Okay.
So they needed some trailer storage.
And so the reality of it is there was more land allocated to that building than the actual building itself.
And part of the rent that they're paying is for trailer storage on an additional approximate 10 acres.
A good catch there.
Okay.
Well, thanks, everybody.
Thanks for listening in.
Good quarter.
Have a great summer.
| 2017_LPT |
2015 | SEIC | SEIC
#Since 2000, but I am not keeping track.
I don't think people are absolutely leaving the market.
We have a big book of business and we have a really big book of business and people move.
That can sometimes ---+ or markets move, that can sometimes exaggerate the bottomline results.
But our activity with new advisors remains very, very strong.
And as <UNK> mentioned, we are increasing the number of sales territories and you see some of that in the expense.
We are increasing our footprint because we see more opportunity to get more assets and we can get more coverage.
I think we are still in a situation where we can grow the profits of this business.
One dynamic to keep in mind is when you look at the asset growth, we had declines in the market reflected in our revenue and we offset that by ---+ well, not completely but we helped offset that with $1.4 billion in net new sales.
Net new sales has an expense component associated with it where appreciation and depreciation in the market really don't have much expense tied to them.
They kind of fall right to the bottom line.
So asset growth for markets is much, much more profitable than asset growth from actual sales, if that makes sense.
There were absolutely investments in SWP associated with both development and in the conversion activity as we begin the migration of the book.
And ---+ but there are also investments in the sales force and in growing the operational infrastructure for the traditional business model.
We're both.
Thank you, <UNK>.
Our next segment is the institutional investment (technical difficulty) and I am going to turn it over to <UNK> <UNK> to discuss this segment.
<UNK>.
Thanks, <UNK>.
Good afternoon, everyone.
Today I'm going to start by framing the investment landscape during the third quarter.
The quarter was marked by heightened volatility with high-quality fixed income segments faring pretty well, while higher risk segments delivered a range of negative returns.
Global equity markets fell significantly with steep declines ranging from negative 3% for US small cap to negative 17% for merging market equities.
As you know, revenue for the institutional segment is asset-based as calculated by averaging the last four months ending balances.
Market depreciation negatively impacts revenues earned during the quarter and if capital markets are negative during the last month of the quarter, revenue is negatively impacted for two quarters.
Ending asset balances compared to the second quarter declined by $4.8 billion to $73 billion.
Revenues of $74 million for the third quarter increased 3% compared to the year-ago period.
However, third-quarter revenues declined $1.5 million compared to the second quarter due to capital market performance during the quarter.
I would expect fourth-quarter revenues to be negatively impacted due to starting the fee calculation with depressed September ending asset balances.
Quarterly profits of $37 million were flat year to year, but declined $2 million compared to the second quarter.
Margins at 50% declined slightly compared to the second-quarter 2015 and the year-ago period.
Net new client assets funded during the quarter was negative $144 million due to slower client transitions during the summer.
As a result, the backlog of committed but unfunded assets at quarter end was $2.5 billion.
New client sales closed during the quarter were $1.7 billion.
New client adoption continues to be well-diversified by both market segments and geography.
So in closing, we continue to be well-positioned to successfully compete in the institutional fiduciary management space.
We enjoy a strong pipeline and we remain optimistic about the growth opportunities for the segment.
Thank you very much, and I'm happy to entertain any questions you may have.
Sure.
I guess the trend towards unbundling, that is typically is with larger institutional investors, so we continue to see a fair amount and what we would call the core market that are bundled types of deals.
So that is something that is not across the board in the unbundling and the pressure on the fees from that perspective.
<UNK>ts Continue to grow in popularity.
I would say that of the $73 billion that we have in assets, we have about $5 billion in alternative programs.
So it's relatively small.
You know, in proportion of the assets.
Do you have easy ones for me.
Yes, I mean there is kind of good news and bad news.
The good news is that we continue to see a lot of sales activity, positive sales activity and closes in the global market, the UK market in particular, and the contract process is slower there.
And it is primarily because the trustees do not work for the Company.
They are separate from the Company.
So, unlike in the US, where if a contract is negotiated it could just be sent around on their office mail and signed by all the trustees because they are employees of the Company, it doesn't happen that way in the UK.
And they don't call special meetings just to sign our contracts.
So there really is kind of a delay.
We have about 10 clients that are in that backlog.
I would suspect that between now and the end of the year, the bulk of those if not all of those would be funded.
And then the summertime is just maybe a little bit slower for funding just in general.
I think that your observation about the expense levels is pretty much correct.
I think that one thing that would change that if it does change it, would be direct costs.
So the more successful that we are outside of the US, okay, the manager costs there, we account for them a little bit differently, but that is good news.
I have other good news for you.
I am not going to develop my own SWP, okay, so I will convert to that when it is ready.
You don't have to worry about any rogue projects going on in the institutional business.
So other than that, we tend to just kind of invest through the business.
So we buy new modelers.
We have done that in the UK last year.
We didn't in the US this year.
And it just gets absorbed by the business.
Thank you, <UNK>.
Our final segment today is investment managers, and I'm going to turn it over to <UNK> <UNK> to sit discuss this segment.
Thanks.
Good afternoon, everyone.
For the third quarter of 2015, revenues for the segment totaled $67.2 million which was $3.5 million or 5.5% higher than our revenue in the third quarter of 2014, and was slightly lower as compared to our revenue in the second quarter of 2015.
This quarter-over-quarter minor decrease in revenue was primarily due to market decline during the quarter, as market depreciation more than offset our new client fundings.
Our quarterly profit for this segment of $23.3 million was approximately $1.9 million or 7.5% lower than the second quarter of 2015.
This decrease in profit was primarily driven by our increase in investment and addition of headcount for future new business.
Third-party asset balances at the end of the third quarter of 2015 were $376.1 billion, approximately $5.8 billion or 1.5% lower as compared to our asset balances at the end of the second quarter of 2015.
Decrease in assets was primarily due to market depreciation of $12.4 billion, offset by net client fundings of $6.6 billion.
Turning to market activities, during the third quarter of 2015, despite market volatility we had a solid sales quarter.
Net new business sales events totaled $7.1 million in annualized revenue.
These sales included new name sales and expansion of our business with our current clients.
In summary, despite the volatile market which dampened revenue growth in the quarter, we continue to add new business and see growth opportunity in the market.
To that end, we will continue to invest in our solutions and workforce as we look towards executing on this growth.
That concludes my prepared remarks and I will now turn it over for any questions you may have.
Yes, I think you are referring to backlog and that is hovering right around $30 million.
Yes, I mean as things fund, luckily as we continue to sell and grow business in the quarter, that's typically goes on for at least a couple of quarters.
And then obviously we will work into the fund what is on the backlog as quickly as possible.
Well, I think ---+ I don't think there's any change you saw in this quarter.
But I think what we continue to see this year has proven out, and it is not just our bank-based competitors.
This is a very competitive market.
There are fees and competitors that try to compete with fees, but certainly puts pressure.
But I think when you stick to the right segment of the market, and the values that you entered the market with, we are really focused on not providing a commodity for our clients and new prospects.
And I think when you match up with the right folks, while fees are always important, I think people are willing to pay for the right value proposition.
So what I say is I think we will what we see from all of our competitors a little bit more aggressive this, but nothing that is out of the norm behaviorwise or otherwise.
(laughter) Thank you Rob, for bringing that up.
Yes, you can hear us on Bloomberg every day.
Thank you for the plug, though.
Well, first, it's a great question.
But I think it's a difficult question to answer.
If you look at ---+ we have a diverse client base, which is great.
Obviously a good portion of our business, about 56% is in the alternative side, which ranges from hedge fund, some fund to funds, private equity.
So it is hard for me to give you a sliver of percentage moves.
What I would tell you is if you look at most hedge fund indexes for Q3, I think the average hedge fund was down around 3.9%.
If you look at our asset declines, we were down about 1.5%.
I think if you went back to 2008 and looked at the declines there, you would see a similar trend.
While we certainly went down, I don't think we had quite as an aggressive impact as kind of the pure asset classes or even some of our competitors.
And I think what has balanced that is we do have a good diverse portfolio of clients.
So what I say in general, and I am not sure this helps you completely, but we are not immune to the market moves.
And certainly we saw that, but I do think because of the caliber of our client base and the diverseness ---+ the diversity of them, it does offer us somewhat.
Yes, that is in that number, and in this business there is always losses.
There was no ---+ what I would say significant losses.
I would certainly bring them up or we certainly have a significant recontract order.
I view that as part of the business day today.
So the number you did get was net.
What I would say to you is we are right in the range of ---+ and I choose my words carefully ---+ but I view it as a solid quarter.
I would expect that sales number and our goal is to drive that sales number higher.
Well, <UNK>, the number I just gave, just to be clear, so we are all talking the same, the number I gave previously was backlog.
That is deals that we have won that have yet to be funded.
I think what you are asking is pipeline of the deals out there.
What I would tell you is, it is strong.
Our pipeline is probably the largest it has been in two years.
However, it is taking longer to get to the pipeline.
Thanks, <UNK>.
I would like <UNK> <UNK> to give you a few Companywide statistics.
<UNK>.
Well, it is hard for ---+ to predict the next quarter of future performance fees because they are based on performance.
So (multiple speakers) that is a little bit more challenging.
But fourth quarter is generally ---+ last year was in a similar range, about 7% of total revenue.
So it is roughly in the same range we had in third quarter.
That was about close to 13%, 14% of revenue.
So, ladies and gentlemen, despite our headwinds, we are optimistic about what we are doing and the investments we are making.
Looking ahead, we intend to keep our focus on long-term growth in the revenues and profits and we remain bullish about our opportunities.
So good afternoon, and thank you for your time and interest.
| 2015_SEIC |
2016 | IPCC | IPCC
#Good morning.
Thanks for joining us for our conference call.
I'm pleased to be joined by <UNK> <UNK>, our CFO, who is on the call as well.
I want to start things off with a quick overview on slide 3.
Net earnings per diluted share were $0.99, down from $1.18 in the second quarter of 2015.
Operating earnings per diluted share were $1 compared with $1.16 last year.
Earnings were down primarily due to an increase in the accident year combined ratio, partially offset by an increase in favorable development on prior accident year loss and LAE reserves.
On a year-over-year basis, we continue to see claim trends rise as higher gas consumption and miles driven have persisted.
We are determined to get ahead of the adverse trends and continue to pursue rate, underwriting and agency actions.
In addition to the rising claim trends, we've incurred $6.3 million in catastrophe losses this year.
That's significantly more than $1.1 million through six months of last year.
With the increasing loss cost in second quarter cats, Our GAAP accident year combined ratio increased to 99.5% from 97.7% last year.
Excluding cats, our 2016 GAAP accident year combined ratio was 98.6%.
The unfavorable [current] year trends were partially offset during the quarter by $12.2 million of favorable loss reserve development from prior years.
This development was primarily a result of decreases in severity estimates in our Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses.
All of these adjustments were related to accident years 2014 and prior.
The favorable development was partially offset by unfavorable development from accident year 2015 in California property damage, driven by an increase in severity.
As expected, in terms of the top line, gross written premiums were down 4.4% during the quarter and 4.1% through the first six months.
Premium growth in Texas in our commercial vehicle program was more than offset by declines in our other states.
Our rate increases in California and Florida continued to affect premium during the second quarter.
However, the premium decline should moderate in the second half of the year due in part to an improving competitive position as we continued to see other companies take necessary rate actions to address their rising loss ratios.
So, let's get into the details behind the highlights on slide 4.
In California, premiums declined 8.3% during the second quarter and 6% during the first six months.
Slowdown was driven primarily by reduction in new application counts as we continued to address the rising loss cost in this state.
Our accident year combined ratio of 99% increased from the prior year driven by higher frequency in severity and collision and to a lesser extent bodily injury.
Average written premium continues to grow with increases in written premium outpacing earned premium changes by about 3 points.
This is fueled by the 5.3% rate increase we implemented in February of this year.
We followed up our February revision with two additional rate (inaudible) filings that are currently pending approval with the Department of Insurance.
We expect our visions to be approved and implemented late this year or in early 2017.
In the meantime, we anticipate some improvement in the loss ratio in the second half of this year from the rate adjustments we've already implemented.
We'll also take other actions as necessary, such as terminating poor-performing producers and reducing commissions where appropriate.
Moving on to Florida, overall, gross written premiums declined 6.2% during the second quarter and 6.9% on a year-to-date basis.
Business was down during the quarter, primarily as a result of a decline in our renewal book.
The drop was expected since we've raised rates nearly 15% over the preceding 12 months.
Accident years 2015 and 2016 have both developed favorably since March of this year.
However, the 98.4% combined ratio for 2016 remains elevated given the unusually high claim trends in Florida.
We continued to see our loss cost increase driven by increased frequency across most coverages, as well as severity in collision and PIP.
Our rate revision of 7% implemented in March of this year along with our planned rate revision in September should help moderate the impact of these loss costs increases throughout the remainder of 2016 and into 2017.
Switching to Texas, gross written premiums in this state grew 35.6% and 28.9% during the second quarter and first six months of this year, primarily due to new business growth.
Our growth has been driven by our target urban zone of Houston.
You may remember that we talked about Houston being a cornerstone in our strategy to reach the Hispanic market.
As for the bottom line, the increase in our 2016 accident year combined ratio was due primarily to catastrophe losses, principally flood and hail claims.
Excluding cat losses, our accident year combined ratio in Texas is 89.2%.
Beyond the cats, we are seeing some positive signs in our data including favorable trends in the property damage and collision coverages.
As for pricing, rate actions taken in the first and second quarter of this year totaling nearly 6% should keep us ahead of the loss trends.
Touching briefly on Arizona, gross written premiums declined 1.7% during the second quarter of this year, but are up 1.3% for the year.
New business slowed during the second quarter following our 8.3% rate increase that was effective in late February.
The 2016 accident year combined ratio has improved given our rate actions and due to a decline in the new business combined ratio.
As for our commercial vehicle product, gross written premium growth continues to be strong with an increase of 16.1% during the second quarter and 14.4% year-to-date.
We are very pleased to see our commercial book playing a bigger and bigger role in our overall premium writings and believe it will be very important to our long-term success.
Our current growth is primarily due to renewal policy growth and higher average premiums given our rate actions.
We expect this growth to continue in the second half of 2016, albeit at a somewhat slower pace.
We have seen a slight improvement in our commercial vehicle accident year combined ratio, primarily due to a decrease in the renewal business loss ratio.
We have implemented nearly 12 points of rate over the last 12 months, which should continue to offset the increase in loss cost trends.
I'll now turn the presentation over to <UNK> to review our financial performance for the second quarter.
Thank you, <UNK>, and good morning, everyone.
Slide 5 provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on slide 6 through 8.
So, let's turn to slide 6.
Revenues were relatively flat compared with the second quarter of 2015.
Operating earnings declined primarily due to a decrease in underwriting income from the increase in the accident year combined ratio as <UNK> discussed earlier on the call.
Overall, while there was not much improvement in our accident year combined ratio during the second quarter, we believe we will see some improvement in the second half of the year as our rate increases from the last 12 months earning and as our other actions continue to reduce the impact on poor performing business.
For the full year, we expect gross written premiums to decline between 1% and 3% and the accident year combined ratio to be between 98.5% and 99.5%.
Moving onto investment results on slide 7.
At the end of the second quarter, cash and invested assets were $1.6 billion with fixed income securities and cash representing 94% of the total.
Roughly 92% of our fixed income securities were investment grade and the average duration of the portfolio was 2.8 years.
Our quarterly net investment income decreased 3% or $0.3 million, principally as a result of a 4.6% decline in average quarterly invested assets.
From a total return perspective, our investment portfolio, which is a AA- average credit quality and a pre-tax total gain in the second quarter of 130 basis points, with 59 basis points from current income and 71 basis points from investment gains.
These returns are not annualized.
Lower fixed income new money yields have continued to impact our returns during the second quarter.
At June 2016, the book yield on our fixed income portfolio was 2.5% flat compared with June 2015.
Wrapping up on slide 8, I'll finish with a few comments on our financial position.
We ended the second quarter with $978 million in total capital and a debt-to-capital ratio of 28.1%.
Our book value per share at June 30, 2016, was $63.54, a 3.3% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 2.6% since June of last year.
Finally, regarding capital actions during the quarter, we repurchased 2,800 shares for an average per-share price excluding commissions, of $78.32.
As of the end of June, we had approximately $36.7 million of capacity left on the share repurchase program, which is set to expire at the end of this year.
Looking ahead to the remainder of 2016 and into 2017, we will continue to be opportunistic in buying back shares and returning capital to shareholders through a mixture of share repurchases and dividends as we have done throughout our history as a public Company.
This concludes our formal presentation.
So, at this time, we'd like to open it up for questions.
Thanks, <UNK>.
This is <UNK>.
I'll start out with Florida.
I mentioned at the last quarter conference call that there was a pretty wide gap between what competitors were following and what they were implementing given the rate level indications and what they selected.
When we looked at the updated filings through the second quarter of this year, that gap has narrowed and it looked to me like companies are now taking around 70% of [what their] indicated need, reflects in the filings themselves.
So, that's a good sign and I made comments during the last quarter that I couldn't understand why companies or how companies could not at least stay closer to what their indicated need was and I think the trends are having a lot to do with that change.
The result is going to be a very hard market, I believe, with a turn of consumer shopping over the next 12, 15 months.
As far as trends are concerned, our trends or high year-over-year, but when we look at trends on a sequential basis, when we look at the second quarter versus the first quarter of this year or the first quarter of this year versus the fourth quarter of last year, we are seeing these trends normalize.
They are flattening somewhat which leads us to believe that we're moving into a period of the new normal, which is good news.
As far as PCI fastrack trends, we look at those too, and from a Florida standpoint, their trends for the first quarter of 2016 compared with the first quarter of 2015.
And if you look at it on a year-over-year basis, that way, regardless of whether it's individual quarter or the trailing 12 months, the PCI fastrack trends to me look like a train wreck, especially on PD, PIP, comp and collision, BI is really the only bright spot that we see there.
So, I think there have been some comments and reports from analysts that the PCI trends are normalizing a little bit too, but I don't think in my opinion.
They look quite as favorable as ours at this point in time.
I will mention one other thing that I thought was interesting ---+ PCI also recently issued a research bulletin in which they were tracking nationwide claim frequencies and they have noted that from 2013 to 2015 there had been a remarkable increase in frequencies over that current time frame, and Florida was one of the states that they singled out as being in the top five states that had the biggest increase.
And PCI did some nice work where they associated much of that increase certainly to miles driven, but also to just sheer traffic congestion; in other words, just the number of vehicles on the road themselves, there is little correlation with smartphone usage, distracted driving added to it, I guess, and they came to the conclusion that the greater exposure of the cars, the greater chances of getting into a collision especially when you have distracted driving to that.
In other words, when you operate in large urban zones, there are going to be heavier traffic jams and when there are more cars on the road, likely they get more.
Also, they came out with a second research bulletin that talk about the average precipitation in Florida in 2015, 2016 being up as well that contributed to the frequency.
So, you hear a lot of companies talk about trends, but they never talk about them at the state level and at the level we talk about.
And until you dig into it on that basis, you really can't understand what's going on.
So, I said a lot about Florida, but I will just sum it up by saying, we are seeing the trends normalize sequentially quarter-over-quarter and that's good news.
Again, if that's a new normal growth (inaudible) problem.
From a California standpoint, I'll say this as far as rate activity is concerned, competition, a lot of filings with 6.9% increases, pending with the Department or that recently got approved.
I think California is not like Florida and the competition is still behind implementing enough rate and getting [in with] claim trends in California.
I think Florida companies are catching up a little bit faster.
The regulatory environment in California certainly could have some impact on that.
Again, from our trends, there is high year-over-year, again, when you're looking at the second quarter of this year versus the second quarter of last year on most coverages, but much like Florida, they appear to be normalizing when you look at the second quarter sequentially versus the first quarter of this year, and again, if you look at the first quarter versus the fourth quarter.
That's what we are looking at, I mean the year-over-year trends are nice and they tell you what's happening year-over-year, but they don't tell you when things have normalized and fallen into that normal range, if you will, and we think we're kind of getting there, which again is good news, I believe.
So, I said a lot, <UNK>, on Florida and California.
Any other follow-up questions where you think you want to ask.
Well, I think there is plenty of capital from reinsurance companies available, it's only for non-standard MGA like companies that operate on that basis where they see most of the premium and losses to a reinsurer.
So I don't think that has abated whatsoever.
I'm not sure that reinsurers are too excited about lot of these days when you look at the results and you look at some of the filings are being made by competitors and in particular competitors that we go head-to-head with quite frankly.
I think there's still quite a gap there in what they're taking and what their indicated need may be, but I think there's still plenty of reinsurance availability out there to offer these guys.
So, they're not going away, they are going to be ---+ (inaudible) but they've been around for many, many years or decades.
So, that's nothing new.
I know there's been some talk about proposing some legislation to effectively eliminate PIP and adding BI, I guess, to PD in terms of those coverages being mandatory.
If they do something like that, I would anticipate that they would raise the BI limit from the current $10,000/$20,000 minimum to something more like $25,000/$50,000 perhaps or $15,000/$30,000 which is the limit in California.
(inaudible) it wouldn't hurt our feelings if they did just to that, if they raise the BI limit, it would certainly offset some of the premium revenue in PIP, but the PIP numbers just aren't getting any better.
They've made an attempt to correct the issues in PIP in Florida and it has failed.
I mean that's ---+ I don't think anyone can argue with that, and when you look at the trend numbers today regardless of whether they are our numbers or the PCI numbers, the PIP trends still look high, regardless of whether it's severity or frequency for that matter, they are still up there.
So, I think it's going to get to a point where consumers just aren't going to be able to afford the premiums, as they are escalating to cover these loss costs on that coverage and there is going to be enough complaining to legislators in their district about this, while I think they'll do something.
Now, having said that, I said that what happened last year, you got to keep in mind, there are lot of interested parties in keeping PIP in place.
We have a lot of influence in the Legislature.
So, if it happens, we're okay either way.
We're going to get the rate to cover the PIP trends one way or the other, but I think from a consumer standpoint, it wouldn't be a bad thing if they change the laws currently staying in.
Yes.
I would just like to make a couple comments in that, the second half of the year as far as opportunities are concerned, I got into some details regarding Florida and California as far as competition, rate changes, and trends.
And we are seeing competitors catching up to our rate levels.
We were early on with many of our rate changes and we are starting to see some signs with competitions catching up and we're seeing some good signs of businesses starting to come back our way.
We talked about that in the last quarter that we were expecting that to happen in the second half and the early on signs are that, that is happening.
Our average premiums are still rising, that's always good news.
Our CV program, I talked, about is still growing, we're very proud of that program and the results.
And finally, our direct to consumer business is growing nicely as well.
We talked about building that business into something for the future that will sustain us regardless how consumers choose to purchase their policies and we're very pleased as to how that has grown.
So having said all that, we are looking forward to the second half of this year and in particular the third quarter conference call.
Thank you, all.
| 2016_IPCC |
2016 | SPOK | SPOK
#Good morning.
Thank you for joining us for our second quarter 2016 investor update.
Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance.
Such statements may include estimates of revenue, expenses and income, as well as other predictive statements or plans which are dependent upon future events or conditions.
These statements represent the Company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.
Spok's actual results could differ materially from those anticipated in these forward-looking statements.
Although these statements are based on assumptions that the company believes to be reasonable, they are subject to risks and uncertainties.
Please review the Risk Factors section relating to our operations and the business environment in which we compete contained in our 2015 Form 10-K, our second quarter Form 10-Q, which we expect to file later today, and related documents filed with the Securities and Exchange Commission.
Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls.
With that, I'll turn the call over to <UNK>.
Thanks, <UNK>, and good morning.
We're pleased to speak with you today regarding our second quarter operating results and what we believe was a solid performance for Spok.
We are beginning to see the benefits from the investments that we have made to enhance and upgrade our product development team and tools, as well as our sales infrastructure and management.
And while we still have more work to do in that regard, we are off to a good start.
During the quarter, we saw strong performance in a number of key operating metrics and made further progress towards transitioning Spok to a growth model and long-term provider of critical communications solutions.
In general, our performance in the second quarter was consistent with our expectations and the seasonal trends we typically experience during the year.
We were very pleased as we saw continued reduction in the decline of our paging units and wireless revenue to record low levels.
Software revenue was in line with the prior quarter, and we believe we are well positioned for the second half of the year.
Our software bookings improved nearly 33% from the prior quarter, and our backlog was up nearly 7.4% over the same period.
In the second quarter, we also saw strong performance in a number of other key operating measures, including solid improvements in operating expense management and cash generation.
We believe that continued investments will yield significant future benefits in the form of our improved, integrated communication platform, Spok Care Connect, and an enhanced and upgraded sales team.
Overall, we continue to operate profitably, enhance our product offerings and further strengthen our balance sheet.
Our ability to generate healthy cash flows allowed us to execute against our capital allocation strategy, returning capital to shareholders, while adding more than $5 million to our cash balances.
<UNK> and <UNK> will provide details on our financial performance and operating activities shortly.
Before that, I want to highlight three key results for the second quarter.
First, software bookings of $20.1 million in the second quarter included $9.9 million of maintenance renewals, a record high.
Operations bookings totaled $10.2 million for the second quarter, representing the first time in the past year that they exceeded $10 million.
And our software backlog grew nearly $40 million at mid-year.
Bookings included sales to both new and current customers, with existing customers adding products and applications to expand their portfolio of communications solutions.
Customer demand remained strongest for upgrades to call center solutions, healthcare applications to increase patient safety and improved nursing workflows.
Also, our pipeline of qualified leads continue to grow both in terms of quality and size, the result of the excellent work by our sales and marketing team to broaden awareness of the benefits of our software solutions.
Overall, we continue to see growing demand for our software solutions for critical smartphone communications, secured texting, emergency management, and clinical alerting.
Also, we continue to widen our focus beyond healthcare in such market segments as public safety, business, hospitality, education and government services Spok continues to build an industry-leading reputation that's generating activity and momentum at the conferences we attend.
Early in May, we were also pleased to publish the results of a customer study demonstrating how Spok customers are achieving notable improvements in staff efficiency and patient care coordination workflows throughout their organizations using Spok Care Connect solutions.
Please visit our website to see these customer success statistics in our new infographic, The ROI of Communication Technology.
Second, wireless subscribers and revenue trends continue to improve.
Our annual rate of paging unit erosion for the quarter improved to a record low of 5.5%, while the quarterly rate improved 900 basis points from the prior quarter to 0.8%.
Our Healthcare segment increased by 1,022 units in service in the second quarter.
In addition, our annual and quarterly rates of wireless revenue erosion improved.
Also, contributing to slower wireless declines was a stable ARPU, or average revenue per unit.
We were pleased to see the continuation of these positive trends, especially in our top performing Healthcare segment, which now comprises approximately 80% of our paging subscriber base.
We're encouraged by the slower than anticipated rate of wireless paging unit revenue erosion.
And let me point out that while many physicians want smart devices and secure messaging is a natural fit for them, they also want to keep pagers because they have long trusted them and want to separate their personal smartphone communications from their work communications arriving on a pager.
Also, in a true emergency situation such as severe weather or an event involving rapid deployment of first responders, (inaudible) networks tend to get overloaded and message delivery can fail or be interrupted.
If an organization utilizes only smartphones, communications can be at risk.
Pagers still work in these scenarios because we use a separate simulcast network and satellite control redundancy.
As a result of these dynamics, we believe that migration from wireless pagers will continue to occur at a slower pace.
Third, consolidated operating expenses in the second quarter, excluding depreciation, amortization and accretion, continued to improve on both an annual and sequential basis.
<UNK> will provide more detail on this in a few minutes, but I am pleased to report these results and the benefits we are seeing from our continued expense management initiatives.
Fourth, consolidated EBITDA, or earnings before interest, taxes, depreciation and amortization, was $8.9 million, or nearly 20% of revenue, in the second quarter, 900 basis point improvement from the EBITDA margin in the second quarter of 2015.
Of course, margin levels will fluctuate over time reflecting our level of investment in an aggressive hiring program in the areas of product development and sales.
However, longer term, we are focused on transitioning to a sustainable and profitable growth model.
And finally, again we generated sufficient free cash flow in the second quarter to return significant capital to stockholders in the form of cash dividends and share repurchases.
During the quarter, the Company paid cash dividends to stockholders totaling $2.6 million or $0.125 per share.
We also repurchased more than 65,000 shares of common stock under our stock buyback program.
I'll comment further on our capital allocation strategy later in the call.
All in all, the Company posted solid operating results in the second quarter, and we look forward to further progress throughout the second half of 2016.
I'll make some additional comments on our business outlook in a few minutes.
But first, <UNK> <UNK>, our Chief Financial Officer, will review the financial highlights of the quarter.
After that, <UNK> <UNK>, President of our operating company, will comment on our second quarter sales and marketing activities.
<UNK>.
Thanks, <UNK>.
Before I review our financial highlights for the second quarter of 2016, I would again encourage you to review our second quarter Form 10-Q, which we expect to file later today, since it contains far more information about our business operations and financial performance than we will cover on this conference call.
As <UNK> noted, we were pleased with our overall operating performance for the second quarter, and we remain focused on executing against our business plan as we enter the second half of the year.
In addition to the substantial progress we made for meeting our long-term business goals, we saw solid sequential and year-over-year improvement in a number of key operating metrics.
Revenue contribution from both software and wireless, combined with focused expense management, helped maintain solid operating cash flow, EBITDA and operating margins for the quarter, as we continued to invest in our business for long term growth.
We also added to our already strong balance sheet and continue to operate as a debt-free company at quarter-end.
In the interest of time today, I will not review our second quarter performance on a line-by-line basis, since much of that information is contained in our news release schedules and federal filings.
If you ask specific questions about our quarterly financial results, I would be glad to address those during the Q&A portion of this call.
Instead, I would like to focus this morning on four key areas that I feel will give you a better idea of the drivers of our second quarter performance.
These include, Number 1, a review of certain factors that impacted second quarter revenue, Number 2, a review of selected items that impacted second quarter expenses, Number 3, a brief review of certain balance sheet items, and finally Number 4, our financial guidance for 2016.
With respect to revenue for the second quarter, total revenue was $44.6 million, in line with revenue levels in the prior quarter.
Second quarter revenue performance resulted primarily from continued strong maintenance renewal rates from our software customers and a lower rate of second quarter paging unit erosion that favorably impacted wireless revenue.
As anticipated, total second quarter software revenue of $16.8 million was essentially flat to the prior quarter software revenue of $17.2 million.
As I've noted on previous calls, our software operations revenue is now generally recognized on a ratable basis, and totaled $7.7 million in the second quarter compared to $8.1 million in the prior quarter.
Maintenance revenue, the other component of software revenue, increased nearly 9% to $9.1 million in the second quarter from $8.4 million in the prior-year period.
It was also up slightly from the prior quarter.
The increase reflects our continuing maintenance renewal rates in excess of 99% from our installed software solution base.
Wireless revenue continues to exceed expectations, as we saw quarterly pager unit erosion slow to a record low 0.8%.
As a result, wireless revenue totaled $27.8 million, down only 1.1% from the prior quarter.
This solid retention reflected another strong performance by our sales team to, again, generate significant wireless growth additions, while minimizing churn and maintaining stable unit pricing.
Note that the financial tables that we included in the earnings release include an additional schedule detailing the components of our software and wireless revenue.
Turning to operating expenses, we reported consolidated operating expenses, excluding depreciation, amortization and accretion, of $35.8 million in the second quarter.
Second quarter performance reflects a more than 8% improvement from the prior year and a more than 1% improvement from the prior quarter, as we continue to manage our expenses to meet the changing nature of our business.
These reductions have not come at the expense of our business operations.
As <UNK> pointed out, we continue to invest to enhance and upgrade our product development team and tools, as well as our sales, infrastructure and management.
Of the year-over-year and sequential declines in operating expenses, the sharpest improvements can be attributed to a decline in cost of revenue expense, as we implement greater efficiencies in our operating platform.
Cost of revenue expense reflects costs for both internal and external implementation services, as well as third-party hardware and software purchased for customer implementations.
Last year, we focused our expense management initiatives to rebalance the use of these third-party services and have used internal implementation employees to manage this cost.
Turning to headcount.
We continue to adjust our employee levels to meet anticipated demand levels as well as the changing requirements of our business, including investments in our product development staff.
Our full-time equivalent employees, or FTEs, were 597 at June 30, 2016 versus 600 FTEs at December 31, 2015, and 608 FTEs at June 30, 2015.
These employee levels will continue to change as we execute against our business plan.
Our capital expenses in the second quarter of 2016 were approximately $1.5 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers.
Through the first half of the year, capital expenses totaled approximately $3 million, and we do not expect any significant changes to the level of our capital expense requirements for the second half of 2016.
Turning to the balance sheet and other financial items, the Company generated approximately $20 million in cash from operating activities in the first half of 2016.
Of that amount, Spok returned more than half to our stockholders in the form of cash dividends and share repurchases.
Of the remaining operating cash, 50% was used to purchase property and equipment, and the remaining $5.8 million has been retained for future use as part of the June 30, 2016 cash balance of $117.1 million.
We expect to use a portion of that cash in connection with quarterly cash dividends, as well as potential share repurchases in the remainder of 2016.
We exited the quarter with no debt outstanding and continue to operate as a debt-free company.
<UNK> will comment further on our capital allocation strategy shortly.
Finally, with respect to our financial guidance for 2016, as a result of the solid performance we saw in the second quarter, we are maintaining the 2016 guidance range that we provided last quarter.
That includes total revenue to range from $174 million to $192 million, operating expenses excluding depreciation, amortization and accretion, to range from $153 million to $159 million, and capital expenditures to range from $6 million to $8 million.
I would remind you once again that our projections are based on current trends, and that those trends are always subject to change.
With that, I'll turn the call over to <UNK> <UNK>, who will update you on our second quarter sales and marketing activities.
<UNK>.
Thank you, <UNK>, and good morning.
During the second quarter of this year, our sales and marketing teams delivered software bookings of $20.1 million.
This represents a 32.8% increase over Q1 and includes a consistently high maintenance renewal rate in excess of 99%.
We also welcomed more than 30 new customers to the Spok family, primarily in the healthcare and government sectors.
I will start by sharing our largest six-figure deal of the quarter.
It came from a government customer looking for a secure, reliable way to monitor 911 calls across more than 160 locations around the US.
Our solution's dependability has been verified with ongoing Joint Interoperability Test Command, or JITC certification, and Spok's reputation for that reliability was a contributing factor in the success of this deal.
This opportunity was also made possible through strategic partnership with another IT company.
The Spok team worked closely with this ally to design an enterprise-wide emergency assistance solution that will meet the needs of this customer.
Healthcare remains an important part of our growth and our largest segment, comprising 82% of overall bookings in the US for Q2.
Many of these are current customers returning to upgrade their systems, and expand their Spok infrastructure.
For example, a customer in the Northeast is adding a secure messaging app to their solution set so physicians can coordinate care effectively via text messages without putting protected health information at risk.
And one-fifth of our Q2 Healthcare bookings were hospitals and health systems that have never worked with us before.
Among the new customers joining Spok in Q2 is a small acute care hospital on the West Coast.
This facility recently completed construction of a new building and seeks to upgrade their contact center.
As they look to have communications across the hospital to assess the project, they realized they needed a solution that would support more than just call handling for their operators.
They saw the value of our integrated solution suite offers beyond standalone departmental applications to help support evolving communications technology.
This hospital selected us for their console platform, because they recognize Spok as a long-term partner as they build out their clinical communications infrastructure.
It is common for our customers to see us not just as a vendor, but also a trusted partner that can support them now and into the future.
A community hospital in the Eastern United States responding to a request from their nursing staff engaged our consulting services team to assess their clinical workflows and make recommendations.
The hospital's leadership wants to ensure that any new solutions will work with their existing IT infrastructure, allow for growth and be sustainable long-term.
Spok's unified enterprise communications platform resonated with this customer and they are working with us to solidify their communication foundation and expand.
Our Consulting Services Group continues to gain momentum and has seen a 70% growth in engagements over past year.
Consulting is one part of our highly skilled professional services group, which is an important part of our long-term strategic direction to give our customers an exceptional experience and set them up for success.
Satisfaction scores with our continually improving processes have increased 7 points year-over-year, and we have been able to improve project profitability by 5% in the same time period.
In addition, 90% of our project managers are now PMP certified.
Looking at customers and prospects outside of the United States, international bookings in Q2 were below our expectations, but our experience indicates that this will not be a trend.
We see healthcare organizations in Europe, the Middle East and Africa placing greater emphasis on communication solutions and applications, as well as more movement towards adopting US-based practices.
With expanding relationships with key healthcare services providers and partners in the region, we see EMEA as a strong market that will gain momentum in the coming years with growth opportunities.
In the Asia Pacific region, there continues to be a lot of interest in clinical messaging, especially critical test results management and our integrated platform to unify critical communications.
This is evidenced by the strong attendance at our recent webinar, Enabling EMR Interoperability, presented in conjunction with HIMSS AsiaPac.
Outside of healthcare in this geography, the team converted solid opportunities to booking in the hospitality sector.
One of our largest deals of the quarter, a new resort and casino in Eastern Asia, will be using Spok to support their contact center.
The resort's parent company has high regard for our partnership and has made Spok a standard partner for their communication technology to help them provide exceptional services to guests.
Before turning back over to <UNK>, I want to provide an update on our marketing activity.
Our marketing team is responsible for expanding our global content development, lead generation and event planning efforts.
Ongoing investment and activities in these areas, which include digital demand generation campaigns, webinars, educational eBriefs, videos and website improvements, help us drive leads and build our reputation as a top leader in the industry.
Marketing is also responsible for planning and coordinating Spok's presence at a large number of trade shows throughout the year.
In Q2, Spok participated in a number of events for both healthcare and public safety.
Qualified leads identified at these shows increased by 33% over last year.
And the caliber of conversations made it clear, our brand recognition is growing and our enterprise communications approach is resonating.
Our social media reach is also continuing to grow.
Quarter-over-quarter, our social following has increased 33% and unique views of our blog more than doubled from the second quarter last year.
Looking forward to the second half of 2016, we expect strong market demand for integrated critical communications, especially in Healthcare, and are making investments in research and development to further enhance our unified communications and collaboration solutions.
One of these investments is the addition of Dr.
Nat'e Guyton as Chief Nursing Officer and part of our senior product strategy team.
Dr.
Guyton will work with nurses around the globe to implement best practices and help us continue to enhance our critical communications solutions for workflow improvements and better patient care.
With that, I'll pass it back to <UNK>.
Thank you, <UNK>, and thank you, <UNK>.
Before we open the line up to your questions, I'd like to comment briefly on a couple items.
First, I want to update you on our current capital allocation strategy, and I also want to review our key goals and business outlook for 2016.
With respect to our current capital allocation strategy, our overall goal is to achieve sustainable business growth while maximizing long-term stockholder value through our multifaceted capital allocation strategy.
That includes dividend and share repurchases, key strategic investments to improve our operating platform and infrastructure, potential acquisitions that can provide additional revenue streams and are accretive to earnings.
First, we expect to continue paying our quarterly dividend of $0.125 per share, $0.50 annually, for the foreseeable future based on our current projections for operating cash flow.
In addition, we may buy back additional shares of our common stock from time to time under our share repurchase authorization and as market conditions allow.
As <UNK> noted earlier, through the first six months of 2016, we repurchased approximately $6 million of our common stock.
As a result, a little more than $4 million remains authorized for purchase under the current buyback plan which extends through year-end.
Next, as part of our capital allocation strategy, we have several options available to us to create shareholder value in addition to returning cash.
One such option that we have discussed and that we are already executing on is to increase our product strategy and development spend in growth opportunities, where we believe we can generate attractive returns for stockholders.
As usual, we will continue to maintain ample liquidity to support our working capital needs.
Last, we've not yet identified the candidate that meets our acquisition criteria, primarily due to what we see as a continued environment of unrealistic valuation expectations and candidates with high cash burn rates and unrealistic projections.
We continue to review candidates that could be a good fit for our platform.
However, as we've discussed in the past, we will remain disciplined in our approach, ensuring that any acquisition demonstrates both synergistic and strategic value for Spok.
In the meantime, we will continue to weigh increases in our internal R&D expenditures against M&A opportunities.
Finally, turning to our key goals and business outlook.
We're encouraged by our solid operating results in the second quarter.
We achieved the majority of our key operating goals, generated significant free cash flow, expanded our services and geographic reach, while returning capital to stockholders.
We also made further progress toward our goal of transforming Spok into a company with a long-term growth trajectory.
Our business goals over the next few quarters are unchanged, and are simple and straightforward, designed to create long-term value for our shareholders.
They include growing our software revenue and bookings profitably across all of our geographies, retaining our wireless subscribers and revenue by slowing erosion, investing in our people, products and infrastructure, and continuing our evaluation of acquisition opportunities that could be accretive to our business that accelerate our revenue growth and that use [our valuable deferred] tax assets.
To accomplish these goals, we will deploy a portion of our capital to accelerate the development, growth and expansion of our critical communication solutions and services.
This includes investment in new products and services, expanding our sales reach both within and beyond existing market segments, extending our sales into new geographic regions, and promoting our brand in key global markets.
In conclusion, there are many reasons we are confident in our future.
Spok is proud to be working with more than 2,000 hospitals worldwide, including the best adult and children's hospitals as defined by the US News & World Report.
We continue to build an industry leading reputation across several vertical markets.
We remain committed to our core values, putting the customer first, creating solutions that matter, innovation and accountability.
Combined with our strong team, solid financial platform, and industry leading products and services, Spok is well positioned for the future.
At this point, I'll ask the operator to open the call for your questions.
We'd ask that you limit your initial questions to one and a follow-up.
And after that, we'll take additional questions if time allows.
Operator.
Okay.
Look, thank you for joining us this morning, everyone.
We look forward to speaking to you again after we release our third quarter results in October.
So everyone have a great day.
| 2016_SPOK |
2015 | MU | MU
#Sure, this is <UNK> <UNK>, just responding to the last part of your question.
I think if you break all of that down, certainly DDR4 and LP4 in their early ramp don't lend themselves to the cost benefits right away like any of the semiconductor ramps that you deal with in terms of the market.
We will see that shift from early ramp headwind to advanced process tailwind in the midpart of our fiscal year.
That's also true with our 20-nanometer product coming out in the ---+ by the time ---+ I said second half in my script, second half at the end of the first half going into the second half will be a bit crossover, more than 50% of our production will be on the 20 nanometer and we'll be in an improved position there as well.
So, all in all, I think what you were asking about, we can confirm is the direction we see our cost position in the marketplace.
Yes, <UNK>, we commented on this last quarter.
It's still mid to high single digits impact in fiscal Q3 as we realize the transition to the updated 20-nanometer technology coming out with Inotera.
That's right.
It is just DRAM and that's just on the Inotera output.
The fiscal Q3 is the relevant time, because the contract kicks in at the beginning of the year, but there's a lag effect in terms of when it flows through our financials and that's the best time to look at it because that also happens to be when the 20-nanometer output is coming.
Let me take that one, <UNK>.
So you're right, we're going to play this by ear in terms of the planar TLC.
As <UNK> mentioned, there is a resurgence in interest in our high-quality MLC offerings for enterprise and high-end client applications and so we're just going to have to see how we dial that piece.
You're also right that we've said our plan is to have the majority of our 3D NAND on TLC in short order.
It is still a new technology; it is still ramping.
And I think it is probably a little premature to try and predict what that looks like in the 3D TLC, what that mix looks like in the first half of the year.
Of TLC.
I can't ---+
Oh, of 3D NAND.
It's going to be relatively small until we get to that crossover point.
I think it's important, <UNK> ---+ again this is <UNK> <UNK> ---+ I think it's important to make a distinction here.
Directionally your categorization of our SBU margins are correct, but I would also suggest on a relative basis to our competitors, our SBU business has held up quite nicely relative to where we were 12 months ago.
And I mean that because there's a number of different market segments that the team has developed and cultivated that we feel will continue to benefit us as we get some of the tailwinds in place that we described in the back half of 2016.
So that's a long-winded way of saying I expect that on a relative basis we get more competitive in 2016 and that our overall performance in SBU will improve based on a number of the elements we've talked about, whether it be TLC or vertical and some of the higher-end enterprise-type products we've described.
Keep in mind, when you look at SBU numbers, you're also looking at a blended trade and zero gross margin business [reporting].
Again, <UNK>, we can't predict the ASPs or the margins for you.
We're just telling you what we generally see and then you have got to layer in the ---+ obviously we're pretty bullish on what we're doing internally in our operational improvements that will play out through the year.
Well, you know, ASPs are a big one.
We always reserve the right to dial mix and we'll take advantage of any opportunities we see there.
I think we have a pretty good bead on what our output is going to be absent some dramatic mix changes, so I don't think that's as big a lever this particular quarter.
I'll see your different tact with my different tact, how's that.
(laughter) More broadly the technology, we see in a number of different end-market segments, both in current application environments and some innovative new areas that might drive some neat development on solutions and technologies to address markets.
The type of markets that we see 3D Crosspoint benefit from are either super high-end gaming applications, which could be for more real environment 8K type applications and provide the exact gaming performance that doesn't have to flush out to a different type of storage media.
It all can be done in 3D Crosspoint.
Another good one would be super high-end reliable system storage enterprise storage applications.
We think, as far as merging application development, we think the technology lends really well to medical diagnostics, for example, where the instantaneous response time of symptoms going in and research data analysis coming out with what that might be is a real-world application that could benefit from Crosspoint.
So these are the type of markets that the technology fits, and I think it's a quick summary of a few that are of interest to where the market can try this technology.
Think in terms of anywhere where you want a large in-memory database or anywhere where you want ultrahigh performance storage systems.
You said something there, how much can compute seasonality affect it, and it depends on how you see the compute market.
What I mentioned earlier was some of the environments that consume similar capacity, like the very low-end part of the server business, had some pricing pressure.
Notwithstanding all that, margins held up pretty well.
So my interpretation to your question is if PCs rebound somewhat, and we're not talking about a wild rebound, but they rebound somewhat going into the holiday season, that could be a positive ---+ that could have a positive impact on the overall pricing in the market.
But we think the diversification of the end markets lends well to relatively stable pricing and margins, as <UNK> highlighted.
Not more than what we've talked about in the past, which is we have these end markets that we have developed product strategies and by shifting some of the capacity away, it relieves some of the pressure in one area.
And the interesting thing overall about DRAM which we haven't really talked a lot about is some of these newer categories, LP4, DDR4, some of these categories actually take ---+ or have a limiting effect or reducing effect on overall wafer production in the industry.
And so as these categories take off and grow, we are of the opinion that, that can have a stabilizing effect too.
Well, I think the PC is about where it's been.
I can't advertise there's been a major uptick in PC demand.
The only data point that I would say that is new for us is that as we sit today the relative channel inventory on PCs is not a huge burden to a recovery.
I think that it's too early to tell what consumers and even the corporate environment are going to be doing through the holiday and through the rest of the year.
I can't give you a great sense of what's going to play out other than the inventory validation of what we see in the channel.
That's true not only for end units and PCs, but also overall true for PC memory relative to where the pricing pressure has been.
I don't think it's going to take a wild shift in behavior for PC environment to stabilize.
It's just probably too early for the holidays to see that.
On the mobile side, despite what we've read in the media about a slowdown in <UNK>a which, in fact, is somewhat true, there seems to be an offset in two areas, one of which is that memory content in phones continues to move upwards, which is more broadly positive, as well as, despite the high-end and mid-range smartphones in <UNK>a, the entry-level smartphone, which are really configured to be pretty good density configurations, are still in pretty good shape, coupled with other emerging markets.
So we continue to be bullish on the mobile market and the team's performance has been pretty good.
When you think about some of the areas that we have shifted to, mobile networking and automotive, the net of it all has been that we've been able to keep our margin in a relatively healthy place and continue to monitor that.
The amount is actually a little closer to $130 million versus $170 million.
And we're certainly going to continue to be opportunistic and as we think about the market during the fourth quarter, we'll be making decisions as we think is appropriate.
You know, it's difficult to necessarily forecast because we'll keep adopting our overall approach as market conditions warrant.
But if I were to categorize how we see it today, we think mobile ---+ and generally we are concerned more than where we sit today.
We see PC on the consumption side of memory flat to down somewhat just based on the overall market demand trends that we see.
In general, we think other embedded markets will only increase, given automotive gaining and the launch in growth of the IoT end segments.
Networking and server are very interesting because what we've seen in the trend in those two markets are as much memory as they can get in they will put in.
And as technology and configurations allow us, DDR4 will drive pretty high growth in terms of memory consumption.
So when you hear us bullish on the overall demand of the end markets, it's with good reason.
Memory consumption is rally driving either reliability, performance, or really new market applications.
And on the DRAM segment, we continue, notwithstanding on the PC business, continue to see growth across the board.
I think that's true.
I think a year ago we might have said that.
As things have played out, the low end of the SSD market where a lot of volume units go, that's starting to be a bit of a bloodbath in the NAND environment.
And the TLC pricing, it was just not something we were going to go fight with our MLC product when we can go shift that to other market segments.
Secondly as we think about the mobile business, the mobile business at Micron had a great year in NAND, tremendous growth, 2015 over 2014.
So we're going to continue to optimize around returns and market attractiveness and between some of the competitive pricing as well as the growth in mobile.
We altered our strategy mildly.
And I think with TLC and with our entrance in the vertical, I think you will see SSDs be more and more prominent because we think we are going to be in a better position to compete with the rest of the market.
Hi, C.
J.
, this is <UNK> <UNK>.
Unfortunately, we're going to probably punt on the revenue qualification.
I would just validate what you started with, which is we're generally very pleased with the ramp and the yield terms we're at today and we see, as we communicated, very consistently, we see a crossover by the end of our first half fiscal year, so we're very excited about that.
Not just from a raw cost perspective, that's great, but also from a product enablement on 8-gigabit configurations and it's going to open some doors for us.
So without qualifying the revenue number, it's a real positive tailwind for us.
So obviously the biggest one ---+ we can't tell you whether it's a headwind or tailwind ---+ which is market pricing.
As we think about the cost side, we should continue to see some improvement as we go further down the curve with 20 nanometer and 16 nanometer TLC NAND.
And then obviously it's going to be the mix between end markets.
And as we've talked about before, we do have the ability, certainly in the February quarter, at this point to think about where we want to direct that mix.
So those are the three big levers and they're going to move in ways that we can't fully predict right now.
On the market pricing side, the other two things we're actually thinking about quite carefully right now.
And, operator, I think we have time for one more question.
Well, that was a pretty good question in of itself.
There's a lot there.
I think we followed the media, we saw the quotes in the press and all that stuff.
We did see some very short-term improvement on pricing at the mid to end of August and even early September, but it kind of has since ---+ we've seen some softness again, some mild softness off of the high.
And so we're just tracking that as we look at it and see where it goes from a demand standpoint, if there's any improvement in the holidays.
But when you talk about the other markets, and I think the question you are asking is what happens when you continue to shift.
Is there a danger of oversupplying the other market segments.
And while it's hard to predict with the data set, it hasn't happened today and we don't sense it, we don't see it in the market at this point.
Mobile has been pretty stable, despite the mix move.
And I think a lot of that is because the market probably didn't have an appreciation six to nine months ago on what mobile densities would be doing.
And, in fact, you've seen tremendous growth, not just in the low-end but across the smartphone segment on DRAM content.
We don't think it's dramatic.
We have heard positive signs on industry supply potentially slowing over the next year or so, but we have got to wait and see how that comes out and shakes out in terms of the market.
But as far as demand, we're very upbeat, as you've heard on the call today, about some of the end market trends we are seeing and our ability to drive our technology there.
It's really a byproduct of this PC environment and can that rebound and then create more balance in the overall end markets.
<UNK>, still tracking pretty well with what we indicated at the Analyst Day, ahead of original plan, and we like the way it's going.
We think you may start to see small impact in fiscal Q2, but really it's a fiscal Q3 story.
All right.
We would like to thank everyone for participating on the call today.
If you please bear with me, I just need to repeat the Safe Harbor protection language.
During the course of this call we may have made forward-looking statements regarding the <UNK> and the industry.
These particular forward-looking statements and all other statements that may have been made on the call that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially.
For information on the important factors that may cause actual results to differ materially, please refer to our filings with the SEC including the <UNK>'s most recent 10-Q and 10-K.
| 2015_MU |
2018 | AAON | AAON
#Good afternoon.
I'd like to read a forward-looking disclaimer.
To the extent any statement presented herein deals with the information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated.
Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.
I'd like now to introduce <UNK> <UNK>, our Chief Financial Officer.
Welcome to our conference call.
I'd like to begin by discussing the comparative results of the 3 months ended March 31, 2018 versus March 31, 2017.
Net sales were up 15.1% to $99.1 million from $86.1 million.
New sales for the quarter are mainly due to the increases in our rooftop and water- sourcing heat pump products.
Our gross profit decreased 38.4% to $15.4 million from $25.0 million.
As a percentage of sales, gross profit was 15.5% in the quarter just ended compared to 29.0% in 2017.
In January of 2018, the company paid all employees a onetime bonus of $1,000 per employee as a result of the Tax Cut and Jobs Act, the Act, which lowered the federal corporate tax rate from 35% to 21%.
This bonus increase cost of sales by $1.9 million, excluding taxes and benefits.
Additionally, the company typically has seasonality in its sales and workforce with the fourth and first quarter being lower in production.
The company maintained a higher level of workforce through the end of 2017 and beginning of 2018 in anticipation of our growing business.
The company's water-source pump business also has a lower profit margin.
And given it is still in the early stages of production, this part of the business is not yet as profitable as our other products.
Selling, general and administrative expenses decreased 3% to $10.2 million from $10.5 million in 2017.
As a percentage of sales, SG&A decreased to 10.3% of total sales in the quarter just ended from 12.2% in 2017.
The overall decrease in SG&A was primarily due to a decrease in advertising expense and profit sharing.
Income from operations decreased 64.2% to $5.2 million or 5.2% of sales from $14.5 million or 16.8% of sales.
Our effective tax rate decreased to 18.7% from 29.7%.
The company's estimated annual 2018 effective tax rate, excluding discrete events, is expected to be approximately 28%.
The decrease in our effective rate was due to the Tax Cuts and Jobs Act that was enacted on December 22, 2017, lowering the federal corporate rate to 21%.
Net income decreased to $4.3 million or 4.3% of sales compared to $10.2 million or 11.9% of sales in 2017.
Diluted earnings per share decreased by 57.9% to $0.08 per share from $0.19 per share.
Dilutive earnings per share were based on 52,910,000 shares versus 53,190,000 shares in the same quarter a year ago.
I'll now turn things over to <UNK> <UNK>, our Chief Accounting Officer and Treasurer.
While net sales increased 15.1% for the quarter, our first quarter was fraught with various issues of which we've clearly identified and implemented corrective actions.
I'd like to talk about some of those details.
In the first quarter of 2017, we were unable to hire plant workers quick enough to meet the demand.
So coming into the first quarter of 2018, we retained a much greater plant workforce in anticipation of the stronger order input than actually occurred.
In January, versus forecast, we were down 40%.
In February, versus forecast, we were down 17.5%.
In March, we were down 15%.
So these orders weren't coming in the door near the rate that they were forecast.
Now these are not comparative to any other time period.
These are only comparative to forecast.
The one bit of good news is that in April, that we were 9% above forecast, so that loop of going down turned and went all the way up to in positive territory.
But through the end of April, we were still just a bit short of forecast.
It is trending in the right direction.
I want to make note that the architectural billing index has been in excess of the benchmark of 50, consistently over the past many months.
This supported the forecast that our sales channel was providing to us.
Our sales channel further confirmed that the orders were in the pipeline as forecast, but slower to release than originally expected.
April somewhat confirmed that assertion.
The next thing I want to go over is the timing of price increases.
So in November of 2017, we had a 3% price increase.
Approximately 50% of what we built in the first quarter had that price increase applied to it.
The other 50% was backlog that accumulated before the price increase.
Beginning right at the first of April, all product is being built on the new price that was established in November.
So component prices increased mostly beginning January 1, so that 50% of the backlog that was built in the first quarter had pressure on it, because those component prices had increased, yet we had not been able to effectively implement our price increase.
While our steel costs are committed well into the third quarter, some commodities such as aluminum were not, and they've had some impact at this time.
Not a great impact but it was some impact.
Probably the greatest impact was our elevated headcount.
We had this forecast from our sales channel partners that looked viable with all the other checks and balances that we utilized.
So we maintain that headcount.
We have approximately 30% surplus headcount versus that same amount of the year before.
Another pressure on us is our new laboratories coming online.
We've hired several people who are learning how to operate the lab at this point but the lab itself is not yet operational.
Portions of the new lab will be commissioned and operational early next month, with additional chambers coming online each month until final handoff in November.
We have to train these people.
It's essential to our immediate success upon completion of the lab, yet today, they're not showing any measurable contribution.
The next thing I want to discuss is the product mix.
If you will notice in the 10-Q, we've built approximately 6 fewer rooftop units the first quarter of this year, yet the revenue was up 12% on those rooftop units.
The result was we built units of greater complexity but at a much lower margin.
These very large complex units are very unique and they don't allow you to establish a whole lot of rhythm as you go down through the production line.
We had certain product sizes that we positioned for aggressive market share capture.
We've been achieving our goals with market share capture, but those came in at a lower gross margin than benchmark.
At the earlier stages of this effort, the dilutive effect of the overall margin was minimal, but the negative impact on the first quarter this year was sizable.
Our water-source heat pump business, while ramping up, we shipped over 1,600 units in the first quarter of 2018 compared with 2,485 units the entire year of 2017.
So all this is still a start-up business, with all the burdens expected of a start-up business, the product offering is accelerating and will gravitate towards profitability throughout the year.
We're on track to be significantly complete with the development of the products and manufacturing resources by the end of this year.
AHRI certification testing is ongoing.
Of the 7 units that were selected for testing, 4 of them have successfully completed the testing.
There is a fifth one in the test chamber at this time.
So we're getting closer and closer to achieving that final goal.
We don't have any determination of exactly when that will be, but we are well past the halfway mark at this point.
So I'd like to summarize with a few thoughts.
While the lab is currently putting pressure on the bottom line, it will enable development and refinement of technology, solidifying our very enviable position as a market leader.
Long term, the lab will prove to be a great investment.
All the units produced in the second quarter will be in accordance with the price increase in 2017.
We won't have that 50-50 dilution.
Then we have another price increase that's effective June 15.
That is forecast to offset many of the cost pressures previously discussed.
It will principally show up in production in the fourth quarter.
Many processes have been revised and improved.
Product mix has become more favorable.
Water-source heat effort is beginning to mature.
The plant workforce has been right-sized to meet customer shipment expectations and improve efficiency.
The Architectural Billings Index remains above 50, indicating the strength in the construction market for the balance of the year.
All these factors considered, we expect to see our margins improve over the fourth ---+ over the first quarter we're targeting historic levels over the next year.
I'd also like to point out that March 31, 2018, our backlog was at $74.1 million versus $68.9 million for the same period a year ago.
So now I will open it up to any questions.
I guess back on the gross margins and ---+ as you said a lot of moving pieces there, I'm trying to think about all of that.
But <UNK>, I think you said you expected to get kind of back at those historical levels, correct me if I'm wrong, over the next year.
As you think about it from here, is it kind of a progressive sort of stair step up as we move through '18 and then maybe to get there by the first quarter of '19.
Am I thinking about that right.
That's exactly the way we're thinking of it, <UNK>, the same way.
Okay, and from the materials cost side of things, I'm just trying to weigh all the different things going on in there.
Is that really the biggest impact here at the end of the day.
Not in the first quarter.
We had component prices, as I said, we had increasing component prices that they announced their price increases last fall, same as we did.
And the kind of the lesson I had to learn was how long it takes from the time I invoke a price increase until it actually hits in our plant floor due to the backlog and the timing of that.
I probably didn't lead that quite far enough and that's why only 50% was built at the new price, while I have some escalation in component prices.
Steel, we still had plenty of steel available at the price prior to any tariff announcement or any of that.
Aluminum was a little bit different, but aluminum is just a very small percentage of the cost of our overall product.
So as we go forward now, as we look at that, we got enough steel in poundage that at our current production rate, it will carry us deep into the third quarter, maybe all the way through the third quarter.
While our price increase that goes into effect in June, the very first unit that hits the plant floor first day of fourth quarter should be at the new price increase.
We believe that with the steel prices that they're talking about right now, which, by the way, are up 56%, not 25% like the tariff that was spoken to be, they're asking 56% premium.
We've analyzed that and if the prices stay that high, which we got reason to believe that they may subside a bit, but if the steel prices ---+ if the aluminum prices stay that high, that of the 5% price increase that goes into effect, we'll use up in excess of 3% of that 5% on those materials.
So that's going to leave us something less than 2% for escalation of wages and miscellaneous and I think <UNK> gave me a number earlier today that wages are looking at about 2.7%.
That's what the general inflation trend is.
General inflation is 2.7%, so when we couple all of that together, the 5% price increase is kind of a hold your own, not really at this point in time anticipated as a you-get-ahead measure.
But at least the timing of it appears to be much more in line with when these additional costs are going to occur.
Like you said that the price increase that I did November 15, if I had to do over on it I would have done it September 15 and that way I would have had the full effect of it when they started seeing these escalated components.
Great.
Okay.
And I mean, it sounds like you should have some pretty good volume coming through here at least in the coming quarters.
Is that going to be enough to offset these pressures and still grow gross profit relative to last year.
I mean, I know you guys don't guide but (inaudible) gravity of this.
Well, yes, we have a very strong backlog, strengthening every moment, like I said, the forecast and the forecast was not relevant to another quarter.
The forecast was actually quite aggressive by the rep force.
I mean, if they would've achieved forecast, oh my gosh, this would've been a heck of a lot different phone call, but it is what it is.
In April, we were up 9% above their forecast, so it felt like a lot of those orders that we thought we were going to get in January, February and even in March, got pushed out a little bit and then they started flooding in here in April.
While it's a curse on one hand that we get that workforce as big as we did, thinking that, that work was going to get in here sooner than it did.
But now, it might be as they call the silver lining in the cloud, in that I actually do have enough workforce by and large to build what we need to build and meet people's expectations and get some revenue through this place.
So I'm very confident at this point with what we see that we're going to have a real good effect of recovering from what occurred in the first quarter.
Got it.
One more if I could.
I'll turn it over.
I apologize.
Did you talk about the certification status for the water-source heat pump.
If you did, I'm (inaudible)
I did.
I did but I don't mind going over it again.
AHRI chose 7 units to test for certification.
4 of those have been tested, successfully completed.
The fifth one is in their lab as we speak.
We have confidence, as much confidence in the one in the lab now and the other 2 yet to be tested as we did the first 4.
So our confidence in achieving that certification is sooner ---+ is strong.
We are at their mercy as we've always spoken about them testing when they do.
One of the key things to keep in mind, of the 7 units that they chose, only 2 of them are what we categorize as the new product, the WH and WV.
The other 5 were products that we have made for years before.
There was no reason to certify those in the past, though, because we were essentially the only ones building them.
And that's been a little bit of the challenge for AHRI is figuring out exactly how to test some of those.
So the majority of those have now been completed.
I think there's one left.
It's a challenging test for them, but of the 3 left to test, I think only one of them is anything that's extraordinary for them.
Otherwise, I believe they'll test at a normal testing pace.
The other thing to recognize about AHRI with their testing, all of us that belong to the AHRI program, all over equipment, which there's multiple sections that you're listing equipment in, AHRI pulls a certain percentage of units from your production line every year and tests them for continuous maintenance-type confirmation of your certification.
That is probably the most substantial use of their lab time.
So when you open up a new section, then it has to work around all of those other tests and you're very much of a secondary effort for them.
So that's what makes it so difficult to open up a new section.
And the other thing is, until all 7 units have been tested and passed, you can't certify any of them, okay.
It's a one or ---+ it's all or none, actually.
We are a little bit understaffed to equal right now as of today.
Hold on just a minute, I'm getting confirmation on this.
We're not having agreement.
Hold on.
What <UNK> means is that at our pace of production at the end of this quarter, we would likely need additional staff, but where we're at, at the moment, we are adequately staffed.
But you will see significant improvement from what we can predict at this point in terms of our headcount versus our production levels within the 2.
Well, all materials are typically at 40% or less of cost of goods sold.
It's 10% of the cost of goods sold.
Correct, and there are enough moving pieces that it's difficult enough to project that, but if I were going to make my best estimate just at the moment I would tend to say your initial thought of low 20 range is probably at the better end of where we're likely to be.
We could be at high teens, but it's somewhere right in that range.
I don't have it in the exact numbers, but there's 47 people affiliated with R&D in the lab, some of which have been here prior to the lab.
But those 47 people, some of them are productive now, but there's a substantial portion of them that are solely being trained and developing additional capacity in the lab.
Our engineering expense in total year-over-year is up about 1% of sales.
So the percentage it represented last year versus this year has increased by about 1%.
Probably dominant number of those are affiliated with the lab.
Yes, the primary products of ---+ that I'm talking about there comprised about 20% of all production first quarter and historically, they had been closer to 10%.
And so they provided twice the dilutive effect as to what they had in historic perspective.
The bookings backlog, it is down to less than 15%, closing in to 12% as of last night, in what's in the backlog.
So we look for that product mix to improve throughout the year.
And this is ---+ it's really influenced by 2 things.
One was that this larger product that we don't make as much margin on, we did a pretty stellar job of cleaning up various aspects of the product to make it more attractive.
So the sales of that product has gone up 3x over recent history, and the other products have not accelerated quite as fast.
So it became a bigger percentage.
Well now, some of the other products are beginning to move ahead with better percentage advancements and getting that back end to a more favorable ratio.
The other thing about it, because it did triple in quantity, it put us behind the gun as far as being able to manufacture.
So its lead time went way out ---+ well when the lead time goes way out, people don't buy, they won't wait that long.
So that was a reduction in the quantity.
But what also happened was it floated into the beginning of this year with all those extended lead times and all that reduction.
So it did not slow down in volume in the first quarter, it had to be increased in volume.
And then the rest of our product line is to the north [will slow down in] the first quarter.
Well, we could tell you what ---+ where we are.
Could we give them that.
Yes, give them that.
Well, April quarters were up 24% versus last April and our backlog is currently $92 million, as of today.
Yes, I believe it will be.
We've not seen anything.
It's too early to have seen any pull forward from the 2 price increases that I presided over.
It looks to me like we won't see pull forward until almost the week of the price increase, at the earliest, 1 week ahead of that.
So possibly what happens for June 1 through June 15 will be a huge anomaly.
But let's just say, a nice average booking day around here in the Tulsa operation is around $1.6 million or $1.7 million a day, let's say.
But the day ---+ on November 13, we booked 8 days, so you pulled 5 or 6 days were really easy, it looks right there.
I think it's going to continue to ramp up.
It's going to stair step some, based on certain things happening.
First off, our second segment of the manufacturing process will allow us to build some bigger units.
We have concept designs finished for those, but we don't yet have them fully vetted out, ready for manufacture.
We didn't have the facility to do it.
That facility comes online within the next couple of weeks.
So probably over the next few weeks, we will have some additional sizes available, which means that there are projects that we've been blocked out of because we didn't have the range of sizes that will start coming in.
So when we introduce this next ---+ 2 sizes, the 6 and 8 size units, that will stair step us up a good bit as far as availability.
Once we get the AHRI certification, which, cross my fingers, happens almost simultaneous with getting the additional product, that will stair step is up.
So we've got 2 significant stair step opportunities probably somewhere in this quarter to early next quarter, but things are ramping up.
We're having one aspect of it is that we have some early adopter type of operations went out there and sold some units and some another people that are standing around watching to see how those jobs went.
While they're getting favorable review, so now other people are getting to engage more readily.
So several things are starting to move loose at the same time.
Still are.
Yes, it's still on target to be finished sometime in August.
I don't think we want to ignore the fact that there's been a considerable effort put into the water-source heat pump.
A lot probably more so than ---+ probably the thing that's happened in the legacy product most significantly is that we've not continued to advance at the same rate that we were advancing at because we only had the ability to develop so much at one time.
Part of our additional overhead in addition to engineering was adding more people so that we could do more parallel projects at the same time.
And that's had some learning curve to it.
It's had some ramp-up time to that.
So I would say that in the earlier stage of it, it was probably more disruptive than it is currently, but I would say that there is some validity in your assertion.
If you give me a do over, I'm not only going to be a little earlier, but I'm going to be a little stronger too.
I doubt it.
Very likely I'll hit it again in October.
Well, the tariffs are ---+ a real question is to what the actual impact was going to be.
You don't want to curb sales to the point that ---+ you don't want to go up so much that you'd cut off the growth.
So it's a bit of a calculated risk either way.
You calculate what you think you can get.
And again, Norm has been a great adviser to me on this, but he's kind of left me alone on this.
So I had to suffer in my own soup.
And so like I said, if I have a do over on it, yes, I would do it a little earlier, I'd do it a little stronger.
And at this point in time, I believe what we've done going forward, is correct.
And we'll just continue to keep a further ---+ watch further down the road as to the way things are occurring.
The most significant thing, more so than the amount that I raised prices, the more significant thing was the timing.
And in my past 32 years of career, when I put a price increase, I saw it hit the bottom line much, much faster.
And so at this juncture, it was a little hard to understand how it was so much longer before it got through the entire process and got to the bottom line.
Well, I have clear understanding on that now, I assure you.
John, one of the things of turning the company over to somebody, you can't tell them what to do all the time.
They don't learn by being told everything they should do.
So sometimes you have to suffer a little bit in silence and hope that it doesn't have too much of a negative effect.
So therein is part of what's going on and it's not just the fact that I'm backing out of the picture, we had the Vice President of Manufacturing and Head of Plant Construction and Senior Vice President and enumerable other people are at the same age level, a little younger than myself even, have left.
In last 18 months, we've had a considerable change and up to level management.
And all of these people naturally do not have years of experience, but still going to move quickly.
And so they're all a little bit hesitant, they all move a little more gingerly than what maybe a more experienced person would do.
So we collectively put all those people together against the new people.
Now you ask yourself, how did these new people measure up to the old people.
Well, I'm going to admit something.
I think <UNK> is due to be a better person in this position than me in the long term because he starts at a different level and he didn't have to do all the heavy lifting that had to be done to get us to this point.
So I'll start right there and I'll then either make a further assumption, across the board all of the people who retired I think have been replaced by at least comparable and in most cases superior potential person.
But this potential person ---+ people aren't where they are potentially.
They're just rising to that point.
So there's been a lot of that has been very hidden in our problem areas in that we didn't have realized problems as quickly, we didn't respond as quickly nor anything else.
The other side of this was we got misled a little bit by the duties.
The duties of 25% on steel and 10% on aluminum.
The actual fact is as we sit here right today, both of them are up somewhere in the mid-50s, they're up 56%, 57%.
But we didn't think it was going to go that far, but the commodity people, when they get an opening, they do like everybody else, they ask for more than they really expect to get.
But initially for a while, they won't get that price.
So you're really sitting here kind of floundering, wondering what the real numbers is going to be once it settles down and we don't know that at this point in time and neither do our competitors.
So we're all guessing.
We're playing a guessing game and a timing game.
And it's quite different than it's been for many, many years.
It's been very, very ---+ we haven't had very much excitement in the industry.
We haven't had very much change and everything's been very predictable.
So this duty that was thrown out, everybody says, okay, got to go for 25 and 10.
Wrong, way wrong.
And so we all have been trapped a little by what's actually occurring out there.
And I know from history, I've been at this an awful long time, they all come out that way and then purchasers finally figure a way to get around them a little bit and they'll get that lowered down.
But we never know how much that will come down.
So we're still a little bit in the dark about what's going on for the future here.
And as that kind that settles out, we're going to see how much more we need to implement that adjustment to it.
Right now, I think we're good because even though we're at open market price on aluminum, we're at ---+ we got a fixed price all the way through until sometime August, September on the steel.
So we're not being ---+ the steel thing isn't hitting us on the commodity.
It is hitting us on the components, however, because the people who we buy components for, may not have that protection on their steel and so they have to raise their price on us on components.
All right.
So let's talk about intangible versus tangible.
The tangible component of it is that we've got a product development road map that is currently moving at a slow pace because of the number of lab chambers that we have available to develop product.
So we will have several times the number of chambers available to us when the new lab is completed.
So rather than having this slow pace of product development, we'll be able to accelerate that probably around 4 or 5 times and the reason I'm not able to give you an exact on that is because these people that we're training now, again, we got to get people trained.
Just because you have a chamber available, it doesn't mean that we've got qualified people to operate it.
So we're trying to lead that situation by training some people now in our existing lab chambers so that they'll be ready to go.
So from a tangible standpoint, we'll be able to accelerate the development of products.
We have plenty of ideas on our product development road map that the constraint, the primary constraint is available lab chamber time.
So that's the tangible.
The next thing is we already have 3 projects that our sales channel has secured because we will be able to test their product for that project in our lab and vet out all the operational characteristics, improve the airflow thermal and acoustical performance of these.
Our sales channel partner in New York City, so apparently it's a new high-rise building because they have 26 units that go 1 per floor is the typical arrangement.
And they sold that with the fact that we will be testing those units in our lab to demonstrate exactly what they need to do for acoustical mitigation in that space.
So it will be a sales enhancement tool related to certain projects as well as developing products.
All right.
Thank you.
We look forward to talking to you at the next conference call.
Good day.
| 2018_AAON |
2017 | LMAT | LMAT
#Thank you, Tiara.
Good afternoon, and thank you for joining us on our Q1 2017 conference call.
With me on today's call is our Chairman and CEO, <UNK> <UNK>.
Dave Roberts is unable to join us because he is available ---+ he is at a vascular conference in London.
Before we begin, I'll read our safe harbor statement.
Today, we will make some forward-looking statements, the accuracy of which is subject to risks and uncertainties.
Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.
Our forward-looking statements are based on our estimates and assumptions as of today, April 26, 2017, and should not be relied upon as representing our estimates or views on any subsequent date.
Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that could cause results to differ materially from those expressed or implied.
During this call, we will discuss non-GAAP financial measures, which include organic sales and growth numbers as well as EBITDA.
A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com.
I'll now turn the call over to <UNK> <UNK>.
Thanks, J.
J.
Q1 2017 was another strong quarter.
I'll focus on 3 items.
First, record sales of $24.1 million and 49% net income growth headlined the quarter.
Second, biologics, now 1/3 of our sales, continued to drive growth at <UNK>; and third, our business in the Americas has picked up momentum recently.
As to our first headline, Q1 sales increased 19% to a record $24.1 million.
Strong sales growth, an improved gross margin, and a low tax rate drove net income growth of 49% and EPS growth of 42%.
In fact, all three of our bottom line metrics in Q1 were our second best ever, op income of $4.2 million, net income of $3.2 million and EPS of $0.16.
We are very excited about passing the $100 million mark in sales in 2017.
will run through our guidance later in the call.
Turning to our second headline.
Biologics accounted for 33% of our sales in Q1, a high-water mark.
The XenoSure Patch grew 48% in Q1 as our 95 rep sales force continued to make market share gains.
We now have clearance to sell XenoSure in 71 countries, and we're pursuing applications in the large markets of China, Japan and Australia.
Our biologic growth extends beyond XenoSure.
Omniflow posted 21% sales growth in Q1 and this 2014 acquisition for our European sales force is now squarely in the win column.
Sales of our recently acquired RestoreFlow Allografts were strong in Q1 and the product has captured the interest of our domestic sales force.
Starting in April, RestoreFlow has been folded into our sales reps quota, which should help drive 2017 sales.
We also recently filed with Health Canada to begin providing RestoreFlow north of the border.
Results in these 3 implants further our confidence in the future role of biologics in vascular surgery.
Two weeks ago, we broke ground on a new biologic-only clean room in our Burlington headquarters.
As to our third headline, Q1 sales in the Americas were up 26%, following growth of 17% in Q4 2016 and 22% in Q3 2016.
XenoSure remains the primary driver, but Q1 growth was, once again, supplemented by AnastoClip, up 49% in the Americas and 43% worldwide, largely due to the recently introduced longer version.
There was no personnel turnover in the North American sales force in Q1.
This could be due to the continuing upgrade of our product portfolio as well as recent increases to our reps' W-2s.
, I want to remind you of <UNK> Vascular's financial objectives: 10% annual reported sales growth and 20% annual op income growth.
Thanks, <UNK>.
Our gross margin in Q1 2017 was 71.9%, a sequential increase of 240 basis points over Q4 2016.
The increase was driven by higher U.S. sales, where margins are comparatively higher; lower sales to China, where margins are comparatively lower; manufacturing efficiencies; and average selling price increases.
In order to further improve manufacturing efficiencies, we have started construction on a new 8,000 square-foot clean room, which will be used to manufacture our XenoSure and other biologic products.
Biologics now represent 33% of our worldwide sales, and we believe that the new clean room will enhance our biologic manufacturing competencies by lowering unit cost over time.
Q1 2017 operating income was $4.2 million, an increase of 27% versus Q1 2016.
The increase was driven by a 19% increase in sales as well as 100 basis point improvement in the gross margin.
The operating margin in the quarter was 17%.
We expect our operating margin to increase in Q2 2017 to 19% and then to 20% for the full year 2017.
Improving leverage in the back half of the year is a result of projected organic sales growth of 9% for the full year and a gross margin of 71.5% as well as cost containment in the second half.
Our effective tax rate in Q1 2017 was 24%, with the lower rate driven by increased employee stock option exercises.
Combined with a 27% increase in operating income, the reduced tax rate resulted in a $3.2 million of net income, a 49% year-over-year increase.
Earnings per share in the period were $0.16, a 42% increase.
Turning to guidance.
We expect Q2 2017 sales of $25.4 million, a reported increase of 13% and 10% organically.
We also expect a gross margin of 70% in the quarter, operating income of $4.8 million, an increase of 27%, and earnings per share of $0.17, an increase of 27%.
For the full year 2017, we have increased our guidance to $100.5 million, a reported increase of 13%, and 9% organically.
We also expect a gross margin of 71.5%; operating income of $20 million, an increase of 22%; and earnings per share of $0.70, an increase of 27%.
In closing, I would like to thank <UNK> <UNK> for recently initiating coverage on LMAT.
We know <UNK> from his <UNK> days and we look forward to working with him in the coming quarters again.
With that, I'll turn the call back over to the operator for questions.
Okay, great, <UNK>, thanks a lot.
That's a great question.
I would say, specifically, I don't think we're going to be guiding exactly on these devices.
I think we've been trying to look at this thing as a ---+ sort of a portfolio, but since it's a new acquisition, maybe we dig in a little bit more than usual.
So the short answer is it's going very well.
The sales force seems very excited about this device.
It's large enough that it has captured their attention.
And the results so far indicate it feels as though we're going to get something in the neighborhood of a 15% to 20% increase in sales, and you'll remember that we bought a $3.7 million business.
So I'd say pretty darn good.
We're pretty excited.
It's not yet in the win column, but pretty darn good.
Yes, yes, good question because there's a lot of movement there.
Sequentially, we were up 240 basis points and a decent amount of that improvement was due to improved mix, particularly sales in the U.S. where margins are comparatively higher versus sales in the ---+ outside the U.S. And additionally, less China sales quarter-to-quarter sequentially, again, may be adding 1% to the margin there because of that.
Manufacturing efficiencies are coming through also pretty nicely in the quarter.
And then average selling price increases as we get around the turn of the year.
So those were sort of the drivers, sequentially, a decent number of those also improving the margin year-over-year.
So it's kind of the same theme, which is an improved mix topic, an improved ASP topic and maybe an improved U.S./OU.
S.
geographic mix topic as well.
Looking forward to Q2, we're thinking we're going to downtick a little bit for the quarter but then rebound as the year goes on.
We're still guiding 71.5% for the full year.
But in Q2, in particular, there's more, I think, accounting issues more than anything else, some manufacturing inefficiencies from months gone by, 5, 6, 8 months gone by, coming off the balance sheet and onto the P&L sort of hampering the margin a little bit in Q2.
But again, recovery coming throughout the rest of the year as XenoSure continues to take up a bigger slice of the sales, and its margin improves, and we improve manufacturing efficiencies on the HYDRO and some other topics as well.
So good bounce back in the second half of the year we think.
Okay.
I mean, one thing to remember is that XenoSure means more in the U.S. than it does in Europe.
And we seem to have found pricing power in XenoSure in the U.S. whereas we don't quite have as much pricing power over in Europe, so that's a big thing.
Anytime you say the word XenoSure, it covers a lot.
It pulls out a lot for our company.
Also, we've had a nice run of the sales reps sticking around and not turning over like we've had historically.
We talked about the turnover before.
So we feel good about that.
And then, of course, we're up from ---+ I think, we're up 10% in terms of the size of the sales force over the last 12 or so months, so that's helping out as well.
The U.S. also has access to this AnastoClip device, which is not in Europe.
I mean, we have it in Europe, but it's so small that it's de minimis.
It's ---+ and that's been going very well, so you have a couple of big horses, XenoSure and AnastoClip in the U.S. and maybe you don't quite have that over in Europe.
Sure, sure.
So I'm going to talk in reported growth numbers rather than organic because I don't want to send our accountants scurrying around in the background here.
But on a reported basis, if you could stylize and say, Asia has gone extremely well for the last 4 or 5 quarters, 40s, 50s, 60s and 70s is growth.
And usually Europe has been sort of in the 12s and 14s.
This quarter, on a reported basis, Europe was only 3%, and a lot of that had to do with 2 things: one is we just had a bad export quarter, and normally it's a pretty big piece to our business.
We do all of our export largely out of our Frankfurt office, and we ---+ it's a very lumpy business and we didn't do too well this quarter.
I have no worries about it annually.
And then secondly, you lost a couple hundred thousand dollars because of the weakness of the British pound.
We usually don't have that problem.
And then on top of that you lost some money from the weakness of the euro versus the dollar year-over-year.
So I'd say those 3 things would point you towards in the quarter.
The reported number was 3% in Europe and normally we've become accustomed to that being sort of 12s and 14s, but again, Asia going great guns and I expect Europe to be just fine.
Okay.
I might punt the cost to J.
J.
in a second.
But I would say, philosophically, the good news here is that you see us raising our sales guidance and the XenoSure thing grew 48%.
Am I doing that right.
No, that's organic, excuse me.
The XenoSure grew 50% on a reported basis.
No, got it wrong, sorry.
48% reported growth in Q1 and <UNK>, obviously, when things grow that fast you got to do something because you run out of room in the clean room.
So we've taken what used to be the shipping department in Burlington, and we're building out 8,000 square feet of brand new clean room space, largely for XenoSure, but also for another biologic device, the ProCol device.
What we then did was, we took the shipping department and we rented a fourth building in Burlington.
So to summarize, we used to have 3 buildings in Burlington, we now have 4, and we did it because XenoSure is growing so fast.
Timing, I bet we're occupying and making human-use devices in Q3 of 2017.
, color on cost on that thing maybe.
<UNK>, I mean, in terms of the cost, it's kind of a short term, medium-term topic, in the short term when we turn on the depreciation for a larger room.
I think, you'll have a negative impact.
Over time, however, as units continue to ramp and the folks within that room can be more efficient because the layout is better and process flow of the raw materials is better, et cetera, et cetera, I think you're going to get some nice efficiencies.
So, in the medium term, I think it's going to be a nice win for the XenoSure margin.
In the short term it might hamper it a bit.
But certainly, the right move.
Yes, so interestingly, FX changed a little bit between last time and this time.
So there's an FX topic in there.
And on the bottom line, that actually increases our euro-based expenses as they get translated back into dollars.
So that $1.5 million in, say, increased sales, take that through gross margin and maybe you get $800,000 or $1 million of GP depending on the mix and maybe RestoreFlow is a little bit more of that mix so it's a little on the lower side, then you get the take out of that, sort of $800,000 or $900,000, that FX topic that I just touched on, maybe $250,000 or so for that.
And maybe purchase accounting for RestoreFlow was a little bit more than we thought when we spoke to you last time.
And the China trials, that we're getting XenoSure ramped up in terms of the entering into China.
That trial is really starting to kick in, I would say this month and next month.
And as we do more cases in that trial, we're obviously incurring more expenses and I think that's a little bit incremental to our last conversation.
So the investment spend piece, if you will, probably another $300,000 or $400,000 out of that whole $1.5 million topic and the rest being accounted for as I mentioned.
On the whole though, for the year, the op margin I'm getting to 20% up from 18% in the prior.
So sort of nice leverage still coming through on the bottom line.
We think growth of 22%, I think that is year-over-year.
So nice growth as well in excess of our 10, 20 mantra, if you will.
So even though we held it flat, I think it's still a nice answer for the year.
Okay, so I'd answer that.
There's 2 positives that I think that come out.
When these assets do get traded, they get more likely to even get traded again, that's always sort of been a truism that I've felt happens with acquisitions.
Therefore, as you're pointing out, for instance, with Bard getting sold, there's a Bard Vascular, maybe the owners of Bard are going to feel differently about certain pieces and maybe Dave can go off and buy those pieces.
And I think that's what you're getting at, so yes, we generally really like when we see these big trades happen.
Another thing we like about these big trades is we do feel like the vascular subsidiaries, which are usually small within these larger entities, get a little bit goofier and a little bit easier to compete against.
They stop product lines, they don't ---+ I think when Synovis was bought by Baxter, it was a good thing for <UNK> because they got a little bit less focused, and we were able to make incursions into the XenoSure market largely due to the fact that Baxter sort of forgot how to sell to vascular surgeons.
And Synovis was pretty good at doing that.
So 2 reasons why we like them.
So yes, we like them all.
One small add-on, I'd say, is what was the multiple here, 6x sales, 6.5x sales, something like that.
When those types of things happen, we feel like you get a markation or a valuation stamp, again, on vascular and medical device companies, so we like that, too.
Yes, yes so the raise in total of about $1.5 million, we beat by $600,000-or-so in Q1, so that's part of the answer there.
And then I had mentioned there's an FX piece, which doesn't touch the organic number.
And that was about $0.5 million.
So surprisingly, there's been a decent shift in the euro FX rate and some of the other FX rates.
So another $0.5 million there of revenue, but not a change to that [9]% organic number.
And then, I think, RestoreFlow has probably got a little bit better outlook going forward than maybe we were thinking last time, and so there's a nice piece of that in there.
And of course, XenoSure continues to surprise on the upside, maybe and do well, and so there's a piece of that in there.
So I would say sort of nice growth from the acquired revenues of XenoSure and some of the organic pieces as well.
But those are the (multiple speakers).
Sure.
I think we're in the second or third inning of that rollout.
And the reason I think that is that we're fighting with one hand tied behind our back.
We don't have that long AnastoClip in the grip clip version approved for Dura, <UNK>.
And that's really what the surgeons and the sales reps are clamoring for.
They don't ---+ they specifically want the A clip, they want the G clip, and I know that's a detail, but the G clip bites, and it's more grippier.
That's why it's called G clip as opposed to A clip.
And so when that comes on, and we don't know what that comes but we've started an animal trial to get that approved.
When that comes on, I think you'll be fighting with both hands and that makes me think you're in the second or third inning.
Yes, sure, <UNK>.
Stock comp, about $500,000 in the quarter and CapEx about $1.7 million.
And just, <UNK>, just a little ---+ <UNK>, sorry to interrupt you.
On that $1.7 million, that's high for us.
Typically we're in the $2 million, $2.5 million range a year when we talk about the clean room build outs, and I think that's a decent part of that $1.7 million that we're talking about in Q1.
I mean, if you get to low 30s for the full year, do something, that might be sort of a place to shoot for.
But in the back half, I think you're in the mid-30s, low, mid-30s.
Yes, yes.
It's been larger in every single quarter since Q3 of 2016.
Do you mind if I quibble with the verb milked.
I'm kind of just having fun there, <UNK>.
But no, we feel good about the device.
And we've told you guys a lot over the years the units are generally flat, and we have price increases.
And I would say it's business as usual with the valvulotome this year.
Though in Q1, we were comping against a high Q1 the year before, and so there wasn't much growth.
I think it was exactly flat on a revenue basis in Q1.
But we feel as though it will be a normal valvulotome year.
We do feel as though we are getting the nice price hike that we put in.
So I would say business as usual with the valvulotome.
Although in Q1, you had a flat Q-over-Q.
Gosh, I hope we didn't give anyone the impression that we thought something was or wasn't going to happen.
I generally feel as though the pipeline is what it is.
There's plenty of things to buy in this space.
But we would definitely never predict 1 or 2 happening in such and such a time frame.
I think that hasn't served us well.
.
Yes, I think it looks excellent always.
And I'll tell you as we get bigger, the pipeline gets bigger because we have more things that are smaller than us that we could potentially buy.
That all being said, I think one of the watch words recently, and maybe this is a small shift in our M&A expectations, is that we bought so many of these smaller companies in the last 5 years.
We bought 8 companies since 2012.
I think they've been a little bit smaller than maybe they should have been and I think when we put a big piece of product in front of the reps, a la RestoreFlow, they react really well.
And when we put a small piece, like the angioscope, in front of the reps, they don't get that interested.
There's not that much in it for each of them.
So I think our mindset is drifting upwards in terms of size.
No more small ones and maybe hold off on those and wait until we get a bigger deal.
Sure.
So I would say the XenoSure progress in R&D that we made, the patches, you mentioned the pledget.
No, nothing special, nothing material there.
The growth in XenoSure is about the original device.
So for better for worse, it's just doing all this by itself, and we haven't helped much with these 2 R&D projects.
That's one.
Omniflow, no, also the same answer.
We had a fantastic Omniflow Q1, we were up 21%.
No help at all from that 7-millimeter device that we launched.
It'll happen.
But these are long things.
And then I would say, the place where you're getting a nice kick is ---+ and we mentioned this before, is that long AnastoClip.
And again, it's only AC and we still have the GC long to give at some point when we get it through the animal trial.
You mean the reported sales growth, $11.3 million between last year and this year.
Is that.
.
I think, we're still not guiding on individual products, and we're trying as hard as we can to coach you guys into looking at this as a mutual fund.
That being said, of course, we realize the importance of XenoSure.
So, I would say the number we wanted to give out this time, which we're giving out now is that the sales were $5.22 million for XenoSure in the quarter and again, we mentioned before that was a 48% reported up, and you guys will have to work on your math as you see what happens this year.
The number, the base number in 2016, the final number was $18.1 million in sales for XenoSure.
I hope you can put that Rubik's Cube back together.
It's really hard, <UNK>.
And I'd say, Q3 is particularly confounding, is probably a good word, because of all the extra sales we made due to the back order from Baxter in Q3 of 2016.
Yes, okay, so the China trial, and I would always ---+ when I refer to these Asian trials, I just kind of have to use the word molasses.
It's molasses.
It's a very long one.
The end date is 2020 or 2021, something like that.
And we have not put our first implants in.
We had thought we would have put our first implant in by this phone call, we have not.
The current guidance from my regulatory staff is we'll put 1 in, in China at least in May, so the beginning of that.
And we hope to do 75 cases of the 225 ---+ I might be getting that number wrong ---+ 280, excuse me.
We hope to do 75 cases this year.
There's your Chinese answer.
As it relates to the HYDRO and the recalls, I think the good news is that the recalls on the HYDROs are all over, they're all mopped up.
You had a very large sales number in Q3 because of this.
You had a small number in Q for sales, you had a small number in Q4 because of this and you're now back to square one with normal results in Q1.
And I would say it's business as usual in valvulotomes in Q1 and then going forward.
Just because the recalls are over doesn't mean we don't have some small quality issues to mop up with the valvulotome.
But I would say the lion's share, the biggie issues are behind us.
Well, it's a good question.
I think largely speaking, it is and one way I try to look at this has been, we were making all these great market share gains before that thing, and I think the proposition of our vascular-centric sales force continues to be what's really driving all this and we happen to be in the right place at the right time.
So I think you're up and running and you're not going to lose these customers, though you know maybe someone wants to go back to Baxter at some point, again, but we feel comfortable that it's just business as usual in our XenoSure segment.
A little bit of that, <UNK>.
Sales up $1.5 million maybe GP up $850,000-or so.
FX is going against you now since the last time we spoke on expenses.
Euro-based expense is now coming back higher, maybe $250,000 for that.
And I think purchase accounting is probably a little bit higher than we thought the last time we spoke with you.
So most of that accounted for with those concepts and then maybe a little bit more of investment spend.
So we've kept it unchanged.
And as I said earlier, you're still up to a 20% op margin in the year versus 18% in the prior year and year-over-year, the growth is 22%, so we think it's still a nice number.
So you saw my guidance.
It was unchanged on the gross margin lines at 71.5% for the full year.
I'm going to guess, yes, it's going to negatively impact us when we immediately turn on the new clean room.
But there's some other good things happening to counterbalance that.
So I'm going to say improvement sort of in the second half from the 70% in Q2.
But yes, when you first turn on the new clean room, you get the depreciation right away.
And then when you get folks in there in a new environment, maybe it takes a little while to get up to speed and get a little bit more efficient.
Maybe there's some training stuff that goes right through to the P&L as they get acclimated to the new space.
But I think fairly soon after that, they'll be operating more efficiently than they were in the current clean room, which is designed less efficiently than the new one is.
| 2017_LMAT |
2017 | AVA | AVA
#No, the ERM will continue.
It is impacted, as <UNK> mentioned, we expect normal hydro, and then it's also impacted by natural gas prices.
The same impacts that we have every year, we have that same variability.
It won't change until we file another general rate case, or if the commission in their order petition, responding to the petition for rehearing or reconsideration, updates our power supply costs.
So otherwise we will have that normal variability until the next rate case, which would reset our power supply costs.
Correct.
If you recall it, <UNK>, we tried to do that back in 2006 and filed a power cost adjustment rate case, and the commission rejected that.
So we do not have that mechanism in our opportunity, but Puget Sound Energy does.
So we tried it and it was rejected, so we have to file a general rate case to reset power supply.
This is <UNK>.
It's primarily oil prices really.
When we purchased the company in July of 2014, oil prices were well over $100 a barrel, and they're half that now.
So that certainly created a bit more of a challenging situation with regard to economics.
They ---+ then there's customer conversion costs, and that plays into it, and access to low-cost financing and some other things.
But I would say the primary driver is just the cost of oil being what it is.
But we're going to continue.
We did ---+ we spent a lot of time looking at it and explored it, did a lot of really good, detailed work.
So we will continue, as <UNK> said.
We will continue to monitor the situation.
If things change, we'll reassess.
Thanks, <UNK>.
| 2017_AVA |
2017 | VTR | VTR
#Thanks Debby
Our high quality portfolio showed continued momentum in the third quarter with all segments contributing to a 2.1% overall growth rate versus prior year
With solid year-to-date performance, we are updating and improving our same-store growth outlooks for the year by 25 basis points at the midpoint
Let me unpack these results for the quarter
Starting with our triple-net business, which represents 38% of our NOI
The triple-net portfolio grew same-store cash NOI by an attractive 3.8% for the third quarter of 2017, driven primarily by in-place lease escalations
Cash flow coverage in our overall stabilized triple-net lease portfolio for the second quarter of 2017, believe its available information, health study at 1.6 times sequentially
In our triple-net seniors housing portfolio, trailing 12 months, same-store EBIT arm coverage was steady at 1.3 times
With the majority of our NOI, clustered around the portfolio coverage average
We view seniors housing triple-net coverage of 1.2 to 1.4 times to be within normal market ranges through cycles
Our strong lease protections and diversification also provide additional security
As Debbie mentioned earlier, given our intention to enter into a joint venture for over 70 senior housing assets currently lease to Elmcroft, we are now excluding these assets from our triple-net coverage and same-store supplemental reporting in current and prior periods
In our post-acute business, IRF and LTAC coverage declined in the quarter by 10 basis points sequentially to 1.6 times, driven by rent increases, the continued impact of the LTAC reimbursement change and labor wage pressures
We expect to realize the benefits of patient criteria mitigation in our coverage ratio starting in the first half of 2018. Having now received the majority of the proceeds from the sales our Kindred SNFs, skilled nursing will soon represent just 1% of Vantas' NOI
SNF industry volume and mix headwinds continue to lower coverage in the segments
However, our remaining SNF portfolio has very healthy lease protections that provide additional security and rent reliability
Finally, Ardent delivered terrific performance in the first half of 2017 with volume, revenue and EBITDA improvements ranking among the top performers in the industry
At the asset level for the Ventas properties, rent coverage remained stable at three times in Q2. Ardent integration of the LHP Hospital is right on track and budgeted synergies are being realized
With encouraging year-to-date triple-net results, we are raising our full year 2017 triple-net same store NOI guidance by 25 basis points at the midpoint to now grow between 3% and 3.5%
Moving on to our senior housing operating portfolio
We are pleased with our SHOP results in a third quarter, growing same store cash NOI by 0.6% versus prior year
Continued profit growth in the context of industry-wide challenges underscores the quality and resilience of our portfolio and the strength of our operators
Looking at the SHOP P&L, occupancy increased sequentially by 40 basis points to 88.7% in the third quarter
As expected, the Q3 year-over-year occupancy gap widened to 230 basis points versus the 200 basis point gap we saw in the second quarter, driven by the impact of continued new competition in select markets
Encouragingly, rate growth was solid in the quarter at nearly 4% which was ahead of our expectations
Rate increases and the high barrier-to-entry markets continue to trend southerly above our portfolio average, while rate in markets with new supply is also growing overall despite price competition
Our operators also did an excellent job of cost containment in the third quarter
Overall expense increases where health just 1.7% despite continued wage pressures
In addition to flexing labor with occupancy, our operators held non-labor costs essentially flat
Reduced performance incentives also benefited the quarter
At a market level, we continue to see momentum in high barrier-to-entry locations such as Los Angeles, Boston and Toronto which drove very strong top and bottom line results
Performance in Canada continues to grow from strength to strength, growing NOI approximately 10% in the quarter, the second consecutive quarter of double-digit gains
Partially offsetting the strength was performance in geographies affected by new competition most notably within secondary markets
While still at elevated levels, new openings in the third quarter were delayed relative to Nick projections
At the same time, new construction starts in our trade areas were flat in the third versus the second quarter
As a result of both of these factors, new construction as a percentage of inventory in our trade areas picked up by 20 basis points in the third quarter underscoring that the impact of new deliveries will carry forward into 2018. From a demand perspective, we were very pleased to once again see greater than 3% absorption gains in the third quarter, suggesting a continue trend of increased penetration rates for senior housing
The security of our residence during the hurricanes is yet another example of the value proposition of senior housing and the potential to raise the penetration rate among seniors above the current 11% level
For the full year 2017, we're updating and narrowing our SHOP portfolio same-store NOI guidance to now grow between a 0.5% and 1.5% versus the previous range of 0% to 2%
The new guidance midpoint implies a modest year-over-year NOI decline in the fourth quarter
That said, our SHOP operators are sharply focused and incentivized to positively close out the year
Rounding out the portfolio view is our highly valuable office reporting segment, representing 25% of Ventas' NOI and comprised of our university based life science portfolio and our high quality medical office business
To help bring the quality of our office portfolio to life for investors, we have expanded our disclosures on tentative versification and credit strengths in this quarter's supplemental reporting
Our life science operating portfolio continued to perform very well through the third quarter
Sequentially, total occupancy remained excellent at 97.5%
We have been really pleased with the reliability of our life science cash flows
In fact, 75% of our rent is derived from investment grade credits for companies with a billion plus in equity market capitalization
In our medical office business, same-store cash NOI in the third quarter increased by 1.5%
We delivered 91.8% occupancy through new leasing and tenant retention that exceeds 80% year-to-date
This retention rate underlines the strength of our diversified MOB portfolio
A few other quantitative examples include over 95% of our NOI is affiliated with leading health systems
Our portfolio is well diversified with our top five health systems representing less than 20% of our MOB base rents
And our tenant's credit profiles attractive with 75% of NOI affiliated with a health system that is rated single A or better
These attributes help drive third quarter revenue up over 2%
Expenses outpaced revenue growth in the quarter principally from lapping a real estate tax credit in the prior year third quarter
Adjusting for this item, expenses grew modestly below revenues
With solid year-to-date results on a valuable platform, we have raised the midpoint of our guidance by 25 basis points to a range of 1.5% to 2% for a same-store medical office assets in 2017. Before diving into our company's overall financial results, I note on the financial impact of hurricanes Harvey and Irma in the quarter
Total direct cost for Ventas resulting from the hurricanes including property damage and other costs approximated $10 million or $0.03 per share in the third quarter of 2017. These expenses reduced our income from continuing operations and NAREIT FFO in the quarter, but have been executed from the company's reported NOI and normalized FFO
So we have appropriate coverage
We have not recognized any insurance proceeds in the quarter or in our guidance, because the timing and amount are still uncertain
With that, let's review our overall Q3 financial results
We are pleased to report another quarter of earnings growth together with even more robust financial health
Third quarter 2017 income from continuing operations per share grew 5% to $0.44 compared to the third quarter of 2016. Normalized FFO per share in the third quarter grew 1% to $1.04 compared to the third quarter of 2016. Third quarter results were driven principally by accretive investment and improved property performance versus prior year, partially offset by the impact of dispositions in loan repayments
Ventas funded investments of over $80 million during and immediately after the quarter, notably including life science development spend for projects currently underway
We are excited to have received $570 million of the $700 million of value creating Kindred SNF sales at a 7% cash and 8% GAAP yield
Thereby reducing our SNF NOI exposure to nearly 1%
We have recognized gains exceeding $500 million on these sales
The accelerates SNF disposition timing represents a $0.04 reduction from the high end of our prior normalized 2017 FFO guidance range, and a $0.07 incremental reduction to FFO in 2018 relative to 2017 due to the sales and use of proceeds for debt reduction
We also increased our liquidity and flexibility to renew an innovative $400 million revolving structure facility to fund our exciting development pipeline anchored by our life science business
The result of this cumulative activity is a robust financial position at quarter end, including improvement in net debt-to-EBITDA to 5.7 times, lower total indebtedness to gross asset value of 39% and steady fixed charge coverage at an exceptional 4.6 times
Let me close out our prepared remarks with our updated 2017 guidance for the company
Specifically, total portfolio same-store cash NOI is anticipated to grow 2% to 2.5%, an increase of 25 basis points at the midpoint
We expect income from continuing operations to range from $63 to $74 and NAREIT FFO to range from $4.07 to $4.12 per fully-diluted share
Both modestly lower than previous guidance to principally to the $0.03 per share hurricane related expenses
Our normalized FFO per share is forecast to range from $4.13 to $4.16. The midpoint of our narrowed normalized FFO per share range remains unchanged from previous guidance because improved property performance offsets the accelerated completion of the Kindreds SNFs sales
Consistent with previous practice, we have not included any further material investments, dispositions, loan repayments or capital activity in our outlook
We assume approximately 359 million weighted average shares for the full year 2017. To close, we're pleased with the excellence we have delivered thus far in 2017. However, this track record of Ventas excellence extends over decades not just years and the team that has delivered it remains tight, collaborative and cohesive
And one of course is Debbie
We are particularly proud that Debbie was once again recognized by the Harvard Business Review as one of the best performing CEOs in the world
She is one of 23 CEOs named to the Harvard Business Review list before consecutive years and one of only two women on this year's list
Ventas's financial performance rank 32nd out of nearly 900 companies globally for over 18 years, that is truly excellent to stand
With that, I will ask the operator to please open the call for questions
Question-and-Answer Session
Sure <UNK>
Bob here
We're really pleased to see the expense growth the 1.7%
We have given guidance early in the year and that's helps me true of about 4% I call it constant volume wage pressure and we continue to see that
So what obviously therefore happening is the operators doing a great job of managing down the other costs not labor costs together with flexing labor with occupancy and that's what's driving the benefits in the quarter
I believe a lot of those costs savings remain sustainable and particularly flexing labor with volume is to go back in time and look at historical occupancy levels, we still have plenty of cushion relative to where we were at lower
So there is still opportunity there and for those with scale which our operators have to continue to drive that to reduce and hold non-labor cost, so still room to run there
In terms of your second question on software implementation costs, that's a onetime cost with Sunrise and putting in the software for care and so we've adjusted that out as non-recurring
It's for care compliance <UNK>, really to be able to when care is provided to a resident to be able to monitor and track that and ultimately bill for it, so
Right, so onetime software upgrade basically
Well, anecdotally we continue to hear it's more difficult to find difficult to find operators to get financing, to find good locations in terms of supply, Debbie quoted some of the steps in terms of starts relative to two years ago which are down nearly 50%
So both the anecdotes and the facts would suggest there's a positive trend there which we're pleased with
As we think about labor going into 2018, obviously a bit early to give guidance
I do think wage pressures will continue, labor pressures will continue into 2018 there
Therefore we're going to turn to price again
I'd emphasis how pleased we are on the rate side with 4% we saw me a year and again we're seeing that across the portfolio and that's really encouraging
Let me differentiate between underlying asset performance and our triple-net same-store
Our triple-net same store has performed very well year-to-date and the race to 3 to 3.5 really reflects the fact that we've done three quarters of the year
And really see stability in that portfolio everything about the rental income
So that through guidance for us
In terms of trends in the underlying portfolio, I think the same the same store senior housing triple-net portfolio same headwind to the industry
And so we probably will see some pressure on that 1.3 times as we go forward here
But again we think got to within underlying norms within the industry
We've been really pleased <UNK> with Canada of course two consecutive quarters now of double-digit growth
And when you look within the occupancy nearly 95%, what course we have is a supply demand equilibrium in Canada, we have great assets in Canada very well operated
And in light of the high occupancy, we've been pushing price again
I think that's a big driver of this performance
So I hope it will be top obviously next year but the fundamentals are there
On the U.S
side, it's very much as we've portrayed I think if you go back to beginning of the year and the framework on guidance we laid out there that's where the year is really kind of very consistently so we really know the surprises so far
Sure
Well, two things as we think about construction that are important which is deliveries and new starts
And in the quarter, this quarter we did see delays in deliveries and that together with flattish new start is what drove the ratio up
And therefore again a step back, I think there's clearly a carry over to 2018. The underlying trends for the industry in terms of starts, we believe will part of our portfolio equally
Within that from a market point of view, one also had to look at demand of that supply growth and for our engine room markets as I described them, we consider this a very, very strong performance and that's LAs, Boston and the New York as I've highlighted
So though in certain areas there have been some new access coming online, again the engine room is strong and the rate is particularly strong in that
So we are feeling good about it
Unidentified Analyst Okay
Thank you very much
Appreciate that
I'll follow-up if I may
You talked about the recently announced JV, I know you just announced it today, so it's fresh
Could you possibly talk about how the JV is being valued and how is demonstrates the value of your portfolio?
Yes, hi Rich
I'll try to
The applied fourth quarter is really U.S
dynamic and really again it's down to the views of deliveries in pacing of new supply
I mean that midpoint really assumes
We have something more compression on the occupancy line
So we'll see but that's what driving that assumption
The question was the profit adding capital spend and it's 200 year-to-date
It's really split between life science and SHOP
And I think the number is still pretty good, pretty good having, that's going to here there about the same
Yeah, so let me break that down a little bit for you
The 10 million is really split call it 50-50 between property damage and other direct costs the other half associated with things like evacuation, meals, lodging et cetera
We have not to emphasis assumed any - yet any insurance proceeds reimbursements
We have insurance obviously to covers those types of events
We have recognized you got the light of the uncertainty of timing and amount
So that's a gross number
It is flowing through the other expense line of the P&L, so it's below NOI
And as I highlighted in the prepared remarks, therefore it's still continuing including in but excluding from NOI and normalized FFO
Thank you
We don't differentiate in that analysis, so stabilized versus non-stabilized, nor do we in same-store at close in
I think the thing that's important to continue to look at when you look at the construction pages, the demand side of the equation then harking back to our framework where we have on average 3% demand as our equilibrium point
And so many of these markets where there is new construction coming online, there is high demand as well
Sure
The secondary markets is where we did see the blunt of new competition and I'd highlight markets like Salt Lake city for example flow into that secondary market segmentation
And it is - when we looked our portfolio and segmented it to say where do we have equilibrium versus a surplus
Many of those markets where we have surplus are in the secondary markets, so that's where we are seeing the impact and you can see quite clearly in the quarter
I think the supply dynamics I mentioned in terms of new deliveries will carry into 2018 no double in some of these same markets
That's a great question and shame it's the last one of the day, it's really interesting
And we are seeing the rent growth, the growth as I mentioned in some of those markets they have new supply
And that is a combination of what I call the releasing but also it is base rent increases
And what is very important and our operators do a very good job is understanding how that releasing spread is trending overtime
And I think in our portfolio generally we feel pretty good about that releasing spread being within norms that are acceptable
So the rate side of the equation is really held us
| 2017_VTR |
2016 | NRG | NRG
#Hi <UNK>.
Right, <UNK>, no.
What I said in the past is I think it's not a fair comparison to put us against some of our generator peers, because they don't have the scale of our retail platform and our retail business.
I think on a generation ---+ our generational platform I will put it vis-a-vis anybody in our space but you need to take into consideration we have a retail platform that I don't believe anybody else on our sector has.
What we have done today, and what I tried to articulate today, is really to give you a comprehensive look at the entire cost structure that we have, one that you can actually reconciled with our financials and that you can hold us accountable going forward.
We have identified and either executed or in execution close to $400 million of cost reductions that I feel we all feel very comfortable that are very achievable, and we are making significant progress.
I think there are more opportunities as we integrate some of the business, specifically residential solar, into the platform, but I expect that we will be looking at other areas.
We now have a comprehensive continuous improvement program that over the years have been very effective under the fornrg umbrella, and we are extending that to the entire organization, so we are reinvigorating that initiative.
It is now company wide, and I expect we will come with additional savings under that framework going forward.
And as we start identifying them, I will provide that additional detail, but just ---+ I'm excited about where we are in terms of our cost reduction program.
We have made significant progress, and I think we run a ---+ we're going to be running very efficient organization here.
That is my goal, and again I think when it comes to comparisons you need to make sure that you compare apples to apples.
No.
I think it would be in 2016.
We are in the process right now.
I announced today the reintegration of residential solar.
We have identified as I said of significant cost savings I think fully integrates with retail.
I am sure there will be more.
We're looking across other areas in the organization so this is an area of focus and to be candid it is a reflection and it has to be ---+ it is an imperative in this commodity cycle.
So we are looking across not just overhead but also operations O& M, and that is an area of focus as we are seeing changes in dispatch profiles and changes in terms of how our units get compensated specifically moving from energy driven margins to capacity driven margin, so everything is on the table, and I think as I said it is an imperative in this current commodity market environment.
I think that's a TBD.
Right now the partners we are focused in the three northeast markets.
I can't comment right now in Texas but I think it's a TBD.
I think what I will say is that's where we are focusing right now, and our partners will support us on those three markets.
Thank you.
Good morning, <UNK>
<UNK>, it is <UNK>.
What I'll tell you was no it doesn't include all of it.
The order of magnitude the little less than half.
There is maybe an incremental opportunity to do so, but that number provides us the amount of capital we thought was prudent right now given the opportunities we see on the deleveraging front, but it's a little less than half of the total amount of capacity, so think about maybe 1500 megawatts a year through the 2016-2017, 2017-2018, 2018-2019 timeframe.
I can't really comment too much on California.
I think that's a little bit more complex, but the answer on the PJM East front is yes.
Added complexity there is obviously a lot of those assets are in the GenOn complex, but it certainly not impossible where that's concerned.
I think going back to Midwest Gen, certainly that is an opportunity that we'd revisit post the completion of the next round of auctions there in PJM.
| 2016_NRG |
2016 | RYAM | RYAM
#<UNK>, we said first of all it spans the third and the fourth quarter, it's about a 30-day outage, so it's about half and half in those two quarters.
We said in the last call that last year we had a 13-day outage, that was about a $2 million type of outage that is a little bit more than twice as long as that outage.
So it would be $4 million to $5 million from an operating impact.
Correct.
That is correct.
(multiple speakers) ---+ in 2017 ---+
Yes, so if you look at page 7, <UNK>, of the slides, this lays out how we see this rolling out.
So you'll see we've got $35 million in 2015, we're assuming $40 million in 2016, and then we're assuming right now targeting $35 million in 2017.
Just to draw your attention to it, last quarter we had $30 million in 2017 and $35 million in 2018, so we're feeling stronger about the pace of the cost savings that are going through, and actually shifted $5 million of that back into 2017.
These are incremental cost savings on top of what we would have accomplished in 2016.
And <UNK>, obviously it doesn't weigh in there anything with inflation or movement and prices in that regard.
So it's just pure saving efforts on behalf of the team.
So <UNK>, it doesn't assume anything in there, so it is the majority, I don't think we will provide any further color on that.
It's the majority, and volumes and prices have yet to be firmed up across the board, that are uncommitted at this time.
I think it's fair to say compared to the volumes this year in our acetate market.
Yes, sure.
This is <UNK>.
We said even last year, 2015, that we were told to expect it would flush through in 2015 and clearly that didn't happen.
As we came into this year, we heard that the sentiment was that largely globally, outside of China, the destocking had occurred.
But still we thought through 2016 the Chinese destocking would, could continue.
So our anticipation and thought at this point based on what we have heard that it should be flushed through in 2016.
Just to put it in perspective, the two things I would point out are we're down year-over-year.
We're not forecasting if you do the math down at the midpoint.
We're not forecasting being down second half over first half of this year, so volumes will be relatively consistent.
If you go back and look at our third quarter last year, we had an exceptionally strong quarter, and we pointed that out at the time with shipments of 133,000 tons of CS, which is considerably higher than any of the quarters we had throughout the rest of that year.
And so we'll be comping that third year quarter.
And I think there could be timing of shipments and other things that could impact this year's shipments, but really that is probably the big driver, the strength of that third quarter last year relative to this year.
<UNK>, let me start with that and I'll turn it over to <UNK>.
And just as a reminder about the JV and how it's structured and of course it's detailed on page 13 of the slide.
The JV which we're calling LignoTech Florida is a $135 million investment over two phases.
Phase 1 is $110 million and it should produce about 100,000 tonnes of lignin.
Phase 2 then is $25 million and adds about 50,000 more lignin.
We're a 45% owner.
Our partner Borregaard is a 55% owner.
We are currently, we've completed all the engineering.
We're currently waiting for permits, primarily two permits, building and environmental permit.
We expect to have those complete in the back half of this year.
And with those complete we'll commence significantly on the project.
We think the project will be about 18 months to complete.
So most of the spending you'll see, <UNK>, is in 2017 and 2018.
With that we're looking at all options for financing.
So we haven't discussed or disclosed what that's going to be, but we're exploring all those options at this time.
And <UNK>, I don't know if you can add more color to that.
We've got some small CapEx this year relative to the overall capital that's needed for the project, which is included in the $90 million CapEx figure.
And then obviously we're working on all financing avenues, and we'll sort that out and tell the market as we get to the end of those options.
And so when we get all that financing in place and how we're going to proceed with this, and we get the permits then of course it goes before our board and Borregaard's board for final approval which we expect again in the back half of this year.
I don't think we said price is down 4% this year.
Price is down roughly 7% this year.
But typically we'll have a little bit lower price decrease in the first half, and a little bit higher in the second half, only because of some sales that tend to shift into, a modest amount of sales that'll shift into the front end of the half versus the back, those that fall out of the back end of the half.
So I would say that the pricing guidance, I think we're right in line with that overall pricing guidance.
No, <UNK>, I don't think we've got that number out there as far as any kind of percentage, anything like that.
Again, the majority of our business is contracted, and again, we are working as typical on the back half of this year on both volumes and prices and so nothing out of the ordinary in that regard.
But I don't think we have any percent out.
I'm trying to think back at what that may be referring to.
All of our CS volume is typically contracted at the end of the year, <UNK>.
We obviously have contracts that come up every year.
As you know the big three, our three largest customers are contracted much longer term, but we'll be going through the normal negotiations contracting, both for our customers and those in the market looking for CS volumes.
I think those comments, I'm sure those comments are directly related to our customers' business, and specifically acetate tow.
And so I can't add any more color than what they have already provided out there for you.
In our regard again, we see it directly as well.
We see the destocking happening on our customers behalf, but we've largely factored that into our plans for the year.
So I think two different issues there, as we look at it.
Yes.
(Multiple speakers).
That'll be consistent with what we do every year.
So it should be consistent with what happened this year.
And that should be in the second quarter there, <UNK>.
Well, <UNK>, as you know both of those segments are smaller segments for us.
So these are high single digit, maybe low double digit type segments.
High single digit, we [haven't] put that kind of guidance out there for a while but it's still very consistent with what we have discussed in the past.
But again we're encouraged because we are seeing some expansion in some of these key areas, again, with some customers in the engine filtration area as well as in the high end ethers area which is where we tend to focus more of our product portfolio is in that high end.
And so we've got several customers out there with plans to grow, again, which is not something we've been able to share with you until this point in time, which is, again, great for us to see and we're encouraged for our customers.
Yes, and again it hasn't changed much.
We've certainly got a lot of focus on it and a lot of dialogue.
We've got some new products out there that we're working with these customers in the ethers and tire cords and other areas.
So yes, but we have always said that we're not going to push it in there, we're going to come in with some value, with some differentiation that allows us to have a meaningful dialogue with our customers and give them something in terms of value that they don't have today.
So with that, it just takes a little bit of time.
And at some point, <UNK>, if we get some meaningful change out there in those segments, we'll give you some updated percentages to help your guidance.
No.
What we're saying is we believe, from what we've heard and of course if we get anything different we will update you as well, that the fundamental market consumption is roughly flat.
And we've said this for some time now.
I think you're seeing with our customers, which is what we see, the ill effects of destocking and mainly now still working through China, that's pushing back on their business in terms of volume, and we listen to their calls as well.
It sounds like in terms of price as well.
And again they have said it's a different equation between what they're working on and what our business is, in terms of pulp going into the market and pricing for our product.
Again I think we share the same, the cloud a little bit.
The reporting information is not great, so we have to go on what customers in China are telling us.
We believe as we stated before and this is not new information, that there's certainly a correction out there in terms of the destocking.
We think also some of the new Chinese regulations have suppressed demand here.
But we had heard that once these are put in place and destocking is through, that they believe their market will be slightly positive going forward.
So we're operating with that framework, that mindset, and if that changes we'll obviously update you.
<UNK>, we're anticipating spending capital associated with the JV in the back half of the year, and most of that capital would be spent after the announcement.
But what we look at here is we've got to get some work going early on, on the infrastructure and other things that we need to do to move the project forward when we get the green light to move forward.
So we're just anticipating that and putting that into our guidance.
Yes, I think that's a fair assessment.
We put out an announcement not too long ago that said look, we're at a point where we're just waiting for the final permitting to come through, and once that comes through, and our Board likes the returns that we think we can get out of it, and similarly that Borregaard, that we'll move forward with the project.
So yes, I think we're positive on the project at this point in time, but obviously there's still final reviews by our Board and we have got to get the permitting in place.
Looking at the back half of this year we're seeing some incremental pressure as new capacity comes online.
We think therefore we're indicating that pricing could be down slightly in the back half of the year, and what the magnitude of that is, I don't know if it's a percent or two, but it's in that range somewhere there.
It could be a bit more, but it's not a huge amount.
And again the key, <UNK>, is that we can flex between commodity viscose and fluff.
And so if we see the fluff pricing get too negative for us, we'll make sure we pursue greater viscose in the coming period.
So we can move back and forth.
But yes, we just see the pressure on some of this incremental capacity coming out there, and it's in line with what we expected at the beginning of the year, it's not really different from that.
But we just are updating you on our perspective for the balance of the year.
I think we have been holding our share across the board fairly consistently, maybe even improved it over the last couple of years.
But it's hard to say because there's been so much dynamics around this, particularly in the acetate with the destocking, it's hard to tell.
And ethers in particular, again we think we're, ethers in other segments, I think we're holding our own, but it's hard to say exactly.
As you know there's not a lot of public information out there so we just do our best to estimate to say where the market's at.
But I don't see a significant change either plus or minus.
You know, we haven't updated that at all, <UNK>, in recent times.
We've certainly seen some pricing pressures in the ethers and other segments more dramatically even than acetate.
So I don't know if there's developing a little bit of gap there or not, but I don't know if we have any guidance to provide for you at this point in time.
But in the past, you're right, we've always said in the high end areas of these other segments they were fairly consistent with acetate.
Whether there's a separation there or not, I'm not too sure because our pricing has come down quite a bit across the board.
So I really don't have guidance to provide you in that regard.
<UNK>, I think it's consistent with the 4% to 5% guidance we gave out at the very beginning of the year in regards to our volume outlook for this year.
As you know, predominantly all our CS volumes are typically contracted by the end of the year.
And so we're able to give out pretty good guidance in regards to that, to that issue when we get to our February call.
And so we're just seeing that the first half was pretty consistent with last year, and last year we had a very strong third quarter.
So that decrease from destocking and other things needs to come into the year at some point, and we're just going to see it happen in the second half versus the first half.
Sorry, <UNK>, you're coming in very weak right now.
I wouldn't take anything from it.
I think our commodity volumes will be strong.
I think we gave out guidance before around the 250,000-plus ton range depending on mix between fluff and viscose.
So I wouldn't take anything from the first half.
From an IRS basis after this contribution we're very well-funded currently, but close to the 100% level, I believe that's accurate.
So close to the 100% level.
Obviously we've got to watch three things as it goes to funding.
One is the returns that we get in the market and obviously last year was a poor return year for everyone.
This year is getting better but it's still below benchmarks for most people.
Second is discount rates, and as the treasuries have dropped and other things we've seen some pressure on discount rates which could increase funding.
And thirdly is the potential adoption of the new mortality tables by the IRS.
And that could happen as early as 2016 ---+ I mean as early as 2018.
Potentially 2017 but I don't think people think that will happen, so probably 2018.
So we'll have to keep a look on those things.
But right now again it was a voluntary contribution, it wasn't a mandatory contribution.
So I think that puts us in a relatively good state, but we'll have to continue to monitor those three other issues in the future to see if that impacts our funding status.
Okay.
We paid $20 million after the quarter ended, <UNK>, so that was one big chunk.
We paid the $10 million pension.
We do have some of the funding for Borregaard on the balance sheet, the lignin joint venture on the balance sheet.
But I think you'll continue to see us look at ways to either reduce debt or put cash on the balance sheet for future investment in the business which we think could drive good returns and longer term growth.
It was, yes.
Good observation, <UNK>.
A couple of things.
One is, and I looked at it more from the end of last year to this year, which was roughly a cash positive $60 million, when you look at the change in current assets and liabilities.
And what you're going to see is when you look at our cash flow guidance it's roughly equal to or slightly less than our first half cash flow, so for the full year.
So some of that was just some early payments and some other things that were timing on the working capital side.
So we would expect a little bit of that to go out at the end of this year, based on timing.
So we'll reverse some of that, that it's very hard to talk about working capital in small increments because it just depends on what day you get paid things, or need to pay certain obligations.
But you'll see a decrease in that in the second half by a bit.
Additionally you'll see significantly more CapEx.
We spent $38 million this first half, and we're going to spend $52 million, or forecast to spend $52 million in the second half.
So you'll see a little bit more cash outflow in the second half than you did in the first half, [and you saw a gain] in the first half.
<UNK>, as part of our Transformation Initiative, I know we talk a lot about the cost component of that, but we are very focused on driving cash flow, incremental cash flow as well.
So as we have discussions on contracts either with customers or suppliers, that's one aspect of the discussions that we have with those individuals.
And we look for opportunities to improve the cash flow through better working capital terms.
So we'll continue to focus on doing that.
Whether or not it'll give us more cash flows next year is hard to say.
But it probably won't be anywhere close to the numbers that you saw this year, as we had a lot of positive cash flow adjustments going through the first half of this year.
So <UNK>, let me answer just on terms of ongoing CapEx, and as we've guided this year we're about $90 million.
We think a steady-state future for us is in that $50 million to $60 million in terms of funding our ongoing business and being a quality consistent supplier.
With regard to the JV opportunity, we have yet to decide how we're going to fund that, and that's what we referenced earlier.
So all those decisions are before us and to be approved by our Board.
And so we're looking at all options, whether it's financing or putting capital in directly, but all of those things out in front of us.
And <UNK>, the $135 million that you referenced and our share of that, the first component of that's $110 million.
So that incremental spend won't come for several years after the JV gets going.
So I think in the near term or the intermediate term we're about the $110 million than the $135 million.
Roughly.
Thank you.
Well if there's no more questions, I'd like to thank everybody for joining us today.
Let me say I'm extremely impressed with our team's ability to drive results on two critical initiatives within our control.
We're well on our way of improving our business through cost and aggressive debt reduction to achieve an appropriate capital structure, positioning us well as a long term market leader.
And I'm confident in our ability to develop opportunities through growth and innovation that allow our customers to win in their markets, and for us to create value for our stockholders.
We look forward to updating you on our progress in a timely manner as we move forward, and I thank for your time this morning.
| 2016_RYAM |
2016 | JBL | JBL
#Sure, <UNK>.
So, I can't sit here today and prognosticate two or three years out on whether or not we're going to grow our mobility business faster than the market.
We certainly have historically.
If you look our Greenpoint business as a proxy, again, I don't remember the exact numbers, but I think we have grown that business probably $2.5 billion in recent years on a relatively modest base.
And so, I feel really good about that.
Will we be able to continue those growth rates two or three years out.
I don't know.
Here is what I will commit to you: If we have the opportunity to grow that business at a good ROIC with good terms with customers, we are going to do so.
If we see the growth rate or the opportunities attenuate, then we will pull back CapEx.
We will be very, very prudent on the investments we make, and that business will throw off a significant amount of free cash flow, because handsets are not going away, and we have got great installed capacity in combination with incredible capabilities with mechanics and material sciences.
So to me, it is going to be one of two paths, and I think both paths are good paths.
Today, I like the path we are on, and one of the things I love about our Company is it is incredibly adaptable and incredibly agile, and we will read and react to the mobility market and do what is right for investors.
Yes, that's more of a read for this year.
The Greenpoint DMS teams have done a terrific job in terms of efficiencies through process and suchlike.
So do not take that as a signal for reads on 2017.
As <UNK> said, we're certainly looking at growth opportunities as we move in the new fiscal year.
<UNK>, I would also add to that ---+ I would read into that the fact that I think we have outstanding terms and conditions, and so I think we're being very, very diligent around how we run the business and how we run CapEx.
It might have an impact on it, but it is not material.
It's different, it's different products, different points in the market.
It could have a bit of an impact, but not overly material.
I think you should think about all of that.
And I do not mean to be reckless with that comment at all, but when I think about diversification, <UNK>, I think about diversification in Greenpoint.
I think about diversification across all of the different end-markets in our EMS business, which is probably 9 to 11 different end-markets, something like that.
And then end-markets aside, <UNK>, I think about our value proposition in the service offering.
So building product in legacy EMS-style is not going to drive a lot of value for our shareholders.
So we are still very good at that.
We're still going to do that, and it's a big part of our business.
But what we have been up to for the last couple of years is also looking at different parts of the value chain that we can play that we have a parenting advantage, and our solid service offerings that might be above and beyond what you consider typical manufacturing.
So I cut the diversification play many different ways.
One of the things I talked to <UNK> about in the last month is it has been a while since we had done an analyst get-together.
And I feel a little bit remiss on that.
Time flies by.
So I think you can expect something from us, certainly in the next 12 months, where we would love to gather everybody on the sell side, the buy side, and the banking side, to get together and give you much more color in what we are up to, because I think you will be really pleased.
I think we're seeing it.
I think we are seeing it with great acuity, and again as you sit back and model out just the rest of this year, I think you'll get to a conclusion that the diversification play, both EMS and then the non-mobility DMS must be diverse, because I think the financials will speak for themselves.
And then I also, as I've said the last three or four calls, I am pretty pleased with the diversification we have in the mobility space, as well.
Sure.
Why don't we hold off on that, and why don't we wait until we do a show-and-tell at an analyst meeting, and I think you will get really good appreciation of what we're doing in the healthcare space.
But I can tell you that it's grown to be fairly sizable, good critical mass.
In 2017, 2018, and 2019, it's going to be material to the Company.
<UNK>, it's <UNK>.
Unfortunately, because of the terms and whatnot with the acquisition and some sensitivity around it, we just can't provide a lot of detail.
I will tell you that that acquisition will be fully accretive by Q1 of 2017.
Yes, that's a good question.
It's very modest at the moment.
We did that acquisition more from a capability perspective, as well as a strategic play along the lines of our diversification.
And we just can't say much about it, unfortunately.
But it will start to have contributions as we get into the early parts of 2017.
Sure.
Are you talking about at a corporate level, <UNK>, or at a segment level.
Yes, so let's exclude mobility.
I said in my prepared remarks our EMS business, it's $11 billion business going to a $12 billion or $13 billion business, and core income dollars on that business, year on year, are going to grow north of 15%.
In this market, that is pretty good.
I think not that long ago, three, four, five years ago, people were looking at kind of legacy EMS business, going ---+ you know what.
It's going to have GDP-type growth to it and legacy EMS margins to it.
Our folks have kind of transformed that, and we have got amazing customer relationships, and we are quite bullish.
So that part of our business is doing well.
I spoke about the healthcare business, and then what I mentioned briefly is our packaging business, which we recently announced internally that we are going to break that off and have that be a standalone business.
And we are doing that because we think that there is some outstanding opportunities in the marketplace around consumer packaging, whether it be the combination of rigid, flexible, and intelligent type packaging.
We're pretty bullish on that ---+ that we have got a whole group internally, <UNK>, that operates maybe two or three degrees away from our core business that are off with some investment dollars and applying some of our know-how to different macro trends that we see.
We are hopeful in that area, and I am bullish in the core business.
And again, I do not sit here and feel good about guiding you down for Q3, but I still remain very bullish on our mobility sector.
Okay.
Thank you, everyone, for joining us on the call today.
We will be available for any further follow-up questions that you have.
Once again, thank you for your participation and interest in Jabil.
| 2016_JBL |
2017 | PLUS | PLUS
#Thank you for joining us today.
On the call is <UNK> <UNK>, CEO and President; <UNK> <UNK>, Chief Financial Officer; and Erica Stoecker, General Counsel.
I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections.
Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 31, 2017, and our Form 10-Q for the quarter ended September 30, 2017, when filed.
The company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.
In addition, during the call, we may make reference to the non-GAAP financial measures, and we have posted a GAAP financial reconciliation on the shareholder information section of our website at www.eplus.com.
Reclassifications of prior period amounts related to numbers of shares and per share amounts have been made to conform to the current period presentation due to the March 31, 2017 stock split.
The effect of the stock split was recognized retroactively in the stockholders equity and in all share data.
The financial statements include the effect of the stock split on the per share amounts and weighted average common shares outstanding for each of the 3-month periods ending September 30, 2017 and 2016.
I'd now like to turn the call over to <UNK> <UNK>.
<UNK>.
Thanks, Kley, and thank you for participating in today's call to discuss our second quarter 2018 results.
This was a quarter of solid performance across key profitability metrics.
Consolidated gross profit grew 6.9% to $87.6 million and gross margin increased 150 basis points to 23.6%.
Following the strong 23% sales growth that we achieved in the first quarter of this year, our second quarter sales were flat as compared to the year-ago period, in part because the current quarter reflected a higher proportion of sales that were reported on a net basis, while adjusted gross billings of products and services increased 3.3% for the quarter.
We continue to benefit from our investments in the high-growth areas of security, cloud, and digital infrastructure.
We are pleased to report that security products and services represented 17.5% of adjusted gross billings in the second quarter.
And this metric increased 170 basis points year-on-year and 40 basis points sequentially.
In the first half of 2018, adjusted gross billings of security products and services grew 30%, compared to the first half of 2017, as security continues to be top of mind for our customers.
Another high point of the quarter and last 6 months is our progress in growing services as measured by revenue growth, expanded offerings and human capital.
Our OneCloud acquisition completed in May, significantly expanded our cloud service and trainings offerings by moving us to the forefront of IT automation and orchestration, DevOps, OpenStack and other related technologies.
We're continuing to train and expand our sales and engineering teams in these new disciplines and utilizing OneCloud's highly trained technology consultants, architects, developers and trainers to deliver the ePlus OneCloud value proposition to our customers.
We believe that OneCloud's unique skill sets will also help increase sales of traditional ePlus products and services, as we continue to drive the penetration of their services to our over 3,200 enterprise and mid-market customers.
We continue to view consultative and annuity services as a key differentiator and a long-term growth driver for ePlus.
An example of how we're leveraging OneCloud's capability is how we're able to help a global enterprise customer move from on-prem to cloud with a Microsoft Office 365 migration for a significant number of e-mail accounts.
We leverage resources from our OneCloud team in both the U.S. and India and local ePlus resources to give us the scalability and ability to provide around-the-clock work for this project at an effective price.
We're selling both a software subscription and services, while creating a methodology and tool set to facilitate the migration, which can be replicated for other customers.
We're also seeing the benefits of our enhanced maintenance services program, which is the service that combines our leading managed service capabilities with vendor assurance programs.
This program provides our customers with transparency, efficiency and higher service levels to ensure their IT investments are protected without lapses in coverage or downtime.
It results in higher margins, albeit over time, than traditional third-party maintenance sales, expands our managed service platform to reduce marginal cost and gives us better visibility into the customer's IT state and strategy so we can properly leverage resources to drive cross-sell and upsell opportunities.
A recent example of this was a health care client that was looking for a higher service level and standard maintenance.
We provided a bundled services offering that added real-time monitoring and 24/7 call center support, alerting them to a problem before they encounter it and helping it ---+ helping to provide faster resolution and thus better patient outcomes.
For ePlus, it also locked the client into a 3-year deal at higher margins.
In mid-September, we again executed on our M&A strategy of expanding professional services, managed services and geographic reach with the acquisition of Integrated Data Storage or IDS.
This transaction expands our Midwest presence with a strong customer base, engineers and salesforce, and also bolsters our managed service offerings with new to ePlus cloud hosting services, disaster recovery and backup as a service.
Over time, we see significant opportunities to scale these annuity service offerings into our broader customer base and also, as is typical for acquisitions, bring our broader line card of traditional products and services to their customers to drive revenue growth.
ePlus investments in highly-credentialed engineering and sales and marketing personnel have been a critical element in enabling us to support our customers to every phase of the IT life cycle.
In fact, just yesterday, we announced that ePlus received Cisco's Global Award for Lifecycle Management Partner of the year.
This award highlights the services which ePlus brings to help ensure customers realize the value of their technology investments over the entire life cycle of their purchase, activation and adoption.
The award also reinforces the investments that ePlus has made to assist our customers across our life cycle practices including software, security, cloud and digital infrastructure.
While we remain focused on holding the line on cost, it's worth emphasizing that roughly 85% of the 17% increase in headcount this second quarter is client facing, which is a necessary investment for our future success and we believe positions us well for future growth.
We are scaling our human capital to meet the growth requirements of the marketplace in terms of geographic coverage as well as broadening our portfolio to meet the demand for emerging and cloud technologies.
On our financing segment, net sales increased 38% this quarter due in part to early terminations of financing agreements.
Our financing business tends to be somewhat lumpy and post-contract earnings can create sizable revenue bumps relating to specific transactions.
We're pleased with our first half revenue performance.
Sales increased 10.2% year-on-year, significantly outpacing overall IT spending growth and demonstrating strong demand for ePlus solutions across our enterprise and mid-market customer base.
We plan to continue to supplement organic growth with acquisitions that increase our service offerings and solutions, expand our geographic reach and allow us to cross-sell our services to acquired customers and acquired services to our existing customers.
Our strong balance sheet provides substantial capital for strategic transactions and our scaling culture positions ePlus as an excellent platform for acquisition growth.
To some up, this was a good quarter for ePlus with positive results achieved on key profitability metrics and continued progress made in expanding our solution portfolio.
First half momentum, together with the demand we are seeing from our customers around emerging and rapidly growing solutions supports our confidence in ePlus positioning moving into the second half of our fiscal year.
I will now ask <UNK> to review our second quarter 2018 financial results in more detail.
<UNK>.
Thank you, <UNK>, and thank you, everyone, for joining the call.
We are pleased with the gross margin and gross profit improvement we experienced in the second quarter.
Our year-to-date results, double-digit growth across the board, showed the benefits of our investments in high-growth areas and position us to grow ahead of the overall IT spending for fiscal year 2018.
Let's start with our consolidated quarterly overview.
In the second quarter of fiscal 2018, our consolidated revenues were essentially flat at $370.8 million when compared to last year's second quarter growth in net sales of 10.5%.
Our adjusted gross billings of products and services grew 3.3%.
This quarter, the adjustment from adjusted gross billings to net sales of product and services was 29% as compared to the prior year of 26%, reflecting a higher proportion of sales of third-party software assurance, maintenance and services.
We've built a team which specializes in these services and find that customers value, the transparency and efficiency we bring to the process of making sure their technology investments continue to be covered without lapse by manufacturer support agreements.
Gross profit was up 6.9% to $87.6 million, and our gross margin widened 150 basis points year-over-year to 23.6%.
The improvement in gross margin was driven by an increased mix of products and services, which are accounted for in the net basis, as well as higher service revenues.
Our operating expenses increased 9.3% to $58.7 million.
The majority of this increase reflects higher salaries and benefits due to increase in personnel.
Our total headcount grew by 17% to 1,282 from 1,096 a year ago with the majority from acquisitions and primarily for customer-facing positions, including 162 sales and engineering personnel.
The increase in salaries and benefits was also attributable to higher health care costs.
Operating income of $28.8 million increased 2.2% year-over-year.
Net earnings increased $17.2 million, 2.7% higher than last year.
Adjusted EBITDA increased 3.4% to $31 million and our adjusted EBITDA margin increased 20 basis points to 8.3%.
Diluted earnings per share for the quarter were $1.23, up 1.7% from $1.21 in the comparable quarter of 2017.
Non-GAAP diluted earnings per share increased 3.3% to $1.27 for the second quarter of fiscal 2018.
This Non-GAAP metric excludes acquisition-related amortization expenses, other income and expense and the related effects on income taxes and the tax benefit associated with the vesting of share-based compensation during the quarter.
Our diluted shares outstanding totaled 14 million for the quarter compared with 13.9 million in the second quarter of last year after adjusting for the 2-for-1 stock split on March 31, 2017.
I'd now like to discuss the quarterly results from our technology segment, which accounted for roughly 9% of our net sales.
Technology adjusted gross billings of product and services grew 3.3% to $503.6 million, while net sales in our technology segment declined 1% to $358.8 million.
Our net sales were impacted this quarter by a higher proportion of sales of third-party software assurance, maintenance and services, which are presented on a net basis as we continue to focus on this area.
As a reminder, adjusted gross billings are sales and products and services adjusted to exclude the costs incurred in the sale of applicable third-party software assurance, maintenance and services.
On a trailing 12-month basis, the technology and SLED markets were our largest, accounting for 24% and 18% of technology net sales, respectively.
Next was telecom, media and entertainment, which accounted for 15% of net sales, followed by financial services at 14% and health care at 12%.
The remaining 17% was from several other customer types.
We continue to have a diversified customer base by industry, size and geography.
Our gross margin on sales of product and services expanded by 100 basis points to 21.2% in the second quarter.
The margin expansion was related to a shift in product mix, as we sold more third-party maintenance and services, which are presented on a net basis and an increase in service revenues.
Operating expenses in the technology segment increased 11.2% to $55.6 million compared to $50 million last year, which related to an increase of $2.8 million in salaries and benefits due to an increase of 186 professionals or 17.8%, of which 50 related to the acquisition of IDS in September 2017, 57 related to the acquisition of OneCloud Consulting in May, 2017, and 48 related to the acquisition of Consolidated Communications IT Services business in December 2016.
In addition, general and administrative expenses increased $2 million, primarily due to increases in marketing expense and expenses related to the acquisitions.
Operating income and adjusted EBITDA for the technology segment decreased 13.4% and 10.9%, respectively, due to higher operating expenses.
Moving to our financing segment.
Revenues were $12 million, up $3.3 million or 37.7%.
This top line growth was mainly attributable to an increase in post contract earnings of $3.4 million due to early terminations of certain financing agreements as well as an increase in revenue from consumption structured agreements, offset somewhat by lower transactional gains.
While the early terminations benefited our second quarter results, they will eliminate the potential for future earnings related to the equipment originally financed.
As I have mentioned in the past, revenues from our financing segment fluctuate, often due to customer-specific events.
As a result, financing gross profits increased 44.5% to $10.7 million.
Operating expenses decreased by $595,000 or 16.1%, mainly due to changes in reserves for credit losses.
Operating income and adjusted EBITDA more than doubled to $7.6 million, reflecting the high-margin revenue and, to a lesser extent, the lower operating expenses.
I will now turn to our consolidated year-to-date results.
Net sales for the first 6 months of fiscal 2018 increased 10.2% to $738 million.
This strong sales growth was driven by robust performance in our technology segment, where net sales increased 9.6% to $716.9 million.
Adjusted gross billings of products and services increased 11.4% to $985.3 million, while consolidated gross profit increased 10.4% to $165.2 million.
Our consolidated gross margin expanded by 10 basis points to 22.4%, while gross margin on products and services decreased 30 basis points to 20.2%.
Net earnings grew 11.7% to $30.6 million and adjusted EBITDA increased 8.8% to $53.5 million.
Our first half of fiscal 2018 earnings per diluted share increased 12.3% to $2.19, while non-GAAP diluted earnings per share increased 8.5% to $2.17.
Turning now to our balance sheet.
We ended the quarter and first half of fiscal 2018 with cash and cash equivalents of $60.2 million, compared with $109.8 million as of March 31, 2017.
The decrease was primarily due to cash used to acquire OneCloud consulting and IDS.
Our inventory and deferred revenue decreased from March 31, as a large competitively bid project was partially delivered in the first half.
Our cash conversion cycle for the quarter was at 23 days, down from 26 days for the first quarter of 2018 and up from 16 days a year ago.
Despite the year-over-year increase, we're moving in the right direction sequentially.
Our cash position remains strong and can be used to fund acquisitions, hiring of additional personnel and share repurchases.
We constantly evaluate all of these opportunities.
For the second half of 2018, we remain focused on developing IT solutions for new and existing customers with an emphasis on cloud, security and digital infrastructure.
We remain confident that we are well positioned to outpace the low-single-digit overall IT market growth for the foreseeable future.
I'll now turn the call back over to <UNK> for closing remarks.
Thank you, everyone.
<UNK>.
Thanks, <UNK>.
We are pleased with the year-to-date net sales growth of 10.2% and gross margin of 22.4%.
We believe that as we continue to move towards being a higher-end IT provider, focusing on products and the consultative and annuity services our customers need around security, cloud and digital infrastructure positions us well to profitably capture market share in the faster growing segments of the IT market.
We have an established and growing base of over 3,200 enterprise and mid-market customers across multiple industry, who rely on us to deliver the outcomes they need to achieve their business goals.
Operator, I would now like to open the call for questions.
Yes, well, so there's a couple of things that I think happened in terms of sales.
One, we had a very large gross to net adjustment that <UNK> noted on the call.
As we've talked about in all of our calls, we also have our land and expand program, where we did have a large project that wound down, if you will.
But the thing that we always talk about, it's cyclical, it's opportunistic, it's lumpy in nature but we do believe we will have other opportunities as we go forward.
So I would take a look at our numbers on the first half or trailing 12 months to get a better feel of where we think we are.
Well, I don't know if I can call it a seasonal one-off thing.
We've seen it for a while in terms of the gross to net.
Now some of this is by design, <UNK>.
So we've got teams that focus on doing these types of renewals with our customers.
But more importantly, upgrading them to some of our enhanced maintenance service programs as well as managed service programs.
So what happens in a lot of cases with these customers, we lock them in for 3 years and then we have a recurring revenue and increased margins as we go forward as well.
So it depends on the customer and depends on the deal.
Yes, we did, <UNK>.
We actually ---+ if I look at the quarter, if I were going to give you snapshot.
One of the strong points was our security.
In terms of our security, adjusted gross billings for security products and services was 17.5%.
That's up 170 basis points year-on-year, and we're actually up 30% for the first half of this year versus last year in security.
Sure, <UNK>.
The financing segment this quarter benefited from some early termination of leases.
So essentially, we're ---+ we negotiated the back end of the residual value disposition of certain leases that early terminated in the quarter.
So we're eliminating the potential for that profitability down the road at the end of the term.
But it did get negotiated in this particular quarter per the customer's request.
Well, we always have fluctuating earnings in this particular segment, whether it's related to transactional gains where we would sell the lease stream or whether it's related to some sort of event that occurs at the termination of the lease, whether it's a buyout, could be an early buyout, or an early termination.
So those are really customer specific, and term specific relating to the financing transaction, in particular.
Do you know what they are.
For the first half, it's roughly 50% organic and 50% acquisition.
Here you go.
Yes, I don't have the quarterly number, Matt.
Well, let me try and take a shot at it Matt, I'll touch on a couple of different things and then maybe it'll will answer what you're looking for.
So if we look at the quarter, I don't think we're satisfied with our quarter.
But we really executed well on a lot of the probability metrics.
So our gross margins were up 150 basis points, our gross profit was up 6.9%.
We had a strong quarter for our security as well as services, which I noted earlier on the ---+ for <UNK>.
And we kind of executed on a lot of our M&A plans in terms of really building out our solutions and portfolio.
The gross to net had a big effect.
This was one of our larger gross to net.
So that definitely had a factor on the net to sale, our sales.
The other thing I'd ask you to just kind of keep in mind a little bit is remember in Q1, we had a 23% growth in Q1.
So when we look at the first half, we're actually very pleased with where we are through the first half.
So we've got a double-digit growth in net sales as well as net earnings.
And then when I look at it, we've continued to invest in headcount.
So <UNK> noted we've added a 186 heads, of which 85% are in the customer-facing sales and services.
So to give you a feel, in March of this fiscal year ---+ I'm sorry, March of 2017, we had 400 systems engineers.
As of the end of September, we've got 467 SEs.
So we continue to kind of invest in the engineering talent we need to be competitive in today's market.
Yes, Matt, just to add to that, we ---+ our gross margin on product and services increased from 21.2% to 20 ---+ to 21.2% from 20.2%.
That's 100 basis points.
So the GP growth was 3.1% on basically flat sales.
So I would say that we executed pretty well in driving more profitability this quarter in the tech segment, in particular.
I would say that project is towards the end for sure.
But that's a customer that we continue to work with on multiple projects.
So as it relates to the big project we've mentioned in prior quarters, yes, it's towards the end of that project life cycle, Matt.
Yes, let me ---+ maybe a few things and I'll see if I could give it ---+ where ---+ it's always tough with the forward-looking, Matt.
So in terms of customer demand, in terms of pipelines, in terms of forecast there, nothing has changed in terms of downward trends or anything like that.
We're continuing to expand some of our offerings and capabilities.
I talked about a few deals in my earlier notes, if you will, and those were opportunities that a year or 2 ago we wouldn't have had.
So there are new income streams for us as we go forward.
The other thing that I'd highlight that we didn't talk about in the release or during our notes that we went through.
If you look at our number sequentially, so at a ---+ on a consolidated basis, if you look at our operating income sequentially from Q1 to Q2, our operating income was actually up $7.5 million.
So that may give you a feel of some of the things that are happening within the business.
Yes, sequentially.
Well, it gives you a trend from Q1 to Q2 is what I was trying to give you, since I can't give you ---+ we don't give forward guidance on December.
So here's what I'd always tell you about this quarter.
There's always a lot of the year-end spend.
That's always out there, that come in.
Those deals are tough to forecast and predict.
But what I was trying to tell you earlier is the customer demand is still there, the pipeline is there and our management team is very confident, comfortable in their forecast.
Well, you always have tough comps.
But what I'd mentioned to <UNK> is, I would always look at it, whether you at our first half or you look at our trailing 12 months, that gives you a true feel of what's happening within our business.
You're always going to have large deals or opportunities that kind of come in and out.
We're opportunistic.
They're cyclical.
A lot of times we'll ---+ like we talk about with the land and expand, we'll get the foot in the door and then grow the profitability over time.
And so they yield great opportunities and they normally pop in from time to time.
So it's tough to kind of give you an exact answer there.
In terms of the SG&A, we did have some specific expenses, obviously related to the acquisitions this quarter as well as some specific expenses related to the quarter itself, which are marketing expenses and some contingent consideration adjustments that will replicate in the following quarter.
We're not unpleased with the SG&A.
We added, like <UNK> said, 186 heads year-over-year.
We picked up several new offices with the OneCloud acquisition as well as the IDS acquisition.
So those expenses will roll through as well.
Well, I think we ---+ we were having conversations with our customers but in terms of an early termination, that's something that's brought about by the client.
So whether it occurs or doesn't occur and they contact us 6 months in advance or 3 months in advance, sometimes we do and sometimes we do not have visibility to that.
Okay.
Thanks, operator.
So if I could first off, I'd like to wish everyone a happy and healthy holiday season.
We look forward to speaking with you come February.
And I want to thank you for joining us on today's call.
Have a great day.
| 2017_PLUS |
2018 | PEI | PEI
#Thank you.
Good morning, thank you all for joining us for PREIT's first quarter 2018 earnings call.
During this call, we'll make certain forward-looking statements within the meaning of the federal securities laws.
These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results.
Descriptions of these risks are set forth in the company's SEC filings.
Statements that PREIT makes today might be accurate only as of today, May 2, 2018, and PREIT makes no undertaking to update any such statements.
Also, certain non-GAAP measures will be discussed, PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC.
Members of management on the call today are Joe <UNK>, PREIT's Chairman and CEO; and Bob <UNK>, our CFO.
I'll now turn the call over to Joe <UNK>.
Thank you, <UNK>, and good morning to everyone.
Welcome.
An earnings call is a time for us to update you on our business and its future as it relates to our strategy, not only for the quarter but over the long term.
Our strategy has always been one that takes a long view and we feel good about the business and where we\
Thanks, Joe.
I want to review our earnings guidance first, move on to operating results for the quarter and the progress we\
There's clearly a disconnect between the valuation of our company and our share price.
Our share price is inordinately pressured by short interest.
We're confident our business is solid, fundamentals are improving, we have access to capital and a great portfolio.
We think there are ways to influence the short sellers, including refinancing our credit facility, which is underway, executing our business plan within our guidance range, maintaining our dividend, even increasing it over time and bringing JV partners on densification projects.
Now, we'll open it up for questions.
So Christy, other than the kind of few noncontrollable items, we were in line with our own internal expectations.
I think principally, focused on our top line revenue growth, we were basically spot on our internal budget for the first quarter.
I think, The Street may have missed just in terms of the cadence of our NOI.
I think we expect to have, first half of the year, probably a little bit [better] than we did last year, and with a ramp-up of NOI and FFO in the second half of the year, following the opening of anchor replacements, other seasonal lease-up.
Well we're expecting our average rent spreads to be in the mid-single digits for the balance of the year based on what we have on our pipeline.
Right.
In some cases, yes.
In other cases, they're just renegotiated leases for tenants set.
As you look at the term, typically they're 1-year terms.
So essentially keeping tenants in place as we identify their replacements.
At this point, yes, we're still comfortable where we are.
We think about where we were a year ago, we weren't at a much different place, although we had a much more challenging second quarter, which we expect to outperform this year.
So I think when you look at where we are at the end of June, I'd ask you to kind of reassess your expectation of our performance.
I think, we feel pretty comfortable where we are at this point in time.
Yes, <UNK> <UNK>, there's still a good deal of levers that we can push at this point as it relates to partnership marketing and specialty leasing, pop ups, et cetera.
There's a ---+ we feel good about it.
You're probably going to see some roll-down of that in the fourth quarter as we open up some of the anchor replacements.
So you'll see kind of an uptick in really the third quarter and then it come back down in the fourth quarter.
The number of leases that fall into that category are relatively de minimis compared to the total leasing volume that we did for the quarter.
So we don't have that information, but I wouldn't expect it to be materially impacting our reported spreads.
Well, I guess in our same-store numbers, we do not include lease termination fees, so that ---+ if you're looking to reconcile our FFO guidance, you'd certainly look at that.
But as Joe mentioned, we have a number of levers to pull.
We also think there'll be some normalization of expenses.
So if we look at our history of the last few years, often times you have a hard winter that may impact snow removal costs and utilities, but we find ways to make that up through cost rationalization elsewhere.
And we've seen ---+ again, we've seen a history of bankruptcy recoveries, payments.
They're not always easy to predict, but we typically take a conservative view and write-off the full amount of any prepetition amounts, and later on we get those recoveries.
That helps to again, mitigate the impact, but it occurs in a different quarter.
Sure.
We had about $600,000 of snow removal and utilities; and about $500,000 of bankruptcy-related bad debts.
And the plans are in place to replace that.
It's not a ---+ it's not being hopeful, it's being measured and having a plan in place that the team is executing.
Yes, some was just the normal seasonal cadence of occupancy.
Typically, the fourth quarter is obviously going to be your highest occupied quarter.
And then, occupancy trends down as some temporary tenants fall out of occupancy.
And they, in fact, come back into your statistics at the end of the year.
But on a quarter-to-quarter basis, again, compared to March of '17, total occupancy was up 50 basis points and nonanchor up 40 basis points.
And the other thing is, sales is kind of a leading indicator.
So obviously, we can't immediately capture the benefit of increased sales in the portfolio in the same quarter it occurs, but it does certainly give retailers the confidence that ---+ to open stores in our properties and to maybe move more aggressively on their expansion plans.
And, <UNK>, I would add to that, that occupancy is in line with our budget.
We were in line with the budget in ---+ to Bob's point, there is a lag between rising sales and occupancy, but it will necessarily follow.
We're flexible, and we'll be opportunistic as it relates to that.
In some cases, we'll use our land as our equity in the deal and maintain some level of ownership.
In the case of, let's say, the Exton example that Bob gave in his script, that's one where we'll realize $10 million in a sale.
Again, it's going to be different.
We see it as an opportunity to enhance our capital position.
So we're not of a mind where we're going to make a major investment in any of these projects, but rather use the value of the land, because we're ---+ take a case like Springfield Town Center or Fashion District in Philadelphia, where we've created significant value from a residential perspective, and we'll want to realize that value and minimize, if at all, making any kind of a capital investment.
Well as it relates to that right now, I don't think ---+ we have a lot of options in front of us with respect to the Bon-Ton stores, and ---+ which might include dispositions and could include retenanting.
So at this point, I think we're looking at our options and going to make a decision that is the best course of action given our capital objectives.
The $1.7 million was just for the first quarter, that was the benefit that we received, not only from anchor replacements but also new tenant openings.
So effectively, even though we absorbed the impact of co-tenancy and bankruptcies, we still delivered revenues kind of in line with our expectations.
So you're going to see some part of that ---+ obviously, the fourth quarter '17 openings, we get the full year benefit in 2018, and we'll also get incremental benefit in the ---+ really in the second, third and fourth quarters.
When you think about, we have HomeGoods and Five Below opening in the second quarter of '18; we have HomeSense at Morristown opening in the third quarter; and we also have a number of tenants at Valley Mall, Onelife Fitness, Tilt, Belk as well as others opening in the fourth quarter.
So we've already experienced some of it.
We'll see an uptick in the second quarter, a modest uptick in the third quarter and a larger impact in the fourth quarter.
I think part of it is related to dealing with some tenants that are probably, longer-term, won't be in our portfolio.
But the interim, as we kind of work through the transition and see the benefits of the ---+ many of the redevelopments, we'd expect those numbers to turnaround in the relatively near-term.
Yes.
That was really a function of timing, the tenant that reported in the first quarter of '17, because we had an extended close at the end of the year, we picked up their 2017 sales in our fourth quarter results.
So it's really a timing issue.
There was no significant erosion in the amount of percentage rents, it's just one of timing.
That is, correct.
No, I think that's what you see is kind of just the processing of some of these tenants through the portfolio.
Again, as I mentioned, this is, I guess, referring back to <UNK>'s comment, we have seen strong sales performance at a number of our ---+ many of our properties.
But I see this as more of a temporary phenomena as we kind of reposition the portfolio.
And these are tenants ---+ again, if you look at the terms of these deals, they're short-term in nature.
So these are not tenants that we expect to see 2 or 3 years from now in our portfolio.
Yes, we're kind of walking on a ---+ Bob is walking on eggs a little bit in answering this question.
I mean, essentially, you're keeping a couple of tenants in place through a percentage in lieu, if you will, with the ability to press a button and exit them and recapture the space.
And so, it's a way to keep space occupied while we're finding replacements.
And that's a fairly usual technique that's being used.
We think with the sales growth we're experiencing with the new anchors we're bringing into the properties, that replacing those tenants is going to be something that, while nothing is easy, it's going to be something we can accomplish in the near term.
But at the end of the day, if you look at our average rents on Page 13 of our supplemental, the average rents, including large and format ---+ large and small format tenants, were up 1% from last year.
So despite the fact you may identify specific renewal spreads, overall we're still moving the ball forward in terms of increasing the amount of rent we get per square foot in the portfolio.
That's GAAP basis.
That's a calendar year number.
I think we've seen ---+ as I mentioned earlier, we've seen some of it from the 2017 openings.
Yes, I would say maybe half of it will come in the back end.
Right, because the openings in '18 will have a much bigger impact on the '19 performance.
Well, I mean, that would be an easy assumption to make.
Certainly, the top 10 assets are performing better, but we have some good quality assets throughout the ---+ that lower half of the portfolio.
If you look at examples like Morristown mall where we got a Macy's back, and we're going to be putting 3 tenants in that Macy's space that's currently under construction.
Cap City Mall is a mall where we added a Dick's Sporting Goods.
And we're about to open up a ---+ the only Dave & Buster's in the Harrisburg market.
So the bottom line is, I don't want to throw the baby out with the bathwater here.
Patrick Henry Mall is another good asset, and Plymouth Meeting Mall, which is sitting at the very bottom of the portfolio, I've never been really comfortable assessing that on a sales per square foot basis, because so many of the successful tenants are well above 10,000 square feet.
And again, that's another place where that Macy's is going to be replaced with 5 new, exciting first-to-market tenants.
So I think we've got a little time before we make ---+ say yes to your question, because there's work being done.
Well, we just made a change to our board.
We brought on Jo<UNK>e Epps as a new board member, and Ron Rubin is going to be stepping down at the annual meeting.
And year before that, we brought George Alburger.
So we have 3 new directors on in a 4-year period.
And we'll continue to look at governance issues and try to improve the company from all perspectives.
We have a ---+ I think in our initial guidance, we had relatively modest amount that was included in our '17 ---+ or I'm sorry, our 2018 guidance.
You might see some of those for a couple of quarters, but we'd expect, by the end of the year, some of those gaps to decrease to narrow.
Just some typical seasonal leasing and some tenants that we were planning to replace.
So our jewelery category was up in the month of March, 2.4%.
On a rolling-12 basis, down modestly, but still performing extremely well, if you look at it as a group.
Yes, Mike, I just recognized that, when we're talking about the dollar amount of the decreases, it's less than $1 million, right, in terms of our difference between kind of a breakeven quarter from an NOI perspective and where we ended up.
So we don't think that's an insurmountable mountain to climb.
If you think about some of the things that both Joe and I talked about, we expect some of these things to be self-correcting, right.
As our history has shown, when we have a large bad debt expenses in one quarter, they tend to level out based on our expectations.
Weather-related expenses, again, we found that more often than not, we're able to kind of mitigate those through additional cost savings or at the end of the year, they tend to kind of even out.
And we do have, as I read through earlier, a number of anchor replacements opening as early as the second quarter, more in the third quarter and then a big slug in the fourth quarter.
So you will see certainly the cadence of NOI and FFO much more back-ended.
I don't have the information to share with you in front of me.
But we also have some significant lease terminations that we expect to record in the second quarter relating to Best Buy mobile and Tea<UNK>a.
And again that will ---+ you would expect to see those boosting our second quarter FFO results.
Well, we expect them ---+ we originally provided guidance of $1.5 million to $3.5 million.
I think we're now leading ---+ expect those numbers to be toward the upper end of that range.
No, no.
But that's ---+ we're talking about ---+ it's not a significant amount we're talking about in terms of the ---+ again, the scale of the company is such that you have a couple of unusual items that skew the results.
But we have, again, I mentioned, of the new store openings, $6.5 million of that at an annualized rate will come onstream in 2018.
That's [not] a full ---+ we'll get the full benefit of that, but certainly those leases will be coming on, and they are signed leases not yet in occupancy.
<UNK>, I mean, the bottom line is, we've looked at our performance, we have a plan in place that includes a number of things, including the anchors that'll be moving in, some of whom will be moving in earlier.
We'll do some ---+ have some pickups there, specialty leasing, filling some of the vacant boxes, the Tea<UNK>as, et cetera, partnership marketing.
So there's a plan in place, and we're comfortable with, and it's not hope.
So let's not get caught up on that.
Probably a bad word to have used.
This is a carefully considered plan that's being executed, and we believe that we will maintain our guidance.
Okay, good point.
When you look at your top 20 tenants, do you have a sense of how much more store rationalization might take place over the next few years.
The tenants you highlighted signed in this quarter, Five Below and Burlington, are not on the list, although Forever 21 is.
And with the top 20 tenants comprising 38% of your annualized gross rent, would you expect concentration to decline materially over time as the mix gets more diverse.
Well, first of, I think it's ---+ <UNK>, this is Joe.
It's noteworthy that 60% of our top 20 tenants had positive sales growth in the quarter.
And when you mention something like Forever 21, we think that a large part of that rationalization has to do with larger stores, larger-format stores, where they moved into former Mervyn's locations, mostly on the West Coast.
Our ---+ as we just announced that we signed a ---+ half a dozen Forever 21s for a total of about 35,000 square feet.
Our average size of our Forever 21 is 8,000 to 12,000 feet, not 60,000 or 70,000 or 80,000 feet.
In that case, I think from ---+ another one you would probably put on your list would be Ascena.
And we have worked through ---+ and they seemed ---+ they're ---+ as leases come up, and we're working through and have worked through much of the issues that have occurred through Ascena, Signet is another one that we've worked through the issues are ---+ with, and we actually will end up getting positive spreads from it.
So in your view, Ascena (inaudible) present much of a risk going forward in the medium term.
In our view ---+ yes.
We don't have a great deal of concern.
We think this is a much better year, and part of it is the portfolio that we are putting forth at this point, which is a portfolio, I think, that is compelling to retailers.
We sit with a significant number of our assets in the Philly and DC markets.
And I could go through asset by asset, but even ones that are not in the Philly and DC markets are in strong markets; Dartmouth, which is the Boston Providence SMA.
So in any event, we don't have a high degree of concern at this point.
We're navigating our way through the issues, and as they come up, we're fairing pretty well.
If there are no other questions, thank you all for participating on the call, and enjoy the rest of your day.
Bye now.
| 2018_PEI |
2016 | COTY | COTY
#So we do not have a complete view on that at this stage.
We should not forget that the two businesses are competing businesses.
And we have not been allowed access, from a legal point of view, in terms of the innovation pipeline.
So that's still to come.
Its [count-out] accounting actually.
So it's really now, we translate the chart of account of P&G to our chart of account, and that's the result of this.
So that's really fixed [extra] that we are [rotated by marketing furniture].
So no, the rationalization is not included in the run rate EPS or EBITDA numbers at this stage in the game.
Right now basically, the first thing we have to determine, what exactly we are going to rationalize, and what the ramification of that is.
So it is not specifically not included.
On the CapEx.
On the CapEx, I would say, <UNK>, your understanding is correct.
So the one-off costs exclude the CapEx impact.
No, the closing is scheduled for October of this year, right.
So yes.
So closing will be in FY17, yes.
You're looking the right way.
No, actually, that's not what we're saying in this slide.
In this slide, what we're saying is that we've ---+ on a pro forma basis, if you have the Coty business, the P&G carve-out business, plus the synergies, minus D&G and the Christina Aguilera, you increase EPS by 50% after year-four.
We are not speaking about growth rates, underlying improvement of the business.
We are not adding [ida machas].
We're not doing any of this.
We are only doing a mathematical exercise where we're saying we are Coty standalone.
Day-one the carve-out business from P&G will come, plus we will generate some synergies with the impact of the three factors into our current EPS.
That's all what we're saying.
Which is already, by the way, a pretty substantial increase in EPS.
But just to be clear, so organically, on the underlying business, I would not make any aggressive assumptions.
Because you have to realize that the same people which are doing the integration also have to manage the business, just to be crystal clear.
So this is a very complex transaction which has to be integrated over the next couple of years.
So it's the same people which are doing both.
So first on the $800 million, $900 million.
This is at closing.
So this is without the synergies, this is without the working capital synergies.
This is not ---+ when we receive the business, the pro forma free cash flow generation will more than double, day-one.
That's the way you should look at it.
And then you add the working capital synergies, and all the rest.
So now on Christina Aguilera and Dolce & Gabanna ---+ first, we have put in the S-4 a conservative assumption.
But at the end of the day, for the time being, we are not in the driving seat of that, so we need to wait until we see what happens on D&G and Christina Aguilera before we can draw any conclusion.
First point.
Second point, the $130 million ---+ this is not the ABGA.
The $130 million is the gross margin minus the brand investment, which is the NCP.
The cost structure attached to that is part of the synergies level that we have indicated.
So we have not provided this level of detail.
What we have said is that we will generate $780 million, and that this $780 million has a phase-in of 40%, 70%, 85% and 100%.
What you can assume is that the totality of the $380 million are going to materialize day-one.
Okay.
And the first year, as <UNK> has indicated and as I've indicated, we'll have to staff up the organization and stand up the organization.
You need to understand that, as <UNK> said, it is a carve-out.
So what does that mean.
This means that P&G is organized with a big shared service center called GBS.
We do not get any of this.
So from a back-up expansion, for instance, we don't get any person to close the books.
So we need to staff up and to set up our organization, in order to be able to close the books after month-one.
So that's one example amongst many others.
So I think the way you should look at it is that the $380 million are going to materialize year-one.
And then you're going to have a couple of investments that we need to do in order to be able to staff up the organization.
But the true way to look at it is that we are going to generate $780 million of synergies with 16% of the acquired revenues.
And 70% of that is going to materialize after year-two.
Right.
I think that concludes basically today's session (technical difficulty).
| 2016_COTY |
2015 | DCI | DCI
#Happy Thanksgiving to you too, Rick.
This is <UNK>.
The reason that we make that comment is because we only saw that slowdown in the US.
And specifically, it was not across the balance of the comprehensive model geographically.
We don't see it in Europe, and as we continue to execute here in the US, we're pretty pleased right now with the pace that we're seeing that business continue.
<UNK>, this is <UNK>.
Actually, I'll just give you the split here because the gas turbine portion of the charges right now are in our corporate and allocated and have not been allocated to the businesses.
So that's not within the business, but then of the remaining $7.5 million, about $5 million is engine and about $2.5 million is industrial.
As far as the first fit wins.
Is that what you mean, <UNK>.
It is.
Our liquid growth has outpaced our air growth.
Our liquid growth ---+ coming into this fiscal year for example, we were roughly ahead by one year in our strategic plan based upon the liquid wins that we've had across the Company.
When we win something, <UNK>, especially on the first fit proprietary, typically what happens is it will be two years to three years before that product on that new customer platform starts to hit that end market.
Then, of course, we're building that presence and therefore the aftermarket opportunity, and it grows over time.
It's the reason why ---+ one of the reasons why we continue to talk about PowerCore because it shows the power of the model of what we're representing by having those first fit proprietary wins.
That PowerCore model is essentially what the balance of our proprietary first fit wins follows.
The softening that we see in construction is really, we're talking about from a global perspective.
We saw additional softening in some geographies like China.
We clearly see it hard in Brazil right now.
When we roll it up comprehensively, it's not necessarily driven for us by an end market in our comments to you on why we've reduced that outlook.
It's more a geographic rolling up to a consolidated number at the Company level.
Maybe the one thing I will add to that is our business is heavily weighted toward the non-res versus res, just given the type of equipment we're on.
You, too.
What we have, <UNK>, what we've baked into our guidance is we have, in the US, more of a positive tone in the first half of our year.
And then as we get into the calendar year 2016 or the second half of our fiscal year, we have a more muted outlook.
We know that in the US first rate truck builds, there is a decline in the future and we've tried to take a more cautious approach in the second half of our fiscal year and bake that in for the US market.
The obsolescence portion, I will take that first, on a particular end market is of course very different from ag to construction to mining on how that works and even different into the on-road, of course.
So we look at that as it will ---+ the reason why we put a 10-year benchmark is because we say the product life is about 10 years and we just take that line in the sand across all those markets.
We look to continue to populate that external aftermarket across that time frame and that's how we measure it.
As far as the growth rate and a ramp up, we don't talk about specifically how that calculates out just simply because, especially in these difficult times, production rates really are a bit more difficult to predict.
So the models that we have ---+ we haven't taken and broken that down and then put that directly into the guidance over the next 10 years.
We do have comfort though that we have enough backlog and enough products, new wins in the hopper, as well as what we're working on to support our expectations for growth in the Company.
With regards to that plant in particular, we factor that into the roughly $12 million that I mentioned.
That savings is already assumed in there.
In terms of euro exposure overall, about 20% of our business is euro-denominated.
So it's not just a euro; a lot of the basket of currencies really has an impact overall, but the euro being the biggest one is why we call that out.
But with regards to the Poland facility in particular, that's already factored into the remarks I made.
Happy Thanksgiving to you too, <UNK>.
That concludes today's call.
I want to thank everyone for their time and interest in Donaldson.
I also want to thank our employees for what they do every day to support our customers.
I sincerely appreciate the tremendous amount of work and resilience they have shown during these uncertain times.
Goodbye.
| 2015_DCI |
2018 | GEOS | GEOS
#Thank you, Erica.
Good morning, and welcome to Geospace Technologies' conference call for the second quarter of fiscal year 2018.
I am Rick <UNK>, the company's President and Chief Executive Officer, and I'm joined by Tom <UNK>, the company's Vice President and Chief Financial Officer.
We'll start the call with my overview of the second quarter followed by Tom's in-depth commentary on our financial performance.
I'll then offer some final remarks, after which we will open the line for questions.
As mentioned for everyone's convenience, we will link a recording of this call in the Investor Relations section of our website at www.geospace.com.
The information discussed this morning is time-sensitive and may not be accurate on the date one listens to the replay.
Also, many of today's statements can be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995.
This includes comments about our product markets, revenue recognition, planned operations and capital expenditures.
All such statements are based on our present knowledge and perception, while actual outcomes are influenced by uncertainties and other factors that we are unable to predict or control.
Related known and unknown risks can lead to undesirable results or cause our performance to materially differ from what we say or imply.
These risks and uncertainties include those discussed in our SEC Forms 10-K and 10-Q filings.
Yesterday, after the market closed, we released our financial results for the second quarter of fiscal year 2018, which ended March 31, 2018.
As reported, revenue of $19.2 million for the quarter reflects a notable sequential increase over the prior 3 months, but signaled a slight reduction from the $20.6 million generated in last year's second quarter.
Similarly, revenue of $33.9 million for the 6 months ended March 31, 2018, declined slightly from the $35.8 million reported for the same period a year ago.
Despite lower revenue in both recent periods compared to last year, we successfully managed to generate a gross profit for the first time in 3 years.
The gross profit was primarily driven by lower inventory obsolescence charges as well as other financial management and cost-reduction efforts that were implemented during these periods.
Further evidence of our cost control efforts is exemplified by our lower operating expenses.
Excluding bad debt reserves and recoveries, operating expenses compared to last year fell by 15% and 8%, respectively, for the 3 and 6-month periods ended March 31, 2018.
Together, positive gross profits and lower operating expenses helped narrow the net losses for these periods over last year.
Revenue generated during the second quarter from our traditional seismic products totaled $3.2 million.
This is a decrease from last year's second quarter, generally reflecting lower seismic industry demand in this period for our sensors, connectors and marine products.
In contrast, revenue from these products in the first 6 months of the fiscal year increased over last year, producing $7 million of revenue.
Sales in the first quarter of specialty sensors and geophones from our rental fleet was a main driver of the 6-month year-over-year revenue increase.
While fluctuations from one period to another in the sale of our traditional seismic products are typical, we anticipate an overall increase in demand for these products if seismic exploration activities increase.
Revenue from our wireless seismic products for the 3 months and 6 months ended March 31, 2018, totaled $6 million and $9.7 million, respectively.
These figures represent declines of 37% and 39% from the respective corresponding periods last year.
It is important to note that the revenue generated during both prior year periods was associated with large OBX rental contracts underway at that time compared with smaller OBX rental contracts in the current year periods.
Despite this decline, we believe demand for our OBX marine nodes will continue to increase in future periods based on the number and size of job tenders our customers are currently quoting.
And in light of that, we recently entered into a contract with a new customer to rent 9,000 of our OBX nodes for a period of 180 days.
We expect revenue from this rental contract to begin near the latter portion of our third fiscal quarter ending June 30, 2018.
Our reservoir seismic products generated $2.1 million in the second fiscal quarter.
This is almost 3x the amount recorded in last year's second fiscal quarter.
Similarly, in the first 6 months of the current fiscal year, revenue from this segment more than doubled from the same period last year.
The revenue increase in both periods is attributed to the sale of borehole seismic tools from our rental fleet, which are utilized in frac monitoring and near-borehole well and reservoir characterization.
Revenue in this segment will continue to fluctuate and will not increase in any significant way unless and until we have been awarded a contract to deliver a permanent reservoir monitoring system.
Discussions to positively provide such systems are underway with customers, but the decision cycles for these projects are typically long and are not expected to have a commercial impact in the near future.
Collectively, our non-seismic products performed very well in the 3-month and 6-month periods ended March 31, 2018.
Total revenue from this business segment reached $7.8 million and $14.3 million over the stated time periods.
The recent quarter's revenue is the largest amount received from these products in the last 5 fiscal quarters.
While our imaging product revenue remained relatively flat compared to last year's 3 and 6-month periods, our industrial products experienced significant gains.
For the most part, these gains resulted from greater demand for our water meter cables and connectors and our contract manufacturing services.
We believe our continued efforts to expand our presence and product offerings in these markets will continue to show benefit.
Extending our efforts to leverage our core technologies within our non-segment ---+ non-seismic markets, we are in early stages of new product development that could significantly expand our presence in the border and the perimeter security market.
We have long served this industry as a provider of reliable sensor products, but due to the adaptation of our advanced permanent reservoir monitoring systems, our borehole tools and cellular-based wireless data recorders, we expect to provide products, which are both innovative and highly scalable in this growing security industry.
In today's world of tightened security and risk management, we believe these products have great commercial opportunity.
So at this point, I'll turn the call over to Tom for some financial detail.
Thanks, Rick, and good morning, everyone.
Before I begin, I'd like to remind everyone that we will not provide any specific revenue or earnings guidance during this call.
In yesterday's press release for our second quarter ended March 31, 2018, we reported revenue of $19.2 million compared to last year's revenue of $20.6 million.
Our net loss for the second quarter was $4.7 million or $0.36 per diluted share compared to last year's net loss of $11.5 million or $0.88 per diluted share.
For the 6 months ended March 31, 2018, we reported revenue of $33.9 million compared to $35.8 million last year.
Our net loss for the 6-month period was $14.2 million or $1.07 per diluted share compared to last year's net loss of $23.2 million or $1.77 per diluted share.
A breakdown of our seismic product revenue is as follows.
Our traditional product revenue for the second quarter was $3.2 million, a decrease of 12% compared to revenue of $3.6 million last year.
This revenue decrease generally reflects lower seismic industry demand for our sensor products as well as our connector and marine products.
Revenue for the 6 months was $7 million, an increase of 12% compared to revenue of $6.2 million last year.
The increase reflects strong demand for sales of our specialty sensors and geophones from our rental fleet during the first quarter.
Our wireless product revenue for the second quarter was $6 million, a decrease of 37% compared to revenue of $9.6 million last year.
Revenue for the 6 months was $9.7 million, a decrease of 39% compared to $15.9 million last year.
These declines in revenue were the result of large rental contracts underway during the prior year periods.
We expect wireless revenue from rental contracts to increase in the coming quarters, primarily due to a recently executed large rental contract expected to last for 6 months.
Reservoir product revenue for the second quarter was $2.1 million, an increase of 192% compared to revenue of $706,000 last year.
Revenue for the 6 months was $2.7 million, an increase of 20% compared to $1.2 million last year.
The increase for both periods is attributable to sale of borehole tools from our rental fleet.
But we reiterate this segment will continue to contribute insignificant levels of revenue until we are engaged in a contract for the delivery of a PRM system.
Moving on to our non-seismic product segment, our industrial product revenue for the second quarter was $4.7 million, an increase of 43% compared to revenue of $3.3 million last year.
Industrial product revenue for the 6 months was $8.4 million, an increase of 31% compared to revenue of $6.4 million last year.
The increase for both periods was primarily attributable to higher demand for our water meter products and contract manufacturing services.
Imaging product revenue for the second quarter was $3.1 million, a slight decrease of 2% compared to $3.2 million last year.
Imaging product revenue for the 6 months was $5.9 million, a slight increase of 1% compared to $5.8 million last year.
We believe these small changes in revenue were normal and do not reflect any particular trend in the demand for our imaging products.
As Rick mentioned, excluding the impact of bad debt reserves and recoveries, our operating expenses for the second quarter and 6 months decreased by 15% and 8%, respectively.
These cost decreases reflect the results of our recent workforce reduction and lower stock-based compensation expenses.
Cash investments into our property, plant and equipment were $495,000 through the end of the second quarter.
We estimate fiscal year 2018 cash investments into our PP&E will be approximately $3 million.
Cash investments into our rental fleet were $1.6 million through the second quarter.
And we expect total cash additions to be approximately $4 million by the end of the year.
Our noncash transfers of inventory to our rental fleet were $8 million through the first 6 months.
And we expect these transfers to increase to approximately $20 million or more by the end of the fiscal year.
These increases to our rental fleet are a result of the replenishment of GSX rental equipments sold to customers and increased demand for the rental of our OBX products.
At the end of the second quarter, our balance sheet remained solid with $41 million of cash and short-term investments.
We had no long-term debt outstanding and the borrowings under our credit facility were almost $28 million, the borrowing availability.
In addition, we reiterate that our various real estate holdings in Houston and around the world are owned free and clear without any leverage.
That concludes my prepared remarks, and I'll turn it back over to Rick.
Thanks, Tom.
During the first 6 months of our 2018 fiscal year, we'd seen oil prices increase to their highest level in more than 3 years, albeit considerably less than record highs experienced in 2014.
Although crude storage figures have fluctuated, efforts by OPEC and other aligned nations to reduce oversupply through managed production are having a stabilizing effect.
Many oil companies are now achieving positive cash flows, largely through tightly constrained spending in conjunction with higher oil prices.
Nevertheless, there remains a hesitancy to increase spending, given the history of how costs have spiraled upwards in the past.
By far, exploration for new fields has taken the brunt of this spending resistance, but we are encouraged by an apparent loosening in the stranglehold on exploration funding.
This is important in light of increasing analyses warning of future supply shortages, if the prior trend were to otherwise continue.
As Tom said, our balance sheet remains strong with no debt and almost $41 million in cash, cash equivalents and short-term investments.
In addition, our available credit facility places our total liquidity at more than $68 million.
As the seismic market takes on recovery, we believe our support and dedication to our customers' needs for both new and existing technological products favors us.
And in full complement, our financial strength demonstrates a level of stability to our customers that significantly derisks their choice in using our technology.
Together with expanding our technology footprint and our non-seismic business segment, we believe we are very well positioned for the future.
This concludes our prepared remarks.
And I'll now turn the call back over to Erica for questions.
A group of questions.
To start with the OBX contract.
Would you discuss the size of this contract on a ---+ from a financial perspective versus the 5,000-node contract that you had before.
Yes, Bill, I'd like to.
The details of this contract are confidential and so in terms of the revenue generation and pricing and whatnot, that's something that we are not at liberty to discuss.
To try to make that question somewhat answerable, would you be able to scale it relative to the other one.
I mean, on the surface, I would say 9,000 nodes versus 5,000 nodes is 80% greater, but I know there could be nuances that I don't appreciate.
I don't really think there is any nuances.
The pricing is standard, our pricing has always been the longer the contract goes, the better right that we're willing to give.
And so length of time has a lot to do with it, and the number of nodes have a lot to do with it.
But I'm not at liberty to really give you more details on that.
Okay.
That is helpful, Tom, because if I recall correctly, the 5,000-node contract that you had was also for the 6-month window.
Is that correct.
I think it actually went a little longer.
.
Yes, I think it had a minimum term of that length, Bill, and then it went longer than that.
And so in the case where you have a contract, say that is originally contracted for 6 months and then it goes longer, but you do give preferential pricing for longer contracts.
Does that imply that, that first 5,000-node contract would have had pricing that was beneficial, assuming something greater than 6 months, if your original contract rate was [for 6 months, did] that day rate, if I may call it, that would have continued.
Well, there are certainly discounts that we offer our customers for long-term rentals as Tom mentioned and if they extend those rentals, I mean, we're going to work with them on pricing on that.
So it's not really just a concrete situation.
There is a lot of fluidity in this that works for us and the customers.
That's helpful.
And then may we shift to PRM business.
You did reference in the release that you do have discussions ongoing.
Would you please characterize what you are experiencing on that front relative to, say, conversations over the last couple of years, please.
Well, I mean, they're in their early stages, these discussions.
So they're not near something that's going to come to fruition anytime soon.
I mean, there's been a lull of significance if you examine the history of the PRM systems globally over the last 5 years or so.
So it's hard to really predict how those conversations will progress, and when or even if they'll become more accelerated in those discussions.
We're just happy to be having the discussions.
It does show that there is interest and an understanding by those that we're talking to of the utility of that product for helping them recover more oil.
So the fact that they're examining that in general and recognize the technology's benefit is, at this point, what we're focusing on.
Great.
And then if we may shift to the border and perimeter security market opportunity that you referenced.
Go ahead and ---+ I'll just let you start, and I may have some specific questions.
But would you discuss that in as much detail as you can, please.
Well, sure.
Our sensors have been used in that industry for quite a long time, but there is certainly a lot more focus in today's world with respect to overall general security in managing those sorts of things that we believe we can actually provide products, that there really aren't much in the way of equivalent out there that have been presented to that market so far.
We have a significant scope of opportunity with respect to our PRM systems and being able to make such large systems functional.
So there's plenty of opportunity for scalability of both the small arrangements, which entail the sensor type markets, where we've been servicing those, but now that we're committed to integrating some of the other systemic components around those, we think that the opportunities are going to really be something that can be beneficial to us.
From a practical perspective, are you talking about the U.S.-Mexican border and being able to detect the vibration from footsteps.
Is that what this bottom line will boil down to.
Well, it's a lot more complicated than that.
But there are significant opportunities there.
We think that we can provide a technology that's useful in that regard.
I don't know, if there's enough time here to discuss it.
But if you could share kind of how it's more detailed or complicated than detecting footsteps, would be happy to listen.
Well, sure.
I mean, there is vehicle traffic, there is tunneling, there's all kinds of aspects of perimeter breaching that occurs in all places.
There's also commercial opportunities, where you're trying to protect resources and make sure that you got those things under control.
Homeland Security has a lot of agenda items in order to keep our society safe.
So to that extent, there's ---+ it's not just footsteps on the ground.
And have you had conversations with the prospective buyers of such equipment and receive some early indication of how they are thinking about this.
We have had conversations.
And we're also in conversation with various consultants within the industry.
From those discussions, we firmly believe that we have some products that are currently under development that can be very useful and very opportunistic.
So yes, we have.
And the time line that you might see a first order.
The cycle time on these sorts of sales are not short either, just like the PRM systems in some sense.
These are well thought-out systems that you go through quite a bit of vetting.
So the timing is not going to be immediate.
But it's worth our shareholders understanding that we're committed to this endeavor and that we think we have a technology that's going to be able to penetrate that market with benefit.
Thanks for a quarter of impressive sequential improvement.
A couple of questions about cash.
The first is just want to make sure I'm putting my numbers together right.
We say that our loss from operations was about $5.2 million, but when I add back to that various noncash items like rental equipment depreciation, PP&E depreciation, stock-based compensation expense, inventory obsolescence and add that back into the operating profit line, I wind up with you guys making a profit from ---+ a cash profit, if I can put it that way, from operations of between $400,000 and $500,000.
Am I reading this correct.
<UNK>, I don't have your worksheet in front of me.
But it sounds correct, yes.
That's a nice place to be, reflecting the combination of improving revenue and cost reduction, and I think what's also notable is that 4 years into a prolonged, even historic downturn, you guys are making discretionary investments in growing accounts receivable, growing equipment inventory and rental inventory and making the R&D investments in the perimeter security products.
So when guys as conservative as you are willing to make those kinds of investments, I would say, those actions speak louder than words about the confidence which you have in the future of the company.
We appreciate that, <UNK>.
Certainly, we are optimistic with respect to what we see in the future, and we're going to be continuing our conservative management.
All right.
Well, thank you, Erica.
This concludes our call, and I want to thank everyone, who has joined our call today.
We look forward to speaking with you for our third quarter conference call sometime in August.
So thanks, and goodbye.
| 2018_GEOS |
2017 | SCHL | SCHL
#Thank you very much, Chelsea, and good morning everyone.
Before we begin I'd like to point out that the slides for this presentation are available on our investor relations website at investor.
scholastic.com.
I would also like to note that this presentation contains certain forward-looking statements which are subject to various risks and uncertainties including the condition of the children's book and educational materials markets and acceptance of the Company's products in those markets as well as other risks and factors identified from time to time in the Company's filings with the SEC.
Actual results could differ materially from those currently anticipated.
Our comments today include references to certain non-GAAP financial measures as defined in Regulation G.
The reconciliation of these non-GAAP financial measures with the relevant GAAP financial information and other information required by Regulation G is provided in the Company's earnings release which is also posted on the investor relations website at investor.
Now I'd like to introduce <UNK> <UNK>, the Chairman, CEO and President of Scholastic, to begin today's presentation.
Thank you, <UNK>.
Good morning and thank you for joining us today.
After an exceptional performance in the first half of the fiscal year, particularly in trade, the third-quarter sales in our book club and trade channels dropped by $20 million compared to the prior year.
However, because of the cost reductions programs we put in place earlier this year in clubs and fairs, segment operating income for the children's book group declined by only $1.9 million in the quarter.
Reading club revenues were affected by lower-than-expected sales of media titles and a segmentation strategy which did not work effectively, resulting in fewer sponsored reading club orders and lower revenue per order.
Of course, we were disappointed with this result, but we are confident we can recover momentum in the club business next fall through enhanced product and incentive programs as well as improved marketing strategies.
In trade, sales dropped in the quarter by $8 million compared to the prior year, almost entirely because of the comparisons to the very strong performance of the adult coloring books last year.
However, at the end of the third quarter we are still $99 million ahead of the prior year in trade revenues, primarily due to the strength of Harry Potter and the Cursed Child Parts One and Two and the Fantastic Beasts and Where to Find Them film script.
Scholastic's strategy to build on our leading position for global children's books and significantly grow our Education business in the US and around the world is underpinned by a carefully developed three-year investment plan in transformational technology.
We are investing to ensure that our infrastructure remains ahead of the curve, enabling us to leverage our unique market position and customer relationships to grow our market share and reduce cost.
We are transitioning our technology infrastructure to enterprise-wide platforms and migrating to software-as-a-service solutions, which will result in improved business processes and much improved visibility to our school-based customers across all lines of business.
After implementation our enhanced platform will also reduce our operational expenses globally.
Largely as a result of our technology OpEx investment, which are included in overhead, our overhead expenses increased compared to the prior year excluding one-time items by $6 million in the third quarter and $23 million for the nine months year to date.
In Children's Book Publishing and Distribution our plan to improve profitability in fairs by better matching fair resources to each school size and interest remains on track and we had higher revenue per fair in the quarter as well as reduced cost.
While revenue declined in clubs we realized cost savings on product and promotional expenses.
Scholastic's own successful franchises, Dog Man in particular, are performing very well in clubs and fairs, but we have not seen a blockbuster title from third-party content providers this year as we had in past years.
In trade we had a number of standout titles in Q3 with continued strong performance from Dav Pilkey's Dog Man books.
We also launched our publishing program based on the iconic American Girl brand beloved by millions of children around the world.
Conversely, sales of adult coloring books, which were very popular at this time last year, declined and we expect coloring books to be a tough comparison in the fourth quarter, as well.
Looking ahead with the upcoming release of the feature film adaptation of Captain Underpants from DreamWorks Animation in early June we expect to see increasing interest in our Captain Underpants backlist and new movie tie-in titles which will also sell in clubs and fairs.
We were also excited about our lineup of new trade releases including Happy Dreamer, a picture book written and illustrated by Peter Reynolds; The Lotterys Plus One by Emma Donoghue; and the first book in our new adult multiplatform series Horizon by Scott Westerfeld, a number one New York Times best-selling author.
In Education we continue to expect our new business pipeline for the year to be back-end loaded.
And we see a strong finish to the year in this fourth and final quarter we are now in.
Recent research confirms that teachers and principals prefer to use a combination of engaging print and digital resources for instruction and we are, therefore, seeing more opportunities to replace basal textbooks with our comprehensive core curriculum programs and pre-K-6 balanced literacy.
Teachers tell us that our core literacy curriculum allows teachers to help students build reading skills in a more interesting and relevant way than they can with a basal textbook.
We also recently partnered with u.
gov on a study that, among other things, confirmed our long-held belief that the best way to enable each student to reach his or her full potential is to instill a student support system that goes well beyond the classroom, including strong partnerships between schools, families and communities.
With our core literacy curriculum combining print and digital solutions and our growing professional development services in family and community engagement programs we continue to build our market position in Education.
In International we continue to see overall growth in key emerging markets in Asia such as India, China, Philippines and Malaysia where revenue grew by 3% in local currency terms as we continue to expand distribution by building on our global product and distribution assets.
As these countries build a growing middle class we see expanding demand for our English language print and digital products that help children learn at school and at home.
In Asia products are delivered through our unique club and fair channels as well as a large regional network of direct-to-consumer sales teams.
Similar growth was also realized in our export business, especially in Latin America which was up this quarter by 21% versus prior year.
We saw local currency gains in trade publishing in the UK and Australia/New Zealand with strong sales of Aaron Blabey's The Bad Guys and RL Stine's Goosebumps.
Looking forward, we are continuing to focus on enhancing profitability by leveraging global product to grow our trade and education business while making investments in technology that will help to lower product cost as well as fulfillment and operating expenses.
Moving on to real estate, we're making good progress on our Soho headquarters building renovations which, as you know, will create new premium retail space and increase the capacity of the office floors, reducing our reliance on costly external lease space.
We are continuing negotiations with high-quality retail tenants and we expect to announce a 15-year lease for our 557 Broadway facing retail space within the next few months.
Throughout the world, schools are increasingly focused on independent reading of children's books as central to literacy and educational development.
We continue to see growth in children's book sales while we significantly expand our pre-K-6 core curriculum literacy programs as well as in our supplementary offerings in education.
We remain confident in our strategy to grow our print and digital publishing businesses to serve our primary customers, teachers, parents, children and schools.
We are reaffirming our outlook for fiscal 2017 as we continue to strengthen our market position by delivering on our mission of helping children to become strong readers and develop high level thinking skills, both through independent reading and curriculum-based literacy programs.
At the same time, our technology investments enable us to market more effectively and reduce operating cost.
With that I will turn the call over to Maureen.
Thank you, <UNK>, and good morning everyone.
In my remarks this morning I will refer to our adjusted results from continuing operations excluding one-time items unless otherwise indicated.
Third-quarter revenues excluding $1.3 million impact of FX were $337.5 million, a decrease of 8% from last year.
Operating loss was $18.7 million compared to $8.1 million last year, resulting in a loss from continuing operations of $0.36 per diluted share versus $0.06 last year.
As you recall, our third quarter is a seasonally lower revenue quarter for Scholastic in which we typically record a loss.
Results for the third quarter included one-time items that totaled $4.9 million which included $4.4 million in severance charges taken in connection with our cost reduction programs as we move from a fixed cost environment to a variable cost model in technology services and $0.5 million related to the exit of lower margin software distribution business in Australia.
Last year third-quarter one-time items totaled $8.3 million and included the non-cash write-down of legacy prepublication assets for $6.9 million and $1.4 million related to severance.
Moving on to our segment results, Children's Book Publishing and Distribution revenues was $199 million compared to $219.8 million last year and operating income was $6.3 million versus $8.2 million last year.
The decline was largely related to lower book club orders and the softening adult coloring book sales trend.
We were able to partially offset these factors with our cost reduction initiatives in clubs and fairs such as lower catalog and promotion cost in book clubs and improved productivity and book fair fulfillment operations.
Education segment revenue was $60.1 million compared to $63.9 million last year and operating income was $3.5 million compared to operating income of $4.5 million last year.
We are gaining traction with our professional development and service revenues which increased this quarter while the decline in classroom books was a result of a shift in our pipeline to our fourth quarter.
Our company-wide focus on improving profitability resulted in lower operating expenses, especially in the digital subscription businesses.
In International segment revenue was $77.1 million compared to $82.3 million last year.
Lower sales in our major markets were partially offset by growth in Asia and export.
The FX impact was $1.3 million unfavorable in the quarter.
In addition, our plan to exit from the Australian software distribution business impacted our revenues for the quarter by $4.9 million.
Operating loss was $3.4 million compared to operating loss of $1.5 million in the prior year due to the lower sales in general as well as higher royalty and bad debt expense in Asia.
Corporate overhead in the third quarter was $25.1 million compared to $19.3 million last year as a result of our investments in facilities and technology as planned as well as the loss of the transitional service income from HMH.
We are replacing disparate business unit systems with enterprise-wide systems that will improve our content and customer management capability and will enable a more cost-effective e-commerce platform.
I'd like to take a few minutes now to update you on some of our technology investments.
We are consolidating our product master data across our business units with one definition of an ISBN that will make it easier to report product sales and rapidly modify strategies and tactics in each channel as appropriate.
We are consolidating multiple web content management systems including for classroom magazines and e-Scholastic websites to one single Adobe experience manager system.
We are creating one repository for all our customer data with a simplified system that will better track our customer relationships in all channels.
We moved our US book clubs to a SaaS-based Demandware system which can handle a significantly higher volume of orders and will lower annual technology operating cost.
We are extending this platform to our Canada book clubs and our teacher and consumer e-commerce stores over the next year.
We launched the Scholastic Digital Manager for all our digital subscription programs in the Education business which will lower costs related to building new digital products and expedite our time-to-market.
We are introducing new business intelligence tools.
As a result, we will be able to identify the best and most likely incremental sales opportunities more effectively.
We are also beginning the design phase of an Oracle ERP platform to manage our financial and supply chain systems which we expect to complete in fiscal 2019 and we will implement a company-wide CRM system.
Through this investment program we are simplifying and standardizing our business processes across divisions using data to improve our customer relationships and leveraging investments and content which will lead to increased revenue opportunities in all channels.
We will also reduce our operating cost as we move from a fixed cost infrastructure and staffing model to a variable cost model which gives us the flexibility to scale our infrastructure and staffing levels with volume and activity levels.
The combination of increased revenue growth opportunities and lower costs will drive a significant ROI over time.
We are confident in our ability to execute this well planned out strategy.
We have successfully implemented approximately $20 million in annual cost saving initiatives to offset the income related to the transitional service agreement with HMH that expired in July.
As a reminder, these savings are reflected within segment operating income rather than in corporate overhead.
Partially offsetting these savings in the current year is the impact of our wage improvement program at our warehouse distribution and customer service centers of approximately $10 million to $15 million on an annualized basis.
The wage rate realignment in this fiscal year has already shown benefits with lower employee turnover at our shared service centers and the retention of seasoned book fair drivers that help us avoid using expensive temporary drivers in the peak season.
During the third quarter, we generated free cash flow as defined of $16.6 million compared to $9.6 million last year and cash and cash equivalents exceeded debt by $456 million at the end of the quarter compared to $343 million last year.
As we announced earlier this week, the Board of Directors declared a cash dividend of $0.15 per share for the fourth quarter and we also recently entered into a new five-year $375 million committed credit agreement.
The new agreement has substantially similar terms and conditions as the previous one, which was set to expire in December 2017 but allows for an increase in the Company's capacity for dividends and other distributions in respect to its capital stock.
We continue to believe performance in fiscal 2017 will be driven by our core growth opportunities in publishing and education in the United States and internationally with improved execution and more streamlined operations.
As <UNK> said earlier, we are confirming our full-year outlook of $1.60 to $1.70 earnings per diluted share excluding one-time items on total revenues of $1.7 billion to $1.8 billion.
We expect free cash flow to be in the range of $40 million to $50 million.
Even with the higher level of strategic investments in technology and real estate, we remain on track to deliver positive free cash flow for the 13th consecutive year excluding taxes paid last year on the sale of Ed Tech.
I will now turn the call over to <UNK> for the question-and-answer session.
Thank you very much, Maureen.
And operator, we are now ready to open the lines for questions.
Thank you, <UNK>.
Good morning.
We discussed this a little bit on the last call where you asked a very good question in the same vein.
Clearly the initial Trump budget includes a significant reduction in education spending.
Over time as this budget gets discussed and finally formulated, we really don't believe the funding environment will change significantly in education as most people in our society rank education along with jobs and healthcare as their major concerns.
Our three-year plan in education, which we are building now, <UNK>, as you know, is one based on improving our market share as we still have a relatively small portion of the very significant spending that currently is available for pre-K-6 core literacy in the schools.
So from our point of view we are forging ahead with our education development, thinking about market share of the existing funding which may go down a little bit.
But we still feel we have significant opportunities in growing our Education business.
I know you are also interested in the switch in terms of charter schools and we are expanding our charter school focus on sales and we are expecting some ---+ the trend is already there in charter schools.
There is not as huge amount of new money devoted to charter schools in the new budget, but clearly there will be some acceleration in the development of charter schools.
And we will be there with our special sales effort to focus on those growing number of charter schools.
Let me start with the latter question and I may turn to Maureen as well to supplement whatever I have to say.
We are in the process of a three to four year of technology transformation.
We believe that we will begin to see significant improvements there in fiscal 2019, and then they will accelerate in fiscal 2020.
But we do believe that in our core longer-term strategy is to significantly lower our cost base by the use of this transformational technology and also to improve our marketing focus and capability to increase sales in a very strategic way as a result of the technology investments we are now making, which are quite sweeping and really affect all aspects of the Company.
I will ask Maureen to come back to that.
But let me answer your retail question, the building question first.
We are really on target with our building renovation.
We will be moving some people in July and we will be completed by the end of 2017 and we will have moved everybody back into the building at that time.
As you know, we have about half of our staff is relocated elsewhere during this year, which has increased our operating expenses during the year.
But we are really excited about this real estate project.
It's going really well.
It's going to be a fantastically more efficient office and with all a lot of new technology enabling our workforce to do a better job.
And on the retail side, which I know has been a concern of yours, we continue to believe that the premium retail on Broadway and Soho remains one of the most desirable places in the world to sell clothing apparel accessories to a youthful market.
They crowd these streets every day and especially on weekends and fill the stores everywhere on the street.
So we're in discussion with a lot of different people about the space.
We expect to announce a major lease soon and we see these opportunities in retail as a long-term investment for Scholastic shareholders.
So over to Maureen on the technology question that you asked.
Well, I agree with <UNK>.
I think we will see the major part of the improvement from our technology investments in 2019 into 2020.
But I'd like to say that we are already yielding some of those improvements now.
We've rolled out Demandware for our book clubs at the beginning of the year and reflected in clubs as a savings related to leaving the IBM WebSphere application and moving to Demandware, which is a SaaS solution pay-as-you-go.
So we already have reflected in the club business lower operating expenses because of that.
And we can move quicker to change our site because of that, and so that has also allowed us to get faster to market with promotions.
As far as other investments that we rolled out this year, we talked about Adobe Digital Manager and classroom magazines and our e-Scholastic site.
That has allowed us to bring down the cost of those applications as well.
As we mentioned in our Education business we moved to Scholastic Digital Manager and you saw in our results that our digital expenses have gone down in our digital businesses, the cost of producing digital product.
So you are starting to see those investments and you will continue to see those investments paying off each year as we roll them out.
Thank you all for listening to our third-quarter story.
We will look forward to talking to you again in July at our year-end conference.
We will see you then.
Thank you all for listening today.
Thank you, Chelsea, very much.
Very smooth call.
Have a good day now.
Bye-bye.
| 2017_SCHL |
2016 | KIRK | KIRK
#Thank you, <UNK>, and good morning to everybody.
The first quarter was in line with our expectations and we're pleased with the progress we made on the strategic priorities that will enable us to drive our full-year performance.
As you'll recall, our full-year guidance, which we have maintained today, assumes a year-over-year decline in earnings in the first half as we invest in the supply chain and continue our shift to a more front-loaded store opening schedule.
We expect second-half earnings to be above last year's levels as we leverage our store growth and benefit from progress on various productivity initiatives.
We are on track with that forecast, which includes bringing inventory levels back into alignment by the end of the second quarter and opening our new stores much earlier in the year.
At the same time, we are moving forward on a set of price, merchandise, and marketing initiatives to drive our long-term strategic plans.
I'm optimistic about the progress we're making and believe we are well positioned as we approach the crucial fall and holiday selling seasons.
One of the biggest improvements we are focusing on involves our supply chain.
Our e-commerce channel has grown at an accelerated pace and now accounts for 7.5% of our total revenues.
Until now, order fulfillment for that channel has been operating out of the same distribution center as our brick and mortar stores.
The combination of this growth with an 11% gain in store square footage in 2015 and a planned 6% to 8% increase for 2016, coupled with the more complex flows of seasonal goods, has added to the demands on our distribution network.
All of these factors strained our supply chain in 2015 and we absorbed considerable dislocation around our peak seasonal build last fall.
To address these issues we've made a number of important adjustments already, including the new e-commerce fulfillment center and a more efficient process for new store openings.
Additionally, we are working to further increase our supply chain capacity by introducing a West Coast bypass operation later in the year, something that is commonplace for companies our size.
The result of these initiatives will alleviate a tremendous amount of pressure relative to the last few years as we approach our critical seasonal build.
Our supply chain work has important long-term implications for the business.
It supports each of the pillars we've identified to transform Kirkland's into a high-performing nationally recognized home decor brand of choice.
These include improving in-store productivity, enhancing our omni-channel platform, optimizing our real estate and development and reinforcing a culture of continuous improvement.
It will also provide some short-term comparative benefits as we cycle against elevated freight costs, higher labor costs and a series of operational distractions that came into play in the back half of 2015.
We're already unlocking better efficiency across the organization and that should enable us to take a more proactive posture to support our fall and holiday merchandise offerings.
We're pleased with both the transition and the trajectory of the direct-to-consumer channel.
E-commerce revenue grew 28% in the quarter.
While we had some startup cost inefficiencies during Q1 which put pressure on both e-commerce sales and labor costs and fulfillment, we are quickly gaining momentum.
The new fulfillment operation is already achieving better output metrics for the direct channel and we expect further improvements as we move through the year.
We continue to see a path to increase the direct channel penetration to 10% over the next few years.
We're taking a holistic approach to market development that takes into account existing and new stores as well as e-commerce growth.
We believe we're in a favorable position vis-a-vis pure direct players, given our unique merchandise assortment, value pricing and store footprint.
Our ship-to-store model accounts for about two-thirds of our direct revenues at present.
Our customers use our stores to visualize ideas and we're achieving strong attachment rates on e-commerce promotions geared to in-store pickup.
Looking forward, we're working on ways to improve the experience by accelerating delivery times and offering more options for the customer.
We recognize the competitive nature of the business and we've begun to test free shipping, provided the customer hits certain thresholds.
Importantly, we're also laying the groundwork to fulfill some e-commerce orders from store inventory to streamline our distribution process.
And finally, we've expanded our supplier direct fulfillment program with new vendors in Q1 and plan to add more over the rest of the year.
We're optimistic about its expansion and the positive impact it can have on the channel and its profitability.
Higher ticket categories like furniture, art, and wall decor are popular online, and allow us to carry multiple styles that are not available in stores.
To further enhance direct sales in the furniture category, during the first quarter we introduced a special order program in our stores which leverages our e-commerce fulfillment and ship-to-store model.
We'll have more to talk about as we develop and refine our e-commerce model and we look forward to updating you in coming quarters.
We've made considerable progress to bring our overall inventory levels back into alignment with sales during the first quarter.
Planned promotional activities, combined with tight management of our receipt plans to the sales rate have allowed us to improve our position.
We're in the final stages of this process and on track to enter the third quarter on plan with year-over-year inventory levels in line with, to slightly below, the expected sales gain for the back half which should provide us with improved margin visibility.
As noted in the release, we opened 14 new stores during the quarter.
We've been able to open stores earlier in the year which frees up operational resources for peak season activity.
This has been possible because our pipeline is full, allowing us to be more selective in the deals we choose to pursue and the timing of our construction activity.
The heavier new store openings scheduled during the quarter led to expense pressures in occupancy and store payroll due to pre-opening activities but we'll obviously benefit from this class of openings as we enter the holiday period.
Optimizing our real estate is one of our top strategic priorities.
Our loyalty program and our e-commerce channel are providing a wealth of data on our shopper.
We've added that to a much more analytical site selection process to refine how we look at growth in new and existing markets.
We're pleased with the new store openings thus far in Q1 and we're adding analytics to better assess competitive dynamics by market to optimize our market spacing and minimize cannibalization.
We're also looking at ways to create a more consistent store, one that's easier to plan, allocate, visually present, and operate.
That will involve new standards for site selection and additional innovation and merchandising.
The special order program I mentioned earlier reflects this.
The program allows customers to order various styles of seating and benches that aren't offered every day currently in our stores.
It's too early to gauge success, but it's just one example of how we're thinking about adding special buys in new categories and additional selection within existing businesses.
As expected, traffic remained a challenge during the quarter, particularly in Texas.
While our ability to affect macroeconomic headwinds is sometimes limited, we are able to control where we invest our marketing dollars to drive traffic.
Therefore, we're reallocating marketing spend to more productive areas beyond our FSI programs and we're optimistic they can drive stronger results.
While some specific macro issues are affecting traffic, we're pleased with our merchandise assortments.
We continue to enhance the interaction between merchandising, visual presentation, marketing in stores, and this strong linkage again supported an uptick in conversion during the quarter.
Categories, including mirrors, clocks, furniture, and fragrance were stronger in the quarter and our Easter seasonal business performed very well.
So we're encouraged by that as we approach the second half with healthier inventory positions.
With that, I'll turn it over to Adam to cover the financials.
Adam.
Thank you, Mike.
Net sales for the first quarter increased 9.8% with comparable store sales increasing 0.5%.
This was in line with our projections and reflects the growth in our store base, continued strength in e-commerce and positive response to our seasonal assortment.
E-commerce revenue continued to increase at a healthy rate, generating $9.8 million for the quarter which represented a 28% increase over the prior-year quarter and accounted for approximately 7.5% of total sales during Q1.
Comp sales trends in our brick and mortar stores were relatively consistent as we moved through the quarter.
Geographically, comparable store sales results were similar to what we experienced in the fourth quarter of 2015, with Texas and Louisiana weighing down on our comparable to our sales results.
Combined, these two states affected total comp by almost 1.5 points.
Encouragingly, two of our largest states by store count, Florida and California, continued to show positive results.
We opened 14 new stores during the quarter and closed 8, ending with 382 stores representing 40 more units than the end of Q1 last year.
First-quarter gross profit margin decreased approximately 215 basis points to 38.1%.
This decline was driven by three factors.
First, merchandise margin declined 60 basis points to 55.8%, primarily due to planned promotional mark-downs to manage inventory levels.
While the promotional environment was competitive, we are pleased with the reduction in inventory and will now be able to achieve our target of being back on inventory plan during Q2.
Inbound freight charges were a smaller component of the merchandise margin decline in Q1 and showed improvement versus the back half of FY15 as we executed on our supply chain initiatives.
Moving on to the other components of gross profit margin, store occupancy costs increased 98 basis points as a percentage of net sales during the first quarter, which were in line with our expectations due to the increased level of store opening activity during the quarter.
8 of the 14 new store openings occurred in late April and did not have time to contribute the level of sales needed to offset pre-opening rent, payroll and advertising costs.
Outbound freight costs, which include e-commerce shipping, were down slightly as percentage of sales.
Similar to Q1 last year, we saw approximately two-thirds of our e-commerce revenue fulfilled via ship-to-store.
Finally, central distribution costs increased 61 basis points.
As Mike mentioned, we executed the transition to our new e-commerce fulfillment facility in Jackson, Tennessee during March.
Startup costs and inefficiencies, especially labor costs, put additional pressure on the quarter.
Looking forward through to the end of the year, we expect that our lower inventory levels, combined with improvements in our supply chain structure, will help improve the flow of goods both in stores and to customers' homes.
Operating expenses for the first quarter were 32.3% of sales, which is slightly down to last year.
Store-related expenses deleveraged during the quarter, reflecting higher healthcare costs as well as marketing expense.
We recognize the benefit in the prior year related to our health care plan which drove a negative comparison to the current year.
Marketing costs were higher as a percentage of sales, partly due to the increased new store opening activity, as we opened 14 stores in Q1 this year versus only 1 store last year.
Store payroll deleveraged during the quarter.
This was within our expectations, also reflecting the higher store pre-opening activity.
Corporate-related expenses leveraged during the quarter, driven by a favorable comparison to our retired CEO's post-employment benefit charge from last year but also by lower professional legal fees, which reflects the hiring of our General Counsel and continued tight management of these expenses.
E-commerce-related operating expenses were relatively flat to the prior-year quarter as a percentage of total revenue.
Depreciation and amortization increased approximately 18 basis points as a percentage of sales.
The tax expense for the quarter was approximately $594,000 or 39.3% of pre-tax income, resulting in net income for the quarter of $0.06 per diluted share.
Moving to the balance sheet and cash flow statement.
At the end of the quarter, we had $38.2 million in cash on hand.
Inventories at the end of Q1 were $69.1 million, an increase of 19% over Q1 last year.
This was in line with our expectations and we anticipate inventory levels to be back on plan by the end of Q2.
As Mike mentioned, part of our supply chain initiative includes incorporating a West Coast bypass operation later in the year.
This bypass will allow us to gain ownership and control of our product earlier in the pipeline to better manage our business, especially during our peak holiday season, without increasing our working capital requirements.
The bypass will improve service to our West Coast stores, take pressure off of our Tennessee distribution center and provide us with more control over our seasonal product flow.
At quarter end, we had no long-term debt and no borrowings were outstanding under our revolving line of credit.
During Q1 2016, cash provided by operations was $2.7 million, reflecting our operating performance and changes in working capital.
Capital expenditures were on plan at $8.7 million with approximately 79% of CapEx relating to new stores and existing store improvements, followed by 11% relating to supply chain improvements.
And IT system improvements accounted for the balance.
As mentioned in our press release earlier today, we are reiterating all of the components of our 2016 guidance that was provided on the March 11, 2016 earnings release.
Thanks, and I will now turn the call back over to Mike.
Thank you, Adam.
As many of you know, Kirkland's is celebrating its 50th year in operation.
Back in 1966, Carl and Robert Kirkland founded our Company with the belief that great style can come at a great price always.
The concept has evolved and thrived through tremendous economic and social change but that vision continues to guide our strategy.
The organization is stronger than ever and I'm confident Kirkland's best years are ahead of us as we build on our founding principles.
We have a lot to look forward to in the back half and we look forward to updating you on our progress.
Operator, we are now available to take a few questions.
<UNK>, how are you.
Hey, <UNK>.
Inventory position: we are very pleased with the progress we made and continue to make on getting back at the position we intend to be going into the back half.
Year-over-year comparisons are still a little tricky, given last year's port slowdown and subsequent flow that started to really occur about this time last year.
So you're still showing about ---+ I think we show about an 18%, 19% increase over the prior year right now.
But as we go into the back half, as I said in my comments, I would see the inventory level being, on a year-over-year basis, up less than the expected sales increase we have in the back half.
Which, if you look at store count and look at your comp assumptions, would be in the 10% to 12% range.
So inventories to be up year over year, a little bit less than that going into the back half, which is considerable progress from where we've been.
We're very happy about that.
From a seasonal standpoint and looking at core, core has continued to be a significant part of our business.
It's 35%-ish of the overall business, so we do everything we can to protect that part of the business.
Seasonal categories have been successful for us for the last few years and we are planning a slight increase there going into the back half.
We saw good results in the spring seasonal aspects of our assortment, and we're excited about what's ahead, looking at fall and then deeper into the holiday period.
Sure.
I think we're still dealing with some promotional activity in Q2.
Q2 happens to be a little bit more lighter quarter in terms of volume and a little more promotional historically, so you'll continue to see some of that in Q2.
But as we go into the back half is where we would see improvement start to come in on the merchandise side.
We also have some inbound freight reductions that we think will help margin going into the back half, as well as all the things we mentioned in our comments ---+ Adam mentioned in his comments ---+ about the supply chain changes we're making and the improvements we expect there.
Well, without going into specifics, <UNK>, you're right about the comparisons.
I think we're up against a 6.7% or so in the second quarter, and that was a little bit more heavy in May and June than July.
So as we think about second quarter and as we planned the year originally, we expected earnings to be down in the second quarter.
And we expected the comp increase to be a little bit less, given the comparison we were up against.
So that's directionally how I would look at it.
Yes, I think around flattish is about the way to think about it.
All right, <UNK>, thanks a lot.
Sure, <UNK>, this is Adam.
We certainly did see a heavier weighted impact for the two states we called out in the prepared remarks.
That being said, we did see some positive traffic trends in some of the other states.
We're not negative across the board, although these states that we called out, unfortunately, are disproportionately higher in terms of sales and earnings contribution; therefore, they have more of a negative impact.
But as we move into the back half of the year, when we started to see the traffic declines, especially in Texas, Louisiana, we're hopeful that some of these traffic comparisons will ease up a bit.
Yes, I'll start with that.
And what I would say ---+ there's really three buckets we're thinking about with supply chain as far as 2016.
One is the fulfillment center move that completed in March.
As I said earlier, after the move and the startup phase, we're starting to see better metrics coming out of that as we expected.
And we expect that to continue as the year progresses.
Secondly, is the West Coast bypass operation.
That will help us in multiple ways.
But first being ---+ in no particular order ---+ first would be the ability for those West Coast stores, which would, when you add up all the geographic areas that would be affected, maybe about 40 stores that will see better service.
When you're not having to bring it all the way to the interior and ship it all the way back out, those stores will be receiving their merchandise at the right time and with the rest of the chain.
We've struggled with that in the past and that will help us on that aspect.
Secondly, it will alleviate pressure on our Tennessee facilities because we won't be bringing all of the flow into those facilities.
And thirdly, and importantly, it provides a governor on our flow.
You've got a facility ---+ and we're a highly seasonal business.
We can time that flow better with that facility in place and allow our DC to manage the goods in an orderly fashion as we flow seasonal product out to the stores.
Presentation is very important to us, and we want the stores showing the product in the order that we've envisioned when we buy.
And this will give us much more capability in terms of being able to control that and better service our stores.
So it's a long-term play.
You can think way long term that, as we grow and continue to get bigger, we will need more infrastructure in our supply chain, maybe a second DC.
But this is something that we'll need anyway, that will help that flow management that is crucial for us, especially as you get into peak.
So the West Coast is the second one.
And thirdly, and I won't dwell on it too much, but to say that we are investing in a systems upgrade on our e-commerce fulfillment that will ---+ the move was one thing; it addressed capacity, it addressed some automation that we added.
But when we get further benefits once we upgrade our warehouse management system that we use to run that aspect of the operation, and we see some efficiencies coming out of that as well.
The timing of all these things is the current year.
It's going to come in phases, but we intend to have it all in place before the peak part of our selling season, which, with e-commerce, is a little bit deeper into the year ---+ you're talking about third quarter here.
So hopefully that provides a little color.
Thanks, <UNK>.
Yes, it's more future-driven there, <UNK>.
To say that we have no cannibalization is an overstatement, so I'm not going to say that.
We are doing infills; it does have an impact.
We're doing a better job of measuring it, especially when we get up front, when we're evaluating a deal.
With all those analytics I mentioned that we've really added to the process, we have better way to track cannibalization, and we are beginning to be able to avail ourselves of those capabilities.
There are some spot markets where I think we've built it out and we are seeing some cannibalization, but it's healthy cannibalization.
I think it's more a statement on going forward as to what is the ultimate store count in each market and how do we address that with the growth in e-commerce.
Well, <UNK>, this is Adam.
As you know, the final regs came out last week and we are still evaluating their impact.
The latest regulations seem to be a little less onerous than we had earlier anticipated.
We'll have more to say on that as we move through this next quarter.
North of $60 million, <UNK>.
That's a topic that we would be in discussion with our Board on, <UNK>.
Obviously, it's always something that we address at that level, and when we have something to talk about, we'll share it.
Hey, <UNK>.
That's a tough one to do.
Our promotional activity was a little higher than last year, as we mentioned.
Conversion was positive.
I think that does play into that, but not enough.
The numbers we're seeing would not suggest that, that's the whole reason conversion is up.
We've made a lot of improvements in terms of how we message and how our teams are connecting in terms of visually in the stores and pulling that off, and we think that's a big driver to conversion.
The promotions certainly have an effect, but I think it's a combination of things and it's hard to really quantify the components out that way.
Well, one thing that we've talked about and we've mentioned here is evaluating our current marketing programs, a big part of which is email, which right now the metrics on email suggest that, that is still a good return and driving traffic to our stores.
We see it when we run our events and the immediate impact that, that can generate.
The other second large component of our marketing spend right now is our FSI program, which we're a little less happy with what we're seeing out of that.
So we are looking, as we look into the back half, we're looking to adjust some of the spend from that into other areas ---+ one I'll name would be digital ---+ that we're considering as a more effective way to drive traffic.
So we will be adjusting the back half spend a bit to position those dollars in areas that are driving traffic at a cost that's acceptable from a budget standpoint.
Thank you.
Thank you, everyone, for your attention on the call today and the questions.
We appreciate them.
We look forward to updating you as the year progresses.
Talk to you next quarter.
| 2016_KIRK |
2017 | LQDT | LQDT
#Thanks, <UNK>, good morning, and welcome to our Q1 earnings call.
I will review our Q1 performance and provide an update on key strategic initiatives.
Next, Mike <UNK> will provide more details on the quarter.
Finally, <UNK> <UNK> will provide our outlook for the current quarter.
Liquidity Services reported Q1 results in line with our GMV guidance, and above the guidance range on adjusted EBITDA, driven by our commercial capital assets marketplaces, which experienced higher-than-expected volume and margins related to large projects in our industrial and energy verticals, in addition to higher than expected service running revenues.
Our DoD marketplace GMV was down 21% year over year, reflecting lower volumes and a less favorable product mix.
We are pleased with the progress made this quarter, despite the headwinds related to changes in our DoD contracts.
The focus of our long-term growth strategy is on our commercial and state and local government business, and we are pleased to report that aggregate GMV in these marketplaces grew 12% year over year, marking a return to top-line organic growth for the first time in eight quarters, and a significant milestone in the advancement of our transformation strategy.
We continue to expand our service offerings to capture more opportunities, and to invest in our sales channels to grow, seller accounts and our buyer network.
During the quarter our retail supply chain marketplace achieved double-digit top-line growth and improved margins, as we continued to attract new clients and expand existing relationships, driven by our strong recovery rates and innovative returns management services.
Liquidity Services is well-positioned to assist retailers and manufacturers during the post-holiday return season, and throughout the year.
With the growth of e-commerce, the volume of returns in the retail supply chain and the need for our services is growing.
Our national distribution center network, returns management services, leading sales channels, and growing buyer base provide clients a one-stop solution to free up space and human resources to quickly recover more capital and reduce their total supply chain costs.
Our commercial capital assets business benefited from strong activity with corporate accounts, particularly in the energy vertical, which is up 68% year over year during the quarter.
We added 23 new commercial accounts during the quarter, and have expanded our sales and business development teams to capitalize on our success and reputation for delivering strong results for our clients.
Our state and local government marketplace also outperformed our expectations during the quarter, as more sellers utilized our platform and value-added services.
We added over 230 new local accounts, including 22 in Canada and 36 in the western United States, which we believe are both still under underpenetrated for Liquidity Services.
This quarter, we also continued to make steady progress with our LiquidityOne transformation program.
We launched our new customer management module, which provides a common process for managing customer and client data, eliminating eight external platforms to manage these processes.
We plan to launch our network international energy marketplace on our new LiquidityOne platform in the summer of this year.
This deployment will support over 32,000 sellers and buyers, transacting across 37 countries and 247 asset categories.
All property management, customer management, transaction management, and financial settlement will occur in our integrated LiquidityOne platform, and will replace numerous legacy systems, and in some cases, manual processes.
Our new mobile first marketplace experience is built on best practices and customer experiences, refined over millions of transactions, to provide a marketplace for sellers to safely and efficiently sell inventory and equipment, and for buyers to purchase an unmatched selection of business assets from the most recognizable sellers across the globe.
We exited the quarter in a strong financial position to pursue our growth initiatives with $127 million in cash and zero debt.
Our near-term outlook remains cautious due to the increase in costs and soft asset pricing in our DoD scrap contract, variability in the timing of large client projects in our capital assets business, and ongoing investments in our LiquidityOne transformation program.
Looking ahead at FY17, we continue to expect solid organic revenue growth in our commercial and local marketplaces.
Our near-term outlook reflects significant current investment on our part, but does not yet reflect the benefit of new products, capabilities, and business expansion opportunities we are building at Liquidity Services.
In closing, as we begin to harvest the investments we are making in our people, processes, and new platform over the next few years, we are excited about the tremendous potential to grow our business.
Macro trends in globalization to growth of e-commerce and sustainability will drive the need for our platform and services.
Liquidity Services is committed to driving innovation and significant value creation for our customers and our shareholders, as we execute our long-term growth strategy.
Now, let me turn it over to Mike for more details on Q1 results.
Good morning, everyone.
As our first-quarter results reflect, we are gaining momentum in fulfilling our goal to deliver the most trusted and integrated e-commerce marketplace solutions to manage, value, and sell inventory and equipment for business and government clients.
In Q1, we returned to organic growth in our commercial businesses, as we continued to build more depth in our client base and grow our network of relationships within our core verticals, including energy, industrial, retail, and state and local government.
We expect the growth in our commercial relationships, combined with the ongoing strength of our state and local government business, to drive GMV growth in FY17.
We anticipate long-term benefits as we continue to move forward with our LiquidityOne platform rollout from our legacy marketplace.
Our platform is designed and being developed as a scalable and elegant solution that addresses the complexity of a two-sided marketplace focused on multiple verticals, and a wide range of asset categories, creating an integrated database and unified buyer experience.
The migration of our next marketplace onto the platform will drive a better user experience and a more efficient operation to grow our sales channels in the US and internationally.
Additionally, the scope of functionality, integrated into each step of our rollout will include the majority of the functionality needed for each subsequent go-live, with the aim to make the process faster and easier with each marketplace we migrate.
Over the long term, this platform serves as a foundation for new capabilities, including self-service and white label solutions.
Looking ahead, our second-quarter items anticipate year-over-year comparative GMV growth in our commercial capital assets, retail, and state and local government businesses, offset by lower volumes in DoD surplus.
Our bottom-line results will be comparatively down year over year, as our gains across our commercial businesses are still more than offset by the effect of the new DoD contract for both surplus and scrap.
Additionally, we anticipate continued investment in sales and marketing in our IronDirect business as we build demand for its products onto the platform.
Management's guidance for the next fiscal quarter does not include any one-time impact from the wind down of our truck center, live auction and retail business.
Our guidance is as follows: we expect GMV for Q2 of 2017 to range from $150 million to $170 million.
A GAAP net loss is expected for Q2 of 2017 in the range of negative $12 million to negative $9 million, and the corresponding GAAP loss per share for Q2 of 2017 ranging from negative $0.38 to negative $0.29.
We estimate non-GAAP adjusted EBITDA for Q2 of 2017 to range from a negative $7.5 million to negative $4.5 million.
A non-GAAP adjusted loss per share is estimated for Q2 of 2017 in the range of negative $0.30 to a negative $0.21.
This guidance also assumes that we have diluted weighted average shares outstanding for the quarter of approximately 31.4 million.
We will now take your questions.
On a GMV it's going to be minimal.
On the bottom line, will be ---+ the plan, as we indicated in the 8-K, is that were going to be winding down here this quarter, and likely a little bit into next quarter, meaning the April.
So if you look at an annualized basis, we're looking at bottom line savings $2.5 million to $3 billion.
The quarter that will have full impact of that will be obviously the June quarter.
From a strategic point of view, let me confirm that Liquidity Services has a very active and growing online marketplace for the sale of a variety of transportation assets for national fleet customers, leasing companies, government agencies, and corporate clients.
We did over $150 million of transportation and fleet asset sales through our online channel in the last 12 months.
The legacy truck center live auction business from permanent land-based sites is what is being wound down.
And that's what <UNK> is referring to.
We are seeing market share expansion.
We have had great success in converting available business and prospects and retail supply chain, state and local government, energy, and what I call multinational industrial clients.
Our pipeline continues to grow, our capabilities are unique in the marketplace.
We believe our competitive advantage is strengthening, in some cases you have consolidation in the marketplace, which is benefiting Liquidity Services, and we expect that to be a longer-term trend.
Sure.
Well, it's top of mind, coming out of the holiday season the growth of omnichannel and online retail.
Our Company is positioned to be the turnkey service and solution for large retailers and manufacturers.
We're dealing with a crushing volume of returns, return rates in the online channel that have gone from 15% to 20% up to 30% or 40% in certain categories, in areas like consumer electronics, apparel, housewares, that dynamic as online sales is the largest share of the pie of overall retail.
It's driving greater demand for our services, and those services include the ability to take returns back directly from consumers, to validate condition of items and in some cases, making level I, and level II, repair and value enhancements.
And then, giving retailers and manufacturers the option to re-commerce those items and sell them back through their own channels, or to use our channels and liquidate and recover value.
In most cases these large companies, and increasing midsize companies, they don't want to dedicate warehouse space, people, time, material handling equipment, to managing open box returns, it's a non-core function, something that is our core focus.
We have a lot of economies of scale through our national distribution center hubs, through our software and services to process, reconcile, and then recover value from these returns.
In our locations the ability to do quite impressive value-added services to certify items as like-new refurbished items, and allow them to be sold directly to end consumers for the maximum recovery for our clients.
So that's a flavor of the types of services that we're offering, and we expect that to be very well linked to macro trends in the evolution of retail supply chain.
I think as part of our Liquidity One investment, we're not only consolidating and integrating our existing marketplaces, we're funding the development of new capabilities, and that will include further enhancements in our returns management solutions, reporting capabilities, client portals for data analytics, to understand what's happening with their inventories.
So we are investing in product.
We're investing in process.
We're investing in the sales and marketing outreach.
We think we have a great product to offer, and we will continue to invest in sharing our story, directly and indirectly, to the industry.
Both.
We have removed the tools from disparate systems, and brought them into a single platform that aligns with the transactional marketplaces, and gives buyers and sellers unified account management and visibility over all of their in-process and complete transactions with us.
So from the outside perspective, they are getting better ---+ using convenience to access information, which can include information about values, about different channels that they can tap within our Company to sell goods.
From the inside perspective, it's just much of our productive for our team to have a single system to use, and it has lots of apps and features internally to capture new client cases.
A case could travel from Australia to Europe in North America, back to China, seamlessly through our platform, with different account managers involving themselves at the right time.
And given the nature of our global client base, that's very valuable to us.
So you've got productivity gains for the internal team, and new features I'm reporting for clients, better integration with our transactional platforms, all being housed within the customer management module.
Sure.
First of all, we are very global in terms of client base where the assets are located.
Our business benefits from the inexorable march of technology obsolescence and the rebalancing of supply chains where companies that reposition plants and equipment over the many years and decades, we've worked with them; they're typically looking for help.
They're looking for people to help manage redeployment.
It's one of the services we offer.
Add to value and sell equipment rather than ship it somewhere.
So we think we are actually pretty resilient and well-positioned for any changes or disruptions from policy changes or renegotiation of tariffs.
The reality is, it's a very fluid and dynamic global marketplace that we operate.
On the domestic market, I think everyone is in a wait and see mode, as to actually how policy is coming out, and we don't really have any way to forecast that better than you.
We talked about our goals regarding development of the underpinnings for the entire system, which is well underway.
The customer management module is a good example of that, and then a series of cascading releases.
<UNK>, we're focused on the customer experience, the quality and reliability of the platform, and migrating these customers.
We have not published a schedule in a more detailed fashion on calendar 2017.
We continue to update both our internal teams and investors, when we have tangible evidence of the deployment of functionality in the marketplace.
And I think from the outside in, you really aren't going to see the level of progress that we've actually made in things like a global ERP implementation.
You have to do all of the infrastructure work well in advance of deploying an eCommerce market place.
So the percentage of progress made or completion is greater than the number of users, the number of market places deployed.
I think in <UNK>'s remarks on the preambles of the call, we have done a lot of work in order to not only prepare for the initial roll out, but to be able to accelerate subsequent market places following the release of network international, which is targeted for the summer.
Just to be clear.
We're not providing a specific time scale on the release of every marketplace.
We're providing a very clear look ahead to what's next.
No.
There is going to be more expense as we go into calendar 2018.
A good amount of this $1 million to $2 million range that I've given, that's going to be pretty consistent this year, is what we said in the past.
Might it be a similar amount growing into 2018.
Yes, it might be.
But I think at some point that's going to taper down simply by the step function that we're talking about.
In terms of timing, at this point, we're not giving timing of exactly when that will happen.
Again, because we're deploying and as we build the functionality, and as we build the marketplaces, we assess every significant, what we call internally every wave of implementation, we assess how much more we want to put into that wave versus delaying into another wave, simply as we look to prioritize the quality versus the needs both from a customer and client deployment perspective.
Well, we recognize that competitive situation.
We've increased the revenue yield to the government.
The business is like any of our businesses, a beneficiary of growing the recovery rate on the goods that we sell, finding sales channels and marketing methods to expand the buyer base.
And as we grow rate of return or recovery rate on the revenue realized on the sale of assets, that falls directly to our bottom line.
So the idea that our platform investment is going to improve across the pollination of buyers, provide more competition for offered assets, that will benefit all of our customers including the product that we sell to the DoD, which helps drive margin expansion.
| 2017_LQDT |
2017 | GD | GD
#Thanks, <UNK> and good morning
I'd like to open by congratulating Phebe on welcoming her first grandchild into the world yesterday
Mother, son and grandmother are all doing well
Phebe is with the newest edition to her family right now, but she left us well-prepared to report our results on this call
I'd also like to welcome <UNK> <UNK>, our Vice President and Controller to the call and thank her for joining me today
Congratulations Phebe, welcome <UNK>, now let's get started
Earlier today, we reported fourth quarter earnings from continuing operations of $2.62 per fully diluted share, on revenue of $8.23 billion and earnings from continuing operations of $807 million
The results for the quarter beat analyst consensus by $0.08, mostly on a lower than anticipated tax provision
Revenue and operating earnings are up significantly against the year-ago quarter, by 5.4% and 7.8% respectively
Earnings from continuing operations are also up $43 million on the strength of a 30 basis point improvement in operating margin, offset in part by a lower effective tax rate in the year-ago quarter
Similarly, earnings per diluted share from continuing operations were up $0.22 or 9.2%
So in summary, against the fourth quarter of 2015, revenue is up 5.4%, operating earnings are up 7.8%, earnings from continuing operations are up 5.6% and fully diluted earnings per share are up 9.2%
Sequentially, the story is just as wholesome
Revenue is up $502 million or 6.5% and operating earnings are up $48 million or 4.5%
Earnings from continuing operations are also up by $40 million and similarly, earnings per fully diluted share are up $0.14. So all-in all a very solid quarter, with good performance all around
The marine group's improved performance, both quarter over quarter and sequentially, is notable
In short, we were very pleased with the quarter
For the year, we had fully diluted earnings per share from continuing operations of $9.87, on revenue of $31.35 billion and earnings from continuing operations of $3.06 billion
We had full-year margins of 13.7%, a record for GD
Revenue for the year is down $116 million, somewhat less than 0.5%
Operating earnings on the other hand are up $131 million or 3.1%, on a 40 basis point improvement in operating margins
Earnings from continuing operations are up $97 million or 3.3%
This, together with share repurchase activity and a lower than anticipated effective tax rate, led quite naturally to an 8.7% improvement in diluted earnings per share
This was a very good year, a year of continuing improvement, a year of accomplishment
Free cash flow from operations is $678 million in the quarter
For the year, we had free cash flow from operations of $1.81 billion which is 59% of earnings from continuing operations
As we had advised you at the beginning of the year, free cash flow from operations was not going to be as robust as is typical for us
It was in fact less than 100% of net earnings
This happened for two reasons
First, we were working off the very large advanced payments received in late 2014 on a major combat systems program
And second, we expected an increase in operating working capital at Gulfstream, consistent with building numerous test aircraft and pre-production parts in connection with the G500 and G600 programs
All of this will normalize and unwind quite positively, beginning this year
In 2017 we expect free cash flow to be approximately 100% of net income give or take a little
We should keep this kind of cash performance up throughout the planning horizon
Let me briefly give you some color on the quarter in each of the business groups
First, aerospace
Revenue was up both quarter over quarter and sequentially
Against the year-ago quarter, sales are up $82 million or 3.8% and operating earnings are up $26 million or 6.3%, as a result of a 50 basis point improvement in margins
On a sequential basis, revenue was up $207 million or 10.3% and operating earnings are essentially flat, as a result of the anticipated compression in operating margin
For the year, revenue is $8.36 billion and operating earnings are $1.72 billion, with an operating margin of 20.5%
This is a year-over-year reduction of 5.5% in sales, almost $500 million, but operating earnings are up $12 million for the year on 120 basis point improvement in margins
All in all, a very good year at aerospace, with strong operating leverage and decent order intake, particularly good in the last half of the year
This result was consistent with our guidance to you that we would hold earnings even with 2015. As I mentioned, earnings were actually up $12 million over 2015. Order activity in the quarter was good and pipeline activity was actually robust
The book-to-bill at aerospace in the fourth quarter was 0.8 to 1 dollar-based and 0.9 to 1 in units of green delivery at Gulfstream
All in all, the order activity going into the first quarter of this year is quite good
The second half of 2016 was actually strong from a pace of activity standpoint and interest in the G500 and G600 is increasing nicely, as we get closer to entry into service with these aircraft
At combat systems, revenue was $1.68 billion and is up $160 million or 10.5% and operating earnings are up $25 million or 10.7% on a quarter-over quarter basis
Sequentially, the story is even better
Sales are up $354 million or 26.6% and operating earnings are up $40 million or 18.3%
For the full year, sales are down $38 million or 0.7%; however operating earnings are up $32 million or 3.6%, on a 70 basis point improvement in operating margin
By the way, this performance is reasonably consistent with the guidance we provided at this time last year
We actually achieved a better result on somewhat lower revenue and stronger operating margins
Overall, combat systems is a story of revenue reasonably consistent with expectations and outstanding cost and margin performance
As you'll learn later in my remarks, this is a business group poised for quite significant growth in the 2017 to 2020 time frame, as we begin delivering on our backlog
Marine group revenue of $2.04 billion in the quarter is up $59 million or 3%, compared to the year-ago quarter and essentially flat on a sequential basis
Operating earnings are up $14 million or 8.1% against the year-ago quarter and up $20 million or 12% sequentially
Revenue for the year is up $189 million or 2.4%
Recall that this year's $189 million increase in annual revenue follows a $701 million increase in 2015 and a $600 million increase in 2014. That's more than 20% growth for the group over that three-year period
On the other hand, operating earnings for the year are down $3 million on a 30 basis point reduction in operating margins, so the story here is a good quarter on both a quarter-over quarter and sequential basis
On an annual basis, we experienced better than anticipated revenue, but not as good as expected operating margin which left us relatively flat year over year
In the information systems and technology group, revenue in the quarter is $2.28 billion up $123 million or 5.7% against the year ago quarter
Operating earnings of $244 million in the quarter are 6.1% better than the fourth quarter a year ago
On a sequential basis, operating earnings are down $12 million or 4.7% on a 20 basis point reduction in margins and a 2.4% reduction in sales
For the year, revenue was up $222 million or 2.5% and earnings are up $89 million or 9.9%, on the strength of a 70 basis point improvement in margins, very good operating performance
Recall that at this time last year, we forecast flat operating earnings for the group, so this was a very strong year for IS&T
On this call a year ago, on a Company-wide basis, our guidance for 2016 was to expect revenue of $31.6 billion to $31.8 billion, an operating margin rate of 13.3% and a tax rate of 29.5% and return on sales of 9.1%
We wound up the year light on revenue with $31.35 billion, but we exceeded our earnings expectation with operating margins of 13.7%, an effective tax rate of 27.6% and a return on sales of 9.8%
Last year at this time, we provided EPS guidance of $9.20. We wound up at $9.87, $0.67 better
About $0.23 of the improvement came from better than planned operating performance, $0.25 from a lower than planned tax rate and the balance, about $0.19, from a lower share count as a result of share repurchases
Certainly, a very solid year by any measure
So before we go to guidance, I want <UNK> to make a few remarks and then talk about the fundamentals of our accounting rule adoption for 2017 and the restatement of 2016 under these new revenue recognition rules
All of the guidance I'll offer you for 2017 and for 2018 through 2020 as well, will flow from the restatement of 2016 which is found in Exhibits K-1 through K-3 of the press release
Okay thanks, <UNK>
So let me provide some guidance for 2017 and some commentary on 2018 through 2020, initially by business group and then a Company-wide roll up
This year, we did a more detailed and extensive planning exercise around the three-year period subsequent to 2017, so I want to take this opportunity to share with you our expectations for that period, as well
In Aerospace, we expect 2017 revenue to be $8.3 billion to $8.4 billion, up 6.4% from 2016 as restated, but coincidentally similar to 2016 as reported
Operating earnings will be approximately $1.6 billion, with an operating margin rate of 19.1% to 19.2%
The margin rate is somewhat lower than prior experience under the legacy accounting rules, as a result of mix shift and increased R&D spending, as well as an anticipated increase in pre-owned aircraft sales
In aerospace for the five year period, 2016 through 2020, that is 2016 as restated, we expect the sales CAGR of 5.3%
That CAGR rolls up modest sales increases in 2018 and 2019, with significant growth in 2020. For the same period, the operating earnings CAGR is expected to be 5.9%
These percentages are of course imply a degree of precision that isn't possible in out-year forecasting, however, we believe they are directionally accurate
In combat systems, we expect revenue to be up 6.6% to 6.7% in 2017, with operating earnings of $920 million to $925 million
This implies a margin rate of around 15.6%
For the period 2016 to 2020, the expected sales CAGR is about 8.7% and earnings CAGR about 9.6%
Combat systems is in a period where several of our international programs are migrating from development, prototyping and low rate initial production, into full scale production
This supports the growth rates I just discussed
The marine group is expected to have revenue of $7.9 billion, a reduction of 2.6% against 2016, as restated
Operating earnings in 2017 are anticipated to be $680 million to $685 million, with an operating margin rate around 8.6%
The 2016 to 2020 sales CAGR is expected to be 5%, with the strongest year-over-year growth in 2018. The expected earnings CAGR for the marine group for 2016 to 2020 is about 9%
Finally in IS&T, we expect a modest improvement in revenue in 2017 and operating earnings of $1 billion to $1.05 billion, with a margin rate of around 11%
For this group, we see a 2016 to 2020 CAGR for sales and earnings of 4.5% and 5.3% respectively
So Company-wide, all of this rolls up to $31.35 billion to $31.4 billion of revenue, up over 2016 restated numbers by more than 2.5%
Operating earnings of $4.15 billion to $4.2 billion, up over 2016 by about 11.5%
And operating margin around 13.3%, about 110 basis points above 2016 restated
Let me emphasize that this plan is purely from operations
It assumes a 28% tax provision as <UNK> mentioned and assumes we buy only enough shares to hold the share count steady with year-end figures, so as to avoid dilution from option exercises
This rolls up to an EPS guidance of $9.50 to $9.55 for fully-diluted shares, up about 10% over 2016 under the new accounting rules
With respect to the quarterly progression for EPS, it's a bit more balanced than most years
Divide our guidance by four, then take $0.10 off the first quarter, $0.05 off the second quarter, add $0.05 to the third quarter and add $0.10 to the fourth quarter and that should give you the rough progression
So much like last year, beating our EPS guidance must come from outperforming the operating plan, achieving a lower effective tax rate and the effect of capital deployment
With respect to capital deployment, we anticipate using all of our free cash flow in 2017 for dividends and share repurchases which will give a boost to the EPS guidance I've just given you
The amount of that boost will depend on the timing and share price
For the period 2016 to 2020, we see a consolidated sales CAGR of 5.6% and an operating earnings CAGR of 7.1%
This is simply a roll up of the projections I've given you for the business groups, so we're quite bullish about 2018 through 2020 in all segments
Now, let me end my remarks there and we'll start taking your questions
Question-and-Answer Session
Sure, so look as it relates to order activity, as I mentioned, we really saw a very encouraging increase in velocity in the second half of the year and that really is representative across the entire model portfolio, including the new products
I think what we're seeing here is, as we expected, as both the G500 and G600 get closer to entry into service, we're starting to see that order interest continue to pick up, so we feel very good about where those airplanes are as they get closer to the EIS, their respective EIS dates
Overall as I said it's not just order activity which again we felt very good about in both the third and fourth quarters, but it's the velocity into what we think of as the pipeline
What comes in sometimes is not the same as what goes out
We have talked about extended or protracted contract negotiations and the timing it takes to get aircraft contracts signed and completed and as good as we saw the second half from an order perspective, we saw just as encouraging velocity from the pipeline perspective going into Q1 which gives us a good bit of optimism as we start this year from an order perspective
With respect to your question about the out years, as I mentioned you saw you heard the remarks on 2017 and the CAGR for the out year period, I think what we see is, as we're transitioning with the real ramp of the 500 starting in 2018 and the 600 starting in 2019, we'll see modest growth in each of those years from their respective entries into service and we'll see more of the acceleration of the growth starting in 2020, when both of them are fully up and have ramped into the production
Sure, certainly, as we've been signaling through this couple of year period, where we have seen lighter than our traditional cash flow conversion, it has been our expectation, our forecast that we would be back to our traditional 100% conversion rate starting in 2017. We have a high degree of confidence in that and we actually do see that as a sustaining trend
This is not a one-time thing, but we do expect to be able to keep up that level of conversion in that range throughout this planning horizon that I described
As it relates to free cash flow or excuse me, CapEx, typically somewhere in the ballpark of 2% of revenues is where we tend to end up around CapEx
That of course depends upon the timing and phasing of various projects across the business, so it can perturbate a little bit back and forth
But certainly what's coming on the horizon with Ohio will bring with it some investment
We're still in the very early phases of discussing what the profile and timing of that looks like with the Navy and so I don't think we're prepared to discuss any type of outsized CapEx investment in any one year, beyond what I just described
But it certainly, we do not see it affect any of that overall conversion rate through the planning horizon that I just described
Sure
So you're pretty much right as it relates to the green aircraft shifting from 2016 into 2017 and that's really what <UNK> was alluding to
Again do keep in mind that green aircraft will shift, including G500 green aircraft, will shift from 2017 into 2018. So this is something that I think is more of an issue in this immediate transition as you try to think about 2016 prior to restatement and 2016 under the restatement and then how you take that restated 2016 to then project 2017. I will point out one notion
Of the number you see in those exhibits around the difference, the delta between the green and outfitted airplanes
We do have a number of, I don't have the exact number off the top of my head, but a number of aircraft that are associated with special mission programs and those get inducted directly into the special mission process and don't go through a completion, so there's a natural delta there and I'm sure <UNK> can give you numbers after the call, if we need to get into that level of detail
As it relates to the G500 certification, we're still on track this year
Everything is going well with the flight test program and we're still targeting certification and entry into service, meaning outfitted delivery prior to the end of the year
Look, as <UNK> described there really is just one primary meaningful difference that we're talking about as it relates to the defense businesses
Don't get me wrong, I don't want to understate what the team has done here to go through this process, because there's a lot of smaller puts and takes, but the big ticket item is this move from the prospective method of accounting for these changes in our long term estimates, to the cumulative catch up method
So the issue there is there's no one thing you can point to, that can say this is directionally indicative from a trend perspective
Because what's happening here, every quarter every year across the portfolio of these programs, we're performing updates to our estimates to complete and we're making adjustments across that portfolio to our profit booking rate margins on those programs
So as we do that in a given quarter, you're going to have some programs go up, some programs go down
As you've seen with a number of our peers who have pretty much all been on this method, even prior to this point, that can lead to somewhat more volatility under the cumulative catch up method than we have experienced under the perspective method
I think you can reasonably expect somewhere in the reporter of magnitude, if you compare them to us historically, 2 times or so the level of quarterly profit adjustment-type impacts on the results
Am I saying, that's what we will see in the future? I wouldn't be foolish enough to try and predict that but it's all going to depend what happens in a given quarter
What you saw in 2016 was that there were a handful more profit rate adjustments that had little to any impact under the prospective method in those periods, but when you take them all in one lump sum, they just drove a little bit more of that anomaly, a little bit more of that perturbation from quarter to quarter
So this is what we're going to frankly have to get into in a little more detail with you in the future, when and if these things happen
And as we said, we fully expect that somewhat increased level on volatility on a quarterly basis, to be part of our story in the future
It does
I would suggest this up front
There's nothing that's changed about anything you can infer about the historic current or future conservatism of this Company
I think the couple key points, those longer term out year CAGRs and forecasts that I directionally gave you, those are strictly rolled up from the operating plan, as submitted by our business units
So this is what each of those individual business unit presidents sees, as they look out over their horizon, mine their backlog and determine the trajectory of their businesses
We're seeing, frankly, a very good news story that we're bullish on across that period and so given the restatement here in the period and the fact that you're having to retune 2016 as you now look at and evaluate 2017, we frankly just thought it would be useful for you to get a little bit more of a picture, so you weren't left in isolation with the two data points make a trend or not, because that could be a tough expectation for anybody assessing the results
So we wanted to show you a little bit more directional color on where we see the businesses going
And we think as we see that type of growth now coming over that period across the Company and really shared by all four of our business groups, that combined with the demonstrated operating leverage we think we've been able to bring to bear, really offers us some great earnings trajectory over that midterm planning horizon
I have not heard anything anecdotal specific to that from the guys down at Gulfstream
As I said, the fourth quarter was very encouraging both from order and pipeline activity standpoint, but I certainly don't think I have enough color to attribute that either to post election or otherwise
Sure, so the planes you refer to, as I mentioned, the 16 is a little bit of an overstatement because they were somewhere in the ballpark of a half dozen or more handful of these special mission airplanes that don't flow into completions so they are done and out
But again I think the key to remember is, what we're trying to do here in the moment and this I believe is last time we'll do this, because green deliveries, will just fade out of the discussion from this point forward
But when you're trying to think about in the moment, as we transition between the old rules and the new rules, some of the instinct might be, as you've articulated, that wow you get to recount the value associated with these green airplanes that didn't deliver outfitted at the end of 2016. But you have to keep in mind, that was going to happen at the end of 2017 as well, so there's an output on the other end that's that natural flow of the business
And if you think of this as a steady in production model, the 650 to 550 to 450 to 280, you'd expect that similar cadence coming out the other end
So if you just leave it at that, it's essentially a net neutral or close to it anyway, where <UNK> articulated it as a modest headwind and when I say headwind, it's an accounting artifice headwind, it's not a business headwind
What's happening there is we would have had, if you imagine a G500 entry into service before the end of the year, there's quite naturally a handful of green G500s that are incremental to those in production aircraft, that are also going to tilt out of 2017 and into 2018, so on balance, we would see more of an outflow if you will or a tilt out of the year in 2017 on the back end, because of that phenomenon around the entry into service of the G500. Even then we're seeing as a tilt in flow from the end of 2016 into 2017. So hence our attempt to try to high pressure you understand in the moment, as we transition, what the impact of the shift of the new rules is on Gulfstream
I think really there's nothing, as I mentioned before
In the moment, when you look at individual quarterly performance and in this case try to examine the difference between how the results looked under the perspective method and the [indiscernible] catch up method it's really a function of what were the booking rate changes on those programs, in that portfolio, in the moment
So when you look at it, the third quarter was actually higher because we had on balance favorable booking rate changes in the fourth quarter across that portfolio, on balance had some negative booking rate changes
Again under the prospective method, as you are well aware and we talked about many types that gets cast out over the future, so there's virtually nil effect in the moment when you make those changes
You can see in the results, it had more volatile effect under the cume catch up method
I don't think you can take that and translate or extend that into what does it mean for the margin rates or the business in 2017 and beyond
Those are pretty much disconnected, I think
Really it's a function of, as you know, we've experienced some cost growth at the Bath shipyard on the settlement of the A12 program and some of the work we're doing on the DDG1000, as well as restart of the 51 program there
So that's well documented and discussed and we're working our way through that and we have every expectation we'll get that shipyard back to where we want it to be, as quickly as we can
So that's one influence and the other is of course, as we add more and more volume around the cost-plus Columbia class development effort, that of course is going to be dilutive in terms of margins, with respect to how it compares to fixed price full rate production programs, so that's really more what you're seeing going forward
Sure, so look as it relates to the Defense budget, I don't know that there's anything more fundamental assumed than what we're seeing which is notionally upward directional budgets that underpin and support the defense programs across-the-board
Really what it's about more so is what's in the backlog
We've developed a historically high backlog across the Company and now we're all about executing that backlog
So a good share of what you see, particularly in combat systems and in marine systems is all about just executing on that backlog and continuing to perform the way we have
So that gives us a great deal of confidence about that trajectory that I described
As it relates to aerospace, so I alluded to before, if I had to guess and I don't want to commit Phebe but I'm fairly certain, this will probably be the last time we talk about green deliveries, because it's all about outfitted deliveries in the future
So to your point right now as we look at 2017, we're projecting somewhere in the range from a large cabin perspective of call it 90 to 95 outfitted deliveries and from a mid-cabin perspective, somewhere in the range of 25 to 30 deliveries
As you are well aware, we tend not to look out beyond one year because we set production rates and work through those customer contracts on an annual basis, so we'll continue to update that on an annual basis, but that gives you a sense of what we're seeing as we head into 2017.
Sure
So you mentioned the backlog is down just slightly sequentially and something important to point out there, particularly as it relates to combat systems
<UNK> alluded to the foreign exchange impact in that group, as it relates to our annual sales
You have to keep in mind there's equally, if not more so, an impact on what you will, the balance sheet for sales, that is the backlog
And so we saw something on the order of magnitude of a $700 million reduction in combat systems backlog in 2016, as a result of that FX headwind
So that gives you a sense of what's happening there
In terms of opportunities in the pipeline, you're right
It is quite robust, both on the domestic and the international front
We've got a number of competitions
There's an 8x8 vehicle in the UK, there's opportunities in Poland and the Czech Republic, follow-on work in Austria
Really the list goes on and on throughout both Europe and the Middle East for combat systems, as it relates to international programs
Domestically, we're looking forward to the ramp up with recapitalization efforts and so on, as it relates to Stryker ECP, Stryker Lethality, with the 30-millimeter gun, Abrams upgrades, Marine Corps Labs, really it's just a very encouraging and robust list for this group, again both domestically and across-the-board internationally
So really exciting to see
Your last part of your question, aerospace slots, I think fundamentally the thing, the way to think about this is, with the good order activity we saw in the quarter, we continue to be encouraged by our EIS next available slots for the various aircraft
The 650 remains essentially consistent with where we were last time, 24 months or so
The 550 remains in the 12 month range, 450, we actually only had one aircraft left to sell so we should get that behind us this quarter which by the way I think is a great testament to this transition and the way Gulfstream has handled this
When you think about it from both sides of the spectrum, on the one end there was the speculation about could we get the 500 into service when we said we could and doing what we said it would? And certainly, the test program it's demonstrating so far that it's meeting if not exceeding all of our expectations for what the airplane can do and Phebe mentioned a quarter ago, we've now officially pulled that EIS in from first quarter 2018 to fourth quarter 2017. So that's on one end of the spectrum, but this point about one 450 left, possibly the more difficult aspect of this transition was managing the supply chain, the order activity, the inventories and so on to close that out in a timely and secure fashion, without exposing the Company and manage this transition and so far so good
So that is really encouraging, so that's what we see on the horizon from an EIS perspective for the various aircraft
| 2017_GD |
2017 | HSIC | HSIC
#Thank you, <UNK>, and good morning to all
As we begin, I'd like to point out that our 2016 fourth quarter results include restructuring costs of $16.1 million pre-tax or $0.15 per diluted share
And our 2015 fourth quarter results include restructuring costs of $12.4 million pre-tax or $0.11 per diluted share
For the full-year, our full-year 2016 results also include restructuring costs
Those restructuring costs are $45.9 million pre-tax or $0.42 per diluted share and full-year 2015 results include restructuring costs of $34.9 million pre-tax or $0.32 per diluted share, as well as a one-time income tax benefit, net of non-controlling interest of $3.8 million or $0.05 per diluted shares
When I discuss our results as reported on a GAAP basis and also on a non-GAAP basis, the non-GAAP basis will exclude the restructuring costs and the one-time tax benefit in the prior year
We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparisons of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business
These non-GAAP financial measures are presented solely for informational and comparative purposes, and should not be regarded as a replacement for the corresponding GAAP measures
You can see Exhibit B in this morning's earnings release that has a complete reconciliation of those non-GAAP adjustments
Okay, let me also point out that the fourth quarter of 2016 included one additional selling week compared with the fourth quarter of 2015. This week is the holiday week between Christmas and New Year's
We report on what's called a 52/53 week fiscal year ending always on the last Saturday in December
So, the next time our results will include an extra selling week will be in 2022. So, in order to facilitate more meaningful comparisons, we will provide a separate estimate
We are providing a separate estimate of the impact of the extra week on our sales growth, as well as providing internal sales growth in local currencies excluding that impact
Okay, so turning to our results now
Net sales for the quarter ended December 31, 2016 were $3.1 billion, reflecting a 9.5% increase compared with the fourth quarter of 2015. Our internally generated sales, in local currencies, were up 4.2%, acquisitions contributed 1.3%, there was a 1.5% decrease due to foreign exchange, and the growth attributed to this extra week was estimated at 5.5%
You could see all of these details of our sales growth contained in Exhibit A in our earnings news release
Our operating margin, on a GAAP basis, for the fourth quarter of 2016 was 6.9% and contracted by 18 basis points compared to the fourth quarter of 2015. There are three key elements that negatively impacted our GAAP operating margin that I'd like to discuss and these three key elements negatively impacted operating margin by about 30 basis points in total
The first item relates to acquisitions completed during the first 12 months and the related expenses as well as switches between agency sales and direct sales in our Animal Health business which combined to negatively impact the contraction by 7 basis points for the quarter
Secondly, influenza vaccine sales this year had a lower margin compared to the prior year, which negatively impacted our operating margin by 15 basis points
And the third item relates to an increase in restructuring costs in the fourth quarter of 2016 versus the same period last year and that negatively impacted the contraction by 8 basis points
If you were to exclude the net impact of these three items, our operating margin expanded by 12 basis points
Our reported GAAP effective tax rate for the quarter was 28.4% that compares to 30.1% in the fourth quarter of 2015. The tax effect of the restructuring costs recorded in the fourth quarter increased our effective tax rate by about 20 basis points in 2016 and about 30 basis points in 2015. Our full-year 2016 effective tax rate was 28.8% on a GAAP basis and, again, the effect of restructuring costs recorded for the full-year increased the effective tax rate by another 20 basis points in 2016 and 30 basis points in 2015. For 2017, we expect our effective tax rate to be in the 28% range
I'd also like to note that in 2017, we are implementing a new accounting standard called ASU 2016-09. This new accounting standard requires excess tax benefits associated with stock-based compensation to be recognized as a reduction in income tax expense in the period which the stock awards vest
As a result, we expect our effective tax rate to be favorably impacted in 2017 and this will primarily occur in the first quarter as this is when most stock-based awards at Henry Schein vest
This impact will occur each year in Q1 and will have varying effects on the annual effective tax rate
Therefore, because of this, we expect our Q1 effective tax rate to be in the range of 23% to 24%, this is for Q1 only
And we still expect that this Q1 impact is included in our estimated effective tax rate for the full-year which, on a full-year basis, will remain in that 28% range
Our net income attributable to Henry Schein, Inc
on a GAAP basis was $139.2 million or $1.73 per diluted share
That represents increases of 7.1% and 10.9%, respectively, compared with the fourth quarter of 2015. Excluding restructuring costs, non-GAAP net income attributable to Henry Schein for the fourth quarter was $151.3 million or $1.88 per diluted share
And that represents increases of 8.6% and 12.6%, respectively, compared with the fourth quarter of 2015, also on a non-GAAP basis
I'd like to point out that foreign exchange negatively impacted our diluted EPS for the quarter by approximately $0.02 and this was partially offset by share repurchase benefit of approximately $0.01 for the quarter
So, let's now look at some detail on our sales results for the fourth quarter
Our Dental sales for the fourth quarter of 2016 increased 7.7% to $1.5 billion
Internally generated sales in local currencies were up 1.6%, acquisitions contributed an additional 1.7%, there was a 1% decrease due to foreign exchange, and growth attributed to the extra week was estimated at 5.4%
We look at North America, our North American internal growth in local currency was 2.2% and included 1.9% growth in sales of dental consumable merchandise and 2.7% growth in dental equipment sales and services revenue
As I mentioned last quarter, there was some acceleration of our equipment sales from Q4 to Q3 and that was associated in part with promotional activities that we discussed on our last conference call
It's also important to note that we saw strong growth in the North American consumable merchandise and equipment sales in December, even excluding the estimated impact of the extra week
I'd also like to reiterate that our growth rate was impacted by the decision to stop selling precious metals earlier this year
This is something we've also talked about on the last few conference calls
This decision negatively impacted our North American dental consumable merchandise sales growth in the quarter by about 50 basis points and this will continue for one additional quarter – first quarter of 2017, at which time it will annualize
International dental internal growth in local currencies was 0.7%, included 2.5% growth in sales of dental consumable merchandise, and 3.9% decline in dental equipment sales and service revenue
This decline was primarily due to a difficult prior year comparison in international equipment sales and service revenue
We also expect the softness in international dental equipment sales to continue in Q1 as we approach the IDS trade show, which is in late March, and anticipate an acceleration of equipment sales thereafter
On an overall basis, we continue to believe we outpaced the global dental market in Q4 and believe the fundamentals of our business strategy remains strong
Turning to Animal Health sales, they were $837.8 million in the fourth quarter, an increase of 10.8%, internally generated sales in local currencies was up 8.2%, acquisitions contributed 0.4%, there was a 3.4% decrease due to foreign exchange and growth attributed to the extra week is estimated at 5.6%
The 8.2% internal growth in local currency has included 10.3% growth in North America and 6.3% growth internationally
When normalizing for Animal Health results to account for the impact of certain products switching between agency sales and direct sales, that 8.2% internal local currencies was 7.8% growth and included 9.3% growth in North America
We believe this normalized growth rate is a more meaningful reflection of the ongoing performance of our North American Animal Health business
These were solid results as we believe we continued to gain market share both domestically as well as overseas
Our Medical sales for the quarter was $621.1 million for the fourth quarter and that was an increase of 10.6%
Sales growth in local currencies was 4.4%, all internally generated, with 0.1% of small decrease due to foreign exchange, and growth attributed to the extra week estimated at 6.3%
It's important to note that timing of influenza vaccine sales negatively impacted the Medical sales growth by 1.2%
And if you exclude this impact, our sales growth in local currencies was 5.6%
Of this 4.4% growth, 4.5% was in North America and growth of 0.9% in local currencies internationally
We are pleased with our Medical growth as we also believe we gained market share in this business unit
Technology and Value-Added Services sales were $112.2 million in the quarter, an increase of 19.6%
That consisted of internally generated sales in local currencies, up 8.5%, acquisitions contributing an additional 9.8%, and a decrease due to foreign exchange of 1.9%
And finally growth attributed to the extra week is estimated at 3.2%
Of that 8.5% internal growth in local currencies, 7.4% was in North America and 13.9% growth internationally
The Technology and Value-Added Services internal sales growth in local currencies was highlighted by solid growth in both our software services revenues in North America as well as internationally
We continue to repurchase common stock in the open market during the fourth quarter, more specifically we repurchased approximately 1.3 million shares during the quarter at an average price of $156.10 per share and that equated to approximately $200 million
The impact of this repurchase on shares for the fourth quarter was positive by about $0.01 per share
For the full-year of 2016, we repurchased $550 million of our stock, representing 3.5 million shares at an average price of $158.88 per share
And while this was above our originally stated goal, we saw an opportunity to be more aggressive when our stock price declined
Our share repurchase program continues to demonstrate our long-term commitment to create further value to shareholders and reflects our confidence in long-term prospects of the business
At the close of the quarter, Henry Schein had about $250 million authorized for future repurchases of our common stock
And we continue to believe that our capital allocation strategy, which deploys a large of portion of annual free cash flow to both repurchases and acquisitions, continues to drive increased shareholder value
Let's briefly look at our balance sheet and cash flow, operating cash flow for the quarter was $264.5 million
That compares to $298.3 million last year
For the year, the operating cash flow was over $600 million – $615.5 million to be exact
Our CapEx for the year was $70.2 million and that results in free cash flow of $545.3 million for the year
As I mentioned earlier, we are really pleased to have exceeded our goals related to cash flow for the year
Accounts receivable days outstanding was about 41.3 days
That compares to 39.3 days last year
Our inventory turns was 5.5 turns for quarter
That compares to 5.6 turns last year
And finally, I'd like to conclude by reaffirming our 2017 guidance for the year
Our diluted EPS attributable to Henry Schein is expected to be $7.17 to $7.30 for 2017. I'd like to point out that if the U.S
dollar continues to strengthen, we may come in at the low-end of this range
And obviously, we can't predict well what's going to happen with the U.S
dollar so we just wanted to point out that we do have sensitivity to the U.S
dollar strengthening
We'd also like to note that we have concluded our restructuring program
We do not expect to have any further structuring expenses in 2017. And as a result, there is no separate guidance on a non-GAAP basis since we will not have any non-GAAP EPS for the year
That guidance reflects growth of 16% to 18% compared to 2016 GAAP diluted EPS, and 8% to 10% compared to 2016 non-GAAP diluted EPS
As always, the 2017 diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of potential future acquisitions, if any
And as I said earlier, guidance assumes foreign exchange rates are generally consistent with current levels
So with that overview, let me turn it back over to <UNK>
I would say similar comments internationally
Markets are stable, they're consistently growing
Historically, we've always seen the international markets grow a little bit slower than the U.S
They're a little bit more comparable at the current time
We absolutely believe we're gaining market share in international dental
So, I would say that steady-as-she-goes and I think that the consistency in the market should continue going forward
Now, of course, that the consumable comment, you know we do have lumpiness related to equipment and the IDS show that we talked about
So, IDS, typically people delay purchases in this current quarter to see new models and new show specials for equipment later in the quarter and that turns into sales in Q2 and Q3. So, we'll see some lumpiness there on international dental equipment sales
I think that's exactly right
We weren't expecting to buy back as much as we bought back
In hindsight, it turns out to be even a good – a very good short-term decision
But longer term, we expect it to be even a better decision because we do have high confidence in the business
The foreign exchange has been a headwind
It has been a headwind for 2016. It's still a headwind for 2017. And because of the unpredictability of foreign exchange, those two kind of counteract each other
Okay
So, I would say there's no significant variance that I've seen between large DSOs and middle market
It seems to be more across the board, although we personally are seeing stronger growth in our middle market
That's an area that we have keen focus on
But I think the overall market is relatively consistent
As you know, <UNK>, we've seen periods of time, so we're optimistic where December and January will continue, but there's no certainty in that
We've seen times where – again, lumpiness in sales
But right now, things seem to be pointing to a slight acceleration in the U.S
dental market
And remember just one other thing, <UNK>
that's consumable comment
Equipment, on the other hand, because of the strong December that we had and because of Section 179, which typically pulls sales forward from Q1 into Q4, you have to expect that Q1, you'll see lighter equipment sales because of that tax benefit that pulled forward
And that's a bit of a timing thing that should occur each year now going forward given that the Section 179 is now permanent
We're still a little bit perplexed as to why it occurred
And <UNK>, actually, I think, in his comments said something similar to that
There's really no additional data points that we've seen that give us any greater clarity as to why it happened
We just know it did
And again, hopefully, the long-term prospects of the dental market will continue to be favorable
The demographics are still on our favor, people taking better care of their oral healthcare, aging population, all of that
So, I wish, <UNK>, I had a better answer but we really don't have more clarity on that
So, you're correct in – for Q4, the extra week was a little bit negative
I haven't calculated the exact amount, but was a little bit negative to overall Q4 operating margins
Again, the main reason is it's a light week for sales
And with two-thirds of our expenses being compensation and compensation-related, you get a full week of compensation
So, margins were a little bit lower there
On full year 2017, yes, our guidance does assume at least 20 basis points of operating margin expansion and it's correct to note that's on what we like to call same-store basis, meaning it excludes the impact, if any, of any acquisitions that could be positive or negative to that number
But we do believe that there's still room for margin expansion going forward
Sure
We'll start with the last part first
The 2017 guidance really only assumed a very modest improvement in end market conditions, not just for Dental, but for all of our markets
So, it was more consistent, but with some slight improvement
February, we didn't comment on because when you start segmenting months and looking at it in a particular week-by-week basis, you really couldn't get misleading results
But we don't think – we wouldn't have said December and January unless we believed that there was potential for it to continue
But looking at the specific weeks, it's too short a period to really draw conclusions from
| 2017_HSIC |
2015 | TAP | TAP
#Thanks, <UNK>.
<UNK>, do you want.
I would say largely in the business, it was planned.
I would say in the US we're probably stepping it up even a little more than we originally planned, given some of the activities that we want to do, <UNK>.
But broadly I would say it was in line.
Yes, I think that's fair, <UNK>.
And obviously as we have seen a little bit of benefit come through on the COGS line and in the US, it has given us the opportunity to make some choices.
And we're making the right choice, which is to further invest behind our brand portfolio because we are very clear we want to get the business really playing to win in the US.
We're in a position where we can make those choices.
And I think the right choices for long-term health of our broad business.
Let me give you a couple headlines.
Both Alan and I have been working very hard from a recruitment perspective.
We've made good progress.
We're both delighted with the way that <UNK> has landed within the business on an interim basis and the way the team have rallied behind him, and the changes that he has already implemented in the business.
So I'm confident we should be in a position, certainly in the near term, to start to really confirm how we're going to move forward on a permanent basis.
So more to follow, but as I'm sure you'd expect, I'm not going to start getting into people's career developments on a call like this, <UNK>.
But making good progress overall.
<UNK>ert, I don't think my answer is going to be any different, other than that we have a clear pricing strategy that we're not going to share publicly.
That's about all I'm prepared to say on that particular topic.
We are not 100% national, no.
But we are on track with the plan that we have been place for that rollout.
And so far we are pleased with it, <UNK>ert.
Thanks, <UNK>ert.
Thanks.
<UNK>, do you want me to take the second one.
<UNK>.
Yes, do you want to take the second one first and then we'll come back on the (multiple speakers) question.
I take issue with one thing you said there, <UNK>, because under Tom's leadership we actually expanded our operating margins almost double since the beginning of the joint venture.
So I think we've been pretty successful from that perspective.
From a portfolio transformation point of view, I would say we've made really nice progress under his leadership, as well.
We're going to continue to focus on transforming our portfolio.
We need to take share of the American light lagers segment.
We need to continue to premiumize the portfolio and develop the above-premium offerings.
And we're working very hard at that.
And I think we've make good progress.
And I'm going to continue to focus on that in a very deliberate focused and bold way.
There has been no update to the guidance that was previously given, <UNK>.
I think (technical difficulties) to add to <UNK>'s comments, I think we've been very clear about the three priorities within the business.
A lot of that continues the good work that Tom and the team did and looks to accelerate that over the course of the life of our long-range plan.
So with regard to the other question, obviously all of that information is in our filings from late 2007 and mid-2008.
As to the opportunity, and clearly it's purely speculative, [were it] to rise for us to secure a bigger share of the joint venture within the US, there is a right of first offer and last offer, and some other associated rights.
But the detail behind that is in the public filings, which I refer you to rather than getting into them on this call.
Thanks for your questions.
Hi <UNK>.
I think what I said, <UNK>, was that if you had to apply foreign exchange rates at the end of July to our results for the second half of last year, it would have reduced our underlying pretax earnings by more than $43 million.
And so if you add on to that the actual foreign exchange impact in the first half of this year of about $27 million, the impact would be more than $70 million year over year.
(Multiple speakers) said last time.
I'm not sure I would characterize it like that, <UNK>.
I think we are pleased with our overall performance in Europe.
And as I mentioned, if you reverse out the loss of the Modelo brands, our shares increased slightly.
And certainly the last couple of months through June and July, and you've heard me mention our July STRs, we've seen relatively strong volume growth.
So that's encouraging.
But clearly we're right in the middle of peak selling season at the moment and we are up against the impact of the floods from last year.
So there's still a lot of volatility in the marketplace.
So I don't think we're in a different place than what we assumed.
And certainly within Canada, <UNK> has been very clear that stripping out the loss of the Miller brands, the couple of areas that we will look at fixing as we go through the second half of this year are the volume impact as we have adjusted pricing in Quebec on Coors Light, and just a couple of trading tactics as well.
But strategically I feel we are exactly where we anticipated being.
But this is always a game of strategy and tactics, and a couple of our tactics we will adjust as we go through the second half.
I think the critical thing is, back to your first question on FX.
We're looking at $70 million FX headwind as we've flagged.
We've also flagged a $40 million on the contract losses.
And we've and very clear that with the strength of our pricing that we've seen in the first half it's given us some options to invest incrementally in the second half to further strengthen our brand portfolio.
That's what has happened and will be happening as we go through the second half of the year.
Thanks <UNK>.
I'd like to thank everybody for their time for joining us on the Molson Coors Q2 earnings call.
And as I mentioned earlier, hopefully we'll see many of you at the Barclays Global Consumer Staples conference in Boston September 10.
So thank you for your time and interest in our Company, and look forward to catching up with you in due course.
Thanks, everybody.
| 2015_TAP |
2016 | STX | STX
#Hi, <UNK>, this is <UNK>.
As we think about heading into the back half of the year, obviously first and foremost we're going to continue to invest in our business ourselves.
As we stated, as we look at some of these one-time costs, restructuring, cash charge specifically around the $150 million, we think that's very manageable over a generation, and what we're able to yield here, again, over the next six to nine months.
Then as far as the dividend, we think that is well manageable, albeit at the higher end of those levels of a pay-out ratio, and obviously up to the Board of Directors.
With that said, we feel that it's very defendable against what we're able to generate moving forward.
I think in the near term, <UNK>, meaning the next six to 12 months, though, the considerations clearly go invest in the business, because we do feel we have technology and product leads across the portfolio that we really want to execute to.
As long as the macro environment stays ---+ I won't say decent, because I don't know that I can call today decent ---+ but as long as it stays like it is today with that product execution, we feel pretty good about the Company's position competitively.
Then in terms of what we would do with that cash flow, again, I think defending the dividend is the first thing that we would do.
We would certainly like to keep the dividend level where it is.
Initially, obviously these are pay-out ratios above the 30% and 50% that we had indicated.
But if the Company's growing into that with improving revenues and margins, then certainly we would put the Company in position where the Board has at least hopefully an easier decision to make than if it were the other way around.
I think in terms of buy-backs, whether or not it's debt or equity, for the near term that's probably not going to be the use of cash.
It will probably be if there's excess cash we would keep it on the balance sheet, just in case the macro situation turns on us, as we had more confidence about a 2017 outlook, and again, the success of our products.
Then we would re-evaluate that in terms of what's the best use of it beyond dividend or going on the balance sheet.
Yes, Eric, thanks.
We talked about it wasn't worth guessing right now to provide you some guidance.
I think I would prefer just for us to get through this next 60 days of really understanding the changes we're going to be making to the operational footprint with related OpEx investments, because the reality is depending on which decisions we make, there's different timing implications.
Some of the things we can get after right away, as <UNK> mentioned, but others, they're really a function of product transitions, customer quality issues, regulatory issues, et cetera.
I think it's just probably not worth guessing at this point.
I think as we get more clarity on the specific actions we're taking, we'll get back to you.
If the question is do we think, though, that we still get back into that range in a reasonable period of time, the answer is yes, we think we can work ourselves back into the range.
But we just ---+ we want to get a little more work done before we give you an idea of when that's going to happen in terms of in this quarter.
As you know, the ---+ our world does not work in the crisp 90-day segments that the calendar provides.
We would rather do a little more work before we lay that out for you.
Yes, I think our feeling, based on customer input, is that ---+ and I was mostly talking to the application shift, <UNK>.
The macro stuff, I'm not going to speculate on.
If it gets worse, then obviously all these markets will be under pressure.
If it gets better, all of them probably get a little bit of reprieve.
But it feels to us like the trend of where mission-critical 15K is being taken out is the point of exposure, and the 10K piece isn't, at least for now, and maybe not for quite a while based on some of our customer impact.
Our only point is that as it transitions, at some point it stabilizes.
We feel like that probably happens in the second half of this calendar year.
Okay.
All right, great everyone.
Thanks for taking the time today, and we look forward to talking next quarter.
Thanks for all your support, as well as to our customers and our suppliers, and most importantly, our employees.
Thanks very much.
| 2016_STX |
2015 | CROX | CROX
#Yes, as we kind of look at July and spring/summer that's really a 2016 initiative.
We'll have a little bit of business in Q4 as it relates to the earlier part of that initiative, but then the spring/summer season will extend further than kind of the '15 season.
So it's really a July 2016 timeframe.
Thank you, <UNK>.
Yes, so yes.
We think we're going to see a sustained differentiation between ecommerce and physical store performance based on macro consumer preferences.
Clearly a large part of our ecommerce growth is driven by traffic improvements which was driven by our marketing, which was driven by increasing interest in the brand.
So as we intend to make sustained investments in marketing over many years we believe we can improve traffic to the brands.
And it's a leading indicator of preference for the brand.
So we believe our DTC business needs to play an important strategic role for the brand in terms of allowing us to showcase the broader product range that we have offer.
And it needs to come positively and drive a strong economic contribution as well.
And we look at ecomm as a leading indicator in terms of that's going to be the first thing that gets impacted and we believe that over time as we can impact more and more we'll see some of the broader benefits as well.
So, <UNK>, we took the charge consistent with our policy internally here at Crocs.
And the vast majority of our partners in China are current on their payment plans.
But we are dealing with some isolated instances among our 40 different distributors in the marketplace.
We're working with those accounts diligently.
And we are trying to address the situation and recover completely our receivables from those accounts.
We continue to work with them, and at this time we feel like our bad debt reserve adequately portrays the risk of the organization.
Specifically our bad debt allowance overall is $12.3 million.
When you add the other rebates and other things like that is when you get to the number that you quoted, <UNK>.
Yes, <UNK>.
So we have taken price increases in select markets to our set currency.
We think about the major areas that we've been impacted by currency they are number one Europe, number two Russia, number three Japan, number four Brazil.
We've taken price action in Russia early this early and we'll take some more later this year.
We've got Japan price action late this year and into the following year.
Frankly in Europe, it's extremely difficult.
So instead of mainland Europe, the UK, Germany, and France we're taking select action on select styles, but a broad-based program is really, really hard.
And we've taken price action in Brazil.
Yes, hi, <UNK>.
Thanks.
Yes, I would say we're planning that in a small way for the fourth quarter.
And I don't think we're prepared to share a number.
We'll talk a little bit more in more detail in September, but right now it's a small part of our fourth-quarter plan.
But we think over time it becomes a bigger and bigger part of the overall program.
Yes.
That's correct, <UNK>.
Yes, so obviously, <UNK>, we're going to talk in more detail about this in September.
And we'll have a more robust conversation.
Going back to something we talked about earlier, we view kind of Q2 performance and the run rate on the go forward business of plus 5% to be an indication of solid performance on the core business despite not having an updated product line.
And putting in a new marketing program and platform on an accelerated basis.
We have more time as we look at '16 to leverage our learnings relative to the spring '15 marketing platform.
We have more time to leverage our learnings as it relates to some of the new product introductions we've had over the last six months.
And we feel we've made a lot of progress.
So we start with that kind of 5% Q2 '15.
We're sharing 280 to 290 guidance for Q3, which is plus 4% to 8% on that go-forward business.
And I think that's in that similar kind of range.
And so I would just leave it as, we continue to feel confident in the direction we're heading.
We feel the core business is stabilizing.
We believe there are a number of key indicators as we look at Q2 from revenue of plus 5% on a go forward basis.
Core business, gross margins, DTC, comps of plus 1% and constant concurrency.
And those are all indicators that we're making meaningful progress.
And I would say as you know, we still have the lion's share of the progress that we hope to bring forth that really starts to hit in spring '16.
And again we'll share greater detail in September, but we're excited for the direction we're heading.
<UNK>, what I'd say is yes.
To get to the operating margin we've talked about in the 10% to 12% range we obviously need revenue growth.
And that's a core part of the strategy.
And our expectation based on our product and marketing evolution, and some of the changes we're making in terms of how we run the business and how the business is structured.
That we will be able to drive growth going forward.
You will get more details of that in the end of September, absolutely.
Thanks, <UNK>.
Okay, thank you everyone.
And have a great day.
Thank you.
| 2015_CROX |
2015 | OFG | OFG
#The $7 million ---+ what we said was because of the accounting effect of this sale, going forward, we do believe the Eurobank portfolio will not have such a high yield.
And it should drop.
And we are in the process of working on our forecast, and we need to work on it to exactly size what it's going to be.
It's going to be much lower than the 22%, 32% that we have.
We are (multiple speakers) yes, yield-wise.
Yes.
It's something that it makes sense to us from a yield perspective rather than going out and buying mortgage-backed securities at 2.25%, we are holding onto our FHA originations and securitizing at a 3% and change.
So make sense for us and it's also tax-exempt so ---+ .
Can you repeat the question.
It got a little bit cut off.
Well, <UNK>, if you look at table 6 we show over there excluding acquired loans.
And so if you look at that, that should give you the idea of what is the decrease in our non-acquired book.
And we show a decrease in early delinquency and also at the [NPA levels EBIT].
We do that ---+ yes, we are in the process of starting that process.
The last one was what we presented last quarter.
And we will be continuing to update that, starting right now.
Thank you, operator.
Thank you also to all our stakeholders who listened in today.
In November, we will be visiting investors in Dallas and at the Sandler O'Neill East Coast financial services conference in Palm Beach.
So we look forward to seeing some of you there.
And our preliminary date for reporting fourth-quarter results is Friday, January 29, 2016.
So thank you again and have a great weekend.
| 2015_OFG |
2015 | AZO | AZO
#It's always difficult to really measure with any precision on that.
Clearly the lower gas prices we believe have been helpful.
And they certainly have probably contributed at some level to our comp.
I don't think significantly, but they certainly have been helpful.
So we try to weigh in all the things between gas and tax refunds, et cetera.
From a maintenance perspective, we think that as we ---+ obviously, this has been a longer winter and it's dragging on.
But clearly spring will be here hopefully in the next couple of weeks.
And then we'll get back to our core maintenance categories and things like that and we expect those businesses to perform well.
So we'll have to get a little further down the road to look in the rearview mirror to see exactly what the impacts are of gas and weather, but we expect it to be favorable in the spring.
Yes, <UNK>.
As you know, I guess we launched the first part of the loyalty program nine or 10 years ago.
And then we took it to the digital program probably seven years ago.
This past year ---+ we used to have different programs in different parts of the country; this past year we went to one consolidated nationwide program.
And the program has worked very well since the beginning.
It continues to work well and it's growing, although it's growing at a lower rate just because it's more mature.
Now there have been two of our competitors that have launched the loyalty programs in the last year, but both are different than ours.
So far, we continue to be very happy with our loyalty program and we continue to grow.
We haven't seen material changes in our loyalty acceptance rate versus where we were before.
The way we think about it is that, as <UNK> highlighted in his remarks, we are very proud of the ROIC number that we have and we recognize that it's probably one of the highest in hardline retail.
At the same time, we are very focused on investing in initiatives that we believe will generate very strong returns and, more importantly, will capture market share and grow earnings.
So I think as we look at the model on a longer-term basis that we'll focus on those kinds of initiatives and they may or may not have some pressure on ROIC and bring it down a little bit.
But again, we're focused on growing operating profit dollars, capturing market share, and investing in activities that generate very strong returns.
Yes, could I add to that too.
If we held ourselves to a standard where we wouldn't make investments unless they were at 32% return on invested capital, we wouldn't do a lot of things that would be very important to our business and would, frankly, put ourselves at a competitive disadvantage.
That's why we've held to this long time internal hurdle rate and it's worked very well.
Remember when we implemented the internal hurdle rate, our ROIC was around 20%.
So we've been able to grow it over time by being very disciplined but, at the same time, we can't hold single initiatives to a 30% plus return.
I would say that, first and foremost, biggest short- to medium-term opportunity is just growing the commercial business.
It's a very low capital required to grow that business.
So anything that we can do, enhance our sales force, continue to improve our execution, that is, by far and away, the single biggest way to drive ROIC.
I think most of the other initiatives, based upon our modeling today, would be slightly dilutive to return on invested capital, but they have very good returns and they're going to accelerate the growth of the operating profit dollars, which is one of our objectives.
First of all, I think, to some extent, gas is probably a more longer-term one.
Obviously we're going to get some increases in gas prices, but on a relative basis, they would be well below last year and I suspect that they will continue to be so for at least the immediate future.
Relative to tax refunds, you're right, as we called out, we think maybe that was 100 basis points of impact on Q2.
We'll have a better feel for that as we move our way through Q3.
And then excluding that, I think that the way we look at it is that that really is the underlying core trends of the business.
I don't think that we see anything necessarily structurally changing in the business.
If you look at the competitive landscape from a pricing promotional activity, even from a capital investment perspective, it continues to be pretty consistent and rational industry overall.
And you were right, we have not been the beneficiary of inflation over the last almost, at this point, I'd say 18 plus months, maybe pushing 24 months, and it doesn't appear as though there's a lot of inflation in the horizon either.
There's a couple of categories here and there that have some inflation, but for the most part, we've been generating these sales out of a no-inflation kind of environment.
So it really is the strength of the customer, the strength of our offering that is really driving that.
I think it's still yet to be determined.
We just went over and implemented 300 stores.
Obviously, that's the biggest thing that we've done at this point in time.
We did it over about three weeks and so far it's gone pretty well.
But there has to be a tremendous amount of efforts in the distribution centers to ramp up for that increase of activity, both inside the warehouse and the transportation team.
So we'll learn from this newest rollout and we'll plan for future ones.
But, more importantly, now we've got about 500 stores on the program and we are hopeful that we can quickly confirm our expectations today.
Won't alter our philosophy at all.
We believe that it is a great way to add value back to the shareholders and return capital back to the shareholders through the share repurchase program.
We've been very disciplined about it.
We operate at a very defined credit metric and we'll continue to do so.
A different group.
It's under 10.
Yes.
We've been doing this for six or seven weeks so far, <UNK>.
And we did a lot of work around systems piece, but even now, at this point in time, we're muscling it.
We're just trying to get a sense for it.
So far we've been really encouraged.
That's about right, yes.
I would say probably about that.
We're certainly going to be right around about a $500 million number or so I think on an annualized basis.
So it will be a little bit of a step-up but not significantly.
I think the latter.
I think hopefully we were somewhat consistent two or three quarters ago when we began to add more inventory and we tried to call out that will put a little bit of pressure on AP to inventory when you fast-forward three or four quarters and here we are.
So it was certainly down this quarter.
We don't anticipate it going down further necessarily for the next two quarters.
But we expect it to hang around that kind of number.
Thank you.
I think we said that it was probably around 15 basis points.
I would say all three of those categories that we identified accounted for about 45 basis points.
Are you talking about the most recent cold snap.
So about half of that was in our results.
Remember the cold snaps, as you get later in the winter, the cold snaps are more of a headwind than they are a benefit.
Early in the season, it spurs activity of people trying to get their vehicles ready for the winter.
Once that happens late in the winter most of the parts that are going to fail have already failed and, frankly, customers have winter fatigue and they're not doing things getting ready for the winter, so they are generally not beneficial later in the year or later in the season as they are.
Great.
Before we conclude the call, I'd like to take a moment to reiterate that we have a long and strong heritage of consistent impressive performance.
While we are excited about our growth prospects for the year, we will not take anything for granted as we understand our customers have choices.
We have a solid plan to succeed this fiscal year.
But I want to stress this is a marathon and not a sprint.
As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful.
Thank you for participating in today's call.
| 2015_AZO |
2017 | BKNG | BKNG
#Thanks, <UNK>
I'll discuss operating results and cash flows for the quarter and then provide guidance for the fourth quarter of 2017. All growth rates referenced in my comments are relative to the prior-year comparable period unless otherwise indicated
I highlight that our non-GAAP financial results and forecasts include stock-based compensation and do not reflect a reduction to income tax expense related to available NOLs
The reconciliation between our GAAP and non-GAAP results is detailed in our earnings release
Room nights booked in Q3 grew by 19%
We were pleased to exceed the top end of our guidance range and experience relatively modest sequential deceleration in growth despite a very difficult prior-year comp and taking steps midway through the quarter to improve the efficiency of our performance marketing channels
Rental car day reservations grew by 5% compared to 12% growth in Q2. Average daily rates for accommodations, or ADRs, were down about 1% for Q3 versus prior year on a constant-currency basis for the consolidated group, which was consistent with our forecast
Foreign exchange rates favorably impacted growth rates expressed in U.S
dollars for our Q3 results as compared to prior year
Q3 gross bookings grew by 18%, expressed in U.S
dollars, and grew by about 16% on a constant-currency basis compared to prior year
Gross profit for the quarter for Priceline Group was $4.4 billion and grew by 22% in U.S
dollars and by about 19% on a constant-currency basis compared to prior year
Gross profit includes $33 million from our acquisition of the Momondo Group, which we closed on July 24. Our international operations generated gross profit of approximately $4 billion, which grew by 23% in U.S
dollars and by about 20% on a constant-currency basis compared to prior year
Gross profit for our U.S
operations amounted to $372 million, which grew about 11% compared to the prior year
Advertising and other revenue, which is mainly comprised of non-intercompany revenues for KAYAK and OpenTable, grew by 27% in Q3 compared to the prior year, including revenue from Momondo
GAAP operating income grew by 152% and GAAP operating margins increased by 2,483 bps compared to Q3 last year
Our Q3 2016 GAAP results include a $941 million non-cash goodwill impairment charge
Operating margin performance was better than our forecast due mainly to gross profit growth and performance marketing efficiency that exceeded forecast
We increased our investment in brand advertising by 55% in Q3 to build brand awareness and drive traffic directly to our websites
Adjusted EBITDA for Q3 amounted to $2.19 billion, which exceeded the top end of our guidance range of $2.13 billion and grew by 18% versus prior year
GAAP net income and fully diluted EPS both increased by 240%, with growth impacted by the goodwill impairment charge in Q3 2016. Non-GAAP fully diluted net income per share was $35.22, up 19% versus the prior year, exceeding our guidance for the quarter and FactSet consensus of $34.26. In terms of cash flow, we generated $1.9 billion of cash from operations during third quarter 2017, which is an increase of about 24%
In July, we paid about $556 million of our international cash to close the Momondo acquisition
During the third quarter, we returned $586 million to our stockholders through share buybacks
Since September 30 through Friday, we have spent an additional $166 million to purchase 87,000 shares
Year-to-date free cash flow amounted to almost $3.3 billion, growing by 20% compared to the prior year
About 34% of our gross profit converts to free cash flow, which is a function of attractive profit margins and capital efficiency for our business
Our cash and investments amounted to $18.4 billion at quarter close, with about $2.5 billion of that balance in the U.S
Now for Q4 guidance, our guidance assumes that our growth rates will decelerate mainly due to the size of our business and consistent with long-term trends
Our guidance also reflects an exceptionally difficult prior-year comparable because our 31% room night growth in the fourth quarter last year was the highest we had achieved in several years
<UNK> just discussed steps we are taking to optimize the efficiency of our performance advertising spend, which we forecast will have a modestly negative impact on top line growth for the coming quarters
Our Q4 forecast is based upon recent foreign exchange rates, which favorably impact our growth rates expressed in U.S
dollars
We have hedge contracts in place to substantially shield our fourth quarter EBITDA net earnings from any further fluctuation in currencies versus the dollar between now and the end of the quarter, but the hedges did not protect our gross bookings, gross profit or our operating profit from the impact of foreign currency fluctuations
We are forecasting booked room nights to grow by 8% to 13% and total gross bookings to grow by 9.5% to 14.5% in U.S
dollars and by 5.5% to 10.5% on a constant-currency basis
Our Q4 forecast assumes the constant-currency accommodation ADRs for the consolidated group will be down by about 1% compared to the prior-year period
We forecast Q4 gross profit to grow by 10.5% to 15.5% in U.S
dollars and by 6% to 11% on a constant-currency basis
GAAP operating margins, expressed as operating income as a percentage of gross profit, are expected to be about 340 bps lower than prior year Q4. Q4 adjusted EBITDA is expected to range between $870 million and $910 million, which at the midpoint, is up about 2% versus prior year
We forecasted adjusted EBITDA as a percentage of gross profit will be about 350 bps lower than prior year Q4. Our Q4 forecast reflects an assumed improvement in year-over-year performance marketing efficiency
The deleverage assumed in our forecast reflects the investments in brand advertising and non-advertising operating expenses that <UNK> just spoke about
The investments in brand advertising and non-advertising operating expenses have a more significant margin impact in Q4 and Q1, which are quarters in which we earn a smaller share of our annual profits due to the normal seasonality of our business
We forecast GAAP EPS between $12.60 to $13.20 per share for Q4, which at the midpoint is down by about 4% versus prior year
Our EPS guidance assumes a fully diluted share count of about 49.7 million shares, which reflects the beneficial impact of common stock repurchases we've made to-date, offset by additional equivalent shares related to our convertible bonds due to the increase in our stock price
Our GAAP EPS guidance assumes a tax rate of 17% compared to the prior-year tax rate of 12%, which was beneficially impacted by non-recurring discrete items
We are forecasting Q4 non-GAAP fully diluted net income per share of approximately $13.40 to $14.00 per share, which at the midpoint is down by about 4% versus prior year
Our non-GAAP EPS forecast includes an estimated income tax rate of approximately 18%, which is higher than the prior year rate for the same reasons I just discussed for the GAAP tax rate
Our forecast does not assume any significant change in macroeconomic conditions in general or in the travel market in particular
We will now take your questions
Question-and-Answer Session
The couple of things I called out in the prepared remarks, <UNK>, were, in particular, the comp that we had to prior year, where we had really high growth rates and the steps that we're taking in performance marketing to optimize ROIs
So I think that that will be with us for the coming quarters until we lap it
But I wouldn't call it structural
And fundamentally, the travel market feels healthy
You see the results reported by the big hotel chains and our competitors
It feels pretty strong to us
The things that have driven our growth in the past, rapidly adding properties to the platform, that continues
And I'm confident that our teams will continue to execute very effectively in adding properties going forward, continuing to improve the experience for our customers on our platforms, which drives better conversion and loyalty over time, and then also continue to effectively advertise our brands to bring new customers to the franchise going forward
So nothing structural from our perspective
Okay, <UNK>
This is Dan
I'll take that one
So, yeah, we said that as we proceeded through the quarter, we experimented with ways to better optimize our performance marketing spend
And I'd say, relative to our guidance that probably had a modest negative impact on top line growth and had a favorable impact on our performance marketing efficiency and bottom line profitability
That said, we're still pretty pleased with the growth that our teams were able to deliver with the marketing mix that they employed
And so we like the results that we saw in Q3.
You're welcome
I'd just say that over time, driving customers to come to us directly should have a nice beneficial impact on overall advertising efficiency
We'll reach some point in time where we're in the markets we want to be with brand advertising and we're spending the level of spend we think that's right to get the reach and frequency that we want
And so we should be able to have good leverage in the longer term once we get to that optimal level of spend
You're welcome
<UNK>, in terms of the U.S
trend over the last several quarters, we're very pleased with the performance of Booking
com in the U.S
We believe booking is growing its share in the U.S
, posting very healthy growth rates over the last several quarters
So that's for the U.S
We've seen improving performance for the Priceline
com business, which is a nice plus, too, as that's a U.S
And then, in terms of brand trends, our forecasts are done the way we do it every quarter, which is look at the actual results we've seen thus far in the quarter and trend off of that generally assuming that we'll see some deceleration as we proceed through the remainder of the quarter, given the size of the business and the long-term trends
So we didn't build in anything specific related to the advertising spend that's planned for the quarter
Our experience has been as we've done many years of TV advertising for Priceline and for KAYAK, and we've been active in TV advertising for Booking
com since 2013, it's a slower build – a slower return on investment typically for that spend
We are doing a better job and improving our capability to measure effectiveness of the advertising, but that doesn't mean it's positive ROI day one
So we think it's going to be the right thing to do for the long term
But in the short term, it's probably going to pressure margins and not deliver the same kind of pop to top line growth the way intent-based advertising would
You're welcome
As <UNK> said in the prepared remarks, it's more just – it's been an ongoing trend for us that we've seen pressure on ROIs, deteriorating margins in our performance marketing spend
And so it was re-evaluating that and looking for ways to start to arrest that trend and even move – starting in a more positive direction
So I'd say nothing specific
Our conversion continues to generally improve on our websites as our teams experiment to continue to see improve the experience for our users
And so nothing there that really drove it
And I'm sorry, was there a second question?
You're welcome
And in terms of penetration, <UNK>, we've made the comment before that we've got a mid-single-digit share of the properties that are available on our website
That's a broad statement of all the properties
But we've been very pleased with our vacation rental business
It's been a fast-growing business for us, growing faster than our consolidated growth rate
So you can assume that the performance there is good and that the penetration opportunity also exists there
You're welcome
Regarding the size of the vacation rental business, we haven't disclosed those stats
You can see the growth in the property count
And you can assume that we wouldn't be doing that if that wasn't growing fast for us
We've said that it's growing faster than the consolidated growth rate
So it's an important – it's a meaningful part of our business, but we aren't going to disclose exactly how big it is today
You're welcome
And when you talk merchant commissions, <UNK>, I assume that you're just looking merchant gross profit divided by merchant gross booking
That's a function of timing, really
The fundamental take rates are stable, but we've got decelerating top line growth, meaning gross bookings growth have the benefit of checkout still occurring from prior faster-growing quarters, and so that's what you're seeing there
You're welcome
I agree
There's nothing that was called out in the chain reports for the quarter that would lead me to believe that anything has changed significantly there
And I'm with <UNK>, I think the growth that we posted and the growth that we're guiding to is spectacular relative to the fundamental growth of the market
The new alternative accommodation business is somewhat less profitable from a partner services perspective
So there are less rooms for property, a lot of properties still to go and gather, and then, typically, requiring a little bit more help in working with our service because they're less sophisticated than the hotel properties that we had initially worked with
From a customer service perspective, too, a little bit more hands-on touch with customers given the unique nature of these properties
That said, the profitability of our vacation rental business is still very impressive, growing fast
We're making investments now, partly in the teams that are facing properties and facing our customers, to make sure we can stay up with the growth
But we're also making significant investments on the IT side
So we're adding teams of people under our booking home umbrella, and they're focused on improving the experience with property owners, including individual property owners that are putting their apartment or home up for rent, to make it a more intuitive experience, easier for them to self-signup and improve efficiency that way
And then, also on the customer service side, improve the experience on the website, there's a number of reasons why people contact our customer service teams asking questions
And as we see what's driving those contacts, looking to improve the amount of information that's available for the customer to serve themselves on the website, answer that question before they ask it
<UNK> talked about the use of machine learning
Hopefully, we can bring that to bear also to just automate some of these processes
So I don't know that it will ever be as profitable as our core hotel business from the perspective of partner services or customer service
But I think there is the opportunity to improve the profitability there and to see better trends over time as the business scales
In terms of exclusivity, that's not something we typically strive for
We want to win our partners' loyalty by bringing them demand at a reasonable price rather than some sort of contractual block-out of other demand platforms
Then in metasearch, <UNK>, we're really pleased with the performance of our KAYAK business
It's growing nicely
It's one of the bigger players out there on meta side
And I'd say, it's – if you want to talk market share of profits, it's right near the top of the list
So very profitable business, growing
I think run very responsibly by Steve Hafner and his team
And we're excited about the prospects of bringing Momondo and KAYAK together and sharing best practices from brand to brand and having the teams work together to make both brands stronger in the future
You're welcome
You didn't ask the second question about trivago
What's your question?
| 2017_BKNG |
2016 | VRSN | VRSN
#Thank you, operator, and good afternoon, everyone.
Welcome to VeriSign's fourth-quarter and full-year 2015 earnings call.
With me are <UNK> <UNK>, Executive Chairman, President and CEO; Todd Strubbe, Executive Vice President and COO; <UNK> <UNK>, Senior Vice President and CFO; and Pat Kane, Senior Vice President, Naming and Directory Services.
This call and our presentation are being webcast from the Investor Relations section of our VeriSign.com website.
There you will also find our fourth-quarter and full-year 2015 earnings release.
At the end of this call, the presentation will be available on that site, and within a few hours the replay of the call will be posted.
Financial results and our earnings release are unaudited, and our remarks include forward-looking statements that are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Forms 10-K and 10-Q and any applicable amendments, which identify risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.
VeriSign retains its longstanding policy not to comment on financial performance or guidance during the quarter unless it is done through a public disclosure.
The financial results in today's call and the matters we will be discussing today include GAAP and non-GAAP measures used by VeriSign.
GAAP-to-non-GAAP reconciliation information is appended to our earnings release and slide presentation, as applicable, each of which can be found on the Investor Relations section of our website.
In a moment, <UNK> and <UNK> will provide some prepared remarks, and afterward, we will open up the call for your questions.
With that, I would like to turn the call over to <UNK>.
Thank you, <UNK>, and good afternoon, everyone.
Our fourth-quarter and full-year 2015 results were in line with our objectives of offering security and stability to our customers while generating profitable growth and providing long-term value to our shareholders.
During 2015, VeriSign delivered strong financial performance, including reporting $1.059 billion in revenues, expanding free cash flow to $629 million, and producing full-year non-GAAP operating margins of 61.5%.
Operationally, 2015 was another strong year for the Company.
VeriSign processed 38.8 million new .com and .
net domain name registrations and finish the year with 139.8 million common net names in the domain name base.
During the year, we marked more than 18 years of uninterrupted availability of the VeriSign DNS for .com and .
net.
As a part of managing our business, during the fourth quarter we continued our share repurchase program by repurchasing 1.8 million shares for $150 million.
During the full year 2015, we repurchased 9.3 million shares for $622 million.
Effective today, the Board of Directors increased the amount of VeriSign common stock authorized for repurchase by approximately $611 million to a total of $1 billion authorized and available under the share buyback program, which has no expiration.
Our financial position is strong, with $1.9 billion in cash, cash equivalents and marketable securities at the end of the quarter, of which $753 million was held domestically and the remainder held abroad.
We continually evaluate the overall cash and investing needs of the business and consider the best uses for our cash, including potential share repurchases.
At the end of December, the domain name base in .com and .
net was 139.8 million, consisting of 124 million names for .com and 15.8 million names for .
This represents an increase of 6.3% year over year as calculated, including domain names on hold for both periods.
In the fourth quarter, we added 4.6 million net names to the domain name base after processing 12.2 million new gross registrations.
In the third quarter of 2015, the renewal rate was 71.9% compared with 72% for the same quarter of 2014.
While renewal rates are not fully measurable until 45 days after the end of the quarter, we believe that the renewal rate for the fourth quarter of 2015 will be approximately 73.3%.
This preliminary rate compares favorably to 72.5% achieved in the fourth quarter of 2014.
As we discussed over the last few quarters, there are many factors that drive domain growth.
These include but are not limited to Internet adoption, economic activity, e-commerce activity, and registrar go-to-market strategies.
Towards the end of the third quarter and mainly during the first two months of the fourth quarter, we saw higher volume of gross additions coming largely in our Asia-Pacific region, primarily through registrars in China.
While we believe China and the Asia-Pacific region will continue to perform well, we expect these markets to return to more normal levels in 2016.
Based on registrar feedback, the most likely contributor of the additional gross addition volume appears to have been driven primarily from domain investment activity in that region.
Also, as we have noted in the past, the renewal rates for domain names registered in emerging markets such as Asia-Pacific have historically been lower than those registered in more developed markets.
Considering these factors, we expect the first three quarters of the year to have roughly a similar pattern of quarterly net additions to the domain name base as we saw during 2015.
However, we expect the fourth quarter of 2016 to be somewhat unique as the expiring domain name base in that quarter will have the largest percentage of first-time renewing names that we've seen, as a result of the strong Q4 2015 performance.
While it's difficult to assess what the renewal characteristics of these new names will be, due to the unusually large upcoming Q4 2016 expiring base, we expect fourth-quarter deletions to be elevated.
Accordingly, deletions could exceed additions in the fourth quarter of 2016.
Based on these and other factors, we expect the first-quarter 2016 net change to the domain name base to be an increase of between 1.5 million and 2 million names.
And we are forecasting the full-year 2016 domain name base growth rate to be between 0.5% and 2%.
As noted in prior calls, updates to the domain name base are posted on our website at least once per day, and our website allows you to track the domain name base throughout the coming quarter and year.
Finally, as an update related to the launch of our internationalized domain name versions of .com and .
net, during December the localized katakana version of .com in Japanese launched and will be in the sunrise period until March 14.
Now I'd like to turn the call over to <UNK>.
Thanks, <UNK>, and good afternoon, everyone.
For the full year of 2015, we recognize revenue of $1.059 billion, up 4.9% from full-year 2014 revenue, and delivered GAAP operating income of $606 million, up 7.4% from $564 million for the full year 2014.
During the fourth quarter, we recognized revenue of $273 million, up 6.5% year over year, and delivered GAAP operating income of $158 million, up 11.3% from $142 million in the fourth quarter of 2014.
The GAAP operating margin in the fourth quarter came to 58.1% compared to 55.6% in the same quarter a year ago.
GAAP net income totaled $102 million compared to $65 million a year earlier, which produced diluted GAAP earnings per share of $0.76 in the fourth quarter this year compared to $0.48 for the fourth quarter last year.
As described last year, our fourth-quarter 2014 GAAP net income was decreased by $26 million and diluted EPS was decreased by $0.19, primarily due to a nine US income tax charge related to a reorganization of certain international operations and a charge in estimate for US income tax charges related to the repatriation of offshore assets back in 2014.
As of December 31, 2015, the Company maintained total assets of $2.4 billion.
These assets included $1.9 billion of cash, cash equivalents and marketable securities, of which $753 million were held domestically, with the remainder held abroad.
Total liabilities were $3.4 billion at year end, up from $2.8 billion at the end of 2014, primarily as a result of the issuance of a new 10-year, 5.25% $500 million debenture completed in the first quarter of 2015.
I will now review some of our key metrics for our fourth-quarter operating metrics, which are revenue, deferred revenue, non-GAAP operating margin, non-GAAP earnings per share, operating cash flow and free cash flow.
I will then discuss our 2016 full-year guidance.
As mentioned, 2015 full-year revenue was $1.059 billion, up 4.9% from full-year 2014 revenues.
Revenue for the fourth quarter of 2016 (sic - see Press Release, "2015") totaled $273 million, up 6.5% from the fourth quarter of 2014 and 2.6% sequentially.
During the quarter, 59% of our revenues was from customers in the US, and 41% was from international customers.
Deferred revenue at the end of the fourth quarter total $961 million, a $71 million increase from year end 2014.
Fourth-quarter non-GAAP operating expense, which excludes $12 million of stock-based compensation, totaled $103 million compared with $99 million in the third quarter of 2015 and down from $104 million in the same quarter a year ago.
Non-GAAP operating margin for the fourth quarter was 62.4% compared to 59.4% in the same quarter of 2014.
Full-year 2015 non-GAAP operating margin was 61.5%.
Non-GAAP net income for the fourth quarter was $105 million, resulting in non-GAAP diluted earnings per share of $0.79 based on a weighted average diluted share count of 133.4 million shares.
This compares to $0.70 in the fourth quarter of 2014 and $0.78 last quarter, based on 135.9 million and 131.7 million weighted average diluted shares, respectively.
Full-year 2015 non-GAAP earnings per share was $3.05, a 12% increase over 2014.
We had a weighted average diluted share count of 133.4 million shares in the fourth quarter compared to 131.7 million shares in the third quarter.
Dilution related to the convertible debentures was 21.4 million shares based on the average share price during the fourth quarter compared with 14.7 million for the same quarter in 2014 and 18 million shares last quarter.
Operating cash flow and free cash flow for the fourth quarter were $189 million and $176 million, respectively, compared with $170 million and $159 million, respectively, for the fourth quarter last year.
Full-year 2015 operating cash flow was $651 million compared with $601 million for 2014.
Free cash flow for 2015 was $629 million compared with $568 million for 2014.
Also, as we have discussed on recent earnings calls, we expect our cash tax rate to stay below the 26% tax rate used for non-GAAP calculations for at least the next several years.
In 2016, we expect to pay cash taxes of approximately $10 million to $20 million.
Due to domestic tax attributes, including cash tax benefits from our convertible debentures, substantially all of the expected cash taxes in 2016 are international.
With respect to full-year 2016 guidance, revenue for 2016 is expected to be in the range of $1.110 billion to $1.135 billion, representing an annual growth rate of 5% to 7%.
Full-year 2016 non-GAAP operating margin is expected to be between 62.5% and 64%.
Our non-GAAP interest expense and non-GAAP nonoperating income, net, is expected to be an expense of between $114 million to $120 million.
Capital expenditures for the year are expected to be between $40 million and $50 million.
In summary, the Company continued to demonstrate sound financial performance throughout 2015.
We have grown non-GAAP operating margins, non-GAAP net income, operating cash flow, and free cash flow.
We have maintained a strong financial position and expect our strong operating cash flow generation to continue as a result of our financial model.
Now I will turn the call back to <UNK> for his closing remarks.
Thank you, <UNK>.
I want to take this opportunity to update you on another item.
On March 14, 2014, the US National Telecommunications and Information Administration, or NTIA, announced its intent to transition its historic stewardship role related to the Internet's domain name system to the global multi-stakeholder community.
A year later, in March of 2015, in preparation for the implementation phase of the IANA stewardship transition, MTIA asked VeriSign and ICANN to submit a proposal detailing how best to remove NTIA's administrative role associated with root zone management.
These related root zone management functions involve our role as root zone maintainer under the cooperative agreement with the Department of Commerce.
In response to the March 2015 request from NTIA, IACNN and VeriSign submitted a proposal to NTIA describing how best to remove NTIA's administrative role associated with root zone management in a manner that maintains the security, stability and resiliency of the Internet's domain name system.
NTIA published this joint ICANN-VeriSign proposal on August 17, 2015, noting it was anticipated that performance of the root zone maintainer function would be conducted by VeriSign under a new root zone maintainer agreement with ICANN once the root zone maintainer function obligations under the cooperative agreement were completed.
ICANN and VeriSign are in the final stages of drafting the new root zone maintainer agreement to perform this root zone maintainer role as a commercial service for ICANN upon the successful transition of the IANA functions.
The root zone maintainer functions performed by VeriSign are delivered via the secure, stable and resilient purpose-built DNS infrastructure that has delivered .com, .
net and ANJ root zone services for an uninterrupted and unparalleled 18 years.
To ensure that root operations continue to perform at the same high level during the expected 10-year term of the root zone maintainer agreement, ICANN and VeriSign are in discussions to extend the term of the .com registry agreement to coincide with the expected 10-year term of the root zone maintainer agreement.
Ensuring that the terms of the two agreements are the same will promote the stability of root operations and will remove potential instability that might otherwise arise if the terms did not coincide.
VeriSign's commitment to security, stability and resiliency within the DNS is the first priority and consideration in the performance of our roles as directed by ICANN and the NTIA.
While we cannot yet determine when or if these documents will be completed, having stability with these key contracts is an important component of the stability of the core infrastructure of the Internet.
While ICANN and VeriSign are in the final stages of preparing the root zone maintainer agreement and the .com registry agreement extension documents, there are several important steps that still need to occur, including completing the drafting of the agreements, posting them for public comment, and obtaining approvals from ICANN's and VeriSign's Board of Directors.
Additionally, under the cooperative agreement, we may not enter into the contemplated extension of the com registry agreement without the prior written approval of the Department of Commerce.
If the Department does not approve the extension, then the current com registry agreement will remain unchanged.
We will provide periodic updates as appropriate on our progress toward these objectives.
In closing, during the last year we furthered our work to protect, grow and manage the business while delivering value to our shareholders.
The end of 2015 marks five years since the completion of our divestiture program and the sale of our authentication services business.
Our goal then was to simplify the Company's business through divestment of non-core assets and to focus on profitability and value creation.
Since the end of 2010, revenue has grown sequentially for five straight years.
Annual non-GAAP EPS has grown steadily from $1.04 in 2010 to $3.05 in 2015.
Free cash flow has grown steadily and was $629 million during 2015.
Non-GAAP operating margin has risen steadily from 41.8% in 2010 to 61.5% during 2015.
We have returned $3.8 billion to our shareholders, including repurchasing over 70 million shares for $3.36 billion, which exceeds our domestic free cash flow for the same period.
We believe the long trendlines of growth in the top and bottom line, along with a consistent track record in returning generated value to our shareholders through effective capital allocation and an efficient capital structure, are what matter most to our shareholders.
We believe that proper balance within our strategy framework, protect, grow and manage, is what makes it possible for us to deliver this type of consistent long-term result and simultaneously serve the interests of our shareholders, employees and customers.
I'm sometimes asked what the next big thing is for VeriSign.
And my answer is simple: more of the same, steady and efficient operation of a great business so that we can steadily and consistently create value and efficiently return that value to our shareholders.
We will now take your questions.
Operator, we are ready for the first question.
Sure, <UNK>.
So, first of all, I think it helps to just understand that we are not actually changing the terms of the .com registry agreement, and this is not a renewal.
This is an extension.
We are negotiating entering into a 10-year contract with ICANN to perform commercial services as the root zone maintainer, services that we now perform under contract to the NTIA.
The contemplated or anticipated term of that agreement is 10 years.
In order to ensure the same steady, available, uninterrupted, secure and stable environment that we have been providing for three decades as a root zone maintainer, it is also anticipated ---+ we are discussing the extension of the .com registry agreement for 10 years.
So at that point, should all of these conditions that I described earlier ---+ for example, approval of ICANN's Board of Directors and VeriSign's Board of Directors ---+ no changes whatsoever can be made to the .com registry agreement without the consent of the NTIA.
So, subject to those approvals and the transition occurring, then we would have 10-year concurrent terms for the root zone maintainer agreement and the .com registry agreement.
So what you would see is essentially a change of the date, the term of the .com registry agreement.
That's essentially the change.
From an investor viewpoint, you would, instead of a renewal in 2018, you would see a 10-year term that starts with the effective date of the two changes, the root zone maintainer agreement and the extended .com registry agreement.
So instead of November 30, 2018, you would see a date that is 10 years from the effective date of those two.
So again qualifying all of this to say that if we conclude our negotiations, we get all the necessary approvals, the triggering event that marks the, quote, effective date would then be the IANA transition occurring.
That process has been underway since March of 2014.
I certainly can't say with any definite date when that will happen, but I can tell you that there is steady progress on the transition.
The target date is September of 2016.
That is the date of the expiration of the IANA contract between NTIA and ICANN.
And if everything occurs at that point, and it is certainly possible all of the work that needs to be done can be accomplished by that date ---+ but again I can't, of course, tell you what will happen when.
I can simply tell you that that is everyone's goal and that the community ---+ ICANN, NTIA, etc.
---+ are all driving for that September 2016 date.
So that is the best date that everybody is shooting for.
So if you wanted to know roughly when that might happen, that would be the target date.
Well, <UNK>, this is <UNK>.
Just to put some more clarification around it, the growth in the fourth quarter was not unique to .com and .
net.
The local ccTLD, .
cn, reported increased growth in the quarter.
We've seen other TLDs report growth.
And so com and net have also performed quite well in that year.
So we clearly saw the domain investment community in the emerging market perform well.
Again, we don't have direct visibility into the end user.
Our customers are the registrars in those regions.
But again, based on the information that we have, we saw that the investor community performed well across the board.
This is <UNK> Let me take the first part of your question.
I would just reiterate again that what we are contemplating here, what we are working towards is an extension of the com agreement.
So the terms wouldn't change in the com agreement.
It is literally an extension so that it coincides with the new root zone maintainer agreement.
Essentially, the goal is to make the term of those two contracts to run concurrently.
That's the objective.
So we don't anticipate that there will be any substantive change or any change, actually, to the terms of the agreement itself, if that helps.
Does that answer your question.
So with regard to your question on Q4 net adds, as discussed, net additions in the fourth quarter were 4.6 million, and they were comprised of 12.2 million new adds, new registrations, and 7.6 million deletes from prior periods.
The 4.6 million was up about 3.8 million from the 800,000 we achieved in Q4 2014 and up about 2.9 million from the 1.7 million net adds delivered in Q3 2015.
The Q4 year-over-year improvement was primarily a result of about 3.5 million incremental registrations coming out of our Asia-Pacific region.
As we mentioned, that was primarily China, and appear largely to be from the investor community over there.
Just to clarify, I wanted to make sure I answered entirely your first question.
You were asking me about a change in terms of the com agreement.
Did you mean to implicate at all the cooperative agreement and the terms, for example, such as the price caps on the price of .com.
Yes.
So let me just say that, first of all, the terms of the .com agreement will not change.
And the presumptive right of renewal, of course, would remain in the com agreement.
The com agreement doesn't actually address pricing; that's addressed separately in the cooperative agreement.
The Amendment 11 of the cooperative agreement is the section that describes our contractual relationship with NTIA with respect to the root zone maintainer role.
That is the portion that, it's contemplated, would essentially move into a new contract, the RZMA that we are negotiating with ICANN.
Amendment 32 is a separate part of the cooperative agreement that addresses pricing with respect to our ability to seek a price change if we think it's justified by market conditions.
So I certainly don't anticipate that that would change, that would remain.
So VeriSign's right to seek relief from price controls based on market conditions that would warrant it would remain.
Yes, I don't believe that's the case.
I think the extension means that the date changes on that agreement, but any change to the agreement requires the consent of the NTIA.
And so I can't speak for NTIA; this is their process.
The part of the process we are involved in would be to negotiate the root zone maintainer agreement with ICANN, to present that along with a com contract that has the date extended and present that to NTIA.
This is, of course, in response to their March 2015 request for a way to transition the root zone maintainer role and to take NTIA out of that process.
So that would be up to them when they see it.
So I think that's what they asked for and that's what they are looking for.
This is not a renewal in the sense that all of the normal things that happen during a renewal would happen.
So I don't quite see it that way.
I see this as precisely what NTIA has called it.
It's a parallel process to address the issue of the root and parallel to the IANA transition process which began in March of 2014.
Yes.
So from a sales and marketing perspective, we would expect that sales and marketing expense to be similar as a percent of revenue as it has been this year.
This is <UNK>.
In a word, no.
But let me just say this.
During my earlier remarks, I mentioned that the next big thing for VeriSign is more of the same, what we did for the last five years in efficiently running our business, providing security and stability, generating value and efficiently returning that value to our shareholders.
That's what you're going to see for the next five years.
So some sort of inorganic growth strategy to try to grow in other businesses or non-core businesses is not part of our plan.
And I certainly don't see that happening.
And we have been very consistent about that messaging.
Now, I've also consistently said something else over the last year or two, which is that, for example, the new GTLD program could present some inorganic opportunities in our core business.
And that's certainly still true.
In fact, just recently, a group of observers of that marketplace who are heavily involved in it all opined that 2016 could be the year of consolidation in that business.
And certainly, those opportunities to acquire growth in our core business would be something we would look at.
And then we have been very consistent about all of that.
Since completing the divestitures, our position on acquisitions is essentially unchanged.
But again, if we see opportunities that come along, we are not opposed to looking at those, as long as they are consistent with our core business, consistent with our commitment to deliver profitable growth, again, the opportunity to participate in the consolidation in 2016 ---+ that's an opportunity for us.
As a significant part of our corporate strategy for 2016, we have evaluated and we are pursuing and we will continue to evaluate and pursue acquisitions of TLDs that are currently in operation, those that have not yet been awarded, in support of our growth strategy, so long as they fit with that strategy.
Almost.
Yes, for the most part, you have it correct.
But let me just point out the .com ---+ so the short answer to your question is yes, I don't expect any of that to change.
I anticipate that we would have our Amendment 32 rights to petition based on changing market conditions for price relief, and also that, certainly, the agreement calls for the ability for VeriSign to seek so-called cost-justified price increases.
And that includes things like cost of implementing consensus policies or specific threats to the DNS that are extraordinary that we have to respond to, unanticipated expenses associated with responding to threats.
I don't see those changing at all.
But in the front part of your question, you sort of lumped the .com registry agreement and the cooperative agreement together, and those are different agreements.
What we are doing here is we're seeking an extension to the .com registry agreement.
The cooperative agreement expires in 2018, and we are not seeking any change to that.
That is up to NTIA.
That is their process, their contract.
So I would certainly defer to them.
But we are not rolling up those two together for a 10-year extension.
We're just simply ensuring that the .com registry agreement ---+ which, I might add, has the most stringent SLAs, the most stringent security performance requirements of any registry agreement ---+ run concurrently with the root zone maintainer agreement because, remember, our performance as the root zone maintainer and publisher ---+ essentially, you can think of it as the bootstrapping process of the Internet, which we do at least twice a day.
And it is critically important to the secure operation of the global Internet that that process be done in an uninterrupted, secure way.
And so, in order to achieve that, we are seeking a concurrent term for the .com registry agreement which addresses the infrastructure and the performance requirements for that infrastructure that provides the security for com and net and the roots to run concurrently with the root zone maintainer agreement, for obvious reasons, to avoid any possible instability that might result.
The cooperative agreement, the only thing that we anticipate would change ---+ I'm not speaking for NTIA, but I assume at some point the Amendment 11, which talks about our role as the root zone maintainer, would, of necessity, change.
But we have no anticipation or expectation that anything else would change.
It expires in 2018, but it's up to NTIA to decide at that point what happens.
Well, I think it is factored in.
I'll let <UNK> offer you some more color on that.
But I will just say that Q4 is a ways off.
It is unique.
We had basically roughly a 50% increase from the year-ago quarter in Q4 of 2015.
I think we had eight-point-something-million gross adds in Q4 of 2014, and we went to 12.2 million in Q4 of 2015.
So it was extraordinary in that sense.
And it's technically possible that a wide range of outcomes could result.
And so I just wanted to point out that one possibility certainly is that deletes could exceed adds, just because of the sheer volume of gross adds that occurred in Q4 of 2015.
That is a mathematical fact.
And I just wanted to point it out.
And maybe <UNK> could add some color.
Yes, I think that's exactly right.
As <UNK> pointed out, last year, in the fourth quarter of 2014, 8.2 million adds versus the 12.2 million adds in the fourth quarter of this year, so a 4 million increase in the additions.
As we historically know, first-time renewal rates are typically around 50%.
So that would mathematically suggest that there's maybe a $2 million increase or 2 million unit increase in deletions.
We've also said that when we look around the world from a renewal rate perspective, we do see emerging markets having a slightly lower renewal rate, on average.
So that could impact the number as well.
Clearly, what would dictate Q4 net adds would be the other side of that equation as to what gross adds would be.
But, clearly, as we said in our prepared remarks, the renewing name base is going to be large.
We had a great, great fourth quarter.
And so we will have those names come up for renewal, and we will keep an eye on what the renewal rate is.
But historically, our first-time renewal rate has been 50%.
Sure, I'd be happy to.
Last year, or in 2015 last year, we did have some expense related to a small restructuring of a portion of our international operations, and the primary difference is that restructuring amount.
Again, from a US perspective, we have our convertible debenture that produces a tax shield.
Last year, it was about $165 million, as we've said.
That convertible debenture tax shield tends to grow about 6% year over year.
We also have approximately $173 million of foreign tax credits that we expect to utilize before they expire over the next seven or eight years.
So we don't expect to pay very much US tax based on our attributes.
So, really, we would look to the $10 million to $20 million to be primarily foreign taxes.
But, again, we had a small restructuring ---+ we talked about it last year ---+ where we did pay some cash taxes as a result of that international restructuring.
Thank you, operator.
Please call the Investor Relations department with any follow-up questions from this call.
Thank you for your participation.
This concludes our call.
Have a good evening.
| 2016_VRSN |
2016 | LOGM | LOGM
#<UNK>, this is <UNK>.
So I'll cover your deferred revenue question first.
Exiting the quarter there's about $7 million to $8 million of deferred revenue in our $137 million balance that is LastPass-related.
If you factor that out, year-over-year growth in deferred revenue is about 23%.
And then do you have a follow up there, <UNK>.
Yes, so on the pricing side.
This is something we've been pretty consistent on over the last couple of quarters, or last couple of years is that trying to bring more scientific approach and more rigorous approach to pricing and packaging.
I don't know that I would characterize going forward that it's a lot of price increases, as much as I would call it a lot of packaging changes.
For instance, even with Pro, we are now bundling in.
When you buy Pro, we're now bundling in LastPass and bundling in a terabyte of storage.
You're actually getting a lot more ---+ it's actually almost essentially a different product than it was 18 months ago.
Two years ago, 2014, it was just a straight-up price increase.
Now it's something that's very different.
We have a long way to go.
We still have products like rescue and Log Me Pro that don't have good, better, best pricing.
We have products that we think are well under-priced.
Even with where we have priced Pro, it's still 50% lower than its counterpart, its closest counterpart competitively.
That will just continue to be part of our ongoing cadence of our business.
Thanks for the question, <UNK>.
We really haven't seen much in the marketplace with regard to the potential spin-out of that business.
Obviously, it's something we're watching and we are aware of.
But we really haven't seen any changes in their go-to-market side or their approach.
So I really don't have any other comments on that.
Yes, thanks.
That's a great question.
And we have certainly, seen some competitive dynamics, I would say, tilt in our favor with the Bold product.
We've also seen some more secular trends, like the move to mobile.
We think we are a leader in mobile.
We really pushed in 2015 to improve our integrations with third parties.
And that really paid off for us in some of these larger deals.
You'll see us introduce video in the first half of this year.
We talked about that last year.
The pace of innovation for Bold has increased and will continue to increase.
I think the reason you're hearing more about it, not only because it accelerated through the year, but also because we do see more convergence between that, our Rescue business, and potentially our Xively business.
Yes.
So thanks again, <UNK>.
Xively, we were pleased with the progress we made from Xively, but it's still a pretty immaterial part of our business.
We had nice growth in the year.
We have some customer wins, as I talked about.
We launched some new features.
But ultimately this is a long-term play.
I think one thing that you'll see us do more of is improve our focus on partnerships in 2016.
We announced a partnership with Salesforce last year that I think will be meaningful going forward.
We just announced a partnership with Solid Works.
So I think that's going to be a bigger part of our footprint.
We are ---+ I'm still very enthusiastic about Xively.
And I'm really enthusiastic about the overlap it's going to have and the pull-through it's going to have in our rescue and bold business long-term.
We can, <UNK>.
So this is <UNK>.
Thanks for your question.
Actually we're really pleased with the fourth quarter.
We're really pleased with the way sales performed.
They actually exceeded our expectations during the quarter.
If you're doing the old ---+ the implied year-over-year bookings growth, the thing that you need to recall is that this time last year we were reporting a very, very strong fourth quarter from last year.
So it's a really tough comparable for us this year.
Last year in the fourth quarter we had a large number of large deals, including several that had multi-year components.
Again, we are really happy with the quarter.
I think you should focus on the deferred revenue growth year over year.
And again, it's just a really tough comparable.
That just has to do with the seasonality we have in our business that really began when we did the pre-conversion.
It's really has to do with that.
Thanks, <UNK>.
When I was referencing, we did have a price increase in December.
Didn't really have much of an impact on the quarter.
Those customers really started coming up for renewal earlier in January.
And so far the renewal rates have been exactly pretty much what we expected.
What I was actually referencing is, even after the price increase, we're still 50% cheaper than the comparable product, the like-for-like product.
I think the pivot for us has been more to make it about a bundled solution that brings in identity management and brings in cloud storage, two things we think are much more important to a cloud-centric type of product.
That's really been our focus, and changing it from just a remote access play into something that helps people in today's cloud-centric world.
All right.
Thank you.
Sure, <UNK>.
Thanks for the question.
Last half is it plays in the identity and access management space.
It depends on ---+ you could look at it a couple ways.
It's a market that by some estimates is $2 billion to $4 billion and growing in the teens.
I think if you look at cloud specifically, that's a smaller portion of that, and growing more rapidly as people move from legacy solutions that we would say we don't compete with, like Microsoft, active directory, and other things, but have cloud-based identity management solutions.
That's really the market we compete.
That's a market that is part of that $4 billion identity and access management space.
And it's the fastest growing segment.
We really think now with the acquisition of LastPass we are in a leadership position.
And it's a product we can also cross-sell to our large base of customers.
So we are really pleased with its performance thus far, and very excited about what it can do in 2016 and beyond.
Thank you for your questions tonight.
LogMeIn had a great fourth quarter and a very strong year.
We set our sights on some ambitious goals that we believe will help us double the business over the next 3 to 4 years.
We believe we can deliver this growth while continuing to produce the profits and class-leading cash flow that have become hallmarks of our business model.
And we believe we have the team, vision, experience and scale to become significant players in some of the technology's biggest and most transformative markets.
We look forward to sharing our continued progress when we reported our Q1 results in April.
Thank you again for your time this evening.
| 2016_LOGM |
2016 | DIS | DIS
#I'm not going to talk about separating those assets.
We fully expected that our media assets are going to continue to contribute to our growth.
We also are designed, as a Company, to leverage intellectual property across a lot of our businesses, or to leverage the collection of brands nicely in the marketplace.
And that also is reflected in the way we operate the businesses from an expense perspective, with consolidation in many different areas.
So if you look at the profile of the Company, interestingly enough, since 2009, look at the growth profile, the Company has grown on a compounded basis by 14%.
The media networks have driven about 8% compounded a year, and the rest of the Company grew 23%.
So 8% a year is pretty strong.
23% is extraordinary.
14%, pretty damn strong, too.
I think that what that says is really, is that over the period of time, we've actually diversified our ability to generate growth and profitability, and that was very purposeful.
These investments that we made it Pixar and Marvel and in Lucasfilm, and the investments that we've made in our parks were designed for us to diversify our bottom line or our growth.
And that was not just across businesses, but really across the world, because a lot of these businesses are global in nature, unlike some of our media assets.
<UNK>, thanks for the question.
Operator, next question, please.
Thank you, <UNK>.
The way we buy back our stock, we do keep an eye on our intrinsic value.
So obviously, the amount of stock we bought isn't an indication that we believe that our stock is a great investment, and it is well below that intrinsic value.
The strength of the balance sheet does afford us a lot of flexibility, so we're able to react to these opportunities, especially when the market dislocates in our name or the market overall.
So we have taken opportunities to be aggressive so far this year, and we intend to do it going forward for the balance of the year.
Thank you, <UNK>.
Operator, next question, please.
You should think nothing but happy thoughts about this Company.
I don't know what else to say.
(Laughter) We're not going to give any guidance whatsoever.
We believe that we've distinguished ourselves in the media sector, not only with our growth these last number of years, but with the assets that we've collected and with the growth potential that we've created for this Company going forward.
And we will leave it at that.
I didn't take it as unfair, but as you know, we're not going to go there.
But I do think it's important ---+ and I don't mean to be too wordy ---+ but if you look at the profile of the Company, we have four businesses that are going to deliver growth for this Company, Parks and Resorts, Media Networks, the Studio, and Consumer Products.
And there was a time not that long ago where we were getting growth really from just a couple of them, and some, like the Studio, was somewhat lumpy in nature, meaning there were good years and there were bad, based on the slate.
I'm not suggesting that every year we grow, because there will be ups and downs in some cases, but they will be much flatter in nature, meaning you can expect that the bottom line contribution from the businesses will continue on essentially a more consistent basis than you saw in the past.
No, I don't think there's anything I can add to that.
Sorry.
Thanks, <UNK>.
Operator, next question, please.
Do you want to address that.
All right, Mike.
Thank you for the question.
Operator, we have time for one more question today.
Well, <UNK>, I think the context that I'd give you on that is, first of all, you've seen how we've successfully grown our advertising revenues.
And especially with the branded services and programming that we have, we continue to get a great response from advertisers, both on our linear channels and on new platforms.
So that looks good, and I think that trend will continue.
And I think we've discussed the affiliate side of the equation.
The only other thing to keep in mind is that as new sports contracts kick in, next year as an example, that will sometimes cause a shift in terms of how the growth is coming, but the overall growth story is in tact.
So I think that gives you what color is available there.
<UNK>, thank you for the question.
And thanks again, everyone, for joining us today.
Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website.
Let me also remind you that certain statements on this call may constitute forward-looking statements under the securities laws.
We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements.
Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.
This concludes today's call.
Have a great rest of the day, everyone.
| 2016_DIS |
2016 | SBSI | SBSI
#Thank you and good morning.
Welcome to Southside Bancshares' 2016 first quarter earnings call.
We had a very successful quarter to start the year, with net income of $13.5 million.
During the first quarter, we had $1.3 million recovery of interest income due to the payoff of a long-term nonaccrual loan and $2.4 million of gains on sales of securities.
These were partially offset by one-time expenses of $2.1 million related to an early retirement package for 16 employees and $325,000 related to an early termination of a lease.
Our diluted earnings per share for the first quarter ended March 31, 2016 were $0.54, an increase of 45.9%, compared to the same period in 2015.
We reported an $11.5 million increase in loans during the first quarter.
Despite the lower than anticipated first quarter loan growth, we continue to believe our loan growth during 2016 will be solid based on the healthy loan demand we are seeing, especially in the DFW and Austin markets and our existing pipeline of approved unfunded loans.
At March 31, 2016 our loans with oil and gas industry exposure totaled 1.23% of our loans.
At March 31, $5.7 million of our oil and gas industry loans were classified substandard with a 4% reserve.
We did not have any oil and gas loans in nonaccrual status at quarter-end.
Loan loss provision expense during the first quarter was $2.3 million, almost all of which was related to one large impaired commercial loan that has been classified nonaccrual for over a year.
Next, I will provide a brief update on the securities portfolio.
The securities portfolio decreased approximately $128 million during the first quarter, primarily due to the sale of longer duration, lower yielding US treasury notes and mortgage-backed securities, as long-term interest rates declined significantly.
The net result was the duration of the securities portfolio at March 31, decreased to 4.8 years from the prior quarter's duration of five years and the average yield of the securities portfolio increased 13 basis points on a linked quarter basis.
We anticipate continuing to utilize a barbell approach for our security purchases using US agency CMOs for the short end and treasury notes, agency CMBS and Texas Municipal securities for the longer end.
During the first quarter, our net interest margin increased 16 basis points to 3.51%.
When the net interest margin is adjusted for the one-time interest income due to the nonaccrual loan payoff, the net interest margin for the first quarter was 3.4%, which represents a five basis point increase on a linked quarter basis.
I also want to provide some purchase accounting accretion and amortization numbers for the first quarter.
For loans we recorded $956,000 of accretion, for securities we recorded $127,000 of amortization and for CDs and FHLB advances we recorded $385,000 of accretion.
This resulted in a net accretion recorded for the quarter of $1.2 million, compared to net accretion recorded last quarter of $1 million related to purchase accounting.
As part of the Board of Directors' approved stock repurchase plan, we were able to purchase approximately 443,000 shares of our common stock during the first quarter at an average price of $23 per share.
I will now turn the call over to <UNK>.
Thank you, <UNK>.
The first quarter was a strong quarter for the Company.
Early forecast indicated 2015 could be a marginal year due to merger related activities.
Fortunately the merger and subsequent integration was successful and 2015 became a hallmark year.
Our projections also indicated that 2016 had the potential to be an outstanding year if we executed our game plan.
Results from the first quarter are indicative that our projections were on target and that our team's execution was on the mark.
The price of oil continues to have an impact on all public Texas bank stock valuations.
Our exposure to the oil and related services is minimal and yet we have seen our stock price closely follow the price of oil.
It appears that regardless of our financial performance, because we are a Texas bank, we are tied to oil, for better or worse.
Fortunately, the markets where we operate have not been negatively impacted by the price of oil and they are continuing to experience job growth, population growth and a demand for new homes.
In addition, the supply of homes in all three markets is at historic lows and home prices continue to escalate, especially in our North Texas market.
Presently, there is no sign of an economic slowdown.
Expanding the franchise through acquisitions is still a consideration, but realistically, until stock valuations return to more normal levels and they are moving in that direction and price expectations are more realistic, merger and acquisition activity will be a challenge.
Our primary initiatives focus on growing the bank organically by expanding our deposit relationship with our customers and continuing our efforts to grow the loan portfolio.
The first quarter loan growth fell short of expectations, but our target remains 8% to 10% for the year.
Considering the health of our markets and the bank's financial position, 2016 could be an exceptional year.
We are now ready to take any questions.
Well, Brad, let me start and <UNK> can kind of clean it up what I mess up.
But in any event, our thought with the consultants is to have a hard look at all of the processes across the bank.
We felt now was a good time to do that, with the transitions through the merger, with OmniAmerican going so well, we found that some of our processes needed to smooth out and we really needed somebody to come in and take a look.
While they are doing that, they are looking to see how can we be more efficient.
Obviously, that's been a focus of ours for some time.
They are having good results.
We formed 10 or 12 teams of our people to dig into the process to look to see how we do business.
We feel like that, things are coming out from that.
We have seen several significant changes and more changes will be coming.
Hopefully we're moving to the best-of-breed, that's our focus.
And obviously, our focus is on the expense side, how do we sharpen that pencil and do a little bit better job there.
And I think we've made some good headway and we're beginning to see that results when we look at our efficiency ratio and the direction that it's been moving.
<UNK>, what would you add.
I know, I hit that from 30,000 feet.
Right.
And they have looked at some of the revenue side and I think they brought some good ideas on the fee income side, and so we expect to begin to realize some fee income increases probably beginning some of it slight in the second quarter, but heavier in the third and fourth quarter.
Exact numbers, we'll probably know better by the end of the second quarter.
And it could have a fairly nice impact on fee income.
And on the expense side, if some of the processes like on the loan process side, we're taking a look at that and we just needed to improve some of those processes.
We may actually need to increase expense a little bit there.
But in a lot of other places they've looked, we're going to be able to decrease expenses in a lot of those areas.
So overall, I think we're looking at an overall decrease in expense in the overall areas that they are looking at and a lot of that is coming together right now, and by the end of the second quarter, we should have a much better feel for the overall impact that that's going to have.
(multiple speakers) And we definitely can hold that for this quarter.
And I would anticipate it'll be lower in the third quarter.
And once the consulting fees roll out, it'll be considerably lower in the fourth quarter.
On the NIM, it really is going to come down to what loan growth, what occurs there.
And if we can have the loan growth occur and start funding some of these loans that have been approved, not have the payoffs in the second quarter that we had in the first quarter, then the NIM should continue to improve.
We did put some swaps on in the first quarter when rates hit a really low level.
So that did drive up some of our expense cost on the funding side.
But we think that some of those swaps are going to really pay some big dividends, because we put them on when rates hit almost the lows.
So it's one of those things where the NIM should begin to perform, because lower yielding securities will roll off, then the higher yielding loans will go on and the deposit costs will go up just a little bit, if the Fed increases rates.
If they don't, those deposit costs should stay fairly flat.
No.
Well, let me look here.
It had about $500,000 impact on the margin.
All in it was, in the first quarter, it was $4.5 million and in the fourth quarter it was almost $5.1 million and that's net of accretion.
You want just the amortization.
The amortization in the first quarter was $5.1 million, the amortization in the fourth quarter was $5,550,000 or $450,000 difference.
The reason we were buying the stock when we bought it was, it was accretive and I don't know, I will have to go run the math, but I don't think it's probably accretive at this point in time.
So I don't know if it's beneficial to the shareholders.
We look at indirect and our attorney has basically said, gosh, you are in Texas and for you to make the claim, when you're going to able to tell the readers what's indirect, you are taking a real risk there.
What we had included before was, we have an office building that's fully leased with some really solid tenants, one of which is one of the largest oil companies in the world and it's about a $16 million credit and it's an office building in Midland.
And so we were including that and I am trying to remember there was one or two other credits that we were including, but those were the type of credits that we were including.
And the other credits were fairly small.
That was the biggest that we were including.
All right.
Thank you very much.
We have had a very strong quarter.
We continue to focus on operational efficiencies, cost containment and revenue generating opportunities.
As we have said, our loan pipeline looks awfully good.
2016, as I said earlier, could be a very exceptional year and we look forward to it.
I'd like to thank all of you for joining us this morning.
| 2016_SBSI |
2016 | EV | EV
#Good morning and thank you for joining us.
For the second quarter of FY16 Eaton Vance reported adjusted earnings per diluted share of $0.48, a decline of 17% from the second quarter of FY15, and a decrease of 6% from the first quarter of the current fiscal year.
With operating expenses down about 1% in both comparisons, the earnings decline is attributable to lower revenues, which were down 8% year over year and 2% sequentially.
Although the Company continues to maintain positive organic growth, market movements, seasonal effects and lower average fee rates, driven primarily by changes in product mix, pushed revenues lower in the quarter, driving the earnings decline.
While we are never happy to report lower earnings, in other respects this was a strong quarter for Eaton Vance.
The performance of our managed funds and accounts continues to compare favorably to peer managers over multiple comparison periods.
At the end of April, 83% of our managed mutual fund assets ranked in the top half of their Morningstar peer groups on a one-year basis, and 82%, 79%, and 74% in the top half over 3, 5, and 10 years, respectively.
Top-quartile performance results were achieved by 49%, 44%, 47%, and 55% of managed fund assets over 1-, 3-, 5- and 10-year periods.
At the end of April, we offered 53 mutual funds rated 4 or 5 stars by Morningstar for at least one class of shares, including 21 5-star rated funds.
Our flow results for the second quarter were also comparatively strong.
On an overall basis, we had consolidated net inflows of $2.1 billion, which equates to a 3% annualized internal growth rate.
Excluding Parametric's lower fee and more variable Exposure Management business, we had $3.8 billion of consolidated net inflows and 6% annualized internal growth in the quarter.
Taking into account the different fee rates of mandates experiencing inflows and outflows, we realized annualized internal growth in advisory and administrative fee revenue of about 1% in the second quarter.
While 1% organic revenue growth is nothing to brag about, we understand that it compares favorably to what a number of other public asset managers are now reporting.
During the quarter, our consolidated assets under management grew to an all-time high of $318.7 billion, benefiting from the $2.1 billion of second quarter net inflows and $14 billion of market price appreciation during the quarter.
The market rally over the course of our second quarter enabled us essentially to recoup the $14.1 billion of managed assets that we lost in the first three months of our fiscal year due to unfavorable market action.
Second quarter average managed assets were roughly flat versus the first quarter.
Digging into the net flow detail, the biggest contributors to our positive net inflows this quarter were Parametric's portfolio implementation mandates at $2.8 billion, and Engineered Alpha Strategies at $600 million, and Eaton Vance management's municipal bond funds at $1.6 billion, and high yield bonds at $1.3 billion.
Second quarter net outflows were concentrated in three areas: Parametric's Exposure Management with net outflows of $1.7 billion, floating rate bank loans with net outflows of $1.2 billion, and Eaton Vance Investment Council with net outflows of $800 million.
The outflows from Parametric Exposure Management reflect reductions in overlay positions by existing clients rather than losses of client relationships.
The ease and low cost with which market exposures can be adjusted up or down is one of the attractive features of Parametric's Exposure Management offerings for the large institutions that utilize this service.
But it's also a source of variability in our consolidated asset flows.
In some quarters, this variability works to the advantage of our reported flows.
In the second quarter of FY16, it went the other way.
As mentioned, we saw net outflows of $1.2 billion in floating rate bank loan mandates in the second quarter.
Although improved from $1.5 billion of net outflows in the first quarter, we continue to be disappointed by the persistent outflows and AUM declines we've experienced in bank loans over the past two years.
Our performance record and reputation as the leading bank loan manager remains intact, so that's not the issue.
The problem is that the bank loan asset class has been out of favor, especially with retail investors.
Over the past eight quarters, we've seen over $11 billion in net outflows from our US retail bank loan funds, including $700 million in the recently concluded second quarter.
But we believe our bank loan business is in the process of turning around.
As we see it, loan investments are an attractive source of high floating rate income and portfolio diversification.
Unlike fixed income investments, floating rate bank loans are positioned to increase their payouts as short-term rates increase, and are not subject to rate-driven price declines as interest rates move up.
Because most bank loans are senior and secured, they're less exposed to credit risk than other debt obligations of the same issuer.
With market attention now again focused on the prospect of Fed action to raise short-term rates, we believe the bank loan category and our bank loan business could be poised for renewed growth.
This past week, I served as Chairman of the General Membership Meeting of the Investment Company Institute, which is the largest annual gathering of investment industry executives.
In my remarks to open the meeting I discussed the challenges now facing the asset management industry, including the shift in investor demand from active to passive strategies, pressures on investment management fees, growing regulatory uncertainties, and compliance burdens and rising costs.
The broker-dealers that are our major distribution partners face their own regulatory issues following the enactment of the new Department of Labor rule establishing a fiduciary standard for investment advice to covered retirement accounts.
While aimed at financial advisors, not investment managers, the DOL fiduciary rule is widely expected to lead to significant changes in how funds and other investment products are used in the future.
In this period of disruptive change in our industry, every investment manager is being forced to consider how to respond.
Our strategy has four primary elements.
First, we are not willing to concede that we can't grow our traditional active business.
At the end of April, we managed $70 billion in actively managed US mutual funds, giving us about a 70 basis-point market share in a $10.7 trillion market.
Industry-wide, new sales of active mutual funds currently run about $2.6 trillion annually, and which our sales represent just less than 1%.
Given the favorable performance of many of our leading strategies, the strength of our distribution, and our tiny market share, I see no reason why our active fund sales cannot increase substantially from current levels, even in the face of a weak overall market.
As we have said before, we view traditional active management is now a game of winners and losers, with Eaton Vance' s performance in distribution strengths positioning us to be a winner.
We continue to devote significant sales and marketing resources to growing our high-performing active strategies.
Our second strategic initiative in the active management space is our sponsorship of NextShares' exchange-traded managed funds.
As a reminder, NextShares are a new type of fund that, for the first time, combine proprietary active management, with the convenience and potential performance advantages of exchange trading.
Our NextShares solutions affiliate hold patents in other intellectual property rights related to NextShares, and is seeking to commercialize NextShares by entering it into licensing and service arrangements with fund sponsors.
In late February, we launched the first ever NextShares fund, Eaton Vance Stock NextShares, which was listed and began trading on NASDAQ on February 26.
That was followed by the launch at the end of March of two more NextShares funds, Eaton Vance Global Income Builder and Eaton Vance TABS 5-to-15 Laddered Municipal Bond NextShares.
Our goal in launching the funds is to gain live experience and to demonstrate the investment and trading performance of NextShares funds of different types.
Results so far are consistent with expectations.
Although the funds are available on a limited commercial basis, primarily through online broker-dealers, Folio Investing and Folio Institutional, we do not expect significant flows into NextShares until we gain broader distribution.
Our first step in that direction was the announcement earlier this month that Interactive Brokers Group intends to offer NextShares through its investing and trading platforms.
Interactive Brokers is a global electronic broker that provides financial professionals and investors with state-of-the-art trading technology, superior execution capabilities, and sophisticated risk management tools.
Interactive Brokers views NextShares as a gateway product to boost their position as an RA platform provider.
As a relatively new entrant to that market, IB is not encumbered by concerns about cannibalizing legacy offerings.
As I have discussed in past calls, broadening access to NextShares to include major fund distributors is critical to near-term commercial success.
Significant progress continues towards that goal.
Since the publication in March of the final Department of Labor rule adopting a fiduciary standard for advice to covered retirement accounts, our conversations with broker-dealers are increasingly highlighting the potential role of NextShares in helping advisors address their heightened responsibilities as fiduciaries under the DOL rule.
In a couple of respects, NextShares may be ideal vehicles for delivering proprietary active management in a fiduciary environment.
First, we expect NextShares to be the lowest-cost and highest-performing format for proprietary active fund strategies.
As exchange-traded products operating much like traditional ETFs, NextShares can substantially avoid the transfer agent fees, floor-related trading costs, and cash drag effects that can meaningfully reduce active mutual fund returns.
Second, unlike mutual funds, NextShares are exempt from the security law restrictions that now inhibit a broker-dealer's ability to level set commissions and other payments it receives on funds of different sponsors.
By minimizing the conflicts of interest and perceived conflicts that may arise from offering similar funds at different compensation levels, broker-dealers may reduce the potential litigation risk they face in connection with the new fiduciary standard.
As financial intermediaries come to better understand the implications of the DOL fiduciary rule for their business, we expect interest in NextShares to continue to rise.
On an overall basis, we are pleased with our progress on NextShares.
We now have funds in the market demonstrating that the structure works.
We have a broad consortium of fund sponsors preparing to offer their own NextShares, and we continue to move forward on the distribution front.
It remains our belief that if we succeed in achieving broad distribution, NextShares can transform how actively managed funds are delivered.
Our third major strategic initiative is what we call Custom Beta, which are rules-based separately managed accounts offered to retail and high net worth investors.
Our Custom Beta line-up encompasses Parametric Tax Managed and Non-tax Managed Custom Core Equities, and EVM Municipal Bond and Corporate Bond Ladders.
Our Custom Beta retail and high net worth separate account assets under management now exceed $38 billion and have grown more than 50% over the past 18 months.
Value-added elements of our Custom Beta offerings include: direct holdings of securities, which permits portfolios to be customized to fit client needs and preferences; lot level tax management and the pass-through of realized losses; and for bond strategies, ladder portfolio construction and ongoing credit oversight.
An additional selling point is that positions can be funded in kind, which can meaningfully reduce transition cost and taxes for clients.
From an Eaton Vance perspective, there are two attractive elements of our Custom Beta business.
First, Custom Beta products are well-positioned for an environment in which a growing percentage of investors and advisors prefer passive and rules-based strategies.
That's exactly what our Custom Beta strategies deliver, with distinctive value-added elements that distinguish them from index funds and ETFs.
Another attractive aspect of Custom Beta for us as an investment investors is stickier assets and lower client turnover.
Investors and advisors interested in performance chasing aren't Custom Beta customers.
Although our Custom Beta business is now sizable, we believe it remains at an early stage of development and we see accelerated growth opportunities continuing for a long time to come.
Our fourth area of strategic focus is becoming more global.
I don't know exactly what the right mix of US versus non-US business is for us, but I doubt that it's sourcing roughly 95% of our managed assets from the 5% of the world's population that lives in this country, which is where we are today.
In addition to owning 49% of Montreal-based global equity manager Hexavest, Eaton Vance operates internationally from offices in London, Sydney, and Singapore.
This month we moved to new space in London that increases our footprint there by about two-thirds to accommodate a growing staff that now includes both global equity and global income teams.
We are now investigating how best to service our growing Japanese business and may add additional resources to support that effort.
And we have a search underway for a new Head of non-US Distribution.
As our investment capabilities grow more global, it seems natural to focus more attention on serving clients in international markets.
While it is unlikely that we'll do something dramatic, the changes afoot in the US market lend greater urgency to our desire to make Eaton Vance a more global Company.
As a final topic before turning the call over to <UNK>, I want to spend a minute on yesterday's announcement that Eaton Vance has acquired a minority equity interest in SigFig, a leading independent business-to-business focused wealth management technology and robo-advising firm based in San Francisco.
SigFig is an emerging leader in the rapidly developing enterprise wealth management technology market and has recently announced a series of partnerships with banks and wealth management platforms including UBS and Pershing.
These companies are partnering with SigFig to apply state-of-the-art digital technology to enhance the investment experience they provide their advisors and clients.
We expect SigFig technology to soon be supporting many of the same financial institutions that are Eaton Vance's most important distribution partners.
SigFig's focus on cost and tax-efficient investing is also well-aligned with our NextShares and Custom Beta initiatives.
By investing in SigFig, and me joining their Board, Eaton Vance gave the seat at the table in the development of the tools that will guide the future of investment advice.
If SigFig can achieve success and realize its commercial potential, we see both significant direct financial rewards and indirect rewards for Eaton Vance.
While we have no plans to make minority investments in development-stage companies, a regular part of our strategy, we felt this opportunity was too important and too attractive for us to pass up.
That concludes my prepared comments and I'll now turn the call over to <UNK>.
Thank you and good morning.
We're reporting earnings per diluted share of $0.48 for the second quarter FY16 compared to $0.58 for the second quarter of FY15 and $0.50 for the first quarter of FY16.
Adjusted earnings per diluted share equaled GAAP earnings per diluted share in the second quarters of 2016 and 2015, and exceeded GAAP earnings by $0.01 per diluted share in the first quarter of FY16 to reflect an adjustment in the value of noncontrolling interest in our affiliate, Atlanta Capital Management.
Although average managed assets of $309.5 billion for the second quarter were up fractionally from the prior quarter and up 2% over the year-ago quarter, second-quarter revenue decreased 2% sequentially and 8% year over year.
The 2% sequential decline in revenue is primarily attributable to two fewer days in the second quarter.
The 8% decline in revenue year over year reflects lower average managed assets in certain high-fee franchises, most notably floating rate bank loans in emerging market equities, offset in part by growth in lower-fee franchises, including Exposure Management, portfolio implementation, and bond ladders.
In the second quarter, aggregate net outflows from our higher-fee strategies abated, with emerging market equity flows turning positive.
Ending assets under management were $9.2 billion higher than average assets under management for the second quarter; which, together with two more fee days in the third quarter, should provide a nice tailwind to next quarter's sequential revenue comparison.
Product mix continues to be the most significant determinant of our overall effective investment advisory and administrative fee rate, although swings in performance fees and the number of fee days in the quarter can also contribute to short-term variability.
As you can see in Attachment 10 to our press release, our average annualized effective investment advisory and administrative fee rate, excluding performance fees, declined to 36 basis points in the second quarter of FY16, from 37 basis points in the first quarter of FY16, and 40 basis points in the second quarter of FY15.
Within investment mandate categories, average effective fee rates for fixed income declined both sequentially and year over year, primarily reflecting strong growth of lower fee municipal and corporate bond letter assets.
Effective fee rates in the portfolio implementation category were similarly affected by strong growth and lower fee centralized portfolio management mandates.
Performance fees had little impact on quarterly comparisons, as they were negligible in all three quarters presented.
In the quarter, we realized 1% annualized internal revenue growth despite continuing net outflows from bank loans and certain other higher-fee strategies.
Although strong growth in lower-fee franchises will likely continue to exert downward pressure on our overall average fee rates going forward, we believe we can sustain positive organic revenue growth if outflows from higher-fee strategies continue to abate as we expect.
Our operating margin was 30% this quarter, substantially unchanged versus the first quarter, but down from 35% in the second quarter of FY15.
The year-over-year decline in second-quarter operating margin reflects the math of an 8% decrease in revenue and 1% lower expenses.
I'll forestall some of the questions regarding margin guidance for the remainder of the fiscal year by saying that we do see opportunities for modest margin expansion, given the higher managed assets today than what we averaged in the first and second quarters, and continuing tight control over discretionary spending.
By modest, I mean 1% to 2%, but that guidance is made in the context of flat markets for the remainder of the fiscal year.
Approximately 45% to 50% of our total expenses are variable, driven by managed asset levels, gross sales, or operating income.
So there are a number of factors that can dampen margins no matter how disciplined we remain in terms of our discretionary spending.
Shifting from revenue to expense, compensation expense declined 1% sequentially, primarily reflecting modestly lower incentive compensation accruals and a decrease in other compensation expenses, including severance and signing bonuses.
Compensation expense ticked up 1% from the second quarter of FY15, driven in part by hiring to support strategic initiatives.
Year-over-year increases in compensation expense to support these initiatives were partially offset by lower incentive compensation accruals.
Compensation expense increased to 38% of revenue this quarter from 37% last quarter and 34% in the second quarter of FY15, mostly as a function of the decline in revenue.
Controlling our compensation costs and other discretionary spending remains top of mind, given the revenue headwinds we're facing.
We remain committed to investing for growth despite these headwinds, but are aware of the cost levers that we can pull if necessary.
Variable distribution-related costs, including distribution and service fee expense, and the amortization of deferred sales commissions declined with the decrease in related distribution service fee revenue.
Other operating expenses were unchanged from the first quarter, but up 5% from the same period a year ago, primarily reflecting increases in information technology and professional services.
Expenses related to our NextShares initiative totaled approximately $1.9 million for the second quarter of FY16, compared to $1.8 million in the first quarter of FY16, and $1.8 million in the second quarter of FY15.
Net income and gains on seed capital investments contributed just under $0.02 to earnings per diluted share in the second quarter of FY16, a $0.01 in the first quarter of FY16, and were negligible in the second quarter of FY15.
Quantifying the impact of our seed capital investments on earnings each quarter, we take into consideration our pro rata share of the gains, losses, and other investment income earned on investments in sponsored products, whether accounted for as consolidated funds, separate accounts, or equity method investment; as well as the gains and losses recognized on our derivatives used to hedge these investments.
We then report the per-share impact, net of noncontrolling interest expense and income taxes.
We continue to hedge the market exposures of our seed capital portfolio to the extent practicable to minimize the effect on quarterly earnings.
Equity and net income of affiliates contributed $2.4 million in the second quarter versus $2.5 million in the prior quarter, and $3 million in the second quarter of 2015.
This primarily reflects the Company's 49% position in Hexavest.
Excluding the effect of CLO entity earnings and losses, our effective tax rate for the second quarter of FY16 was 38.7%, as compared to 38.4% in the first quarter of FY16, and 37.6% in the second quarter of FY15.
We currently anticipate that our effective tax rate, adjusted for CLO earnings and losses, will be approximately 38.5% for FY16 as a whole.
In terms of capital management, we repurchased 2.1 million shares of non-voting common stock for approximately $70.7 million in the second quarter of FY16.
Over the past four quarters, we've repurchased 8.8 million shares for $303 million, driving our average diluted shares outstanding for the quarter down by 5% compared to the second quarter of FY15.
Shares outstanding of 113.9 million at the end of this quarter are down 4% from the 117.9 million reported a year ago, and down 1% from the 115.2 million reported on January 31, 2016.
We finished the second fiscal quarter holding $432.8 million of cash and short-term debt securities, and approximately $280 million in seed capital investments.
Our outstanding debt consists of $250 million of 6.5% senior notes due in 2017, and $325 million of 3.625% senior notes due in 2023.
We also have a $300 million, 5-year line of credit, which is currently undrawn.
Given our strong cash flow, liquidity, and overall financial condition, we believe we're well-positioned to continue to return capital to shareholders through dividends and share repurchases.
This concludes our prepared comments.
At this point, we'd like to take any questions you may have.
Sure.
I guess I would say two things.
One is, we've had pretty good performance, both on an absolute basis and relative through the end of April.
I think there's something like 4% returns in our bank loan funds, which are pretty good.
Sometimes these are ---+ although these are not cash investments, sometimes they're compared to cash returns and certainly, that's a much more attractive return than people are earning today on cash investments, that's number one.
The other factor, which I think is ---+ maybe gets too much emphasis but is ---+ it's certainly been important over time is the rising expectation for short-term interest rates.
So you own a fixed income fund when interest rates move up.
Your income is unchanged, generally, and you're subject to loss of principal value due to duration effects on the value of the bonds.
With a floating rate investment like a bank loan, it works the opposite way, which is that because there's essentially no duration here in floating rate assets, you don't get the negative effect on valuation but you get the positive impact on distribution rates, on income rates.
So two things.
Strong performance of late, I would say, and the rising expectation for another round of interest rate increases sometime between now and the end of the year.
Sure.
The two areas that have really hurt us over the last, I'll say, maybe six to eight quarters have been emerging market equities and bank loans.
And as I talked about in my remarks, those have primarily been asset class effects, not issues related to Eaton Vance performance or other issues related to changes in our team or changes in our strategy.
In both cases, things are looking much better.
We actually had modestly positive, just barely positive flow ---+ sorry, net flows in emerging market equities for the quarter, but that's a significant improvement from where we were just a couple of quarters away ---+ ago.
That's a nice fee rate asset class.
The second one, which we just talked about, is bank loans which I said in my prepared remarks, about $11 billion of net outflows over the last eight quarters.
We'd like to think that's coming to an end.
You see it in better flows, retail in the US and I think if you just look at the industry data that comes out, I don't know what you look at weekly or monthly, you'll see a much improved tone to bank loan fund flows.
So those would be the two primary things.
The other thing is we did have, as I mentioned, about $800 million in outflows from our Investment Counsel business which is our in-house Investment Advisory business.
That, we view that as one-time nature, one in time in nature and was related to the departure of two people from that organization.
So that's ---+ our optimism for flows is really primarily focused on emerging markets, bank loans and this one-time event in counsel.
Talking more generally about pipeline, an area of strength for us, just a few to tick off.
One has been Eaton Vance High Yield, which has been really a product in the sweet spot with a team that's been in place for over 20 years, very strong performance, good risk characteristics, where we're starting to see some fairly meaningful success there and a good building pipeline.
If you talk to our institutional sales team here in Boston, that's an area that's one that they're focusing on.
Parametric, across a wide range of strategies, is doing well.
It's seeing lots of interest in their ---+ in what we call Engineered Alpha strategies.
The growth product continues to be what they call defensive equity which is, essentially, an options-driven hedged product that they offer to institutions.
They also have a growing business in Australia, where we've got some pending flows in what they call Centralized Portfolio Management, which is essentially where institutional investors turn over the implementation of their portfolio trading from a disparate group of individual managers to having those managers submit models to Parametric, and have them implement the trades.
And there's a building pipeline there as well with a notable win that we expect to fund in the third quarter.
But generally, business is pretty good.
We have positive flows, positive pending flows, really, across most of our ---+ most, if not, all of our subsidiaries.
I should add Atlanta Capital Management is an area where we saw some outflows last year, some performance-driven effects but ---+ in their growth team.
That's largely been addressed and flows there have moderated.
But the other thing that's happening there is that we're starting to see stronger institutional interest in their, what they call, Special Equities ---+ sorry, Select Equity strategy, which has about, I think, an eight-year track record but really outstanding results and is a focus-type large and mid-cap equity strategy with strong performance that's, up to now, about $600 million in assets and potentially, in a position to see accelerated demand.
Sorry, the pauses in adoption of the Department of Labor initiative, you mean.
We don't think so.
We view that the Department of Labor initiative and the fact that they've got these pending deadlines of whatever it is, March or April of next year, and then the end of 2017, to really convert their business over to a, at least in some parts of the business, a different way of operating.
It's not a hard argument to make to people that NextShares fit very well with this new world and can be a solution to some of the problems they face.
We're viewing it and I think the broker-dealers are viewing this as an added incentive to take a look at NextShares as opposed to a reason to defer looking at it beyond the implementation.
If this were ---+ if there were no connection between NextShares and Department of Labor, given the focus there is on ---+ within broker-dealers on ensuring compliance, maybe that could be a rationale for deferring looking at NextShares.
But we see it as the opposite, where broker-dealers are likely to be more interested in NextShares.
It has been helpful to conversations to make that connection with broker-dealers.
Well, let me ---+ I'll try and address those in order.
In terms of margin, as we noted, we came in at 30% this quarter.
When I said the 1% to 2% I would say as we're looking forward, if you look at what we anticipate we might see in the third quarter, we would be ticking up somewhere between 31% and 32% on flat markets.
That's our current expectation, again, a lot can happen and a lot can happen in terms of what happens in overall operating income, what happens in terms of sales, in terms of market.
So there are things that can push us around, obviously.
But in current conditions, we would anticipate seeing a 1% to 2% uptick in relation to where we were in the second quarter.
In terms of the non-op CLO, the consolidate ---+ we have one consolidated CLO entity at this point and it's just whatever happens within that entity ultimately flows through.
So there's ---+ it's just ---+ there's just noise.
But if you look at where we actually cordon off as CLO activity, net and then down at the bottom obviously, most of it, if not, definitely the majority comes out through the noncontrolling interest.
So there's not a lot of net impact in terms of the operations of the CLO entity.
Pretty much what falls to the bottom line is our management fee and then a modest, our modest portion of our investment income associated with our investment.
Outside of that, in terms of our gains and losses on other investments, we were ---+ when we've been running at roughly a $0.01 a quarter.
We were just over a $0.01 this quarter, so it's just south of $0.02.
There's really been no significant change there.
Okay.
So let me just make sure I hit on everything.
If I miss something, maybe one of these guys can remind me.
But there's mutual funds versus separate accounts, we had positive ---+ not by much, but we had positive net flows into mutual funds in the current quarter, which you can think of as flows into areas like high yield, we have a strong balance fund, our 5 star SMID-Cap Fund, munis, we had good fund flows.
Those things were substantially offset by outflows from primarily bank loans.
So trending positive there.
And I would say that probably the biggest swing factor in, as I see it, in our ---+ turning that mutual fund number strongly positive is really probably in bank loans which is turning negative bank loan flows into what I think, pretty quickly, could turn positive.
Obviously, there are other factors there with, I mentioned 21 or 22 5-star rated funds.
Some of those are niche products, state specific munis, as we have a number of those in that range.
But we have quite a few broadly based funds that are today positioned to gain market share and sell, as I tried to address in my remarks.
There are $2.7 trillion of money in motion invested today in actively managed funds.
That's not active to passive.
That's sales of active funds.
On an overall basis, the active fund business is shrinking by about 2% a year, just net flows divided by beginning of period assets.
But that still creates enormous opportunity for fund sponsors that, as we do, have a broad base of distribution and have a broad menu of high-performing funds.
If we had 25% market share, it would be very hard to do, very hard to outrun a negative asset, a negative business, but with less than 1% market share, we feel we've got excellent opportunity to continue to grow in that, even though as we see it, flows will continue to move from active to passive on an overall basis, at least until something happens to change the relative performance dynamic that we've seen over the last few years.
So our mutual fund business, which is essentially all active business, has been trending positive, trending better, was positive in the current quarter and my baseline expectation would be that it will continue to trend positive with the biggest swing variable and likely to be the performance of bank loans in a flow sense.
In our separate account business, you touched on a couple of areas.
One is exposure management, the other Portfolio Implementation.
The Exposure Management, let me just maybe spend a minute talking about what this is.
So this is sold to large institutions, a service sold to large institutions where Parametric provides an overlay, so that if they have more cash in their portfolio than they would like, they arrange with Parametric on a systematic basis to put that cash to work synthetically using derivatives.
And it's a growing opportunity.
There are only a couple of major players in that business.
It was a business that was bought by Parametric in ---+ at the end of 2012.
We've essentially doubled the business since then.
We've expanded our roster of institutional clients.
The penetration of that market, we believe, is still quite low; just the number of large institutions that are using this is relatively limited.
And we see continued growth there with some volatility quarter to quarter, as positions are added and subtracted.
As we talked about in this quarter, it worked against us but the underlying trend of client flows and new business, net new business remains strongly positive for that business.
Portfolio implementation is a category that includes both institutional and retail and high net worth within that.
Actually, I think this is different than your question, <UNK>, but it's primarily driven by individual investors, not by institutional.
And this fits in with our Custom Beta product offering that I talked about, which is growing quite strongly, where Custom Beta, which again, is Parametric tax-managed separate accounts and non-tax managed separate accounts customized in different ways, plus Eaton Vance Managed Corporate Ladders and Municipal Ladders.
Those are sold into our traditional broker-dealer relationships and then sold also on a direct basis to the RAA marketplace and the multi-family office marketplace.
There what we're doing is essentially competing against index funds and index ETFs.
What we're saying to the client or saying to the financial advisor, we can provide index-like or benchmark-like returns but with customization to take into account other holdings that the investor might have, social objectives or social screens that the manager wants to impose, and the ability to achieve better tax treatment because in a separate account, you can manage taxes down to the individual lot level and you can pass through losses.
So it's a very powerful message.
It's resonating with financial advisors.
We have a large and growing business with most of the major wirehouse firms on the retail side.
And we have a growing business, also, serving registered investment advisors and family offices, as I mentioned.
Assets there are up about 50% to the current $38 billion over the last six quarters, so growing nicely.
What we're really identifying is a key growth franchise for us on the passive side of the business.
So think of Eaton Vance as, before, straddling the active/passive divide.
Most of our traditional business is active management.
We think we can grow there based on strong performance by using NextShares to differentiate us and to enhance performance based on a more efficient structure.
But then also on the passive side, growing through this Custom Beta suite of products as well as the broader capabilities that Parametric offers institutions, including Exposure Management.
The cost of what, exactly.
So we've talked in past calls about implementation cost and the fact that Eaton Vance has said that we would, with early adopters, that we would be willing to pick up their cost for becoming distributors, again, early adopters.
We've disclosed that we did that in the case of the Folio arrangement.
Maybe not in all cases, but we would expect the first few arrangements that we would, again, do that.
The cost is six figures, we think, generally, low six figures, maybe more than that for firms that have bigger, more complicated operations.
But it's something that we believe we can fit within the ---+ our existing budget parameters for NextShares.
On top of that, with some lead partner arrangements, there may also be other incentives to compensate them for their internal training cost but those aren't things that have been necessarily committed to at this time.
Yes, this is <UNK>.
We don't tend to give strict guidance in terms of what we anticipate we're going to buy back in the next quarter.
I think that we would say, as we have in prior quarters, that we anticipate we will continue to be active in the market.
We're on a ---+ we obviously had a slightly accelerated pace in the first two quarters of this year compared to last year.
I don't think at this point, we'd be willing to give any additional guidance outside of the fact that we intend to be in the market, as we have been in prior quarters.
Sorry, for non-Eaton Vance sponsored products.
So the only one that's been announced, which you probably know, is Waddell Reed ---+ Waddell & Reed, as ---+ or Ivy Funds, has announced plans to launch, I believe, it's three funds in an August time frame.
And we're certainly supportive and encouraging of that effort.
I would say beyond that, we have, I guess it's 10 other fund firms that have received exemptive relief to offer NextShares and there's, I would say, a longer list than that of firms that expressed interest if, and this is always the big if, if distribution emerges.
And to see significant progress in additional firms offering NextShares, we'll need to see progress in terms of at least announcements of other distribution arrangements.
As it is now, we're happy to be working with Folio and supporting the existing three products.
But they're a relatively small company.
They don't have a big distribution footprint at this point.
And that's not much of a lure to other fund companies to go through the process of training their sales organization and launching new products.
As we've said before, the key to success is gaining distribution access and that continues to be a primary, if not the primary, focus for us with our NextShares initiative.
| 2016_EV |
2015 | MSCC | MSCC
#Certainly.
We assess capital very proactively in terms of what the demands on the business are, and certainly we see with the attractive valuation that the stock buyback is the number one thing for us now.
However, we do have debt, we understand that, we will manage the debt as we go forward as well with the expectation of paying it back within its term.
And we also have a target to be below 3.0, which is where we're at right now exiting this current quarter on October 1, because we actually see a price reduction in our term loan A debt and we'll save 25 basis points on that.
So we're going to make sure that we get below that level, which we will be at through natural EBITDA growth.
But that could be a consideration also in terms of our use of cash.
And of course we're an acquiring company, and M&A is always there to take a piece of the money as well.
Yes.
Well, the wireless CapEx is still soft in China, that hasn't changed.
We're seeing similar to most of our peers.
But the real highlight is again the broadband gateway, extremely strong not only in China but pretty much worldwide.
We're one of the few, I think, but communications is going to be up for Microsemi.
We have a tremendous amount of new products, we have a lot of design wins, and for us it's a market depth position for growth stability and good cash flow contribution.
They're all looking pretty attractive.
I think most recently, because Boeing came out so bullish ---+ aerospace, we worked diligently on our positioning and new product introduction, into the aerospace marketplace.
I would take it back to a product area.
I couldn't be happier than I am with the RFPGA SoC group with the strength of their new product and generation product, design wins in all of our markets.
Communications, I think we touched on it two or three times, bullish on communications.
Again, very, very proud of our markets, defense, and I'll wait for 2016 for satellite.
So at the end of the day, most all of our markets are built for growth stability and cash contribution, which they should be.
Thank you.
<UNK>, you want to jump on a capacity question.
So specifically, we've had to increase some foundry capacity to get additional wafers.
We've got some proprietary high-voltage processes that put us in a very unique position in our broadband gateway market.
So communications definitely benefiting from that.
We saw ---+ definitely saw, the upside in demand there.
That has since the spending shifted a little bit from foundry capacity, putting that in place, to more test capacity, putting that in place and reducing some of the costs associated with the tests to get that [whipped] through the channel.
So mainly that's the area, and then of course, every time we launch new product, it takes some of our FPGA platforms, new packages with higher speed testing.
Some of the capacity is going to support some of those programs that have been captured and scheduled to launch to production with our customers mid next year.
It's pretty broad.
If you look at it, this is a technology partner place, so we work very, very closely with other chipset vendors, the who's who there we're working with.
It's multi-continent, so it's not dependent on any one particular territory.
It does appear, all the wireless infrastructure softness that people are seeing, there seems to be a wholesale shift from wireless to more endpoint broadband wireline bandwidth.
And so we're benefiting from that greatly.
The nice thing there is, the entire network is starting to change in terms of architecture.
And it's got some nice implications not just from the position that we have today but in some of the adjacent product categories that were up-and-coming, timing, POE, there's now reversed power feed for [GDOT band].
It's got a number of different areas that get us excited for the future.
Yes, what you're getting is a good solid long lead time of good margin products.
The aerospace as we mentioned was up 5% sequentially, 16% year over year.
I see that actually strengthening going into the second half of the year.
And, what we're really waiting for to double down, as we would call it, is the satellite business.
And we see that slightly strengthening through September/December quarter, but we're looking forward to a strong 2016.
Yes, sure.
(Inaudible) power radio in the medical business, we did mention the oil-related business which is headwind for those of you ---+ for headwind.
But the medical business is certainly recovering and balancing that off the industrial.
As a reminder, it was 2% sequentially and down 2% year over year.
So I think if we go year over year, we could call it kind of flattish, I'd be a happy CEO.
Thanks for joining us today and have a great day.
| 2015_MSCC |
2015 | MD | MD
#Good morning, <UNK>.
Well, we think that there will always be opportunity to do both.
We definitely want to move more towards the definitive read world.
But we think there are always going to be opportunities for both our percentage of definitive is increasing, and we expect that we will continue down that path.
Well, birth ---+ admissions to the NICU are always going to be a percentage of birth.
So as births go up, you can expect this maybe 10%, 11%, 12% admission to the NICU.
So as births go up, NICU admissions are going to go up.
Neonatal abstinence syndrome is a big contributor to that.
I also think that if you ---+ if you know anything, if you follow what's going on in obstetrics, hospitals have gone to in-rooming their babies with their mothers.
And so the old concept of a nursery with 20 kids in it, that the nurse was feeding and taking care of, that ---+ that's probably gone in most, if not all, places across the country.
And what that means is there are more ---+ there are always babies now staying with their mother.
And that makes the pediatricians nervous because if anything happens to a baby while they're in the room with the mother, the mother is not likely to pick up on it.
If the baby whatever turns a little blue or ---+ And so I think there is less tolerance from the pediatricians to leave these babies rooming in with their mothers.
And at the first sign of any change in the baby, they're likely to want to admit the baby.
So the only place we can admit them is the level 2 neonatal NICU.
Perhaps if that baby was in the nursery with all the fat eight bound babies around and the baby turns a little blue the nurse knew enough to not worry about it or to at least tell the pediatricians, reassure the pediatricians that the baby was okay, et cetera.
If that happens in a room with a baby and the mother, chances are that baby's going to end up in the neonatal ICU.
Yes.
No.
We continue to grow that program very nicely.
And it's all ---+ it's not acquisitions.
We may at this point be the largest group of pediatric or of OB hospitals in the country and all of that growth is organic.
There hasn't been any acquisitions.
I think we ---+ <UNK>, what did we get, ten of those.
Ten of those programs across the country so, yes, it continues it grow.
That's a nice ---+ a nice area of growth for us as well.
Yes.
No, I'm not saying artificial.
I'm saying that in the old days, there was a nursery with some newborn nursery nurses who had experience caring for these babies and who could identify ---+ there are babies that do well for the first 12 hours and then something happens, and they end up when their (inaudible) closes, they end up in the NICU.
And so there are a number of admits to the neonatal intensive care unit that come not from the delivery room but from the NICU when the baby develops infection or sepsis or something and it takes time for those symptoms to express themselves.
That ---+ when the baby is in a regular nursery with nurses who know had they're doing who have been taking care of these well babies for a long time, the nurses are able to pick it up immediately and to determine, make the call and get the baby taken care of.
When that happens in a regular room with a mother who is not used to seeing sick babies and transitional babies, et cetera, it's likely to be a while before it gets picked up.
And what I'm saying is that some of these admissions are cautious pediatricians who recognize that if there is any ---+ if there are any of these symptoms that happen while the baby is rooming, they're not going to take any chances and say, well, let's wait three hours and see how the baby proceeds.
They're going it say let's get the baby into the step down the level 2 nursery, not the level 3 NICU but let's get the babies to the step down nursery and make sure he gets monitored and we've got somebody looking at the child who knows what ---+ what they're doing.
I think some of the admissions are allowed.
The question was why the increase in admissions, and they said was it all related to do neonatal abstinence and I said no I think births are going up, and admissions are a percentage of that, and neonatal abstinence is a percentage of that, and I think that this also may play a role.
No.
We're definitely changing our marketing patterns, and we have definitely had a number of conversations with not just one, with our hospital partners.
And so, yes, we are looking to be a solution for our hospital partners for whatever problems they might have.
And you probably heard me say in the past that we have three pediatric surgery practices and one pediatric GI practice, et cetera, and those are just a reflection of some of these conversations that we're having with our hospital partners.
Yeah.
Good morning <UNK>.
So commercial pricing has been pretty challenging over the last, I don't know, couple years already.
So that continues to be the case.
But this ---+ this quarter was specifically related to lack of having that favorability because we had a big favorability in the last quarter.
So that was pretty much it, as well as, obviously, the parity decline.
So for the third quarter historically there is a slight increase in payor mix, not really that ---+ that large.
So there could be.
But given that we had such an increase in the second quarter, we're not expecting that to be so ---+ so drastic.
But, again I keep cautioning about payor mix because it has been something that has been volatile over the last years.
So we have ---+ we have in your guidance, as I think somebody ---+ somebody else had asked <UNK> the drivers of the same unit, a big chunk of it is volume and less on pricing similar to what you saw on Q2.
Thank you.
Yes.
I mean I don't know that I would say for all of the ASEs, but certainly for most of them depending upon the hospital contracts.
If the hospital owns a couple of ASEs, we are very likely to have those ---+ the coverage of those ASEs.
Now if there's a hospital ---+ if there's a hospital system that has six hospitals within a community and we're providing coverage in four of those hospitals and somebody else is in two, then ---+ then we wouldn't.
Yes.
This is <UNK>.
So in talking to a few ---+ talk a little bit about as <UNK> said the volumes going to outpatient, we are seeing outpatient volumes growing but they're growing both for hospital outpatient to part of the hospital so he we would get those as well at outpatient surgery centers and it is a mix.
It depends if we have a system-wide contract or specific hospital within a system we won't necessarily get that new surgery center.
Clearly, if the system is opening a new surgery center, we are pushing to be part of that.
And we are seeing growth in addition outside of the ORs in the hospitals so we're seeing things in the cath lab and GI and EP.
We're seeing a significant movement of using anesthesiologist in those areas of the hospitals and we're seeing volume growth from that.
And that's been moving across a lot of hospital systems so we expect to continue to see that.
As far as the peri-operative process, yes, there is a big movement to try to get anesthesiologists more involved this that, whether it's pre-op, a lot of our practices are already involved preoperatively to the patients, but there is a push to do more of that.
There has been an initiative by the ASA on the peri-operative surgical home on getting anesthesiologists much more involved.
We actually have five practices involved in that collaborative, and actually we're currently working on hospitals and all of those require the hospital to be involved in that process as well.
And we are working with hospitals on how do we move that forward, more systematically in the future.
So we're involved in how the patients get prepared for surgery and actually some post-surgical work as well to make sure that we can help the hospital with the pre-admissions, and design the process around that.
We also have other programs around recovery after surgery that we're rolling out in multiple practices.
And we've seen some significant impacts on length of stay.
Okay, if there are no further questions, then I will just thank everyone for participating today, and we will look forward to speaking next quarter.
Thank you.
| 2015_MD |
2016 | VRTU | VRTU
#So like you observed, the DSO was higher this quarter, primarily bringing Polaris on to our set of books.
Polaris DSO was always a little bit higher.
Even though I have provided color that the Virtusa DSO is relatively flat, so we believe their DSO will come down for the remainder of the year.
This first quarter is usually a seasonal cash-use quarter because we have incentive payout awards that get paid in the Q1 quarter.
So therefore, we should be accreting cash for the remainder of the year.
Across the board, we have seen, whether it be our largest accounts, Citi, where we have actually been selected by them as a strategic preferred partner across the entire remit of Citi, or otherwise, we have generally benefited from some of the vendor consolidation activities that have been going on.
And we have expanded our ability to provide a much larger portfolio of services, which I think bodes well from a consolidation perspective.
So, Vince, to specifically answer your question, we don't believe that the headwinds we are seeing are the result of vendor consolidation as much as just delayed decision-making just across our client base tied to macroeconomic headwinds.
So I will start and maybe <UNK> can add.
Our expectations for Citi remain the same.
We have actually executed extraordinarily well.
We have strengthened our relationships there, and we are seeing very good pipeline momentum at Citi.
<UNK>, anything you would like to add.
Yes, I think our full-year guidance for Citi is in the $120 million range, which is in line with our expectation.
Keep in mind that this takes into account a significant amount of reduction in revenue because of the commitments to cost reduction through efficiency improvement that we signed up to.
And a lot of that gas is getting filled up by new opportunities and new deals that we are signing up with Citi.
And the good thing is that we are finding that the distractions across all parts of Citi, not just the corporate bank or the transaction banking, but also in the communal bank, in their ATM business and cards business and also the private bank, and a lot of traction that we've also seeing in the corporate technology office, which is a managed risk and compliance kind of program, and also data and analytics kind of initiatives.
So just to add a little bit more color to this and an earlier question around the kind of things that are getting delayed, in the BSS sector, the spend around digital transformation programs and risk and compliance programs remains strong.
That's not something that is very significantly impacted by all these headwinds.
[Around] the bank and the [VA] kind of activities where the banks are obviously under a lot of pressure to reduce their costs and commissions, and that is where they're trying to figure out whether or not they want to continue some programs, whether or not it makes sense for them to consolidate some of their suppliers and trying to drive spend down by getting [rid] accounts and so on and so forth.
But to the extent that our primary strategy is to eventually be a transformation and innovation partner for our Citi and our other banking clients, I think we are in a very good place to be able to weather that and to essentially emerge with positive revenue growth in the coming quarters.
Thank you all for joining.
I want to take this opportunity to thank our global team members for their hard work and dedication toward the success of our clients' programs.
Thank you.
| 2016_VRTU |
2015 | SLAB | SLAB
#A lot of these applications are where we either have both micro controller and wireless connectivity content, or where that is now getting integrated in to a single SOC.
Those developments are being driven off of a Silicon platform and a software platform.
In general, our customers are then connecting that into the cloud eco-system.
So, we are not providing the cloud platform that they are using, although that's an interesting topic of discussion.
So, I believe that our platform approach ---+ I mean this is a way to get leverage across a broad range.
The IOT market is broad.
I mean, you have applications with lots of different requirements.
It requires a portfolio of products.
To do that efficiently, you'd have to build it on a platform of both Silicon and software.
And, so all of the developments that we have going forward, I mean today on our 32-bit micros going forward on our connectivity and our 32-bit micros, those are all going to be on the same platform.
And, that is what is driving the majority of our engagements today.
Yes, I mean, I think you look at ---+ what Amazon is doing, and what Microsoft is doing, what ARM is doing.
We are working with all of those companies and more to integrate our solutions into those clouds platforms.
And certainly, when you're in IOT, you're dealing with data and cloud and apps and you have to have strong partnerships and decide what you need to offer and what's cost effective for us to offer.
Where we can make money.
And where we can able partners to be successful.
So, we are working throughout that entire eco-system to plan the best path forward.
Thank you.
I think we are cautious at this point in time looking in to the first half of next year.
We've watched our peers report throughout last week, and in to this week.
And there were a number of surprising guides for substantial reductions in revenue performance in fourth quarter.
That concerns us.
We feel fortunate and confident to deliver a guide that is slightly up for 4Q.
But the industry, in general is not reflecting that.
So I think we would look in to next year right at the moment, viewing the macro environment as not particularly encouraging.
So, we'll track this very carefully and try to bake our view of the macro world into what we provide for you in the January call about 2016.
Well, I would say that our integrated wireless connectivity with microcontroller set of products is in general, in extremely high demand and is highly differentiated versus everything else in the market.
If I would have to put one on top is when you integrate microcontrollers and wireless connectivity, it is hard, it is especially hard to do it with robust software stacks, with multi-mode, where you're dealing with multiple wireless protocols at the same time.
Getting that integration to work in high performance and robustly in a network and that is where we think we have the highest differentiation from a silicon and system perspective.
Being able to deliver that in and in an easy-to-use way.
And for instance, into modules [over] tools.
That also, creates an additional level of stickiness and differentiation.
Yes, <UNK>.
I view consolidation actually as an opportunity for us.
For instance, if we look at Broadcom going into Avago, they are going to find, let's say $1 billion worth of synergies, which means a lot to your engineers.
They went from being a company that I was somewhat concerned about.
They're a high-quality company executing ---+ they could have come after IOT.
I believe that's not going to be the case now.
That's favorable to us.
If you look at companies like Atmel, and NXP and Freescale that are going through significant mergers and have, had challenges themselves in some ways.
I think that they will be distracted over the next couple of years as they merge road maps and merge cultures.
I also view that as an opportunity for us.
That being said, I view our main competitors as TI, ST and Nordic and we ---+ in the IOT states.
And all three of those states have stayed out the M&A [fray].
I believe that they will all remain focused.
I think it's all overall a net positive for us.
But long term, I do believe that some of those companies may come out strong, if they can achieve the benefits of the scale.
But you just look at the overall reduction in the R&D expenses.
TI's now below 10%, I think they are now 9% R&D.
And I think that the level of innovation in the industry is going to decline.
And that's an opportunity for us to go and take share.
Yes, <UNK>, we kind of touched on this earlier, but the OpEx was [living] at a 5% increase in 2015.
The key points right now, are to view the first half of 2016 as seasonally high, as our fringe factors reset.
We'll be able to provide more color on the January call for the overall annual overall profile for OpEx next year.
Thanks, <UNK>, thank you.
| 2015_SLAB |
2015 | FL | FL
#Sure.
We're opening Flight 23 shops in conjunction with Footaction, across a number of stores.
So as we remodel Footaction, some of them, like 34th street here in New York, certainly Del Amo out in California, State Street in Chicago, have fantastic Jordan shops that open up, along with Nike Kicks lounges, as well.
So we'll continue to expand that with Nike, as we roll out more ---+ and brand Jordan, as we roll out more of our Footaction remodels.
The Armory is a one-store build-out, but ---+ in the Champs doors right now, but we've got plans to expand that in 2016.
We've also taken some of the ---+ we've taken it down to some wall units inside the store.
So we've got a number of stores with units that look different on the wall, that takes some of the elements of the Armory, and bring it into more Champs stores.
And that effort will also continue, as we roll into 2016.
You know how we operate, <UNK>.
We have a prototype, then we test some things, we test different geographies, we test different size stores, we test different markets.
And once we get a level of confidence with our vendor partners, we accelerate the rollouts.
But both of those are great initiatives, with two really important partners.
Thanks, <UNK>.
<UNK>, we're ---+
Yes, we're already at 10:00 AM.
So make it short.
<UNK>, I get to be a little bit ambivalent, in that the categories are somewhat driven by our consumer, not driven by me.
So I really have a tremendous amount of respect for the work that our merchants do to get the right product for our consumers.
And I ---+ one of our strengths is that we are so laser focused on our consumer, by banner.
And as the consumer moves a little bit, as some of those lifestyle preferences change a little bit, as the bottoms that they're choosing to wear, whether it be a Tiro pant or a denim jean, that drives a lot of their sneaker choices.
Sometimes basketball is the perfect silhouette; sometimes running is the perfect silhouette.
But our team does a really, really good job of getting those categories and those products merchandised appropriately.
So I like to drive sales.
I like the customer to wear what they're most comfortable wearing.
And we don't have a bounty on any specific category, to say the least.
We want to drive them all.
I look at our Week of Greatness, which starts tomorrow, <UNK> ---+ and I know you talked about some of the launches that are upcoming.
I like the way the calendar lines up for us.
The Week of Greatness has got some fantastic shoes that actually start today, with the Curry II, and then roll out significantly over the next week.
Great shoes, across our markets, each day of the season ---+ or of the Week of Greatness, I should say.
And then when we get to the pre-Christmas launches, again, I like the way the calendar lines up, and the way the shoes line up.
So we have a degree of confidence, certainly, going into the holiday season.
Yes, the allocation tool is up and running, has been for the better part of a year, for our North American business and Europe.
The next phase of it is the order planning module that lets us impact the orders that we write, and that's an early 2016 pilot.
Thank you.
Okay, operator, I think that's all we have time for today.
We appreciate everybody's participation on our call today, and we look forward to having you join us on our next call, which we currently expect will take place at 9:00 AM on Friday, February 26, following the release of our fourth-quarter and full-year earnings results earlier that morning.
Please note that's one week earlier than we have traditionally announced full-year results.
Happy holidays.
Thanks again, and good-bye.
| 2015_FL |
2017 | KRC | KRC
#Yes, <UNK>, do you want to cover that one.
Yes, this is <UNK>, let me jump in initially.
We've ---+ my recollection is we've only done one small transaction of $12 million so far this year and so what we said in the opening comments was we're working on some transactions that could take that to $200 million but in terms of the specific transaction, I mean <UNK> can talk about it, but we're really not going to get into details on the transaction because it hasn't closed yet.
Yes, right now we're subject to confidentiality agreement so we're not going to comment on the disposition.
Well, we've said before that we thought it would likely be San Diego area and that continues to be the case.
Yes, that's one of the tenants, that's the end of the third quarter of next year so they would be vacating.
Yes, <UNK>, do you want to go over that.
Yes, this is <UNK>.
You know, as you've moved through these projects they evolved, scope changes with respect to additional square footage that we were able to fit in on the site.
You know, final planning of the residential town and the retail.
It has mostly to do with some additional square footage that we're going to be able to squeeze in under the current entitlements.
It also relates to construction cost.
You know, we've been forecasting fairly significant increases and that's exactly what we've seen throughout the platform.
No because as <UNK> said, we ended up increasing the square footage.
We pretty well covered the expected increase in construction costs and related soft costs within the initial budget but as <UNK> said, we did increase the square footage.
So yield wise we think we're going to be right about in the range we've forecasted.
Well, I think whenever they want to ask it.
If I think it's realistic, you know, we always forecast that we're going to have a period of time subsequent to completion of the warm shell and what not to lease the building up.
You know, generally we beat it very substantially but I think once the building tops out it's appropriate to say, you know, how are things going.
People can ask whenever they like but most of these markets are not preleasing markets.
Seattle has not been a prelease market although it has seen a couple of projects that have been preleased, one being the very significant 800,000 square feet or so for Google being done by Vulcan, Paul <UNK>'s company and the other Facebook, I think it's around 400,000 feet also being done in South Lake Union by Paul <UNK>.
Generally buildings are up and nearing warm shell completion in Seattle before they're leased and it seems true in Hollywood and San Diego and most of the markets we're in although we've seen exceptions to that obviously particularly in San Francisco a few years ago.
Sure, I don't know that I have that in my head.
Does anybody on the <UNK> team.
We don't have our construction development people in the room so ---+ Do you have that Rob or <UNK>.
I'm thinking it's 3Q 2018 but we can double check that.
Yes, <UNK>, do you want to deal with the San Diego.
I think <UNK> can cover One Paseo.
Yes, so Judd how are you.
On One Paseo on the front end it's all about pulling permits and getting through the city so we had a little bit of a delay on just getting through the city and the permit volume.
That's primarily the schedule.
We're working hard to make a lot of that up so ---+ but that was the cause of it.
Can you repeat the question because I didn't follow ---+
I'll defer to <UNK> in terms of what was reported but we haven't decreased the square footage.
I think as we started construction we locked in the new number.
So it's 650 at this point.
Sorry, I know the answer to that.
Sorry, there are a couple of parcels that are near 333 Dexter when we bought the site that had square footage related to them as well and so the difference between the 650 and the 700 is related to those parcels that were across the street.
Yes, it's basically now in our shadow pipeline, we've taken them off the development page and they are potential development for shadow pipeline.
Yes, no some of that is related to property taxes.
A lot of that is you can see tenant reimbursement is up so a lot of that was passed through so it didn't really impact, you know, the bottom line.
I think for the remainder of the year we obviously had strong same store growth in the first quarter, 2% in the second quarter, we anticipate sort of flat same store for the remainder of the year to end up in that 2.5% to 3% range.
But, you know, it's utilities, it's opex, it's property taxes but, again, if you look at our reimbursement line most of that is pass through.
Rob, do you want to cover that one.
Sure, I'll start with San Francisco.
You know, as Jeff mentioned the quarter had marginal 136,000 feet of negative absorption but what that doesn't show are the pending deals that are happening, one of which has already happened that will be reflected in Q3.
Year to date there have been over ten deals of over 100,000 feet.
Going down below that there have been 29 deals of 20,000 feet or greater so activity remains really strong and this is ---+ a lot of it is net growth from companies that have already have facilities in San Francisco that are looking to expand and we continue to see interest from tenants that aren't in San Francisco yet but touring.
So San Francisco I think is on record for a really strong second half of the year and brokers themselves are also very optimistic.
So we're very pleased with what we see.
Switching to Seattle and specially Bellevue, we're ---+ as <UNK> said, the building we've got can suite single tenant, multi-tenant, two twin towers connected by super floors has all of the bells and whistles, great retail on the ground plane and there's nothing in the development horizon right now that will deliver when we deliver.
So we've got a window until extremely pleased with what we see going on and you've seen kind of stepping out of South Lake Union, just Seattle in general, the amount of activity and leasing that's happened year-to-date has put it in the top rank of the country in terms of office markets.
So it's not just ---+ it's not just South Lake Union it's also Bellevue and even Downtown Seattle has seen some significant leasing.
You're talking about dispositions.
Yes, well we kind of ---+ we get together every year, we figure out which buildings we think are going to perform very well for the future and which buildings may not or which buildings maybe have tapped out and we concentrate on the latter two.
I wasn't quite sure about what you were talking about in terms of opportunities.
You know, we could sell everything if we wanted to.
The market is extremely robust with regard to buyer activity and we will continue as we have over the past, I guess, better part of 20 years we've been a public company we'll continue to do select dispositions to recycle capital or take advantage of other opportunities.
So, I think you'll just see more of the same.
Right now, as I mentioned you know, San Diego in Total is 8% above market so that's going to hit next year so that will take a big chunk of that away.
<UNK> do you want to ---+
Twenty-five to 30%.
Yes, what it ---+ what was the latest update from (inaudible) guys.
We believe spring of 2018 the Central SOMA Plan will be approved and approximately six months after that the Prop M allocation for Flower Mart.
Yes, <UNK> <UNK> here actually.
Quick question for you on the velocity of leasing amongst the younger kind of VC funded companies in San Francisco and Silicon Valley area.
How is that looking.
I mean you mentioned some of the smaller deals with the 20,000 square foot range were getting done but how does it look overall in terms of their ability to continue to grow and so forth.
Well, you've got to really look at VC funding and if you take a look at the VC funding in San Francisco, the second quarter was $7.7 billion, the first quarter was $6.2 billion.
It's on track.
They've raised more money then I think they've ever raised and as we understand it, it's on track to ---+ so about $14 billion in the first half.
That contrasts with ---+ you know, in 2010 it was $10 billion, $12 billion in 2011, $11 billion in 2012, $12 billion in 2013 and then we dropped, then we pumped, up to $25 billion in 2014 and $27 billion in 2015, $21 billion in 2016 last year.
We're on track to see a lot more VC funding this year than all but maybe 2014 of the last seven years and I think that bodes well for our continued growth of these companies and that generally translates to continued growth in demand for space.
Thank you.
You're welcome.
Thank you for joining us today, we appreciate your interest in KR<UNK>
Goodbye.
| 2017_KRC |
2016 | LKQ | LKQ
#We are intentionally buying a better vehicle.
It's slightly newer ---+ younger, I should say, in age.
With that intent of, as that car part shifts to a newer car, Jamie, we want to have, obviously, newer model parts in the inventory.
It is going to plan.
We are buying that younger vehicle.
We are absolutely getting more gross margin dollars.
We run a report here that is showing that we are actually getting more dollars out of the same amount of cars.
Not really.
The inventory, historically, has turned about 3 times a year; there's no big changes there.
On a consolidated basis, it will begin to turn a bit faster, just because PGW has a much higher turn, because their OE business is basically direct delivery to the assembly lines.
Order of 6 to 7 times.
I think that's fair, Jamie.
It is opening up new opportunities for us, particularly in the accessory space ---+ those vertical moves.
We have a lot of opportunities there to expand that side of the Business.
We are not in the reman transmission business today.
We think that's a great opportunity for us, so we are looking at those opportunities very closely now.
Thanks, Jamie.
Yes.
<UNK>, PGW had a really good contribution to the quarter.
Again, they haven't changed their overall projections for the year, their budgets or their plans.
So, they're right on target.
That's a combination of both the aftermarket business and the OE business.
Obviously, the OE business plays to different dynamics than our historical businesses, if you will.
The reality is, they are very ---+ they're different, right.
The drivers of our core North American business are different than the core drivers of the PGW business.
Again, we think our core North American business had a great quarter.
I mean, the margins were up, gross margins were up, operating margins were up, profitability was up nicely.
The organic growth was a little bit lower than I think was expected.
But given what was happening with total, the frequency of collisions, all put together, we think we had a terrific first quarter in North America.
I will just add to what <UNK> said, with the PGW acquisition, we are starting to sell glass in our LKQ facilities.
Those reps have access to that.
We do like that.
Certainly, the distribution side of the Business, to be able to cross sell in our different entities.
We're looking at opportunities in Europe as well, so we're very pleased with that acquisition.
The biggest benefit we think we can get is just training.
By consolidating our call centers, and getting our people better trained and better monitored is the ultimate goal here.
We talked about the CCC initiative where more and more is going online as an opportunity as well.
We see more effectiveness with our sales reps, and just being able to better handle call volume as well.
The way we are situated now with sales reps spread out all over, we now have the ability to move our phones ---+ if the phones go down, we can move it to a different call center.
We do plan on going to extended hours, so that at 5 in the morning, if someone on the West Coast wanted to order a part, if they are up early, those will ring on the East Coast, and when we close down at 5 o'clock on the East Coast, those phones will be ringing on the West Coast.
We expect expanded service because of the way we're going to be routing the calls and handling the sales force.
We do expect some good efficiencies to come out of this.
Collision today is roughly 30% of our total revenue.
I think the question you are asking ---+ is collision ---+ kind of performance of collision versus mechanical.
The collision side actually performed a little bit better than mechanical.
The two biggest parts we take off of a salvage vehicle is obviously the engine and the transmission.
On the aftermarket side, we sell no mechanical.
Mechanical strictly relates to the salvage side of the Business.
The reality is, those parts start selling year seven or so.
If you take a look at the requests that we get for engines and transmissions, about 15% of the total requests relate to model years that are 1 to 6 years old.
65% of the requests come from model years that are 7 to 15 years old.
The sweet spot for the mechanical side are older vehicles, and the strong SAR rate over the last several years, it's going to take some time before those cars come into the sweet spot on the mechanical side.
A little bit stronger performance on collision versus the mechanical, but nothing ---+ not significant.
It's annualizing roughly about $80 million now.
Thank you, everyone, for your time today, and we look forward to speaking with you in October when we report Q3 2016 results.
Have a great day.
Thanks, everyone.
| 2016_LKQ |
2017 | LAMR | LAMR
#Thanks, Chantel.
Good morning, everyone, and welcome to Lamar's Q4 and full-year 2016 conference call.
Certainly a lot to feel good about in 2016.
The very successful integration of six new markets from Clear Channel, pro forma revenue growth that handily beat GDP, and most importantly, strong growth in our AFFO per share.
Very clean, very strong operational and financial results.
Regarding 2017, pacings indicate low single-digit growth for Q1, with growing momentum as the year progresses.
Every quarter after Q1 is showing acceleration in our pacing.
Consequently, our AFFO guidance for 2017 implies pro forma revenue growth in the low mid-single-digits.
We are characteristically trying to be conservative in our estimates of other components of AFFO, mainly maintenance CapEx, tax leakage and interest expense.
All said, 2017 looks like a solid, steady-as-she-goes year.
<UNK>.
Good morning, everyone.
Just to click through a couple of the high points in the quarter and the year.
For Q4, on a pro forma basis, our consolidated revenue was up 2%, consolidated expenses were up 1.9%, and that translated to a 2% increase in EBITDA.
EBITDA margins were right at 45% ---+ 44.9%.
And that is the highest fourth-quarter EBITDA margins we have had in several years.
On the full-year basis for 2016, our consolidated revenue was $1.5003 billion, which for us, is a milestone.
It is a record.
We have never broke $1.5 billion before.
And on a pro forma basis, that is up 2.9%.
Consolidated expenses were up 2.3% and that translated to a pro forma growth in EBITDA of 3.7%.
As <UNK> mentioned, AFFO for the year came in right where we projected it would, as far as the high end of our guidance range.
It was $489 million ---+ and that is what we projected last year to be the high end of our range and that was translated to $5 a share AFFO, and that was an 8.9% increase over 2015.
On a free cash flow basis, our free cash flow before dividends was approximately $418 million.
The Company paid out approximately $293 million in dividends in 2016, and that produced $125 million in free cash flow after dividends.
We are expecting free cash flow, even with an anticipated increase in dividends for 2017, of 10% over 2016, to be in excess of $100 million as well.
CapEx for 2016 was $107 million, which is what we had targeted last year at this time to be our total CapEx then.
Last, our total debt was $2.378 billion and that translates to 3.5 times on a pro forma EBITDA basis, which is where the Company said it intended to operate at some point, between 3 times and 4 times going forward.
So we are right in the middle of what we had intended.
<UNK>.
Great, thanks.
Before we open up for questions, I will add a little color to what we are seeing with our digital footprint, what our plans are for 2017, and what we are seeing with our customer categories.
In 2016, we added about 115 new digital displays, and we absorbed roughly 171 from the Clear Channel acquisition.
So we concluded the year with 2,575 digital displays in the air.
Our plans for 2017 are to deploy roughly 150.
We are going to step up the pace slightly, given that last year our same board digital performance was up 4%, which gives us a little bit of confidence that we can add the additional capacity.
Q4 was ---+ on the same board digital side, was 1.2%, but much of that was a little bit of a slowdown in December.
We are feeling good about how the first quarter is shaping up on the digital side.
Regarding local and national business, for Q4, local was up 1.2%, national was up 3.5%.
So we concluded the year with local being up to 2.5% and national being up 4.2%.
Our sense, given the early part of 2017 and where our pacings are, is that national will be slightly weaker than local for all of 2017.
That is just the way the pacings are looking as we sit today.
So it would not surprise me if on this call next year, we give you a year-to-date 2017 where local was slightly stronger than national.
Categories of business ---+ exceptional strength on the service side, up 12%.
Good, strong, solid growth on the restaurant side of 3%, and amusement, entertainment and sports at 4%.
These are numbers for Q4 of 2016 over Q4 of 2015.
There are a couple of advertising categories that are seeking their footing post-election.
I think it is safe to say that hospitals and healthcare are trying to figure out what their future holds, and it is showing up in their ad spend.
They were down slightly, and continue to be down in Q1.
We expect they will be back when the future of the Affordable Care Act is determined.
And then another category which has struggled for its footing is education.
We feel good about education going forward.
There were some of the large commercial colleges that advertise with us that were struggling with their business model in the latter parts of the Obama Administration.
We feel like they are going to gain their footing, but they were down also in Q4, and are looking to get their footing in Q1.
So with that color, I will open it up for questions.
And who we got first.
Let me hit the AFFO thing first.
On the components of AFFO, we can certainly control maintenance CapEx.
Last year, we budgeted $45 million; we came in at $38 million.
Part of that exercise was upside surprise in the cost of digital units and their longevity.
So we are budgeting $45 million again.
We will see where that comes out.
You don't want to start a maintenance CapEx, so it's not completely in your control.
But yes, we can control that one.
We can't really control where interest rates go.
We budgeted for two interest rate rises, and it is going to cost us a few pennies on AFFO this year.
And then the tax leakage, we are guesstimating that it is going to be roughly the same.
Now should a tax reform package come through and corporate rates drop, we would enjoy a 6% or 7% advantage to our AFFO guide.
We're not budgeting that, but that is what would happen if corporate rates got to 20%.
The numbers I am giving you on our full-year look are our actual pacings.
So that is stuff that is on the books that is over and above the same time last year.
It is harder for us too, when we look forward to break out the categories.
But what we think is happening is, what you are seeing in other companies' reports.
It seems like near-term GDP is a little bit lighter then what is going to happen in the back half.
Maybe the whole macro is anticipating some sort of fiscal stimulus from either tax cuts or infrastructure spend or both.
But again, these are actual on-the-books pacings.
I will turn that over to <UNK>.
Auto for the fourth quarter was basically flat.
It is 6% of our book.
It's probably normalized at 6%, and that looks to us like where it is going to stay.
All right.
And <UNK>, we've got approximately $230 million in NOLs that we are allowed to carry forward to future years.
Yes, good question, and it is still a fragmented market.
For those who don't follow us for a long period of time, since we've become a REIT, we generate, give or take, $120 million in free cash after all obligations.
That's distribution, all CapEx, interest and the like.
And we typical deploy that in the small fill-in, tuck-in acquisitions.
And that activity is ongoing, it is relatively predictable.
And to your point, the outdoor advertising business doesn't use the language of cap rates.
And fortunately, valuations are not where they have been in the traditional REIT space.
They're not running around paying 4.5%, 5%, 6% cap rates for the assets we are acquiring.
Consequently, that has been a predictable and valuable exercise for the Company.
The largest acquisition that we can point to on valuations of late, of course, is what we did with Clear Channel last year at this time.
The trailing announced multiple of EBITDA contribution was 12.5 times.
The forward multiple for us, under our management, we promise to the market we would bring it in, in 2016 at about 11.5 times.
I am pleased to report those markets performed slightly better than that, and the forward multiple we ended up paying was more around 11-ish times.
So that should give you an it indication of what's going on out there.
Typically, when we're doing a transaction, particularly if it's a tuck-in, we are the highest and best buyer, and it's not going to be perfect information on what we can do with the assets.
Of course from the seller's point of view, they want a good strong historical multiple of how they perform with the assets.
From our point of view, we care about the multiple we're paying on how the assets have performed going forward.
And that delta is what allows us to create value.
Okay.
So <UNK>, in Q4 our overall platform and our digital platform, same-board, was roughly the same.
So I do not think there would have been a [disproportionate] (inaudible).
Now, the overall digital platform probably did, because we had more units in the air than we did Q4 of 2015, right.
So the overall digital platform probably outperformed the rest of the platform.
Does that make sense.
And I will go ahead and hit the CapEx numbers and what we are seeing out there.
There are two things that are going on.
When we started deploying digital units back in the 2005, 2006, 2007, 2008 timeframe, the expected life was seven or eight years.
Today, because manufacturers are getting so much better at what they're doing, and they are producing units that are more robust and have a longer life, the projected average life of a unit now is 12 years.
So that added life is really tremendous for us on our maintenance CapEx projections going forward.
And then you also have costs coming down.
The cost curve was dramatically dropping three, four, five years ago.
But we are still getting 5%, 10% reductions in the cost of deployment.
So modest reductions in cost, but pretty dramatic increases in useful life.
Yes.
Good question.
We are approaching a window where some of that is callable.
And there is no shortage of smart bankers that are giving us advice on when it is accretive to make that move.
Certainly when those numbers make sense, we will act accordingly.
Right now, I really like where our capital structure is.
It is almost perfect for being a REIT.
80%, 85% of what we have on our balance sheet is long and fixed, and then we've got a little bit of floating that we can amortize, if need be.
And so our capital structure right now is exactly where we want it to be.
And absent a meaningful acquisition, I would not anticipate a whole lot of activity this year.
You know, we are going to be opportunistic, right.
Wherever it makes the most sense and wherever the cheapest cost of capital takes us is probably where we will end up going.
If you recall, I will take the second one first, <UNK>.
If you recall, back on our last conference call, I was not real optimistic about how December was going to pan out.
And quite frankly, it came in the way we thought.
When we look at the categories that struggled, the one that stood out to me the most was education.
And again, it tied back to some of the problems that were experienced with the commercial colleges.
The good news is, it appears to us that those problems are being worked out.
There was a big article in the New York Times just the other day about how the commercial colleges are feeling better about their future.
And then the other category of it was, likewise down, was healthcare.
Both of those in our book are local, by the way.
And so that's I think where some of the local softness came from in December.
So getting back to digital and how we handle deployments and how we gauge demand, we are a bottom-up organization when it comes to yield management.
And what I mean by that is, I do not dictate from Baton Rouge how many boards are going to be deployed.
Rather, our local general managers gauge demand and give us a feel for what they believe can be absorbed in the marketplace.
So I think it is the right way to do it.
It is a gauge of demand and supply that is on the ground and in touch with our customers every day.
So if our local GMs say: I don't want any more of it because my customers are happy with the supply we've got, then we do not deploy.
If they call is up and say: look, I can put two more out here because it makes sense, given what I am seeing in the marketplace, then we send them out.
Does that make sense.
Sure.
Good question.
Let me start with the fact that both of those businesses, transit and airport, are in our TRF during our taxable REIT subsidiary.
We like those businesses, but we tend to have a different approach than the [JP Decodes] and Outfront and Clear Channels of the world in that we pretty much stick to the DMAs that are below the top 20.
So consequently, our portfolio is a very large portfolio of relatively small transit contracts.
So no one contract represents more than 1% of that business.
And what that allows us to do is, we just incrementally add them over time.
We have added successfully over the last few years probably dozens of transit agreements to our portfolio.
Because none of them are meaningful in and of themselves, we do not do a press release on them.
We just slowly grow the business.
The airport business is the same way.
We purchased that business a couple of years ago for a modest amount of money, and we have added some franchises to it.
This year, we are looking to have, give or take, $30 million in revenues from the airport business, and give or take, $3.5 million in EBITDA contribution.
And that will be across 20 different airport contracts.
So again, no one big contract is going to make or break us in that business.
But we are just going to incrementally add them.
And we will wake up in a few years and you will go: wow, that was fun.
Well, Chantel, thank you.
And thank you, everyone, for listening.
Again, we are looking forward to a 2017 that will be, as I described, solid and steady as she goes.
And we look forward to visiting with you on our Q1 2017 call in a few months.
| 2017_LAMR |
2017 | AKAM | AKAM
#I think they're very large.
Bot Manager fits in with our Kona Site Defender in the web security product space, and Bot Manager's market is at least as big as Kona, and we're seeing that in terms of the ARPUs with customers that are adopting that.
EAA and ETP are on the Enterprise side, and that is a new market for us to go into.
That's a market that has traditionally used devices that are purchased by the IT manager, operated in the private network.
I think, as we go to the future, you are going to see those capabilities sold as cloud services in a recurring revenue market.
We are bringing those kinds of products to market now to help that fundamental change in enterprise architecture and enterprise security.
In the long run, I think the services for enterprise networking and security have a bigger TAM than web delivery and security.
Of course, it's just at the beginning, so it will take a long time to catch up.
But there's a lot more money spent in enterprise networking than there is in content delivery.
And I think the enterprise ---+ the term often you will hear in the industry is enterprise networking is turning inside out, and I think you'll be seeing the adoption of cloud services replacing a purchase of devices operated by the IT manager and the WAN.
As we talked about, I think as the percentage of revenue, we expect or are certainly prepared to see a decline in percentage of revenue.
First, you have the rest of the business, the core business over 90% growing at a very strong clip, and I think these six, of which there's really three that are larger today, quite possibly could decline in the revenue they pay us, which would mean their percentage would continue to decrease.
And that is ---+ as we look to the future, that is the way we are thinking.
Of course, we're going to do everything we can to maximize revenue in those accounts.
I think we provide them tremendous value, and three of them are still sizable customers and I think will always be sizable customers for Akamai.
You know, I don't think there's so much of an issue there, and the impact that anyone of them can have is now much less than it used to be.
So I don't think that's an issue really to be thinking about.
I think the key is they are less than 10% today.
We are anticipating further declines certainly as a percentage of revenue through the year and potentially in the future.
But I don't think there's any giant event in a single quarter associated with any one customer.
Well, I think ---+ you know, again, I think you should look at our depreciation expense a bit as a percent of revenue.
To take the depreciation expense that we have been incurring as a percent of revenue and as you ramp CapEx as a percent of revenue, you should be ramping depreciation as a percent of revenue in a similar way.
Yes, we're not giving guidance at that level of detail, other than to say we expect some further declines.
Not at the rate we have already seen obviously because now they are less than 10% of our total revenue, and this is associated with ---+ these companies spend billions of dollars a year in infrastructure generally, and they are doing more of the delivery themselves.
I think we still provide them significant value, and of course, I would like to see the revenue there increase as we go forward, but we're not expecting to have that happen.
Yes, I would say OTT is growing at a very solid pace.
It hasn't exploded.
At times, people think that might happen, but that has not taken place.
I think there's a lot of new offers out there who continue to be new offers.
People are going to try lots of different kinds of things, and some will have more success than others in the marketplace.
It is a very hard thing to do.
Just even the delivery of the videos at high levels of quality is very hard, and that's where we really excel.
And so we get a significant share of that market, and as it grows, we should be in a position to benefit from it.
And there's other things besides the delivery that are complicated technically.
Things involving ads with ad-supported OTT.
Very complicated to do, and there's a lot of players in the ecosystem in getting everything to work just right.
There's problems sometimes.
And, again, this is where Akamai really helps their customers in being able to make sure that OTT has delivered reliably to handle large-scale at high bit rates, which means high quality pictures and at a reasonable price point.
Because as that industry grows, they need to see the cost per bid delivered come down.
And so that's a place where we've got great strength, and I am very optimistic about the future growth of our OTT business.
Yes, we don't really operate on an overflow basis, so it's ---+ whatever you are seeing is not really attributed to that.
I don't think there has really been a fundamental change in the Internet platform companies in terms of their utilization quarter to quarter.
Generally the trend that we expect to see is they are going to try to do more of the delivery themselves.
Obviously they will take the easier stuff and work on that first.
That's one thing that we have seen in the past.
That said, this stuff is hard to do and to do well and to actually to do affordably.
And I think ---+ so I think that we will continue to have business with these customers.
I just think it will be a lower percentage of revenue going forward.
No, I think you're going to see a steady increase in investment throughout the year.
I think you're going to see that investment occur.
It's going to begin in the first quarter.
You won't see it manifest itself significantly because it's going to take a while to get the headcount onboard and the spending to ramp.
So I think you're probably going to begin to see that effective in Q2.
And then my expectation is that, again, it will stay in the high 30s% thereafter.
So I think it will probably ---+ I'm not going to specifically guide for Q2.
But, as I said beyond the first quarter, which I said 39% to 40%.
And I think it will be 39% to 40% depending upon where revenue lands in the range.
But I do expect that in Q2 and beyond, it is going to operate in the high 30s%.
Yes, well, part of that is, again, when you talk about acceleration, you're talking about year on year.
So, as <UNK> mentioned, the declines we've seen in these large customers were much more significant in 2016.
So the wraparound impact of that really began a little bit in Q4.
You're going to see that continue in Q1, and so some of it is the wraparound effect of these customers not having nearly the impacts on the Company growth rates as they did a year ago.
My comment was more of a sequential comment, the Q4 to Q1.
We always see some seasonal decline in the Company revenues and also with these big customers.
And I expect to see that happen in ---+ as I mentioned, I think some of the seasonal decline is going to be much more notable in the media business, and I think you're going to see steady growth in the Performance and Security business.
Yes, roughly, yes.
Yes, you can click to buy Akamai whole site delivery on Azure.
A lot of companies have done that.
It's not a material amount of revenue to us.
The Microsoft relationship, on the other hand, is very important to us.
We have a substantial number of customers and revenue that flow through Microsoft, and of course, they are a large customer themselves.
Yes, we have a new CMO, Monique Bonner, and really making substantial progress in our digital marketing effort, and I think that will help quite a bit in terms of generating more efficient inbound sales.
I wasn't referring to a specific timeframe.
I think you know the Company has been operating in double-digit revenue growth.
This is actually the first year we have not.
I think you know that certainly the driver of that has been what's been going on with these large Internet platform customers.
The Company growth rate outside of them has been growing in the mid-teens.
So we have been growing in the double digits.
I think ---+ my point was that as we make these investments, these investments are going to take a bit of time to see revenue ramp, and so you are going to see the dividends from these investments more in 2018 and 2019, and I think that is what's going to lead to consistent double-digit growth for the Company.
We're pretty pleased with our international growth.
You are right that our international growth has been growing very fast and growing very fast in particular in our Asia-Pacific region.
So our investments ---+ our investments are much more weighted, I would say, on R&D innovation, to be frank.
Our investments are not heavily weighted towards more go to market.
I actually think the go-to-market side of the equation, we will make some investments there.
It's a matter of giving our existing salesforce more products to sell.
Our salesforce is pretty confident at penetrating our products into their installed base set of customers.
It's a matter of giving them more products to sell.
And I think that by stepping up investment in R&D, getting more products announced I think will lead to more revenue.
And we have proved that we can do that, security being the most recent example.
<UNK>, I think we have time for one more question.
Yes, I think in general that we continue to get good traction in upgrading Ion into our customers that buy our Web performance products that, as you can imagine, that it's a hierarchy of ---+ it starts with customers that really, really care about performance.
And so I think we have further room there, but I think that kind of the customers that are going to buy Ion, many of them are already buying their products.
But while there is more to sell there, I would say they are probably not a significant, significant opportunity there.
And yes, we have seen when customers upgrade to Ion that there is an ARPU uplift at times, but I also think there's other things to sell for our Web performance solutions.
As <UNK> mentioned, Image Manager is another offering to sell into the installed base.
So, if they are buying Ion, now they can buy Image Manager.
If they are buying DSA, now they can buy Image Manager.
And I think you're going to see us have other adjacencies like that within Web performance as well.
With the top six, we have obviously lost share to the do-it-yourself effort.
We are not seeing lost share to other third-party CDNs.
So it's an issue with the DIY, which is the big Company has their own platform, and they want to try and do more of it themselves.
Okay.
Thank you, everyone, and we want to ---+ appreciate you joining us for today.
And then closing, as <UNK> mentioned, in addition to our 2017 Investor Summit on March 14, we will be presenting at a number of investor conferences in February and March.
And details of these can be found on the Investor Relations section of Akamai.com.
Thank you all for joining us, and have a wonderful evening.
| 2017_AKAM |
2016 | MTSC | MTSC
#Thank you, <UNK> and good morning, everyone.
Thank you for joining us for our third quarter investor call.
We appreciate having the opportunity to discuss our financial results for the quarter and update you on our outlook for fiscal 2016.
First, let me remind you about the focus of our Company and the nature of our two business units.
This may be particularly helpful for those newer to following our Company.
Our mission at MTS is simple.
We are a focused test and measurement company, dedicated to making our customers' new products more precise, safer and more reliable and enabling them to get to market more quickly and confidently each year.
We carry out this mission through two operating business units.
The larger of our two businesses is Test, which provides highly engineered testing systems and services largely to R&D and product development groups within automotive, aerospace, energy, and infrastructure OEMs, as well as leading research laboratories and universities worldwide.
Our Test business is fueled by our customers spending on research and new product development, markets that are less sensitive to the short-term economic swings that have generated such volatility for many companies in recent years.
Our second business unit is Sensors.
While MTS has been in the position sensor business for over 30 years, following the close of our third quarter, we were very pleased to announce the completion of our acquisition of PCB Group, a global leader in the design, manufacture and distribution of a broad range of sensor products.
This acquisition significantly expands our sensor technology offerings across a number of key market segments, including the test market where we will leverage our very deep customer relationships for testing equipment and service.
Historically, MTS has been a leader in linear position sensors, which are essential for automating heavy industrial equipment and increasing the precision and safety of heavy vehicle systems that utilize hydraulic controls.
These sensor markets are tied more directly to industrial capacity utilization and heavy equipment demand than our test business markets.
With PCB's leadership in piezoelectric sensing technology, we will now also provide sensors and components used for acceleration, vibration, motion, pressure and force measurement.
These sensor technologies both enhance the performance of our customers' products and through their application in the product development testing, enable our customers' new products to enter the market more rapidly and reliably.
Approximately 65% of the PCB sensor markets are fueled by our customers' spending on research and new product development, similar to our Test business.
The remaining sensor markets are tied more directly to industrial capacity utilization and heavy equipment demand, similar to our historic position sensors.
Going forward, we will integrate our historic sensor business with that of PCB to create a single sensor business unit, serving a wide range of both industrial and test markets worldwide.
With this backdrop, I'll start with the headlines for the quarter.
There are three key takeaways for the call today.
First, we were pleased with our results for the quarter.
Revenue for the third quarter grew an outstanding 18% to a record $158 million, driven by strong backlog conversion in our Test business.
We were able to realize a significant portion of the revenue shortfall we experienced in the second quarter from improved custom project execution and direct labor headcount additions during the quarter.
Earnings were solid with Test gross margins improving 510 basis points on a sequential quarter comparison.
Second, we're very excited to have completed the acquisition of PCB in the opening days of our fourth quarter.
The combination of our historic sensor business with PCB is an ideal outcome for MTS, transforming the Company into a larger, more competitive, technology-leading test and measurement solutions provider with a broad product portfolio serving diverse growing end markets, and with a large and deeply intimate global customer base.
PCB brings scale to our sensor business with more rapidly growing end markets, higher margins and strong free cash flow.
It also brings greatly enhanced synergies between our Test and Sensor business units, generated by the use of PCB's sensors by our current test customer base and support of the new product testing.
This combination will bring long-term value to our customers through scale, to our employees through growth, and to our shareholders through expanded profit margins and strong free cash flow.
We're truly excited to add PCB with the MTS family.
With the close of the deal in early Q4, integration of PCB has begun in full-force and we're on track with our planned integration efforts.
We've validated many of the synergies we modeled in our assumptions and have started the work to realize the value from the acquisition.
The third key message for today is regarding our outlook for the remainder of fiscal 2016.
With regard to revenue, we're refining our revenue guidance range to $630 million to $640 million, and refining our earnings guidance to $1.35 to $1.50 per share.
These guidance ranges are inclusive of the contribution from the PCB acquisition and all restructuring and acquisition-related charges.
<UNK> <UNK> will provide more detail regarding our guidance in a few minutes.
With that, I'll now review orders in more detail for the quarter.
Total Company orders decreased 18% or $28 million to $125 million in the third quarter, driven largely by the Test business.
Test orders, which were down 21% in the quarter were impacted primarily by the timing of two large custom projects totaling roughly $21 million.
Given the abnormally high custom order rate over the last two years, this volatility is not unexpected.
While Test product orders were softer in the quarter, we were very pleased with the momentum of our Test service business, which continue to deliver strong orders growth.
Orders for Test services in the quarter increased an impressive 34% to a record $27 million, bringing the year-to-date increase in Test service orders to 22%.
This increase was driven by our focus on upgrades of software platforms in our installed base and continued focus on strategic relationships with customers to extend the life of their existing equipments and full service contract wins, in this case with customers in Europe.
We continue to perform lab assessments for many of our customers.
This results in building deeper engagement, which often leads to orders for critical spare parts in lab upgrade services that will enhance the productivity and efficiency of our customers' laboratories.
Our large and continually growing installed base of equipment, which now exceeds $4.5 billion and the investments we've made over the last few years in expanding our field service organization and to modernize the tools they use to serve our customers continues to provide us with an opportunity for sustained and profitable growth in our service business.
We're continuing to have field service engineers to invest in our service infrastructure as appropriate to support the service business, which will help drive future growth for our Test business unit.
Moving to our Sensor business, orders were down [7%] reflecting largely the timing of blanket orders.
With the short lead times available for sensor products, customers have moved to a just-in-time ordering approach rather than placing annual blanket orders for products.
Omitting the blanket order effect, order rates were flat in the quarter for Sensors, as new design wins in the mobile hydraulics markets largely offset continued softness in the industrial machinery markets worldwide.
Our backlog continues to be very strong, driven by our Test business, ending the quarter at $352 million an increase of $9 million or 3% compared to the prior year.
And finally, I'd like to comment on the opportunity pipeline.
As we believe it's a good indicator of market strength and the potential for future growth.
Given the nature of the sales process, the 12-month opportunity pipeline is dominated by Test opportunities today.
However, this mix may change with the increasing scale of our Sensor business in the future.
At the end of the second quarter, our 12-month pipeline of opportunities stood at a new record of $978 million, up 12% compared to the third quarter last year and up 3% sequentially.
That was a third quarter number, $978 million.
These identified opportunities for future sales, reflective of the healthy continuing demand we see for expanded and enhanced testing capability in R&D and new product development by our customers worldwide.
This visibility into future demand builds confidence in our ability to deliver sustained organic growth going forward.
A key metric we used to monitor the health of our opportunity pipeline is the deferral rate within the pipeline.
This is measured as total dollars deferred as a percentage of beginning of quarter pipeline.
The metric improved slightly to 50% compared to 54% on a sequential quarterly basis and a slightly better than our historical average rate of the [mid 50 percentile] range.
As a reminder, as the deferral percentage in the pipeline increases, the volatility of orders' performance tends to increases.
This can make predictability and resource planning more challenging compared with the volatility we experience when the deferral rate is lower.
Relatively normal deferral rate provides us with confidence in our ability to secure future orders and deliver on these orders in the most productive manner.
We'll continue to update you on this view of our markets in the quarters ahead.
Now, I would like to turn the call over to our CFO, <UNK> <UNK> for some additional financial detail on the quarter.
<UNK>.
Thank you, <UNK>.
My remarks today will summarize our third quarter results based on a year-over-year comparison.
Overall, as <UNK> mentioned in his remarks, we feel good about our results for the third quarter.
As we expected, revenue growth was very strong in the quarter, fueled by strong conversion of backlog in Test.
Earnings were largely in line with our expectations, but were significantly impacted by non-recurring restructuring and acquisition-related charges.
Now moving on to more detail about the quarter.
Third quarter revenue of $158 million increased 18% reaching a new Company record.
Looking more specifically at revenue by business, Sensors revenue of $24 million was relatively flat.
While orders were down 7% in the quarter, we were able to convert backlog which kept the revenue comparable to the prior year.
Moving on to Test, revenue was a record $134 million in the quarter, increasing an outstanding 22%.
As <UNK> mentioned, we were able to improve our conversion of backlog into revenue during the quarter, from improved project execution, and the direct labor headcount additions that we made during the quarter.
This was a nice result for Test and something we expect to continue into the fourth quarter.
One item that I want to correct from the earnings release, in the headlines, we stated that Test service revenue for the quarter was a quarterly record.
Although it was a strong quarter for service revenue, it was not a record for the quarter.
Test backlog ended the quarter at $338 million.
Custom backlog as a percent of total backlog was approximately 67%, a decrease of 10 percentage points compared to the end of our second quarter.
This improved mix in our ending backlog is good news for the Test business going forward.
However, the shift is not expected to have a significant impact on our fourth quarter results.
We will continue to monitor our mix of orders, as we progress through the year and we'll provide more detail regarding how this mix shift may impact our results going forward, when we issue guidance for fiscal year 2017.
Moving on to the rest of the P&L.
Gross margin was $58 million, an increase of 9% from higher volume in the Test business.
As a rate to revenue, gross margin decreased 280 basis points from 39.7% to 36.9%, from a decline in margin rates in both businesses.
Sensors gross margin was down 8% to $12 million on lower volume.
The gross margin rate decreased 370 basis points from 54.9% to 51.2%, primarily resulting from lower volume and higher indirect labor cost.
We expect the Sensor business margin inclusive of PCB to remain in the low to mid 50% range going forward, with improvements expected as volume increases.
Test gross margin came in at $46 million, up 15% on higher revenue that I previously mentioned.
However, the gross margin rate decreased 210 basis points from 36.3% to 34.2%.
0.6 percentage points of the decrease resulted from pricing pressures on standard products sold in the material markets in China from increased competition, 0.5 percentage point resulted from higher proportion of customer revenue which typically carries a lower margin and the remaining margin rate decline resulted from higher compensation and benefits.
We expect the Test business margin to be in the 33% to 35% range in the fourth quarter.
My next topic is operating expenses.
Operating expenses increased $11 million or 28% to $48 million and were 31% of revenue.
The increase in operating expenses resulted from $5 million of acquisition related expenses, $1 million of restructuring costs and $5 million from higher commission expense, increased compensation and benefits and higher professional fees.
Excluding the acquisition-related and restructuring cost, operating expenses were 27% of revenue, the bottom end of our forecasted range.
Going forward, we expect operating expenses inclusive of the PCB business to be in the previously communicated 27% to 29% range, excluding acquisition-related and transaction related amortization expense.
Operating income decreased 37% to $10 million, primarily driven by the acquisition and restructuring-related charges.
Next, I want to briefly discuss net interest expense.
In recent history, net interest expense has generally not been material.
Year-to-date, net interest expense in fiscal 2016 was less than $1 million.
As you know, we took on more debt at the beginning of our fourth quarter to fund the PCB acquisition.
More specifically, in addition to the issuance of $460 million of term loan B debt, we issued tangible equity to partially fund the acquisition, which resulted in approximately $27 million of debt that is required to be paid down over the next three years.
As part of that arrangement, we are required to pay a coupon rate of 8.75%, a portion of which is interest expense and a portion is a reduction in principle.
The term loan B debt interest rate is pegged to LIBOR plus a credit risk spread of 4.25%.
There is also a LIBOR floor of 0.75%.
So the current all-in interest rate we are paying on the debt is 5%.
We're committed to paying down this debt as quickly as we can and given our projected free cash flow, we believe that we will be able to delever fairly quickly.
However, due to the higher level of debt, net interest expense will be material for the foreseeable future.
We are forecasting net interest expense for our fourth quarter to be approximately $7 million.
My next topic is taxes.
The tax rate in the quarter was 28.4%, which was slightly below the prior year rate of 28.8%, and was slightly below our anticipated rate of 29%.
The decline in the tax rate primarily resulted from a decrease in operating income.
With the addition of forecasted income from PCB, we expect the tax rate to be approximately 29%, consistent with our previous guidance.
Earnings per share decreased from $0.72 in the prior year to $0.46, primarily driven by the acquisition, restructuring-related charges and a higher share count, which negatively impacted earnings per share by $0.32 in the quarter.
Excluding these charges, non-GAAP earnings per share would have been $0.78, up 8%.
A reconciliation of these earnings to GAAP earnings is included in our earnings release, which is available on our website and the SEC's website.
Moving on to a summary of cash.
The cash balance increased $109 million in the quarter to $173 million.
The increase was driven by the issuance of common stock and tangible equity units associated with the purchase of the PCB Group, which increased cash to $186 million net of issuance costs.
Partially offsetting this increase in the quarter was $44 million to fund an escrow account associated with the PCB acquisition, $21 million to reduce our debt balance, $8 million to purchase the cap call related to the tangible equity in that offering, and $4 million for dividends.
Now, I'd like to update you on our full-year revenue and EPS guidance ranges.
As <UNK> mentioned in the headlines, we are refining our full year revenue range to $630 million to $640 million, including the contribution from the PCB business.
We are confident in our ability to achieve this revenue range given the confirmed demand from our technologies across our Test markets, as evidenced by strong order performance in the first nine months of the year, the high level backlog we have entering the fourth quarter, and the expected contribution from the newly acquired PCB business.
Regarding our earnings per share for the full year, as <UNK> mentioned in the headlines, we are narrowing the expected range to $1.35 to $1.50 per share.
This guidance range includes contribution from the PCB business, all non-recurring severance, acquisition and integration-related charges, transaction related amortization of intangible assets, higher interest expense from the new debt we issued, and the negative impact of a higher share count.
We narrowed the previously issued guidance range, because we have lower than anticipated non-recurring acquisition-related charges from our acquisition of PCB that are partially offset by higher-than-anticipated amortization expense, and share count.
We previously anticipated acquisition-related charges to be in the range of $27 million to $29 million in fiscal 2016, but we now foresee these charges to be in the range of $18 million to $20 million for the full year.
In the fourth quarter, we're anticipating transaction related amortization expense to be approximately $3 million to $3.5 million and as I mentioned, net interest expense to be approximately $7 million.
Finally, I'll conclude my remarks with a brief update regarding the reported material weaknesses in internal controls over financial reporting.
We continue to make progress on the various measures that we have in place.
We have implemented new procedures in our sales and contracting processes to include identification of specific deliverables contained within multiple element revenue arrangements into deferral and appropriate amount of revenue.
These actions include the hiring of new personnel as well as providing additional training for existing personnel.
We believe that we are on track to remediate the material weaknesses by the end of our fiscal year.
This concludes my remarks for today.
I will turn the call back to <UNK> for his final comments.
Thank you.
Thanks, <UNK>.
In summary, overall we were happy with our quarterly performance and believe we're on the right track to deliver improving results in the quarters ahead.
Although orders growth was not as robust as recent quarters, given the strength of our opportunity pipeline, we believe it's largely timing related, and we expect our markets to remain robust.
We have a tremendous long-term global customer base and continue to see rising demand for our technologies across our Test markets.
Our Test services business continues to perform well, reflected in four consecutive quarters of double-digit growth.
Lastly, we completed the PCB acquisition and integration activities are well underway.
All this provides us with confidence to deliver the revised guidance for 2016, and revenue and earnings growth in 2017 and beyond.
That concludes our prepared remarks and I'll turn the call back to you, Sheryl, to host the Q&A session.
Yes, it was 67%.
67% in backlog.
Obviously, <UNK>, we're looking for pricing opportunities every time we get the chance, the technology we offer, we believe is the best in the world and we're looking to ---+ we pay it fairly forward and the investments we made to sustain that, I would say, there is no push to overtly change the mix of product.
If you look at our opportunity pipeline, we don't go into that level of detail to break the pipeline down into categories, but all the categories remain very robust, the custom ---+ engineered to order, which we all lump in these calls to in the custom category and the standard products.
So, we've got great opportunities in every branch of this, it's more timing related.
So, year and a half ago, I struggled to explain the uptick in custom orders as strong as it was, those waves seem to tend to wash across our customer base, for example, in automotive.
We see upgrades of large facilities, which require custom equipment that started a year and a half to two years ago.
And it really came in very quickly, and now that some of that's taken root and those orders are placed.
We see more of a return toward normalcy over time.
So I wouldn't over-sell this mix improvement in backlog and to <UNK>'s point it's not going to really impact our earnings performance until fiscal 2017, but it is a nice trend and we're pleased with it, and we think all of our categories remain strong and very competitive.
Yes, <UNK>, we're continuing to hire, because we just got such an opportunity for growth out there.
The customers want more and more of field service engineers and we're hiring and training as quickly as we can.
What you're starting to see now is that pivot from, it being dominated by the investments we're making to landing more ---+ not only more volume, but an increasingly rich volume or an increasingly rich mix of services that we're selling.
So, I would expect that to continue over time; there will be some volatility; there will be quarters that are up and down in terms of margin performance, but ---+ because we continue to make consistent investments in the business.
But I think, if you average them out over the coming quarters, you'll see a nice trend upward in margin over time.
So again, I am not over-selling the improvements we made in the quarter, I think they were great.
And I'd love to see them continue every quarter there will still be some volatility, because we continue to invest a lot of money in our services business, because there's such demand out there.
Yes, <UNK>, I just want to add one thing on that.
So yes, it was a nice uptick, I mean gross margins were above 43%.
Year-to-date services in that 39% to 40%, and that's the range we expect going forward, is that 39% to 40% in service margins, because we will continue hiring FSEs, Field Service Engineers, as we see this as a big opportunity for MTS.
<UNK>, that's the safe thing to do from your modeling standpoint, it's layered in like that.
There will be some volatility around that number and obviously we're driving to make it as (inaudible) we can record.
Yes, that's where year-to-date and we expect that going forward.
I think it'll be mid 40%s and above that.
So that's what we really see.
When we get to make critical mass, if you will, of installed field service engineers, so the percentage we're adding every year drops, the drag on the business from the investment we're making will decrease.
And I think, and we're making some marvelous investments in terms of software upgrades and things that are going to bring a lot of value to the customer base.
So I think you'll see over time, we're returning to the kind of the mid 40% range, mid 40%s gross margins, but it will take some time just given the trade-off between investments in people and the richer mix of business that we're starting to win.
I like the mix change in our backlog.
It depends on how it flows through every quarter, we still have a lot of custom concepts and a highly customized kind of engineered to order products in that backlog.
So there will still be some volatility quarter-to-quarter.
I think the shocks that we saw earlier in the year in terms of projects that we have won, kind of 12 to 18 months ago, I do believe that has passed.
So I think we'll see much improved smoothness of performance, if you will, and a gradually improving margins going forward in the Test product business.
Yes, in terms of growth profile, <UNK>, it's clearly the two-thirds of the business that overlaps with our Test business, we're very confident seeing growth in that, because again, we have such excellent visibility into the opportunity pipeline looking forward in our Test business because those projects have plans so far in advance.
So, we know there's going to be investment in new R&D and product development that will fuel our Test business.
We also believe that will fuel two-thirds of the [PCB] sensor sales to conduct those tests in the lab and outside of the lab.
So we feel very good about the growth prospects there, part of their business and our historic business that's exposed to industrial machinery.
It remains frustratingly sluggish and I think they've delivered some nice growth in the last few years, they've been exposed to the same headwinds that we have in terms of just the overall GDP at the world and especially capacity utilization and machinery demand.
So where we and I think PCB from the past are winning a lot of business, it's just the overall demand, it has been sluggish or even negative at times.
So it's kind of offsetting, so it leaves you with fairly an exciting growth rates on the industrial equipment side.
On the Test driven side, which again is two thirds of the PCB business related to our Test markets, I think we'll see the same kind of demand drivers that we do in our current business.
And as we said, our opportunity pipeline in Test is a record level approaching $1 billion.
So, we feel very good about the demand looking out the next couple of years.
Absolutely, <UNK>.
I am ---+ no doubt about it.
I can't put a number to that, but obviously the ---+ to shortened development cycles by our customers.
They're trying to get more and more data from each test they run, which requires more and more sensors, and more and more data handling from those sensors.
So, yes, that was a big rush <UNK> for us investing in this business.
I just think, our customers are under immense pressure to short development cycle times to get these new cars, new planes, sold it to customers more quickly.
And as they drive to take time out, the best cycle is pushing our Test equipment business into interfacing more and more with simulation environments.
So we're investing a lot in the interface with simulation technology to link our Test equipment into that.
And a key part of that is data collection from the Test itself.
And so, I love those fundamental drivers, I don't believe they're going to go away for years and years to come, and it was a big rationale, because of the depth of our customer knowledge in Test, a big rationale for the acquisition of PCB.
No, I think you'll see us smoothing going forward <UNK>, particularly as our backlog improves and mix, toward the more historic custom versus standard product mix, it makes it just much, much easier to claim your engineering resources and to run the factories.
So we feel good about that, the long-term move back toward normalcy in our backlog.
The lumpiness really, it's almost the inverse.
If you look back into Q2, it was a couple of very big complex projects, or clusters of similar projects that really ---+ that we had taken, probably a year and a half ago or a year ago that really found this up near the end of their time in manufacturing.
We had to go back and do some design modifications to meet our customer desires as they had evolved.
So that it really develops up and I'd say it was quite the aberration.
I think I feel very good about the improvements we made in the quarter.
Some of that was really from the second quarter.
I don't think there was any real pull-forward from Q4.
I just think we've just ran the business better and a strong focus on turning backlog and you saw natural improvements.
Yes, we have a little bit stronger competitive base in China and the China economy has been slow.
So, actually it surprised me that we didn't have more pressure than we've had in the last year and a half.
Clearly in the last couple of quarters, there's been some pricing pressure within China again on standard product, the things that we're less differentiated on.
So we still have dominant positions in custom and highly engineered to order products there.
But our standard products where we have a few more competitors, they have shown some more pricing competition and I think that's why we called it out.
One thing I would mention, <UNK>, as we've launched some ---+ a couple of very nice new product families over there in the last few quarters and as those grow in volume going forward, it's meant to directly address the differentiation question in the Chinese market.
So we're responding to that pricing pressure by launching some new products that we think are more highly differentiated in that standard category.
So that's our approach defending off the price competition there.
It's nicely distributed around the world.
The demand, if you looked at it versus history between and then we kind of divided between the Americas, which is dominated by North America obviously United States, Europe, which is dominated by Western Europe and Asia, and then now increasingly dividing Asia into individual countries, it's very well distributed.
If you look at the pipeline, not only for the next 12 months that we will report on, but if you look out a year or two, you see OEMs around the world and in virtually every geography making very similar investments in their laboratories.
So clearly there is a predominant to invest in Asia, because that's where their demand is coming from and they want their labs closer to the customers, but they're still spending ---+ a lot of our OEMs are still spending a lot of money in the US, and then Western Europe and especially on the very high end laboratories that are moving toward more simulation and integration of test equipment simulations for the engineering basis.
So I would tell you it's a great business and it's very well distributed around the world.
So from a risk standpoint, we feel good about that.
It's not dominated by any one customer or one geography, as opposed to the others.
No, <UNK>, it's been remarkably smooth.
I've been very pleased with the PCB management team that we've asked to leave the combined business going forward.
I think their leader David Hore and the quality of the team that he built over the last decade really shines through.
And they have embraced our historic business and are getting to know that and a lot of the synergies we have modeled, they validated and have put their own spin on them, and we feel very good about it.
So again on both the cost and the revenue side, our plants have been validated, we worked hard at those plants during diligence.
We had time, and we invested resources to do it and is paying dividends now, I think those are ---+ those have been confirmed.
Now we got a lot of heavy lifting to do over the next two to three years to realize them.
But on both the cost and revenue side, I would expect we'll hit our targets.
Yes, in the other markets.
Yes, it's a great discussion <UNK>, the aerospace business has been very solid for us.
Again it tends to be a little lumpier, depending on when the customers are launching new aircraft, but and we see some move between the large body aircraft company and the regional jet kind of companies.
But it's been fairly robust.
We feel very good about it.
And again bringing PCB into the family now they participate in that aerospace testing, as much as we do.
So in terms of ground based testing and even air testing of airplanes, so we love that addition.
It's been a good market.
Civil seismic testing has been nice and consistent, now the problem with that business is testing large projects.
So it's lumpier by nature, but the overall demand for civil seismic test equipment has been high and particularly there in China.
China and the other areas in Asia that are really active geologically for earthquakes, which really is the driver for those laboratories.
So I think you see a lot of Chinese spending in universities and that's driving investments in seismic testing, not only for earthquake resistance, but in terms of building and bridge designed for performance, things like that.
They really are spending nicely and consistently over time.
And again, mainly driven out of Asia, which would include Japan and Indonesia and other countries in Asia as well that are exposed to earthquakes or Tsunamis.
I'm trying to think, materials testing to support ---+ materials are going through an evolution right now into carbon fiber-reinforced composites.
And you see those, and clearly taking root in the new aircraft, the new Airbus airplanes, Boeing aircraft, you see a lot of composite usage and it's expanding down into the smaller aircraft sizes now.
So a lot of composite usage, which is very good for our materials testing business.
We've got some of the leading equipment for testing composite material, we feel very good about our position there and those materials by their nature require a lot more testing than to metal alloys.
So it's very good long term for our business, so again that market, while it was a little bit softer in the last quarter just driven by some specific engine aircraft programs, all in all, looking out the next couple of years, we feel very good about materials testing business.
And that's generally standard product for us, within our standard category, good margin rich product that should again be very nice to have in our backlog.
So I think that covers the major markets.
<UNK> have I missed anything.
You covered it.
Got it, okay.
Any other question on the markets or geographies, <UNK>.
Yes, absolutely, <UNK>.
Its legs are growing, I'd still say, they are kind of short, they're growing.
The frustration there is, they bring a lot of value to a customer's products.
They make earth moving equipment, mining equipment, cranes, they make them a lot smarter.
The problem really has been in in-demand for those products.
So while we're getting designed in the platforms, it's been offset somewhat by volume in the room, I think we'd use probably a 10% number, <UNK>, in terms of growth.
10% year-to-date in orders in mobile hydraulics, yes.
So mobile hydraulics for us is up 10%, <UNK>, in a very tepid in-demand market.
So when that volume does pick up for people that are in the earthmoving mining, heavy lifting crane business system, you're going to see a lot of growth in that business.
So we feel really good about the design wins.
So the legs maybe short, but they are running fast and we're really waiting on the global GDP improvement to drive more demand.
I will say there is no, there is not much product in the pipeline I mean, in the inventory in the pipeline.
So when you do see an uptick in in-demand or its major construction equipment companies, things like that, it should really flow through nicely quickly to our business.
But today, I'll take the 10% growth, I feel good about it.
But it's got a lot more potential demand.
Okay, Sheryl, thank you very much.
And thank you all for participating in our call today.
We look forward to updating you on the progress again next quarter.
Thank you and have a great end to your summer.
| 2016_MTSC |
2017 | ADS | ADS
#Thanks Ed
Revenue for the third quarter increased 1% to $1.9 billion, soft against our mid-single digit expectations, primarily due to hurricanes Harvey and Irma negatively impacting the growth shields at Card Services, which knocked off about three points of growth
Core EPS increased 13% to $5.35 for the third quarter 2017, better than our expectations, primarily driven by lower loss rates of Card Services and a lower tax rate, a result of initiatives implemented during 2017. Excluding the improvement and the effective tax rate, core EPS increased approximately 9% for the third quarter
Adjusted EBITDA net increased 7%, benefiting from the better-than-expected loss rate at Card Services
During the quarter, we reduced our corporate debt by approximately $180 million to $6.2 billion
That brings our corporate leverage ratio down to about 2.8x as of September 30, 2017 versus our covenant of 3.5x, leaving us with over $2 billion in available liquidity
Let's slip to the next slide and talk about LoyaltyOne
As expected, the third quarter was tough for LoyaltyOne, with revenue decreasing 20% to $305 million and adjusted EBITDA decreasing 26% to $61 million
Fortunately, the future looks brighter for this segment
Breaking it down by major business
AIR MILES revenue decreased 28% to $185 million for the third quarter of 2017, driven by a 43% decline in AIR MILES reward miles redeemed
This drop in revenue was consistent with our expectations as we pulled in the burn rate, which are miles redeemed divided by miles issued from 129% last year to 80% this year
80% is our target, really, moving forward
Importantly, the negative draw over from the elevated redemption rate is gone entering the fourth quarter of 2017. AIR MILES issued was down 7% year-over-year
Normal spend is on track, but we have seen less promotional activity in the grocery vertical
We expect issuance growth to improve in the fourth quarter and in 2018. Importantly, we recently re-signed BMO, our largest AIR MILES sponsor, to a multi-year contract
BrandLoyalty's revenue decreased 5% to $121 million for the third quarter of 2017, consistent with our expectations
BrandLoyalty's fourth quarter is looking good, with revenue and adjusted EBITDA expected to increase double digits year-over-year
Let's go to Slide 5 and talk about Epsilon
Epsilon came in short of expectations for the third quarter, with revenue increasing 3% to $559 million and adjusted EBITDA decreasing 7% to $125 million
Year-to-date, revenues has increased 5%, slightly better than annual guidance while adjusted EBITDA is essentially flat, soft compared with our annual guidance of 4% growth
Revenue came in short of expectations as the growth rate in our digital offering slowed during the quarter
We believe the onboarding of new clients will fill this hole quickly
The pull back in digital growth also negatively impacted EBITDA margins for the third quarter
Importantly, Epsilon's technology platform offering continued to show progress toward a promising turnaround, with revenue increasing 1% for the third quarter
This is a significant improvement compared to the double-digit decline in the fourth quarter 2016. The client base is showing stability, and we've seen an increased win rate on the basis of the introduction of cloud-based more packaged products into the market
Let’s now move on to Card Services
Card Services produced another solid quarter growth, with revenue up 9% to $1.1 billion and adjusted EBITDA net up an even better 20%
Average card receivables increased 14%, just under $16 billion, consistent with our expectation of mid-teens growth while credit sales increased 5% to $7.4 billion
Operating expenses increased 16% to $382 million or 9.2% expressed as a percentage of average of receivables
The percentage is essentially being flat with last year
The net loss rate was 5.5% for the third quarter 2017. A substantial improvement compared to the 6.2% loss rate in the second quarter of 2017 and better than our expectations
Importantly, gross loss rates were flat with the third quarter of 2016, even excluding the slight benefit from the hurricanes, which I'll talk about later
Recovery rates are still down year-over-year, pressuring the net loss rate, but we consider this pressure to be transitory as we shift collections back to internal
Our delinquency forecast continues to suggest flat to lower loss rates in 2018. This trend allowed us to slightly drop our reserve rate during the quarter while maintaining 12 months of forward coverage
Now the question everyone has been asking what was the impact of the hurricanes
We estimate the hurricanes reduced our credit sales by approximately two points, reduced our revenue by about $40 million for the quarter or about 100 basis points negative impact to gross yield and benefited our loss rates by about 15 basis points
So what that means to our gross loss rates were down 18 bps year-over-year, take away the 15 basis points for the improved from the hurricanes, and that's roughly the flat year-over-year change in our gross loss rates
It is important to remember that this is a temporary impact
Under FEMA-designated individual assistant disaster areas, affected cardholders are not required to make payments nor will any interest or late fees be assessed for two month period
Hurricane Irma will impact us early in the fourth quarter and then operations will return to normal
With that, I will turn it over to Ed
Yes, so there's two things I'd point you, Dan
First is the gross yield decline year-over-year makes the percent growth look a bit higher, the 16% you referred to
If you had basically the same gross yields year-over-year, you'd see it flat-flat
As a percentage of AR, it moved a nominal amount
We said, going back to the last quarter, we expected our operating expenses to be better this year, 40 to 50 basis points
I think that's still on track
We would tell you we're still in the process of adding collectors
And we'll staff them up over the remaining of Q4. I would still expect the OpEx leveraging in Q4 to be better year-over-year
That said, we're still very much on trend to that guidance we gave last quarter of about 40 to 50 basis points improvement on an annual basis
That'd be correct as well
But let's say we hadn't had the influence of the hurricanes affecting our gross yields, the revenue growth would have been up 15% to 16%
So you have to basically influence the fact that you take a whack on your gross yields is not influencing your OpEx
It just means for affected person within that FEMA designated zone, that account is frozen from migration to the delinquency trends to loss if they're in that affected area
So if they were in to 150 days past due and they were affected, it would just mean that's going to freeze and that would not have rolled into the charge off after 180 days
I'd say, Dan, we think the core is still very strong
Occasionally, you get some timing differentials when new programs are coming onboard
I think that's the biggest thing we're looking at
We'd expect it to bounce back in Q4. We just had a little bit of a timing with fewer new programs launched in Q3 than what we've been doing before
But like I said, I think that will bounce back in Q4.
We would tell you the backlog is still strong
Occasionally, it just shifts as to which quarters till when the program is going to onboard
And I would say, we said a little bit lower in Q3.
Thanks
That is the consolidated number
And again, it's rounded to three
It was about $40 million impact to card and a $40 million to total
It's about 2.6% so around…
Well, what we said on the last call, <UNK>, is that the credit sales through online are basically outside of bricks-and-mortar over a third of our credit sales
That number can jump up to north of 40% in the fourth quarter as you get the holiday spend
That's really the metric we've been focusing on
It's the traditional bricks-and-mortar or about 85% in store, 15% online
And we have over a third of our credit sales online
So that's really the ability for us to capture the data, identify you, track you online and give you a relevant target it off and it gives us the ability to do that
We'd put it this way, <UNK>, is the improvement is not definitive on us onboarding Signet
I mean, we're looking basically – yes
If we're looking to Q4, we would tell you putting Signet on the side line, we feel good gross losses will be down year-over-year in Q4. And that's going to be driven by the natural improvement you're seeing on delinquencies in that wedge
We estimate that it's up to 15% of our accounts were within the Florida affected area and the Houston and Texas affected area
That doesn't mean that all of them would have gone into this program, but it's up to 15% of our accounts were affected
Yeah
I’d hate to say anything is permanent, but I'd tell you what we would target is about 20 basis points improvement per year, and that's expressed as a percentage of average AR
Obviously, growth imbalances influences it
There are certain programs that influence it
But I think that's a very reasonable target
It's about 20 basis points per year
Tim, we'd tell you not really anything that we've seen different between the interactions online versus bricks-and-mortar
We know with online, we need to drive different service products
That's just the ability to minimize shopping cart abandonment, the ability to capture
You make it very simple if you make a transaction
But in terms of loss performance, delinquency performance, so forth, there's really no differences
So think about it this way
It didn't influence our loss rates, really, at all for the quarter
The shift you saw that is put in held-for-sale is a vertical that's really just not a core vertical for us
It's pretty small
We're going to look to divest it
It is at the carrying value, which would be par amount than the anticipated losses, so there is no assumed gain or anything associated with it
It's something we'd probably look to try to get off our books toward the end of this year, early next year
But really, it goes back to something that Ed said before, is with the growth we're generating and now assume that coming onboard, we can look at different verticals and this is one we tested for several years, really, not a great vertical for us
It's really time for us to basically do a little bit of cathartic process to the file and get rid of the things that we don't want to focus on
And so that shift to held-for-sale, that's exactly that small vertical that we're just decided not to pursue
It is performance of the overall portfolio, plus we did have some sales in the market, which we already had contracts in place
So just like we saw in June, we saw a little bit of improvement in recovery rate
We saw the same thing in September
So it's a combination of natural trends, a little bit of sale of previously charged-off paper that really drove the improvement
| 2017_ADS |
2017 | VMI | VMI
#<UNK>, this is <UNK>.
I would say you're correct in concluding that utility and ESS are going to provide the lion's share of the sales growth.
And I think the indication is that irrigation is going to be on the whole similar to last year.
And then in coatings, we believe we'll get some growth, plus on top of that we'll have a full-year impact of the Texas facility which started up late last year and didn't really contribute much to the top line.
And then Energy and Mining would be relatively flat compared to what we saw in 2016.
So I think as far as ---+ there really isn't ---+ we haven't provided a specific breakout as far as pricings.
There's certainly some pricing baked into that 5% sales growth, but, and it varies a little bit by segment.
But I'd say the majority of it is expected to be volume-related revenue growth.
Yes, I would say more or less that would be the case.
If you look at overall expected economic growth in the US, that should rise on the whole, coatings sales.
It depends a little about an individual sector's, but I think that's a fair assumption.
<UNK>, we haven't gotten into that level of detail as far as profitability by segment.
But certainly, if you think about what <UNK>'s comments were regarding lead times and utility in the pipeline and the orders and so forth, we're expecting to continue and the operational [objectives] as well to continue to grow on the utility side of it.
Right.
Yes, you are right.
I mean one of the things we ---+ a couple things we saw particularly in the back end of the year after Brexit was a pretty significant decrease in the discount rates, the AA corporate-bond rates which really drives much of pension valuation.
Because as those rates go down, all the future payments end up being amounting to more money because they're discounted at lower rates.
So you saw we had an increase in our pension liability, but it's important to understand that this plan is a dormant plan.
So all of the members of the plan are either retirees that are drawing a pension today or they're deferred members, so there's no actives in there.
So in that sense, it's got a little different risk profile to it as well as time goes on.
We'll see some valuation bounce around with respect to ---+ just because of how discount rates work, but the asset portfolio did quite well in 2016 and it helped to mitigate some of the effects of the discount rate effect.
But I think we're ---+ we work closely with the pension trustee board and it's just something we have to manage over time and we feel over the long term it won't be a big material impact to us as this all unwinds, but it's a pretty volatile environment right now.
I would say <UNK>, that it's relatively small related to that as well.
Where we're going to continue to be opportunistic, where we can, so we're not building in a lot of activity on share repurchase for 2017, but that remains to be seen depending on what happens with the market.
Thank you Kayla.
This concludes our call and we thank you for joining us today.
This message will be available for playback on the Internet or by phone for the next week.
We look forward to speaking to you again next quarter and, at this time, Kayla will read our disclosure statement.
| 2017_VMI |
2017 | WY | WY
#Thank you <UNK> and welcome everyone
2016 was a transformational year for Weyerhaeuser
Through our merger with Plum Creek and a $2.5 billion divestiture of our Cellulose Fibers business we became a focused timberland and forest products company and nearly doubled the size of our timberland holdings
In the midst of executing these portfolio changes, we maintained our relentless focus on performance
In 2016, we increased full-year EBITDA by almost 55% to nearly $1.6 billion
We delivered the highest annual wood products earnings in over a decade
We captured merger cost synergies faster than expected and raised our 12 month run rate target by 25% and we achieved over $100 million in operational excellence improvements
Finally, we returned $2 billion of cash to shareholders through the repurchase of common shares
For the full-year 2016, Weyerhaeuser reported net earnings of just over $1 billion or $1.39 per diluted share or net sales of $6.4 billion
These results include the solid fourth quarter performance I will highlight this morning
Our fourth quarter net earnings were $551 million or $0.73 per diluted share on net sales of $1.6 billion
This includes after tax earnings of $489 million from discontinued operations, primarily the gain on divestiture of our pulp mills and after-tax special charges of $44 million for a tax adjustment associated with repatriation of Canadian earnings following our Cellulose Fibers divestiture, merger related expenses, and some non-cash real estate impairments
Excluding these items, we earned $106 million or $0.14 per diluted share
Adjusted EBITDA for the fourth quarter totaled $400 million
This is an improvement of over 60% compared with a year ago and represents substantial increases in each of our operating businesses
Before discussing our business results in more detail, I will make a few comments on the housing market
Single family housing activity continued a steady improvement in the fourth quarter
Single family starts rose 10% compared with the third quarter and ended up the year up 9% compared with 2015. Total U.S
housing starts finished the year at nearly 1.17 million, a 5% improvement from 2015. As expected, the single family share of activity increased during the year and multi-family activity remained volatile
For 2017, we expect single family housing starts to increase by over 10% and we anticipate total housing starts of approximately 1.25 million to 1.3 million
Economic fundamentals support a trajectory of continued steady housing growth
Employment and wages are rising
Consumer confidence is strong, mortgage rates remain historically favorable, and public surveys indicate that builder confidence remained near historic highs
Although builders are managing through some constraints such as availability of skilled labor, stringent permitting requirements, and land and construction cost inflation, our customers echo the optimism seen in builder surveys and feel confident that housing market will maintain solid upward momentum
Let me now turn to our business segments
I will begin the discussion with timberlands
Chart 4 to 6, timberlands contributed 123 million to fourth quarter earnings, 1 million more than the third quarter and 223 million to adjusted EBITDA
Western timberlands contributed $101 million to fourth quarter EBITDA compared with 109 million in the third quarter
Export log volumes declined due to seasonally slower construction activity and timing of shipments
Average realizations, however, improved moderately across all export markets as market dynamics remained favorable
In Japan, housing activity remained solid with wooden housing start up 8% for the full year
Japanese lumber inventories which were elevated for much of 2016 after a delay in the consumption tax increase continued to decline to the seasonally slower construction period and are now at more normal levels
This created favorable supply demand dynamics and supported improved pricing in the quarter
Pricing for our Chinese export logs improved also
Fourth quarter log inventory to Chinese ports were largely flat with third quarter levels and we experienced continued strong takeaway throughout the quarter
In the Western domestic market, sales volumes were lower as mills took holiday downtime but average realizations improved slightly
Low mill inventories drove demand particularly in Southern Oregon market
Our Western crews did a good job adjusting harvest plans to adapt to record October rainfall
Our fourth quarter harvest lines were unaffected by weather and we had no infrastructure damage
However, per unit logging cost and road spending increased compared with the third quarter due to the wetter weather
Moving to the South, Southern timberlands contributed 112 million to fourth quarter EBITDA, up 4 million compared with the third quarter
Southern markets remained flat as mills had adequate inventory, and average log realizations were largely comparable to the third quarter
The harvest volumes increased modestly as fourth quarter typically included a higher volume of stumpage sales
As in the West, our crew successfully flexed target settings to adjust to November severe weather and we had no material damage to our timberland
Silviculture expenses declined as fourth quarter typically includes fewer site preparation and hardwood management activities
EBITDA for Northern timberlands totaled $7 million
This was unchanged from the third quarter on comparable prices and volumes
The strategic review of our Uruguay operations is proceeding well
We continue to see strong interest and look forward to providing further information when the review is complete
Real estate, energy, and natural resources, chart 7 and 8. Real estate and ENR contributed $13 million to fourth quarter earnings
Excluding special items, the segment earned $27 million, $12 million more than the third quarter
EBITDA increased nearly two thirds ---+ let me start over, EBITDA increased nearly two and a half times to $90 million
Our average price per acre declined due to mix as fourth quarter included a large transaction in Montana where timberland prices are regionally lower
For the full-year 2016, we sold approximately 83,000 acres or roughly 0.6% of our land base
Fourth quarter special items included $14 million of non-cash impairments
These resulted from a change in strategy for several small legacy real estate projects that were formerly targeted for development
The asset value optimization work continues to proceed well
As we indicated during our December Investor Day, we have finished applying the AVO process across our Southern ownership and are in the process of listings in the 500,000 newly identified acres
Our focus has now turned to the West where we are evaluating our Washington and Oregon acres
This work is going very well and remains on track for completion by mid-year 2017. Wood products, charts 9 and 10. Wood products contributed $99 million to fourth quarter earnings
The business delivered full-year 2016 earnings of $512 million, the strongest annual earnings since 2005. Fourth quarter adjusted EBITDA totaled $132 million, $71 million lower than the third quarter primarily due to seasonally lower sales volumes and operating rates
Lumber contributed $57 million to EBITDA, $28 million lower than the third quarter
Sales volumes declined 12%, average lumber realizations decreased 2%, and Western log costs increased
Operating rates were lower and unit manufacturing cost increased due to planned downtime for installation of capital projects at several of our Southern mills
Heavy rains and regional flooding resulted in modest weather related downtime in some of our Western and Southern locations and higher manufacturing costs for our Canadian mills
EBITDA for OSB totaled $46 million, $17 million lower than the third quarter
Sales volumes declined 18% and average sales realizations were comparable to the third quarter
Operating rates declined due to downtime for planned maintenance as well as repairs to our Sutton, West Virginia mill
As we previously disclosed, the Sutton mill experienced a fire on November 1st
This was an insured event
Repair activities progressed rapidly and successfully and the mill resumed full production around year-end
The net fourth quarter financial impact of this fire on OSB business was approximately $5 million, the amount of our deductible as we brought the mill up and received insurance reimbursements faster than expected
We anticipate no net financial impact from this event in the first quarter as modest repair expenses should be offset by reimbursements received within the quarter
Engineered Wood Products contributed $26 million to EBITDA, $17 million lower than the third quarter
Sales volumes for Solid Section and I-Joists declined approximately 10% and operating rates were lower due to planned maintenance and holiday downtime
Average realizations increased modestly
EBITDA for distribution totaled $5 million, slightly lower than the third quarter
By focusing on improving product margins and tightly managing cost, the business performed well in what is typically a seasonally challenging quarter
I will now turn to discontinued operations chart 12. We closed the sale of our pulp mills and printing papers business on December 1st and November 1st respectively
This completed the divestiture of our Cellulose Fibers segment
Net after tax earnings from discontinued operations of 489 million are primarily comprised of the gain on these two divestitures
Chart 13 operational excellence, as I mentioned in my opening remarks I'm proud that each of our businesses maintained its relentless focus on improving relative performance and delivered strong 2016 operating results throughout the merger integration process
Each of our business has met or exceeded its 2016 operational excellence target
Timberland has delivered 42 million of operational excellence improvements primarily from merger related operational synergies
In Wood Products OPEX improvements included $16 million in lumber, $21 million in OSB, $12 million in Engineered Wood Products, and $15 million of EBITDA improvement for distribution
The benefits of these improvements are clearly visible on our bottom line
In total wood product EBITDA improved by almost $270 million in 2016 compared with 2015. A $41 per thousand square feet year-over-year improvement in our OSB realizations created a tailwind of $120 million and an $11 per thousand feet improvement in our lumber realizations provided a tailwind of approximately $50 million
The remaining $100 million improvement was largely attributable to nearly 65 million of wood products OPEX and the addition of the Plum Creek wood products mills
For 2017 we are targeting additional operational excellence improvements of $95 million to $125 million across our businesses
This includes $40 million to $50 million in timberlands, [Indiscernible], $20 million to $25 million in OSB, $10 million to $15 million in Engineered Wood Products, and $5 million to $10 million in distribution
I will now touch briefly on our merger cost synergies
We have been achieving our targeted cost synergies faster than anticipated
And as we mentioned in December the scope of opportunity has exceeded our initial expectations
We raised our cost synergy target by 25% to $125 million and remain highly confident we will achieve this full amount on a run rate basis by the end of first quarter 2017. We also remain on track to eliminate the $35 million of cost formerly allocated to our sale of fibers business no later than 2017 year end
I'll close this morning with a few comments on the softwood lumber agreement
Although discussions between U.S
and Canadian negotiators continued through the end of 2016 we have been unsuccessful in reaching an agreement
With the change in administration, negotiations are currently on hold while U.S
trade representative and Department of Commerce appointees are confirmed and take office
In the meantime the U.S
International Trade Commission and Department of Commerce have continued to evaluate the petition for countervailing and anti dumping duties filed by the U.S
Coalition at the end of November
On January 6th the ITC unanimously determined that there is a reasonable indication that the U.S
has been materially injured by imports of softwood lumber products from Canada
Department of Commerce is currently conducting an investigation that will result in a determination regarding preliminary duties
We expect the announcement regarding preliminary countervailing duties in late April with an anti dumping determination following in late June
Our preference remains for a negotiated agreement
coalition continues to work closely with the Office of the U.S
Trade Representative and we look forward to resuming negotiations
I will now turn it over to <UNK> to discuss some financial items and our first quarter outlook
Thank you <UNK>
I am proud of our 2016 achievements
We have transformed our portfolio, delivered strong operating performance, and taken substantial strides towards a successful and value creating merger integration
And in 2017 I'm very optimistic about the opportunities in front of us
We remain strongly committed to driving industry leading performance, capturing merger synergies, fully capitalizing on improving markets, and demonstrating disciplined capital allocation to drive superior value for our shareholders
And now I’d like to open the floor for questions
Question-and-Answer Session
Good morning <UNK>
So let me start with your second question regarding the anti-dumping duties and we are not taking any steps to rebalance, <UNK>
As we've talked about previously, if you look at our Canadian operation, about a third of our Canadian operation is sold ---+ of our production is sold in Canada, a third is sold in export markets outside the United States, and a third comes into the U.S
Overall, our Canadian lumber operations is roughly 20% of our overall lumber operations, so you take that 20% times a third it's not a big part of the driver for our lumber operation
In terms of CAPEX <UNK>, the $300 million is in line with what we've done over the last couple of years, and our primary focus in our CAPEX in our Wood Products operation is low risk, high return projects that drive down our overall cost structure and that's been a key part of accomplishing our OPEX
With that said, some of those projects do in fact result in debottlenecking and additional capacity, and as we've also stated we are in the process of rebuilding two of our mills Dirk's and Millport, which have been really good mills for us historically
But, in order to significantly dive down the cost structure of those mills, we essentially needed to rebuild them in place and that will result in some additional capacity as well
But again, the primary focus is on the cost side where we will be increasing capacity as a result of some of the projects that we've put in place
<UNK>, in terms of operating rates, we are optimistic about demand as we move into 2017 for all of our products
So I would tell you there will be some seasonality as there always is, but I would anticipate lumber operating in the low to mid 90's, OSB operating in the low to mid 90's, ELP normally operates about 10% lower than that, so I would anticipate that being in mid 80's type range
But as I said, we are encouraged by what we're seeing in terms of demand
And as we talk to our customers, they are bullish on housing and increasing demand for all of our products in 2017. In terms of the coordination between engineered wood and distribution, that's something that’s here where we also have done a lot of work on
And I would tell you those two operations are working more closely together than they ever have historically
And that's been very beneficial in driving improvements in both our EWP and our distribution business and I think there will continue to be further opportunities for that coordination as we move forward
In terms of G&A I would tell you that the slight increase in fourth quarter versus third quarter is just timing
We are if you look at where these companies were before we combine them in 2015 versus where we're going up in 2017, we're highly confident that we're going to meet or exceed our $125 million target by the end of the first quarter of 2017. And as I said earlier we are at a basically $100 million run rate through the fourth quarter of 2016. So in really good shape on our G&A and as I mentioned earlier the $125 million is 25% higher than what we originally factored in when we announced the merger
In terms of the engineered wood products and distribution coordination and quantifying that <UNK>, as you would expect that is difficult to quantify but that is part of the OPEX improvements that we've highlighted in 2017. And there maybe some upside as these two operations continue to work closer together and figure out a way to drive value for customers and improve bottom line profitability
You know <UNK> it's hard to tell yet
I mean we're only into the ---+ through the month of January and as you know the look back will be roughly 90 days
So, hard to determine yet if there's been a significant change in the Canadian activity
As you know Canadian activity was up significantly in 2016 and we'll be watching how that plays in 2017. A lot of rumors floating around as to what may or may not happen but too early to tell what changes if any the Canadians maybe taking as we move into 2017 in the potential look back period
Well <UNK> what I would tell you is as we continue to learn more about our real estate operation and what the opportunity is there, we continue to be encouraged by the AVO process and what that is unveiling
So we are confident that, that number will be over $250 million for 2017.
So <UNK> we continue to be encouraged about what we see in the export markets
Let's start with Japan as you know that's our biggest market
So as we said earlier prices were up in fact in the fourth quarter which was encouraging
Volumes were down but that was due to seasonality and frankly some of the timing of our shipments and how the ships played out that were going to Japan
In the first quarter in line with your point we do anticipate volumes will be up
And our best guess right now is flat pricing but we continue to be encouraged by what we see out of Japan
Housing market activity was up 8% roughly through the month of November which is the last data point that we have
As we look to China encouraging there as well
As you know log inventories continued to be at normal levels, pricing was in fact up in the fourth quarter
Volume again was down seasonally and as we move into the first quarter continuing to anticipate good demand out of China and we anticipate volumes up in the first quarter versus the fourth quarter
Yes, I would say customer log inventories in the West are kind of towards the low end of normal as we as we move into the year
And I would say in the South they are kind of at normalized levels in terms of where you would have seen log inventories historically
You know our take is the first and second quarter we would anticipate pricing to be essentially flat
We do think there's the possibility of slight improvements in pricing as we move to the second half of the year and then as we look further out than that we continue to be quite optimistic about the improvement in Southern log prices
As housing continues to improve that will drive demand
As you also know there are significant projects that are being built and will be coming online in 2017 and 2018 type timeframe that we think that's going to drive 12 million to 13 million green tons of additional demand
And then of course a big component of this will be what happens with Canada and we think either as a result of hopefully a negotiated agreement which will result in a quota or the duties that that will have an impact on the amount of lumber that is coming in from Canada which will result in more demand on Southern saw logs
So all those factors we are encouraged by what we see there and like I said are hopeful that we'll see some slight improvement in the second half of this year but more importantly as we move into 2018 and beyond
We think we're going to see some pricing power as a result
Thank you
But a lot of these changes to the markets we're doing a lot of work on it but it's still too early to know exactly how these will play out under this administration
But a lot of moving parts that could have frankly potential benefits for our company going forward
At this point that is generally fair
More work to be done and more specifics to be learned but I think to your point if anything it should be a net positive for our company and the U.S
Thank you
Good morning <UNK>
And so it's good question, <UNK>
So, what we ---+ when we started this process as you were recalling as you highlighted two or three years ago, a lot of the improvements were non-capital improvements because our take was show ---+ these mills needed to show that they could make operational excellence improvements without capital
And then if they could do that then they earned the right to capital to further drive down the cost structure
So we initially said okay let's do this without capital
Once you show that and you earn the right to capital which will further drive down the overall structure of our mills set
So as you said we've made good progress
There's still more work to be done but we now have confidence <UNK> as we put in this capital that we will in fact continue to deliver on these OPEX improvements and more importantly than that continue to drive down the overall cost structure of our mail system where we will in the current upturn that we're in outperform the competition
And when things do eventually roll over, which we think was many years from now we will be back at the bottom
Now with that said <UNK> I don't want to give you the sense that this $300 million of capital is going to be the level forever
We think there's a couple more years of spending at this level to get our mills fully positioned to where they need to be from a cost perspective and then you would see capital fall off to a more normalized level in the $200 million to $250 million range
<UNK>, what I would tell you ---+ I think timberland markets do continue to be strong and we see that over and over especially for high quality timberland there's a lot of interest in its investment class and for high quality timberlands there's a lot of interested buyers both domestic buyers and frankly international buyers starting to show up
So as these TMOs do mature and that is happening some of them you see being extended due to performance
Some of them you see trading back and forth but a lot of interest in continued in this asset class and like I said any process that is being run and there are some being run and we participate in just about all of those
There are a number of interested parties who are part of that
Yeah <UNK>, so as we mentioned at our Investor Day kind of over 90% of our business assets is in timberlands and as you have just highlighted a significantly improved cost structure for wood products
Our go forward cash flow will be much more stable and that's intentional
We're in the process of discussing the payout ratio with our Board and we will update you when those conversations are complete
But we think there is the opportunity to increase the payout ratio as we look forward
In terms of a dividend increase, as we have consistently said for the past few years we are committed to a sustainable and growing dividend
As we look into 2017 we're clearly going to benefit from cost and operational synergies, continued OPEX improvements, and as we've talked about this morning stronger housing markets
So, all those things will be factored in as we work with our Board on decisions regarding our dividend
Thank you
So, on the second part of your question, clearly higher natural gas and oil prices will benefit our Energy and Natural Resources segment
We have a lot more leverage to natural gas and forever rough numbers just to give you a sense, every dollar improvement in natural gas, $5 million to our bottom line all else being equal
But as you would also anticipate when pricing increases that also gives you the opportunity to go lease more
Don’t have quite that type of leverage to oil but as oil prices continue to improve there will be more opportunity from a leasing perspective
In terms of commodity price push we're starting to see a little bit of that not big numbers at this point but that ---+ turning to that, that is why OPEX is so important as we are at some point going to see some cost push and a big part of our operational excellence efforts are to make sure we are doing things that offset that or frankly more than offset that so that the benefits we see from our increased pricing and volume fall directly to the bottom line
Yeah, as you said the strong U.S
dollar continues to be a headwind for us
All other currencies that are important to us weaken versus the U.S
dollar after the election
Some of them has strengthened slightly this December but they overall net-net remain weaker than where they were at the end of the third quarter
In Japan as you said the risk there is the strong U.S
dollar pressures
Prices our customers products compete with lower cost lumber imports from Europe but as I said earlier despite all that we continued to have good demand for our logs into Japan and we actually saw some fall off in the imports that were coming in from Europe during that time period
So net-net while it's not positive we work through that and continue to have good demand from our Japanese customers and part of that is built on the long-term relationship and unique relationship we have with our customer base in Japan
I would say the biggest difference in timberlands versus where we were the first two or three years are the additional opportunities that have been presented as a result of combining
Weyerhaeuser and Plum Creek
So a portion of the $42 million that we got in 2016 was due to those operational synergies, the ability to rebalance wood flows, to minimize cost, and increase realization, optimize the silviculture practice cost based on our larger scale
And then frankly just best practices in harvesting and transportation both again as a result of scale but maybe even more importantly learning from each other
There were some things that Weyerhaeuser and when we got in there looked at it did better and lower costs than Plum Creek and there were some things that Plum Creek did
So as we move forward while we're confident in having what I would say were a fairly significant targets 40 million to 50 million in 2017 and I would anticipate a similar number in 2018 are because of the opportunities that have been created by combining these two companies taking best practices, taking advantage of the larger scale both from ability to service customers, rebalance wood flows, and drive down the overall cost structure of our timberlands operations
So really excited about that and I can tell our folks are really excited about it as they almost on a daily basis find additional opportunities for OPEX as a result of the combination
So as I mentioned earlier in my comments, the first and second quarter are pretty kind of low volume of sales and so we're guiding for lower amount in fourth quarter
Real estate sales can be a little lumpy, it depends on the character of the transactions and so it's a little difficult to predict
And then the second half we'll see it will pick up
So, that's pretty much the pattern we would expect pretty low in the first and second quarter and then picking up in the third quarter and then a lot of closings really occurring in the fourth quarter
Good morning <UNK>
You know <UNK>, I’ll tell you that right now our focus, what I like to say number one, two, and three is continuing to make sure we fully capitalize on the value that we can create by combining Weyerhaeuser and Plum Creek and driving the synergies and other benefits to the bottom line
So that's what we are primarily focused on
As we continue to work through that, and as I like to say earn the right to continue to grow we will be looking at Timberland acquisitions to potentially grow our company
With that said with the scale we have and diversity of geography we have we don't have to grow so we can be very disciplined as we move forward
In terms of South versus the West we're basically like both of those markets and would look so it's not a waiting more to one than the other
We both ---+ we like both the South and the West and would look to potentially growing both of those as we move forward
Good question <UNK> and there are a lot of various regulations, potential regulations regarding that
I can tell you we’re doing an immense amount of work on that front
We've got a really good technology group that is looking for different applications that you can put on engineered wood products that will in fact extend what's called the burn through test, extend that and as a result of that meet any additional requirements that may be put forth from that
So again a lot of work being done on that, very encouraged about what we've seen so far in the test that we're running and think we will be well positioned as we go forward in EWP
No, it's clearly state by state that's the way these things work
Again a lot of uncertainty regarding exactly what that may look like and what the timing may be
But we've been on top of it and feel good about the opportunities to deal with this on a go forward basis
Yeah <UNK>, I do think there is the opportunity for price improvement in EWP as we move through 2017.
Alright, thank you
Yeah, I think it's going to take a little bit of time <UNK> to get the appointments in place and approved and get up to speed
So I can't tell you exactly when negotiations will start again
But it's going to take a little bit of time
In terms of the U.S
coalition a lot of work continues to be done just to ---+ so we don't lose any momentum during this period of time
I think the U.S
coalition are all on the same page and like I said are hopeful of a negotiated settlement as we move forward
Alright, thank you
So as I understand it that was our final question
I would like to thank everybody for joining us this morning
And as always really appreciate your interest in Weyerhaeuser
Take care
| 2017_WY |
2017 | ACOR | ACOR
#Thanks, <UNK>.
Good morning, everybody.
We reported AMPYRA net sales of $131.5 million for the second quarter of 2017, that was an increase of 8% over 2016.
We are reiterating our 2017 AMPYRA revenue guidance of $535 million to $545 million.
On March 31, we announced that the U.S. district court invalidated certain of our patents related to AMPYRA.
We disagree with the ruling and filed a notice of appeal in May.
The appeals process typically takes 12 to 18 months from the notice of appeal and our opening brief is due the first week of August.
We will continue to drive the growth of AMPYRA and benefit from its revenue, at least, through July of 2018, pending the outcome of the appeal.
Moving to our late stage pipeline.
We filed our NDA for INBRIJA on schedule during the second quarter.
This was a key milestone achieved, thanks to intensive work by many dedicated Acorda associates.
We expect the FDA to notify us by the end of September, regarding whether the submission is accepted for full review and we expect the 10-month review.
INBRIJA is being developed as an on-demand therapy for symptoms of OFF periods and people with Parkinson's who are on an oral levodopa carbidopa regimen.
OFF periods are one of the most debilitating aspects of the disease.
Our commercial preparations for the launch of INBRIJA are well underway.
We also expect to submit a marketing authorization application or MAA to the European Medicines Agency by the end of 2017.
In the last month, we presented efficacy and long-term safety data from the INBRIJA Phase III program at the MDS meeting in Vancouver.
The efficacy study met its primary endpoint, an improvement in UPDRS Part III, the standard validated endpoint agreed to by the FDA.
The long-term safety data showed no statistical differences in the mean changes in FEV1 and DLco, pulmonary function test from baseline to week 52, between INBRIJA and observational control groups.
Overall, in these studies, patients were using INBRIJA an average of about twice a day up to 1 year of treatment.
We're projecting peak INBRIJA net sales in the U.S. alone of more than $500 million.
Moving to tozadenant.
Tozadenant is an oral adenosine A2a antagonist, representing a potential first-in-class treatment for chronic maintenance therapy of Parkinson's disease in the U.S. This would be complementary to INBRIJA, which is intended for on-demand use rather than chronic maintenance use in OFF periods.
In a Phase IIb trial, tozadenant reduced average daily OFF time by more than 1 hour relative to placebo, even in people already being treated with several other concurrent Parkinson's medications.
We expect results from our pivotal Phase III clinical trial in the first quarter of 2018.
We believe that tozadenant, if approved, represents a commercial opportunity in the U.S. that is greater than that of INBRIJA.
Dave will now review select financials for the quarter.
Thanks, Dave.
So in the first half of 2017, Acorda experienced a major setback, and also major positive milestones, respectively, the adverse AMPYRA patent verdict and the positive INBRIJA Phase III and safety data and timely submission of the INBRIJA NDA.
Setbacks are inherent in the growth of biopharmaceutical companies and the difference between long-term value creation and not is most often diversification and execution.
Acorda's management team and board implemented an aggressive diversification strategy, beginning 3 years ago, which is now yielding results.
Very importantly, following the reductions to our operating expenses, which we implemented after the patent verdict, we project that the company's balance sheet will be sufficient for us to achieve cash flow positivity with the launch of INBRIJA in 2018.
This does not include any consideration of additional cash to be generated by royalty monetization or other business development activities.
We're focused on 3 key areas this year and into 2018: advancing our late stage Parkinson's program toward approval and commercialization; maximizing the value of AMPYRA, including appealing the patent verdict; and generating value through business development initiatives.
We'll now take your questions.
Operator.
Okay, great.
Thanks, Mike.
So the activities between now, and hopefully, approval next year are executing, really, on the program.
So we will be hopefully engaging with FDA throughout and responding to questions, providing them with information.
There'll be the usual 120 days safety update that we'll provide.
As we said on the call or in the presentation, we expect somewhere in September ---+ by somewhere in September to be informed of, hopefully, acceptance of the NDA filing and then proceed from there with the actual review and back-and-forth with FDA.
We're preparing separately on manufacturing.
Pre-approval inspection, is a key item, and so we're drilling on that over and over and over so that we will be prepared for pre-approval inspections.
So again, it's really execution and just making sure that everybody here is focused, has their eye on the ball and that we are thinking of anything possible that FDA may come up with our may need, so that we're able to respond in a very timely and crisp way.
In terms of a panel, we certainly have not been informed that there'll be a panel and we don't know.
I don't want to front-run the FDA on this, because they will be telling us whether or not they think there's one necessary.
We, personally, don't see why there would be a panel for this particular drug with the data set that we have.
But again, we can't preempt the FDA.
We don't see a reason, but if they do, we'll discuss it with them.
And then with regards to the NeuroDerm deal that you alluded to, it's very encouraging to see that there are repeated signs now that the whole issue of OFF periods for people with Parkinson's is really gaining a lot of currency.
When we did our original deals with Civitas 3 years ago, there were a lot of people, even I have to say, even in the medical field, who were not entirely convinced or not really into it.
I think that deal really underscores that this is one of the key frontiers and key unmet needs in the Parkinson's space, and it's something that people with Parkinson's and MDS specialists are enthusiastically encouraging the industry to come up with solutions for.
So we feel we're terrifically positioned with INBRIJA on that one.
It's not that we are more optimistic, it's that our commercial team has continued to do its market research and its work in the area.
And we're at a point where we feel confident coming out and telling people that we think it's a larger opportunity based on the work that's been done.
Remember, it's a chronic maintenance therapy versus an on-demand therapy, which would be used periodically in a different rates by different patients, which would be INBRIJA.
Whereas here, you've got something where the Phase III looks like the Phase II, you have a brand-new mechanism of action, a brand-new class of drug, first time in 20 years that, that would be true in U.S. So there's a lot of cachet for that and we think that, once you put a patient on it and if it works for them, they are going to take it every single day.
So within the Parkinson's space, we would expect more broad and more chronic usage, which is why we think it's bigger.
The other thing to point out is that we originally were expecting that we would be entering a market after istradefylline, which was Lunbeck's entry.
Because of the failure of that program, we no longer are accounting for that in our market projections, and that also feeds into, obviously, a bigger market opportunity for tozadenant.
Yes, so we have studied extensively all of the drug device ---+ particularly, the inhaled drug device combinations and what the story was there.
The team at ---+ what is now Acorda Boston, but was Civitas, has been doing this for 20 years, and had an enormous amount of experience with FDA as they did the original insulin program, which delivered over 1 million doses over that program for several years.
So they've been able to fold all of that learning over that long period of time and interactions with FDA into what we've done with INBRIJA.
Let's admit right up front, we do all the work we can and the FDA may still find things, but what I ---+ what we are comforted by is that the Civitas team has checked every single box that we and every consultant that we brought in and some of them being ex-FDA as well, could think of.
Typically, when these things have had issues, if they have not been direct issues with the clinical data like safety or efficacy issues or the molecule itself, they've typically been delivery issues, reproducibility of dose from dose to dose or manufacturing issues around the device itself.
We have done a huge amount of work to mitigate that.
One of the things, with this product, that is more comforting than some others for example, is that it's not a metered-dose inhaler.
Typically, the metered-dose inhalers tend to be more complicated, right.
Because you have multiple doses in a single device.
You have to ensure that every single dose that comes out is the same every time and so on.
This is a much more simple and straightforward device that's been refined over many years.
It has, I think, 6 or 7 pieces of plastic that are molded together and one little metal piece that pierces the capsule.
But the dose is actually much more like an ordinary pill or capsule, because it is a capsule.
So you know you're getting the same amount of powder every single time because that's what's in the capsule.
You put it in the device, it pierces and then you inhale what's in the capsule.
So from that standpoint, there's just less complexity.
There are just ---+ It's like when you buy sort of a modern refrigerator with a digital display and all kinds of bells and whistles, and the one thing that you are always worried about is there more things to break, right.
Here, there are really fewer things to break.
And so that, in and of itself, gives us a lot of comfort.
That and the fact that we've just done a huge amount of homework over and over and over.
And having said that, if FDA comes up with questions about it, we will be ready.
Okay.
So they are nominally the same going after the same target, which is the adenosine 2A ---+ A2a receptor.
Istradefylline is a different class of molecule.
It's a xanthine versus an adenosine based molecule, which is tozadenant.
Now having said that, that doesn't give you the answer, but it does tell you that they are very different types of molecule.
What we were attracted to when we made the decision to buy Biotie Therapies with tozadenant, was that when we looked at the history of data in the field, the Phase IIb trial for toz, we believe, had more robust data than the istradefylline trials had.
So the outcome measures were stronger, there was more internal consistency.
There was clear dose responsiveness.
It was an extremely robust Phase II.
Istradefylline was quite variable when you looked at the data.
So there were certainly signals there, but in our view, it was not nearly as convincing and strong as tozadenant.
So we start out with that as a baseline.
If you look at the Phase II data, we come out and our external experts come out concluding that it worked in Phase II.
And then the issue is, how do you translate that reliably into a larger Phase III study, so that you get, at least, the same result that you did in Phase II.
And that's been an area of difficulty for this class of drug and that was seen with preladenant, which was the Merck entrant into the field.
So we took learnings from the preladenant study, there was a paper in JAMA that was published after their Phase III failed, pointing to very clear steps that were missteps that occurred during that trial, which we have taken into account in our trial.
So for example, there were entire countries where they decided to put centers that did not work out well, that did not have high-quality data.
We avoided those countries.
We made sure that we vetted the centers that were doing the trials extremely, so that we only had the highest quality centers that had a track record of producing high-quality data.
We have an external group of expert movement disorder consultants, specialists, some of the most accomplished in the field, who actually reviewed the recruitment in this study, and that's probably the secret sauce that goes along with this.
So they actually are reviewing the recruitment to make sure, in an ongoing way, that the patients that are coming into the study are actually the right patients, and if they conform to the inclusion-exclusion criteria, with no exceptions.
That's also been an issue for other trials where, frankly, it's gotten sloppy and it just wasn't picked up and they did have the right patient population.
We have ongoing monitoring of the trial.
We look at the blinded data that's coming in just to make sure that there is nothing [on tour] that looks weird or funny going on.
When something comes up that sounds like it might be an issue with the center, we have a SWAT team that goes out and that immediately engages with the center.
So we're doing everything that we can think of and that our external experts can think of to ensure that the trial will have the highest possible quality data.
Our belief is that, for other members of the class that have not done well in Phase III, that these were the reasons why they did not do well.
And so we're mitigating those risks.
Yes, so it's very much alive.
We didn't emphasize it on the call because we wanted to emphasize the near-term late stage products.
But in fact, we have of a number of drug in the pipeline that are going to have read-outs this year, SYN120 prominent among them for symptoms of dementia in Parkinson's disease.
Just to remind people, this is a combined 5-HT2A/5-HT6 antagonist.
5-HT6 has been implicated in cognitive symptoms.
5-HT2A is more on the affective side where you would be looking at symptoms of psychosis.
And you find ---+ if you look at the field, you've got pimavanserin from Acadia that's really primarily 5-HT2A, that's already been approved for psychotic symptoms in people with Parkinson's, you've got Axovant working and others working on 5-HT6 angle for dementia, mostly in Alzheimer's and other dementia ambitions.
So we're actually quite excited by the potential of SYN120.
This is the first real human proof of concept trial for this particular molecule in Parkinson's with dementia.
We should have a read out by the end of the year.
Now ---+ yes, the caveat on it is that the trial is, somewhat, underpowered.
We inherited that when we bought Biotie.
They did not have the funding to do tozadenant properly and to do a larger SYN120 trial.
So they did the best they could with the funding available.
Nevertheless, we hope we'll see some useful data and if we see positive signals that are credible out of this study, we would have another molecule that we can launch into late stage development, that would be extremely exciting.
Plus the potential that it could actually be used as a dual mechanism, because people with these degenerative brain conditions, Parkinson's, Alzheimer's, others.
Typically, there are a lot of them, who suffer from both cognitive symptoms and psychotic symptoms.
And this would offer the potential of having a single treatment that could address both.
So we're excited about it.
But we have to wait for the data at the end of the year.
And then of course, we're still waiting for data, also, by the end of the year on our M22 antibody for remyelination in MS, and also on our molecule for our VAP-1 inhibitor for primary sclerosing cholangitis, which is a proof of concept.
It's a potent anti-inflammatory molecule with potentially multiple indications.
This is a proof of concept.
If this looks interesting, we would look at it for perhaps ---+ or it could be looked at for things as diverse as liver fibrosis, for example.
So all of that should be reading out by the end of the year and we'll see where we are.
It's an excellent question and I'm not sure I have the full answer for you.
I will tell you that when you are dealing with symptomatic relief, typically, these indications have a lot more in common physiologically than not.
If you are dealing with disease modification, you're in a different mode, right.
Because then you are addressing different disease substrates.
But when you are getting into the substrates of cognitive dysfunction in dementia, so for example, by boosting cholinergic output, those have more in common than not across these different conditions.
So we would expect that if you see a positive signal in Parkinson's, that, that ought to translate into something like Alzheimer's disease.
All right.
Well, thank you very much for joining us, and we are looking forward to some exciting developments over the next 6 to 12 months and we'll see you at the next quarter call.
| 2017_ACOR |
2017 | AVY | AVY
#And hello, everybody
As Mitch mentioned, we’re off to a good start to the year
We grew sales by 7% excluding currency and 4% on an organic basis
And we delivered an 18% increase in adjusted earnings per share, driven by strong operating performance and a lower tax rate
Currency translation reduced reported sales by about 1% in the first quarter, with an approximately $0.03 negative impact to EPS
Our adjusted operating margin in the first quarter improved 40 basis points to 10.1%
This was driven primarily by the margin expansion in RBIS
Productivity continues to be a key driver of the year-on-year margin improvement, including about $11 million of incremental savings from restructuring actions net of transition costs
Our adjusted tax rate was 30% in the quarter, reflecting our revised outlook for the full year rate, which is lower than prior year, due largely to geographic and income mix and the adoption of new accounting standards that impact the accounting for taxes on share-based compensation
We now expect the impact of this accounting change to be approximately $0.14 for the year, roughly $0.07 higher than previously anticipated due to the rise in our share price during the quarter
Free cash flow was negative $22 million, which is $15 million better than Q1 of last year
Higher net income and improved operating working capital performance was partially offset by higher capital spend to support our growth strategy
We continue to expect free cash flow conversion for the year of approximately 100% of GAAP net income
We also repurchased approximately 500,000 shares in the quarter at an aggregate cost of $35 million and paid $36 million in dividends
Including dilution, the company’s share count increased by roughly 600,000 shares in the quarter, half of which relates to the tax accounting change
Additionally, you may recall that dilution always has the biggest impact in the first quarter of our year
Overall, our balance sheet remains strong and we have ample capacity to invest in the business, as well as continue returning cash to shareholders in a disciplined manner
As you know, in March, we issued €500 million of 1.25% senior notes, which are due in 2025. We used approximately €200 million of the proceeds to repay short-term borrowings associated with last year's acquisition of Mactac
The remainder will be used primarily to support further investment in the business, including acquisitions
We’re pleased with the results of this first euro offering, which is consistent with our large and growing footprint in Europe and provides us a natural hedge for our balance sheet
On the acquisition front, we closed the previously announced Hanita Coatings deal in March and the integration of that business is underway
The announced acquisition of Yongle Tape is on track to close in the middle of this year as well
Both of these acquisitions will accelerate our ability to grow faster in higher-value categories
We expect the impact to 2017 EPS to be immaterial for each of these transactions as we move through their integration phases
Now, let me turn to the segment results for the quarter
Our Label and Graphic Materials sales were up 9% excluding currency and up approximately 5% on an organic basis
The solid organic growth continues to be led by the emerging markets and Western Europe
The strength in emerging markets continues to be broad-based, with double-digit demand growth in the quarter
We also had a modest benefit from pre-buy activity in China, ahead of our price increase that took effect in late March
Within the mature markets, we continued mid-single digit growth in Western Europe and that was partially offset by some softness in North America, as Mitch indicated
Our high-value categories were up mid-single digits on an organic basis, with low single-digit growth in the combined graphics and reflective businesses, offset by some continued strength in specialty labels
The slower growth in graphics was due mostly to timing of customer purchases as well as a challenging comparison in North America, where the category grew at a mid-teens rate in Q1 of 2016. LGM's operating margin of 12.7% was unchanged from last year as the benefit from higher volume and productivity was offset by unfavorable product mix and higher employee-related costs
The year-over-year impact of price and raw material costs was negligible in the quarter, but we did see some modest sequential raw material inflation and we expect that trend to continue into the second quarter
As I mentioned, we have raised prices in China
And if current inflationary pressures in other markets persist, we will look to raise prices again where appropriate
Shifting now to Retail Branding and Information Solutions, RBIS continues to show good progress from our business transformation, with organic growth of 3% despite a lower contribution from RFID than we have seen in recent quarters
And we had continued meaningful improvement in our operating margin
In the base apparel categories, we continue to see volume growth outpace apparel unit imports in what remains a challenging environment
In addition, the impact of strategic price reductions to improve our competitiveness moderated in the first quarter
As Mitch mentioned, the RFID was up mid-single digits for the quarter, in line with our expectations
We continue to expect this business to deliver 20%-plus growth per year, with volatility in the growth rate from period to period
RBIS’ operating margin improvement reflected the benefits of productivity initiatives and higher volumes, which are partially offset by higher employee-related costs
As the team continues to execute its business transformation, we anticipate continued margin expansion over the balance of the year
In our Industrial and Healthcare Materials segment, our sales also came in better than anticipated, with growth of 4% excluding currency and an organic decline of approximately 1%
Mid-single digit organic growth in industrial categories largely offset the expected decline in healthcare
Operating margin declined in this segment overall due to the sales decline in healthcare categories as well
Let me now turn to our outlook for the balance of the year
We have raised the midpoint of guidance for adjusted earnings per share by $0.18 to an updated range of $4.50 to $4.65. Roughly $0.07 of this increase reflects the stronger operating outlook and another $0.07 comes from the higher-than-expected impact from the tax accounting change
The remainder reflects the reduced headwind from currency translation, which is partially offset by modestly higher share count
We now also expect the impact of restructuring charges and other one-time items to be approximately $0.30 for the full year, a $0.10 increase versus our previous assumption
This reflects the shift in timing of certain charges associated with our restructuring actions and the inclusion of transaction costs from the Yongle Tape acquisition, which was not previously in our guidance
We outline some of the key contributing factors to our EPS guidance on slide nine of the supplemental materials
I’ll focus on the factors that have changed from our previous outlook
We now expect organic sales growth of 3.5% to 4.5% for the full year, reflecting our solid results in the first quarter
At recent foreign exchange rates, we estimate that currency translation will reduce net sales by approximately 1% and reduce pretax earnings by roughly $10 million
As discussed, we’re also expecting interest rate of approximately 30% for the full year
And we expect average shares outstanding, assuming dilution, of 89 million to 89.5 million shares
Our other key assumptions essentially remain unchanged from what we shared last quarter
So, overall, to wrap up, we’re very pleased with the start to the year and our continued progress against our long-term strategic and financial objectives
So, thank you and now we’ll open up the call for your questions
Question-and-Answer Session
Yeah
So, it’s not actually higher share-based compensation
It’s the tax impact on share-based compensation
So, that was the change in the quarter
So that’s related to an accounting standard change
So, we have removed the impact of taxes on share-based compensation from an equity to the income statement
So, that was really what the challenge was
It’s not necessarily an increase in share-based compensation overall
Yeah
Really, the impact of a smaller headwind on currency, given where we are right now versus where we were at the beginning of the year, net of a little bit of a headwind on the share count
In terms of the cash tax, not a major change from where we’ve been historically at this point
That accounting change also did have a small impact on our cash flow as well, but overall not a big change from a cash tax rate
I think on graphics in particular, we did have a little bit of low-single-digit growth in North America in the quarter
And that was coming off of Q1 of last year where we grew, I think, in the mid to high teens in the graphics business
If you look at kind of a couple of year comp there, we’re still up in the mid-teens from where we were a couple of years ago in Q1. So, still feel good about our overall trajectory in graphics
Just a little bit of a blip in this quarter with the high growth we had a year ago
Overall, as Mitch I think mentioned in his comments, other volumes in North America were up slightly year-over-year, particularly in our base business, then offsetting part of that kind of slower growth rate in graphics
It’s broadly the volume flow-through from what we’ve changed on the top line by and large
Obviously, individual divisions, there's different things going on
But that's one – I’d say overall what’s happening
Jeff, so I ought to take this one
We issue equity-based compensation within the first quarter
And people who are retirement-eligible, that tends to have a disproportional hit at the point of grant on the P&L, not only necessarily vesting
So, that’s one of the reasons that it hits in Q1 a little bit more than elsewhere
Yeah
I think the gap is negligible in the first quarter
As I said, we do expect some modest inflationary pressure sequentially into Q2. So, you might have a slightly bigger gap, but still relatively modest overall
And we’d expect it to narrow again in the second half
Thank you, Jeff
I think we started to see some increases in China, in particular, a little bit earlier in acrylics, in particular, I think, earlier this year that let us to do the price increasing action in March
We are starting to see the pressures in the back half of Q1 and into Q2, increased a little bit, as I said, in some of the other regions, and that's where we’re evaluating other actions
But, again, also looking at how we look at productivity in material reengineering to help abate that as well
But, overall, we’re seeing a little bit, again, modest increases across the regions, a little bit earlier in China, which is why we took the action there
And we’re evaluating actions in other areas
But we do see some signs that this inflation could be a bit transitory across the year
so, we’re making sure we’re staying on top of that and we’ll increase prices as appropriate and where it’s necessary
Well, this being our largest business, the whole range of our guidance that we have, 3.5% to 4.5%, we came in at 5%
You’re asking specifically about LGM
So, at the low end, you’d have to have a moderation for the rest of the year
And at the high-end, you would basically have a consistency with what we saw on Q1.
Thank you, <UNK>
So, first, on the employee cost inflation, this business is more employee intensive than our other businesses, and that's why we call it out as far as the wage inflation that we have within the business
You would expect – I won’t comment specifically about in this year, but over the trend of the transformation that we have that that headwind would moderate a bit
The key thing we focus on is our general wage inflation – because we have this in all of our businesses – getting it to a size where it’s at or less than our general productivity that we have
So, non-restructuring productivity
So, using Lean Sigma and otherwise
And that is our focus and that's something that we've achieved within the quarter and reached
And then, as far as our share gain opportunities, you asked about the – we cycle through the strategic pricing adjustments, but talking about price going forward within this business is tough
It’s a custom business, so you're moving from a 3 x 3 tag to a 3 x 2 tag and going from four color and five color and so forth
So, what we really focus on are the variable margins within that
And we think that we can continue to maintain the variable margins and continue to drive more competitiveness and gain more share
And the share isn't just about price
A big move here has been our improved service, both preorder and our design capabilities, as well as post-order, so how quick we can deliver the products to our customers
That is a key part of the value proposition that we’ve dramatically improved over the last 18 months
| 2017_AVY |
2017 | SKYW | SKYW
#Thanks, everyone, for joining us on the call today.
As the operator indicated, this is <UNK> <UNK>, SkyWest's Chief Financial Officer.
On the call with me today are <UNK> <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Chief Commercial Officer; <UNK> <UNK>, Chief Accounting Officer; Mike Thompson, SkyWest Airlines' Chief Operating Officer; and Terry Vais, ExpressJet Airlines' Chief Operating Officer.
I'd like to start today by asking <UNK> to read the Safe Harbor.
Then I will turn the time over to <UNK> for some comments.
Following, <UNK> I will take us through the financial results.
Then <UNK> will discuss the fleet and related flying arrangements.
Following <UNK> we will have the customary Q&A session with our sell-side analysts.
<UNK>.
Thank you, <UNK> and <UNK>.
Good afternoon, and thank you for your interest in SkyWest.
During the fourth quarter and throughout 2016 we continue to execute on our plans to reduce our risk and evolve our entities to become better, more efficient operations that add value for our people, our partners and our shareholders.
To start, I think it's important to point out our significant fleet movement during 2016.
Over the past 12 months we've added, removed or redeployed more than 125 aircraft across our base fleet of 652 aircraft.
Our ability to execute these significant transitions while successfully operating more than 1.1 million flights is only possible with the exceptional work of the 19,000 professionals across our organizations.
It is clearly no small task to deliver strong reliability and service through significant fleet movement, and I want to thank our people for once again doing an exceptional job.
The evolution of our fleet continues to reduce our risk, improve our capital flexibility and ensure we adapt to our partners' long- and short-term needs.
Reducing our CRJ700 tail risk, ensuring strong liquidity, combined with our pilot availability also help reduce our risk moving forward.
As a result, in 2016 we achieved 38% growth in adjusted EPS over 2015, which <UNK> will touch on later in the call.
During the fourth quarter we continued to make progress on our fleet transition plan, and this evolution continues to produce positive outcomes.
We added new E175s to our Alaska, Delta and United operations.
We redeployed several CRJ700 aircraft from our United operation to our American and Delta operations.
And we began removal of the CRJ200 from our ExpressJet operation as we move to a primarily dual-class CRJ operation with that entity in 2017.
At the same time, we announced a new agreement with ExpressJet to operate CRJ700s for American.
In fact, as we reduce the 50-seat aircraft at ExpressJet, we will grow the dual-class fleet at that entity, an important evolution for long-term viability there.
Additionally, it's worth noting that for the 2016 year, ExpressJet produced a $30 million financial improvement over 2015.
Although we're removing the CRJ200 fleet at ExpressJet, from an overall perspective we continue to see strong industry demand for 50-seat flying with proper economics.
By the end of 2017 we will expect to have removed 200 50-seat aircraft from our fleet over the last three years, but we are confident that our anticipated 50-seat fleet aircraft levels outlined in today's release will stabilize after 2017.
Our objective is to ensure we are best positioned to meet industry demand, and our ability to optimize our overall fleet mix and deliver strong performance continues to meet that objective.
Strong operating performance and service is paramount to what we do on a daily basis.
Our two entities continue to deliver exceptional operating performance during the quarter.
SkyWest Airlines delivered an impressive 99.9% adjusted completion for the quarter, an exceptional mark during any quarter, but especially noteworthy as they accepted 19 new E175s in the same period.
ExpressJet delivered a solid 99.8% adjusted completion for the quarter.
Both of our airlines are delivering top performance within our partners' portfolios.
Once again, after fourth quarter, one or both airlines has been the top-performing carrier in United's network for more than two years now.
Together, our two entities operated more than 270,000 flights in the quarter and continued to deliver consistent exceptional reliability and service.
Our operational success continues to drive demand for our product, and we're well positioned to deliver on that demand with our pilot availability and fleet flexibility.
Looking forward, we expect to complete delivery of this round of new E175 aircraft, improve cash generation, and ensure we are best positioned for continued opportunities and strong demand across the industry through 2017.
As many of you know, the airline industry is often about being in the right position at the right time, and our ability to execute on our current strategy has positioned us well for continued success along those lines.
As we've experienced recently, additional new flying can come unexpectedly in changing conditions, and as we continue to improve our position we are focused on remaining the partner of choice for our existing and new growth.
We believe we're exceptionally positioned today, as our capital and pilot allow us to respond immediately to these opportunities.
As we harvest cash flow and delever our balance sheet over the next few years, we plan to be well positioned in the industry if and when scope or other conditions evolve.
So, although our current delivery cycle of E175 is completed in 2017 we are very well positioned for any new future opportunities.
Additionally, our ability to attract and retain top aviation professionals continues to set SkyWest apart in our industry and to provide added value to our employees, our partners and our shareholders.
I want to again thank our more than 19,000 professionals for their exceptional work in delivering world-class service for our passengers, our partners and for each other.
<UNK>.
Today we reported a GAAP net loss of $270 million, or $5.22 loss per share, for the fourth quarter of 2016, compared to net income of $41 million, or $0.78, from Q4 2015.
Adjusted net income for Q4 2016 was $29 million, or $0.54 per diluted share, up from adjusted net income of $25 million, or $0.49, from Q4 2015.
As we previously announced, the adjusted results for Q4 2016 exclude a $466 million pretax noncash impairment charge and $7 million in early lease return charges.
GAAP net loss for the 2016 year was $162 million, or $3.14 loss per share, compared to net income of $118 million, or $2.27 per diluted share, for the 2015 year.
Adjusted net income was $143 million, or $2.73 per diluted share, for 2016, up from the adjusted net income of $103 million, or $1.98 per diluted share, for 2015.
Revenue was $758 million in Q4 2016, up $5 million from Q4 2015.
The increase in revenue included the net impact of adding 19 additional E175 aircraft during the quarter, the most deliveries we have ever taken in a quarter.
We expect to put 18 more into service during 2017, to take our total fleet of E175s to 104.
Our total fuel cost per gallon averaged $1.85 during the fourth quarter, almost flat with the $1.84 per gallon in Q4 2015 and up from $1.75 per gallon in Q3 2016.
Average fuel cost per gallon in 2016 was $1.70, down from $2.09 in 2015.
Let me touch on the two items we excluded from our $0.54 adjusted EPS this quarter.
In December 2016 we announced that our ExpressJet operation expects to transition to flying primarily dual-class aircraft in its CRJ operation by removing its 50-seat CRJ200 aircraft from service over the next year.
<UNK> will provide more color on this shortly.
Additionally, we announced in December the early termination of our residual value guarantees by Bombardier on 76 CRJ200 aircraft owned by SkyWest Airlines and ExpressJet.
As a settlement for this early termination, Bombardier paid us $90 million by the end of the year, along with other consideration.
Both the required sale of each aircraft and the anticipated cash requirement to SkyWest of returning the aircraft to mid-time condition, were points of risk and uncertainty for SkyWest that this termination agreement eliminates.
Consequently, we reduced the estimated residual value on our CRJ200 aircraft based on current market conditions.
As a result of the Bombardier RVG termination agreement, current market values of CRJ200 aircraft without a Bombardier residual value guarantee and the scheduled removal of over 40 CRJ200s from service in 2017, SkyWest evaluated its total 50-seat CRJ200 fleet and related long-lived assets for impairment in Q4 2016.
So, as I indicated earlier, we recorded a noncash impairment charge in Q4 2016 of $466 million pretax on our CRJ200 aircraft and related assets, which is net of the $90 million in cash proceeds from the Bombardier termination agreement.
As I also mentioned earlier, we recorded a $7 million noncash early lease return charge this quarter.
This completes the lease return charges of $10 million to $15 million we had estimated in last quarter's conference call.
Let me say a couple of things about our balance sheet.
We ended the quarter with cash of $565 million, up from $498 million a year ago.
We issued $429 million in new long-term debt during Q4 2016 to finance the 19 new E175s delivered during the quarter, with total debt increasing by $320 million net of scheduled debt service payments.
Total debt as of December 31, 2016 was $2.5 billion, up from $2.2 billion as of September 30, 2016 and $1.9 billion from December 31, 2015.
SkyWest also used $24 million in Q4 2016 for other capital investments, $17 million for an early retirement of debt, and $76 million to purchase the 19 E175s.
We are very bullish on our ability over the next few years to generate free cash flow net of scheduled debt payments.
The cash required for the final 18 E175s in 2017 will be reduced by a $40 million deposit that we expect to utilize.
We believe we will end 2017 up nicely in cash on our balance sheet over the current level, absent any additional investment opportunities beyond the 104 E175s.
We expect our debt at the end of 2017 to peak at around $2.6 billion once the last tranche of E175s is delivered.
Again, absent any additional investment opportunities, our total debt net of cash could fall by up to $1 billion from the end of 2016 to the end of 2019, including our expected growth in cash net of scheduled debt repayments.
Again, consistent with past practice, we will not give formal specific earnings guidance.
That being said, let me provide a little color.
For the full year 2017 we would expect EPS, excluding special items, to grow by a low-double digit rate over our 2016 adjusted EPS of $2.73.
Q1 is benefiting from the new E175 flying we have put in place over the last year but is being negatively impacted year over year by temporarily higher pilot carry and training cost, higher fuel costs and adverse weather compared to Q1 2016.
Thus we would expect Q1 of 2017 to be roughly flat with our Q1 2016 results.
We would expect completing the CRJ700 transition to American and our strong pilot situation to benefit us in our seasonally stronger second and third quarters.
<UNK>.
We're not going to get into too much detail on that, but we can give you a little color.
<UNK> can help you a little.
Yes, <UNK>, this is <UNK>.
Thanks for your call.
Appreciate it.
And great question, and one that we certainly spend a lot of time on.
And I think it's interesting to note from a strategic perspective and what we spend a lot of our calories doing, there's a fair share that we monitor new 76C aircraft that may be coming down the pipeline.
As you know, this last year we've had a couple of new mainline agreements with Delta and United that didn't provide any relief along those lines.
And so from our perspective, though, when you look at what strategically we're doing, that's kind of why I started at the beginning of the script in talking about the number of agility type of items that we had internally to moving our existing fleet around for new opportunity.
When we discuss fleet flexibility and changing market demands, only a small portion of that has anything to do with new aircraft.
So I think that we are very optimistic about our position that we're in today to respond to a lot of what we anticipate changing market conditions before the next round of RFPs come.
So that's our priority.
We love to take a look at new aircraft.
Certainly our people love new aircraft.
But there's no question that we also still see some good, strong internal opportunities just in sort of the regional chaos, if you will.
But that being said, we also continue to have long-term conversations with pretty much all four of our partners about what happens in the next two, three, four, five years as it relates to new aircraft.
Yes, so in the fourth quarter, <UNK>, we had what you could sort of think of as two nickels worth of softness, a nickel related to pilot training and carry costs, roughly, as we were preparing for the E175 deliveries, and just the overall pilot situation was very good and very strong for us.
And then we had the transition cost for the 700s that ---+ both of those things are continuing into the first quarter, but both of them are definitely temporary in nature.
I mean, the pilot situation is sort of a great problem for us to have right now that creates opportunity for us in our seasonally stronger Q2 and Q3.
And the transition costs from getting those 700s pushed over to new partners, I mean, that's huge to us from an elimination of tail risk perspective.
It pushes a couple more years of contract extension on those.
And that transition should also be complete by roughly midyear.
Yes, that's probably fair.
Again, Q2 and Q3 are seasonally our best quarters.
But as we get through these transitions and push those 700s into service that'll be largely second half.
So let me give you a little more color on that, <UNK>.
Thanks for the question.
This is <UNK>.
And just briefly I think for the year ExpressJet basically ended up at a slight loss.
And I would anticipate next year we're probably going to be in the same position, even though we're eliminating some unprofitable flying with the 50-seat aircraft.
And a lot of it is more transition costs.
We are growing in optimism, clearly, with that strategy of what happens at the end of 2017 with it being an all dual-class fleet.
It provides strategically more agility for the enterprise to respond to market demands and that type of stuff.
But it's a great operation.
They deliver an unbelievably well-performed and safe operation.
Great people out there.
Almost made profitability this last year and we anticipate will be roughly about the same in 2017.
And so let me be clear what I said.
So, yes, there will be ---+ the debt should peak at the end of 2017 at about $2.6 billion.
The $1 billion was a debt net of cash.
So we expect between now and 2019 to both reduce our debt and increase our cash.
And so debt net of cash from 2016 to debt net of cash in 2019 could be down as much as $1 billion.
Well, again, <UNK>, we're expecting to take the bulk of the remaining E175 deliveries in the first half of the year, so a lot of our pilots will be deployed against those new deliveries that'll happen.
So I think that some of the transition costs from the 700s and some of the pilot carry and training costs are going to carry into Q1, as we indicated.
But we also have some weather issues and higher fuel price that are going to be affecting Q1.
So that's why we were guiding to roughly flat with the year-ago number.
Yes, so we've obviously got a lot of what I would say fleet flexibility with our 50-seaters.
We expect our fleet to stabilize around 250.
And the reason why is the demand continues to be very strong.
We have dialog with every one of our major partners today about 50-seat lift.
And those conversations are going on today, and they're beyond ---+ and they're for lift beyond 2017.
And so we think that the demand will continue to stay strong.
We are a very strong 50-seat operator, and we continue to see the demand staying stable for us in that fleet type.
Yes, so there is an American contract that is also expiring in the first part of the year that was profitable.
Yes, so, I mean, this is <UNK>.
It's a great question, and I can tell you it's an issue that we spend probably more time on than anything, because of the value of what it does for the enterprise and that.
But we ---+ let me kind of present it in a way of ---+ there's a lot going on outside of our enterprise relative to what other folks are doing with pilots, but I think that what we've certainly seen at both entities is that our ---+ as we recruit pilots, pilots are very smart, they're very astute, and they know what they want.
Sometimes it's just money, but most of the times it's a lot of other things that we offer.
We have great domiciles.
We have some of the industry best training and safety programs, and that's a reputation that's worth more than any signing bonuses and those types of things most of the time.
But our outlook on it certainly is a complicated model where we look at what our partner demands are, look at what our fleet commitments are, and evaluate what our recruiting abilities are.
There is no question that between the two enterprises it's a little different picture.
Certainly it's easier as unprofitable aircraft goes away on the ExpressJet side to meet that demand and continue to do what we need to do.
That's part of the reason why we made that strategic move on the CRJ side to go to an all dual-class fleet, take out some of the more unprofitable (inaudible) 50-seaters and enhance some of the domiciles and that flying that the pilots love relative to dual class.
On the SkyWest side certainly we've had strong demand for our fleet as we continue to add 175.
And I can tell you that the folks at SkyWest are doing an outstanding job recruiting.
And we're always very, very careful about what we enter into from a commitment perspective with our partners, especially long term out.
Beyond 12 months the visibility of pilots become a little bit more gray than what they are in the next 3 months.
But part of what I think is going to make us successful going forward is to have a very good, solid operating platform that's reliable and safe, training pilots, in my view, better than anybody else in the industry.
We have excellent pay and benefits and everything here, and we're going to continue to be focused on taking a very complicated model with a lot of variables and molding that into first and foremost in a very safe manner, delivering what our major partners need.
So our outlook in 2017 is good.
We feel comfortable with our pilot levels in 2017.
2018 we like what our opportunities are and flexibilities are.
But the picture for 2018 is going to continue to develop throughout this year, and we'll keep you guys apprised of how that goes.
Yes, no, it's a fleet mix.
The dual-class planes obviously have more seats and longer stage length.
Steve, this is <UNK>.
Thanks for your question.
It's a great one, and I can say that as time goes on the way we've started to manage our fleet over the last two to three years as time goes on it continues to provide us more flexibility and less risk.
And so it's good.
The further we get out the more it's mitigated and the more flexibilities within our fleet to respond to the demands within the industry.
Sure, Steve.
I mean, like, it assumes, not surprisingly, that we get the 104 E175s by the end of the year and that for now there are no more investment opportunities this year.
So it's sort of playing out the current story that we see.
And the situation that we're in right now again with strong pilot situation, we hope that positions us.
As <UNK> mentioned, we've got the capital and we've got the pilots to hopefully monetize any unexpected opportunities that are out there.
Thanks, Andrea.
Again, just want to thank everybody for your continued interest in SkyWest.
We're pleased with our progress at both entities, and we're very pleased with the position that we are in as far as future opportunities will be, and we look forward to continuing this evolution and progress, and we'll keep you updated next quarter.
Thank you.
| 2017_SKYW |
2016 | ABBV | ABBV
#I think there's two ways to look at it.
I mean, first of all, if you look at the guidance that we provided back in, I think it was, October 29 of last year.
And you look at what happened to the consensus numbers, what you'll see is they shifted out, roughly a year.
I think the mean now is, probably ---+ if you look at where people are assuming biosimilar impact in the United States, it's probably in that 2019 ---+ <UNK>, correct me if I'm wrong here ---+ that 2019 time frame, although it moved out from about 2017 to 2019.
And I'd say one of the things we track is ---+ to try to understand how the market is perceiving that guidance is we track what our stock performance has been versus our peers over that period of time.
And I saw it just the other day, it made a change in the last couple days a little bit, but we're the number one performing stock since that point in time.
So I think it was around 14% appreciation or something like that ---+ 15% appreciation.
So I think it did have a positive impact.
Having said that, I would agree with your point that there's still this overhang, and this overhang is built around different catalysts.
As we've said before, we've given a lot of clarity in that review of what our IP strategy is and the confidence that we have in our IP strategy.
How the market will relate to that, that's a little harder for me to describe, or predict I'd say.
But certainly I think, as it plays out, I think the market will basically start to better understand what our position is.
And, certainly, as you have more confidence around that, I think you will see the sentiment change.
I think the bigger issue ---+ and I think Rova-T and the IL-23 are two good examples.
We, obviously, have a point of view of what we think is going to happen.
We've communicated what that point of view looks like, I think, in very clear terms.
That doesn't mean that everybody believes that point of view.
But what I'd say is, if you look at even the bare case on HUMIRA, which we certainly don't agree with, and you look at this pipeline that we've now assembled of assets that have a very high probability of success, I think even in the most bare case possible, most people would look at that pipeline and say, they should be able to grow through whatever happens.
Now, obviously, we have a different view of what we think is going to happen.
But even if you look at ---+ at least at the models I've looked at, that have the worst case built into them, when I look at our pipeline and the probability of success of those assets I described in my formal remarks and you just add them up and risk adjust them, based on the data you've seen and the commercial success you would expect from those assets, I think a reasonable person would draw the conclusion that you can grow through that.
And I think that, ultimately, will be the calculus that investors are going to have to make.
Thanks, <UNK>.
And that concludes today's conference call.
If you'd like to listen to a replay of the call, please visit our website at abbvieinvestor.com.
Thanks again for joining us.
| 2016_ABBV |
2016 | DNOW | DNOW
#Well, most of the positives that came from Q2 in those areas were recent contract awards.
So we expect those to continue going forward Q3 and beyond.
Fortunately, those new contracts were strong enough to offset just seasonal declines with most of our other customers in those markets.
Yes.
If I were to describe the different customer segments that are negatively impacting our revenue line ---+ whether that's operators or land drillers or offshore contractors ---+ offshore contractors are definitely in the top of the list.
It's not much of our business in Canada.
We do a little bit off Nova Scotia and New Brunswick, but not much as a percent of the whole.
And our Gulf of Mexico offshore business is low-single-digits percent of the entire US, but when you get to our international segment, that's different.
That's a big part of our business, is offshore market A in the North Sea and on Asia, Australia, Middle East.
We have a lot of offshore exposure.
So it continues to not only hurt us from the perspective that customers are no longer buying because their rigs are not working, but those rigs that are not working are supplying the other rigs that are working.
So, I don't know the percent total now, but in 2014, I would estimate that 50% of our international revenue was probably offshore-oriented.
Thank you.
I would like to thank everyone for their interest in DistributionNOW, and we look forward to talking to you about our third-quarter 2016 results.
Thanks.
| 2016_DNOW |
2015 | ICUI | ICUI
#Yes, sure.
Hey, <UNK>.
I think you have to unfortunately go back in history and the Q1 of 2014 was about the lowest quarter we had on an OEM basis right when I got here last year.
And so the growth rate looks high year-over-year.
I think when we look at the sequential numbers, that is what I was trying to say in the comments, it is basically up $2 million bucks from Q4 and then we are saying that we expected it to be down a bit sequentially.
So maybe it took a little bit more than it was running at this quarter and will give back a little bit more ---+ took a little bit more in Q1 and will give back a little bit more in Q2.
That was sort of what we were saying, and the unknown for us is the back half of the year and that is why we want to wait to Q2 to talk about it, but certainly I mean it's not lost on us, plus16 doesn't mean minus 5 to minus 10.
<UNK> mentioned it is probably somewhere in the middle.
Sure.
I think right now, with the changes we made on the sales force and new people we're hiring et cetera, I think there are no net negatives to the equation.
Sequentially our direct business was equal almost in Q1 as Q4.
But, we had a huge currency issue in Q1, so it sequentially grew to a level I think we felt pretty good about.
Again, if you compare that to Q1 of last year it looks a lot better because that really was the bottom in that case of our direct business, but I think initiatives are going well and again for me the proof will be can we keep sequentially doing this, right, regardless of what the year-over-year stuff says.
And I take currency out of that equation when I am looking at whether sequentially we're doing the right thing or not.
It is different for different parts of the world.
I think we see the US broad market growth as 2% to 3%, probably faster in some other spots in the world.
You really have to go deeper, <UNK>.
Look at how much available US infusion channels are out there to go get given all the change that's happened over the last four years and make your own model as to what the available market and what's a realistic capture rate for them.
And I think we've been appropriately conservative through that since we've started talking about it.
No, I think it will come true.
I think we're being cautious, right.
We're very sensitive to adding costs until we're certain the revenues are there, so we have been trying to be conservative and cautious waiting to see what the revenue picture looked like before we put anything back in, because we made commitments about what we would take out.
I think we actually had more than $10 million of cash cost reductions.
We talked about 10, but we wanted to make sure the revenues came through before we added anything back.
If we can afford it, there is not some magic margin target out there that we're shooting for.
I feel good about where our adjusted EBITDA margins came out this quarter.
We know what best-in-class in the industry is, but there's an opportunity to make an investment that can help us deploy capital or drive revenue growth, or do something strategic we're going to make it.
It's not about like hitting some magic margin number.
That's just a static thing.
That is (technical difficulty) not over long term.
I think as <UNK> mentioned, look at Quarter Two.
That is going to be a fairly good run rate going forward for our SG&A.
On oncology, as <UNK> said, constant currency growth was ---+
Pretty solid, like 20%.
We actually sell more oncology outside the US than we do inside the US, I have been saying for a long time.
So, we feel the pinch of currency on that line, but I think we feel really good about what we did there and then reported 11[%] on a direct.
Yes, we have been suffering because it's been choppy on the OEM side of that business and I think we continue to believe what we said in the last call or the call before that, which is we think by the middle of this year that should bleed itself out.
There was a lot of extra stuff in 2013 and I think they are doing what they can.
I do think our partner continues to be focussed on that, and it will get more intensity and we should see the results of it.
On the---+
You mean excluding the discrete.
The discrete was about $2 million.
I'll go first and see if <UNK> has got anything to add.
I think, <UNK>, again it is misleading to look a little bit ---+ I feel for our business it is misleading to look year-over-year, and so again I'm very focussed are we chipping away and improving at every quarter.
We did improve over Q4.
I think the components of that growth were not due to big industry changes.
I think the overall consumption rate, as we talked about in the last call continues to be positive for us.
We've had some wins, but there is not some sort of massive individual piece of business that we can point to.
It is a lot of little things than just being focused.
So I don't think there is some big individual thing, it's really the market went up in general.
Just compare it on a constant currency basis sequentially, <UNK>, and then it goes back to our thoughts around our product that it's extremely sticky, and I think you're seeing the results of that.
I don't think we've seen any ---+ maybe I would say on Diana system, <UNK>, I think it does help us get a better conversation going around a complete solution, around closed system transfer devices oncology.
Particularly high-volume centers, we have a unique offering there to make clinicians safer, more productive, et cetera.
In core IV, I don't think it's driving the attachment rate with the new valves.
The new valves are their own conversations.
Yes, that's correct.
I'll go and then <UNK> will pop in.
So when we got here and we talked about cleanup activities last year, there were a number of legacy items that made a lot of sense as a small company that probably didn't make as much sense when we became the scale that ICU was, and so we were passing a lot of value top to bottom to other people sitting between us and the customer, and it didn't make a lot of sense.
It wasn't moving market share.
And so we cleaned those items up and we get the full margin, and so that's been a big driver in that.
That's in the books now.
That is not going to get any better.
The thing that is going to get better from here on is volume, right.
More volume, any sort of revenue growth, or even at these levels you see anything we are able to do, you see above these levels it would get better.
If we are not above these levels, it's hard to argue it should get better.
Right now we feel pretty good about ---+
Improved margins.
Improved margins for the balance of this year relative to where we were last year.
Right, and we'll update you in more detail how we see the rest of the year ending up margin wise, but there is sustainability to what <UNK> mentioned and then the rest of the year we'll update you next call.
No, we were ---+ at the gross margin line it is neutral because we get a pickup from Mexico and a slight loss from Europe.
Outside of anything that we would have to do to keep manufacturing margins improving, quality folks or capital deployment, people can help on that, yes, that's it.
And those are all included in the guidance we gave for the year last time.
The concern in Q4 was we didn't have them filled so the Q4 SG&A I felt looked too light.
We gotten a lot of them filled.
Some of that just came in in February or March, so it is still not a perfect number.
By the time Q3 happens everything will be for good.
Okay.
No, I think for what we see right now that's the right number, but we will debit EBITDA margins and invest if we see something that can add revenue growth.
So I don't want to put a line in the sand and say it is permanently absolutely what it is.
If something can drive value, we'll make the investment.
Again, it is not perfecting margins for one quarter.
I think for what we see right now and the guidance we've given, we think it makes sense.
If we can do better, maybe it will change a little bit.
I think we're pretty disciplined, and it has got to pay itself back in a reasonable amount of time.
Getting closer.
We hope to release it by the end of this year.
It's hot out there.
We're looking.
We know we're on the clock.
At the minute right now we're focused on keep driving performance in the business, keep trying to improve.
Keep looking at things and when something makes sense, we'll do it.
I just feel like we can't count on that happening.
It's a very robust and frothy market out there and I don't want us to make a mistake, and so that's where we are.
All right.
Okay.
Thanks, everybody, for investing the time to learn about what we're doing here.
The Company is moving forward in a very positive way.
We have come together as a team and serving customers well, and I think we're really excited about what we're doing.
Our Q2 call I think is going to be super informative and I hope people dial into that and we're going to be working hard over the next 90 days to get there.
Thanks, everybody.
Thanks for the support.
| 2015_ICUI |
2017 | MMC | MMC
#Thank you, very much
Good morning, and thank you for joining us to discuss our second quarter results reported earlier today
I'm Dan <UNK>, President and CEO of Marsh & McLennan Companies
Joining me on the call today is our <UNK> <UNK>, our CFO; and the CEOs of our businesses <UNK> <UNK> of Marsh; <UNK> <UNK> of Guy Carpenter; <UNK> <UNK> of Mercer; and Scott McDonald of Oliver Wyman
Also with us this morning is Dan Farrell of Investor Relations
Before we begin, I would like to thank <UNK> Zaffino for his many contributions to both Marsh and Guy Carpenter over his 15 plus years with the company
We wish <UNK> continued success and look forward to working with him as he moves on to the next phase of his career
Marsh & McLennan has a deep bench of leadership talent
We are constantly looking to invest and add capabilities to our organization
Talent is a key area of focus in this regard, and we were both opportunistic and strategic when we acquired talent
Last year, we added <UNK> <UNK> and <UNK> <UNK> to our organization, two experienced and highly regarded industry executes
I've worked with <UNK> for almost 20 years, and I can tell you that his transition into the Marsh's CEO role will be seamless
Over the past year, he's been a key part of setting strategy as President of Marsh, as well as being a member of the MMC Executive Committee
<UNK> has more than 30 years of insurance industry experience and provides a thoughtful perspective on the future of our industry and potential growth opportunities
He has a proven track record of strong leadership, success in building client relationships, and inspiring colleagues
Since he joined Marsh, <UNK> has been heavily focused on client service and retention, and these will continue to be key areas of emphasis going forward
I'm also happy to have <UNK> <UNK>, the CEO of Guy Carpenter, joined the MMC Executive Committee
Over the past year, his leadership has had a meaningful impact on Guy Carpenter's already strong record of performance
Throughout their carriers, <UNK> and <UNK> have built strong relationships across the insurance value chain
While both have led successful large organizations, I believe their enthusiasm for improving the client experience sets them apart, and will benefit overall growth going forward
In addition, <UNK> and Scott continue to demonstrate tremendous leadership and have delivered impressive results at Mercer and Oliver Wyman
With these operating company heads, combined with the rest of our Executive Committee, I believe, we have the strongest leadership team in the industry
That said, the performance of our company goes well beyond senior management
Our success is driven by strong teams throughout the firm executing and making decisions where they matter most, close to our clients
While we invest for the future, we continue to emphasize the basics, delivering for clients every day, adding value and pursuing new opportunities with the sense of urgency and passion
We continue to invest in technology, digital, data and analytics to drive innovation and faster growth
In this regard, we've had several important announcements since last quarter, Mercer recently launched Mercer Digital an integrated business across health, wealth and career to better leverage the digital capabilities that have been built in the organization
Our data and technology combined with specialized Consulting expertise positions Mercer Digital to help organization's transition to a digital future while ensuring their work force thrives
As part of this initiative, Mercer announced Rohit Mehrotra will be taking a new role as CEO of Mercer Digital
Rohit came to MMC when we bought his fifth startup CPSG, that acquisition has performed well for us and we are pleased that he is taking a broader role in Mercer
Earlier this month, Mercer also announced an equity investment in PayScale a cloud based provider of compensation management software and real time salary data
Together, we will collaborate on new innovative compensation and workforce data products and solutions
Another important announcement was Marsh's hire of Sastry Durvasula as Chief Digital Officer and Chief Data and Analytics Officer
Sastry brings an in-depth knowledge of digital technologies and will oversee the strategic design, development and delivery of digital capabilities, data and analytics and client-facing technology
We also continue to broaden our participation in the technology and innovation landscape
For example, we recently added to our relationship with the private equity firm, Aquiline Capital Partners, by participating as one of the anchor investors in a new fund focused on early stage technology companies in insurance, as well as asset management, retirement and benefits
We will continue to invest capital to shift our mix of business to faster growing segments and geographies
These are just examples of some of the numerous partnerships, investments and strategic initiatives underway across our organization to position ourselves to thrive and shape the future
We talk about balance in many aspects of our strategy and philosophy
And the events of this quarter highlight another dimension of balance in how we operate MMC
While we continue to innovate and position for future long term growth, we remain focused on delivering today
This requires rigorous attention to the fundamentals and maintaining focus on the client
Technology advancements, increasing complexity and the pace of change in the world, represent significant challenges for our clients to address in the areas of risk, strategy and people
We are uniquely positioned to support them and help them succeed
Now let's turn to some highlights of our results
Our second quarter performance was solid and in line with our expectations
We produced consolidated underlying revenue growth of 3% with growth across all four operating companies
Operating income was up 5%, while adjusted operating income increased 7%
EPS was $0.96, up 7% and adjusted EPS rose 10% to $1. And on a consolidated basis, the adjusted operating margin improved 70 basis points
For the six months, underlying revenue growth was 3% and the consolidated adjusted margin expanded 70 basis points
EPS for the six month period grew 13% on a GAAP basis and 14% on an adjusted basis
Looking at Risk & Insurance Services, second quarter revenue was $1.9 billion with underlying growth of 2%
Adjusted operating income increased 9% to $535 million, with our margin expanding 110 basis points to 27.9%, the highest second quarter margin in 30 years
For the six month period, underlying revenue grew 3%, similar to the full year growth rate in 2015 and 2016. Adjusted operating income of $1.1 billion rose 10% and the adjusted margin also improved 110 basis points to 29.1%
In the Consulting segment, second quarter revenue was $1.6 billion, up 4% on an underlying basis
Adjusted operating income increased 3% in the quarter to $298 million
The margin of 18.7% was flat with the prior year
Similar to the first quarter, recent M&A activity impacted earnings
We anticipate improvement as the year progresses and expect Consulting to deliver solid earnings growth and margin expansion for 2017. In summary, we are pleased with the results for the first half of the year
For the full year 2017, we continue to expect underlying revenue growth within the 3% to 5% range that we have operated in for the past seven years, margin expansion in both operating segments and strong growth in adjusted EPS
With that, let me turn it over to <UNK>
Thanks, <UNK>
Operator, we're ready to go to Q&A
Question-and-Answer Session
Thanks, <UNK>
It's Dan, I'll just start a little bit by saying how thrilled I am that <UNK> is part of the team
And as you know, over the last several years, Marsh is doing well, so it's not crying out for massive amounts of change
But having said that, every business can be improved of – and I'm sure <UNK> will put his own mark on the organization and I'm looking forward to seeing the further developments as we go forward
But <UNK>, do you want to add a little bit of flavor to that?
So, basically some structural changes, some simplification and some emphasis on the client experience and client initiatives around retention
You have anything else, <UNK>?
Well, I think that pricing has put pressure on organic growth across the businesses for number of years now
I wouldn't look at the second quarter as being the start of the new trend driven by price or premium reductions
As you were just saying yourself, yeah, looking at the first half of the year, Marsh was at a 3%, which is consistent with where they were last year and the year before and so that's probably a more appropriate way to look at that
But what do you see in rates and premium, Scott?
Thanks, Scott
Next question please
Okay
I wouldn't overemphasize shifts of business, I mean clearly some things move around quarter-by-quarter, I wouldn't take too much into it
As we've said a couple of times and as we've done over the last few years, the back half of the year, particularly the fourth quarter usually is a bit stronger for us on an overall business basis, so I will look at it that way
We're happy with our first half results in general, not only on a growth basis, but also we're getting growth from acquisitions, some of which we're giving up in FX, but there is growth in acquisitions which is going to benefit us in future years
We like the fact that our adjusted operating income was reasonably well up given the growth rate and as well as EPS, margin expansion hit our expectations
So overall, we're happy with the first six months and we're looking forward to the next six months
In terms of MMA, we don't breakout MMA other than to say they had a nice quarter and the basic thing that we said all the way starting back in 2009 was that we expected MMA to be able to outgrow Marsh and all I'll say is that, yes, they have been doing that and they did it in the second quarter as well
And generally, I mean when I look at the RIS segment, we're in a pretty modest GDP world with basic rate levels in the P&C sector in almost all geographies and in almost all lines of business going down
Now going down may be at pace, it's not quite as steep as it was last year, but it's still going down
And so when I speak about margins, one way to look at it is, we would have liked to grow Marsh more in the second quarter than we did and operate expense controls throughout the year and recognizing that we are in this kind of lower growth environment and so that's the one of the reasons why the margin may have passed a little bit more than what we originally expected because we would have thought that we could have grown a little bit more than 2%, and we're pretty comfortable that 2% is not the new reality, but that we will have quarters, every once in a while, that look like that
Just like we'll have some quarters every once in a while like last quarter where Marsh grew 5%
It didn't make 5% the new world, 2% is not necessarily the new world either
And so, our expense controls tend to be multi-quarter, right, even a multi-year, and so there is – that's why the margin may move around a little bit
Yeah, I'll do a little and then I'll hand off to <UNK> to give you a little bit more
But basically it's not property and casualty, it is property
And basically the way to look at it is, there is a major insurance company Allianz that had always wanted to participate in a more significant way in United States property, but they were – they felt they had enough cash
And so that was an inhibitor of greater levels of participations
And Marsh very creatively sought through, well, how can we marry up their appetite with alternative capital, and sought alternative capital using a high degree of Marsh data and Marsh analytics to create more of a portfolio look to the property portfolio that Marsh has
And that was a combination between Allianz and Nephila, which at the end result means that they're willing to write virtually every property account of Marsh and they're willing to write that at a guaranteed discount to the client of 7.5% off of any other markets pricing for the balance of the placement
And so it's clearly a win for the client, it's a win for the market because that certainly bringing a market like Allianz to the forefront with alternative capital backing is a big positive and it's another example of Marsh innovation
Now I haven't checked in lately as to how often this is doing et cetera
But, <UNK>, do you want to add something to that?
Anything else, <UNK>?
Well, a couple of things
No, there's no update in terms of the FCA that that investigation is ongoing and we're cooperating fully
We imagine it will take quite a while for them to work through their analysis and come to some sort of determinations, but it's really all that I'll say on that at that time
Now in terms of the FCA review of the wholesale market, they do that on a periodic basis
And I don't see any connectivity between the FCA review which may entail a review of facilities as well as – with the investigation that's going on in the aviation sector
It's a good question, and it's something that we wrestle with as a leadership team
I mean, at the end, clearly, we are finding ways to operate the business in a more efficient manner and improve our productivity over time
And we've done that for a number of years
I mean, just to remind everyone, we're in the – 2017 is our 10th year of margin expansion
And this hasn't been a little bit of expansion
This has been significant consistent levels of expansion over time
We are in a more for less business
Our job is to deliver more value to our clients every year at fundamentally better levels of efficiency within our own organization
So that search for a smarter way, that search for additional operational efficiency, that never ends
And when I look into the future, whether it's robotics, whether it's deep learning, AI, et cetera, I think there'll be all kinds of avenues for us to become a more efficient organization as we go forward
So, I don't think the margin story is different
Now, do I think the margin will expand typically more when we have a better top line than 3%? Yes
Do I think that 13% adjusted EPS growth over the long term will be far easier to achieve with a better top line? Yes
So, we are doing everything possible to position the company through mix of business, through acquisition strategy, through organic investment on an ongoing basis to spur growth into the future regardless of market conditions, because our anticipation is the market's going to be similar to where it is today
And so, and anything to the upside, I think, would be a benefit to us
In terms of margins, in general, I can tell you, when we're around the leadership table, margin doesn't come up
Earnings growth comes up, revenue growth comes up, acquisitions come up, but actually, we think that margin expansion is not a strategy per se, it's an outcome of how we run the business properly
And really, one of the core philosophies of the company is that revenue growth should exceed expense growth almost every quarter and certainly every year
And so, when we look at it on that basis, it's just a natural outcome
<UNK> - Credit Suisse Securities (USA) LLC Thank you very much for the answer
And maybe, it's a great question and no, it's not a client response, although it is definitely the clients at the table in our discussions and thinking through it as to how we can improve the client experience
A factor of me being in the business for more than 35 years is I've seen other changes
As an example, I remember when companies thought that email was a proprietary value, or I remember when people were asked about well what is their Internet strategy, or actually in the beginning, what was your world wide web strategy, okay
So, ultimately the way I look at it is, all companies that expect to be successful in the future will be digital on some basis or another
And so, I don't believe that this is necessarily a next year thing
I think we're positioning the company to be successful long into the future
When we consider digital, we really look across three dimensions
It's not just about growth, it's about growth, operational efficiency and clearly people who work for our organization
And so, in terms of growth, it's really about the client experience and the robustness of our offerings and some of our acquisition strategy
So, you look at Thomsons or PayScale Equity Investment or Torrent or Dovetail
They're one way or the other all digital players
If you look at Mercer 365, it's a technology play, it's a user experience play
In terms of efficiency, we are beginning to experiment
Now I would emphasize experiment
You're not going to see early term results for bots or robotics, automation, machine learning, that kind of stuff
Although there are parts of our business where we will increasingly look to utilize that kind of capability and see how we can become more efficient
And in terms of people, I mean, Sastry and Rohit are just two examples
There's many others of how we're adding new skills to the organization and we're hiring more data scientists, more developers and this is going to be an ongoing process
But I just wanted to highlight that for us, the battle has been joined
So I'll start and then I'll hand off to <UNK>
One, I could say that that we're really as an organization very pleased with Guy Carpenter and that's not a short-term phenomena
Guy Carpenter has grown underlying revenue 25 over the last 26 quarters, best-in-class growth by far
And ultimately has built some share and wins a lot more than it loses
And so from that standpoint, we're proud of the organization
And we're very excited about adding somebody like <UNK> to the mix, top tier, reinsurance executive, seasoned, smell of the market on them and so I expect if that Guy Carpenter will continue to perform super well relative to its peer group over a long stretch of time of <UNK>
With that lead up what could you possibly say?
Thank you
Thank you
Next question, operator
Yeah, a couple of things, one, it's not the acquisitions of clients that is impacting their top or bottom line, it's really acquisitions that Mercer made really in December that has created a short-term hiccup to earnings and an impact on margins
And so, that will sought itself out as growth begins to come in
And so, it's really – it's not – I mean, at the end, we think that there's been pretty consistent strong levels of growth both in our Oliver Wyman and Mercer
And when we look at the back half of the year, we really don't give margin expectations or operating income expectations
We do believe we'll have solid earnings growth in Consulting for the year and we will have margin expansion for the year
Now, what that is, I mean, at the end, when I look at Consulting's margins, I mean, in the last five years, they're up 680 basis points
And so given the first half of the year, I don't think you can have a dramatic increase in margins consistent with 680 basis points over a five year period
But having said that, we do expect to see margin expansion in the back half
I mean, overall, we do – we expect the company, particularly, building momentum through the back half of the year with usually a stronger fourth and third, but we don't really have an annual goal with regard to adjusted EPS or margin expansion
We expect this to be a good solid year
I mean, when I – when we started the year, I was asked the question about 2017 versus 2016 in the macro environment and I pretty much said I thought 2017 look a lot like 2016 and still believe that is kind of the case
We're still in that kind of environment
Generally slow growth around the world at least modest level of growth, some P&C headwinds, low interest rates, business confidence that descent but fluctuates with the geopolitical cycle
So we're in – we remain in the grinded out years and we expect to have good performance in that
But we don't expect it to be one of these knock your lights out kind of thing, I mean I know that we've grown I think 14% adjusted EPS through the first six months
But really if you back out the accounting benefit of – on the compensation change is really 9%
And so I think in – we feel comfortable with that kind of level, at the level of growth that we're performing in the first half
We're expecting a little bit better in the second half and we're happy that we're now in it
Yeah, I'll hand over to <UNK> in a second
But the Defined Benefit business, it's a terrific business, but it's not a growth business
If you think about is there a new Defined Benefit formation with companies and startups, et cetera, no
I mean basically companies today in almost every market not exclusively but certainly in the United States and in other major markets, lean heavily in the favor of Defined Contribution over Defined Benefit
And Mercer has done a really wonderful job over a number of years extracting value from our Defined Benefit practice
And – but <UNK>, you want to give us some more on that?
Do you have anything else, Josh?
Well, okay, define the long term
I mean clearly Defined Benefit and pension plans have a long way to run, right
These are 25 to 50 year programs as people live longer as how they operate
So, it is not a quickly declining business, and we've had many times where we have grown, but largely the growth tends to be project related work as opposed to growth in the basic business
So I would put in a category of low levels of negative growth or low levels of positive growth quarter-by-quarter but on a declining trend
Okay
Next question, please
There were a couple of unusual things, but <UNK>, you want to talk about that?
That's right
I mean the Latin America is still critical market for us, when we look over a multiyear basis, it's been our fastest growing region
We don't break out geographies, but Consulting had a decent quarter in Latin America, so there is nothing fundamentally wrong
There is a – obviously there is a number of issues that individual countries are working through, but we like our positioning in Latin America, we would expect that it would return to better growth patterns in the future
Good morning
I don't think we're going to comment on the growth level, whether it's going to go up 10 times in the next 10 years, I think all you guys have had the experience of the exchanges to think about before we start hitting 10 times growth on any part of any of our Consulting or Risk businesses
Clearly cyber is here to stay, and around the world, tax are becoming more advanced, and therefore defenses have to be more advanced, and insurance is a good – is basically for a lot of companies, it's a package of yes, you get some risk transferred, but you also get some comparative considerations as capital providers seeking to project their capital are able to advise on best practices and some of the things that they're seeing with otherwise competing markets
And so, from that standpoint, there is a risk management quality to the insurance offering that is very beneficial to clients
And as you see around the world higher levels of disclosure requirements on breaches, I think you'll end up seeing insurance being one of the mitigants to that, but <UNK>, do you want to talk about our cyber practice a bit and what we're seeing?
Yeah, one thing I was looking at recently and which I find interesting anyway, because you hear a lot about the insurance market, and many companies just sort of dipping their toe into cyber and concerns about accumulation risk and cyber hurricane et cetera
So let's take your $3 billion premium level, and say what's a typical rate online for cyber, it typically is less than 1%
So if you just run the math on that, there are something like $300 billion of limit that has been provided against that $3 billion of premium and in that context there is no dipping the toe in the water
There are many markets in cyber in a significant way and it's probably the growth opportunity in property and casualty
Next question please
I mean rates are geared against losses in competitive environment
There is lots of capital providers, lots of insurance companies, so there will always be some downward pressure
There's better management teams, better data and analytics and so there is not naïve underwriting like you may have seen in the 1980s or 1990s
And so there is probably a tighter range of outcomes, but it really depends on loss activity
If the loss activity comes in, it will put pressure on rates
We are seeing on the reinsurance side some slowing down, or harder to place lines of business and certainly not anything approaching a hard market in any way, shape or form on reinsurance
And usually you see reinsurance tighten before primary tightens
And so we've got a way to go here before we see that
I mean when we look at the last let's say year, maybe even two years, the UK market and the London market in particular has the deepest downdrafts in rating levels and so that is the most competitive market in the world from a price reduction standpoint
And so it's a tough place to do business these days
Anything else, <UNK>?
<UNK>, you want to take that? So basically to rephrase it, it's like, is cat bonds volume fueling 4%
Sure
Well, just a little bit
One, it's an overall review of a marketplace and the dynamics of a marketplace
Then it's started out broadly on asset management including investment consultants and now it's narrowed a little bit to investment consultants in the level of concentration that there are with the largest investment consultants and what that pertains to and the potential conflicts that that could arise from that
And so, we're very much cooperating with the review, and it's obviously an important business to us, both investment consulting and investment management on a delegated basis
But, <UNK>, you want to talk a little bit about our business?
Thanks, <UNK>
So I think we have time, operator, for one more question
The acquisition pipeline is good
I mean we are – we look at a lot of different things, not from a detailed due diligence basis
So we've got good peripheral vision, we're live in the marketplace, so we'd have a good look across both RIS and Consulting
And I would say when we look at our pipeline, looks pretty good
We over the last three years, have spent about $1 billion in transaction value per year
It's too early to say, it's only through the first six months we've had a pretty active first six months of the year and where we look at our pipeline
And a lot these things take a long time in terms of gestation period
But so when I look at the pipeline now, this year looks pretty good and it even looks pretty good next year
We've I'm sure certain things that we're looking on right now, would take a little bit longer time
Our focus is generally on faster growing businesses and businesses that can improve our capabilities
Wouldn't mind every once in a while seems something right up the alley of our strong suit where we get some synergy and some decent earnings growth out of it through some expense saves, but our overall acquisition strategy is geared towards faster growing businesses
Well, I don't know if there is a wholesale business anymore
I mean, clearly there is specialty placement businesses that have done quite well and they're good businesses
If you ask me if I would have preferred that we didn't exit that kind of specialty placement business
Yeah, the answer would be, I would prefer that we would have been still in that business, but when we go back in, it's a different kind of question
I mean I think they've done a very nice job, there is some good companies out there, but we're an awfully big company and we would have wanted to do something in a real minor way on an a structural basis like that
But fundamentally, we look at the wholesale business, so called wholesale business and we think they've done a nice job building out their specialties and their capabilities over a long period of time
Okay
Thank you very much, Mindy
And I'd like to just thank everybody for joining us on the call this morning, and I'd especially like to thank our clients for their continued support in our colleagues for their hard work and dedication in serving them
| 2017_MMC |
2015 | AKAM | AKAM
#Well, we see tremendous potential for growth in APJ.
You have a lot of the world's most important companies there.
The majority of the world's population is there.
A lot of end-users coming online.
So, a lot of potential growth for us.
And we are building out our strength and experience, and our management team there.
And so that's why you would see those announcements.
Are you talking about going forward, <UNK>.
Yes.
I mean, I think as we've talked about, that the media business can have variability from quarter to quarter because of gaming releases, software updates, things of that nature.
But I think what we've said consistently is we expect the business to grow in the mid-teens kind of on a ongoing basis.
There is going to be some quarters and some years it grows well north of that.
There will be some quarters and some years where it grows a little bit less than that.
But we believe it's going to be a strong mid-teens grower kind of long-term.
And I would say that, again, some period is going to be faster than that and some period is going to be lower than that.
Yes.
I mean, if you just do the math on it, that the kind of the ---+ in that Performance and Security category, that the other non-security businesses grew about 14%, which is consistent with what they grew in Q4.
Again, pretty solid growth that, as you can imagine, that security is the new offering for the Company.
It's been the new offering for a while.
I think with the Prolexic acquisition, there's been a lot of training and I would say focus from the sales force for selling security.
And one of the things I had shared is that in addition, as we've been building out the sales force, the sales force also sells media.
And so I think what you are seeing is the sales force sells the myriad of our solutions.
I think we are seeing a little bit stronger growth in media and certainly in security.
I think the Web performance growth rates are pretty good, but I think that, certainly, the Web performance growth rates, I think, are being impacted by maybe the focus more on the security space for now.
Yes.
I mean, we are very pleased with the gross margin performance.
I think what tends to happen sometimes in Q4, Q4 has tended to be seasonally our strongest revenue quarters, and so sometimes you tend to see margins uptick.
Last year, we had gross margins of around 78%.
I think we are probably going to have gross margins in the 77% to 78%.
We're not that tight within a point.
So we are very pleased.
As you can imagine that we've been building out more on the platform.
We built more out in Q4.
We built more out in Q1.
We are signaling we've got to do more in Q2.
You can expect that when we are doing that, we are increasing in particular colocation costs for that buildout.
We are seeing bandwidth costs that obviously increase with the level of traffic growth.
But if you look at it in aggregate, having gross margins of 77% to 78%, we are very pleased with that.
Yes.
Well, to be clear, I mean, we were a little bit lighter in Q1.
We didn't signal in Q1 that we were going to be kind of at 16% of revenue for the year.
Our range of 16% to 18%, and what I am saying is that I think we are going to be at 18% or maybe a little bit higher than that.
And I think what you are seeing is we are signaling that we are doing more network buildout.
We did some in Q1.
We're going to do more in Q2.
And you can expect that that is in anticipation of traffic demand.
And there is a lag between building out the network and monetizing it from a revenue perspective.
The lag tends to be maybe a quarter to two.
And what we want to make sure we're doing is we want to make sure we're building out the network to support the most aggressive traffic growth expectations.
And we have found that if those traffic growth expectations don't materialize, we grow into it in the following quarter.
So, it's a low-risk proposition for us.
And what we're doing is we are building out for what we think is going to be traffic growth in the back half of the year.
And we'll see if that occurs.
But if it's a little bit less than what we expect, we'll just dial back CapEx thereafter.
So I think you're going to see us go through a period of kind of increased network buildout.
And I think you should view that as a bullish sign from the Company around what we think is opportunity ahead.
Yes.
I think you heard the tail end of it that we are ---+ actually, we are quite bullish on all the businesses, but media in particular, the traffic buildout that we are signaling is we are definitely signaling some bullishness that we have on the traffic side.
We'll see.
Again, as I said, we build out in anticipation of what we think is an aggressive traffic demand, so that we are there for our customers should they need us.
If we fall a bit short of that, it will be just a quarter thereafter that we kind of lower our CapEx expectations.
But we are very bullish about the prospects for security.
So I think you are going to see continued growth in the security space.
You know there's a lot of opportunities as well with Web performance.
We're not nearly penetrated on Web performance with customers that ---+ in particular, in the international markets, there's a lot more opportunity.
We certainly have opportunities in the US as well, but we are pretty bullish on all the areas that I think there is secular tailwinds for the Company, both in media with more content moving online.
I think there's opportunities in security, and there's opportunities in Web performance.
And I think what you're seeing us do is we are investing to capitalize on those opportunities.
Well, I'm not going to provide guidance beyond the second quarter.
I did signal kind of just so that people have an awareness of where we are heading, so that it's not a surprise.
I think you can expect that it's a combination of both.
It's customers that we currently have and it's customers that we expect may move to the Akamai platform.
That's what we are bullish about.
Hello.
Yes, we don't disclose the EBITDA and operating margin of each one of the individual businesses.
I think you can expect that the Security business is in early stage growth where we are investing more rapidly than we are seeing in revenue growth.
So you can certainly see the Security business is early-stage.
You can expect that we are going to continue to invest in that.
We are going to invest in buildout of the network to support what we think is growing demand there.
We're going to invest in more security engineering capability, more security sales capability.
So, we are going to continue to invest in certainly one of the areas of significant investment for the Company.
It probably is worthy to note beyond Security, though, your comment about EBITDA, because I'm sure it's going to come up as a question.
So I'm guiding 40% to 41%.
I know we've joked about it on other calls that I've been signaling this for a while.
This is certainly something that we are guiding here for Q2.
And I certainly signaled that that is the intent of the Company to operate in the 40% to 41% in the foreseeable future.
I did outline a few areas.
Obviously, M&A is a variable that may affect EBITDA margins longer-term, depending upon M&A activity that ---+ whatever that company's profile is.
Foreign exchange, depending upon what happens with foreign exchange.
We have a little bit of a natural hedge, but it's certainly, as I mentioned, an EBITDA erosion.
So if foreign exchange continues to see the dollar strengthen, that will obviously have an impact on EBITDA margins that is somewhat out of our control.
And I'd say a third area is, we signaled more network buildout.
I would say if we start to see a ---+ maybe an inflection point in the need for us to build out faster to support our customers, we will do that.
And that may have an impact on EBITDA margins.
So those are things I would say as I sit here right now, I think we're going to operate in the 40% to 41% range.
But those are variables that could affect it higher or lower.
Yes I think you can expect as the maturity business scales, that the growth rates will slow from ---+ let's face it, we've had growth rates over 100%, some of it benefiting from the Prolexic acquisition.
But certainly, yes, I think you can expect in the near-term, it's going to grow well north of the Company average, because even with the Prolexic acquisition anniversary occurring.
But our expectation ---+ again, we talked about the Company model that our desire and ambition is to grow to $5 billion by the end of 2020.
That requires a 17% growth rate.
We think that there is opportunity for 17% growth rates really in all of our businesses.
I think media has that opportunity to grow like that.
I think the performance businesses have that opportunity.
I think security does.
That ---+ so I think there are a lot of ---+ each one of our businesses individually have a lot of room left to grow.
So, even though security growth rate certainly, once you go through an anniversary, will slow, I think you can expect that we are not nearly tapped out as far as opportunity in that space.
Yes.
As we develop major new carrier relationships, typically that will be followed with some CapEx deployment to take advantage of those relationships.
I don't think any one in particular is a big swing, per se, so I wouldn't worry about that in particular.
Obviously, China is a very important market, and so we are going to be working on the relationships there and expanding deployments.
In terms of security, we develop a lot of the core technologies ourselves.
We also look at partnerships, and as you know, M&A.
We did acquire Prolexic, as I ---+ last year, as I talked about earlier today.
We acquired Xerocole.
Now, Xerocole, I don't think was positioned as a security company with their recursive DNS technology, but that is an important component, technology component, for us as we develop our enterprise security solutions that we plan to bring to market next year.
So as we go forward, you can expect sort of more of the same that way.
There will be a lot of organic development.
There will be partnerships.
And potentially, we are always looking for companies that have good technology that we can bring to bear for the benefit of our customers.
Cisco is still in the early stages, so there has been customer adoption.
There is a strong pipeline.
I don't expect material impact on our revenues this year to Cisco with a Cisco relationship, but there's a good roadmap in place.
And we hope that there will be success in the marketplace that will start to really have a help to us in 2016.
Sure.
On the M&A front, both Xerocole and Octoshape had very little revenue.
That was really not the purpose of those acquisitions.
Those were kind of technology acquisitions and people-related acquisitions that were quite ---+ they had a little bit of revenue, but I would say not material to even comment on.
I think we commented or in the press release, both companies combined had roughly 50 employees.
So just do general math on that, you can probably ---+ it's probably a $3 million sequential increase ---+ $3 million to $4 million on spending.
They certainly didn't have, obviously, the margin profile that Akamai does, so they are slightly dilutive; not very material, but slightly dilutive to Akamai.
And on the EBITDA front, yes, I'm not moving off the 40% to 42% ---+ 40% to 42% is our long-term model.
What I'm suggesting to you is that we are going through a period here where we are probably going to be operating the Company at a lower end of that.
And you know, some of that I think is based on some investments that we think are going to pay dividends.
One of the areas that we talked about is we are doing a little bit more in the way of network buildout.
And so I think that is going to pressure EBITDA margins in the near-term.
And we probably shouldn't dwell too, too much on EBITDA margins by themselves, because I think you need to look at the financial model of the Company in aggregate, that if our media business starts to explode on revenue, and it has an impact on EBITDA margins, I'm not going to be unhappy with that.
I mean that's a business mix phenomena that we'll deal with.
That ---+ and so I think we just want to make sure that we are agile in responding to what we believe is traffic demand.
And that's really what we're doing.
And I think what I'm signaling is that we are probably going to operate at the lower end of our kind of range, and we'll see what happens as far as kind of the ecosystem for media.
We'll see what happens with the overall macroeconomic environment with foreign exchange.
And we'll see what happens relative to M&A for the Company.
But I would say, based on what I shared at the Investor Summit, I do believe that is a very long-term model for the Company.
I don't know if you will really see seasonality.
I think what you might see in the Security business sometimes is that because there can be very high profile attacks that you read about in the media, sometimes when that happens, you do see an uptick in our security business, because customers need to be protected immediately.
And they will turn to us to help them immediately.
So you might see some ---+ well, I wouldn't call it seasonality, but you might see an uptick if, in fact, you start to see some significant high-profile media events that occur.
But I think, in general, it's a subscription revenue business.
And that's the way it will operate.
It doesn't necessarily have spikes based on traffic usage or things of that nature.
Well, you can think that, as I mentioned, it's about a 1 point EBITDA impact year-on-year.
So you can ---+ kind of a general flavor of what the flowthrough is of that.
Our EBITDA is 40% to 41%; the flowthrough is probably closer ---+ on the FX line, closer to 50%.
So you can take that $22 million that I mentioned and you're probably going to see an $11 million flowthrough from a foreign exchange perspective.
And obviously that will flow through to earnings as well.
Well, it has a potential for both.
But as we talked about previously, the large majority of the world's major broadcasters are already sizable Akamai customers.
So, I think probably a lot of it is from customers that exist with us today but would be doing new things with us as they move TV content over-the-top.
Yes.
We added about a little over 300 people in the quarter.
We've been hiring ---+ you are right, we've been hiring in sales; we've been hiring in services.
We've been hiring in engineering.
So hiring has been pretty pervasive in the Company.
And it's focused in kind of two specific areas.
One, it's hiring to enable us to grow, and it's also hiring to enable us to scale as a company.
So we are hiring in all those areas.
You can expect that we're going to continue to hire throughout the year.
I think you're probably going to see us hiring and our spending maybe grow more in line with revenue growth kind of longer-term.
But we have been going through a period of hiring and spending growing faster than revenue.
That will kind of continue for a kind of a short period of time, but I think they are going to see it level off and grow more in line with revenue.
Yes.
So we've had good adoption on the new Ion product line.
As you know, there's Ion Standard, which is really focused on excellent performance, ease of use.
And on the mobile environment, Ion is all about providing excellent performance in a variety of use cases, where the user may be and how they are connecting, and what device they are using.
And then Ion Premier, which is really the ultimate ---+ you know, all the technologies we have, designed to make a really fast and reliable experience for the end-user.
There's a lot of mobile technologies that we are developing.
In fact, if you look at the Investor Summit presentations, we list several of them and talk about them there, so you can get a lot more technical detail.
But things ---+ front-end optimization, adaptive image compressing ---+ compression; the shutter protocol, which we developed for decreasing the frequency of communications in mobile devices and suppressing the headers.
So, less back and forth there.
So there is a variety of things we do to try to optimize the experience and get around the inherent bottleneck of lack of capacity and high latencies in cellular environments.
| 2015_AKAM |
2016 | SNX | SNX
#Hi, <UNK>, it's <UNK>.
So over the last year or so, Minacs has been growing at higher single-digit growth rates.
And there is some overlap, but it's relatively small.
We have two customers that really are the bulk of that.
And the customers were aware of the transaction and supported the transaction, and frankly, allow us to grow with the combined business going forward.
Well, I'll tell you, <UNK>, we're always focused on growth.
And you probably could have said ---+ made the same comment last year and the year before, not just about Hyve, but any business we have.
So obviously, we don't sit on our laurels.
As we continue to earn more and more business, we continue to look for more growth opportunities too.
So we don't look at that as a headwind.
Thank you.
Hi, <UNK>.
Clearly, we continue to work on the business quarter on quarter on quarter, improving it, both getting better leverage out of our investments, as well as streamlining some processes, and driving efficiencies as <UNK> has mentioned.
We also tend to get more leverage within our business in Q3 and Q4, which you saw last year, in our expectations as you'll see this year again.
But we don't stop, but we continue to figure out how to make better improvements.
And as <UNK> mentioned, we're on path to our double-digit operating income expectations for 2017, as we made the announcement at the Analyst Day, and that's what we're focused on achieving.
Thank you, <UNK>.
I think anything that's good for HP Inc.
usually translates in being good for us as well.
I think what's behind it though, when you look at the ---+ really the business that they bought, which is the ---+ which is really an enhancement to the A3 business, and the A3 supply chain.
Because of the specialty businesses that we have, and certainly, one focused on the business component of the higher end printer and copier business, I think that plays very, very well into one of the strong capabilities that we have in the marketplace.
So, yes, I think it's going to benefit us, certainly very well.
Hi, <UNK>.
Yes, it's <UNK>.
So we do that now.
We forecast so much of our revenue that's going to be cannibalized by ourselves, driving better processes, which can come out of robotics and automation that we do.
We primarily see it more in our healthcare and banking financial services business which tends to have some more complicated mature systems, with multiple legacy systems to get to a work product, which is where we see a lot of value.
We see it as a differentiator from us offering it to our clients and taking share from our competitors who are not offering it.
And we also see it as being able to drive more margin enhancement, as clearly it allows us to do more with less, as we drive better efficiencies for our clients.
So we continue to invest in that area.
We're doing it now.
We see some good payback, and we'll continue to drive it forward.
Thanks, <UNK>.
All right.
Thank you, everybody, for joining our call.
| 2016_SNX |
2016 | CMC | CMC
#Yes, we always tend see a working capital release in the fourth quarter and continuing on into the first quarter, and then we begin to see some working capital build in our fiscal second quarter in preparation for the busy season.
And the other factor that drives inventory build would be in preparation for outages, and we do have a couple of projects where we will be preparing for the outages associated with those projects and building some inventory to allow us to continue to operate without interruption during the outage period.
But we will begin to build some inventory in anticipation of the heavier construction season.
I think the one difference from, let's say, a year ago, a year ago, we had built a fair amount of working capital on the M&D side of the business and based upon the discussion we just had around the challenges in that segment, we're not going to see the same working capital build in M&D, or we are not anticipating the same inventory build in M&D for this year's fiscal second and third quarter as we did last year.
Good morning, <UNK>.
Yes, let me go ahead and take that first.
In terms of what you describe as the texture, we normally break that out between public and private and there had been a trend moving towards more and more private projects as a higher percentage of our total order book, and that trend continues.
It's better than 50% of our bidding activity these days, which is positive, because as we've noted before, private projects are less vulnerable to price lock-ins that make it difficult for us to make margin than some of the public projects.
It will be, we'll monitor this because with the FAST funding there could be a shift towards more public projects, but the nice element of that is when we get into an environment where there's strong non-residential demand, as well as public moneys that are available, it gives us an opportunity to be more discerning about the projects that we take on emphasizing, obviously, the better margin projects.
And as far as geography is concerned, we've talked about this in the past.
Our western region operations, which go into the fab business, as far as the fab business in California remains strong.
Our micromill in Arizona has run full out for better part of its life since we've started operating the mill, and its complemented by a good fab business, and we still see strong demand in California.
Texas markets remain strong and bidding activity and bidding levels are high in the sense of total project volume.
And we're seeing some strength in the southeast, specifically in Georgia, that we really hadn't seen in more recent periods of time.
South Florida and the beltway around Washington D.
C.
have been strong for ---+ well, the beltway as long as Texas has remained strong.
And South Florida was kind of the first market to recover as Latin American money came into the Miami/Fort Lauderdale area and construction activity picked up.
And New York has been strong, so when we look at the ABA Index more recently, the average, on a national basis, was just under 50 at 49.3, whereas the indicators in the South were 55.4, and then the West was 54.5, and going back to April of 2015 none of the indices for the South or the West have fallen below 50.
Yes, <UNK>, I'll take that.
The $180 million is still what we anticipate, that's a net number after factoring in the number of incentives available to us, both state, local and federal, and all of that is progressing well.
Our CapEx guidance for the year, as I mentioned, was $220 million to $230 million.
That does include our expectation for the micromill, as well as normal CapEx.
Thanks, <UNK>.
Good morning, Happy New Year, <UNK>.
Yes, so, <UNK>, the total backlog in the fab business is in the range of 600,000 tons, and if you look at our quarterly shipments, we could argue that's maybe a couple quarters worth of business.
But it's a really dynamic backlog and every day we're shipping product and every day we're booking, and so we'll relieve some of that backlog which might have a higher margin.
So there's no doubt that you'll see continued pressure on margins as we get forced into situations of meeting competitive pricing based on imported product, and so it's really hard to give a hard and fast of when that turns.
The greater pressure could be, and would be, in some regards favorable for our recycling business wouldn't be so favorable for the fab business, which is if we saw dramatic increase in our raw material prices as it works its way through the system.
So I'm trying to answer your question as best I can, but it's hard to pin a number down as to when that backlog changes dramatically from perspective of margin.
It will be something that will continue to creep and that assumes that there isn't any further erosion in scrap markets, and today there is still some differential between what scrap sells for and what iron ore sells for and even though there is historically some correlation between those two, ferrous scrap prices are still fairly high relatively speaking.
Now we've said we believe it's going to stabilize because we've had issues with flow and that will probably cause some spiking from time to time as we saw in December, and that's with operating rates in the mills in the aggregate on the 60% to 65% range, so there hasn't been any pressure on raw material pricing for scrap even from the integrated mill.
So it's an interesting dynamic and flows have been impacted and that's one of the reasons why we view our integration, vertical integration in the scrap business, as being important because it gives us access to raw material.
Yes, thank you, <UNK>, for the question.
So when we made the change, what we will basically do is have an obligation for the taxes on the remaining balance of our LIFO reserve from a tax perspective.
And to put it in perspective, last year we paid $38 million of cash taxes related to the LIFO income that we booked in the year, and if you just consider the decline in scrap in the first quarter, we would be looking at a fairly hefty cash tax number in FY16.
But because we froze that balance, we essentially will spread the tax obligation over four years and it will be around $11 million to $12 million over the next four years.
It's a pretty minimal cash impact.
Each year.
Good morning, Chuck.
(laughter) So you're telling me I didn't pack enough, Chuck.
No, Chuck.
We prepare for this call and do a kind of around the world conference call yesterday, which would have preceded your overnight report, but we haven't received any reports in that regard.
It would be great to see some improvement in pricing coming out of China because there really isn't any discipline there and it goes back to what I said earlier about disintermediation.
Some of the government-sponsored traders are ---+ they are driving what prices are, and many of the producers just have to meet that in order to book with those traders.
No, not so much, Chuck.
We haven't seen any dramatic change in flows other than a significant reduction in exports from the United States.
What we have ---+ would have been reported and what we have tried to understand and deal with is more, I'll call it blast furnace-based billets moving throughout Southeast Asia and into Europe, including Turkey, and those billets being converted into finished product.
So this is why ---+ I made the comment about scrap and iron ore, the fact of the matter is if iron ore is cheap enough and there's enough aggressiveness in pricing by the likes of Chinese producers they can move semi-finished product as aggressively as they move finished product to keep at least melt shops running.
And while it may not make economic sense to us, they aren't reacting to the same economic drivers.
And we know that earlier in the year, the Ukrainians and the Russians did the same thing which was move semi-finished product into Turkey based on import statistics and that product was converted and then exported.
Thanks, Chuck.
Thank you, Chuck.
Good morning, <UNK>.
We would like to have seen more, but we're pleased it was an increase over what prior funding had been.
So that's a positive indication that the governmental authorities recognize the need to start dealing with infrastructure.
There still only remains an $0.18 per gallon federal tax on gasoline which, given the outlook for energy prices in the future, there might be enough [chutzpah] to do something about that to raise funds which would go directly into infrastructure, which, again, cascades into making jobs not only in construction but in the steel industry.
But I guess only time will tell us whether or not any change in administration would be that supportive.
I think it was positive that going into an election year, and that's one of the things we had been counting on that both sides of the aisle were able to come together and close a deal on the funding for FAST, because as you know, for years, it was pushing along for three months at a time.
So the other positive benefit of this is that it does allow states to plan for their spending.
When the transportation bill is pushed or extended three months at a time it's really hard to think about projects beyond that, which means that some of the more major projects aren't undertaken.
And what I commented on earlier, states developing funding mechanisms as we are here in Texas based off of a sales tax ensures that moneys are available to take advantage of matching fund projects that are principally federally based.
Yes, the spending was just a little over $11 million, and then we're still projecting the $220 million to $230 million for the year.
And let me get to my notes on the share repurchase, within the quarter, it was around 350,000 shares and following the ---+ in December, we repurchased 534,000 shares.
Year-to-date number was about $54 million, right.
Yes, year-to-date we've exhausted about $54 million of the $100 million repurchase program.
Good morning, <UNK>.
Well, there's no doubt that the strength of the dollar has a significant impact on all of our activities from recycling to fabrication.
And it's one of the disadvantages of having a stronger dollar, there are a lot of advantages to a strong dollar, but it opens up the door for imports and in an environment where there's global over capacity.
So it's a bit of a magnet to ship product to the United States when there's a stronger dollar.
And so we've seen those pressures, and I think it changes the formulas for calculating what's economically efficient for shipping to the United States.
Transportation costs are down globally, as well, which also makes it more competitive.
And we lobby hard for the interests in the domestic industry and ---+ along with the Steel Manufacturers Association, as well as directly with legislators, and we continue to promote the notion that it's about fair competition as opposed to just protecting our markets.
We believe that we can compete with anyone on a fair basis, but some of the practices that I described earlier in China that cascade into other markets and cause different behavior creates an unfair flow of trade that we don't get government subsidies that we can't be competitive with, so it's all about fair trade for us, <UNK>.
We are a global trader, we know markets are open, but when there's heavy subsidization in markets that causes them to move product throughout the world, that's not good for the global economy or for the home market.
Essentially, in this case the Chinese are exporting their employment problems or unemployment.
I haven't noticed it as being perceptibly different or more disadvantageous, but the economics will continue to drive that and a stronger dollar would reduce, would make it more attractive for others to export product to the United States.
So we know we watch it closely, and it's not something that we can impact but we can only react to, and we react along the same lines that we just talked about.
Yes, <UNK>.
I think we're going to continue to be prudent in the execution of that program and there's a lot of factors that need to be balanced.
We place a priority on having a strong balance sheet and strong liquidity position.
We've made a commitment with the Arizona mill and we've committed to fund that ---+ or Oklahoma mill, excuse me ---+ and we made a commitment to fund that with internal funds, so we're going to look at a whole host of factors in making the decisions on how much and how aggressive and, certainly, our share price will also factor into that.
So it's one tool and we will continue to evaluate it on an ongoing basis.
<UNK>, I'd add to that.
We have, the Board of Directors approved $100 million share buyback and we've still got $46 million before that would exhaust itself.
So at the rate we've been doing this it would take awhile to do it.
We really base it on economics more than anything else, so if we need to, if there's an opportunity to do more we'll be assertive, but we have plenty of opportunity within the current approval.
Good morning, <UNK>, thanks for your question, we appreciate it.
We are always evaluating our businesses and more recently one of the downsizings we undertook was in Australia where we sold a majority of the assets that we have there, and we still have one distribution asset that's being marketed.
But we evaluate all our businesses on their ability to generate returns in excess of the cost of capital, so there's always some thinning that's going to be going on.
Some of it can be very small and items that you wouldn't normally note, like fab scrap yards that we've closed.
We've also acquired some small fab yards to complement our recycling business, so there's a little bit of buying and selling that goes on all the time.
But in terms of major, major restructuring and selling assets, I don't envision that, not at this point in time, but things change and we continue to monitor it, and one of the things that I've been very open in saying is that we're not married to the assets that we have, they've got to generate a return that's reasonable and competitive and creates value for our shareholders.
So we always monitor the performance of our businesses and that's how we concluded the decision to sell the assets in Australia.
Yes, I think I've answered it, <UNK>.
Yes, that really wouldn't be appropriate to comment on right now.
We're always looking at the market for opportunity and we think we're pretty good operators of the micromills.
As I noted in my comments earlier, we've been running essentially full, the Arizona micromill since it was built, and that's why we decided to build the micromill in Durant is because of its existing technology, its low risk, if you will, of execution.
We have a market that we believe it will serve quite efficiently, so that was, in our estimation, a sound project to engage in.
So we continue to look, but we don't have anything that I'd comment on specifically otherwise.
Good morning, <UNK>.
This is a question that we've been asked since the beginning of the decline of the rig count last year.
Over the course of the year, we did see a bit of a dip in the Houston market in construction activity, and bidding.
I think it was just caution to what was going on, but that has since recovered, so we're feeling even optimistic about the Houston market.
The other markets didn't really fall off.
We have a diversity of industry in North Texas from automotive to sports complexes to insurance, businesses relocating processing centers here.
And the San Antonio market is not at all an energy market, and Austin has got other influencing factors.
So we've seen really good strength continue with the exception of that dip for a couple of months in the Houston market which has since recovered.
So the biggest impact that we've had in our order book as a result of the decline in oil and gas prices is really related to trading of tubular and SBQ products which is more energy oriented, and so some of our comments and results related to the M&D division relate to products that do serve the energy industry, but it's a small part of the overall portfolio.
Well, <UNK>, working with our counsel, we had been pressing for ---+ through the appeal process ---+ for a review of the duties that were imposed with respect to Turkey.
So the case has been remanded back to the Department of Commerce, and there's several different matters that the Court of International Trade asked Commerce to relook at, or rethink, and the Department of Commerce has until February 19 or 21 ---+ 22, to respond to the remand from the Court of International Trade.
So at that time, my understanding is that the Department of Commerce can choose to further clarify their findings, they can choose to reevaluate.
I don't know that doing nothing is an option, but one way or the other they have to respond to the court, and so we'll see what the decision is and what direction it takes.
So we're doing everything that we can with the existing trade case.
I think it's really on the initial ruling and the initial data, and I'm getting a nod that's what it's based on entirely.
Okay.
Yes it does, <UNK>.
Yes.
Okay, well, thank you very much, Gary, I appreciate that, and once again, thank you to everyone for joining us on today's conference call.
We appreciate your interest and we look forward to speaking with many of you during our investor visits in the coming days and weeks.
Thank you very much and Happy New Year.
| 2016_CMC |
2016 | SPN | SPN
#Yes, I think what we have said is we would expect to continue to see the deepwater rig count trickle down some.
And not necessarily from Q3 to Q4 specifically, but over the course of the next few quarters until we've got an oil price that causes deepwater operators to choose to be more active.
A big part of our Gulf of Mexico revenue reduction from Q2 to Q3 was in the subsea P&A where we concluded the project in the third quarter; and as we said, we have no subsea P&A revenue in the fourth quarter.
So I would expect that we see Gulf of Mexico revenue come down, not just because of rig count but because of the inactive period for subsea P&A, which will go back up in the first quarter.
That is customer commitments that we have the first half of 2017.
Yes, I think the question about the US land market kind of carrying any deterioration from the Gulf of Mexico Q3 to Q4 is a lot about pace in the Gulf of Mexico.
And if we see increased pace and urgency with our customers from a completion standpoint, then yes, I do think it could overcome it.
But whether we see that pace or not is a question.
Welcome.
Yes, I think either way it's the components are going to be called on.
Whether or not you are rebuilding a unit or placing new orders, there is going to be call on engines and power engine pumps for sure.
Part of what we have tried to do, <UNK>, is to get in line early on some of this stuff because I am biased to believe that at some point in 2017 we're likely to see some tightness on components.
In total around $1 million.
We have seen those prices in total come down a bit, but they are still within 10% or 15% of what we saw in 2014.
You are welcome.
Yes, that's a great question.
I think that overall what we see with these companies that will be emerging from bankruptcy is companies that have very little cash to put to work, and certainly from a cost structure standpoint they are going to be paying less interest.
But I don't know that outside of their interest payments there's a lot that's been done within those companies from a cost structure standpoint.
We see them being encumbered with cash problems even when they exit bankruptcy, and that in some way inhibits their ability to respond to an up market.
I don't see them as being any more irritants they have been historically,
Yes, it is a matter of moving assets to the places where you're most likely to be able to rent those assets.
There is not a lot that you can do from a fixed-cost standpoint in the rental business other than exit a market.
To this point we have not chosen to exit any markets in our rental business and I really don't foresee that we will, particularly the Gulf of Mexico.
You think about this and maybe we don't have a deepwater rig count in the Gulf of Mexico that anytime in the very near future goes back to where we were in 2014.
But as the rig count comes off bottom, the incremental margin associated with rentals is going to be very high because we have got very little fixed costs in order to put those assets to work.
I think the other thing is: That in an overall smaller market, we're not going to have very much in the way of capital required in those businesses.
They still have the opportunity to generate very high-margin and spin off a lot of free cash flow, which characteristically is what we have seen in those businesses.
That is exactly right.
And part of the reason for that, <UNK>, is that the increment margins that go along with that business as revenue goes up are very high because we don't have people associated with the product when it leaves our yard.
And for the most part, the maintenance on those assets was done when they were returned to the yard.
So to actually prep a string of pipe for a customer is a very low cost for us, making the incremental margins very high.
I don't know that we have thought about a specifically that way because part of what is going to drive this in our rental business is lateral link.
So, if you are drilling a lateral that is the on average 3000 feet longer than where it was in 2014, then how many fewer rigs would it take.
I don't know that we have necessarily done the math on that, <UNK>.
But clearly on a per rig basis, with longer laterals rental revenue increases on the downhole rentals because they have got more pipe in the ground and more bottom-hole assembly in the ground.
You're welcome.
Thanks to all of you for joining us.
We will talk to you next quarter.
| 2016_SPN |
2016 | NR | NR
#Thank you <UNK>, good morning to everyone.
2016 is off to an extremely challenging start, particularly in the North American market, where the rig count declined by nearly 40% since year end.
Outside of North America, while activity levels have remained much more resilient over the past year, we're announcing a greater impact of the prolonged weakness in commodity prices causing customers to delay certain projects, as well as greater pricing pressure from those that continue drilling.
And while the E&P customer activity has yet to show signs of a rebound, we are continuing to maintain our focus on those factors we can influence: protecting our market share, actively managing our costs, protecting our balance sheet and liquidity, and penetrating new markets.
With regard to cost controls, we took additional steps during the first quarter, including salary reductions for executive officers in a significant number of North American employees, the suspension of the Company's matching contribution to our 401(k) plan, as well as a reduction in the fees paid to our Board.
All these actions help to further align our cost structure to the current activity levels.
During the quarter we also trimmed the North American workforce by an additional 20%, bringing our total reductions, including contract labor, to 50% since the beginning of 2015.
Meanwhile, we maintained our strong balance sheet, and end the quarter with $83 million of cash and no outstanding balances under our revolving credit facility.
We used $9 million of cash to repurchase convertible notes at a discount on the open market, realizing nearly a $2 million gain.
We also used $13 million for capital expenditures in the quarter, most of which is related to our fluids infrastructure projects, including the Fourchon deepwater facility.
Our cash position is further strengthened in April with a collection of $27 million in tax refunds resulting from the carryback of our 2015 tax losses.
We're also seeing continued progress in our efforts to penetrate new markets, while our latest deepwater contract in Uruguay is now underway.
We're also making progress closer to home in the Gulf of Mexico.
Our Port of Fourchon capital project remains on track, and our marketing strategy aimed at penetrating this customer base is progressing.
On the mat side, while the weak exploration market is continuing to provide a strong headwind for both rentals and mat sales, we are pleased with the progress that we're seeing in other markets, most notably in the power transmission segment.
During the first quarter of 2016 we generated $9 million of rental and service revenues from non-exploration markets, representing a sequential increase of approximately 50%.
We remain in the early stages of our efforts to enter these new markets, but we are very encouraged by the long-term opportunities that we see from our composite matting solutions.
Now turning to the specifics of the first quarter ---+ as I mentioned a moment ago, the market environment has become significantly more challenging, particularly in North America.
With a sharp decline in drilling activity in the first quarter, our North American Fluids revenues declined by 31% sequentially, while our international fluid revenues declined 16%.
In the mats business, we achieved a 17% sequential increase in rental and service revenues, with strong rental growth in non-exploration markets being partially offset by continued softness in E&P activity.
Meanwhile, mat sales were slow in the quarter, leading to a 22% sequential decline in total segment revenues for the first quarter.
And finally, I would like to comment on the recent leadership change in our mats business.
Matthew Lanigan joined the company last week as our new President of Mats and Integrated Services.
Matthew comes to Newpark with over 20 years of global experience serving in a variety of industries and capacities.
After starting his career at Exxon Mobil in Melbourne, Australia, Matthew spent the past 16 years with General Electric, serving in a variety of roles within their plastic and capital divisions, including leadership roles in operations, sales, and marketing.
The diversity of Mr.
Lanigan's experiences make him uniquely qualified to lead our Mats and Integrated Services business.
We are very pleased to welcome Matthew to the Newpark team and look forward to his contributions.
With that, let me now turn the call over to <UNK> <UNK>, who will review the performance of our fluids business.
<UNK>.
Thank you, <UNK>, and good morning everyone.
In the first quarter the Fluids Systems segment generated total revenues of $99 million, reflecting a 24% decrease from the fourth quarter, and a 43% decrease year over year.
In the US, revenues were again impacted by the sharp decline in rig count.
US revenues were $37 million, down 39% sequentially compared to the 27% decline in average rig count over this period.
Consistent with our experience in early 2015, in periods of sharp rig count declines we experience a disproportionate decrease in product sales as customers flow their purchases and work through their inventories at the rig site ahead of laying down rigs.
In addition, as we highlighted last quarter, our fourth-quarter revenues benefited from high downhaul fluid losses for all drilling, which did not recur this quarter.
The combination of these items caused our sequential revenue to decline at a quicker pace than rig counts, even though we maintained our US market share.
On a year-over-year basis, the US revenues were down 62% compared to the 61% reduction in rig count.
In Canada, revenues came in at $30 million, up 8% from the fourth quarter, outperforming the 3% increase in rig count.
On a year-over-year basis, revenues were down 29%, also outperforming the 45% rig count decline.
Our Canadian business unit has been a bright spot in an otherwise challenging North American market, as our team continues to outperform the broader market activity, benefiting from market share gains.
Our EMEA region posted revenues of $38 million, down 16% sequentially.
As highlighted last quarter, the fourth quarter benefited from approximately $4 million of completion product sales into the Republic of Congo, which were not expected to recur.
The remaining $3 million decline in revenues is largely attributable to the successful completion of the deepwater Black Sea project.
Algeria remains our most active business in the region, as revenues continue to ramp up under the Sonatrach contract signed early in 2015.
The increase in Algeria was largely offset by a general slowdown in drilling activity with other customers, driven by the weak commodity prices.
On a year-over-year basis, revenues from the EMEA region were up 6% despite a $4 million headwind from currency translation.
Adjusting for currency, the region's revenues increased 16% over last year's first quarter, benefiting from market share gains in Algeria and Kuwait as these NRC customers tend to maintain activity levels despite the weak commodity prices.
Our Latin America region posted revenues of $9 million in the first quarter, up 2% sequentially.
Revenues in Brazil declined by $1 million, driven by the continuing reductions in Petrobras spending.
Meanwhile, the ultra-deepwater project in Uruguay began at the very end of March, providing only a modest revenue contribution in Q1.
On a year-over-year basis, Latin America revenues are down $5 million or 37%, primarily driven by a $3 million headwind from currency translation and lower Petrobras activity levels.
Given the continued deterioration in activity and outlook in Brazil, we are evaluating more aggressive measures to right-size our cost structure in this region.
In the Asia Pacific region, first quarter revenues were $2 million, down 53% sequentially, as customer activity levels continue to soften in the weak commodity price environment.
On a year-over-year basis, the Asia Pacific region declined by 73%.
On the technology front, revenues from our family of evolution systems continued to play, although at levels consistent with the overall revenue decline, coming in at $14 million in the first quarter, including $12 million in North America.
As <UNK> mentioned, with the exceptionally weak market conditions in the first quarter, we continue to take more aggressive cost actions to right size our organization.
As highlighted in yesterday's press release, the first quarter included $3.2 million of charges associated with workforce reductions, predominantly in North America.
Our North American workforce was reduced by nearly 25% in the first quarter, bringing the total reduction since the beginning of the cycle to nearly 60%.
Adjusting for the severance charges, the segment reported a $12 million operating loss in the first quarter, reflecting the impact of the lower revenues.
While the North America region has been hardest hit in the current market environment, Latin America and Asia Pacific both reported small operating losses in the first quarter in 2016.
Turning to our near-term outlook, we expect to see North American revenues continue to trend closely to the overall rig count, with the US rig count currently standing at more than 20% below the first-quarter average and Canada currently in spring break-up.
In the EMEA region, although we are seeing increase in price and pressure, we expect to see a modest improvement in revenues driven by higher activity levels in North Africa and the start of the work in Albania.
Meanwhile, despite the continuing pullback in spending from Petrobras, our Latin America region is expected to strengthen in the second quarter driven by the ultra-deepwater project in Uruguay.
With the benefit of the Uruguay project, we expect total segment revenues to remain in a similar range as Q1 over the next quarter.
In terms of operating margin, we expect the second quarter to benefit from the full period impact of the recent cost actions which should help improve our results somewhat from our normalized $12 million loss in Q1.
And finally, I would like to take a moment to comment on yet another new market entry, as we recently received our first contract award in Oman.
While this four-year contract is expected to provide only a modest revenue contribution over its term, the award is meaningful as it represents another step in our expansion in the Middle East, building upon our 2014 entry into Kuwait.
With that, I will turn the call over to our CFO, <UNK> <UNK>.
Thank you, <UNK>, and good morning everyone.
I will begin by discussing our mats business before finishing with our consolidated results.
The mats business reported first-quarter revenues of $16 million, down 22% from the fourth quarter and 57% year over year.
Sequentially, the revenue decline is primarily attributable to a $7 million decline in mat sales.
First quarter mat sales were soft, coming in at $1 million, although the P&L impact was partially offset by the sale of older-model used mats from our rental fleet.
For income statement presentation purposes, used mat sales are not reflected in revenue, but rather as a disposal of PP&E, with a $1.1 million net gain on the used mat sales recognized in other income.
Substantially, all of our mat sales in the first quarter, both new and used, were to customers in non-oilfield markets.
Rental and services revenues came in at $15 million for the first quarter, reflecting a 17% sequential increase as compared to the $13 million last quarter.
Despite the continued weakening of the E&P markets, the stronger revenue contribution was driven by our efforts to expand into new markets.
To that point, customers in non-exploration markets contributed $9 million of our rental and service revenues in the first quarter, reflecting approximately 50% growth from the $6 million generated in the fourth quarter.
Meanwhile, oilfield markets continued to soften, declining by approximately 10% sequentially.
A bright spot in the exploration market has been the performance of the Defender spill containment system.
To date this year, the Defender system has been deployed on three drilling sites with three different customers.
Two additional sites are currently scheduled, and customer feedback regarding the system performance has been very favorable.
Comparing to prior year, the $21 million decline in revenues included a $12 million decrease from rental and services, along with a $9 million decline in mat sales.
As highlighted in yesterday's press release, the first-quarter operating income for the mats business benefited from a reduction in depreciation expense associated with our mat rental fleet, reflecting changes in estimated useful lives and residual values.
As a result of these changes in estimates, depreciation expense for the quarter declined by $1.6 million.
Segment operating margin came in at 24%, up from 14% last quarter, benefiting from the depreciation change along with the gains on the sale of used mats, but well below the 43% operating margin from a year ago.
Looking to our near-term outlook, while our visibility is always a bit challenging in this business, the second quarter is currently shaping up to look a lot like the first quarter.
While we continue to see a meaningful level of opportunities both on the rental and sales side, the timing of the projects is very difficult to predict.
Meanwhile, we expect E&P customer activity will remain soft until we see a more meaningful improvement in commodity prices.
Overall, we expect segment revenues to remain in a similar range to Q1.
At this revenue level, we expect operating margins in the teens.
Now moving on to our consolidated results.
For the first quarter of 2016 we reported total revenues of $115 million, down 24% sequentially and 45% year over year.
SG&A costs were $23.5 million, down 7% sequentially and 10% year over year.
The sequential decrease is primarily attributable to declines in legal costs and incentive compensation, while the year-over-year decrease includes the benefits of cost reduction efforts along with lower legal costs.
Corporate office expenses were $7.4 million in the first quarter compared to $13.6 million in the fourth quarter, and $7.8 million in the first quarter of last year.
As we highlighted on last quarter's call, fourth-quarter results included $5.8 million of charges largely associated with the anticipated resolution of pending wage and hour litigation, and related expenses.
Adjusting for these items, first-quarter corporate expenses were down $400,000 from the prior quarter.
Consolidated operating loss was $18.8 million in the first quarter, compared to an operating loss of $94.3 million in the fourth quarter of 2015 and operating income of $6.1 million in the first quarter of 2015.
As we reported last quarter, the fourth-quarter results included $83.5 million of charges largely associated with the impairment of assets.
Foreign currency exchange netted to a $500,000 gain in the first quarter, up slightly from the fourth quarter and $2 million better than the $1.6 million currency loss in the first quarter of last year.
First-quarter interest expense netted to $2.1 million, compared to $2.5 million in the fourth quarter and $2.3 million in the first quarter of last year.
The reduction in interest expense is primarily attributable to lower borrowings, including our outstanding convertible notes.
During the first quarter we repurchased $11.2 million of our outstanding convertible notes in the open market for $9.2 million, resulting in a $1.9 million gain on the extinguishment of debt.
The first quarter 2016 tax provision was a benefit of $5.3 million, reflecting an effective tax rate of 28.3%.
The low effective tax benefit rate is largely attributable to the pretax losses in certain foreign jurisdictions, for which the recording of a tax benefit is not permitted.
Net loss for the first quarter was $13.3 million or $0.16 per share, compared to a loss of $1 per share in the previous quarter and net income of $0.01 per share in the first quarter of last year.
As noted in last quarter's press release, the fourth-quarter charges accounted for $0.89 of the fourth-quarter loss.
Now let me discuss our balance sheet and liquidity position.
During the first quarter, operating activities used cash of $3 million.
Changes in working capital provided a minimal benefit in the quarter, as reductions in receivables and inventories were largely offset by reductions in accounts payable and accrued liabilities.
We used $12 million to fund investing activities including $8 million spent on facility and infrastructure projects in the US and Uruguay.
Financing activities used $12 million, including $9 million used to repurchase convertible bonds and $2 million of net payments on foreign lines of credit.
As of the end of the quarter, borrowings under our foreign lines of credit were $6 million, in addition to our $160 million of convertible bonds that mature in Q4 of next year.
We ended the first quarter with cash of $83 million and a total debt balance of $166 million, resulting in a total debt to capitalization ratio of 24.4% and a net debt to capitalization ratio of 13.9%.
As anticipated, while no borrowings are currently outstanding under our revolving credit facility, following the further deterioration in the North American market in recent months, we were unable to remain in compliance with the financial covenants of our bank facility.
We've been working closely with the members of the bank group and are currently in advanced discussions regarding alternatives, and anticipate having the process completed within the next 10 days, prior to the filing of our first-quarter form 10-Q.
The amendment is likely to include typical asset-based lending characteristics, which provide us with a greater level of assured access to additional liquidity through the cycle should we need it.
For the full year 2016 we have modestly trimmed our capital expenditure expectation, with CapEx now expected to be in the range of $30 million to $40 million, including approximately $15 million of remaining spending for the deepwater shore base project.
As we discussed in previous quarters, until we see a rebound in revenues, we expect to continue generating cash through working capital reductions, most notably from inventories.
In addition, during the month of April we received $27 million of our tax refund, resulting from the carryback of our 2015 US tax losses.
Now I would like to turn the call back over to <UNK> for his concluding remarks.
Thanks <UNK>.
Clearly 2016 is off to a challenging start.
But we again move quickly to respond to the rapidly changing market.
Our balance sheet remains strong, with a current cash balance of over $100 million and net debt below $70 million.
Our near-term focus remains on diversifying our revenue stream, including our efforts to penetrate the deepwater Gulf of Mexico, and a continued expansion of the mats business beyond the rig site.
Despite the extremely difficult market conditions, we remain committed to our long-term strategy.
In fluids, the change in the global competitive landscape continues to provide additional opportunities, particularly in the international markets.
The expansion at Oman serves as yet another step forward in our strategy.
With each opportunity we are making progress towards our goal of becoming a recognized global leader in drilling fluids.
In the mats business we are excited with the addition of Matthew Lanigan as the new president.
His background is ideally suited to capitalize on the opportunities that exist for this business.
We are continuing to make progress in our efforts to diversify our mats business into markets that are less dependent on drilling activity.
While it takes some time for our penetration in these markets to take hold, we remain very confident in our ability to capture a meaningful share of these markets longer-term, which will ultimately lead to a greater diversification in the revenue stream and improve stability of earnings throughout the commodity cycle.
In closing, we remain cautious regarding our outlook for the business in the near term.
While there are some positive signs that the fundamentals in the oil and gas industry are stabilizing, and the recent modest improvement in the pricing of commodities is encouraging, at this time we are not planning for the recovery to occur until 2017.
Our visibility into the coming quarters is limited at this point, and a number of clouds hang over the industry, such as the continuing reductions in capital spending by our customers, and the backlog of drilled but uncompleted wells.
For these reasons, we will remain focused on preserving our balance sheet and manage our business to be in a position to take advantage of the market when we start to see signs of a sustainable recovery.
With that, we will now take your questions.
Yes, well in terms of the timing of it, as I mentioned a moment ago, we expect that to be completed here within the next 10 days.
So we are deep into the discussions and it is going fairly well.
As far as the size of it, yes, I would expect some degree of reduction from the $150 million facility that is in place, and I think that's pretty consistent with what you're ---+ what we are seeing across the marketplace.
Beyond that, I think the big change here is just the transition to the asset base structure, which is in times like this actually an improvement because it's linked to your underlying assets, your receivables, your inventories, and that provides you with a much more assured availability regardless of the state of the industry.
Sure, and actually there's a little bit of a linkage there between what we saw come through the P&L in terms of the gain on sales as well as the ---+ with the depreciation change.
But, as we have gained more experience with the mats and developed more of a history on the useful life, the residual values ---+ as we disclosed this quarter we have sold some of the older-model mats out of our fleet at a meaningful gain and that's what caused us to go back and revisit our depreciation policies associated with the mats, both the useful lives as well as the residual values that they have at the end.
And both of those were adjusted and we have now reflected that going forward.
So that $1.6 million benefit that we saw in the quarter we'll see a like benefit here going out from this point forward.
It's a real positive because it reflects the strong performance of those mats.
Sure.
As mentioned, the biggest opportunity that we have is on the inventory side at this point.
We have been taking that down over the past three or four quarters.
But as we've talked about in the past, that one is more of a slow grind, and at this point though, we see another $20 million plus of opportunity in terms of the inventory side, and aside from that, there is some opportunity in the receivables.
Receivables will naturally flow with your overall revenue so as the activity continues to come down, you get a little bit more from that.
But inventory is really the bigger driver on working capital.
The last one that I think is worth highlighting though, is we mentioned this NOL carryback that we benefited from, and ultimately recovered that $27 million here in the month of April.
But with as rough as the 2016 is setting up for, we have a similar opportunity then next year, so -
Regionally we have opportunities everywhere.
I think our main focus really has to be to focus in on areas where we can do the most good.
So the Middle East is one that we are obviously focused on, and I did mention a few moments ago about the contract that we picked up in Oman, which modest in revenue but strategically very important to be in that country ---+ that Shell Oil working there, Occidental working there.
So it's a very critical step in our advance through the Middle East market.
There are opportunities ---+ obviously depending what happens with the Uruguay project, we will see, there may be further opportunities there in Uruguay, beyond Total drilling there, there are many customers that are waiting in line to drill in that area.
And of course our Gulf of Mexico deepwater, we feel are going to be many opportunities coming our way there.
The facility, as I've mentioned, is nearing completion and we expect later in the year to be reaping the benefits of that.
Evolution is still playing in certain areas internationally, but of course it's playing in revenue levels consistent with the rig count declines in the overall revenue.
But it is still playing for example in China, still playing; and in Asia Pacific and Australia, still playing but albeit at reduced levels.
It is still playing well here domestically.
The ratio of work that we have that's Evolution work compared to the total revenue we have, is still holding up in a fairly good ratio there as it was previously when things were better.
So, the technology is still in play and still moving forward.
On the offshore side we will be moving more of course to Kronos, which we've talked a little about our Kronos deepwater system.
And as we develop things in the offshore deepwater Gulf of Mexico and as things develop in Uruguay and different places around the world, from an offshore standpoint, we will be moving to a slightly different technology.
Yes, historically we have done quite well in Canada.
And Canada is a quite a unique market.
We have a team that have been together in Canada for quite some time.
We also have some new technologies that we have up in Canada that are playing quite well.
A little different approach to the market up there, where we are using a brine-based system with various additives that allowed people to do things in one-stop-shop as it were, other than going to numerous places to do that.
So it's people and technology really, I would say.
And we have done so far, so good.
Yes, the offshore requirements in deepwater are quite different from the land operations obviously, that Evolution is used in.
So the whole formulation and the whole Kronos development is based around the requirements from that technically demanding business.
For example, you need low ECDs, low equivalent circulating densities ---+ it takes a very special formulation to do that.
But suffice to say, I think it's just a different technical game in deepwater and Kronos has been formulated for that.
It's over the life of the contract.
It's not a huge contract, but it is our first contract in that country and its moving forward with our Middle East strategy, parlaying from the work we got in Kuwait.
| 2016_NR |
2016 | PRAA | PRAA
#You know when you start looking at quarterly performance, you really can get mixed up because the timing of the purchasing in the prior two quarters has a lot to do with that.
And so, my initial recommendation would be for you to go back and look at last year's purchasing timing.
Last year, there was a much heavier level of purchasing in Q1 and that makes a difference in terms of timing and how things will go quarter by quarter.
So, it's a lot easier to look at these things on an annual basis.
When you start looking at Q3 over Q3 and Q4 over Q4, you can get really mixed up in this metric.
I mean it's a very dynamic issue and, as you would expect, it's one that we weigh based on buying opportunities that we're observing, conversations with our bank group and trying to read where our room to lever comfortably would be.
And then, obviously, another input that we watch is what's happening with our share price.
So, it's definitely a dynamic set of variables that we're constantly trying to read.
I mean I think you're ---+ I don't know ---+
Exactly.
But we also have a dynamic income statement.
So, I think that your equation is very simplistic and I don't know that we can ---+
---+ fairly draw conclusions from it.
Thanks.
Again, <UNK>, we're not giving guidance for 2016 and so, we're just trying to let you guys know what we're looking at.
That's all and that's as far as we're going with it.
But I mean if there's some confusion about what we call GAAP and what we don't call GAAP.
GAAP, obviously, had all the expense in it this past year.
That's right.
No.
They change a requirement and they ask for a different document type and then we have to go get that document type and supplement our filings with that.
So, we often have it on hand and, in other scenarios, we can go get it.
So, it's really just a timing lag.
It's nothing more than that.
In other cases, we're dealing with disclosures, which may lengthen our talk times and may impact collector productivity and we need to push back against that with other analytical enhancements.
Yes.
<UNK>, so for a company that doesn't give guidance ---+
---+ I'd say we're being dragged into an uncomfortable conversation.
We're simply trying to point out that the headwind that we face due to U.S. supply is causing us to rethink that long-term growth goal that had been stated historically and that we believe a more reasonable way to look at it is in terms of a single-digit growth rate as opposed to what we had talked about historically.
And, again, we are talking about I would say a medium-term period of visibility as opposed to declaring something for the very long term.
So, we're in a period of transition right now.
We feel as though the large sellers are going to be returning at some point, but we don't know when.
And, until we get that stimulus from them building, we are in this period where more interesting growth is going to be more difficult unless we're able to do more in U.S. core or Europe.
I would say that, over the years, the investor community, and you in particular, seem to have been able to model our cash flows, if nothing else, very accurately.
I don't see anything around our business that would cause those kind of (inaudible) to not work any longer.
We wanted to make sure that everybody understood that our ability to replenish that insolvency funnel was difficult and remains difficult.
But the cash flow from the ERC that's on the books, again, I know of nothing that's going to cause it to behave in a manner that's dissimilar from how it's behaved in the past.
Well, I mean I would say, by virtue of the fact that we've been steadily moving up yields on portfolios that we have acquired over time, including ---+ take a look at the multiple expansion on the 2014 portfolios.
We are realizing higher yields than we had underwritten at time of acquisition.
I think that our view is that a lot of that is being driven by some tailwinds that the consumer has had over the last year, year-and-a-half, and some strategy and analytical improvements that we've employed.
I think our view is that pricing, especially in the U.S., continues to be quite competitive.
And I don't think that we would characterize the U.S. pricing market as softening, at least, at this point.
Thank you, Operator.
That concludes our Q4 2015 earnings call.
Thank you all for joining us.
We look forward to speaking with you again next quarter.
| 2016_PRAA |
2016 | MOH | MOH
#<UNK>, are you talking specifically about Florida.
Okay.
The Florida rate increase was ---+
In September.
So we talked about that at the last call.
Thanks for joining us, everyone, and we look forward to seeing you on Thursday in New York for investor day.
| 2016_MOH |
2015 | EXC | EXC
#<UNK>, it was both across the utility business, as well as at the Constellation and ExGen part of our businesses.
So we had strong weather and operating results at both PECO and ComEd.
And then we had good operating results at BGE.
And then as <UNK> articulated in his discussion, we had strong performance from the generating part of our Company.
I think there's a couple of things, but I think the biggest thing is there is just a complete lack of liquidity in Nihub, especially when you get beyond like the 2016, 2017 period.
We think that ---+ with normal weather in 2016, we think Nihub is somewhat fairly valued, but as you move at on the curve, it gets materially undervalued and that's driven mostly by the lack of liquidity.
If you look at it, you have gas prices that are in a contango market and M3 is relevant because it's across the power pool, a lot of hours are setting price using M3 gas.
So if you look at like 2016 to 2018, you've got $0.25 of value on the curve just ---+ I'm sorry ---+ $0.40 of value associated with Henry Hub prices and another $0.20 to $0.25 with M3.
There's $0.65 of value in the gas curve and yet the power prices at Nihub today are $0.25 backwarding.
In addition, coal is in contango as well, so that's part of it.
The coal retirements are part of it.
We have seen heat rate expansion even at these low gas prices.
We think some of that is being masked quite frankly by the fuel being so low, but when you put all of that together and then the complete lack of liquidity, that's where we are coming up with the driver of higher prices in the future.
I know that there's a lot of interest in us engaging on the cost reduction topic before EEI, but I think it's probably better to align our disclosure around that cost reduction effort with our outlook for 2016, 2017 and 2018 hedge disclosures.
You'll obviously see the significant benefit of CP in that period aligned with the benefits of cost reduction.
So while the story is positive, we'd ask for your patience in terms of transparency around that until EEI.
The bottom line is we are seeing improvement over the LRP period.
Yes.
| 2015_EXC |