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2016 | AGCO | AGCO
#You could see that as us being also conservative.
We had a little higher production than expected in our Europe business.
We did a little more in a couple of factories and we extended our shut down and lowered production in the second half to provide us a little runway room for some new products going in in the second half in some of our factories.
And so it was more of a timing and planning around the production schedule than anything else.
Hello, <UNK>.
So far we survived.
That's real demand.
Yes, we just come from a Board meeting in China where we showed the Board our investments.
And I can tell you that we are very proud of what we achieved.
We basically have a state-of-the-art tractor assembly factory.
In theory, we could assemble their fan tractors.
It's an improvement versus the fan factory, so that means we are really, in the area of manufacturing, we are really a top leader in our industry.
We want to position to recruit and hire 1,500 people, which is, of course, huge job to do, and our HR people really did a great job here.
So that means we have the factory.
We have the people.
And now I think there's an easy part, which is basically the export business from China to our existing markets, because we have distribution and we just, I say, people are pulling, so to say, the new product out.
When it comes to China, that's a longer process, because distribution is difficult.
China is huge, and that will take some time.
This is strategic, but <UNK> will answer.
But if that will be, let's say, if the huge new normal would be different from what we think it should be, then of course, you look into little bit more aggressive activities.
And we do that as a simultaneous engineering approach.
So that means our manufacturing guys look into this and look into the possibilities of maybe merging one or the other factory.
I don't think that we will do it.
But we want to be prepared in case it's needed.
Good morning.
In these down market conditions, it's always the fact that the markets are very competitive for the deals that are out there.
There's more competition.
It's pricing, and incentives are stronger.
And so pricing's weaker and incentives are stronger.
And so I think we'll see that for the rest of the year.
I would say that everyone's in the marketplace is being very responsible, but it's very competitive, as well.
The numbers are right, and we are performing, we are pretty much on track.
So it's basically the Segot market introduction in the European markets, in South America and in North America.
But this project is pretty much on track.
Yes, those two, I think both comments are pretty accurate.
On our Europe, Africa, Middle East, we're looking at flat to slightly down margins for the full year.
And then in South America, looking again for the same thing, flat to slightly down for the full year.
So we do expect a fairly substantial improvement in our South America margins in the second half to get us there.
That's right, yes.
| 2016_AGCO |
2016 | PSX | PSX
#So let me take that and talk about them both.
I think that we've said, in terms of the capital spend at PSX, we've always been on the glide slope towards $3 billion.
There's no question our capital the last two years has been very high as we've tried to advance the midstream business and get PSXP to scale quickly.
That was a decision we took really kind end of 2012, coming into 2013.
When we think about share repurchase, we think about intrinsic value and as long as the shares are trading below intrinsic value, we're going to be in the market buying.
We're in the market every day buying.
Some days we buy more than others.
That's true.
And I'd say consistent with our guidance that we've been giving in 2016, we're going to be between $1 billion and $2 billion of share repurchases this year.
We haven't given outlook on that.
But I would say we'll probably be within that same range in terms of share repurchase for 2017.
Absolutely.
Yes, <UNK>, this is <UNK>.
So bear in mind that the almost $350 million of undistributed equity earnings, so that's reflected in the earnings number, but the distributions aren't coming back.
The bulk of that is in CPChem.
But you also see it at WRB JV, XL power lubes and then the several other smaller JVs.
Some of those, it's reflective of the investment that's taking place inside of those JVs that's consuming that cash.
Some of it, a portion is just a timing effect, the distributions aren't necessarily ratable.
So when you think about the $560 million of cash flow excluding working capital, if you were to add back the undisputed equity earnings to put it on a sort of consistent basis, that's just over $900 million of operating cash flow, which then lines up with what you'd expect from the earnings generated, given the environment.
We've always consistently said we'd never build a speculative frac.
I think our view is that NGLs will continue to grow but they're going to grow slower than what we thought two years ago.
And so I think that the decision to push the FID on frac two simply reflects that, <UNK>.
I think that's always something we look at every day in terms of the inorganic growth.
The other thing I would say is we think we still have a pretty good backlog of organic projects we can invest in around our own infrastructure, whether it's more terminals, butane blending, ethanol blending, more pipes.
I think that just around the portfolio we still have a really good backlog of investable opportunities for the MLP.
There's no question, when you think about the long-haul, third-party where their crude pipes or NGL pipes are fracs, I think those opportunities are probably diminished versus what we thought two years ago.
And, <UNK>, just to comment, we purchased additional small interest in Explorer pipeline as one of the opportunities we look at inorganic.
But that's a pipeline we've been ---+ it's in PSXP today, but predecessor to PSXP, <UNK>lips, we've been investors in that pipe for a long time, so it fits strategically.
But I think those are kinds of inorganic bolt-ons that we look at that say they can add value and they fit strategically with our overall footprint that PSX and PSXP.
Hi, <UNK>.
Yes, <UNK>, it's <UNK>.
So if you look back in history and you think about our spend, we anticipate about $2 billion a year of funding or purchases, if you will, at PSXP.
To the extent that those are PSX, it's a project, just what we do.
I think that's kind of to meet our target on distribution growth and our planned $1.1 billion of PSXP, you're kind of roughly in that $2 billion a year range of purchases.
So that will be a source that equity and debt financing that will finance that.
Yes.
I mean, the majority of ---+ we have a large backlog of organic that we're developing that would fit logically in the MLP.
So that's been the strong connection so far with smaller bolt-on outside inorganic.
But, yes, so the majority of that I think you can think about as PSX and ---+ but we're always looking at opportunities to add to the value through outside opportunities as well.
<UNK> ---+
Run rate EBITDA of $400 million at PSXP today.
We feel really good by end of 2018 being a run rate EBITDA of $1.1 billion.
We see a clear path to get there.
Don't see an issue at all in getting there.
So basically our major maintenance turnaround's still on schedule we planned.
These are relatively small unit turnarounds that just were able to defer.
They just move around sometimes on planning basis.
But the fundamental way that we go about the major turnaround planning is unchanged.
So I think our guidance where we typically get to on turnaround expense is pretty consistent year on year.
Flexes a little depending on which refinery, but we really haven't changed our philosophy on turnaround expenditures and timing of those.
Hi, <UNK>.
Well, it's several projects in midstream beyond frac two that we're looking at.
I also mentioned the project financing of DAPL Epcot.
And so that's going to be a very classic type project finance and so our share of that would be somewhere around $600 million-ish, I would say.
Probably most of it would be in 2016, maybe a little bit spilled over in 2017.
But you just kind of sum all that up and that's really how you get to a $3.3 billion level.
And frankly, we're still working the numbers and I suspect it's going to come in below $3.3 billion when we give you guidance in a couple months.
You're right.
We've had a lot of build of inventory in pad one in New York harbor.
There's been an incentive on Europe to continue to run.
I think that reflects storage economics right now.
But that is a place that needs to rebalance.
Somewhere between the US East Coast and some of the European refineries, we still look at that, say there needs to be some balancing on the inventory side or the production side to balance that out.
And that typically tends to be a more marginal or higher cost area, another reason we think about that.
So a lot of dynamics in play around that and we'll have to see how it shakes out.
No matter how you cut it, some plays you've got to get the production and demand back in balance a bit more on the refining side.
That's why we anticipate that run cuts come and that would seem to be one of the places that we look at that think that could occur.
I would say we're still in process on Whitegate.
I think I would tell you we're pleased with the progress to this point and hopefully, as I said I think on last quarter, our intention is we get this closed this year.
I think my comments earlier were around the capital budget and the projects that we have on deck and ensuring that any project we do meets our hurdle rate expectations.
In terms of the overall portfolio, of course, we have the process on Whitegate we just talked about.
I think as we come to the end of the Whitegate process, I don't think there's a lot more in the portfolio that we have on deck.
Certainly for 2016 or thinking about it into 2017.
In terms of potential M&A, we look at every day.
I would say that prices still look relatively high to us, relative to the organic opportunities we may have in front of us.
We would look at that.
If we can find assets for the right value, we're certainly willing to do that.
I think the Explorer one was a good example.
But that was done at the PSXP level and I think, in terms of midstream, you'll see us doing more and more activity at the PSXP level.
Hey, <UNK>.
Yes.
So we're about 97% complete on the LPG terminal.
There's different pieces.
So we're actually right at the front end of our commissioning and drying out process, getting it ready.
So we anticipate that we'll be operational toward the end of the year.
We are actually essentially completing construction and now working into the commissioning piece of that business.
So that's about to become operational.
On the market side, you asked about the contracts, we continue to work the contracts.
<UNK> said the commodity environment's challenged today.
So I think that the commercial arb or opportunity is narrower than what we had originally planned in the short term, but we still fundamentally see that strength.
And as I said, it's got to clear the market here somewhere to really make everything balanced just based on the demand side.
So we feel pretty good about the longer term fundamentals there with some stress short-term, I think, on the commercial side of that.
But the load across that looks really solid to us.
We continue to work that.
We said that the EBITDA on that project, $400 million to $500 million, 20s% or so would be commercial opportunities and so the ramp-up schedule really relates more to the fee.
And I think that what we're seeing is that opportunities for that are going to be a bit lower, but in the commercial arb really where we're seeing most of the compression in terms of that run rate.
But we're ready to ramp up when that thing becomes operational as these contracts start to kick in and we get the asset in play, but that takes a bit of time as you bring up the operation.
So, <UNK>, most of that capital, the capital investment in sites is in Europe.
We have a great market position, good return.
But it's going to be modest, just given the size of the market and the rate at which it's growing.
So it's really, I think, a level that we see continuing to go forward.
On the US side, a little bit of capital on the marketing side for that.
But most of this is done through our dealers and our marketers, our customers.
And so it's part of our marketing structure but making good progress in terms of revamping the sites, particularly on the 76 and the <UNK>lips 66 brand and we're seeing increased pull-through to the branded chain.
So we're strengthening that really through our marketing and commercial relationships versus a capital investment piece that we're driving.
Yes, crude ran up quite a bit in the second quarter and so as it comes off, the margin between, say, a coke and the crude, that differential widens back out.
That said, some of the other products are LPGs.
To the extent that NGL prices ---+ I mean, propane prices come down significantly here recently.
And so as you see that, it's kind of a moving target.
But generally we do better with lower crude prices in terms of the secondary product loss, if you will.
That narrows.
It's basically a boost or tailwind for our margins.
Hey, <UNK>.
It should all be in NGL.
Let me take maybe a 30,000-foot view on this question, if I can, and then <UNK> can come in behind me and give you some of the details.
So I know you have a concern around this and we understand that.
If I can just go to the 30,000-foot level and just talk about the Sweeny hub in general, we still think that that's a great project and we see value creation opportunity there.
You think about NGL pipes coming out of the Permian, West Texas and Eagle Ford and going by Sweeny.
You think about a world class refining, world class petrochemicals.
We have the largest single site ethylene facility at Sweeny.
We're building 2.2 million tons of polyethylene capacity.
We're building the fractionator.
We're building the caverns.
We're building the interconnecting pipes to Bellevue and on to [Preport], and then 150,000-barrel-a-day LPG export facility.
We still like that concept and what we're creating there.
I think short term, what you're seeing in the market, there's going to be stress in the LPG side of it.
The frac is running well.
It's running to design limits.
We're seeing certainly heavier feed than what we premised.
So we're running about 80 a day at the frac today versus 100%.
But it's completely loaded in the back end of the frac.
The other thing I would say is as this project is coming up, we have a lot of project expenses that are hitting us beyond just the frac.
So think about the pipes and the caverns and the commissioning, the start-up of the LPG export facility.
So you should expect to see those costs continue through the end of 2016.
But when you talk about the frac itself, we dropped it, all of it.
It's at PSXP today.
The EBITDA's about $100 million.
So $25 million a quarter.
There's a little bit of leakage that goes to the noncontrolling interest.
So then you take that and bring it to a net income level and that was more than offset by the project expenses we had and the seasonal trading activities that we had in our NGL business.
So I think of that.
But we're not worried about this whole NGL complex that we're building at Sweeny in terms of it coming up and we're looking forward to getting the LPG export up later this year.
We'll start commissioning activities actually in the next couple weeks as we start thinking about that.
And so I just want to say that we still really like this project a lot.
And, <UNK>, if you want to fill in anything I missed, you're welcome to do that.
No, I think it really is about the total.
And <UNK>, so you know, it's a PSXP asset today.
<UNK> said we're down a little bit with the ethane.
As the ethane comes out of rejection, that comes up naturally.
It also starts to load more of a pipe in the caverns that are there.
Relatively small contribution but it's up and it's running a lot better.
We have had great operational improvement the second quarter and so that's what we're focused on and then we've got to get this LPG up and get the entire value chain going on that one.
<UNK>, we haven't disclosed our specific RIN costs in refining or benefits in marketing.
But you highlight the situation, so we do have the RIN exposure in refining.
We have an offset in marketing.
Obviously as RIN prices increase, that's hurting refining more and you see that reflected in our capture rates.
But there's offset in marketing.
But we don't provide the actual numbers.
So the inventory impact is ---+ so to the extent there's an inventory impact in our capture, it's reflected in that other bar.
The actual effect in the quarter was ---+
Yes.
So it's a combination of your RINs expense, product differentials, outbound freight costs, any inventory effect.
They are all in there and inventory is normal.
We don't disclose individuals but, yes, I think, as I made the comment, I think we think about it and look at the light sweet and say where would that incrementally be and based on the products and the configuration.
So rather than ---+ just go ahead and say we always look at that and we'll look at that, make sure that incremental barrel has incremental profit.
And to the extent that we don't, we'll cut crude runs.
No.
Thanks, <UNK>.
So the $1.1 billion is a target of both existing assets when we began as well as our growth projects, as we think about the composition, so exactly what we drop when is something that we always look at.
So it's going to be a combination of both of those.
But as you look at the midstream EBITDA we put out in 2018, we grow from around $1 billion, say, in refining and midstream income when we started in 2013, 2014, pushing that up over $2 billion.
So that's really the growth that's there.
Some of that's commodity as well.
So there's some ---+ depending on the commodity markets, could be some of that about 20%.
And that's really how we think about it is that look through EBITDA, you've got $1 billion plus of EBITDA growth over that period.
But what you put into PSXP is a mixed question that we really don't address specifically.
So the end of 2017 you put the Sweeny hub, you've got DEPL Epcot, you've got Bayou Bridge coming on.
You're pushing up well over $500 million of incremental EBITDA in the midstream, both a combination of PSXP as well as PSX.
So, yes, so debt to cap, 27% fully consolidated at the end of the second quarter.
On a net basis, 22%.
When you exclude PSXP, I think it's 25% total; 19% on a net cash basis.
So still a fair amount of headroom from a balance sheet standpoint, balance sheet capacity to weather the ups and downs in the market.
Most of the capital programming ---+ <UNK> talked about $3.9 million capital budget coming to something $3.3 million-ish for the year.
But a lot of the capital is locked in and so that's where having the balance sheet capability to deal with that over that time period certainly helps us.
The MLP model is a critical part of the overall funding.
So as we continue to grow the ML P dropdown assets, you'll see cash coming back to the PSX level.
And it's going to be in the form of ---+you'll see equity raises like we did in the second quarter and you'll see debt going on the MLP as well.
Just one thing, <UNK>, that I would add to that.
We're kind of on a glide slope to $3 billion.
So think about kind of $1 billion-ish of sustaining capital and $2 billion of growth.
Most of that growth is really directed towards midstream and we fully expect that we can fund that coming out of the MLP.
You bet.
Have a good day.
| 2016_PSX |
2016 | CMC | CMC
#Thank you.
So thank you again, everyone, for joining us.
We felt we had a good quarter, and we look forward to increased shipments and demand in the third and fourth quarter because of seasonality, construction markets.
And we look forward to reviewing those results with you in just a few months.
In the meantime, thank you for joining us on today's conference call.
We look forward to seeing you and speaking with many of you during our investor visits in the coming months.
Thank you very much.
| 2016_CMC |
2016 | JKHY | JKHY
#That's a little bit of it, yes.
It was a little below.
Alogent was actually a License and implementation and maintenance.
It was basically a toolkit that was sold, and then you sell a bunch of professional services to build it the way the banks want it, which is the way the Tier 1s and international banks do business.
And that's not the way our typical community bank does business.
Yes, it should be back there this year, <UNK>.
Like I said in the opening comments, our annual maintenance billing collections were behind last year by about $10 million.
So if you just throw that in there, that's the difference.
If you figure CapEx or cap software levels off or down slightly in FY17, that was a $19 million increase this year over last year.
Put those two numbers in there and you're back way above earnings.
Yes.
Yes, I think we have, we have three payments businesses, Our debit switch, our bill pay business, and our ACH remote deposit business.
All of them growing in that 5% to 7% range, let's say, for the coming year.
And again, we have this headwind that we're trying to grow over that I mention my opening remarks regarding the two significant customers that we lost last year.
Which we should ---+ those will anniversary in the December quarter.
No, I think the R&D run rate was a little higher in Q4 than what you can typically expect the run rate.
It's going to level back down a little bit going into FY17, <UNK>.
<UNK>, I do not have that at my fingertips.
I apologize.
It's somewhere around 79.5 million.
Thank you.
Again, I want to thank you for joining us today to review our fourth-quarter and FY16 year end results.
We are pleased with the results from our ongoing operations and the efforts of all of our associates to take care of our customers.
Our executives, managers and all of our associates continue to focus on what is best for our customers and our shareholders.
I want to thank you again for joining us today.
And Andrew, will you now please provide the replay number.
| 2016_JKHY |
2015 | COL | COL
#As we look at it year over year, the head wind from a sales perspective is a little bit over $40 million.
And I'd say the vast majority of that is in our government systems business.
That said, we're still forecasting government systems to be flat despite that headwind.
The customer-funded pickup is around our data links, and I think Pat described that in his remarks.
Company-funded is around this TrueNet radio solution which provides both ground and airborne capability, primarily focused at the international market.
And remember, we've said as we start to come out of this cycle in government systems, we are going to spend a little bit more on R&D to position our products for international markets or commercial-type procurements, and that's exactly what we're doing.
No, no update for you.
Let me start with the second question first.
The growth in these new programs, whether it be KC-46, the F-35 program, are driven by the cycles of those programs.
In fact, we are seeing good growth now on the helmet and avionics that were brought in the F-35.
That will continue.
We're actually going through a period of a dip between development and production on KC-46, which is a headwind for us.
Our revenues are down on KC-46.
They'll ramp back up as we start low rate initial production, and production of those aircrafts.
They tend to follow the program cycle as opposed to the overall budget dynamics there.
The first part of your question was around the data links.
We are gaining share in the data link area.
Programs that are important there are the MIDS to JTRS conversion.
We're implementing some new wave form capability.
We've got a new data link capability called TTMT which is a broadband data link.
You've probably seen this recent announcement by Northrop Grumman of the air-to-air refueling of the unmanned platform.
That was done utilizing our TTNT advanced networking technology.
We see really good growth opportunities there in our data link business.
I'll also say that our core communications business, if you set aside the JTRS Manpack phenomenon, is doing quite well.
As we went into the cycle, our short-cycle business was impacted more dramatically, more quickly.
But as we're stabilizing here, we are seeing our short-cycle business actually coming back.
So, things like data links, our navigation equipment, communications equipment are all showing signs, early signs of recovery, which is good.
We're not in the Rifleman competition.
We're more in the Manpack program.
That's the big army communication program out there for us.
The draft RP is out.
Industry is commenting on that.
They're planning to go to procurement competition late this fiscal year.
Awards will be probably next year but you're not going to see any meaningful revenue now until probably 2017 when we start ramping up.
Their intent is to select multiple suppliers for that but it will be a full and open competition.
That's probably a big one to watch going forward.
Saner, I'm not sure what the heck the army is going to do on Saner yet, whether it's going to be funded, whether they're going to delay that, whether they're going to continue to just buy some of the existing solutions that they have.
I'm not sure yet on Saner whether that's going to be an opportunity for us or not.
I'd prefer to see a new Saner open competition.
It would give us more opportunity.
But I think in the main, it's not a material driver.
It's not a JTRS kind of program.
No, unfortunately, we're not seeing any of that yet.
I've not forecasted that we're going to see that until we get into another budgeting cycle.
It's something I talk to the guys repeatedly about.
But I can't track any major shift in strategic direction that gives us a retrofit opportunity that we can track to a fuel.
It, obviously, isn't hurting but I don't think the money is moving from the fuel budget to the retrofits and mods budget yet.
No.
If you look at our dividend ratio it was just time for us to update that.
So, there's no change in strategy.
This just reflects the increase of income that the growth is providing from the company, and we're adjusting our dividend accordingly.
So, you should expect that as we continue to grow the bottom line of the Company.
That particular acquisition we're looking at providing about 1 point of revenue next fiscal year to our commercial portfolio.
I think more importantly is that it provides us this broad offering and will certainly allow us to continue to be successful in the in-seat and wireless video application in the single-aisle market.
It's 1 point of growth next year, which is good.
Not overly material, though.
We don't provide wired in-seat twin-aisle solutions right now.
Our focus is in complementing our single-aisle product line.
Whether this would be applicable to a twin aisle might be something we'll look at in the future.
While this product line is going to sit in our commercial systems business unit, this is a part of our overall strategy to provide information offerings.
So, you can envision in the future where we're providing not just the in-seat video equipment but also the onboard wireless distribution, as well as the connectivity service.
And we've been expanding in our market reach there to provide the cabin connectivity service.
So, we can see in the future where we're providing a much broader, fuller sweep of offerings to our customers going forward.
I would say there's properties out there we're continuing to work.
They're particularly like a Pacific Avionics which means they're privately owned, they take nurturing to make the deal happen.
I've said publicly that I wish we were a little faster at moving these.
Jeff MacLauchlan's come into the company and that's one of his focus areas, is to try to accelerate our ability to convert on these.
I think there's opportunities for us to continue to build out the portfolio, and we'll keep prosecuting those.
I think you should view this as a typical bolt-on enhancing our total product offering in this new connected airplane environment.
Today we've got the IMS organization that allows us to provide the services.
We had the onboard equipment for in-flight entertainment.
We did not have a product offering for this wireless distribution.
That's where Pacific Avionics comes in.
There are other areas we'll continue to look to build out this portfolio to provide all the value-added offerings associated with a connected airplane going forward.
So I wouldn't look at this as a platform.
I'd look at this more as building on the platform that we've already got and as part of our overall information strategy.
I think it was pretty close, maybe a little bit higher.
We're still planning on having a lower tax rate in the second half of the year.
I would tell you, I think the bulk of the tax planning is going to be in the fourth quarter.
So you'll probably see a rate in the 30% range for the third quarter, then coming down in the fourth quarter.
We're at really low rate as they're going through the ramp-up right now.
I think we have 30 ship sets in our year so we're on a one to two month rate right now.
Pretty muted ramp-up as they deliver those aircraft at a much slower pace than what we saw with 787.
Now, we are aligned to do Airbus in this overall A-350 ramp-up.
So, we're not in the situation where we saw with 787, where we were misaligned and then it took us a ---+ I'm sorry, with 77, it took us a year to get back aligned.
We're pretty well directly aligned right out of the chute with Airbus.
There was a few.
We sold it.
The sale price was $5 million.
There was $3 million in cash and we took a $2 million note.
Not exactly a robust sales process but we did get a little bit.
Yes, I think we're looking for more stable performance out of the large cabin as opposed to growth.
I think actually our global demand was probably more to do with the alignment of when we were shipping equipment as opposed to market demand for the aircraft.
We're watching that very closely.
Obviously the Russia sanctions is an example, is an area that is of concern for the large cabins.
We track that just like you do with the OEMs, but we're calling for relatively stable global production.
Thank you, Melissa.
We plan to file our Form 10-Q later today so please review that document for additional disclosures.
Thank you for joining us and participating on today's conference call.
| 2015_COL |
2016 | PLXS | PLXS
#Yes, that's a good question, <UNK>, because of course once we're up into our margin range, the story shifts to top-line growth.
I think just philosophically, the way we would look at this is, our drive toward shareholder value is about ever-increasing economic profit.
And of course, having our margin performance up in the range that it is, and improved working capital metrics is going to drive our ROIC higher here in the coming quarters because of our balance sheet metric portion of that, the denominator is on a five-quarter average, so we will see that improve.
And then it's about driving top-line growth, which requires us to increase the capital base.
And then achieving a consistent return on that ever-increasing capital base that is there to support higher revenues.
I think one of the boundaries that we look at in terms of accepting business, is, can we achieve our operating margin over a long time, our target range over a long time, with that new piece of business.
And fundamental to that is whether or not we think we can sustain some level of competitive advantage with that program versus our competition.
And so it's not extraordinarily complicated.
We also understand that not all pieces of business, from a margin standpoint, are priced the same; not all pieces of business require the same level of relative invested capital.
So we give our sector teams some latitude to manage their portfolio, but at the same time, we expect them to deliver our targeted metrics on an overall basis, within that portfolio.
So being up in the range that we are now gives us a little room to maneuver, where previously it was difficult for us to really maneuver with customers and be more competitive when we needed to, to get additional engagement with new customers.
So I would expect us to start seeing acceleration of top-line growth, now that we're in the spot that we are in.
I think, <UNK>, we can probably still stay within the low double-digit range for the next few years.
You know, I am guiding 10% to 12% for the full year in FY16.
I would expect something similar in 2017.
Maybe it ticks up a little bit as we go past FY17, but nothing dramatic.
We are not alone then.
(laughter)
This is <UNK>.
It's very similar to the industrial/commercial story, where a significant amount of the growth is coming from new program ramps that we've announced over the last several quarters.
Keep in mind, the ramp schedule for healthcare/life sciences is a big longer, so the stuff that we're seeing ramping now are actually from wins that go back into the beginning of the year, and even at the end of FY15.
So that is where the strength is coming from.
The end markets, as I think <UNK> mentioned, are flat and a little bit ---+ I don't think he used the word volatile, but they don't move around a lot.
But we haven't seen significant growth from the end-markets themselves.
This is <UNK> again.
Yes, the program wins that we have been experiencing in industrial/commercial and the two that we have talked about a little bit, the size of those programs are decent-sized programs, bigger than what I would say is a traditional industrial/commercial opportunity.
And it's really led by a couple of things.
One is, in one case, the customer decided to outsource the significant portion of their work.
And so that came in a nice- sized chunk.
The other one, the product line is quite substantial, and we're sole-sourced on being able to build that, so we won the entire project.
So again, two really nice, healthy-sized programs there.
I think the other part that is key here is that we are also making inroads into other divisions of those entities.
So we see there's a nice continued relationship with both of those customers.
I think from a pricing standpoint, as you ramp new programs, they are always a bit more challenged on the markets, because there's a lot of expenses that go into ramping a program.
As we've talked about before, we model the sectors and strive towards a 4.7% to 5% goal.
So they are actually little bit more challenged in the beginning, and as we ramp up, our expectation is that their performance is going to fall in to help us achieve our operating margin goals.
And the thing I would add though too is, when we set our operating margin goals as 4.7% to 5%, that includes ramping the new business that we need to fuel our growth.
So our expectations is that we can grow and maintain those margins.
Yes.
You are trying to get at how much of the revenue growth is already in the bag.
(laughter)
This is <UNK>.
I will take a shot at this.
And what I am going to say is very high-level and generic, because every program can be significantly different.
But you hit on it, is that, networking/communication, the ramp on those programs is ---+ if you had to give an average, you are looking at six months.
So anything that we win, we typically expect to be ramped in a six-month timeframe, six to eight months.
Healthcare/life sciences can be substantially longer.
It can be anywhere from probably 18 months to 24 months before we see a volume ramp.
Defense/security/aerospace is a similar story in terms of our length of ramp.
And industrial/commercial can be somewhere in between.
We can see things ramp relatively quickly ---+ six months.
It can be longer; 12 months 18 months, especially if you look like a semiconductor customer.
And the caveat I'll put on this is also where it comes from.
Our healthcare/life sciences wins, a lot of those are products that we are designing.
So the ramp schedule can be a bit longer.
In the case of the industrial/commercial, that customer that I talked about where we ---+ basically, they decided to outsource.
It's a pretty significant fast ramp.
And so that's also the challenges, is that, whether or not this is a new program that they are trying to penetrate the market, or whether it's existing business that we're transitioning in, the ramps can be all over the place.
Hopefully that gives you a little bit of color.
But it is really hard to say that there is a specific one for each one.
So <UNK>, I think I will add just a little bit more color around FY17 too, just to give you and the others a bit better idea of our view.
If we go back to June when we had Investor Day, we painted a optimistic picture for FY17 and beyond, from a growth perspective.
And what I would say is, we still feel that way.
We talked about the potential for solid growth in FY17, with a goal to get to the low double-digits.
We still view that as a reasonable goal.
Now, it's certainly too early to guide.
It's too early to call the year, because a lot of things can change in a big way.
But if end-markets hold up, if we don't see end-markets crash, if new program ramps go as we anticipate, we expect to really grow meaningfully on a year-over-year basis in each of our quarters.
We do believe that all our sectors are going to show growth within the year.
And that's how things are lining up at the moment.
Thank you.
All right, well, again, I want to thank, of course, the sell-side analysts, who just do a fantastic job covering Plexus and our story.
And I want to thank the investors who are on the call, for supporting Plexus.
This is my last earnings call.
And so I want to thank all of you for the great support.
And of course, I appreciate you all on an individual basis as well.
I know many of you personally.
So thanks for the support over the years.
And with that, we will close down the call.
Thank you.
| 2016_PLXS |
2018 | SAIA | SAIA
#Good day, ladies and gentlemen, and thank you for standing by.
Welcome to the Saia, Inc.
First Quarter 2018 Earnings Call.
Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mr.
Doug <UNK>.
Please go ahead, sir.
Thanks, Hanna.
Good morning, everyone.
Welcome to Saia's First Quarter 2018 Conference Call.
Hosting today's call are Rick O'Dell, Saia's President and Chief Executive Officer; and Fritz <UNK>, our Executive VP of Finance, Chief Financial Officer.
Before we begin, you should know that during the call, we may make some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements and all other statements that might be made on this call that are not historical facts are subject to a number of risks and uncertainties, and our actual results may differ materially.
We refer you to our press release and our most recent SEC filings for more information on the exact risk factors that could cause actual results to differ.
Now I'm going to turn the call over to Rick O'Dell.
Good morning, and thank you for joining us.
This morning, we announced our first quarter 2018 financial results, with diluted earnings per share of $0.80 compared to $0.44 in the first quarter of last year.
The EPS comparison benefited by $0.03 from an alternative fuel tax credit for the full year of 2017 that was enacted in the first quarter of 2018.
Robust shipment and tonnage growth, coupled with continued pricing improvements, translated into meaningful year-over-year operating results.
Key first quarter metrics are as follows: LTL shipments per workday rose 8.4%; LTL tonnage per workday rose 12.2%; LTL revenue per hundred weight increased 7.7%.
LTL revenue per shipment was up by 11.6%; and the operating ratio improved by 160 basis points; and operating income was up 57%.
The first quarter marked the 31st consecutive quarter of year-over-year improvement in our reported LTL yield, and contracts renewed in the first quarter included an average agreed-upon price increase of 7.6%.
A few other operating highlights from the quarter I'd like to mention before I turn things over to Fritz to review some financial results.
Rate per shipment increased by 3.6% to 1,355 pounds, benefiting from continued strong industrial activity and also from our efforts to improve mix.
Length to haul grew by 5% to 837 miles, attributed to our expanding geographic coverage.
Our cargo claims ratio of 0.88% worsened a bit from 0.75% in the first quarter.
Our employee count is up about 10% compared to the first quarter of last year.
And these ---+ as these new associates gain experience, we expect to see further improvement in our cargo claims ratio.
Purchased transportation miles in the first quarter were 10.9% of total linehaul miles compared with 7.5% last year.
This increase is being driven by volume growth as well as purchased transportation used to balance the network after weather-related terminal closures.
With that, I'm going to go ahead and turn the call over to Fritz <UNK> to review our financial results.
Thanks, Fritz.
Saia is off to a really good start in 2018, and we have an eventful year ahead of us.
In the first quarter, we opened 2 new terminals, 1 in Fort Worth, Texas.
It's our third terminal in the Dallas Metroplex and the 20th in the state of Texas, and it was opened in February.
In March, we opened a terminal in Scranton, Pennsylvania, our seventh terminal in the Northeast, all opened within the past year.
We'll open our eighth northeastern terminal later this summer in Pennsylvania.
And we continued to advance multiple locations for additional terminal openings in the Northeast where we continue to target 4 to 6 terminal openings this year.
We'll be opening our second terminal in the Seattle market later this quarter.
Similar to the opening in Fort Worth, this second location in Seattle will allow us to be closer to the market and provide enhanced service to our customers.
There's an added benefit in that the new terminal opening release pressure on the existing facility and will benefit our hiring efforts, as the location will allow us to draw from a different pool of candidates.
As Fritz mentioned, our capital expenditures in 2018 are likely to approach $265 million, depending on the timing of some real estate transactions.
So in conclusion, the first quarter results were very positive from a growth and improved profitability standpoint.
We look forward to continuing our growth and margin improvement in both new and existing markets as the year unfolds.
With these comments, we're now ready to answer your questions.
No.
It's really due to the kind of the new employees, the number of incremental dock employees.
It just was a bit of a deterioration.
And obviously, we've been on a multiyear improvement to get the cargo claim ratio where it is.
I still think it's a pretty good number.
And it was actually driven a bit more by kind of a cost-per-claim scenario as opposed to the frequency.
So I think from a customer satisfaction standpoint, we ---+ it wasn't really much of a deterioration.
But we tend to report the number because we think it's pretty good in the industry.
So we're providing that, too, but obviously, both from an investor standpoint as well as from a customer standpoint.
Not yet.
So tonnage ---+ and this is our total LTL tonnage for April through yesterday, it's up by 10.1%, and shipments are up by 7.9%.
Yes, let me ---+ both categories ---+ yes, let me just clarify for everybody kind of why we did that.
Traditionally, we had on our public releases, we would list TL, which is simply a weight break, so that would indicate LTL tonnage that was in excess of 10,000 pounds.
And we felt like that, that created a little bit of confusion because people interpreted that as truckload.
And in fact, it really is simply heavier-weighted LTL shipments.
So to be consistent with other public folks, we consolidated that into the single line.
So what you historically would have seen is LTL and this TL breakouts were just considering all one now.
So the 10.3% I just gave you is the total, so the old LTL and TL put together.
Would you like the shipments numbers, too.
And <UNK> and all of you guys, we have a datasheet that we'll ---+ that goes back and provides the combination of, basically, our LTL business, the total tonnage, and we'll be happy to provide that to you guys offline, if you need it for your kind of modeling and look at back in history, so you have comps.
Well, obviously, we're seeing some increase in our weight per shipment, which is kind of negative on the yield, and then you got to offset, right, with the length of hauls going up.
And then we're very focused on business mix management.
It's a very positive yield environment.
And it's a tough driver market.
We're paying $5,000 signing bonuses in places to attract drivers.
We just need to be properly compensated.
You look at the capital expenditures that we have, obviously, it's increasingly a heavy technology-oriented business.
We have a wage increase coming up at 1st of July, so we're just very focused on the yield and margin opportunity.
And I think it's pretty meaningful.
So I think it's a good environment, very positive environment.
Yes, so <UNK>, we're going to ---+ we approached this just like we did in years past, where it's a market, it's kind of a job category market to market sort of analysis.
So our ---+ we'll be in a range of between 3% and 4%, with the drivers in some markets at the upper end, maybe even a little bit above that kind of a rate, with an average kind of 3.5% and above for the whole company.
So it will be kind of that basis.
If I go back a year, we were sort of 3%, 3.5% on average across the company, a little bit higher obviously this year.
And again, just to stress, it's a market sort of based view there, so that implies to some markets are going to be a little bit higher, we've got to be competitive.
And it tends to be the highest end of our range of wage increases are going to be the driver and mechanics frankly in total.
Yes, I think that's what happened, right.
I mean the tide of the truckload market gets and then it ---+ from an availability standpoint, I think what you see is people need capacity, and the truckload guys, instead of taking a truckload stop-off-type route, they'll just ship it on the LTL because they can get a full load and make one stop, and it improves their utilization, I would think.
So we are seeing that and those kind of heavier weighted-shipments are up, but almost at twice the rate that our total shipments are up.
Not quite.
We're not quite there yet just because we're not that cost-effective up there yet, right.
So as we get density in our routes, et cetera, I think we'll be ---+ we would expect the productivity to improve at a faster rate.
So it's probably a little below what our average margins are.
But what you have, too, is now our overhead and fixed costs are being allocated over a bigger book of business.
So from a costing standpoint, the way we kind of look at different reasons and whatnot, the network, some of the other ones are benefiting because I'm now allocating costs to the Northeast, so ---+ but yes, contribution margin-wise it's positive.
Yes.
I mean, it's a bit of a mix.
Are you just talking about volume.
Are you talking about volume in this yield environment.
I mean it's just ---+ there's a lot of moving parts right now.
And I think the opportunities are obviously pretty significant.
20.
Yes.
I mean, our data shows that our yield is below the market.
I think you guys can look at the same data and you'll probably find the same thing.
A part of that is kind of where we are in the marketplace, right.
I mean, we grew up as a regional carrier, and you had to compete with those regional good operating guys that build a lot of directs, et cetera.
And so we play in that market still to a meaningful degree.
And then we also are expanding our footprint, have a different value proposition.
We have improved our service, our cargo claims ratio.
So ---+ but as you try to improve your yield, some of it's mix, right.
Because a customer may use you today because he's a price player.
If I decide I'm not going to be in the price market anymore because that, that doesn't really work for me or I want to ---+ I have to change them out with another customer, right, does this mean he's going to pay 14% more, right.
So that's kind of ---+ so we're working through kind of this business mix management.
And the other thing you can say is there's ---+ that's not a direct line thing when you're in a network kind of high-fixed-cost business, so you want to stage that in.
But the market is really good right now, and we're evaluating unprofitable business or let's just say minimum-type shipments that don't have the margin you might want, right, even if it's ---+ let's just call it a 90% or 88% operating ratio, I'd rather have a 88% operating ratio on a $260 shipment than an 88% operating ratio on a $80 shipment, right.
It's just not enough money in today's environment.
So we're kind of working through those opportunities.
And what I would say is I think the market is conducive to that right now given the strength in the market and the quality of our service of product and an expanded offering.
So we're going to do it in a staged way and not take a bunch of risk on it.
You've seen some other people will decide one day to get in this market, the next day they're getting out of it.
Sometimes, it doesn't always go the way you're ---+ in a network business, the way you're modeling it.
So I'm really excited about the opportunity.
And with where we are as a company, I think we're staging these actions in a very appropriate manner.
But given the strength of the market, we're also being pretty aggressive with that, and you can see that with the contract renewals, right.
It's still in that range.
I mean, you might call it 8 points or something, right.
But if you look at us, we've been kind of leading from a yield standpoint.
But other people are getting good yield improvements as well, so it's not ---+ let's just ---+ we're like 20% of ---+ the way closing the gap maybe, so it's still the most meaningful opportunity that we have, that, plus capitalizing on the broadening network to get that fixed cost leverage that we were talking about.
Yes.
I mean, obviously, I would comment, too, I mean we're doing that, and we're also aggressively staffing for anticipated peak.
We started earlier this year because of our confidence in the market and the growth that we know we're going to get from the Northeast expansion.
So it's probably like a little more training costs in the first quarter than we would have had in the past.
From a staffing standpoint, normally, we wouldn't start kind of staffing for the peak in March, and we'd hire ---+ we're hiring every week start ---+ right through January, so our own readiness in terms of capacity is improved.
And then, like you said, we're having some serious conversations with customers and making sure that the capacity that we're paying for and staffing for we are being properly compensated for, especially in some of these more head-hauled tough markets like in the Pacific Northwest, into <UNK>orado, head haul business down into Florida.
We just have to make sure that we're being compensated for the capacity that we're providing, so that's ---+ with those conversations are obviously being had.
So <UNK>, so I think when we have looked at our kind of longer-term CapEx, so this year, obviously, we've highlighted $265 million.
And we're going to be focusing our real estate investments on what we would say are the strategic sort of assets that we want to own.
So the Fort Worth facility we added this quarter, that's an owned asset, right.
We'll ---+ as we see terminals in the Northeast that allow us to give us that runway to grow, we'll ---+ or the strategic location, we'll own those.
I think that we pointed out that we bought the Laurel, Maryland facility.
That was a well-positioned asset, great geography there.
That one's ---+ we're not adding real estate between Baltimore and Washington, so it's a good location.
So I think you'll ---+ we're kind of prudent about that.
As we find assets that make long-term sense, we're going to own them.
I think we're going to see ---+ in our business going the next several years, you're going to see us making real estate investments that bring us closer to the customer, not only in the Northeast, but in other markets.
So Fort Worth, the third terminal there, that was ---+ what that was about.
So those are strategic investments.
Those are ones that we think differentiate us and they're the ones of the facilities that give us an opportunity to grow over time.
So we don't think ---+ with that said, the least assets that we have currently utilized, we don't necessarily view those as a drag or an overhead cost.
I mean those were things, yes, we're paying market cap rates, but we're also in a position where those are ones that are effective for us.
But if we find opportunities to be more strategic about or have longer-term assets, we'll do it.
And we also just ---+ we bought Scranton as well.
Some of the properties we're looking at are ---+ will be purchases, and then we have a contract on a break up there that we would expect to own as well.
So yes, I mean, we want to own the strategic assets.
And we're building terminals in Indianapolis, some other areas, we've built in Saint Louis.
So I mean you see us kind of make ---+ we want to own those strategic assets when we can.
I will give you an example though.
Our newer terminal, it wasn't for sale, right.
The landlord didn't want to sell.
It's a nice facility, 101 door.
One of the other major competitors was in there.
We were able to secure that under long-term lease.
So it's just the market, right.
Yes.
We kind of like the average track rate right around 5 years.
So we're pretty comfortable to that, we're pretty close to that right now.
So as you ---+ as we expand, we'll obviously continue to need to make fleet investments to maintain that average age.
I think the big thing that I think I may have pointed out prior was the ---+ particularly our forklift fleet was something we're dissatisfied with the age.
So last year, we really pushed that, made a significant investment to bring that more in line with what we think the economic benefit of the average age of being able to maintain the forklifts.
The trailer fleet, we feel pretty good about as well.
There's a little bit of an opportunity to bring that average age down, but we feel like it's not a ---+ it's an appropriate balance of what reliability, fuel efficiency and maintenance costs, and significantly all the safety investments that are on board.
Yes.
So <UNK>, on that one, the Houston region, which is kind of our ---+ we would consider a proxy for energy, has kind of outpaced the growth of the company here in the last ---+ first quarters.
So it's a little bit above the average.
So it's returning closer, not all the way to where it was in sort of 14, but it is done well this year.
So that ---+ but I think it's important to note across the company, there's really not a significant outlier, although that is above the average, it is the ---+ we see pretty uniform growth.
And I would just comment on business mix as well.
We're very focused on growing kind of the smaller accounts that have a better yield profile generally.
And we're seeing some ---+ we're having a lot of success there in supporting new account opportunities as well as market penetration amongst our existing accounts for that segment.
And again, that's a plus, too.
And then that it operates better, and you got ---+ taken a big position with the big account going out with RFQs all the time as well.
I mean, we like our big accounts that operate well, but not all of them do, so you're always kind of working through that.
Those larger customers tend to have more of a ---+ sometimes a procurement, some of them have more of a procurement mentality, right, as opposed to partnership, relationship, logistics opportunity.
It's a mix.
I mean, we provide the assets.
Today, it's a expensive to provide assets and drivers, and they take a margin.
I mean that's their business, right.
So we're constantly evaluating that to make sure that the partnership relationship works.
And quite frankly, in an environment like this, we're going through some pretty major repricing with them kind of like you would with other national-account-type profile business, right.
Yes.
So <UNK>, we don't necessarily ---+ we don't break out the kind of step-ups or yes, what we're seeing because that's kind of a more a mix of business kind of a challenge there and when we use PT.
But if I look back at the ---+ if I look back at the quarter, we used roughly ---+ at the first quarter, our PT percentage as a total linehaul miles that came from truckload is right around 7% for the quarter.
So and if you add the rail in, then that'd be about 4% from there.
Yes.
So about 11% of our miles are purchased.
That was Q1.
And if you look back over time, so if I were to go back to prior quarters, it's really kind of driven about ---+ it's driven about what that mix of business looks like, where it comes in the quarters, it's really not always a consistent pattern quarter-by-quarter.
One of the things that Rick pointed out earlier on the call was that we've been pretty focused on hiring, so that gives us an opportunity to optimize some of that.
So that's why it's not necessarily a good predictor of what Q2 miles might look like, because we're always taking action with that, and at the same time, freight patterns are changing.
I would also comment as some of the high-cost PT lanes, right, were, let's just say, for argument's sake, Dallas to Denver, <UNK>orado.
I mean, that's a very high cost ---+ you're either going to come back empty or you're going to pay a high cost per mile.
We have to make sure that business is being priced properly.
If it is, then we'll keep buying the PT and move in the freight at a good margin.
And if it's not, then if we adjust the pricing and then the customer doesn't take it, then we take the PT out.
So managing a network like this is a little bit ---+ it's part science, part art a little bit, right, when you're trying to predict what's going to happen.
Yes.
I think I would say is we're on our strategy, we're on our plan with this.
As we have entered these markets, there were ---+ we knew that we would move sort of upsize the new work opportunities.
So when we first entered that market, we leased the facility that would get us operating.
And with the full view that we were going to move to a new or larger, more perhaps strategic location, so that's consistent with our plan.
As we look at facilities, Rick pointed out that we bought the Scranton facility.
That was well priced, and it gave us the opportunity to further penetrate the Pennsylvania market, so that move's consistent with strategy.
Let's buy this one, price works, good location, reaches our customers.
So I don't know that we would have altered that.
We have continued to look for those properties that give us kind of a long-term what we would say advantage or place that we could grow into.
So those were ---+ it really hasn't changed.
I'd hate to be kind of evasive on this.
It actually depends.
So Baltimore facility I mentioned, we had ---+ there was a seller, it was an opportunity to buy it, we're going to buy that one because that's a great location.
Scranton was a good location.
Newark, we would have liked to own it, but it wasn't for sale, so that one made sense for a lease.
That was the option we had.
So I think it's going to be dependent on what the opportunity is.
I mean, we tend to kind of follow industrial production more than anything else.
But I think ---+ you and the market have way more data points than we do so ---+ and our customer base is so diverse.
I mean, it's really ---+ you've got one industry may be killing it, another one may be seeing some signs, I don't know that we would have any more insights than you would have.
Do you have any other comments, Fritz.
No.
I think I would add that I think our strategy is, yes, we have ---+ there's an industrial ---+ emphasis in LTL, that's long been there.
But I think a little bit of a differentiator for us is that we are finding ---+ continuing to find traction with our own growth initiatives around, be it northeast expansion or further penetration in existing markets.
I mean, the Fort Worth thing is an important addition for us.
We'll add other second terminals in other markets later on this year.
So for us, the growth opportunity, our customers are like our value proposition, so that continues to drive our ---+ what our opportunity is.
Yes, we could.
That's ---+ the thing we like about this expansion strategy ---+ we can manage this, right.
So we started out a year ago.
We communicated that we're going to start with 4 terminals.
And if it accelerated or we saw opportunities, we could dial it up with an accelerator or push the accelerator down.
And we did.
We added a couple of terminals beyond the original 4 planned.
Right now, we feel pretty good about what we see, and so we're still on the track of 4 to 6 in the Northeast.
So it ---+ those are ---+ the strategy is built around the ability for us to adjust up or down based on what we see in the market conditions.
Okay, great.
Thanks for your interest in Saia today.
And again, we're excited about the opportunities and expect an eventful year at Saia for the remainder of this year.
Thanks.
Thank you.
| 2018_SAIA |
2016 | LANC | LANC
#Thanks, <UNK>.
Good morning.
We appreciate you joining us today.
<UNK> and I will provide comments on the quarter and our outlook, with <UNK> joining us to respond to your questions.
We are pleased to report record first quarter earnings with net income of $33.4 million and earnings per share of $1.22, a 21% increase from last year's first quarter.
The primary drivers of this improvement were lower ingredient costs, a more favorable sales mix and lower freight costs.
Segment operating margins reached 18.8%, versus 15.3% last year.
While sales comparisons became challenging, as expected, we were pleased to see retail channel sales grow almost 3%.
Our licensed Olive Garden brand salad dressings, our New York Bakery and Sister Schubert frozen breads, and Marzetti caramel apple dips were all good contributors to our retail growth.
We continue to see a very competitive refrigerated salad dressing category, as newer entrants help create a more active promotional environment.
Food service channel sales declined almost 5%, with our customer rationalization efforts and lower selling prices both key factors in the decline.
We also saw less limited-time offer promotional activity this quarter versus last year.
Our resulting sales mix was 52.4% retail, a 190 basis point increase from a year ago.
From a new retail product perspective, we're pleased with the early demand for our New York Bakery Bake & Break garlic bread and the acceptance of the more recently introduced Sister Schubert Shareable dinner rolls.
Under the Olive Garden label, we've added a red wine balsamic dressing, which is now arriving on retailer shelves.
The retail channel also saw more investment in consumer promotional spending, including the increased emphasis on digital marketing and higher coupon redemption costs.
Based on IRI sell-through data for the 12 weeks ended October 2nd, we remain the leader in our six key retail categories, and we are outgrowing the category in four of those.
The IRI data did indicate some share decline for our business in the refrigerated dressings and refrigerated produce dips categories.
Let me now turn to <UNK> to make a few comments.
Thank you, <UNK>.
Similar to our past commentary, our balance sheet continues to remain strong.
I will comment on some of the larger line items within our balance sheet that have changed since June 30th.
From a high level perspective, the increase in our cash balance of nearly $28 million since June can be summarized as follows ---+ cash provided by operating activities of $45 million offset by regular dividends of nearly $14 million and property additions of $4 million.
In general, the increase in our accounts receivable balance reflects higher sales volume.
Consistent with past quarters, we continue to see our overall agings remain solid.
The increase in our inventory since June largely reflects the seasonal build in our retail inventories each fall in advance of the seasonal sales increase we see in our second quarter on certain product lines, such as Sister Schubert's.
In general, our inventory levels remain in line with our expectations, and we continue to place emphasis on this important element of our working capital.
As mentioned above, cash expenditures for property additions totaled $4 million in Q1, with the largest amount spent on new packaging equipment to accommodate growth.
Presently, we still anticipate capital expenditures to be in the range of $20 million to $22 million for fiscal 2017, and will include projects to increase capacity and productivity.
Depreciation and amortization expense totaled approximately $6 million for Q1 of fiscal 2017, and we expect an annualized amount of approximately $24 million for the current fiscal year.
The increase in our accrued liability since the June balance sheet date largely reflects an increase in accrued income taxes due to the timing of our first quarter estimated payments occurring in October.
With respect to our balance sheet capitalization, we continue to have no debt and nearly $535 million in total shareholders' equity.
We ended the quarter with nearly $146 million in cash and equivalents, and we have available borrowing capacity under our credit facility of nearly $150 million.
Our capital allocation initiatives continue to be focused on funding future organic growth initiatives, acquisition opportunities, continued dividends, and opportunistic share repurchases.
Finally, our overall effective tax rate of 34.3% for the first quarter is consistent with our expectations and previous guidance.
At this time, we would expect a similar effective rate, plus or minus a few tenths, for the balance of fiscal 2017.
<UNK>, I will now turn the call back over to you for your concluding comments.
Thanks, <UNK>.
Turning ahead to our second quarter, usually our strongest of the year, we will face a comparison to a strong quarter a year ago.
We expect our food service channel to experience continued sales headwinds from customer rationalization and deflationary price adjustments.
We are somewhat optimistic, however, on our core chain account business and feel we could see some improved limited-time offer promotional activity as well.
Retail channel sales should see continued contribution from the new products I mentioned earlier and everyday sales and marketing execution.
We feel good about our product placement and promotional plans for the fall holiday season.
Sister Schubert's will be an important factor in our potential growth with the new Shareable Bread product and the focus on their core SKUs and their strongest markets.
We expect the refrigerated dressing category to stay competitive, and we will be adjusting our promotional efforts as necessary to support our brands and the premium positioning of the category.
From a supply chain perspective, we will continue to see lower ingredient costs, although with a declining benefit from that of our first quarter.
We presently anticipate these costs to be comparable to the prior year as we enter the second half of the fiscal year.
Freight costs should also be lower in the quarter, although we will anniversary this reduction as we move into the second half.
We continue with our focus on operational excellence, as progress is being made in that area, with still more to be realized.
Our efforts in searching for the right acquisition opportunities continue, with a focus on branded retail, on-trend products, merchandise in the perimeter of the store.
At our upcoming November board meeting, we will give thorough consideration to our cash dividend rate.
Suzanne, we're ready to take questions.
The customer rationalization and price deflation will linger into the third quarter some, <UNK>, so it's not quite finished yet, but certainly by late in that quarter, it should be behind us.
Honestly, <UNK>, we are at the high end of what we talked about, of the mid to upper teens kind of segment of operating margin range.
The sustainability is a challenge as we move forward given the declining kind of ---+ the lower input costs, so I'd say we are at the high end of that range.
Right at the moment, <UNK>, I wouldn't say we've really worked any other products into that space.
It is a priority, though, as we think about both acquisition opportunities and longer-term innovation, but nothing that is having a material impact at this point.
You're welcome.
Thank you, <UNK>.
The primary benefit is coming out of ingredients.
I don't know that I can give you an exact breakdown, but the strong majority is that, and then I think we'd follow it with mix benefit, which is always a little hard to measure, and then freight following up in third place.
Well, it was related to closed operations, and I would like to think it's limited to the quarter, but as we've commented in the past, those costs sometimes can fluctuate quarter to quarter.
This was an unusual quarter in that we had a little more costs related to those expenses than we've seen in a more typical quarter, so ---+
We hope that's it.
Yes, I think the ballpark of it is kind of in the low mid-seven-figure investment, and I'd let <UNK>, if he'd like, to comment on some of the things we're doing.
Sure.
Some of that was out in support of new product launches, that <UNK> described earlier in the call, so some slotting in particular, and we had couponing that was also out there in support of those items, and then just traditional marketing and advertising costs were up as well, all in support of new item launches and other seasonal items.
I think you said mid ---+
That mid ---+ kind of a low to mid seven-figure increase.
Yes, so we're in the millions there, so that was a meaningful increase for us.
I don't have an exact percentage for you, but meaningful.
It was.
Well, yes, we'll be anniversarying that as we move forward.
We do a little bit this quarter, more so next quarter, so, yes, it's just a year-over-year comparison.
But, no, we don't see those costs ---+ barring some shock like we did experience in the recent past, don't see those changing much.
Well, they're both probably always open for discussion, but I was really referring to the regular cash dividend.
Having just done a special dividend a year ago, it's not something that we feel we have a practice of doing on a frequent basis.
You're welcome.
Thanks, <UNK>.
Well, thank you again.
We appreciate you joining us this morning.
We look forward to talking to you late January with our second quarter results.
| 2016_LANC |
2015 | QNST | QNST
#Thank you, <UNK>, and thank you all for joining us today.
We are pleased to report Fiscal Year 2015 and June quarter results.
Fiscal 2015 was a pivotal year for QuinStreet.
Our initiatives to revitalize the business with new products, and with the diversification of media and markets, returned the Company to annual growth in the last three quarters of the year.
The initiatives also put us on a path that we believe will allow us to sustain renewed growth and re-expand adjusted EBITDA margin.
The June quarter, or Fiscal Q4, saw a continuation of recent trends with year-over-year revenue growth driven primarily by more stability in our education client vertical and strong growth in auto insurance and other client verticals.
Education revenue grew year-over-year in the quarter for the first time in 14 quarters, due to increased contributions from new products, from not-for-profit clients, and from international markets.
Stepping back to look at our progress in Fiscal 2015, one key area that led to improved performance was media and market diversification, enabled and accelerated by partnerships.
We entered into a record number of important and impactful new partnerships last year.
These partnerships fall into three main areas ---+ one, partnerships with large, high-quality media companies and properties, where we have been able to create or significantly increase performance marketing revenue results for the partner.
These partnerships draw on our uniquely effective technologies and expertise in performance marketing, and weave us more broadly and deeply into high-quality, stable Internet media sources based on our value add.
Two, partnerships with not-for-profit schools, and third-party enablers of their online programs, where we provide or manage media and marketing services and match our large media flows of student prospects to their offerings, and in so doing, help scale both their programs and our share of that fast-growing new market.
And three, expanded client partnerships across verticals, where we are providing a wider range of services and technologies to increase and differentiate value to our clients, and broaden and deepen our relationships with them.
All of these partnerships draw upon and demonstrate the strong value add of QuinStreet's unique capabilities and assets in performance marketing, the largest form of marketing spend on the Internet, and they are important initiatives to diversify our media and markets, and thus expand our footprint for growth.
We expect to sign even more partnerships this year, and that existing partnerships will contribute at an increasing rate in Fiscal 2016.
Now, highlighting with numbers the progress with partnerships and other strategic initiatives in Fiscal 2015: revenue in the education client vertical from new products, not-for-profit clients, and international markets grew 70% in Fiscal 2015 and was 55% of total education revenue in Fiscal Q4.
Revenue from auto insurance clients, our second-largest business, and what we believe to be our largest addressable market, grew 22% in the last three quarters of Fiscal 2015 on the strength of new product ramps.
Revenue from new media sources, or those not in our traditional search ecosystem, grew by over 70% in Fiscal 2015, to 20% of total company revenue.
These new media sources include partnerships with large media companies, internal call center, owned and operated e-mail, and social media.
We expect these new sources to grow by over 50% again in Fiscal Year 2016, continuing our successful media diversification strategy.
Revenue from mobile traffic grew 58% in Fiscal 2015, approaching 20% of total revenue.
Revenue from owned and operated media sources, our highest-margin media sources, grew slightly in Fiscal 2015, reversing the declines of the past few years.
We expect revenue from owned and operated media to grow by over 20% in Fiscal 2016.
So, Fiscal 2015 was a year of strong progress with our strategic initiatives, and that progress showed up in a turnaround in our top-line results.
Turning to our outlook, we expect revenue growth to accelerate in Fiscal 2016, as we further ramp successful initiatives and roll them across more of our businesses.
We also expect adjusted EBITDA margin to expand, particularly in the second half of the fiscal year, driven primarily by top-line leverage, and as some of our larger partnerships move from early investment in optimization to greater margin contribution.
At this point, we expect revenue growth in Fiscal 2016 ---+ or Fiscal Year 2016 ---+ to be approximately 10%, and that adjusted EBITDA margin in the full-year 2016 will be higher than in Fiscal Year 2015, with adjusted EBITDA margin in the second half of the year in the mid-to-high single digits.
For the September quarter, we expect revenue to grow approximately 8% year-over-year, and adjusted EBITDA margin to be in the low single digits as we invest in some important, early new media partnerships, and other strategic initiatives to drive continued and long-term growth and future margin expansion.
With that, I'll turn the call over to <UNK>, who will review the financials in more detail.
Thanks, <UNK>.
Hello, and thanks again for joining us today.
We are pleased with our results in the fourth quarter, which wraps up a solid Fiscal 2015 for QuinStreet.
In all, we executed well across our growth initiatives throughout the year, and grew revenue each of the last three fiscal quarters.
We are beginning to see the results of our investments over the last two to three years show up in our financials.
For the fourth quarter, we reported $70.9 million of revenue, up 5% compared to the same quarter last year.
Adjusted EBITDA was $2.9 million, or 4% margin.
Adjusted net income for Fiscal Q4 was $479,000, or $0.01 per share.
For Fiscal 2015, we reported $282.1 million of revenue, which was flat compared to the prior year.
For the year, we grew revenue from down 10% in Q1, to up 1% in Q2, to up 5% in both Q3 and Q4.
We believe this is the beginning of an up-and-to-the-right trend that we expect to continue to accelerate in Fiscal 2016.
Adjusted EBITDA was $10 million, or 4% margin, and adjusted net income was $2.5 million, or $0.06 per share.
Please see the supplemental data sheets available at the Investor Relations page of our corporate website.
They provide essentially all of the figures and details on that review.
For revenue by client vertical, our education client vertical represented 39% of Q4 revenue and grew 1% compared to the year-ago quarter to $27.4 million.
This performance reflects our continued success offsetting declines from traditional lead generation to US for-profit schools, with strong growth from new products, not-for-profit clients, and international markets.
These new products and markets now comprise the majority of the overall revenue in education.
New products include better matched and qualified leads, which are more suited to the for-profit clients under the existing regulations, as well as our recently-launched click and call products.
For Fiscal Year 2016, we feel good about our position in the evolving education market, and expect year-over-year revenue growth in the September quarter as well as the full fiscal year.
Our financial services client vertical represented 40% of Q4 revenue, and grew 5% compared to the year-ago quarter to $28.6 million.
We are particularly excited about our auto insurance business, which grew 19% in the quarter, as well as our mortgage business, which grew 14% in the quarter.
The growth was offset by decline in life and health insurance, as we are in the earlier stages of rolling out our products and technologies that have already proven successful in auto insurance and mortgage.
We believe we are well-positioned to return that business to growth over the coming quarters.
As we have discussed in the past, client marketing budgets in auto insurance are substantial and continue to be a focus of our investment dollars, as we believe this is our largest addressable market.
We expect our financial services client vertical to grow by double digits in Fiscal 2016.
Revenue from our other client vertical represented 21% of Q4 revenue, and grew 12% compared to the year-ago quarter, to $14.9 million.
Continued solid execution from our B2B technology and owned services businesses drove the growth.
Moving to adjusted EBITDA, we delivered $2.9 million, or 4% margin, as we continue to invest in our growth and diversification initiatives.
We expect adjusted EBITDA margin to be in the low single digits in the September quarter, as we make a number of significant investments in new media partnerships, which <UNK> discussed.
That being said, we expect to see margin expansion in the second half of Fiscal 2016, primarily through top-line leverage and as these partnerships achieve scale.
Turning to the balance sheet, our cash and cash equivalents balance at quarter end was $60.5 million.
Total debt decreased to $15 million from $65 million in the prior quarter.
During the quarter, we restructured our credit facility in order to better align with our existing capital needs and to reduce our cash interest expense.
In summary, the fourth quarter wrapped up an important year for QuinStreet.
It was a year of significant positive change for our business and for our financial outlook.
Three main points include: one, we turned revenue around in our education and financial services client verticals ---+ together with our other client vertical, we are positioned to accelerate revenue growth in Fiscal 2016; two, we invested wisely in new products, markets, partnerships and opportunities at the expense of near-term EBITDA, but in order to drive growth in the future ---+ as growth accelerates, and partnerships achieve scale, we expect EBITDA margin to expand in the second half of Fiscal 2016; and three, we have a fundamentally strong business model, which allows us to invest in new growth initiatives while at the same time maintaining a healthy balance sheet.
We look forward to reporting more progress to you in the coming quarters.
With that, I'll turn the call over to the operator to open up Q&A.
Hey, <UNK>.
Both.
We expect to see ---+ yes, we expect to see both.
You know what, we haven't looked at it that way, <UNK>.
So, I don't know if that calculation ---+ I don't know if that's a calculation that makes sense to me or not.
In general, incremental revenue comes in on average closer to 40% margin, so if you look at a top-line leverage model, which I think we've shared with you and others, that's kind of the number that I would use is incremental revenue coming in at about that margin, on pretty close to the same other fixed and semi-fixed cost base.
And that's kind of how the leverage model works for us.
It's a little different angle, I think, on the same question, but I haven't looked at the math the way you just described it.
We did it for the year, though.
For the year, <UNK>, it was 11% year-over-year.
Over the last three quarters of the year, we grew 22% in auto insurance.
And just to clarify, <UNK>, you were asking about auto insurance, or were you asking intentionally about auto, life and health.
All insurance.
<UNK> just gave you the numbers for auto insurance.
We don't ---+ we did not pull out, and we don't pull out separately, just insurance.
As you know, we have financial services, which for the year grew, I think, about 5%.
<UNK>'s looking at the number now.
6% for the year.
6% overall for the year for total financial services, but we don't ---+ we didn't cluster just insurance in that mix.
We certainly could get that, and send that out, or report it next time.
It's about 3%.
Great, thanks, <UNK>.
Thanks, <UNK>.
Hi, <UNK>.
No, <UNK>, if you know ---+ and we've talked about this historically ---+ if you look at our business model, we're still generating a positive normalized free cash flow.
And so as we evaluated the situation, this new line better fit our existing capital needs, because we are cash-flow generative, while at the same time allows us to save a lot of money in cash interest expense for, frankly, capital we weren't going to access or use.
And that was kind of the main point of the restructuring.
We expect that in combination, it'll be pretty neutral to gross margin.
I think the thumb rule of all together, the media will come in at an average of ---+ on a weighted average basis of about 40%, it's probably a pretty good rule of thumb to use on top of a pretty stable other cost base.
So, I think that's still right.
The owned and operated media does come in at a higher margin, though it does also come in with higher demands on other expenses.
You have to have more people to do owned and operated than you do to do purely partner, but the partner revenue will come in at a lower, obviously, media margin, but will require fewer people.
But, I think the general rule of 40% on average media margin on top of a flat other fixed and semi-fixed cost base is a safe one and a good one to use, but there'll be ---+ there are more moving parts in that underneath the ---+ as I just described.
But that's still a good rule to use.
| 2015_QNST |
2016 | UVE | UVE
#Hello and welcome to the Fourth Quarter and Full Year 2015 Earnings Presentation for Universal Insurance Holdings, Inc.
I'm <UNK> <UNK>, Chief Financial Officer.
Making the presentation with me today are <UNK> <UNK>, Chairman, President and Chief Executive Officer; and <UNK> <UNK>, our Director, Executive Vice President and Chief Operating Officer.
Earlier today we filed our Form 10-K with the Securities and Exchange Commission and issued our earnings release.
To find copies of these documents, please visit the Financial Information and Press Releases sections our website at www.universalinsuranceholdings.com.
Our SEC filings can also be found on the SEC's website.
In addition, an audio recording of this presentation will be available on the home page of our website until March 24, 2016.
Before we begin, please note that this presentation may contain forward-looking statements about our business and financial results.
Forward-looking statements reflect our current views regarding future events and are typically associated with the use of words such as believe, expect, anticipate, and similar expressions.
We caution those listening, including investors not to rely solely on forward-looking statements as they imply risks and uncertainties, some of which cannot be predicted or quantified and future results could differ materially from our expectations.
We encourage you to carefully consider the risks described in our SEC filings with the SEC, which are available on the SEC's website or the SEC filings section of our website.
We do not undertake any obligation to update or correct any forward-looking statements.
With that said, I'd like to turn the presentation over to <UNK> <UNK>.
Thank you, <UNK> and thank you all for joining us as we review our results for the fourth quarter and full year 2015.
I would like to begin by providing some highlights from the quarter and year and then take a moment to review our strategy and growth initiatives.
<UNK> will then discuss our operational highlights and <UNK> will conclude by discussing our financial results.
We are pleased to have delivered another record quarter in the fourth quarter, concluding a historically strong year, in which we achieved the highest earned premiums, total revenues, net income and diluted EPS in the Company's history.
For the fourth quarter net income was $29.2 million, an increase of 39% year-over-year and diluted EPS was $0.82.
For the full year, we delivered net income of $106.5 million, a 46% year-over-year increase with diluted EPS of $2.97.
These record results highlight the consistent execution of our growth strategy across all aspects of our business and the hard work of our employees and our peer leading network of approximately 7,800 independent agents.
Thanks to their efforts, UPCIC has grown to become the largest private homeowners' insurance provider in Florida.
With an expanding presence in 15 additional states outside of Florida, supporting our success is our consistent focus on maintaining disciplined underwriting standards as we seek to grow our business on an entirely organic basis.
Our results demonstrate that this approach is working.
Thanks to our organic growth strategy and the initiatives we have in place.
We have seen a consistent increase in policy count and an insured value in all states in which we operate over the past two years.
We have successfully maintained a market leading position in Florida among private insurers and have seen our total insured value for states outside of Florida increase from 9% of our total in 2013 to 12% in 2014% and now 16% as of the end of 2015.
A key factor on our success has been our commitment to providing high-quality service to our policyholders and independent agency force through our vertically integrated structure.
We have continued to invest in our business and areas including underwriting, policy issuance, general administration and claims processing and settlement.
An important benefit of maintaining the claims functions internally is that allows us to review and pay claims in a more efficient and timely manner and more effectively control claims handling costs.
I would like to take a moment to showcase the considerable progress we have made in terms of our claims processing.
Thanks to the added resources we now manage in-house, our average time to close claims in 2015 decreased by over a week as compared to 2014 and 2013.
Not only does this provide us with a significant benefit in terms of the policyholder experience and by extension of our relationship with our independent agents, has allowed us to decrease our claims operating expenses and lower our loss adjustment expenses.
Ultimately, our ability to provide high-quality service through our vertically integrated business model has been a key driver behind our steadily improving renewal retention rates, which exceeded 88% in 2015, compared to 87% in 2014 and 83% in 2013.
Another element in our strong profitability in 2015 was our decision to eliminate quota-share reinsurance, in our 2015-2016 reinsurance programs.
We believe that the restructuring of our reinsurance program and our focus on continuously reviewing our reinsurance coverage has allowed us to capitalize on attractive reinsurance pricing and terms, retain 100% of our profitable business and effectively manage risk.
Our consistent execution in operational performance has resulted in a robust financial position, allowing the Company to continue returning capital to shareholders.
In November, we completed our previously announced $10 million share repurchase program and initiated a new $10 million repurchase program.
We also continued to return capital to our shareholders through our dividend program.
In January, the Board declared a dividend of $0.14 per share of common stock, an increase of $0.02 or approximately 17% from the $0.12 per share paid previously.
Our ongoing share repurchase program and dividend payments highlight our continuing track record of prudent capital deployment and the commitment to returning value to shareholders.
As we look ahead, we remain focused on executing on the four key pillars of our strategy to drive profitable growth.
First, we continue to provide high-quality service through our vertically integrated structure.
Second, we will continue to increase our policies in-force in Florida by seeking profitable, rate adequate and 100% organic growth.
Third, we will continue to diversify our revenue base and risk by increasing our policies in-force in states outside of Florida through our geographic expansion strategy.
And fourth, we will continue to optimize our reinsurance program as our risk profile changes.
Our record results for the fourth quarter and full year highlight the merits of our strategy and we remain committed to executing our plans to drive profitable growth and enhance value for our shareholders.
With that, let me turn it over to <UNK>.
Thank you, <UNK>.
I would like to add some further commentary on our progress as respects the four key pillars of our strategy you mentioned.
First, from a service perspective, we just recently exceeded 400 full-time employees for the first time in Company history.
With over 180 claims professionals' and another 120 in underwriting and marketing, the vast majority of our staff works directly with our policyholders and independent agents every day.
We have developed a proprietary suite of applications that provide all functions of our business and most importantly, this sophisticated policy processing system is solely managed by our own employees through owning, managing and continuously enhancing the core system, which supports the insurance enterprise, we leverage our proprietary technology as a distinct advantage in servicing the business.
Second, we have continued to build upon our past success in Florida by adding additional organically grown policies in 2015.
Specifically during calendar year 2015, the net growth in the Florida book was 44,000 policies, nearly 9% year-over-year growth, $72 million of additional in-force premium, all produced through our independent agency partners and underwritten one policy at a time.
Third, our geographic expansion continued at a successful rate, and we added certificates of authority to write business in five additional states during 2015, bringing our geographic footprint to a total of 16 states.
In addition to Florida, we are actively writing policies in 10 other states.
This leaves the five remaining states in the pipeline for future growth.
We're currently in various stages of research rate and form filings and agency appointments in these five states.
During the course of 2015, the net growth in the 10 other states was 24,000 policies, just shy of 50% year-over-year over $20 million of additional in-force premium.
Again, this business was all written through our independent agency partners and underwritten by our staff.
Lastly, from a reinsurance perspective, we are currently in the early stages of the process for the June 1, 2016 renewal of our catastrophe reinsurance coverage.
The transition in 2015 to a single catastrophe tower covering all states, coupled with the continued growth in our portfolio outside of Florida, representing 16% of our insured values should continue to lead to efficiencies in our catastrophe reinsurance purchases.
With that, I'll now turn the discussion over to <UNK> <UNK> for our financial highlights.
Thank you, <UNK>.
I'd like to provide a little more detail around the financial results for the quarter, their drivers and briefly touch upon the results for the full year ended December 31, 2015.
Net income for the fourth quarter for 2015 totaled $29.2 million, which is an increase of 39%, compared to $21 million in 2014.
This reflects improvements in multiple measures, driven by our efforts to increase profitability through rate adequate organic growth, favorable changes in the structure of our reinsurance program, including ultimately elimination, our quota-share reinsurance, and operational initiatives, such as the improvements made in claims process.
Diluted EPS for the fourth quarter was $0.82, which was up $0.23, or 39% increase from the same quarter in 2014 and in line with the increase in net income.
An increase in net earned premiums of $55.2 million or 57.8% for the quarter, compared to the same period in 2014, was due to both an increase in direct earned premiums of $22.2 million and a decrease in ceded earned premiums of $33 million.
The increase in direct earned premiums stems from our ability to drive organic growth both inside outside of Florida.
The elimination of quota-share reinsurance contracts was the primary driver behind the decrease in ceded earned premiums.
Net investment income in the quarter increased by $970,000 or 122%, year-over-year to $1.8 million, this reflects an increase in our invested assets and actions taken to rebalance our fixed income portfolio to increase yield.
We generated $768,000 of realized gains in the fourth quarter of 2015 compared to $274,000 for the same period in 2014.
We realized gains from time-to-time when opportunities arise.
Commission revenue of $4.1 million for the quarter was up by $790,000 or 23.8% year-over-year as a result of the overall changes in the structure of our reinsurance programs, including the amount of premiums paid for reinsurance and the types of reinsurance contracts used in each program.
Policy fees of $3.4 million for the quarter were up $281,000 or 8.9% year-over-year as a result of the increase in policy count.
Losses and loss adjustment expenses of $60.6 million for the quarter were $26 million or 75.2% higher than the fourth quarter of 2014, which was primarily the result of the elimination of our quota-share reinsurance contracts and to a lesser extent, our growth in exposure.
General and administrative expenses were $53.6 million for fourth quarter of 2015 compared to $33 million for the same quarter in 2014, an increase of 62.7% or $20.6 million.
The majority of the increase was due to additional amortization of net deferred acquisition cost of $18.2 million, resulting mostly from the elimination of quota-share reinsurance effective June 1st of 2015.
There were also increases in stock-based compensation of $1.2 million, which reflected an appreciation in the market price of our common shares and $1.2 million in other remaining expenses combined.
The effective income tax rate decreased to 39.1% for the fourth quarter of 2015 from 43.2% for the same quarter in 2014.
The improvement in our tax rate is primarily due to a reduction in the amount of non-deductible executive compensation.
Now let me turn briefly to our full year results for 2015.
Net income increased by $33.5 million or 45.9% for 2015 compared to 2014.
This reflects an increase in net earn premiums, net investment income, commission revenue and policy fees, which were partially offset by decreases in net realized gains on investments and other revenues and increases in operating expense.
Diluted earnings per share for 2015 increased by $0.89 or 42.8% compared to 2014.
The full year results for 2015 reflect the record results on multiple measures, including the highest net income and diluted earnings per share in the Company's history.
Stockholders' equity reached an all-time high of $293.1 million as of December 31, 2015, compared to $218.9 million pro-forma stockholders' equity as of December 31, 2014.
In closing, we believe our results for the quarter and full year reflect all the operational and strategic initiatives intended to increase profitability, protect our policyholders and strengthen our balance sheet.
Now, I'll turn it back to <UNK> for his closing comments.
Thank you, <UNK>.
We are pleased with our performance in 2015 and believe we have the right strategy in place to drive continued profitable growth and shareholder value creation.
Our experience and dedicated team, focused underwriting discipline, robust internal capabilities, superior claims operations and strong independent agent distribution network are all competitive advantages that we believe will allow us to capitalize on our future growth prospects.
We have also taken strides to improve our investor communications, including enhancements to our 10-K, which we filed today.
We hope you'll find this information useful and as always, we welcome feedback from our shareholders.
In addition, beginning next quarter, we will have the Company's first Earnings Call.
In closing, I would like to thank our independent agents and employees for their hard work and dedication, as well as our Board of Directors and management team.
Thank you.
| 2016_UVE |
2015 | OGE | OGE
#Yes, I think ---+ good question.
So we're actually quite proud of this.
And philosophically, this is not a one-time project that we have these initiatives or teams out there.
This is every day.
This is just grinding away, looking for opportunities.
We've seized opportunities around supply chain, around our maintenance of our facilities, engineering systems.
We've had a number of opportunities as people have retired, how we've retooled the workforce and brought new people into the Company.
So there's no singular item, <UNK>, is what I would tell you, and I think that speaks to the durability or the sustainability of what we're doing here.
And it's just a daily effort, and we're keenly focused on keeping our own costs low ---+ in this case, actually reducing them.
But I expect that to continue.
I think it's probably something that you'd do on an annual basis, a lot of things going to your O&M expense.
But I think that's more of an annual trend.
And we've been trending that.
We've been watching that since 2011, and I'm really proud of the effort the entire Company has put forth on this, and I don't expect it to cease.
The expectation is we continue going forward.
Well, I think, let me clarify that a bit.
So we are very fortunate to see load growth on our system.
So we're adding customers.
And so what we've been able to do is absorb that and not see incremental costs go up, okay.
So I don't think you're going to see O&M reductions go down if you're thinking in terms of rate case activity or anything like that.
What we're saying is that we're absorbing this additional load with productivity and efficiency gains in our system.
Yes and yes.
And so we're seeing a number of the chain accounts build box stores and restaurants and things like that coming in.
We are beginning to see a bit of a slowdown in the oilfield sector, as you'd expect.
But it does not seem to be slowing down on the commercial side, the retail side.
Yes, they do.
So Enable serves the Mustang Plant currently and Horseshoe Lake and Seminole.
And then some other suppliers serve Red Bud and McClain.
Yes, you are.
We won't be a full taxpayer until 2018.
Well, they are deliberating right now.
This is, I think, the top item on their plate.
In fairness to the Commission, they've got a heavy caseload.
They've been very involved in some of the ---+ you know, there's been a lot of earthquakes here, so they've been involved in that analysis.
And in fairness to Commissioner Hiett, he walked into this.
He didn't have the benefit of the history that had gone on the previous four years with this, so he's quickly getting up to speed as well.
So I don't really have any, <UNK>, any more insight than that.
And we're as anxious as you are to get this resolved.
I will tell you that we have had some discussions, not complaining or anything about this case, but more about prospectively, we've got to come up with solutions.
What can we do on our side to make this process faster in the future.
So we're looking forward in terms of how we can improve this process to make it more timely.
Right.
I think your thesis is exactly right.
I mean, we have asked if they're looking for any more information, if they need anything from us.
I think your thesis is right.
It's sitting there on their desk.
They're deliberating right now.
No, we ---+ are you talking about as far as taking actions to comply.
No, <UNK>, we are taking actions to comply.
We have a deadline, we have compliance dates between Regional Haze and MATS, and we are taking actions.
We could not wait ---+ go ahead.
No, no.
The actions we're taking is exactly what we spelled out in our testimony, exactly what we communicated well in advance of our filing, and our plan of attack is exactly what we've been communicating for a couple of years now.
When you say a decision different than that, what do you mean.
The ALJ ---+ I think the ALJ was primarily speaking about various components of how you'd recover that.
But the Commission is not ---+ it's our job to design and operate this system and make these decisions on how the business is going to operate.
And so I don't believe that they're going to get into making decisions about what assets we should be utilizing.
And besides, remember, the ALJ did indicate all of this was prudent, and the legislation provides for that as well, in that this was a mandate, a requirement, and that's what this legislation that was put in place was to address, was timely recovery for environmental mandates.
And this is a mandate.
Yes.
So on Mustang, our point there on Mustang was we wanted to be upfront and transparent with the Commission, let them know where we were going with how we are going to reconfigure our fleet.
We had a window of opportunity there to be able to site new generation closest to the largest load center.
It serves a very critical piece of our 345 transmission loop around the city.
And we made that case to the Commission, and whether they account for that in a rider, or whether they want to deal with that later in a rate case, that's fine.
We'll deal with that.
Yes, it's really just a timing issue as it relates to a tax impact.
That write-off will actually flow through our corporate tax calculation and impact our effective rate accordingly.
That's correct.
It accelerates any amortization of that.
And you don't really amortize goodwill, anyway.
It just sits there until (inaudible).
No.
Okay.
Well, once again, I want to thank our members for their hard wok and dedication and commitment to safety, and thank all of you for joining us on this call, and have a great day.
| 2015_OGE |
2016 | WY | WY
#Yes, <UNK>.
This is <UNK>.
We definitely spend time with the rating agencies to make sure that they understand our deposition and our EBITDA generation and we're very comfortable with where we're at with the rating agencies and our current investment grade rating.
And, <UNK>, if you [reference] the share repurchase, we have ---+ as we said, we were going to do it on an accelerated basis.
We've essentially completed the $2 billion in, I guess, less than six months and did it at what we think at an attractive value from our shareholder perspective of less than $29.50 per share.
So pleased with the progress that we've made on the share repurchase.
I think that is a component of what's happened on the log pricing.
Small land owners ---+ you never know exactly what motivates them or when they bring things to market.
But clearly there we have seen some of that happening over the past year or two.
Thank you.
Hi, <UNK>.
Yes.
So you're exactly right, <UNK>.
What we said is that the authorization was for $2.5 billion.
That we would do $2 billion on an accelerated basis.
And as I just mentioned, we've essentially completed that.
We've also said consistently that once we do that, we'll take a pause and we'll work closely with our board to determine the timing of the additional $500 million.
So that's what we'll be doing.
Sure.
We are, as you would anticipate, constantly evaluating markets and the way to grow markets.
As you also he know, the South is very small in terms of export market currently.
But we'll continue to look at opportunities as we move forward and we think that market will in fact develop over time.
Yes.
So those are the joint venture partnerships that Plum Creek entered into.
And we have been in discussions with them.
And we're aware that they're seeking to do an accelerated program to divest some of those properties.
Given that's a joint venture, we treat that as equity accounting.
We'll see the benefit of that as they execute on that plan.
So, <UNK>, this is <UNK>.
We'll see a mix but we may see some more Plum Creek lands coming in in the third and fourth quarter, which will result in a little higher basis because of that step-up.
As we look at the combined portfolio, obviously we're focused on getting through the Weyerhaeuser lands through the AVO process.
But in conjunction with that, we're looking at all the opportunities on the combined portfolio.
And it really does provide us with a lot of optionality as far as which lands to bring to market.
<UNK>, as you know, we're committed to a growing and sustainable dividend.
2016 is going to be very noisy as we continue to move forward and lots of moving pieces.
As we look into 2017, we're going to continue to benefit from cost and operational synergies, continued OpEx improvement, strong housing markets, all those type of things.
We will be spending time with our board as we move forward to figure out exactly how to think about the dividend on a go-forward basis with the mix of assets that we now have, with the much more stable earnings streams that comes from Timberland and then the improvements that we've made in our wood products to take some of the volatility out of that and, most important probably, to eliminate some of the down side in our wood products operation on a go-forward basis.
So all things that will be factoring into what the appropriate level of our dividend is on a go-forward basis.
So, <UNK>, we're guiding to 18% to 20% for our full-year taxer rate.
As far as the allocation of the interest expense between the taxable REIT subsidiary and the REIT, we actually have debt that is associated with taxable REIT subsidiary.
So that's allocated and tax affected accordingly.
And then there's debt associated with the REIT asset.
So you'll get a blended rate.
Yes.
Thanks, everybody, for joining ---+ indicated that was our final question.
And just like to close by thanking everybody for their interest in Weyerhaeuser.
That care.
| 2016_WY |
2018 | BRS | BRS
#Thank you, <UNK>.
Please turn to slide 4.
Good morning.
Welcome to our fourth-quarter fiscal-year 2018 earnings call.
We will begin the call as always with a review of safety, our number-one core value; and with safety improvement, the first priority of our fiscal 2018 STRIVE priorities.
I am proud of the effort and results our employees continue to achieve in safety improvement during an extremely challenging time in our industry.
Bristow has always believed that periods of market decline should not translate into a decline in safety performance.
In fact, we further believe that safety improvement is measured not only by the score, as in accident rates or TRIR statistics; but, as importantly, it is also how our team is playing on the field in both reporting and risk identification before an incident or accident happens.
We did finish fiscal 2018 with no class A or B air accident and we also experienced fewer injuries this year than last.
But the foundation for continuous safety improvement at Bristow is also the willingness of our employees to report hazards and issues of concern.
And we continue to see extremely robust reporting from our employees, better than in years past, that puts Bristow in the best position to address risks before an accident or incident occurs.
In particular, I want to congratulate our team in Trinidad for accomplishing Target Zero performance for the entire fiscal year, but outstanding reporting also.
I also want to recognize continued and significant year-over-year improvement in our fixed wing operations at Eastern Airways and Airnorth.
The Organizational and Safety Effectiveness Survey, or OSES, we completed this past year, gave us reassurance that our Target Zero culture and commitment to safety is stronger than ever, especially on the flight line and in our shops.
In recent weeks, our area leadership teams in each country have been actively engaging with employees through focus groups and town halls to understand the specific actions we will take in fiscal 2019 that will make the greatest difference in areas identified in the OSES, dealing specifically with operational effectiveness and employee engagement.
The early feedback from these engagements is extremely positive, and is leading to specific actions locally and globally to further improve safety, operational effectiveness, and employee engagement.
As part of this fiscal 2019 engagement, we will also employ Target Zero in a way that speaks to all generations of our team, whether it be new or veteran employees of Bristow or among our passengers, and specifically how Target Zero will improve their lives in the next decade.
Please stay tuned.
Turn to slide 5.
During the fourth quarter and for the full fiscal year, we have successfully accomplished our fiscal 2018 STRIVE priorities.
This page shows that.
The successes on this page and the previous page provide runway from fiscal 2018 survivability to fiscal 2019 sustainability, and ultimately a return to profitability.
So let me discuss these 2018 STRIVE successes with some comments on fiscal 2019 that <UNK> will then expand upon.
Our first priority, as I spoke about: safety improvement.
We discussed this on slide 4.
I am tremendously proud of the Bristow team for achieving yet another safe quarter with an increase in our safety record and reporting, the play on the field, both sequentially from the third quarter of fiscal 2018 and also quarterly year-over-year.
Two, cost efficiencies.
We have successfully reduced G&A to 12% of revenue, excluding one-off restructuring charges, and this is a level not seen since fiscal 2014.
<UNK> will discuss this in more detail.
But in addition to the previous received $125 million of OEM cost recoveries, agreements for an additional $11 million were finalized this month.
In fiscal 2019, we will continue to work with our OEM partners to create a sustainable business model with further cost efficiencies.
Three, portfolio and fleet optimization.
As our aircraft leases continue to roll off, we were able to lower our aircraft rent expense 11% throughout this fiscal year.
Improving capital efficiency through the return of these aircraft is critical to both improve profitability and improve debt to EBITDA, as we currently expect to reduce rent expense even further in fiscal 2019, as we have the ability to return 21 leased aircraft during the year.
In addition, aircraft sales continue to be a positive for our portfolio and fleet optimization, as we have successfully deferred CapEx, as discussed on our second-quarter fiscal 2018 earnings call.
Bristow now has minimal aircraft capital expenditures during fiscal 2019 of only USD20 million.
Fourth, revenue growth.
Our fiscal 2018 financial results reflect a continuation of Bristow's success in this global short cycle market for aviation services.
Remember, we define short cycle as unforeseen call out requests for contracts measured in weeks and months, not years.
This short cycle work was driven mostly by clients' exploration and production demand with short lead times for rotary services, particularly in the Gulf of Mexico, Norway, and the United Kingdom.
In fact, I'm happy to highlight that we have had a three-year contract extension in Norway that we announced this morning in a press release, with an existing customer that will increase utilization from three to up to five medium aircraft.
Additionally, we have won another three-year contract extension commencing in the second-quarter fiscal 2019 which utilizes one existing large aircraft.
But it's still a very competitive market out there.
And there is still clearly an oversupply of aircraft, with Bristow losing some contract tenders in fiscal 2018, even with that success.
In March and April, the Group lost contracts in Africa and Brazil, with leadership getting some of the revenue back with recontracting of those aircraft already, and other portfolio management which is underway.
We are also seeing an increase in activity in all of our core areas now.
But, similar to last year, there isn't absolute visibility on this recontracting.
And two, we don't expect to see this uptick in the first quarter of fiscal 2019 either.
Lastly, I just want to touch on an important aspect of our business ---+ not just our commercial successes, which give us a lot of confidence in fiscal 2019 ---+ but our strong liquidity position and increased runway over the next several years due to the successful actions taken in the second half of fiscal 2018.
We have eliminated near-term financing risk, and have over $350 million of cash on our balance sheet due to the excellent work of <UNK> <UNK> and our finance and accounting teams, on top of which the operational teams helped contribute.
I would like to highlight that that strong liquidity, coupled with our strong operating leverage, helped shape our guidance for fiscal year 2019 even with less visibility that we see.
And we define operating leverage as utilizing existing aircraft with minimal additional cost, allowing much of that future revenue to fall the bottom line, similar to 2018.
And with that, I will hand it over to <UNK> to give you additional insight into our liquidity and our fiscal year 2019 guidance.
Thank you, <UNK>.
As <UNK> mentioned, we were successful in fiscal 2018 by setting a strong foundation for the future which gives us confidence as we execute in fiscal 2019.
And in line with the prior three fiscal years, in spite of challenging conditions, we ended fiscal 2018 with $380 million in liquidity.
Our fiscal 2018 ending liquidity is a result of many financings and other positive actions taken over the past two years, including $630 million of equipment financings, the issuance of $144 million of convertible senior notes, and our recent $350 million five-year senior secured notes offering.
Importantly, with a portion of these proceeds, we paid off and terminated our 2019 bank maturities, thereby increased our liquidity runway with our first senior note maturity not until fiscal 2023, and with a manageable annual debt amortization of approximately $50 million per year for the next three years.
Additionally, in April 2018, we further increased our liquidity with our new $75 million five-year ABL facility.
This additional source of liquidity is not included in our March 31, 2018, liquidity balance of $380 million.
The borrowing capacity under the ABL facility was approximately $25 million as of May 23, 2018.
Please see slide 35 for a complete listing of our debt repayments and amortization schedule as of March 31, 2018.
In addition to the financings, other fiscal 2018 liquidity-enhancing actions included the deferral of approximately $190 million of aircraft CapEx into future periods, and $136 million in OEM cost recoveries.
We also successfully reduced total CapEx from fiscal 2017 to fiscal 2018 by $89 million or 66%.
And we continue to make further progress in fiscal 2019, which I'll touch upon on the next slide.
We also reduced G&A costs from fiscal 2017 to fiscal 2018 by approximately $10 million or 5%, excluding restructuring costs.
G&A cost reductions continue to remain a focus; and, since fiscal 2015, we have reduced G&A costs by approximately $75 million.
We returned eight leased aircraft in fiscal 2018 and have the ability to return an additional 21 aircraft during fiscal 2019, having already returned six through May.
Of the returned aircraft, four were H225s.
And we have the ability to return three more during the remainder of fiscal 2019, all of which will further reduce cash leased costs in fiscal 2020.
Fiscal 2018 was clearly a culmination of several years of effective execution on a number of important fronts, providing the required liquidity to allow us to remain focused on improving operational performance and increasing cash flow.
Note that on May 18, 2018, our cash balance was $362 million, which is net of approximately $25 million of principal, interest, and redundancy costs paid since March 31, 2018.
Please turn to slide 7.
Before we get into our fiscal 2019 financial guidance, it is important to highlight that although oil prices are at multiyear highs, the primary beneficiary continues to be onshore oilfield services rather than offshore.
However, with that said, as we saw last year with our improving financial performance throughout the year, fourth-quarter fiscal 2017 continues to look like the base from which our EBITDA, flight hours, and LACE rates are building.
Indicators remain that the market demand for offshore aviation services continue to stabilize, primarily driven by increased short cycle work and the expectation for a larger number of FIDs in calendar years 2018 and 2019.
For fiscal 2019, we are providing guidance ranges for similar financial metrics, including revenue, adjusted EBITDA, rent, and other measures, as we did in fiscal 2018.
For fiscal 2019, initial adjusted EBITDA guidance range is $90 million to $140 million.
Although wide, this guidance range reflects the dynamic nature of the offshore market due to the short cycle work.
Also, given our operating leverage, an increase or decrease in activity impacts the bottom line materially as incremental margins are significantly higher.
Turning to our lines of service, for our oil and gas operations, similar to fiscal 2018, our fiscal 2019 guidance reflects the limited visibility from short cycle offshore activity.
For example, the average drilling contract length of our non-major oil and gas clients in the Gulf of Mexico is approximately 180 days, highlighting the short cycle nature of the increased flying activity.
In addition, the initial guidance reflects the benefit of OEM cost recoveries realized in fiscal 2018, not fully present in fiscal 2019; the loss of a contract in Africa at the end of fiscal 2018; lowered financial expectations from Lider; partially offset by lower rent expense.
For our UK SAR operations, our increase in year-over-year fiscal 2019 guidance primarily reflects the full-year benefit of having all 10 SAR facilities operational on a full UK SAR basis rather than some Gap SAR facilities, combined with OEM cost recoveries that will benefit fiscal 2019 results.
Eastern and Airnorth fiscal adjusted EBITDA guidance remains in line with fiscal 2018 results.
Guidance for key cost measures, including G&A and rent, is lower in fiscal 2019 compared to fiscal 2018, reflecting the benefit of cost reduction actions taken last year.
Interest expense is projected to increase in fiscal 2019 by about $25 million as a result of our new $350 million 8 3/4% senior notes issued in February.
Lastly, we have further reduced our expectations for non-aircraft CapEx spend by about 40% from fiscal 2018 to $25 million in fiscal 2019, with an expectation of aircraft sales proceeds of about $15 million.
Similar to last year, we expect to update our guidance as the year progresses.
With that, I will turn the call over to <UNK> for closing comments.
Thank you, <UNK>.
So let's sum it up before we go to Q&A.
Commodity macroeconomic drivers, including politics and other things, are making the highest oil prices since the end of calendar year 2014.
And this has positively impacted the overall operating financial positions of our clients and service providers, including us.
That's a very good thing.
And all stakeholders, including Bristow, are benefiting.
But onshore producers and service providers are benefiting more.
In addition, the supply and demand imbalance in the offshore services sector, including helicopters, continues to make the offshore market challenging.
Recently, we have seen are early signs of stability through an increase in short cycle work and the number of projected FID awards.
We've also seen an increase in our flight hours year-over-year, pretty materially at 10%.
This has led to modestly higher lease rate year-over-year and our better financial results in fiscal 2018; but also a balanced view for fiscal 2019 today, in May, given the lack of revenue visibility.
We believe that we are well positioned to capture the upturn in the offshore market whenever it occurs, and it's already starting to occur.
But similar to last year, we need to maintain an increased cost efficiencies so revenue falls straight to the bottom line.
Our fiscal 2019 priorities capitalize on fiscal 2018 successes by, one, continuing our safety improvement journey; two, proactively managing our cost structure across a more commercially responsive and proactive hub structure; three, revenue growth, by being competitive in this short cycle market; and four, increased aircraft utilization of our existing fleet, leading to improved financial returns measured by return on invested capital.
Bristow has a game plan for fiscal 2019 to address this market and deliver on all of our fiscal 2019 STRIVE priorities, similar to last year.
We continue to pursue improvements through further OpEx efficiencies, lease cost savings, CapEx reductions, and other initiatives both internally and externally.
To continue our successes from this low point of fiscal fourth-quarter 2017, we must change the way we do business.
And we did that in 2018, and were very successful at it.
There is need to continue this innovation and greater cost efficiencies as we return to sustainability and profitability in the near future.
With that, I will turn it over to the operator for Q&A.
Let's talk about calendar year 2019, which again, for us, is mostly our fiscal year 20.
There's no doubt, very similar to our peers in the offshore, that we do see a better fiscal year 2020, or calendar year 2019, then we do this year.
And don't get me wrong; we see a better FY19, also, it's just we don't see as much of the visibility on the back end right now.
And so we're being very balanced in putting that type of LACE rate growth in, in fiscal year 2019.
For 2020, we see more of it.
The recent contract, for example, that we won, and talked about this morning in a press release, starts really in fiscal year 2020.
So we are already starting to see signs of that.
We're also seeing a number of aircraft that were in the market and unutilized or underutilized start to move either out of the market of oil and gas or also starting to be utilized.
For us specifically, that is S-76s in the Gulf of Mexico.
But we're also starting to see, and getting balance on, our S-92s globally.
But that being said, there is still an oversupply of aircraft.
I'd say that we're mostly in balance right now with AW139s.
And so the market is much more in balance this year than it was last year.
That being said, it is still very competitive.
We have brought our costs down.
And I'm very confident that that cost structure, which can get even more competitive over time with our OEMs, will be able to succeed in a way that it was similar to last year.
But again, we're being balanced.
We don't see as much of that visibility, especially in this first half of this year, as we would like.
And, in the end, we've been fairly balanced in the past and I think that served us well.
But I will say this: both <UNK> and Al and the teams have done a great job.
And if I didn't think them enough on this call, both in how they operated safely, but also our commercial responsiveness to this client base, has been I've seen in almost a decade at the Company.
And it gives me a lot of confidence as we move into fiscal year 2019, and also fiscal year 2020.
Look, and I would frankly maybe steer you towards the clients.
Sometimes I don't like to speak for our clients on these calls.
But I will say this: first and foremost, in the helicopter and aviation space, the OEMs, our supply chain, have significantly brought down the production of new helicopters.
There really aren't any being brought onboard, of any amount, anytime soon.
There are a few new types that are coming on.
But even that, compared to even midcycle, is much, much lower to your ---+ and I think on a relative basis to rigs and boats, that helps this industry a lot.
That being said, it is still an oversupply.
We are working through that.
And so for us being able to move 225s, for example, out of this industry is important.
Not adding new types of aircraft when there's still oversupply of excellent aircraft like the S-92, the S-76, is important to this industry that we maintain that measure.
But you're right; there has been a significant reduction in the supply of aircraft.
And that's not going to if ---+ as the uptick starts happening, and I've told our teams this, this upturn will happen gradually, and then all of a sudden.
And that's what we're seeing right now.
It's gradual.
The LACE rates are moving up.
Our LACE rates are approximately 3% higher year-over-year.
That's a good thing.
But it's also ---+ we want to try and stay balanced as we talk about what we can do in FY19.
That being said, our cost structure is fabulous from the standpoint of being able to get most of that extra revenue down to the bottom line.
I still believe we can do better, both as a company and as an industry.
Yes, there is, <UNK>, actually.
In the K ---+ and we've been very transparent out there in terms of the benefits of both the AW settlement and the Airbus settlement ---+ and actually within the K, on page 101, for example, there's actually a lot of detail around the impact of that.
But last year, Airbus benefited us by about ---+ a little over $15 million on the income statement.
And we still have some benefit of that into FY19, but not to the same extent as we had in FY18.
And then the recent OEM settlement with AW is around $11 million, which we'll actually pick that up, and that's really flowing through the SAR line.
The headwinds you referenced, in and around Africa and Lider, I alluded to, really the ---+ Lider historically have gotten retained or some kind of equity earnings from them.
Last year we got about $7 million, but obviously some of the changes in contracts, some of the headwinds they faced in the contract in the near-term down there, that will be impacted.
And then the roll-off of this African contract at the end of March will impact our operations out of Africa.
And as we sit here today, we're still looking at redeploying those assets.
We've actually redeployed some of those out of Africa, bringing them back here.
And so those assets are not completely fully, if you will, recontracted or utilized as we sit here today, just given the contract rolled off recently.
But we think LACE rates down in Africa could be down around 25% year-over-year.
So that gives you a sense of how to put some parameters around that, <UNK>.
Is that what you were looking for.
On the ladder first, on the non-aircraft CapEx: quite honestly, <UNK>, it's across the board.
What goes in that bucket is land and buildings, IT, mods.
So across the board we ---+ I mean, I think it's fair to say we are scrutinizing every dollar that gets spent in this company.
You really have to justify it twice.
So that's reflective of just a trend we've seen over the last three or four years.
And there's an element in there, actually it would be a little bit lower, but we actually have some fixed wing engine rebuilds to get done this year, and that's just kind of timing, if you will.
You have to do those things through the life of the aircraft.
So, otherwise, it would be a bit lower than that.
On the rent, the ---+ a couple of things.
There's a handful of aircraft that actually go back at the end of FY19, so we don't actually have any real benefit from that built in.
I mean, there are 21 aircraft to go back this year.
We've given back six already.
We've got three more 225s to go back, so those are easy to give back.
The rest are really ---+ we've got about ---+ remaining, about eight 92s, of which about half of those go back at the end of the year.
So, in effect, what I'm backing into is to get the benefit this year, all I've got to really do is give back around four 92s, the 225s, and I get the lion's share of the benefit.
So we have a high degree of comfort around the range ---+ obviously the range we've provided.
Sure, I'll take that, and then I might also give it over to <UNK> <UNK>.
Dan, always our May calls are a bit difficult for us in this downturn.
There's no doubt that we've bottomed fourth quarter of fiscal 2017, and we've done a great job getting our cost structure in line to be competitive, and 2018 successes show that.
But what we're trying to tell the Street now is we have a lot of confidence that we can get a lot of these LACE rates moving.
And especially in Africa, where currently we're looking at less utilized aircraft, either moving them out or keeping some of them in.
Either way, we're already seeing signs that we're putting those aircraft back to work.
At this stage of the game, though, we feel it would be not balanced to give you guys a significant amount of upside revenue in a forecast and a marketplace that, even at $70, $80 for offshore, is still showing a level of gradual recovery, and not significant, rapid recovery in one year.
Do I have confidence that we'll be able to get there.
Absolutely.
And we had the liquidity window to be able to do that and continue to work with OEM partners, continue to work with internal cost structure, even be that much more competitive.
But in the end, we've got to be balanced in what we show you guys in May, and that's what we've done.
But like I said, all markets are seeing increased hours, and a lot of that revenue will fall to the bottom line.
But stay tuned to how we actually look at the rest of the year.
Because, for us, it's about the execution on a quarterly by quarterly and even a monthly basis as we go after some of this new revenue.
And there is revenue to go after.
<UNK>.
Yes, I agree, <UNK>.
I think it's important to highlight that those contracts in Nigeria, or in Africa, ended in March.
And pulling those aircraft down, as <UNK> alluded to, we've moved some of those assets out.
They are back, going through rework and we'll be working on recontracting and replacing that revenue.
So those aircraft were back in my hub.
The other aircraft remained in Africa, and as <UNK> alluded to, we're working on recontracting those, as well, now.
And Dan, we have a lot of confidence.
Again, one of the markets that is actually recovering a bit faster than in the past is Africa.
And it's not just Nigeria.
When you look at Senegal, Mauritania, Angola ---+ all those markets are recovering.
It's just gradually, and then all of a sudden.
Again, it can be very easy for a management team with less visibility into this market, but I'm following what I think is the best practices of some of my peers in boats and rigs to be able to give you guys a sense that, again, it's a gradual recovery on the offshore.
A lot of the benefit right now, in May of 2018, of $70 to $80 oil is accruing to the onshore.
It's coming to us; there's no doubt it's coming to us.
But it's going to be gradual, and then all of a sudden.
Yes, <UNK>, that is correct.
But <UNK> ---+ it's <UNK> ---+ just to your point.
But there is a lot more to go after.
And partnership with the OEMs, and again, you saw last year, we believe in working with them.
But they better show some partnership; otherwise, there are actions that we can take to grab efficiencies on our own.
This is not ---+ we're not just dependent on them.
We can do a lot of things on our own to bring our cost structure down, if, for whatever reason, that partnership is not being shown.
And so it's not meant to be a threat to the OEMs; it's just that there's only so much we can do, given issues associated with PBH, our TAP agreements.
And so for us, we're encouraged by what we see with partnership with our OEMS, but there are actions that we can take to lower that, too, without them.
Just want to say again ---+ because I don't think I emphasized this maybe enough ---+ is how proud we are of the teams and their work in fiscal 2018.
It's been a hard year with the new Bristow hub structure.
I want to thank everybody in your areas.
Stay tuned for the Target Zero deployment that we're going to be doing.
And then also I think stay tuned for how we're going to be able to be successful in this marketplace as it unfolds in 2019.
Thank you very much.
| 2018_BRS |
2017 | AEL | AEL
#<UNK>, it's <UNK>.
Are you referring to the renewal rate adjustments.
Those renewal rate adjustments are on pass, so to speak, and they will not be rescinded or adjusted.
I think we've said on several other occasions, in response to questions about those, that the competitive factors don't extend down into renewal rate activity.
While that may sometimes show up in conversations with agents as they see how different carriers treat their policyholders on renewal, and I think even with our adjustments, we've treated ours awfully well relative to what we hear about how they may have been treated by some other carriers.
But that's not really a big question in the competitive landscape, unlike comparisons of rates for new sales opportunities.
One thing we want to point out, <UNK>, is that the coinsurance treaty that Eagle has with the team was scheduled to drop to 50%, effective January 1, and that's what's happened.
So that has dropped from 80% to 50% as part of the agreed-upon terms in the agreement.
And you mentioned MIGA at the tail end of your question.
MIGAs at American Equity have never been part of our strategy.
They've been an accommodation to agents who are selling fixed-index annuities, and if a particular agent had a customer policyholder who wanted a MIGA policy, we wanted to at least have a policy available for that agent to place with us, as opposed to forcing them to go to a competitor.
MIGA policies are very rate sensitive and so the tenants of agent loyalty and relationships disappear in the MIGA space.
It's just not one were interested in being in because the only way you really do have long-term success is kind of almost always having the highest rate.
And the coinsurance percentage on MIGA stays at 80%.
It's just on the FIA business it drops to 50%.
This is <UNK>.
We think by adding MVAs to our FIAs it certainly won't put us at the top of the heap but it'll get us closer.
Instead of being 90 to 100 basis points on a cap, we think that we can get maybe 25 basis points or 35 basis points closer to the top.
So at that point, our producers will start remembering the value that we provide in excellent customer service and renewal rates and all this other stuff that we've built the Company on.
So that's a plus there.
On the income part, on the guaranteed lifetime income part, as you look at the competition today, we're about, on an income basis, 80% of the number one income company, but we're about 98% of the company that would be ranked number two.
So there's a big cluster of us that are pretty close and our guaranteed income and there's an outlier company that's way above everybody else.
We think we can put together a new lifetime income benefit rider for our FIA products that can kind of, maybe take us a little closer to the top of the cluster, so to speak, but we're not to be anywhere closer to the outlier company.
And the reason I talk about that is, if you look at us and rank us in the cluster, we might be ranked fifth or sixth or even seventh as far as a guaranteed income.
But it's in a very close pack, so people that run these comparisons, they will see us show up and we're ranked fifth or sixth.
If we can make little tweaks here and there, and show up second or third, we can be selected more frequently, obviously, than when you rank fifth or sixth.
No, we've been ---+ all the price testing we've done is looking at consistent profit measures with what existing products have.
It's certainly affecting the smaller firms, in that they can't ---+ they don't have the infrastructure to be a financial institution, and when you look at the IMO exception, it's very, very few IMOs that will even qualify for the IMO exemption.
So the way I look at it is that these smaller firms you know have to make a decision, either get out of the FIA business or consolidate with the larger IMOs out there that do have the infrastructure and that has a capability to be an FI.
It's unfortunate in that the DOL rule is almost turning the FIA business into a monopoly because there's going to be fewer and fewer IMOs if the rule goes through that have the ability to be financial institution than currently exist today.
We're going from hundreds of IMOs down to maybe, I don't know, 5 to 10 that could be an FI.
Hey, <UNK>, you said M&A opportunity from AEL ---+
But we don't own any now so what's your ---+.
It's not really part of our business plan would be to be owning IMOs.
I think we still are on the path that we don't want to own production.
And where the consolidation and the potential for M&A really happens, it's for the larger IMOs who do qualify for FI.
They either have the potential where they might be acquiring smaller firms or having striking agreements where somehow that production is rolling up underneath them and they're acting as the FI and they're getting paid for the ---+
I don't think I can put a finger on that statistic.
We have ---+ our persistency is usually good with our Gold Eagle members, as far as retaining them from one year to the next, but I don't know of any numbers I can point directly to the DOL about.
<UNK>, agents wouldn't leave, they might start producing and that obviously would catch our radar.
And our guys monitor production activity from sources in that and don't hesitate to pick up the phone to call people.
But I certainly haven't heard any commentary.
I doubt <UNK> has either about ---+ we've got these agents that are no longer producing for us.
Our top 5 IMOs are responsible for about 52% of our sales and our top 10 are responsible for 78% of our sales.
Some of that commentary to me, that's just kind of evidence the DOL's lack of knowledge of what our products are in all that but ---+ financial ---+ the ability to adjust rates during the surrender period is part of natural product design.
We've said repeatedly that particularly on index annuities, our pricing sets an option budget at the start or at the time a product is issued, and we buy a 10-year bond or whatever it is, to fund whatever rates we can offer.
But the indexed terms are going to be influenced in subsequent periods by what's going on in the market because option prices are dictated by market volatility and other factors.
So while we might have to change our caps and participation rates, it's going to be because of factors that are not necessarily ---+ that are outside of our control.
So, I think, as I read that, one example of not having a very good grasp of what the product is and how it's designed, the policyholders have lots of options and the companies do to.
So it's part of overall product structure.
MVAs, your question on MVAs is in effect doesn't happen during the operation of the product.
It happens when somebody elects to surrender or receive cash outflows prior to the expiration of the surrender period.
| 2017_AEL |
2015 | ARW | ARW
#Steve, <UNK> <UNK> here.
We're pretty optimistic about the immix acquisition.
We've had a good presence in the federal marketplace, and this will only give us that much more depth and breadth.
If you think about our strategy, which has been to continue to move to software-based solutions in the data center, they bring a great portfolio in that regard.
Very consistent with where we are headed and also some very good value from an enablement perspective in that sector.
So, we think it.
s just going to help us for the long-term, and we think it's consistent with our strategy.
Yes, they do.
We think they were as expected in Q1, and we're more or less on plan in the way that we look at the market, both federal and state and local for the balance of the year.
Yes, I think the first thing that we said we were going to do is widen the products that we had that we were bringing to market.
And, I think <UNK> and his team have done a very good job of that.
And I think you'll notice that the opening statement where I said we had good balanced sales, which means that customers are now buying more of the complete solution from us than sort of scatter-shotting us with just products.
That's where we wanted to be.
We saw really good uptick in servers this quarter.
Security software continues to be a real good place for us.
We've really kicked up the performance of that over the last couple of years.
Notably, infrastructure software is up, which says that the data centers are alive and well and still growing, and there's a lot of work to be done.
We're seeing what I would say good, balanced sales.
We had ---+ storage was up for us.
I know that there is a lot of talk about the change of the storage and the products, but there's still a lot of activity that we see in storage and would expect to continue to move and migrate with the business around storage, too.
So, all in all, I would have to say that not only in the Americas, but we saw the exact same type of balance in Europe.
And, for us, it was exactly what we were looking to do.
Hopefully, that answers your question.
<UNK>, thanks.
In the first quarter, I would say that we saw that book-to-bill of about 1.02.
So far in this quarter, we are seeing a 1.12 book-to-bill.
So, any idea that in the first quarter, customers were over-ordering for the marketplace, we've only seen their ordering increase going into the second quarter.
We don't believe there was any change of customers' order patterns in the first quarter from what we've seen in past history.
Billings are up a couple of percent right now.
We're still seeing Europe very strong with billings up 20% over the same type of period.
We are refuting the idea that there was early buying going on, and saying, we are seeing more consistent buying, which caused us to increase our inventory in the first quarter to take care of the demand that we were seeing into the second quarter.
Yes, there are a few extra days.
At the end of a quarter, those days can be pretty substantial.
That could be the partial reason for the first quarter, and that's why we are looking at the business right now on a six-month basis and then bringing it in by the quarter.
So, we don't think there is anything happening here that is going to change the outlook for the first half of the year.
And, right now, we're still as bullish on the year as we were when we came into it.
<UNK>, you are getting the numbers directionally correct.
The reality is, it's brand-new to our portfolio.
And then, we have got to factor in also that we have a cut-off at the end of our third quarter that is a couple days short of September 30.
So that actually, what will happen is we will be picking up some of that federal surge, if you will.
Mostly, in Q3.
But, some of it will trail off into Q4.
If we talk about them individually, right.
We have one that we did in Germany, but we own 53.7% of it.
And, that's a public Company.
So, we have to be very careful in disclosing anything ahead of what they disclose around future performance.
So, that's not in our number, and we probably won't be putting that in our number since we don't want to run afoul of any type of selective disclosure for a German public company.
So, that one's not going to be in our guidance in the near-term as we go forward and I really would prefer not to quantify expectations around that because we don.
t, as I say, want to run afoul of the German requirements.
The other one, we are talking about one that's closing at the end of April, and then we've got to look at the seasonality there and factor in only two months versus a full quarter.
I think your couple hundred million dollar number might be a little bit too high for us at this point in time.
Thanks, <UNK>.
We actually believe that there is still room in the margins, although we think it's important to first show a sustainability of where the margins are in components over a period of time here.
So, you will see some fluctuations up-and-down in those margins as we stabilize those businesses.
In the computer group, as we see more software sales and more services sales become a bigger piece of the portfolio, we would expect to see the margins there continue to grow right along with the change in mix, as that occurs over the next few years.
The good news of that is we.
re sitting here looking at two businesses that are far from mature and far from just being what I would say something that has historically been a lower operating income business.
We're producing more for the customers, which means they are paying us more.
We're doing more design wins with the customers.
There is more web activity with the customers, and we expect that to continue.
While I don't have a number for you now, I would say as we go into the second half of the year, we want to get through the currency fluctuations that we're seeing now and really see how the business acts in a stable environment.
Because if you look at what components has done with the currency fluctuations on top of a market that hasn't been usually robust, I would say that's pretty good right now.
Hi, <UNK>.
We continue to invest in the cloud transition.
We believe it's one that playing out over time, not overnight.
In our ArrowSphere platform where we do a lot of the provisioning and the billing and the enablement of the sales channel to cloud offerings, we now represent well over 100 different as-a-service offerings with some 50-odd different suppliers.
So, we are there for the channel as the channel continues to move down that path.
Our run rates each quarter continue to improve with that segment of the business.
It did again in Q1.
I would say, though, it's going to be a long transition.
It's one that won't play out in any given quarter.
Brokers would be hugely small.
(laughter) That's not a target for us.
The biggest pieces we have in terms of our vertical markets would be ---+ or the biggest growth areas would be lighting, automotive, and we've seen pretty good growth in aerospace and defense in Europe.
As far as what percent we have for EMS companies in Europe right now, I don't have in front of me.
So, I'll have to get that to you after the call.
A little bit of that would be the investments we made in the past of an electromechanical market because we are seeing deeper and wider penetration by our businesses there.
So, we have made a decision to go ahead and support the sales that we are seeing, as well as support the opportunities that are coming in.
That may account for a day or two of that.
I don't know, <UNK>, if you have anything else to add.
<UNK>, if you are doing it on a consolidated basis or consolidated revenue, keep in mind that the transition to similar service agreements in ECS [undercalls] our real revenue growth, right, because that's on a net billing basis.
So, we're seeing that become a bigger percentage of the mix when I look at it.
So I think that is maybe something we've just got to keep track of.
As <UNK> mentioned, around passive electromechanical, that's a product line that turns about four times a year.
We are investing more in that versus the semi space which turns six to seven times a year.
So I think there's a couple of different factors, not one big driver or one big region, with the exception of maybe Europe because we've had two quarters in a row with double-digit, year-over-year revenue growth.
Where maybe we laid in a little bit more inventory to support ongoing great performance by the team there.
Yes, a lot less exposure than what we just suggested.
We're still in the medical market, the industrial market, and things like that, but the PC market is very light exposure for us.
The cell phone market is very light exposure to us.
That's why you see the manufacturers mainly talk about those directly, unless it's some big, low-margin supply chain activity that somebody has taken and doing for that customer.
But for the most part, that's not where we play.
We haven't provided it, but it's a round number of $700 million.
I would say what we normally see is a variable cost of about 2% for the incremental sales volume, so that's one thing to keep in mind as we go forward around the quarter.
If you just give me one moment, I'll see if I have the actual number for immix.
I might not have it with me.
I may have to come back to you.
Immix would be, for the quarter, around ---+ let's call it somewhere between $10 million and $12 million.
It will be the same seasonality as the Taiwanese company.
That really doesn't have that much of a difference from what you see in the rest of the region.
Well, the line card add has everything to do with the solutions that we are trying to offer for the customers and where they are evolving to.
So, as we add more software lines ---+ for example, over the last couple of years, we added security software virtualization software, and we saw those businesses take off retrospective and to add a fair amount of sales to us.
If you remember, I guess now it's six or seven years ago, we were primarily just a server distributor.
That's what we did.
That's what we're living on.
During that time, you saw the sales continue to grow for ECS.
But what was also happening was a decline in proprietary servers over the same period, sometimes in double-digit format that we were overcoming with our services, software, and storage business.
What you're seeing, now, is some of the servers have begun to put some life back into the marketplace.
We are seeing some refresh, which is good.
We're seeing an uptick, a continual uptick in security software.
Virtualization is still running at probably an average of 10% to 12% quarter in, quarter out, for us.
And infrastructure software is starting to come up, so that has been an area that is also bringing some light to us.
Probably, the next hurdle is going to be what happens in storage over time and how fast the solid states come in and impact rotating.
But, we are prepared either way.
We've been guiding this business through those changes.
We're seeing more sales in ArrowSphere today than we've ever seen.
We're totally prepared for what we would call cloud initiatives, whether it's on-premise, off-premise, or some sort of hybrid.
In general, we think we have most of our bases covered right now.
If there's anything we're not selling, you think we should be in, boy, we are all ears.
It's interesting.
While we've seen some of the newer products come up, we've seen some of the older products go down.
We've been in this constant balance.
But frankly, that is the nature of this business and that's the nature of how it exists.
And whether you are a manufacturer or a distributor or a solution provider, there are products that are hot that you get in and you start producing.
And then, they hit a level of maturity and once that level of maturity hits, you start to go end-of-life and new product comes on.
I think that's probably ---+ our ability to anticipate that has helped us with the 7%, 8%, 9%, 10% growth rates that you see for us out of that business.
What you are going to see now, is probably earnings in the future grow even faster than sales because of software and services.
That's how I think you're going to see the business evolve, which actually isn't bad for anyone.
Remember how I explained Europe sales before.
If you'll remember, several quarters ago we talked about an increased investment in sales people and engineers in Europe coupled with the conversion of our ERP system.
Those two things combined have A, made us more efficient, allowed us to put more of our costs towards selling, and those engineers have brought in more designs, which has helped us grow faster in that market.
At this point, we do see ourselves growing faster than the European market, overall, which is a positive.
We are seeing an uptick there.
The North America business ---+ we started to invest, probably, a little longer than a quarter or go in some engineers and sales people, so we would expect that one to pick up more toward the second half of the year.
But Asia, right now, has a strong, strong book-to-bill compared to last year.
We've seen it start to come online after the Chinese New Year, albeit late.
But the truth is, I don't think it's going to change the overall economy of Asia.
I think it's just some seasonality we are seeing and the backlog starting to build going into the second half of the year.
Hopefully, that balances it out.
But all in all, we are seeing a strong book-to-bill right now, and most of it makes sense to us as we see it.
I don't think we published those numbers as we saw them coming out.
What we have done is we've given you the mix, if that will help you right now because I think we were looking at something like 6% or 5% for the year.
The current mix of the business is around 35% software, 30% storage, services 15%.
Servers are a little less than 15%, and networking is more than 5%.
[If you're going to need some] broad numbers, the server market probably combined was 20%-plus up year-over-year.
In software, a range from ---+ anywhere from 10% to 20%, to give you an idea.
That is globally year-over-year, and there's different pockets of strength between North American VAD and ECS.
Still pretty robust performance when you look at those type of product sets.
Sure.
The FX change, or the currency change, reduced the sales, reduces GP, reduces SG&A, and it reduces operating income.
Right across the board.
At this point, I think that, <UNK>, is a little bit ahead of itself.
Most of the growth today is coming from the existing storage manufacturers.
They're still doing well in the mid-market.
We're still seeing a lot of opportunities, and my expectation is you'll start to see the other lines that we have ---+ start to come up more towards the second half.
But, I don't believe it's going to be this immediate hockey stick.
There still has to be acceptance in the marketplace, and that's going to take a little while.
So, we fully expect our traditional vendors to be pulling the hay wagons for the next couple of quarters.
I think you just hit both of them.
I think the currency and coupled with the fact that these guys have got to upgrade these data centers, and some of the growth that we are seeing right now ---+ we haven't seen proprietary or industry standard servers grow at the rates that we've seen there for quite some time, that being over 10%.
We've seen the services and the software piece come up very nicely.
Any time you see virtualization hanging in there at 10%-plus, tells you that something.
s going on.
But, infrastructure software was sitting there at about 22%.
I would say right now, we are seeing it across the board, which tells us that the data centers are upgrading.
I'll start off strategically.
Any time we do something like that we hope it's cannibalistic because that means we are on the front end of the market, and then customers are going to adopt it from us.
That's why you make those investments.
We don't ever try to hold back where the market is going from going there.
We want to make sure we support the market.
<UNK>, I'll let you talk about some of the changes you've made in it that are pretty exciting.
Sure, <UNK>.
<UNK>, remember, our ArrowSphere platform is not a strategy.
It's just a tool set, and it enables the transition to cloud offerings over time.
Our strategy is really to address the fact that customers want choice.
They're going to keep some mission-critical workloads and applications on-premise.
They're going to look to leverage third-party cloud offerings where and when it makes sense.
And, we believe, over time, certainly in the enterprise, the Hybrid Cloud model is the one that will prevail.
These investments are all about helping customers migrate down that path and working with the right channel partners to help them get there.
but again, it's not something that we see happening over time ---+ I should say, overnight.
We see it happening over time.
As I've said before, our run rates each quarter continue to improve with that piece of our portfolio.
I might add that you typically see the very large customer base that is serviced directly by some of our manufacturers move faster than you see the mid-market.
That's why there is usually a clue, for us, of where to take the business over time because once something gains acceptance at those large customers, then you know it's going to happen.
Once they can be convinced since they are so price-sensitive, it takes a lot less to convince the mid-market.
So, we believe we are right where we need to be with that right now.
| 2015_ARW |
2016 | GPC | GPC
#Welcome.
Well, my understanding of the question on the trends was more product oriented.
And that's where I think we have stabilized in particular product categories.
In terms of the impact of Easter, we should see the benefit of that in April.
We should pick up a little bit more in April that we gave back in March.
Well, we'll see how it all shakes out, and we'll give you an update on it in our second quarter conference call.
So you're correct, when we look at gross margin, the other three segments are fine.
The pressure on gross margin was through Industrial, and so a lot of our initiatives are in place.
And I should mention, Industrial has done a really good job.
Their core gross profit was up in Q4, and was also up in Q1.
So they've done a lot of things on the buy side and sell side to help get that up.
So when the volume does come back, and it probably needs to be more in the very low single-digit range for us to get some of that volume incentive back, that's going to really go straight to the margin.
So the good thing is, they're SG&A improvements and they're core gross profit, those things are already in place.
And when we do get just a little bit of volume back in the top line growth, then we'll see that on their operating margins.
Thank you.
Hello, <UNK>.
So all of our businesses have initiatives in the working capital, and specifically focused in the payables area.
So while I would say just more of the majority of the dollars are coming from Automotive, we do have improvement coming from the others.
And I can tell you their teams, it's baked into our pay plans, it's part of all ---+ everybody's performance.
It's part of what everybody is pushing down, is working capital initiatives.
And we are seeing some improvements in the non-automotive as well.
So the idea is that we have just continued improvements each quarter.
But again, it's more coming from Automotive, but we're getting some of from the others too.
Yes, <UNK>, so I'll answer that two ways.
On the brakes business, our brakes business has been solid now for a number of quarters in a row, and that's across all the brakes.
So that's rotors and friction and calipers have been all outpacing our overall growth.
And I think it's just a great job by our team out in the field grabbing some market share, and we got a great partner on that side.
If you will recall, <UNK>, a year ago on the chassis side, we were having some significant service issues.
And pleased to report those are now behind us, and we're seeing that business return back to more normal growth rates.
But we were down quite a bit early last year as a result of some of the service problems.
So again, that's a business we ought to do quite well throughout the first half of the year.
Thank you, <UNK>.
We thank you for participating on today's first quarter call, and we appreciate your support of Genuine Parts Company, and we look forward to updating you in July on our second-quarter results.
Thank you.
| 2016_GPC |
2016 | CATM | CATM
#Sure.
The pipeline that we are looking at is multidimensional.
And I don't mean to be cryptic, but they range across different size deals from bigger to midsize to smaller.
And that's both in the US and outside the US.
We believe that there are opportunities for small portfolio acquisitions here and there that provide a footprint for us entering a particularly new market.
We believe there are opportunities for a few larger deals based on the timing that's appropriate from the seller's perspective.
And we can't always control that.
So, the pipeline, as I've said in prior calls, is as rich as we've ever seen it in terms of size, breadth, and the number of countries.
But the discipline is also in full swing in the company, and just because it's on a list doesn't mean we should do it.
So, I don't know if I'm helping you get anywhere with your question, but the pipeline is one I'm pleased with and one that will bear fruit for us over time, but always difficult to pinpoint the time but, with the re-domiciliation, certainly an asset to compete on a level playing field with any other potential acquirer.
I think I would probably characterize it as this.
We're in a scale business, so focus is healthy.
And I think mastering the art of the European deal would be a useful construct for the company for a bit.
Having said that, as you well know opportunity knocks in different times and different ways, and we don't always get to regulate the flow of those knocks.
So, we certainly remain open to the right opportunities anywhere on the planet, quite frankly.
And the question is are they the right opportunities, and is it a good time to be in the market.
I will say the following.
I always prefer to be in a market that is slightly more mature rather than slightly less mature because I don't want to be in the business of training people on how to use ATMs.
I'd rather be in the business of making an existing model way more efficient, if that makes sense to you.
Unfortunately, probably not, but I certainly expect you to see stuff next year.
And I expect to have some good storyboard for you in next year.
We are operating it and customers are accepting it.
But I just think, given the challenges of the complexity of the EMV rollout combined with the challenges of the software stack we were rolling out, it's just gone slower.
And I would have to fess up that it's in that slowness that we probably missed the window to have material opportunity this year.
But I'm extremely bullish on the opportunity overall, and I am excited about its ramping opportunity in 2017, 2018, and beyond.
So, there are rules of thumb, some of which we would not expose in a competitive public environment, but I can do the following for you.
We think in terms of Allpoint, generally without any energy, creating a double or a triple over what we would normally see from an institution at our ATMs.
I think one of the things you'll see in the future, particularly from deals with larger entities, will be more of a structural commitment to leveraging the asset.
And by that I mean to imply hopefully over time a materially higher rate of penetration at Cardtronics Allpoint ATMs by those kinds of card bases.
So, there is sort of a ---+ branding gets you one kind of ratio.
Allpoint gets you another kind of ratio.
And if there's no engagement, that's one level.
But if there is engagement, if there is marketing, if there is commitment, then you'll see something material.
And we run card bases on our platform where, for some financial institutions that never were doing Allpoint or branding with us, we might have seen 2% or 3% of their traffic.
And if we manage the account ---+ which takes a whole lot of handholding and time so it's not add water and stir ---+ we can see penetration rates of all of their ATM transactions, 10%, 20%, 30% of all their volume.
And that's where, for some of these larger accounts, we hope to deliver meaningful same store impacts over time.
The beautiful thing about the Cardtronics' model is we don't have to teach people new behaviors.
They know how to use an ATM, but we still have to teach them to use the right ATM.
And when the financial institution cooperates, pretty good things happen with that from a same store perspective.
I guess I would call it a combo in the sense that, as banks are managing their transformation process to this digital model, fewer branch model, lower employee count model, they're looking for solutions.
And we find ourselves brainstorming with them as opposed to saying take this off the rack sort of thing.
But, if forced to answer your question, I would say off-premise activity like the TD deal and ---+ is a hot subject because it frees up capital and allows them to focus on some internal activities.
And increasingly, I think the Allpoint model is getting additional traction.
Branding still does fine and it gets combined with other activities.
And multibank branding I think will give that new depth of texture because it will allow us to alter the pricing models for effective ---+ getting multiple entities delivering greater returns on an ATM but at a lower transaction cost for them.
So, I think ultimately I'd like to be telling you sometime next year all cylinders are pumping equally and aggressively.
But I think in fairness, for a lot of the larger banks, their off-premise leads are a target at the moment.
And for lots and lots of banks big and small the Allpoint access, so they can stop thinking about deploying off-premise, is increasingly important.
You're welcome, <UNK>.
Thank you all.
Thank you.
| 2016_CATM |
2016 | FMC | FMC
#Good morning.
I will ask for <UNK> to comment with me.
As we said in the script, remember there is seasons in terms of manufacturing in lithium.
And we are getting into a period which is the winter part of the season and we're going to have more rain and more snow and conditions which can limit more, to some extent, our production of carbonate.
So, what we're expecting in the next three quarters is less carbonate available because of our manufacturing, like most people operating in this part of the world, in the next couple of quarters.
On the positive side, our costs continue to be good, and our pricing will be positive.
So, it's a differential between all of this which creates maybe a little bit less of an over performance in the remaining three quarters than we have in the first quarter.
I don't know if you want to add anything, <UNK>, to this.
Yes, I think if you look, historically, at the earnings, the seasonality has been there.
We're doing what we can to reduce volatility, but that seasonality is going to remain where the first and fourth quarter give us the most volume and flexibility on the mix we can sell.
Yes, first, as you know, most of the carbonate, by a long shot, we use, is produced by us.
So, what we are buying under contract today versus the overall usage is incremental and what we are buying is locked under a long-term supply agreement.
So, we are not facing significant price increase in carbonate.
But, if it plays the way we expect it to play, and once again it will have to be confirmed, but the way we look at it is, for now, we are producing enough carbonate and buying enough to run our strategy around chloride, butyllithium metal, and hydroxide.
And as time will go, we're going to have to sell more hydroxide.
We're going to have to increase our capacity in hydroxide, and we'll have to buy more of carbonate on the actual market, which should be at a time when our peer companies will be increasing capacity and making the product more available in the markets.
It looks like all of this is falling in place quite well.
<UNK>, do you want to add something.
Yes, thanks for the question.
<UNK> has it down well.
The other thing we look at, always, is incremental things we can do in Argentina, and there are small opportunities for small capital to increase our throughput in Argentina which gives us some flexibility as we go forward.
So, right now, I would say there is no major issue around potential increase in the future of our cost in terms of our ability to execute our strategy around carbonate and hydroxide.
Yes, I'll tell you the way we look at Ag Solutions, right now.
First, let me talk about the Ag market as we see it for this year.
I think we are not changing our view for 2016.
We still believe it's a mid- to high-single digit downmarket, mostly driven by North America and Brazil within the high teens.
And maybe Asia and Europe in the high single-digit, while Europe and Asia would be in the low- to mid-single digit decrease.
So, we are not changing our view.
It could be maybe turning more toward the high single-digit overall global market.
The way ---+ and why do I feel better about the way we are operating in the Ag market, it is not because we're seeing a fundamental change in the market in the short-term.
But, what I think we are doing at FMC, I think the key difference is that we know better how to operate in this type of market.
I can tell you, you see it in our numbers.
We are not fighting to keep market share on sales of product.
We are much more looking at three types of objects here.
First, it's very important for us in focusing only on FMC product, is to decrease FMC product in the channels.
The second aspect is we want to be able, by doing that, to focus more on the quality of the sales which is: more term, price, and collection.
And then, looking at all of that, the objective is to align more sales with the normal demand pattern.
You see that in the numbers in Q1 in North America.
Sales down 35%, I think on slide 4, while product on the ground, we're up above market 7%.
So, the way we are operating in the market, today, I believe we have more control over our selling process than we might have had in the past when we got hit by the downturn.
Beyond that, I would say, I would not exclude the market to turn around in 2017, but I have no indicators telling me it will be the case.
So, I think we are much more focused, <UNK>, on operating under the current conditions with very high control on term, price, and managing very closely in partnership with our customers our inventory to create much more predictability in ourselves.
That's where the level of confidence for me is increasing at this stage.
<UNK>et turnaround, I think we'll have to wait a little bit more, and certainly, to go into Q3, Q4 to have more visibility.
That's the million-dollar question with the real.
The truth is that the stability, or the predictability, in the movement of the Real is really what matters to us.
We've talked about it in the past with regards to the timing of changes and the pace of changes.
Q1 and Q2 just aren't really periods in which we have a lot of commercial activity going on in Brazil, so it's really what it does in Q3.
Again, it isn't so much the level.
We've shown that in Q1 where with an average rate of 3.9, today it's closer to 3.5, we were able to still capture pricing on the limited number of sales we have in Q1.
The question will come in Q3, how stable, how predictable is the Real.
In the rest of the world, you look at the forward curves on the currency, it does not feel like a strengthening dollar is what the market is expecting.
That, generally speaking, is what's factored into our numbers, relative predictably, not a big strengthening of the dollar around the world.
Q1 feels like, when you look at where the dollar is today compared to a year ago, Q1 feels like the last of the quarters that we have those tough FX comps.
So, subject to any changes away from where the market expects today, doesn't feel like currency will be quite the high level story that it was last year.
Sure.
It's a pretty straightforward story.
We clearly have an increased expectation around EBITDA, but the truth is, it's largely around working capital.
And you have to bear in mind, if you look over the last few years, two years ago we had a terrible performance with working capital with, largely, cash outflow.
Last year, we turned the corner, and sort of stopped the bleeding and improved it slightly, but this year, we expect that trend to continue so that working capital becomes a positive generator of cash flows.
Our biggest focus is always going to be the Brazil receivables balance and getting that receivables balance down.
But we're also very, very focused on inventory levels, our own inventory levels and making sure that we are very efficient and very thoughtful about what inventory we hold, where we hold it, and how much of it we hold.
So, it's coming in multiple different areas, but you really should be looking at working capital as the primary driver of the increase in cash flow for 2016.
In general terms.
Yes, we are not changing, actually we still have the same numbers, so the numbers would be talking about 60, 70 are very well in line.
And a full run-rate of 140 to 160 getting into the middle of next year are, also, still the targets.
So, there is no change in our numbers, right now.
You know, I think whenever you talk about terms and pricing, we want to be highly cautious and solely comment about we do.
Our strategy, today, is quite simple.
We are highly focused on maintaining our pricing at a healthy level.
We are very vigilant on terms, as you know, balance sheet is always a key challenge for a company like us, and more than ever, we are highly disciplined on terms and not giving terms.
What it means for us, and I'm only talking for FMC, what it means for us is, certainly, we are prepared to see timing change in our sales, and that's what I've been talking about.
We're not being willing to do anything to push product in the market if there is not a complete need for this product by the market.
You know, space shelves is a word we use a lot, but, when you have technical product to be sold, those products, you know there are needed.
And then you have commercial contract with customers.
So, it is not a situation where, because we are aligning our sales with the market demand, that we are taking an enormous risk to see somebody taking our shelf space by the end of the year and us not being able to sell a product.
For example, <UNK> talked about our Authority product line.
It's a pre-emergent product.
It's required ---+ needs to be bought in Q4 and Q1.
We know this product will be sold.
So, I think our strategy might be a bit differentiated, but we are only focusing on ours along the lines of what we discussed before.
Yes, <UNK>, this is <UNK>.
You know, we talked about it earlier.
I got a question earlier about whether we thought it would be a headwind or a tailwind.
I think in initial stages, I expect rates to be reduced.
Good news is we know with Enlist and Xtend that they will still be recommending the use of the pre-emergent herbicides, of which Authority is one of the market leaders.
So, we know we're going to have a substantial market there.
I would say weed resistant acres continue to grow, so we're going to see that pre-emergent continuing, certainly in the US and, as I said earlier, in Argentina.
I think from an over-the-top perspective, we have some very good products that we're going to be promoting, such as our Cadet herbicide, which we think will be a great tank mix partner for those products and really offer a broader spectrum of control.
Don't expect to see us in 240 in Dicamba.
That's just not the sort of business we're going to be in.
We're going to be in the more differentiated products, more highly specialized where we can bring value to the growers and distribution.
You know, I think the food market for us, there is an acceleration.
The way we look at our market in nutrition and in health, are interesting.
In health, the good news is when you are with the customer, you are there for a while because you're not being reformulated out easily.
The problem with that is it's not easy to gain new business.
While the same applies to food, but the reverse.
I think there is a trend to reformulate, change formulation.
There is a very fast cycle which gives opportunities for us.
So, the stronger we are with our product, the more opportunities.
But, by the same token, also, it opens the door for new product and competitors.
So, I would say today, it could be a slight tailwind, knowing that we are, maybe, the largest market shareholder and maybe the more complete product line.
But, I don't see that as a major change from the past.
<UNK>, do you want to add some comment to that.
I would say we see it as a trend.
This is <UNK> <UNK>.
I see it as a trend.
We see it as a trend like many others that have come and go in the industry.
The industry is very that fad-based.
To <UNK>'s point, unlike the health markets where there's very little change over periods of time, there is a great deal of change from every two or three years whether it's low-fat, Atkins and now this simplification, clean-label phenomenon.
It really does come down to the breadth of product line we have.
The fact that they are well-suited to being all naturally-based.
And then having the applications capability to respond to them in the right places around the world, having a spread of knowledge in the right places in your customers.
So, we're well-positioned for it.
Anytime there's a reformulation, there's a challenge, so it does create an effort on our part to respond.
Going forward, we see it as a tailwind though, for us, given the breadth of our product line and application capabilities.
Specifically in the food market.
It comes down to understanding very well, not only what is going on with your direct customers, the large food or small food company, but with consumers.
And then being able to put together a formulation that meets the needs.
So, product differentiation, for us, is less about proprietary technology, intellectual property, such as a patent that might drive more what happens in our Ag business.
It's more about the know-how.
Being able to put a sum of ingredients together that meets a specific need and understanding either color, texture and/or taste issues that might impact the success of that brand.
So, it really comes down to the differentiation around the application and the ingredients we bring as opposed to a proprietary ingredient in the food product itself.
Listen, I don't know what strategy our competitors are operating around.
Their own market push of product, discounts and how rationale they intend to be.
I think what we have made is a decision.
And that is a decision we have made globally.
We believe we are in a situation where the markets are such, and the level of inventory in the channel are such, that you can't guide your activity by what the others are doing.
I think we have a plan in place.
We are working very, very closely in cooperation with our customers who understand our strategy.
We are not going to try to sell in Q1 or Q2 or Q3 a product which is needed in Q4.
And in exchange, we maintain a healthy pricing and terms situation.
And you know, that's where we're going to be focusing.
I believe what we're going to do during this downturn, and until this turns around is, we are not going to work hoping that the overall level of inventory in the market channel is going to go down.
I think it's to tall of an order and too unpredictable.
So, we will be focusing solely on FMC products.
I think the numbers are quite spectacular.
You know I said that many times.
34% sales down in the first-quarter in North America, plus 7% product on the ground.
That is millions of dollars of inventory which are outside of our customer's inventory which they will need to replenish when the markets need it.
And that's the way we are operating.
Our competitors will have to use a strategy which is appropriate for them.
I think the way we look at it, and you know there was a question before, I think it was <UNK> who asked that question on the level of confidence in the market.
I think our strategy, today, allow us to have more visibility in terms of the timing and level of our sales, because we become less dependent upon what the market is doing and rushing to place sales to be safe and those on the shelves.
So, what it does to us is creates more predictability and maybe increase the level of confidence of how the quarters ahead of us are going to be unfolding.
We know which product will be required, usually which technology will be required depending on the season in Q4, Q1 and Q2.
And that's a discussion we have with our customers, and that's the way we our operating, right now.
So it's just giving us a bit more certainty on how things will unfold.
Well, that's all the time we have for the call, today.
I want to thank everyone for joining.
I'll be available for the rest of the day to go through any additional questions.
Again, thank you.
Have a good day.
| 2016_FMC |
2016 | STE | STE
#Sure, <UNK>.
I don't think we are seeing any significant different view of the Life Science Capital business than we have seen before that is order patterns have been fairly consistent and our backlogs are fairly consistent.
It is just when you look at any given quarter, any given month since it tends ---+ it is a small business that comes in relatively large chunks ---+ it tends to be a little bit lumpier than the rest of our business.
So we did have ---+ we've got a couple of nice quarters now in Life Science capital and we have been anticipating that.
We were weak six months or so ago.
People were asking us why we were weak in Life Sciences.
It is basically just the business is fairly steady and we have seen a pickup in our hydrogen peroxide product lines and so we do see that favorably and that is a good profitable product for us.
So that is part of the operating profit, operating margin improvement both the volume coming through the plants as well as the mix to that kind of product line.
But other than that, we see the same.
The other thing that comes through obviously in total in Life Sciences, the GEPCO acquisition we did and that is working just as we expected it to which we expected good performance and they are performing nicely.
So that is pretty much as anticipated as well but it is a nice pick up.
<UNK>, just on a year-to-date basis through the third quarter, Life Sciences capital is up 4%.
So as <UNK> said, we know this is a lumpy business but 4% for the year is good.
Sure.
I will start with North America since that is the one that gets the most attention I suppose.
And we have clearly seen again if you go back, we had a couple of years where we basically said it was flat and then maybe a year or so ago we said things looked like they are picking up and last quarter we said they might be picking up a little better than we thought even or a little more favorable and I think that has continued.
So we are seeing nice trends.
We are not seeing 20% improvements in I will call it long-term outlook but clearly our order rates have been quite strong last quarter quite strong.
This quarter we had a good shipment quarter and yet we still increased the backlog.
So and kind of looking out forward, it still looks pretty similar.
In terms of mix, which we are often asked about, I will call it the replacement business versus the large order business or project business that we have, we kind of saw it move back to kind of the normal levels kind of 70/30, 70% being replacement but we did have some exceptionally, some good strong orders in the month of December that are more project related so our projects were up a bit.
And I don't know the weighted average over the last six months but it had been running pretty much normally and we picked up a little bit in the month of December.
So we will see how that looks.
Looking out forward, our outlook or our pipeline looks pretty normal for us but also continues to stay at the levels that we have been seeing the last little bit so it continues to stay strong.
We do think we are doing nicely in terms of holding our fair share of the business but we also see the other people in our business, the capital business, reporting strong revenues and strong outlook so we know this is somewhat ---+ we think we are doing a nice job but we think the markets also picked up.
Outside the US, we consider EMEA, Europe and we have been weak there, Mainland Europe if you will or Europe as we normally think of it, is not strong but it has not been terrible for us.
EMEA has been very ---+ or the Middle East I should say has been very difficult for us and pretty much everybody I think.
And I think we see that continuing for a while given both the economic uncertainty with oil and then the uncertainty related to some of the geopolitical issues, we are not seeing a strong market down in that part of the world which is significant.
For us Asia-Pacific has picked up, we are less China centric than some other folks so although what China does does affect that area, Asia-Pacific has come back a bit.
So we have seen some back to our normal levels.
We were soft in Asia-Pacific.
And then Latin America conversely has been weak and we see some continued weakness there.
Again, those economies that are based on either minerals or oil are pretty tough and so Brazil, Venezuela and a number of the countries in Latin America we are seeing some weakness.
At a high level I think that is pretty much it.
We want to work on that but I would say a couple of things.
You may remember last quarter you were asking us about R&D being above normal amounts which hurt our operating income and so as we have said before, sometimes R&D comes in lumps and as you are doing a project, your building prototypes whatever, you can see $1 million or $2 million run through pretty quickly.
So some of that is just temporal but the other thing we have to consider is we are increasingly a service business and so we have that recurring revenue so when you apply our R&D spend to our total revenue, it looks much different than our R&D spend to the specific revenue the R&D is applied towards.
So as you might expect, the businesses like US endoscopy that have a high concentration of new products and are very medical device oriented and product development dependent, their R&D spending is much more like what you would see in the other device sectors, in the high single digits, sometimes in the low double-digit kind of numbers depending on what we have going on.
Whereas on the service side, it is effectively zero.
so at least at this time that is how we do it.
We actually do R&D in service but it is service R&D.
We don't capture it in that bucket and that is something actually I do want to think through some and we may be able ---+ we want to think through how we do that.
We may be able to give some guidance on that going forward, we will see.
But to the extent we do not capture it on our books as R&D, it just shows as expense.
Yes, we have forecasted $135 million for the combined company for CapEx for fiscal year 2016.
And then we will provide guidance in 2017 when we have our conference call in April or May.
Yes certainly, <UNK>.
This is Mike.
One of the issues that we definitely have is what we are comparing to.
So our year-over-year comparison as we anniversary the Synergy Health acquisition, our comparisons will get a little bit different and they will shift and as I said earlier, that will cause our revenue to be more sensitive to fluctuations in currency than we are compared to legacy STERIS but also cause our bottom-line to be less sensitive to fluctuations in currency versus legacy STERIS.
So once we get to that point we will have a shift.
That shift has already started.
It is just we don't have a comparison to measure against.
If you look at it on an actual basis, <UNK>, our exposure clearly relates to the UK pound because as we translate the pound base because our second largest operating base and revenue base is in the UK and so any fluctuations to the pound will have an effect on us.
And then the other places where we do businesses outside the US and the UK ---+ of course since we report in dollars doesn't have an effect ---+ outside the UK, the euro, would be a very strong component because we have a good size revenue base there.
And then everything else tends to be more from a manufacturing side of the equation, the cost side.
So we have the Canadian dollar, the Mexican peso are significant in that.
So those four currencies make up the bulk of our differential.
But as Mike said it depends on what you are comparing to.
We have that exposure and actually this has moderated our income exposures.
We are doing forecasting going forward.
When we do our forecasts, say okay, now what is the impact of a change in currencies going forward.
We are more naturally hedged now than we were and so we used to have fairly significant exposure if you will and then we were reverse of what most companies are, we tended to be positive if the dollar strengthened and negative if the dollar shrank.
But that is going to moderate on the bottom line which is the one we care the most about obviously.
<UNK>, just to help you out even further, if you look at our forecast, what we have included in our forecast is based upon forward-looking rates as of December 31, 2015.
What we have baked into our forecast is we have ---+ in the full-year the FX currency rates impact on revenue for the full year.
Year-over-year compared to legacy STERIS will be about $28 million negative to the top line but about $20 million positive to EBIT and that is where the full fiscal year 2016 compared to the full fiscal year 2015 for legacy STERIS.
Hopefully that helps.
That is correct, <UNK>.
Sure.
I will step back a little bit I guess and say you have to remember what the basis of this business is and the basis of this business is the medical device industry, specifically those who have devices that touch the bloodstream so they have to be sterile.
And what we will be doing is locating facilities and growing capacity where we believe the device industry is growing and going.
We were historically if you will unhedged for those businesses that were moving outside the United States and decided to sterilize where they manufacture.
Manufacturers have two choices.
They can manufacture one place, send it to the US and distribution facility and sterilize near the distribution facilities or they can manufacture OUS and sterilize near the manufacturing point and the reverse is true for things that are built in the US and shipped to other places.
So we will locate in or around these centers of manufacturing and/or centers of distribution around the world.
We now have a much better footprint to follow them wherever they go.
So that is number one.
Number two, in terms of technologies as you point out there are two basic technologies, gas and radiation.
We are not overwhelmingly one way or the other on gas versus sterilization.
It depends on the technologies the manufacturers need based on their design and their packaging requirements.
Although we tend to be a bit heavier on the radiation side than we are on the gas side of the equation.
So we are stronger on the radiation side.
In terms of cobalt and e-beam and potentially other forms of radiation, clearly in terms of that we will be watching that and working with the manufacturers to see what their design requirements are and how they want to process.
But it is clear that we have now a much larger footprint in the e-beam side of the business and that was purposeful.
We have grown our footprint in e-beam.
As you know, now we have two new factories that are coming up here in the next few months in the US that have significant e-beam capacity so we are growing our e-beam capacity.
Synergy also has e-beam capacity around the world so STERIS in total now is again much more hedged to cobalt, e-Beam than we were before whereas STERIS was historically almost completely cobalt.
In terms of cobalt supply and pricing as you know, we have intermediate to long-term contracts depending on what you think the long-term is.
Not 30-year contracts but not one-year contracts, for our cobalt supply.
We at this point although we have effectively two potential sources of supply in the world, we are not concerned about our source of supply at this point.
I guess I've got ask a question.
Are you talking mainly about the ST side or mainly about the healthcare side.
I should have just answered one and gone with it.
Just kidding.
On the ST side, it is ---+ we were very strong as was Synergy with the multinationals in this space.
It does give them more opportunity to think about working with us in a more seamless fashion.
So they are happy with that.
We pretty much cover North American and they pretty much covered Europe and Asia so we don't see a requirement for expansion of salesforce based on that.
We think we are well covered.
If anything there might be some modest synergies there but not big numbers, you would never notice either direction.
On the Healthcare side of the business, it is somewhat similar in that Synergy was clearly stronger in the UK market and other places in Europe and they had developed and were developing a sales force in the United States.
We clearly have seen as I mentioned we also as you may recall, IMS had a portion of its business that was also into the sterilization outsourcing of CSDs and so we have been able to put those two groups together as I mentioned and we have seen a reduction in those costs.
We will see an ongoing reduction in those costs and we believe we will be able to do that.
We will be adding in that space but we will be able to do it more efficiently working as one unit than we would have as two.
So we do think there are efficiencies there.
Sure.
I will go back to the S4 and there might be some minor variations but we had a couple of million dollars as I recall buried in the AST business, a little bit more, $4 million, $5 million in HSS business as we now call it or Health Service business as we now call it of cost synergies.
The balance was in for lack of better terms, corporate and back office.
Corporate is a pretty big piece, a CFO, CEO and a couple of senior type executives go a long way on those kind of numbers and then the balance is back office.
The back office will take longer than the others so it has a longer runway.
But that is generally where it is.
Now if I were a betting man, if I look at our history in doing these things, we always have surprises both ways.
Where we I think if anything were probably conservative, would be in the businesses themselves.
If I were a betting man I would bet the businesses outperform.
And sometimes the way we split it in the S4 if we don't know exactly which business it goes into, we leave it in corporate so if I were a betting man, we will see more inside the businesses when we report them out over time either because we didn't know exactly where to put it or because they outperform the numbers that would be our experience from past times.
And then if I were a betting man, the back office ones are always the hardest to get.
We will get them, not hardest difficult, hardest in time because oftentimes we have to change information systems, we have to do things to lean out the processes before we get the benefits of that and so if I were a betting person on balance, we will get whatever we thought we were going to get there but if it were going to be faster or slower I would bet on slower.
In total, I'm very comfortable with what we have out in place.
| 2016_STE |
2016 | CUB | CUB
#So we will see an improvement in the next couple of quarters, which will get us into that range of 10.5% to 11.5%.
I can't give you specifics by quarter.
But the first-quarter was very weak, so we are starting to see this quarter improve, and then we will see the next couple of quarters.
We are seeing most of the improvement, really, in North America.
This is <UNK>.
How are you.
Both of those opportunities ---+ I would say the upgrade to WMATA is worth tens of millions of dollars.
I think the opportunity in Sydney could be much greater than that.
Sydney will likely ---+ it will be over the term of the contract, so we are talking that could be 8 to 10 years on the initial term.
So ---+ this is <UNK>.
Pretty much following what we said on the call back in January, they ---+ as far as sales go, it's very backend-loaded to Q4, more on the GATR side because it's a product shipment business.
The TeraLogics business is very consistent quarter-to-quarter.
So, I would say GATR is a little bit backend-loaded in Q4.
But they are performing, margin and sales-wise, very close to what we thought they would do.
Hi, this is <UNK>.
How are you.
We are very pleased reaching the first hurdle in early April.
The next milestone is, after our fiscal year closes in the beginning of October, we will roll out a lot more functionality of SAP across all of our Defense businesses in the US.
It is then followed by CTS and additional units internationally in the next fiscal year.
So, we are on track for all the milestones.
And I would expect to see efficiencies improvement, particularly in SG&A and supply chain spending, starting to kick in at the end of next fiscal year.
Yes, and especially in Defense Systems.
So, you're really ---+ like last year, because we are going to ship a lot of product systems, so Q4, revenue-wise, in Defense Systems, will ---+ they will ---+ be have a peak in sales and earnings in the Q4.
If you look to last year, I think we made virtually most, if not all, the profits in Defense Systems in Q4.
That's correct.
It's just different shipments in comparison to last year.
You know, we haven't given any guidance on that, so I am going to defer on the question, because we didn't provide any guidance on that.
But it will be something less ---+ a lot less than last year because of the acquisitions and the ERP spend, to give you a little bit of color.
Yes, we didn't have the specifics, but we just gave ---+ the currency that is causing everything is the pound.
The ---+ when we gave our initial guidance, we gave what was the assumed rates for the year.
So, the Australian and the New Zealand are relatively flat or a little bit up from where we were, but it's the pound that is probably down about 10% for the year.
Sure.
That is correct.
So we expect the ---+ this is <UNK>.
We expect the trial to go [N] number of months, and we expect a follow-on to happen towards the end of the calendar year.
We are very hopeful that the design and build portion will have an improvement over the past and will have margin expansion there in Australia.
So, organically, there's three large bids.
I think we only really need to win one or two of those to really kickstart the growth.
So, New York on the MTA bit, we have a KC-46 bid.
As <UNK> mentioned, there is a bunch of large services contracts and Defense Services.
And then Transportation has got Melbourne sitting out there as well.
So it doesn't take winning all those.
It is a combination of a couple of those.
And our growth historic for many, many years has been a combination of organic as well as growth by acquisition, and we intend to follow that path.
Yes, this is <UNK>.
As I mentioned earlier, there are a number of government services or ---+ ground services training opportunities that are matched to our skill set.
And there is a number of them, so if we win at the same rate that we have been winning, there will be growth.
The portfolio reshaping of these larger companies of their services business may make sense for them.
I think the environment continues to be competitive.
But I am heartened by the fact that these opportunities I spoke of are not LPTA.
They are best-value opportunities.
And you know, the margin profile isn't as attractive as the systems business, but the incremental returns on capital are still very high in services.
So, we are able to grow the business and the business is throwing off free cash flows.
So the incremental returns are decent.
In addition to the asset velocity, we also gained customer intimacy.
A lot of the services contracts are in training.
We obviously are in the training systems business, and that flow of information and experimentation is very helpful to our systems business.
I think if you look at other companies, there was not as close a synergy between their services business and their rest of their business.
And in our case, there is.
Yes.
So, all of the contracts ---+ Chicago, Vancouver, Sydney ---+ are profitable now, <UNK>.
And we are getting some monies as we go, kind of an incremental.
On the LCS contract, we are in the middle of negotiating with the customer.
And, as a matter fact, we got some word recently that they are keen on resolving the issues.
So, if we remain savvy, we will be able to get it done this fiscal year.
And we are working towards that.
Thanks for joining us on the call today.
We are excited about our future and thank you very much for your interest and support in our great Company, as we work hard to create greater value.
| 2016_CUB |
2018 | LNTH | LNTH
#Thank you, <UNK>, and good afternoon, everyone.
Q1 was a strong start to the year for us, with effective and continuous execution on our investment programs and corporate growth strategy.
We met the top end of our first order ---+ first quarter guidance for total revenue and exceeded our guidance for adjusted EBITDA.
Importantly, the brief Moly supply interruption we experienced with one supplier, NTP in South Africa, is behind us.
The NTP processing facility has been back online since mid-February, and we began receiving Moly supply from them at that time.
Although the disruption did temporarily weigh on revenue for our TechneLite generators, the impact was ultimately in line with our initial expectations, and we currently do not expect any further Moly shortages that would have a material effect on our 2018 results.
From a big-picture perspective, we see this year as the beginning of an important period of strategic investment in our business and believe the right mix of cash flow generation, internal investment and acquisition or in-licensing activity will be key to achieving our long-term growth objectives.
Our 3-pronged corporate growth strategy is to: one, enhance the growth trajectory and profitability of our core microbubble franchise; two, augment and invest in our pipeline with focus on emerging technologies; and three, pursue complementary external opportunities that fit with our objective to deliver long-term sustainable growth and profitability.
I'll provide an update on each area of our corporate growth strategy after Jack reviews our Q1 numbers in detail.
Jack.
Thanks, <UNK> <UNK>, and good afternoon, everyone.
At the onset, let me remind you that the tables included in today's press release include a reconciliation of our GAAP results to the as-adjusted non-GAAP performance I'll be covering with you today.
We're excited, of course, to have achieved the high end of our revenue guidance while exceeding guidance for adjusted EBITDA, which reflected fundamentally strong performance in Q1.
The outperformance of adjusted EBITDA stemmed from a combination of strong cost management and to a lesser extent, timing of certain R&D and promotional expenses that we will incur during the remainder of 2018.
It is important to note that the timing of that spend will have no impact on our ability to achieve planned overall timelines of our clinical development programs.
Diving into the numbers and starting from the top line, Lantheus delivered $82.6 million in worldwide revenue for the first quarter of 2018, an increase of 1.6% compared to the first quarter of 2017.
We continued our strong DEFINITY performance with worldwide revenues totaling $44.7 million for the quarter, an increase of 18.4% over last year, as we continued to drive the appropriate use of contrast in echo studies.
TechneLite revenue in the first quarter was $21.4 million, a decrease of 20% over the prior year, which, as <UNK> <UNK> mentioned, was primarily a result of the temporary disruption in Moly supply.
Xenon revenue for the quarter was $7.9 million compared to $8.1 million in the first quarter of 2017.
Finally, revenue from our Other Product category was $8.7 million in the first quarter compared to $8.8 million 1 year ago.
Moving below the revenue line, our first quarter 2018 gross profit margin, excluding technology transfer activities, which we refer to in our reconciliations as new manufacturing cost, totaled 51.6%, an increase of 175 basis points on a year-over-year basis.
This improvement reflects the increased contribution of DEFINITY to our total revenue mix.
Operating expenses were $27.2 million for the quarter, a decrease of $700,000 from Q1 of last year.
Operating income for the first quarter was $15.1 million, an increase of $3.2 million on a year-over-year basis.
Adjusted operating income for the first quarter of 2018 decreased by $700,000 or 4% compared to the prior year period, which included accelerated depreciation and debt refinancing and operating costs.
The decrease also reflects the increased investment in our strategic programs.
Moving below operating income, first quarter interest expense totaled $4.1 million, a 25% improvement over the same period 1 year ago, reflecting the lower interest rate obtained through our 2017 refinancing activities.
Net income for the first quarter of 2018 was $8.2 million or $0.21 per diluted share compared to $4.1 million or $0.11 per diluted share for the first quarter of 2017.
Adjusted net income for the first quarter of 2018 was relatively flat compared to the prior year period.
Moving on to our quarter-end balance sheet.
As of March 31, 2018, we had cash and cash equivalents totaling $73.7 million.
Borrowing capacity under our revolving credit facility remained at $75 million, making our total liquidity, including cash on hand, $148.7 million.
This provides substantial support for our operating and investment needs and represents a 28% improvement compared with the same period 1 year ago.
First quarter 2018 operating cash flow totaled $700,000 in cash used compared to $5.5 million in cash generated for the first quarter of 2017, substantially driven by a purposeful inventory build of DEFINITY.
Capital expenditures for the first quarter of 2018 were $2.1 million compared to $4.9 million in the first quarter of 2017.
I'll now turn to our guidance for both the upcoming quarter and the full year.
For the second quarter of 2018, we anticipate total revenue in the range of $85 million to $90 million and adjusted EBITDA in the range of $20 million to $23 million.
For the year, we are maintaining our guidance for revenue in the range of $337 million to $342 million, and for adjusted EBITDA, in the range of $85 million to $90 million.
We are pleased with our performance with both revenue and adjusted EBITDA for the first quarter, and we will continue to reevaluate our guidance as we monitor our positive operating trends.
With that, I will turn the call back over to <UNK> <UNK>.
Thank you, Jack.
Let's start by reviewing the progress under our 3-pronged corporate growth strategy, which is focused on enhancing the growth trajectory and profitability of our core microbubble franchise, augmenting and investing in our pipeline with focus on emerging technologies and pursuing external opportunities that fit with our objective to deliver long-term, sustainable growth and profitability.
As the foundation of our microbubble franchise, DEFINITY is the leading echo contrast agent worldwide.
We have patents covering certain facets of DEFINITY through the year 2037, and our research, development and patent work continues.
Moreover, the use of microbubbles in therapeutic and diagnostic applications is gaining more interest in the market, and we believe it will emerge as a valuable platform for increased uses.
With the expertise we have built in microbubble technology, our goal is to lead in these growing markets.
I shared previously, we believe a left ventricular ejection fraction, or LVEF, indication for DEFINITY would allow for even greater penetration in the echo market.
LVEF is an important measurement of heart function, and it is used as a tool for clinicians to identify the presence of certain diseases and conditions that decrease the pumping efficiency of the heart.
We believe DEFINITY-enhanced echocardiography produces LVEF measurements that are superior to unenhanced echocardiography.
And if an LVEF indication is approved, the use of DEFINITY would expand to a large patient population that would benefit from more accurate measurements.
In terms of market size, we believe that a new LVEF indication for DEFINITY could approximately double the addressable echo patient population in which DEFINITY could be used.
Approval would also provide DEFINITY with 3 years of marketing exclusivity for that indication.
We are working with FDA on a Special Protocol Assessment, or SPA, for our LVEF trial design and anticipate completing that process in the first half of this year.
We will then conduct 2 identical clinical trials, which, together, would have a total enrollment of about 300 patients.
We will update you as our clinical trials progress.
Importantly, an SPA represents the agency's preliminary agreement that our planned Phase III design is appropriate to form the basis of an efficacy claim.
It is a critical, validating milestone and will provide regulatory clarity and enable us to submit a new drug application if the trial's primary endpoint is achieved.
Additionally, we are leveraging our in-house expertise by building microbubble manufacturing capabilities at our campus in Billerica.
This investment will help ensure reliable supply by creating supply chain redundancy, while at the same time, improving our cost of goods sold and enhancing gross margin.
In terms of our PET product pipeline, we've completed the agreed-upon technology transfer and other preparatory activities for the second Phase III trials, Flurpiridaz F 18, which is the focus of our collaboration and license agreement with GE Healthcare.
GE is executing the Phase III trial and has indicated that patient recruitment will begin in the first half of 2018.
This perspective open-label international multicenter trial of Flurpiridaz F 18 for PET MPI will enroll up to 650 participants and has a target completion date in the second half of 2020.
The primary outcome measure for this trial is the diagnostic efficacy of Flurpiridaz F 18 MPI in the detection of significant coronary artery disease.
Secondary analyses will be performed in patients of special clinical interest, including women and obese and diabetic patients, where current spec MPI technologies have demonstrated limitations in their diagnostic performance.
Next up is an update on our Phase III LMI 1195 program.
We believe 1195, a Fluorine-18 based PET agent represents a first-in-class and useful diagnostic tool for a population of patients at risk for sudden cardiac death.
Nuclear imaging provides a unique tool capable of measuring changes at the molecular level, including cardiac function of the norepinephrine transporter, or NET, in a noninvasive and repeatable manner.
We developed 1195 to target the NET, and we are encouraged by data obtained from collaborations with academic centers, which have allowed us to progress the 1190 (sic) [1195] program to this stage.
Internationally, our DEFINITY China program with Double-Crane continues to advance, with patient enrollment complete for the cardiac and pharmacokinetic studies and enrollment in the kidney and liver studies ongoing.
We project submitting an application for an Import Drug License to the China FDA in the second half of 2018.
Addressing the third element of our revenue and profitability growth strategy, pursuit of external opportunities, we continue top-line assessments of a large number of opportunities.
From a strategic standpoint, we look for opportunities that fit within or complement our current capabilities, and that would address significant unmet needs in markets and patient settings in which we are already successful.
With that in mind, we continue to evaluate the broader imaging landscape and therapeutic adjacencies as key areas for potential expansion through M&A and in-licensing.
From a financial perspective, we are mainly focused on assets that are or can soon be accretive to revenue and create the ability to improve our profit margins and cash flow.
We are open to a broad range of deal sizes and structures with an eye towards strategic fit and assets that are already commercial or close to commercialization that will then be accretive to earnings within a short time horizon.
We expect to capitalize on our collective expertise and create positive synergies that will help to ensure our commercial success.
In closing, as we implement our 3-pronged corporate growth strategy, we are focused on internal investments and acquisition and in-licensing opportunities that, we believe, in Lantheus' hands will deliver excellent returns on our investments.
With that, Jack and I are now available to take your questions.
Operator.
Happy to talk about that, Raj.
I do want to clarify, though, the comment you made about adjusted EBITDA being down year-over-year.
While I recognize that's true, if you include the milestone payment made to us by GE Healthcare in 2017.
I think it's fair to subtract that from the year-over-year comparison.
And when you do that, essentially, our EBITDA is tracking with our guidance to be equal to 2017.
So just wanted to clarify, that's to start.
Yes, well, it still applies but Raj, I will say, and this is what we talked about in Q4 as well, that is a purposeful decision we've taken because we're investing back in our business with some of the programs that I've spoken about.
And we think it's the right time, and we also think it's the right investment because it ---+ we feel it services our future in a way that keeps us not only sustainable but has us growing and offers us the ability to grow in future years.
And that's been our decision, invest to grow, and it starts in '18.
You're right.
I think there was some response to the stock after we offered that message.
But as you say, also, we've seen the stock recover, and we hope that with the good earnings that we reported today and the progress we've made on our programs that people will continue to believe in the stock and what we're doing to run the company.
And it doesn't represent the ---+ all of the EBITDA overperformance in Q1.
As Jack said, there's a sizable chunk of that that is related directly to our efforts in management for cost management.
Sure.
So Raj, it is one of my primary attention ---+ areas of attention that I personally attend to, and there're several prongs to our strategy here.
First and foremost, we believe we have the right to protect the intellectual property that we've developed for DEFINITY.
And so we do have ongoing investment in work that we see as having been, especially recently, very successful.
We had another Orange Book-listed patent awarded in October of 2017, and more recently, we had another patent listed with the Patent Office.
It's not an Orange Book-listable patent, but it is another patent that continues to define what we see as the unique specifications of DEFINITY that are required to deliver the efficacy and the safety that we've been delivering for 17 years with this product.
And our efforts are not done there.
I think our decision to invest in an additional indication for DEFINITY is partly driven by our belief that we can rightfully defend our product, and we think it's a product that continues to serve the market from a patient-value perspective.
The LVEF indication will double the addressable patient population that we currently address with DEFINITY, and we think it serves a very important value-added diagnostic tool for the physicians who will use it.
I'll never say never because I can't.
But the ---+ our first patent is set to expire in mid-2019, and that's a patent that is our method-of-use patent, Orange Book-listed.
As such, that is a patent that currently, were there to be other filers, would require a paragraph 4 certification to us.
And I can say we have received no paragraph 4 certification.
Yes, <UNK>, it's Jack.
Let me start out and kind of give you an overall view of the size and then I'll ask <UNK> <UNK> to comment on anything additional.
So from an overall size perspective, as we've talked about on a number of quarters, we've really worked to put ourselves in a position that we feel, from our existing balance sheet right now, we're in a strong position for a midsized acquisition.
If you kind of think about our cash position has been hovering in the mid-70s, the revolver of that we haven't touched has remained at about $75 million.
And then we are in a good leverage position.
So as we look at our first acquisition, we recognize the criticalness of hitting a good one and making sure it makes sense, and we can absorb it.
And so I think we would be looking at probably not a significantly large acquisition that would cause us to lever up immediately, but something that we can probably handle within our existing balance sheet with, perhaps, some expansion of our debt.
Having said that, we will, again, as <UNK> <UNK> said, we would never say never, and we are carefully evaluating each and every opportunity that does present itself.
I'll just add, <UNK>, because you asked about any particular examples of things we're interested in.
And there are several, and we're looking at them.
Two areas really.
One is, we have a very well-demonstrated history of success in being able to supply into hospital environments for patient care settings, unique patient-ready dosing that aids either in diagnosis, or sometimes, in guiding intervention for that patient.
Right now, we are focused on the echocardiography lab and the nuclear medicine imaging department.
But there're many other areas inside the hospital and in adjacent hospital settings, such as hospital outpatient centers or surgery centers, where those types of activities are also going on.
And we are very interested in them, because we have, as I said, we've kind of really understand how to sell into that environment, and we have all of our learnings from DEFINITY to replicate that would allow us to, we believe, to be successful there.
So that's one area.
And that includes currently commercialized assets that are already out there.
The other area that I referred to is microbubbles.
As ---+ if you look at the literature, what you see is that the use of microbubbles is expanding beyond simply as an imaging agent.
They have the capability to be carriers and to be interventional in and of themselves in certain medical settings.
And when you look at the possibilities of how they can be used and the folks who're looking at that, the DEFINITY bubble rises to the top as approvement in bubble not only by its size but by its stability and by its kind of noninvasive ease of administration.
And so those are some partnering efforts that we are looking at to ensure that we stay on the forefront of how microbubbles are being used.
And that's really all I can offer now, but I think it's offered some clarity into the main areas of interest that we have.
So this is an on-site project.
We're using an existing building, so we don't have actual groundbreaking.
We're going to do a fake groundbreaking with a pile of dirt.
But it is a plan that has already been discussed with and presented to the FDA so that we are ensuring that we're within all their guidances for what finished has to look like.
And so it is a well thought-out process to get to done on what's done needs to look like.
That ---+ our fake groundbreaking is actually next week, and then as we continue to bring in different assets and prepare the building we're putting it in, we'll see continual progress over the next 18 months or so.
And I'll be happy to update on the calls with obvious milestones.
<UNK>, it's Jack.
I'll take that.
I don't know if I'd call it reverse.
But I would say that from a Puerto Rico perspective, we are back up and ---+ we never really had that much of impact as you ---+ I'm not sure we quoted that exact number, but it was a very minimal number in Q4, and we are now back and fully operational.
Obviously, the island still continues to get back to its full operations.
But from our ability to supply the hospitals, we've been back and running since probably end of last year.
In terms of what, <UNK>.
I didn't understand the ---+ that word.
Selling days.
Selling days.
I'm sorry, <UNK>, I don't have that in front of me.
Jack, you have it.
Yes, I do.
And the answer is no.
There was no difference in the change of Q1 last year over Q1 of this year.
In Q1 of ---+ in Q4 of last year, we did pick up a day sequentially but not a day year-over-year.
Look, I think there're 2 kinds of market issues that I'll ---+ or opportunities that I'll speak to.
And then I'll let Jack get finer on the actual dollars associated with them.
But what ---+ one is, we continue to grow the DEFINITY market.
So that's a product that you've seen the kind of growth that we've posted year-over-year for the last several years, and we intend to continue that growth with the investments that we make in appropriate medical use contrast with echo.
So that's 1 area.
And the other area is, we are continuously looking for ways to expand the revenue potential for our nuclear product.
It's not as evident or is available because it is a fairly mature market and most sales are contracted.
But we do take any opportunity we can to opportunistically supply customers with contracted ---+ or levels of sales that are above their contracted minimum.
So I don't know, Jack, if you want to add on the dollars.
No.
Yes.
No, we have not.
So no, <UNK>, we did not quantify.
I think Jack offered some qualitative comments in our last call but not quantity.
Yes, I would say, the only thing I'd add to that, <UNK>, if you think of kind of the consensus that was developed by the analysts versus where we came in, in our guidance, it was probably $2 million to $3 million light.
I'm not saying that's the number, but I am saying it's an immaterial number to our overall revenue.
So there are 2 different things, <UNK>.
The 3-years exclusivity is related to the indication itself.
And so it just means that other products without that indication can't market to that indication during that 3-year period, unless they do the clinical work themselves and are awarded the indication.
The patent protection protects all uses of DEFINITY for all indications.
And yes, we are absolutely still vested in and confident about the work we're doing for the patent stage related to DEFINITY.
The ---+ again, the patents go to the molecule, the indication.
So the answer is yes to both, but they are separate.
The marketing exclusivity only pertains to the specific indication.
Thank you.
| 2018_LNTH |
2017 | BHE | BHE
#Thank you, operator, and thanks, everyone, for joining us today for Benchmark's Second Quarter 2017 Earnings Call.
With me this afternoon, I have <UNK> <UNK>, CEO and President; and Don <UNK>, CFO.
<UNK> will provide introductory comments, and Don will provide a detailed review of our second quarter financial results and third quarter outlook.
We will conclude our call with a Q&A session.
After the market close today, we issued an earnings release highlighting our financial performance for the second quarter and we have prepared a presentation that we will reference on this call.
The press release and presentation are available online under the Investor Relations section of our website at www.bench.com.
This call is being webcast live, and a replay will be available online following the call.
Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation.
During our call, we will discuss forward-looking information.
As a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties described in our press release and SEC filings.
Actual results may differ materially from these statements, and Benchmark undertakes no obligation to update any forward-looking statements.
The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix of the presentation.
With that, I will now turn the call over to our CEO, <UNK> <UNK>.
Thank you, <UNK>, and thank you for joining our second quarter earnings call.
I am very pleased with our performance for the second quarter, where once again, we met or exceeded all of our commitments.
Revenue for the quarter was $617 million, up 6% year-on-year.
This is the second consecutive quarter of year-on-year growth.
And as we look at the drivers of that growth, it was really fueled by our Test & Instrumentation sector, where our broad engagements with semiconductor capital equipment manufacturers is delivering handsome year-on-year growth.
We also saw a good in our Aerospace and Defense sector, where we had broad growth with a number of existing accounts.
And we also saw computing once again grow on a year-on-year basis, primarily due to our engagements in the storage arena.
Gross margins came in at 9.4%, a 30 basis point year-on-year improvement.
Our GAAP margins were 4.1%, again quarter-on-quarter improvement.
And we had EPS of $0.38, a $0.03 improvement year-over-year and 4% (sic) [$0.04] on a quarter-on-quarter basis.
If you look to our capital ---+ working capital and, more importantly, our cash conversion cycle days, the company did very well this quarter, posting 65 days of cash cycle days.
That's below our anticipated target of 70 days and both a quarter-on-quarter and year-on-year improvement.
Result of that is that we generated $15 million of cash from operations.
That brings us to $93 million year-to-date.
If you remember correctly, we guided between $125 million and $150 million for the full year.
So we are well on our way to meeting that objective.
And finally, our ROIC was 9.5%.
That's a 50 basis point quarter-over-quarter improvement, and we anticipate further improvements in our ROIC in the third quarter.
If you turn to Slide 5.
As we have said in the past, revenue growth is essential for us to achieve our objectives, and the key to revenue growth is obviously bookings growth.
And we posted a goal of $150 million of bookings by the second half of this year.
This quarter, we posted $142 million of bookings, which is slightly below that second half goal, and we're extremely pleased with the progress we're making.
Probably what's more important is the types of bookings we're enjoying.
And as you can see this quarter, almost 99% of all our bookings are in our higher value segments.
And what is particularly encouraging to me is that the distribution is relatively even between our A&D segments, our Medical segments and our Industrial segments.
And I'd like to give you a little color as to what some of these wins were.
So in Industrial, we had 2 new customers award us businesses this quarter: one in the industrial robotics space; the other having to do with an optical recognition application used in industrial products.
In Medical, we had 2 new customers as well: one for infant health monitoring; the other for medication dosage monitoring.
In A&D, we saw a broad growth in bookings from a variety of existing customers in situational awareness platforms, munitions, communications and avionics systems.
And finally, we saw in our Test & Instrumentation good growth again with our semi-cap customers.
So I'm encouraged by this progress and what it means going forward.
If we turn to the next slide.
As we've said in the past, our goal is to drive revenue growth at the right level and mix of profitability.
And to improve our level of execution and speed, we outlined 3 initiatives in previous calls to allow us to do that: the first was to optimize our network; the second was to implement our market segment sales organization; and the third was to expand our engineering solutions and capabilities.
I'd like to give you a brief update on these 3 initiatives.
First, if you remember in our last call, we announced the relocation of our headquarters to Arizona and the consolidation of the corporate staff.
As you recall, prior to this, Benchmark was a virtual organization with the majority of the executive teams spread around the country and the corporate staffs dispersed as well.
The objective of moving and consolidating them all to Arizona was to get better efficiency, better rigor of decision-making and speed.
I am pleased to report that the relocation will be substantially complete by the end of the third quarter.
Today, all my direct reports are in Arizona, and as we speak, the corporate staffs are being relocated.
As part of this relocation, Jon King, who has been our EVP of Operations and has been with Benchmark for over 20 years, has decided not to relocate and will be transitioning to another position and brooding to retire.
I want to thank Jon for all his many contributions to the company over the past 20 years.
He will be sorely missed.
On Monday, we announced that Mike Buseman, an industry veteran, will be joining us in early August replacing Jon as EVP of Operations.
Mike will focus on accelerating our initiatives with regard to operational excellence and customer experience, and we're extremely excited to have Mike join Benchmark.
With regards to our market-sector sales organization, we have been focused on hiring sector-knowledgeable, business-developed personnel specifically to accelerate our hunting activities.
We are substantially complete in this area.
Coupling this group with our existing account management, operations teams as well as engineering leads should position us for future bookings growth in the future.
It has been our fundamental belief that a robust engineering set of solutions yields higher-value manufacturing opportunities.
And I am pleased by the progress we are making in extending our offerings in the engineering area.
And what I'd like to do today is give you a little color as to some of the activities we're embarking on that and the progress we're making.
In the Medical arena, we are investing in a range of biomedical technologies, including biometric sensing, precise fluid metering and fluid management, the goal of which is to drive growth in specific target applications in the area of remote patient monitoring, infusion pumps and in vitro diagnostic applications.
At our last earnings call, we announced as part of our relocation in Arizona that we would be creating 2 new design centers.
One was a design center sole-focused on IoT applications.
The objective of this design center is to develop an interactive IoT system.
And our goal is to provide a full situational awareness platform from centers to gateways, which allows customers to customize their requirements to provide a competitive time-to-market advantage for IoT and machine-to-machine applications.
We have the majority of these building blocks today, and the objective of this group in Phoenix to integrate them into a holistic platform, a reference platform if you will, for application and solution developers.
We're making good progress in integrating this and staffing our design center in Phoenix, and I'm extremely excited about the potential.
In addition to the IoT design center, we also announced we would have a rugged RF and high-speed design center as well.
Here, we are expanding or leveraging the capabilities of our current large filter business, and we'll be expanding our RF component lines, developing modules and integrated microwave assemblies as well as leveraging high-speed circuit design in RF fabrication.
All of these are targeted to provide more complete solutions to our telco and advanced aerospace and defense markets.
Good progress has been made in the staffing and establishment of this design center.
On future calls, we will provide you more color in some of the areas expressly that we believe will drive future revenue growth and, more importantly, higher value segment penetration.
And as I close, I'd like to just turn you to the next slide, which is Slide 7.
If you remember correctly, we previously stated our targeted business model, which was to get to non-GAAP operating margins of in excess of 5.5% and ROIC in excess of 12%.
Earlier this year, we provided waypoints or milestones to track our progress, and I'd like to give you an update as to that progress as I stand here now.
On bookings, as we said, our second half objective was to be at or above $150 million per quarter.
As we said earlier, we are closing on that gap with ---+ based on our second quarter performance.
Revenue mix, we expected that we'd be at greater than 65% of our revenue mix in the second quarter in high-value markets.
We are hovering around that capability today and expect to be there just slightly above it in the second half.
Our gross margins are 10 basis points away from our waypoint target, and our SG&A is 20 basis points above where we should be.
Now obviously, SG&A is dependent on revenue growth, but we believe we have a shot to drive to both of those.
On long-term profit per square foot, which I believe is a metric of what ROIC will be going forward, we originally had a waypoint of $32 a quarter.
That was based on a point-in-time metric.
And in full disclosure, we were previously tracking LTM.
So in order to make it apples-to-apples, we have modified the waypoint to an LTM waypoint at now $29.
And as you can see from the chart, we're within $2 per square foot striking range for the second half waypoint.
So all in all, a good quarter, making progress across all fronts.
I want to thank all the employees of Benchmark for all their hard work they've had.
Now I'd like now ---+ like to now turn over to Don to give you more color on the financials.
Thank you, <UNK>.
Thanks for everybody for joining today's call.
We're going to start on Slide 9, and I'll provide a quick recap of our second quarter income statement.
Our revenues were $617 million, which exceeded the high end of our guidance, and we're up 6% year-over-year, again, which is the second straight year ---+ second straight quarter of year-over-year growth.
In the second quarter, our GAAP ---+ our non-GAAP operating margin was 4.1%, which increased from the first quarter, driven by our higher revenues.
Our non-GAAP EPS of $0.38 was above the high end of our guidance of $0.31 to $0.35 and again primarily really driven by better absorption and higher-than-expected revenues.
We have a couple of items that are included on our GAAP EPS numbers of $0.34.
We have $1.5 million of restructuring and other costs.
We also had $700,000 of recovery from the sale of inventory that we had written down in the first quarter due to a customer insolvency.
For the quarter, our ROIC was 9.5%, up 50 basis points from the last quarter, and again, our long-term target is 12%.
Now let's turn to Slide 10, and I'll give you a quarterly ---+ review our quarterly results by market sector.
Industrial revenues for the quarter were up 5% quarter-over-quarter due to increased demand from our customers.
Industrial revenues were down 14% year-over-year, primarily due to softness across several of our top customers.
On A&D, revenues were down 4% quarter-over-quarter due to demand mix and qualification issues.
A&D revenues grew 16% year-over-year, driven by increased demand ---+ defense demand.
Our Medical revenues were flat quarter-over-quarter and down 6% year-over-year from lower demand across several of our top customers.
On Test & Instrumentation, our revenues grew 16% quarter-over-quarter and 47% year-over-year from strong demand in our precision machining business, serving the semi-cap market.
In summary, our higher-value markets represented 65% of our quarterly revenues.
Overall, the higher-value sectors grew 4% sequentially and year-over-year, which is still below our overall 10% target.
Strength in Test & Instrumentation did not offset the headwinds we saw in Industrial and Medical sectors.
Now turning to our traditional markets.
Computing was up 29% year-over-year, driven by growth from our existing storage and new security customers.
Telco was down 12% year-over-year, primarily due to declines in demand for optical and broadcast products.
Our traditional markets, which represented 35% of our second quarter revenues, were up 11% from last year and 20% from the first quarter.
Our top 10 customers for the quarter represented 45% of our sales.
Let's turn to Slide 11 for a discussion of our quarterly business trends.
Again, we had a very good quarter.
Gross margins for the quarter were 9.4% and improved 30 basis points year-over-year based on higher revenues and better mix.
Our non-GAAP operating margins were 30 basis points up from the last quarter due to better absorption and higher revenues and down 10% ---+ 10 basis points from last year due to additional SG&A cost.
Beyond the $1.5 million in restructuring for Q2, we do expect to incur additional restructuring charges of approximately $1.5 million in the third quarter.
Now please turn to Slide 13, where I will provide a few updates on cash flow and working capital.
We generated $15 million in cash from operations for the quarter.
Free cash flows were a use of $4 million for the second quarter.
Our cash balance was $749 million at the end of the quarter, with $92 million available in the U.S. Our inventory at the end of the quarter was $416 million, an increase of $12 million from the previous quarter.
Our accounts receivable was $392 million, an increase of $11 million from March 31.
And our accounts payables were flat quarter-over-quarter.
Now let's turn to Slide 14, where we'll look at our cash conversion cycle.
We improved our cycle day targets by 2 days, ending the quarter at 65 days.
Again, this is an 18-day overall improvement compared to the second quarter of last year.
Just one other note I want to make: we are including our customer deposits, as we mentioned last quarter.
Over the last year, we've been focusing on increasing these deposits to improve our working capital performance, and these deposits have become more meaningful.
So we now report them in determining our cash conversion cycle performance.
Let's turn to Slide 15 to review our third quarter guidance.
We expect revenues to range from $575 million to $595 million, our non-GAAP diluted earnings per share expected to range from $0.32 to $0.36.
Implied in this guidance is a 3.7% to 4.0% operating margin range.
For modeling information for the third quarter, let's turn to Slide 16.
Overall, we expect Industrial revenues to be up low single digits in Q3 based on modest strength from our robotics and automation customers.
A&D is expected to be up mid-single digits in Q3 based on increased demand across multiple platforms and programs primarily in communication and munitions.
We expect Medical revenues to be up about 10%, with the increase in demand across a number of existing and recently launched programs.
For Test & Instrumentation, after an exceptionally strong demand we saw in the past 2 quarters, we expect that demand to moderate somewhat in Q3, and we expect that to be down about 10%.
Turning to traditional markets.
Computing revenues will be down about 20% after an exceptionally strong demand for storage and security-related products in the second quarter as well as memory component shortages constraining higher demand.
And finally, telco revenue should be down greater than 15% due to continued weak demand from our optical and broad-based ---+ broadband customers.
Interest expense is expected to be $2.3 million, and we expect the effective tax rate to range between 19% to 20%.
Expected weighted average shares for the Q3 are expected to be 50.5 million.
As <UNK> stated earlier, we had a very good quarter and a great first half of the year, and we look forward to providing you an update on our Q3 results in October.
And with that, operator, please open the line for Q&A.
Okay, Steve.
This is <UNK>.
Let's take Medical first.
I mean, obviously, Medical revenue has not been growing as we had hoped it to be.
But clearly, Medical is a function of ---+ kind of the programs you have and where they are with regard to FDA certification and, therefore, their ability to ramp.
So we believe that we'll see growth then in the third quarter primarily because some of the programs which have been waiting FDA approval like we expect to begin to ramp, and as they do so, it will drive additional revenue growth.
So the Medical space is an interesting one because you have to have a lot of bets on the table.
It takes a long time from a booking to a revenue realization.
And depending on the level of FDA certification required, it is elongated.
So that's why we are so driven to get as many different types of technologies and capabilities out there to get higher bookings in the Medical space because you need to have a lot of chips on the table if you're going to get some wins.
And that's how we view the Medical space.
In Industrial ---+ look, Industrial, our products or our engagements are probably more limited, as we said before, in process control and energy.
And one of the things we have to do is diversify our engagements in Industrial.
We'd have more end-market diversification to allow us to continue to grow even when you have different market oscillations in end markets.
So hopefully, that answers your question.
So I'm not sure we've talked about it at length.
We have a filter business that does high-end filters, right.
And so as we look at future growth and demand in aerospace and telco markets, what is going to be really important going forward is high signal integrity as it relates to the move to 5G for telco and in the area of defense communications and EM.
Now we believe we have capabilities at both Lark as well as other parts of the company that if we put them ---+ bring them together, we can serve these customers quite well and we'll grow with that.
And so we are just concentrating our efforts to expand and start with more RF components, and we'll bridge into modules and the like.
And I think this will be a natural extension of our RF capabilities, where we marry the spare capabilities previously in different parts of the company into one and we give a higher-value proposition to our customers.
And the world of 5G will be upon us.
And as that happens in 2020, we have to position to help our customers to realize it.
Well, <UNK>, look I think that ---+ we always said '17 is a transition year.
And I'm pleased that we've seen revenue growth in the first 2 quarters of the year.
Now the third quarter is normally down sequentially from the second, and that's embedded in our guidance.
Now even with that, I believe you will see, depending on where we are in that range, year-on-year growth.
It may not be as much as our previous 2 quarters, but I know that in the mid to the high (inaudible) flat to positive year-on-year growth.
Right.
So look, when you put on additional go-to-market resources, right, depending on their level of understanding of the space and the Rolodex in the space, you can expect it's going to take them a couple of quarters before they even started getting their first booking.
And from the time you get a booking to the time you realize the revenue, depending on the sector, it could be anywhere from 90 days, and probably the easiest ones, which would be compute and telco, to up to 180 to 240 days for Medical.
So that's why it's so important to prime this pump first with people to drive bookings that will drive revenue.
And I wish it was a more shorter cycle but it isn't in our industry.
So <UNK>, look, I think the ---+ Don made the comment, and I think it really references NAND memory.
And if you look at the market for NAND memory today, it is pretty tight.
And in fact, unless you have reserve capacity, the lead times are really elongated.
Now NAND memory is using a lot of computing products, and so whether or not you get enough allocation and the timing of that allocation to be put in the product and realized in terms of revenue is the real issue.
So that was really the reference to component shortages.
Well, look I mean, at the end of the day, it will impact certain areas in the storage arena, where we have a lot of exposure to storage.
So could we have shipped more product in the second quarter if we had more supplies and components.
The answer is yes.
It's a watch item for us as we go through the second half of the year and specifically in the third quarter.
And I think if you look at the entire supply chain in terms of a variety of different components, it's getting tighter across the board.
And this is a watch item for us.
And we're being very, very circumspect as to what it means to our customers and what it means to reserve and capacity (sic) [reserve capacity].
It's a function of where it is.
So obviously, the stuff that's in Medical and A&D, the time to realization is a little longer in terms of revenue.
For the Medical products, because of where they stand with current FDA registration ---+ I kind of spoke about that earlier.
In the A&D products, it is kind of where they are with regard to funding levels from the government, right, and the like.
So those 2 sectors will probably have the longest booking-to-revenue realization time frame.
In the ---+ in some of the other areas, especially in Industrial, we can probably get it sooner.
And in the Test & Instrumentation area, we can get it sooner.
So it's a mix.
That's why as we look at how we have to hunt and how we have to put our ---+ get our bookings to achieve the target level, it's not so much the aggregate that's important.
It's the composition that is because we have to have enough composition so that we're not rotating ---+ over-rotating the revenue 2 years away.
And that is a big change in focus that we have in the company today: how to make sure we have balanced bookings that translates to revenue growth.
So you have to understand the realizations for each booking sector.
A long-winded answer, I apologize.
Look, I ---+ we're just going to get ---+ our focus is on the third quarter.
I'm hopeful that the fourth quarter follows seasonal pattern.
No.
Look, Mitch, not really.
I mean, it's our job to give you our most balanced view what could happen, and that's what we do.
Now I will tell you, right, as you expect any operational executive to do, we are driving our organization to always deliver at the high end or better.
And this is where execution becomes important.
As long as the market isn't ---+ was not blowing in your face, if you can execute, you should do better.
And so we get a balanced view on guidance, but I look at how well the company performs or how well we execute.
And that execution is how well we do on chasing parts to get to customer demand.
It's how we can reduce inventory.
It's how we can do those things that drive margin and asset velocity.
And if we do our job well, we should do better than we think we can do.
Not always the case, but if we do it well, we should do better than we think we can do.
Well, first off, we have ---+ well, we enjoy a broad set of engagements with a variety of semi-cap customers.
So that is, I think, a strength of the company.
And as you know, semi-cap demand is a function of end market demands, right, both in a variety of traditional technologies and new technologies.
And I think that if we were to step back and look at overall semi-cap demand based on the growth of data center requirements for content delivery and deep analytics, LCD television demand, memory demand and a whole variety of other things, the secular growth rate for that industry is probably better than it has been in the past.
And so while you might get a little bit of oscillation quarter-on-quarter, on balance, I think that industry will continue to grow faster than traditional norms over the next years ---+ couple of years.
And we are extremely pleased to be engaged with customers that are growing.
Yes.
Thank you all for joining us on our call today, and we will be available post this conference call for follow-up questions today and tomorrow.
Please don't hesitate to reach out.
Thank you, and have a great day.
| 2017_BHE |
2015 | ABMD | ABMD
#I think it's generally going to be a relatively smooth ramp.
And, we'll add capacity.
I mean, we are building out the capacity.
The operators, actually, will be hired over a hard period of time.
And so, I expect the ramp itself to be relatively smooth.
We just want to be prepared for the upside that we see in the business.
Hi, <UNK>.
I think our expectation is that the cadence will be not unlike its been in prior years.
We will see more growth in the second half than in the first half.
As you know, the first and second quarters, for us, have always been more challenging than the third and the fourth.
We have this new label, and this new protective PCI launch, but this is also new territory for us.
So, we are going to learn as we go.
And, I think that's pretty much what our guidance incorporates.
I would use a typical split, yes.
I think, <UNK>, right now, we think the right thing to do is to be investing in what we see as an extraordinary growth opportunity that comes along very few times in a lifetime.
We have the first PMA approval for the Impella 2.5.
We've got supplements to submit, and when those come along, those will be additional catalysts for the business.
So, our focus is really on driving the top line.
And, that is how we are basically operating the business right now.
On a longer-term basis, there's certainly no doubt in my mind ---+ and I think we have demonstrated this, by virtue of the fact that from time to time, our investment levels haven't kept pace with the growth of the business.
That could happen again in FY16.
But, there's no doubt in my mind that, in the long-term, we will have top-tier, industry-level operating margin rates.
<UNK>, this is <UNK>.
Now that we have the PMA approved, we're working through all the specifics with the FDA for the remaining supplements, for the products and the indications.
And, our current plan is to be prepared to submit the additional supplements by the end of September.
<UNK>, our main focus is, as you have stated it is, really to go deeper at the existing centers.
Now that we have the PMA approval, we can really engage with the heart-failure community, the referring physicians and also direct to patients.
And, we believe that our existing sites are trained and ready, and will provide the best quality and rigor, in the procedural success rate.
That's really what we're focused on.
And then, relative to the SG&A spend, <UNK>'s already outlined that this year.
And, we're really focused on getting the type of growth that maintains quality and rigor, in the outcomes and the training, because that's how you become the standard of care.
We're not going to try to run too fast.
And, we're not going to try to have any physicians starting to ramp the procedure, if we don't feel that they have the experience or expertise levels.
So, we're going to do extensive training.
And, we're going to be involved in opening up and supporting the physicians, to have better patient outcomes.
<UNK>, we will be submitting for the CP and the 5.0.
We'll be submitting for additional indications.
Some are larger, some are smaller.
Things that have to do with myocarditis and postpartum cardiomyopathy.
And, we do have several publications, and an FDA study, on the Impella 5.0, which tends to be more of a heart-failure patient, and more of a patient that has low cardiac output or shock.
And then, just to remind all our investors, our US Registry on Impella has been a significant investment.
And, we're going to continue to build that out.
We have established separate data collection.
We have our own executive committee.
And we are ---+ in the end, we will create what is the largest database of high-risk patients that exists in the world.
It's probably too soon to tell.
We're still working through all of the specifics.
And, we will give updates as we go, Jason.
It's just a matter of how fast the enrollment, and the sites that are willing to go through and create that type of rigor, on something that they're supporting commercially.
Sure.
The 2.5% this quarter was 26%.
The CP was 65%.
And, the 5.0 was 7%.
And there is 1% leftover.
It's some consult sales and a little bit of RP.
<UNK>, thank you for the question.
I think there's two pieces to the education for physicians.
The first is ensuring that our users, that have the most experience, have all the tools that they need, and all the support that they need, to continue to treat the patient population that is growing.
And, we also want to provide them tools that they can use with their hospitals, their administrators and their referring physicians, to create more awareness of the benefits of protective PCI.
The second piece of our education is really, directly to the heart-failure community.
And, this is a community that we haven't been able to engage in the past, because we did not have the regulatory approvals.
And, to ensure that they understand that, you can have a high-risk PCI patient that is class III or class IV, and if they have ischemic disease, and you do extensive revascularization on this patient, you have real benefits and improvements in their quality of life, and improving their heart-failure status.
And so, that's been documented in all of our European studies, and in the two FDA studies, Protect I and Protect II.
We're not looking to go out and create all new sites, with all new physicians.
The product has been out under the 510(k) clearance since 2008.
So really, it's about making sure our best users have all the tools they need to ensure their success.
And then, to bring on the next level of adopters that have used Impella, but have not created a protected PCI practice, or who have not used it as extensively as some of their best users.
And, that's really the focus right now, at our existing sites.
<UNK>, the amazing thing about our portfolio right now is that the Impella portfolio, from the left side to the right side, can potentially treat multiple types of patients.
And, we're very focused on being the standard of care for percutaneous hemodynamic support, which is a large population of patients, as well as now, this protected PCI population.
And if we do a good job here and provide a clinical solution for these patients.
We're looking at $2 billion opportunity in the US, Germany, and Japan alone.
So we're very focused on our existing product.
However, we do have the worlds smallest heart pump.
We do have extensive IP.
So, you're going to see us continue to improve the existing products, to make them easier to put in.
Better quality, as we expand the regulatory approvals on them.
And then, later this summer at our investor day, we'll show a little but more of things we're working on.
But again, we want to remain focused on this core opportunity, to become the standard of care.
Thank you.
We just want to thank all supporters.
And, if you have any follow-up questions, please feel free to call me direct.
Have a great day.
| 2015_ABMD |
2016 | MRO | MRO
#That's okay, we'll give you an out today, <UNK>.
It is a question.
When I think about the capacity and execution capacity question I think of it really in two buckets, <UNK>.
One is the internal capacity and competencies.
And I think <UNK> and I have both addressed, that we've been very thoughtful in our approach there to ensure that we preserve the internal capabilities and capacities needed to get back into growth mode when we do get that constructive pricing.
We've done that through redeployment, everything from special projects to field leadership roles, to displacement of contractors, so that we do retain those essential skill sets that will be required when we get back into a growth mode.
Externally it is a little bit more complicated in that the service sector has been a bit decimated, at least on the labor side, from this correction.
I do think what we will modulate some of that is just many companies will still be in either balance sheet repair or will just simply not have the cash flows or the wherewithal to get back on a very fast ramp.
So, I do think that the ramp will be self moderated in some ways once we get on it.
But I think maintaining those strong relationships with our key service providers, which we have been able to do during the downturn, that's very important.
We are going to leverage those relationships when the bell rings again to get back into growth mode.
Yes, sure, <UNK>.
Let me maybe address it this way.
When we talk about getting to the maintenance capital and getting back on a growth mode, you really have to talk about it from a common starting point ---+ where are you starting that discussion.
So if I fast forward to the end of this year based on our current plan, and I look at where my resource plays will be exiting at the end of this year, and I think about what type of capital program will not only flatten but will actually start growing sequentially in 2017, based on what we know today ---+ and, again, this is not a budget outlook ---+ we would probably place that capital program in the resource plays in the $1.3 billion to $1.4 billion.
And, again, that's not just getting us back to flat, that's actually starting sequential growth again in 2017.
That's a ballpark number.
It is one that I think will continue to improve.
<UNK> did a great job describing some of the secular efficiencies that we're already creating in the business.
The Eagle Ford is a great example of that because we're still operating at scale there.
And as we take those efficiencies forward we expect that that number will even have some downward and constructive pressure on it.
Sure, <UNK>, this is <UNK>.
I'm happy to address that.
I'm pleased that you noticed that, actually.
The Bakken team has done a really effective job of managing that production base over the last year at lower and lower activity.
One of the key things is we had lower activity and they've been very focused on the base business, the production efficiency, or up time is really rising.
And that's been a focus of theirs not just the last year but the last couple of years, and they've really improved there.
I think probably more important than that in driving that flattening decline profile you see is that we've made a material shift in our completion practices over the last year and a half.
And the wells from 2015 are among the best we've ever developed and put online.
The declines from those continue to flatten, so that group is a big part of driving that flatter profile.
Those completion practices with more fluid volume, higher density profit loading, more stages, have all been beneficial, and we continue that.
We certainly sit today at lower activity, we have less opportunity to demonstrate that.
But we look forward to the future.
There's enormous commodity price leverage in the Bakken.
When we get back to activity there we expect to be able to deliver even better wells in the future than we have in the past, just building on that.
I think we even look forward to saying in the second quarter earnings being able to talk about the results from the Clark's Creek pad in West Myrmidon where we will have pumped what we view is our most sophisticated, most aggressive stimulations to date in the Bakken, and we expect those results to be compelling.
The way I would address that is going back to my earlier comments around what 2017 might look like in a more constructive environment as we get back on a flat and even a sequential increase or growth in the US resource play.
We are setting today at right around seven rigs across all the resource plays.
We've got five rigs running in the Eagle Ford, two rigs running in Oklahoma.
As we think about that notional budget out in 2017 in the resource plays, that $1.3 billion to $1.4 billion we talked about, that type of spend in 2017 would likely see us ramping into rig activity that would probably be close to double where we are today.
So, we absolutely have the capacity internally, and we feel that the vendor and service community could support it, as well, if that scenario did in fact play out ---+ and, again, this is not a 2017 budget discussion ---+ but if that scenario did play out we would comfortably be able to ramp into that level of activity.
I think what we are saying is that as we look at a reasonable plan under a constructive pricing scenario, that's a type of ramp-up that we think would be supportable with all the other constraints that we may have around cash flows, et cetera.
So, we would be very comfortable.
I wouldn't want to portray that as a peak that we think we could get to, we just think that's a realistic scenario to think about.
Hey, <UNK>, this is JR.
You've probably seen from the materials that we put out last night that we have increased our hedge book.
I think we've done that really for the purpose of protecting at least some level of our cash flows that in turn supports the balance sheet.
When I look at the second half of 2016 we've got now positions in the aggregate of about a little bit less than 60,000 barrels a day of crude production.
Those are done through either straight two-way collars or through three-ways.
When I look at an average floor price, it is around, call it, $49 to $50 average floor price, with a sold put on the bottom of that of right around $40.
So, it does put, again, I think, a floor underneath at least a portion of our production, just to give us assurance with regard from a cash flow standpoint.
Really nothing at this point in time beyond the 2016 timeframe, <UNK>.
We don't have anything hard and fast, <UNK>, but I would tell you anything north of say, half of our crude production we would likely not do, at least at this point in time.
Again, what we're trying to do is at least put some level of support under the cash flows but still allow our shareholders an opportunity to participate in as much of that upside as possible against the use of the collars and the three-ways.
Yes, <UNK>, I'm actually glad you asked.
I've seen the brief write-ups earlier this morning and, needless to say <UNK> and Zach have been responding to a lot of questions from folks.
And to be honest, first and foremost ---+ I think you were somewhat alluding to it ---+ it is really predominately driven by the macro conditions in the first quarter, being a substantial reduction in realized prices on a CNC basis, about 25%.
And of course the volumetric implications, as well.
But when I then just look at more the micro granular level, there is an item, to use the vernacular of some of the reports this morning, the amount of the deferred taxes in the first quarter, the deferred tax benefit in the first quarter, might have been lower as compared to what many people were assuming it to be.
And, unfortunately, it is really just the methodology we are using for inter-period tax allocation.
So, how we allocate taxes, we anticipate for the full year how we allocate them on a quarterly basis.
Honestly, that coupled with a couple other nonrecurring items likely accounts for close to $0.07 or $0.08 per share on a cash flow basis.
So, I think, unfortunately, when you are always looking at working cash flow before working capital you're going to get some anomalies there.
We always try, of course we're managing total cash flow, and look at it on an after working capital basis.
And when I do that, we did have an additional anomaly in there.
We had some nonqualified pension payments that we paid in the first quarter that relates to our late 2015 workforce reduction.
And as every company has in the first quarter, we also had the prior-year's incentive compensation payment.
So all of those items actually add together to get us back another, as I said, $0.07 to $0.08 in the aggregate to cash flow per share.
| 2016_MRO |
2017 | ADI | ADI
#Question for Vince.
I just want to follow up on your comments around automotive with Linear Tech.
And more specifically, can you talk about how expansive your opportunity set is.
If there's any examples of things that you think they will help you expand the content within automotive.
Yes.
So automotive for us is a story of continuing content gain here for both LTC and for ADI.
So we see it as a key growth market for the combined companies.
So I think we've talked before about ADI having great strength in emerging applications like, for example, 77 gigahertz radar ---+ LIDAR, infotainment with our A2B technology, for example, bringing new technologies into the powertrain, such as the rotational and linear sensing magnetic devices and, as the powertrain electrifies, being able to get our battery management technologies in there as well.
So I think both LTC and ADI have a lot of complementary capability, for example, to the ADI signal chains that I've just talked about here, we're adding LTC power management capability.
And the outcome of that is we can architect an optimized solution for each of the subapplications here for the automotive customers.
And the ---+ there's great complementarity between the signal chain and the power chain.
So I think that's looking very, very good.
And also, there's a lot of new power management things that we're looking at independent of signal chains that LT will be instrumental in helping us nail down over the coming few years.
So as I said, there's a tremendous amount of benefit in coupling power management with the signal chain.
And every single application in which we play within the transportation automotive sector requires both signal chain and power management.
So ---+ and what I'm seeing so far is a tremendous level of collaboration between the applications teams, the design teams in really grabbing the opportunities here with both hands.
Yes, I guess, just a brief one, just on the integration.
Good to hear that it's on track and kind of good start out of the gate.
Just any comments in terms of culture, key people and any kind of milestones we should be aware of.
Well, we've known that LT is a very, very high-quality company.
And I've been obviously hands-on involved in the integration of the 2 companies.
I'm very, very impressed by the quality of the people throughout LT, and I'm also very impressed with just how fast both companies are coming together to create something better than the sum of the parts.
So right now, we're laser-focused on leveraging the combined strengths of both companies to generate this long-term profitable growth possibility that we know is there.
And we are taking our time to really figure out ---+ and we're being been very, very patient at figuring out how to combine the leadership ---+ we've combined the leadership teams, but we're being very patient in trying to figure out what the best of both really means here.
So I think to answer your question very directly here, <UNK>, we're culturally I think in good shape.
Our values, as I've talked about many times before, the values around technology and business and customer are very, very similar.
And in creating this best of both, we're actually leveraging the differences in the way the operating routines of both companies ---+ to draw from, to create something greater than the sum of the parts.
So we're focused, as I said, on delighting our customers, ensuring that we're capturing the upside demand here.
And I think overall, the ---+ once the values are compatible, as I said, I'm using the cultural differences to create something greater than the sum of the parts.
And the LT leadership is playing a key role.
I've got 2 members of the senior LTC staff on my staff.
And the LT leaders are contributing to this new company multiple levels down at this point in time.
Yes, thanks, <UNK>.
I think it's true to say that, first off, we're recovering from a relatively weak environment in the prior year.
So the compare is kind of easy from that perspective.
From everything that we can tell right now, the growth is broad-based across all the industrial sectors and, in fact, across all the geographies as well.
And I think that's just a function of the better business environment versus last year overall.
And if you ---+ just paying attention to our own customers as well, they're all guiding for low to high single-digit growth in 2017.
As a company, several years ago, we made a strategic pivot in terms of where we placed our R&D, putting more into B2B applications.
And industrial has been a great beneficiary of that.
So I think just given the cycles in the industrial sector, in general, we're beginning to see some of those products really contribute in a meaningful way across factory and process automation, aerospace and defense, the instrumentation ATE business.
And so I think the business environment is overall better, but we're also doing better in terms of grabbing share through the effects of our new product investments over the last several years.
Yes.
Thanks, <UNK>.
Well, we're---+ as ADI organic, we've been doing better and better in terms of building solutions for our customers from antenna right down to bits, leveraging the strength of ADI and Hittite combined.
And we know that as customers put greater and greater pressure on for more integration, to be able to solve the noise problems more effectively in these radio systems, that power management is going to be a great help to us.
And already, I think in the shorter term, we're being actively engaged in discussions to use existing products with ADI solutions, for example, in the transceiver space, in 5G systems, leveraging LT's power technology.
And that's only the beginning because, over the coming generations, when we can start to architect the radio solutions now with the new advances in power management technology that LT has been making, I think we can have several generations here of success in both the wired and the wireless business in the years ahead.
And there's no doubt there's tremendous symbiosis between the signal chain technologies that ADI has been so strong in over the years with the power technologies that LT now brings to the table.
So the conversations with our customers are very active and ---+ with existing products, and we're now plotting the next new architectures based on the combination of the 2 companies.
Yes, it's a good question.
It's true that both companies have had very, very strong focus on gross margin.
I think it's a great kind of proxy for the quality of the innovation that you're developing, the price you can command and, ultimately, the gross margins that you can get.
So what I will say is that ADI has probably just ---+ given our buying power and our operational focus, we have combined now with LT, we've got more buying power.
So we can be more flexible in terms of taking some market share with products already available without sacrificing the margins, just given the signings of the so-called bill of materials that we're now sourcing across both companies.
So we don't intend to drop our standards, but we do intend to be aggressive in terms of leveraging all the available products and technologies that we have to grow our business profitably.
I think that's the way to think about it.
Well, let me tell you, Chris, we've ---+ obviously, we've retained the search firm.
And what I can tell you is that we're making excellent progress right now.
My expectation is that we'll have a replacement named by the end of the fiscal year at the latest.
But I'm quite optimistic that we'll be able to announce something quite well before then.
So in the interim, I'm taking a very hands-on approach with the integration of L<UNK>
And I'm also relying ---+ we've a terrific bench of people at ADI across all the facets of the management of the finance function of ADI.
So we can ---+ we're very, very well positioned to ensure that we hit our targets in terms of the ongoing operation as well as the synergies.
So synergies are on track, and we'll update you on where we are at the Investor Day in the latter part of June here.
Yes, well, I think as we've talked about earlier on, the various markets all have different cycles in terms of uptake, design cycles and adoption cycles.
But I think obviously every sector in which we play, including consumer, has an opportunity for ADI to draw Linear Technology power management for additional revenue opportunity and growth.
I would say in the ---+ it's the medium term to see the effect anyway of leveraging existing products and getting any meaningful revenue growth from those products, it's probably a 2- to 3-year proposition as we've experienced as well with Hittite.
But I think the areas that we will see meaningful growth in the medium term here will be automotive, for sure.
I think the communications sector will see a good uptick in the medium term.
Very judiciously, as well, we're looking at some consumer opportunities.
So obviously, those hit probably sooner than any other sector of the portfolio we manage.
And I think industrial is 3 years plus from here.
So I think that's the way to think about the adoption of existing products and new sockets and the effect that we should see on revenue growth here.
No.
I think when we've talked about synergies, we've been very clear that we've acquired LT for all its capabilities in terms of technology and customer management, channel management, operations and so on, to drive revenue synergy over the long term.
But ---+ no, I think as I said in the prepared remarks, I'm very pleased with the progress that we're making.
We've ---+ we had actually executed a lot of the decisions on the $150 million of synergies in advance of combining the companies.
And the synergies are well identified and the actions are in place to get the synergies executed.
So my sense is it'll take us, during the coming year, to really see the effects of the synergies in our P&L from a cost perspective.
And a little bit longer than that, I think, as I've just been talking about to get the synergies from the cross-selling opportunities.
Yes, I think your point is well taken.
I think originally, when we began talking about 5G, we were talking about it being a facet of our business in kind of 2020-plus.
It now seems that we're obviously in trials right now with 5G, all the major application areas, all the major customers globally.
So my own sense is that we'll begin to see, I think, a meaningful ramp in revenue in the 2019 kind of area.
Maybe it's a little sooner.
Maybe it's a little later, but that's my sense at this point in time that there's an aggressive pull-in at the carrier level as well as the OEMs to make faster progress in deploying 5G.
Yes, I think just to add a little bit of color to what <UNK> has said, small cell is still a small activity from a market perspective.
We're very, very well positioned.
And I think it will start to accelerate somewhat during the course of the next 12 to 18 months and become a more meaningful part of the overall wireless story in communications infrastructure.
Okay.
Let me try and unpack.
There were a couple of key questions there.
I think, with Hittite, we knew that the technology was very, very strong.
And ADI ---+ one of the big synergies we got from acquiring Hittite was just the channel reach ---+ the customer reach and the channel reach that ADI had that Hittite didn't have, so we've been able to leverage that to tremendous effect.
We knew that the portfolio of products was very, very strong, so that's been a huge help to us.
Obviously, we've been able to architect.
We've been together now almost 3 years, and we've been able to architect some really new creative solutions in areas like aerospace and defense, phased array antenna, for example, these days, these new radar systems that are being deployed as radar systems digitize across the globe.
Even in instrumentation, where a lot of the high-frequency systems require the combination of mix signal and microwave technology.
Obviously, in the automotive sector where all these microwave technologies are being deployed, having the combination of ADI and Hittite there has been really, really powerful.
So I think it's ---+ it was a case of a lot of products that needed a new channel and a lot of re-architecting of customer systems based upon ADI's signal processing mix signal strength and Hittite's Microwave strength.
So what was the second part of that question.
So, leverage to Linear.
I think the approach we have on the best of both was also true with Hittite.
We tried to figure out how to be patient, understand the world-class capabilities that Hittite had in terms of people and technology.
And we've taken the very same approach with LTC.
LTC is obviously a world-class company as well.
So just being patient, listening to create something greater than the sum of the parts, build a whole new operating system across the company for speed and simplification.
That's what we did with Hittite, and that's what we're doing with LTC times 5.
Well, clearly we've been able to reduce the public company cost of the combined company.
That's one of the things that's been executed pretty much straightaway.
I think we had talked before as well about an early retirement program that we had put in place at ADI, and we begin to see the benefits of that fettering in over the next couple of quarters.
But the ---+ and obviously distribution channel optimization as well that we had talked about before, that will start to show benefits to us I think towards the back end of this year and the early part of the coming year.
So they're just 3 or 4 examples of the things that we've already got in play that we'll start to see the benefit of.
And all the other synergies are identified.
And we've got the actions in place, and we're now just ready to realize them.
| 2017_ADI |
2017 | ACIW | ACIW
#Thanks, Jacqueline, and good morning, everybody.
Today's call, like all of our events, is subject to both safe harbor and forward-looking statements.
You can find a full text of both statements on the first and final pages of our presentation deck today, a copy of which is available on our website as well as with the SEC.
On this morning's call is Phil <UNK>, our CEO; and <UNK> <UNK>, our CFO.
With that, I'd like to turn the call over to Phil.
Thanks, <UNK>, and good morning, everyone.
I'm pleased to report our first quarter financial results were ahead of our expectations and a strong start to 2017.
First quarter revenue of $231 million was up 10% compared to last year.
We also generated $42 million in EBITDA, which was a 68% increase over last year and operating free cash flow of $76 million, which was 157% from last year.
In the quarter, we signed some important contracts across a range of solutions and geographies.
We signed an important contract with Jack Henry to help bring immediate payments for a wide range of their financial institution customers, notably, customers will have connectivity to the clearing house and sales networks, real-time systems allowing consumers and businesses to send and receive payments and data instantly directly from their accounts at their financial institution.
We also continue to make progress with our universal payments and retail payments solution initiatives, signing important renewals, including 2 with large national switches, one in the Middle East and one in Asia.
These customers plan to use our flexible Universal Payments technology to gain competitive advantage and functionality, such as Apple Pay acceptance and ATM surcharging.
Further, we're seeing that transaction capacity requirements are growing faster than customers expected in terms of both newer wallet and micropayments as well as traditional usage.
In our fast-growing e-commerce segment, we continued to sign contracts from traditional merchants that increasingly appreciate our industry-leading omni-channel solutions and endpoint connectivity.
We're also signing customers pursuing new use cases, including end console payments in the gaming vertical.
Looking ahead in our pipeline, we're making progress with several customers that are interested in leveraging the power of UP in significant and transformational way.
We hope to have more to say later in 2017 about this.
Following the successful Investors Day in March as well as several customer-focused events across key geographic regions, we remain extremely optimistic that we have positioned ACI to benefit in the coming years in the evolving electronic payments landscape.
In summary, ACI is off to a good 2017.
We are firmly on track to achieve our financial targets for the year and are fully committed to our longer-term growth goals.
With that, let me turn the call over to <UNK> to provide details on our first quarter and 2017 guidance.
Thank you.
Thanks, Phil, and good morning, everyone.
I first plan to go through the highlights of the first quarter, and then provide a reminder of our outlook for the full year 2017.
We'll then open the line for questions.
I'll be starting my comments on Slide 6 with key takeaways from the quarter.
Now overall we had a solid start to 2017.
Our renewal bookings were particularly strong, up 34% over last year.
This was offset by a decline in new bookings, mainly given the timing and the particularly strong comparison in Q1 2016, when we saw nearly 50% growth.
We continue to expect full year new bookings growth to be in the high single digits.
Our 12-month and 60-month backlog declined $6 million and $23 million, respectively, from Q4, 2016, again, mainly due to the timing of new bookings.
We saw strong growth in revenue, up 10% over the prior year quarter and given our relatively fixed cost structure, this revenue growth delivered adjusted EBITDA growth of 68% compared to the prior year quarter.
We saw strong growth in operating free cash flow, coming in at $76 million and more than double the prior year quarter.
And while we don't officially guide the cash flow for the year, we're clearly tracking ahead of our original forecasts.
We ended the quarter with $100 million in cash and a debt balance of $710 million, down $43 million during the quarter.
And lastly, here, we have $78 million remaining on our share buyback authorization.
And one thing of note, as we mentioned at our Analyst Day in March, we have updated our financial statement disclosures and our Form 10-Q to reflect our new 2 P&L organizational structure and have presented our revenue and profitability for our ACI On Demand business, which consists of our Software as a Service and platform as a service in our ACI On Premise business, which consists of our traditional license, maintenance and professional services operations.
So you will see that when we file our 10-Q.
Turning next to Slide 7 with our full year outlook.
We are reaffirming our full year guidance for the full year 2017.
We expect revenue to be in a range of $1.0 billion to $1.25 billion.
And we continue to expect adjusted EBITDA to be in the range of $250 million to $255 million.
And we expect new bookings growth to be in the high single digits.
For Q2, we expect revenue to be in a range of $225 million to $230 million.
So overall, a strong start to the year and one that positions us well to achieve our financial targets in 2017.
That concludes my prepared remarks.
Operator, we are ready to open up the line for questions at this time.
Our pipelines are very, very strong.
Almost everyone around the world is either in planning to upgrade or in the process of upgrading, as electronic payments have redefined themselves much more with how electronic real-time payments take place are burgeoning around the world.
As a matter fact, in a lot of places, whether be in India, the Far East, the places that are just growing their consumer economies, they're growing much more rapidly on the e-commerce side than they are in the more traditional ---+ what we view is the traditional way.
Well, traditionally, the growth in e-commerce transactions, even for our traditional customers who are renewing, and we've had a tremendous success with our RPS program.
So what's come with that is, people are not only renewing their traditional business with us, we're getting a very healthy growth in incremental transactions that they are purchasing going forward.
That's what we meant there.
I think we saw in the fourth quarter of ---+ I think we saw it accelerate towards the end of ---+ we saw an acceleration towards the end of last year, which is continuing.
Well, I would say, generally our ---+ I would say, we apply for historical uses of cash.
Obviously, we have the scheduled term repayments.
We would look at tuck-in type acquisitions as well as we still have nearly $80 million left on our share buyback authorization.
So I think the overall uses of cash will generally be along those lines.
Well, what is live on the UP platform.
We don't have that many customers that are totally live on ---+ we probably have a dozen or so RTS, those that have bridged customers that are live.
We have some very big projects that are finishing phase 1.
On the retailer side, we have some big projects: railroads, retailers and I'm missing a third category.
Hotel.
What.
Hotel.
Hotel, right, that are just coming live.
You don't see the impact of those yet.
And we have some ---+ from a pipeline standpoint, we have not a few, but several transformational UP deals that are in the pipeline, <UNK>.
So I've never felt, this has been a labor of love for over a decade.
I've never felt more comfortable about us than I feel right now.
Well, I think the best thing we've heard and that we're both pleased and we're grateful is that the immediate increase in dialogue and pipelines that came from that, I believe, was our greatest ---+ what I think it was our greatest affirmation.
And then I also believe, having demonstrated real time, both the day, financial analyst day.
But we also did it the day before, demonstrating our ---+ the UP capabilities and the (inaudible) that UP is not this hardwired hub type structure, but it's a highly orchestrated, very variable, an Erector Set, so to speak.
That really struck a chord with several of the people that follow our industry that hadn't attained that level of comfort before.
So that was very positive for us.
Yes, I wouldn't say there's anything in particular.
I think most of our cost structure is generally the same.
Any year-over-year difference could be attributable mostly to timing of certain professional fees.
Yes.
I mean, we are ---+ thanks for asking that question.
We're within 1 quarter of taking these 20-something data centers down into 4 data centers.
And I think you know, we said we have invested in the very recent past, $100 million in capital in costs.
And some of that costs is continuing to build a highly leverageable infrastructure that today, we're equally balanced between our ability to support North America and our ability to support the European/Middle East/African continents.
So we're within 1 quarter of concluding that effort.
Well, the license side, by its nature, has a pretty significant ---+ a lot of that is not recurring.
So it has seasonality to it.
Part of the beat in the first quarter was higher-than-expected capacity revenues, which can be ---+ it's really ---+ it\u2019s based on the number inside the customers that need capacity in a given quarter.
So part of that beat was higher capacity, which, in last year, came later in the year.
We are very ---+ our business has a natural shape to it, of which you have the first 3 quarters and then you have the fourth quarter, right.
And the first 3 quarters can look a lot more lumpy year-to-year against each other because they're not that significant to the fourth quarter.
I suppose we could get out over our skis and whatnot and be more aggressive.
We are a little more aggressive as it relates to the cash that we're going to bring in.
But other than that, this gives us the luxury of bringing on as high-quality set of deals as we can.
So it certainly makes our guidance more comfortable for us.
But we're not ---+ we don't think there's any value in increasing at this point.
<UNK>, do you want.
Really, I would agree with that.
I think it certainly de-risks what would typically be a pretty heavy fourth quarter.
So great way to start the year.
We're comfortable with where we're at guidance.
If you look at what we\u2019re doing (inaudible) we have significantly increased bookings in our business.
And in the bookings, it takes, at the short end, 180 days.
At the long end, it takes us almost 500 days to install these bookings.
And so if you ask me if I felt a lot better about '19 and second half of '18, I do feel a lot better about it.
But we don't sell pizza.
We can't convert it right away to our revenue line.
You'll see most of those revenues next year.
No.
No, we'd be disclosing their proprietary information.
So no, we don't do that.
Not necessarily.
I think (inaudible) on one of the bigger ones is Jack Henry so that will likely begin on next year.
On some of the contracts that are in our SaaS and platform businesses have shorter time to install.
So we can begin to see those recurring revenues kick in before we exit 2017.
But not a pretty significant contributor this year.
A lot of the sales that we get in any particular year are going to build our backlog and really contribute to future years' revenue.
Well, I'd say, again, Q1 had ---+ and I said in my prepared comments, the comp of Q1 last year, if you look back, was nearly 50% growth.
So we had a very strong Q1 last year and essentially maintained our full year guidance.
I wouldn't look at Q1 as anything other than a tough comp.
And the backlog is also a factor that in a quarter in which you have as much revenue as we did.
It's again, a timing issue when we have the new bookings because it's the new bookings that fill backlog.
And so again, I think they're both a function of timing in the year as we get into Q2, 3 and 4, and we start to see those new bookings pick up, that's ultimately going to feed the backlog and contribute to future revenue.
Yes.
Brad, this is Phil.
I just think ---+ I don't want to overly make ---+ bookings by quarter, fourth quarter's big enough that you can really have a good year-on-year.
What will probably happen in second quarter is, we'll do tremendously versus the previous year.
And I wouldn't want to overly celebrate that too, right.
It just has to do with the way it comes.
Certainly, the first half of the year, the way it comes in.
We are ---+ I could not ---+ I am more confident than I was 3 months ago about our ability to make our full year bookings.
But I don't want to make too many excuses about the first quarter.
And I'm not going to pretend second quarter that we're the Second Coming because we had such a great year-to-year comp.
It kind of ---+ year-to-year, we sell capital-oriented items and whatnot, whether someone buys at the first quarter, or they buy at the third quarter.
That's not that big a deal.
What we like about selling it earlier in the year, is it gives us more discretion towards the end of the year.
But we are very, very comfortable.
The momentum is here.
I think we told you, we are not renewing deals prematurely, unless there's some customer need for it to take place.
And that throws off the year-to-year a little bit.
We signed very little in a way of renewal that wasn't time appropriate to do.
So I'm very, very ---+ the net is, I'm very comfortable where we are.
And we're not going to take more credit than we deserve, say, next quarter, we blow it out of the water, we're not going to take credit for that because the sum of the 2 quarters against the full year commitment.
Well, I think you know that UP powers everything we do.
So UP powers our immediate payments capability.
I think that ---+ just my personal, a lot of decades in the payments business, I think we are underestimating the power of immediate payments the same way 30 years ago we underestimated the power of credit cards.
And I think we'll be amazed.
I think real-time commerce deserves and requires real-time payment.
And whether the world collectively understands what they're putting together, it's happenstance but suddenly, all the governments around the world and their central banks become enlightened that real-time payment ---+ and I think you're going to see under UP infrastructure that real-time, that wire and immediate payments are going to become coupled cousins.
And you're going to see a lot more sophisticated ways that companies, big and small, and there's no way they're going to hold the individual out of the benefit of immediate payments.
I think immediate payments is huge.
First, you have to build the infrastructure, then you have to build its usage.
But so much of the world is coming on board at the same time.
And so many of us, people are thinking globally about how the schemes should work.
And it's just making a lot of ---+ I couldn't be more enthusiastic about immediate payments.
And we're seeing it in the marketplace.
I mean, our customer base is certainly getting it.
The ones that are [seeking] us out, they certainly get it.
And I would say that the retailers understand and the e-commerce understand immediate payments.
Maybe they may see more benefit to us than even the financial institutions and financial intermediaries.
Well, thank you all for dialing in and we look forward to catching up with everybody in the coming weeks.
Have a good day.
| 2017_ACIW |
2016 | EFII | EFII
#So we did announce three new productivity suites.
We had three announced already in 2015, and at Connect last week we announced three new productivity suites aimed at specific subsegments of the market.
So we continue to make progress around making the applications more modular.
But it is definitely a work in process.
And we are going to continue to come out with more suites, continue to get more modularity in there.
So we will still have on occasion some large projects from customers that require custom development, but that's really a function of individual clients.
But we are certainly better positioned now to respond to customers' requests around large projects.
It's really because ---+ the way that our OpEx is structured now is that we do have a lot of pay-for-performance in the fourth quarter with the overachievement.
Even though it was down at a lower level of OpEx as a percentage of revenue, in Q1 the variable pay portion of it, because the revenue is much lower, will be at a lower level; and that will help to scale down the absolute level of OpEx.
We are saying 36% to 37%.
And Q4, I think, was at 35.5%, so it's kind of right at the low end of that range in Q4.
We've transitioned most of the clients now onto the new US-style revenue recognition method in their contracts.
So we are ---+ you know, running into Q1 we think we are at a pretty normalized level in terms of us being able to recognize what we sell, when we sell it like we do in the other segments of the business.
Yes, sorry it wasn't clear.
Yes, that was the numbers.
In general now ---+ remember, we're going to report now all the inks together, not just UV.
That was essentially what we saw for the spray graphics enablers before.
So between all types of ink, which is UV for the spray graphics enablers, and ceramic ink, and the water-based for the textiles ---+ we recorded a growth in volume of 65%.
Now that's obviously not really fair to the presentation, because we had ---+ we are not counting what wasn't in our ownership a year ago.
So even if I add Reggiani and Matan, of their ink last year in Q4, they were not ---+ the volume ---+ they were not part of EFI ---+ the growth was about 30%.
We are showing a very, very strong growth, especially on the textile, but of course on ceramic from a percentage year over year is a very strong number.
But still smaller compared to the other two.
And UV is the largest number, but also well into double digits.
So we are very pleased with that volume that our customer is recording, and it's showing you they are moving more jobs from analog to digital.
The ink numbers on the textile was presently surprising when we looked at that.
We knew it was going to grow nicely, and it grew very nicely.
And I think definitely that with EFI, Reggiani is more emphasizing on attachment rate ---+ means if you buy printer from us, we really want to sell you ink.
And so we are seeing more activity there.
Customers are making more bigger volume.
And obviously, when they buy more printers, they print more.
And again, we state that as an indication to the underlying demand in the market.
In what is not the easy macro, we are seeing jobs moving.
30% growth is a number I don't think you're going to find in too many industries and too many categories.
We did still set our long-term gross margin targets at the investor day, and our goal long-term is to get back close to 40% again, as we mentioned.
So we are not giving forward guidance beyond Q1, but we definitely see opportunities to continue to push the margin trend higher, back to where it used to be, in the inkjet segment.
You know, I think that it's ---+ you know, we don't want to put a stake in the ground right now, because currency is obviously having an impact upon that, as does the growth rate of the different businesses.
And right now we are just trying to keep up with the opportunities that have been presenting themselves across the different segments.
And we are seeing the margin come in a bit higher than we were anticipating; it was kind of the high end of what we thought it was going to be in Q4.
So we are making some good progress, but I don't think we are ready to put a stake in the ground to say: it's going to be here on X date.
Well, as we mentioned previously, the ink that we are selling at Reggiani today is not ink that we manufacture, and so it's not quite at the margin of the other inks that we manufacture on our own.
But it's still nice margin and higher margin than the printers, so there is some benefit there.
But that ---+ as a reseller, you know, we can't get the same type of margins as when we make the stuff ourselves.
It's really the leverage of the higher revenue that we saw there.
As that business ---+ you've seen the gross margin expand there consistently over the last ---+ really, the last five years.
And so that is the beauty of that software business.
As the revenue expands, we have a great drop rate.
And so we do believe as we continue to expand that business that we will continue to see nice gross margin accretion.
Thank you, everyone, for joining us today, and thank you for your interest in EFI.
Our success reflects the hard work and dedication of our team around the world.
And as always, I want to thank them for their efforts, as well as for the shareholders for their support and confidence, and our customers for their trust.
We are excited about the year ahead and look forward to sharing our progress with you.
Thank you.
| 2016_EFII |
2017 | CAT | CAT
#Well, thanks, Jim
Good morning to everybody
As Jim stated, it was a strong quarter with higher sales across all regions and improved margins, and we raised the profit outlook
Our commitment to running the business using the operating and execution model is evident in the team's focus on profitable growth and cost discipline building on our restructuring efforts
Let's turn to slide 4, and I'll quickly walk through the numbers
Sales and revenues of $11.4 billion were up 25% from the third quarter of last year, our strongest quarter-over-quarter in terms of sales and revenue growth since the fourth quarter of 2011. About half of the increase in sales volume was from higher end-user demand
The other half was from favorable changes to dealer inventory
The favorable change to dealer inventory was mostly due to the absence of dealer inventory reductions that occurred last year during a full-year run of dealers reducing inventory by over $6 billion, not from dealers building significant inventory this year
Dealers reduced inventory $700 million in the third quarter of last year as compared to a $200 million dealer inventory increase in the third quarter this year, a net change of $900 million
While changes to dealer inventory were favorable, it is important to note that dealer inventory in terms of months of sales are low based on historical levels and are lower than at the end of the second quarter
Profit per share was up $1.29 from $0.48 to $1.77. Adjusted profit per share more than doubled, up $1.10 from $0.85 in the third quarter 2016 to $1.95. Higher sales volume and favorable price realization were the largest drivers to the increase in profit
Let's turn to slide 5. Third quarter operating profit was $1.577 billion as compared with $481 million in 2016, up almost $1.1 billion
Positive changes to operating profit came from several areas
The largest increase to profit was a result of higher sales volume
About half of the change was from higher end-user demand and half was from a favorable change to dealer inventories
All four geographic regions saw sales and revenue increases ranging from 20% to 29% versus a year ago
However, keep in mind that, in some cases, this was off a very low base, especially in Latin America
Dollar sales increase was highest in North America primarily due to higher end-user demand for both new equipment and aftermarket parts as well as favorable changes to dealer inventories as dealers in North America held inventory about flat in the quarter versus reducing inventories in the third quarter a year ago
Asia/Pacific saw the second highest increase in dollar sales primarily due to higher end-user demand for construction equipment
About half of the increase was in China with strength also broadening to other countries in the region
Price improved $343 million in the quarter
The favorable change was primarily due to Construction Industries
Variable manufacturing costs were favorable $143 million largely due to the favorable impact of period costs absorbed, as inventories increased in many of our factories to support higher production levels
As we ramp up production, we remain focused on lean principles, and the inventory turns improved in all three primary segments
As we ramp, we are working closely with our supply base to reduce lead times and raise production levels, in some cases, off of a very low base
Our focus is getting product to customers quickly, but also efficiently
However, we are focused on improving availability to meet higher end-user demand
For the first time in several years, material cost increased in the quarter
We expect higher steel costs to put pressure on material costs moving forward
Total period costs were higher by $349 million
When you exclude the higher short-term incentive accrual, period costs were about flat despite a significant increase in sales volume
This is a reflection of our continued cost discipline that has enabled us to control costs while making targeted investments in key areas to drive future profitable growth
Restructuring actions continue
These actions are important to achieving the flexible cost structure required to remain profitable through the cycles
Restructuring costs were $90 million in the quarter, $234 million less than in the third quarter of 2016. Before we walk through the segments, I want to touch on the balance sheet
ME&T debt-to-capital at the end of the second (sic) [third] (10:28) quarter was 36.1%, an improvement from 38.6% at the end of the second quarter
Year-to-date, ME&T operating cash flow was $4.2 billion, $2.4 billion higher than the first nine months of last year
Enterprise cash at the end of the quarter was $9.6 billion
Now let's move on and we'll go through the segments, starting on slide 6. And we'll start with Construction Industries
Construction Industries sales were up 37% to $4.9 billion
Higher sales in all regions and favorable price realization contributed to the increase
Order activity was strong in the quarter across all regions, and the backlog increased about $500 million
About half of the sales volume increase was from favorable changes to dealer inventories
Most of this favorable dealer inventory change occurred in North America and EAME, where there was significant reductions to dealer inventory in the third quarter of last year
Asia/Pacific and EAME dealers increased inventory in the quarter
Construction Industries dealer inventory is up about $300 million from the start of the year, but from a month of sales metric, they're low versus historical levels
The other half of the sales volume increase was a result of higher end-user demand
North America end-user demand increased primarily due to increasing activity in the oil and gas industry, including an uptick in pipeline construction and improving residential and nonresidential construction
Asia/Pacific saw strength across the region
However, China continues to be a bright spot and a surprise to the upside
Our current estimate for 2017 is for the 10-ton-and-above excavator industry in China to more than double versus last year, which would result in sales that are higher than our estimate of normal replacement demand for the region
We believe that some demand has been pulled forward into 2017 so that construction projects can be completed before activity slows in the winter months
While we are seeing strengthening fundamentals in parts of EAME, the favorable sales increase was primarily due to favorable dealer inventory changes, not end-user demand
Price realization also contributed to the increase
Latin America, especially Brazil, remains challenged, and sales are still at very low level
However, end-user demand did increase due to stabilizing economic conditions in several countries in the region
Construction Industries segment profit of $884 million was favorable $558 million, driven by higher sales volume and favorable price realization
The increase in period costs was due to higher short-term incentive compensation
Excluding the short-term incentive compensation, period costs were about flat
Segment profit margin in the quarter was 18.1%, an increase of about 900 basis points from the third quarter of last year and about flat with the second quarter of this year
Let's move to Resource Industries on slide 7. Favorable changes to dealer inventories combined with strong demand for aftermarket parts to support overhauls and maintenance work, as well as improved price realization were the primary drivers of the $500 million increase in sales and revenues for Resource Industries, an increase of 36%
Dealer deliveries of new equipment increased slightly
As we have stated previously, the mining cycle has started to turn
The parked fleet has come down from its peak and stabilized for several months
The initial surge earlier this year in trucks coming into service bays for overhauls has started to subside, especially in Australia, where we first saw demand increase, but demand for aftermarket parts remains at a healthy level
Utilization on trucks has steadily trended higher over the past eight months and recently achieved a five-year high
While the number of trucks being overhauled has come down, the higher utilization and number of trucks working in the mines has also contributed to an increase in aftermarket parts demand
For the third quarter in a row and after four years of dealers reducing their inventories and our factories producing below retail demand, dealer inventories were about flat in the quarter, driving a favorable change to sales
Year-to-date, Resource Industries dealer inventory is up just slightly from the end of 2016. Although price realization was favorable in the quarter, the competitive environment in Resource Industries continues to put pressure on pricing for many of our products
Order activity across all regions remained strong in the quarter, and the backlog increased about $300 million from the second quarter
However, Resource Industries new equipment sales and production levels still remain at historically low levels
Segment profit was $226 million, up $303 million from a loss of $77 million in 2016. The improvement in profit resulted from higher sales volume, favorable price realization, lower manufacturing cost, primarily due to cost absorption as inventories increased in the quarter and were about flat a year ago
Period costs were about flat as the benefits from a number of restructuring and cost reduction actions offset higher short-term incentive compensation
Segment profit as a percent of sales improved to 11.6% from a loss position a year ago
It was the best quarter this year for Resource Industries in terms of both segment profit and profit as a percent of sales
Now we'll move to Energy & Transportation on slide 8. Energy & Transportation sales, including inter-segment sales, were up about $600 million or 16% in the quarter to $4.8 billion
Sales were higher across all applications
New engines and aftermarket sales for industrial applications increased in all regions to support higher equipment demand across several industrial customers' end markets
In oil and gas, demand for aftermarket parts to support well servicing applications increased in the quarter
In addition, the build-out of North American natural gas infrastructure, combined with new wells that have had a higher concentration of natural gas than previous wells, continued to drive strong demand in midstream gas compression
Sales into power generation were up, largely due to timing of projects in North America and EAME
Transportation sales were also up, as rail services demand increased to support higher North America rail traffic in the quarter
Segment profit for Energy &Transportation was up $178 million from $572 million to $750 million
This was largely attributable to higher sales volume and a favorable impact from cost absorption, as inventories increased in the third quarter of this year to support higher production levels and were flat last year
Period cost increased in the quarter, primarily driven by higher short-term incentive compensation
Segment profit as a percent of sales improved 180 basis points to 15.5% from 13.7%
Before I move on to the outlook, a few comments on Financial Products
Operating profit was about flat versus the third quarter of last year
The portfolio remains healthy with past dues down 4 basis points from the third quarter of 2016 and used equipment prices continued to improve
Now let's move on to the outlook on slide 9. In July, we provided an outlook for sales and revenues of $42 billion to $44 billion
As a result of encouraging order rates, good economic indicators and an increasing backlog, we are providing new guidance for sales and revenues of about $44 billion
We have raised the profit per share outlook to about $4.60 and raised the adjusted profit per share outlook from $5 at the midpoint of the previous sales and revenue range to about $6.25. The increase in the profit outlook is largely a result of a higher estimate for sales combined with a favorable mix, improved price realization, and the slower ramp of period cost spend for targeted investments
These positives are slightly offset by an increase in short-term incentive compensation expense and higher material cost
Sales and revenues in 2016 were $38.5 billion, and profit per share was a loss of $0.11 with adjusted profit per share of $3.42. Our revised outlook is sales and revenues of about $44 billion, profit per share of $4.60, and adjusted profit per share of $6.25. This equates to adjusted profit per share up more than 80% on about a 14% sales and revenues increase
The implied fourth quarter is for sales and revenues of about $11.4 billion and adjusted profit per share of $1.53. We expect higher material cost and period cost spend for targeted investments will negatively impact operating leverage in the fourth quarter
Now let's discuss the sales outlook starting on slide 10. We now expect Construction Industries' sales for the year to be up about 20% versus the previous outlook of up 10% to 15%, driven largely by higher end-user demand across all regions
The increase on the sales outlook is driven primarily by a higher sales forecast for Asia/Pacific and North America, with strength in Asia/Pacific expanding beyond just China
Order rate for Construction Industries have been strong across all regions, although in many cases off a very low base
The backlog is up significantly from the third quarter of 2016 and also up from the second quarter of 2017. For Resource Industries, we now expect sales to be up about 30% for the full year versus the previous outlook of up 20% to 25%
In our prior outlook, we expected aftermarket parts sales to decline in the second half of the year, as machine rebuilds were expected to slow and for sale of new equipment to offset this decrease
As predicted, we did see some slowing in aftermarket parts sales in the third quarter; however, not to the pace that was anticipated
The increase to the sales outlook for Resource Industries is largely driven by our higher expectation for aftermarket parts sales
Our forecast for new equipment sales has not changed from our previous outlook
We continue to see strong order activity for Resource Industries, and the backlog increased from both the third quarter 2016 and the second quarter of this year
Energy & Transportation sales are forecasted to be up about 10% for the year versus the previous outlook of up 5% to 10%
The largest driver of the increase in the sales outlook for Energy & Transportation is a higher forecast for the sale of engines into industrial applications, as our customers across several industrial end markets are seeing strength in their industries
Energy & Transportation 2017 sales growth is largely due to the strength in onshore North America oil and gas
We continue to see strong rebuild activity in wells servicing for engines, transmissions, pumps and flow iron as well as demand for new equipment
We also expect shipments to North America gas compression customers to be higher this year, driven largely by demand for reciprocating engines, as solar sales into oil and gas applications are expected to be flat for the full year
Transportation is now expected to be up, as higher rail traffic has driven higher demand for rail services
Power generation industry remains challenged, and we anticipate sales to be about flat to slightly up for the full year
While order activity has been strong for the first three quarters of 2017 and the backlog is up, geopolitical uncertainty, global and regional GDP growth and commodity volatility will be risks as we move into 2018. Potential tax reform and an infrastructure bill would be positives for the long term
At this time, we are focused on operational excellence, and our segments are in the process of planning and implementing strategies to drive profitable growth
It is too early to comment on 2018, and we will share more on 2018 in January
So, let's wrap up with a few takeaways on slide 11. In the third quarter, we saw encouraging order rates and an increasing backlog in the quarter
Year-over-year sales and revenues were higher by more than $2 billion
Operational performance for the year has been strong, as third quarter segment margins continued to improve as a result of our commitment to the O&E model, operational excellence and profitable growth
The balance sheet remains strong with $9.6 billion of enterprise cash on hand and a debt-to-cap ratio of 36.1%
Given year-to-date performance and confidence in our end markets, we raised the 2017 profit outlook
We are focused on delivering the new strategy that Jim rolled out in September at Investor Day and are focused on driving profitable growth through margin expansion, asset efficiency and expanded offerings, especially services
With that, I'll now turn it back to you, <UNK>
| 2017_CAT |
2015 | AES | AES
#I'll ask Tom to talk about the credit improvement for us at DP&L and then we'll come back to the Brazil question.
We continue to pay down debt.
I haven't got the FFO projections offhand, but the next maturity which is with at the DPL parent, not DP&L utility is $130 million next fall and we expect to be able to pay that off with internal cash flow that was contemplated when we left some of it outstanding with the refi we did a year or so ago.
So we continue to see debt paydown.
We will be transitioning the DP&L integrated utility from a fully integrated.
We will be creating a Jennco, basically a sister to the utility that will involve some refinancing at the DP&L level, and that we'll be over the next couple of years, within the next couple of years.
We can follow up with the FFO specifically at DPL and DP&L.
When you're asking about Brazil, are you asking versus 2015 are versus our prior 2016 guidance.
It's approximately $0.05 that is coming from Brazil from the different things that are happening in Brazil.
Again, going back, we had a 5% decrease in demand, which is very strong, this year.
It's reflecting a weakening economy.
The economy in Brazil is actually contracting between 2.5% and 3% this year.
In addition, you had increase in tariffs and you've had these terrible weather conditions in Sul.
That's a part of the things that are affecting demand in Brazil and then you have the effect on the currencies.
I think we would have to really look at the distribution of our portfolio.
And really where we have synergies.
We're not going to do any deals, we've always said, that would just bring money.
There really has to be synergies or something special to it.
Right now we're really focused on completing our projects and those that we mentioned are Southland and Panama, a little desal in Chile.
And some energy storage projects which we think have a great potential not only for the projects themselves, but also to help us with third-party channel sales of our technology.
I would say Mexico is a market that looks attractive given the partner that we have, but we're going to be very disciplined.
We're going to be disciplined going forward, because, obviously, we have to react to the change of circumstances.
We think that we have a lot of embedded growth in what we have already done.
We do not want to be in a situation where we are spending on things that therefore we cannot finance or we have a better opportunity to use that money somewhere else.
Now having said that, if we give guidance out to 2018, but obviously 2019 is going to be even stronger.
And then in 2020, you have Southland coming on.
So we also want to have the opportunity for of these brownfield additions in the [1920s] space, but we're not going to be spending a lot of money chasing them at this stage.
But if there are opportunities that we can keep at a low cost on the back burner, we will be looking at those.
I think there are two things in Brazil.
One is that they are in a recession now.
It is a difficult one; it's going to take a little time for them to work their way out of it, in my opinion.
There's obviously a lot of political confusion, which doesn't help.
But, having said that, in the case of Brazil, this is an economy which has a population in the optimal level.
It is still growing.
There is still a lot of opportunities in Brazil, especially they do have structural reforms.
So I think everybody, if you look at a medium to longer term outlook for Brazil, in the energy sector, will be far more positive than the outlook today, because you're really looking at it.
I think what is important to realize about Brazil, it is not just commodities that's affecting them.
It has really been internal politics and internal decisions.
So, their ability to recover is much greater.
So that's it.
We don't expect great recovery in Brazil in 2016 and maybe even 2017.
But thereafter, the fundamentals of the market look pretty sound.
Morning <UNK>.
In terms of the longer-term guidance, we have some modest share repurchases in there.
I would point out that ---+ I've always said in the past, we do always get the authorizations that we need.
But we have said that we would do this opportunistically.
So we will be very, again, disciplined in our execution of this.
In terms of cash, we have some debt paydown as well into these forecasts to make sure that we're credit neutral or improving our credit over time.
We look at a balance of share repurchase and debt repayment.
It takes time, there's opportunities to complete those.
We'll look at those, but we don't put hypotheticals into our numbers.
It's an allocation of discretionary cash beyond our CapEx as defined between share repurchase and debt payment.
First I want to clarify.
This is up to $1 billion.
We don't have a targeted $1 billion in sales.
So this is up to $1 billion.
It will depend on the opportunities and the use that we have for that cash.
I want to make that perfectly clear.
In terms of our guidance, we do have continued fine-tuning of our portfolio.
We have some consideration for some modest dilution from some of the sales.
Because that may not pan out in the sense it depends what we sell, the timing of what we sell.
But we are being prudent in here that if we sell so.
We will update that in terms of some of these asset sell downs materialize.
And of course and it will vary very much the net effect.
Whether it's exactly what we have embedded or not, will depend on the use of that cash, whether it's debt paydown or share buybacks or it's another project and what's the gestation period of that project
I'm going to pass this one to Bernard.
We're not going to give a breakdown by SBU.
But Bernard can give you a little color about some of the things.
He's looking at the SBU level, but this is everyone.
This is finance; this is IT; this is absolutely everything is being look at in the Company.
When you look at what we have done since 2012, we have seen more opportunity for seeds we moved actively for the SBU.
So we're taking advantage for economies of scales, some process, some monetization.
I'm trying to give you a flavor of four pockets that we're looking more into that quarter.
The first one is intensified our progress in subsidiaries and economies of scale that is very focused on sourcing, coal, spares, inventory and long-term service agreements.
The second part that we have here is centralized our global G&A.
We continue to focus on that.
We have roughly about $480 million as the global G&A ownership-adjusted.
So we have financiers, we have service centers already lower across locations where we operate.
So we're going to lever up those.
We want to continue to have more G&A transactional process, or back-office activity done in those lower cost locations.
The other one is based on estimatization and relegation of what our AES programs, that is actually to improve our profitability for our 35 gigawatts fleet.
That is also including cheap grade and lower our outage or efforts that we have in our fleet.
And the last pocket is really streamline our organization as we rebalance the portfolio.
As we sell down some of our business, as we sell some of our assets, we also were looking for what are the new operations that are coming in for our construction.
We're streamlining our organization in order to be more centralized and more focused on more efficient base on the portfolio that we have.
We thank everybody for joining us on today's call.
We look forward to seeing you at EAI.
In the meantime, if you have any questions, please feel free to call our IR team.
Thank you and have a nice day.
| 2015_AES |
2016 | BPFH | BPFH
#<UNK>, let me bridge back to what <UNK> said.
<UNK> and the team have been analytically religious about client measurement and client profiling.
<UNK> mentioned that we believe there is about $600 million of AUM represented by high-quality clients who warrant tremendous retention attention.
What we can't give guidance on is how much of that $600 million ultimately retains versus departs.
What I can tell you is that we're swarming at $600 million.
<UNK> also made a key point about staff stability.
We have attained a high level of staff stability.
Staff departures are not triggering the remaining risk level around retention.
The one strategy <UNK> mentioned was not a fulcrum in anything that happened the first quarter.
I am not a believer in bad luck, but in the first quarter, frankly, I think we had bad luck.
Every one of the six clients who drove that bulge number are a bit of a story.
So, as I've said in previous public statements, I think the retention journey, unfortunately, is not a straight-line.
It's lumpy quarter-to-quarter.
We certainly had our hopes up in Q4 when Q4 departures looked a lot better than Q3.
Therefore, we're very disappointed in the Q1 number, but I am not at all believing this is a problematic trend.
I think we are trending with each passing quarter toward greater and greater client stability.
Again, looking at the normalized expenses, I think we have a lot of the investments in place.
We saw some of those expenses in the first quarter.
You look at the $66.7 million.
You take out the $2 million, or so, of FICA seasonality that we had and the restructuring, and I think you get into more of a $63 million, $63.5 million range for normalized.
That does have some elevated professional fees if we can get that down, we can take that down a few hundred thousand as well.
Good morning, Alex.
Sure.
That was about one-third of the inflows for the quarter.
Sure.
First, overall, the pipeline is twice as large today as it was this time last year.
I should add, by the way, an editorial comment in light of all of the change that has been going on, the transitions, some new management, the fact that that's twice as large given the focus has been in other parts of the business, I think that's pretty phenomenal.
I can't guarantee it will go to four times from here, but I'm pretty encouraged by that.
The pipeline is not, the growth from that is not all attributed to that group, although the majority of that group is from the West coast.
Frankly, I think that group has unlocked an incredible amount of opportunity from our West coast bankers that they've been starving for at least for the last 2-1/2 years while I've been here.
They are contributing to it, but it's all over, through our channel partners, it's through the East coast.
We've developed a dedicated effort calling on our internal bankers with our Boston Private Wealth personnel, treating them like a client, and making sure they are educated and understanding the new model.
I think the more the bankers here in Boston and California hear about that, the more and more they are opening their client books to us.
Clearly, if you breakdown those large clients, they were atypical besides we had ---+ and I would also classify them as less wealth management clients and even maybe more as investment management clients, which we're trying to get away from.
I should also point out, and I think Clay said it, that one of the client's depart is a result of a strategy change where we retired a strategy, and $50 million went out, but I think, strategically, it was the right decision.
So, is that a client outflow, due to personnel change, no.
Back your original question, I think, our average size relationship is $3.5 million.
The number of clients on that list of 600 is probably 50 to 60.
Yes, we haven't done it historically, Alex.
I'll look at that.
I don't want to blurt it out on this call and then trap us in new disclosure.
I will tell you this, though, I think the headwinds in active US equity management remain high.
Having said that, one ray of sunshine is in the first quarter, a lot of the drawdowns that I saw were not client terminations.
It was really reweighting and rebalancing.
Now, one quarter does not a story make, but I do have hope that our repositioning of both Anchor and Dalton Greiner, good value-added investment performance, good high quality marketing and distribution, a balanced focus, not only on the institutional space, but institutional plus platform channels and domestic partners, plus in the case of Dalton Greiner, international investors looking for US equity exposure, I do think we are taking a balanced approach.
If we get into a market environment with reduced uncertainty, I think a big part of the first quarter was just kind of the start to the year and just elevated uncertainty everywhere.
That always has a chilling effect on client allocation.
Again, we're just focused on the controllables for us.
Investment performance, value-added, marketing and sales.
I do take some heart, though, in the change in anatomy of the negative flows.
It was less terminations than historic, and more reweighting, rebalancing, et cetera.
And I'll take a look at, going forward, do we get into gross net and all of that.
But we have not.
It's a different business.
Again, you have to think about it.
Our clients are largely the large platforms.
Most of the assets sit on very large S&A UMA platforms, so we have the large institutional client.
The underlying high net worth clients that sit and drive the assets on that are not someone that we have direct relationships with.
It's a little bit of an apples-to-oranges comparison when you're talking about client relationships.
That's okay.
It was probably about half.
About half was related to the net recoveries.
And about, which we didn't have previously reserved for, and then half was related to the reduction in commercial loan balances.
It was Construction and C&I.
I don't have that right now.
We do track that, and we will look into, potentially, it's something we could disclose in the future.
Again, it's really hard, it's hard to use as a predictive tool, though.
No.
We do put that in the tables, I think, last year, we probably had about $2.5 million for the whole year, $2.3 million, something like that.
This was an elevated quarter, $1.1 million.
It can be lumpy.
Year-over-year, the first quarter of 2015, it was $1.7 million, then we had zero, then it was $300,000, $300,000, and then it was a million this quarter.
Again, it can be very lumpy related to some large credits that pay off.
<UNK>, it's an astute question.
The answer is, yes, but it's largely in place.
We spent a lot of time last year working on appropriate incentives and resets, and they're typically of several types.
We have some very appealing, and yet, high class.
What we don't want to create is some kind of mercenary culture, but we have a very appealing set of incentives for our client facing private bankers to introduce clients to our wealth management and trust businesses.
Our wealth management client advisors are very focused on client service and building the caliber of their client books of business, which, obviously, is both introduction as well as retention.
And then we have a number of salespeople covering channels, third-party centers of influence, and in our investment management businesses, selling in the institutional space and the like.
We spent a lot of time last year, in particular, scrubbing those arrangements, making sure they were appropriately centered, and I feel good about it.
No, we don't have any restraints or constraints on that.
Thanks.
Thank you all for your continued interest in us.
We're going to be very active in the coming several months with IR outreach.
We look forward to seeing you and seeing our investors.
| 2016_BPFH |
2016 | ILMN | ILMN
#There was nothing in the European numbers that was market specific, and so these were revenue recognition issues of various sorts, as I highlighted in the script.
None of those were particularly related to specific markets within the clinical sector or the research sector.
They're two sort of different issues.
If we look at Q1, that was really a HiSeq story, and that was a HiSeq story across regions, and we talked about the fact that a lot of that was the HiSeq shortfall, and the orders that came in, that we weren't able to recognize as revenue.
That's really what the Q1 story was.
Looking forward the issue is around the forecasted shortfall in Europe, and there, we believe a lot of it is around sales execution, and that's really what we are focused on, driving more discipline into generating pipeline, getting visibility into the pipeline and Jen urgency in working the deals through the process, and that's across instruments, and across markets in Europe.
I think personnel and then the knock-on effect on the process we're running in Europe.
I feel like we have ---+ you're not going to put all this on one person, and we have definitely good people on the team.
What we are seeing is that we don't run as disciplined a process in Europe as we do in the other regions, and already, we're starting to see in the last few weeks, an improvement in the visibility of the pipeline through this quarter, and we're seeing more urgency in our sales process.
So that we believe were the biggest drivers in what we're seeing in Europe.
And <UNK>, on the instrument revenue, we're not bifurcating the guide for the year into the individual component pieces, but I gave some specific commentary.
Clearly, we've given commentary around Q1.
I gave some specific commentary around Q2 there as well.
So definitely a slower start for the year, driven by the high throughput.
And then as I mentioned, we'll see an uptick toward the second half of the year.
But not giving out specific commentary on breaking down the revenue growth by that category at this point.
Yes, I maybe wouldn't characterize it exactly like that, <UNK>, but I think your points are important ones.
I've highlighted over the past year or 18 months that much of the market development that has to happen now in sequencing falls on Illumina, that we don't have a lot of other large companies who are spending marketing dollars developing markets, and so that is key for us to do, more than it ever has been.
And the big markets we're opening up now have each their own unique set of issues, whether it's reimbursement, or regulatory, or in the case of GRAIL, clinical trial work.
And so it is ---+ it does take some time to open up those new markets.
Having said that, there's no question that Illumina's still driven by product innovation.
In all of our businesses, we analytically see a cycle that's related to product cycles.
And whenever we launch new platforms, we get a surge of new orders for those instruments, and then the following year, the consumables begin to catch up, and then that platform begins to level out over time.
So every platform has an S curve associated with it.
It is true that we are a larger Company now, and therefore each individual S curve has a smaller of effect on the total revenue of the Company.
So there's no getting around that fact.
And so, we have much greater diversity in our business now, which is a good thing, but each individual product launch probably is less of an impact than it might have been, back when we had only one sequencer, for example, when we replaced the GA with the HiSeq, everybody bought a HiSeq, because it's the only product in the market.
That's not quite where we are today.
As we look to operationalize those dynamics, as <UNK> said, there are two dynamics playing out.
One is there is an opportunity for us to get more actively involved in the development of those markets, so we can accelerate the adoption of NGS into the different markets we play in, and work with our customers to help them with things like the trial that we're doing, the STAR trial we're doing in the PGS space, in the IVF world for example.
We're also getting more engaged with our customers in the payer community, and market access programs.
And part, as <UNK> said, of what we do to develop the market is actually bring new instruments into the market, which can catalyze the market through access to a lower price point.
Certainly a set of things we are doing to operationalize developing those markets.
Separate from that, there is a change in how you sell at this scale, and that in addition to tracking the big deals that get a high level of visibility at the executive level, a scalable sales process needs to make sure that we're taking care of the flow business, and that we do have really good visibility into pipeline, how pipelines are progressing, the opportunities.
And that's what we're putting into place in Europe, for example, right now.
Yes, that's exactly right.
So we did see as expected decline in Asia in Q1, but as we look at the forecast for the rest of the year, we do believe we have the opportunities and pipeline to support a mid-teens growth for the year.
The things that are driving those are, one, there is activity around the Chinese PMI.
That is causing purchasing to happen.
We saw that already start, and we expect that to play out.
We're continuing to see incremental improvement in Japan for example, and while that is slow and steady, it's slow and steady in the right direction, and we're seeing that show up in our pipeline as well.
And John, obviously Japan was a challenge quarter after quarter for us last year, and so that's reflected in the comps.
<UNK>, you want to walk through that.
Or do you want me to.
<UNK>, I missed the first part.
You're saying in relation to the utilization slide.
So I think a couple things.
Firstly, the capacity calculation itself, which is based on the actual mix of types of kits that our customers buy and run, clearly that's increasing quarter-over-quarter, as a result of the both the installed base, a little bit of the change in mix, and us coming out with higher throughput instruments, which I'll come back to when I look at the capacity utilization chart.
If you think about the percentages, what you probably ---+ what you don't want to see is a very low percentage of utilization.
That would reflect a lot of spare capacity in the market, which would have a read-through, I think, to future instrument purchases.
You're obviously not going to see utilizations based on our trajectory, our past history and our trajectory of much over 50% on an ongoing basis, due to the decentralization of the market.
Only in a centralized market would you see it much, much higher than this.
If you look at the data, what you're seeing is ---+ you see a couple of inflection points, where the utilization tends to stabilize.
That happens to coincide ---+ in one case go down if you look at 3Q 2014.
That coincides with when we put new capacity in the market.
Back then was the V4 run kit, and that created an instant increase in available capacity, which caused a dip in utilization.
As you can see that recovered.
Same thing as when we introduced the HiSeq 4000.
That had an effect on the growth in utilization, because we introduced new capacity into the market with that instrument as well.
And then what you're seeing, if you see it normalized for that one large order, is a fairly consistent growth rate, which is exactly what you would want to see, which we believe reflects the capacity is not ---+ there's not excess capacity in the market.
It's being utilized at a rate that is increasing over time, in spite of the increased volumes or capacities that we're putting out there, with the higher throughput instruments and kits.
The take away of course, in this, is that to the concern that there is all this extra capacity being generated in the market, I think this analysis and what we've gotten from our base case analytics show that's just not the case.
That the average instrumentation utilization, if anything, is on a slightly upward trend, which is exactly what we would hope to see.
And expect to see.
Europe would be lower on the averages.
The trend line probably isn't much different, but we clearly see highest utilization in the US.
Europe tends to be significantly lower on average utilization across almost all the platforms.
Well, I think from a magnitude of the challenge, Q3 2011 was the other big one for us, driven by very different factors.
That was a collection.
It was one of those again rare quarters where you had the convergence of a whole bunch of factors all at once, which I think we had this quarter, as well.
The specific factors then were different than the ones we had in Q1, but it was one of those convergence effects that sometimes happens, and that's what happened to us in Q1.
So I'd say that's the closest analogy in terms of lots of things going in the wrong direction in one quarter.
Well, we can't give you specifics on that of course.
If you think about it, ordered arrays have only been implemented on the highest end of our product line, HiSeq X and the 3000, 4000.
We could put ordered arrays on other products in the product line, when and if that becomes important for a throughput and cost reason, and is the highest return R&D program for us to invest in.
And so that technology can be applied to the other instruments.
We've not done that yet, because we don't think it's the most important factor in increasing the overall revenue from those segments.
But we have a broad product line now, and over time, various portions of that product line will age out, and they'll be replaced by brand-new products that we bring into the market, that of course will have dramatic new innovations built into them and we've been working on the fundamental technologies around this, and you've seen continued improvements in what we did in NextSeq, and then how we learned from MiSeq and NextSeq and even MiniSeq, and many of those improvements will get bundled into whatever the next system architecture is.
Clearly, we're working across the entire product portfolio, and we'll launch products into the segments we think are the richest opportunities there.
And we think that none of those segments is, I guess I'd describe it as permanently saturated, meaning that people won't change out their boxes if we bring something brand-new in, and that can be dramatically different in cost.
It could be dramatic improvements in ease of use and usability, dramatic improvements in speed.
There's all kinds of vectors we're working on and prioritizing in our R&D pipeline.
Instruments aside, we have very exciting stuff going in the sample prep area, in the informatics area, and it's a very broad product development portfolio.
One thing I'll add, in addition to looking to over time refresh everything we've got, one of the other things you can expect is, look, we are keenly focused on addressing the biggest impediments to getting NGS adopted in the different segments.
Some of that is through our own offerings, and you can expect innovations where customers are telling both you and us that there are the biggest bottlenecks.
So for example, one of the things we heard early on when we launched the X is that the informatics around was a problem and a challenge for our customers, and you saw us launch SeqLab.
You can expect that across the different segments, the biggest impediments that customers are telling you about they're telling us too, and through a combination of our own innovations and partner innovations, you should expect us to be looking to address those.
Well, there was an underlying factor where one or a couple perhaps of our NIPT customers are converting to NextSeqs.
That was something we were aware of.
That was in the plan.
We knew that going in.
It was in the forecast.
We did exactly what we thought we were going to do in those examples.
The ones that we cited and referred to in the script and in the table were ones that essentially stalled the HiSeq order we expected to get at the very last minute, where we thought that those orders were coming in, and they didn't come in, because the customer was considering that and we didn't know about it.
That's the execution issue.
So if you go back and look at the exact script, we didn't say primarily outsourcing.
We did cite the example of outsourcing as one factor that we knew about, at the preannouncement date.
You can imagine in those two weeks before the preannouncement we were scrambling hard to try to get as much data together as we could, and have a preannouncement that was timely.
We didn't want to wait another week to do a preannouncement, to have more data, and so we've learned a lot in the last two weeks, when all of the analytics from the Q1 have really come in and we've been able to digest them, talk to the regions, get the new forecast, and understand all of the background detail.
So we've been able to go order by order and look at every one of the circumstances, and break it into the pie chart that you see, in the deck that we provided.
So there were a lot of different issues, and no singular themes that dominate.
I think what happened is because we mentioned that one comment, people jumped on that one thing we mentioned as the cause, and it clearly wasn't, and we didn't intend to imply that it was.
So we probably should have said, among many causes, this was one we knew about at the time.
The factor was the shortfall in HiSeq.
That's the one factor.
In addition to getting the orders in that didn't convert into revenue.
Those were the two issues that we talked about in the preannouncement, and those are the two issues still.
We are seeing a number of customers gearing up to try to be participants in the PMI.
We don't know who will win that ultimately, and I don't think they do either, frankly.
There's obviously a couple of very strong candidates to participate, and those are large entities, some of which own instruments already, some of which don't.
So we think they will buy in advance, to have some installation, and perhaps the pull-through will be a little bit lower on those in the early stages.
But they should get very highly utilized, once the program begins to ramp up.
So sure, we could have a little bit of lower utilization locally on some instruments, but that's not atypical.
People sometimes do that for other programs, as well.
And we'll take that into account in our forecast, in our plan.
Sure.
So one of the things we talked about is, we did have the four Xs that came in Q1.
We did see some interest from the wanting to participate in the Chinese PMI, that is driving some of the X interest.
We haven't gone public with the customers that have come online in Q1, so I can't say that there's definitely demand generated from the Chinese PMI, but we can't talk about specific customers associated with that.
The only one that's public is Genewiz.
That's still a factor.
We still use the access to samples as a criteria for the purchase.
And what we've really seen in probably the past year is more of the X customers are metering out their instrument deliveries.
We're in the very early phases of X, people were converting their entire large existing programs over to the X.
If you're a Broad, or you're an HLI.
What we see now is that someone will place an X order and say, okay, I want two units for now and then a quarter or two from now, I'll take another three.
And so we're not ---+ that's one way that we deal with the sample access problem, and they do, as well.
<UNK>, you want to start.
I'll start with the orders conversation, <UNK>.
Obviously, a large part of the orders that we booked in the first quarter were shipped in the first quarter, as you would normally expect.
But we built significant backlog, and I called out specifically sequencing consumable backlog, and that will ship mostly through this year.
In fact, almost entirely, there's some that carries over into 2017 and beyond, but most of that's going to ship this year.
The way I would think about that is it's an advanced ordering of reagent purchases that we're going to get, or we should get anyway, throughout the year.
So it gives us some confidence, but I wouldn't think of it as necessarily incremental.
It is relative to last year and prior years, it is larger than we've traditionally seen, and so it gives us a little bit more of the backlog than we would normally have at this time.
And then, I also mentioned that we have about a third of our ending backlog for the quarter rolling over into the second half, which gives us some confidence.
Obviously, that includes a portion of those sequencing consumables that I just talked about.
So nothing more quantitative than that at this point, but other than the sequencing consumables, I would say we're pretty pleased with the array business and the consumer- driven activity there, which has been another helpful part of building backlog.
What it wasn't necessarily was a significant proportion of instrument backlog.
That's not ---+ it's become much more of a ---+ instruments have become much more of a turn in the quarter type of activity.
We don't necessarily come into the quarter with significant levels of backlog, like you saw us have in Q1 of 2015.
And it's much more normalized now.
I would just add, the math on the backlog growth is pretty simple so it's 700 plus minus the revenue that we did, and so that growth in the backlog was more than we've typically seen in Q1.
So we felt really good about the incoming order rate.
With respect to NIPT, what we're seeing is that the large payers, the majors there tend to assess coverage decisions on specific dates, and so they're on a cycle.
And so if they're not on cycle to do this in 2016, there's little to no chance they're going to go off cycle to approve this.
As we have mapped out all those cycles, there still remains the possibility that some of them late in 2016, but the majority of them fall in 2017, which is why we have cited that we think the bolus of these coverage decisions will be made in 2017.
With respect to cancer, the narrative really isn't about stable reimbursement, because the vast majority of the cancer tests aren't reimbursed today.
Even foundation medicines isn't.
Most of that market is being driven by labs running these tests for market share reasons.
Most of the labs are losing money on the cancer test.
So the reimbursement opportunity in oncology lies ahead of us, and it's something that many of our customers are working on.
It's an area that I'll be spending a fair amount of my time on in the next year.
And it's related to the standardization challenges that I think exist here.
We're in the phase of the oncology market where it's becoming increasingly fragmented, with lots and lots of different panel products, and one of the things that Illumina needs to do is to begin to reconverge that market into a more standard set of products and more standard set of processes so that payers can get their heads around what is something they should be paying for, and that's something our TST15 is attempting to do initially, and that's had great reception.
Our TST170 will begin to move in that direction as well.
But remember, those are RUO products, because we can't sell those for clinical use.
And so we are evaluating what's happening with the FDA before we begin to push those toward regulatory approval.
If you recall, we had projected nominally a 20% to 25% cannibalization rate of MiSeq.
We're seeing a rate so far at least, that's less than that.
Part of it is an interesting phenomenon where the low price point of the MiniSeq opens the door to a new customer, and then as we begin to engage with that customer, we use it as an upselling opportunity to sell them the MiSeq rather than a MiniSeq.
We're seeing that phenomenon working well for our salespeople, because they'd love to sell $100,000 instrument rather than a $50,000 one, if they have the option to do so.
Having said that, the MiniSeq product did well in its first quarter.
We've got a great pipeline there, and we're continuing to be optimistic about MiniSeq.
And the data we have today at least indicates a lower cannibalization rate of MiSeq than we would have expected previously.
It's a little too early for us to have any data on that, <UNK>.
We're continuing to look at this, and the number of customers that actually cross the finish line, got installed, are actually running these at any volume is still a relatively small number.
So it's too early for us to put an estimate out there.
In general, what we've used across the product line is about half of the purchase price.
I think in this product, it will probably be less than that.
So I'd model something less, significantly less than half.
So we'll be looking probably three or four quarters out before we actually start quoting what the actual range is running.
Well, I mean, clearly GRAIL and Helix in many ways are incremental to what we were doing before, and we should be thinking about them as such.
These are very important strategic bets that we think are the most important market opportunities for us to be working on.
The base level of R&D, and the growth rates you've seen over the past couple of quarters will begin to moderate based on our ---+ the absolute number will begin to moderate based upon the ---+ let me say it again.
The absolute growth rate will moderate in the R&D lines, because of the actions we're taking to slow down hiring, and that's important to more closely match what's happening in R&D with the recast revenue growth rate.
And so, we'll be analyzing this over the next quarter, and probably give you a little bit more update next quarter, not guidance for 2017 or 2018, but probably a little more qualitative statement about what you can think about R&D and sales and marketing.
One of the things we have said if you take out GRAIL and Helix over any three year time horizon, there is leverage in our operating model organically, right.
So we continue to believe that.
Thanks, <UNK>.
Thank you, operator.
As a reminder, a replay of this call will be available as a webcast in the investor section of our website, as well as through the dial-in instructions contained in today's earnings release.
Thank you all for joining us today.
This concludes our call, and we look forward to our next update following the close of the second fiscal quarter.
| 2016_ILMN |
2017 | ORCL | ORCL
#Thanks, <UNK>
Good afternoon, everyone
I’m going to focus on our non-GAAP results for Q2. I’ll then review guidance for Q3 and turn the call over to Larry and <UNK> for their comments
As you can see, we had another excellent quarter
Customer adoption of our Cloud products and services continues to be very strong and what we have called our on-premise business remains robust
Bottom line, our transition to the Cloud is going well
Despite the currency benefit being less than my guidance, total revenue was more than the high end of my guidance range and earnings per share was at the high-end even at a higher tax rate than expected
Cloud SaaS revenue for the quarter were $1.1 billion, up 47% from last year
Fusion Cloud revenue was up 56% for the quarter
Cloud PaaS and IaaS revenue for the quarter was $398 million, up 20% from last year
But just as a reminder, part of the Cloud PaaS and IaaS business is our legacy hosting services which don’t share the same high growth characteristics as PaaS and next-gen IaaS services
This portion of PaaS/IaaS saw growth of 46% in CD and 49% in USD, while the traditional hosting services, which we are de-focusing, were down nearly 10%
As traditional hosting services become a smaller part of total PaaS and IaaS, the underlying growth of PaaS and next-gen IaaS will be more visible
I want to also take a moment to review the announcements we made in October of bring your own licenses, what we call BYOL and autonomous database
Unlike the applications business where customers move to SaaS subscriptions, stop buying upfront licenses and shelve application support, BYOL customers can leverage their years of investment in Oracle database and technology software and bring those licenses to the Oracle cloud infrastructure instead of cancelling their licenses and support and moving to rent new licenses
With BYOL, we are seeing a strong increase in our technology installed base as customers renew their unlimited license agreement, invest in more licenses and options and renew support
Because BYOL is now available and customers better understand their transition options to move to the Oracle Cloud, technology new software license revenue is dramatically improving from the declines we were seeing previously
We expect this trend to continue as we roll out Autonomous Database as customers license the options and technology they need
We expect to continue to take share in database
Now, total cloud and software revenues were $7.8 billion, up 7% in constant currency and up 9% in U.S
dollars
In fact, we’ve consistently overachieved our software and cloud revenue forecast the last seven quarters
I focus on these numbers, which we refer to as the ecosystem revenues, because that is where all of our software assets come together and you can start to see the powerful dynamics of the business, especially with our BYOL model
Total cloud revenues in the quarter were $1.5 billion, up 39% from last year
Total on-premise software revenues were $6.3 billion, up 1% from last year, reflecting stable software license and continued high attach of software support and renewal rates that reflect the stability of our installed base of customers
GAAP application total revenues which is new licenses and support and SaaS, were $2.7 billion, up 13% and GAAP platform and infrastructure total revenues, which includes new license and support and PaaS and IaaS, were $5.1 billion, up 4%
As for cloud margins, our SaaS business continues to scale and grow and the gross margin has expanded to 66% up from 59% last Q2. We expect to see further improvement in FY 2018 and we remain committed to our goal of 80% SaaS gross margins
The gross margin of PaaS and IaaS was 40%, down from 44% last quarter as our geographic buildout goes forward in response to demand but ahead of the bulk of new revenue recognition
When we are at scale, I expect to see major improvement in PaaS and IaaS gross margin
Hardware revenues were $940 million, down 9%, and service revenues were $856 million, essentially unchanged in constant currency
Total non-GAAP revenue for the company were $9.6 billion, up 4% from last year and 6% in U.S
dollars
Non-GAAP operating income was $4.2 billion, up 8% from last year, 10% in U.S
dollars
The operating margin was 44%, which was up from 42% last year
The operating margins have now increased year over year for five consecutive quarters and while I can’t promise this will happen every quarter, I do expect that operating margins will continue to expand
The non-GAAP tax rate for the quarter was slightly higher than expected at 25.2%
As a result, EPS was $0.01 less at $0.70 a share in U.S
dollars, up 14% in U.S
dollars, 12% in CD
The GAAP tax rate was 22.1% and GAAP EPS was $0.52. Operating cash flow over the last four quarters was $14.6 billion, up 2%, and free cash flow over the last four quarters was $12.5 billion
Capital expenditures for the quarter were $599 million
I expect the cloud CapEx spending would be driven by our ARR growth and the PaaS/IaaS buildout that I mentioned earlier
Obviously, should we see higher than expected ARR growth, we’d expect to see higher CapEx investments as well
Now we have more than $71 billion in cash and marketable securities but net of debt our cash position is $10.9 billion
The short-term deferred revenue balance is $8.1 billion, up 6% in constant currency
This quarter we repurchased nearly 41 million shares for a total of $2 billion
Over the last 12 months we’ve repurchased 74.5 million shares for a total of $3.5 billion
We also paid out dividends of nearly $3 billion
The Board of Directors increased the authorization for share repurchases by $12 billion and again declared a quarterly dividend of $0.19 per share
Now to the guidance for Q3. My guidance is on a non-GAAP basis and in constant currency
However, there has been some currency movement and assuming current exchange rates remain the same as they are now, currency could be as much as 3% positive on total revenue or $0.03 positive on EPS
So, for Q3 in constant currency, Cloud revenue including SaaS, PaaS and IaaS are expected to grow 21% to 25%
Total revenues is expected to range from 2% to 4%
Non-GAAP EPS in constant currency is expected to be somewhere between $0.68 and $0.70. That puts the USD earnings per share at $0.71, and $0.73. This assumes a non-GAAP tax rate somewhere around 24%
Of course with the current and very real possibility of tax reform, the Q3 tax rate could easily end up being very different especially to the extent that there is repatriation
With that, I will turn over to <UNK> for his comments
Well, I think our capital expenditures will be very similar to last year
As I mentioned to you last year, we spent about $1 billion in kind of CapEx associated with the cloud
We spent about $1 billion in our real estate expansion
And the way that CapEx works really is there’s a certain amount when we open data centers, and that cost quite a bit to just get started
And then the buildout is a little bit less because there’s abasing starting block
So I think we -– and what happens is you start to get really major economies of scale as you – once your setup is basically set up, straight and ready to go
So I see it like last year
A lot of growth, about half of it is in real estate which I don’t expect to continue necessarily as much on that side
So no, no deceleration, just trying to get some economies of scale as we build out
We’ve got some plans but nothing
Now the revenues are coming in so that’s why we’re having the improvements in margins
Yes, absolutely
So it’s not only BYOL
It’s also in preparation for Autonomous Database
So understand that to get the benefit of Autonomous Database in the Oracle cloud, you bring your own license, but you may also, you will also need depending on which service you need, you’re going to need some of the options in addition
And also, as you bring your own database licenses, you’re going to want to have app server licenses and middleware licenses in order to work with your database
So all of that, that BYOL is a fundamental change and is significantly different from how SaaS works
And that’s what I try to explain
In SaaS, you are now doing a SaaS subscription, you’re no longer using your license
You don’t need to buy more licenses, and you shelve your support
With BYOL, you buy additional licenses, you bring them to our cloud and you continue to pay support
And that is going to be very significant going forward
And it’s already, you already see it in this quarter already
And we announced it in OpenWorld
The mechanics are not automatic, so let’s actually set this up
What has clearly happened, and I could already see this even at OpenWorld in talking to customers, they now understand that they will want to have more licenses
So as their unlimited agreements are starting to expire, they could have historically pick up
I’m going to rent all my licenses going forward, there’s no point in owning them, they would’ve certify those licenses and stopped buying additional and renewing unlimited agreements
So what they’ve now seen is there pathway with BYOL gives them complete flexibility of when they are ready to move to the cloud, but that there’s a benefit in owning your licenses and buying more and renewing support
So customers moved to the cloud when it makes sense for them
Autonomous Database, which is coming out in a little while here, that’s going to be an enormous driver for customers to actually move there important workloads to the cloud
You understand? The two are related, but not the same
Larry, I don’t if you want to
So there are a few things going on here
Remember, when you bring your own license to Oracle IaaS, the service you purchase is more expensive than the basic IaaS because you get all of the autonomous – all of the capability you wouldn’t otherwise get, first of all
But you cannot divorce the margin of just IaaS without remembering that both licenses are being purchased, and support is continuously paid
That’s why you heard me say, maybe you heard me say, the so-called on-premise license, because it’s actually now that we’ve launched BYOL, it is actually a misnomer because the customer – it’s currently categorized on our income statement as on-premise software and support, for that matter
Those are called on premise, but there’s nothing on premise about them
You can bring them to the cloud
So you have to understand how much money in that pool because with SaaS on the applications side, remember, we don’t sell you a new license, you no longer renew your support, and you start renting SaaS licenses and the service all bundled together
So in this case, to the extent that - and, by the way, I just want to be clear, customers have the option if they don’t want to bring their own license, to buy, to rent licenses through PaaS
That’s also available to them
But financially for both them and us, it actually works out best if they bring those licenses and those with unlimited agreements can bring an unlimited amount of licenses to our cloud as well as continue to use whatever they’ve got still on premise at their own state while continuing to pay support and buying additional licenses
So the math is more complete and very profitable for both us and the customer
Well, to the extent that repatriation is part of the final bill, and to the extent that whatever is the rate for the cash that we bring back, either what we actually have or the deemed repatriation, that will make available to us under $60 billion, depending on the tax of cash that we can use for whatever would be available for us
We haven’t made any decisions about how we would use it
I believe that it is mandatory repatriation
So, a tax will be due on all cash outside the United States for all of those companies, and I believe we’d need to book it, or at least book an estimate for it in the quarter that the tax law changes
That will make our tax rate look sort of strange, but, of course, I’ll disclose the amounts and all that
I’m not sure that the final rate has been set, and, whether it will actually stay in the bill
So, we hope it does
We hope they do move to a territorial system
It will make us more competitive, and we look forward to that
For your first question, yes, I think that operating income is going to grow faster than revenue because we get economies of scale, we have margin improvement, and the business is growing
And when it grows, we get economies of scale that allow us to grow income, operating income faster than revenues
And I’m quite sure of that
I think you should not confuse bookings with revenue, and PaaS and IaaS forecast looks good
I’m not giving you – I’m not breaking them down for you, but I expect them to be positive and consistent with what you would have seen
And just as a reminder, the PaaS/IaaS includes a piece that is not growing and a piece that is growing
The piece that’s not growing is like 200 something, 240 – I can’t remember
No question because the PaaS/IaaS that we care about, the one we’re focused on is growing 40 something percent
| 2017_ORCL |
2016 | NOC | NOC
#Sure.
I commented a little bit on that earlier in terms of some of the burn-down of advances that we've seen on a couple international programs, and also, I think as we've had a few contractual delays that have impacted the timing of cash flows and the working capital as well, as I mentioned, the DFAR clause in terms of limitation on performance based payments.
Largely I don't think we see anything in there other than timing for the most part.
If you look at our historical timing of cash flows, we're much stronger in the fourth quarter, just in terms of how our business flows through the year.
We're much stronger in terms of in-flows in the fourth quarter.
And we expect that to be a continued trend this year.
We'll have a strong finish to the year and we're confident that we'll be within our range from a free cash flow perspective.
That cash flow will come out of those receivables and drive the working capital down.
So I think at the end of the year you'll see that we're at a level of working capital that's about, more consistent, with where we normally are by year-end and then we'll continue to focus on this as we move forward.
We are working with our customer on the impact of the DFAR clause on working capital and how we manage that going forward.
I think they recognize that that's important to both parties in terms of an appropriate level of cash flow for the type of contract and for the cost profile that's incurred on that contract.
So no issues in terms of overall collectability or any significant change in our ability to manage the working capital.
I think we've just got to work through these couple things and we'll see our cash flows start to increase as we grow the business as we look forward.
<UNK>, I'll just ---+ I'll say that in terms of backlog, we did make a change in terms of our quarterly disclosure of it this year, and I wouldn't be able to say much more than the trend data that we've got in the document.
Both AS and MS are up from the year-end and TS, we disclosed, was down slightly from last year.
And largely what I'll tell you is that the quarterly impact of awards we view as kind of, sure, it has some lumpiness to it, and looking at this over the longer term we think is the more appropriate way to think about awards.
And at year-end we'll endeavor to provide the level of backlog detail that you all will be looking for and I think that's probably the most information I can give you at this point in time.
I would say that we undertook an effort to buy back 25% of the outstanding shares of the Company in 2013.
We worked that through the system through the fourth quarter of last year and that resulted in a significant amount of capital deployed in excess of free cash flow.
I wouldn't necessarily expect that to continue.
As you look forward, we would expect to be essentially deploying cash in a manner that says, look, we're going to invest in the businesses, as <UNK> mentioned.
We're investing higher in terms of CapEx.
We pay a competitive dividend.
You saw we increased our dividend again in May.
And then excess cash we tend to deploy through share repurchases.
We take a pretty consistent approach to share repurchase.
We're not speculative.
We set a plan and we go after it.
In terms of maybe what you're seeing is we finished the 25% repurchase in the fourth quarter of last year.
We have a little bit of a slower first part of the year this year in terms of cash generation, so we spend a little bit more than 100%, but as we generate the cash in the fourth quarter, I think you'll start to see that normalize a bit.
Robin, I think that's all the time we have for right now, so I'm going to turn it over to <UNK> for final comments.
All right.
Thanks <UNK>.
Let me wrap up by thanking our team.
We are just so fortunate to have an amazing group of people across our Company who are focused on performing for our customers and our shareholders, and I sincerely appreciate all that they're doing.
Thanks to everyone for joining us on our call today and thanks for your continuing interest in our Company.
| 2016_NOC |
2015 | SCHL | SCHL
#Thank you very much, Nicole, and good morning, everyone.
Before we begin, I would like to point out that the slides of 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, and other risk 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 posted on the Investor Relations website.
Again, that's 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 all for joining our third quarter earnings conference call.
For this morning's [fair] remarks, I'm joined by Maureen O'Connell, CFO and CAO.
In our traditionally small third quarter, Scholastic's strong results in children's books and classroom publishing continue to be helped by the enthusiasm in the market for children's independent reading.
However, these gains were partly offset this quarter by the adverse effect of foreign currency translations and a decline in Ed Tech that is largely attributable to a tough comparison from last year when we had a large MATH 180 sale that did not repeat this year, as well as lower consulting revenues.
During the quarter, we took actions to restructure our Media organization to better align its operations with our core businesses, including moving our audio and video book operations to our Book Publishing group.
Also, while there is strong interest in Scholastic's programming, in today's evolving media landscape, it is no longer necessary for us to maintain the infrastructure required for production, and we will be closing down our Soup2Nuts production unit in this quarter.
We've also agreed to enter into a three-year agreement with Universal, NBC Universal, a first look at our trade publishing properties for live-action movies.
This gives us an opportunity to work with this top studio that has a direct stake in ensuring that our properties can become outstanding motion pictures.
As brick-and-mortar retailers contract, more children are buying books through our Club and Fair channels.
In fact, the Kids & Family Reading Report, released in January, found that our book Clubs and book Fairs rank second only to libraries as the key sources for children's books.
The 17% revenue growth this quarter in our Clubs, in particular, reflects higher engagement levels in schools, increases in the number of teacher sponsors and more student participation.
This remarkable turnaround in Clubs took place in calendar 2014, starting with our January offers last year, and sales have grown and that period by more than 30%.
We now expect sales for the rest of this school year to be equal to the very strong performance in Q4 last year.
We reported 2% growth in book Fairs.
Steadfast support in schools is leading to higher attendance at our book Fairs and higher revenue per Fair.
However, we had a slight year-over-year decrease in the number of Fairs in the third quarter because some schools had to postpone Fairs due to the harsh winter weather in parts of the US.
Most of these Fairs have been rescheduled and we expect a strong fourth quarter in book Fairs.
As a result of our direct connections to kids through our Clubs and Fairs, in particular, we know what books children love to read.
In Trade this quarter, we continued to see strong results from the Minecraft Handbook series with great early sales of the new handbook, Minecraft: Blockopedia.
As we look ahead to next year, we are ramping up for the October 2015 release of the Goosebumps movie starring Jack Black, and we have an exciting lineup of tie-in publishing that we will roll out this fall.
Further bolstering our Trade business, we purchased a minority equity interest in the UK book publisher, Make Believe Ideas.
MBI is a highly regarded publisher of innovative early childhood books sold in mass-market channels including Walmart and Target.
Their vivid interactive books inspire creativity in early learning, principles that are well aligned with Scholastic's own.
The first Scholastic branded MBI books will be introduced next week at the Bologna Book Fair and are slated for global release in fall 2015.
We achieved 7% growth in the quarter in Classroom and Supplemental Publishing overall which continues to be a growing business for the Company.
We are strengthening our position in US schools on the basis of our ability to help teachers supplement reading in social studies programs with personalized learning options and customized curriculum.
Sales of guided reading materials and classroom books continue to grow strongly.
Scholastic's guided reading helped teachers into reading achievement and differentiated instruction as they develop their curriculum.
Our Classroom Magazines also answered the need for high-quality engaging non-fiction content in classrooms.
Circulation in Classroom Magazines exceeded 14 million copies per issue this quarter, as teachers continue to turn to our print editions and digital companions to help enhance the classroom experience.
In Ed Tech, we are continuing to implement initiatives to expand the user base for all of our core intervention programs, especially our higher margin offerings.
This quarter, we are encouraged by the growth in new business for READ 180, and as you may recall, READ180 customers are highly likely to purchase additional programs from us in the future.
MATH 180 Course II, concentrating on algebra readiness, is being field tested now and will be released later this year.
We know that schools are very excited about this new program, and the fourth quarter is a significant revenue quarter for Ed Tech, and we are well-positioned for the summer and back-to-school seasons.
In International, we grew overall revenue before the impact of foreign exchange.
Our fast-growing business in Asia will now reach more than $100 million in sales this year.
Solid local currency sales in that region and India were supported by the growing global commitment to helping children learn to read in English and local languages, as well as math instruction in English.
We are continuing to build our education publishing capacity in Asia, both for local and global markets, and are growing our consumer book revenues in Asia through both direct sales and trade channels.
In conclusion, we look forward to a strong fourth quarter in Children's Books, Supplemental Education, and International, and we remain confident that the initiatives underway to strengthen sales operations in our Educational Technology business will support our sales efforts as we close out the year.
With that, I will turn the call over to Maureen to provide more detail on our financial results.
Thank you, <UNK>, and good morning, everyone.
Our third quarter revenue grew by just over 2% to $382.1 million, and excluding one-time items, loss per share from continuing operations was $0.59, an improvement over a loss of $0.68 last year.
Before I get to the detail behind our operating performance, I'd like to quickly review the one-time, mostly non-cash, items for the quarter which were $0.09 per share in total.
These are mostly comprised of $2.9 million in severance charges associated with the restructuring of our interactive Media business, where we are streamlining operations so they are better aligned with our growth opportunities in Children's Publishing.
We also had an asset write-down of $1.5 million related to a warehouse consolidation in Canada, and a non-cash settlement charge of $0.6 million connected to our defined-benefit pension plan.
As you may recall, we had a one-time net benefit of $0.30 per share in the third quarter last year which included a favorable settlement of outstanding federal tax audits.
Cost of goods sold excluding one-time items increased about 1% to 52% of sales mostly due to higher free book promotions in Clubs, Minecraft margins, higher cost of product due to foreign exchange in Canada, higher trade fulfillment costs in Australia, and higher product amortization in our Educational Technology business.
SG&A excluding one-time items was essentially flat to the prior year.
Now turning to our segment results.
Children's Book Publishing and Distribution segment performance was strong with revenue growth of 7% to $202.9 million.
On the strength of marketing strategies implemented last year, School Book Club revenues grew by 17%.
In School Book Fairs, we increased revenue per Fair for the eighth consecutive quarter and grew revenue overall to $91.2 million.
The harsh winter weather did have an unfavorable impact on the Fair count in Q3, as <UNK> mentioned, and we expect to make up that in Q4 when the rescheduled Fairs take place.
In Trade, 2% sales growth was largely due to the popular Minecraft Handbook series, and core back list titles including Harry Potter.
Overall segment operating loss improved to $2.2 million versus a loss of $10.6 million last year last year as a result of higher sales volume together with lower operating costs and lower technology spend, partially offset by higher promotional spending in Clubs.
As you know, the third quarter is a smaller period for our Educational Technology business, and sales, as many schools and districts do not implement new curriculum programs mid-year.
Segment revenue in Educational Technology and Services fell by 4% to $34.3 million, mostly due to lower math product and consulting revenues during the quarter.
READ 180 new business revenue and expansion sales grew in the quarter.
Segment operating loss was $12.4 million as a result of the lower sales and higher amortization expenses.
We had a strong quarter in Classroom and Supplemental Materials Publishing, with segment revenue increasing by 7% to $49.1 million, and operating income increasing by 62% to $3.4 million.
These results were driven by Classroom Magazines, where we were able to both increase pricing and achieve a higher circulation, and guided reading and classroom book collections, which are becoming an even more viable element of our classrooms throughout the country.
International revenue in the quarter was $86.3 million versus $91 million last year.
Our International revenues are heavily impacted by the strengthening US dollar, and we had a $5.5 million unfavorable foreign exchange translation effect this quarter.
In local currencies, revenue growth In Australia/New Zealand, the Asia-Pacific region and export was partially offset by lower Hunger Games sales in the United Kingdom and Canada this quarter.
Segment operating income improved to $0.9 million versus $0.1 million last year.
We are investing modestly to increase publishing capability in Asia, where we are seeing healthy demand for our English language instructional material.
And these investments offset the impact of lower promotion and salary-related costs, and an insurance recovery from a warehouse fire in the India.
Overall, Media segment revenue this quarter was $9.5 million compared to $10.7 million in the prior year period, and segment operating loss improved to $2 million from a loss of $2.3 million in the prior period.
As I mentioned earlier, we are restructuring our Media operations so that they are better aligned with our core publishing operations and opportunities.
As such, we have deferred the timing of recognition of revenue of certain programming.
This deferral, along with lower revenue from Leapster and lower audio book sales caused our revenue to decrease this quarter.
As part of the restructuring, we shifted audio and video book operations to be part of our Trade Publishing group.
The audio and video book sales will now be reported as part of Children's Book Publishing and Distribution beginning in the fourth quarter.
Corporate overhead in the third quarter was $19.4 million compared to $11.2 million in the prior year period, excluding one-time items.
This increase was primarily due to higher planned investment in corporate level information technology in the current quarter to improve our data, analytics and selling capabilities.
The overall impact of these investments was essentially offset by lower technology spend in the business segment.
We had a year-over-year increase in depreciation expense related to our purchase of our headquarters building.
During the third quarter, free cash use was $4.6 million compared to a use of $17 million in the prior-year period.
At quarter end, net debt was $69.5 million compared to $157.7 million a year ago.
During the quarter, we repaid $20.1 million of debt and distributed $4.9 million in dividends to our shareholders from cash on hand.
We announced yesterday that the Board of Directors declared a regular quarterly dividend of $0.15 per share on common stock in the quarter.
Now turning to our outlook for FY15, we are affirming our outlook for total revenue of $1.9 billion, and earnings per diluted share from continuing operations in the range of $1.80 to $2, although we now expect to come in towards the lower end of our EPS range.
We expect free cash flow in the range of $65 million to $85 million.
The fourth quarter is a significant period for us, particularly for our education businesses.
We also expect the restructuring of Media business and the actions taken to reduce overall costs will improve earnings in the fourth quarter and beyond.
Finally, turning to real estate.
I know many of you are very focused on this topic, so I will provide a short update today.
We have entered into discussion with a short list of potential real estate investors and various strategies to monetize a portion of our real estate holdings in SoHo.
Interest from these investors remain high.
As previously indicated, we will provide a more detailed update on our real estate plans at the end of the fiscal year.
And now I will turn the call back over to <UNK> to moderate the question-and-answer session.
Thank you, Maureen.
Nicole, we are ready to open up the lines for questions.
I think the result ---+ it's from several things, <UNK>.
As you know, we've been in this business for a long time, as you said.
Right now, the enthusiasm for independent reading and for books in the schools is at an all-time high, somewhat comparable to the whole language period of the 1980s.
Teachers are going back to books after some flirtation with digital and trying to make that work.
These are largely print book sales, although there is an appetite for our digital subscription programs.
Our Classroom Magazines have been amazing in their growth in the past three or four years because the non-fiction is so beautifully attuned to the common core.
And at the same time, our digital companions make it possible for the teacher to ---+ on the one hand ---+ take advantage of the simplicity of the print magazine program, which is beautifully orchestrated for their teaching, and also can tell the kids to go and look at the digital supplements and/or teach them themselves, the digital supplements on their whiteboards.
So that's boosted up the Classroom Magazine.
But underlying all of this, I think there's a dissatisfaction, to some extent, with core printed basal textbooks.
People are looking for different kinds of solutions and they are customizing their own curriculums to a great degree.
So we work with them on that, as well as providing professional development and support services.
So I think it's just a perfect storm of a wonderful reception for our supplementary business and it's growing by leaps and bounds and we are investing more heavily in it.
In respect to the Clubs, going forward, I think we've achieved a remarkable increase in sales since January of 2014 through December of 2014, a one-year turnaround program that produced a 30%-some increase in sales in Clubs.
Obviously, we are leveling off a little bit right now compared to the tremendous gains that we had last spring.
But we see the Clubs as part of this overall independent reading thrust as gaining traction with more teacher sponsors and more child use as independent reading becomes more popular.
So we continue to see growth in that business, but the one-time growth that we had in the last year, which has been so dramatic, we don't see that continuing at that level of sales.
Does that answer the combined questions, <UNK>.
If not, I can also ask other members of the staff here to talk about those issues.
Well, I think we're seeing the book business in general, if you look at the Trade, Education and so forth, especially on the Trade side, the book business is pretty flat.
We see more people buying books in Clubs and Fairs then we have in the past.
So I think we see low-single-digit growth, for sure, in that business.
But that's what we see coming in the future.
We think we have continued opportunities as the people use our channels for getting children's books as opposed to going to bookstores, which are, unfortunately, dwindling a bit overall in our country.
Thank you all for your attention in this third quarter earnings call.
We'll look forward to talking to you again in July for our full-year results, and we appreciate your continued support of Scholastic.
| 2015_SCHL |
2015 | SXT | SXT
#Good morning.
I am <UNK> <UNK>, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation.
I would like to welcome all of you to Sensient's conference call to discuss 2015 third-quarter financial results.
I am joined this morning by <UNK> <UNK>, Sensient's President and Chief Executive Officer.
Yesterday, we released our 2015 third-quarter financial results.
A copy of the release is now available on our website at sensient.com.
Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the Company's filings with the Securities and Exchange Commission.
We urge you to read Sensient's filings for a description of these factors.
Please bear these factors in mind when you analyze our comments today.
Now we will hear from <UNK> <UNK>.
Thanks, <UNK>.
Good morning.
Sensient reported adjusted earnings per share of $0.77 in the third quarter, compared to $0.78 in the comparable period last year.
Foreign-currency translation continued to have a significant impact on the Company's results, reducing adjusted EPS by $0.06 in the quarter.
In local currency, third-quarter adjusted EPS increased by $0.05 or 6.4%.
Adjusted operating income was up about 2% in local currency, driven by strong performances from the flavors and fragrances group, the Asia-Pacific group, and most of the business units in the color group.
Sensient's operating margin was 15.7% in the third quarter, which is the same as last year's third-quarter margin.
The flavors and fragrances group has strong capabilities in sweet beverage and savory flavors, natural ingredients, and fragrances.
We have realigned our commercial and technical activities around common product lines to better serve our customers and we are continuing our efforts to shift the Group's product mix from simple ingredients to the more complex flavors and flavor systems.
We're making progress with our restructuring program and other efforts to lower costs.
The combination of upgrading our product mix and reducing our cost structure has improved the Group's operating margins and it will enable us to deliver sustainable profit growth.
Flavors and fragrances group performed well in the third quarter, reporting higher revenue and operating income in local currency.
Removing the impact of exchange rates, revenue increased by 2.5% and operating income increased by 5.4%.
The Group's operating margin improved to 15.1%, up 100 basis points from the third quarter of last year.
Many of the Group's businesses performed very well this quarter, with the North America beverage, North America sweet flavors, European sweet flavors, and fragrance businesses each delivering solid profit growth.
We expect the Group to show solid profit growth and higher operating margins again in the fourth quarter.
We continue to make progress with our restructuring activities.
We stopped production at our flavor facility in Canada at the end of September and we are on schedule to consolidate two more of our flavor facilities in Europe by the end of the year.
We will consolidate our last facility in 2016.
Our restructuring efforts are on track and our expectations for the timing of savings are consistent with what we communicated last quarter.
The flavors and fragrances group's third-quarter performance is a strong indication that our restructuring actions and the strategy to shift the business to higher-margin products are making substantial progress.
As I mentioned last quarter, some of our sales, technical, and production resources need to be focused on restructuring in the short term.
Their efforts are facilitating the timely execution of the plan and minimizing disruption to our customers.
As we near the completion of restructuring in the second half of next year, these resources will be fully focused on driving growth.
There is more work to be done, but we are making significant progress.
We're looking forward to completing our restructuring activities and we're optimistic about the outlook for the fourth quarter of 2015 and for all of 2016.
Most of the color group's businesses performed well in the third quarter, but the group's results were off due to the continuing challenges faced by the specialty inks business.
In local currency, the cosmetic, pharmaceutical, and food color businesses each reported higher revenue and operating profit.
Cosmetics reported double-digit revenue and operating profit growth in the third quarter and the pharmaceutical business reported double-digit profit growth.
Excluding the specialty inks business, the color group's third-quarter revenue increased by approximately 3.5% and operating income increased by 7.5% in local currency.
We continue to see strong interest in natural colors for food and beverage applications and many of our customers are making public commitments to use natural colors in their products.
We have made significant investments in our natural colors business and we are ready to assist our customers in making these conversions.
Our natural colors sales are showing strong growth, with our North American food color business reporting double-digit sales growth in the quarter.
We had several wins in North America in both the second and third quarters and the value of our natural color projects has tripled in the last year.
Sensient is the market leader for food and beverage colors and we are well positioned to lead the conversions to natural colors over the next few years.
The specialty inks business continues to be affected by the quality issue we mentioned last quarter, as well as by currency issues.
The quality issue has been resolved, but as I noted during the last call, we expect difficult comparisons to continue through the end of this year, but we expect significantly better results in 2016.
The specialty inks business delivered strong growth during the past few years and we continue to see good long-term prospects in the inks market.
We improved our position in the market with the Xennia acquisition in June and we're rapidly integrating Xennia's personnel and products.
Xennia strengthens our technical capabilities and broadens the product portfolio for our inks business.
The shift from analog to digital printing is a major trend that is still in its very early stages.
This trend, along with a shift to natural food and beverage colors, has the potential to provide significant growth opportunities for our color group in the years to come.
During the third quarter, we purchased approximately 600,000 shares, and year to date we have purchased more than 2.5 million shares.
Including dividend payments, Sensient has returned almost $200 million to its shareholders in the first nine months of this year and almost $400 million since the beginning of 2014.
We will continue to evaluate opportunistic share repurchases as part of our capital allocation strategy.
Foreign-currency translation has had a significant impact on the Company in 2015, reducing EPS by $0.06 in the third quarter and $0.18 for the year.
In addition, we will continue to have challenges with the inks business in the fourth quarter.
The impact of these items is consistent with our expectations at the end of last quarter and we are maintaining our EPS guidance of $3 to $3.09.
Sensient performed well in the third quarter.
We continue to make progress on our new strategy and on our restructuring activities.
Flavors and fragrances and Asia-Pacific groups each delivered solid growth.
The color group remained strong and most of its businesses performed very well in the quarter.
We continue to be very optimistic about the future.
<UNK> <UNK> will now provide you with additional details on the quarter.
Thank you, <UNK>.
Sensient reported revenue of $344.5 million and operating income of $43.2 million in the third quarter.
The reported results include $11 million of restructuring and other costs.
Excluding these costs, operating income was $54.2 million.
Foreign-currency translation reduced revenue by approximately 8% and adjusted operating income by 7%.
Diluted earnings per share from continuing operations, as reported, were $0.61, compared to $0.47 in last year's third quarter.
Restructuring and other costs reduced earnings per share by $0.17 in the quarter and by $0.31 in last year's third quarter.
Adjusted earnings per share were $0.77 in the third quarter, compared to $0.78 in the comparable period last year.
Foreign-currency translation had a significant impact on earnings per share, reducing EPS by 7.7% or $0.06 per share.
In local currency, adjusted earnings per share grew by 6.4%.
For the first nine months of the year, diluted earnings per share from continuing operations were $1.89, compared to $1.13 for the same period last year.
The reported EPS results include $0.45 of restructuring and other costs for the first nine months of this year and $1.18 of restructuring and other costs for the same period last year.
Adjusted earnings per share were $2.34 in the first nine months of 2015 and $2.31 for the comparable period in 2014.
In local currency, adjusted earnings per share grew by 9% or $0.21 per share year to date, as foreign-currency translation reduced EPS by $0.18 per share.
Cash flow from operating activities was $16.6 million in the third quarter and $93.5 million year to date.
Third-quarter cash flow was off last year's strong performance, due to a number of factors.
We began to make significant improvements in working capital in last year's third quarter, which affects the comparability of this year's results.
In this year's third quarter, cash flow was impacted by some restructuring activities and other one-time items.
We remain focused on working-capital reductions and we expect our cash-flow performance to normalize over the next few quarters.
Capital expenditures were $18.5 million during the third quarter and, consistent with our previous comments, we expect capital expenditures to be approximately $85 million this year.
Our balance sheet remains strong.
Our debt currently stands at 2.4 times adjusted EBITDA.
We plan to keep debt levels in line with an investment-grade profile to maintain the flexibility for capital expenditures, dividend payments, share buybacks, and acquisitions.
Thank you very much for your time this morning.
We will now open the call for questions.
Okay, sure.
So to begin, we are tracking very closely natural colors' growth in North America since this is where the bulk of the conversion activities are taking place, and not only for this quarter.
This quarter, we were up double digits topline and that's also true on the year-to-date metrics for natural colors North America.
As you look across the global food colors piece of things, when you think about topline we are up mid-single digits topline globally on food colors specifically, so you have a combination of some of the more mature markets, say in Europe, and then that's mixed with Brazil and Latin America and North America where we are doing quite well.
But that does not include the Asia-Pacific impact, which we don't necessarily categorize in the color group as we do in the Asia-Pacific group.
But I think you can use the mid-single topline growth that we have had year to date as a pretty good indication of where we are going with food colors.
Yes, Q1 is the short answer, I think, when you take in those factors, the one related to quality and the one related to FX.
The Swiss Central Bank, that was in mid-January that they made their decision, which was the principal transactional FX effect we have talked about, so we lap that one obviously in Q1, within a couple weeks of the start of Q1.
And then from a quality standpoint, on the basis of a comparison, you will start to see the significant improvement in the inks on a year-over-year basis beginning in Q1 and we expect that to accelerate on a sequential basis throughout 2016.
So in other words, we would expect Q2 to be better than Q1 and Q3 to be better than Q2, and so ---+ but, yes, from a purely comparable basis, Q4 of this year will not compare very well to Q4 of last year in that business.
We expect to continue to see very good growth in food, colors, pharma, and cosmetics, but the inks will be a drag in Q4.
But as, again, we get into Q1, I think we are free and clear from a comparison standpoint and you will start to see that growth accelerating again there.
But it is ---+ as I mentioned in the script, it is one of the two significant ---+ most significant macroeconomic events that are taking place right now, this conversion from analog to digital inks, that are affecting our business very positively; the second being, I believe, the conversion to natural colors.
And so, it's a phenomenal market.
It's a great market to be in.
We have built a really nice and diversified portfolio of products.
We have a very nice innovation pipeline, and as you know from our capital spending there over the last few years, we have made the necessary capital investments to be successful in this market.
This is one of the most exciting markets as I look at this Company that we're going to be able to take advantage of in the coming years.
Sure, as we began the year, the expectations for flavors on the topline that I had indicated would be flat.
That was related significantly to our culling activities that we were expecting to take this year.
So as you can see, we're up about 2.5%.
If you factor back in for culling, we were up more like about 3.5%, 3.6% on the topline.
So, a little bit better than we had anticipated.
That's not to say that we are done with culling, but as I think I have referenced on these calls before, the timing of the culling is not necessarily always predictable.
And to the extent you may also be now internally utilizing some of those ingredients for flavors, that may also affect the timing of that.
So, a little bit better than we had thought is the short answer.
I think with respect to your question involving competitors, sure, we have a number of competitors.
Some we compete with very strongly.
Many of those aren't ones that you are necessarily tracking because they're private.
But the ones that I think you are probably thinking about, we compete with them here and there.
Again, we have fairly different models and fairly different businesses at this point, and so I think to the extent those in Europe, many of them are benefiting from currency, particularly the ones in the eurozone, and so, okay, it's a helpful piece for them, whereas it's not so helpful to us because most of our profit is right now in the US.
And the profit ---+ sorry, the business is headquartered in the US, but a lot of the profit in Europe and Latin America we're translating back unfavorably into dollars.
Who knows.
Next year, maybe it is the opposite effect.
So I think in terms of how we are faring in the market with respect to competitors, I think I am feeling pretty good and better and better about how we are able to perform and execute.
I think in terms of our innovation platform, I'm very pleased with the progress we are making.
I think it's a very big market, so we're not necessarily always crossing paths with some of the companies that you are thinking of.
And, again, I think with the types of customers that we are going after, those market B and C customers, we don't necessarily interact as much.
And so, what I can point to is a lot of success that we are having, broad-based success.
You have seen a nice turnaround in the sweet businesses.
You probably recall in the first half of the year that was a real tough one for us, but we have made some improvements there.
Our beverage business continues to do well, and so we are seeing broad-based evidence that our strategy of selling flavors, technology platforms embedded in those flavors, and flavors that are incorporating our ingredients, I think you are seeing and we are seeing very strong signs that that strategy is real and it is one that we've been able to capitalize on.
You know, again, it's a little bit tricky.
I think we're going to have a good Q4 in flavors.
I think you're going to see some revenue growth.
I think you're going to see profit growth.
And I have committed to a mid-single digit OP growth in flavors for the year and I have said that on each of the calls and I will continue to say that for the year.
That's about where I think we're going to land.
I think you're going to continue to see good improvement in the operating margin as well in Q4, and so that is consistent.
But I think with respect to culling, a lot of it is affected by order patterns, a lot of it is affected by timing, and so I think that, could it be consistent with Q3.
I think that might be a good consideration.
Maybe it is 1% to 2% revenue impact on the topline for Q4.
Sure, so the organic growth, so, as I said, we had about 3.5%, 3.6% to be precise, when you take ---+ when you factor back in the culling.
Without that, it was about 2.5%.
We had very, very good growth in a number of our businesses.
Sweet in particular had very good topline and bottom-line growth globally.
Fragrances did quite well, double digit as well on the top and bottom.
I think we saw pretty good growth in Europe.
We were between about 4% and 5% on the topline there and the operating profit growth that we saw was very broad based.
And what ---+ as a ---+ so some of it is market affected and some of it is internally affected.
So, clearly, we saw better growth in the businesses that are not undergoing restructuring than we did businesses that are undergoing restructuring.
So that is an internal factor that has impacted where we are seeing more success than, say, other places.
I think the market as a whole, it is a ---+ a lot of it depends on which customers you hitch your wagon to, and we continue to hitch our wagon to a much broader base of customers and it is a model that we've used very effectively in the color group where we are dealing with not only large multinationals, but also a lot of smaller startup, what the market would maybe call B and C, customers.
So as we have expanded that principle to flavors, we are seeing in a lot of markets a lot of success with these B and C customers, who seem to be rather unflappable in the face of macroeconomic challenges.
They continue to push forward with new product releases.
So, again, it is a broad answer, but I think what I can tell you in conclusion is that good success across the board by region and by segment, and I think that ---+ and even by customer type, but clearly what the market would call these A customers, you read the headlines like I do, and you can see that a lot of those businesses are very much struggling.
Many of them are in cost-cutting mode, and I think flavors to the extent we are perhaps less represented there, it should have less of an impact on flavors.
So that's the way I'm seeing that.
Yes, we have ---+ certainly all of our businesses are represented in China, from pharma to flavors and colors, fragrances.
We are doing very well in the personal care side of things.
I can't say that the market for personal care is doing as well as we are.
I think we are doing well in excess of market growth in that category.
I think that certainly there has been a slowdown in activity, a broad-based slowdown, on the food side of things, so that would affect colors and flavors.
Less development, per se.
There was, I think, in the first half of the year perhaps a little bit of destocking going on, perhaps a little bit of a slowdown in customer activity, but we don't ---+ I think as we are getting into the second half of the year, we don't see that getting much worse than it was in the first half.
I think the customers are ---+ they're certainly a little bit more cautious than they were last year or certainly two years ago, but whatever initial shocks of China's growth slowing to whatever it is, 7%, a rate that we would obviously all kill for here in the US and Europe, they seem to have gotten over their initial concern with that and we seem to be largely on track again in China.
Sure.
Good morning, <UNK>.
So on working capital and more specifically on cash flow, it was really the latter half of last year that we began to make progress on bringing working capital down, and so really in the second half of last year and the first quarter of this year.
So in looking at cash flow, there is really two things going on.
We have got a more difficult comparable because we got some one-time benefits as the inventory came down last year, and then the thing you're asking about, this year we had a couple of one-time items.
So although inventory overall remains lower, we keep that discipline in place versus last year, in the quarter we had to build some inventory and it was because of the flavor restructurings.
So in at least two instances where we are consolidating facilities, we have some inventory build there.
So that's one of the main working-capital impacts.
There was also a little bit of a receivable timing issue.
Some of that is related to just the resolution of some of the quality issues in the inks business.
But both of those are temporary and will pass.
So we will continue to have a little bit of a difficult comparable for the next couple of quarters, but I don't think you'll see this degree of one-time items this year.
Yes, I think, <UNK>, if I can just add another couple points there and we have talked about this a little bit in the past, we certainly have opportunity to bring down the working-capital requirements within the Company.
When you look at ---+ parts of our business benchmark quite well, so, for instance, our traditional flavors business, we are below 115 days of inventory.
And in many of those businesses, we are well below 100 days of inventory.
Where we have got a fairly big opportunity is to bring down colors' inventory, and as we look at that business, not only has inventory been coming down for the last two days, but we track internally a cash conversion.
They have taken another 15 to 20 days out of that from a year ago, on a year-to-date basis.
So, still a lot of work to be done there, but I think we certainly have instituted the discipline.
We incentivized management according to the expectations there, but we have got a lot of opportunity to continue to bring down working capital from the historical higher points that we have been operating at.
So for the ---+ first, just looking at the fourth quarter, it is usually a little lower in the fourth quarter, if you look historically.
So we have been ---+ I think our range has been about 27% to 29.5% through our first three quarters.
I would expect it to be a little bit below that in the fourth quarter, but not probably as low as we were last year.
So that is going to take us around the 26% to 27.5% for the full year would be my expectation.
Yes, so I will give you some guidance for 2016.
Flavors, as we think about 2016 as a year on the revenue side, yes, so culling will continue to some degree.
A lot of that will be affected by the timing with respect to customer pricing.
In other cases, it may be affected by our ability to divest a certain product line from the Company.
But barring any of the more dramatic events, we would expect culling to continue and to be largely and substantially completed by the end of 2016, which is consistent with where we have been on that one.
Now in terms of where that nets you from a growth standpoint, we would expect net of that, that is to say ---+ well, including culling, next year we would be in the low and possibly mid single-digit topline growth.
But where we have guided on this one for 2016 is low single topline growth, but with a stronger growth profile and operating profit and a continuing and accelerating of the operating margin improvements.
And not only would we have that in flavors, but the expectation is, given as the inks is recovering in colors and as we continue with a very good growth profile of those non-ink businesses, we would also expect good topline growth in color, and then, as well, an operating margin improvement consistent with that recovery in the inks business.
So, we're feeling really good about 2016.
I think we got a lot of great things going on in the Company.
We are going to continue to get through this restructuring in flavors and execute on that strategy.
Colors, I think we're going to stick to our knitting in many of these businesses where we have been very effective, and then, as well, we're going to have the benefit of recovering from our ---+ of our inks issues from this year.
And then, with the expectation that currency stays where it is, we won't have as much of this FX translational.
But you know something else that oftentimes gets lost in these analysis is the impact of FX transactional.
Translational is one thing.
Transactional is something else, and that's where you are potentially ---+ you can potentially be losing money.
In some cases, you are gaining, but in others, you are losing, and that was ---+ when you look at our quarter, we talk about $0.06 of translational this quarter, but there was another $0.02 of transactional.
And so, you can probably repeat those numbers for each of the quarters of this year to really get the impact of FX.
So, again, a lot of this is based on the assumption that FX rates will largely stay where they are today, particularly dollar/euro, dollar/Canadian dollar, and dollar/peso, which are three of the bigger impacts on the business.
So assuming we are not talking about FX anymore, God willing, in Q1, we should be past that, too.
Yes, so this year, 2015, we were projecting $7 million to $8 million for the year, about three-quarters of that from flavor and the bulk from ---+ the other quarter from color, corporate, and Asia-Pacific throughout the rest of the Company.
2016, as we broke out on the last call, we are looking at about $9 million there, $9 million to $10 million, and that would include as well ---+ this is ---+ I am kind of splitting hairs, but I want to make sure I am splitting hairs because this needs to have hair-splitting analysis done.
There is an FX impact from where we initially placed our savings estimates to where they will translate to at today's rates.
And so what I am saying in plain English is that there is a need to institute price increases in certain markets to account for that FX impact on the savings so that we do stay in line with our estimated $30 million of savings.
So when you include ---+ that $9 million reflects not only the savings, but the pricing that is necessary to overcome that change in FX.
So, again, to only the true hair-splitting accountants out there, this may be what is he talking about, but I think it is an important distinction that we need to make in the interest of full disclosure.
I think your question is ultimately getting at can we get pricing and I think the answer is yes.
Okay, if there are no further questions, we will wrap things up.
Thank you very much for your time this morning.
If anyone does have a follow-up question, feel free to contact the Company.
Thank you again.
Goodbye.
| 2015_SXT |
2017 | CVG | CVG
#<UNK>, it's <UNK>.
Good morning.
I think we feel very, very good about the breadth of offerings that we have.
<UNK>a has just spoken about channels but also across the various geos.
So we can basically handle for our clients any call-type they want us to handle in any geo and across all these various channels.
We continue to think that the value proposition for offshoring is compelling and strong and certainly, as channels shift more and more to digital, that helps support even more the growth offshore.
That said, we also feel strong that we have one of the longest largest onshore footprints in the industry and ability to basically handle volumes for our clients wherever they want them handled.
That's what they're looking for from us.
And, <UNK>, also to add to that, we also do see growth in our clients that are non US-based.
And we see that growth across some of our European clients, et cetera, and are feeling good about that.
Interestingly enough, we talked a lot about the communications vertical in the past and we're actually beginning to see some stabilization outside our two large clients in that vertical and some return to growth in some of our European opportunities in that space.
So as it relates to kind of in-country different client base other than our US, we're also seeing ---+ I'm encouraged by what I see in that team's pipeline.
Sure.
Sure.
We have been making investments, significant ones and in a vertical structure ---+ vertically aligned structure with presidents of each vertical and dedicated resources from a marketing and go-to-market perspective around the verticals for the last year or so.
And so I believe we're starting to see that pay off.
And you see that, Dave, in our new business signings and you do see it in the breadth of the verticals represented.
We're getting better at tailoring our offerings to these various verticals and making our broad capabilities very specific and relevant to their vertical needs.
And so that's playing out and we had a record year of deal signings overall.
And in each of those quarters, we saw deal signings across all of those other verticals.
So I feel good as we drive to stabilize in the communication space and particularly these two large clients that, behind the scenes, we've been gaining consistent traction in growing our other verticals at or above market.
And that's part of our long-term investment approach and overall strategy to return to an organic growth basis in the business while we pursue inorganic as well where it makes sense to diversify the client base and add capabilities, for instance, by geo or in the digital realm that help enhance our service offerings.
So I think what you're seeing and we're seeing play out ---+ certainly the just getting tighter and better through those resourcing investments and a structural change that has us have instead of one chief commercial officer that covers every vertical in a generic way, four presidents that line up around each of those verticals specifically and can really customize our breadth and depth of offerings and make them relevant and sell them better, frankly, to our clients to help solve their needs and issues.
And as we talked about, the other vertical ---+ that's where we've been talking about the strong demand we've seen over time for healthcare and retail.
Mostly nearly 75% of the growth you see in the quarter in that vertical is organic.
So, yes, there's some contribution from buw but the vast majority is organic.
In financial services ---+ again, strong demand there.
And about half of that growth is organic and the other half is coming from acquisitions.
That's exactly right and you heard that in our remarks.
We're masking with those two large relationships.
In one case, it's something that I would describe as episodic.
The one where we're talking about a need for return that we just simply can't chase or won't chase because I don't think it's a market-based pricing scenario.
The other is part of our business model ---+ working with our clients to make sure we can do the work in their shore of choice is part of our business model.
But no question, we're growing around those things and I feel very good about the returns on the business we're signing, the breadth of the type of opportunities that were signing, the complexity of the work moving up that complexity chain.
We're seeing that investment thesis and strategy and value prop play out in the deal signings in those other verticals.
Maybe we were not clear enough about that.
We largely have paid that down and drawn on the AR securitization.
So as we expanded that, we were able to make the pay down of $115 million, I believe, on the term loan.
We think that's advantageous.
The borrowing costs are lower there by roughly 100 basis points when you're all said and done.
But not quite as big an impact as you just suggested.
That's right.
There will be no required payments in 2017.
We've looked ---+ we've made a couple discretionary contributions back in ---+ a couple of years ago as mentioned and here in this quarter.
And we'll look to do that over time.
But there's no requirement to do that.
Thanks.
No.
Not really.
We are still seeing demand and in those signings, <UNK>, would be a great example.
In those quarterly signings numbers, that represented demand for each of our geos in that signing number.
So we haven't yet seen anything that I would say is a trend impacting our business.
Now episodically, as you well understand, even in a given client relationship across multiple programs, we can have something being moved to the US and something at the same time on another program being moved to a near shore or offshore location.
So we constantly have shore migration choices being made based on client programs, needs, cost structures.
But I am not seeing yet anything that would be a trend toward not having offshore or near shore choices in our client's mix of solutions.
So, <UNK>, it's <UNK>.
I would say that we still view the market as a slow grower ---+ think low single digits ---+ 3% or so.
That's what the prognosticators have.
As you look at our guidance for next year and you strip out the impact of the acquisition and the impact of the two large clients, even after that we're guiding to relatively flat.
So we are still a little bit sub market.
But I think over time the investments we're making in the other verticals in the go-to-market structure, et cetera, will help us out there.
<UNK>, I haven't given a whole lot of thought to that.
The other segment represents roughly 20% of revenue or so.
There's no individual vertical there that is as large as the financial services vertical.
And so don't really have a timeline for when we would break that out in any more depth.
Clearly the largest two pieces there would be retail and healthcare.
And, again, those are both smaller than the financial services vertical for us.
It's a fairly unique situation in that case with that client where on a certain call type, <UNK>, we had a significant, significant share of that call type.
Because when they needed us to handle that volume, we had the size and scale to do it and to ramp up quickly and do it.
The expectation was over time, they would look to diversify.
We're talking about something close to 100% share here.
They diversified it across a couple of providers.
We still have the work.
We still do it well but we have, what I would call, a more normal share baked into our outlook for 2017.
The movement to that more normal share is a piece of the revenue change we're seeing with that client.
It is the smaller piece of the moment.
The bigger piece is us walking away from an opportunity to do work at sub-market pricing.
All right.
Well with that, thank you all for joining us for the call and have a good day.
| 2017_CVG |
2017 | NKTR | NKTR
#Well, I think, good question.
I will let J.
Z.
give you some sense of mechanistically where the differences are.
I can tell you that we're probably at least a year ahead of that program, we will be in the clinic this month.
give you a sense of how we have achieved that.
Thanks <UNK>.
A lot of this came from everything that we learned from NKTR-214.
We learned a lot about how the receptor ligand interaction between IL-2 and its receptors is regulated and controlled, the kinetics of the binding.
Also we learned an awful lot about the different cellular sensitivities of the IL-2 signal, and in particular, the T reg, which is really tuned to signal to respond to the lowest amounts of IL-2, which is why you see the kind of efficacy you see with low dose IL-2.
And we have also had a chance of course in the 214 context, we always compare it against all of the other competing molecules, and we always ask the question of bias versus selectively in that context, and you know the answer to that story, we have talked about it for many months, and now are seeing it in action in the clinic.
And really it's a very similar situation for NKTR-358, by using a polymer the way we do, we can really achieve a much better ability to interact with the receptors, and we have even gone as far as generating surrogates of the mutant versions of IL-2, the same ones that really mimic some of the biological properties of both the Delinia, and the other molecules that are in this class as well.
And really when you test it head-to-head, NKTR-358 has a much superior performance in the cellular assays that we test them in.
So we're really excited about where we are.
We are really excited with the fact that the IND just went in late last month, and that we plan to open our first clinical trial later this month as well.
So we're very, very excited about our position and this program.
And I'm glad you raised the issue of Celgene buying Delinia.
You can see how important molecule that can stimulate regulatory T-cell production, as opposed to suppressing the entire immune system, and clearly the value that a program like that has in treating numerous diseases.
So it's certainly sets a standard for a molecule like NKTR-358, which as J.
Z.
said, we believe is actually a much better approach to doing this.
Yes, we can hear you.
Hi.
This is <UNK> <UNK>.
How are you.
So Shire has stated that they do have plans to globally develop hemophilia, and so that would be in all of the same that ADYNOVATE is in.
So their idea is to replicate the ADYNOVATE label, with what they have done with the Advate label, so the strategy would be the same.
Yes.
And I think clearly, I mean certainly talking from Baxalta's point of view, and now Shire's point of view, they would like to ADYNOVATE be the successor to ADVATE, and it certainly makes sense.
It's a better molecule, and we have put a lot of effort into making sure that ADYNOVATE is the exact same molecule as ADVATE, but long-acting.
It is full in ADVATE, and that was done intentionally, so that they could eventually switch over patients, and maintain their dominant position in the space.
Well, I can't speak for them directly.
I imagine they would do it fairly quickly.
It's difficult for me to speak for Shire, but I would imagine that they're very interested in getting as many patients on ADYNOVATE as possible, as quickly as possible.
Thanks.
Thank you.
Well thank you everyone for joining us this afternoon.
Of course, I want to think all of our employees for their hard work, and their dedication to the Company this past year.
As you can see from today's call, we have a number of milestones and catalysts coming up for Nektar over the next several quarters.
The potential conditional approval for Onzeald in Europe, the Phase 3 data for the Bayer programs, the Phase 3 data for NKTR-181 efficacy trial, and of course, data from the first 15 to 20 patients in the combination program of NKTR-214 with nivo, and data from the first trial of NKTR-358 in Lupus.
So we're very excited about this, and we look forward to seeing many of you at the Cowen conference next week.
Thank you very much.
| 2017_NKTR |
2015 | FAST | FAST
#June was disappointing, there's no question.
And even at the 1% on the extra day, it was not where we wanted it.
And when you look at ---+ when you talk about outside of the oil and gas, some bright spots for us, I look at some things that are happening and taking place within the business in Florida, in California, in some of our Midwest regions.
We're starting to see Canada, when you really factor in the native currency, is actually performing well.
And so this oil and gas thing, as we've talked before, <UNK>, it's just got such a ripple effect through the economy and through the business, that it's just weighting us down.
But if you look at non-res, we think when we look at our information, we believe that's heavily tied to oil and gas.
So that's a factor.
We look at ag and heavy manufacturing ---+ all headwinds right now for us.
That's a fair statement.
That's the assumption I'm going on, too.
I believe so.
We've touched on that and really talked about the mix and what it does to gross profit.
But the inherent cost structure that we have and the ability to leverage that cost structure ---+ one of the things I shared with our Board yesterday is, if you look at our business, we have the 80% of our business that's going through either a US or Canadian store.
And 20% of our business that's either going through what we call an on-site situation ---+ or a strategic account store where we have a very close, tight relationship with a large customer ---+ or our non-US and Canadian store business.
If I set those aside and look at the 80% that is the store business, when we set up the Pathway to Profit back in 2007, most of our business was going through that store piece.
And we said as this piece continues to mature, we could take the operating margins from the 18.3% we are at, to north of 23%.
This quarter, if I look at strictly the store subset ---+ so that chunk of business that represents about 80% of our sales ---+ we were at north of 23%.
So we actually hit our Pathway to Profit target in that subset of stores.
And we've always said that's a point-in-time number, because that group of stores is about $106,000 a month in business.
So I think it's a very bullish for our long-term ability to drive the profit machine that is Fastenal.
You bet.
Well, the leverage that we described in Pathway to Profit, that's structural.
That's a case of, our occupancy as a percentage of sales continues to decline, because we're running more dollars through that same building.
The portion of our labor that's tethered to the store becomes a smaller and smaller portion of our labor pool.
Those kinds of things are structural.
The things that aren't structural that are part of the tug-of-war of life, if you will, is one of the challenges <UNK> put out to the team, and I think the team responded tremendously to, is: folks, we're investing and adding all these people.
We can't spend money doing other things.
We've always been [prival] to traveling.
And sometimes we joke about some of the things we do when we travel, because that's who we are.
We doubled down on that.
Now, how permanent that component is, is a function of the tug-of-war of life.
If we were growing faster, <UNK>'s message might not have resonated quite as deeply with our district managers, our national accounts folks, our regionals.
Because they might be traveling a little bit more because they're visiting more customers, they're visiting more people, they're doing more things.
And sometimes you dial that back.
Maybe you don't need to have that meeting.
Maybe you have that meeting as a conference call rather than a face-to-face.
Maybe you do these things in the short-term.
But those in the scheme of our expense pool are relatively small, but they're very symbolic.
And the fact that we managed our travel, our non-store operating expenses, as well as we did, I think, was enhanced by the call to action that <UNK> put out there three, six and 12 months ago.
But we demonstrated we can do it when we need to do it.
Because when you're growing your top line 5%, you've got to do things like that, that may maybe you wouldn't have to do if you were growing at 12% or 14%.
Rob, I would just add one thing, though, and you have to link this together.
That when you put a call out to the troops, and you get them into the why ---+ and I said that at the opening ---+ they were asking and they want to grow.
Their commission plans are set up that way.
So they want to grow, they want to take market share, they want to serve at a high level.
When you put out there that we want to add energy into your store, but I need a little help over here ---+ that's what we're talking about.
They saw the reason, and they responded.
Like <UNK> said, the team just did a tremendous job.
Oh, that will be in our Q.
Let me see if I have that page handy here.
Let's see.
On a machine-equivalent basis, okay, the signings number would be 3,931 versus the 2,916 that we did in the first quarter.
The installed at the end of the period would be 37,714 versus 35,997 at the end of first quarter.
And I think the rest of the stuff was in our release.
We have a group of store employees, district managers and national account members that are key to driving that number.
Because one thing that we know about our business that we keep reiterating with our team: the vending machine is a sign of engagement with your customer.
If you are truly engaged with your customer, you should be able to put vending machines out there and it makes the business stickier.
And it's just good common sense.
Have a reason to be in talking to your customer multiple times a week.
I think the other thing too, Rob, is, again, I worked in the store and when you ---+ again, it's a world of competition, and we like that.
We love it.
And so when a competitor comes in and they see our blue machines in there, our folks are starting to understand that how tough it is for the competition to get us out.
It's a learning curve with 2,600 stores, 2700 stores.
But more and more stores are adopting, more and more stores are seeing the benefit.
More customers ---+ and for me personally, if I'm in a store and I have a customer with vending, and I show you and take you to that customer, and you see it in action, that is how we continue to see more engagement and more adoption in the field.
I think it's what we said earlier.
I think this is actually linked to what's going on with our national accounts.
Everybody's engaged with vending, whether it's the local store, district managers, regionals and national accounts.
But as our national accounts are providing the growth, they're also providing a lot of what we're seeing on our vending right now.
Yes, sir.
And it's 9:42, Central.
It looks like we have time for one quick question, if there's any left.
Our goal is always to be as close to 30% as we can.
And I was pleasantly surprised by the fact we were able to hit 40%, despite the fact that June came a little bit weaker than we thought it was going to be.
And I noted that on the last call; we get antsy when that number is below 25%.
Because if that number isn't at least better than our operating profit, what's causing us to lose that.
Now, if we're losing that because we are consciously making an investment in something, that's one thing.
But our anxiousness rises if we're not meaningfully beating that number.
We've seen the impact in our revenue, we've seen the impact in our gross profit.
It's difficult to quantify it, because sometimes there's a lot of noise in the numbers.
We have different customers in there.
You have customers we are changing the source of supply, because you're bringing a better cost value to them.
It's not just in steel; it can be in non-steel products as well.
But there's no doubt about it, steel is creating headwind for us, and it's creating some challenges.
It also creates some opportunities.
Earlier, when asked about our gross margin change, I indicated about half the drop from Q1 to Q2 centered on our supplier incentives, and probably about a quarter of the drop related to the impacts of pricing.
Yes.
Thank you.
| 2015_FAST |
2018 | EFX | EFX
#Yes.
So I think <UNK> addressed this a little bit earlier, right, which is as we move through and we work with, with varying customers through the process that they have to make sure that they're comfortable with this ---+ the cyber IT and data security actions we're taking.
As we complete those reviews with a given customer, then we see that the process changes, and then our ability to sell discrete projects as well as new products improves.
And as we make progress with our customer base through that process, and we are making progress, then we see the opportunities to continue to sell new products.
And then also, those discrete projects improves with time.
So ---+ and we are seeing that occur.
Yes.
And like I mentioned at the beginning, the more rational that we get about the process and the more that we make progresses within our remediation and investment program in IT and security-related areas, the more we expect this progress to continue.
But at this time, it's not a trend.
Sorry ---+ we're ---+ how about we just ---+ and I apologize here.
We're not able to find where you're seeing that.
<UNK>, we <UNK>n't see it here, so we'll have to take it off-line.
So we're not sure what you're referring to, okay.
So we'll maybe .
.
Okay.
I'd like to thank everybody for their time and their interest.
And with that, operator, we'll terminate the call.
| 2018_EFX |
2016 | UNP | UNP
#As we regularly say, we are continuing to focus on business development.
And we have a huge number of business development initiatives underway, across the board, which are really overshadowed by the coal and the shale fall-off and some of the rationalization we're seeing in international intermodal.
If you look at our chemicals business, the Gulf Coast franchise, while many of those plastics expansions will not come on until next year as we've talked about in the past, we still have lots of opportunities in terms of LPG growth.
Mexico energy reform, there's a lot of growing interest in terms of moving products there.
We are working on a number of different initiatives with that.
And so there is general economic strength that we're seeing in our Industrial Products business in terms of construction coming back, housing coming back.
Chemicals has the benefit of plastics going to the automotive industry, as you see automotive sales.
So, there's a slowly-strengthening economy out there and we're doing a lot of business development to go after it which, again, is being overshadowed by the huge volume numbers for coal and shale and the other headwinds we have.
<UNK>, you want to handle that.
<UNK>, as you know, we have a standard answer where we don't really talk about specific contract negotiations.
I will say we negotiate aggressively and assertively, and we are in a very competitive environment.
And for any particular contract negotiation, we probably have dozens, if not hundreds, of terms that we're negotiating.
And, like always, as markets change and we look to be competitive, we evaluate a bunch of those terms and conditions and what works for us, works for our customer base.
Yes, as you just lined up, volume is our friend.
We're looking forward to the point where we're growing on the top line because it does make it easier to drop that to the bottom line.
Having said that, in the place we are right now, we're in the process of getting our overall structure to match where our markets are today.
And then from that point moving forward, we'll continue to be aggressive on our productivity, on our efficiency, on our business development, And generally that model is very attractive when we grow.
<UNK>, this is <UNK>.
It was yeoman's work by the operating team because it was a significant challenge for them, but they did a fabulous job.
I would say that the impact to us was less than $0.01 in terms of EPS for the quarter.
<UNK>, this is <UNK>.
You know, we don't give guidance on mix.
And the reason we don't is because we are in so many different markets, which we are very proud of in terms of the diversity of our network.
There are a lot of moving parts, as you know, and there's mix even within each of the commodity groups.
Having said that, you're right.
We are coming off of unusually high negative mix challenges.
And we do think our best look at the balance of the year is that will moderate.
Again, we're at high-water marks here I would hope, at 2.5%.
And certainly last quarter's 4% negative impact on mix I would hope is an all-time high-water mark.
But we do think our best guess is that's going to moderate, but it's difficult to actually put any finer point on it.
Thank you, <UNK>.
Let me take a stab at that, <UNK>.
The way we think about coal is it's facing a large number of headwinds right now: low natural gas prices as an alternative; pretty significant inventory overhang on piles right now; and a weak electricity-generating market, some driven by weather.
So as those headwinds persist, coal's going to continue to have some difficulty.
We're going to have to chew up some of this excess inventory before we see coal demand really strengthen.
What it might look like two, three, four, five years from now, we still think it's a pretty important part of the overall electricity-generating base in the United States.
It's not going back, we don't think, to where it was four or five years ago.
And you can make an argument either way that it strengthens a bit or that it might decline a bit.
Our best guess is we're probably in the relative sphere where it's going to operate, other than the really significant headwinds that we're facing in this particular time frame.
I think if you're asking specific to the floods, we did a great job of making sure our customers had alternatives and satisfying their needs and keeping them well informed.
If you're asking in terms of the overall operating environment, we are in a competitive environment.
We compete every day for every piece of business that we enjoy.
And we compete on the basis of providing our customers the best experience they're going to get in the marketplace.
Everything we do every day is oriented towards making that happen.
<UNK>, for us, I would say minor and I would anticipate that it'll be minor for the balance of the year.
Correct.
<UNK>, the point I was trying to make on the ---+ number one, you can always have those swings depending on what capital projects are going on.
But that was more of a sequential comment.
Generally speaking, you would start to ramp up some of your capital projects in the first quarter that perhaps you weren't running as you finished the fourth quarter.
So that was more of a comment relative ---+ this particular go-round ---+ relative to the sequential look.
Year over year, in the first quarter, not as material of an impact.
But that can change from time to time.
But I think if you look at ---+ again, the first quarter was pretty clean in my view, when you look, year over year, in terms of 11% headcount reduction really is representative of very solid, outstanding productivity performance.
And, of course, remember the year before, we had our share of challenges.
I wouldn't give guidance on that.
I think probably the best way to think about it is that 2% inflation, generally speaking, should look like the guidance we're getting on the labor inflation line, which would be closer to 2%.
The actual numbers, I think, are 108 days, which is about 41 days above, call it, a five-year average.
No, 41 days above last year.
And how long it takes to come down just depends on all the factors we've talked about.
<UNK>, we can do it for as long as is necessary.
We've demonstrated that we understand how to use attrition as our friend, how to use initiatives like Grow to 55+0.
We know how to get our cost structure right.
We're in the middle of doing that and we're going to continue to do it.
My expectation is that we don't have to do that forever because I do expect us, at some point, to start growing the top line.
We're in a unique environment right now with a lot of headwinds.
Some of those headwinds represent structural shift, like in coal, where a portion of that book of business is probably permanently reduced.
But, in the big scheme of things, at some point those headwinds abate; we start growing again.
And even in that environment, we're still focused on making sure that we have the structure right, that we have our costs right, and that we're constantly looking for efficiency.
<UNK>, I would say, no.
I wouldn't read into the fact that we happened to finish the quarter with a high cash balance as a change in anything we're doing.
It's going to be the balanced approach.
We need the cash for working capital, for taxes, for dividends.
And we'll continue to be, as we have been, opportunistic on the share buyback as we move forward.
This is <UNK>, <UNK>.
There is a lot of grain in storage.
There is about 200 million bushels that were carried out from last year.
I think the USDA estimates are that can grow by another 500 million bushels, based on the number of acres that are being planted and the types of yields that are expected.
So, there is a lot of grain out there.
We believe that eventually it has to move, and so we are certainly optimistic that, when it does move, we're going to get our fair share of that.
And it will move; it's just, right now, US grain is not competitive on world markets.
The strong dollar is an issue.
There are other issues in terms of really good crops in other places ---+ growing regions around the world.
But we do think it ultimately will move and we're going to get our fair share of it when it does.
Cam, you want to start by talking about locomotives in storage.
We have a really good mix of high horsepower and low horsepower in storage.
And, particularly on the low-horsepower fleet, as we look out over the next three to four years, there's some very nice lease return-backs that we will do.
And we're very confident we can hold our low-horsepower fleet size and return those leases without any impact to our customers.
I'll let <UNK> talk about fuel headwind.
From the standpoint of operating ratio, we wouldn't be reaffirming it and talking about it if we didn't have confidence and faith in achieving it.
We believe that, given any reasonable outlook, we are going to improve operating ratio this year.
I would just add to that, <UNK>, that clearly we'd rather have positive volume.
And, just a reminder, we did guide that we think full-year volumes will be down mid-single digits.
That's a challenge.
But, to <UNK>'s point, what we're expressing here is confidence in our ability to continue to be squeezing out productivity initiatives and continuing to price appropriately in the marketplace.
On the fuel ---+ the guidance we're giving on fuel is that while it was a $0.10 headwind in the first quarter, largely driven by the $0.08 benefit the previous first quarter last year, we think that's going to moderate.
If fuel prices stay where they are, our expectation would be that, that headwind will moderate, largely because we start to lap the fall-off in fuel from the previous year.
That's exactly ---+ the quarter-over-quarter look, yes.
I would say probably comparable to what we saw in the first quarter.
Absolutely.
Within the operating department team we have 12 projects that we've identified that we kicked off late 2014 and into 2015.
Many of those projects are gaining very, very good traction in 2016.
And we have a couple others lined up for the end of 2016 going into 2017.
So, they're broad based, they're well measured.
We feel very confident, to an earlier question, that when we identify one of these productivity projects, that we can hold that productivity as volume comes back to us, so that we have great leverage out into the future.
<UNK>, as you know, we don't break it out by commodity, but clearly the mix that we've seen in the last few quarters is a challenge.
And I'm particularly proud of the fact that, with reductions in volume and the headwind that we faced in the mix, we have continued to drive outstanding operating ratio performance.
So that's the focus.
Irrespective ---+ you've heard me say this many times ---+ we're going to play the hand that the economy deals us.
We're not going to use the challenge that we're facing right now of a mix headwind as an excuse not to make continued margin improvements.
That's what were all about.
That's what's driving our initiative of G55.
That's what's still driving our plus or minus 60% operating ratio by full-year 2019 focus.
We have to live in that world.
But, clearly, those challenges that we faced here on the mix have been challenges.
Thank you.
It is reasonable to expect us to continue to be able to be effective at adjusting our cost structure, even in the face of further volume declines.
Now, we're not saying we anticipate things get worse from where they are right now.
But if they were to, we have the ability to continue to adjust our cost structure.
We've demonstrated that, to this point, there are still levers to be pulled.
We'd much prefer to grow, but we will pull those levers as we need to.
From my perspective, there are ample opportunities to be more efficient everywhere I look on the railroad.
We will continue to be able to generate productivity from that perspective.
And as we have to take larger chunks of cost out, we'll continue to evaluate that and do that effectively as well.
Thank you very much.
And thank you for your questions and interest in Union Pacific today.
We look forward to talking with you again in July.
| 2016_UNP |
2017 | IPG | IPG
#Thank you, <UNK>, and good morning
As a reminder, I'll be referring to the slide presentation that accompanies our webcast
On slide 2, you'll see a summary of our results
Fourth quarter organic growth was 5.3%, U.S
organic growth was 3.3% and was 4.7% excluding the impact of lower pass-through revenue
International organic growth was 7.8% with increases across all regions
For the full year organic growth was 5% and all regions increased organically
Q4 operating margin was 21.4% compared with 20.8% a year ago
For the full year operating margin expanded 50 basis points to 12% and operating profit increased 8%
For the quarter, diluted earnings per share was $0.78 and was $0.75 excluding expense of $0.06 per share for business dispositions, which is reflected pre-tax in our other expense line and also excluding the impact of certain discrete items that benefited our tax provision and totaled $0.09 per share
Full-year diluted EPS was $1.49 per share and would have been $1.37 per share excluding losses on dispositions and the benefit of certain discrete items in our tax provision
We repurchased 13 million shares for $303 million during the year
As <UNK> mentioned, we announced this morning that our board has once again significantly increased our common share dividend by 20% to $0.18 per share quarterly and added $300 million to our share repurchase authorization
Turning to slide 3, you'll see our P&L for the quarter
I'll cover revenue and operating expenses in detail in the slides that follow
Here it's worth noting a few below line items
First, the $25 million of net expense from business dispositions is reflected in our other expense line below operating income and it's primarily non-cash
Second, our effective tax rate as reported in the quarter was low at 24.1%, adjusted for the dispositions and for discrete tax items, our adjusted effective tax rate was 31.2%
For the full year, our adjusted tax rate was 33.4%
As you can see our tax rate continues to be volatile from year-to-year
This is due to the utilization of loss carry-forwards and adjusting valuation allowances based on sustained operating performance
As our profitability continues to improve around the world, our underlying trend is toward a lower effective consolidated tax rate
Accordingly, we expect our normalized effective rate will be in the range of 35% to 36% in 2017, which is a couple of percentage points better than we've targeted in recent years
It's also worth noting here that our cash tax rate 2016 was 29% of pre-tax income, which is also our expected 2017 tax rate
Turning to revenue on slide 4. Fourth quarter revenues $2.26 billion compared to Q4 2015, the impact of changes in exchange rates was a negative 2%, while net dispositions were negative 20 basis points, the resulting organic revenue increase was 5.3%
Revenue growth for the full-year was 3.1%, consisting a 5% organic growth and a positive 20 basis points from net acquisitions, while currency was a negative 2.1%
Our organic pass-through revenue decreased $24 million in Q4. Excluding that impact, organic growth would have been 6.4%
For the full year, our organic pass-through revenue decreased $17 million organically and reduced organic growth by 20 basis points
These pass-through revenues are in our events, sports and direct marketing businesses and changes in pass-through revenues are offset dollar-for-dollar by changes in our O&G expense
As you can see on the bottom half of this slide, Q4 organic growth at our Integrated Agency Network segment was 6.7%, led by Mediabrands, McCann, R/GA and Huge
At our CMG segment, our marketing services specialists, a decrease in pass-through revenue weighed on organic growth in the quarter
Excluding that effect, CMG's organic growth was a solid 4.7% in the quarter, led by mid single-digit performance by our public relations agencies
For the full year, you see that organic growth rates were 5.3% IAN, and 3.6% at CMG
Moving onto slide 5, revenue by region
, Q4 organic growth was 3.3% and was 4.7% excluding the change in pass-through revenues on top of 6.2% a year ago
These are led by IPG Mediabrands as well as Huge, R/GA and MullenLowe
Pass-through revenues decreased due to the timing, projects and our events business
Among client sectors, healthcare was our growth leader and food and beverage was also strong
For the full year, U.S
organic growth was 4.4% with increases across all of our principal disciplines in most client sectors, including food and beverage, tech and telecom, healthcare, retail, and government services
Turning to the international markets, the UK grew 11.7% organically in Q4. It's our notably strong performance at a number of our agencies, notably Mediabrands, R/GA, Jack Morton and McCann
For the full year, UK organic growth was 8.5% and was still strong at 5% including the impact of higher pass-through revenue
Total revenue growth was 1.2% which includes both the positive impact of acquisitions in the market, and negative impact of FX when the pound starts depreciation
In Continental Europe, we had another double-digit quarter with 11.1% organic growth, held by new business wins
Among our largest markets, we had very strong growth in Germany and Spain, while France and Italy decreased
For the full-year, organic growth for Continental Europe was 5.7%
In Asia-Pacific, organic revenue growth was 7.5% Q4 on top of 7.9% a year ago
We had double-digit increase in three or four largest markets, India, China and Japan
Australia grew in the mid single-digits
We had growth across most of our agencies including Mediabrands, McCann, MullenLowe and Weber Shandwick
For the year, organic growth in the region is 1.7%, would have been 4% if not regional decrease in the pass-through revenues
In LatAm, we grew 5% organically in the quarter
We continue to see strong performance in Argentina, Mexico, Chile and Colombia, which offset the decrease in Brazil
Our growth in the regions led by Mediabrands, Huge and R/GA
For the year, organic growth was 12.2%, a strong growth in all of our major country markets
In our other markets group, organic revenue growth was 90 basis points in the quarter
This group is made up of Canada, the Middle East and Africa
For the year, organic growth was 4.8%, a very strong performance from Canada
On slide 6, we chart the longer view of our organic revenue change on a trailing 12 month basis
The most recent data point is 5% for calendar year 2016 on top of 6.1% in 2015 and 5.5% in 2014. As <UNK> mentioned, this is industry leading performance
Moving on to slide 7, operating expenses, which remained well controlled in the fourth quarter
Total operating expenses increased 2.3% compared with reported revenue growth of 3.1%
For the full year operating expenses grew 2.5% supporting revenue growth of 3.1%
Our ratio of total salaries and related expenses to revenue for the full year was 64.2% compared with 63.8% a year ago
Underneath that we continue to drive efficiencies on our investment and base payroll, benefits and tax, which is our largest cost catered, 10 basis points of operating leverage for the year and 30 basis points excluding the impact of lower pass-throughs
Our expense for incentive compensation increased in 2016 to 4% of revenue from 3.7% in 2015. That was mainly driven by the increased expense of our long-term incentive comp programs, a reflection of strong operating performance over the past three years, against both our revenue and operating margin targets
Expense for temporary labor was 3.7% of revenue for the full year 2016 compared with 3.6% a year ago
Severance expense was 0.9% of revenue the same levels a year ago
Our other salaries and related categories 3% of revenue compared with 2.9% in 2015. Year end head count was approximately 49,800, an increase of 1.3% from a year ago, while average head count over the course of 2016 increased 2.4%
As you'd expect head count increased in growth areas of our portfolio including digital services, media, P&R and a support of new business wins
Turning to ops and general expense, O&G was 23.8% of full-year revenue compared with 24.7% a year ago giving us 90 basis points of operating leverage
For the year, we continue to drive leverage across our O&G categories
The exception was occupancy expense where it benefited from a one-time credit 2015, as we have previously described
We had 20 basis points of leverage on our expense for T&E, office supply and telecom as well as 10 basis points on professional fees
In addition, we had 80 basis points of leverage on our category of all other O&G expense, as pass-through expenses decreased from a year ago along with the related revenue
As I mentioned in connection with revenues, pass-through expenses are primarily in our events, sports, direct marketing disciplines
On slide 8, we show our operating margin history on a trailing 12 month basis with most recent data point at 12%
We have made sustained and significant gains
There is still work to be done and we remain highly focused on attaining our long-term goal
Turning to slide 9, we present more detail on below the line adjustments to our reported fourth quarter results, in order to give you a better picture of comparable performance, with a loss in the quarter of $25 million in other expense related to disposition of a few small non-strategic businesses
The after tax impact was $0.06 per share
As you can see, the impact of the new accounting standard for share-based compensations was de minimis in the quarter
Moving to the right hand on the slide, we recorded benefit in the amount of $37 million for U.S
federal tax credits, which benefited from our diluted earnings per share by $0.09. Result this fourth quarter adjusted diluted EPS $0.75 per share
Slide 10 depicts similar adjustments for the full year 2016, again for comparability
You can see our loss of $0.10 per share, diluted share for business dispositions are benefited $0.03 per share for the new accounting standard, a share-based compensation with a benefit of $0.11 per share for U.S
federal tax credits
In addition, valuation allowance reversals related to business sales were a benefit of $0.03 per share
We also released tax reserves upon the conclusion of previous year's tax examinations, which is a benefit of $0.06 per share, result is an adjusted full year diluted EPS of $1.37. Turning to slide 11, the current portion of our balance sheet
We ended the year with $1.1 billion of cash and short-term marketable securities, which compared to $1.51 billion a year ago
We returned $542 million to shareholders during the year, through share repurchase and common stock dividends
Under current liabilities, the increase to the current portion of long-term debt reflects the upcoming maturity of our $300 million, 2.25% notes due in November of this year
On slide 12, return on cash flow for the full year
Cash from operations in 2016 was $513 million compared to $689 million a year ago
The comparison includes $414 million used in working capital compared with the use of $99 million a year ago
It is not unusual for working capital to be volatile from year-to-year due to the timing of collections and payments in our media business
Investing activities used $268 million in the year including $201 million for CapEx and $52 million for acquisitions
CapEx was above the level of the prior year in our recent run rate due to a number of large agency moves during 2016. Financing activities used $666 million, mainly $303 million for the repurchase of our common stock, $238 million for common stock dividends
2016, our net decrease in cash and marketable securities was $409 million
Slide 13 is the long view of our debt decreasing from $2.3 million in 2007 to our current debt total of $1.69 billion at the end of 2016. Slide 14, shows the total of our average basic plus diluted shares over time, that the far rights of the total as of year-end 2016. Our average total shares decreased by $156 million shares over this period, well our starting position for 2017 is $402 million on the right
In summary, on slide 15, we are pleased with our performance in the quarter and the year
Our teams executed very well, achieving strong revenue growth while maintaining expense discipline
And our balance sheet continues to be a meaningful source of value creation as evident in the actions announced by our board today
That leaves us well positioned entering 2017. With that, I'll turn it back over to <UNK>
The only thing I'd add, <UNK>, is, we're looking for 50 basis points of margin for 2017. I like to think we're going to get leverage across all of our respective cost buckets
So to point to a specific area of leverage I think that's not the point
The point is, our guidance is 50 basis points of margin
The second point with respect to is the growth – is the margin target predicated on growth at one of our specific segments, the answer is no, both – well I'll take growth from anywhere
I don't mind
That's okay
It does get harder
And as I mentioned on one of the earlier calls, we're targeting 50 basis points
We're not going to guide to specific leverage points in our cost structure
Every dollar we spend, we're looking for to gain incremental efficiency
The biggest cost that we have is around our people
And we did see some leverage in our base benefit tax this year and that's nearly we'll continue to be disciplined around
And to your point earlier, in synopsis is variable and based performance, it can go up or down
And that's based on performance as well
| 2017_IPG |
2016 | BEL | BEL
#Yes, more than happy to do that.
We have been focusing on the areas that we have been talking about, first of all, trying to get the people in place and as I mentioned we are good on the way to hire one person which will start in September here in London to cover the European market, which will be our number two in that position.
We are also at the point of hiring somebody to be based in Dubai, which will from there cover the Middle Eastern market and focusing also on markets like the Indian Ocean.
We are still in the process of hiring somebody for Asia-Pacific.
Our initial plan was to put somebody in Bangkok but the market has ---+ or we have not been able to find the right quality of talent there.
So we have shifted to the plan to put somebody in Singapore and we are working on that.
And for Latin America and for the Americas we have not started the search process yet, but we will do that very soon.
That was planned to start at the beginning of 2017.
For as far as the discussions are concerned, I myself have been involved in many of those discussions together with James.
And we have had a large number of I would call very positive and very receptive discussions with individual owners where we've been looking at opportunities.
A number of them were clearly outside of our range.
And I think part of doing good development is being able to step away from certain deals early on.
But a number of them were also serious and within the boundaries that we have described to you from a financial and from a brand point of view in our strategic plan, and we are working very hard on seeing how we can get some of those over the line.
Without giving dates or giving deadlines on them I think that the feedback has been positive and I feel comfortable that as we step up our efforts that there will be a number of opportunities both in the acquisition component as well as in the management range.
And then, of course, the trains that we have been adding as a separate component of the overall growth strategy.
Did that sort of answer your question, <UNK>.
I think that when we did our presentation in New York we gave an overview of what would help us shift the growth opportunity in our existing hotels and how can we drive organic growth.
Underneath there we gave you a few examples but there is a whole list of 10s of initiatives that have started and we already actually started even before we came to New York.
I think that the ones that I mentioned are around the website, which we consider to be an opportunity that we could work on very quickly and get quick results.
Another one that I could mention just as an example, and not that that is going to change in the majority our numbers for the second or third quarter, but we spoke about the German language speaker and the fact that we could not book over the website until the second quarter of this year.
Since we introduced it in April, we saw a lift of the German language speaker bookings of 7% year-over-year, which even though those numbers per se might not be so big, altogether these are bits and pieces that add up.
And once that we start seeing all those little bits getting together then it starts making sense and you will start seeing good results.
We have been working very hard as well with the teams in the way of getting our capital lined up, making sure that we go back into our hotels, figuring out where the opportunities are, where we can do similar things as what I was describing for the Peru property - adding new rooms, adding new opportunities, re-converting underutilized space.
And there is no rocket science there but it is certainly something that will help us get to the results.
What we will do is the overall list of individual activities, together with Philippe, we will make sure that we will keep you posted as those individual bits and pieces come through, where we stand and how you can keep us accountable against them.
I think that's a fair way to think about it and I also think that lines pretty much up with the time frames that we have set in order to get some of those activities on the road and where the kick-in will come would be, it might start early but the financial impacts will be Q2 and Q3 of next year, in many cases.
Well, I think it's hard to speculate on when deals get signed.
But what we know today is that there is a number of transactions that we're working on, that I would consider to be serious enough that I would hope to be able to announce those over the coming quarters.
Listen, <UNK>, I don't want to speculate on any intentions or anything around Barry, as we've all seen that he filed a 13G and as such will be taking a passive position.
For as far as the way of us communicating with individual shareholders, we have a policy and I think it's wise to stick to that, not to comment on any individual communication with shareholders like we would do with all of you.
Obviously, for Barry certainly like for any other investor, we love to have communications with our investors.
And we have had those in the past with any of our investors.
And we look forward to maintaining those relations, and the same would apply for Barry.
Thank you very much, Sarah, and thank you everyone for joining us today.
We look forward to speaking with you next quarter.
| 2016_BEL |
2016 | MDXG | MDXG
#Well, <UNK>, it's primarily the inventory that we brought in when we acquired Stability Biologics.
But much lesser degree.
We have a little bit of an increase in inventory of the MiMedx products, but that's really driven by the new products that we're introducing in the second half of the year.
So the combination of those things ---+ those two things really contributed to the growth.
It was a little over $4 million.
<UNK>, also on top of that, it still had some issues with products that have not been contracted on FSS that had been brought in on consignment and so forth, so that they haven't been through ---+ in some cases, they hadn't been through the proper contracting process.
So basically, their controls weren't as tight as they needed to be.
With our products having an FSS schedule, we actually meet the requirements that they're looking for.
But as sometimes happens with some of these government agencies, when they come through and make some changes, there are some confusion that happens with various entities and it just takes them a while to work through that.
But I think in the long run, it's actually going to be a good benefit to us, because we have contracted through the appropriate process and it's been a negotiated national rate on the prices there.
In the quarter, let me get back to you with that in a minute, <UNK>.
It was prior to, just prior to.
Well, the first thing is <UNK>, we've made a conservative effort to bring in associate account executives.
So we bring them in.
They assist with a territory and an account executive.
And then they will transition in that 6- to 12-month period, where they take on their own full territory.
So by design, we know that we have areas that we're still underpenetrated.
And so this is a process that we're utilizing to transition into new territories effectively.
So by definition, that's going to cause our productivity, as you look at it from that perspective to look like it's slowing, but it's again an investment for the future.
And again, as they become their own territories, then we see that ramp up.
<UNK>, in answer to your question, $1.8 million.
Yes.
Well, we certainly think we are.
And again, I've never in my public company life seen a company that seems to have so many troubles.
So that does reflect somewhat in the marketplace.
Thank you.
Well, I hope this has been informative.
You know, you're free to call us.
If you have additional questions, please do so.
Meantime, management will go back to work and continue to make this growth very, very sustainable.
Thank you very much.
| 2016_MDXG |
2015 | XRAY | XRAY
#Good morning, <UNK>.
Hello, <UNK>.
<UNK>, I ---+ we're in the regulatory approval process right now and the process of filing for antitrust approval and also shareholder approval.
I think on this point, we've got to stick to the script that we had at the time we did the announcement.
The two companies are still operating independently of each other at this point.
And so, I think I'd refer you back to the slide deck that we have from the announcement in mid-September.
I don't think we can go any further of that, than that, on this call this morning.
I'm going to start this.
And, <UNK>, if you have something to add.
No, I mean, I think that the ---+ we had a price increase October 1.
Which, we do annually at ---+ on October 1.
And, we saw, kind of, the same activity from the channel that we normally do.
So, no, I don't think I saw any material difference.
No, <UNK>, I guess I'd add I think our price increase was pretty similar to the rate it's been in prior years.
Generally, in that 1 point to 1.5 point- range.
I think the behavior of our distributors was very similar to what it's been.
There's some businesses that might have been a little longer or shorter in the context of the pre-buy.
But, those tend to average out.
And, so, I'd say, overall, pretty similar impact to what we've seen in the past.
I don't think we quantified that in the prepared remarks.
I'm going to start this, and then, <UNK>, if you want to quantify, you can.
The plant got back up and running and also we got availability of the inventory that was in the facility in late September.
So, we lost a good five weeks, maybe even six weeks.
But, it occurred ---+ the explosion was, kind of, in early August.
And, by the time we exited the quarter, we had full access to the facility again.
I just want to make clear that, in a country like China where we import product into, and we hold it in a logistics point, we don't have the flexibility to do a rush of new products into the country.
Because, they got to clear the port.
So, the fact that we lost access, not only to the manufacturing, but, to the inventory to ship, is what caused this disruption.
Yes, I think that the ---+ roughly, the difference in trajectory on that business alone had about a 60 basis point impact, approximately, on the total internal growth number.
And, about 300 basis points on the rest of world.
So, again, it's hard to tell.
But, if we look at difference in trends, that was the ---+ that's the impact.
Thank you.
That's exactly right.
Yes.
You got it.
I would add that those liabilities will likely be refinanced.
Yes, correct.
I mean, our intentions are to refinance these in the near term.
But, they did move in the quarter from long-term to current.
Morning.
Morning, <UNK>.
Yes, on the inventory.
Obviously, we don't provide guidance on a quarterly basis.
But, I guess, I would say over a period of time we've brought it down gradually.
I would have the expectation that it continues to come down gradually.
We may have an individual quarter where it may stay stable or come up a little bit based on either transitional items, transitional initiatives we have, in the near term, relative to the margin improvement initiative.
Or, quite frankly, new products, as you mentioned.
But, I guess I'd take a longer term, or moderate, intermediate term view on it, <UNK>.
Say that, I would expect to ---+ we've got considerable room to continue to bring this thing down.
Relative to CapEx.
I'm ---+ at this point in time, in our CapEx expenditures, are relatively modest based on historical trends so far.
I think that is an area, again, relative to our asset turns that we're focusing on.
And, I guess, I would say for the year, I would anticipate it being in the $65 million to $80 million range for the year.
You bet.
Well, thank you very much for your interest in DENTSPLY.
That concludes our conference call.
I'll be around today for follow up.
Thank you.
| 2015_XRAY |
2018 | TPRE | TPRE
#Thank you, operator.
Welcome to the Third Point Reinsurance Ltd.
earnings call for the fourth quarter of 2017.
Last night, we issued an earnings press release and a financial supplement, which is available on our website, www.thirdpointre.bm. Leading today's call will be Rob <UNK>, President and CEO, but before we begin, I would like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the fourth quarter 2017 earnings press release; and the company's other public filings, including the risk factors in the company's 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Forward-looking statements speak only as of the date they are made. And the company assumes no obligation to update or revise them in light of new information, future events or otherwise. In addition, management will refer to certain non-GAAP measures, which management believes allow for a more complete understanding of the company's financial results. A reconciliation of these measures to the most comparable GAAP measure is presented in the company's earnings press release. At this time, I will turn the call over to Rob <UNK>. Rob.
Thank you, Chris.
Well, we had a strong fourth quarter and a terrific full year.
In the fourth quarter, we generated net income of $44 million for a return on equity of 2.8%.
And for the full year, we generated net income of $278 million and return on equity of 20.1%.
The strong results were particularly gratifying given that they allowed us to highlight the strengths or at least the uniqueness of our total return business model.
In a year with record cat losses and poor industry results, we had stable underwriting results; and a 20% return on equity, among the very highest in the industry.
Chris will go through the details of our results in just a minute.
From our inception 6 years ago, we have focused on generating stable long-term float and minimizing underwriting risk by focusing on closure contracts of less-volatile lines of business.
Now that we have stable long-term float, have increased surplus by $1.1 billion over 6 years and are fully connected with producers, we plan to increase our expected underwriting returns by incrementally, and I stress incrementally, increasing the risk profile of our reinsurance portfolio.
We plan to increase our writings of specialty lines, rate lower-layer excess covers in addition to quota share and raise some shorter-tail event-type covers.
We are off to a strong start in 2018 having already written more than $325 million of premium and at improved pricing levels to the transactions we booked early last year.
We believe that, in the years leading up to 2017, when there was much less cat activity than the modeled expected activity, reinsurers earned outside profits, which masked the poor pricing in noncat lines.
Recent cat events have shone a light on this poor pricing.
And we've seen 300 to 400 basis point improvement in the composite ratios of the quota share contracts we renewed at 1/1 through a combination of improved underlying insurance pricing and reinsurance terms and conditions.
Now I would like to take a few minutes and talk about the potential impact of U.<UNK> tax legislation passed at the end of 2017.
To start and to be very clear: We do not believe that the new tax legislation will have a material impact on our financial results.
The tax legislation is enormously complicated, and there are really 2 pieces of the Tax Act that can impact us.
The first is the Base Erosion Anti-Abuse Tax or BEAT.
This is a tax on certain payments from U.<UNK> taxpayers to their foreign affiliates.
For many reinsurance companies, there will be phased-in 10% tax on gross premium ceded under intercompany quota share agreements.
This has caused many offshore reinsurance companies to eliminate or restructure these agreements and to increase the capitalization level of their U.<UNK> affiliates.
For Third Point Re, there will be no change to our intercompany quota share arrangement.
And we will not be subject to any BEAT tax.
The tax applies to entities where the gross receipts of their U.<UNK> tax-paying subsidiary exceeds $500 million.
Our U.<UNK> tax-paying subsidiary is under this threshold.
And we expect that it will be so for the foreseeable future, and therefore the BEAT tax should not apply to us.
The other part of the tax bill that will impact us, at least indirectly, is the test for determining a passive foreign investment company or PFIC.
If we were deemed a PFIC, our U.<UNK> tax-paying investors would be required to pay taxes on the current taxable income of the company.
To be clear: Our financial results are not impacted by the PFIC rule, just our investors' after-tax returns.
But of course, any negative impact to our investors is a concern to us, especially since it will affect our share price and our access to capital, so we will be taking certain steps to ensure we are not a PFIC.
The Tax Act modifies the active insurance exception to PFIC status by adding a requirement that reserves must generally constitute more than 25% of a company's total assets for the relevant year.
However, the tax law uses an odd definition of reserves.
Only loss and loss adjustment expense reserves are used in the formula and not UEP reserves.
Our loss and loss adjustment reserves are currently less than 25% of our total assets, as they are, by the way, for almost half the U.<UNK> P&C market.
One factor working against us is the structure of our investment account.
Instead of investing through a traditional limited partnership arrangement where only the net asset value of our portfolio managed by Third Point LLC would be presented in our balance sheet, our investments are managed through a separate account, with the gross assets and the gross liabilities related to our investment activities reflected on our balance sheet.
Under our current investment account structure, our gross assets exceed the net asset value of our investment portfolio by more than $1 billion.
We plan to restructure our investment account so that we will present only its net asset value on our balance sheet and thereby reduce our total balance sheet assets by the $1 billion while preserving similar economic exposure to Third Point investment strategy.
Once we've completed the investment account restructuring, we are confident that we will clear the 25% threshold by year-end.
I will now hand the call over to <UNK> <UNK>, who will discuss our investment results in greater detail.
<UNK>.
Thanks, Rob.
And good morning.
The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 2.7% in the fourth quarter of 2017, net of fees and expenses.
The account returned 17.7% in 2017, net of fees and expenses, versus returns for the S&P and CS event-driven indices of 21.8% and 6.3%, respectively, for the year.
The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.
In 2017, many factors combined to create a favorable environment for our opportunistic equity investment style.
93% of returns came from the equity portfolio.
And these were driven by strong stock selection in event-driven situations, several constructivist investments, strength in the tech sector, successful short-selling efforts and maintaining a well-balanced portfolio across sectors with equal exposures to cyclical and defensive stocks.
Our equity book generated a return of nearly 30% on invested assets for the year.
While the portfolio was mostly U.<UNK> focused, we had more ex U.<UNK> exposure than in recent years.
And international investments generated 25% of 2017 returns.
In Q4, equities continued to drive profits, with industrials, consumer and financials as the top-performing sectors.
Energy, TMT and health care were flat for the quarter.
The total equity portfolio returned 5.2% on average exposure during the quarter.
Credit exposure remains modest in an environment, with tight spreads and many participants chasing the same opportunities.
We continue to monitor the impact of a rising rate regime and will adjust exposures accordingly.
Corporate, structured and sovereign credit debt returned 3.2%, 1.4% and 60 basis points, respectively, for the quarter.
Our portfolio remains concentrated in equities and balanced across sectors, with a focus on U.<UNK> investment opportunities.
We will continue to monitor economic data closely and adjust our portfolio exposures to changing market conditions.
Now I'd like to turn this call over to Chris to discuss our financial results.
Thanks, <UNK>.
As Rob noted, 2017 was an excellent year for Third Point Re with a market-leading return on equity exceeding 20%.
Our diluted book value per share ended the year at $15.65, which was an increase of 2.8% for the fourth quarter and 19% for the full year.
The key driver of our results was the excellent investment returns that <UNK> just discussed in detail.
For the fourth quarter, we generated net investment income of $67 million, bringing the full year to $392 million.
Related to our underwriting results.
We continued to reshape the portfolio.
And based on these changes as well as some improvement in overall market conditions that Rob discussed earlier, we expect continued improvement in our underwriting results over the next 12 to 24 months.
Related to movements in gross written premium, just a reminder that, given our focus on large contracts that in some cases may not renew or may renew in noncomparable periods, we will not overly react to premium movements in any given quarter.
Having said that, our gross premiums written increased by $83 million or 103% to $164 million from $81 million in the prior year's quarter.
Gross written premium increased by $24 million or 4% to $642 million from $617 million in 2016.
The increase during the fourth quarter was primarily due to the renewal of 2 contracts, l of it ---+ l of which was a 2-year contract written in 2015 which renewed this year.
And the second was a contract previously written for 1 year in 2016 where we renewed for a 2-year period in 2017.
As Rob mentioned earlier, these were 2 examples of contracts where improvements in pricing, terms and conditions resulted in us writing contracts that we would not have expected to renew earlier in the year.
The modest increase in premium for the full year reflects several moving parts but includes $286 million of new premium written during 2017, partially offset by nonrenewals and other timing differences.
Movements in net premiums earned between periods reflect the timing of earnings in our in-force portfolio but was also impacted for the full year of 2017 by $109 million of new retroactive reinsurance contracts written in the second quarter which are fully earned when written.
We did not write any retroactive reinsurance contracts in 2016.
We generated a $9.2 million net underwriting loss for the 3 months ended December 31, 2017, compared to an underwriting loss of $9.5 million in the prior year period.
And our combined ratio was 107.1% compared to 105.0%.
For the 12-month period, we generated a $43 million net underwriting loss compared to an underwriting loss of $50 million in the prior year period, and our combined ratio was 107.7% compared to 108.5%.
We did not record any catastrophe losses in the fourth quarter, and we maintained our $5 million estimate of cat losses for the full year of 2017.
The cat losses in 2017 accounted for 1 point on the full year combined ratio.
During the fourth quarter, we recognized net prior year's favorable reserve development of $2.5 million.
As we did not have any net reserve development in the prior quarters, this was also the amount impacting our full year's results.
As a reminder: Our reference to the net impact of reserve development reflects the impact of changes in loss reserve estimates as well as any offsetting impact of acquisition costs.
Federal and administrative expenses for the fourth quarter of 2017 were $14 million compared to $5 million for the prior year period.
General and administrative expenses in 2017 were $53 million compared to $39 million for 2016.
The increase was primarily due to an increase in our annual incentive plan compensation accruals, reflecting the performance of the company year-to-date.
In the fourth quarter of 2016, we reversed our bonus accruals based on performance, which lowered the expense in that period.
The increase in income tax expense for the 12 months ended December 31, 2017, compared to the 12 months ended December 31, 2016, was primarily due to higher taxable income generated by our U.<UNK> subsidiaries.
As a result of the change in tax rate, we reduced our net deferred tax liability during the fourth quarter, which resulted in a gain of approximately $800,000.
We do not expect any material impact to our effective tax rate as a result of the changes from recent tax legislation, which Rob discussed earlier.
Finally, as noted in our earnings press release, we have increased the authorization on our share repurchase plan to $200 million.
We intend to buy back shares when our share price is 95% of diluted book value per share or lower, subject to market conditions, rating agency capital considerations and other factors.
I will now hand the call back over to Rob.
Thanks, Chris.
We had a great year in 2017 with market-leading returns, and were able to showcase the strengths of our total return business model.
After building up stable long-term float by focusing on less-volatile, cash-rich quota share contracts and reserve covers, we plan to incrementally shift to more risk taking to improve our underwriting results.
Recent cat events have contributed to some improvement in pricing, and we're off to a strong start in 2018.
I will now hand the call back over to the operator, who will open the call up for questions.
Thank you.
Yes, I think obviously inflation goes hand-in-hand with interest rates.
And that's been a ---+ and that's obviously been something that we, along with everyone else, have been focused on.
I think we also need to just look at growth expectations.
And I'm not saying that growth is a problem, but it's definitely an issue that we're looking at and, I think, getting past sort of the concerns about interest rates and inflation.
And I think that maybe a more pressing issue is going to be whether the rosy assumptions that everybody has about earnings growth this year and next year will be met.
I'm not saying they won't be met, but it's definitely something, given some of the recent economic data which tends to be noisy, we need to keep an eye on.
As far as positioning the portfolio, we've been in a process of reducing both gross and net to be more nimble in what we think will be more of a range-bound market this year, still one with a lot of great opportunities but probably won't have the same tailwinds that we had last year in terms of a low volatility and a steady up and to the right market that ended up over 20% for the year.
I'll let Rob answer that one.
I mean I guess ---+ yes, we can ---+ I can ---+ this is Chris here.
I'll start that.
And certainly Rob can chime in.
So I mean, I guess, to your question, <UNK>, we don't intend to be a PFIC at the end of the year.
Clearly, if we were deemed a PFIC, that would blunt the advantage of investing in Third Point Re in terms of the tax considerations of investing in a corporation.
As ---+ Rob laid out in his initial remarks our plans to address the PFIC, and there's really 2 parts to how we intend to ensure we're not a PFIC entity at the end of the year.
As Rob mentioned, due to the structure of our investment portfolio as a separate account rather than an LP investment, our balance sheet is grossed up by the underlying investment assets and liabilities.
We plan to restructure our investment account to more of an LP-type structure in a manner that achieves the balance sheet presentation that helps on the PFIC ratio while preserving the same investment exposure and expected investment returns to our shareholders as they would have under the existing structure.
And based on the information you would see in the earnings release and the financial supplement, by doing that, it would bring our ratio for purposes of the PFIC test from 15% to 21%.
And so that would leave us about $200 million of loss reserves, under the required 25% ratio.
We expect to be able to close that gap in the normal course of business, including writing additional reserve covers, which as you know is already a core part of our underwriting strategy.
And also, <UNK>, although we don't like the measurement, there's now a bright line test.
So everybody knows what they have to achieve to be considered not a PFIC.
And I ---+ there's always been a cloud over Bermuda reinsurers with respect to PFIC, and so I view that as a positive.
Yes.
I mean it's early days in terms of data science, but ---+ they've already had a very strong influence on us in terms of using machine learning and artificial intelligence and applying that to the data that we get, both from our developing some quantitative screens that we use, especially on the short side, and also on helping to supplement the fundamental work that our various industry teams do in terms of better understanding consumer behavior or what's going on in sales channels and other things.
So it's a very exciting thing.
We spend a lot of time and energy on it, but look, this is something that is going to be ---+ is going to require a lot of time and resources as this is a multiyear project.
It's basically embedded in our organization at this point and will be there, and we're just starting to see the first fruits of that effort.
But I don't think you can be in any business today that's reliant on information and requires people to make decisions based on data without having a sophisticated approach to accessing and analyzing that data, whether you're a hedge fund or an operating business.
And we're certainly making the commitment and the investment in that area so that we stay up to date.
I have no real opinion about it.
I mean they've made some unusual investments in the financial services area.
And I don't know.
I don't really have an opinion on this one ---+ unusual in that they're unexpected for a tech company, both the Fortress investment and this investment.
But you'll have to ask Masa Son that question.
Well, the combined ratio is going to improve our core book of business.
We're just seeing improved pricing.
We already write some specialty business through quota share contracts, and so <UNK>, it's really an extension or maybe a slight acceleration of what we've been doing.
And we've retained a lot of earnings recently, so from a rating agency standpoint, I think we're just fine.
Yes.
I mean, yes, you're right.
I mean previously we had announced a threshold of 90%, and now we've just announced a threshold of 95%.
And it's a little bit of an increase.
Clearly, as we said in the past, buying back our shares below book is immediately accretive to shareholders on future earnings.
And given the ---+ as Rob just pointed out, the additional earnings that we've retained over the course of the year and a strengthening of our capital position, we made the decision to move that dial out slightly.
<UNK>, our gross premium really hasn't changed much in 3 or 4 years.
And now we're up to $1.7 billion in surplus, which is $500 million or so more than we were a few years ago.
So we have room to take a little bit more risk and buy back shares.
I guess, first, on property cat, we're unlikely to write any meaningful amount of property cat this year.
We're looking at how the market is shaping up, pricing; very interested in what goes on at [6 1].
And then we're going to look at cat activity during the year.
And so that's something that's under consideration.
And the second question is are we going to stretch out the tail, that ---+ was it your ---+ the second part of your question, <UNK>.
More, just sort of expectations on liability duration as result of shaping the ---+ reshaping the portfolio.
I think it comes in a little bit.
Just the more event-driven-type risk that we're looking at, we're bringing in slightly.
You're probably not going to notice any meaningful change this year.
Yes, that's right.
No.
No, it didn't require any external approvals.
Of course, any time you're making changes like this, we'll be working closely with our regulators and with the rating agencies to ensure they fully understand what we're doing, but as I said before, the intention is to restructure things in a manner that results in a different balance sheet presentation but retains very similar, if not the same, investment exposure and expected investment return.
Yes.
And, <UNK>, we currently have a separate account.
Maybe a more traditional way for reinsurers to invest in hedge funds is through an LP structure, but both approaches are widely used.
Well, thanks, everybody, for joining us.
We look forward to talking to you next quarter.
If there is any questions in the interim, please give us a call.
| 2018_TPRE |
2016 | ATI | ATI
#To Pat's conversation or his comments on where we are in Q3 from a demand standpoint going into Q4, there were three major issues for us.
One is oil and gas and the oil and gas market.
We're confident that we're maintaining our share of that market, but we're seeing less demand in things like umbilicals and those kind of things, Q3, Q4.
We're also seeing the ---+ what has been called destocking in our distribution community as they head into year end.
Nickel prices have been relatively stable here over the last few months, but they're into their year-end inventory reduction.
The third thing we saw was push out on some major capital projects.
Now that said, in the last few weeks heading into Q1, we're seeing an uptick in quoting activity, lead time activity, lots of questions from customers as they prepare for what they see as a stronger first half in capital projects in oil and gas.
<UNK>, we're not changing our guidance on capital.
The $20 million of essentially carry over is being pushed out from 2016 into 2017.
We don't have any significant capital investments being considered for 2017.
The biggest strategic project we have is the completion of the nickel superalloy powder facility, the new greenfield facility down in North Carolina, and that by the way is progressing very, very well, and is on schedule and will be started up here in 2017.
So capital remains on track.
I think in addition to the comments that Pat and <UNK> made on flat rolled products, the market situations are the market situations.
We don't control those.
We do have strong views and take a lot of input, and we did think the fourth quarter was going to be a stronger demand and a stronger operating rate in the fourth quarter, especially for some of the differentiated projects ---+ differentiated products that touch on some of the big global projects that <UNK> touched on.
And they have been ---+ we thought that some of those awards were going to be made here in the third quarter and we'd be producing in the fourth quarter, and it looks like it's flipping by about a quarter.
So that hurts us.
And quite frankly, we have to do better.
Some of it was within our control, and <UNK> and his team know that and acknowledge that, and we know what the ---+ we see the pathway, right.
We know what has to be done in order to achieve what we said.
We don't take lightly what we said.
That is our commitment first to ourselves and then to our shareholders.
We will continue to focus on pulling all the levers and taking all the actions within our control on turning around flat rolled, and we do think that we will begin to see some benefit from the market, which is always critical in these businesses which have relatively high fixed costs.
Over a long period of time, there is no such thing as a fixed cost.
Over a shorter period of time, there is and absorption does matter.
So no excuses.
We have to do better.
Yes, I think every one of our competitors is different.
They have different product mix profiles.
We make some things that some of our competitors don't make, and they make things that we don't make so it's really hard to compare.
I think from a macro basis, as I kind of look through some of the comments that were being made, especially as it pertains to an alloy system that we don't make, which is aluminum, I think there are some comparables between what two of the aluminum ---+ the flat-rolled aluminum producers have said about inventory correction that I'm sure has an impact on their operations that doesn't impact us.
I mean, I think on the titanium inventory correction side, which we do make, as it services the airframe market, as you'll remember, <UNK>, we went through that for a prolonged period of time a couple of years ago, right.
I think that's in a better situation and in a better condition.
I think the biggest issue is really on the differentiated products.
I spent a lot of time going through in my prepared comments the meaning of that, not only from a mill product form standpoint but also as it is produced in the forgings, primarily forgings at this point in time because we're not yet delivering what we need to deliver on the titanium investment casting side, but we will.
But on the forgings side, both the hot die and the isothermal, I mean we're really very good at making those parts, quite frankly.
If I could tout the and recognize the job that <UNK> <UNK> and his team does.
We're good at it, and our customers know that.
And where others might be stumbling a little bit as they maybe start to ramp up, we are there to support the customer, and we have seen some of those.
The other side is the legacy demand on the jet engine side is still very strong, and some of the LTAs, long-term agreements, that we were awarded in 2015 give us parts that we never produced before, quite frankly, especially on the forged products side.
And we're seeing that.
I think quite frankly you would see that even more of a dynamic level of improvement in profitability in high performance if some of those other end markets were hitting on some better demand side.
The oil and gas market, which is an important market for high performance, is not in good shape.
The electrical energy, the large combined-cycle industrial gas turbines outside of maybe demand from China, not in good shape.
And the chemical processing industry is important.
So I think there are similarities between companies we compete with.
There are differences.
What we're seeing is what I said in my comments.
And 2017, I think we've already commented on flat rolled products.
We expect the segment to be profitable.
I don't think it's going to be heroic because we're not looking at underlying, real strong demand in some of those end markets, so I think it will be more by brute force.
Right at this point in time as we position that business well, so I think it will be low-single-digits type of thing.
And I think the high performance will be into the teens, the low teens at this point as the market, primarily aerospace, we're not banking on oil and gas being a strong demand driver in 2017, or any of the other end markets that are kind of languishing right now.
We don't think that that will change dramatically in 2017.
When they do come back, when the demand does come back, those are kind of different capacities that produce some of those products.
They will be significant profit drivers that will build on the momentum that we have in aerospace.
<UNK>, do you want to comment.
Hello, <UNK>.
No, we saw no deferrals from Q3 to Q4.
Did you get that, <UNK>.
It's really three things, <UNK>, and I think <UNK> has touch on several of these.
First of all, it's the long-term agreements that we've won that are a combination of legacy programs that we had not either been on before, or parts that we had lost in earlier negotiations.
Second is the next-generation platforms, particularly the single-aisle programs.
And third, the combination of the differentiated products associated with them that really represent for us a fully integrated solution for our customers beginning in our mill products businesses pulling through our forging and castings businesses.
The net combination of all that meant we've got growing volume through our facilities, and that growing volume is really helping with cost absorption, and once we hit a good absorption profile with that mix, we get a higher incremental margin and I think you're beginning to see that.
Right.
It's a combination of mix and volume.
Thank you all for joining us on the call today, and as always, thank you for your continuing interest in ATI.
Thank you, <UNK>, and thanks to all of our listeners for joining us today.
That concludes our conference call.
| 2016_ATI |
2017 | RF | RF
#Thank you, <UNK>, and good morning, everyone
Now let’s get started with the balance sheet and take a look at average loans
In the third quarter, average loan balances declined to $79.6 billion as growth in the consumer lending portfolio was offset by declines in the business lending portfolio
Total new and renewed loan production remained strong for the quarter and approximated $16.2 million
Within Consumer, we continue to reshape our indirect lending portfolios with a focus on increasing overall risk-adjusted returns
This is evidenced by our decision to exit a third-party indirect auto contract, while expanding our indirect other Consumer portfolio through point-of-sale offerings
As a result, average balances in the consumer lending portfolio increased $180 million or 1% quarter-over-quarter, despite the strategic runoff in the indirect vehicle portfolio
Excluding this runoff, average Consumer loans increased approximately $385 million
Average indirect vehicle balances declined $180 million or 5% during the quarter
Runoff in the third-party portfolio of $205 million was partially offset by an increase of $25 million in our dealer financial services portfolio
The full year average impact of the runoff portfolio is expected to be approximately $510 million
Our other indirect lending portfolio, which includes point-of-sale lending initiatives, continues to experience growth
Average balances increased $257 million or 26% linked quarter aided by the purchase of approximately $138 million of unsecured consumer loans late in the second quarter
Average mortgage balances increased $171 million or 1% during the quarter
However, growth continues to be constrained by lack of housing supply across our footprint
With respect to home equity lending, average balances continue to decline during the quarter, decreasing $134 million or 1% as growth in average home equity loans of $44 million was offset by a decline of $178 million in average home equity lines of credit
Further, average line utilization decreased 68 basis points, compared to the second quarter
Average balances in our consumer credit card portfolio increased $36 million or 3%, as a number of active cards increased approximately 2.5%
Turning to the business lending portfolio, average balances totaled $48.3 billion in the third quarter, a 1% decline from the second quarter, despite a 1% increase in total new and renewed production
As <UNK> mentioned, we experienced elevated loan payoff and pay downs
In particular, many customers in the large Corporate space access the fixed income market taking advantage of favorable pricing spreads, using those proceeds to pay down or payoff bank debt
The level of payoffs and pay downs was 1.5 times higher than the previous quarter and just over 50% higher than the third quarter of last year, a number of investor real estate loans paid off prior to maturity, reflecting the impact of low capitalization rates and a modest increase in mergers and acquisitions was observed in the middle market space, further contributing to elevated loan payoffs
In addition, the decline in average owner-occupied commercial real estate loans reflects continued softness in demand and competition for middle market and small business loans
As part of our risk mitigation strategy, we continue to reduce exposure in certain industries and asset classes
For example, average direct energy loans decreased $52 million or 3% ending the quarter at $1.9 billion or approximately 2.4% of total loans outstanding
Average multifamily loans decreased $58 million or 4% during the third quarter and average medical office building loans decreased $24 million or 8%
In addition, average investor real estate construction loans declined $195 million, due in part to our ongoing efforts to improve diversification between construction and term lending
While these risk mitigation strategies have impacted average loan growth, we believe they are appropriate and will position us well for prudent and profitable loan growth in the future, while maintaining an appropriate credit risk profile
Evidence these strategies are working include, continued declines and expected loss estimates across all business lending categories, improving our relevance and profitability within the shared national credit book or capital recycling efforts have also reduce both the probability of default and expected loss estimates by approximately 10%
The company has reviewed approximately $33 billion of large shared national credit exposures since 2016, and as a result, we exited $4.2 billion of credit and added new or expanded existing relationships of $4.6 million
These expanded relationships provide average trailing annual revenues that are 51% higher than all other shared national credit relationships
Average trailing annual non-interest revenues that are 123% higher and average risk-adjusted returns on capital that are 252 basis points higher
With respect to loan growth, while current pipelines are higher than they have been all year, line utilization reductions and payoffs experienced quarter have tempered expectations
As a result, full year average loan balances, excluding the impact of third-party indirect vehicle runoff are expected to be down slightly
However, based on what we know today and borrowing another quarter of elevated payoffs, we expect loans to grow in the fourth quarter on an end-to-end basis
Let’s move on to the deposits
Similar to loans we also continue to execute a deliberate strategy to optimize our deposit base, focusing on valuable low cost Consumer deposits, while reducing higher cost brokered and collateralized deposits
Total average deposits decreased less than 1% during the quarter, primarily due to our strategic decision to reduce higher cost deposits
Average deposits in the Wealth Management segment declined $276 million or 3% as a result of ongoing strategic reductions of collateralized deposits
Certain institutional and corporate trust customer deposits, which require collateralization by securities continue to shift out of deposits and into other fee income producing customer investments
Average deposits in the other segment decreased $220 million or 7% driven primarily by our strategy to reduce retail broker suite deposits
Average deposits in the Consumer segment experienced a seasonal decline of $153 million, while average Corporate segment deposits increased $23 million
We continue to expect full year average deposits to remain relatively stable with the prior year
Let’s take a look at the composition of our deposit base
Third quarter deposit costs remain low at 17 basis points and total funding cost were 37 basis points, illustrating our deposit advantage
As a reminder, our deposit base is more heavily weighted towards retail customers, approximately 75% of average interest bearing deposits and 51% of average interest free deposits are considered retail
In addition, we have a loyal customer base, as more than 43% of our consumer low cost deposits have been deposit customers at Regions for more than 10 years
And finally, approximately 50% of our deposits come from MSAs with less than 1 million people and approximately 35% from MSAs with less than 500,000 people, both are in the top quartile versus our peer group
For these reasons, we believe that our deposit base is a key component of our franchise value
It is a competitive advantage in a rising rate environment
Now let’s take a look at how this impacted our results
Net interest income on a fully taxable equivalent basis was $921 million, representing an increase of $17 million or 2% from the second quarter
The resulting net interest margin was 3.36%, an increase of 4 basis points
Interest recoveries continued to benefit net interest income, adding $4 million and 2 basis points of net interest margin relative to the second quarter
After normalizing for recoveries, net interest margin and net interest income benefit primarily from higher market interest rates, driven by the June Fed funds rate hike, partially offset by a decrease in average loan balances and higher interest expense associated with our holding company debt issuance early in the third quarter
Further, one additional day in the quarter benefited net interest income by approximately $5 million, but negatively impacted net interest margin by approximately 2 basis points
Looking forward to the fourth quarter and excluding the impact of interest recoveries, we expect net interest income and net interest margin to grow modestly, in line with market expectations for December Fed funds rate increase
For the full year, we continue to expect net interest income growth in the 3% to 5% range
Before we move on, I want to make a couple of points about our asset sensitive, given the extended low rate environment, the majority of our balance sheet has essentially re-priced
As a result, our natural reinvestment of fixed-rate loans and securities even at current interest rate levels will be accretive from here
So even if interest rates remain low, our balance sheet is position to deliver continued growth in net interest income
Let’s move on to non-interest income, adjusted non-interest income decreased $13 million or 3% during the quarter, driven primarily by declines in mortgage and capital markets income, partially offset by an increase in service charges
In addition, the company incurred $10 million of operating lease impairments during the third quarter, compared to $7 million incurred in the second quarter
Year-to-date, we have incurred $22 million in operating lease impairment charges, primarily attributable to oilfield services customers
Mortgage income decreased $8 million or 20% during the quarter
Despite a 9% decline in mortgage production, sales revenue increased $1 million or 4%, primarily due to improved secondary marketing gains
However, this increase was offset by $9 million reduction in the valuation of residential mortgage servicing rights
Capital markets income decreased $3 million or 8% driven by lower merger and acquisition advisory services, and loan syndication income, partially offset by higher revenues associated with debt underwriting
Card and ATM fees were negatively impacted by the hurricanes, as the estimated impact of fee waiver was approximately $1 million in the quarter
However, service charges increased $6 million or 4% during the quarter, aided by continue checking account growth, new now banking accounts and higher mobile deposit revenue
Wealth Management income remained relatively unchanged during the quarter
Of note, our wealth team recently launched the Regions’ wealth platform through its partnership with SEI Global Services
This new and enhanced platform is expected to benefit all customers across the wealth space, including private wealth, institutional services and asset management, with best-in-class online experience, while also increasing operational efficiencies
Similarly, in an effort to improve our customer experience through innovation, we were in the process of rolling out a new iTreasury platform
This should enhance the customers experience and further expand our product capabilities
We also announced this week plans to expand person-to-person payments and account to account transfer solutions through our partnership with Fiserv
We will add Turnkey Service Brazil and Transfer Now capabilities in the first half of 2018, providing an enhanced and seamless customer experience across all payment types
With respect to future non-interest income, we expect growth in capital markets revenue next quarter as several transactions originally expected to close in the third quarter are now expected to close in the fourth
In addition, we expect a modest increase in Mortgage, Wealth Management and card and ATM fees to collectively contribute to overall growth in adjusted non-interest income during the fourth quarter
We continue to expect full year adjusted non-interest income to remain relatively stable with the prior year
Let’s move on to expenses
On an adjusted basis expenses were well-controlled in the third quarter, decreasing $19 million or 2%, compared to the second quarter
Total salaries and benefits decreased $14 million or 3%, primarily due to reduced pension settlement charges and lower health insurance costs
Professional fees decreased $7 million during the quarter, associated with lower legal and consulting costs
Provision for unfunded credit losses also decreased $5 million during the quarter
These declines were partially offset by $5 million increase in occupancy and a $7 million increase in other real estate expenses related to branch damage, hurricane preparedness and other storm-related charges
Despite the impacts of operating lease impairments, pension settlements and hurricane-related charges, the adjusted efficiency ratio improved 150 basis points to 61.7% during the quarter
We continue to expect the full year adjusted efficiency ratio to be approximately 62%
The company also produced solid growth in pretax pre-provision income, increasing 4% compared to the second quarter and 12% compared to the third quarter of the prior year on an adjusted basis
For the first nine months of 2017 the company generated positive operating leverage on an adjusted basis of just over 1%, reflecting growth and adjusted total revenue of 1.5%, offset by 0.3% increase in adjusted non-interest expense
We expect full year adjusted operating leverage of approximately 2%
With respect to taxes, the effective tax rate increased 140 basis points in the quarter to 30.9% and our full year guidance for the effective tax rate remains unchanged in the 30% to 31% range
Shifting to asset quality, excluding the impact of the hurricanes, we experienced another good quarter from the credit perspective
Non-performing, criticized and trouble debt restructured loans continue to improve
Non-performing loans decline $63 million, resulting in an NPL ratio of 0.96%
We also reported a 10% and 8% decline in business services criticized and total trouble debt restructured loans, respectively
These declines were primarily driven by improvement in commercial loans
Net charge-offs totaled $76 million in the third quarter or 38 basis points of average loans
This represents an $8 million increase over the second quarter and includes the impact of two large energy credits
For the first nine months of 2017, net charge-offs represented 41 basis points of average loans
We continue to expect full year net charge-offs to be in the 35 basis point to 50 basis point range
As <UNK> mentioned, it’s too early to assess the full impact of the hurricanes, generally it takes up to nine months to fully evaluate storm-related losses
We are still gathering available intelligence, including direct communications with customers where possible to determine potential losses resulting from the storms
As you would expect, our loss estimate includes a significant amount of uncertainty
Based on our current evaluations, we have provided for an incremental reserve of $40 million for loan losses
Including the incremental reserve, the provision for loan losses match net charge-offs for the third quarter
The resulting allowance for loan losses at quarter end increased 1 basis point to 1.31% of total loans outstanding
We continue to characterize overall credit quality is stable
However, volatility from quarter-to-quarter in certain credit metrics can be expected, especially as it relates to large dollar commercial credits, fluctuating commodity prices and further analysis and revisions to hurricane-related exposures
Let’s move on to capital and liquidity
During the quarter we repurchased $500 million or 34.6 million shares of common stock and declared $105 million in dividends to common shareholders, an aggressive start to our recently approved capital plan
We see the compounding benefit of executing repurchases early, but also understand the need to retain some flexibility throughout the year
Our resulting capital ratios remain robust
Under Basel III the Tier 1 capital ratios was estimated at 12.1% and the fully phased-in common equity Tier 1 ratio was estimated at 11.2%
Finally, our liquidity position remains solid, with a low loan-to-deposit ratio of 81% and we were fully compliant with the liquidity coverage ratio rule as of quarter end
Regarding expectations, while 2017 has been challenging in many respects, we still expect to meet our overall profitability targets for the year
We are able to accomplish this because our asset sensitive balance sheet continues to benefit from increasing interest rates, including the benefit of our core deposit base and at the same time we are continuing to exercise solid expense management
I have provided an update on each of these targets on the previous pages of deck
Those updates are summarized again on this slide for your reference
So in conclusion, despite the negative impacts from recent hurricanes, we reported solid third quarter results and remained focused on continuing to execute our strategic plan to drive growth and shareholder value
And to end, as <UNK> mentioned, we expect to achieve the majority of the $400 million expense eliminations by 2018, one year ahead of schedule and are committed to achieving additional expense reductions over and above the $400 million amount, and we look forward to providing additional details to you later this year
With that, we thank you for your time and attention this morning
And I’ll now turn it back over to <UNK> for instructions on the Q&A portion of the call
And in ---+ so in indirect auto, that runoff usually takes about two and half years runoff
It cost us somewhere in the $500 million range as we mentioned, so we just now finished about a year, so we have about a year and half round number, <UNK>
So we think about repurposing, we got ---+ round numbers we had talked about another $1 billion that we were looking at
The truth is we continue to see opportunities to look at all of our relationships as they continue to come through and mature, and so it’s hard to explain to you exactly how much in terms of runoff would occur, it’s really the opportunity to look at a lot of large corporate relationships as they come up for renewal
Yeah
I will answer the last question
We really want to reserve that <UNK> for December, because we are continuing to finalize our budget, our strategic plan for the next three years
So we will have a better net response to you then
As we think about, how we are going to simplify and grow our bank, really looking at all processes that we have, starting with how we serve the customer all the way to how back office enables the front office to deliver our product and service
Our goal is really to simplify how our customers bank with us and how our associates serve our customers
So it is a broad base initiatives that we will be looking at how we can leverage technology to get more efficient and to have a more effective responses in many areas, and so we continue to look at branches as we’ve done, we have consolidated more branches and any peer since the crisis and we look at a lot of square footage even outside of the branch in terms of opportunities for saving
So it’s is pretty broad base
<UNK>, let me add one another thing, you know what our goal is with regards to efficiency in 2018. And as <UNK> just mentioned, our expectations are to do what we have to achieve that ---+ those expectations that we laid out at our Investor Day, regardless of the environment that might be ahead of us in a slow growth whether rates are up or down or whether they are up or flat, and so that that’s what our reason for focusing on the expense initiative
I do thank…
…for Barb comments that, every day we are learning a little bit more from our customers and obviously the more information that we get from customers and communities, the more refined our estimates are for those losses
And historically, as Barb mentioned, within about a nine month period we got a great degree of certainty about what that potential is
We’ve taken what we believe to be disciplined and prudent approach of what we’ve done this quarter, but for certainty we have got a lot of play out
So, I think, that, clearly, as we mentioned the hurricanes, three of them happened right here at the end of the quarter, so we did our best to estimate losses both on the credit side, as well as the non-credit side
We will have some adjustments in the fourth quarter
I don’t expect those to be many great magnitude thus far based on what we know today
And as we think about expenses, we still are within our guidance that we provided at the end of the year that we would be less than 1%, we have given you a guidance that we believe our operating leverage for the year will be approximating 2%
So, I think, your questions also leading into what it’s look like for ‘18 and I am just going to ask you to be little patience until we get to December and we will give you a better net number for both ‘18, ‘19 and ‘20.
Yeah
So provided a little bit of guidance in terms of where our balance sheet is currently positioned right now with regards to even rates where they are as we have fixed rate loans maturing that and securities are rolling over that we can reinvest to have some accretion in net interest income and resulting margin
We do believe if we mentioned that we will grow loans in the fourth quarter we will give you guidance in terms of loan growth relative to 2018 again in December
But we expect to continue to benefit without a rate increase and of course, the probability of December increase is in the plus 80% right now which is why we gave you the guidance on NIM in the fourth quarter to be up modestly
The actual balance is effectively unchanged
I think our commitments are in the range of $38 billion, outstandings roughly $19 billion, commitments are up modestly, outstandings are down a little year-over-year, couple $100 million, but we have generally tried to hold those balances about flat and are again remixing the business exiting some relationships, as <UNK> pointed out, entering others as we see opportunities to be more relevant and to gain more of our customers’ share wallet
So we’ve mentioned quite a few technology investments in our prepared comments in terms of helping our customers, helping guess our customers bank easier with us and helping our associates serve our customers
So you are going to continue to see investments in digital, will be a big investment that we need to have
And I think the whole simplify and grow the bank, again a lot of initiatives there in terms of process
So we think technology will enable us to have more efficient and effective processes through that implementation, which is going to cost us a little bit of money, which is why we don’t want to answer the question for ‘18 just yet
Yeah
<UNK>, it’s actually both of those
We are looking at the total portfolio, the fixed rates that are ---+ that exist on both in consumer and in the business side, as well as the securities book that rolls over every month, and so it is a combination of those two or literally three things that we believe will help us be accretive in terms of net interest income even if rates stay kind of where they are
Well, we’ve ---+ so we do believe that as rates continue to increase in the face of that, those rates increase deposit betas will also increase
We’ve been fortunate thus far our deposit beta is around 10% thus far, quarter-over-quarter we were about 14%, but like beta about 10%
We believe this is a unique advantage for Regions and that our deposit base SKUs to our retail depositors where in smaller markets we’re in those markets where deposit costs or deposit pricing is less sensitive and that we will have a better deposit beta relative to our peers consistent with what we experience last up cycle
So we think there’s continued benefit for us to actually extract the value out of our deposit franchise as we finally getting rate increase
And if you look at, I mean, over the last several quarters we really strengthen the composition of our deposit base and we think it’s more of the core strength of the company and we have rationalized some of our higher cost deposit that whether it be collateralized deposits or public funds deposits
And under these liquidity rules, we want to make sure that we’re building high quality deposit base that we can depend on quarter in and quarter out and so we feel very good about the deposit base we have built obviously in this environment
We have been able to really make that composition ship very gracefully and feel good about where we are at today on deposits
So, <UNK>, what we recently changed was, when we added the $100 million, so we had an original $300 million plan
We added $100 million earlier and said we would find that through 2019. We have now adjusted that extra $100 million and say, we find the majority of that in 2018. So, not much of that component is actually in our current run rate
And we will give you better guide as to what that means in December
That would be fair
Yeah
So we continue to evaluate the risk-adjusted returns on all of our businesses, we evaluate diversification of our businesses and geographies and as it relates to insurance you’re quite right, industry has had a down on a premium market for some time, that starting to reverse actually recently
And so, but we continue, we are going through our strategic planning process, where we look at all of our businesses as we speak and we will give you again more guidance as to what that looks like for our next three years, we will lay that out in December
Yeah
So we backed off that a little bit, you know that industry very well, the multiples of cash flow became very expensive and it was hard for us to justify the type of investment it was going to take us to get any type of sizable acquisition done
So what you have really seen it later are really smaller acquisitions of producers that we put into that business and but it’s really right this minute cost prohibitive for us to spend the type of cash flow
It’s going to be required to do the deal
So we have laid out a target common equity Tier 1 in the 9% range
We had originally targeted that for the end of 2018. We can’t quite get there by the end of 2018. It will be in 2019 before we get there kind of given where our loan growth and our capital plan are laid out
We will update that as we do our CCAR next April, but we expect that to approach that sometime in 2019.
That’s correct, <UNK>
So we have kind of got to the point where our premium amortization is really not as important to us in terms of what our ultimate net interest income and margin are, we are sitting here in the mid-30s in terms of amortization, that might drift a bit lower, but not appreciably
So we are looking at maybe it bottoms out in the low 30s to high 40s
| 2017_RF |
2016 | PYPL | PYPL
#Look, there's a number of already stuff going on in browser.
And so I think you're exactly right.
Like the day that I came here to PayPal was the day that Apple Pay was announced.
Those two things are etched in my mind.
It's been 18 months, right.
In the last 18 months what's happened.
We've added 25 million-plus net new active accounts.
We have more engagement than we've ever had in our base.
We have accelerating TPV, accelerating revenue.
And why is that.
Honestly, it's because payments is really hard.
And it is hard to crack.
And the other thing is that there are value propositions out there that focus on a piece of payments.
And we have a very comprehensive value proposition.
And I will say this, we are not standing still.
I have operational reviews every single month with my team, and the last thing that I said to the consumer and the merchant team is: I truly believe that what they've done and where those teams are going will widen the distance in terms of our value prop.
And I hope to be able to ---+ I think you can see some of that with One Touch.
I hope you'll see other things as we move forward.
We basically ---+ this has not been an easy journey for PayPal.
We've had to fully upgrade our technology platform, but we've done most of that.
And because of that, really for the first time, the innovation that's always been here but just not able to get through our pipeline, is now actually coming into the market and innovating at scale.
You've seen the backlog of sales that we have right now.
That's because of demand, and demand for the value proposition that we have on the Braintree side.
One other thing I would just say.
At this point the more announcements that come out, actually the better off I think it is for us.
It is so confusing out there for a customer.
You have another announcement coming out.
There's a lot of Balkanazation going on, a lot of confusion.
You can only use this pay in this retailer, this pay with this technology, this pay with this device.
And we've got a real trusted brand.
We have a base of almost 180 million customers right now.
And I think that the more confusing it is out there, the more people turn to brands that they can trust and that work across any OS, any device, any POS technology out there.
And I actually think at this point, although I respect every one of those competitors greatly and we watch everything carefully, our biggest competition is our ability to execute against our game plan right now.
We have a good game plan.
We have a really good road map to increase our value proposition for both merchants and consumers.
And we just need to stay focused on that and get those things out into the market.
And our results hopefully will continue to do the same thing that we've done over the last 18 months.
Thank you very much.
<UNK>, that's a great question.
So you're right.
We had Paydiant, Modest, Xoom.
Modest, you're starting to see some of that already with what we've been able to do on Pinterest, what we've been able to do with Facebook, what we've able to do with contextual commerce.
And stay tuned on that front.
We've got a lot more coming out on that piece of it.
Xoom just closed.
We're obviously moving to integrate that, put that onto the PayPal platform.
When we're able to do that instead of it just being US send out, we'll start to integrate other countries, other corridors, cross-sell.
So we think there's a tremendous leveraging that we can do on the Xoom side.
Paydiant, we've spent a bunch of time now integrating Paydiant into the PayPal and Braintree stacks, and just had a review again last month.
We're largely complete with phase one of that.
And what that really allows us to do is take a platform that ---+ a white label platform.
Just think of our ---+ a lot of our offline movement is to provide a white label platform to allow merchants to write their own apps, because merchants understand their consumers better than we will ever do that.
And they know their consumers.
They know the value prop that a consumer will respond to.
They drive people to that value prop.
Like Subway is a great example, right.
They can customize their sandwich.
They can define the pick-up time.
They can come in, skip the line, get immediate rewards.
Then decide to pay with those rewards right at the time of the sale or split tender that.
All of that is power through our unbranded platform.
So it's not just payment types, but rewards, and offers is paid.
That's sort of the ultimate way that we're thinking about it.
And we are really ---+ I think we are going where the trends are going.
We're not trying to react to, let's NFC over here, or whatever it may be.
That doesn't mean we won't have NFC as part of our [platform].
We don't think that's a winning strategy, just substituting tapping a phone for swiping a card.
What we think is a winning strategy is allowing merchants to use the power of mobile to get closer to their customers.
And we want to help power the difficult plumbing of that, all the payment processing of any payment type, rewards, offers, et cetera.
And we are having substantially different conversations with our merchant base as a result of that platform.
Much more strategic in nature, much more about where the industry and the nature of commerce is going as opposed to, as <UNK> said in his remarks, as opposed to just being a tender type, a part of checkout in which really, that's really a commodity, or increasing commodity element versus the digitization of commerce going forward.
And so I couldn't be happier actually with that Paydiant acquisition.
It is the engine piece of that in-store element.
You connect that, which I think was really the leading in-store platform player with us, PayPal traditional, which I think was like a leading player in online, and Braintree which is a leading mobile player.
Combine those together, it's a very ---+ and combine, then almost 180 million consumers that we can bring to light up that platform by doing credentialization of identification, et cetera to take friction out of the sign-up process; and it's a pretty strong set of assets that we bring to the offline market.
That's a tremendously large opportunity for us, but we are just starting here.
I don't want to oversell it at all.
I love the set of assets we bring to it.
But it's very, very early innings on that.
Operator, we have time for just one last question.
So the first one is that is an accurate [assessment].
We are just beginning on those conversations across the ecosystem, but the answer to that is, yes.
And more to come on that as we move forward.
In terms of Apple Pay and Android Pay, we don't release that information.
But as we talked about in other conferences or calls, when Apple Pay first announced, half the brands that they announced were integrated through the Braintree platform.
When Android Pay first announced, half those brands were integrated through our platform.
So we have a really good insight as to those different services.
But we wouldn't release those publicly.
I think that's it.
Thank you, operator.
Thank you everybody for joining us this afternoon.
| 2016_PYPL |
2017 | NTGR | NTGR
#Thank you.
Couple of comments I would make on that.
Retail is mainly cameras add a little bit, too, potentially to 20%.
So, cameras are a little bit more seasonal from a Q4 to Q1.
You notice, I believe, last year the CBU business went up.
The year before it went down.
So it's usually a few points down normally on a seasonality basis and then service provider's lumpy, as we've always said.
Approximately $55 million, if you can see it wasn't quite $55 million this quarter and that moves around.
Basically we are guiding with what we see in front of us but the big differential is in revenue coming down all driven by the retail ---+ just the normal seasonality and then added a little bit by the cameras.
Yes cameras, especially, is very seasonal.
Camera sales over the holiday season is super high and then come into Q1 it drops off pretty quickly.
Like it or not, the thing is, when we calculate revenue we have to take into account returns.
Right.
People by a lot of cameras over Christmas, some of them get returned.
They become negative in Q1.
That's why you get a higher camera business you actually have a more pronounced drop off from Q4 to Q1.
Absolutely.
On a year-over-year basis, definitely but not on a sequential basis because a lot more people buying cameras over the Christmas holiday season and then it [quiets] off in Q1.
That drop off is more pronounced than the normal home networking.
Last year as you rightfully pointed out when home networking is dominant versus Arlo ---+ the drop off in Q4 to Q1 is more like 20% and this year is more pronounced than that because Arlo is definitely a bigger portion of the RBU revenue.
So, that's why you see a more severe drop off from Q4 to Q1.
<UNK>wever, the seasonality for cameras after the drop off in Q1, then it will start to grow again from Q2 all the way back into Q4 again.
One thing we are pretty good out is managing expenses at this point.
With that the seasonality we believe that we have plans to manage this and to achieve our goals and we will stick to that and if different things happen we could just as easily make more revenue and have less.
We will make the appropriate adjustments as necessary.
Well, I mean, if you look at CBU from a pure topline perspective it might be a drop in the bucket.
<UNK>wever, if you look at the bottom line perspective it's pretty sizable, all right.
It is certainly not a business to be sniffed at.
But you're right.
Growing that business would help our bottom line significantly and clearly we are working very diligently to grow that segment.
Now, unfortunately over the last two or three years we have been dragged down by the continuous decline of the storage market.
Everybody knows that.
Most people are now using drop box and Google photos and all that.
So, the entire storage market is shrinking.
So, that really doesn't help us.
Even though our switch is growing pretty nicely every year we still have to counteract the decline in storage.
On the wireless [land] side, the same thing.
We have not been really growing much because of the competitive nature of the market with a lot of strong competitors such as Ubiquity and Rutgers and to a lesser extent, Aruba.
<UNK>wever, we do believe that going forward while the switch business is becoming a much bigger portion versus storage and wireless land, we do have the ability to grow the overall SNB business.
Now clearly, from a full-year 2015 to 2016 we grew nicely on the CBU business, but of course, it's an easy comp, right.
But going forward we could continue to grow the CBU business even in a high single-digit or 10%-ish profitability contribution would be pretty significant.
Sure.
What I would say when we look toward Q2, I would say, it could be flat to slightly up.
That will just depend on how fast the new products get out of the gate.
I would expect flat to slightly up.
Okay.
It is a (inaudible) of mathematics.
As you probably know, in our [out of state] presentation our router share is closer to 45% to 50%.
Our hope is to hold or increase shares in that segment as I just commented.
<UNK>wever, when the market shifts from router to Wi-Fi mash, even though we're the leader in Wi-Fi mash, we are nowhere near the 45% to 50% market share.
So, if you think of the [hot] math we have to deal with, if the market shifts from router to mash, even though we're number one in both cases we could end up losing share overall and we don't quickly get our mash market share through the 45% to 50%.
That's the head that we are working against.
We believe that we would be up to the challenge.
That's why by going up to the challenge we believe that we can grow the RBU about 10% combined with CBU.
Now, given the fact that we say that CBU would be in the high single digits that means implied Orbi has to grow 10% anyway for the year.
Thank you all for joining today's call.
2016 was a phenomenal year for our employees as well as our shareholders.
We entered multiple new product categories, delivered unique solutions to our customers, developed a new exciting stock brands and delivered significant returns for our shareholders with many new and exciting products on the horizon.
We will look to continue our momentum into 2017 and I look forward to updating all of you in April.
Thank you.
| 2017_NTGR |
2016 | PZZA | PZZA
#<UNK>, it's Steve.
So I'll give a little bit more color around that.
When we launch the quality guarantee, strategically, clearly we had a plan in mind.
We wanted to talk about her clean label work that we've been doing for the last 3 to 5 years.
Clearly it was a branding spot.
I think just in terms of timing and the promotional environment, probably could've been better timing just in terms of the traffic mover.
But we did accomplish what we set out to accomplish to educate the consumer on why is Papa John's different.
Why are we the recognized quality leader within the category.
But we did move to a slightly more retail-driven promotion.
We did have our $9.99 offer ---+ the large, up to five topping promotion that was even in the branding spot.
But we moved to a more retail-driven focus, switched some of our media from [$]30s to [$]15s and that drove significant traffic because it is certainly a good value offer for Papa John's.
It's not, to John's point, the $5 prices that we've seen from some of our competitors.
But we saw strong traffic momentum towards the tail end of the quarter.
That promotion did quite well.
We wrapped the quarter with that.
And as you can see in today's environment, we have ---+ we're on the medium's promotion ---+ two mediums, two toppings for $6.99.
Which is more premium compared to what some of our competitors have done but we've tested the medium offer for years in the local markets and it's also performing well.
<UNK>, this is John.
Not to give away our age, but Steve and I have been doing this combined for over 65 years.
I remember June of 1993 we went public.
And pizza was doing a Big Foot pizza.
So we've pretty well seen just about everything that you can imagine and we've dealt with about everything you could imagine.
So when the thing bobs and weaves a little bit, we wake up and do this every day.
And that's our job and that's what we do.
And so from time to time, they're going to get ---+ I mean the question is when they go from $5 a pizza to $4 because they will, because they have to.
And I'm sure we'll feel that a little bit.
But again, after three or four or five weeks we get right back on our game plan.
Not a tremendous amount of bumpiness, <UNK>, but I'll hit it a little bit.
So as I noted in the opening remarks, the conference is $0.01 to $0.015; so not a huge number.
And then as you look forward kind of at that cadence ---+ what's it look like.
I'd say overall, G&A will probably be a little bit higher in the second quarter due to the event ---+ due to the conference as well as some investments we're making in our technology team.
And then you should see it kind of come back in the second half of the year to more moralized levels.
And as we've said, we expect overall G&A as a percent of sales to be about the same as last year.
So a spike up a little bit in the second quarter, come back down second half, be about even for the year directionally.
Yes, Dave, it's Lance.
I'll start and then I'll let John or Steve jump in if they'd like.
Certainly we do expect higher comp sales going forward, as you've heard.
But with that said, we do have a few headwinds.
You're going to continue to see FX rates.
You're going to continue to see additional investments in our IT and international infrastructure, which are really the two major drivers that you've seen.
And then, frankly, we think it's a little bit early in the year.
We'd rather get a little further under our belt before we address earnings guidance changes.
So I think those are the main reasons.
Anything you guys would add.
<UNK>, it's Steve.
I just had a couple things.
I think the key point is it's early, as Lance had alluded to.
I think if you look at our 2% to 4% guidance, obviously that aligns with what we've got posted on our earnings guidance of $2.30 to $2.40.
If look at our stacks, it's not hard to look at the fact that we're 66 in Q1, a 5 Q2 goes to 31 in Q3, and then a 2 in Q4.
If we can produce the stacks that ---+ and I think we're confident we can.
Obviously, those things could potentially have potential upside.
But at this stage in the game, I think that's why we look at the guidance that we have put forth.
And, <UNK>, this is John.
The thing that we really focus on is the restaurant profitability.
And we've ---+ Evan and his team, Simon, we've tripled our restaurant profitability over the last four years and we're having the best year we've ever had in 2016.
So if you're driving restaurant profitability, that's where your income is coming from.
It is just a healthy situation.
I'll start and then guys can jump in.
So we've seen a little bit of wage inflation.
Overall, if you kind a look at that other restaurant operating line, in the neighborhood of half of that was wages and half of that was continued insurance pressures that we've spoken about before.
So I'm not going to go into exactly what we're seeing from minimum wage and what we're not.
But the other thing I will say is, we're in some of our corporate markets which is close to our P&L, are not in some of those New York, California, where you see the real high minimum wage.
But there is pressure throughout the rest of the country in various forms.
<UNK>, it's Steve.
The only thing I would add is the way we look at it is try to balance things.
So we look at it, as John alluded to before, profit after FLM.
So in Q1 obviously commodities are down, sales were down a little bit but we still were very competitive on the bottom line.
Our strategy is to drive the top line sales and leverage what's happening within the environment.
We know wages will move.
Frankly, we want to be able to continue to give our team members raises because the performance has driven us to look at it from that strategic rationale.
But I think that you'll look at us continue to drive top line sales and be able to mitigate that.
The key point is, again, the significant movement in overall wages are in states where we don't currently have corporate restaurants.
<UNK>, this is John.
The $50,000 number ---+ our managers would have to go backwards to make ---+ our managers make more than $50,000.
So we're already covered there.
The drivers make more than the $15 an hour.
And that leaves you really the people in the store that are prepping in doing the phone.
And the more you drive your IS platform, the less of those folks you need.
So I think we're in a perfect position to handle any kind of wage increase.
The thing that we do look at, we scrutinize quite a bit is cheese and fuel.
Because as long as we've got some cheese hedged and some fuel hedged, it's pretty hard to miss the number.
Everything else kinds of falls in place.
Without getting specific, <UNK>, we're actually ahead on development in the first quarter and to period four.
We're actually ahead of our budget and our forecast.
Yes, <UNK>, we never use the weather as an excuse.
But ---+ and I don't want to get too specific here because all upset Lance.
But P1 had a nice start and the weather did impact P1.
Easter wobble ---+ you want to jump ---+ handle that one, Steve.
The Easter wobble was clearly the very last week of the quarter.
These things, <UNK>, as I had said before, they're not significantly material because typically weather shakes itself out on a year-to-year basis.
From a quarter-to-quarter those things end up becoming factors but not material factors, which is kind of why we don't ever call out a specific number to it.
I think the key point, again, is that the significant traffic momentum that picked up towards the tail end of the quarter offsetting really some of those other factors as it relates to weather and wobbles from a calendar standpoint.
<UNK>, I'll kind of give you the ---+ our ---+ how we operate our marketing.
We move extremely quick.
We did the MLB ---+ we took that from soup to nuts in less than three weeks with a commercial.
So we ---+ not only are we flexible, but if we need to make a change it just doesn't take long to put me in a studio and get the creative done and get it out in the market.
Steve, you want to hit the different ---+
<UNK>, let me give you the mindset ---+ this is John ---+ give you the mindset that we have.
You all see the comp number once a quarter.
We see that number every day.
And so I can tell you, when that number turns negative, the place doesn't feel near as good as when the number's positive.
So we're on this everyday.
And so if it is ---+ we do have a negative day, we're on this ---+ what happened.
What happened.
How do we fix this.
<UNK>, this is John.
The cheese is about at 35 right now.
Yes.
The thing about cheeses is it is capable of going from $1.35 to $3.
And we just believe that we just can't miss our number on a quarterly basis ---+ not that we're chasing number ---+ unless something that comes way out of the box that we can't influence.
So what we're trying to guard against is any kind of really downside incase cheese does do something crazy.
So let's say were hedging cheese right now at $1.65 or $1.70 and we've got half or 60% hedged and the cheese goes to $1.35, we're fine with that.
It's not a problem.
But what we don't want to do is be sitting there at $3 a pound and not have it hedged.
<UNK>, I would say it's remained extremely aggressive this year.
And again, that always aligns with where the commodity environment is with cheese prices being as low as they are.
That's going to be more favorable.
It's going to drive a more competitive environment.
As we've said in the past, in a more competitive pricing environment, the national players are going to be more significantly discounted and they're going to be taking share from the independents and the regionals.
So it seems to all come back to consolidated share within the category.
The big players win, leveraging the strengths to the economy of scale and the strength of technology.
So, it works out well for us in the long term.
That's why we're well on her way to our 13th consecutive year of positive comp sales.
It's all about consistency in the long-term for Papa John's.
<UNK>, this as Lance.
So you had a couple things really bringing that margin down a little bit.
One of them again, foreign currency had about a $700,000 impact.
The other thing is we did ---+ we do now show certain sublease rental income from the UK.
We show it grossed up when we did show it net.
And it's essentially a zero margin business.
So it drove that margin down.
That's a 2% and it will look that way the rest of the year, so that you're aware.
So really on a go-forward basis, it's really kind of a percent you were looking at in the first quarter.
And that was really driven somewhat by the foreign currency.
And then a little bit due to China.
We continue to have weakness in the China market.
And as Steve and John both referenced, we're moving forward there with a re-franchise plan.
<UNK>, and I would just say ---+ it's Steve ---+ on international market, there's going to be volatility.
And you certainly can't take percentages to the bank.
We want to grow this business dollar for dollar, year after year after year.
I think we've demonstrated that since 2012.
The international business has certainly been moving in the right direction.
I think Jack Swaysland and his team has provided an infrastructure for growth.
That's why we're so excited about 2016 being a record year for total new country openings.
New country openings are low single-digit in year one but that provides us with a platform to really drive that dollar growth up in the right direction.
Percentages are always going to move around in an international business.
Sure.
I'll just do that for the high level, <UNK>.
I'm not going to get into a lot of the numbers.
But what you'll have remaining ---+ you'll have zero corporate stores on the international side.
And then you will have two QCCs, one in the UK, one in Mexico.
The one in Mexico's really very, very small.
So really what you're talking about as far as owned assets on the Company's books will be the commissary over in the United Kingdom, which is a pretty significant contributor.
That's all you'll be looking at post sale.
Again, the percentages game ---+ we're careful with.
So we try to drive the top line side of the business.
The sports partnerships that we have, whether it's the Major League Baseball league sponsorship, the NFL league sponsorship or the over 150 sponsorships we have from collegiate to professional ---+ all of those are designed to drive brand awareness.
The activations drive sales.
And ultimately they drive more profit after our food, labor and mileage numbers.
So yes, some of those promotions are quite aggressive.
In fact some of them are 50% off after a game day win or a number of points or goals that are scored.
But ultimately we know we're bringing in new customers.
We're building the brand awareness.
And we're growing the overall brand.
<UNK>, it is Steve.
55% are total digital online sales.
60% of that is coming now from mobile channels.
We have previously announced that it is 50% so it's now up to 60%.
On the overall 55% or the 60% or both.
Promotional activity is certainly one of them.
Clearly a lot of our promotional strategies is driven to drive conversion from off-line to online.
Some of that's just organic consumer behavior.
Consumers are moving more to technology.
And then a lot of is just the enhancements that we've made to the foundation on our platforms.
We believe that the customer experience in our digital channels is improved.
So that's driving the retention in frequency levels to drive the overall mixup.
The mobile side is just obviously been the most accelerated driver of growth within the digital platform.
And I don't suspect that's going to slow down anytime in the near future.
The guidance is using actually kind of probably high ---+ mid to high $1.50s.
We certainly take a look at our forecast as cheese prices move around.
<UNK>, this is John.
The farmer breaks even about a $1.55, $1.60 a pound.
So when they start losing money, then that's not good.
Sooner or later the supply and demand have to set in and the price will go up.
Thank you, Shannon, and thanks, everyone, for being on the call.
We will talk to you next quarter.
| 2016_PZZA |
2018 | UFCS | UFCS
#Good morning, everyone, and thank you for joining this call.
Earlier today, we issued a news release on the results.
To find a copy of this document, please visit our website at ufginsurance.com.
Press releases and slides are located under the Investor Relations tab.
Our speakers today are Chief Executive Officer, <UNK> <UNK>; <UNK> <UNK>, our Chief Operating Officer; and <UNK> <UNK>, Chief Financial Officer.
Please note that our presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
The company cautions investors that any forward-looking statements include risks and uncertainties and are not a guarantee of future performance.
These forward-looking statements are based on management's current expectations, and we assume no obligation to update them.
The actual results may differ materially due to a variety of factors, which are described in our press release and SEC filings.
Please also note that in our discussion today, we may use some non-GAAP financial measures.
Reconciliations of these measures to the most comparable GAAP measures are also available on our press release and SEC filings.
At this time, I'm pleased to present Mr.
<UNK> <UNK>, Chief Executive Officer of UFG.
Thanks, <UNK>.
Good morning, everyone, and welcome to the UFG Insurance Fourth Quarter and Full Year 2017 Conference Call.
Earlier this morning, we reported consolidated net income of $1.81 per diluted share, adjusted operating income of $1.78 per diluted share and a GAAP combined ratio of 93.8% for the fourth quarter of 2017.
This compares with net income of $0.46 per diluted share, adjusted operating income of $0.46 per diluted share and a GAAP combined ratio of 102.6% for the fourth quarter of 2016.
For the full year 2017, we reported net income of $1.99 per diluted share, adjusted operating income of $1.79 per share and a GAAP combined ratio of 104%.
This compares with full year 2016 net income of $1.93 per diluted share, adjusted operating income of $1.78 per diluted share and a GAAP combined ratio of 100.3%.
Our fourth quarter and year-end 2017 results benefited from the Tax Cuts and Jobs Act, which passed into law on December 22, 2017.
The impact of this change added $0.86 per diluted share to adjusted operating earnings in the fourth quarter.
Removing the impact of the tax law change, adjusted operating earnings were $0.92 per diluted share for the fourth quarter, which is an increase of $0.46 per diluted share compared to the fourth quarter of 2016.
<UNK> will be providing additional details on the financial impact of the tax changes later in this conference call.
During the fourth quarter 2017, we began to see improvement in our core loss ratio, including a decrease in our commercial auto and commercial property losses.
As a company, we have several initiatives in place to return our auto line of business to the acceptable level of profitability, which includes continuing to aggressively increase pricing on our auto business.
We believe we are gaining traction in our auto lines and we'll continue our initiatives to improve profitability going forward.
During the fourth quarter of 2017, catastrophes were manageable, with cats adding 2 percentage points to the combined ratio compared to 3.6 percentage points in the fourth quarter of 2016.
The cat load for the fourth quarter 2017 is lower than our 10-year historical average of 6 percentage points.
For the full year 2017, cats added 7.4 percentage points to the combined ratio, up from 6.5 percentage points in 2016.
The 10-year historical average for cats has been 7.3 percentage points, so 2017 was right in line with our historical performance.
For the full year 2017, the hurricanes during the third quarter had the most significant impact, accounting for $22 million or approximately 30% of our total 2017 cat losses.
The wildfires in California accounted for $2 million of our cat losses in 2017.
Moving on to expenses.
Our expense ratio increased to 33.3% in the fourth quarter of 2017 as compared to 30.2% in the fourth quarter of 2016.
This increase is primarily due to the deterioration in profitability of our auto lines of business, which accelerates the amortization of our deferred acquisition costs.
For the year, our expense ratio was 31.2% compared to 30.6% in 2016.
So despite the increase in the fourth quarter, our full year 2017 expense ratio continues to meet our expectations at around 31 percentage points.
2017 was a year that definitely had its ups and downs.
UFG, like the industry overall, continue to battle a deterioration in performance in our commercial and personal auto lines of business.
We expect to return these lines back to our desired level of profitability with aggressive rate increases and other initiatives.
In 2017, UFG also incurred losses from 3 powerful hurricanes and devastating wildfires in California.
The diligent and proactive efforts of our claims staff allowed us to minimize the impact on our policyholders and agents and return them to a sense of normalcy as quickly as possible.
In addition to these large catastrophes, in 2017, the industry endured the second most costly severe convective storm season in the U.S. in a decade.
UFG was no different than the industry.
The majority of our remaining catastrophe losses in 2017 were from severe convective storms.
I believe it is worth noting that in both these cases, our selective underwriting minimized our losses from any individual cat event.
Finally, signs of improvement in our underlying core loss ratio in our commercial auto and commercial property lines has us headed in the right direction.
Looking forward to 2018, we are still on track to close our previously announced sale of our life insurance business in the first half of 2018.
As we stated previously, the proceeds from the sale will be used for various capital initiatives, which may include share repurchases, regular and extraordinary dividends and potential future acquisitions.
With that, I will turn over the discussion to Mike <UNK>.
Mike.
Thanks, <UNK>, and good morning, everyone.
As <UNK> indicated, we had some improvement in our core loss ratio in the fourth quarter of 2017, driven by a decrease in severity in our commercial auto and commercial property lines of business.
We are making progress in our ongoing efforts to improve profitability in our commercial and personal auto lines of business with the initiatives we've been discussing all year, and we will continue to push rate increases while keeping a close eye on these lines during 2018.
All of our regions will also be reviewing our underperforming accounts and taking appropriate rate and underwriting actions necessary to return these lines to profitability.
In the fourth quarter of 2017, we had 18 large commercial auto claims compared to 24 large commercial auto claims in the fourth quarter of 2016.
For the full year, we had 63 large commercial auto claims compared to 45 large claims in 2016.
This reduction in frequency of large losses during the fourth quarter is encouraging, and we look forward to seeing the benefits of our auto initiatives carry on into 2018.
On Slide 10 of our slide deck, we have provided a breakdown of the geographic distribution of the large commercial auto claims received for the full year 2017.
Our risk control representatives are continuing to focus their efforts on accounts with significant auto exposure.
These efforts include ensuring that our commercial policyholders have acceptable hiring practices, driving ---+ excuse me, driver screening practices, vehicle use policies and vehicle maintenance policies in place and that they are being enforced.
Also recently, we began working with the selected automobile accounts to implement a net-based telematic solution to monitor and prevent distracted driving practices by insured drivers.
The new app will provide information on miles driven, hours driven, number of drives, drive times a day, drive durations, drive locations, routes, mobile distractions and also provide data on hard stops, acceleration and speed.
We are also continuing to grow our enterprise analytics department and look forward to the additional capabilities this department will provide to our underwriting teams in both risk selection and pricing.
Enterprise analytics is also directly involved in our [OASIS] initiative, which is a multiyear project to modernize our policy processing system and transform the way we do business, allowing us to incorporate data and analytics into our daily decision-making.
The initial phase of this project is complete, and we expect to make substantial progress in the year ahead with support and guidance from over 50 employees serving on the OASIS team.
For commercial property, similar to our commercial auto initiatives, we implemented several strategies in 2016 to address our underperforming commercial property book.
In the fourth quarter of 2017, we began to see some improvement in this line due to these initiatives.
In particular, we have seen significant reduction in fire losses during 2017 as compared to 2016.
We believe that fire results are benefiting from an increased focus on lost control on this line, including the use of infrared imaging technology.
Additionally, there has been an increased focus on underwriting discipline for older buildings and certain classes of business.
Moving on to market conditions.
During the fourth quarter of 2017, market conditions were competitive on both renewal and new business across all regions.
The average renewal pricing change for commercial lines increased by low single digits, primarily driven by an increase in commercial auto pricing.
Filed commercial auto rate increases processed during the quarter averaged in the low double digits and commercial property increases averaged in the mid-single digits.
Filed workers' compensation rate decreases averaged in the mid-single digits.
Personal lines renewal pricing also increased with average percentage increases in the low single digits and filed rate increases processed during the quarter averaged in the upper single digits.
All regions continue to aggressively address our poor-performing accounts through nonrenewal or significant rate increases.
During the fourth quarter of 2017, premium and policy retention remained strong at 84% and 81%, respectively.
Our success ratio on quoted accounts decreased 1 percentage point from the prior quarter to 27%.
This decrease, similar to the third quarter, was largely driven by a significant drop in the success rate of our specialty division, resulting from a large increase in quote request for this division again in the fourth quarter.
As we continue to address the deterioration in our book of business, our expectation is that premium and policy retention may be negatively impacted.
With that, I'll turn the financial discussion over to <UNK> <UNK>.
Thanks, Mike, and good morning.
For the fourth quarter of 2017, we reported consolidated net income of $46 million compared to $12 million in the fourth quarter of 2016.
For the year ended 2017, consolidated net income was $51 million compared to $49.9 million in 2016.
The increase in net income in the fourth quarter and full year over the comparable period is due to prior year favorable reserve development, improvement in our core loss ratio, as <UNK> and Mike have discussed, and changes in the corporate tax rate, resulting in a onetime adjustment to net income.
UFG realized a tax benefit of $21.9 million associated with remeasuring our deferred tax liability under the new lower corporate rates that will be in effect in 2018 and beyond.
In simple terms, the deferred tax asset on the balance sheet reflects an opportunity for our future tax deduction and our deferred tax liability reflects the future taxable income amount.
However, I note it is not as simple as just applying a rate change from 35% to 21% as various other tax rules create permanent and temporary timing differences between accounting for income taxes and actual corporate income tax payments.
UFG's effective rate, which can vary as a function of the amount of pretax income or loss, has historically been in the range of 21%.
Although subject to variability in any year, we anticipate our effective tax rate will approximate 15% to 17% on average under the new tax code.
One of the more significant items potentially impacting property and casualty companies will be the requirement to discount loss reserves based solely on IRS factors and using company payment patterns will no longer be permitted.
With bonus depreciation being increased to 100% writeoff for assets with a depreciable life of 20 years or less, we may see capital investments increase across our commercial client base.
So in analyzing the impact of the new tax bill, we view it as a positive development for UFG as well as for our commercial policyholders.
We will continue to refine our calculations as more definitive guidance is issued.
Moving on to premiums.
Consolidated net premiums earned increased 2.6% in the fourth quarter 2017 as compared to 2016, while total revenues were flat.
Year-to-date consolidated net premiums earned increased 3.5%.
Total revenues increased 2.8% as compared to 2016, with the resulting increases in property and casualty continuing operations premium being offset by decreases in discontinued life insurance business premium.
Consolidated net investment income was $25.1 million for the fourth quarter 2017, a decrease compared to fourth quarter 2016 with $33.4 million.
For the full year 2017, investment income was $100.9 million or a 5.5% decrease over 2016.
The decrease in net investment income in the fourth quarter and full year 2017 was primarily driven by the change in value of our investments and limited liability partnerships as compared to the same period in 2016 and not due to a change in our investment philosophy.
And looking at only our property and casualty insurance business or our continuing operations, we reported consolidated net income of $1.78 per diluted share and $1.75 per diluted share in the fourth quarter and full year 2017, respectively, as compared to net income of $0.46 per diluted share and $1.90 per diluted share in the same periods of 2016.
Net premiums earned from our continuing P&C operations grew by 6.5% and 6.6% in the fourth quarter and full year 2017 as compared to the same period in 2016.
As we have discussed in our previous conference calls, our expectation for premium growth in 2017 was 4% to 6%.
We will emphasize profitable growth initiatives along with continued rate increases, expecting year-over-year growth rate to remain in a similar range for 2018.
We experienced favorable reserve development of $16.3 million in the fourth quarter of 2017 compared to $4.2 million of favorable development in the fourth quarter of 2016.
For the full year 2017, favorable reserve development was $54.3 million compared to $31.2 million for the same period in 2016.
The impact on net income for the fourth quarter and full year in 2017 was an increase of $0.42 and $1.38 per diluted share compared to an increase of $0.10 and $0.79 per diluted share in the same period of 2016.
To expand further on our reserve development in the fourth quarter of 2017, the biggest driver was favorable development in our fire and allied line of business.
For the full year 2017, a majority of the favorable development was from other liability lines and workers' compensation, partially offset by reserves strengthening in our assumed reinsurance lines.
Our full year reserve development of 5.4 percentage points of the combined ratio is slightly below our 5-year and 10-year averages of 5.8 and 5.7 percentage points.
At December 31, 2017, total reserves were within our actual estimates.
The combined ratio in the fourth quarter 2017 was 93.8% compared to 102.6% for the fourth quarter 2016.
For the full year 2017, combined ratio was 104% compared to 100.3% for the same period in 2016.
Removing the impact of catastrophe losses in reserve development, our core loss ratio improved by 0.7 percentage points in the fourth quarter and deteriorated 4.3 percentage points for the full year of 2017 as compared with 2016.
The primary driver of the deterioration in the core loss ratio is an increase in the number of severe commercial auto losses in the first 3 quarters of 2017, as previously discussed.
Referring to Slide 9 and the slide deck on our website, we provided a detailed reconciliation of the impact of catastrophes and development on the combined ratio.
Return on equity was 5.3% in 2017 compared to 5.5% in 2016.
Even though net income was slightly higher in 2017 compared to 2016, the decrease in ROE is attributed to a higher denominator equity base.
During the fourth quarter, we declared and paid a $0.28 per share cash dividend to stockholders of record on December 1, 2017.
We have paid quarterly dividends every quarter since March of 1968.
During the fourth quarter, we did not repurchase any shares of our common stock.
For the full year 2017, we repurchased 701,899 shares of our common stock for a total cost of $29.8 million.
We purchased United Fire common stock from time to time on the open market or through privately negotiated transactions as the opportunity arises.
The amount and timing of any purchases is at management's discretion and depends on a number of factors including the share price, general economic and market conditions and corporate and regulatory requirements.
We are authorized by the Board of Directors to purchase an additional 2.2 million shares of common stock under our share repurchase program, which expires in August 2018.
And with that, I will now open the line for questions.
Operator.
Well, it's ---+ maybe I'll let Mike answer in more detail, but I think there's kind of a lot of factors to a little bit the type of looks of business differs slightly by the branches.
I mean, a little bit of it's underwriting.
Some of it is a little bit more heavy vehicles written.
And then court jurisdictions are part of the fact or 2.
Mike, do you have some things to add to that maybe.
Yes.
<UNK>, one thing I would say is there is ---+ for a lot of these regions, correlations are based on how much premium they write.
So for example, Great Lakes is our second largest auto region and East Coast is by far smallest.
So that's part of the reason of the difference there.
The one outlier would be West Coast office and a couple of things playing into that.
One, they tend to write more heavy wheel exposures, which tend to generate more severe losses.
And then the second thing, as <UNK> mentioned, is jurisdiction and just that state, if you look at national statistics, there's been a lot more auto issues in that state, a lot of congestion, just tend to see higher frequency and severity in the state of California than a lot of the other states.
I think on the property, probably the biggest thing is age of building.
We've kind of become a lot more strict on older buildings.
And then on the work comp, we're down in that line.
I think if anything else, that as premiums are going down in that line, we've probably walked away from more business as the pricing goes down.
Mike, you got anything to want to add.
Yes.
Property, in particular, has been a line of focus for us, and we're probably most pleased with the reduction in fire loss ratio between 2017 and 2016.
Our storm losses were up quite a bit in the year but still had some improvement in the line, so we feel good about that.
On the work comp side, the only other thing I'd throw in there is we've got analytics at play there, which I think is helping.
So we try to focus on reducing the severity within that book, and I think we're making some progress.
Yes, <UNK>, that is correct.
Yes.
Sure, <UNK>.
So I think we've mentioned in the past we've assembled a Capital Committee as part of our board.
We've chosen to kind of wait until after the sale to decide what the best use of the proceeds are going to be.
We've listed in the conference call some of the areas that we'll consider.
I think we've told you in the past, we're maybe not as looking for acquisitions as we have in the past a little bit, focusing more on organic growth.
But we still list that as [not full] use.
And we continue to look for M&A opportunities still.
Our stock price will kind of depend.
The share buybacks are a function of where our stock is trading, so we'll use that more heavily, obviously, if our share price stays a little bit lower.
And special dividends is something we have not traditionally done, but I know that's something else that we're going to be talking about going into the future.
And then we're kind of continuing to refine our capital analysis and A.
M.
Best has a new ---+ kind of new BCAR system that we would also like to take a look at that to see exactly where we stand capital wise from a minimum required capital and that will help us make some of our judgments as well.
Yes, I probably should've looked up.
Obviously, when we file rates, you're ---+ you have to load in for your tax rates.
So that ---+ I don't know if it's a 1-year or if it's a 3-year rolling, but that tax cut will be passed on to our policyholders, certainly within 2 or 3 years.
It could be quicker than that, but I think there will be some benefit maybe in the shorter run.
But as we continue to file new rates, that new tax rate is going to be reflected in there.
So I know California has talked about mandating that the tax cut be returned to the policyholders, but I think the market is going to kind of ensure that, that happens relatively quickly.
<UNK>, this is Mike.
I would add a couple of points there.
I think there'll be more pressure from the regulatory bodies on personal auto, which is 3% of our book than on the commercial side.
And the second thing I would say is with the auto results that we've had, when you look at our indicated rate calculations, the tax will be a very small part of that and I'm confident we will still have justification for increased auto premiums going forward until we get the numbers back in line with where we want them to be.
This now concludes our conference call.
Thank you for joining us, and have a great day.
| 2018_UFCS |
2016 | PFE | PFE
#Okay.
On GEP, I have always used the analogy although it's a pharmaceutical business that really given it's in sterile injectables which we sell on quality and barriers to entry, and given it's biosimilars which also will be eventually sold on the quality of the manufacturer and the data we have, and then the emerging markets which is sold on brands and quality, that it sort of looks like a consumer business with just a touch more risk than a normal consumer business.
So perhaps some nice comparables for PEs really ought to be the consumer-like business.
Now you may or may not agree with that, but it is slower growing, growing with GDP just like consumer businesses do, being sold on brands, and then a little more affected because it does have pricing risks and some development risks.
That's how I would look at it.
The first line market share is now 38%.
That's number one.
We have achieved leadership and to have surpassed AI monotherapy.
The second and third line market share are 26% and 14% respectively.
When it comes to duration of treatment, it's too early to assess because as you know the product has been launched a year approximately ago, and PFS duration from the data is around 20 months since PALOMA-2.
So we need some time to assess what will be the actual duration period.
Thank you.
On one hand with 4-1BB, we presented last year at ASCO, and we will provide update during this year.
4-1BB with Rituximab and lymphoma, that had very promising response rate in refectory ---+ Rituximab patients, about 35%.
We have expanded that study, it looks certainly very promising so that could be one opportunity for moving 4-1BB fast forward.
4-1BB and OX40 are expressed in many tumors in the immune infiltrating cells.
So we will have a broad ambitious program where we see opportunity for these across many different solid tumors and some blood related cancers.
Let me make a correction.
I think I said 20 months in PALOMA-2.
It is 20 months in PALOMA-1.
We haven't disclosed the duration treatment of PALOMA-2.
We'll do that at ASCO.
Thank you everybody for your attention today.
So long everybody.
| 2016_PFE |
2017 | ADP | ADP
#Thank you, <UNK>, and thank you for joining our call this morning
We appreciate your interest in ADP
This morning, we reported our first quarter fiscal 2018 results, with reported and organic revenue up 6% to $3.1 billion
We're pleased with this revenue growth which was above our expectations
Revenue growth in the quarter includes approximately 1 percentage point of pressure from the fiscal 2017 disposition of our CHSA and COBRA businesses, which were substantially offset by the benefits from foreign currency
Our adjusted diluted earnings per share grew 6% to $0.91 per share and benefited from a lower effective tax rate and fewer shares outstanding
Overall, this earnings growth in the quarter exceeded our expectations, and we're very pleased with our solid results, which <UNK> will walk through in more detail shortly
New business bookings during the first quarter were down 3% compared to the first quarter of 2017. This performance was in line with our expectations as we begin to realize the benefits of our fiscal 2017 head count investments while we continue to manage through the effects of the regulatory uncertainty that has prevailed since last year's U.S
elections
Despite the short-term bookings pressure, we continue to be very pleased with the performance of our down-market businesses and the solid results in our multinational business
As we communicated previously, we continue to expect our bookings growth to gradually expand back to pre-ACA growth levels as we progress through the year
As a result, we continue to anticipate full year fiscal 2018 new business bookings growth of 5% to 7%
On the client retention front, we experienced a 160 basis point improvement during the quarter, which was ahead of our expectations and saw positive growth across all of Employer Services <UNK>ets
This performance is due in part to our continued efforts to upgrade clients to strategic cloud platforms as well as the investments we've made to improve the client service experience while also aided by the easier compare from our fiscal 2017 first quarter federal government OPM contract loss
Our client upgrade initiatives continue to progress nicely and now we have more than 83% of our clients on our strategic solutions
We also continue to make good progress on our Service Alignment Initiative where we now have 2,000 associates across our three new scalable service centers and 5,400 associates in total across all five of our strategic service locations, delivering service to clients across the HCM spectrum
I'm proud of these efforts and of our speed to execute, which have enabled us to rationalize our footprint by exiting nine subscale facilities this quarter
This represents a closure of 63% of our total planned exits under this initiative in just over one year
The progress we are making with respect to new platforms and improved service is leading to happier clients and improvement in our NPS scores
It isn't just our own internal metrics that are helping tell the story
Last month, G2 Crowd, a leading business software review platform ranked our Workforce Now solution number one in satisfaction for payroll and HR management suites in their fall mid-market grid report
In analyzing the reviews of actual users of the products, ADP was also named the leader in all five HR software categories: payroll, HR management suites, core HR, performance management and applicant tracking systems
We're excited about the innovations we continue to introduce to the market that are helping clients meet the dynamic needs of an evolving workforce
And it's gratifying to see these investments in HCM innovation continue to be recognized with prominence in the industry
A few weeks ago, I had the opportunity to attend the HR Technology Conference in Las Vegas where few of these innovations took center stage
For the third consecutive year at HR Tech, ADP was recognized with an HR Product of the Year Award from Human Resources Executive magazine, this time for our Compass Solution which is designed to boost the leadership and collaboration behaviors of our clients' employees
In addition to this recognition, we scored a second three-peat at the show after our Pay Equity Explore Solution was named one of HR Executive's Awesome New Technologies
Pay Equity Explorer is a powerful tool that combines data science and benchmarking and is built on the biggest data sect in HCM, the ADP Data Cloud
It was developed to help clients uncover insights and identify potential opportunities when it comes to gender or race pay gaps, so they can stay competitive in the war for talent
Innovation is a job that's never done
While we are incredibly excited about the solutions we are delivering in the market today, we are even more excited about the future
In September, we had the opportunity to brief HCM industry analysts on the new products and services coming out of our global product and technology organization
At the event, we previewed our next generation of client-centered innovation including a low code application development platform that enables internal and external development teams to build agile country, segment and client-specific applications, leveraging the latest technology and delivered by the public cloud
We also shared progress on our efforts to deliver next-gen payroll and tax filing engines which will further increase our differentiation in payroll and payments
These engines are designed for multi country localization and will enable us to deliver paid and other services with greater flexibility based not only on the needs of our clients today, but also their evolving future needs as organizations are increasingly comprised of both full-time and contract workers
ADP's unique ability to meet the needs of our clients today while anticipating their needs in the future have been hallmarks of our success over the past 68 years, and will drive our sustained growth in the years ahead
Also before I turn the call over to <UNK>, I'd like to say a few words on our acquisition of Global Cash Card, which we announced in October
At the core of HCM is ensuring employees are paid accurately, securely and in a timely fashion
This is the DNA of ADP
And with the acquisition of Global Cash Card, we are strengthening and expanding this core capability
For those not familiar, Global Cash Card is a leader in digital payments, including pay cards and other electronic accounts
The digital payment space is an exciting one for the future of payroll
The increasing use of contract workers in the gig economy has driven the demand for these accounts, which can let independent contractors bring their various wages and expenses into a single account, providing the best picture of their financial well being
From the employer's perspective, digital payments can be less expensive, more immediate and a more secure option than other means of payment such as paper checks
With this acquisition, ADP becomes the only HCM provider with a proprietary digital payments processing platform which will be integrated with our aligned pay card solution for a seamless client experience
We are excited about this acquisition and we're pleased to welcome the Global Cash Card team to the ADP family
I'm proud of the efforts of our associates
Our results in the quarter continue to reflect the enduring qualities of ADP, including a culture that is relentlessly focused on delivering a great client experience through best-in-class technology and unparalleled service
Fiscal 2018 is off to a good start, and we look forward to turning over full attention to advancing our strategy and delivering on our commitments to all stakeholders, clients, shareholders and associates alike
And with that, I'll turn the call over to <UNK> for a further review of our first quarter results
Well, I think as I mentioned in my comments, I think this quarter, the improvements were really across all of our ES segments
And as we've said in the past many times, retention can be a very volatile metric especially as you get into the up market
But this quarter, we happened to have good news and we're very happy about it
We think that is not just because of volatility but I think because some of the things we've been doing around investments in our service organization
We see our NPS scores coming up and so, we're very pleased with that
I would say that, to your question about the mid-market, we are not finished yet with the migrations of our clients in the mid-market
We have about 2,000 left
We still think that we'll be close to done, if not done, by the end of the calendar year
We may have a couple of stragglers
But we do expect to be substantially done by the end of the year and that does put pressure on our retention because as we've mentioned multiple times, and the same still holds true, there's quite a substantial difference in retention between our strategic platform in mid-market and our legacy platform
So, what you're alluding to, we hope and we expect will happen a couple quarters from now as we get all these migrations and the mid-market behind us
But that would not be one of the reasons why there was improvement in the mid-market as well as in the rest of ES this quarter
I think the impact of that large loss was around 100 basis points last year
So, the right way to look at this is about 60 basis point improvement in retention for the quarter
Other than that it's getting really big
And we're still pretty happy with 10% unit growth
I don't think anything further to report there, but that's becoming a very large, we're close the 0.5 million worksite employees
That's one of the largest employers in the U.S
, if you look at it as, which we do, as an employer even though there are sub-clients
Obviously there's more than 10,000 clients in the PEO, but it's a very large – the way we treat it for, the way we have our retirement program and the way we have our workers' compensation and benefits, et cetera
We are a co-employer and consider ourselves a co-employer for the purposes of some of the responsibilities around employment
And so technically, I think we're probably in the top five now in terms of size of employers in the U.S
which is becoming a very large base
But we feel pretty happy and pretty satisfied with that kind of growth rate
So just to make sure we get our language clear here, because we have introduced some new terminologies
So, when we refer to next-gen platforms, so we have our strategic platforms, which are Workforce Now, RUN, Vantage and our Global View multinationals platform
We did start talking and we mentioned it in our introductory comments that we talked to industry analysts in mid-September about our next-generation platforms which we have only a handful of clients on today
So, I just want to make sure I clarified the language there
As we go forward, we'll be more careful about making sure that we pick the right language
So, and I'm sorry, what was the rest of the question?
So since we still have a lot of work to do in the up-market where we've really only begun the migrations, I think that's consistent with what we've said before in our publicly released information around the proxy contest
I think we included there about 51% of our revenues being on our strategic platforms that I just mentioned the names of
It's very important to note that when we talk about our strategic platforms, we have a number of areas of our business where there's really no immediate plan to migrate or move clients
So for example, our insurance services, our retirement services, we have some international platforms that we're happy with that we're not planning any movement there
So, we could probably in the future be able to provide some more color around the quote-unquote addressable market
In other words, what part of our client base is really up for migration, if you will, but the right answer, the straight answer is 51%
But we're not aiming to get to 100%, I guess is the
We disclose a lot of information, again as we've been trying to communicate with shareholders about some of the things we've been doing here over the last five or six years
We've disclosed, I think, some additional information about that
And I think starting off with the fact that we've increased our innovation spend from around $150 million to around $450 million, I think or somewhere thereabouts in that neighborhood, so it's a significant amount of increase in our R&D investment
A large part of that was in the next generation platforms that we just announced recently that we've been working on here in some cases for three to four years
But we've also made big investments in things like our data cloud and things like our mobile solutions and some of the other products and innovations that we actually already have out in the market and are helping us, I think, with our efforts in terms of helping our clients and also helping drive new business bookings and retention and so forth
So, that's a sense of what's happened with the innovation spend
On the maintenance spend, for the sake of I guess government work, it's about flat
So it's increased slightly
But again, in the world of some inflation, the fact that we've held that constant, we see that as a good news story
It was a conscious effort to really shift the mix, if you will, in the balance of our spending to more innovation and less maintenance
A lot of our maintenance spend is focused on platforms that serve tens of millions of employees that get paid, both on our tax engine and our payroll engine
And so as we develop these next generation technologies, when we retire those legacy platforms, which is a ways down the road, then obviously, we would expect actual decreases in maintenance spend
But for the last several years, this has really been a story of increasing the spend and making sure that that spend is focused on innovation while we build out the necessary platforms to move clients to and then reduce the spending on those legacy platforms
We have retired I think it's around 13 legacy platforms
So, it's the first time in a long time at ADP that we've actually retired things
So, it's not like we haven't made any progress, but those were relatively small dollar items in terms of the overall maintenance spend
The really big chunks of spend are on some of our large scaled legacy platforms that service, by the way, very well and are very efficient, very secure and very reliable
And we have no plans to get off of them in the next three to six months or any kind of timeframe like that
So this is a, as we always say, this is an evolutionary process, not an overnight change
So, I'm going to let <UNK> maybe go through a few of the numbers here
But just quickly on the hurricanes and <UNK> will give you a sense of impact
Clearly, it had an impact on the business
But I just want to take a moment to also point out that these were massive storms, especially in Houston and in Puerto Rico
We have a decent sized business in Puerto Rico
We obviously have a very large presence in Texas and in Houston specifically
And what our associates and our infrastructure people did to be able to continue our business, not necessarily as usual, but to make sure the business went forward and that we served our clients was nothing short of heroic, including flying airplanes from Tampa when no other planes were flying into Puerto Rico to deliver supplies to our associates but also to deliver payrolls to the businesses that were actually still functioning and still wanting to pay their people so that they would be able to actually have money for, in obviously what was an incredible crisis
So, the fact that you're asking the question, I think shows the strength of ADP that we continued to perform and to deliver business as usual in the face of what was obviously a very, very challenging situation
I think <UNK> maybe has a little bit of color on the numbers
And just to point out, there have been times in our history in the PEO where it's been even higher than this
So as <UNK> said, it really depends on the general health care inflation environment
It's clearly not sustainable from a – it's not just about our PEO or our own company, but this is why there was healthcare reform to begin with, that you can't have this kind of healthcare inflation for a long period of time, because it just doesn't work from an economy standpoint
It becomes the entire GDP eventually
So, it's safe to say that this is a number that has to, by definition, maybe not over a quarter or two or over one year, but that number has to at some point converge or regress back to the mean
But we have had times where we've had even bigger differential between worksite employee growth and our pass-through revenue growth
And this is probably from a three or four year standpoint, this is probably the highest it's been and it's probably in line with what you're hearing out in the world, right
Which is healthcare inflation's picking up a little bit
We'll try to help with that, but again, what we encourage people to do is to look at Employer Services margins and profit growth and the PEO's margins and profit growth
Because what we're focused on is growing EPS and creating value for our shareholders
We're not fixated on a specific margin number even though we realize that the margin number is important to the overall economic model and to actually building a model that works
Right
Exactly, I mean that's ultimately the – growth in Employer Services and profitability Employer Services and growth in PEO ultimately would drive return on invested capital and that's really the right way to focus on the business
As you know, our PEO business is our most profitable, most successful, best business
So, for us to get overly concerned about mix and what impact that has on the overall margin, I realize it's something we have to address and we have to talk about and help people with their models, but it's really not the right way to focus on the business
One last thing, because you did mention about the distraction on the – I just wanted to answer that question because others may have the same question
I think the way I have been, had a lot of investors asking is the same thing, because there's a lot of concern about the distraction of the proxy contest and I would say that it's an extremely high distraction for an extremely small group of people
As you can see from the results of this quarter, it did not distract our associates or our sales force
I think it's probably, it's both
I think we had, we obviously feel better about what's going on with retention and I think the trends in the business
We got a little bit of help from, even from float income as you mentioned because that actually flows into our top line as well as into our bottom line
But I think you're correct that that just happens to be the way the numbers have fall out as well
So I think it's both things
I think that one of the things we've been as we've been kind of going out talking to folks, making sure that this is an opportunity now to make sure everyone understands that the starting point for margins in terms of the amount of room there is for improvement was larger in the small business market than it is in the mid-market
So we have a successful good business in the mid-market including healthy margins
We do think that based on what we see around retention potential because the real, one of the really important improvement to the small business division was the rise in retention which has a fairly big impact in that business on margins because the amount of business you have to sell, which brings with it sales cost, implementation cost, is less to achieve the same growth objective if you will
And so that was an important part of that picture, if you will, in small business, the improvement in retention
I am hopeful, based on what we're seeing so far, that we are going to experience good improvements in retention in our mid-market as well once we're through migrations all of our clients on one platform
Better retention should have the same impact that it had on SBS in the sense that you have sell that much less business in order to achieve the same growth rate or you can grow faster, like it's either you get the best of both worlds that you can choose which way depending on market conditions you want to move
But the absolute starting point is important as it is always in any situation
And again, we don't give specifics sub segment data if you will
Neither do any of our competitors, I would just point out
But the fact is the margins are higher
They were higher to begin with in mid-market and the replatforming is really about strengthening our competitive position, driving faster growth and hopefully some modest improvement in margins as well because we do expect to get higher retention rates in the mid to long term as we get all of our clients onto one platform
Yeah, and think I also want to point out again, I want to say it one more time that clearly some of the pressure we're experiencing is from investments, because we have been investing in our sales force for example
But it's just important to note that some of what's happening in terms of these numbers is still these mathematical grow-overs and comparisons
Because last year, in the first half of the fiscal year, so the last two quarters of the calendar year, we had almost 20% operating income growth, and then in the last two quarters of the fiscal year, first two quarters of the calendar year, because of the ACA grow-over in the comparisons of having lapped the revenues, the revenue comparison, we ended up having the numbers go in the opposite direction
And the two quarters that we're in right now, the quarter that we're just reporting plus the next quarter, are really mirror images of the first two quarters of the calendar year
And then as we've said multiple times in our guidance, our second half of this fiscal year gets back from a margin standpoint, from a growth standpoint, from a bookings standpoint to a more reasonable normalized place, if you will
So unfortunately the way – you guys know this better than anyone else – like whenever, whether it's an acquisition or ACA or some other factor, you have to really look beyond that to understand what's really happening beneath the covers
And so we had 12 months of easy comparisons, and then we had 12 months of hard comparisons
And we have, I guess right now, a couple more months before we get through those difficult comparisons
Well we hope, we do for example invite clients on a regular basis to visit our Innovation Center in New York City in Chelsea to kind of get first hand knowledge of some of the things that we're working on
And it's not just about the platform
We have other things that we are working on as well that we share with our clients
So obviously, part of that is an effort to make sure the clients understand our roadmap and so that they stick with us as we get through product development and then eventually a transition to our New York platforms
I think that would be true in each of our business segments, but it's obviously very important in the up-market enterprise space where the client lifecycles are very, very long
So we have very high retention rates in our up-market business
Client stay 15 to 20 years on average
And obviously if they are staying with ADP for that long, that means they've already been through multiple changes in technology with ADP over the years
So this is just another evolution if you will, which makes the products better for them, easier to use, easier to service, easier to upgrade
So these are all, I think, part of leveraging technology, which is one of the central themes that we've had here for the last five or six years
So we're really trying to do what ADP's been doing for many years with a slight change in emphasis, with greater emphasis on product and technology than maybe historically we had had 5, 10, 15 years ago
So the second part is a tricky question, because the way it gets shared, if you will, is it makes our company stronger
It allows us to, for example, theoretically, to be more careful with price increases
None of which – so I guess the answer is, we haven't changed anything
Like it hasn't – if rates were as you know because of the way our portfolio is laddered, even though we felt multiple years of pressure on the downside, we are getting a little bit of help here on the upside
But there's really, this isn't like an overnight, and I don't mean overnight in the sense of rates
But because of the laddering, there's not that kind of dramatic of a change that we are all of sudden that it's raining money out of the helicopters and we have to figure out what to do with it
But we definitely appreciate it
It's better than it was when it was going in the other direction
So it's all positive
So I think historically, I think it probably make us stronger, more competitive
But we really don't – there's no pricing mechanism
We didn't raise prices, when interest float income went down and rates went down
And we don't plan on lowering prices when it goes up
I guess to be completely direct
And, <UNK>, just to add, just to be even more clear, we lost $300 million in float income and that's assuming that the balances have stayed flat, but the balances actually grew from about $15 billion to over $20 billion during that period of time
And I am thinking back to like 2007 and 2008 when we peaked in terms of our float income
And so there's a long way to go to get back to that $300 million and that would not be even adjusting for inflation and for growth
And as <UNK> just said, we don't have those kinds of arrangements
We didn't increase our prices when that was going on
So we managed to improve our margins and grow our business in the face of that kind of headwind
And so I think it feels fair to us to now enjoy the fruits of a better environment on a go-forward basis would be the way we would look at it
We never said there's a new version to an up-market product
And so you shouldn't say it either
So what we built was, we built a platform on which we can build apps that could serve a number of different clients
It could be used globally
It could be used in the up-market and frankly someday, can be used in the mid-market
So we're not ready
We shared a lot of information with industry analysts and we're trying to share as much information with all of you without sharing so much information that it creates a competitive problem for us
And so we're not ready to say exactly what we're doing and where we're going
But I can tell you that the benefits are obviously usability, speed to change and speed to development, cost of maintenance, not to mention cost of development
So there are a number of benefits that we will get from our product development efforts
And that's really only talking about the low code development platform
We also have two very large investments in back-office systems
So this is our gross-to-net payroll engine and our tax engine as well
There we expect and the plan is to have that be completely transparent
These engines are back-office engines that are really not visible to the clients
They just, they create outcomes
The front ends are Workforce Now, Vantage, and some of our other front-end products
And so there's really no expected impact assuming that we execute well in the kind of transition, if you will, to a new gross-to-net payroll and also tax engine
The expectation for improvements, though, are fairly significant in the sense that we'll have a lot more flexibility around the things we can do around payments
So we may choose to, we may not necessarily do it, but we'll have the ability to do same-day payments, real-time payments
We'll have a lot more flexibility around speed to make changes, whether they're statutory or competitive changes in our systems
And then the cost of maintenance and the cost of support will go down significantly based on our business cases that we have for these back-office engines
So these are really modernization efforts because those platforms serve us incredibly well today at high scale, high reliability and high security
But we believe based on our business cases that obviously, whether it's two, five, seven years down the road, that new technology can help us leverage those services that we provide in a much more efficient manner
Well the impact of the acquisition would be zero because it's zero
It's a great business and it's a good-sized revenue business fortunately it's around breakeven is the way we would describe it
So it's not a huge drag on our earnings and it's not a huge help
It has a small drag on margins obviously because at breakeven, and with some reasonable revenues, it doesn't help our margins
But I would say no impact in terms of EPS guidance from acquisitions
And the other, I'm sorry the second part of your question was?
I think for bookings growth, what we try to look at is the noise in the system has been pretty significant in the last 24 months because first, we had ACA and then we didn't have ACA
So I have to preface my comments by saying, it hasn't been exactly business as usual
But in typical business as usual for ADP, we would have a head count increase, accompanied by a productivity increase of our sales force, which would lead to our sales result
And so the mechanisms that we would, the buttons that we would push to try to increase or improve our new business bookings would generally be around increasing our head count, or our capacity if you will of sales, because we could also spend money on digital marketing and other tools that make our sales force more efficient
And then what can we do around products to drive the productivity, because some of the productivity is just like in any business, we expect our sales force to do a little bit better each year
But we also try to give them better products and more things to sell so that they can also grow their productivity that way
So one of the things we did last year is, in the face of the challenges we were having, we decided to actually invest in head count
We'd had two or three years where we were able, because of the tailwind of the ACA, to put less into head count because we were getting more from productivity
And we opted last year really to, in order to make sure that we had a good couple of years of new business bookings, we invested in our head count
And we're now I think at about 7% head count growth year-over-year
That's pretty healthy for us when you look at the last five or six years
It doesn't have an immediate impact because those people have to become productive
They have to get ramped up
They have to get into the field
But as those people mature, that's an investment that should pay off for us for several years to come as those new sales reps become more mature and become more productive over time
So I guess the answer your question is, the reason we feel good about our forecast, which again is subject to interference by, as we just saw the government had a fairly large change in direction nine months ago
So we can't ever say we're 100% sure, but we look at certain metrics that give us confidence in terms of what we have in terms of guidance and it's mainly around head count and modest productivity improvement
I don't think so because as <UNK> said, I mean I think it's first of all, it's early
We're through the first quarter and I think you could tell that we feel good about our results
We feel good about the future
But I think it's premature
We did get help from tax
We did get a little bit of help from on the growth rate from the floating come
So I think it's just too early
But directionally, we feel good
But I think it's way too early to think about how the first quarter impacts 2020 for us
Yeah, and I think part of the reason for that is we've obviously invested a lot already
But now we're in the process of quote-unquote hardening and also getting clients
We do have clients, by the way, on each of the three next-generation platforms
These are real platforms that we've invested hundreds of millions of dollars in over multiple years
So we feel good about it
They're real and they're going to drive long-term efficiency, lower costs, stronger sales, better client experience
But from a timing standpoint, I think it's clearly way too early I think for us to be factoring those types of improvements into our forecast
But for, there is no question that whether it's in 2020 or the last half of 2020 or in 2021 or 2022, these investments are expected to have meaningful impacts on ADP's competitiveness and its profitability as well
Thank you
As you could see, we're off to a really good start, and we're happy that the initiatives that we have around enhancing our service, the innovation of our products and expanding our distribution model are working
And we have obviously a lot of confidence that I think the investments will continue to deliver the results we expected from those investments, especially in the latter half of fiscal 2018 and beyond
Over the last several months, obviously we've been involved in this proxy contest and I just want to acknowledge for a minute our associates, because obviously, some of them may feel like their efforts have been put into question during this process
And as I mentioned, I think the distraction has been largely to a small group, but inevitably our associates also hear some of the noise out in the market
And I just want to thank our associates for the resolve that they've had in delivering to our clients what the clients expect from ADP
And I also want to thank them for the encouragement they've given to us to continue to move beyond the distraction and continue to deliver valuable services to our clients
The dedication, I think, and the attentiveness and the integrity, more importantly, of our associates is what makes this company great and it's what our founder I think insisted on
And I'm confident that with their help and their support, we're going to continue to make ADP successful
I also want by extension to thank our shareholders and the confidence they've put in our management and our board
As we've gone around visiting and talking to investors, the encouragement that we've gotten from them, I think just strengthened our resolve to continue to do the right thing for them, and also on their behalf
And so with that, I want to thank you again for joining us, and thank you for your interest in ADP
| 2017_ADP |
2016 | FICO | FICO
#Thank you, Katelyn.
Good afternoon and thank you for joining today's FICO first quarter earnings call.
I'm Steve <UNK>, Vice President of Investor Relations, and I'm joined today by our CEO, <UNK> <UNK>; and our CFO, <UNK> <UNK>.
Today, we issued a press release that describes financial results compared to the prior year.
On this call, management will also discuss results in comparison to the prior quarter, in order to facilitate understanding of the run rate of our business.
Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.
Those statements involve many uncertainties that could cause actual results to differ materially.
Information concerning these uncertainties is contained in the Company's filings with the SEC, in particular in the Risk Factors and Forward-Looking Statements portions of such filings.
Copies are available from the SEC, from the FICO website, or from our Investor Relations team.
This call will also include statements regarding certain non-GAAP financial measures.
Please refer to the Company's earnings release and the Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure.
The earnings release and Regulation G schedule are available on the Investor Relations page of the Company's website at fico.com or on the SEC's website at sec.
gov.
A replay of this webcast will be available through January 28, 2017.
And now, I'll turn the call over to <UNK> <UNK>.
Thanks, Steve, and thank you everyone for joining us for our first quarter earnings call.
I will briefly summarize our financial results for this quarter and then I'll discuss some of our strategic initiatives and their expected impact.
In our first quarter, we reported revenues of $200 million, an increase of 6% over the same period last year.
We delivered $19 million of GAAP net income, up 34% from last year and GAAP earnings of $0.59 per share, up 36% from last year.
We delivered $32 million of non-GAAP net income, up 42% from last year and non-GAAP EPS of $0.99 per share, an increase of 45% from the same period last year.
Our scores segment was up 27% over the same period last year.
Much of this was due to growth in consumer scores.
But our B2B business is also growing nicely, due to higher volumes.
Our application segment was up 4% over the same period last year and our tools segment was down 21% due to a one-time favorable settlement last year.
It's a strong start to our fiscal year and I'm pleased with the results.
Our topline revenue growth of 6% over last year continues our growth trend and I'm pleased to report that recurring revenues were up 12%.
As scores revenue continues to grow and we spend our cloud-based business, we expect recurring predictable revenues to be a bigger percentage of our total numbers.
And as our revenue growth trend continues, we are beginning to see how we can leverage that revenue growth to the bottom line.
Last year, I talked about some large implementations that encountered cost overruns.
Those overruns had a negative impact on our margins and masked much of the progress we were making.
This quarter, by contrast, we drove 6% revenue growth, much of which is very high margin revenue.
Because of this and our focus on cost controls, we were able to increase our non-GAAP operating margin by 600 basis points and we were able to super-size that leverage by our ongoing program of share repurchases.
At the same time, we remain focused on driving growth.
As promised, we're shifting resources towards distribution.
While our overall headcount is down 22 from last quarter, our quota carrying sales force grew by 23 people to help bring our products to market more quickly and broadly.
Our sales force will continue to grow as the year progresses.
Bookings this quarter were up 24% over the same period last year and our pipeline looks strong.
Demand is growing for Advanced Analytics that enable better decision making and we are committed to marketing our technology aggressively to capitalize on that emerging opportunity.
While these distribution investments are primarily in our tools and applications segments, we are also pursuing growth in Scores.
We again delivered significant Scores revenue growth.
Much of this was on the consumer side where the combination of our Experian partnership and growth from our myFICO business continues to drive our high-margin recurring revenue.
And we're also growing our B2B business.
We're seeing two important trends in Scores B2B.
First, we're seeing increased volumes and originations scores as the macro credit market continues to improve.
And second, we're seeing significant volume growth in account management scores as customers pull more scores to support their risk management initiatives and customer loyalty programs.
Finally, we remain focused on expanding our market share in all areas of our business and we remain disciplined in our investment strategy.
I'll share some summary thoughts later, but now I'd like to turn the call over to <UNK>.
Thanks, <UNK>, and good afternoon, everyone.
Today, I'll emphasize three points in my prepared comments.
First, we delivered $200 million of revenue.
That's an increase of $11 million over last year, primarily driven by a high-margin recurring revenues.
Second, we delivered $19 million of GAAP net income and $32 million of non-GAAP net income, which is an increase of $10 million year-over-year.
Finally, we had $36 million of free cash flow this quarter and our trailing 12-month free cash flow number was $146 million.
We used $28 million to repurchase shares this quarter and improved our net leverage position.
I'll begin by breaking the revenue down into our three reporting segments.
Starting with applications, revenues were $120 million, up 4% versus the same period last year.
Much of the increase was driven by our acquisition last year of TONBELLER, a provider of financial crime and compliance solutions.
But we also had a strong quarter in fraud solutions, adding two new Falcon customers and also signed a new collections and recovery customer.
Our applications bookings increased 24% from the prior year with strong growth in transactionally-based products.
In the tools segment, revenues were $24 million, down 21% versus the prior year.
The decline this quarter was driven by a one-time favorable settlement last year related to under-reported royalties on our Blaze Advisor Rules product.
More important though is our tools bookings increased 9% from the prior year, adding to our backlog of revenue that will be claimed going forward.
And finally, in our Scores segment, revenues were $56 million, up 27% from the same period last year.
We're continuing to see very positive trends in both parts of our scores business.
On the B2B side, we're up 8% versus the same period a year ago.
As <UNK> mentioned, volumes are increasing, particularly in originations and account management, as we've added some new customers and have also seen existing customers increase the frequency of score polls.
The B2C revenues were up 88% from the same quarter last year, as we've now completed a full year since initiating our partnership with Experian.
Looking at revenues by region, this quarter, 76% of total revenues were derived from the Americas.
Our EMEA region generated 17% and the remaining 7% was from Asia-Pacific.
Recurring revenues derived from transactional and maintenance sources for the quarter represented 74% of total revenue.
Consulting and implementation revenues were 17% of total and license revenues were 9% of total.
Bookings this quarter were $86 million, up 24% from the prior-year quarter.
We generated $23 million of current-period revenue on those bookings for a yield of 26%.
The weighted average term for our bookings was 24 months.
Operating expenses totaled $169 million this quarter compared to $192 million in the prior quarter, which included a $16 million restructuring charge.
Adjusting for that charge, operating expenses were still down about $6 million compared to last quarter when we had a high cost of revenue associated with certain professional services engagements.
We remain focused on managing cost tightly while still investing responsibly in growth and we expect our OpEx run rate to be approximately $170 million to $175 million over that next few quarters including amortization expense.
As you can see in our Reg G schedule, our non-GAAP operating margin was 25% for the first quarter.
We expect that operating margin to be between 26% to 28% for the full year.
GAAP net income this quarter was $19 million, up 34% from the prior year and non-GAAP net income was $32 million for the quarter, up 42%.
The effective tax rate was about 19% this quarter and was positively impacted by a catch-up from the reinstatement of the R&D tax credit.
As a result, we expect the effective tax rate for the full year to be about 28% to 30%.
The free cash flow for the quarter was $36 million compared to a negative $5 million in the prior quarter.
For the trailing 12 months, cash flow was $146 million up 13% from the prior period.
Turning to the balance sheet, we had $91 million in cash at the end of the quarter.
Our total debt is $619 million with a weighted average interest rate of 4.3%.
The ratio of our total net debt to adjusted EBITDA declined this quarter to 2.4 times, below the covenant level of 3.
During the quarter we returned $28 million in excess cash to our investors by repurchasing 319,000 shares at an average price of $89.11.
We still have nearly $91 million remaining on our latest Board Authorization and continue to view share repurchases as an attractive use of cash.
We also continue to actively evaluate opportunities to acquire relevant technologies and products that advance our strategy or strengthen our portfolio and competitive position.
And finally we are reiterating our previously provided guidance for the fiscal year.
With that, I'll turn it back over to <UNK>.
As I've been saying for several quarters, I believe FICO is in unique position with tremendous prospects.
This year we celebrate 60 years in business.
We've built a legacy of high quality products that are industry leaders particularly in financial services.
If there is increasing demand for our IP from other markets, our build-out of the decision management suite allows businesses to take the same decision making capabilities that pour financial services customers have used for decades and applied cutting edge analytics to improve their decisions.
And our FICO Score continues to demonstrate why it's the industry standard.
And among both our existing financial services customers and consumers, we are increasingly understanding that the FICO Scores is indeed the score that matters.
I'll turn the call back now to Steve to cover Q&A.
Thanks, <UNK>.
This concludes our prepared remarks and we're ready now to take your questions.
Operator, please open the line.
Yes, <UNK>, what was driving originations this quarter is a lot of what we've seen leading up to this quarter, which is the auto scores that are being pulled for auto sales along with more credit card pulls that are starting to appear within the underlying numbers.
As it relates to account management, we haven't seen a trend of an increase in scores pulled in fact this quarter was one of the largest we've seen in in a number of years.
And what's been driving that in part is enhanced credit risk management going on within the banks, as well as more and more banks, who are rolling out Open Access programs are beginning to pull scores more frequently in order to provide that to their customers in the form of a monthly report.
Sure.
The very short answer to your question is the FICO Score franchise has never been stronger.
We are ---+ it's very healthy and what we're seeing is more and more customers coming on FICO, not customers departing from FICO.
As you know in the US, we have a 90% share in credit decisioning in situations where scores are used and what we are seeing is in the 10% we don't have, we're seeing customers come back rather than departures.
I'm glad you raised that question because it's worth commenting on some of these recent articles and the discussion with the alternative lenders.
When we put together FICO Score, our goal is to provide precision, credit decisioning with the most predictive power possible across as larger population as we can and actionable population for our clients.
And so the FICO Score that we're all familiar with is designed to do that, it's designed to provide a high level of prediction across a large population.
There are only situations where you can take a very narrow population and find some data set that has high predictive power for a correct decision for a very narrow population.
And that's not a problem for FICO.
In fact, we do custom scores for our bank clients and we're happy to use all sorts of alternative data in a custom score to provide a more precise decision with respect to a particular population.
But when you get into some of these alternative lending situations, you see players who are focused on very narrow populations and so they're looking ---+ they look at data beyond the trade line data that we tend to focus on.
Of course, we can look beyond that too and we do, and we're always on the lookup for new and different data sources that can score populations that are previously unscored.
And so for example, we've launched this FICO score XD, which lets the score on the order of [50 million] consumers who are previously unscorable.
And that's leveraging utility, payment data, telecom payment data, some rental payment data.
And although it's not as broad as the trade line data that we use in the traditional FICO Score, it is predictive and useful for a smaller population that wasn't being picked up before.
So, where we can do it, we do do it.
I think some of the headlines reflect a bit of a desire by some of these alternative lenders to start controversy.
We're not really seeing it in our numbers, we're not selling fewer scores, in fact we sell our score to many alternative lenders and those volumes are going up, not down.
We do have things in the pipeline, but we don't have updates for you at this time.
We continue to have very good prospect there and we have very strong partnership with Experian, but nothing to announce right now.
Yes, absolutely.
I mean, some of it is increasing capability and additional features around our core offering.
Some of it, there is some amount of international expansion that's going on.
With Collections and Recovery, what started out as being a bit more of a focus on third-party collections has really broadened, so that we believe we have the premier offering for both banks and third-party, and so there is a broadening there and an expansion of our Collections and Recovery franchise.
And then B2B Scores, we touched on it earlier, you're seeing some activity that just comes from the economy picking up and more attention to risk management from the banks.
But also, we believe that banks are pulling these scores much more frequently to support their communication discourse to consumers.
And so as they put FICO Scores on to bank statements, they are reaching out for scores on a more frequent basis and sometimes for more accounts than they were pulling before.
Our total, <UNK>.
I've got to check, give me a second to check.
We are adding new customers and we are seeing existing customers buy more.
Although we don't position DMS as a platform when we sell it and we've positioned it as a solution to a problem, the fact is the way it's architected.
We're putting in a lot of platform capability when we sell the very first solution.
And so the ability to expand on that and to broaden the solution and to move into adjacent areas for our customers is pretty high, flexible and fast.
And so we are seeing initial DMS sales, followed by follow-up sales.
It was just under $6 million a year ago.
Yes.
So if you pull that out, you get a sense for where we are.
Lot of it, <UNK>, was the myFICO Scores in the B2B Scores business along with the Experian revenue as well as fraud and TRIAD revenue that comes through our channels from a ---+ on a transactional license basis.
So it's kind of the big products.
We have been in the market and we continue to view our stock as just a terrific opportunity, especially at these levels, and so you can imagine and expect that we will continue to participate in stock repurchase at these levels in a fairly aggressive way.
We are though, <UNK>, just as a reminder, blacked out during the period, leading up to our call.
But beyond that, we're in the market.
And <UNK>, just to close out on your first question on sales, at the end of this last week, we had roughly 345 people in all of sales and roughly 190 of them are our field sales, quota-bearing reps.
Headway, yes.
But we have nothing to announce.
No, we did not build Affinity into our guidance.
It's closer to $5 million, it's under $6 million, just around $5 million.
Yes.
<UNK>, we built into our guidance, which is the number we reconfirmed today for tools high single-digit and we still expect to get there through a combination of license deals and any SaaS offerings that we sell through the DMS.
Yes.
So, on the Falcon deals, those were on-premise deals with some European customers.
So they were not SaaS, they were sold under the classic Falcon model though on a SaaS basis, we had another strong quarter.
We had almost $8 million of booked deals across a variety of our products including the collections recovery products and the debt-manager products, and of course the Adeptra product line, which is all SaaS basis.
Yes.
It laps.
What we did is we built into our guidance, the run rate, actually in the year, our fourth quarter, that's what we built into the guidance.
It essentially laps in our quarter ending in June, which is when we had almost the first full rollout of all of the Experian subscriber base.
And let's see.
The other part of your question was do we break that out separately.
We don't, but I will tell you that our myFICO business grew at very high double-digit rates this quarter compared to last year.
Yes.
Well, our fourth quarter last year, the one ending in September, was a record quarter where we had, it was roughly $40 million, $45 million of license revenue.
So if there is a tough comp, that would be it.
We do actively market it.
But as you can imagine, we don't have anything like the war chest that our competitors have for marketing their offerings.
And so you don't see us on television, for example.
We are footing the tab for the advertising costs.
But, we do market it, I mean it's not a hobby, it's a business.
We're not quite satisfied with the pace and we are pushing to hire and will continue to hire.
What's happened is we're getting traction with the products and the services.
We've got this terrific offering and we're really in a mode now hiring as higher in confidence sales people to sell this kind is as quickly as we can and we still have openings.
Thanks, Matt.
Thank you.
This concludes today's call.
We like to thank you all for joining.
| 2016_FICO |
2016 | PPG | PPG
#<UNK>, this is <UNK>.
Let's start with the assumption ---+ we all year, we've been saying that it would be within the 2% to 4% range.
So, I think our assessment has been relatively accurate.
And, this past quarter, overall, we were up low-single digits, and that was over, obviously, a quarter prior-year, that was a little bit weaker than we expected.
We did have some bright spots.
Certainly, the Home Centers did very well, from that standpoint.
We had ---+ all of our retail partners, had a good quarter, from that standpoint, as far as paint sales were.
Our trade business was up, also.
Our company-owned stores continue to perform better.
We think we're closing the gap in that regard.
We're seeing a modest improvement in Canada, as well.
So, I would tell you that the industry has been about where we expected, in that 2% to 4% range.
And we expect to see, next year, in a similar type fashion.
No.
For refinish in Europe, the only thing that we really notice, was that the insurance companies in the UK have been getting tighter and tighter on claim management.
Other than that, I would say there was nothing significant.
Certainly, our waterborne products continue to take share over there.
And we did have a nice win, that we'll be talking about in the first quarter call, when it starts to add to the bottom line.
<UNK>, I'll take the cash flow question, and <UNK> will address the other two.
We're going to put out our 10-Q in the next few days.
The cash flow is a little bit murky simply because we have a significant amount of pension-related specials.
We have some asbestos payments that are reflected as liability reductions.
So, the numbers, you'll need to see the pieces, which will be very well articulated in the Q.
We're up about, on an apples-to-apples basis, excluding some of the specials, we're up just below 10%, year over year on a cash flow basis.
But you'll need to see the specials to fully understand that.
<UNK>, I think you.
Yes.
On the environmental spending, <UNK>, we are planning to spend about half this year of what we spent in total environmental cash, versus last year.
Last year, we spent about $100 million and it will be about half that this year.
Obviously, the environmental spending has some level of unpredictability based upon how the parcels are remediated, and any additional work that we find.
This is an ongoing journey that's been going on for a few decades.
But generally, we think that the run rate of cash spending in environmental this year is more representative to what we would see going forward, and hopefully over time it will continue to modestly diminish.
In terms of pension spending, we did say that we would have about $175 million of top-up of some of the plans, that resulted from the annuitizations that we did on both the US and Canadian side.
We put about $50 million of that into the plans in Q3.
We've got another $125 million to do between Q4 and 2017.
So that will occur over to that period of time.
Aside from that, there is some modest, I'll say, high-single, low-double digit millions of dollars, that we put toward the international plans on an annual basis.
This <UNK>, again.
I would say that, working capital has been a real bright spot, particularly in Q3, where all three elements of working capital: receivables, payables, and inventory have improved in days.
And in fact we took mid-single digits days out of inventory in Q3.
We need to continue to make progress because we still think there is a gap to our peers, in that respect.
That will come from a combination of a more rigorous S&LP process, but also complexity reduction.
And we do continue to think that there will be additional, we'll call it, 100 basis points or so on an annual basis of improvement, in working capital.
But pleased with the progress so far, more work to do.
<UNK>, this is <UNK>.
There's been no change.
We're very experienced in the acquisition ---+ we've done more than 50 acquisitions in the past 10 years.
We have a very dynamic play book that we consistently apply, and we expect fully to ---+ anybody that's below our system average, to get them up to our system average in a relatively simple period of time.
We get the raw materials quickly.
We move on to the best practices next, then we do the back office, and then we bring in our new PPG products.
We expect to be there.
We're not at all concerned.
We just did MetoKote.
We've already picked $1 million of those synergies in the first 90 days.
We're going to be okay in that area.
I think it's a fair question, and I would tell you that everybody starts with their own idea about what a fair price is.
I would tell you that we are not paying 15 times.
We're going to remain disciplined.
But, I don't expect that the current elevation of a couple of specific, unique transactions, drive the entire market.
So, we didn't pay anywhere near that for MetoKote.
And we have others that we're working on right now that aren't in that stratosphere.
Certainly, we are going to have to react to the marketplace.
I don't know whether some of our competitors are thinking that the zero-rate interest environment is going to be here forever.
But, we certainly recognize that there are different expectations when you do an acquisition.
And just following up very quickly on <UNK>'s comment around discipline.
That's a very important point.
At the end of the day, we benchmark against the return that we get by returning cash to shareholders, and what they can, given that.
On a risk-adjusted basis, if we can have an accretive acquisition that returns, in excess of our weighted average cost to capital, that's really the benchmark.
Not necessarily comparing it to any other recent deal.
And that includes any synergies that we can get, either on the revenue or cost side.
Hey, <UNK>.
<UNK>.
We'll take them one at a time.
When you look at the performance coatings business, again, we did have additional growth-related spending that crimped our margins this quarter, in that particular segment.
Certainly the margin growth was contracting, as you noted, due to the diminishing benefit of raw materials.
$15 million of additional growth-related spending was impactful in that particular segment.
If you flip to the industrial segment, as <UNK> alluded to earlier, we did see ---+ we are working with our customers in that segment on our selling prices to them.
And that's the one factor I would point to in that particular segment.
In both these segments, there's always puts and takes outside of those particular items but those would be the two key items.
Actually, <UNK>, especially coatings materials was actually the weakest of the four that were in there.
Automotive had a very good quarter, as we talked about.
And our industrial team had a very good quarter.
When you look at it, our automotive parts and accessories was up high-single digits.
Our coil business was up high-single digits.
Wood was up, transportation coatings were up.
Heavy duty equipment was up for the first time in a long time.
I'd have to guess, but at least two years.
Our packaging business continued their year-over-year growth.
We're in the beginning of a secular growth rate for this.
So, they were up high-single digits.
The move to BPA-NI.
Really, when you look at it, the specialty coatings materials, they were the weakest of the four.
It was everybody contributing though.
Yes, it was definitely share growth in the industry.
We have worked hard to increase our share in that area.
The customers are very comfortable with our ability to deliver more productivity in their shops; that's what they're looking for.
And we've been able to deliver that productivity through value-added products.
And that's what's driving us.
The industry itself, as you know, you can read the papers, continue to be quite weak, but we're very pleased with our team's performance.
Yes, this is <UNK>.
The Comex cost synergy targets, we completed that, fully, by the end of last year, actually.
We do have some sales synergy targets for Comex, that are primarily related to PPG products going into Mexico, as well as Central America.
Those are on track or slightly above track.
The other restructuring program that we announced last year, again, diminishing benefits, as we approach the fourth quarter.
So very modest benefits in the fourth quarter and we will be fully captured at that point.
No.
<UNK>, the way I would think about it is, there are several properties that are out there that are coming to the market because they see the prices that are out there.
And so that makes more people think about whether or not this is the time to get out of some of their investments.
I would also tell you that we have historically worked with a number of these family owned companies for many, many years.
And it takes a long time, sometimes, to build that relationship, to get them to the point where they feel comfortable, ready to pull the trigger.
Whether it's a generational change, whether it's been a dynamic where they're looking at reduce their focus on the coatings business, or whatever the dynamic might be.
So, we're going to continue to work with our potential acquisitions, whether it is a family owned company, or some of these private-equity owned ones.
I think the pipeline looks solid.
In general, <UNK>, what you said is correct.
No growth, it doesn't matter what your margins are if you're not growing.
But, we do have some business mix differences in Europe.
We could have pluses or minuses just around business mix, but generally what you said is accurate.
This is <UNK>.
Just to follow up quickly, you have decremental margins at the profit contribution line, but that's another reason why we're looking at our total cost structure.
So we can minimize any downside, if the [vime] becomes muted in the near future.
And the team over there has done a very good job, thus far.
But there are some additional opportunities that we're going to be looking at, in conjunction with this next set of initiatives we are talking about.
I would say that's a very, very small factor.
Heavy duty equipment has reduced its size and scope overall of our industrial coatings, because of their decline.
So it has no real material impact.
This is <UNK>.
Most of the costs are peso denominated.
There is a little bit of transaction exposure from buying some materials from outside of Mexico, but we do have the ability to hedge a portion of that.
We don't get into detail as to how much we do, but the limited transactional exposure there is, we do have the ability to mitigate that.
Plus there is also pricing opportunity when you see these kinds of movements on currency.
So that's another mitigating factor, which is the reason that business continues to perform very, very well on both top line and bottom line.
<UNK>, let me add to that.
From the Comex perspective, they continue to outpace our original target, which is 2 times GDP.
We've opened up 67 new stores in the quarter.
We're at 168 new stores through the first three months.
So we're going to exceed our target.
We're getting close to 4,200 stores in Mexico.
We're going to have probably 190 stores.
We also opened up new stores, which we're not counting, in Lowe's, so we have a store-in-store concept down there as well.
Overall, even with the challenges to the peso, the PPG Comex team has been doing a phenomenal job.
We don't want to go into specifics right now on the exact amount, because we're assessing all the potential actions we're looking at.
What we can say is, it's going to be broad based and significant, and will address all elements of the cost structure.
And when we have the things nailed down as part of our planning process, we'll update the market at appropriate time.
<UNK>, as we've said in the past, generally you take a couple of quarters to phase it in, and then you start to get more benefits at the back half.
I think we are in inning three.
So, BPA non-intent coatings really started in France.
They have factored their way over to the US, and some of the food applications.
Now California, in fact, their regs, and the way they are going to force to people talk about it, kicked in actually, October 18.
So, that will be more pressure in the marketplace to shift to the BPA-NI coatings.
And, of course, once that starts to happen, I always use tuna fish as an example ---+ you pack cans in Thailand.
Those cans show up in Europe, they show up in the US.
And they're not going to run two and three different formulations for some of those tuna fish runs.
So you're going to have certain markets following later, just because of where they export to.
We're in the early innings, and we're really pleased with the acceptance of our new technology.
If I could add, this is one of the businesses, again, where we're stacking year-on-year growth rates of very high levels.
So we were up mid-single digits this quarter.
That's on a very good comp last year, so that stacking effect is very helpful for us.
Well, we only have one that's falling, and seven are flat.
I talked about Ti02 being up.
Right now, it's a relatively benign environment going into the fourth quarter.
We'll obviously have to wait to see how it looks with the first quarter.
But that's how we stack them up.
We do think, <UNK>, we do have a benign global economy here.
So, the push for raw material inflation shouldn't ---+ there's not a demand-supported push for that.
<UNK>, we put out an 8-K in mid-September that provided, by quarter, the last several years of our EPS from continuing, excluding flat glass in mid-September.
I think for the fourth quarter, that was $1.16.
That European fiberglass business will remain in continuing, it wasn't a sale of an entire business, so based on GAAP guidance, it remains in continuing.
| 2016_PPG |
2015 | ALOG | ALOG
#Good afternoon and welcome to Analogic Corporation's first quarter for FY16.
The following corporate officers are present: Mr.
<UNK> <UNK>, President and CEO; Mr.
<UNK> <UNK>, Senior Vice President, CFO, and Treasurer; Mr.
Michael <UNK>, Vice President and Corporate Controller; and Mr.
Fry, Senior Vice President, General Counsel.
I'd like to remind everyone that a supplementary presentation will be used during today's call.
If you've not already downloaded the presentation, you can do so at any time at investor.
Analogic.com.
The presentation will remain available until <UNK>uary 8, 2016.
Now, I'd like to turn the call over to <UNK> <UNK>, Head of Investor Relations.
Good afternoon, everyone.
Welcome to Analogic's first quarter conference call for FY16.
Earlier today, after the market closed, we issued a press release describing the financial results for our first quarter.
If you have not yet downloaded the press release, you can do so via our website at investor.
Analogic.com.
Before we review the quarter, I would like to remind everyone that today's call may include forward-looking statements such as comments about our plans, expectations, and projections.
For more information on risks and other factors that could cause our actual results to differ significantly from our forward-looking statements, please refer to our most recent Form 10-K and 10-Q reports on file with the SEC.
Also on today's call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP.
We believe that using non-GAAP metrics provide investors a more thorough understanding of our business.
An explanation and a reconciliation of our non-GAAP financial measures are provided at the end of the presentation, and in our first-quarter press release.
And now, I'd like to turn the call over to <UNK> <UNK>.
Thanks, <UNK>.
First of all, I'd like to welcome <UNK> <UNK>, our new CFO.
<UNK>'s extensive background and experience will help us achieve our goals and create value for our Company, and our customers, and our shareholders.
<UNK>, it's great to have you on board.
Now let's move to slide 4 of the presentation.
Revenue came in at $115 million, that's down 3% from last year, and 2% on a constant currency basis.
Gross margin was 44%, flat from last year, and includes a currency impact of 1 point.
GAAP operating margin was 2%, that's down 2 points.
Non-GAAP operating margin came in at 8%, that's down 1 point.
Our GAAP EPS measured $0.11, that's down $0.18, and includes $3.3 million, or $0.26, from restructuring on a pretax basis.
And our non-GAAP EPS came in at $0.55, that's down $0.08 from last year.
So if we move to slide 5, take a look at our segment highlights.
Medical Imaging revenue was down 3% year on year.
CT and MR were down somewhat on timing of shipments in the quarter.
We saw solid growth in our private label CT shipments to China, and mammography saw double-digit growth, driven by new Chinese customers.
Our ultrasound revenue declined 3% in the quarter, and was essentially flat on a constant currency basis.
We launched and started selling our flagship bk5000 into surgery, and we introduced the bk3500 into the point of care markets of anesthesia and emergency medicine.
Emerging markets were up, offset by some seasonality in North America, and Europe was down on currency.
Legacy OEM probes were down, as we see certain older probes aging out, or becoming obsolete.
Our ultrasound technology partnership is starting to build demand, with a major launch at RSNA that will help us expand our market opportunity into general imaging.
The Sonic Window is now in clinical testing, with multiple leading dialysis players.
Security and Detection was down 3% compared to prior year.
Medium speed shipments slowed in the quarter.
We continue to see consistent demand in the high speed area.
And in Rapid DNA, the payment delays did impact some revenue recognition.
Now, as you might know, <UNK> <UNK> joined Analogic last week.
I'd like to give <UNK> an opportunity to say a few words before we turn the call over to <UNK> <UNK>, who has stood in as our Interim CFO during the search process.
Thanks, and <UNK>.
Thanks, <UNK>.
First, it's great to be here.
Secondly, I want to provide background for those of you not familiar with me, as well as discuss the major reasons I made a move to Analogic.
My career started with GE, where I was exposed to multiple businesses, including GE's diagnostic imaging business, as well as GE Capital.
I also had assignments in multiple geographic locations, including stints in Asia and Europe.
My GE experience provided a solid financial and operational foundation, as well as demonstrated the benefit that strong leadership in finance and accounting can bring to a business.
After GE, I moved into a variety of healthcare roles, starting with Smith & Nephew's sports medicine business, where I led the accounting team, and helped significantly increase their global presence, as well as grew their capital equipment platforms through innovative financial service product offerings.
I moved to my first public CFO role at AMRI in 2004, which is a global provider of contract research and manufacturing services to biotech and pharmaceutical companies.
At AMRI, I helped create their global footprint, particularly in Asia, and leading the Corporate Development efforts of the Company.
My last role was at AngioDynamics, which is a leading provider of products relating to image guided procedures in the vascular and oncology space.
Career changes are difficult choices, but in this case after meeting <UNK> and his executive team, it was an easy decision, as it was clear that <UNK> had built a high powered team, which has prepared to drive Analogic to another level of performance.
In addition, my desire was to be in a business focused on growth.
But you also need a strong balance sheet, robust product pipeline, and Board support to make this a reality.
I think all of these ingredients are in place here.
Another important element for me is being in a global Company, as this provides further opportunities for growth.
In the end, all these factors made it the right choice to make a change to Analogic.
Now, philosophically, I will continue the approach I have taken over the last decade, which is to be direct, transparent, and approachable.
I look forward to continuing my relationships with many of you I already know, and building new relationships.
I'll now turn the call over to <UNK> <UNK>, who has done an excellent job over the last seven months as acting CFO.
In view I've been in the role one week, it makes more sense for <UNK> to walk you through the financial results.
<UNK>.
Well <UNK>, I mean <UNK>, sorry, this is <UNK>.
At this point, we've certainly, I'd like to see us get the BK inquiry really behind us, all-in, get it all behind us.
But given that we're in discussions, really I think we just have to ---+ I just have to leave it with what we said so far.
We have outlined what we've heard from the US government, and at this point, we just need to work through, and again, try to get this whole thing behind us.
Well I think, if I look back to what ---+ we expected that the probe, the legacy probe revenues to end up somewhere around in the mid to low teens of the ultrasound total segment.
At this point and even one of the reasons we came out and talked about it early is that, at this point, we're thinking it's probably going to end up more like around 10% of that total segment.
And in the longer run, we probably would have thought it would get to about that level, and it's hard to call timing on that.
So at this point, we see that happening this year, as we come down, as we get through the year, we think we'll settle out at about 10% or so, roughly speaking of that segment.
And it is going to be a bit of a head wind here over the next couple ---+ three quarters, but at that point, we think that we expect it to annualize and run at that normalized lower rate.
Yes, I think that it was pretty much in line.
I tried to signal that a quarter ago, because we knew that we were taking all the sales reps in, and going through the training, and launching the products.
And Q1 is typically a lower seasonal quarter for us.
But with the launch of multiple products across these segments, we expected that it will take ---+ that the quarter will be a little light, and we would start to see things ramp up as we got through the end of the year.
Certainly, we see the biggest, the flagship 5000 is on certainly on schedule, it's launching, we're already selling it.
Really excited about it.
The point of care product, we see that really now starting to launch in Q3.
And then you look at the relationship ---+ the technology relationship with Carestream.
we see that starting to pick up and really starting to layer on a lot more incremental growth, and that really starting to add, as we get into Q3 and Q4, but what we certainly expect to see some of that in Q2 also.
But as far as your question, I don't think we were really far off what we expected in this segment.
Where we were certainly a little further off would be in the timing on the probes coming down, and its headwind effect on us.
Well I mean, I think they are both good news stories in mammography.
There is no question getting some of the new incremental customers in the growing China market is really good news for us.
And it is combined with Siemens, and their approval in the US, and both sides taking, helping us see improvement in growth.
You know what.
The way we, I think, have to report, is what the actions themselves in a vacuum do, as far as the cost and the savings.
But certainly, what I try to give you a look at the next year and outlooks is, we put all that together, because there's other ---+ certainly some of those positions will backfill maybe in different places.
Like <UNK> said, we did have some additional people take the voluntary retirement.
And overall, we think that's good ---+ good for people to have the opportunity to be able to successfully go into retirement.
But some of those are positions that we're going to have to backfill.
So we wouldn't expect that to drop to the bottom line, but when you put it all together, certainly, it's a part of why we expect to continue to drive margin expansion in the business.
And <UNK>, I would also add, I think it's worth saying, you brought up the probes question, and the fact that it's not really in many ways in my mind, in our minds, considered strategic.
Because it really is, as we get some of these older products, part of our natural cycle is that as items, as they get to a certain age, some of these are things that have been in production for ten or more years.
And you do expect them to age out and obsolete.
They are certainly much lower, as far as your gross margin contribution.
We're more than replacing that revenue with much more quality revenue at the top line, with our branded products.
So I don't want to lose sight of the fact that in the long run, this is a very good and healthy transition of the mix.
Thanks, <UNK>.
You mean on the legacy OEM probes, that is what you're talking about, in the ultrasound segment.
We don't expect that to go to zero.
But our strategy over the last couple years has been to really focus on what drives growth in our branded direct business, and to look at the probes on the OEM side, to be things that we would typically do if we were already doing it.
So if we're already doing it and there's an opportunity to help absorb some overhead and sell-through to some other OEM customers, then we're interested doing it.
And I said, I expect that to settle out somewhere around that 10% region, which is really not far off of where we see it ending up this year.
So that's why we don't see it being a further head wind, but in this year, it is a head wind for us.
Sure.
Right.
Well if you think about the Rapid DNA product lines, the product sells to, primarily today, it's selling primarily through our OEM customer, NetBio, to governments, to government agencies.
It's not being sold in high volume, because it was never expected that portion would be high volume.
That's going to the Department of Defense and entities that are going to take this product overseas and so on.
The bigger markets and secondary ---+ or not secondary, but the primary growth opportunity that we saw with this is in law enforcement, which would be to police departments, and the FBI, and in the law enforcement space in the US and around the world.
But now that's being, we knew it was going to be held up through this process of the testing and validation and so on.
So at this point in time, the revenue and the shipments are associated almost primarily with governmental agencies.
So with a Company that's new and somewhat thinly capitalized, we have to be fairly conservative on the revenue recognition side of things.
And so what we've done is we've shipped units to really help them develop this market, and to really safely grow and to become a viable Company, but because of that, we're not able to accept or recognize revenue on it.
However we do have to recognize the cost on those units going out.
That's just the process and the accounting rules on something like that.
We think in the longer run that revenue segment on its own will certainly correct itself, and be fine as they get ---+ build their working capital and they start to see more growth, and the time reduces for them to get paid by their big governmental customers.
And then in time that really helps fundamentally underpin the business.
But then the real opportunity comes as the FBI completes their testing, and they are able to then sell to states, and so on.
So that's again a longer time constant, but I know, it's a mouthful but that's where it is.
I'm trying to predict the governmental testing, and when they are able to actually say something.
I don't know, it's certainly not a science, and I don't even know if it's an art.
But we expect that the product will pass.
We expect that we'll hear from the FBI, and they will hear from the FBI as far as validating the product, is appropriate for our use with their databases.
The other thing that still has to happen is there's a law in Congress right now, that will enable states to purchase the ---+ and use this type of equipment in the state labs and other law enforcement applications.
So that's going to take ---+ that we do expect to take a little more time, too.
That operates on a fairly long cycle.
Just to clear that up.
Last year, we saw about $6 million worth of shipments, but we only recognized about $3 million or so in revenue.
So for last year, there was like $3 million in revenue, $6 million in shipments.
This year, it's hard for me to predict, because I can't really predict exactly how they are going to be on their financing side, and so on.
And if they are able to pick up financing, or if we see the natural business itself was able to build up working capital as we expected to, then we'll start to see more cash flow from that.
But at this point, we are not, I don't necessarily have a high expectation in this year.
I expect that there's going to be some continued delays, at least early in the year, and when we know more, we'll tell you more.
Well, we've watched the tenders as they come, and as they are able to talk about, somebody wins a tender and they go public with it, that's when we can talk about it.
There's certainly a long list of airports that are in that process of testing, and deciding which Company they want to go with for these kinds of technologies, and which kind of technology they are going to use.
So I don't know that I can say much more than that.
We try and look at what do we forecast that to mean to us, and build that into what we say.
But again, it's very difficult to say, based on some of these airports, by very large numbers of pieces of equipment.
And whether we win ---+ we certainly expect to win a nice portion of those, but it's really difficult to say how much we should expect to win, and to put into our numbers.
That's partly why it's lumpy and very hard to forecast.
But at the end of the day, there's certainly a lot happening there, and we feel like we're well-positioned for it.
Yes, what we've said and as we look to the large OEM customers that we work with, and we listen to their calls and we see how they're doing in the shorter term, and we hear what they are saying in the longer term.
There's an expectation now that in the US, the fundamental procedure demand is out-growing the capacity of the equipment.
So we think that the US will start to see some uptick.
There's different predictions, but they tend at this point to be fairly conservative, in the low single digit growth.
We do, given that we also sell direct to a lot of these large customers, we all tend to have an indication that there's some pent-up demand, the equipment has gotten older, people haven't replaced us.
So we think that's going to, at least the insurance seems to is have settled down with Obamacare and such, that we think the US will start to get on more of a normalized track.
Europe seems to be stable.
And Asia, as we know, the growth vector has been coming down, but it's still, there's still growth there.
And we do expect that we're going to see a change in the mix there of the kind of companies getting a lot of that business.
And we feel that in China, there's a lot of opportunity for a small number of rural, or should I say local customers who are developing and working to get into these markets.
And these are companies that we feel we're pretty well positioned with, and we'll see the upside of that.
But at the same time, there will be some mix shift there, we think, from some of the large OEMs, multinationals to a small number of local players, that we think will do pretty well there.
So all said and done, the fundamentals of the worldwide market, we think we'll start to see that move back to at least a low single digit growth, as we just in general as we start to look out a little ways.
Well thank you for your interest in Analogic, and we'll invite you to come and call back in March when we review our second quarter FY16 results.
Thanks again, and have a good evening.
| 2015_ALOG |
2017 | FN | FN
#Thank you, <UNK>, and good afternoon, everyone.
I'm very happy to be joining the Fabrinet leadership team at this exciting time in the company's growth.
While we are experiencing near-term challenges in certain end markets, as <UNK> mentioned, Fabrinet is well positioned for long-term profitable growth.
We continue to attract and grow new business while increasingly diversifying our customer base across a broader range of end markets.
We are doing this in a deliberate and strategic manner by leveraging our strengths in high-mix, low-volume production that takes advantage of the advanced manufacturing capabilities we have developed to serve the optical communications space as well as adjacent markets.
For example, our new product introduction facilities, Fabrinet West and Fabrinet UK are already attracting new customers for volume manufacturing in Thailand across a variety of end markets.
I'm looking forward to furthering this strategy to diversify Fabrinet's customer base by strengthening our leadership position as the manufacturer of choice for the optical communications markets.
In the short 6-week period since I have been on board, I visited our teams and operations around the world, and I have met with several of our customers, and what I saw makes me very optimistic.
We have a strong and expanding customer base and we have excellent people and first class manufacturing capabilities.
I am very positive about the long-term opportunities at Fabrinet, and I'm looking forward to getting to know our investors and analysts.
Now let me turn the call over to TS to discuss the details of our first quarter performance and our outlook.
TS.
Thank you, <UNK>.
I\
<UNK>, <UNK> and TS, I guess, my first one is I'm trying to bifurcate on the data center.
You seem to be talking about it being roughly flat.
We've heard several of your customers speak to you, some QSFP28 trends that are relatively challenged.
So can you help us understand, for your business, what's happening with QSFP28 relative to silicon photonics sequentially.
This is TS.
Yes, we have a couple of customers ---+ we produced datacom for a couple of customers.
So the 1 customer or 2 customer you heard about datacom's weakness may not necessarily reflect on our entire portfolio.
So we are still looking at datacom.
Year-over-year, we'll continue to deliver stable results.
Okay.
And then no difference on ---+ no noticeable difference on QSFP28 versus silicon photonics within that outlook.
Yes.
It's the same ---+ same story goes.
QSFP28, we have almost half a dozen of customers.
And some of them are ahead of the curve.
They are doing very well in the CWD<UNK>
Some of them having some challenge transition from LL4 to CWD<UNK>
But in aggregate, we see ---+ overall in QSFP28 is doing okay for us.
And silicon photonic is the same thing.
We mentioned about one customer have a product transition.
And the other customer in the earnings call, they talked about downward guiding ---+ guidance.
So all these are reflected in our guidance.
And pertaining to the silicon photonic customer who, you said, is going through the product transition, is this somebody that's transitioning to another product line that Fabrinet makes and it could prove somewhat temporary.
Or is this a customer that may be moving more to a emerging market solution, meaning, that this could prove to be a multi-quarter headwind.
My understanding is that they are doing it with us, okay.
So that's my understanding.
Okay.
And just last one for me is on the ---+ you previously discussed I guess, discuss the customer who wanted to sell direct to hyper scale.
And I was wondering if you can provide us with an update on progress with that solution and when we could expect a meaningful revenue contribution, maybe $10 million or more in quarterly revenue.
Yes.
In general, we don't comment on the specific customer programs.
But I can tell you that we are actually ---+ progress, on plan on the initiative.
That is reasonable, Alex.
Yes.
The automotive, the legacy customer, we continue to do well, pretty stable.
As we discussed before, we are in the new product for some of the customer, and those parts are doing well.
That's why in the prepared speech, we talked about non-optical communication.
The segment is ---+ we actually guided up in that segment.
That's correct, Alex.
Alex, most of the legacy customer, you heard the earnings call, they are actually guided down on the datacom.
They are a little bit pessimistic on datacom, as you can hear from the earnings call.
But again, we ---+ most of our offset is on the new customer, as you correctly pointed out that.
But in terms of mix, we don't normally give out the mix.
But I can say that most of the offset is from the new customers.
We like to think that way.
But in the short term, what we guide is what we guide.
Datacom will be down.
Yes, <UNK>, not necessarily.
We are just picking out only the indirect labor.
We never touch the direct labor, even in our previous reduction in force.
So those are the guys who have ---+ we need them to generate product.
So when a business turns, we definitely have the workforce to capture the business.
So these are the indirect labor, things like technicians, and some of the low-level engineer.
We found, with the lasers business condition, we are a little excess, and that's why we take out those redundancy.
You probably know that we get 13-week forecasts on the customer, so that is the visibility we have.
Beyond that, our guess is as good as anybody else's guess.
I will say region is more new customer versus legacy customer.
So as you know, we did quite well in our new businesses and we continue to run that new business segment.
That's right.
Yes.
Yes, we had some new customers who came online.
We classify a new customer or new business as a business we never have in November 2014, we start tracking from there.
So those are the business we acquired, and then we continue to ramp their production.
So those are the area where we concentrate on.
Most of the legacy customer, except one customer mentioned in the earnings call that they are looking at ---+ up on the telecom.
But I think majority of them are guided down, so that is reflected in our guidance.
Again, you're getting into the customer application territory.
I really don't want to make a comment on that.
Okay.
So obviously the quality is all over.
We look at ---+ the way we look at it, datacom is stable, stable to slightly down a little bit.
Silicon photonic, hopefully we can be flat on that because we've got ---+ again, we've got ---+ have thousands of customers, some up and some down, where a new customer will contribute to the growth.
So at this moment, we really don't want to get into segment guiding, but datacom is stable and flat.
And silicon photonic, I do ---+ I hope that it will be flat also.
Okay.
So on the telecom, obviously, we see the data in front of us.
Obviously, I hope that Chinese will come back.
That will really contribute to the telecom.
And also, one of my customer is saying that they are pretty optimistic about the ROTEM ramp.
If that happens, it will benefit Fabrinet.
So that are the 2 major drivers we are keeping an eye on, okay.
And on the silicon photonic, really nothing much I can say because there are 5 or 6 customers, which had different levels of RA<UNK>
And some RAM are faster than the other.
So as I earlier ---+ I mentioned earlier, I like to see at least flat in the technology segment.
| 2017_FN |
2017 | CPF | CPF
#Thank you, Brandon, and thank you all for joining us as we review our financial results for the second 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.
We are pleased to report on another solid quarter of financial performance, with net income of $12 million and diluted earnings per share of $0.39.
Net income for the quarter included a significant credit to the provision for loan losses, which was offset by a one-time loss realized from repositioning our securities investment portfolio for improved deals in the longer-term and higher income taxes.
<UNK> will provide more details later in this call.
Loan growth continued at a stable rate, with increases of $46 million or 1.3% on a sequential quarter basis.
The primary drivers of loan growth from the previous quarter were the residential mortgage, home equity and consumer auto loan portfolios.
On a year-over-year basis, loans increased by $187.8 million or 5.5%.
From a year ago, Hawaii loan balances increased by 8.6%, while Mainland loan balances declined by 14.4%.
Deposit growth continued to be very strong, with increases of $108.9 million or 2.3% on a sequential quarter basis and $481.2 million or 10.9% year-over-year.
Our continued focus on building and strengthening customer relationships has resulted in a truly strong core deposit growth of $132.7 million or 3.5% over the previous quarter and $370.4 million or 10.4% over the same period last year.
The primary driver of our deposit growth was the non-interest-bearing demand deposit portfolio.
Asset quality remains strong at a more normalized level with nonperforming assets at 0.16% of total assets.
We continue to be adequately reserved for future loan losses, with our ALLL at 1.5% of total loans and leases.
The Board of Directors for both our holding company and base subsidiary was expanded from 10 to 11 members in June of this year, with the addition of Paul Yonamine.
Paul was born and raised in Hawaii and previously served as Managing Partner of KPMG Hawaii operations, as well as Senior Adviser to the mayor of the city and county of Honolulu.
He is currently an Executive Adviser and Board Member of IBM Japan, where he recently served as its President and Country General Manager until March of this year.
He's currently the Executive Chair of GCA Corporation, the largest independent M&A firm in Japan.
We look forward to Paul's contributions to our company's strategic direction with his depth of knowledge and experience in the technology and global business arenas.
The economic outlook for Hawaii continues to be generally positive for the remainder of this year, primarily with steady performances in our visitor industry, labor market conditions and personal income growth.
Year-to-date, as of the month of May, visitor arrivals increased by 4.2% over the same period last year.
Visitor spending during the same period increased by 9.8% to $6.9 billion.
Job growth remains steady, with an increase in May of 1.3% over May of last year.
Employment also increased by 1.9% during the same period.
For the month of June, 2017, the Hawaii unemployment rate was 2.7% compared to the national unemployment rate of 4.4%.
Real personal income is projected to increase in 2017 by 2.4% over 2016.
Hawaii's GDP is forecasted to increase by 3.7% this year compared to the previous year, and the Consumer Price Index here in Hawaii is expected to be 2.5% higher in 2017 over 2016.
At this time, I'll turn the call over to <UNK> to review the highlights of our second quarter financial performance.
Thank you, <UNK>.
Net income for the second quarter of 2017 was $12.0 million or $0.39 per diluted share compared to net income of $13.1 million or $0.42 per diluted share reported last quarter.
As mentioned by <UNK>, there were 2 large nonrecurring items that negatively impacted our second quarter results.
Firstly, during the second quarter, we executed an investment portfolio repositioning strategy, where we sold roughly $98 million of available for sale securities and reinvested a similar amount in slightly longer duration higher-yielding securities.
While the overall reinvestment had a slightly longer duration, it included a barbell strategy that will outperform in a flattening yield curve environment.
The repositioning incurred a $1.6 million pretax loss and will increase prospective annual net interest income by roughly $0.7 million.
Secondly, our second quarter income tax expense included a onetime increase of $0.9 million related to the payout of a former executive's supplemental executive retirement plan.
Return on average assets in the second quarter was 0.88%, and return on average equity was 9.32%.
Net interest income increased by $0.4 million sequential quarter and our reported net interest margin declined by 1 basis point to 3.29%.
The sequential quarter comparisons were impacted by $0.4 million and $0.9 million in net interest recoveries on nonaccrual loans recognized in the second and first quarters of 2017, respectively.
Excluding loan interest recoveries, the normalized second quarter NIM was 3.25% as compared to the normalized first quarter NIM of 3.22%.
During the second quarter, we recorded a credit to the provision for loan and lease losses of $2.3 million compared to a credit of $0.1 million recorded in the prior quarter.
Net charge-offs in the second quarter totaled $0.3 million as compared to net charge-offs of $1.2 million in the prior quarter.
At June 30, our allowance for loan and lease losses was $52.8 million or 1.47% of outstanding loans and leases.
Second quarter 2017 other operating income totaled $7.9 million and was negatively impacted by the previously mentioned investment portfolio repositioning.
Other operating expense for the second quarter totaled $32.3 million.
The reported efficiency ratio for the second quarter was 65.3%.
Normalizing for the nonrecurring investment portfolio repositioning and net interest recoveries would result in a normalized efficiency ratio for the second quarter of 63.8%.
In the second quarter, our effective tax rate was 38.2% and was inflated by the previously mentioned SERP payout.
We expect our normalized effective tax rate to approximate 34% to 36% going forward.
During the second quarter of 2017, we repurchased roughly 249,000 shares of common stock at an average cost per share of $30.89.
We've also repurchased an additional 71,000 shares month-to-date in July at an average cost of $31.53.
That completes the financial summary, and now, I'll return the call to <UNK>.
Thank you, <UNK>.
Through the first half of the year, we remained on track with our 2017 business plan, which has resulted in building our core deposit base and generating quality credit.
Our continued focus going forward will be on enhancing our customers' experience, 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.
Thank you.
Sure.
Let me turn that question over to <UNK> on the details.
<UNK>, during the second quarter, we originated roughly $170 million during the second quarter, which was about a 20% sequential quarter increase over the first quarter.
If you recall, the first quarter was a slightly down quarter from the fourth quarter.
Fourth quarter was the quarter when we had a few projects complete.
So we did have a nice increase relative to the second quarter ---+ relative to the first quarter, excuse me.
The gain on sale margins in the second quarter did show us a slight decrease, and it was a function of what we put into the portfolio and a function of the loans, the amount of loans that were sold, servicing [released].
That's a lot of questions, <UNK>.
We'll start off with the overall margin.
I think, the guidance for the margin remains unchanged from the prior quarter.
We do expect to be able to keep the margin in the 3.20% to 3.30% range.
You did point out the increase in the cost on large CDs.
And that portfolio has a relatively high beta.
Fortunately, it's a pretty relatively small portfolio.
And again, as <UNK> mentioned, we did have nice growth in non-interest-bearing DDA balances during the quarter.
As far as deposit betas, I think that, that guidance is still the same.
I think, the core deposit beta is roughly about 15% and the total deposit beta is just under 30%.
I think, it was done around in the middle of the quarter, <UNK>.
And yes, it should benefit us prospectively by about 1 basis point on the NI<UNK>
Sure.
Let me take that one, <UNK>.
So we do expect good growth in the resi mortgage portfolio in the second half.
Among other things, we have a condo tower here that will be closing in the fourth quarter, and we have a nice percentage of the mortgages on the sale of the units in that condo building.
And then, as far as overall loan growth for the second half of the year, we continue to be optimistic about the mid- to single-digit full year loan growth across all of our asset classes.
And I would say that for the first month of the quarter, we are off to a very nice start.
Sure.
That close to $10 million in the commercial mortgage portfolio was financing for an existing customer ---+ actually, a customer that's been with us for more than 10 years.
The interest rate.
The quarter ---+ yes, the second quarter is about $26.6 million in purchased auto, the weighted average rate was 4 ---+ in the 4.6% range.
No, but it was purchased at a premium on a net basis, Jackie.
I want to say it was on the mid-2s.
Yes.
Yes.
As we stated before, we will probably need to keep the Mainland exposure relatively flat as we continue to ramp up the Hawaii portfolio.
But over time, it will decline over time over the longer term.
But in the near term, we're probably going to keep it flat.
And as you know, the auto portfolio amortizes quickly.
So it's a battle to keep it flat.
Yes, Jackie.
As you know, we have an asset liability committee that reviews the balance sheet positioning on an ongoing basis.
So we periodically see opportunities to reposition.
At this time, there are no further plans to reposition, but again, it changes with market conditions.
On the overall, it was very small, yes.
So it was [100] out of the $1.5 billion.
On that piece, we did extend duration slightly but, as discussed, it was ---+ it extended duration slightly but it was a barbell strategy where ---+ that included floating rate securities, so it did change the risk profile of that portion of the portfolio.
So what we sold had really exposure to the intermediate part of the yield curve on a fixed rate basis.
And what we repurchased was floating rate securities on the front end and longer duration securities on ---+ fixed rate securities on the longer and.
So it does perform, it changed the risk profile to perform better in a flattening yield curve environment.
Just wondered if we could stay on loans here.
Do you have an update as to where your SNC was.
And then, what the breakdown between Hawaii and Mainland is.
The SNC portfolio number is $104 million on the Mainland.
And then, <UNK>.
.
There's about $45 million in Hawaii, Hawaii [states].
Okay.
And then, just the home equity, can you comment a little bit about that.
That saw strong annualized growth this quarter, just how you're thinking about that.
And was any of that purchased.
The home equity portfolio is all originated here by our lenders in Hawaii.
And it continues to be a focus for the company as we think about our deepening customer relationships here.
So some are referrals from our branches and some from our home mortgage loan consultants in our mortgage division.
Okay.
And the 26% annualized growth, could we expect it to continue at a similar clip.
I would say that we are hopeful that we'll be able to do that as we continue to focus on deepening our relationships, and particularly in that portfolio.
Okay.
And then, just going over something that <UNK> touched on, as we look at your jumbo deposit costs, they were up 19 basis points this quarter, they were up sharply last quarter, too, how should we be thinking about that portfolio going forward.
I mean, that portfolio as a percentage dropped, just linked quarter, 22% down to 20%.
Are we going to expect to continue to see that run down.
And what is your goal on that.
Let me turn that over to <UNK>.
<UNK>.
Yes.
So a large percentage of the jumbo time deposit portfolio is public deposits.
So that's a portfolio that has a relatively short duration and it's pretty market-based and that's really what drives the high beta.
So that portfolio will continue ---+ to the extent that the Fed continues to tighten, that portfolio will reprice to market pretty, pretty quickly.
So going forward, we have the ability to manage the size of that portfolio, that's all in the pricing, but we have the ability to manage the size of that portfolio, and that's really going to be a function of what we can accomplish on the core deposit front.
So in the second quarter, we had exceptional performance on the core deposit front and that did allow us to shrink the public deposit portfolio slightly.
Okay.
And so just again, as we think about where the time deposits may sit, particularly going into potentially another rate hike at the end of the year, I mean, could we expect to see that line item at some point be down 16%, 17% of your total deposits, assuming that the growth is there on the core side, is that reasonable.
Yes, <UNK>, it's going to be a function of what we're able to accomplish on the core side, that's correct.
Okay.
And then, I know I ask you this every quarter, but as we think about your loan loss provisioning, obviously your credit is now pristine, your reserves to loans sitting at $147 million, but you had a very big loan loss provision reversal.
I mean, if we think about the provision build, is it possible that starts occurring in the third quarter.
And then, if you can just sort of refresh us a little bit where you're thinking on a reserves to loans as a target.
Sure, <UNK>.
I'm going to turn that question over to <UNK>.
<UNK>.
We are expecting normalizing, barring any significant recoveries in the coming quarters.
I would say that we don't set a target level, as you know, and really, we will continue to analyze our loan portfolio mix, asset quality as well as the economy to determine what that reserve level will be on a quarterly basis going forward.
Okay.
Just last question, internal controls in your remediation plan, can you just give us an update there.
Yes.
We are continuing to execute on our remediation plan.
And we don't anticipate fully remediating the material refits as we do have some key controls that are annual controls.
So those will be performed and tested at year-end.
Okay.
So full resolution will probably be spring of next year, assuming all goes as planned.
Correct.
I'll take that question, <UNK>.
In regards to the other operating expense line, you can continue to think about $31 million to $33 million on a quarterly basis.
And then, specifically on your question on compensation expense, it should be in the range of $17.5 million to $18.5 million.
In the second quarter, we had a couple of things that bumped up that compensation line.
So the first is we did have the effect of the merit increases for all of our employees in the second quarter.
And then, further, there was a onetime adjustment to our incentive compensation accrual.
That's correct.
The guidance I just gave is where we expect to be for the next couple of quarters.
Sure.
I'll turn that question over to <UNK>.
<UNK>, the second quarter was actually a good quarter on that front.
New volume loan originate ---+ weighted average new volume yields were roughly in the 3.90% range, which is very close to the overall portfolio to yield of 3.95%.
So that's the closest we've been in this rate cycle.
However, I will say that new loan origination yields tend to be a little volatile, it does bounce around a bit.
So I think, it's a little early to say that we've hit a trough here.
But the second quarter was a good quarter.
Thank you very much for participating in our earnings call for the second quarter of 2017.
We look forward to future opportunities to update you on our progress.
| 2017_CPF |
2017 | GGP | GGP
#So the As are generally about 10% of NOI and the Bs are generally 13% to 14% of NOI.
CapEx.
All kinds of CapEx and the allowance of CapEx, that's in that math.
Well, the ---+ we've chosen to be prudent here.
We've chosen to seek.
Out institutional investors to come in and be our partner.
The institutional investor base is eager to acquire more A centers.
There are no A centers in the market for sale.
They've elected to be part of a ground-up development, such as Norwalk.
And in discussions with them, because there are so few of these, the question is should we increase the size of the project from about 200,000 square feet to 300,000 square feet.
We're evaluating that.
The leasing activity, as I mentioned, if this project was 300,000 square feet, is preleased to about 50% today.
The mix, so far, has been a combination of entertainment, fitness, restaurants, apparel, electronics, home furnishing.
I will likely venture to say, of that 50%, a larger percentage has been nonapparel.
Yes.
We've said it's an 8% to 10% return.
The rents we're getting today would demonstrate that the retailers feel that the sales productivity of the center will be in the high $700s.
So they're sort of are not-anchor deals, and they're not in-line deals.
They take about 60,000 square feet.
They do terms.
I think that's a 20-year term.
And we get ---+ I would sort of sit back and say, a return of at least 6%, if not slightly higher.
I think businesses as usual.
We don't start unless it's preleased.
We've actually maintained that our Seritage venture produces closer to 7%.
The non-Seritage is between 8% and 10%.
So I think we've maintained exactly in that sort of wheelhouse.
The tenant demand is there.
Again, these are the better-quality assets, which is where most of the redevelopment is occurring and there is a demand for space as evidenced by ---+ even a trailing 12-month leasing spread actually inched up a little bit.
Even though I've continued to maintain guidance of spreads of 8% to 10%, they have inched up.
So it's sort of speaks to a flight to quality to good real estate.
Yes.
So we tried to lay those out on Page 4.
But effectively, on the G&A front, we had the Seritage gain last year, which is included in mining that G&A number, and we had that onetime bonus pool impact.
So you had a $20 million swing from 1 year to the next.
It looks like this year was much higher than last year, but the reality is you really need to adjust for the run rate.
Except the bonus pool.
We're thinking of joint venturing it as is as well.
It's pretty comparable.
So with respect to the net debt number, that's effectively as we've been saying for a long time, the growth in EBITDA.
Some of it is the amortization of debt that occurs.
But generally, it's the growth in EBITDA.
That is the driver of that statistic.
With respect to the line, we just had a timing issue on cash.
We expect that to be 0 by the end of the year.
We had ---+ we paid a special dividend in the first quarter.
We paid the regular dividend in the first quarter.
We paid the bonus pool in the first quarter.
The first quarter has a large chunk of cash.
So we feel pretty good about our liquidity position.
We don't really have anything going on in the marketplace right now in terms of loans.
So ---+ and as far as the floating rate exposure, it's generally ---+ and we've maintained this for a while.
Since we are a one-loan, one-property philosophy, if we have an asset that's not ready for fixed financing, it's going to be floating rate.
That's just the definition.
We also have ---+ about half of the floating rate is in a term loan with the banks that has a fairly good maturity on it.
I don't have that broken out.
We were really just trying to focus people on the cash flow and the downtime, though it does take time to get these people back in.
But I don't have a specific occupancy target for the second quarter.
; So, <UNK>, we have 12 Seritage JVs; 4 are under construction.
And I've said, I think in my previous call, the various other ones have dates and timelines, and 9 out of the 12, so far, are preleased.
So we could ---+ we hope to see start in construction on another 5, hopefully in the next 12 months.
As it relates to the other acquisitions, as you know, both in the case of Tysons and actually Stonestown Galleria in San Francisco, we recaptured the Macy's boxes.
So they sort of have a fair leaseback for 3 years, I believe.
We're making headwinds.
Stonestown is virtually 100% now leased.
We hope to recapture it a year ahead of schedule, again showing the demand for A-quality assets.
And in the case of Tysons, again, we have very good leasing progress.
Again, I fully expect by year-end, we'll be 100% lease of the Tysons box.
<UNK>, as I mentioned, I don't want to be repetitive but there's no sacred cow.
We will look at all alternatives, okay.
We've done the math and we look at our top 80 assets and we refine that after a while.
We're all in the real estate business.
There's a demand for space, and we know that the math of just ---+ of the value of the A assets is so much in excess of what we create today.
It will be na.
ve for us not to look at all options available to us to create shareholder value.
And I think we've said this in numerous investor meetings.
As a matter fact, at the Citi conference, we said it at almost every meeting.
But I think it takes a sense of urgency when devaluation is not being appropriately met in the marketplace.
So we're ---+ we will evaluate one of all multiple paths to go on, and we will make some decisions in the near term.
It will always involve the board because any decision over $100 million requires board consent, okay.
So it'll be management's recommendation, and the board will review and approve our path forward.
Brookfield, like any other investor, cares about shareholder value creation.
And we will evaluate what's the best way to bridge the gap between the value as we see as a company, okay, and where it creates today.
I think it's a little bit of both.
I think if it's quality real estate and the retailer wants to maintain their position in the shopping center, they would have to pay the appropriate rent and maybe, in the short term, a slight hedge up in occupancy cost.
It may be.
We've seen that with retailers, I mean, who have actually turned around, and Talbots is a great example.
Talbots continue to pay rent while they were in a turnaround.
They've done a fantastic job turning around their business.
It was important for them to maintain their position of real estate and decided to take the difficult pain while they were in the turnaround process.
I'm only giving you a success story.
J.
Jill, very similar.
Again, I'm very proud to say that these are power retailers who had turned their business around and moved forward.
I would also sit back and tell you that there are retailers who are eager to expand ---+ power retailers eager to expand as they've seen the carnage, okay, of the tenants that went bankrupt who have been in a weak positioned for long periods of time, such as Limited, such as Wet Seal.
And so we are actually seeing other retailers, who have performed, stepping up and increasing their size and scale in the shopping centers so that they can actually take ad<UNK>tage of the lost apparel sales from the bank of retailers.
I think the better assets will continue to perform.
And I think what we see is ---+ what we don't break out is between the A assets and the B assets, that the carnage is more felt in the lower-quality assets than the higher-quality assets.
And as I demonstrated, that the big delta in NOI weighted in sales is $705 to non-NOI-weighted, it's $591.
So you can just sort of appreciate that, that sort of applies even for apparel in the higher-quality assets versus the lower-quality assets, and we're not NOI weighting at 1.8%.
Given you've started monitoring traffic, could you provide some details around what you saw in the quarter.
So traffic has been steadily building through the year.
The traffic is likely up in the ---+ in our shopping centers.
Only a handful of them have sort of calendared, if you will, so you could year-over-year comped.
But we will tell you that we see ---+ if I were to just look at the amount of traffic from the first quarter, the first quarter had ---+ January had 30% of the traffic, February had 30% of the traffic, March had 40% of the traffic and April is building ahead of March.
So we're actually seeing traffic build.
Again, the best function of ---+ are showing you that the centers are performing well and actually sales have picked up.
And then in terms of store closures, is it evenly distributed across the As and the non-As.
Or did you see a higher percentage of square footage close in the non-A malls, which I know you pointed out as 20% of NOI.
So the ones that obviously liquidated, like Wet Seal and Limited, there's no ---+ it's across-the-board.
But for the ones that have not, I'll give you a little example.
Payless Shoe allows bankruptcy.
Thus far, we only have 2 closures of the 80-odd Paylesses that we have.
rue21 announced a list of 400 closures.
Thus far, we only have 14.
And so they tend to be in the lower-quality assets.
And then just one final one for <UNK>.
Given the comments around depressed occupancy in 2Q, what would be reasonable same-store growth expectation for that quarter.
Well, it'll probably be the worst of the year.
The bankruptcies will hit it.
Probably $10 million of that $25 million will probably hit the second quarter, so less than the first quarter.
Well, if you take out the $25 million, that's a big chunk of it.
And then there were some odds and ends around the same-store that kind of offset in net G&A.
But I think if you look at what we said in the comments, you can pretty much get there.
ARROW is basically out of everything other than FFO.
We ---+ it's tax-affected.
It's all down in the FFO.
There is a line item in our supplement called ---+ I think it's net investment income, which is where the pretax income of ARROW goes and then we have a tax provision.
So it's out of the EBITDA.
It's out of the company NOI.
It's out of the same-store NOI.
Yes.
At this moment in time, it's been and we've maintained it.
That's been 7%, and the [odd] reason for that is obviously half the space is being leased back to Sears.
All I'm going to say is that it doesn't ---+ NOI weighting highlights the quality of the portfolio.
Spinning assets doesn't mean that one of the ---+ that could not be one of the options, that we were the first people to spin Rouse.
So you could say in this cycle, we invented the spin.
And so the answer is you just lose whatever x hundreds of millions of dollar of cash flow.
It really doesn't change your portfolio.
If the investor base needs to see a higher-quality asset without appreciating that NOI weighting does the same thing, it's ---+ we hear you.
And from our perspective, like I said, the way to value the asset pool is to figure out how we demonstrate that the ---+ sum of the parts is greater than the whole.
Because at the end of the day, we're in the retail real estate business.
And the disconnect that exist between the private and the public markets is expensive.
I actually gave you that on the A assets, the market price is in the mid-3s to the low 4s.
If you take my 80% of my NOI and do the math, you'll see that we're in the real estate business.
And at some stage, the market will appreciate the value of the real estate, and it may be that we need to demonstrate how we show them that.
And again, it's our job to create shareholder value, and we're focused on it.
Well, we've already identified for '18 and '19, all right.
So right, now we've identified ---+ we control the real estate.
We are in the redevelopment process.
So to get that sort of 30-ish million dollars in '18 and the same 30-ish million dollars in '19 of incremental NOI is already in our authority and development, all right.
So to effectuate that in '18, you have to be well under construction today.
So over the last 6 years, we believe in good corporate governance and there's been a rotations of our Board of Directors.
As you may remember or may not, in 2010, 2011, we had John Schreiber, Cyrus Madon, Sheli Rosenberg as part of the board, and they rotated out in the last couple of years.
So we actually feel that it's good corporate governance to rotate our directors.
And we are actually very happy to have Janice Fukakusa, who was the CFO of RBC; and Tina Lofgren, who was Head of Real Estate of TJX Companies, to be new board members after our Annual Shareholder Meeting.
<UNK>, I think it's up to us to sort of think a path just for the sake of discussion.
If you sold an asset and you dividend out the cash to your investor base and they believe they can invest their money, it's ---+ all it does is it takes it off the top.
If you buy back your stock, it's a whole different animal.
So I could take a very extreme situation and say, let me sell 80 A malls and dividend out $25 in dividends, or some math better than that, and then I have 50 assets producing $0.5 billion of cash flow with a 0 stock price or say a $0.25 stock price.
I don't know the answer.
All I'm trying to demonstrate is that if a market doesn't value the real estate, it's our job to make sure that the investors get their appreciation, either in the form of dividend or some form of demonstration that we are in the real estate business and the real estate needs to be valued appropriately.
So I don't really have an answer.
All I do realize is the disconnect has gotten so wide, it is up to us to demonstrate to the market that there's a real estate value at stake here.
It's just the management and the board.
<UNK>, we have just started the process of evaluating the path that we want to take.
The disconnect has widened, as you can all appreciate, in the last 30 days.
So when we went out for ---+ to put the project of Norwalk to find institutional investors, each 1 of the 4 institutional investors that presented a proposal to us for Norwalk inquired for asset sales or JV partnership in the built, stabilized assets, and they did tell us in discussions how they view the market pricing to be.
As a matter of fact, if you speak to most of the institutional investors and ask them which is the best-performing asset class within their portfolios, it usually is superregional malls that have produced, over the last 20 years, the best return.
And we continue to see that today.
If I actually just look at the As and the higher-quality As, it actually ---+ as the quality increases, that growth rate goes from 4% to 5%, even in this environment.
Thank you for joining the call.
Please contact <UNK> or <UNK> with any questions you might have.
We look forward to seeing many of you over the next couple of months at ICSC and NAREIT.
Have a great day.
| 2017_GGP |
2016 | AJG | AJG
#Well, we've closed four additional deals since the quarter ended, so we've got 12 done for the year, and the pipeline is robust.
Whether or not they actually close in the second quarter, third, or fourth, every single deal has its own life span, but we've got a very solid pipeline.
Thanks, <UNK>
Yes, Australia and New Zealand, in particular.
We're really happy with our position in the UK.
If you remember, just two or three years ago we didn't really have a retail presence at all.
Today we're one of the five largest players in that market.
That group has come together very well.
The re-branding has been done, it's all <UNK> now.
You recall it was Oval, Giles, and Heath.
We're Arthur <UNK> across about 70 outlets through the UK.
Yes, it's a competitive market place, just like the United States, Canada, Australia, New Zealand.
But we think we compete pretty well.
Yes, I think it's nice affirmation of what we saw, too, that there is good opportunity in the retail space in the UK.
I think there's lots of opportunity there.
There's still some private equity owned firms there.
They're going to have to do something as time comes up.
I think people realizing better to be with a strategic than with an independent or private equity owned.
We're seeing terrific opportunities there.
Thanks <UNK>.
The market place, I think, is probably a little bit more stable than I thought it was going to be coming into the end of the year.
October, November last year we saw probably a little bit softer market than we're seeing today.
Property is soft, no question about it, especially on the cat side, but probably a little bit more stable market.
I think our closing ratio's up just a bit.
We've got a very solid pipeline of new business opportunities, and our team is doing very well on new business.
I think also to add to that, the second quarter is our highest property quarter for us.
As you look at your models, I don't know if I would necessarily assume that it will be the same over the next three quarters.
You might want to caution yourself a little bit on the second quarter because of property rates.
Also, I think just since November and December, this is a stable environment.
I think our clients are having the opportunity to be able to see [really] the value that we bring.
In a stable environment we out-shine a lot of our other - smaller competitors, in particular.
When Pat's talking about our hit ratio being better, that's what we're seeing there.
Yes, to answer your questions backward, yes.
When mid-single-digits, we believe there's an opportunity to still hit our 17% margin target in each of the next three quarters ---+ which is expansion over last year.
In terms of what's happening on the organic side, if you go back and look at our supplement over time, there have been some periods where <UNK> Bassett's growth has been in the 5% or 6% range, and then it jumps up to the 10% or 12% range.
The reason why is that as we look at some larger accounts, they typically will incept on January 1 or on July 1.
There are some times where they ---+ we get them in the pipeline, let's say in 2015, hoping that the incept on January 1, but switching over to us can take some time.
But we see more new business incepting July 1 this year than let's say maybe in the past where it incepted on January 1.
It's a little bit of a step function a little bit of a step function type business.
Some of these are pretty large accounts.
We're seeing good ---+ we had 6% growth in the US.
Australia is largely flat at this point, but again, there's some big programs that are coming up for proposal over the next couple years down there.
I think what you're looking at is the head count on the brokerage side dropped about 45 heads between ---+ since the last period, yet we still had acquisitions that might have added 100 or 150.
We're probably net backwards 200 heads, and its largely as a result of our integration efforts, our productivity initiatives.
Most of that ---+ we didn't have big layoffs ---+ most of that was just through natural exits that happened in the business.
But it just shows that we're getting more productive every day.
Thank you.
Good morning.
It's a little less than 20%, but wholesale was up about 2% for the quarter.
Yes, they have head winds on the property side, and you need to know that the second quarter is their biggest property quarter.
Yes, let me tell you there's three answers in that question.
First, when it comes to the bankruptcies, most of those, when the coal mines go bankrupt it's usually holding company bankruptcy but the mines are still operating, because they have contracts they have to continue to deliver coal on.
A lot of these utilities have had ---+ required to take contracts.
The coal is still moving, even though the holding company might be bankrupt.
I think there's been five of them in the last year or so, as they restructure and make themselves more efficient.
Second of all, the power plants.
As you recall, when we put our clean energy plants in at a power plant, we put them earlier in the dispatch curve.
When we do our plants, these are plants that are more likely to run than let's say less efficient plants that only get dispatched during the high peak loads.
We are at the mercy of the weather.
We did have a little bit of a warmer winter that did impact us a little bit, but we still see that we're on track.
This program runs through 2021, so long-term displacement of coal to other fuels.
It takes a long time to displace a plants, and this program goes really for another five years.
Truthfully, the amount of displacement that's happened over the last eight years probably is not likely to repeat, because they displaced to natural gas in the plant that they couldn't.
They really can't move these plants to natural gas that we're operating on efficiently and effectively in the next five years.
In summary, I was going to say that I think we're still well positioned.
I still see us having 15% growth in our net earnings this year.
We still have other plants that we're working on putting in place that should continue to expand our earnings as you look into the future.
Overall, I would say it's a steady-state business.
Thanks, <UNK>.
Good morning, <UNK>.
No.
Yes, the way that their compensation raise increases happen, it doesn't happen in the first quarter.
You'll see that be more like 17% going forward.
17.6% on $200 million of revenue might have been $1 million less than what ---+ of expense than we expected initially, but I feel 17% in the next three quarters is achievable.
That's right, <UNK>.
I think, <UNK>, for us it's more execution than it is macro.
Those are big trading partners for us.
In each instance, we've got deep, very meaningful relationships with each of them.
Each have their own issues that they're dealing with, but our trading relationship is very strong and continues to grow with all three of them.
It's really not those three driving the market.
I think really, we know that 90% of the time when we compete, we compete with a player who's smaller than we are.
In our 32 ---+ in the United States, our 32 areas of focus, our verticals, are very strong.
We know those businesses, and we think we're probably tougher than anybody in any of those; and new business is very strong.
Yes, I think ---+ what I've been impressed with over the last five years is we've had ups and downs in various lines of coverage that have gone soft or hard, depending on what those lines of coverage need.
But over the last five years, we've seen more discipline on the underwriting side than I have in my 40-year career.
I think that remains.
I think catastrophe property clients deserve a decrease.
The wind hasn't blown.
There should be no shock to anybody that cat property is off.
When you take a look at workers' compensation, depending on the geography, the state, what have you, when it needs to go up it goes up a bit.
When it needs to come down it comes down a bit.
D&O, same sort of thing.
What we're seeing is many cycles within the lines of coverage, based on what really needs to happen to those lines.
I think that's a level of discipline that the industry has enjoyed for five years that I'd never seen before.
I think it's more of the same of that, <UNK>, yes.
Those three companies have issues that they're dealing with, but by and large, they're trading on the street, they're doing very well.
Thanks, <UNK>.
Good morning, <UNK>.
No, I'd say pricing is relatively stable.
Look, at any account, you could go into any of our offices and go to a sales meeting, and you're going to hear a story of somebody getting a 25% decrease.
Someone's going to be shocked by it and what have you.
But when you look at our book of business across the entire platform, and you see that really rate and environment and rate and exposures cost us 0.5 point, that's no soft market.
It's not ---+ you can have an account that gets knocked down big time, but by and large, when you look across the entire platform it's a pretty stable situation, with the exception of the property business, and to some degree transportation.
It's strong, we're good.
Casualty lines ---+ with the exception of energy and natural resources, our wholesale business is very strong, as is our MGA business.
Thanks, <UNK>.
First question, yes it was.
Because we had a stronger first quarter, that caused us to recognize a little bit more.
When you have more organic growth, you have more earnings, and therefore you recognize a little more tax credit.
That's the first one.
Longer term, I think even though we talk about the end of this program to generate credits being expiring in 2021, our plan is to hit the end of 2021 with a long glide path of having a balance sheet with a substantial amount of credits in it that can continue to reduce our tax rate well into the 2020s.
Even though the generation phase may be over in 2021, the actual utilization of credit should go on.
I think right now we have about $375 million that's in our balance sheet right now.
We're using about $100 million a year.
I'd like to have a five or six, seven-year balance sheet by the time we hit that point.
Now, what do we have as opportunities after the fact.
Listen, we thought at the end of Section 29, which was the precursor to Section 45 credits that we were done.
There's something else that the government does in order to foster tax credits.
The government really understands that better energy is a good policy, and therefore they want to incent commercial enterprises to go out and develop new technologies to better the environment.
I think there could be another program after 2021, but we've got five years to work on that.
In terms of our cash generation, look at this as well into the 2020s.
We've done it only for the last 20 years, so I think there's something else out there.
Exactly the opposite of that, <UNK>.
This is a great opportunity for <UNK> Bassett.
The market place has been an unbundled market place for large accounts for the last 20 years.
Liberty has unbundled at times, as well.
This is just more opportunity for GB to showcase their wares in terms of being able to convince clients that using <UNK> Bassett will lower their claim cost.
We're pleased that Liberty's coming that direction.
We have a lot of carriers that are recognizing their claim outcomes are better with <UNK> Bassett, because <UNK> Bassett can customize the claim delivery to the customer, not necessarily to the way the carrier wants to.
To be able to customize the delivery of the service that we provide will deliver better claim outcomes.
The carriers recognize it.
We do it for a lot of carriers.
We're really good.
When we're paying about $10 billion a year of claims, primarily in the workers' comp or general liability space, we are experts in that business.
Our outcomes are better.
This is another acknowledgment by a carrier that there are some things that we might be able to do better than them.
I think this is a terrific opportunity for us, as these carriers recognize that we can do things for them.
Yes.
Thanks, <UNK>.
90% of the claim goes out in the claim cost.
Only 10% goes out in the adjusting cost.
If you can reduce the 90% by a little bit, you can sure have the pay for a lot of the 10%.
Donna, any other questions.
Yes, we did hit on this before, <UNK>, but I'll be glad to do it again.
We're very pleased with the progress we've made in the UK, especially on our retail side.
Our specialty business is second to none there.
Our London broking business is really top of the game.
Retail, you will recall is an acquisition of three players that we put together over the last couple years.
It's going extremely well.
We had about 3% organic growth in the quarter on our retail business.
It's all re-branded from Giles and Oval and Heath to <UNK>.
Organic growth is on the up-tick, and we see really good things happening there.
Yes, in terms of the Compass, the revenues on that are less than $5 million, so it's not a big deal.
That was a network of relationships that were provided to the UK retail space that came from either Giles or Oval, I can't remember exactly which one.
But truthfully, our guys don't need a network now because they're a part of <UNK> and they can trade within <UNK>.
They can get the resources and the capabilities that they need.
Compass really is an opportunity for smaller retail brokers, and it doesn't really work inside of <UNK>.
We're selling that off as a no, nevermind, to be honest.
Right.
Thanks, Chuck.
Working backwards, when it comes to the Willis-Miller deal, the fact is RPS trades primarily with other than the large brokers, so it doesn't really have much of an impact to RPS.
I would say there's nothing there.
When it comes to the head count, I think because we're seasonally smallest in our acquisitions in the first quarter you see the decrease in head count more so.
I think that when you look at going forward, you'll probably see increases in head count as our acquisitions are coming on.
But underlying, yes we are controlling our head count through attrition, through becoming more productive.
If we didn't have the roll-in of acquisitions, you would probably see a decreasing head count just from natural attrition.
This is ---+ we're naturally getting better every day.
Well, we bought some in the quarter to offset the shares that we used in tax-free re-org, so it's out there.
Thanks, <UNK>.
All right, Donna, I think that's it.
Yes, Donna.
Thank you very much everyone for joining us this morning.
We really appreciate it.
We're excited about the results for the quarter, and look forward to a strong 2016.
Have a great day.
| 2016_AJG |
2017 | UFCS | UFCS
#Good morning, everyone, and thank you, for joining this call.
Earlier today, we issued a news release on our results.
To find a copy of this document, please visit our website at united ---+ ufcinsurance.com.
Press releases and slides are located under the Investor Relations tab.
Our speakers today are Chief Executive Officer, <UNK> <UNK>; <UNK> <UNK>, our Chief Operating Officer; and <UNK> <UNK>, Chief Financial Officer.
Please note that our presentation today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
The company cautions investors that any forward-looking statements include risk and uncertainties and are not a guarantee of future performance.
These forward-looking statements are based on management's current expectations and we assume no obligation to update them.
The actual results may differ materially due to a variety of factors which are described in our press release and SEC filings.
Please also note that in our discussions today, we may use some non-GAAP financial measures.
Reconciliations of these measures to the most comparable GAAP measures are also available on our press release and SEC filings.
At this time, I'm pleased to present Mr.
<UNK> <UNK>, Chief Executive Officer of United Fire Group.
Thanks, <UNK>.
Good morning, everyone, and welcome to the UFG Insurance First Quarter 2017 Conference Call.
Earlier this morning, we reported net income of $0.77 per diluted share, operating income of $0.67 per share and a GAAP combined ratio of 96.5% for the first quarter 2017.
This compares with net income of $0.88 per diluted share, operating income of $0.83 per diluted share and a GAAP combined ratio of 92.3% in the first quarter of 2016.
During the first quarter of 2017, our growth in premiums and total revenues slowed moderately compared to the last few years.
Net premiums earned grew 5.2%, which is in line with our expectation of 4% to 6% growth for the full year 2017.
Likewise, total revenues also grew 6.5%.
During the first quarter of 2017, we had an increase in losses in our P&C segment, driven by 2 items: first, an increase in catastrophe losses; and second, a deterioration in our core loss ratio, primarily in our commercial and personal auto lines of business.
For the quarter, catastrophe losses added 4.1 percentage points to the combined ratio, compared to 2.0 percentage points in the first quarter of 2016.
Our 10-year historical average for the first quarter is 2.6 percentage points.
This increase in the first quarter of 2017 was primarily due to hail storms in the southern United States in the month of March.
The deterioration in the core loss ratio added 3.3 percentage points to the combined ratio.
This deterioration was driven by an increase in the frequency and severity of losses in our auto lines of business.
As we mentioned during our fourth quarter conference call, we are continuing to implement many new initiatives including pricing increases, stricter underwriting guidelines, new analytical tools and more rigorous loss control requirements.
These new initiatives are focused on improving our underwriting performance, particularly in our auto lines of business, where we are tailoring our marketing, underwriting and loss control efforts to address distracted driving, an issue that continues to drive the increase in frequency and severity of losses.
Also during the first quarter, we held our annual underwriting meetings, visiting each of our regional branches.
The main focus on this year's meetings was on these new initiatives and improving the underwriting results of our auto book.
Our expectation is that it will take a few quarters before we will see the benefits of these efforts in our financial results.
Mike will go into more detail regarding losses and the strategy we have put in place to address this deterioration.
And another one of our initiatives is adding new analytical tools, as we recognize the need to have more sophisticated approach to analyzing data.
To first ---+ excuse me, to assist with this initiative, we have added 3 new analytics professionals to help us make strategic decisions related to selecting and pricing risks, identifying trends and entering new markets to name a few.
For the life segment, we reported net income of $1.4 million or $0.05 per diluted share in the first quarter of 2017 compared to $400,000 or $0.02 per diluted share for the first quarter of 2016.
The increase to net income was primary driven by the sale of a previously-impaired fixed maturity security, which resulted in an after-tax gain of $800,000 in the first quarter of 2017, partially offset by an increase in death benefits in our traditional life business.
As we mentioned last year, we will be implementing many new strategies in 2017 to improve profitability in our life segment, many of which have already been put in place, including product pricing adjustments and restructuring our commissions.
As expected, these changes resulted in a decrease in sales of our single premium whole life products.
We believe these strategies are positive steps to improve profitability in our insurance segment.
Before I turn the discussion over to Mike <UNK>, I'll end my portion on a positive note.
Our expense ratio continues to meet our expectations with a fourth straight quarter of an expense ratio right around or about 30 percentage points.
Even with the significant progress we have made in lowering and maintaining our expense ratio near 30 percentage points, we will always continue to look for efficiencies.
In closing, we were once again named to Forbes 2017 list of America's 50 Most Trustworthy Financial Companies for the fourth consecutive year.
We are honored to be recognized in this prestigious list amongst these top-rated financial companies.
With that, I will turn the discussion over to our Chief Operating Officer, Mike <UNK>.
Mike.
Thanks, <UNK>, and good morning, everyone.
As <UNK> indicated, one of the items impacting our results in 2017 was an increase in catastrophe losses as compared to the first quarter of 2016.
This year's catastrophe losses for the most part were driven by an increase in frequency of claims related to hailstorms in the southern United States in the month of March.
In the first quarter of 2017, we received 389 catastrophe claims compared to 190 catastrophe claims in the first quarter of 2016.
The second item which impacted our results in the first quarter of 2017 was the deterioration in our core loss ratio, impacted by an increase in frequency and severity of losses in our auto lines of business.
As <UNK> mentioned, we believe the majority of this increase is due to distracted driving, which we are addressing with the following initiatives: implementation of a distracted driving campaign aimed at our agency partners and our insureds, enhanced focus on distracted driving and our loss control efforts including the enforcement of vehicle use policies, driver training programs and driver screening processes and continuing to evaluate in-pilot telematic solutions, that have the capability to identify districted driving issues as well as other risky driving behaviors.
In addition to the efforts to address distracted driving, we continue to push rate, especially on marginally-performing accounts, evaluate predictive analytic solutions including the implementation of a new model targeted for Q2 and emphasize our auto lines as an area of focus with all of our regional profit centers, as <UNK> mentioned in his comments.
Also to improve profitability in our commercial auto book, we are currently asking for and receiving rate increases in the mid- to upper-single digits.
We believe we can continue to push for rate increases in our commercial auto line while also continuing to review and non-renew underperforming accounts.
Continuing on with our discussions on loss ratios, our commercial other liability loss ratio improved significantly in the first quarter of 2017 as compared to prior year, primarily due to favorable reserve development and a reallocation of YB&R reserves, while we saw a deterioration in our loss ratio and our workers compensation and assumed reinsurance lines of business.
The deterioration in workers compensation was due to 4 claims received in the first quarter of 2017, over $500,000.
Despite the deterioration, the loss ratio continues to be within our expectations for this line of business.
The deterioration in our assumed reinsurance is primarily attributable to the emergence of prior year catastrophe losses, in programs which we participate, which are reported on a lag basis.
It is not unusual to see significant quarter-to-quarter variability and assume business premium and loss bookings.
During the first quarter, we continued to experience a softening of the market and an increase in competition.
We were most successful on accounts with less than $50,000 in premiums, but also had success in accounts over $50,000 in certain regions, specifically in our Rocky Mountain, Gulf Coast and East Coast regions.
Overall commercial lines average renewal pricing was flat compared to fourth quarter of 2016.
Filed commercial auto and commercial property rate increases continue to be in the mid- to upper-single digits with negative rate changes for our other casualty lines and workers compensation lines of business.
Premium and policy retention were comparable to the fourth quarter of 2016, at 84% and 81%, respectively.
Our success ratio on quoted accounts decreased 1% from the prior quarter to 34%, as we continued to address the deterioration in auto broker business, premium and policy retention may be negatively impacted.
During the first quarter of 2017, property casualty premiums written increased 8% as compared to the first quarter of 2016, with a majority of the increase due to rate and exposure and endorsement in audits.
Less than 1% is attributable to new business.
With that, I'll turn the financial discussion over to <UNK> <UNK>.
Thanks, Mike, and good morning.
For 2017, we reported consolidated net income of $19.9 million or $0.77 per diluted share compared to $22.4 million or $0.88 per diluted share in the first quarter of 2016.
The decrease in net income in the first quarter as compared to 2016 is primarily due to an increase in catastrophe losses and deterioration in our core loss ratio previously discussed by <UNK> and Mike.
Consolidated net premiums earned increased 5.2% in the first quarter of 2017 as compared to 2016, in-line with previously mentioned expectation.
Consolidated net investment income was $25 million for the first quarter of 2017 or a 12.6% increase compared to $22 million in the first quarter of 2016.
The increase in net investment income for the first quarter was primarily driven by the change in value of our investments in limited liability partnerships as compared to the same periods in 2016 and not due to a change in our investment philosophy.
This resulted in an increase of $2.5 million in investment income during the first quarter as compared to the same period during 2016.
Losses and loss settlement expenses increased by $25 million or 17.9% during first quarter of 2017 compared to first quarter of 2016.
The 2 primary drivers of the increase in 2017 were an increase in catastrophe losses and increase in commercial and personal auto losses, as we've previously discussed.
Favorable reserve development for the first quarter of 2017 were $24.9 million compared to $23.9 million in the first quarter 2016.
The impact on net income for the first quarter 2017 was $0.63 per diluted share compared to $0.61 per diluted share in the first quarter 2016.
As a reminder, our first quarter favorable development is generally higher than other quarters, with the annual shift of IBNR reserves from prior accident years to the current accident year.
For example, as you look through to our other liability line of business loss ratio at 16.3% first quarter 2017 versus 48.1% for the comparative quarter of 2016, this reflects the favorable indications in development associated with this line of business and shift of IBNR to other lines of business in the current accident year.
Specifically, decomposing favorable development in the first quarter of 2017, the majority of the favorable development impacted 2 lines: commercial liability, with $25.7 million; and workers compensation with $4 million of favorable development.
This favorable development was offset by reserve strengthening in commercial and fire allies with $2.5 million and assumed reassurance with $6 million of adverse development.
Combined ratio in the first quarter of 2017 was 96.5% compared to 92.3% for the first quarter of 2016.
Removing the impact of catastrophe losses and reserve development, our core loss ratio deteriorated 3.3 percentage points in the first quarter of 2017.
The primary driver of the deterioration in the core loss ratio is an increase in auto losses, as previously discussed.
If you refer to Slide 9 in our side deck on our website, we've provided a detailed reconciliation of the impact of catastrophes in development on the combined ratio.
As <UNK> noted, our first quarter 2017 expense ratio at 30.3% represented a decrease of 1.5 percentage points compared to first quarter 2016.
The decrease is primarily due to a decrease in post-retirement benefit expenses of $2 million before tax, which is associated with the change in benefits we discussed during the fourth quarter and a reduction in our core per contingent commission based on the deterioration and the loss ratio.
Moving on to a discussion of our capital and capital management activity in the quarter.
Shareholders' equity increased 2% to $960 million at March 31, 2017, from $942 million at December 31, 2016.
Book value increased $0.86 to $37.90 in March 31, 2017, from $37.04 at December 31, 2016.
The increases in shareholders' equity and book value are primarily due to net income of $19.9 million and an increase in unrealized investment gains of $7.5 million to $141 million, partially offset by payment of shareholder dividends of $6.4 million and share repurchases of $5.7 million.
Return on equity was 8.4% for the first quarter of 2017 compared to 9.9% in 2016.
The decrease in ROE as compared to same to last year was primarily due to a combination of a decrease in net income, an increase in shareholders' equity.
Our return on equity, excluding unrealized investment gains, is 9.8% in the first quarter of 2017.
During the first quarter, we declared and paid a $0.25 per share cash dividend to stockholders of record on March 1, 2017.
We have paid a quarterly dividend every quarter since March 1968.
Also to note, during the first quarter of 2017, we have been more active with our share repurchase program.
During the first quarter, we purchased 134,981 shares of our common stock at an average price of $42.59 and a total cost of $5.7 million.
Year-to-date, through April, we have repurchased 11.7 million of our United Fire stock.
We purchase United Fire common stock from time to time on the open market and/or through privately negotiated transactions as the opportunity arising ---+ arises.
The amount and timing of any purchases will be at management's discretion, and will depend on a number of factors including the share price, general economic and market conditions and corporate and regulatory requirements.
We are authorized by the Board of Directors to purchase an additional 2.7 million shares of common stock under our share repurchase program which expires in August 2018.
And with that, I will now open the line for questions.
Operator.
<UNK>, this is Mike.
I'll try to take this question.
We think, overall, pricing is pretty flat.
I would say that probably, over the last quarter, we saw a little bit of a rebound.
Maybe ticked back up a little with the trouble in the auto line help and to support that line a little bit.
But overall pretty flat.
We're seeing decreases in liability in work comp that mostly offset the increases in the auto lines.
Our own will be the same, <UNK>.
That's ---+ the commentary that is given was on our own place.
That concludes our conference call.
As a reminder, transcript of this call will be available on the company website at ufcinsurance.com.
On behalf of management of United Fire Group, I wish all of you a pleasant day.
Thank you.
| 2017_UFCS |
2015 | BOH | BOH
#Yes, that's correct.
The total is $14.2 million, and it had been $13.5 million in the previous quarter.
Right.
Yes, as I mentioned, we're reinvesting at right now minus 33 basis points.
So it's a little bit tighter in terms of duration, and the interest rate environment hasn't been that robust; so that's what's creating that.
Well, we were down about 4 basis points on average compared to the second quarter.
But as I mentioned in the formal remarks, the fact that we are growing loans at such a strong pace is producing higher total interest revenue.
I think the lease portfolio, Aaron, we'll continue to see bleed down, probably at the same rate we've seen for a few years now.
So what we're bringing on in that portfolio are good basic operating leases to commercial operations here in town.
And what's coming off, obviously, as you all know, are legacy national leveraged transactions.
The net effect of that is going to be that the portfolio is going to shrink.
Overall, all of our asset ---+ all of our lending categories are performing very well right now.
CRE has been the headliner for a good amount of time; it continues to be through the third quarter, and we think we still have some space left in this cycle for continued growth.
Having said that, we're pretty mature in both the commercial and in particular the commercial real estate cycle.
Really what you're likely to see is, as our core relationships begin to pull back in light of pricing in the marketplace, you'll likely see us doing the same.
Residential mortgage has been very strong as a result of just the environment.
The refinance market had been reasonable, and we've also had a good amount of condominium projects where we've been the beneficiary of good amount of market share as those projects have come to market.
We're going to see a bit of a dip in that segment.
We're between projects, if you will, in the cycle; so we may see some pressure on residential mortgage loan growth the next couple quarters, but we've got some projects down a year or so from now.
Then finally on the other consumer side, home equity and indirect and installment and credit card, those portfolios are growing very nicely for us and really I think are a reflection of what's happening with the economy here in town.
We did.
Production.
<UNK> has the number here.
It was about 180.
And that includes the servicing rights.
Yes.
Well, as we mentioned, the real estate had an impact.
We may have some future real estate transactions that would be one-time in nature.
Other than that, the one-time items were really in the second quarter.
I mentioned the 401(k) transaction.
We had BOLI insurance benefits that were paid in the second quarter.
So it's those types of things that are possible.
The BOLI is always possible into the future.
The 401(k) transaction is not going to repeat into the future.
Yes, it was $1.4 million.
It was actually two separate transactions and there had been a small transaction in the second quarter.
So the swing or the delta was $1.4 million this quarter.
That's correct.
The only caveat to that is that we do have various pieces of real estate that we may sell from time to time.
And so that could impact it, but you're right on the general principle.
Resi mortgage is 4%, in that neighborhood.
That would be typical for a 30-year mortgage.
Sometimes there is blending in there of 15-year mortgages which can impact that.
Right.
And the commercial ---+ let's see.
The commercial mortgage space is coming on at about what's on the balance sheet right now.
Well, the resi mortgage had been 4.14% in the second quarter.
So you're blending in at a lower yield.
Then when you take account of the fact that it's not all 30-year mortgages, ---+ there's some 15-year mortgages in that number ---+ that would be the reason.
Right.
On average, right.
But I think directionally, your sense that pricing is getting tighter is probably correct.
I think versus a year ago, I would say the resi mortgage market is tighter, particularly at the jumbo end of the spectrum.
Commercial real estate is pricing-wise probably tighter.
C&I for obvious reasons is probably the tightest, but has been for some time now.
Yes, well, I think it's tough to tell because it's a dynamic situation.
But directionally I would say the market is getting more competitive, which would allude to the fact that pricing may get tighter.
Well, I think what we're always looking for are reasonably granular, sticky relationship deposits.
So to the extent that we can expand that book of business, we're always looking to do that.
Ironically, we're probably the lowest paying deposit institution in this market which, as you know, is a pretty low cost of deposit market.
And yet we've over the years had just a bounty of deposit flow in.
So those will come in and those will go out; we intentionally maintain a good amount of liquidity because what we're really focused on is our relationship deposits.
So if spot balances bounce from quarter to quarter, frankly that doesn't bother us as much as just understanding where we are with our relationship deposits ---+ which, as I look at it, core consumer and core commercial have been growing nicely for us on an average basis.
The plan is to sell stock next year, and probably of the same magnitude as we've done this year and really going back one previous year.
Whether it occurs exactly in the first quarter, I can't predict that at this moment.
But, yes, the trend is ---+ the desire is to sell another slug of stock.
Not much on the way of seasonality, <UNK>, because given our economy out here we don't have a lot of seasonal lending type of activity.
But yes, we have had some payoffs.
The C&I book is probably our least granular or most chunky portfolio for us, so we do see swings as we close on something or if something pays off.
I guess what I would say is, of all of our commercial portfolios that's probably the portfolio that we're looking for just a steady ---+ I won't call it flatlining, but we're looking for that portfolio to be steady versus growth out into the future.
Well, really for us in this marketplace there are three factors that come into play.
We've got a lot of project financings in the market right now.
So that in any given quarter can produce a pretty good slug of volume for us if we're the dominant mortgage provider for a particular project as it comes online.
For-sale business, purchase business, has been pretty steady here in the islands.
As long as sales volumes continue on the path that they have, which has been mid-single-digit growth, that should be pretty steady for us.
Obviously, we'd like to do more of that business if we can.
I think the swing factor is going to be refi, and refi is going to be a function of what happens rate-wise.
So if we see rates drop or at least remain stable, that should be reasonable business for us.
If rates move up sharply, then obviously that's going to have a negative impact on volumes.
I'd like to thank everyone again for joining us today and for your continued interest in Bank of Hawaii.
As always, if you have additional questions or need further clarification on any of the topics discussed today, please feel free to contact me.
Have a great day, everyone.
| 2015_BOH |
2017 | LYB | LYB
#Thank you, <UNK>
Please turn to Slide 8 which puts fourth quarter and full year segment results
As <UNK> already mentioned, both O&P-EAI and the Technology segments achieved their second consecutive year of record EBITDA during 2016 with O&P-EAI surpassing $2 billion
<UNK> will review these results in more detail during the segment discussions
Our fourth quarter results included a $58 million charge for a lump sum pension settlement that negatively impacted the quarter by $0.09 per share
In addition, our full year results included the $78 million after-tax gain on the sale of our Argentine polymer business
During the 2016 cost process, we addressed an issue within our primary tax calculations
The issue is not material to any period and pertains to the other complicated tax accounting for our cross currency debt swap
As a result during fourth quarter we had recorded $61 million non-cash out of period cumulative correction charge for 2014, 2015, and through the third quarter of 2016. The impact to the full year 2016 results to correct for the 2014 and 2015 out of period amount is $74 million
These are non-cash charges and will not impact our cumulative taxes over the life of this loan
However, it does negatively impact our fourth quarter and 2016 effective tax rate by 5.8 and 1.4 percentage points respectively
Together the pension settlement and the correction charge adversely impacted fourth quarter earnings by $0.24 per share
The combined impact of the pension settlement, the correction charge, and the gain on the sale of our Argentine polymer business negatively impacted full year 2016 earnings by $0.07 per share
Please turn to Slide 9 which provides a picture of our cash generation and use
During 2016, we generated $5.6 billion of cash from operations
We also took advantage of favorable markets and further optimized our euro to U.S
dollar debt balances by issuing €750 million in bonds at a coupon rate of 1.875%
The cash and short-term security balance remained relatively constant for the year at $2.4 billion
Turning to Slide 10, you can see that the $5.6 billion in cash from operations during 2016 compares well with the prior three years
This strong cash generation has allowed us to fund both internally reinvestments and returns to shareholders
Over the past four years, we have funded $6.7 billion of capital investments, approx one half of this investment was allocated to profit generating growth project
We have returned $20.7 billion through dividends and share repurchases over the past four years
Since the inception of our share repurchase program, we have repurchased approximately 179 million shares or approximately 31% of the initial shares outstanding
At the end of 2016, we had approximately 21 million shares or 50% remaining under the current 18 months share repurchase authorization that begun in May of 2016. As we do every year, I would like to address some of your 2017 modeling questions
Regarding capital, we are currently planning to spend approximately $2 billion during 2017. This spending level advances both our base maintenance and growth program approximately 45% is targeted toward profit generating growth
A large part of this growth investment in 2017 will be dedicated to the new Hyperzone polyethylene plant that is scheduled to begin production in 2019. Although not all plants are finalized yet, we estimate capital spending to range between $2 billion and $2.5 billion annually to 2021. Approximately 50% of this spent is targeted toward profit generating growth
The largest individual growth project in this period is PO/TBA plant that we plan to advance toward a final investment position in the first-half of 2017. Our net cash interest expense for 2017 is expected to be approximately $350 million with a weighted average cost of long-term borrowings of close to 5%
2017 annual book depreciation and amortization should be approximately $1.1 billion
We plan to make regular pension contribution in 2017 a total approximately $110 million and we estimate the pension expense of approximately $65 million
We currently expect a 2017 effective tax rate of approximately 27%, the cash tax rate is expected to be slightly lower
Now, I will turn the call back to <UNK> for a discussion of our segment results
Thank you
It's <UNK> <UNK> speaking, thanks for the question
I don’t think we should focus the share repurchase program quarter-by-quarter
The way to look at it ,we initiated the new 10C51 in May of 2016 and completed virtually 50% by year end of that existing program, roughly 8.3% for the full year and as we have said in the material in front of you, it is an 18 months program, and obviously we are not commenting on future - how we are going to buy in the future, but clearly have the intention to finish the program as we have done in the past
<UNK>rey <UNK> Okay
Your cash flow from operations was $1.7 billion in the quarter
And when you look at depreciation and net income and working capital changes, it comes to about $1.2 billion
What led to the extra $500 million in cash generation in the quarter?
| 2017_LYB |
2016 | POWL | POWL
#Well [Rhett], this is <UNK>.
24 months ago, generation was a lot stronger.
We are seeing some activity increase in the last couple of quarters on the quoting side.
Competition is definitely ---+ price pressure is definitely increasing.
As <UNK> mentioned and we have mentioned on previous calls, on the distribution side, we saw an uptick two, three quarters ago.
And those projects tend to be smaller in that they are not as big as generation.
But we are seeing regionally in the States some markets that are stronger than others on generation.
We are doing some work in the UK and we have also had some success in the Middle East.
<UNK>, good question.
I'm going to try to give you an example of what we are trying to get at there without too many details because there's some things there that we are still getting our hands around.
But as an example, 10, 12 years ago on the documentation side ---+ every one of our projects requires documentation.
And the engineering companies which are 99% of the time involved in the change from the end-user to us used to take care of that requirement.
Over the last 10, 12 years, that's been pushed down to the supplier.
So we are looking at best practices and how to address that, making sure that what we are doing and positioning and offering to our clients in terms of what we can offer is uniform and best leveraged throughout the Company.
So we are trying to in our operational reviews make sure we are positioning that right and executing it right.
So as an example, that's what we are doing.
We are looking at our products and our integrated solutions with teams and trying to attack it with the same sort of passion.
Well, to clarify, there were a couple of markets geographically that we have taken steps into.
We talked in previous calls about the utility market and also East Canada.
That's an initiative that is going well, and we continue to be actively learning and seeing what we can do to accelerate the rate of success there.
We did take some steps in the Middle East.
In terms of core oil and gas markets, that's still a strong area, but it's also extremely competitive.
<UNK> made a comment here a minute ago about onshore Canada being tough.
While the market is still spending in Middle East, but everybody is playing there.
So it is a tough market.
And we did take some steps in the Far East but I would say that's also a market that has decreased activity.
Some of the elections are really delaying things there and the funding just looks to be not as strong as it was, say, a year ago.
Yes, I assume you are speaking of the electrical equipment industry.
Of those that are focused on the hot specifying project related business, I would suspect that they are feeling the same as we are with significant pressures.
Those that are more on the commercial construction at least here in Houston should be doing well.
Thanks, <UNK>.
From a revenue perspective, there was some shift of revenues that they have come in a little bit.
You are not talking a huge amount.
But I would say some of the revenues that we had previously anticipated would occur in the April/ early May period did get pulled in, and we were able to support the customers' requests in those areas.
So ---+ but I would view that as less than 10% of our total revenues.
When you are looking at the bottom-line impact, clearly, it was primarily influenced by the cost improvements and efficiency benefits that we received from the Canadian business.
Canada was profitable in the second quarter.
It actually exceeded our average and was able to pull up the gross profit as opposed to be a business that had to be supported.
I think the trends have been consistent, and it is downward.
It is, depending on the particular project, who shows up from a competition standpoint, which market it's in.
I don't want to sit here and say that everything is falling off a cliff.
But I would say the majority of the projects that we go into ultimately end up with price pressures either from the engineering firm or from competitive levels from the beginning.
There's a lot of rebidding going on where firms are attempting to try to find the bottom as well as justify going forward what they are spending.
And when you rebid projects, typically that pushes the price levels down.
(inaudible) additional comments.
No, I agree.
The degree of rebidding on projects before they release full funding has definitely increased, and that creates lots of opportunities for new entrants to the market and just amplified some of the pressures we see.
Again, I think <UNK>'s right: not across the board but, on average, we are seeing an uptick.
We are focusing on both.
If you're looking at the most recent quarter spend, it would be more in improved manufacturability, improved features and improved design costs of products that we have historically manufactured.
But we have invested in and we do have resources that are 100% dedicated to looking and developing new products, particularly in some of the areas we talked about in the past from a control and monitoring standpoint.
We appreciate your questions today.
Thank you for joining us, and we look forward to speaking with you again next quarter.
| 2016_POWL |
2017 | NWN | NWN
#Thanks, <UNK>, and good morning, everybody.
I'll start today with highlights from the quarter and then turn it over to <UNK> to cover our financial performance.
And then finally, I'll wrap up the call with an update on some of our key projects.
2017 is off to a good start, and our financial results were solid, and operationally, we are making significant headway on our objectives.
For the first quarter, net income increased $3.7 million to $40.3 million.
The utility performed well due to customer growth and the effects of colder weather.
Our region is also off to a good start this year from an economic standpoint.
We continue to see growth and outpaced the nation on many fronts.
Unemployment numbers were favorable, with Oregon posting the lowest monthly unemployment rate since 1976 at 3.8% in March.
This compared favorably to the U.S. national monthly unemployment rate of 4.5%.
Average unemployment numbers in our major population centers, which is mainly Portland and Vancouver, have remained low at 4.5% over the last 12 months.
During that same period, construction in the Portland-Vancouver area was down, with a 5% decrease in single-family permits, but overall remains strong on the heels of a healthy 2016.
In fact, the metro areas posted the highest number of total residential permits issued, that includes both single-family and multi-family permits, since 2007.
Although home sales were down about 4% for the last 12 months after a peak early in 2016, average home prices in the Portland area increased by about 12%.
In our Washington service territory, home sales were up year-over-year, with an increase of about 4%, and home prices increased 13%.
All of this translated to continued, strong customer growth, with the addition of over 12,000 customers in the past year and a growth rate of 1.7%.
As our region and customer base continues to grow, we are focused on several capital projects to ensure the safety and continued reliability of our distribution system.
Our liquefied natural gas facilities at Newport and here in Portland are essential to operations during peak heating days, like the ones our territory experienced this past winter.
A few years ago, we began making improvements in these facilities, and we expect them to be complete next year, with a total investment of about $35 million.
As you may remember, in Clark County, Washington, we had been adding high-pressure distribution lines over the last couple of years to support customers in our fastest-growing community.
We expect to complete our $25 million upgrade in 2019.
This past March, the Oregon Public Utility Commission issued an order after months of collaboration with natural gas utilities in Oregon.
The order allows utilities to request tracker mechanisms for specific investments related to safety.
The order provides high-level guidelines for these requests in the commission's key objectives.
While the order does not guarantee programs would be approved or investments would be tracked in, this framework is an important step in continuing to thoughtfully prioritize safety and reliability investment.
NW Natural, with the support of the Oregon Public Utility Commission, has a legacy of integrated safety programs that have allowed us to ensure the integrity of our distribution system and transmission assets, including the removal of all the cast iron and all the bare steel from our system, making our system one of the most modern in the country.
We look forward to working with the Commission on these programs in the coming months.
Now with that, I'll turn it over to <UNK> to cover the financial results for the quarter.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
I'll start this morning with the quarter results and wrap up with a brief review of cash flows and 2017 guidance.
For the first quarter of 2017, we reported net income of $40.3 million compared to $36.6 million for the same period last year for an increase of $3.7 million.
Results were driven by a $4.3 million increase in utility segment net income, offset by a $700,000 decrease in our gas storage segment.
The utility's strong results reflected a $5.5 million pretax or $3.3 million after-tax increase in margin and a $3 million pretax or $1.8 million after-tax increase in other income, mainly due to the noncash charge taken in 2016 as we closed the environmental cost recovery docket.
These items were offset by higher O&M expense.
The $3.3 million increase in utility margin reflected customer growth and the effects of colder weather.
In total, deliveries increased 26% due to customer growth and colder-than-average weather, with record-breaking precipitation in February and above-average rain in March.
This compared to a warm first quarter in 2016.
Offsetting these positive factors were lower comparative gains from our gas cost incentive sharing in Oregon.
The company and customers continue to benefit from lower actual gas costs than prices set in rates, although the spread has narrowed this year.
For the quarter, our gas storage segment net income decreased $700,000, reflecting lower asset management revenues from Mist as well as higher expenses at Gill Ranch for routine periodic pipeline and compressor maintenance.
We have contracted both our Mist and Gill Ranch facilities for the 2017-'18 gas storage year, which began on April 1.
Our Mist facility remains under long-term contracts at similar prices to prior periods.
At our Gill Ranch facility, we contracted about half of the capacity in firm contracts at slightly higher prices than the prior gas storage year.
But overall, prices have remained below historic level.
The remaining capacity at Gill is under asset management agreements with a third-party and will be subject to market pricing.
For the Gill Ranch facility, we are closely watching for the final gas storage regulation from the Division of Oil, Gas, and Geothermal Resources to be issued, which will help us further assess the cost required to comply with the new regulations and our future investment in this asset.
Moving briefly to cash flows.
For the first quarter, the company generated $145 million in operating cash flow from higher customer receipts due to colder weather, offset by higher gas purchases and income tax payments.
We invested $39 million in capital expenditures, reduced short-term debt by $53 million and paid dividends of about $14 million.
Moving to 2017 financial guidance.
We continue to expect capital expenditures in the range of $225 million to $250 million for 2017, including $80 million to $90 million associated with our North Mist expansion.
The company reaffirmed 2017 guidance today in the range of $2.05 to $2.25 per share.
Guidance continues to assume customer growth from our utility segment, average weather conditions, slow recovery of gas storage market and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws or regulations.
With that, I'll turn the call back over to <UNK> for his concluding remarks.
Thanks, <UNK>.
Last year, we engaged in a comprehensive, strategic planning effort for our utility business.
That effort continued to emphasize our commitment to safety and reliability as our top priority.
It also resulted in the development of 5 core strategies that will shape our focus in the coming years.
They include continuing to provide superior customer service and meeting the evolving needs and expectations of our customers; enabling core utility growth; furthering a constructive regulatory agenda; continuing to attract and retain a talented workforce; and effectively positioning our company for a low-carbon future.
As part of that strategy work, we've had a team focused on identifying new areas where we can proactively reduce emissions.
We're calling this our low-carbon pathway initiative, and one area of focus is putting our pipeline system to work in new ways.
To that end, I'm excited to report that in April, we announced our first renewable natural gas project for the city of Portland, what the city announced as its single largest climate action project to date.
For its part, the city will build a renewable natural gas production facility to recover, convert and claim biogas from the city's largest wastewater treatment plant to our pipeline quality standards.
Once clean, the renewable natural gas will be delivered through NW Natural's existing pipeline system to serve heavy-duty vehicles.
Under the agreement, NW Natural will build and maintain the compressed natural gas vehicle fueling station, allowing us to earn a regulator return for that investment under an existing tariff.
We expect the station to be operational by the end of 2017.
While our investment will be modest for this initial project, it is noteworthy due to its aggressive reduction in greenhouse gas emissions.
In fact, the city notes this single project will cut emissions by 21,000 tons annually.
We are proud to be helping our city close the loop on waste and take advantage of our modern distribution system in new and exciting ways.
It's our hope that this is the first of other renewable natural gas projects to come.
Finally, let me give an update on our North Mist Expansion Project.
As we discussed, the North Mist project will support grid reliabilities by supplying innovative, no-notice storage service to Portland General Electric that can be drawn on at any time, balancing the variability of additional renewable power on the electric system.
The estimated cost of North Mist is $128 million, and includes development of a new reservoir of 2.5 Bcf, a compressor station and pipeline.
In the first quarter, we finished construction of the primary well pad and cleared the compressor station site.
We also received a crucial approval for delta pressure from the Department of Geology and Mineral Industries, allowing us to store the necessary amount of natural gas in the reservoir.
In the coming months, we will build ---+ we will be drilling the remaining wells and constructing the compressor station and pipeline.
We expect most of the construction on the project will be complete this year, with plans for it to be in service for the winter of 2018.
When the expansion is placed into service, the investment will immediately be rate-based under an established tariff schedule that has already been approved by the Oregon Public Utility Commission.
Overall, I feel very good about the opportunities in front of us.
We remain focused on working with policymakers and customers to continue providing value for both our communities and investors.
Before we take questions, I would also like to say how pleased I am to have Frank Burkhartsmeyer join our executive team as Senior Vice President and Chief Financial Officer on May 17.
Frank comes to NW Natural with a wealth of experience in the energy industry and an impressive and varied career.
Most recently, Frank was President and CEO of Avangrid Renewables.
I am confident Frank will be a great addition to our team.
I would also like to thank <UNK> for all of his work as Interim CFO these past months, and congratulate him on his promotion to Vice President and Treasurer, in addition to his roles as Controller and Chief Accounting Officer.
Thanks again for taking time this morning with us.
And Ryan, we'll open it up for Q&A at this point.
Yes, it's a good question, <UNK>.
The North Mist is a wonderful asset in the Northwest.
As you know, there's not a lot of underground storage in Northwest.
So to have an ability for us to expand and provide additional storage, you have the scarcity value.
So it's all about location, location, location.
So North Mist is one of those opportunities.
Gill Ranch is in a little bit of a different situation.
Obviously, the Northern California market right now, if you look at them, the market numbers that the markets are charging for storage, it's indicating we're in an oversupplied market.
I think you know our thesis has been long-term, that California, as they continue to add more and more renewables, will need additional gas storage to kind of balance.
But at this juncture, the market is clearly telling all of us we're oversupplied.
We'll see what happens going forward along that front.
We've got a lot of things that are changing in the California market.
We've got the new regulations coming out that <UNK> referenced.
The DOGGR regulations are going to be coming out.
We'll have to see how the market prices those and what happens there.
And then I think we're also going to be hopefully learning information this week from PG&E.
They're having a public meeting about storage in their rate case dynamics.
So maybe there'll be some additional information that will be coming out of that meeting that will be beneficial or, at least, help identify the area.
But with the North Mist project, it's about location, location, location.
So I think that asset is perfectly positioned, not only for this opportunity, but maybe even opportunities in the future.
With Gill Ranch, we're just going to have to see the supply of storage or the demand for storage go up, in my opinion.
No, it's actually a little bit less, <UNK>.
When we're in this kind of variable pricing market that we're in, when we look at contracting, first off, most of our contract in the short term in nature.
Anyways, we've got a couple that are very long-term contracts, but we ---+ the bad news is we're in an oversupplied market, which is dropping pricing.
So we want to make sure that we don't contract that in for the long term.
So last year, we actually contracted a little bit larger capacity still in short term.
What we're doing this year is we're holding a little bit back for our optimizer to take advantage of the markets.
So we're hoping that the results will be a little bit better as a result, but it's a little bit less than it was last year.
Well, thanks, Ryan.
This is <UNK>.
Thanks, everybody, for joining us this morning.
If you have some other questions, give <UNK> a call, and we will hopefully also be seeing a lot of you here in a couple of weeks at the AGA Financial Forum.
So let us know if you need to meet with us.
I think we've got a pretty full schedule right now, but we'd be happy to see if we can do something.
Again, thanks, everybody, and have a great day.
| 2017_NWN |
2017 | ATVI | ATVI
#Hello, <UNK>.
Thanks for the question.
Last year was a really epic and important year for us.
In addition to celebrating our 25th anniversary, we posted record results and had more people playing Blizzard games than ever before.
We're very grateful for the passion and support of our players, and our commitment to delivering awesome content to them has never been stronger.
So, with that in mind, we have put in a significant effort into being able to support the type of longer-term engagement that Blizzard games have always delivered, but doing so now across more games on more platforms and in more regions.
So, we've really had to scale up our organizational capabilities to do that.
This year, we will have compelling new content across all of our franchises as well as continuing to expand beyond the games with things like comics, animated shorts, and more.
In addition, we are always thinking about new game ideas, and we have several in the prototype phase.
But, not able to talk about those right now.
As I mentioned before, the Overwatch League also represents new business and engagement opportunities for us this year and beyond.
And, that is going to be a big focus for us as well.
Great question, <UNK>.
I actually think it was a very important milestone for esports.
It is a large-scale broadcast commitment, and I think it really demonstrates how valuable our content can be as spectator content.
I think when we look at what the opportunity is for professionally produced content, and as <UNK> pointed out, city-based competition around the world, which there really isn't an analog to.
We think that if you look at where advertisers want to spend their capital, where sponsors want to spend their capital, it is very difficult to reach 18 to 35 year-old males today, and this programming is incredibly compelling.
People are watching it largely as user-generated content today.
But, we think the professionally produced content will have tremendous value.
We think this is going to be a big area of opportunity again to strengthen our franchises, but probably most importantly to really celebrate our players.
Because if you think about the player investment that our players make ---+ the time, the commitment.
This is a great opportunity for us to showcase and celebrate our professional players, and we think there is going to be large audiences and large numbers of advertisers willing to support those efforts.
All right.
Thank you everyone for joining us today, and we'll look forward to talking to you again in early May.
| 2017_ATVI |
2018 | TPRE | TPRE
#Thank you, operator.
Welcome to the Third Point Reinsurance Limited Earnings Call for the First Quarter of 2018.
Last night, we issued an earnings press release and financial supplement, which is available on our website, www.thirdpointre.bm. Leading today's call will be Rob <UNK>, President and CEO. But before we begin, I would like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the first quarter 2018 earnings press release and the company's other public filings, including the Risk Factors in the company's 10-K, where you will find factors that could cause actual results to differ materially from those forward-looking statements. Forward-looking statements speak only as of the date they are made and the company assumes no obligation to update or revise them in light of new information, future events or otherwise. In addition, management will refer to certain non-GAAP measures, which management believes allow for a more complete understanding of the company's financial results. A reconciliation of these measures to the most comparable GAAP measure is presented in the company's earnings press release. At this time, I will turn the call over to Rob <UNK>. Rob.
Thank you, Chris.
We produced a small loss in the first quarter with flat investment results and a $6 million underwriting loss.
Third Point LLC, our investment manager, continues to generate solid risk-adjusted returns and performed well in the first quarter relative to broader market indices after producing a 17.7% return for us in 2017.
In the first quarter, our combined ratio improved to 104.5% from 106.3% in the first quarter of 2017 and from 107.7% for all of 2017.
We are committed to driving our combined ratio lower by continuing to carefully manage expenses, pushing for improved pricing on renewals and carefully expanding our writings into higher-margin lines of business and forms of reinsurance.
The increased focus on higher-margin business includes increasing our ratings of specialty lines, writing lower-layer excess covers in addition to quota shares which we currently write, and writing some shorter-tail event-type covers.
In the first quarter, we wrote $378 million in premium, a record quarter for us at a blended composite ratio of 96%.
Please note this business will gradually improve our composite ratio as the premium earns in over time.
The blended composite ratio was 300 to 400 basis points better than recent quarters due to an increase in writings of higher-margin mortgage business in the quarter and some improvement in market conditions.
We believe the improvement is due to ---+ in part, to the heavy cat losses experienced by the industry in 2017.
Outsized cat profits and historically low cat activity years leading up to 2017 had been masking the rampant underpricing of non-cat lines of business.
Now I'd like to take a minute and repeat some of what I said on our last earnings call regarding the impact of the U.<UNK> tax legislation passed at the end of last year.
As we have emphasized, we do not believe the new tax legislation will have a material impact on our financial results.
The only piece that could potentially impact us is the test for determining a passive foreign investment company or PFIC.
The tax act modifies the active insurance exception to PFIC status by adding a requirement that reserves must generally constitute more than 25% of the company's total assets for the relevant year.
However, the tax law uses an odd definition of reserves.
Only loss and loss adjustment expense reserves are used in the formula and not UEP reserves.
Our loss and loss adjustment reserves, as a percentage of our total assets, is currently 16%, which is below the 25% threshold.
One factor working against us is the structure of our investment account.
Instead of investing through a traditional limited partnership arrangement where only the net asset value of our portfolio managed by Third Point LLC would be presented on our balance sheet, our investments are managed through a separate account with the gross assets and gross liabilities related to our investment activities reflected.
Under our current investment account structure, our gross investment assets exceed the net asset value of our investment portfolio by more than $1 billion.
We're in the process of restructuring our investment account so that we will present only its net asset value on our balance sheet going forward and plan to have that restructuring completed in the third quarter.
As a result of this change, we expect to meet the 25% threshold at year-end with minimal impact to expected shareholder returns and operations.
I will now hand the call over to <UNK> <UNK>, who will discuss our investment results in greater detail.
Thanks, Rob.
And good morning.
The Third Point Reinsurance investment portfolio managed by Third Point LLC was down 0.2% for the first quarter of 2018 net of fees and expenses, compared to the S&P 500 decline of 0.8% for the same period.
The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.
An important shift in markets happened in the first quarter.
Over the past 2 years, markets were boosted by positive surprises in growth and benign inflation, but during the first quarter, uncertainty returned in each of these areas.
Investors have become increasingly concerned about multiples, particularly since after many years of low rates, there's finally an alternative to equities in the form of relatively riskless 2-year money.
We've also seen manufacturing indices start to decline from elevated levels.
As the markets today grapple with multiples and which inning of the late cycle we're in, we're watching closely to see if a recession, which we don't think is close, might be getting closer.
In the first quarter, our equity portfolio generated a return on assets of about minus 0.5%.
Positive returns in financials and TMT were offset by losses in other sectors, primarily consumer and industrials.
Our equity short portfolio returned positive 2.4% on average exposure.
We intend to further increase short exposure to fundamental single names and quantitative derived baskets in 2018 and rely less on market hedges to dampen volatility and reduce net exposure.
Credit exposure remains light in a market with tight spreads generally and limited opportunities.
Corporate credit returned minus 1.1% on average exposure, roughly in line with the iBoxx high-yield index return of minus 1%.
Our minimal exposure to sovereign credit produced a return on assets of positive 5.6% driven by strength in emerging markets.
Structured credit was our strongest performing credit portfolio of the quarter.
The book was up 7.1% for the quarter, comparing favorably to the HFN mortgage index return of 0.9% for the same period.
Looking ahead, we still anticipate S&P growth in the U.<UNK> supported by fiscal stimulus in 2018.
We remain focused on maintaining a portfolio that can deliver compelling risk-adjusted returns across market cycles and we'll opportunistically adjust the portfolio across expected further waves of volatility.
Now, I'd like to turn the call over to Chris to discuss our financial results.
Thanks, <UNK>.
Our return on equity for the first quarter was a negative 1.6% and our diluted book value per share at the end of the first quarter was $15.39, which was a decrease of $0.26 or 1.7% from December 31, 2017.
During the quarter, we repurchased approximately 1.6 million of our common shares for $24 million.
We continue to believe that buying back shares below book is a smart use of our capital.
As we've noted in the past, we plan to buy back shares during open windows when we trade at or below 95% of diluted book value per share, and we have $176 million available under our existing share repurchase plan.
The net investment loss for the quarter was $2 million and reflects the small negative return for the period, which <UNK> discussed in detail.
Our gross premiums written for the first quarter was $378 million, which was an increase of $232 million or 159% from the prior year's first quarter.
This was our largest quarterly premium written since our inception and included $106 million of new business, including 1 large multi-line quota share contract for $92 million.
However, it also included $136 million related to contracts renewed in the current year period that were originally written in 2016 and in the third quarter of 2017, and therefore did not have comparable premium in the first quarter of 2017.
As a reminder, we tend to focus on large contracts, which may not renew in a comparable period.
As a result, our top line gross premiums written can be lumpy from quarter to quarter.
The significant increase in the first quarter should not be viewed as an indication of expected premium growth trends.
We generated a $6 million net underwriting loss in the current quarter and our combined ratio was 104.5% compared to 106.3% in the prior year quarter.
There was very little impact in the quarter from reserve development and the improvement in our combined ratio primarily reflects a lower G&A expense ratio compared to the prior year's quarter.
As Rob mentioned earlier, we did see some improvement in terms and conditions on a number of contracts that renewed in the period.
As a result, we would expect that our combined ratio will continue to improve as the business written late in 2017 and in 2018, at improved margins, is earned.
Total general and administrative expenses for the first quarter of 2018 were $9 million compared to $11 million for the prior year period.
The decrease was primarily due to lower payroll-related costs and lower stock compensation expense.
The increase in foreign exchange losses were primarily due to the revaluation of foreign currency loss and loss adjustment expense reserves denominated in British pounds, where the United States dollar weakened in the current year period compared to the prior year period.
As a reminder, we have minimal net exposure to foreign currency movements from our foreign currency reinsurance contracts, as we typically have collateral accounts with a similar amount of foreign currency assets as the net reinsurance liabilities.
However, these offsetting FX gains on the collateral flow through net investment income.
We thank you for your time and we'll now open the call for questions.
Operator.
I wouldn't necessarily characterize it as bearish.
I do feel that you aren't ---+ we aren't in a time right now where you're going to be rewarded for taking a lot of long market exposure risk.
I do feel we'll be in more of a trading range environment and we're also improving on the short side, so I just think it feels like it's a good time for us to continue to have the portfolio of long concentrated positions that we have but to have more balance on the short side.
And I feel like shorting ---+ this is the time where I think we can make money on the longs and on the shorts.
Where do we see the most risk.
I think ---+ it's also less about markets and more about the nature of the environment that we're in, where there's just a lot more disruption, and I think the same kind of stock-picking skills that apply on the long side, apply on the short side.
And we're just seeing more opportunities to find companies that we think are going to go down or at least materially underperform the rest of the portfolio.
I ---+ we can't give all of our secrets away on these calls.
Yes.
Look, it's something we're following very closely, and I think it's just too soon to say what impact it's going to have on the market broadly.
Obviously, there are some specific companies that have China as a large end market and ---+ but we're following the back-and-forth very closely.
We do think China has more to lose here than the U.<UNK> based on the analysis that we've done, but having said that, we're ---+ I think it's just too soon to say.
Sorry, I was just going to comment.
If fully earned out, which will take a couple of years, it would be breakeven, and I guess to answer the last part of your question, we've seen an improvement in our combined ratio this year.
To get down to 100, we're probably a couple of years out, but that's certainly our goal, and I think we're on a good track right now.
As far as the premium in the first quarter, a lot of the increase had to do with timing.
We had done a number of off-cycle deals that just happened to renew at 1:1.
I think we had Chris, 19 deals.
Yes.
There was 19 or so deals in aggregate, and that's right, <UNK>, as we said in the opening remarks, there is about $136 million, as Rob said, was off-cycle renewals that just happened to come up in the first quarter.
And then just ---+ I think you mentioned the 1 new deal that we mentioned, that was a large multi-line specialty contract.
It was a new placement into the market.
It's a retro of an established reinsurance company, and the underlying mix is a mix of sort of traditional casualty and other specialty lines where we expect to generate a small margin and it's good float-generating business.
It sort of fits into our strategy of looking at more contracts that have a little bit more heavily weighted mix towards specialty lines at slightly higher margins.
Yes.
And so a lot of it's timing, but we did see some improvement.
And I don't want to overstate that.
We saw a little bit of improvement and there was a couple of deals that we did not expect to renew that did renew.
And so we're ---+ it's timing, but we're also happy with the way that market conditions slightly improved.
Yes.
I mean, I think, <UNK>, really no change.
I think we've been pretty consistent in our messaging around our intent around share repurchases.
And the repurchases you saw in the first quarter was a reflection of making open-market repurchases within our open window, which of course for the first quarter is a fairly narrow window, given the timing of our 10-K filing and then closing back down again for the first quarter.
So as we said in the opening remarks, our plans continue to be to repurchase shares in the open market during open windows, at around 95% of book value or lower.
We are limited to daily volume limitations just within the normal limitations of buying back shares in the open market.
And that's roughly $2.5 million or so worth of shares per day in open window to give you a sense of what the opportunity is, depending, of course, how our shares trade relative to book.
Yes.
And maybe I'll start with talking about cat.
And so I think, Chris, as you've heard from others, the market is very disappointed in what's going on in cat renewals.
And in the past couple of weeks, we've heard from many brokers and many of our reinsurance company peers that the Florida cat submissions were renewing flat, which is too bad.
Now, interestingly, we think the cats might have had a bigger impact on pricing, a positive impact on the types of deals that we focus on, which to date have been surplus relief type deals.
And we think they had been underpriced for some time, but the sort of lucky, low-cat activity, years leading up to 2017 just masked that underpricing.
So with the cat losses, we have seen some improvement.
Just roughly, I would say, we're renewing deals at maybe 200 to 300 basis points better.
It happened that we saw more of an improvement in our portfolio in the first quarter because of mix, but there's a noticeable improvement.
Now whether that continues or not, I guess we'll see.
We're feeling pretty good about a moderate positive trend for the rest of the year.
I don't think we're seeing an uptick in submissions.
And just ---+ let me explain what we're doing with casualty retro contracts.
So we have a couple of offices, a relatively small team.
We are very well-connected relationship-wise with brokers in the other reinsurance companies.
And so we look to do casualty retro instead of writing the underlying, when we think we get a reasonable economic deal with the overrides.
And so the overrides sort of averaged 7%, and we think that is a fair deal for us because we believe it would cost us at least 7 points to build out the global infrastructure that these reinsurance companies have.
Now over time, we're going after the underlying business and to the extent we're successful, and we already have some success, we'll peel that from the retro.
No.
We're not going to write any property cat this year, and ---+ we follow it, there might come a time when we write property cat excess of loss.
So now examples, we have written a couple of stop-loss contracts so this is the total results of the company and there is some cat in there, that's one example.
We do write some higher-layer excess mortgage covers, another event-type cover that we write, we have some marine in the portfolio, that would be in that bucket.
And so we've written some from the start, in order to bring our combined ratio down, we need to move from pro rata to excess in different forms, and so we're going to do that incrementally.
Yes.
Maybe I'll ---+ <UNK>, Chris here.
I'll start with a couple of specifics and then Rob can give you a sense of sort of our view going forward on premium.
For example, in last year's ---+ I think it was third quarter, we wrote a couple of large reserve covers and ---+ actually, sorry, the second quarter.
And as you know, those don't ---+ those are not necessarily subject to renewal.
Now, of course in some cases, we may upsize deals or make changes that result in some premium, but for the most part, reserve covers don't result in a renewable premium base.
And in the fourth quarter of last year, we renewed a couple of large property homeowners contracts that were written on a 2-year basis.
And so those won't come up for renewal again in this year's fourth quarter.
So those are a couple of examples.
I mean, I think we've talked quite a bit about this in the past, just the nature of the portfolio is very difficult for us to reasonably predict our top line premium over the course of quarter-to-quarter comparisons, or even annual is often difficult.
And maybe just to emphasize that, the average size of our transactions is much bigger than the average in the industry, we're somewhere near the top.
And so that causes issues, especially when renewal dates and terms of contracts get moved around by the clients.
Just before the call, we had a meeting with the senior underwriters to estimate, we discuss what our gross written premium is likely to be this year, and our best guess, and this is a guess given all the factors we just mentioned, is sort of flat to up as much as 20% this year.
Thanks, everybody, for your time today.
If any other questions come up, please give us a call.
Otherwise, we look forward to talking to you next quarter.
Bye-bye.
| 2018_TPRE |
2016 | IPG | IPG
#Thank you, <UNK>.
Yes, it is a fair question.
Yes, we have been on a good streak, particularly on the event side of the business over there, as well as our networks.
<UNK>ly what you're seeing in the UK this quarter, is we are cycling through some losses.
We had both on the media side of the business as well as the creative side of the business.
We are seeing an impact of that.
Absent that, we think our offerings in the UK are very strong.
Notably, R/GA, McCann, you know, all of our networks, MullenLowe.
We believe that we will continue to be strong in terms of our performance in the UK absent something weird happening as a result of Brexit.
That is a mouthful.
Look, obviously MRM is a very strong component of the world group and IPG and we are always looking to add talent and strength in our offerings.
We see there is a big opportunity at MRM at the world group, in terms of cross disciplines, as well as potentially using that in the open architecture environment.
Yes, we are beefing up our expertise in that particular segment and we believe that those opportunities will come as we strengthen their offerings.
R/GA and HUGE are very interesting examples of competency.
They started out as pure play digital agencies.
Obviously, with the growth of digital they have expanded dramatically.
R/GA is a great textbook story of growing globally with success in the markets that they have opened in.
R/GA you can put up a shingle and all of a sudden you have strong businesses.
Their reputation is second to none, in terms of their space.
R/GA has done a great job of expanding their offerings focusing on the connected environment.
They are doing design.
They are doing business transformation.
They have expanded their offering well beyond the typical digital play, if you will.
That is why we are seeing the great growth out of R/GA.
Similarly, HUGE has expanded.
Remember when we acquired HUGE we had 80 people in Brooklyn, New York.
Now we have some 1,100, 1,200 people on a worldwide basis.
They have expanded their offerings as well in terms of different offerings and their go to market strategy in terms of business transformation.
<UNK>ly, expanding upon just the pure play digital offering.
If you plug those two agencies in our open architecture model, frankly, there is hardly many companies that compete with the strength of our global networks plugging in our digital place to supplement their own expertise.
That is frankly the whole concept of open architecture.
It is a challenge for us, obviously, because those individuals are focused on growing their wonderful businesses.
But again they also see opportunities partnering with some of our agencies.
Some of the wins that we have seen, we've seen partnering of those digital ---+ whether it be HUGE or R/GA with whether it be McCann, FCB or MullenLowe, although MullenLowe has Profero, which is another digital agency that is performing extremely well on a global basis.
It is not by accident that we see our digital agency grow in double digits.
Of course the embedded digital expertise we have at Weber Shandwick and experiential marketing and all of our networks themselves have very strong digital offerings.
That is why we do not break out digital.
<UNK>ly, digital is really throughout our offerings.
The concept of our open architecture is to provide the best talent we have, within the expertise and bring the best to our clients.
<UNK>ly, it is working quite well.
Hopefully, we will see another win that reflects that in the next couple weeks.
First on the overtime, we have been doing work on it and we are obviously looking at ways to mitigate it.
But to the extent, it does effect us, it is not a significant number.
Obviously, we are working towards reducing it.
We will in fact implement whatever we need to do to minimize the effect of it.
On a pass throughs, yes, the answer is basically all of our pass throughs have to do with our events.
It has nothing to do with media ownership, which obviously is one of the confusing parts of pass throughs from our competitors and us.
Throughout the years what we have been trying to do is change the contracts on these event engagements.
Because whether we act as an agent or not affects the accounting.
What would happen is we will go out and outsource a lot of the people that are used in that engagement and it is treated as a straight pass through but the accounting has it in our revenue and in our expenses, so we back out the pass through.
So it's not something that is a surprise to us.
In fact ---+ and those pass through numbers are actually coming down because when we enter into contracts, we know that it is confusing from an accounting point of view.
So we try to structure the contracts to reflect it properly, so that we don't find this.
So if you look at it on a global basis, we had 30 basis points of pass throughs, which is why if you looked at our overall organic, we would increase that organic by 30 basis points.
<UNK>, we started this about three years ago ---+ four years ago, to move away from being a principal and become an agent in the events business.
Every quarter for the past three years you've seen her pass throughs coming down.
On your working capital question, you know how volatile it is around quarter end, with respect ---+ primarily it is cash flows around media.
Nothing stood out.
We had a couple clients who were in some inefficiencies in our payment streams so it tripped over into third quarter.
For us, it was normal course and there was nothing that was a surprise.
You are welcome.
Yes, <UNK>, everyone started the year thinking it was.
If you remember, I did not think so.
The reason for it is we did not know of any big media reviews or existing clients.
That is basically why I answered the question the way I did.
I still do not see as big ---+ there are two big reviews out there.
Obviously AT& T and of course McDonald's on the creative side.
But yes, I suspect as always we will see ---+ probably around September, we will see some media reviews.
But certainly it will be pretty hard to compete with what we had last year, <UNK>.
What is happening ---+ some of our clients are just asking to look, as far as the A&A report.
Of course, we have dialogues with our clients, going over contracts and making sure our language is as tight as it has been.
We had all these provisions in our contracts before whether it be the ability to audit, transparency.
Clients will ask questions like that but I do not see any big upheaval in terms of reviews as a result of the A&A.
I know there is one particular company out there.
Not a client of ours, that has brought in their outside auditors to look at this kind of stuff.
I am knocking on wood, we have not seen any of that.
Thank you, <UNK>.
The reason you do not see us talking about it is because we do not see it.
We are in the camp of that one versus the other one.
Interesting question on ---+ look 62% of our business in the quarter came from the United States.
There is no question that is a strength of IPG.
We have very competitive offerings across all of our networks.
Plus let's not forget our independent agencies in the US.
We have Deutsch.
We have Hill Holliday.
These are very strong ---+ the Martin Agency.
We have strong independent agencies in the US.
And frankly, if there are UK or European companies looking to break into the US market, we have more than enough competitive offerings to pick up that business.
And obviously, the digital components in the US is exceptionally strong.
We can really field a great team to get that business.
The other side of it, the US side of the business is very competitive, particularly on the CPG side.
We did see some of our clients shift some business to us in the US and as they do acquisitions in the US, they want to beef up the offerings.
There is some of that and our growth in the US.
I view that as an opportunity.
I think the fact that we have 62% of our business in the US is a strong positive for us.
I know this goes through waves, if you will, in terms of being better off in other countries but we have been consistently very strong in the US and frankly, we like the position.
Thank you, <UNK>.
How much time do we have left in this call.
First let me talk about the accounts in review.
The most significant item, it's not in review, but, well it is in review, it will be, is the Army.
There is a mandatory review every five years.
We've been extended through September of 2017 on that one but there will be a review of the Army coming and obviously we have done this before and hopefully we'll be able to retain.
[C-OT], a client of MullenLowe is in the midst of a review and we hope to hear from that in the next couple months.
And TD Bank is in review.
Those are the significant items of review from existing clients.
And our existing wins, ---+ I think it goes to the offering and a comment that we have always said that we want to treat our existing clients as if we are pitching them all the time.
The retention of BMW is significant.
Obviously, it is a good client for Mediabrands, but it is also an indication of verification of the work that we have been doing and the fact that as the market changes, we are able to field it with talented people, tools, and data, analytics that are necessary and we are very competitive in the media space.
What was the other question.
A good portion of the tailwinds phased in within first quarter and second quarter.
Some of it spilled over to the second half of the year, which is what I talked about.
Obviously, with new wins and so on we will have some additional business issues.
Wins hopefully and tailwinds in the second half.
But it is too soon ---+ we are not going to give out a number on that yet because frankly, some of our wins have not been announced yet.
The answer is yes, we have tailwinds, not as big as the first half of the year and it certainly tails off in the second half of the year.
Although, the timing of these things ---+ again, I have to reiterate, the timing of these tailwinds and when they impact, we really don't have much control over that.
It happens to be in the hands of our clients.
We are very conservative when it comes to whether we answer the question of when is the timing of our tailwinds and for good reason.
They are all baked into the revenue forecast right here.
It was a little bit less, because obviously we had some in the second half of the year.
Canne, as I said before in my comments, on a revenue basis, we outperformed ---+ we are not as big as some of our competitors so if you throw a lot of money in Canne, you can win more awards than anyone else.
We think a good way of looking at it, is comparing awards per revenue and when you do that, our agencies performed better.
That is the way we look at it.
Of course we are gong to look at it that way.
McCann was very strong this year in Canne.
And that is not by accident.
McCann had a very strong emphasis on creativity.
Rob Riley and his team working with Harrison and part of the McCann World Group had a very strong effort in Canne.
The results are reflective of that.
McCann New York in particular.
It was great to see the awards they were winning and of course McCann helped ---+ won the healthcare agency.
It is an important factor.
Every year we look at the question of risk/reward in terms of spending the kind money that we do in Canne.
No one asks for the person who performed the poorest in Canne.
(Inaudible) I believe you will continue to see a strong effort in terms of awards and to reflect the creative power.
Creativity and effectiveness is a critical component of what we do, which is why FCB, MullenLowe, all of our agencies participate in it but we pick and choose the work we want to put in.
We are very proud of all agencies and the awards that we one.
You're welcome.
Yes.
I think that was a big talk in Canne.
A lot of it was coming from the media owners, the TV owners and a lot had to do with the upfronts.
Remember last year's scatter ---+ a lot of companies were caught flat in the scatter and had to pay higher pricing.
We saw an uptick in TV in the upfront.
And a lot of people read into that therefore the money going into digital is slowing and it's going back to TV.
You know in the US in terms of spend, we see 2016 sort of equal between digital and TV.
<UNK>ly in 2017, we believe digital will pass TV.
The growth of digital is slowing a bit, because look, it keeps getting bigger and bigger but TV is not going away.
So our expertise is to help our clients decide where to put it and some clients are happy with digital and they spend more in digital.
Other clients are concerned about the ad fraud and visibility and are they getting the right ROIs in terms of box and all of the ad blockers and so on and they are more comfortable with TV.
It is a question of what gives the clients the best ROI.
<UNK>ly, that is what we get paid to do in terms of helping our client understand it.
We continue to see that as the opportunity for our business.
Thank you very much for the participation and I look forward to talking to you again in our third quarter results.
Bye now.
| 2016_IPG |
2018 | GTY | GTY
#Thank you, operator.
I would like to thank you all for joining us for Getty Realty's fourth quarter and year-end earnings conference call.
This afternoon, the company released its financial results for the quarter and year ended December 31, 2017.
The Form 8-K and earnings release are available in the Investor Relations section of our website at gettyrealty.com.
Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.
These statements are based on management's current expectations and beliefs and are subject to trends, events and uncertainties that could cause actual results to differ materially from those described in the forward-looking statement.
Examples of forward-looking statements include our 2018 guidance and may also include statements made by management in their remarks and in response to questions, including regarding future company operations, future financial performance and the company's acquisition or redevelopment plans and opportunities.
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
I refer you to the company's annual report on Form 10-K for the year ended December 31, 2016, subsequent quarterly reports filed on Form 10-Q and other filings made with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statement made today.
You should not place undue reliance on forward-looking statements which reflect our view only as of the date hereof.
The company undertakes no duty to update any forward-looking statements that may be made in the course of this call.
Also, please refer to our earnings release for a discussion of our ---+ of discussion of our use of non-GAAP financial measures, including our definition of AFFO, which was revised at the end of the quarter and year, and our reconciliation of those measures to net earnings.
With that, let me turn the call over to <UNK> <UNK>, our Chief Executive Officer.
Thank you, Josh.
Good morning, everyone, and welcome to our call for the fourth quarter and year-end 2017.
With Josh and me on the call today are <UNK> <UNK>, our Chief Operating Officer; and <UNK> <UNK>, our Chief Financial Officer.
I'll begin today's call by providing an overview of our fourth quarter and year-end 2017 performance, touch on our 2018 strategic objectives and then I'll pass the call to <UNK> to discuss our portfolio in more detail, and then <UNK> will discuss our financial results.
Our results of business activities in the fourth quarter capped off what was a strong year all around for the company in 2017.
We are pleased that our portfolio of properties and roster of tenants grew significantly during the year.
And more importantly, we are encouraged that the fundamentals of the convenience and gasoline station sector remain among the healthiest in the entire retail landscape.
As we close out 2017 and look ahead to 2018, we remain focused on creating shareholder value by executing on each of our stated growth initiatives, including realizing organic growth from our operating assets, enhancing our portfolio through accretive acquisitions and unlocking embedded value through our selected redevelopments, all of which, we believe, we demonstrated throughout 2017.
Turning to our results for the quarter.
We again produced growth in net earnings, FFO and AFFO for the quarter as compared to the same period for the prior year.
On a per share basis, which takes into account our capital-raising activities during 2017, our quarterly AFFO per share was $0.43, which was $0.01 per share ahead of our performance for the prior year's quarter.
And for the year-end 2017, we reported AFFO per share of $1.66, which exceeded the high end of our revised 2017 guidance range of $1.64 per share.
The strength of our quarter and year stems from our success in executing our growth both in terms of acquisitions and redevelopment.
On the acquisitions front, we invested $214 million to acquire 103 properties during the year in a combination of portfolio and individual transactions.
With respect to redevelopment, rents commenced on 2 redevelopments during 2017, including a new-to-industry convenience and gas location, which we delivered in the fourth quarter.
In addition to our recently completed transactions, we have a pipeline of acquisition opportunities and a growing number of redevelopment projects, which are scheduled to come online in 2018 and beyond.
Utilizing the financial flexibility that we've worked hard to create, we were able to finance our growth in 2017 with a combination of debt and equity, including a long-term fixed rate, debt private placement and measured use of our ATM program.
We place a premium on being conservatively leveraged and are committed to maintaining a well-laddered and flexible capital structure as we look to grow the company.
Looking ahead, we remain focused on our three-pronged growth platform consisting of a combination of stable growth, supported by asset management activities and our core net lease portfolio, expanding our portfolio through acquisitions in the convenience, gas and auto-related sectors and selected redevelopment projects.
We are confident that we'll be able to continue successfully execute on our strategy throughout 2018.
We will remain diligent on our underwriting standards as we look forward.
As such, we will continue to be focused on acquiring high-quality real estate and partnering with tenants who share our commitment to the growth and evolution of the convenience and gas sector as these are critical components to driving additional shareholder value as we move through 2018 and beyond.
With that, I will turn the call over to <UNK> <UNK> to discuss our portfolio and investment activities.
Thank you, Chris.
In terms of our investment activities, we had a very productive year as we added high-quality assets to the portfolio, both including those with gas and convenience uses as well as properties with potential for alternative use.
Substantially, all the properties acquired have full-service C-stores and competitive gas operation, and many have either in-line or stand-alone QSR offerings, which adds to site's earnings potential.
During 2017, Getty's pipeline of potential transactions increase significantly.
For the year, we underwrote more than $1.3 billion opportunities, which meet our initial screening process.
The result of which was the acquisition of 103 properties for the year ended 2017.
Our total acquisition volume was approximately $214 million.
Our weighted average return exceeded 7.3%, and the weighted average initial lease term was 14.4 years.
To review a few highlights of our investment activities, for the year, we added 6 new high-quality tenants to the portfolio, including Applegreen, Circle K, Empire Petroleum and Jiffy Lube, among others, further advancing our goal of diversifying our rental income by the addition of tenants with strong operations and financial quality.
We also added several new geographic areas to our portfolio, chiefly, our expansion into both the southeastern and southwestern United States.
We are now represented in 28 states.
Moreover, post our 2017 investment activity, we now have 62% of our rental income coming from the top 25 national MSAs.
While the acquisition market continues to be competitive in the convenience and gas sector, we remain disciplined in our underwriting criteria.
Our pipeline of actionable opportunities remain strong, and we are in the process of reviewing and pursuing several additional acquisition opportunities for both single assets and portfolios.
Moving to our redevelopment platform.
We delivered our third redevelopment project during the quarter.
In December, rent commenced for a new-to-industry convenience and gas location, leased to [Sheik], in Central Pennsylvania.
Our total investment in the project was $392,000 and we will generate a return on this investment of more than 20% on an incremental basis.
In terms of redevelopment projects, we ended the quarter with 13 signed leases and LOIs, which includes 9 active projects and 4 additional projects and properties which are currently included in our net lease portfolio.
All these projects are continuing to advance through the redevelopment process.
We expect substantially all these projects will be complete over the next 1 to 3 years.
In total, we've invested approximately $1.1 million in the 13 redevelopment projects in our pipeline, and we expect to have rent commencements at several sites during 2018.
On the capital spending side, we estimate that these 13 projects will require total investment by Getty of $10.5 million and will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.
For more detailed information of the redevelopment pipeline, please refer to Page 14 of our investor presentation, which can be found on our website.
We remain committed to transforming selected sites in our portfolio and look forward to updating everyone as we make progress.
As a result of all of our activity, we ended the year with 890 net lease properties, 9 active redevelopment sites and 8 vacant properties.
Our weighted average lease term is approximately 11 years, and our overall occupancy, excluding our 9 active redevelopments, remain constant at 99.1%.
With that, I turn the call over to <UNK>.
Thank you, <UNK>.
For the fourth quarter, our total revenues and revenues from rental properties, which excludes tenant reimbursements and interest on those with mortgages receivable, were $34 million and $28.2 million, respectively, representing increases of 14.4% and 13.7% over the prior year's quarter, respectively.
The growth was driven primarily by the benefit from our Empire and Applegreen transactions.
During the fourth quarter of 2017, our cash operating expenses, consisting of property cost and G&A expenses, increased by $0.3 million quarter-over-quarter.
In addition, our environmental expense increased by $2.1 million in the quarter.
For more information on specific expense movements, please refer to this afternoon's earnings release.
Our FFO for the quarter was $20.2 million or $0.51 per share as compared to $17.9 million or $0.52 per share for the prior year's quarter.
Our AFFO for the quarter was $17.3 million or $0.43 per share as compared to $14.5 million or $0.42 per share for the prior year's quarter.
It should be noted that beginning in the fourth quarter of 2017, the company revised its definition of AFFO to exclude 3 additional items: environmental litigation accrual, insurance reimbursement, and legal settlements and judgments, because the company believes that these items are not indicative of its core operating performance.
As a result, the company will no longer highlight notable items when discussing comparability of its AFFO from period to period.
For the year ended 2017, our total revenues and revenues from rental properties were $120.2 million and $101.3 million, respectively, representing increases of 4.2% and 4.8% over the prior year's result.
Again, this growth stems from our 2017 acquisition activities, and we expect the full year impact of this growth to be felt in 2018.
For the year ended 2017, our cash operating expenses decreased by $1.1 million.
Our FFO for the year was $74.6 million or $2 per share as compared to $64.2 million or $1.87 per share for the prior year.
Our AFFO for the year was $62 million or $1.66 per share as compared to $57.1 million or $1.67 per share for the prior year.
Turning to the balance sheet and our capital markets activities.
We ended the quarter with $380 million of borrowings, which includes $155 million under our credit agreement and $225 million of long-term fixed-rate debt.
Our balance sheet is strong and well positioned.
Our weighted average borrowing cost is 4.8%, and the weighted average maturity of our debt is 3.3 years, with approximately 60% of our debt being fixed rate.
Our debt to total capitalization currently stands at approximately 28%, and our net debt to EBITDA is 3.8x.
In addition, we've judiciously utilized our ATM program during the quarter and issued $5 million of capital at an average price of $28.70 per share.
For the year, we raised $117.8 million of capital, $104.3 million through our follow-on offering at $23.15 per share and $13.5 million through our ATM program at an average price of $27.28 per share.
Our environmental liability ended the quarter at $63.6 million, down $11 million for the year.
For the quarter and year ended December 31, 2017, the company's net environmental mediation spending was approximately $3.3 million and $12.9 million, respectively.
Finally, we are introducing our 2018 AFFO per share guidance at a range of $1.68 to $1.74 per share.
Our guidance does not assume any acquisition or capital market activities, although it does reflect our expectation that we will continue to execute on our redevelopment, leasing and disposition activities.
Specific factors which impact our guidance this year include: one, the full year impact of earnings from the Empire and Applegreen transactions; two, our expectation that we will forego rent when we recapture properties for redevelopment; three, our expectation that our cost of borrowings will increase in 2018; and four, the full year impact of the dilution associated with the company's 2017 capital-raising activities.
With that, I will turn the call back over to Chris.
Thank you.
That concludes our prepared remarks, so let me ask the operator to open the call for questions.
Yes, that's a great question.
We're certainly mindful of our maturity schedule and the percentage of debt that's flowing versus fixed.
The floating percentage is elevated this quarter because the closing of Applegreen inside of the quarter.
I think as we look forward, we're simply evaluating additional balance sheet transactions to reduce our exposure to rates and also extend our debt maturities to more closely align with where our leases are maturing.
It's not contemplated in the guidance.
I'd say, right now, we're evaluating a few different alternatives for more long-term capital.
So I think that's about all we'll get into at this point on the call.
Yes, sure.
We certainly believe, sitting here today, we have access to capital that we need to achieve our growth plans both in terms of raising additional debt and/or equity and then potentially utilizing our ATM program further.
On the debt side, we maintain that there's sub-4x debt-to-EBITDA level on a pro forma basis for Applegreen and Empire at year-end.
We said publicly that we can operate at a higher leverage level of that 4.5 to 5.5x.
With that said, Getty's always been conservative from a leverage standpoint, and I don't think that we would plan to deviate from that philosophy.
On the ATM side, we plan to continue to use the program where we have opportunities to issue at prices which we find attractive and where there are immediate uses for that capital in terms of growth, either from the acquisitions pipeline or from a redevelopment portfolio.
And we do believe that, as we look ahead into 2018, that we can execute that into some of our projects upon their completing during the year.
Yes.
It's really hard to say that there is a particular number, that 15%, or plus or minus, in various other years.
Our portfolio acquisitions generally stem from industry M&A, where we're partnering with an operator who's acquiring an operating business.
So the level of transactions that we have historically reviewed has moved from year-to-year.
And obviously, transactions are competitive and have historically been competitive, so the rate of actually closing on industry M&A has been kind of higher in certain years and quite frankly lower in others, just given the lumpiness of the M&A in the industry.
The one thing I would add to the comment, though, it's just a little ---+ apart from your question is I do think that, as a company, our growth in the industry is being recognized and that we are seeing more opportunities.
We continue to be very selective and have a focus on certain markets and acquiring certain types of real estate.
So nothing's changed from an underwriting perspective, but I do think we are seeing more activity, which we're excited about.
Considering out of the markets, right, I mean, some of it is a cost of capital gain.
I think that the MLP market has kind of come back a little bit and their cost of capital is maybe less competitive than others.
There's certainly private equity and private real estate funds that are very active in the sector that are ---+ that we see quite often.
And we continue to see other REITs, public and private REITs, that like the sector and are often looking at some of more assets.
They're the ones that we're trying to acquire.
Yes, let's start with that piece of the question first, Tony.
That figure of $1.3 billion that <UNK> quoted includes everything from single-tenant lease acquisitions, where we're looking at acquiring an existing triple net lease for assets that met our initial real estate screening.
So obviously, there's a number ---+ a ton of one-off net lease activity in the market, but it has to meet our initial screening in order to get to <UNK>'s team in terms of underwriting.
All the way up to some of the larger M&A deals in the sector, where we looked at.
The Empire deal was north of $100 million, so that certainly qualifies as a larger portfolio transaction, but other similar transactions in terms of size to the Empire deal, we certainly looked at.
So there's quite a broad range of different types of transactions, both lease acquisition as well as M&A and sale-leaseback opportunities that we're trying to generate that we underwrote during the year.
In terms of cap rates, what I'd say is we continue to see a significant amount of capital looking at deals on our asset class, coming from all types of either institutional buyers and the 1031 markets.
I think the cap rates continue to be aggressive.
And while there is certainly been a recent spike in rates, and you'd expect to see cap rates moving along with that, I think there is certainly a lag in the market as we've not seen cap rates really slide up to meet that increase in borrowing costs.
Yes.
Sorry.
Yes, sure.
The market for credit transactions has been in the mid to high 6s, so call it 6 3/4 up to 7 3/4.
It's a range I've quoted in the past and I really don't think you've seen a tremendous amount of movement across that yet.
Obviously, you expect there to be some at some point, but I do think, given the size of the assets, the strength of the 1031 market, I think you'll see maybe more of a delay than you would otherwise expect.
Well, we typically lead with convenience and gas, right.
That's the backbone of the company.
That's the history of the company.
We certainly widened it to look at more auto-related themes.
We've looked at and acquired during the year some other auto-related sites, such as the Jiffy Lube, which <UNK> talked about.
The Applegreen deal included 5 stand-alone Burger King restaurants.
So those are now fixed properties that are in the portfolio.
So we certainly cast a little bit of a wider net.
The car wash sector is one that we've been studying and that we're somewhat familiar with given that a lot of our CNG locations have carwashes on them.
So we're certainly casting a bit of a wider net, but still being at the core that the convenience and gas brings.
Sure.
We said we're comfortable operating in the 4.5 to 5.5 range.
We were just under 4 on a fully pro forma basis at year-end.
So I think there's a little room to run on the leverage.
But the company has always been conservative.
And I don't think that's something that we anticipate changing.
Yes, that's a great question.
The other income number this year for the year was $8.5 million.
A lot of that was money that we took in from either insurance reimbursements or legal settlements and judgments.
If you look at the last page on our earnings release, where there's a reconciliation of net earnings to AFFO, you can see the big swing, the biggest of which was $6.381 million from legal settlements and judgments.
And that's the geography on the income statement.
Those are income streams that are due to individual cases or individual matters that are hard to predict the timing of and/or ---+ and quite frankly, those which are one-off in nature and that we don't expect to recur with any sort of frequency or predictability.
Thank you all for joining us for our year-end conference call for the year 2017.
We look forward to a productive 2018, of course, speaking to everyone again when we report our first quarter in May.
| 2018_GTY |
2018 | PRI | PRI
#Thank you, Casey.
Good morning, everyone.
Welcome to Primerica's first quarter earnings call.
A copy of our earnings release, financial supplement, presentation and a webcast of today's call are available on our website at investors.
primerica.com.
<UNK> <UNK>, our Chief Executive Officer; and <UNK> <UNK>, our Chief Financial Officer, will deliver prepared remarks then we'll open it up for questions.
We reference certain non-GAAP financial measures in our press release and on this call.
These non-GAAP measures have limitations, and reconciliations between GAAP and non-GAAP financial measures are attached to our press release.
During the call, we will make forward-looking statements in accordance with the safe harbor provisions of the Securities Litigation Reform Act.
The company will not revise or update these statements to reflect new information, subsequent events or changes in strategy.
Risks and uncertainties that could cause actual events to differ materially from those expressed or implied are discussed in the company's 2017 annual report on Form 10-K and may be updated by our quarterly reports on Form 10-Q.
Now I'll turn the call over to <UNK>.
Thanks, <UNK>.
Good morning, everyone.
Today, I'll share performance highlights and accomplishments that position us for continued growth, and <UNK> will cover our financial results.
Our focus as a company and our messaging to our sales force leaders is to continue to build on the strong growth we've achieved over the past few years.
The need in the middle income market for what we do is greater than ever.
We're executing business enhancements and launching initiatives focused on distribution growth to broaden our reach and to help create more financially independent families on [Main Street].
We successfully expanded our distribution capability in the communities we serve by increasing the size of our life insurance licensed sales force 8% year-over-year to over 127,000 representatives.
Beginning on Slide 3, you can see in the first quarter of 2017, we continued delivering solid earnings growth across the business and returning significant capital to shareholders.
Our adjusted operating revenues increased 14% to $462.9 million, and adjusted operating income before income taxes increased 15% to $85.9 million year-over-year.
Net adjusted operating income increased 27% to $66.2 million from the prior year period driven by increases of 22% and 8% in the Term Life and ISP segments, respectively, and the benefit of tax reform.
We achieved 32% growth in adjusted operating EPS, and our ROAE expanded to 19.0%.
We expect annualized ROAE to increase to about 21.5% for the full year 2018.
Our diversified business generates solid earnings and returns a significant amount of capital to our stakeholders.
In the first quarter, we repurchased approximately $46 million or 468,000 shares of Primerica's common stock.
We plan to repurchase a total of about $200 million of shares during 2018 in addition to paying stockholder dividends and we plan to deploy capital at or above this level in the future.
We are also investing in our business to generate organic growth.
As we discussed last quarter, we expect to incur about $11 million of additional costs on digital initiatives in 2018.
We intend to spend approximately $10 million of the previously discussed $7 million to $10 million of tax reform benefit on investments to accelerate planned initiatives and to give back to our key constituents in 2018.
While this incremental spending for these purposes was nominal in the first quarter, we do expect to incur a total of approximately $21 million throughout 2018.
In addition to solid financial performance, we surpassed the very strong distribution results achieved in the first quarter last year.
On Page 4, you can see our life licensed sales force grew 8% from the prior year period.
Recruiting of new representatives increased 7%, and new life insurance licenses were 8% higher, indicative of continued recruiting growth and licensing focus.
On a sequential quarter basis, recruiting increased 18% following the typically slower holiday season.
New life insurance licenses slightly declined from the prior quarter, reflecting seasonally lower recruiting levels in the fourth quarter.
We expect the size of the sales force to continue to increase in the second quarter of 2018.
On Page 5, you can see Term Life insurance policies issued were consistent with strong results a year ago.
Productivity of 0.19 policies issued per life licensed representative per month in the quarter was slightly below the prior year period, although consistent with historical first quarter trends.
On a sequential quarter basis, Term Life insurance policies issued declined from the fourth quarter.
A lower number of new life insurance applications is typically submitted during the slower holiday season, which leads to fewer issued policies in the months following.
We're very pleased with our record Term Life growth over the past 3 years.
We recognize that as growth compounds, the aggregate level of policies we've issued makes it challenging to sustain the elevated level of policy growth.
We are continuing to grow the size of our sales force and we're constantly working to maximize productivity through business innovations, technology, and strategic use of incentives.
On a longer-term basis, we anticipate seeing healthy growth in our Term Life issued policies that's generally in line with the growth and the size of our sales force.
For the remainder of 2018, we expect Term Life issued policies to grow between 5% and 8% with some quarterly fluctuations in productivity.
Over the past several years, we've positioned ourselves to take advantage of shifts in consumer interest and product demand as they emerge.
In our Investment and Savings Products business, we have significantly enhanced the licensing process, product offerings and client experience in order to drive growth.
These initiatives include providing more licensing preparation and assistance; a streamlined application process; and the digital delivery of marketing materials, prospectuses and other documents.
A large portion of our sales growth in the past 2 quarters can be attributed to the successful launch of our Lifetime Investment Platform, which expanded our ability to meet the needs of our clients with more assets.
These enhancements, coupled with other factors, have driven growth in product sales with larger average initial investments.
In the first quarter, we achieved an all-time record level of Investment and Savings Products sales of $1.8 billion, up 12% year-over-year, reflecting strong managed account sales.
Retail mutual fund sales increased 8%, influenced by strong Canadian sales.
Our variable annuity sales improved, increasing 10% compared with the first quarter a year ago, while segregated funds declined, reflecting lower demand for investment product guarantees in Canada.
ISP net flows were positive $212 million and average client asset values increased 15% year-over-year to $61.7 billion.
Managed accounts were our fastest-growing asset class, increasing 40% from the first quarter of 2017.
While managed accounts do not generate sales-based revenue, they produce higher levels of recurring asset-based revenues which will benefit the business longer term.
As we head into May, we're using the proven leverage to drive growth and we are working on high-impact initiatives involving digitization to improve client experience and facilitate representative success.
Our business fundamentals are strong and we're well positioned to continue to achieve solid distribution growth and operational results for our stakeholders.
I feel good about our opportunities for the future.
Now I'll turn it over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
My comments today will cover the earnings results for each of our business segments and then conclude with a company-wide review of insurance and other operating expenses and income taxes.
Starting on Slide 6.
In the first quarter, our Term Life segment revenues and adjusted direct premiums both increased 15.5%, outpacing growth in benefits and expenses and delivering a 22% increase in income before income taxes year-over-year.
Solid growth in adjusted direct premiums was driven by strong sales levels in the past few years; the runoff of business subject to the IPO coinsurance; and policies that continue beyond the end of the initial level premium period, which are no longer ceded to the IPO reinsurers.
As we've discussed in the past, the coinsurance transactions entered into at the time of the IPO have given us a long runway for double-digit growth in adjusted direct premiums.
The tremendous growth in issued policies over the last few years, the strengthening of the U.S. dollar in 2017 and the additional end-of-term premiums we began retaining last year led to adjusted direct premiums increasing 15.4% in 2017.
As the post-IPO block of business has grown, the benefit of the IPO coinsurance continues to diminish.
Given this, combined with stable exchange rates and our 2018 expectation for issued policies, we anticipate the growth rate in adjusted direct premiums to be between 14.5% and 15% in 2018 on a full year basis.
In the first quarter, the DAC amortization ratio, which also includes non-deferred insurance commissions, was 16.6% versus 16.8% in the prior year period.
Persistency in the quarter was generally in line with 2017 levels, and we expect persistency to remain at this level adjusted for typical seasonality throughout 2018.
During the quarter, we experienced heightened lapses in certain regions affected by last year's natural disasters, although the impact was not as significant as the lapses in the prior year period associated with a specific block of Louisiana policies.
The DAC amortization ratio also reflects a 20 basis point increase in insurance commissions, mainly from changes made beginning in 2018 to our sales force equity program that modestly shifted commission expense from deferred to non-deferred expense.
While this shift changes the timing of expense recognition, it does not impact the overall economics of the program.
We expect the quarterly DAC amortization ratios to be similar to the 2017 ratios for the remainder of the year with a full year ratio of approximately 16%.
Incurred claims were consistent with the prior year experience with the benefits and claims ratio at 59.5% for the quarter.
Both periods reflected seasonally higher claims, often reported by the industry in the first quarter.
We consider this to be normal business volatility.
On a full year basis, we expect the 2018 benefits and claims ratio to be around 58.5%, consistent with the prior year.
While always seasonally high due to annual employee equity awards and merit increases in the first quarter, the net insurance expense ratio declined 50 basis points year-over-year to 8%, primarily due to about $1 million of lower premium taxes and fees from changing Primerica Life's state of domicile in December of 2017.
For the full year, we expect the Term Life net insurance expense ratio to be slightly higher than 2017, reflecting the investments in digital technology and other key constituent initiatives that are expected to be incurred in 2018.
The Term Life margin is expected to be around 18.5% for the full year 2018.
Moving now to our Investment and Savings Products segment.
On Slide 7, you'll see that our ISP revenues and income before income taxes increased 15% and 18%, respectively, compared with the first quarter a year ago.
Revenues grew faster than income due to revisions made to our record-keeping platform contracts in December.
While these changes are expected to benefit pretax account-based income by about $3 million on a full year basis in 2018, the additional account-based expenses fully offset the $7.4 million in additional account-based revenues in this quarter.
Note that for purposes of calculating account-based net revenue per account in our financial supplement, some expenses not formally included in the calculations have been added [on in a] historical basis to reflect the expanded scope of our transfer agency record-keeping services.
Year-over-year, sales-based revenue increased 7%, in line with growth in revenue-generating product sales.
Total product sales grew 12% over the prior year period, reflecting strong growth in managed account sales from the adoption of our new Lifetime Investment Platform since its launch in the second quarter of last year.
As we've mentioned in the past, although managed account sales did not generate sales-based revenue, they do provide ongoing account-based revenues ---+ earnings above what we receive for other U.S. products.
Asset-based revenues increased 16% year-over-year, reflecting 15% higher average client asset values overall, including 40% growth in managed account assets.
Canadian-segregated fund DAC amortization was $1.7 million higher versus the first quarter last year, primarily reflecting negative Canadian market performance in the current year as well as strong market performance in the prior year ---+ or in contrast to strong market performance in the prior year.
On Slide 8, you can see the Corporate and Other Distributed Products segment adjusted operating revenues were $30.5 million, and adjusted operating losses before income taxes were $13.7 million in the first quarter of 2018.
Net unrealized gains decreased to $17.9 million at quarter-end from $60.3 million at December 31, 2017, reflecting the impact of higher interest rates on prices of fixed income securities in our invested asset portfolio as well as the adoption of a new accounting standards update, which [reclassified] unrealized gains on equity securities into retained earnings as of the beginning of 2018.
While rising interest rates will continue to pressure fixed income prices, over time, our investment income will benefit from the ability to reinvest our portfolio at higher yields, albeit at a gradual pace.
Now I'll move to a discussion of the company's insurance and other operating expenses.
On Slide 9, you can see our first quarter expenses of $104.3 million or $14 million higher than the first quarter of last year, about half of which was due to the investment in savings products, account-based expense changes previously discussed.
The remaining variance primarily reflects $1.5 million of other growth-related expenses as well as about $5 million of annual merit ---+ employee merit increases, equity awards, ongoing technology spend and other expenses that support the business.
The incremental spend we announced in February was nominal in the first quarter as we continue to refine the strategies and lay the groundwork for the investment.
As <UNK> mentioned, we still expect to incur $21 million on digital development and key constituent initiatives throughout the remainder of 2018.
Looking ahead to the second quarter of 2018, we expect expenses to be about $99 million, largely reflecting the typical sequential decline in our annual employee-related expenses.
Of the $21 million total initiative spend for 2018, we plan to spend about $4 million on key constituent initiatives and about $2 million on digital development in the second quarter.
Moving now to income taxes.
In the first quarter of 2018, the operating effective income tax rate was 22.9%.
The 2018 full year operating effective income tax rate is expected to be around 23.5% with the second quarter tax rate about 100 basis points higher as historically seen.
The annual rate is higher than previously estimated due to the global intangible low-taxed income component, often referred to as GILTI, of tax reform.
Barring any changes, this provision is expected to add approximately $1 million of tax expense per quarter.
As I wrap up, let me say that we remain committed to maintaining a strong balance sheet and capital position.
Our holding company cash and invested assets were $107 million as of March 31, 2018, and Primerica Life estimated statutory risk-based capital ratio was approximately 480%, providing ample opportunity to fund capital deployment throughout the year.
Now let's open the call up for questions.
Yes, <UNK>.
The ---+ as we've said in the past, we've enjoyed productivity at the very upper end of our historical range for quite some time.
And what we've seen is it edged back into the middle of the range very consistent with other first quarters.
We see this as just normal fluctuation in productivity that happens over time as incentives come and go and we transition from one incentive program to the next.
Also, as you've noticed, we had quite a gain in momentum on the ISP side of our business.
And often, our 2 major products compete with each other for attention.
And so you'll see as one advances, the other tends to contract just a little bit.
So we believe what we're seeing is just the normal change in productivity.
We have a lot of programs, a lot of efforts in place to make sure that we do everything possible to keep productivity as high as possible.
But it's just normal trending as far as we see it.
Yes.
Well, I think you got it right, <UNK>.
The SEC has stepped in as the DOL rule was dealt with by the Fifth Circuit.
The SEC has stepped up.
And as we've often said, we believe they're the appropriate regulator to be dealing with fiduciary standard.
So we're appreciative that they've acted under their authority and are taking a thoughtful approach to their recent rule proposal.
They've requested substantial input from the industry as a normal part of this process, and that's where we are in the process right now.
And so of course, we're participating in that, along with other industry participants and groups.
So in a way, the process has started again, and it's not just begun, but it's in process.
We're in that comment period, and so knowing exactly where it comes out is always hard to predict at the early ---+ at this early point.
That said, we do believe this is the appropriate direction.
And we are anticipating continuing to be able to do business as we've done in the past and continue to grow our business.
So we don't see any new or unexpected hurdles.
It's a process we deal with as we go.
We'll comment on the proposal.
I'm sure there'll be future versions of the rule that will be adjusted, and then we'll see where this comes out.
First, I just wanted to see if you could provide some more color around how the Term Life claims and persistency performed in the quarter relative to your expectations.
It sounded like it was roughly consistent year-over-year, but I thought that the first quarter of '17 experience might have been a little bit unfavorable for those 2 items.
Just wanted to see if you could separate out the typical seasonal impact and then any variation above and beyond that, if there was one.
And to the extent that there was a difference versus expected, any quantification would be helpful.
Sure, sure.
So first on claims, we do think this is definitely seasonal experience.
We have (inaudible) ---+ if you look back over the last 8 or 9 years, I'd say 6 or 7 of them, the first quarter had been elevated.
So this is not atypical from what we've seen.
And in fact, it was elevated in last year as well.
This year, I'd say the claims were about $3 million-or-so elevated vis-\u0102\xa0-vis whether it be a historical norm on an average-quarter basis, which was actually slightly better than it was last year, but relatively in line.
We did see sort of that experience last year maybe a little closer to the $4 million range.
So again, we don't look at that as having any ongoing issues and in fact, believes like I said, that it's pretty consistent with what we've seen in the first quarter in the past.
With regard to persistency, there's a couple of things going on here.
We generally believe that our persistency levels are pretty much stabilized as ---+ at where they are right now.
We've been doing a lot of work on this just to make sure we're comfortable with it.
And in fact, some of the things that we've seen have to do a little bit with the disasters ---+ natural disasters that unfortunately the country was faced with last year and quite frankly the year before.
We specifically saw last year a block of policies that we had been asked to not lapse come and lapse in Louisiana in the first quarter of 2017.
This year, we've been actually accruing, if you will, for that expected lapses even when states have asked us to restrict lapses.
That being said, when we look at our first quarter experience, we are seeing a bit of an ongoing lag in a couple of regions that really were impacted, Puerto Rico, Louisiana being 2 of them.
And so there is some of that, which we hope will taper out throughout the rest of the year.
The other thing to mention, and it is ---+ we shortcut this and say it's the DAC ratio.
But I will remind you that the DAC amortization ratio actually includes the line item of insurance commission.
And because of this one program that we changed with our sales force, the compensation program, we can no longer defer the expense.
So you're actually seeing it hit quickly or hit now rather than being deferred and amortized.
That being said, it doesn't change the overall economics of the program.
The amount of compensation total outlay is the same.
But we do think that that's impacting the ratio by about 20 basis points year-over-year.
And so if you ultimately look at it, I think what we've said is that on a full year basis, we expect the ratio to be around 16, which is really very consistent with what it was in 2017.
Got it.
That's very helpful.
And then if I could, just moving to the tax rate guidance.
I was hoping you could provide a little more color on the GILTI provision, how that impacts Primerica.
And then just given that I think the revised 23.5% guidance provided was specifically for 2018, should we think about the tax rate impact from that GILTI provision as kind of steady in longer term.
Or is there a chance that, that impact or pressure moderates as we go beyond 2018.
Yes.
And I just love the acronym in and of itself.
I think it's just well said.
But for those who don't know what GILTI is, it's the global intangible low-taxed income provision.
And really, what it's meant to do is be a penalty for companies that have a lot of offshore earnings in low-tax jurisdictions.
We, of course, have only offshore earnings in Canada, which now is actually, a higher tax jurisdiction than the U.S. So theoretically, and when we first did our analysis, we didn't feel that this would even apply to us.
Given the rapid nature in which the legislation was written, and you probably heard this from other companies, there are a lot of things that need to probably have language cleanups done.
This is one where the language was written where it, in our view, accidentally forced us to not be able to take full credit for a foreign tax credit.
There has been some discussion by folks at the IRS and others that they will look at how this provision has been written, so we are fairly optimistic that a rewrite will occur that would allow us to actually reverse the vast majority of this tax.
But at this point, given there has been no formal change, we felt it appropriate to go ahead and adjust the rate and accrue it.
So before I talk about really next year, we are still hopeful that there are some modifications this year that curtail some of the impact.
There was nothing specific I would point to, <UNK>.
I would say that I think that this ---+ the clearing ---+ the parting of the clouds from a regulatory perspective has probably led some to be a little more confident in the future direction of the product and therefore consider recommending it again.
During the period of grave uncertainty about variable annuities, I think a lot of people said we're just going to put those on the shelf and not talk about them and then we'll see what the future holds.
And now I do think there's a little bit of clarity that's arrived and a little more confidence.
And so that's what I would attribute it to.
It's no special program or anything unusual that would create a spike in sales.
It's just a little return of confidence, would be my opinion.
Yes, that's policies issued, which is ---+ it's easier for us to transact ---+ for us to track transactions because sometimes size of transactions fluctuates, and so it's a good kind of fundamental stat for us to track.
And as you know, our business is driven ---+ our insurance business production is driven by 2 major factors, the size of our sales force and productivity.
We feel very good about the health and the growth and the size of the sales force, and so that's a fundamental factor that's in place growing at the 7% to 8% kind of range according to which metric you look at.
And so we think that gives us an advantage if we can ---+ if we're successful in working on our productivity because the sales force has grown, then that's the other half of the equation.
And that gives us a ---+ kind of leg up on the process since the sales force is larger.
So if we can be effective in our incentives between now and our convention next year and through our convention next year, then we think we've got an opportunity to get that growth rate back up closer to the sales force size.
No, I think we're saying very much the same thing.
I mean, as we all know, as you look at various quarters in the past and in the future, you got some quarters [are more difficult comparables] than others.
And so I think you'll get some fluctuation by quarter, but there was not an intent on my part to create any difference there in the way we described it.
Yes, I think that is exactly what we expect to happen, that it would be ---+ it would ---+ it should bolster that rate.
It's certainly a ---+ as we ---+ as I mentioned in my prepared comments, it has a higher asset-based earning stream than our other U.S. products.
There's a little bit of noise in that ratio right now because of the DAC amortization in Canada.
Just so you know, that's a little bit of what's causing the quarterly number to be off.
But we do expect that number to continue to grow.
We've talked about I think 40% growth this quarter year-over-year in those assets.
The real thing you got to look at to gauge when it will be truly impactful is when that block of assets itself becomes sizable enough in relation to some of the other assets like the mutual funds in the U.S. So as that continues to grow, it will become more and more impactful.
And so we're growing it at a pretty rapid pace.
So I do expect that to become valuable to the ratio in short order.
I think certainly, and I haven't done the actual math.
And of course, you have to take into consideration all the other oddities that may happen from quarter-to-quarter like the Fed fund experience.
But with that said, I would say you're already really seeing it, but by next year you should see it more pronounced.
No, I'm not.
You're welcome to ask some more questions, <UNK>.
| 2018_PRI |
2017 | NNN | NNN
#<UNK>, hey, it's <UNK>.
That's an excellent question.
When we develop a relationship with a retailer, what we see is that it perpetuates itself over a number of years.
I looked at 2016 and of the 40 relationship retailers that we did business with, 11 of them were new, meaning that we didn't do any business with them in 2015.
So that's kind of a 25% rollover there or addition, I guess, in 2016.
I don't have long-term historical numbers on that, but that feels like a little more than usual.
We typically add a few relationships each year and have a few drop off.
I will also say that 40 ---+ doing business with 40 relationship retailers is the biggest year we've ever had for number of relationship retailers.
And 100% of our dollars invested in the fourth quarter in 2016 were with relationship retailers.
And typically that percentage is more in the two-thirds of dollars invested number.
Our leasing team is working on those right now.
We have 31 SunTrust leases that will not be renewed in April of 2018.
So we've got a little bit more than a year before the current rent stops on those properties.
And the rent on those properties comprises about 0.7% of our overall base rent.
So again, just to keep that in perspective, it's a very nominal amount in the big picture.
Our leasing team is working on the assets and we're off to a very good start.
But it's too early to report any material news yet.
I think also maybe just one other factor is that there's no effect on our 2017 numbers or guidance with respect to those 31 properties.
I perhaps should also add that we are scheduled to sell 10 of the SunTrust properties back to SunTrust at the end of the first quarter of 2017.
That transaction does look like it's on track, and that's a at a 5.65% cap rate.
<UNK>, let's touch on the last point first.
We are primarily focused on small box retail and have built a portfolio that we've got.
But there is room in our portfolio for larger boxes, and we look at those deals all the time.
<UNK> mentioned that what we focus on a great deal is market rent when we're underwriting our acquisitions, and so we would ---+ we will look at big box deals, and you may see us do some of those deals over time.
But they will be thoroughly, selectively underwritten.
Gander did ---+ sporting goods stores are to a large degree apparel stores, and that's been a tough line of trade for folks, and that's what was difficult for Sports Authority and it's been difficult for Gander also.
This winter was not cold enough long enough to generate the customer demand that sporting goods retailers were hoping for.
All of that ---+ and we have very little additional exposure to sporting goods.
I think maybe nothing or next to nothing.
But we will ---+ we'll continue to look at big box deals in any category, depending on the price per ---+ the price, the rent per square foot, and the market rent.
That's what we'll use to evaluate whether it's the right risk adjusted return for us.
The reality is for us, 1031 really has no impact on the acquisition front and it comes into play occasionally on the disposition front, meaning we're selling properties to a 1031 exchange buyer.
That at the margin, that's the only place it might come into play, and it would not impact our desire or interest in [up REITs] or units, et cetera.
I don't think it would impact us in any way there.
<UNK>, especially when you think about it, we specialize in lots and lots of small transactions, $2.7 million average, to try to create an up REIT or issue op units in that small dollar size.
The complexity just isn't worth it given that there's so many opportunities that we evaluate.
Should we talk about this when we know what the policy is.
Yes, we're speculating like everybody else.
I'll be curious, again, what comes out because I don't know anyone's really thought through the first, second and third derivative impacts of some of the things they think about.
You think about taking away interest deductibility ---+ I hope they think that through.
And so that would ---+ that could have ramifications, forget REITs, throughout the financial system.
So I'm not sure how much of this will actually come into play.
At the moment, I think tenants and what we had a little bit around this issue with lease accounting change and would that impact people if they had to keep the leases on the bounce.
To date, it has not changed anyone's economic behavior, some of these changes.
We'll see how the tax policy plays out, but I have a feeling that sale leaseback financing will remain a viable piece of the capital stack for a good variety of retail tenants.
We saw very little disruption in that market.
Again our primary focus is on doing transactions with those 40 relationship retailers and growing that pipeline of business.
But we didn't see deals come unwound.
We didn't see folks pulling the plug on transactions.
Looking forward, I think that there's ---+ it feels, <UNK>, like it's just going to be ---+ 2017's going to be a whole lot like 2016.
That there's going to be good properties out there for sale with willing sellers and competition if you're a buyer.
I will I say too, in one sense I like the choppiness in the capital markets, whether it's equity or the debt markets you're referring to.
Because usually what happens is to the extent that carries on for a period of time, it creates a little more discipline in the marketplace for acquisitions, and that's a better environment for us versus one where capital's widely, widely available at crazy cheap prices.
So we actually like it when things tighten up a bit in the capital markets that forces a little more discipline in the acquisition market.
It's better for us.
Yes, I haven't really priced it out in detail.
I'm guessing high 5%s today.
It got to the low 6%s recently.
I think it might be in the high 5%, 6% range today would be my sense.
Thanks very much.
We appreciate your interest.
We look forward to seeing some of you at the Citi show and best regards.
Cheers.
| 2017_NNN |
2015 | GPS | GPS
#Thanks.
Appreciate the question, <UNK>.
And I can see you are thinking about the business in the right way.
Not surprising.
Right now, as I mentioned, we're seeing a little bit of life in denim and the Resolution Denim has gotten a pretty good reception from customers.
They're really finding that they like the whole notion of it, the fit, the fabric, et cetera.
Obviously denim has been ---+ I characterize it as the customer has taken a bit of a pause in denim over the course of the last several quarters.
And I would say, as much from our business but also having just been in New York during fashion week and seeing what was being talked about, what was in the showrooms, what the news was in denim, I'm not going to call a turn in the denim business, but I'm feeling, for the most part ---+ I'm feeling now differently than I felt for a while, which is that she's probably coming back to denim in a way that we haven't seen her be for several quarters.
So encouraged there.
But it's early days.
Tops is tough right now.
And it's wovens and knits.
It's a fit issue.
It's a fit intent issue.
It's an aesthetic issue.
And so we're very much focused on that.
And very much focused on fixing that as quickly as possible.
And so if I had to go to one category, I would definitely say it's in the tops business.
And obviously both knits and wovens for Gap Brand are very material categories and the product is just not ---+ she's just not responding to the product there right now at all.
So let me just stop there.
That's work that we need to do.
On the issue of the tension of consistency and creativity, I actually think that's a false dichotomy, to tell you the truth.
And let me just give you an example.
Fit.
Fit in bottoms ---+ so fit for us, which is a huge issue with respect to a women's loyalty towards her pants, we should be the experts at fit.
We had been the experts at fit and shame on us when we lose consistency on fit because then she can't count on us.
It also, as you might imagine, has an impact on the digital business because if she counts on the fit and the fit has changed, then we obviously have an issue with returns right now.
And so fit consistency is a science.
It's a discipline.
In no way does it impede what we need in terms of the great creativity of our design teams.
So I guess I've worked in other creative businesses during my career and I've always found that, rather than being a trade-off between consistency and discipline and creativity on the other side, consistency and discipline enables creativity.
And, frankly, takes a lot to work away from what the team has to do at the end of the day.
So this is really the reaction I see from our design teams as well.
They want to win and they want to have a foundation that they can build on every season.
So the words that I use when I describe Gap, which I think are very relevant, are casual, optimistic and American.
And if you haven't been in our stores and looked at the women's assortment, I would suggest that you do, but I suspect that you have.
And I would challenge you to find that we are consistently expressing casual American optimism through the product expression that we have in our stores.
And so those are the words that we're using.
And what does that mean tangibly.
In summer what you will see is there some more ---+ it was a very neutral summer that we had last year.
You will see more color, brand-appropriate color, coming back into the business by the time we get to summer.
So that's a change that has been made.
Print and pattern, obviously, as we get into late spring and summer ---+ not so much in spring, but you'll see a bit more of that when we get into summer as well.
And then as we move into fall there's a little bit more.
And then the work that's going on right now on holiday is holiday for Gap is really a time for very a optimistic oppression of the brand.
At a time when a lot of the industry tends to go to a very dark and neutral place, we have done very good business over many years with a more optimistic expression of the brand during that timeframe.
That doesn't mean go nuts on crazy stripe again, go nuts on Fair Isle or some of the other cliche trends, perhaps, that you see during holiday, but we have an opportunity to express the brand in a very optimistic and colorful way there.
But also, obviously, in a feminine way, which is the other piece that's missing from the women's business.
And so I'm not going to call a turn on the business right now.
I'm being very honest with you about the work that's going on and when you will start to see some change and I'm not promising anything until we get later in the year.
But I think even as we get to summer and the fall, we'll start to see the brand shift a little more to be expressed through the appropriate filters of the brand.
I'll let <UNK> grab the specific number, if she wants to talk about that.
I'd rather go to a slightly different place, which is to really talk about this change that we've made in the structure of digital and marketing.
And it's something that I did very intentionally.
And I did it very intentionally in the two brands that we did it in under two leaders who I know very well and I think are very enlightened and very capable leaders.
Now, you're going to want to know what does that mean at the end of the day.
And let me give you a couple things that we'll probably continue to talk about.
Our brands are being engaged digitally much more so than through traditional marketing vehicles.
And the good news about digital engagement is we have a much better line of sight to the return of our spend in digital engagement versus some of the traditional marketing vehicles, like a billboard or a transit shelter or those kinds of things.
And so part of what I'm trying to do by bringing those two things together is to really get our arms holistically around how the customer is engaging our brand and then start managing that for the highest returns in our overall spend.
And I'm not going to say that we are going to spend less marketing, but, honestly, I'm pretty confident that we are going to be able to see a path towards evolving to higher returns on the marketing spend that we have across a number of different vehicles.
The second thing which I've highlighted, but I want to highlight again, is that we have had the luxury of living with our digital expressions of our brands, our websites as being very efficient transactional channels.
Today, to me, it becomes an end, which is those digital properties also have to carry the aspiration and the emotion of the brand, as well as being very efficient channels.
And by bringing those two things together, we really now have leaders and an organization that's going to be thinking digitally first in everything they do.
And it starts with very simple things, which is if you're shooting marketing assets for traditional marketing vehicles, oftentimes those assets don't manifest themselves in the best way possible for digital use.
And we just need to put to a digital first mindset, and I do believe we'll get some efficiency out of doing that.
I'm much more excited about the effectiveness of our overall spend that we're going to see.
So it's kind of a mixed bag, quite honestly.
And really depends as a function of a couple of things.
Obviously how the assortment was bought and how a team in a given part of the world put pressure on different parts of the business.
In some places in the world, like in China as an example, our kids and baby business indexes much higher into the overall business than the adult business.
And that business has been pretty consistent and pretty strong.
And so here's what I would say is we have had the same ---+ product issues that have been the product issues in North America have been product issues everywhere, in that we have brought the business different and the customer engages the business different.
We've seen levels of strength in China, as an example, that have been better than what we've seen in other parts of the world.
I don't know, <UNK>, if you want to talk at all about specifics of the China business.
We don't break out very much, so I think directionally that's appropriate.
I think we had our success in China, certainly, than we saw in North America with the assortment.
And a lot of that is, as <UNK> said, is how it was bought in China and the favorable mix to kids and baby, which has continued to be more of a relative strength.
The other thing I'll say, just to put a period at the end of the sentence is, we're confident that as we make progress in the women's business, it will have an impact around the world.
Thanks for the question, <UNK>.
So if I step back and look at opportunities for the brand, opportunity number one, is consistency, season after season, and that's what gets me probably more excited than anything about the fact now that we've had a little bit of a run there with consistent product, which the customer has consistently responded to.
I would also really point you to the expression of the brand and our marketing.
I follow them ---+ probably the best place that I go to, honestly, to see it is on Instagram.
I follow Old Navy and a number of our other brands, as well as a number of other brands.
And there are honestly times when I look at Old Navy's imagery on Instagram, and it's hard for me to distinguish between a premium or a premium contemporary brand in terms of the aspiration of the fashion that we're presenting.
And so Stephen uses the word naspirational.
I think it's a great expression that you see when you see those brands juxtaposed against each other and how Old Navy is really communicating the fact that it's got current trend that is right where it needs to be right now.
And clearly, that's what she and the overall family is responding to.
Still bullish, obviously, for Old Navy, so that's in the domestic business.
Given consistency, there's a long runway in front of us there in terms of opportunity.
Very bullish on the international business and the expansion that we have in both Japan and in China.
And then a couple places worth highlighting inside the assortment.
I touched on the fact that Old Navy has a family-wide active expression.
We've had tremendous customer reaction to that.
She's really engaged and she is engaged on behalf of the family.
Kids, the men's business and her business, the active expression.
And that's a place where, if that's a trend, that's a trend that's got a long runway in front of it.
So we're excited about being able to build out that business and it's a business that is, essentially, purely incremental for us inside of Old Navy.
There's real estate to house the business.
We're not having to trade off other key categories, so it's a very nice incremental business for us that allows us to build the business, build productivity in the real estate and give her another reason to come inside the store.
On the first question, it definitely, <UNK>, includes the hedge rates embedded, so the guidance includes the hedge rates for 2015.
And as I mentioned, we hedged 12 to 18 months in advance, so the hedge rates tend to lag spot by about 12 to 18 months.
So they worsened again, but they didn't worsen to the degree that they did coming out of 2013 to 2014.
But that is all embedded.
With regard to how we look at defending margin rate, I would say we look country by country, certainly, and we don't feel like, in a lot of our countries, given the competitive landscape and the orientation toward value of the customer, that there's a lot of room to just full sail increase prices, given the increase in AUC driven by the stronger dollar.
What we look at more is how do we assess and address the issue through our promotional cadence, through our sales and markdowns.
That's what we've been trying to do overall for the last year and half as we've been facing the pressure already.
And we'll continue to look at sourcing mechanisms as well as we move forward, since we'll probably be in a dollar strong environment for a little while here.
Okay.
So I'll take a quick pass at this and then I'll hand it off to <UNK>.
So let's be clear.
We participate in an almost $2 trillion global marketplace for apparel and accessories.
So as a Company that has $16 [billion], roughly, in revenue, there's a lot of space out there.
As to the target customer for Gap, I think I am less focused on the target customer than I am on the fact that Gap, at its best, has historically been a pretty democratic brand.
And what gives me the greatest pleasure is to see a woman with her daughter, either a young daughter or her adult daughter, shopping in the brand.
And that is exactly what we saw back in 2012 and in 2013 when we had product, well-priced, appropriate for the brand, that was on trend in our stores.
And so I'm a little less inclined to embrace the two-dimensional cutout of the target customer, rather than great product that's right for the brand and for the aesthetics filters of the brand.
We'll power a good business.
And so then as to our brands competing with each other.
My basic perspective on that is get the best product you can through your brand filters.
And there's a lot of competition out there to go and beat.
And I'm less inclined to think about our brands competing against each other than competing with both fists against our competitors and winning every day.
<UNK>.
Yes, briefly on the buybacks, our range always includes various scenarios.
And given our track record, I think it's safe to say our scenarios would include some level of buyback.
Great.
I'd like to thank everyone for joining us on the call today.
As a reminder, the press release, which is available on gapinc.com, contains a full recap of our fourth-quarter results, as well as the forward-looking guidance included in our prepared remarks.
And as always the Investor Relations team is available after the call for further questions.
Thank you.
| 2015_GPS |
2017 | INGN | INGN
#That's another good question.
The one is really easy.
There's nothing in our results in 2016 attributed to the new CRM system.
While we started the project, a lot of the time and effort that's gone into it has been a planning phase.
It will actually go live in the middle of this year.
There's nothing from that, in fact, if anything, that just kind of curved our focus a little bit, and it's one of the reasons that we did slow down in hiring, because you have the same people focused on planning for that system.
You hit on the other one that's a success, is the G4.
We spent a lot of time in the fourth quarter focusing on improving our scripting, honing that sales process.
One of the successes that came out of that is we drove our mix from about a third to about 50% by the end of the year.
We will continue that focus throughout this year.
If you recall, we said we think our sea level point is at about 60%, 65% penetration, so, we're not there yet, that we made great progress in the fourth quarter.
Why can't it continue in the future.
Well, there's always puts and calls.
We're going to continue to hire this year.
In fact, you noted that we are going to ---+ we're running out of space in Texas, so we have got to open a facility.
That's evidence of our commitment to continue to hire and grow our sales team and drive market penetration.
I think we can continue to get some leverage out of the G4.
Long term, we will get some leverage out of the new CRM system, but in the short term you'll actually take a step back.
If anybody's been through a software conversion, they tend to be a headache.
There's always some bugs that you have to work out, and we expect that will happen.
We've done software upgrades and changes in the past, and you have to fight through some things.
Like any year, there's going to be some puts and calls, and that's all reflected in the guidance that <UNK> had noted.
Just to expand on that a bit, headcount on a year-over-year basis was up less than 10%, but revenue on the direct-to-consumer side was up 40%.
We don't want to imply or have the takeaway be that the difference is productivity.
There was incremental productivity improvements in the D2C team, both from the scripting side, as well as the launch of the G4 product, but that was more incremental in size of productivity increases, and the rest was more around the timing of hires, when they happened, how many fully productive and seasoned reps we had out of the total pool, because that has a dramatic impact on the overall success of the direct-to-consumer organization versus the prior comparative period.
Thank you.
Sure.
Our focus, again, is primarily on direct-to-consumer.
That's where we focus our resources, our growth.
We've been very careful to not over-invest in B2B channels, whether it's domestic or international.
On the South Korean opportunity, that was one that came our way, it took a little bit of investment in time and effort to work with the South Korean team to secure the proper registration and reimbursement for product.
But you have to remember, while it's a nice upside for us in the fourth quarter, South Korea is still a relatively small market.
It's not a market that we would have independently said, let's go after South Korea, that's a great opportunity.
Again, when we're looking at what are we going to go after, set penetration in our own backyard, that's where our resources are.
As these opportunities continue to come our way, and they do, we will continue to assess them and look at what kind of resource do we have to invest to harvest that, and we will take advantage of them, but I don't want to lead you to the idea that we've got a bulletin board here with a bunch of South Korean opportunities that we're going after, because that's not the case.
It's about direct-to-consumer in the USA.
To answer the question a little bit more directly, <UNK>.
It was less than 5% of our international revenues of fourth quarter that came from that South Korea customer.
It still is a small portion of the $12.1 million international bucket in the quarter.
As we said for guidance next year, and kind of how we've always approached guidance, the closer we are to the end consumer, the more visibility we have on what we expect in revenue, in the areas that we are farther from the end consumer, we tend to be more cautious in our guidance.
Inherent in our guidance range is that we expect direct-to-consumer to be our fastest-growing channel.
We also expected that going into 2016, however, what ended up happening was both B2B domestically and internationally grew faster than our direct-to-consumer sales segment.
So, that certainly is something that is just an approach in our guidance, because we are farther from the end consumer.
On the domestic sales side, we do expect, when we say that we expect solid growth there, that really is coming from the traditional HME side, either through our private label partner or through our own direct sales efforts.
The reseller business, the Internet reseller business, has been growing much more modestly than the 69% we saw on the domestic side in the fourth quarter of 2016.
So, that growth we expect will continue to be driven by traditional HME purchases, going into 2017 as well.
What I would say is, we are cautious about how quickly the HME community will adopt.
We certainly see the large market opportunity that eventually POCs should be the standard of care, but how the HME community will get from where we are today to that point, and the timing of that, we still are very cautious on that.
While we've seen a great couple of years now of success of them really trialing POCs, we still feel like we're in the early stages the POC trials, and as a result, we don't want to get out ahead of ourselves in terms of our guidance.
Overall, we see between business-to-business and direct-to-consumer relatively similar operating margins in those businesses.
So, while the business-to-business side has a lower gross margin profile, it has lower operating expenses, as well.
So, where that revenue comes from specifically on an operating margin basis, we're relatively neutral on that from a margin perspective.
You will notice in the fourth quarter, we've continued to make nice progress on our gross profit or gross margin on the sales side of the business that came in at almost 50%, 49.9%.
That's both an increase by increase and mix towards direct-to-consumer, but you also see that we are continuing to lower our cost to goods.
On an average basis year over year, if you take our total sales cost to goods divided by our units sold, we're down about 15%.
So, we have continued to take cost out where we can, based on higher volumes and design improvements that we've been able to implement that helps our overall margins and offset both the pressure we've seen on the average selling price side, as well as the reimbursement pressures that we've seen on the Medicare portion of the business.
It certainly is still pretty early in that launch.
We really started ramping that up towards the end of the third quarter, and then really into the fourth quarter, we didn't give a specific number there, but it is certainly well below 50%.
Within that channel, what's important to remember is that there are a certain number of resellers that sell our product, and while they have seen improved productivity associated with the G4, just like we've seen on our internal side, they are also very much limited by the size of their sales force.
So, their growth rate there follow much more closely to how they're growing their internal teams, and they tend to not grow as quickly as we try and grow, and the overall traditional HMEs are growing at this point.
It's more having to do with their size of budgets of investments and headcount and media expense that drives their success on the direct-to-consumer internet cash buys, just like it does on our side.
We are still seeing that, even into the first quarter of 2017.
In the quarter, excluding Cures, the gross margin would've been approximately 23%, excluding the $2 million benefit from Cures.
We haven't given specific guidance there, but the mass majority of the reimbursement cuts are now behind us.
So, we don't expect to see large additional cuts to reimbursement rates, but you can tell they are already at pretty low rates from where they were a year ago.
So, we do expect that from there we would continue to look for ways to improve our gross margin profile on the rental side of the business, through cost productivity on the rental [states].
| 2017_INGN |
2017 | K | K
#Just to clarify in terms of the guidance what you said is the margin in the US snacks segment is going to come up in line with North American average.
I think that number is closer to 400-plus basis points, so I am not sure what numbers you're looking at there, <UNK>.
That's a net impact.
So obviously there's a lot of moving pieces in there.
There is a shift of activity out of SG&A into price reduction to retail to reflected the transferred activity that retail is now picking up, and there's also investment into a stronger pull model.
And <UNK>, maybe you'd like to talk a little bit about some the pull model ideas that we have there in terms of where we're going to reinvest in the marketing area.
When you mentioned several areas of reinvestment, it is all of the above.
And I think it is driven by how the shopper shops in more channels, but also how the shopper shops when it comes to click and collect in our mainstream retail channel, and we need to give more of our resources especially behind big brands like Cheez-It, Pringles, Rice Krispy Treats, which are really differentiated offerings.
We need to get more investment behind those brands to go meet the consumer and the shopper how they're shopping.
And spend less of that money, if you like, in a distribution system and move more of that to pull.
Quite frankly in those brands, when you look at their incrementality and the profitability, there's a lot of growth to be had that we can't get at today because of the focus of our resources, quite frankly.
So it is all of the above including new package formats, more investment in food, more advertising, more shopper marketing, that's where we're leaning.
So to clarify there, it would be more brand building driven as opposed to promotional, not trades but more of a pull perspective.
Thank you.
So we can't comment on what our competitors will do.
This was the right decision for us and it's the right decision for us again because 40% of our sales today are already through warehouse, we are seeing better share, better growth, better service to our customers in that warehouse system.
We also have a world-class warehouse system here in the US which is very capable and very good at servicing high merchandising categories like cereal and Pop-Tarts.
So we believe that we are well-positioned to make this transition and this transition is not dependent upon what our competitors do, it's the right thing for us to do.
And on the customer side, I've spoke to a lot of customers, they are aligned and in agreement this is the right strategic move.
If you talk to customers, you know how much their retail environments are changing, a little bit of a seismic shift in how they have to move to meet shopper needs, how they are working hard on their replenishment systems.
Quite frankly, this felt exactly like the right time for our business to make a big strategic move like this.
Yes, there will be disruption, yes there will be competitive action, but I think this is exactly the right thing for us to do, with a forward-looking lens on how the shopper shops and how our customers are changing their shopping.
There is obviously a margin benefit to the a company of moving from DSD to warehouse, but remember we had to invest back into a stronger pull model into the marketing elements.
We still have to invest in the warehouse model so while there is some percentage of sales in DSD there is also a percentage of sales required to support the warehouse model, so there is a number of moving pieces here.
We think the guidance we have given on the margin improvement in snacks is appropriate and gets you to the right ballpark of where we will end up.
So yes, we did talk about the deflationary environment in the UK and I mentioned earlier that we are seeing some transactional currency exposure, particularly because we import Pringles into the UK from the eurozone.
We have also talked about revenue growth management.
Across the globe and specifically in Europe we are taking some actions around revenue growth management to manage our profit and loss performance.
And you may recall within the prepared remarks, I mentioned something about the Q1 may be a little bit slower start as a result of elasticity in Europe and we are referring specifically there to potential price elasticity as we work with retailers on pricing action, we are working through the marketplace.
It would occur through the second quarter and the third quarter.
So as we go through this transition not every customer is transitioning at once.
We are working with each individual customer based upon their readiness for the transition to enable them to have the transition as effective and efficient as possible, so across the second and third quarters these transitions will occur.
And you will see more of a run rate happening in Q4.
I thank you.
Good morning, <UNK>.
So revenue growth management covers a number of areas.
It covers both more effective trade space, price architecture, brand mix, et cetera.
And we started the implementation in 2016, across 2016 you can see the improvement in price mix was negative in the front half, it was more stable in the back half.
In 2017 we do expect positive price mix at a consolidated level, despite the adverse impact of the DSD transition from DSD to warehouse.
So still on a consolidated basis we still expect positive price mix.
As I said, it's a combination of four or five different variables.
It is not just one item that is going to drive that improvement.
Operator, I think we have time for one last call ---+ question rather.
Hello, Rob.
It is <UNK>.
I think you're probably talking more about the wholesome business in the more recent past.
We look at our wholesome business, as I said Rice Krispy treats is doing great, Nutri-Grain is doing well, those two parts of the business are doing fine.
K was still a drag through last year.
As we come in to the beginning of this year, we have renovated even more of our food.
Where we have renovated so far we have seen better performance, but we do have some legacy foods that are part of our wholesome snack platform that is still going to be there.
But we have new protein bites and protein bars coming here in January.
I think there is eight different items.
We're back on air in February or at least digitally, talking to consumers again around the Special K brand from a wholesome point of view.
So the whole restage is continuing, we're bringing more new food to life, and our aspiration this year is we can go from being down double digits to down low single-digits to flat on Special K as we reinvest, as we reinvest in the brand for food and advertising.
On Special K wholesome snacks.
Is to, yes, significantly cut the decline this year as we go forward.
It would be down double-digit last year if you look at the Nielsen data, and yes our aspiration will be somewhere less than five this year or flat if we are good.
Thanks, everyone, and please do not hesitate to call 269-961-9050.
I will be around all day.
| 2017_K |
2018 | TRIP | TRIP
#Thank you, <UNK>, and good morning, everyone.
Q4 capped a year of important progress on our long-term growth initiatives, and we've been taking important steps to preserve EBITDA, while also investing for future growth.
Our market opportunity is huge, and we know we still have a lot of work to do.
It is incumbent upon us to execute and unlock this growth potential.
With that, we now open up your call for questions.
<UNK>.
This is <UNK>.
I'll start with the first part of the question and Steve can take the second part.
Our assumptions for next year, 2 important drivers is, one, in the front half of the year, we are not yet lapping the bid-downs that we saw in Q3, and that's going to give additional pressure on growth rates in the front half until we lap that in the second half.
The second important driver is our marketing investments.
As we said in our prepared remarks, we're pulling back in Hotel on our total marketing investments, increased TV, but decrease our online marketing, and that is going to result in additional pressure on the top line growth, but is helping the bottom line because we're cutting marginal unprofitable spend.
So those are the 2 most important drivers and the reason why they work more significantly on the first half of the year than on the second half of the year.
And hi <UNK>, this is Steve.
Our relationships with our biggest customers, our big OTAs, Priceline and Expedia group, I would characterize as excellent.
They like the traffic we send.
They help us identify and qualify even better traffic for them.
We drive a reasonable number of bookings.
It's strong, notwithstanding Priceline or any company's interest in shifting a marketing mix.
So as we look to the future of our Hotel business, we see strengthening relationships with these folks, with our supplier direct channel, with the independent hotels, leaving us in a position of a nice healthy option.
Super, Mike.
Thanks for the question.
Yes, our Non-Hotel business, particularly Attractions, is doing really well.
It's all a function of having a wonderful supply footprint that continues to grow, matching it ---+ getting better and better at matching it with the demand footprint that TripAdvisor prides, plus all the indirect channels that the Viator business unit also chases, be they travel agents or the viator.com set of websites or other third-party relationships.
So not unlike how the Hotel space has had some fantastic growth over the past couple of decades in the form of booking engines, Viator and its supply team have been fantastic at getting attractions bookable online.
And when we acquired them, integrated our demand platform into that, it just fueled the growth that you're seeing and that we expect to see for many more years.
We haven't identified meaningful competitors in the space that are directly competitive to Viator.
It's not to say there aren't handfuls in various countries, but really, the point of competition or the point of growth opportunity is teaching folks that when they're on TripAdvisor, they can book those attractions.
When they're on Viator and all the other vehicles that consumers will use to book, that it's, in many cases, smarter, cheaper, safer to book in advance or book on our mobile device when you're in market rather than walk up to the attraction and hope you can get a ticket or phone it in or rely on a hotel concierge.
So we're tapping into a marketplace that is exploding in terms of going from the traditional offline mechanisms to online.
And we think we're in a great position to capture the increased demand.
In terms of the tax rate and the impact from the recent changes, there are many puts and takes but the most important impact on us in the upcoming year and in the following years is the lowering of the U.S. corporate tax rate from 35% to 21%.
We have a little over half of our revenues in the U.S. and a very sizable component of our profits in the U.S., and so that's going to make an impact.
Our GAAP tax rate, we expect to be in the high 30s.
Despite that, in 2018, we have a couple of GAAP impacts that keep it up in 2018.
One is SBC impacts from our share price and the second one is certain loss in countries that can be used for tax purposes as that allows us.
So high 30s is the GAAP tax that we expect.
We expect a lower non-GAAP tax.
Thank you, <UNK>.
To start with the online marketing, yes, that's a very important driver of what's going on in our auction business, in particular, in Q4 and into 2018.
So we have progressively refined, over the past year, our ability and attribution of the downstream convertibility of traffic.
We've always managed online marketing as a basket to roughly break even.
But as we have better information on attribution and better models, we're basically seeing that some of the spend was not profitable, and so we've become more sophisticated in identifying that and have started in the back half of '17 to eliminate some of that spend, and we'll continue to do that into '18.
Now the impact of that is that it reduces our growth rate from online channels, and this is across search and other online channels.
It reduces our spend.
It reduces our revenue, but it improves our profitability because, by definition, we're taking out the least performing spend here.
And so that's what's been going on in the second half of '17.
And as we look at '18, and one of the drivers of our statements that we are able to, at least, mitigate the impacts on EBITDA and decrease the decline in EBITDA, '17 to '18 versus '16 to '17, is that we pull back on some of that marketing spend to help the bottom line.
And this is Steve.
With respect to the mobile monetization question, it's definitely still early innings.
We have some nice tailwinds, we believe, from consumers who are getting more and more comfortable booking something as complex as travel on their phone, and that just naturally helps our downstream conversion rate.
We're getting better ---+ the industry, I should say, is getting better at measuring cross-device attribution.
So someone who looks on our site and clicks downstream and then returns later on a desktop to book on a client site, we are getting ---+ we expect to get more credit for that.
And some of our newer products, like sponsored listings, that help hoteliers get into the consideration set for where someone might want to stay or for restaurants.
These are priced the same and work equally well on mobile versus desktop.
So kind of at launch, the product is already monetizing it at the same rate, if you will.
So yes, we're proud of the improved revenue per shopper on the phone.
We would expect that to continue.
Some opinions around the table would say that the highly considered weeklong vacation purchase, while maybe researched on the phone, is still going to be transacted for a while on desktop.
I'm thinking that's happening a lot quicker than some others.
But just internally, we know that all of our development, all of our focus is delivering the best product on the phone with the responsive design that also carries it to the web, but we're building for the phone as our future now.
Yes.
Thanks.
I'll take the first part of the question.
We're investing significantly and we have been investing in '17 in this long-term growth for the Hotel segment.
And we believe that there's ample opportunity for us to return to profitable growth in the Hotel segment.
And the big investments we have been making and continue to make are booked on the product side.
We have been investing in a much improved user experience, as it comes to price comparison for hotels and then additionally have reinforced that with a strong brand marketing campaign.
And so last year, we spent $74 million on TV.
We're going to spend more in 2018.
And those are our long-term investments in changing user perception from predominantly seeing us as a great place to do research, to a great place to do research and price compare and find their best deal on the hotel side.
And so that's a long-term investment that we're making and continue to make and believe will ultimately get us back to profitable growth on the hotel side.
In the near term, we look at our bottom line in the Hotel segment, in particular, in 2016 and 2017, we've seen a meaningful reduction of our EBITDA.
And when looking at some of the levers that we have there, we've turned our eye to online marketing.
I've talked before about how we'd looked at online marketing and the potential there to create some benefit.
That doesn't come at a long-term cost to us ---+ or not at a significant long-term cost to us strategically because a lot of that revenue that we create with this online marketing is short term in nature.
It doesn't have a very large lifetime value component to it.
And so it's a short-term revenue gain that actually has a short-term negative EBITDA impact, as well.
And so, as we mitigate the EBITDA losses in our Hotel business, that's the area of investment that we focus on the most, while continuing to have room for investment in the things that really matter for us strategically long term.
And so between those, then we strike a balance between getting to sustainable growth in the Hotel business over time and making sure we invest in that, while preserving EBITDA and margin in the Hotel business by focusing on some of the more near-term impacts of online marketing.
And <UNK>, this is Steve.
So sort of moving on from that kind of focus on the hotels, I bring in how the new organization and the new President roles that we've created really help drive home.
That President of hotel is chartered ---+ and that whole business unit is chartered with delivering the absolute best hotel shopping experience, making sure the marketing mix is appropriate, as <UNK> talked about, leaning into the TV campaign for the brand shift, for the consumer awareness as a more sustainable long-term EBITDA positive growth trajectory for hotels.
And then I've set up a business unit on our core experience because when we look at the non-hotels, it's really leveraging this incredible demand, the incredible footprint of this TripAdvisor community of travelers that, I have to admit, has been underinvested in relative to our particular shopping channels in the past.
And so we want to deliver a real crisp look in the core experience in terms of a consistent interface across the platform and new vehicles to attract customers to TripAdvisor, which are a stickier part of the journey, so that you're not just shopping for a hotel or just shopping for an attraction, but planning out your entire trip on TripAdvisor because that is a piece of our differentiated experience that really nobody else can touch.
And so when we look at that, it's yet another way to build an experience that is unique to TripAdvisor, that monetizes across several different channels, be it flights or hotels or rentals or restaurants or attractions, leans perhaps a little bit more to media when you look across the segments, and you have 1 to 2 of our newest media products in the past 6 months.
One is a replacement for Restaurants and a similar product for hotels.
And that, again, all compliments on having the best-in-class shopping experience for each of the verticals.
And so Attractions is certainly growing super fast with, as I mentioned before, lots of headroom.
So tying that into our demand footprint is where we see high growth for TripAdvisor in the future on a very differentiated playing field.
<UNK>, this is Steve.
Thanks for the question.
I'll take the first one, then <UNK> the second.
So we do run the kind of traffic acquisition teams for Attractions and Hotels separately.
So when we talk about, as <UNK> said, to elaborate on the change in that marketing mix, it's really all about hotels.
So Attraction continues to secure traffic through all available channels, both buying traffic onto the TripAdvisor point of sale as well as the various TripAdvisor domestic and international points of sale as well as the various domestic and international Viator points of sale.
So full steam ahead there.
No pullback at all on the Attractions side.
And with regards to your second part of your question, <UNK>, we have started to pull back on the marketing in Q3 and in Q4 and are continuing to do that in Q1 and then throughout the rest of the year.
And year-over-year impact will be felt in every quarter, but, of course, is going to be felt more in the front half of the year because we started to pull back already in Q3 and 4 of '17.
And we see this as a reset that will continue throughout '18, setting us up well for '19 thereafter.
Sure.
This is Steve.
Thank you, <UNK>, for the question.
I'll take the first one, <UNK> the second.
We have seen stability in auction.
We remind folks it's always volatile month to month.
And it's rare that we've kind of called anything out, other than that kind of onetime Q3 bid-down that we saw that clearly had a material effect.
So with the caveat of, yes, there's always a some ups and downs, I would say the term is stabilized, not shift in any particular direction since Q3.
And on the direct spend, it's a minority that we have identified as unprofitable, but it's a sizable enough minority for it to matter and really be a real lever that we have for EBITDA mitigation.
And so we have identified that and we'll continue to evaluate as we go forward.
It's a dynamic in the sense that to the extent that we are able to improve our monetization revenue per shopper, that also helps the return, obviously, of the paid spend and, therefore, some of the spend that we have identified currently as unprofitable becomes profitable.
But right now, we saw meaningful minority of spend that we're able to address.
Yes.
Thanks, <UNK>.
We have not quantified this ---+ we've stated that we expect a decline.
We've not quantified the magnitude of the expected decline.
We are pulling back on marketing, as I described before.
And we are investing in television.
We believe that the visibility that we have on EBITDA is a little better than on revenue, especially because of that dynamic that I was describing of the actual monetization that we'll find has a leverage effect on how much we can spend on marketing.
And so the variability on our revenue line is a little bit larger than on EBITDA line.
So we've chosen to give better visibility on overall EBITDA and said we would be approximately flat for the year on consolidated EBITDA.
And on revenue, expect to be down, but haven't quantified that.
As we progress in the year, we may or may not clarify that view.
Yes.
Average take rates are healthy.
There is variability in them, but they can be as good or sometimes better than the Hotel business.
So it's a very ---+ from a profitability perspective, from both the gross margin as well as a contribution margin perspective, a very healthy business.
And the growth is continuing very nicely in our Attractions business.
We saw a sort of a quarter-on-quarter deceleration of revenue growth in Non-Hotel in Q4.
That was not driven by Attractions.
Attractions has continued to grow from Q3 to Q4 very consistently.
We had a few more one-off impacts on our Restaurant business and our rentals business that we don't expect to continue into '18.
And for the whole Non-Hotel segment, of which Attractions is about half now, we expect very similar growth as we've seen in '16 and '17 for ---+ in '16, we saw a 27% growth.
In '17, we saw 24% growth in that Non-Hotel segment.
And we expect continued performance there with Attractions clearly a strong performer in that portfolio.
We haven't ---+ this is Steve.
We haven't done that breakout, but I do encourage you to remember that there's the Viator point-of-sale and all of the international components.
There's all of the third-party distribution agreements that Viator had before we bought them and have expanded since.
There's the travel agent channel that, again, sell through Viator, and TripAdvisor is a channel.
So TripAdvisor is clearly growing the fastest because we're able to tap into this existing demand and control both sides of it.
But I wouldn't want someone to think, at this point, that most of the demand or anything is coming from TripAdvisor.
That would not be accurate.
It is growing the fastest.
And we see, definitely as we look at the future of the Attractions segment, we think the biggest potential is to continue to leverage the large user base we have on the TripAdvisor pages.
And so a big focus, to keep improving that product and make sure we have more bookable products on TripAdvisor, so we can improve that monetization of those users.
On the Hotel side, in particular, as you can imagine, we're very careful with any expense item, not just marketing, but any overhead or any people investment that we make, and we continue to do that.
Clearly, we are matching our ability to grow expenses with our ability to grow revenue.
On the Non-Hotel side, we continue to invest, and we'll see people growth on the Non-Hotel business side.
Thanks, <UNK>.
Good questions.
I'll take the first.
Big picture, we see tremendous growth available to us in the Hotel space.
We haven't been able to deliver anywhere near the expectations that we hold ourselves accountable for in the past couple of years.
We know that, and we've been doing a bunch of things over the past year to address it, to improve our fundamentals, to improve the structure and the way that we're running the company internally.
And of course, it starts with delivering a better product on all fronts.
So we've made nice strides on the fundamentals, like pricing, usability, doing a better job measuring preference, and site performance.
These are all things that may not get a lot of fanfare, but are very meaningful for improving conversion on the site, which is direct revenue and improving user engagement.
So we think that there's still a lot that we can do there, and we have a track record of making those improvements.
I then point you to some of the newer products, media products like TripAdvisor ads, enabling hoteliers to get into the consideration set.
It's almost all incremental revenue and profit for us, so there's potential there that we're excited about.
And the cadence of us releasing these new products, I think, is a good sign internally when we look into the company.
And again, it's both helping the consumer and helping the biz.
And then when we look at our shift of marketing mix, we have many, many years of doing the search engine marketing pieces.
And we kind of know what to expect by way of how it changes the brand and how it builds or doesn't build a lifetime value, whereas TV, the signs that we're seeing are quite encouraging for that longer-term brand-building, changing the perception of TripAdvisor from just reviews to a place where I cannot only read reviews, discover, but also shop.
And that shop action, finding the best price, obviously, is where the money is in the Hotel segment.
Take all of that together and we see that Hotel business getting back into meaningful growth mode over the next few years and that, again, delivers on the bottom line as well, completely separate and very different dynamics in the Non-Hotel space, but we've already talked about that.
In terms of things that are out of control, which is the other part of your question, <UNK>, is clearly what has lessened our control is the marketing strategies of our partners as well as how our competitors choose to behave.
But we believe that we have such a potential with the platform, as Steve was just describing, of making improvements that we can get back to sustainable growth in that Hotel business over time and effectively offset any of the pressures that we can see there.
But, especially in the short term, as we saw in Q3, there are bumps in the road that are out of our control, very clearly.
The best thing we can do and what is in our control, to continue to make sure that we have very high-converting traffic on our sites.
And we believe that, ultimately, will pay off in revenue for us because that's valuable traffic where a large site, valuable traffic for any partner.
And we continue to hone our product and make it better and better.
And so we can stay ahead of the competition or catch up in areas where we have to catch up, which was true on the price comparison side in 2017.
The next part of your question, <UNK>, was around TV.
We are going to invest in new markets, as well, so this is a combination of continuing investment in existing markets.
Last year, in those existing markets, we obviously only spent for a little over half a year.
We started in June, but we have learned a lot.
And we think we can more efficiently spend some of that TV spend in those existing markets as well, and so we'll continue to do that.
We're launching some new markets as well and plan to expand the footprint that we touch in terms of our overall revenue footprint.
We're also launching a new creative in parallel to our existing creative that we have put in place.
And we believe being able to compare those 2 will help us drive forward as well.
We acknowledge that the consensus was higher of how much we're going to spend.
We've looked carefully about what we thought was a good progression.
We see good signs in our television investment.
We see positive signs in terms of the branded metrics that we see, both in terms of appreciation and brand awareness as well as just spiking branded traffic on our sites in those markets where we're on TV.
But we're going to grow this gradually rather than in big lumps.
And so this $100 million to $130 million is a gradual progression from the $74 million that we spent in 2018.
And of course, we'll continue to evaluate that on our way to getting this to breakeven for us.
Yes, <UNK>.
I'll take the first question and I'll ask Steve to answer the second one.
So the Non-Hotel business, we have online marketing spend, particularly in our Attractions and rentals business, to a lesser extent, also in our Restaurant business.
We've run a small TV campaign on the Restaurant business last year.
And we continue to invest in marketing the Non-Hotel segment, particularly on the Attractions side, to make sure that we can continue to capture the growth there.
And on the Vacation Rentals side, we look at rentals as an important category for all of our travelers.
We've added it on the site for quite a few years in almost all of our markets, and we certainly expect that to grow in prominence, as we feature it to more travelers and more places on the site.
So one of the things that we look and say we don't do a good enough job at is presenting rentals in markets where we don't have the right set of hotels or predominantly rental markets.
And right now it's, we admit, too difficult to find on our site.
So short version of the answer is rentals, strategic part of the offering for TripAdvisor, for the accommodation shopper and that will stay that way, but we're not making massive new investments in the rental category, vis-\xe0-vis the other players out there.
Thanks, <UNK>.
Happy to take both questions here.
On the Hotel side, Instant Booking or the ability to actually finish the transaction on TripAdvisor remains part of the product on all platforms in most countries.
We think of it as earning its spot in the meta auction.
So where we have signals that the consumer prefers this, then that's what we will show in the premier position.
Otherwise, it is yet another option.
It's not a strategic thrust for us to grow that channel, as it happens, because a segment of the population like it.
That's wonderful for us.
If not, that's okay.
So we're no longer ---+ as of a while ago, we're not trying to push that forward and we're not investing a ton of resources in that particular path versus a click-off to a supplier or an OTA.
To the second question, Attraction distribution, we are thrilled to sign up as many distribution partners for our Attractions business globally.
We think of it as TripAdvisor is one, albeit very large, distribution channel for the Viator supply platform, but it's only one and they have many others, and we love there to be hundreds more.
So we have separated the concept.
We're not preferencing a TripAdvisor platform.
We love as many different channels to be picking up that, our supply to be as valuable to attraction owners as we can.
And so since we have the demand and demand is growing, it's obviously great for the TripAdvisor traveler, but it's equally great for travelers who are on other sites.
Nothing that we call out, in particular, other than comments that you've heard from others in the industry.
We believe, overall, the market is robust.
And we are working through our transition, but we believe we're operating in a robust online travel environment.
<UNK>, first, on the TV.
So we didn't guide to a number for 2018 before.
We said we would gradually increase is what we said about it.
And as I was saying before is we look at the different campaigns, the impact.
We see good results.
We see what we want to see.
We also believe that we can improve, still.
I said before, we're launching a new creative in parallel.
We've had lot of learnings about improvement opportunities that we have at different markets that we've invested in last year.
And so rather than really expanding much more aggressively in the area of $200 million in 2018, we're going to do this gradually.
And so we're going to earn our way into it.
And if it continues to do well, that means we can increase our plans for 2019.
On the display side, so we saw ---+ as you probably point to sort of an acceleration in that line of our display and subscription in Q4, the display business can sometimes be lumpy with budgets at the end of the year being allocated at the last minute and it doesn't always replicate.
So we saw some of that happening in our Q4 business.
And so I caution against extrapolating the Q4 growth rate into 2018.
Rob, I'll go ahead and start in.
<UNK>be <UNK> could add more.
On the mobile rev per shopper, we have seen that grow.
As I mentioned before, some of it is going to be just the tailwind of people being more comfortable booking, But we've done a lot by way of reducing the friction and improving the user experience on the phone.
To the best of my recollection, the bid-downs that we saw in Q3 were across all devices because our some of our clients had wanted to pull back, for their set of issues, I would say.
So the short version would be, yes, we think our mobile rev per shopper would have been higher had it not been for some of the bid-downs.
For the Core Experience unit, it's very early days in the reorganization, but we are focused internally on building that sort of connective tissue, making sure that the user feels like they're on one TripAdvisor site, experiencing multiple different parts of our value proposition.
We're excited about it.
We see a better impact on membership.
We've also been working hard on some of the foundational layers.
We're rolling out some of our new map functionality has just been kind of rolling out, which, if you're experiencing it, you're on a test slice.
And I think you'd agree that it's actually much better than it has been.
And that's going to play out over the course of the year as we delight users in more aspects of the overall shopping experience.
I tease you with ---+ there's some new features coming over the course of the year that aren't particular to the hotel shopping versus the attraction shopping versus the flight shopping, but are really more focused around enabling folks to plan and have a better trip and enjoy the travel experience.
And those will be rolling out in plan, in design, in development now and rolling out over the course of the year as kind of output coming from this particular business unit.
It's another highlight, just to follow up on <UNK>'s earlier question about what is in our control and what is not in our control.
Clearly, what we are doing is investing in revenue sources outside of the core auction, where more of those elements outside of our control are present, as we all know.
And so this core experience is one example of that.
Non-Hotel investment is another example of that.
And Steve was talking about some of these new ad products that we offer to hotels, as well.
And so these are all categories of where we believe real potential diversification away from reliance on the core auction uncontrollable dynamics.
Thanks.
Good question on the unpacking of what's going on, on the online marketing side.
And I think it's a bit of all of those things, but a couple of things to say about that.
First is our approach had been to spend to approximately breakeven, on average, across the portfolio.
And we have different ---+ as in any portfolio, of course, different levels of profitability and some more profitable and some less profitable, as a starting point.
So we have taken a more disciplined look at that.
The second thing that has happened is we have improved our attribution models, and so we have been able to have better insight into the downstream conversion of some of the traffic that we provide.
Of course, we operate a model in which we get paid on a per-click basis, but then the downstream conversion of that traffic is actually very important for future behavior in the auction.
We've become smarter about that attribution across devices, attribution across channels.
And so that has given us some new insight into what, we believe, are more or less profitable channels.
And then there's, indeed, the impact of as your revenue per shopper moves, some channels that were profitable before become less profitable.
And so all of those have allowed us to take a harder look and draw a different line of the performance we want to achieve across all channels.
And this is Steve.
On the kind of loyalty rates and other things that other partners currently do that we don't, we think it's, in the scheme of things, a relatively small effect, if any.
There's always been a certain preference among some to book supplier direct.
And we have those suppliers, almost all of them, in our auction today.
So if you are a loyal Marriott user, that's wonderful.
You come to TripAdvisor, make sure you're getting a good price, click on the Marriott link and book and get your points and/or your better pricing, your loyalty rates.
We also have a subscription product that takes advantage of that instinct to book direct.
And again, we get paid a little differently, but we still get paid for when a traveler has that brand direct preference.
So it's not really in our wheelhouse to opine on whether those programs are gaining traction or not, but we don't think it's going to have a material impact on our business, even if they did.
Yes.
On the monetization, so we keep improving that monetization gap as, again this quarter, we accelerated RPS on the phone.
And we see definitely more upside there and more opportunity to narrow.
How far we can really narrow it over time is a question, and Steve addressed it before, of what is going to be ultimately the behavior of our users for the higher-end travel booking.
And therefore, it's always going to skew more to desktop.
But we believe we can continue on this path of narrowing it.
It may never completely close, but we are on a path to narrow it.
In terms of capital allocation, yes, we have a sufficient funding capacity.
We have both cash, and since tax reform, that cash is more freely usable across the globe for us than before.
And we have a sizable credit facility in place, so we have the funds.
We look at 2 ways of capital allocation beyond investment in operations.
One is M&A.
We continue to keep an active radar on M&A.
We've been less active on the M&A front in 2017 compared to previous years, but we continue to look at great opportunities to help us grow and enhance our strategy.
And then buyback has been a consistent area of investment.
We invested $250 million in 2017 and we've just received another approval for $250 million from our board.
And so we're actively continuing to look at that as one of the options we have for capital allocation.
Well, I want to thank everyone.
I thank all TripAdvisor employees around the globe.
Sorry that we're having some technical difficulty at the end of the call here with all of you on the line.
I wish we could take a couple more questions.
But in any event, we look forward to talking with and catching up with you next quarter.
Thanks again, everyone.
| 2018_TRIP |
2018 | CCMP | CCMP
#Thanks <UNK>.
Good morning everyone and thanks for joining us.
This morning we announced another quarter of very strong financial performance including record quarterly revenue, net income and earnings per share.
This is the fourth consecutive quarter, in which we have reported record revenue, which we believe demonstrates the continued strong execution of our strategic initiatives complemented by robust industry demand.
<UNK> will provide additional details about our financial results later in the call.
Let me start by providing some details on the current operating environment and our view of global semiconductor industry demand.
During the March quarter, industry demand remained strong, particularly in the memory segment, where our customers continued their migration to 3D NAN<UNK>
We currently estimate that approximately 50% of 2D-to-3D NAND wafer capacity conversion has occurred with the remainder expected to be completed over the next several years.
We've also seen continued capacity expansions in 3D NAND underway primarily in Korea and China, which along with the expected tight supply of DRAM memory should provide growth opportunities for us in the future.
In the advanced logic and foundry segments, we've seen our customers growth moderating a bit, as they get pass through traditional stronger periods associated with new smartphone launches.
However, we continue to work closely with our customers to help them advance to smaller feature sizes and believe that new applications in mobile, artificial intelligence, autonomous vehicles and block chain should continue to drive demand for advanced logic semiconductors in the future.
Finally, we continue to see a robust demand environment in the legacy logic and foundry segment driven by Automotive, Internet of Things and Industrial Automation.
We expect this demand environment to persist given the increasing connectivity requirements needed in these important applications.
Now let me turn to company related matters.
This quarter, we recorded strong results in all 3 key product areas, tungsten slurries, dielectrics slurries and CMP pads, primarily due to strong demand across a wide range of applications and technology nodes.
Geographically, all regions were up this quarter compared to the same quarter last year.
Most notably revenue in Korea was up approximately 65% year-over-year, primarily due to our strong positions in the growing memory market in that region.
Turning to performance by product area, revenue in our tungsten slurries was 17% higher than in the same quarter last year.
This growth was driven by the ramp of our customers advanced technologies in memory and logic including 3D NAND and FinFET.
As mentioned earlier, we expect the memory area to remain strong and 3D NAND expansion to continue into the second half of this fiscal year and beyond.
In addition, during this quarter we achieved record revenue from our dielectrics slurries.
This was primarily driven by increased demand and the benefit of customer wins for our ceria-based solutions at advanced memory customers.
We continue to see a bright future for our refreshed portfolio dielectrics products in memory, logic and foundry and believe we are well positioned to continue growing revenue, while also improving profitability of this product area.
Turning to CMP pads, this quarter we also achieved record revenue.
We are focused on capacity expansion in driving excellence throughout our supply chain to support our customers in both advanced and legacy applications.
In addition, we are seeing increased rate of adoption at major advanced memory customers due to the lower defectivity performance benefits of our NexPlanar technology.
We believe the combination of our technology, global technical support and the shorter qualification times we have experience with our NexPlanar pad solutions combined with the strong customer interest will keep us on the trajectory of our goal to grow our pads revenue to over $100 million in fiscal 2019.
I'm also pleased to report that during the quarter, we were awarded a Perfect Quality Award from ON Semiconductor, a leading supplier of semiconductor-based solutions, primarily focused on automotive, communications and computing applications.
CMC has received this award for 3 consecutive years, which demonstrates our ongoing commitment to supply high quality, robust CMP solutions that enables our customers to advance their technology in the growing areas of the semiconductor industry, including automotive.
Also of note this quarter, in March, we announced plans to collaborate with Fujimi Incorporated in the development of certain advanced IC CMP solutions for the semiconductor industry.
We believe that by working together, we can leverage our respective expertise to meet and exceed customer requirements for innovative IC CMP solutions for an increasing number of advanced semiconductor applications.
I'm delighted with the opportunities this initial collaboration is designed to provide for our customers and respective companies.
Fujimi Incorporated and Cabot Microelectronics are both leaders in materials development with the track record of providing high quality leading edge IC CMP solutions to our customers.
Together, I believe we are even better positioned to develop advanced IC CMP solutions for the semiconductor industry.
Finally, this quarter we also announced our refreshed Capital Deployment Program, which includes the doubling of our quarterly cash dividend as well as a commitment to returning at least 50% of our annual free cash flow to our shareholders.
We believe this refreshed strategy demonstrates our confidence to continue profitably growing our business as well as our commitment to returning additional value to our shareholders.
Looking ahead, we feel confident about our ability to continue delivering on our long-term financial goals of growth faster than the industry and margin expansion.
Although recent reports suggest that industry growth maybe beginning to moderate, especially in the logic and foundry areas, we believe our business model, which is primarily based on wafer starts will allow us to continue to profitably grow.
As a result, we currently expect third fiscal quarter revenue for IC CMP consumables business to increase by low to mid-single digits compared to this quarter.
I'm confident of the continued momentum in our 3 key product areas, which we believe provide the foundation for profitable growth for our company.
We remain focused on delivering innovative, high performing and high quality CMP solutions to our global customers.
We believe our global resources, infrastructure and quality and supply chain excellence continue to differentiate us among leading suppliers of specialty materials to the semiconductor industry and position us well to deliver another year of strong performance.
And with that I will turn the call over to <UNK> for more detail on our financial results.
Thanks Dave, and good morning everyone.
My comments will generally follow the related slide presentation we posted on our website this morning.
Let's start with an overview of our financial performance this quarter, which is provided on Slide 3.
Revenue for the second quarter of fiscal 2018 was a record $143 million, which is approximately $24 million or 20% higher than the same quarter last year.
This increase reflects continued strong global semiconductor industry demand and our focus on our key ---+ our 3 key product areas.
Sequentially, revenue increased $3 million or approximately 2%, which is in line with the expectation shared on our previous conference call in January and at our annual meeting in March.
This is notable since the March quarter has traditionally been a seasonally soft quarter for us.
Our net income of $29.7 million was also a record and represented an increase of $11.5 million or approximately 63% over the same quarter last year, driven by higher revenues and increased gross margin.
Non-GAAP net income was $31.3 million.
Dave mentioned our previously announced Capital Deployment Program and research collaboration with Fujimi.
Later I will elaborate on the Capital Deployment Program.
Now let's drill into revenue, which is shown on Slide 4.
As previously stated, we define tungsten slurries, dielectrics slurries and polishing pads as 3 key product areas that are strategically important to us.
During the quarter, these accounted for approximately 80% of total revenue and I'll mention each in order .
Tungsten revenue was $60 million, an increase of approximately 17% compared to the same quarter last year.
Dielectric slurries delivered record revenue of $35 million, up approximately 24% from the same quarter a year ago.
Sales of polishing pads delivered record revenue of $21 million, up approximately 23% compared to the same quarter last year.
Sales of slurries for polishing metal other than tungsten, including copper, aluminum and barrier represented $17 million, an increase approximately 15% from the same quarter last year.
Finally, revenue from our engineered surface finishes products, which includes QED, data storage, electronics substrates and surface finishes was $10 million.
During the quarter we divested our surface finishes business, which did not have a material impact on our second quarter financials.
Now please refer to the Slide 5, which provide some higher level P&L comparisons.
Gross margin for the quarter was approximately 52.5%, compared to 50.4% in the same quarter a year ago.
Excluding $1.3 million of amortization expense related to the NexPlanar acquisitions gross margin was approximately 53.4%.
Higher sales volume and a higher value product mix were positive, but were partially offset by higher fixed manufacturing costs including higher incentive compensation expense.
Year-to-date, gross margin was approximately 52.7%, compared to 50.1% last year.
We now expect our GAAP gross margin for the full fiscal year to be between 51% and 53%, increasing our guidance from the prior expectation.
This includes an adverse impact of approximately 100 basis points related to the NexPlanar amortization expense.
Operating expenses, which includes research, development and technical, selling and marketing, and general and administrative costs were $38 million this quarter, an increase of $1.9 million over the same quarter a year ago.
This primarily reflects higher incentive compensation and annual merit increases.
As a percent of revenue, our operating expenses declined to 26.5%, compared to 30.3% in the second quarter of fiscal 2017.
Our operating margin was 25.9% in the quarter, an increase of 580 basis points from the same quarter last year.
This increase was driven by higher gross margin and prudent control of operating expenses.
Diluted EPS was a $1.14 this quarter, which represents an increase of approximately 61% over the prior year quarter.
Diluted EPS on a non-GAAP basis was a $1.19, this was primarily driven by higher revenue and higher gross margins.
Now, please refer to Slide 6, which provides balance sheet and cash flow information.
We generated cash flow from operations of $36.5 million.
We ended the quarter with a cash balance of $461 million and $138 million of debt outstanding.
We paid off this debt in April.
Capital spending for the quarter was $4.6 million, bringing our year-to-date total to $8.8 million.
Accordingly, our free cash flow was $31.9 million in the quarter.
Let me provide a few reminders about our Capital Deployment Program.
As we reported in March, our Board of Directors declared a quarterly cash dividend of $0.40 per share on our common stock representing a 100% increase over our previous quarterly dividend in an annualized rate of a $1.60 per share or approximately $40 million in aggregate.
This represents approximately 1/3 of our fiscal 2017 free cash flow of $120 million.
We also announced our intention to distribute at least 50% of our prior-year cash flow to shareholders on an ongoing basis through a combination of cash dividends and share repurchases.
This combination would represent at least $60 million to be paid in fiscal year 2018.
We believe the increase in our regular quarterly cash dividend and our stated intention to distribute at least one half of our free cash flow, allows us to return a meaningful amount of capital to shareholders, while also reporting flexibility to execute M&A that leverages our core capabilities.
As a reminder, our capital deployment priorities remain, investing in the organic needs of our business, paying dividends, executing mergers and acquisitions in related areas and repurchasing shares.
As of March 31, 2018, we had approximately $115 million of authorization remaining under our existing share repurchased program.
Separately, the passage of the U.S. Tax Cuts and Jobs Act facilitated our repatriation of approximately $200 million in overseas cash and short-term investments.
We executed this in April and use some of this cash to pay off our term loan.
As a result, we expect to save approximately $4 million of interest expense on an annualized basis.
We provide some closing remarks on Slide 8.
From a financial perspective, we achieved strong performance in our fiscal year 2018 second quarter.
Revenue increased $24 million from the prior year, while operating income increased $13 million, implying that approximately 54% of our incremental revenue dropped directly to operating income.
Finally, in the appendix on Slide 9, we provided a table, showing the updates to certain expectations.
As we think about the second half of 2018, at present we expect continued solid industry demand.
With that said and as Dave mentioned, we currently expect fiscal third quarter revenue for our IC CMP consumables to show a low to mid-single digit increase compared to our second quarter.
As stated, we're raising our full year ---+ our full fiscal year gross margin guidance to 51% to 53%.
We continue ---+ we intend to continue to manage our operating costs to provide strong operating leverage and income growth.
We now expect our operating expenses for the full fiscal year to be between $148 million and $153 million, an increase from the prior range.
This increase allows us to support additional revenue and primarily reflects higher incentive compensation and annual merit increases.
Our effective tax rate for this fiscal quarter was 19.6% and we continue to expect our effective tax rate for the remaining quarters to be between a range of 21% and 24%.
Our capital spending expectation for the full fiscal year remains between $18 million and $22 million.
Now I'll turn the call back to the operator as we prepare to take your questions.
Yes, hi <UNK>, it's Dave.
For China, obviously I spend a lot of time there and we follow same things you do.
There are a lot of newer domestic players that are in various stages of start-up and we have a very strong position in China with both the domestic customers as well as the international players.
So we're really excited about the future growth there are in China.
Specific to your question about a memory customer starting up in China, we've seen a lot of activity there.
I would just generally say most are still in pilot production at this time, except the established players like the SMIC and [WALL-E], but we're supporting and watching closely.
Yes.
As you know, <UNK>, we sell ---+ our products are used in pretty much every fab that make semiconductors today and so we also filed a TSMC announcement and more broadly the concern around weakness in handsets and obviously smartphones drive a lot of demand in semiconductors.
But there's a lot of other sectors that are also pulling demand things like automotive, industrial, high-performance computing, block chain, all those are really becoming more and more important for semiconductor demand.
So lot more than just mobility and I would say also for a customer like TSMC, they also have a wide range of different applications besides smartphone.
For us, we really see a continued strong demand environment especially in memory, but also in those legacy, logic and foundry segments.
So for us whether business shifts back and forth between customers, that doesn't affect us as much, but obviously we're watching the handset demand as well as the other sectors.
We have strong positions in both NAND and DRAM as you know.
Samsung is our #1 customer and they just reported overnight continued strong outlook that they talked about for memory.
And just in terms of, between NAND and DRAM, just because of the current transition that's happening from 2D to 3D in the NAND space where there is a doubling of CMP steps when you go to 3D NAND, that presents a stronger growth opportunity for us than the continued technology migration and DRAM.
We mentioned that we think about 50% of 2D has been converted to 3<UNK>
So there's still a lot of runway for that conversion going on and we're really excited about the growth opportunities especially in NAN<UNK>
<UNK>, I missed the first part of your question around memory.
Could you repeat.
Yes, and that's something we'll update at the end of the year.
We did talk about around 45%-46% from memory, and we had also commented that memory was growing the fastest, so just based on that trajectory if you ---+ you can make your assumptions there.
And then in terms of split between advanced and legacy, what we're seeing is there is continued strong demand in the legacy, what I can call like 35, 28, 20-nanometer technology and <UNK> actually commented about our non-tungsten metals business being up.
One of the drivers was that more legacy aspect pulling the products like aluminum into the mix.
But as you know, we have a really good exposure across all the different technology nodes, both advanced and legacy.
The one comment I make around advanced is especially on the logic and foundry side, with 10- and 7-nanometer still in ramp that's the FinFET structure that uses a tungsten gate.
So that's a really important product for us and working closely with those customers and obviously that's still in fairly early stage ramp.
So we feel like we've got a really good amount of exposure to both advanced and legacy.
We just see a stronger demand environment in the near term for the legacy, logic and foundry.
Yes, sure.
So for tungsten, we are up year-over-year about 17%, down slightly sequentially and we see that is basically fluctuations in order demand.
Nothing has changed from our perspective in the competitive environment.
So really just order fluctuation and obviously we see a really strong growth ---+ strong future for tungsten, especially given the 3D NAND and FinFET.
Yes, and obviously we work really closely with those advanced customers that are considering new and different materials at different stages.
Cobalt is one material that's of interest, but for us the more challenging the application, I think the better it is for us, because that's obviously where we excel, where the only one that has a focused business on CM<UNK>
So those materials challenges should really play into our strength.
We haven't seen on the road map, a very strong adoption of cobalt right now, which is one of the materials being considered.
But it's something that we're working closely with our customers as they look at material solutions.
Hi, <UNK>.
So we're excited and encouraged by the collaboration, but obviously it's just in the beginning stages.
Just to clarify again the collaboration at this stage is really based on collaborating on IC CMP applications on the slurry side and just ---+ really what we look at is leveraging our respective competencies in areas that we really don't participate in today in either companies.
So the example of that would be some of the emerging materials that are being contemplated for 7-nanometer and below for advanced logic, so really niche applications.
But I do think we have the opportunity to leverage both companies expertise in this area.
They are obviously the leader in the field.
We're a leader in the field.
So I think this will be good for our customers, but obviously just beginning and our focus right now is making that collaboration successful.
Yes, <UNK>, this is <UNK>.
We have a lot of efforts, a lot of activity going on in terms of building up that pipeline and continuing to build a robust pipeline.
Yes, there is nothing for us to speak about here today, but from a deployment perspective and an action ability perspective, from a finance, we're going to make sure that we have the dry powder necessary and we view our situation today and paying down the term loan and moving to zero debt as the right thing to do right now, but we hope that's the step along the path and certainly, we'd like to use our strong balance sheet to enable future M&A going forward.
And just to echo <UNK>'s comment, <UNK>, the type of opportunity we're looking for has not changed.
We look for something in the material space in a closely related area and as <UNK> mentioned, even with our new capital deployment plan we feel like we have plenty of flexibility to go after different opportunities in the M&A space.
Right, so just in terms of that you mentioned and explained our acquisition, that's one more really pleased was that was an example of more of a bolt-on, where we saw a technology, and sort of the start-up type of company, where we took that technology, enhance the quality supply chain and then leveraged our commercial channel to proliferate pads and that's gone really, really well.
So we mentioned another record quarter for pads and we're seeing a really strong pipeline behind that.
In terms of just different opportunities, the list is limited because we are very ---+ we've always been very disciplined around acquisitions and we want to find something in the material space that's also financially compatible with us.
So, the list is not long.
We would like and we look at all different types of sizes as well, depending on what it could add to our business, if it was more of a bolt-on, you think that be more in the CMP space something like NexPlanar, if it was a larger acquisition that would be something that would have to leverage our capabilities, but also as mentioned in the material space in a closely related area and financially compatible with us.
Yes, Chris.
So, we've obviously in the background have a very healthy demand environment.
We saw a pretty healthy increase in our non-tungsten metals.
I commented earlier that some of that was driven by demand for our aluminum solutions, which as you know are used in the 28- and 20-nanometer node.
And so ---+ and we also saw some increases in barrier and copper as well.
I feel like in terms of competitive landscape, we feel like if there's an opportunity out there we should be winning them in the CMP space.
So really no change there, but overall healthy demand and as I mentioned our earlier also the legacy, foundry and logic has shown some consistent strength and we see that continuing to be strong going forward.
Right, Chris.
So, as you know, that the new nodes and advanced nodes are ---+ there's a window there, where if you win that, there is an opening, whereas a displacement might take a little bit of time.
What we talked about in the prepared comments is, we are really pleased about some increased proliferation with some memory customers at the advanced nodes.
But our pipeline for pads opportunities, expands the whole gamut between displacement and new technology nodes as well.
You mentioned sort of the legacy foundry and logic.
We do see that as a really big opportunity not only just for pads, but also for consumables sets to bring both the pad and slurry together to those customers.
So I think you'll see us be even more active in that area in the future.
Yes, I think it's a bit of all of the above.
And just this past week both Samsung and SK hynix announced, and although there was some concern over memory pricing, their demand outlook for memory was very robust and continues that way and so obviously they're heavily concentrated in Korea.
They also have facilities in China, but mostly in Korea.
And I think that's primarily what drove the growth with just healthy demand in the memory market, I think for our Company as a consumables, wafer start-based company, our positions in memory, I think are really differentiated and so when those key customers are doing well, that will definitely have a positive impact on our results.
<UNK>s.
So for pads again we announced a record quarter.
The KFMI collaboration is something that we are focused on to bring more business in the China market longer term.
We did mention we saw first revenue already, but it's very early.
So I would say not a significant driver of our pads revenue yet.
Yes, I think, we're going to focus on what we can control.
They're obviously the incumbent, really still throughout the industry and so we're seeing a lot of good success with our pad products and so I would say that's more business as usual.
| 2018_CCMP |
2016 | ARRS | ARRS
#Yes, I don't know if we can give you a lot more color on that, <UNK>.
At a broad stroke, you are not ---+
So, <UNK>, what we have said is that both the access business and the CMTS businesses are big businesses, and they are, and really we haven't gone much further than that.
I don't know, <UNK>, what do you think.
I don't ---+ my sense is there wasn't much of a change there, but ---+
No, I would say more broadly just the continued investment around next-generation entertainment experiences was probably the larger factor versus Rio specifically.
And certainly, many of the service provider customers that we work with put programs and marketing campaigns around the Olympics and the viewing experience that they can get, but I don't know that that unto itself was a big item in the quarter.
Well, it sounds like when you were doing your math, you were only considering Comcast, and, of course, we have added Charter to the mix.
I suspect that's part of it.
And, of course, as the share value changes from the point of time where we ---+ from inception, that really does change the Black Scholes value of it.
So, many things to the puzzle, but it sounds like you might be not considering the Charter piece, Kyle.
<UNK>, welcome to the (multiple speakers).
Glad to hear you on the call.
So, <UNK>, maybe I will make a few comments.
You can jump in.
So on the ramp, it depends a lot on the timing of the announcement.
There are some times we will announce something and we are still in development, and there is other times the announcement is concurrent with launching and deploying.
So, it is a little hard to put a complete finger on it, but usually there is a lag of some sort, <UNK>, right, between an announcement and actual deployment of some sort, right, but it's usually within a six-month period or something like that.
DOCSIS 3.1, if you want to answer that, clearly there is a cycle ahead of us there.
Yes, so we view DOCSIS 3.1 as being, I will say, the next big ---+ at least from a CPE broadband perspective, the next big DOCSIS upgrade cycle, and while we have talked about initial product certifications and some early shipments, we think there is a broader transition or migration that is going to happen throughout, starting maybe in earnest in 2017, but certainly well into 2018 as well.
I view it similar to the DOCSIS 2 to DOCSIS 3 migration in some respects, although 3.0 had a number of upgrades buried in it unto itself.
But we view that transition happening, and also I would point out that Wi-Fi is closely coupled in there as well in terms of we're seeing upgrades take place now to introduce the latest in Wi-Fi technologies, and I think that gets coupled in with the 3.1 rollout that we expect to see in 2017 and 2018.
Okay, great.
Well, we just want to thank everyone for joining.
I know it is a busy season, so taking the time, we really appreciate it.
Lots of good questions.
Look forward to seeing you at some of these upcoming events, and if not, maybe at CES in Vegas in January.
So, thank you.
Thanks, everyone.
That concludes our call.
| 2016_ARRS |
2015 | TECD | TECD
#Clearly, we had robust growth again in Q4 with mobility.
But we also had other vendor product sets that we also had very nice growth as well.
Mobility is not the entire story on our growth in Europe.
As <UNK> indicated, we have a portfolio of vendors and product sets, and we go to where the market allows us to achieve that demand.
So in the end, we have responded very nicely and we have picked our spots, and we believe we can continue to grow in this market.
Your comments on Apple are interesting.
But keep in mind that the iPhone represents only about a third of our Apple sales.
Apple is performing very well in the desktop, in the laptop and mobile space.
We sell the Apple TV; we sell the Apple watch.
So this is not just an iPhone phenomenon that's being manufactured inside of our growth story around Apple.
And just to give you some broad other data points: our storage business in the US was up 21%.
Our security business in the US was up 27%.
This is not just Apple.
There's a broad array of products that we sell.
Apple happens to be one of the ones that there's good market demand on, and we are operating and executing against that demand very effectively.
But there are other product areas that are growing and we are operating and executing against those just as effectively.
I can't explain necessarily why.
There's a lot of dynamics why IT spending varies up and down inside of a quarter, inside of a year, inside of a decade.
The average IT spending historically is 4% to 6%.
I think if you look at the research houses right now, they are all saying that IT spending in the US is below that 4% to 6% range.
So at Tech Data, we respond to the realities of the market.
We don't make the market.
We don't create the demand.
We respond to the realities of it.
And the realities are that IT spending is moderating in the Americas.
It's reflected not only in our results, but in all of the results in the ecosystem.
Our competitors, the vendor partners ---+ we sell their products.
And the publicly traded reseller customers that are ours all point to the same place of some moderating demand in the Americas.
So I don't think it's our role to explain why.
It's our role to grow as much as we can profitably inside the market opportunity that exists.
And to be as efficient and as effective as we possibly can be to put our products and services into the market and grow ---+ as we said in our prepared comments, to try to grow faster than the market where we can do that profitably.
So I wish I had the reasons why IT spending has slowed in the Americas.
But that's not what we focus on.
We focus on optimizing against the reality.
Yes.
I think that there's obviously ---+ when there are alternatives that exist, that slows down the IT decision cycle.
So if the historical decision is do I put this application on a mainframe or do I put this application on an industry-standard server, that's pick one, A or B.
The decision cycle is not that long.
When you now factor in converged infrastructure and on-prem versus cloud and then hybrid cloud, it just gives the IT infrastructure, the CIOs of the world, more alternatives to try to factor what's the best solution for their company.
The good news is at Tech Data, we sell all of those alternatives.
We sell Intel-based; we sell proprietary servers.
We sell bare metal in the cloud offerings, we sell converged infrastructure, we sell the software that makes all of that work together efficiently.
We sell the as-a-service offerings that our vendor partners have.
So while the decision cycles and processes may be more complex, from a Tech Data perspective, it's very important that we keep ourselves aligned with the vendor partners that are setting the IT agenda in the marketplace.
And we are very well aligned with the leaders in that space.
And so we get to benefit from the realities of the market.
Our $200 million performance in the cloud I think speaks to the reality of what's really happening in the cloud.
It's a slow and measured deployment.
There are opportunities there, and our infrastructure and our set of offerings position us very well.
As momentum builds in the cloud, we are prepared to be able to take advantage of that.
Where the channel is today is very much in an awareness and education mode, trying to get the resellers to understand the cloud environment, get the resellers to understand the transitions their business models need to take, and to get them to begin to transact there.
And so that's why we talked in our prepared comments about these group sessions that we run, where we accomplish that with many resellers.
There's clearly momentum building, but the reality is Tech Data will sell much more on-prem technology in the next few quarters than we will cloud solutions.
But we're prepared to sell both as the demand leads us there.
Yes.
So when you say vertical, I'm assuming you mean industry segments.
And as <UNK> said in his prepared comments, healthcare and education, state and local were strong segments for us in the US.
But we don't segment the market as discretely as you are describing at the industry level.
We segment it at the size of the opportunity.
That's why we talk about SMB or midsize businesses or enterprise businesses.
And then we also segment it by the solution category, whether it's mobility or data center or consumer electronics.
So we are not in a position to tell you that there's a vertical that's gotten weaker in the US.
That's just not the way that we cover the markets.
And that's not what our vendor partners ask us to do, either.
So we can't give you much insight into that, other than big verticals like healthcare and public sector and education, we have dedicated resources that manage the resellers that sell into those verticals.
And it's very clear to us the performance that exists there.
No.
My observation would be that ---+ first of all, as I've said for the decade that I've been here, this is a very competitive business that we are in.
And I don't think it feels any different in either of our geographies this past quarter than it has felt in years gone by.
There are very able competitors in our market space.
We know them; they know us.
And none of us are afraid of competing.
But this doesn't feel any more competitive or any less competitive than it has in recent quarters.
That's a very good observation.
We had sales in Clearwater, sales in Toronto, and sales in Costa Rica.
And over the course of the last year or so, we have been in the process of centralizing all of our phone sales in Clearwater.
It does a couple of things for us.
It allows us to get greater leverage of our management staffs.
It allows us to more quickly do education and training.
In a dynamic market like we are in right now, it's very important that we keep our sales team current on the architectures and technologies and solutions that our partners are bringing to the market.
And consolidating in one place allows us to do that more efficiently.
And it also allows us to, in a centralized fashion, to create headcount that we can then deploy out in the field in our customers' offices.
So by centralizing, it allows us to be smarter, execute better, and have better coverage around the US.
It's a process that we have begun to roll out.
It's working very effectively.
And we think in the long run it will allow us to cover the market opportunity better and be more competitive.
I'll take the first part.
As I said earlier, by consolidating, that ultimately frees up some resource, some headcount, some SG&A that we can redeploy into field coverage.
As well, there are units inside of our team here in Clearwater that had been prior internally focused and now we are redeploying those resources to be out in the field in our customers' offices.
So net-net there will be some increase in headcount, some decreases in headcount.
I think in the final analysis, there won't be large increases in headcount in the Americas on this sales reengineering process that's taken place.
But what our customers will see is more Tech Data coverage, covering more customers, both over the phone and in person, in their customers' offices.
And that's really the important part to our vendors.
And that creates the growth opportunities that we are searching for.
Sure, yes.
You are exactly right in regards to our cash flow, as we used a bit of cash as we ramp up for our seasonally strong fourth quarter in Europe.
So that was not a surprise.
We commented on that in our last call.
In regards to capital deployment, as we indicated every quarter, we meet with our Board of Directors and outside advisors and look through our three alternatives, which, as you indicated, would be a stock buyback, M&A opportunities, and then, of course, organic growth.
And there's really nothing new on that front.
We continue to closely review our capital structure and we are going to do what's best for our shareholders and the return to them.
So really nothing new to report in that regard.
Clearly, we have a flexible balance sheet, one that allows us to seize on opportunities as they present themselves.
So that's the good news: we have a very strong balance sheet.
Again, our gross margins went down year over year by 5 basis points, which isn't all that significant.
And there's lots of puts and takes to get to that decline.
Clearly, mobility was stronger this quarter and it attaches a lower gross margin.
But as we indicated earlier, it also attaches a lower amount of SG&A and a great capital turn, so very nice investments.
So a lot of puts and takes, but nothing significant.
And it's in line with our prior quarters.
It's our seasonally strong quarter in Europe, which we have a significant mobility practice.
It goes across all of our product segments.
So it really is again the puts and takes.
And we model it from bottoms up and we believe our gross margin is going to be in line with our prior quarters.
We continue to look for improved profitability opportunities in both geographies.
It's not a one and then the other; it's Europe is further along in the process that we run to try to optimize its performance.
But it doesn't stop.
We continue to look for more profitable vendor partners, more profitable technologies and solutions.
But yet, as your question said, we still have to respond to the realities of the market.
And in the market today, mobility products continue to be very, very fast-moving products.
And that's an opportunity that we are responding to.
We make every effort to try to balance that off with other, more profitable parts of our portfolio.
But they are driven by the demand opportunity that exists that we respond to.
Yes, our sales team is incented by a variety of factors, including sales growth, gross profit percentage growth, and a variety of factors that drive our performance that are key to our success.
So very much aligned with the rest of the team at Tech Data.
No.
There is really a good mix of financial metrics that we award the team with.
Return on invested capital is one of those metrics.
But for the sales team, it's primarily sales, gross profit percentage, gross profit dollars, and so forth because they control that ---+ that's most of what is under their control.
Exactly.
As you indicated, there is a lot of different movements.
We have significant operations in the UK, the Nordic region, and some other areas like the Swiss franc play in addition to the euro.
The $1.07 peg is due to the recent movement here in the US expanding interest rates.
And overseas, they are looking at lowering interest rates, and the pressure on the dollar.
So we are guiding to what our bank consensus is telling us, which is $1.07.
You should be able to get and will be able to get to the revenue in the various regions when you look at the Americas, which is primarily the US dollar.
And with our guidance there and with the impact of exiting our Latin America operations, you should be able to get very close on that.
And then the balance would be the European revenue level.
So I think you can work through that and come out very closely when we gave you the actual revenue in dollars.
We thought that would be a big help to have you be able to model it.
The other thing was the miss in the models this last quarter was gross margin, and that's why we gave you that additional color.
No; in regards to gross margins, there is very little to no impact.
And as you work down through ---+ when I say gross margin, that's gross margin percentages.
So FX does have an impact on our top line.
As you go down through our income statement, though, as you get down to our operating income, the movement in FX is not going to have a significant impact, at least from the current levels down to $1.07.
I think you've seen most of the significant move over this past year is from very high levels down into the $1.10s and now going from the $1.10 area down to $1.07.
It's not near as significant.
Sure.
Well, from our balance sheet perspective, over 30% of what we buy in Europe is in nonfunctional denominated currencies from our vendor partners.
And we hedge that on an everyday basis.
We hedge our balance sheet.
So we are 100% hedged; have great systems to do that.
We do not have much FX volatility at all on our balance sheet.
In regards to our income statement, we do not enter into hedges, as some of our vendor partners and other companies throughout the world do.
We've decided not to hedge our income statement.
So that is not an impact on our reported results.
| 2015_TECD |
2015 | HRC | HRC
#Yes.
<UNK>, this is <UNK>.
Obviously we need to align our operating structure and the rest of our infrastructure along the lines of what we laid out at the investor conference.
We will start reporting that way as that structure gets put in place, and we start operating the business specifically that way.
We have a lot of work to do yet to get our organization infrastructure in place for the international part of the business.
Once that is put in place, then we will start reporting that way.
<UNK>, this is <UNK>.
I think at the investor conference we commented that we'll be doing that some time during 2016.
As <UNK> gets his team fully in place so we got Management accountability, matching the segments, as <UNK> said, that we laid out at the investor conference, we'll do that.
It'll probably be in the first half of 2016.
Yes, let me take a couple cuts at that, <UNK>.
One specific to your question on what do we see externally, and two, how does that translate into our 2016 guidance.
As I said in my comments, HCA obviously is a bit of an impactor for us, just because it's our biggest customer, but that's just timing.
We've won that business the last two years.
We got it in Q4 of last year, we're getting it in Q1 of ---+ last year being 2014, we're getting it in Q1 of 2016.
Ex-HCA, as I mentioned in my comments, orders for the quarter and certainly for the year were up year-over-year, and backlog at the end of the year is up year-over-year ---+ and reasonably healthfully up, also.
I think capital orders for the full year were up 9%, even though we had HCA slip out of 2015 and into 2016, while it was in 2014 last year.
We're not seeing any real changes in the stability and the strength of hospital CapEx.
We've got a pretty active order book right now, and I think we feel reasonably good that 2016 is going to look a lot like what we laid out at the investor conference, low- to mid-single digits, which I think is what our guidance is for 2016.
That said, as you flip from 2015 to 2016, our North America capital business was up 17% in revenue in 2015, and before we layer Welch Allyn into the portfolio, that's half our business.
That was a big driver to the 7% constant-currency growth we saw in 2015.
You do the math on that business growing in the low- to mid-single digits.
You got surgical and respiratory and Trumpf growing in mid-single digits, and you've got international improving from minus 5% to flat.
Then you later on a point or two of FX.
That's where you get to the ---+ call it 3%-ish growth for 2016.
The impact on the strength in North America capital, big impact obviously on our 2016 guidance; but the stability that we want to see in this business, we're certainly seeing.
We don't expect it to grow double digits in 2016, clearly.
I think you guys would question our judgment if we came out with another double-digit capital growth in 2016.
But we certainly expect it to be steady, solid, low- to mid-single-digit growth, and we see nothing at this point to deviate from that plan.
<UNK>, we're obviously pushing it hard, and we'll get the savings in the bank as quickly as possible.
The other piece as part of the $40 million is some footprint consolidation, and that's going to take a couple years, two to three years to get done.
But <UNK> and his team are obviously working hard to get as much of that $40 million in as soon as possible.
We're sticking with the commitment that we made a couple months ago at this point in time.
Thanks a lot.
Hi, <UNK>.
Yes.
We're increasing pretty dramatically our operational cadence.
By that, I mean getting deeper on every aspect of the business, making changes.
Literally in the past few months I think you saw ---+ met Carlos Alonso, or at least heard him speak when we were at the investor conference.
We swapped out our leader in Europe.
We brought in a very seasoned veteran that I know from my past that I think is going to make a huge impact.
We've changed, and are in the process of changing our German leader, our leader in France.
We're also ---+ on the personal side, we're very focused on that.
We're also looking at how do we integrate these businesses to take cost out of our structure internationally.
We are integrating Welch Allyn into the international structure, as we mentioned.
We're integrating Trumpf into our structure.
What that's going to allow us to do is shape some expense out of what it takes to deliver the products internationally, and give us more strength.
Places like China and other places, size and your gravitas, it really matters.
Pulling this all together into a single customer experience center will make a big difference, as well.
That covers the expense side.
We've covered leadership, we've covered expense.
Now to get strategically, one of the areas of opportunity that we have is ---+ and I'll mention, too ---+ are some of the products that we have that drive higher margin in the US, we don't offer in all of the international communities.
We're starting to correct that.
These are product lines like our Clinical Workflow Solutions.
It's offered on a very limited basis overseas, and it has a nicer margin, and it's a product that others would like to have.
We're starting to develop that for the international market.
There are other products that I spoke about at our investor conference that we're going to do ---+ we're going to offer overseas, as well.
The higher margin, higher med-tech component of a products that I think will really help lift us.
Then finally there's just allocation of resources.
We ---+ today we're going to have the opportunity to take some of our resources that today are selling lower margin, long-term care (inaudible - background noise) solutions, and move them into the higher margin, higher growth potential products like a Welch Allyn overseas.
That gives you a broad brush of what we're doing with people, with expenses, and strategically.
I think as we said in the investor conference, we are very excited about the stability of the cash flow that the combined operation has.
Obviously we had a great cash flow with that base Hill-Rom business, combined nice cash flow with Welch Allyn.
Our immediate focus is on de-leveraging.
But as we said in the conference, we're always going to be looking for ways to profitably grow the business.
As opportunities present themselves, we'll obviously take a look at them.
We'll look at whether or not there's other creative ways for us to make sure that we can mind our balance sheet, but also grow the top line and grow it profitably.
Immediate term is de-leveraging, but we are keeping our eyes open and our options open going forward.
<UNK>, this is <UNK>.
Just to add briefly to that.
You should absolutely expect us to continue to be focused on M&A.
It was a big part of the strategy that we laid out in September.
We've got room.
We are confident we can find opportunities that match our strategy, and we're not going to take a year off.
We're going to maintain the discipline we followed.
We're committed to doing that, and we're also committed to investing to grow the Company, while at the same time as <UNK> said, deploy our capital to de-leverage in the absence of any M&A.
Thank you.
You bet.
Good morning, <UNK>.
Well, North America is the majority of our rental business.
It's more than two-thirds of it.
I think this time last year, on the margin side, I think we said margins for rental this year were going to approximate what the fourth quarter margins were last year, which were just around 50%.
That's pretty much where we'd landed the full year.
Obviously we had some margin compression here in North America that we've talked about throughout the year.
The rest of our rental business, it includes the respiratory care business, and which has been a flat ---+ more flat business, certainly than North America rental this year.
Those are the two biggest components of our rental business globally.
<UNK>.
Yes, we've talked about it in the past.
Size-wise, it's just north of $100 million.
I'd rather not get any more specific than that.
It's growing strongly.
It's a big part of our value proposition, and we've continued to add new products into that offering.
We've got high expectations for it going forward to really stabilize and accelerate the underlying capital growth of our patient support systems business.
Well, they made an acquisition early in 2015, but year-over-year, the growth rate that <UNK> laid out, 3% to 5% for Welch Allyn, that's more or less an apples-to-apples comparison.
There weren't any acquisitions later in the year that are going to have any significant accretive impact on 2016.
Yes.
<UNK>, this is <UNK>.
There wasn't any pull-forward.
The growth is probably about $20 million, I think, above what we had said ---+ $20 million, $25 million.
A big chunk of that is Trumpf, North America, as I mentioned in my comments ---+ they were up 25%.
Like any capital business, their fourth quarter tends to be the heroic quarter of the year, and we saw that here in FY15.
Welch Allyn over-performed, probably represented 20% of that overall.
The rest of it largely came out of our North American business.
As you well know, capital business is the toughest one to predict.
The vast majority of the $25-million improvement in Q4 came out of various parts of our capital segment.
Again, you look at next year as a full year, I think we're pretty much in line, and we are in line with what we laid out at the investor conference.
We've got some FX drag of 1 to 2 points on the full year.
We've got a bigger FX drag in Q1, 3 to 4.
I think we're right in line with the commitments and the expectations we set in September.
Yes, I think that's true, <UNK>.
I'll go back to my comments earlier.
I think it was in response to your question, the macro-environment, and how does that translate into our guidance next year.
Again, think about our North American business, 3% to 5% growth.
SRC and Trumpf same thing, 3% to 5% growth.
International flat.
You knock a point to two off of FX, we're right in the zone of where we think this business is long term, in terms of low to mid-single-digit growth.
2015 was clearly an anomaly on our North America capital business.
But yes, I don't think there's anything heroic in 2016.
If we continue to execute along the things that <UNK> said earlier, we might surprise ourselves.
But we feel good about the guidance that we put out here.
There's significant bottom-line earnings growth.
There's significant accretion just in line with what we committed to from Welch Allyn.
There's 100 basis point of margin expansion on our core business.
I think we've got everything moving in the right direction, and we're pushing to move it as fast as we can on the top line and on the bottom line.
My pleasure.
Thank you, Amanda, and thanks to everybody for listening in on the call.
We look forward to speaking with you.
So long.
| 2015_HRC |
2018 | UNT | UNT
#Thank you, Jason.
Good morning, everyone.
We want to thank you, this morning for joining us.
With me today are <UNK> <UNK>, <UNK> <UNK>, <UNK> <UNK>, <UNK> <UNK> and Bob <UNK>.
Each of these gentlemen will be providing you with updates concerning their segments.
We will then take questions at the end of the call.
For the last several years and through changing economic conditions, we have pursued a disciplined path to grow all 3 of our business segments while maintaining annual capital expenditure budgets largely in line with our anticipated cash flow.
While it is our belief that the segments work very well together, we continue to grow each segment with the object of reaching a scale of self-sufficiency.
As previously communicated in the earlier press release, we completed the sale of 50% of our ownership interest in our midstream subsidiary, Superior Pipeline Company, for $300 million, highlighting that segment's current value.
While Unit retains day-to-day operational control, we and our new partners are focused on the continued growth of that business to further increase its value.
Proceeds from this sale were partially used to pay off the outstanding balance of Unit's revolving line of credit.
The remainder will be used to accelerate growth within our oil and natural gas segment, the midstream segment and for general working capital purposes.
Overall, the transaction provides substantial new liquidity to Unit as we focus on continuing the growth of all 3 segments.
With the successful completion of our Superior transaction, we have elected to terminate our at-the-market offering of our common stock.
That program, announced in February of 2017, resulted in the issuance of approximately 787,000 shares during the first half of 2017, generating proceeds of approximately $18.6 million.
Despite the company's strong liquidity position, our plan is to remain disciplined with our capital expenditures.
We will spend our money where we believe it will result in the best return for the company.
I now would like to turn the call over to <UNK> <UNK>.
Thanks, <UNK>.
We reported net income for the first quarter of $7.9 million or $0.15 per diluted share.
Adjusted net income for the quarter, which excludes the effect of noncash derivatives was $11.1 million or $0.21 per diluted share.
Our non-GAAP financial measures reconciliation is included in our press release.
For the oil and natural gas segment, revenue for the first quarter increased 2% over the fourth quarter of last year with higher oil and natural gas prices being offset by lower production and NGL prices.
Average daily production decreased primarily because of delays in the completion of new wells drilled.
Operating costs for the first quarter increased 3% over the fourth quarter of last year because of higher lease operating expenses primarily due to increased workover expenses, saltwater disposal expenses and gross production taxes.
For the contract drilling segment, revenue for the first quarter decreased 1% from the fourth quarter of last year due to decreased mobilization and other revenue partially offset by increased utilization and day rates.
Operating costs for the first quarter increased 1% over the fourth quarter of last year because of more drilling rigs operating.
For the midstream segment, revenues for the first quarter decreased 1% from the fourth quarter of last year primarily due to lower gas gathering and liquids sold volumes per day offset slightly by higher daily gas processed volumes.
Operating costs for the first quarter decreased 5% from the fourth quarter of last year because of lower cost of gas purchased.
We ended the first quarter of 2018 with total long-term debt of $790.5 million, a reduction of $29.8 million from the end of the fourth quarter of 2017.
Long-term debt consists of $642.8 million of senior subordinated notes, net of unamortized discounts and debt issuance costs, and $147.7 million of borrowings under our credit agreement.
On April 2, Unit signed its fourth amendment to its credit agreement in connection with its sale of the 50% ownership interest in Superior.
One condition of the sale was the release of Superior from the credit agreement.
The fourth amendment also provides for, among other things, a maximum credit amount, a borrowing base and an elected commitment, all in the amount of $425 million.
The sales transaction closed on April 3, and the outstanding borrowings on the credit facility were paid that same day, bringing our current bank debt to 0.
Our senior leverage ratio was 0.45x at the end of the first quarter, and the maximum senior leverage covenant is to be no greater than 2.7x our EBITDA.
Pro forma for the sales transaction, our net leverage ratio would have been 1.63x at the end of the first quarter.
At this time, I will turn the call over to <UNK> for our oil and natural gas segment update.
Good morning.
For the quarter, per-day equivalent production was 46,500 barrels of oil equivalent, a decrease of just under 1% from the fourth quarter of 2017.
Production for the quarter was in line with our expectations that it would be near unchanged compared to the fourth quarter of 2017 because of anticipated late first quarter timing of production from 2 multiwell pads at our Granite Wash play.
The slight drop in daily production from fourth quarter '17 to first quarter '18 was due to delays bringing 1 well online following fracture stimulation and a 2-week delay in beginning drilling operations in the Gulf Coast area.
Despite these delays, the forecast for 2018 production remains unchanged at 17.1 million to 17.4 million barrels of oil equivalent, which is a 7% to 9% increase over 2017.
In the Gulf Coast area, we continued our development, exploration and recompletion programs during the quarter.
The Wing #18 located in the Wing lease near the Gilly Field in Polk County, Texas, was drilled and completed in the BP Fee C sand with the well flowing at rates of 6.3 million cubic feet per day and 75 barrels of oil per day.
This was a successful discovery of a new interval in the Wing lease, and we are currently drilling the Wing #20 to further delineate this discovery.
In the Cherry Creek prospect, we plan to drill the [Wolf Pastor] #1, which is the delineation well for the Trinity #1, in the second quarter.
In the Brandt prospect, the first exploration well, the Engel #1, continues to flow at rates of 7 million to 8 million cubic feet per day, and we plan to pick up an additional rig in the second or early third quarter to drill delineation wells in this prospect.
Also there were 8 recompletions and 2 workovers completed in the quarter.
Our plan for 2018 is for 13 to 15 recompletions and 10 new wells, 8 of which will be vertical and 2 horizontal.
Additional wells may be drilled pending successful delineation of our pre-exploration prospects.
In the Texas Panhandle Granite Wash area, we continue to drill extended lateral Granite Wash wells in the Buffalo Wallow field.
We recently reached total depth from pre-extended laterals: the Carr #1H, the Carr #2H and the Carr #3<UNK>
These wells are now cleaning up after fracture ---+ after being fracture-stimulated in late March.
Our longest extend lateral wells, which are between 8,700 feet and 9,700 feet ---+ the Francis 1H, Francis 2H and the Francis 3H ---+ all had first sales in February.
These wells are also cleaning up after fracking.
Our plan is to continuously operate at least 1 drilling rig in the Granite Wash during 2018, which should result in 11 new extended-length lateral wells for the year.
In our Southern Oklahoma Hoxbar Oil Trend, or SOHOT, area, during the quarter, we completed 3 new Marchand horizontal wells.
In January, we completed our first extended lateral Marchand well, the Schenk Trust #1-17HXL, with an IP30 of 2,318 barrels of oil equivalent per day.
In February, we completed the McConnell #1-11H with an IP30 of 1,426 barrels of oil equivalent per day.
The second extended lateral, the Livingston Land #1-33, has been drilled and is cleaning up after recently being fracture-stimulated in late March.
During 2018, our plan is to continue with the 1-rig drilling program, which should result in a total of 9 new wells with 6 being extended lateral wells.
In Western Oklahoma, we spud our initial well, the Irwin #1-4H, in the STACK play located in Dewey County, Oklahoma, during March.
Following the Irwin, we plan to drill a second STACK well off the same pad and then move the rig to drill 2 additional wells in Western Oklahoma.
At our last conference call, we said we planned for these 2 wells to target the dry gas area of the STACK reservoir in Custer County.
However, gas takeaway capacity constraints in this area of the STACK have led to the potential for lower realized gas prices and/or constrained gas production rates.
Consequently, the value of the large amount of gas resource we feel our acreage position holds may be best optimized by delaying development until realized gas prices improve.
Since our acreage in the STACK play is largely held by production and we have the option of delaying development, we may choose to target other reservoirs or other areas of the STACK play within our acreage holdings that offer less gas marketing risk and better returns.
During the quarter, we participated in a total of 7 nonoperated wells completed in the STACK play, and overall, we have participated in over 50 nonoperated wells in the play with an average working interest of about 5%.
Results from this nonoperated program have been good, and we expect to continue to participate in 5 to 10 wells per quarter during the remainder of 2018.
First quarter activity has set Unit Petroleum up for an exciting second quarter.
During the second quarter, we will be ramping up production from 6 Granite Wash wells that will result in quarter-over-quarter production growth and more gas going to Superior's Hemphill plant, and in the Gulf Coast area, we will drill delineation wells in our 3 exploration prospects giving us a better idea of the size of the prospects and future development potential.
We will continue to follow our strategy of spending within cash flow of our growing production and reserves, utilizing Unit drilling rigs and Superior midstream services, where possible, to capture more of the value chain, and augmenting our drilling inventory in areas that have relatively low play and acquisition costs but still offer competitive full-cycle economic returns.
At this time, I will now turn the call over to <UNK> for the Drilling Company update.
Good morning.
The contract drilling segment had a good first quarter with rig count remaining steady, revenue increasing as well as securing a long-term contract for our newest BOSS rig.
Average day rate for the quarter was $17,038, an increase of $393 per day over the fourth quarter.
The average total daily revenue with no elimination of intercompany profit was $17,223, an increase of $250 over the fourth quarter.
Our total daily operating cost before intercompany eliminations increased by $622 for the first quarter as compared to the fourth.
This increase was primarily due to a crew wage increase for the Mid-Continent and Permian rigs and an increase in payroll taxes resetting at the beginning of the year.
The average per-day operating margin for the first quarter, before elimination of intercompany profits, was $5,179, which is a decrease of $371 from the fourth quarter.
The majority of this decrease was due to higher-than-usual mobilization cost associated with 3 long-rig moves and a slight increase in rig cost.
Our non-GAAP reconciliation can be found in today's press release.
Our rig utilization remained constant throughout the quarter at 32 rigs.
Currently, all 10 of our BOSS rigs are operating with 5 of them under current contracts.
We recently negotiated a long-term contract for our 11th BOSS rig.
Fabrication of this rig has begun, and we expect it to be operating by July in the Permian.
We also upgraded mud systems on 2 of our 1,500-horsepower SCR rigs during the quarter.
We have several additional SCR rigs, which are excellent candidates for refurbishment as the market dictates.
We do remain optimistic of our opportunity to grow during the next quarter.
At this time, I'll turn the call over to Bob for the Superior pipeline update.
Thank you, <UNK>.
The midstream segment continued to produce solid financial results for the first quarter of 2018.
Our operating profit before depreciation is $14.4 million for the first quarter 2018, which is an 11% increase over the fourth quarter of 2017.
This increase is partially due to higher volume on our higher-margin Cashion processing system and additional condensate at our Southeast Texas Segno gathering system.
I will now focus on several key midstream assets.
At our Hemphill facility in the Granite Wash area, our total throughput volume averaged approximately 67.5 million cubic feet per day for the first quarter of 2018, and we produced approximately 171,000 gallons per day of natural gas liquids.
We had not connected any new wells to the system in the first quarter as are several recently drilled wells scheduled to be connected in the second quarter from the Buffalo Wallow area.
Construction of laterals to connect these wells have been completed, and we expect to receive cash from these wells in the second quarter.
Additionally, we started a compression expansion project that will increase the compression capacity in the Buffalo Wallow area in order to handle the expected increased production expected from this area.
At our Cashion processing facility located in Central Oklahoma, the average throughput volume for the first quarter of 2018 was approximately 42.6 million cubic feet per day.
Our total processing capacity at this facility remained at approximately 45 million cubic feet per day.
At this facility, we complete construction of our pipeline expansion that allowed us to gather and process gas from a new area in which the producer is actively drilling.
We continue to construct lateral lines in this area to connect new wells as they are drilled.
During the first quarter, we connected 3 new wells from this area.
Also, during the first quarter, we continued to receive gas from a producer who is committed to deliver volumes to us for a 5-year period.
If they fail to deliver the required volume, they will pay shortfall fee, which will be settled annually.
At our Pittsburgh Mills gathering facility located in the Appalachian region, during the first quarter of 2018, our total gathered volume averaged [5,106 million] (sic - see 10-Q, "106.5 million")__cubic feet per day.
We are continuing construction of the pipeline to connect the next scheduled well pad.
This new well pad is to include 7 wells and would be connected to our compressor station located on the southern portion of our gathering system.
We expect to complete construction and begin gathering the production from this well pad by the end of 2018.
Additionally, we\
Thank you, Bob.
As you can tell, we had a very good quarter ---+ first quarter of 2018.
We feel very good about how the company is positioned to continue to pursue its growth strategies.
We believe that the sale of the partial ownership interest in Superior provides a valuable data point in the valuation of that segment.
Further, we are positioned to accelerate the growth of that part of our business with our new capital partners onboard.
We also will accelerate the growth of Unit Petroleum as we move forward [as] we're adding an additional rig measure during this year and, of course, that in turn helps growth of both the midstream and the drilling segments as well.
We currently have the best inventory of highly economic well prospects than we have ever had.
<UNK> and his team are working diligently to facilitate the best development of these prospects possible.
We are fortunate that our STACK division is largely held by production so that we can develop the asset in the best economic environment possible rather than being forced to do so while differentials are so lopsided in a constrained market.
Our BOSS rigs continue to perform exceptionally well.
We're building #11.
We're having discussions with operators about the next BOSS rig.
The midstream partial interest sale resulted in a sharp reduction in Unit's leverage.
Having new partners also intent to see the business grow should help facilitate cash flow expansion.
Additionally, the cash received from the sale has resulted in a substantial amount of liquidity on our balance sheet.
Finally, as always, we will remain focused on capital discipline.
I now would like to turn the call over for questions.
<UNK>, this is <UNK> <UNK>.
Approximately, about 20% of our oil production comes from the Gulf Coast area, and there we get LLS oil prices, which are currently, what, $2.80 or $3 above WTI, and then our oil transportation fees coming off of that are around $3 a barrel-or-so, $2 a barrel.
So we get close to WTI realized prices for the Houston area.
The remaining oil that we have is all in ---+ is mainly in either the Texas Panhandle or Western Oklahoma, and there we generally get WTI prices minus about $2 to $3 a barrel for transportation, and so those are our realized prices, and then, of course, you have to figure our hedging positions into the price after that.
So it depends on the play that you're talking about.
But if you're looking at, for instance, our SOHOT play, which is about 70% oil production, at that oil price, our full cycle returns will be up above 80% rate of return in that play, including our land cost, everything thrown in there along with the drilling and completion cost.
Our other plays, the Granite Wash, STACK and Wilcox, will depend more on natural gas liquids prices than oil prices.
That would be close.
Our Wilcox area is probably a little better than that, and our Granite Wash area is a little lower than that.
First of all, I hear that same story, <UNK>, a lot about the mid-20s for the high-tech rigs, but we're not seeing that yet.
I'm just not seeing those kind of numbers yet.
On the SCR rigs, those prices are gradually coming up.
I don't know if you're asking what do you think our day rates will be on that as much as what you're asking about the margins.
But in many cases, when you look at the margins over a longer period than 1 quarter, those margins will continue to increase probably by 10% or 15%.
And the reason I say you have to look at it longer because, as I mentioned earlier, we suffered some cost early on this year by making some long moves and, over the course of the year, those moves ---+ that investment in those moves continue to pay back, and so our margins will increase because of that.
And also, our margins are increasing because, for the type of rigs that the customer wants and that we can provide, there's not a huge abundance of those right now that are high.
Well, we actually haven't added any additional ones since back in late summer.
We've maintained that same number that we've had ---+ I'm sorry.
New contracts.
Okay.
You want a number.
$18,000 to $19,000, but they're (inaudible) what we provide.
So on the Irwin pad, we plan on drilling 2 wells that were currently around 3 weeks away from TD-ing the first well.
And then we'll skid the rig and drill the second well off that same pad.
So the 2 wells will have to wait to be fracture-stimulated till both of them are drilled.
And so likely first production is not going to be available until sometime in the third quarter, maybe the late second quarter, yes ---+ or maybe early third quarter, sometime or in that time frame.
Yes, we continue to discuss additional BOSS rigs all the time.
We have ---+ take people, engineers, management from other companies to go visit our rigs for them to see them firsthand.
So we're fully expecting to be able to continue with our program.
We just hope that we can accelerate it, but that continues all the time.
That's a very hard question, <UNK>, because we've batted that around a lot.
We see places for the BOSS rigs as they are right now to continue, but we also see the opportunities for wells that are not only longer laterals, but deeper from the kickoff point, wells that could be measured depth of 25,000 to 28,000 feet, and we're working on plans on how to accommodate those kind of ---+ the amount of pipe rack and just the loads that we would contend with.
So my guess right now is that's the direction that we will change to as we go forward, but it doesn't ---+ it won't eliminate necessarily the rigs as they are either.
<UNK>, this is <UNK>.
We'll continue kind of with our one at a time kind of program for a while.
If it was ---+ unless we see demand picking up substantially.
We're always looking at the market and what we think we can work in our market area.
We don't want to overbuild, but we want to be able to take care of the customers that we have; that when they want a BOSS rig, that we could deliver it to them.
So is there a magic number.
No, not ---+ that's going to be market-dictated, basically.
Sure, the Wing #18 drill ---+ that well was drilled to a deeper depth and tested another sand in that fault block.
The fault block from the sands have produced already and are currently producing will probably recover somewhere in the range of 60 Bcf-or-so, maybe even a little more than that.
And this additional deeper sand will add on to that.
Because we don't have a second well producing from that sand yet, we're unsure of where the gas-water contact is in that interval.
And so at this point, I can't really say how big that could be.
All I can say is that the Wing #18 has been a really pleasant surprise because we were concerned that, that deeper sand was going to be wet when we first tested it.
But it's making over [$]6 million a day and almost 100 barrel of oil a day.
So it's been a very nice surprise.
No.
We always keep our eye on how other people are fracking their wells.
At this point, the evolution of completion technology, in my opinion, is far down the learning curve.
There's still a few things that are going on that are new on the divergent side and maybe how you pump and some things like that, but not anything monumental.
And so we're pretty far down on the learning curve at SOHOT on the completion side.
Sure.
We could add ---+ we will add an additional rig.
Well, we have the fourth rig running in STACK now.
That fourth rig could end up drilling in Buffalo Wallow.
Later on, it could also end up drilling more wells in Western Oklahoma in other areas of the STACK play.
And we also have a ---+ the chance or the possibility to run a second rig on the Wilcox.
So we have several different places we can run additional rigs, but we're currently just going through our economics, updating all those and showing Dave and <UNK> kind of the different economics.
And we'll come up with a plan going forward here, before too long, in terms of exactly where we're going to run our additional rigs.
Thank you, Jason.
Again, I want to thank everyone for joining us this morning.
We will be out on the road over the next couple months and hope to see many of you then.
But if not, well, have a good late spring [early summer].
Thanks.
Bye.
| 2018_UNT |
2016 | SNX | SNX
#I'll start, then maybe <UNK>, you can add some detail later.
The good news is that I think there's been a lot more press and interest in Open Compute.
But also keep in mind that when we talk about or our overall Hyve business, only a portion of that is really directly related to Open Compute.
A good chunk of the work that we do, although somewhat touches on OCP, really are more custom configurations specific to our clients.
Collectively, when we look at the trend of large scale data center build-out, and in particular moving to more custom build, whether it be OCP based or not, that's really where the big growth in the market is, and that's what we address directly with our Hyve Solutions business.
Yes, <UNK>, your view on Japan is accurate.
It is much more of a broad line based business, and we do have a larger than North American footprint in the retail space than we have here.
That said, when we try to describe what's happening in the underlying market, and what's been going on for the past two years, the Japan economy, as you know, has been under stress.
It is recovering at this point, and we're actually seeing positive signs now two quarters in a row that there is stability, and certainly growth is starting to return in certain segments.
That is absolutely true in the commercial segment.
Consumer is still somewhat lagging behind, and because of the bigger footprint that we have in consumer, that is weighing down a little bit on our overall growth for that business.
So that said, we put double and triple effort into driving more and more presence and breadth in the commercial side of our business, starting with the product side, but also expanding market presence in other areas of Japan, that we feel that were under-served in the commercial part of the business.
And that's been an investment that we've been making over the past year.
That continues to happen, and we're starting to see good results come out of that.
So <UNK>, the sunsetted government contract frankly we've been calling out for two-and-a-half, three years, because we bought it from IBM, and identified it from the first call, and tracking to ---+ in fact, at the time we actually had two contracts within the government space that were ending, that we had to replace.
And one was, gosh, almost $100 million, and we replaced it without ever calling it out.
The second one, as we talked about, was larger than this originally, but in the last 12 months was a little over $120 million.
So we have been replacing those, and our view 90 days ago was similar to what it is, and has been right now, in terms of that contract.
In terms of some of the other movement from a site consolidation exercise in the US, this is something that we've been having conversations with for the last number of months, and had discussions.
Had there been price increases, well might have stayed within North America.
But frankly we're comfortable with what the outcome is, because it will allow us to be more profitable once we make the switches and moves of this different revenue business.
And actually, to follow up on one point, two of the centers actually had their leases up within this period of time, as well, so timing frankly worked out well with that as well, as we did our view of the consolidation.
So nothing's really changed within the last 90 days.
<UNK>, as I mentioned, in Q1 ---+ sorry, in Q2, the $28 million, the vast, vast majority of that is the contract that sunsetted.
In Q3, that sunsetted contract year-over-year compare was at the highest amount, and will be about a $35 million impact, just for that contract.
The offshoring will be significantly less than that.
We don't want to call out the final number, because we're just doing the transition plans and everything else that goes along with it, but it's ---+ I'll tell you, it's not as much as Q2 and Q3 of the sunsetted contract, in terms of annual revenues.
So put it in a size for you in that way.
I think your assumption is correct.
I mean, Q2 is what we see as our lower operating margin for the year.
And then we see progression as it goes through the rest of the year, primarily driven by obviously moving some of the work to lower cost centers, reshaping our US footprint, as well as some of the onboarding of new business that we have within our bookings that we're on-boarding.
<UNK>, I don't want to get into providing future guidance.
I think what I'll tell you is this.
Clearly, we have one contract that has lost money for Q1, that we're calling out as losing money for Q2.
But we've said that we'll be profitable for a full year basis is our belief.
And so that obviously will show up in one of the quarters, in the preceding two quarters that will be quite a big impact, and therefore will drive operating margin much higher than what you'll see seasonally for the first two quarters.
I think also you'll see the general improvement within our cost structure, as we take out some of the costs of the US and consolidate, and move some of the work to lower-cost jurisdictions.
While our revenue is muted a little bit by moving it offshore, obviously we generally tend to have a better margin profile of business offshore than onshore.
So all of that will contribute to a better operating margin as we go forward in the course of the year.
Sure.
For US specifically, I think going back to Q1, again, the slowness was pretty much in what I would call the broadline or commodity part of the business.
So obviously higher volume, but that is more the lower margin part of the business.
In addition to that, the consumer market was a little bit soft.
In particular, coming off of the post holiday season.
And there was not as many new product introductions as we had seen in prior years, as well.
So just kind of calling out where the softness was, it was broadline January specific, and the consumer market.
But as I said, as we continued on into our quarter, we saw the market really restore to more normal demand levels.
In broadline in particular, yes.
Yes, we would have reached these without the consolidation.
Just categorically, what continues to be strong is anything communications security related.
So within the specific product lines that we have, within networking, in particular campus Wi-Fi and pretty much all of our security lines, that was pretty strong.
But some of the hardware parts of enterprise were a little bit softer, in particular, some server categories.
Actually, it's more ---+ I'd bridge it more between Q3 and Q4.
If you remember, we talked about renegotiating it in Q4, and so there was a bit of catch-up that was Q3, pulled into Q4, with the renegotiation.
But I would bridge it more between Q3, Q4.
From an absolute operating margin dollar perspective it will be down, just because of the gross revenue will be muted, and down from it.
But from a margin profile perspective, at a gross and at an operating income margin perspective, it will be higher.
No.
I mean, we do do this on a continuous basis.
We're always working with our clients to move things around.
Specifically what was driving these discussions was I mentioned two of the facilities had their leases up.
And so before we re-renewed ---+ and they were single use facilities I guess is the best way of putting it ---+ before we renewed, we wanted to make sure the client was as committed as we were.
When we started going through the new pricing model with the increases and other things, the reality was that it didn't make sense for the clients, and it was a better decision for them to move their work elsewhere, and us to support that, and work with them.
And these had been long-term contracts that had come across from IBM, that had not seen increases for some time.
So the reality is that effectively, cleanup, because these two came at the same time we're calling it out, but we've actually had moved things back and forth, as well as moved some things onshore, for whatever the client's strategic initiatives are, that we need to support.
| 2016_SNX |
2016 | CTXS | CTXS
#About half.
No, <UNK>, it's actually not a concern of mine.
We're not looking to raise debt at this moment in time.
We've got $2 billion in cash and liquidity in other ways, and we've been repurchasing a lot of stock, at the same time.
So if we need to go approach the capital markets in the future, we'll address that based on the facts and circumstances that are present then.
<UNK>, let me take that at a high level.
Yes, we're doing a lot of things with Microsoft.
I'm sure that if you go back and you look at some of the materials and announcements we've made, whether it's at Summit or Synergy a year ago, you'll see that everything from Windows Server updates to Windows endpoint migrations, always an important part of our strategy around workspace services.
We had <UNK> Anderson on stage with us at Summit just a couple of weeks ago talking about all the great things we're doing together.
And so yes, a lot of opportunity, definitely a driver in the business.
And just allows us to collaborate that much tighter.
In terms of Azure as a stand-alone, yes, lots of things we're doing both with Azure, AWS and other major cloud providers, whether that's migrating workloads to the infrastructure, whether that's running control planes in the infrastructure, whether that's providing, frankly, infrastructure to the data centers, and we've got a multifaceted relationship there.
Kyle, are there any more questions.
Okay.
I just want to thank everyone again for joining us today.
Really excited to have <UNK> on board, part of the team.
Looking forward to 2016, and we'll talk to everyone again at the middle of April.
Thank you very much.
| 2016_CTXS |
2015 | TTWO | TTWO
#Greetings and welcome to the Take-Two Interactive first-quarter fiscal year 2016 earnings call.
(Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr.
<UNK> <UNK>.
Thank you, sir.
You may begin.
Good afternoon.
Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2016, ended June 30, 2015.
Today's call will be led by <UNK> <UNK>, Take-Two's Chairman and Chief Executive Officer, <UNK> <UNK>, our President, and <UNK> <UNK>, our Chief Financial Officer.
We will be available to answer questions to answer your questions during the Q&A session following our prepared remarks.
Before we begin, I'd like to remind everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws.
These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.
We have no obligation to update these forward-looking statements.
Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.
These important factors are described in our filings with the SEC including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2015, including the risks summarized in the section entitled Risk Factors.
I would also like to note that, unless otherwise stated, all numbers we will be discussing today are non-GAAP.
Please refer to our earnings release for a GAAP to non-GAAP reconciliation and further explanation.
Our earnings release and filings with the SEC may be obtained from our website at www.taketwogames.com.
And now I will turn the call over to <UNK>.
Thanks, <UNK>.
Good afternoon and thank you for joining us today.
I'm pleased to report that during the first quarter, we delivered strong revenue and earnings growth driven by robust demand for our recent releases and catalog, as well as better than forecasted recurrent consumer spending.
Our solid earnings converted into significant cash flow and at quarter end, we had approximately $1.2 billion in cash and short-term investments.
Nearly two years after its record-shattering launch, Grand Theft Auto V continues to outperform expectations.
On April 14, Rockstar Games brought this groundbreaking title to PC with a number of enhancements, generating stellar reviews and strong digitally delivered sales.
In addition, we benefited from ongoing demand for the console versions of Grand Theft Auto V, particularly as the installed bases of Playstation 4 and Xbox One expand.
Today, Grand Theft Auto V has sold in more than 54 million units worldwide.
And Rockstar Games is successfully driving engagement with the title in meaningful incremental profits through the release of new content for Grand Theft Auto Online, which I will discuss shortly.
NBA 2K15 continues to broaden its global audience and build on the franchise's trend of annual growth.
The sell-in of the title has crossed the 7 million unit mark and surpassed NBA 2K14 during the same period after launch.
And NBA 2K15 has generated substantial revenue growth over last year's release, driven in part by high margin recurrent consumer spending.
Our first-quarter results were also enhanced by a diverse array of other recent releases and catalog titles.
Standouts include the Borderlands series, particularly The Handsome Collection, WWE 2K15, and Evolve.
We continue to capitalize on our industry's transition towards digital distribution.
During the first quarter, our digitally delivered revenue increased 139% to $254 million and represented 69% of our total net revenue.
This result was driven by growth in full game downloads and recurrent consumer spending, both of which exceeded our outlook.
Recurrent consumer spending represented a significant component of our overall business mix accounting for 25% of our total net revenue in the first quarter.
Grand Theft Auto Online was once again the single largest contributor as Rockstar Games has driven sustained engagement through the ongoing release of free content updates, most recently the Ill-Gotten Gains Updates Part 1 and Part 2 which were launched in June and July, respectively.
Roughly 70% of Internet connected Grand Theft Auto V users have played Grand Theft Auto Online and the active user base continues to grow with average monthly active users for calendar 2015 to date up more than 40% versus calendar 2014.
In addition, virtual currency for NBA 2K was an important part of our digitally delivered success.
Revenues grew by 54% year over year, benefiting both from online console play and strong engagement with the MyNBA2K15 companion add.
Downloadable add-on content is also a key element of recurrent consumer spending.
The leading contributors in the first quarter were offerings for the Borderlands series and Evolve.
Finally, our results benefited from the enduring popularity of WWE SuperCard, which has been downloaded more than 7.5 million times and sustained growth from NBA 2K Online in China which now has 27 million registered users and continues to be the number one PC online sports title in China.
Expanding our revenue from recurrent consumer spending is a key strategic focus for our organization and an important high margin growth opportunity.
We now anticipate the revenue from recurrent consumer spending will grow in fiscal 2016 and represent increased percentage of our total business mix versus last year.
Fiscal 2016 is off to a solid start and promises to be another year of substantial non-GAAP earnings and positive cash flow for Take-Two.
Our ability to project significant profits this year with a lighter release schedule reflected our Company is now structurally a higher margin enterprise than in any time in our history.
Today, Take-Two is a global interactive entertainment leader with the industry's top creative talent, a diverse portfolio of critically acclaimed and commercially successful franchises, and a solid financial foundation.
We are better positioned than ever to deliver growth and margin expansion in future years and returns for our shareholders over the long term.
I will now turn the call over to <UNK>.
Thanks, <UNK>.
Today I will discuss our pipeline for the remainder of fiscal 2016 and beyond.
On September 29, 2K will continue their illustrious basketball legacy with the launch of NBA 2K16.
This year's release will define the ultimate intersection of sports and pop culture with three unique game covers featuring NBA All-Star Stephen Curry, James Harden, and Anthony Davis, as well as an all-new MyCareer mode, written and directed by acclaimed filmmaker Spike Lee.
NBA 2K16 will also feature the most extensive soundtrack in NBA 2K history, including more than 50 tracks by notable artists such as The Ramones, Nas, Jay-Z, MIA, Calvin Harris, and Drake.
On October 27, 2K will release WWE 2K16, which will further leverage the development expertise and visual concepts and promises to take this beloved sports entertainment franchise to exciting new heights.
Stone Cold Steve Austin, a 2009 WWE Hall of Fame inductee and winner of 21 championships throughout his career will be the cover superstar.
In addition, 2K recently announced that action movie icon and WWE Hall of Fame inductee Arnold Schwarzenegger will make his series debut in WWE 2K16.
Consumers who preorder the title at participating retailers will receive his two famous characters from the films, The Terminator and Terminator 2: Judgment Day, and compete in the squared circle against the games roster of WWE superstars.
In November, 2K will launch XCOM 2, the sequel to the 2012 game of the year award-winning strategy title XCOM: Enemy Unknown.
Developed by Firaxis Games, XCOM 2 will introduce procedurally generated maps for deep replayability and will offer a higher level of modding support.
XCOM 2 will include a diverse collection of new enemies, aliens, and weapons and will provide greater story, strategy, and tactically driven combat.
This month, the title will be on the cover PC Gamer Magazine, which features an all-new detailed look at the game and interviews with the development team.
Also in development at Firaxis Games is Sid Meier's Civilization: Beyond Earth: Rising Tide, a thrilling in-depth expansion pack from the hit franchise that has sold in over 31 million units worldwide.
Rising Tide expands Beyond Birth to new frontiers on the planet's surface and beneath its seas, adding even more choices and diplomatic options as players continue to build a new vision for the future of humanity.
2K plans to launch the title this fall.
Fans of Firaxis Games can also look forward to the Second Annual Firaxicon, an event celebrating the studio's games and players which will be held at the Baltimore Convention Center on October 3.
Firaxicon will provide consumers with an opportunity to meet members of the development team, attend panel discussions, and experience both Rising Tide and XCOM 2 prior to their releases.
On February 9, the release of Battleborn promises to continue our proven track record of launching successful new intellectual properties.
Currently in development by Borderlands creators, Gearbox Software, Battleborn is a first-person shooter with 25 unique characters that grow and level up as players progress through the game.
Battleborn will include a cooperative story mode featuring a variety of heroic adventures as well as three different competitive multiplayer modes full of intense online team-based action.
2K will hold an open beta for Battleborn prior to its release and we'll have more to share about its details later this year.
Also during fiscal 2016, consumers in Asia will experience Civilization Online, our free to play mass multiplayer online game developed in partnership with renowned South Korean-based studio, XL Games.
2K recently completed its second closed beta test for the title and consumer response was extremely positive.
We believe this bodes well for the game's forthcoming commercial launch in Korea which represents another important milestone in building our online business in Asia.
We also plan to bring Civilization Online to Taiwan, Hong Kong, and Macau through a publishing partnership with GameFirst and recently announced a deal with to launch the title in China, the world's largest PC online game market, through online publishing powerhouse, Shihu 360.
In keeping with our focus on providing ongoing engagement, we plan to support virtually all of our upcoming titles with innovative offerings designed to drive recurring consumer spending.
We will also continue to release offerings for many of our current titles including additional free content for Grand Theft Auto Online.
Over the past several months, 2K has presented impressive exhibitions at a number of high-profile events that have enabled consumers, in-flowers, and press to get hands-on time with the upcoming releases.
From E3 in Los Angeles to Comic-Con in San Diego and Gamescom in Germany, the reaction to our titles has been incredibly positive and anticipation for their launches continues to grow.
In the months ahead, we will build on that momentum to reinforce our strong outlook for this year.
Heading into and throughout this holiday season, we will deploy our worldwide marketing and distribution expertise to drive sales and create must-have moments at retail.
Our teams execute well-coordinated global campaigns that leverage every relevant form of media, both traditional and social, to turn our product launches into [tentpole] events.
Whether on discs or through digital download, we will ensure that our products are available to consumers whenever and wherever they want them.
Looking ahead, our robust development pipeline extends far beyond fiscal year 2016.
Last week, 2K announced that Mafia III, the next installment in our successful organized crime franchise, is currently in development for Xbox One, Playstation 4, and PC at Hangar 13, 2K's new development studio.
Planned for release during fiscal year 2017, the story of Mafia III introduces a new playable protagonist, Lincoln Clay, an African-American Vietnam War veteran who is determined to take revenge on the Italian mob for betraying and murdering his black Mafia family.
Players will choose their path to revenge and build their own crime empire in a fictionalized New Orleans circa 1968.
Mafia III combines the best of cinematic storytelling with a dynamic narrative structure that responds to player choice, situated in a city that changes based on their actions.
In addition, we have numerous unannounced games in development that are planned for release in future years, including both groundbreaking new intellectual properties and offerings from our established franchises.
With our industry-leading creative assets and focus on operational excellence, Take-Two is well-positioned for the long-term success.
I will now turn the call over to <UNK>.
Thanks, <UNK> and <UNK>.
On behalf of our entire management team, I would like to thank our colleagues for their hard work and a solid start to the year.
And to our shareholders, I would like to express our appreciation for your continued support.
We will now take your questions.
Operator.
Are you looking at the GAAP financials or the non-GAAP financials.
We don't show that but the GAAP the way the internal royalties is calculated a little different than what we're doing with the non-GAAP where the non-GAAP financials and the EPS associated with that is going to follow along with the overall profitability of the business and the internal royalties to be calculated, based on the overall profitability of the business and that profit share at that point in time.
Hi <UNK>, it's <UNK>.
You obviously all of those titles have significant ---+ are significant contributors towards our digital sale, both as digital download and in recurrent consumer spending.
We don't have any details to provide you specifically across game to game, but we can tell you in general it's growing across all of our franchises.
So for the accelerated amortization of the capitalized development expenses that we talked about, the amount is about half of what the margin effect was in the quarter.
So we're not talking about what specific title that is for, but that's the amount.
And what's driving that is on each quarter, we look at the estimates of lifetime titles of our sales, and it will adjust the capitalized development cost ---+ the amortization for it, based on what those estimates are, whether it's up or down.
And <UNK>, regarding the M&A environment, I think we see that as unchanged.
As you know, market prices are robust for certain companies in our space; and I think that reflects the fact that this is a growth area in the entertainment business and certain companies are doing very well indeed.
We tend to be very disciplined.
We are looking for accretive opportunities, and we are very focused on value.
But we don't really see any changes there.
From our point of view in terms of cash, we increased our cash balance this quarter.
We [consolidated] operations, generated free cash flow.
That's certainly good news.
We're reporting roughly $1.2 billion in cash.
We account for our converts as though they will be satisfied with equity, so on that basis, preferably it's all net cash as well.
So our view on that is that cash in our business can be a strategic asset.
It allows for one to be opportunistic and it supports the Company that operates within a business that does offer some risk.
So we do see it as a strategic asset that will allow us to avail ourselves of both internal and external growth opportunities as they come about.
In terms of use of cash, we've said there will be three potential uses first to support organic growth.
This Company story is an organic growth story largely.
Second, to avail ourselves of inorganic opportunities ---+ I just addressed that.
And third, to return capital judiciously to shareholders and we do have an open authorization for a buyback from our Board.
So I think it will fall within those three buckets.
This is obviously a high-class problem to have.
Hi <UNK>, it's <UNK>.
I think first and foremost, the intention of all the labels in our studios is to create product that people really want to enjoy and that will delight consumers.
So, that's first and foremost.
Whenever we are thinking about a development pipeline it's how can we create franchises.
The best way to create a franchise is to create great product.
That being said, I would say pretty much across the board, every one of our releases on a go-forward basis should have some kind of recurrent consumer spending opportunity.
There may be some puddles where it doesn't make sense, but again, that's a creative decision as much as it is a business decision, but there is no ---+ I don't think there are any specific genres where it doesn't play well.
If you look at some of the titles today from which we are generating recurrent consumer spending, they could be more diverse, so I think it's fair to say that that's a focus for us across all of our titles and I don't think that there's any set rules in terms of genres, etc.
In terms of Battleborn, again, our ---+ whenever we take a release window for any of our titles, it's really two ---+ it's two specific things.
It's when the title is ready, when is the best time for us to optimize it from a creative perspective, and then when do we think the right window is for that title, given what's in the market and also given the natural consumer patterns of purchasing patterns over the years.
I would say that it's really more the former.
The most important decision that we make is, is the title ready.
Is it the best creative ---+ are we putting our best creative foot forward when we are releasing a title.
That's always primary.
And then we will look at it and we will say, is there an open window.
Given that, is there an open window that we can utilize.
And I think pretty much across the board, there aren't many months in the year where we feel uncomfortable releasing a title.
Most of our titles stand amongst themselves.
We don't necessarily need a holiday to drive our spending because these are very high-quality AAA titles that are tentpole releases in and of themselves.
And then in terms of DLC for GTA V, we don't have anything to say about that today.
That's NBA 2K Online in China and it's based on 27 million users.
Well, on your first question on the digital business we do expect the margins to continue to grow as we continue to get our digital business getting bigger and bigger, but what percentage that's going to be, it's a little early to say, but we expect it to continue to grow over the long term.
And in terms of the percentage of our business, reflected by digital downloads as opposed to physical sales, we do see that growing over time.
The first quarter was disproportionately high because of the release of Grand Theft Auto V for PC, which tends to be heavily downloaded format, but we also see the percentage growing for consoles over time.
I don't think we are quoting a specific figure.
We are blessed that we have two distinct labels at this Company and most of the studios have a lot of talent.
We do not have a tech sharing environment ---+ very congenial company, but we don't think that's the best way to get ---+ to get the best out of our development folks.
That's not the way it works around here.
Mafia III is a completely different experience.
I would not compare it to anything else out there.
The reveal was great, but it stands alone.
And no, we don't use any other game in the same sentence as Grand Theft Auto.
It is the industry standard bearer and it's not up for comparison.
So no, I think it's flat or (inaudible) that may be the case but it's not.
It's early in the year.
We are really ---+ we are very happy with the way the first quarter penciled out.
We have a lot of other cards to turn over.
We have got obviously a big release in the second quarter with NBA 2K16.
We're really excited about that, but it is early days yet.
But thanks, it's a really good start and we continue to believe we have a lot of work to do.
We also have a great deal of opportunity.
We would like to thank everyone who attended the call today for their attention, for the great questions, and we do appreciate your continued support, thanks so much.
| 2015_TTWO |
2015 | HRB | HRB
#Yes, commercial paper has always been more of a luxury from our perspective.
It's really more of a cost savings.
I think in the last few years with the regulatory changes and the way that banks look at the economics of C-Locks, that that arbitraged, as it were.
It's changed a little bit.
We felt it very appropriate, given these broader announcements, about our capital structure to use this as an opportunity to relook at the C-Lock.
We have a great facility right now.
We've got great banks that are part of that.
We're going to relook at that and we've talked about the three major benefits in the prepared remarks.
I can't comment on what may come out of that because obviously it's not finalized at this point in time.
Of course, when it is finalized, we'll provide more details as appropriate.
As many of you know, we've got a tax rate that is naturally at the high end of the range for corporations in the United States, in the high 30% range.
We've been actively looking at a number of strategies and we've been successfully able to execute them pretty consistently over the last couple of tax seasons and also continuing through this current quarter.
Those are discrete in nature, and what I mean by that is they're one-time.
All really good.
There's real benefits to the Company.
We have not yet communicated what we think the more permanent or long-term view is, what we think the effective tax rate is, but we plan to do so at some point in the future.
Thanks, <UNK>.
Yes, I can't really give you a forecast at this point in time.
It's going to be subject to market conditions, timing.
We're going to look at 10-year structures.
Our view is we'll be consistent with other market transactions similar to this, but I can't give you more guidance than that.
Yes, I mean, provided through the Press Release and today's comments and guidance on how we think that we have additional incremental debt capacity on the balance sheet.
We're not at a point we are going to get more specific than that.
I don't think buying back shares with daily overnight money is the right sort of term structure to go with.
But we feel very comfortable with the tender that we've announced with the contingency around the C-Lock as well as other customer conditions, that we'll be able to fulfill the $1.5 billion tender offer.
And again, <UNK>, I would caution everyone.
What we're doing here and there's ---+ I'll leave it to <UNK> to talk about the sources and uses.
What we're trying to do here is not position this as incremental debt to do this or that.
We're trying to reset the capital structure here.
We're no longer a savings and loan holding company.
This gives us an ability to set up our capital structure in line with our true business model going forward.
And then from that, we will then make decisions within the framework of what we talked about today from a capital structure perspective.
Yes, we've been pretty consistent in communicating with you, especially last quarter or so, that when we expect at the time the bank transaction to close which is, of course, now closed, that we would have about $1 billion of extra capital available.
And I'm confirming that again today with you; that's one of the primary sources, of course, for what we're planning to do here and announced.
In terms of [mind assent] this structure outside of the country and/or restricted, that's not really ---+ in our minds, that's part of the permanent capital structure.
We have done a good job in the last couple of years bringing some of that back from Canada and Australia and that's part of what the $1 billion represents.
Thanks, <UNK>, for your comments and, yes, it has been a bit of a long journey here.
And again, you said it well and you and I have talked about this.
We now, if you will, have the Company that we wanted.
Yes, the core of our strategy is what we call tax-plus.
We're going to center the Company on the tax preparation event and that is consistent, whether we are talking about international or here in the US.
Our principle is to serve clients the way that they want to be served, whether that be through digital efforts or with assistance.
And we will continue to operate with ---+ that's consistent with our brand and determine ---+ and I think what we did last year with Tax Identity Shield as an example.
Where can we add value to our clients' lives.
If we're able to monetize that, but ultimately we want to be the place where we do the best job on taxes, the most accurate job, where we get the maximum refund for our clients, and do it in a way that protects their security.
And that will continue to be ---+ it's somewhat of a simple notion, but I think a lot of times in business ---+ and when I first started with this Company, a lot of investors said to me, can you ---+ your story is too complicated; your story is too complicated.
Well, I think we've got a nice, simple story right now that I'm really proud of and I think we can continue to drive a lot of value.
You want to take the second part, <UNK>.
Yes, to keep it simple, I think you did sort of a very nice, high-level summary there, <UNK>.
But cost, capital, what's next.
I mean, not next, we've been working on it already, but helps us to continue to focus on even more is really the revenue side of the business model.
As you know and many people on the phone know, we really want to get to a point where we are sustainably growing 4%-plus.
And to borrow a quote from my good friend Jason Houseworth, who runs our digital business and our product side, we're maniacally focused on that.
And we, at that point, will be able to spend much more time talking about the early season challenges that we've had the last few seasons; continue to talk about the value proposition; continuing to talk about all of the things we can do to execute to be more relevant for our clients and, frankly, to win more clients from some of our competitors.
Thanks, <UNK>.
Well, the opening number, we're kind of coming out with a big production, if you will.
But again, I would go back to the facts here.
The Board has authorized a $3.5 billion authorization through June of 2019, that's essentially four tax seasons.
We will have a tender offer we will launch tomorrow which we think is a great way to take immediate action.
And then from there, we are not going to be ---+ we have options in front of us, but I think what I would focus on is that we're looking at this over that four-year time frame.
I don't know, <UNK>, if you have anything you want to add.
Yes, our focus right now is what we've announced today and we don't have much comments in our dividend policy.
Obviously everyone knows we pay a dividend and the yield, depending where the stock price is at, is in the mid 2% range and we've been in that range now for a couple years.
But we have no (multiple speakers).
We did raise the dividend 33% a few years ago, but we don't have any comment beyond what we stated today.
Yes, a very fair question and consistent with the way we've handled this, I think in the past.
I'm not going to get into that, certainly, on September 1.
As we get closer to Investor Day and the actual tax season, we will share more of those plans then.
Thanks, <UNK>.
Thanks.
Yes, so we have regular conversations with Standard & Poor's and Moody's.
We have good relationships.
We have a lot of respect for the team at both firms.
We would, in a normal course, talk about our business performance.
What we've said today is we believe that with this plan that we'll maintain investment grade metrics.
But ultimately that's a decision that the rating agency is going to make and that's really their call, not ours.
Yes, I don't know that we've commented on certainly the upcoming tax season.
The extensions are still out there.
We're still doing tax returns for tax season 2015, so we haven't come out with a position on growth going forward.
Again, as we get closer to the tax season and/or at Investor Day, we'll have an indication on that.
We'll be able to study ---+ the tax season will have fully closed and then we'll give you what our belief is as a best estimate.
No.
Sorry, no, just to be clear.
Yes, so this is one of those awkward questions, because of the tender situation, I'm not able to get into in much detail.
All I can tell you is that it was well-considered and discussed with the Board and Management and outside advisors, and we felt it was the appropriate number.
Yes, I was going to say the same thing.
There was great deliberation given to this.
Obviously, during the time when we were in the regulatory approval process we couldn't talk too much about it but obviously we spent a lot of time on that.
And we had said consistently that upon closing of the transaction and us being deregistered we would come out with our plan shortly thereafter.
And, hopefully, we hit that marker.
Thanks, <UNK>.
Do you want to go, <UNK>.
Yes, we've been ---+ thanks for the question, Mike.
So we've been very consistent in our perspective on this, but it's a well-considered discussion of topic with the Board and Management.
We've talked to a lot of external people over the last couple of years and we've gone public and said we believe there's value in maintaining investment-grade metrics for H&R Block.
We've not been specific as to why.
There are a number of considerations that are unique to Block, but there are some general things as well.
We don't think it's very valuable at this point to get into a specific articulation of that.
Sir, can you repeat the question.
I'm not sure I understood question that question there, Mike.
Can you ---+
Yes, I mean, as we said and say again, we are not going to get into specific articulation of the pros and cons.
We think consistent ---+ we think there's value in it and we are not going to share more than that.
So thank you for that question.
It wouldn't be a call if we didn't have a Sand Canyon one, so thanks, Mike, for bringing that here at the end of this.
So as I said in the script, there was no real major change this quarter in Sand Canyon's perspective of things.
The representation of warranty reserve continues to be at $150 million and there are several counterparties that are in [tolling] arrangements that they are moving along with Sand Canyon.
In addition to that $150 million, there's a couple hundred ---+ $200 million plus of equity.
And if you sort of reverse-tax effect that, that means there's net assets, as it were, of $450 million-odd in total.
The view that H&R Block has and I think that Sand Canyon would have, is that it's a time bound issue.
It will take multiple years to resolve.
My personal view is getting sort of a situation where there's no exposure to Block is really kind of the expected outcome at this point in time.
I don't think we would be in a position where we would be able to forecast down the road anything more in terms of positive cash back to the Company.
And as always, we point you to the quarterly disclosures and the annual disclosures for a lot more detail on this.
Yes, with regard to making the documentation requirements consistent, we are certainly in active discussion as part of an overall software working development group with the IRS and with Treasury.
And I think that there's been a lot of discussion.
It's a policy question, but I think we are ---+ the ball is being advanced.
I just don't know how far for this tax season, but we certainly believe that it's the right principle, that no matter what your method of filing, that it be consistent and in terms of what you need to document and I'm hopeful that will happen for certainly for this tax season.
Thanks, Mike.
Okay, thank you, everyone, for joining us on today's call.
We will look forward to talking to you down the road.
| 2015_HRB |
2016 | CUZ | CUZ
#Good morning and welcome to Cousins Properties' second quarter earnings conference call.
The press release and supplemental package were distributed yesterday afternoon as well as furnished on Form 8-K.
In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg.
G requirements.
If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website.
As you may be aware, on April 29th, 2016, we announced a merger between Cousins Properties and Parkway Properties.
A separate press release was issued and the investor presentation with the related conference call transcript regarding the proposed transaction were posted to both companies' websites.
In addition, please note that the joint proxy statement was filed on July 25th, 2016, and has been posted to both companies' websites.
Certain of our directors and executive officers may be deemed to be participants in the solicitation of proxies with respect to the proposed transactions.
Information about the participants and proxy solicitation is contained in the definitive joint proxy statement.
With the exception of a brief update regarding the special meeting, this call will focus on our second quarter results and we request that you confine your questions and comments to these results and not the announced merger.
Please be aware that certain matters discussed today may constitute forward-looking statements within the meaning of Federal Securities laws and actual results may differ materially from these statements due to a variety of risks and uncertainties and other factors.
The Company does not undertake any duty to update any forward-looking statements whether as a result of new information, future events, or otherwise.
The full declaration regarding forward-looking statements is available in the press release issued yesterday and a detailed discussion of some potential risk is contained in our filings with the SEC.
With that, I'll turn the call over to our Chief Executive Officer, <UNK> <UNK>.
Thanks, <UNK>.
Good morning, everyone, and thank you for joining us on the Cousins Properties' second quarter conference call.
With me today are <UNK> <UNK>, Cousins' Chief Financial Officer, and <UNK> <UNK>, Cousins' Chief Operating Officer.
I'm happy to report we had a very busy and productive second quarter here at Cousins.
I'll start with a brief overview of some key financial and operational highlights through the quarter and then focus my comments around the status of our merger with Parkway Properties and the subsequent spinoff of the combined companies' Houston portfolio into a separate publicly-traded REIT.
During the second quarter, Cousins delivered FFO before merger costs of $0.22 per share for a total of $0.42 per share year to date.
Impressively for the 18th consecutive quarter, we've posted positive same-property cash NOI growth.
We also leased approximately 402,000 square feet of office space during the quarter for a total of 622,000 square feet for the first half of 2016.
This solid leasing performance was accompanied by a positive second generation cash leasing spread of 4.3%.
This represents our ninth consecutive quarter of positive rent rollups for the company.
Our continued execution on the leasing front underscores the strength of our portfolio as well as the robust demand we are seeing in our core markets.
The office portion of our development pipeline including our project with Dimensional Fund Advisors in Charlotte finished the quarter 79% leased, up from 74% leased at the end of last quarter.
The notable activity here was the execution of a 10-year, 43,000 square foot lease with Microsoft at 8000 Avalon, our newly announced Atlanta office development with Gerald Hines.
Other exciting news is the recently executed 68,245 square foot lease with Cadence Software at Research Park V in Austin, which brings the building to 97% leased, just 7 months post completion.
<UNK> will provide much more detail on our development pipeline and operational performance in his remarks, but I just wanted to highlight a couple of examples of the continued great execution by our teams, particularly in Atlanta and Austin in this quarter.
Switching gears, the biggest Cousins' news during the second quarter was our announced transaction with Parkway Properties, where we will merge the operations of our two companies and simultaneously spinoff the operations of our combined Houston portfolios into a separate publicly-traded REIT.
The transactions are on track and we expect to close during the fourth quarter of 2016.
The S4 went effective on July 22th and the proxies were mailed on Monday to both Cousins and Parkway shareholders of record as of July 15th.
On August the 23rd, Cousins and Parkway will separately hold special shareholder meetings whereby the shareholders of each company will vote on the merger.
In addition to the approval of both Cousins and Parkway shareholders, the closing of the merger is subject to, among other things, the SEC approval of the spinoff of the combined companies' Houston portfolio into a separate publicly-traded REIT, which will be called Parkway Inc.
and will be led by Jim Heistand.
On July 1st, Parkway Inc.
filed its initial registration statement on Form 10, which is currently being reviewed by the SEC.
We will continue to keep you up to date on the status of these transactions as we head toward an anticipated fourth quarter close.
In the meantime, in addition to running our businesses, both companies have formed a dedicated integration team and we are working together to ensure both the Cousins and the new Parkway will be ready to open for business the day of the closing.
The teams are highly focused on all facets of the business to ensure a smooth transition for our customers, our shareholders, and our employees.
Post merger and spinoff, Cousins will operate in six markets, which will each be led by a seasoned, on-the-ground managing director, tasked to drive the business at the local and regional level.
Drilling down deeper, we have completed full staffing plans for each building in the portfolio and are thrilled to soon welcome so many outstanding new team members to the Cousins organizations.
These dedicated property management and engineering professionals serve on the front line with our customers every day and are critical to the company's long-term success.
As we make progress with our integration and staffing plans, I'm further encouraged and quite frankly excited for the go-forward value proposition of Cousins.
Let me walk you through my rationale.
First, we are expanding our trophies office portfolio in six of the leading growth markets of the Sunbelt.
Importantly, 81% of our assets will be located in the best urban submarkets, which have historically outperformed the broader MSA market in each city.
Also interesting to note, not a single asset in the new Cousins portfolio will be [surface park] and the average age of our portfolio will improve by approximately eight years.
By way of these metrics, no other portfolio in the Sunbelt offers this type of scale and quality in the most desirable urban locations.
Secondly, our collection of high-quality assets will give us an extraordinarily powerful critical mass in our core submarkets of Buckhead, uptown Charlotte, the Austin CBD, and Tempe, making us the number one public office owner based on total square feet in each of these submarkets.
We believe this puts us in a unique position to increase our pricing power with customers and vendors, enhance our flexibility to meet the changing customer need, and allow us to attract and retain best-in-class local market teams.
Over time, we believe this will drive customer retention and occupancy.
Third, our geographic footprint expanding to such markets will enhance our diversification, both geographically and in our customer base.
Our customer base will not only be stable with blue chip names like Bank of America, Wells Fargo, and Deloitte as our top customers, but it'll also be well diversified with no single industry concentration greater than 20% of our total annual contractual run.
Finally, as you all know, a key tenant to our ongoing strategy at Cousins is maintaining a simple, low-levered balance sheet.
I can assure you that post-transaction, our conservative balance sheet policy will remain intact.
It is this strategy that afforded us the flexibility to take advantage of our current opportunity with Parkway and I believe it will benefit us in the long term as we continue to opportunistically seek ways to unlock value for our shareholders.
With that, I'll turn it over to <UNK>.
Thanks, <UNK>, and good morning, everyone.
I will begin my comments today by briefly highlighting some of our key leasing and operational metrics from the quarter and then spend the remainder of my time providing more specific market, portfolio, and development pipeline updates.
The team delivered a strong leasing quarter across the portfolio.
We executed approximately 400,000 square feet of leases during the quarter.
Importantly, this included approximately 200,000 square feet of new leases, which represents the highest level of new leasing activity in 2 years, if you exclude the 494,000 square foot lease in the third quarter of 2015 with NCR for their new corporate headquarters.
Overall, lease economics continue to trend in a favorable direction in our Sunbelt markets, with the exception of Houston.
In addition, our second generation releasing spreads remain positive for the ninth consecutive quarter with a 17% increase on a GAAP basis and a 4.3% increase on a cash basis.
Importantly, this metric was positive across all of our markets, including Houston.
But before moving on, I do want to note that this particular metric is lumpy and highly dependent upon the geographic mix of where we execute leases in a given quarter.
As I've said in the past, Houston has been a key driver for our outsized releasing spreads.
However, Houston has only accounted for 28% of the company's leasing activity year to date for 2016 compared to 66% in 2015.
While the slowdown in the Houston market has contributed to the deceleration of our Houston leasing activity, the biggest driver has been the lack of any material near-term lease expirations triggering large renewal opportunities like we had in Houston during 2014 and 2015.
Switching gears, I'll provide some color on each of our markets, starting with Houston.
As I mentioned earlier, fundamentals have weakened.
Trailing 12-month job growth totaled just over 5,000 jobs and for the first time in 5 years, Class A net absorption was negative during the second quarter.
The Class A availability rate including sublease space is now just over 20%, which has not occurred since 1995.
However, as we have stated in the past, our urban portfolio in Greenway Plaza in the Galleria continues to significantly outperform.
Our Houston portfolio is approximately 90% leased, which is 600 basis points better than the market-wide Class A average.
In addition, the portfolio has relatively low risk profile with no single expiration greater than 75,000 square feet until September of 2019 and per CoStar, only 34,000 square feet of sublease space is available across our entire portfolio.
Our leasing team on the ground at Houston remains active and continues to deliver terrific results.
To highlight, we leased approximately 89,000 square feet during the quarter.
While the last several years in Houston have been extraordinarily difficult for all, the effects of this downturn do continue to validate Cousins' strategy of focusing our efforts on trophy properties in urban locations, all real estate market cycle, but in our experience urban submarkets with the highest barriers to entry in an attractive amenity base do outperform on the way up and equally as important, hold up better on the way down.
Switching gears to Atlanta, fundamentals remain extremely strong.
The city produced approximately 77,000 jobs over the last 12 months, which is in the top 5 nationally.
Importantly, the development community in Atlanta along with the capital markets continues to demonstrate great discipline as it relates to new construction.
Less than 2 million square feet of speculative space is under construction across the entire city, which represents just 1.6% of Atlanta's 122 million square foot Class A office market.
These are historically low numbers for Atlanta at this point in its cycle.
Our team continues to take advantage of these tailwinds as we make great progress in our Atlanta portfolio during the quarter.
We increased our percentage leased from 88% to 90% across the Atlanta portfolio.
We had some terrific wins at 191 Peachtree, which is now 92.5% leased as we executed two full floor leases during the quarter, including one to the Metro Atlanta Chamber of Commerce.
Also in the CBD, we executed a 38,000 square foot datacenter lease at the American Cancer Society with a BBB credit.
ACSC is now 87% leased, which is the highest level since the third quarter of 2011.
Up in Buckhead, we continue to mitigate upcoming rollover at Terminus 100 as first generation leases begin to expire during 2017 to 2019.
If you remember last quarter, we renewed Wells Fargo and this quarter we executed a full floor renewal with UBS. At Northpark Town Center, in the central perimeter, we made great progress as well as we executed approximately 90,000 square feet of leases during the quarter including key renewals with Hanover Insurance and Apple.
In addition, we executed a new full floor lease with Wells Fargo during the quarter and post-quarter end we signed an additional 16,000 square feet expansion with Wells Fargo, which increases Northpark Town Center to 87% leased today.
Equifax has announced that they will be vacating approximately 68,000 square feet at Northpark in the third quarter of 2017 as part of a broader corporate consolidation plan into Midtown.
We viewed this as a 50/50 probability when we purchased the property in 2013.
So it is a small setback.
However, the Equifax lease is well below market, which creates a terrific opportunity for our team as the central perimeter submarket lacks large blocks of space with direct access to MARTA.
Overall, we remain very confident in our long-term repositioning plan for Northpark.
Our plan's $4.5 million capital improvement project is now underway.
Similar to our work at Promenade, 2100 Ross, and 816 Congress, the repositioning project at Northpark will focus on enhancing key common areas and lobbies as well as adding new amenities for our customer base.
We have had great success with similar projects in the past and are very optimistic that these targeted upgrades will allow our team to further capitalize on the existing leasing momentum.
Over in Austin, fundamentals also remain very healthy.
We continue to watch for signs of a slowdown, given Austin's exposure to the technology sector.
But we have not yet seen any meaningful changes to leading indicators.
In fact, job growth remains robust with a 4% increase over the last 12 months and Class A net absorption is just under 800,000 square feet through the second quarter.
New supply remains slightly elevated in Austin with almost 2 million square feet under construction.
We are actively monitoring this development pipeline, but it does not pose a significant risk to our portfolio, which is now 97% leased after our recent lease with Cadence Software at Research Park V and has 7.5 years of weighted-average lease term.
Charlotte also continues to deliver very steady growth.
Job growth remains well above the national average at 2.7% and the office market continues to absorb space at a healthy pace with approximately 580,000 square feet of net absorption through the second quarter.
Vacancy in the Class A office market has fallen to 8.2%, which is the lowest level since the early 2000's.
Class A vacancy in uptown now stands at just 7.4%.
Developers have taken notice of these attractive fundamentals as approximately 3.2 million square feet of new supply is now under construction.
However, like Austin, our portfolio is very well positioned relative to this new supply as we are approximately 99% leased with approximately 9 years of weighted average lease term.
Moving on to our development pipeline, which inclusive of the Dimensional Fund Advisors project in the south end of Charlotte, totals approximately 1.1 million square feet of office with some additional multifamily units and retail space.
Importantly, our team has done a fantastic job, defensively positioning our development projects, given we are relatively late in the economic cycle.
As <UNK> mentioned, with the recent Microsoft lease at Avalon, the office component of our pipeline is 79% leased with meaningful time remaining until the delivery of these projects in 2017 and 2018.
We have also made exciting progress on the retail component of our pipeline.
Earlier this month, we announced that Target's urban concept will anchor the retail component at Carolina Square, which is now 61% preleased.
From a timing and cost perspective, the development pipeline remains on track.
We will likely close on our Decatur multifamily development in August.
The project will consist of approximately 330 apartment units, 30,000 square feet of office, and 20,000 square feet of retail.
We plan to develop this approximately $79 million project in a joint venture with AMLI and Cousins' ownership will be in the 20% range.
This is a terrific site located adjacent to the Decatur MARTA station, which we believe is a clear, competitive advantage and positions the project for success.
On page 21 of our supplemental, you might have noticed that we have increased both the size and estimated cost of our NCR project.
As I previously said on our Q3 2015 conference call, when we announced this exciting development, these numbers will likely continue to fluctuate as we finalize the design and size of the project with NCR over the coming quarters.
But as a reminder, the structure of our lease is based on a return on cost concept, so our financial return will not be impacted if the size and/or cost of the building fluctuates.
With that, I'll turn the call over to Greg.
Thanks, <UNK>.
Good morning, everyone.
As <UNK> said earlier, we're extremely excited about the Cousins' prospects after completion of the Parkway merger and Houston spinoff.
But in the meantime, we're still running our business and reporting our earnings.
So in that spirit, I'd like to take a few minutes to quickly summarize our second quarter financial performance.
Excluding merger and spinoff costs, which were $2.4 million or a little over a penny per share during the quarter, FFO was $0.22 per share during the second quarter.
Accounting rules require us to expense transaction costs as incurred so these numbers run through our income statement and they reduce our FFO.
Outside of the merger, it was a quiet but solid quarter, reflecting the strong underlying office fundamentals in our Sunbelt markets.
Same-property NOI was firmly positive.
Rents continue to roll up and leasing velocity accelerated.
Beyond running our core business, we are laser-focused on satisfying the conditions to close the merger and spinoff.
For those of us at Cousins involved in the finance and related support areas, this means completing significant integration of both people and systems as well as closing numerous capital markets transactions, which are all proceeding well.
But we know the work associated with the Parkway transactions isn't confined to us just here at Cousins.
For those of you that track our financial performance or harder yet, forecast our financial performance, the merger and spinoff will require more of your time and resources.
Although the transactions themselves are pretty straightforward, the next couple of quarters will be difficult to model with absolute precision; the exact timing of the closing, the cost to unwind various interest rate swaps, (inaudible) of maintenance required in the debt that's being prepaid.
These variables and many more are largely out of our control.
However, rest assured that when the dust settles, we will continue down the path we've been on for the last few years, a simple and compelling strategy executed with a strong balance sheet.
With that in mind, I thought it might be helpful to remind everyone about just how far we have already come down this path.
About three years ago, on our fourth quarter 2013 conference call, I said we had arrived at an important tipping point.
After years of complicated financial statements, we committed to improving the transparency and the quality of our earnings as well as the simplicity and strength of our balance sheet.
I'm proud to say we have delivered on those commitments.
In 2012, total net fee income along with our land sales gains totaled approximately $24 million or 36% of our total FFO.
Through the first 6 months of 2016, these same categories have totaled only $3.7 million or a mere 4% of our total FFO.
Over that same period, we also reduced our debt to EBITDA from about 6 times to a very healthy 4.5 times today.
All else being equal, both of these very strategic, very positive trends should reduce earnings.
However, we've actually increased FFO per share over the last 4 years by over 60%.
But we're not finished.
This merger and spinoff are fully consistent with our stated strategy and they allow us to take some very large, significant steps in the path we began down several years ago.
But these are not our last steps.
Our goal is to become the premier Sunbelt, urban office REIT, a must-own name in the REIT industry.
Before turning the call over to the operator, I wanted to quickly review the dividend policy surrounding the Parkway transaction.
Per the merger agreement, Parkway and Cousins will maintain their existing dividend policies through the closing as well as coordinate the timing of the respective dividend payments.
Parkway has already declared its third quarter dividend of $0.1875 per share to be payable on September 6th to shareholders of record on August 23rd.
Cousins anticipates declaring its third quarter dividend of $0.08 per share in the near future to also be payable on September 6th to shareholders of record on August 23rd.
Assuming a fourth quarter close for the merger and spinoff, each company's post-merger individual boards will decide the amounts and the timing of the respective fourth quarter dividends.
No stub, partial or prorated dividends are anticipated at this time.
With that, I'll turn the call over to the operator for your questions.
Clearly, the merger and spinoff are top of mind and will likely generate the most inquiries.
But please note that we're unable to provide more details beyond what we've already discussed on this call.
Thanks for your interest and now I'll let the operator take over.
<UNK>, this is <UNK>.
As I said when we had our merger call, Atlanta is really in a very unique supply/demand position.
So, a heavy market concentration here is a positive thing to have.
There's very limited new supply and I think at this point in the cycle you won't see those numbers change that much.
Having said that, I also said in the call that long term we don't want a concentration for a long period of time greater than 40% in any single market.
That will still be our objective.
Once the merger's closed, then we'll start being able to give more thought to the strategic concentrations that the company has and where we want to invest more and where we may want to harvest some of what we have.
No, I would say one of the strong rationales behind this transaction from our standpoint is the market position that we are left with in Atlanta and Austin and Charlotte.
We've demonstrated in Austin most recently that having multiple buildings in the best submarket gives you some competitive advantages both on the ---+ what you're able to offer your customers as well as some operating efficiency.
So, we like the physical assets and we like the concentrations in Austin and in Atlanta and Charlotte.
Having said that, no building is sacred and if we get to where we have a trade we want to make in one those markets, we won't hesitate to do so.
But we think that's one of the real strengths of the merger is those market concentrations.
<UNK>, it's <UNK>.
Really what's driven the decline in expenses has been really terrific work by our team in the field.
It primarily relates to us renegotiating some utility contracts as well as going through the real estate tax appeal process, which has brought our expenses down.
So we'll continue to do that same type of work year to year.
But those changes in expenses are primarily attributed those two particular reasons.
<UNK>, it's <UNK>.
That was ---+ we'd had a minor typo in the first quarter supplement.
It's footnoted in the supplement.
There was no back up.
It was just a mistake in the supplement.
Thanks, <UNK>.
Yes, I think in general across all of our markets, again the exception of Houston, you know the markets remain strong.
Lease activity is good.
I think what we have seen and what I tried to communicate at NAREIT is the length of time to get deals done has taken longer.
I think that's just corporate America taking a closer lens to any decision that they make, whether it be a cost decision or investing in capital.
People are taking a little bit more cautious approach, which has made deals, the length of time to get them done, take longer.
But we haven't seen a significant pullback in activity in Atlanta, Charlotte, or Austin.
It's good pipelines, just slower to get them done.
Yes, it across the three markets excluding Houston again, from a base rent standpoint, we continue to show positive rent spreads.
I think looking at our statistics where you might see some softness would be in the costs of the leases, TIs, and free rent.
I think you know similar to the rent rollup statistics, it can be a little bit lumpy and highly dependent upon both the geography of the lease and the type of lease.
So in this particular quarter, I think our costs could look a little bit elevated, but those include some first generation leases at Avalon and Research Park.
Those tend to come with a higher TI as you would expect on a new development.
Here in Atlanta, we had a decent amount of activity downtown, which tends to come at a little higher cost.
All fantastic deals that are positive for 191 and ACSC, but tend to come with a little bit higher price tag.
I think specifically at ACSC, as I mentioned in my remarks, it was almost a 40,000 square foot lease to a datacenter customer, which does come with a higher cost to build out that space.
It does also come with a higher rental rate.
So from a NER kind of NPV perspective, a very, very attractive lease for that building.
So it's highly specific to the particular quarter.
I think as you look over kind of the long term, if you kind of normalize those new construction TIs, we would be fairly consistent with previous quarters.
You know I would say the ---+ when we looked at Florida and we didn't take a real deep dive look at it, but there were a couple of pretty good REITs that were already down there and operating successfully on a long-term basis.
It's not a very, if you look at any of the individual markets, they're not real large.
So, we just saw better opportunities in some other markets in the short term.
Having said that that you know we have noticed that some of our peers have been successful down there.
So we're all about getting with our teammates down there and learning those markets better and get to where we understand them better.
The only thing I would add to that, [Tom], is just as we evaluated our geographic opportunity, I think at Cousins we always believe our relationships are a competitive advantage.
So we had been active over time in Charlotte for many, many years.
Similar to that in ---+ over in Texas as we'd been in Dallas, we'd been in Austin.
So, as we looked at markets with highly attractive demographics and fundamentals, where we had relationships, we felt like we could leverage those and that got our attention first.
Well, I'm not an expert on oil companies, but there was a good article I think this week in the Journal that was talking about how in general the oil companies' CEOs were feeling a little bit better about the long-term prospects, but at the same time there were ---+ was still some downsizing going on at the [true] level.
So, our guys in Houston would tell you that the headline news of so and so cutting back employee count is not as frequent but it also has not disappeared from the market.
I think one of the great things that long term for Houston, it doesn't mitigate the last few years and the impact of energy, but the fact that it still is job positive and the medical center and the chemicals businesses, some of the banks like that, are showing that the economy certainly isn't as one category dominated as it was in the 80's when Houston went through the big downturn.
But I wouldn't say we heard a lot of people go out and declare that we're absolutely through and this is the bottom.
I hope that's right, but that's not what we've been hearing.
We also hadn't heard people say there's a lot more to come.
It just sort of keeps dribbling out.
Yes, as <UNK> said, I'm not an energy expert either, but I think the ---+ the folks that we talk to in Houston, I think they're looking for stability and ultimately as that price settles out, that will dictate what the ---+ you know on down the supply chain what the services companies can charge.
Cause it's ultimately not about the price of oil, it's about the margin to the oil company and how much money they're making.
So, I think they're all looking for stability across the board and all upstream, downstream, midstream, and the services company to be able to plan their business and run their business.
Right now, the uncertainty as it's bounced around, it's been extraordinarily hard, which has led to folks just making kind of no decision.
So I think stability is probably the most important.
Yes, it's <UNK>.
The first thing I would say just to make sure we're looking at apples-to-apples, I know a lot of our competitors when they publish those stats are just including TIs and leasing commissions.
Our published stats include TIs, leasing commissions, and free rent.
So I think on an apples-to-apples basis, it looks ---+ it makes us look a little bit higher.
As we've looked at the trends over the last couple of years, quarter to quarter, this particular quarter is slightly elevated to past quarters here at Cousins and again kind of what's driven that is a little bit of first generation TI that's been included in there.
Then a little bit of the downtown Atlanta leasing does come with a higher cost.
But I think the costs that were attributable to the leases this quarter weren't necessarily higher than they were in downtown Atlanta a few quarters ago.
So, I think as you look at that, we're fairly normalized excluding the first generation costs.
We would hope as our market stabilized in Austin and Atlanta and Charlotte that our team will be able to continue to push those down.
We think it's certainly kind of landlord favorable and are starting to see that trend happen as TI and both free rent come down on kind of a per-year basis.
<UNK>, I think it's just what got in the pocket this quarter was some expensive leases downtown and then on a new projects.
One thing, when we, outside of Houston, we don't see the pipeline of potential prospects in any of our markets slowing down.
One, we had less space to lease, but what we see is the decision making taking longer, which is ---+ you know I think just a function of corporate America as it has been for, you know, since the Great Recession is very expense minded.
So, you're dealing with a big corporation that goes through a lot of layers before the lease comes back approved.
<UNK>, let me ---+ I've got the luxury of a table in front of me that has long-term trends on kind of second gen CapEx.
Just to step back from this quarter and this year and take a look at the longer timeframe, you know our average second gen CapEx divided by total NOI over the last 10 years has averaged 17%.
Over the last 3 years has averaged 18%.
Through the first 6 months of this year, 18%.
So when you take a step back and look ---+ you smooth this out for bumpiness, it's not exceptionally high relative to NOI.
Thanks, <UNK>.
Hey, <UNK>, it's <UNK>.
I would say, again putting aside Houston where I think activity has just really stalled, you know given the weakening fundamentals, buyers are looking for a deal whereas the owners or sellers are very well capitalized in the urban markets and have chosen to just kind of wait this cycle out.
We turn our attention to Atlanta and Charlotte and Austin, I think we've seen values kind of hold constant.
I'd say they've kind of generally plateaued.
We're not seeing any more kind of cap rate compression but we haven't seen it expand either.
If there's kind of any change over the last six months and you've probably heard this from others, it's just really the depth of the buyer pool and the number of bidders that are getting to that price.
But they generally stayed fairly steady.
Candidly, we've probably seen fewer value-add type deals that are out in the market.
Really, I think that's just a function are those that really garner a lot of buyer interest.
I think it's just a function of at this point in the cycle where markets in our state are predominantly healthy.
If you've got a value add asset at this point, there's probably something wrong with it in terms of why it hadn't leased.
So, those maybe have performed a little not as well, but they're probably a lower end quality product.
But overall it's just steady and a little bit thinner.
Sure, in terms of our specific portfolio, to kind of tackle that first, as I mentioned in my prepared remarks, we really just don't have a lot of material expirations over really the next three years in Houston.
It's a big credit to our team on the ground who got out in front of that.
So as we look forward to the rest of 2016, we've already taken care of our largest expiration, which was just 35,000 square feet.
Kind of looking out in 2017, I think our team feels pretty good about the activity that we have.
But it's just not a material percentage, so I don't think we're forecasting big declines within our portfolio over the next couple years.
It's just more broadly speaking in Greenway and the Galleria.
Again, it's the sublease space relative to some of the other submarkets being out west and really downtown has been far more muted.
Out there you've seen sublease space in the 6%, 7%, 8% of the inventory available, whereas in Greenway and the Galleria, it's a much smaller percentage.
Certainly, we're going to continue to see that grow but the pace of acceleration with the sublease space is definitely moderated.
We've heard some people saying it's going to, across the city could rise to ten million square feet.
I don't know that it's going to truly hit there cause it seems it's now moderated.
But I think far less impactful in Greenway and the Galleria.
Yes, <UNK>, we continue as <UNK> mentioned in his comments, has been a big focus of paring it down.
There's not a lot of what's left on the land that we would consider core.
A lot of it is still the hangover from when we were in the residential business.
It just takes a while for the market to turn and there be a buyer.
Some of it will actually be sold for timber.
So I think it'll take a few more years for us to work our way through.
There's a parcel here and there that we want to keep.
What we've been really watching and making sure that we're ready to move is this whenever the permits, multifamily cycle turns that there are some key sites in these submarkets that are so important to us that we would like to buy so that we've got them ready for the next cycle.
We were talking about one of those yesterday and you know the market was probably still a little bit early.
But you know the multifamily really across our footprint for the last four years has been able to outbid office guys on sites.
But some of those sites are still undeveloped and we think there will be some opportunity in the next couple years to get some key core sites in these markets.
That'll be our intention to do.
We've always said that we expect to keep land under somewhere in that 3% to 5% of the total portfolio value.
No, no, no, to rezone back to office, which is very easy to do.
<UNK>, it's <UNK>.
Just to put some numbers on this, I mean we only had $35 million in land on our balance sheet at the end of the quarter.
Inside of that $35 million, which is really 1% of the company right now, you've got, the Victory piece of land down in Texas, TFA, which we're about to start, and the NCR Phase II piece that we're about to start.
So we have kind of three core pieces of land that comprise the vast majority of that $35 million.
In terms of that kind of residential stuff that we still have on the books, it's $8 million.
So it's just, it's just ---+ we'll wind it down but it's just not ---+ it's absolutely not significant.
Thanks, <UNK>.
I'd like to thank everybody for joining us today.
This has been a good solid quarter and really proud of what the teams accomplished.
We're extraordinarily excited about the ---+ completing the upcoming transaction with Parkway and look forward to sharing more on that as we get further down the road.
Thanks.
| 2016_CUZ |
2016 | UNT | UNT
#Thank you, Christine.
Good morning, everyone.
We want to thank you for joining us this morning.
With me today are <UNK> <UNK>, <UNK> <UNK>, <UNK> <UNK> and <UNK> <UNK>.
Each of these gentlemen will be providing you with updates concerning their segments.
After their comments are concluded, we will take questions.
Before we begin the segment reports, I'd like to [overview] some remarks about the Company and more broadly, the state of the industry.
We've entered into another challenging year in which our focus continues to be on balance sheet preservation.
We've made numerous difficult decisions about activity levels, capital expenditure price and G&A levels.
We cannot control commodity prices, therefore we must and will focus on things within our control.
The industry has responded to unsustainable price levels by substantially reducing capital expenditure budgets.
As a result, drilling activity has fallen to unprecedented levels within the US with the total US land rig count dropping 42% since the end of 2015.
Our capital expenditures are budgeted at a level which will keep spending within anticipated cash flow for the year.
At the end of the first quarter, we had no rigs operating for oil and natural gas segment.
Only in hindsight, we believe with absolute certainty be able to determine the ultimate duration of this cycle.
We will adjust our operational cadence to levels to ensure that we will weather the storm.
Although we approach the future with cautious optimism, we feel we are beginning to see some signs of improvement.
According to the most recent Baker Hughes rig count, there were only 391 working US land rigs as of April 29, 2016, a new record low dating back to 1949.
As a result, we are beginning to reach the tipping point on US crude production.
Prices have, for the moment, bounced off the first quarter lows.
According to the EIA reports, US crude production has begun to decline pretty dramatically.
EIA monthly reporting reflects US crude oil production declined by 565,000 barrels per day from April of 2015 to February of 2016.
EIA weekly data from February of 2016 to present reflects an additional reduction of 304,000 barrels of oil per day.
On the natural gas side, monthly and weekly production reports are a little more mixed.
It appears at the US dry natural gas production may be declining ---+ may be beginning to decline due to the effects of reduced drilling and completion activities.
Equally important, increases to natural gas demand associated with power generation due to coal and gas switching and exports to Mexico and LNG cargos totaling approximately 4 Bcf a day, suggest an increasing demand.
Furthermore, new chemical and fertilizer projects scheduled to come on line in 2017 appear to bode well for future demand.
In conjunction with periodic price improvements, we have taken the opportunity to layer in a few more hedges to protect cash flows for the remainder of 2016 and 2017.
We're trying to be opportunistic to create value for our shareholders.
I would now like to turn the call over to <UNK> <UNK>.
Good morning.
We reported an adjusted net loss for the first quarter of $20.3 million or $0.41 per share, which excluded the effect of non-cash derivatives and ceiling test write-down.
Our non-GAAP financial measures reconciliation is included in our press release.
For the oil and natural gas segment, revenues for the first quarter decreased 23% from the fourth quarter because of lower commodity prices and a decrease in production.
Operating costs for the first quarter decreased 8% from the fourth quarter.
This decrease is because of lower lease operating saltwater disposal, production tax, and general and administrative expenses.
For the contract drilling segment, revenue for the first quarter decreased 23% from the fourth quarter because of a decrease in the number of drilling rigs operating and lower day rates.
Operating costs for the first quarter decreased 14% from the fourth quarter because of fewer drilling rigs operating.
For the midstream segment, revenue for the first quarter decreased 15% from the fourth quarter because of declines in liquids sold and processed volumes and lower natural gas liquids prices.
Operating costs for the first quarter decreased 15% from the fourth quarter because of lower gas purchase prices and volumes.
The effective income tax rate for the first quarter was 27.6% compared to 37.8% for 2015.
The decrease was because of an increase in deferred tax expense related to the vesting of restricted stock in the first quarter of 2016.
We anticipate the effective rate for the balance of 2016 to be approximately 37.4%.
We ended the first quarter of 2016 with total long-term debt of $898.7 million, consisting of $638.5 million of senior subordinated notes, net of unamortized discount and debt issuance costs, and $260.2 million of borrowings under our credit agreement.
In early April, we amended our credit agreement, which among other things, set our elected commitment and borrowing base at $475 million and established our maximum senior leverage covenant to be no greater than 2.7 times EBITDA through the first quarter of 2019.
The borrowing base consists of our oil and gas properties and the midstream business, and does not include our fleet of drilling rigs.
We believe our liquidity will be adequate to carry out our 2016 capital plans.
For 2016, our capital expenditure budget remains unchanged from the beginning of the year and is below our anticipated cash flow and proceeds from non-core asset sales.
Our capital expenditure budget is $161 million to $187 million.
The budget is based on realized prices of $34.57 for oil, $8.01 for natural gas liquids and $2.24 for natural gas.
By segment, our 2016 capital expenditures are a range of $109 million to $131 million for the oil and natural gas segment, a range of $9 million to $11 million for the contract drilling segment, of which 56% to 69% is associated with certain components for future BOSS rigs, and $22 million to $24 million for the midstream segment, of which 52% to 57% is associated with fee-based projects in the Appalachia area.
At this time, I'd like to turn it over to <UNK> <UNK> for comments on the E&P segment.
Good morning.
Starting in the Wilcox, we are pleased with the operational results for the first quarter of 2016.
Production for the quarter increased 3% as compared to the fourth quarter of 2015, and is up 30% as compared to the first quarter of 2015.
Our initial two Gilly field horizontal wells have now been online for approximately one year, and the wells are still producing at impressive rates of approximately 16 million cubic feet equivalent per day and 9.5 million cubic feet equivalent per day.
During the first quarter of 2016, we drilled and completed four new horizontal Wilcox wells.
Two of the wells are located in Gilly field and two are located in separate nearby fields.
One of the Gilly field horizontal wells started producing in early February at a peak 30-day rate of approximately 12.7 million cubic feet of gas equivalent per day from the Wilcox Gilchrease sand intervals.
The second Gilly well was drilled in the shallower Wilcox Segno interval and also started producing in early February at a peak 30-day rate of approximately 5.6 million cubic feet of gas equivalent per day.
The lower IP rate for this well is most likely due to poor sand quality in this portion of the field.
The other two horizontal wells completed during the first quarter were recently fracture stimulated, and the results from these wells will be discussed on the next conference call.
As planned, we released the Unit drilling rig in mid-March in the Wilcox with currents plans to potentially add back the Unit rig in the fourth quarter of this year.
Behind pipe re-completion program, the Wilcox is also achieving great results.
During the first quarter, we re-completed three new behind pipe Wilcox zones in existing vertical wells that were producing from deeper Wilcox sands at marginal rates.
Our average working interest in the three-rig completions is 85%.
Prior to the re-completions, the combined production rate for the three wells was approximately 25 barrels of oil per day and 300 Mcf per day.
After the re-completions were done, the oil rate increased from 25 barrels of oil up to 900 barrels of oil per day and the gas rate increased up to 15 million cubic feet per day.
This is a 45-fold production increase.
The total cost for re-completing all three wells was approximately $700,000 or about $235,000 per well completion.
The CapEx amount is lower than expected because two of the wells that were re-completed did not require fracture stimulation at this time.
In general, the overall production results were higher and the capital costs were lower than what we had forecasted.
During the remainder of 2016, we anticipate completing four to six additional behind pipe re-completions.
Our Wilcox team is continuing to make progress in evaluating and leasing in several new Wilcox's lead areas.
Some of these new projects are anticipated to be tested in 2017.
In the SOHOT Hoxbar area, operational results for the first quarter were in line with what our expectations were.
Oil production on a per day basis increased 3% as compared to the prior quarter.
However, overall SOHOT total production decreased 6% on a per day basis, primarily due to natural gas declines as a result of not drilling any new Medrano gas completions.
Three horizontal Marchand sand oil wells were completed during the quarter with an average 30-day production rate of approximately 800 barrels of oil equivalent per day, which is consistent with our current type curve.
A fourth horizontal Marchand well was recently fracked in late April and is currently in the early stages of flowing back.
As scheduled, the drilling rig was released in early March and current expectations are to potentially resume drilling in the fourth quarter of this year.
Our leasehold in SOHOT core increased 5% during the first quarter to 18,721 net acres.
At this time, I'll turn the call over to <UNK> for the drilling company updates.
Good morning.
The first quarter has continued to be a very challenging time for our contract drilling segment, as we faced the depressed demands for drilling services.
The average day rate for the first quarter was $18,392, a decrease of $212 per day from the fourth quarter.
The average total daily revenue before inter-company eliminations and including early contract termination fees was $20,473, which was a decrease of $506 from the fourth quarter.
Our total daily operating cost before inter-company eliminations increased by $1,007 per day for the first quarter as compared to the fourth.
This increase in daily cost is largely attributable to having fewer days over which to spread fixed cost.
The average per day operating margin for the first quarter before the elimination of inter-company profits and bad debt expense was $5,651, which is $1,607 per day decrease from the fourth quarter.
The reduction in total revenue and an increase in daily expenses attributed to the lower daily margins.
Our average number of active rigs during the first quarter was 20.6 rigs, which is 6.6 less than the fourth quarter.
We began the quarter with 26 operating rigs and decreased to 15 at the end of the quarter, which is fairly consistent with the industry drop in active rigs.
Currently, six or our eight BOSS rigs are under contract.
We are very confident that we will persevere through the current market conditions because of our history of being financially prudent, our long-term relationships with key operators, and the versatility of our fleet and our people.
We have initiated several cost saving programs and reduced our CapEx budget to maintain our financial liquidity.
We are maximizing the efficiency of our staff with consolidations and additional job responsibilities, and in many cases, elimination of positions.
We have combined three of our division offices into one and closed two of our offices.
We have also suspended operation of our trucking fleet in the Texas Panhandle.
We recently reduced the wages for the drilling crews and also salaries of all the drilling segment employees to further reduce daily expenses.
All of the above changes will show as potential savings going forward.
At this time, I'll turn the call over to <UNK> for the Superior Pipeline update.
Thank you, <UNK>.
Superior Pipeline began 2016 with positive results despite the low price environment [persisted] in the first quarter.
During the first quarter of 2016, we increased total gathered volume per day by 15% compared to the first quarter of 2015.
This increase in volumes, along with our focus on controlling operating expenses, resulted in better than expected overall financial results.
We're currently operating 26 individual gathering systems in Oklahoma, Texas, Kansas, Pennsylvania and West Virginia, which includes 1,465 miles of pipeline and 13 gas processing plants.
During the first quarter of 2016, we connected 22 new wells to our systems.
Additionally, during the first quarter of 2016, we completed construction of the new fee-based Snow Shoe gathering system in Centre County, Pennsylvania and connected three wells in this gathering system.
During the first quarter of 2016, our NGL gallons sold were lower by 9% compared to the fourth quarter of 2015 because we were operating in a more profitable liquids projection load due to depressed liquids pricing during the quarter.
During the first three months of 2016, we invested $2.7 million in capital projects as compared to $7.7 million in the first three month of 2015.
Our 2016 capital expenditures are estimated to range between $22 million to $24 million.
I will now focus upon several key areas of our midstream business.
In the Mississippian play in north-central Oklahoma, at our Bellmon processing facility, during the first three months of 2016, we connected five new wells to the system, and the average throughput volume was approximately 36.2 million cubic feet per day.
This facility has the ability to process approximately 90 million cubic feet per day from two processing skids.
Also in the first quarter of the year, with the installation of additional compression, we're able to connect and receive additional production from third-party producers in the area.
In central Oklahoma, at our Cashion facility, our average throughput volume for the first quarter of 2016 was 32.8 million cubic feet per day.
This processing facility has the ability to process 45 million cubic feet per day.
We are in discussions with producers who are actively drilling Meramec wells on the northwest end of our gathering system.
We are currently in negotiation contract terms and are optimistic we will able to connect this new production to our system.
At our Segno gathering system located in Southeast Texas, we continue to increase our gathered volume.
In the first quarter of 2016, we finished two new wells and we averaged approximately 85 million cubic feet per day.
During the first quarter of 2016, we completed several upgrade projects, including the gas pipeline extension.
With the completion of this project, we increased overall gathering capacity of the Segno system to 120 million cubic feet per day.
In the Appalachian area, Pittsburgh Mills northern expansion has been completed.
This expansion project extends our system into Butler County, Pennsylvania and provides an additional outlet for our gas.
During the first quarter of 2016, we connected 10 new wells from two well pads, and averaged approximately 92.3 million cubic feet per day.
Once all the wells are fully functional and are flowing for the full month, our volume will average between 145 million to 150 million cubic per day.
We are also working on connecting two more well pads that have a total of eight wells to the northern portion of our system.
These pads are scheduled to begin production in the third quarter of this year.
Construction of the gathering lateral to connect the first pad has been completed, and we expect to begin construction of the pipeline to connect the second pad as soon as the permit is approved.
With all these wells connect to our system, we anticipate our throughput volume to remain at approximately 150 million cubic feet per day for the remainder of the year.
All of this gas is being produced as dry gas, [not being to be] processed.
Also in the Appalachian area and our newly completed fee-based Snow Shoe gathering system located in Centre County, Pennsylvania, we connected the first part to the system in February with two additional wells connected in March.
Our throughput volume averaged 7.1 million cubic per day for the first quarter of 2016.
We've completed construction of the gathering lines to connect three additional wells from a different producer in the area.
These wells have been connected and started flowing in April of this year.
As compression will not be required initially, we are postponing the construction of the compressor station until it's required at a future date.
In summary, we are off to a strong start in 2016 in Superior Pipeline, as we continue to focus on key areas in our midstream business.
Total throughput volume increased in the first quarter mainly due to the additional wells connected to our gathering systems in the Appalachian area.
We have been able to maintain consistent financial results due mainly to our fixed fee systems, which have low commodity price impact, while retaining the upside in our commodity based systems when price improve in the future.
As liquid prices continue to be depressed, we are operating in full ethane rejection mode at our processing facilities, which reduces the amount of liquids recovered, but it's the correct economic decision in this price environment.
With the success of our Appalachian area, along with our focus on the controlling costs, we feel our midstream segment is situated very well to have another successful year.
At this time, I'll now turn the call back over to <UNK> for some final comments.
Thank you, <UNK>.
Before moving to the Q&A, I would like to once again highlight just a few points.
The first quarter has been very challenging.
We continue to be diligent about taking appropriate steps to build value.
As <UNK> discussed, a very important step was working with our bank group on our borrowing base redetermination and covenant modification.
We are positioned well to manage through the cycle with no near-term maturity issues.
With continued focus on executing on the appropriate measures, we are very confident that we will get through the duration of this cycle and our shareholders will see the benefit of our efforts to that end.
I would like now to turn the call over to questions.
Well, we are not using the combination of different vehicles to hedge.
We're using collars, we're using three-way collars, we're taking in some cases some pretty wide collars, leaving lots of upside on the commodity pricing and not trying to protect the oil price, the bottom of the oil price at $40 or $45, but taking some wider type collars [on our shale] gas.
On gas, we're a little bit more narrowly focused on ---+ we're not as confident I guess as the potential for a dramatic movement of gas prices as we think the potential could be there for oil.
We're still ---+ Unit, again, is somewhat unique.
Even if we hedge to 100% of our oil and gas, we're still totally unhedged on our natural gas liquids, we are totally unhedged on our rig side, and we're totally unhedged on our midstream side.
We're not a typical just E&P company.
If we hedge all of our oil and gas production, we've taken all the upside out.
There is going to be demand for the SCR rigs.
We still have customers for SCR rigs or AC rigs today when they could be using AC rigs, but the customer base ---+ the major customers, the major companies that are out there are going to be more prone for AC rigs.
More of the independents are going to be indifferent.
Their biggest concern will be price, what the charge is on the rigs.
We are still putting ---+ we've still got SCR rigs running today.
So, I'm not ---+ so whether all of our AC rigs go back to work in the next 12 months or not, this is going to depend on price.
But if your price projections on oil happens, you will see the majority of our SCR rigs go back to work.
<UNK>, the re-completions we did in the first quarter certainly exceeded what our expectations were.
But in general, the re-completions are primarily in Gilly field, that general area.
But the wells that we drilled anywhere three, four years ago, vertical wells that have a lot of stack pay in it.
So we're originally producing the wells out of lower zones, those wells had to produce, and in many cases, produced very well, but have come down.
We target a rate somewhere between 0.5 million and 1 million a day.
When one of the wells gets down to that level, we look at re-completing the well, and what that entails is setting a temporary bridge plug above the zone that's currently producing, so you block off that production, you come up, you perforate the new zone, you frac that zone, you produce it till the pressure of the new zone gets down to a level where you could comingle it back with that lower zone, and then you go back and drill the plug out.
Essentially, the previous zone and the new zone produce together for some length of time, and then you go through the process again until you essentially re-complete the whole wellbore.
And in many cases, in the Gilly field, you might be talking about six different re-completions.
The cost for the quarter is lower.
Our average cost for re-complete is about $600,000 per well.
The cost for this quarter was below normal because two other wells we re-completed, we didn't have to frac at this time.
When you go back to frac it, then your cost will be somewhere in that $600,000 range per completion.
The cost, overall costs is certainly down and probably about a third overall, but the drilling cost ---+ to give you example, the early Gilly wells we drilled out there were in $3.5 million to $4 million range.
We're currently now drilling that at about $2.5 million to $2.6 million or $2.7 million.
The main cost, certainly, of the deeper Wilcox wells is the frac cost because it's high pressure.
You have to use bauxite.
And those costs, although they've come down probably in the range 40%, it's still the biggest cost item of these horizontal wells.
But our cost in general for the newer Wilcox wells will range somewhere around $6.5 million up to the high end of maybe $8 million.
Some of the previous wells were in the $9 million to $12 million range.
We are rejecting as much ethane as we can.
It's still substantially under water price-wise to try to recover ethane.
Over the next two quarters, I don't see anything changing, unless gas totally crashes in price.
Difference in the gas price and ethane values determine whether you recover or reject, and gas has strengthened from (inaudible) improvement.
Now, next year, as the new petrochem plants come on line and start demanding ethane to produce ethylene, I think there might be a substantial jump in ethane and propane 18 months out.
So, there is light at the end of the tunnel.
From all indications, the people that are using the BOSS rigs now are so pleased with them, they will want to continue.
Needless to say, the prices will be different because those prices were established 1.5 years, 2 years ago and the market has changed so much.
So we'll have to expect lower day rates.
But I don't see any of our present operators wanting to release those rigs when the time expires.
Thank you, Christine.
Thank you very much everyone listening in this morning.
Things are looking better.
Compared to where we were 60 days ago, things are starting to definitely look a little more optimistic, and we're not by any means calling a bottom to the market.
Everything is going to be up to the right.
But the general feeling is, it's feeling better than where we have in the several months.
So thank you again, and we will be talking to hopefully most of you over the next few months.
| 2016_UNT |
2017 | NI | NI
#Thank you, Catherine, and good morning, everyone.
Welcome to our quarterly investor call.
Joining me this morning are <UNK> <UNK>, Chief Executive Officer; and <UNK> <UNK>, Chief Financial Officer.
The purpose of today's call is to review the NiSource financial performance for the fourth quarter and the full year of 2016 as well as provide an overall update on our utility operations and growth drivers.
We'll then open the call up to your questions.
As a reminder, we will be referring to our supplemental slides during this call.
These slides are available on our website.
Also available on our website is the document that contains segment and financial information to accompany this presentation.
Before turning the call over to <UNK>, just a couple of reminders.
Some of the statements made on this conference call will be forward-looking.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements.
Information concerning such risks and uncertainties is included in the MD&A and risk factors sections of our periodic SEC filings.
In addition, some of the statements made on this conference call relate to non-GAAP measures.
For additional information on the most directly comparable GAAP measure and a reconciliation of these measures, please refer to the supplemental slides and additional segment and financial information available on NiSource.com.
In that document, you'll also find our full financial schedules that have historically been available in our earnings release.
One final reminder, when comparing our full-year 2016 results to 2015, keep in mind that we successfully completed the separation of Columbia Pipeline Group on July 1, 2015, and those results for CPG are now classified as discontinued operations.
So, with all that out of the way, the call is yours, <UNK>.
Thanks, <UNK>.
Good morning, everyone.
Thanks for joining us.
2016 marked the first fiscal year for NiSource operating exclusively as a regulated utility company and the financial and operational results that our team produced during the year demonstrate the enduring strength of our long-term infrastructure investment strategy.
The customer focused investments we're making are enhancing the safety, reliability, and environmental performance of our systems as well as customer service and employee training, all of which supported earnings and dividend growth for our investors.
Let's look at slide 3 of our supplemental deck and highlight some of our significant achievements in 2016 and early 2017.
We delivered net operating earnings per share, non-GAAP of $1.09, which compares to $0.94 in 2015 and is near the upper end of our 2016 guidance of $1.05 to $1.10.
We invested a record $1.5 billion in our gas and electric utility infrastructure across our seven states.
The value of these investments deliver included replacement of 406 miles of priority pipe, 12% more than in 2015, driving continued reductions in leaks, outages, and emissions.
In addition, we replaced 60 miles of underground cable and more than 1,200 electric poles improving electric reliability for our Indiana customers.
We also completed significant regulatory initiatives supporting these investments across our footprint.
These included gas base rate case settlement approvals in Kentucky, Maryland and Pennsylvania and just last month, reaching a settlement agreement in Virginia, as well as approvals of settlements and a long-term electric modernization program and electric base rate case in Indiana.
And finally, infrastructure tracker updates in several states.
We're committed to further reduce our greenhouse gas emissions through these continued gas modernization investments and planned coal-fired plant retirements as we diversify our electric generation portfolio.
In fact, in early 2016, we became a charter member of the US EPA'S methane challenge program committing to reduce our methane emissions by more than 300 million cubic feet over five years.
We also added about 33,000 new customers in 2016, our best year for customer growth in a decade.
The growth was driven by a number of factors including an increase in gas conversions from other fuels, recovery in the new housing market, and low customer attrition.
With our continuing track record of producing strong results and the confidence that we have the right business plan and the right team in place, we are reaffirming our net operating earnings guidance of $1.12 to $1.18 per share for 2017.
In addition, we now expect to invest about $1.6 billion to $1.7 billion in our infrastructure this year, up from our prior estimate of $1.5 billion.
The increase is driven primarily by investments on the electric side related to increasing service reliability and repositioning our generation fleet.
These investment levels keep NiSource on pace for continuing sustained execution on the $30 billion of identified regulated utility investments we first outlined in 2014.
Now, I'd like to turn the call over to <UNK> who will discuss our financial performance in more detail.
Thanks, <UNK> and good morning, everyone.
Turning to slide 4.
As <UNK> mentioned earlier, we delivered non-GAAP net operating earnings of about $351 million or $1.09 per share in 2016 compared with about $299 million or $0.94 per share in 2015.
On an operating earnings basis, NiSource reported about $894 million for the year, which is an increase of about $62 million over the same year in 2015.
On a GAAP basis, our operating income was about $858 million for 2016 versus about $800 million in 2015.
The biggest driver of our solid financial performance continued to be the impact of our long-term infrastructure investments.
Now, let's take a closer look at our segment level results.
Our gas distribution operation segment delivered operating earnings of about $598 million in 2016, an increase of about $30 million from 2015.
And our electric operation segment reported operating earnings of about $302 million in 2016, an increase of about $23 million from 2015.
These increases were driven primarily by higher net revenues from returns earned on our infrastructure investments across our seven states.
And as <UNK> mentioned, our net operating earnings for the year came in near the upper end of our guidance range, and our solid overall results demonstrate the strength of our investment driven plan.
Full details of our results including details of our fourth-quarter performance are available in our earnings release and supplemental financial information posted this morning at NiSource.com.
Now, turning to slide 5, I'd like to briefly touch on our debt and credit profile.
Our debt level as of December 31 was about $7.9 billion with a weighted average maturity on long-term debt of approximately 13 years and a weighted average interest rate of approximately 5.4%, down from 5.9% at the end of 2015.
At the end of the year, we maintained net available liquidity of about $684 million consisting of cash and available capacity under our credit facility.
I'll note that we increased our credit facility by $350 million to $1.85 billion during the fourth quarter to provide additional liquidity and support for our capital investment program.
It's also worth mentioning again that our credit ratings at the three major agencies are investment grade.
Standard & Poor's rates NiSource a BBB plus, Moody's at BAA2, and Fitch at BBB, all with stable outlooks.
Going forward, our financial foundation is strong and poised for continued growth.
But before turning the call back to <UNK>, I'd like to briefly address federal tax reform, which we know is a topic that many of you are tracking closely.
As with any potential legislation that could affect our customers and shareholders, NiSource is actively monitoring the discussions and working with our industry partners at AGA and EEI as well as elected officials to help shape a balanced and constructive outcome.
Our objectives in this policy effort are to retain interest deductibility, ensure fair and effective transition rules, while also balancing the interests of our customers and our shareholders.
I'd also say it's way too early to comment specifically on tax reform; however, I would note that as a 100% regulated company, most tax changes would be reflected in customer rates and have minimal to no impact on regulated earnings.
Sorry.
I think we're having a fire drill here.
(laughter) We're going to check on that.
I'll continue until we get notice.
So, it's too early, we are a 100% regulated company, and so most tax changes would be reflected in customer rates and have minimal to no impact on regulated earnings and only a modest potential impact on cash flow.
The primary exposure NiSource has under some current proposals is related to a portion of our corporate level debt, not capitalized in regulated offering companies, or our current investment programs.
Therefore, eliminating the deductibility of interest and/or reducing the corporate tax rate below the current 35% would have a modest dilutive impact on consolidated earnings.
Now, I'll turn the call back to <UNK> to discuss a few customer, infrastructure investment, and regulatory highlights.
Thanks, <UNK>.
We've continued to execute on our well-established customer-focused infrastructure modernization investments.
Together with regulatory initiatives and enhanced customer programs, we're focused on delivering our results the right way with our customers, communities, employees, and investors in mind.
In 2016, we received several recognitions for doing just that.
For instance, we were named to the Dow Jones Sustainability Index North America for the third straight year.
The Ethisphere Institute named NiSource to its list of the World's Most Ethical Companies for the fifth year in a row, and we were named by Forbes magazine as one of America's Best Large Employers, an honor based on independent surveys of employees at the nation's largest organizations.
We're also continuing to provide programs and services that can help our customers reduce energy usage and manage their bills.
For instance in December, the Public Utilities Commission of Ohio approved a plan by Columbia Gas of Ohio to continue offering its energy efficiency program for another six years.
We expect that approximately 700,000 customers will benefit from these programs during that period, helping them save money by reducing their gas, electric, and water usage.
Since the separation of Columbia Pipeline Group on July 1, 2015, NiSource has produced a total shareholder return of nearly 41%, outperforming the Dow Jones Utility Index.
And in November, we were ranked number one for total shareholder return among mid-cap electric companies over a five-year period by the Edison Electric Institute.
Now, let's turn to some specific highlights for the fourth quarter from our gas operations on slide 6.
New rates became effective December 19 at Columbia Gas of Pennsylvania following Pennsylvania Public Utility Commission approval in October of a joint settlement agreement in our base rate case.
The approved settlement supports the continued upgrade and replacement of infrastructure and allows recovery of increases in safety related operating and maintenance costs.
The new rates increase annual revenue by $35 million, and the settlement includes incentives to expand gas service to commercial customers.
In Virginia, we reached a settlement in January with all parties to our base rate case pending before the Virginia State Corporation Commission.
The settlement, if approved as filed, would allow for about a $29 million annual revenue increase.
We filed the rate request in April 2016 seeking to adjust base rates to recover investments that improve the overall safety and reliability of the distribution system.
The case also supports the growth of our Virginia system driven by increased customer demand for service.
Updated interim base rates subject to refund were implemented in September.
On February 8, a hearing examiner recommended approval of the settlement without modification and a Commission decision is expected in the first half of 2017.
In Kentucky, we implemented new base rates on December 27 following Kentucky Public Service Commission modification and approval of our base rate case settlement agreement.
The approval includes an annual revenue increase of about $13 million and will allow for continued system modernization and pipeline safety investments.
In Maryland, we implemented new base rates on October 27 following Maryland Public Service Commission approval of a settlement agreement in our base rate case.
The approval increases annual revenue by about $4 million and supports the continued replacement of aging infrastructure and increased pipeline safety investment.
In Massachusetts, we implemented revised rates under our 2015 base rate case settlement.
The settlement provided for about a $4 million incremental annual revenue increase effective November 1, 2016, which was in addition to the approximately $33 million increase that took effect on November 1, 2015.
The settlement supports our continued efforts to modernize our pipeline infrastructure and reduce emissions while positioning our Massachusetts operations to continue to serve customers safely and reliably.
I do apologize.
The facility that we are in is experiencing an evacuation.
It's not a drill, so we will resume this call just as quickly as we can.
I apologize for the truncated front end.
We'll come back and finish up and take your questions just as soon as we can reoccupy the facility.
Catherine, can we pause the call momentarily.
Okay, we apologize.
We'll be back shortly.
Catherine, this is <UNK> <UNK> again.
We are back in the building and ready to reconvene, so we apologize for the inconvenience to everyone but we appreciate your patience.
So as soon as <UNK> grabs a seat, we'll restart where he left off.
Thanks.
Thanks, <UNK>, and thanks, Catherine, and again, our apologies for that.
Although, I will say as we keep safety as our top priority in all that we do, important that we respond to these kind of incidents appropriately, so thanks for your patience and we'll pick up right where we left off.
I was updating on our gas business segment and regulatory activities, had gone through a number of the states.
I'll resume with the Massachusetts story where we implemented revised rates under our 2015 base rate case settlement.
That settlement provided for about a $4 million incremental annual revenue increase effective November 1, 2016, which was in addition to the approximately $33 million increase that took effect on November 1, 2015.
The settlement supports our continued efforts to modernize our pipeline infrastructure and reduce emissions while positioning our Massachusetts operations to continue to serve customers safely and reliably.
In Indiana, we continue to execute on our seven-year $824 million gas infrastructure modernization program to further improve system reliability and safety.
On December 28, the Indiana Utility Regulatory Commission, or IURC, approved our semiannual tracker update covering about $67 million of investments that were made in the first half of 2016 under this program.
Several other NiSource utilities also filed annual tracker updates related to their gas infrastructure modernization programs.
This includes Columbia Gas of Massachusetts under its Gas System Enhancement Program, Columbia Gas of Virginia under Virginia's SAVE Act program, and Columbia Gas of Maryland under its Strategic Infrastructure Development & Enhancement program.
Combined, these filings provide for recovery of about $125 million in capital investments focused on safety and reliability.
The SAVE and STRIDE updates were approved in December.
In Massachusetts, we expect a Department of Public Utilities order prior to May 1, 2017, when the update is scheduled to be implemented.
As you can see across our gas utilities, we had a robust list of accomplishments on the regulatory, customer, and infrastructure fronts to wrap up 2016.
Now let's turn to our electric operations on slide 7.
On November 1, NIPSCO submitted its Integrated Resource Plan to the IURC.
It outlines NIPSCO's plans to meet its customers anticipated long-term energy needs.
The NIPSCO team worked constructively with stakeholders to develop a balanced plan focused on providing customers affordable clean energy while maintaining flexibility for future technology and market changes.
Under the plan, NIPSCO would retire 50% of its coal-fired generating fleet by the end of 2023, including Bailly Generating Station Units 7 and 8 and RM Schahfer Generating Station Units 17 and 18.
The Midcontinent Independent System Operator has approved closure of Bailly Units 7 & 8 by mid-2018.
Also, as outlined in the plan, on November 1, NIPSCO requested IURC approval to invest approximately $400 million in required environmental upgrades at its Michigan City Unit 12 and Schahfer Units 14 & 15 generating facilities.
New rates became effective October 1 under NIPSCO's electric base rate case settlement, which was approved by the IURC on July 18.
The settlement provides a flat form for NIPSCO's continued investments and service improvements for customers, and increases NIPSCO's annual revenues by about $73 million.
We're also focused in Indiana on executing our seven-year electric infrastructure modernization program, which includes enhancements to electric transmission and distribution systems, designed to improve safety and reliability.
The IURC-approved program represents approximately $1.25 billion of investments to be made through 2022.
We began recovering on approximately $46 million of these investments this month.
Finally, our two major electric transmission projects remain on schedule with anticipated in-service dates in the second half of 2018.
The 100-mile 345-kV and 65-mile 765-kV projects are designed to enhance region-wide system flexibility and reliability.
Substation, line, and tower construction are underway for both projects.
Before opening the call to your questions, I'd like to remind everyone of our investor day scheduled for March 8 in New York City.
That's in two weeks.
The event will begin at 8:00 AM Eastern time, and I will be joined there by other members of NiSource's senior management team to discuss in detail the Company's regulated utility infrastructure investment strategy.
The event will be webcast live on NiSource.com.
As we wrap up today, just some key takeaways for the year in our long-term investment proposition.
NiSource's long-term utility infrastructure modernization programs continue to enhance value for customers and communities while also driving solid financial performance for our shareholders.
We expect to deliver non-GAAP net operating earnings of $1.12 to $1.18 per share in 2017 with about $1.6 billion to $1.7 billion in capital investments.
With our robust investment plans, we continue to expect to grow both net operating earnings per share and our dividend every year while maintaining our investment grade credit ratings.
Thank you all for participating today and for your ongoing interest in I and support of NiSource.
Now, let's open the call to your questions.
Catherine.
Thank you, Catherine.
I appreciate that.
We'll take that not as a sign of no questions but as an indication that you'll have a chance ---+ we'll have a chance do talk in a couple weeks, and we do look forward to that.
Thanks, again, for your interest in NiSource.
Once again, a reminder about our investor day on March 8 in New York City.
It will be a great opportunity to do a deeper dive into our business and to give you a chance to hear from some other members of our senior team.
Thanks for your interest today, and have a great and safe day.
Take care.
| 2017_NI |
2017 | CVCO | CVCO
#Thank you, [Lateef], and welcome, everyone, to the second quarter conference call.
As usual, Dan <UNK>, our Chief Financial Officer, is with me; and Mark Fulser, our Director, Financial Reporting.
Dan will open up with our financial report, and I'll make a few comments, we'll take your questions.
Dan.
Thank you, Joe.
Good day, everyone.
Before we begin, we respectfully remind you that certain statements made on this call, either in our remarks or in our responses to questions, may not be historical in nature and therefore are considered forward-looking.
All statements and comments today are made within the context of safe harbor rules.
Our forward-looking statements are subject to risks and uncertainties, many of which are beyond our under control.
Our actual results or performance may differ materially from anticipated results or performance.
Cavco disclaims any obligation to update any forward-looking statements made on this call, and investors should not place any reliance on them.
More complete information on this subject is included as part of our earnings release filed yesterday and is available on our website and from other sources.
For our quarterly report on the financials.
Net revenue for the second fiscal quarter was $201 million, up 6.5% from $188 million during the second quarter of fiscal year 2017.
Breaking this increase down by business segment, factory-built housing net revenue increased $11.9 million from a larger proportion of higher-priced homes sold and improved homes sales volume, including incremental sales from our new Lexington Homes factory in Mississippi.
Financial services segment net revenue increased from more insurance policies in force and higher home loan sales volume compared to the prior year quarter.
This revenue increase was partially offset by $1.4 million of required payments to reinstate catastrophic reinsurance policies for the insurance subsidiary, causing a direct adverse impact to quarterly earnings.
Consolidated gross profit in the second fiscal quarter as a percentage of net revenue was 17.2%, down from 20.8% in the same period last year.
As described in our earnings release, severe hurricane activity this quarter adversely impacted consolidated financial results.
The financial services segment loss was caused by high homeowners' insurance claim volume in Texas, although the company's losses on these claims were limited to $1.5 million through its reinsurance contracts.
In the factory-built housing segment, the hurricanes caused substantial new home inventory damage at certain company-owned retail stores as well as limited number of lost production days and delays of home sales in Texas and Florida.
Selling, general and administrative expenses in the fiscal 2018 second quarter as a percentage of net revenue was 13% compared to 13.5% during the same quarter last year.
The improvement was related to fixed cost efficiencies gained from higher net revenue levels.
The effective income tax rate for the quarter was 27.3% compared to 28.7% in the same quarter of the prior year.
The current quarter contains a benefit related to the required implementation of new accounting standards, requiring the company to record tax benefits from stock option exercises as an income tax expense reduction.
Whereas, these benefits were previously recognized in equity.
The prior year quarter also had a low effective income tax rate that resulted from research and development tax credits that became realizable during that period.
Net income for the second quarter of fiscal 2018 was $6.2 million compared to net income of $9.3 million reported in the same quarter of the prior year.
Net income per diluted share for Q2 '18 was $0.67 versus $1.03 in last year's second quarter.
Comparing the September 30, 2017, balance sheet to April 1, 2017, the balance sheet of Lexington Homes is included in the consolidated balance sheet this quarter.
Cash was approximately $137 million compared to $133 million 6 months earlier.
This increase was primarily from net income and cash provided by operating activities.
Accounts receivable increased from sales growth during the period.
Commercial loans receivable was higher from additional inventory for planned lending during the period.
Inventories increased mainly from the Lexington Homes transaction, delayed sales of finished goods related to the hurricanes and additional stocking of raw materials to facilitate increased production levels.
Prepaid expenses and other current assets increased from reinsurance amounts to be collected.
These resulted from higher hurricane-related insurance claim activity at our insurance subsidiary this quarter.
Accrued liabilities grew from similarly high insurance loss reserves as well as increased customer deposits and volume rebate accruals from more home sales.
These increases were partially offset by lower salary and wage accruals at the end of the quarter.
Lastly, stockholders' equity grew to approximately $413 million as of September 30, up approximately $19 million from the April 1, 2017, balance.
Joe, that completes the financial report.
Okay.
Thank you, Dan.
Hurricanes Harvey and Irma were a major setback to us and highly unlikely to be repeated as Harvey was considered a 500-year event and Irma was also similarly very unusual and an infrequent event in the State of Florida.
As Dan mentioned, our reinsurance contracts are proving very effective in limiting our claims expense in our insurance operation to our self-insured retention or deductible, if you will, of $1.5 million.
Plus, as Dan indicated, we are required to buyback this reinsurance after a catastrophic event, which cost another $1.4 million.
The sales and delivery of homes that were postponed were particularly impactful to our company-owned retail stores.
Fortunately, most of our ---+ none of our team members, I should say, were injured, although several of our people in the Houston area were trapped and had to be evacuated by boat and a couple lost their homes.
For certain of the losses we incurred at our facilities, both retail and manufacturing, we may receive some insurance coverage that is currently in the adjustment phase, but we had to recognize the losses in Q2, irrespective of any tax recovery via our commercial insurance.
The better news is that we expect to experience an increase in business in the future as people begin to replace their damaged homes in the Houston metropolitan market.
While tough and challenging the hurricanes were, we avoided major damage to production facilities, which are all in operation and, in fact, we're in operation just couple days after the event.
We expect to be back on track for the next 2 quarters and post an excellent 2018 fiscal year.
Macroeconomic trends in the single-family housing market remain favorable.
We are well positioned to capitalize what we expect it to be continued, steady growth.
We have the team, innovative solutions, balance sheet strength, and growth strategy to continue to drive improved profitability and increased value for our shareholders.
And with that, we'd be happy to take any questions you may have.
Well, I'll take the second part first and Dan can take the first part.
Typically, after these major claim events, we do apply to the regulatory authorities, in this case, primarily in the State of Texas, Texas Department of Insurance, for rate increases based on the losses that we incurred.
That takes some time for everyone to get approved.
I think we hesitate to speculate, but one would think that there'd be an opportunity to increase rates.
However, that will take some time to get approved.
And then, of course, we have policies that are typically of 1-year duration.
So to get those increases through, it doesn't happen immediately as it happens as the policies renew.
Our policies do not go beyond one year.
So within a 12-month cycle, we would have all the rates in place in all the policies.
We did ---+ in past catastrophic events, we had some serious hailstorms about a 1.5 year ago.
We were able to get rate increases, and those have now been largely implemented in our policies.
So that's the answer to your question on rate increases.
And Dan.
Sure.
Yes, just to pick up on the cost of the hurricanes that occurred with respect to insurance company, the 2 numbers I mentioned in my notes, $1.4 million for the buyback of the reinsurance policies or reinstatement of the premium was a direct impact.
So $1.4 million there.
And then $1.5 million was our self-insured retention.
So the total, that's $2.9 million related to the hurricanes for the quarter for our insurance company.
Of course, then we had some additional impact that we mentioned related to our homebuilding business from property damage.
And then some delayed sales that we discussed in our earnings release as well.
And I would add to that, <UNK>, that in addition to the losses, direct reinsurance and deductible losses at Standard Casualty Reinsurance Company, you also have increased operating expenses because, of course, we had our claims adjusters out full time traveling in the Houston market, where hotel rates are very high during a situation like that.
So we see increased SG&A expenses during the event like that, which are above the normal.
So there were some ancillary impacts to our income statement in addition to those 2 larger numbers that we've covered.
Well, we haven't quantified.
Yes, as you can see, we haven't outlined.
This is Dan speaking.
Specifically, we wanted to make sure that it was understood what it was that it's the property damage at the sales centers on new home inventory that was just caught in the flooding as well as some damage at the factory locations.
That's still going through that insurance review.
So we've recorded our worst-case scenario as required by GAAP.
We may be able to do a little bit better than that, but that will take time to work itself out.
So we've got that full impact recorded there.
We just haven't outlined the specific number because it's moving still a little.
And then the delays in shipments that occurred as well, obviously, we had a certain number of homes.
It's had to quantify exactly what that is.
But those homes that were in process to be sold were delayed because of the weather and disruption in the areas.
And we expect that those will be able to be booked through in ensuing quarters.
Right.
Well, it's ---+ certainly, we've already started to see some increased traffic at our stores in that Houston market.
Some people can look at replacing their homes fairly quickly.
They had proper insurance coverage.
Others might have to wait for some government assistance of one sort or other of loan programs that have historically been done by the federal government, and in some cases state is involved.
So that's for private replacement of homes.
The FEMA activity and potentially State of Texas activity as well to provide temporary living units for victims of the hurricane, that had started and probably will continue for some time.
By started, I mean FEMA has ordered some homes from the industry.
We are participating somewhat in that effort.
We want to try to help out.
But frankly, with the backlogs we have at our plants and they need, of course, to fulfill our commitments to existing customers, we couldn't take everything that was available, but we did take a number of those homes and we will be building them.
Actually, not at facilities in Texas, we're building at facilities that have some additional capacity available.
Yes, labor is a challenge, and we find that to be the case for our peers.
Our vendors, tell the same thing.
And people outside our factory-built housing industry, we hear the same thing.
I think it's a macro issue for the economy, for this country.
And we're trying to combat it or deal with it in a variety of ways.
It's sometimes wages.
So we've certainly been increasing wages, increasing incentive programs, encouraging our employees to refer other people to our facilities and they'll get a bonus for that.
So there's a lot of things we're doing to try to attract and retain people.
But frankly, there's just the dearth of availability of labor in most markets.
And so we're trying to step up our recruiting efforts.
We've hired a full-time recruiter just to spend time doing that.
But it's kind of a moving issue, and we're trying to figure out solutions.
But I don't think there's an easy answer.
The good part about our business is that we can provide good, steady employment to people.
And they can come to one location, work there every day.
They'll get employee benefits and paid vacation and so forth.
And that's not often the case if they work in a subcontracting environment for on-site construction activities.
So we do have some advantages.
We expect and be able to get labor locally and to keep the people.
So that's not something we can resolve, but we certainly can say we'll handle in the medium term.
But we are making some progress.
And we're obviously doing the best we can with our existing workforce.
It does constraint us from trying to expand production capacity or in some cases actually open up facilities or expand facilities of existing operations, but it's something we just have to deal with.
Let's say, it's a macro issue.
It's not something that it's just impacting us.
And we'll do whatever we can to mitigate the effect of reduced labor force.
Well, I think that we generally have an ability in this industry, not just us, but I think most of the participants in this industry will ---+ because of the typically short build time, although backlogs are somewhat longer now, we can announce price increase based on material cost elevation, inflation or labor cost inflation, and we generally pass that on.
And keep in mind, of course, this is going to be the case with other forms of construction as well, commercial and residential site build.
They are all facing the same issue.
So I think we're in the inflationary environment with respect to materials and labor.
And we're generally able to pass that through, sometimes not as quickly as we'd like.
And sometimes with backlogs, we think, it will pass quickly because we don't generally increase pricing retroactively.
So it sometimes takes a little while, but eventually, we're able to get it through as a pass-through.
<UNK>, we'll stop and see if somebody else has question.
Well, we don't make forecast, public forecast.
We ---+ internally, we feel very positive.
I said about the outlook and our ability to serve growing market.
I think we'll do that in a combination of ways.
We'll add facilities.
We just usually did in Mississippi.
We'll look at expanding existing operations.
We have sister plans in a couple of our facilities here, sister buildings to our current operating facilities that are not operating.
So we have some brick-and-mortar, if you will, that's currently unused.
We're looking expanding into those operations.
They are contiguous to our existing plant.
And then of course, we'll continue to look at other acquisition and/or greenfield or de novo plant possibilities to expand reduction capacity.
So we think, given that and the fact that not only is residential construction, residential home sales expected to do well, we believe that the factory construction within that segment of single-family residential will grow at better rates than it has in the past.
So that is there will be more interest in factory-built construction because of the affordability, the energy efficiency and the shorter lead times eventually for that product.
So we feel ---+ and the fact that a lot of the new buyers are not looking to put all their money into home and other investment ideas.
And so we think the market is moving towards more efficient homes and perhaps a more modestly sized homes, which should benefit our industry as we go forward.
So again, we don't talk about individual capacity by plant for a couple of reasons, one, from a public disclosure standpoint, but also from competitor standpoint.
But the Lexington plant has ---+ is a good facility.
We actually have 2 facilities there.
One is operating, the other one is idle.
So as we increase production and demand, as demand increases there, we have that potential to open up a second plant.
But the existing plant has substantial unused capacity.
From a distribution standpoint, they had an existing customer base.
We are adding to that with some of our relationships.
And then we're helping them increase their marketing efforts.
We have a broader, robust marketing presence than a private individual company such as Lexington had.
And so we can help them there.
The biggest issue there is change in the culture somewhat as with any acquisition.
And we're doing that.
We're changing the product, somewhat product design.
We've already done that, and we've introduced new product to our distribution base, which has helped us gain new shelf ---+ more shelf space.
So I think it's going fairly well.
It's not a contributor at this point wasn't expected to be, but it's not a contributor.
We bought it knowing that we had to turn it around, and we're working seriously on doing that.
It's good workforce there, good people.
And so we're going to work with that.
So good market to be in.
But as with any acquisition and/or greenfield, if we were to greenfield a plant, it'd be fairly long period of time before that plant would turn profitable.
And so we always weigh our options.
Do we greenfield the plant, do we acquire something that needs to be ---+ need some attention or do we pay something more for something that doesn't need maybe perhaps needs less attention.
In this particular case, that's where the market is.
This was a very good opportunity for market we want to be in.
And so we'll take our time.
We'll get it right, and it will be a contributor down the road.
But as I say, it is not today.
Our current backlog at the end of the quarter is $199 million, <UNK>.
And that compares to $63 million, the same time last year.
Yes, <UNK>, it's ---+ I like the question.
We are looking at expanding our presence in the mortgage financing business.
We have a good platform, a very good operation in CountryPlace Mortgage, which has been in business for quite number of years.
Very good people, good team.
We're primarily have been originating traditional land home mortgages for manufacturing homes.
And we're now expanding into personal property loans for manufactured homes, or commonly called chattel loans, where the home is the only collateral.
There's no land involved.
And we are deploying some of our capital and some investor capital into that effort.
We're going to take it slow.
And we're going to be careful in our underwriting and expansion of that business.
But we do think it's an opportunity for us to serve a lot of our retail base more with kind of one-stop operation where they could buy the home and finance the home through our company.
And it's certainly also a good profit center business for us because you make money in the origination loan and you make money servicing the loan after the loan is originated.
So again, we ---+ we're not prepared to say how much money we'll invest in that.
It will be fairly modest amount vis-\u0102\xa0-vis our cash balance.
But it will be some use of our cash.
We're also, again, listing or has solicited third-party investor money.
We're modestly successful in attracting some of that.
We have more work to do there.
Preference would be to originate these loans and sell them and retain a portion of the equity in that loan portfolio, and that's what we're excited to do.
But it'll involve some investment of our funds initially to produce that portfolio of loans, which we then would sell to third-party investors.
Hope that helps.
Okay.
Thank you, [Latif], and thank you, everyone, for joining.
We appreciate it.
And be happy to talking to your follow-up questions and be reporting to you next quarter with better results.
Thank you very much.
| 2017_CVCO |
2016 | PRSC | PRSC
#Good day, ladies and gentlemen, welcome to the Providence Service Corporation first-quarter 2016 earnings conference call.
(Operator Instructions) As a reminder, this conference call may be recorded.
I would now like to turn the conference over to <UNK> <UNK>.
You may begin.
Good morning and thank you for joining Providence's conference call and webcast to discuss first-quarter 2016 results.
On the call from Providence today is <UNK> <UNK>, Chief Executive Officer; and <UNK> <UNK>, Chief Financial Officer.
We have arranged for a replay for this call, which will be available approximately one-hour after today's conclusion, on our website www.PRSCholdings.com.
A replay will also be available until May 20th by dialing 855-859-2056, or 404-537-3406 and using the passcode 1349659.
Before we get started, I would like to remind everyone that during the course of this call, the Company may make comments which may be characterized as forward-looking statements under the Private Securities Litigation Reform Act.
Those statements involve risks, uncertainties, and other factors which may cause actual results or events to differ materially.
Information regarding these factors is inc---+ is contained in yesterday's press release and the Company's filings with the SEC.
The Company may also discuss certain non-GAAP financial measures in an effort to provide additional information to investors.
The definition, calculation, and reconciliation to the most comparable GAAP measures can be found in our press release and our current report on Form 8-K furnished to the SEC on May 5, 2016.
Finally, for simplicity, we will be speaking in US dollars when referring to such things as contracts and revenue.
Amounts translated from other currencies such as the British pound have been translated at the exchange rates in effect for the corresponding time period.
I'd like now to turn the call over to <UNK> <UNK>, CEO.
All right, thank you, <UNK>.
And thank you all for joining today's call.
And most importantly, thank you to my colleagues for another solid quarter across Providence.
So as you will hear today, our focus really continues to be on operational excellence.
And as a result, maximizing the intrinsic value of our businesses.
And while we are also looking at the deploying capital in acquisitions, valuations remain high.
And as a result, we are deploying capital by buying PRSC stock.
We believe that the combination of minimizing share count growth, or hopefully reducing it, while we're increasing our business's intrinsic value is a win-win for our clients, colleagues, and long-term shareholders.
So within our US healthcare services sector, we had another quarter of solid performance with margins consistent with long-term trends.
Despite this, our teams are acting with urgency in a few strategic areas which I have mentioned before.
For example, Matrix, which was acquired in October 2014, they operated with a talented but very limited sales force until Q4 2015.
Upon becoming CEO in two ---+ in Q3 of last year, I worked with Walt Cooper and the Matrix team to increase our focus on building these sales resources.
The result of this specific investment for Matrix is an enhanced team with a business development pipeline that has grown to include over 100 sales targets, largely generated over the last few months.
While not all of these targets will likely be converted into 2016 volumes, what makes Matrix unique is the availability to respond to all of these targets with a unique network of over 1,000 nurse practitioners, not all of whom are employed but are available at a moment's notice.
Also part of what makes Matrix unique is our operations group.
Our operations group makes it possible for our NPs to respond quickly to client needs in a low-cost manner.
Finally, I would like to mention that our care direct offering continues to make meaningful progress with a recent verbal award and accelerating pipeline growth.
At NET services, or LogistiCare, our leadership team was enhanced through the addition of both call center and logistics experts who are focused on workforce optimization and transportation provider management.
Through a variety of initiatives in these very large buckets, we expect to enhance our service levels and our s---+ extend our strategic lead over the next 6 to 24 months.
On the sales and contract side, we recently picked up two new MCO contracts in Iowa and California on April 1st and our pipeline remains in good shape with several additional MCO opportunities.
On existing contracts being rebid, our initial protest in South Carolina was denied but we have since filed an appeal.
And in New Jersey and Missouri, we have submitted our RFP responses and are awaiting the award announcements.
Moving to workforce development, which is largely comprised of the May 2014 acquisition of Ingeus, EBITDA before Mission Providence turned prof---+ positive this quarter.
Led by solid operational performance in our work program, and with both areas of outperformance and challenges within our offender rehabilitation program, or RP, adjusted EBITDA before Mission Providence losses was $2.9 million.
Mission Providence is a joint venture that was formed in late 2014, commenced operations in July in ---+ July 2015 and is still considered to be in its startup phase.
It als---+ you should also know that it is accounted for in the equity in net loss of investee line on our income statement.
As previously reported, volumes remain under expectations at Mission Providence.
The Mission Providence underwriting process, which occurred in 2014, did not anticipate this lower level of volumes.
And as a result, our infrastructure is currently out of alignment with volumes.
Over the remainder of the year, we expect this misalignment to be corrected.
However, we unfortunately do not anticipate break-even profitability until the fourth quarter of 2016.
Our WD Services leadership team is working closely with the joint venture management team to implement an improved delivery model, drawing heavily upon their experience with the work program in the UK.
Jack Sawyer, whom I appointed global CEO of workforce development in the fourth quarter of 2015, is reacting with urgency to the opportunities and challenges ahead of him and his team.
Strategically, we announced the closure of our Polish business on top of the closure of our Swedish business in Q4 of 2015.
While our Polish and Swedish teams served their clients very successfully and we thank them for their service, we found it increasingly difficult to justify investments into markets without appropriate growth prospects and client diversification.
We have no further plans to close any additional businesses within WD Services at this time.
However, as with any project-based business or any business within the Providence portfolio, we will maintain a vigilant focus on where we deploy our scarce resources.
On the business development side at WD Services, the leadership team is working on revising the project bidding governance framework.
Having led a multi-year period of financial improvement at IESC, another project-based business, I appreciate that underwriting, as in the investment business, is key to any long-term contract evaluation because you have to live with the results of that evaluation for years.
However, when the evaluation is done right by industry experts who underwrite for unexpected challenges, profitability and returns can be good over the long term.
To that end, we recently named a new head to the business development department who has extensive experience working in the UK outsourcing sector over the past 15 years.
Our pipeline is building again in our core UK employment services market and we are pleased to announce that we were recently notified that we won two contracts related to diabetes prevention in the UK.
We anticipate launching those contracts this summer and using them as strategic beach heads into additional more traditional healthcare service offerings over the next few years.
Moving onto capital.
We continue to wait for the fat pitches in terms of acquisitions.
In the meantime, we are continuing to repurchase PRSC shares.
So as you can tell, we continue to be very focused on our long-term priority of creating intrinsic per ---+ value on a per-share basis.
Financially, this means maintaining or reducing our share count.
Operationally, this means working with our leadership teams to optimize our portfolio of businesses.
The combination of which can be quite powerful over a multi-year period for our clients, colleagues, and long-term shareholders.
Thank you for your support.
And I will now hand it over to <UNK>.
Thank you, <UNK>.
Thank you all for participating in the call today.
And we will now turn it over to questions.
Thanks, <UNK>.
Sure, yes.
And chronic care, care direct, population health, these are all terms that are, I guess, quite popular in the healthcare arena these days.
And can mean a lot to a lot of different people.
Obviously, a lot of excitement around it.
And it's all around sort of the movement towards caring for people in the home.
Particularly those with sort of chronic conditions or where there's some sort of post-acute or in-home intensive need.
And so where we try to leverage our experience is obviously around the nurse practitioner, since we have a network of over 1,000 of them.
We have 800 of them on staff at any point.
We also have a particular level of density in certain areas.
And so we have a few pilots going on right now.
We've just been verbally awarded another on the West Coast.
Our pilots are on the East Coast.
And we not only use our nurse practitioners who can go into the home.
But they also can go into facilities as well.
And we work ---+ we actually build a team outside of the NPs as well.
So that might include social workers, RNs, and preve---+ provide more of a holistic approach to sort of that in-home care management.
So that can, I guess, on the ---+ there's huge sort of interest, as I said, in this.
It is, I think, moving slower as an industry.
We've looked at a lot of acquisitions in this area that could enhance our technology or the resources that we have.
And I think what we've learned is a lot of opportunity, not a huge amount of track record or experience.
And as, you know, sort of you take on risk in terms of pricing because a lot of the clients are actually trying to shift off risk.
I think we're very cognizant of as you take on multi-year contracts potentially with some of these populations.
that underwriting is very important and track record is important.
And so to pay a high price in terms of acquisitions to acquire this additional resource is something that we are pretty disciplined about.
And as we try to grow the business, we'll grow it in a fairly disciplined manner.
So again, it's not making a huge financial impact this year.
And I don't think it'll ramp up too quickly.
But we do see it as sort of an area for huge potential over the next sort of three or four years.
Sure.
Yes.
And I think it's important to recognize that over the past six or seven years, growing at a CAGR of 15%, 16%, the LogistiCare team has done a phenomenal job at meeting the clients' expectations and growing the business very quickly.
I think with the addition of a few key leaders, <UNK> McGean is one.
He joined as COO just a few months ago.
Ed Ringer joined in the middle of last year as CIO.
I think ---+ and myself and Matt Umscheid, we spent more time with the leadership team.
I think the ability to enhance certain areas and make some investments around IT in particular around workforce management systems, is one that most call centers sort of have sort of deep resources in.
That's one area where we can probably enhance ourselves.
Our operations.
There's a whole transportation optimization area.
We spend ---+ it's pretty clear what we spend from our income statement on transportation.
So any ways that we could utilize technology or work with our transportation providers to improve our service levels there.
And hopefully then our operational efficiency and then profits after that I think is the big area of opportunity.
I think we're still in the early innings in terms of assessing it.
I think we really, you know, not only Ed and <UNK> and Herman and the list goes on.
But there are additional people that we're adding to help sort of assess the opportunity, frame it up, determine ---+ I mean, we have mult---+ a lot of pages of a lot of smaller potential initiatives.
But we're in that phase of: All right, how do we actually roll these out.
What's the cost benefit.
So I think this is definitely a six- to 12-month focus with benefits ranging ---+ they could start rolling in fairly quickly.
We've seen a few areas that around KPIs that have started to improve a little bit.
But we probably won't be seeing the full impact of this for 12, 18, 24 months.
So, sorry I can't give more.
We'll definitely share more as we progress through the year.
And get some more clarity around what the opportunities could be.
Great.
Well, I ---+ that was the only question that we have in ---+ that we had in the queue.
So thank you, <UNK>, for that.
And we appreciate everyone's time.
And if you have any questions, feel free to reach out to <UNK> or myself.
Thanks again for your support.
Bye-bye.
Thank you.
| 2016_PRSC |
2018 | HSKA | HSKA
#Good day, ladies and gentlemen, and welcome to the Heska Corporation First Quarter 2018 Earnings Call.
Please note, today's conference is being recorded.
At this time, I would like to turn the conference over to Mr.
<UNK> <UNK>, Director of Investor Relations with Heska.
Please go ahead, <UNK>.
Good morning, everyone, and welcome to Heska Corporation's Earnings Call for the First Quarter of 2018.
I'm <UNK> <UNK>, Director of Investor Relations.
Prior to discussing the company's first quarter results, Heska would first like to remind listeners that during the course of this call, certain forward-looking statements may be made with regards to future events or future financial performance of the company.
Any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements.
Factors that could cause or contribute to such differences are detailed in writing in places, including Heska Corporation's annual and quarterly filings with the SEC.
Any forward-looking statements speak only as of the time they are made, and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statements to reflect events that occur after the time such a statement was made.
We have with us this morning, <UNK> <UNK>, Heska's Chief Executive Officer and President; <UNK> <UNK>, Heska's Chief Operating Officer and Chief Strategist; and <UNK> <UNK>, Heska's Vice President, Chief Accounting Officer and Controller.
Mr.
<UNK> will begin with commentary surrounding the results reported today, followed by additional comments from Ms.
<UNK>.
And after Ms.
<UNK>.
At this time, then I will turn the call over to <UNK> <UNK>, Heska's Chief Executive Officer and President.
<UNK>.
Thanks, <UNK>.
Good morning, everybody.
Today, we're pleased to discuss the first quarter 2018 results that are detailed in our release this morning.
I'm very pleased with these results, and they slightly exceeded my expectations.
Net revenue increased 10.8% to $32.8 million, led by our Core Companion Animal segment, which rose a healthy 12.8% in sales led by a 17% increase in point-of-care consumables and a 33% increase in imaging.
On our last call for 2018, I called out 3 clear jobs at Heska for the year.
First, we are to continue to win in our baseline domestic plan that emphasizes Heska Reset diagnostic subscriptions.
We are doing well in this area.
As we entered the year, our outlook for point-of-care laboratory consumables was for 15% to 20% growth.
We continue to see this outlook as reasonable.
In the first quarter, point-of-care laboratory consumables rose 17%, while quantities utilized by our customers rose above this level.
In addition to solid sales growth, laboratory consumables and instruments gross margins improved 1.4 percentage points to 52%, demonstrating the benefits and reliability of our Heska Reset subscriptions model to deliver growth, profitability and cash flows.
Regarding market share gains for point-of-care laboratory, we entered the year seeing 1.5% to 2% share gains, and we continue to see this outlook as reasonable.
End user customer demand and growth for point-of-care diagnostics appears to be strong.
Heska continues to gain market share from individual hospital accounts at a rate consistent with our goal, and we have now begun installations to our larger corporate accounts, which were won at the end of last year, which we see accelerating into the back half of the year.
Helping Heska to win the largest accounts is the launch of the Element DC5X, the industry's most powerful specialty grade, high-volume dry chemistry analyzer.
Element DC5X is on track for deliveries in the coming quarter, and preorders have begun with notable high-volume wins already booked.
The second job called out for the year on our last report is to deliver 10% or higher growth in Heska's imaging product line.
We are currently exceeding this target.
Investors may recall that last year was an integration and resetting year for imaging.
As we entered the year, we called out several positive drivers to return imaging to 10% growth for 2018.
The first quarter outperformed our goals with a 33% increase in sales that also delivered an increase in gross margins of 3.8 percentage points over the prior year period to 40.8%.
With new products on tap to begin shipping in the second half of the year, positive momentum and other tailwinds, we remain confident in the imaging performance goals for 2018.
The third job called out for the year on the last report is to work to deliver on our next big product and geographic expansion opportunities to drive major step-ups in growth.
These key growth initiatives are scheduled to be more fully shared during our Investor Day scheduled for May 15 in New York City, where we will share our progress on 3 key growth initiatives and provide several updates on our Reset subscriptions program, which we believe will be useful and encouraging to investors seeking to understand Heska's strength at a deeper level.
Growth initiatives covered at Investor Day will include research and development investments for projects slated for launch in 2019 and 2020, major new product line extensions into addressable markets in excess of $100 million, and an update on Heska's geographic expansion strategy and investments outside of the United States.
We look forward to seeing you at our Investor Day or having you participate remotely via webcasting.
Now I'll turn the call over to <UNK> to go through the details of the quarter.
Following <UNK>'s comments, we'll open the call to answer your questions.
<UNK>.
Thanks, <UNK>.
For the first quarter of 2018, we reported revenue of $32.8 million, a 10.8% increase from $29.6 million in the first quarter of 2017.
Revenue for our Core Companion Animal segment, or CCA, increased 12.8% to $26.8 million in the first quarter of 2018, up from $23.8 million in the first quarter of 2017, driven primarily by strong point-of-care laboratory consumables revenue increase of 17% and point-of-care imaging products revenue increase of 33%, offset by a decrease in instrument revenue of 29%, largely due to lower capital lease revenue recognition and lower levels of noncore diagnostic pump sales.
Revenue for our Other Vaccines, Pharmaceuticals and Products segment, or OVP, increased 3% to $5.9 million in the first quarter of 2018, up from $5.8 million in the first quarter of 2017.
First quarter 2018 gross profit rose 0.7% to $13.3 million compared to $13.2 million in the first quarter of 2017.
Our first quarter gross margin was 40.6%, a decline of 4.1 percentage points from 44.7% gross margin in the first quarter of 2017.
This decline is due to a decline in gross margin in OVP to 9.4% in the first quarter of 2018 from 37.4% in the first quarter of 2017, resulting from primarily unfavorable product mix.
Total operating expenses in the first quarter of 2018 were $11.4 million or 34.9% of sales compared to $10.4 million or 35.3% of sales in the prior year period.
The increased operating expenses were related to stock and other compensation expense recognition, research and development expense related to new product development and consulting fees related to advisory services.
Operating income decreased 33% to $1.9 million during the first quarter of 2018 compared to $2.8 million in the first quarter of 2017.
Operating margin of 5.7% for the first quarter of 2018 was negatively impacted by OVP product mix, which was affected by the timing of a higher revenue but lower margin contract manufacturing product shipment.
This unfavorable product mix impacted gross margin by approximately 5 percentage points.
Net income attributable to Heska Corporation decreased to $2.2 million or $0.28 per diluted share in the first quarter of 2018 compared to $4.6 million or $0.61 per diluted share in the first quarter of 2017.
The company's effective income tax rate for the first quarter of 2018 was a benefit of 15% compared to a benefit of 51% for the first quarter of 2017.
The effective tax rate for this quarter was favorably impacted by the discrete tax benefits associated with the vesting of restricted stock units but to a lesser extent than this impact of the first quarter of 2017.
The company estimates the discrete tax benefits associated with the vesting of restricted stock units resulted in a tax benefit of $0.8 million for the first quarter of 2018 or $0.10 of diluted earnings per share as compared to approximately $2.2 million impact of discrete tax benefits or $0.29 of diluted earnings per share for the first quarter of 2017.
The company has an underlying annual effective tax rate of about 27% to 29% minus the effect of discrete tax benefits related to stock option exercises and the vesting of restricted stock units that could result in a tax deduction in excess of the book compensation expense recognized.
While the company expects the underlying annual effective tax rates to be in the 27% to 29% range, these rates could be impacted on a quarterly basis by volatility due to accounting for income taxes associated with previous and future stock-based compensation awards.
At this point, we'd like to take this opportunity to open the call up for your questions.
Operator.
(Operator Instructions) We'll take our first question from Jim <UNK> with <UNK> & Company.
First question I want to ask you is not really about anything that happened in the quarter but about Henry Schein and their plans to spin off their vet business, and how you think that will impact your business.
So first, I think it's a positive for the Henry Schein Animal Health team.
I think it's a fantastic structure.
I think it'll free them up to be more aggressive in the space and more focused, which we believe impacts our business positively.
I think, as you know, we partnered with them in terms of distribution on a ---+ an exclusive basis for the core companion laboratory business, and we anticipate partnering with them on international initiatives as well.
So we think it's a winner.
We think the combination with the vets' first choice and their analytics and their software skills and capability, especially when combined with the market share leadership that Henry Schein has in practice management solutions, we think that's a very powerful combination of data.
And the more valuable they are to the veterinarian and the pet owner, the more valuable they are as a partner to Heska.
So it's a very long way of saying we like it.
Okay.
And on that distribution note, the last call, you talked about ramping up your direct sales force by, I think, about 25% in 2018.
Can you give us an update on how that's going.
Okay.
And I assume we'll hear more about the new product launches in a couple weeks at the Investor Day.
It's probably business development, a little bit of tax, little bit of structure.
As we contemplate some of these things, there are times when we need outside help to make sure our structure is correct for the development that we're pursuing.
And I think that's probably the majority of that, those outside fees.
Yes, I think we're going to try and update that on Investor Day as well, Jim.
And it's a thoughtful question.
We want to make sure we give a thoughtful answer.
We've got a lot of moving pieces.
I think, so far in the first quarter and going into the second quarter, our message has been that sales are good.
Product margin, gross margin is good.
End user demand is good.
We're on track for all those things, but with some of these moving parts, we thought it was a little bit early to try and get more precise on what the timing of some of these spends are.
And I think we'll be able to be little more precise on Investor Day.
So I want to defer that for a couple days, because I think context around those spends and timing and what it does to operating margin is important.
So we have to be a little more fulsome on Investor Day than we can be on our earnings call.
As tempting as it is, I'm going to refrain from asking about products because I know I don't want to get in front of you on Investor Day.
So anyway, just ---+ we saw OVP ---+ and I think you even suggested it might be down year-over-year.
Can you talk about what might have grew 3%.
So was that above expectations.
Or was that at expectations.
Or just kind of help us think about OVP, which ---+ at least, my model has it going down year-over-year.
Yes, year-over-year, I think, we called out a pretty discrete number.
I want to say it was $21 million.
Yes.
And so the number for last year is out there as well.
So it is down year-over-year, and we called out a pretty specific number.
And I think we also called out a pretty specific number on gross margin.
So the good news with that business is, we feel like we have good visibility on a yearly basis, but timing of product mix, because most of the product that comes out of that facility are on contract manufacturing agreements, which means we're providing manufacturing for the timing of third parties.
And so in the first quarter, we had a large shipment of 3% gross margin product that is tied to a larger relationship that ships much higher gross margin product throughout the year.
So the timing of that 3% gross margin obligation affects quarterly gross margin but not annual gross margin.
I hope that makes sense.
Got it.
Yes.
And then just as a follow-up to a question Jim asked for the Henry Schein, Henry Schein actually has something brewing in their merger that's really going to help them develop the industry.
But Henry Schein also has a lot of strength outside the U.<UNK> So I mean, do you see any potential strengthening of Henry Schein outside the U.<UNK> that you could leverage for your own products, given the fact that you already have a very strong relationship with Schein.
We do.
I think it's probably a reasonable anticipation for most folks that we would partner with Henry Schein globally as we have in the U.<UNK> Obviously, they have been quite busy.
We have been quite busy, so we haven't made any announcements and moves towards that.
But I think, we'll talk about that a little bit more on Investor Day as well.
And then I'll just ask one more.
You've noted a lot of corporate account wins.
You have a product that's good for high volume.
You have consumables that are cheaper than or less expensive than market rate.
So you have also these Petcos and other stores that are trying to drive same-store sales and opening veterinary clinics.
So can you talk about maybe the opportunity for your products in those kind of settings if you have any relationships there brewing.
And what kind of opportunity for growth do you see there.
And that will be my last question.
Yes, <UNK>, I think we're more focused on full-service veterinary hospitals.
Our equipment, I think, is generally acknowledged to be very precise, very accurate and kind of a professional-grade type of product.
I think, when you get into more of the consumer end of the market where maybe it's not full-served veterinary medicine, I think, ease-of-use, smaller form factor, those types of things and price tend to really drive some of those purchase decisions.
So we really are focusing kind of on the higher-end, full-served veterinary hospitals.
And those are folks like the pet vet care that we got at the end of last year, and we think those folks will continue to acquire other high-quality veterinary ---+ full-served veterinary hospitals.
And so we'll grow alongside of them but we're less focused on some of the false starts that I see kind of in the more consumer places like the Petcos versus PetSmarts versus Walmarts versus there's a lot of opportunity, I guess, there, but I haven't seen a lot of tangible opportunity.
I think the entity that is executed ---+ has executed well, the Banfield entity that's part of the Mars family.
But I haven't seen much more than that in terms of opportunity for Heska.
So we're going to focus on the full-served veterinary hospitals.
Yes.
So that's a great question.
The installs were in line.
The nature and the mix of the installs is always important.
So capital equipment recognition will drive instrument revenues differently than operating lease recognition, which would be lower revenues in the current period.
So the mix, for instance, corporate accounts tend to be under operating lease, whereas individual hospitals tend to be under capital lease, and the mix of installs, operating lease versus capital lease can vary.
In addition to that, we also have a pretty big effort to install new devices into existing hospitals in return for extensions of their subscription.
And that has different instrument accounting treatment as well because you're taking the balance of their current deal and rolling it into a 72-month new deal, which will affect the equipment portion, all of which is to say the instruments portion of revenue is far, far less important to our business.
And I think we will explain that in much more detail on Investor Day to help people understand that.
We think it's fair we should call it out, but there are so many factors driving that.
They don't really indicate health or weakness in that area that I think understanding the moving parts on Investor Day will help.
Noncore pumps is just a straight traditional ---+ we have the leading infusion pump in the market and people have bought hundreds and thousands of these things over the years.
All of the major distributors also sell these pumps, and that's a timing question.
So in some quarters, you might get $1 million in pump orders, and in some quarters, you might get $200,000 in pump orders because those are stocked at the distributor level.
And when that moves the numbers meaningfully as it did this quarter year-over-year, we call that out for you.
I think it was approximately $500,000 difference in pump deliveries for distribution for the quarter compared to the first quarter of 2017.
So it was a meaningful number, so we wanted to call it out.
Yes, correct.
Yes.
I think I'll defer back to <UNK>'s response to the last caller's question in regards to operating margin and discussing that more fully at Investor Day, because, clearly, those ---+ we have strategic plans in place and those clearly do affect our operating margins, and I think we want the opportunity to be thoughtful about it and discuss in person.
Yes.
So I almost put it in my prepared comments, <UNK> Aroesty is a fantastic hire for Heska.
He comes from, most recently, Siemens, where he was managing point-of-care diagnostics, which I think was, by a couple multiples, larger than the size of Heska.
He has 10 years of experience being based in Europe, most recently out of London but also reporting into Germany.
So I think he's an ideal executive to lead our rest of the world expansion.
I can't say a whole lot more about that until we kind of tie it together with what the logistics and marketing strategy outside of the U.<UNK> is, but I'm tickled to have him.
I've been trying to get him for a while, not officially, but he's a friend of mine.
I think very highly of him, and I think you'll like him a lot when you meet him.
(inaudible)
It's a great question.
There's a very large customer that we have in the OVP segment, and part of that relationship is we have an obligation to ship that product as part of our overall relationship with them.
So we ship some very high-margin product for that large customer as well.
And as a good partner, when they need $1.5 million to $2 million or 3% margin product, we agree every year to produce that and ship that for them.
So that's the answer as to why ship it.
It's part of the overall $21 million in sales and 20% gross margin that OVP does every year.
And so the 3% product that we shipped was not a surprise to us.
It just depends on which quarter it ships.
And obviously, it doesn't show up quite as greatly if it ships over multiple quarters as opposed to stacked into 1 quarter.
And this year, it's stacked more into 1 quarter than maybe it has in the past.
There's not so much converting.
We have a contract with them that calls for a very high percentage of their hospitals to convert within 2018, and so all of those conversions are contracted to be completed in 2018.
But laying the groundwork and getting the first batch of those installed is always a slower more gentle process than what you see once you get momentum in that.
So I think you'll see higher increases of installations, but it's not so much a conversion question as it is logistics question on their side.
They have communication and training and swapouts, and we have logistics in terms of shipping and training and installation and those kind of things.
So the first quarter was very light.
The second quarter will be heavier in terms of installs than the first quarter.
And I think by the third or fourth quarter, we will be humming right along to get to that kind of 80% targeted conversions in 2018.
Thank you.
I want to thank everybody who took the time to listen to our call and to follow us.
I'm pleased with our first quarter results, and I'm proud of the work that the entire Heska team did.
I think we built value for investors.
We certainly improved the lives of veterinarians and pet owners and most importantly, pets.
I remain super excited about what the next 5 years looks like, and we look forward to updating everybody on May 15 during our Investor Day in New York to share details on why I remain super excited about the next 5 years and Heska's bright future.
So I hope you can join us, either in person or by webcast, and we look forward to speaking with you soon.
Thanks and have a great day.
| 2018_HSKA |
2016 | IIVI | IIVI
#Okay, <UNK>, thanks a lot for your question.
I would say that, for the core of our strategy going forward, I would take it just as a straight line for where we come from.
It's typical for us as we did with the Oclaro acquisitions to go ahead and spend the time doing a real nice job planning it, getting it in-house, getting organized, getting it stabilized, putting the efforts into both the market and the product portfolio and the operations and then allowing the teams to grow.
And I would say that that's pretty much where we are at, where the most recent acquisitions that we've done, we are stepping up our organic investments on the belief that the long-term prospects for devices that can be made on that platform is very, very strong for II-VI in the long term.
We need to stick to the knitting and make sure that we get things done, get them done on time, get things in place.
However, we will continue to grow both by organic investments and by acquisition.
That's my belief.
So, we won't take our eye off the ball, both strategic planning for the long-range, so it will be as determined as we ever were while <UNK> was the CEO to make sure that we do things right, we do the right things, and that we get the absolute best deal we can for the II-VI shareholder in the short term, and that we can make real good on in the long term.
I would say ---+ this is <UNK>.
Certainly what <UNK> said is just right.
We think we are well-positioned.
We do want to integrate what we've bought and work on the organic opportunity in VCSEL platform right now.
At the same time, there are other things that we could be acquiring.
We are not right now imminent to do any.
But there are a couple near us, so if you had to say how we are leaning, we are two thirds on integrating and fix, and one third to look at other acquisitions.
We have to do that.
It's the type of business we are in.
We are materials suppliers, merchant suppliers, have to keep our eyes open and will continue to do that.
For the year.
Let me just first say this.
In this Company, we are very, very committed to a lot of things that are kind of run the Company by the basics, and that starts with if the money isn't made of the gross margin level, it's basically not made.
So, a continued focus on the management improvement of the gross margin is really important to us.
So I would say that we take even small changes in the gross margin pretty seriously.
And while I am actually not going to give you a range for the back half of 2017 or 2018, I would tell you the Company is very cognizant of the sorts of gross margins we've had in the past.
We focus on new products to improve or certainly not dilute the gross margin.
But volume does matter.
The single biggest thing that will affect gross margin is, aside from just natural yield, is what you sell off the yield.
So those things do make a difference and I think as <UNK> said, as we expand our capacity, our team that manages the manufacturing and engineering in this Company drop all the segments are very, very good at that.
And they look to be sure that that capacity addition, if they've done as <UNK> said with full view of how it's going to be used, productivity improvements, etc.
So, while we do have a pretty wide range for a few different reasons, not the least of which is just trying to be cautious on exactly how the optical communications cycle could go for the whole year, all four quarters, we certainly would strive not to be living at the bottom of it, I would say.
First of all, we continue to view the industrial market very favorably.
That's an important market to us.
We are very good at that.
But we are also very good at the rest of the markets.
I would say what makes optical communications more variable with respect to the gross margin is, in times such as we may be said to be seeing today, there ---+ where capacity is being constrained, orders are going out further, there may not be as much pressure on price decreases over time as we would typically see in a more down part of the cycle, where the quarterly reduction in prices is not only much more aggressive, it may not be limited to once a quarter.
So that, at the end of the day, it's really about demand.
But I would say where we see the cycle rate at the present moment, at the very least, people are not having as much time or really just as much supply chain capacity to be able to be pushing prices down as they have in the past.
<UNK>, would you like to add to that.
I would say we continue with a very, very strong dedication and focus on the industrial market, <UNK>.
As I mentioned in my comments, we had another record quarter for our 1 micron components, for the industrial materials processing market.
China seems to be in the last quarter, and maybe half of this third-quarter and powerful fourth quarter, very, very strong.
The demand is strong.
The demand for our current products was strong in the fourth quarter, and the demand for existing products at new customers, including for a very sophisticated beam delivery systems and cutting tools, has increased in the last two or three months beyond any interest in we've seen before that.
So we have ---+ we've reorganized salesforce.
We have increased our team both in China and Korea, and in Japan as well as supporting the team dynamics in Europe and in the US.
It will continue to be a very important market for us to invest and manage and grow in.
No, not particularly.
Obviously we do talk about the capital increasing, which to the extent that we have just say half of that in the beginning of the year, that will add to the depreciation, of course.
But those are probably the main ones that really affect the margin growth for next year, other than just changes in the topline.
Yes.
You have that right.
There is $12.5 million at the very least in there, just on one-time expenses.
Okay, well, we want to thank you all for joining us today.
Thank you for your support throughout this year, and we will see you on October 25.
Thank you for joining us.
| 2016_IIVI |
2015 | ANF | ANF
#On the MG&A line, <UNK>, the way to think about that, we do have incremental expense modeled in 2015 related to incentive compensation normalized, having normalized accrual rates on incentive compensation.
For the year that is a little over $20 million as a Company.
A large portion of that will be in the MG&A line as well as a slight increase in marketing spend as we dedicate more growth to digital marketing.
Hi, <UNK>, it is <UNK>.
To answer your featured question, let's start with the top piece.
And just to reiterate kind of where we went before, each and every category that we currently have we are looking at for opportunity.
There is clearly a big opportunity in tops and we need to strike a balance, which brings me to your question on the must haves.
We are looking to do a good, better, best pricing.
We like to give the consumer an opportunity to enter an opening price point for us.
So we have had very good success to that so far.
And fashion will always be a piece of our business, it's a matter of figuring out what percentage that needs to be.
Sure, I think what we said earlier was that to begin with the logo impact that we felt across the business certainly weighed on the e-com business in the fourth quarter and so did the international component of that.
We also said that we felt we left some business on the table in December in Europe where our promotional and shipping messaging was probably not as compelling as it could have been and that is something we will work to rectify as we lap that in 2015.
Yes, I mean, <UNK>, we have always said that we make decisions on buybacks quarter by quarter taking into account both liquidity and valuation.
We don't comment on the specifics of that discussion either in advance or typically after-the-fact.
So it is what it is as we go quarter by quarter through the year.
Yes, <UNK>, it really wasn't a change in the plan.
We've introduced a plan really for the first time that on an ongoing basis will provide incentives for store management based on the performance of their store, primarily measured around the sales performance of the store.
So we are doing that on a quarter-by-quarter basis as we go through 2015 which gives us the opportunity to adjust it as we need to to make sure it is being effective in achieving that objective.
But we think it is important that the store management has a stake in the performance of their store and that is essentially what we have put in place.
Thank you.
| 2015_ANF |
2016 | DSW | DSW
#Yes, I think the ones I think is the best example is obviously our acquisition of Ebuys.
I think it has an incredible opportunity for us to evolve the DSW Inc model.
I will tell you there are several other investments that we have made that we're not in the position yet to disclose how we're going to leverage them, but I think there's some great opportunities for us to create different and unique experiences in our stores and using technology to create those experiences that force you to come to a DSW location or another banner underneath DSW Inc.
But we're not in a position yet, Ed, to be able to present some of those, but we have some pretty cool things we're working on in that space.
Thank you.
So I want to thank everyone for joining us today, and I really want to reinforce our commitment to driving our top line and improving this profitability of our Business.
We have significant work ahead of us, as I'm certain you could hear from the call.
But I know we are committed to creating a strong foundation that's going to drive long-term, profitable growth.
So, thanks, everyone, and we appreciate your support.
| 2016_DSW |
2015 | XRAY | XRAY
#Okay.
<UNK> <UNK>, Morgan Stanley.
First question is, I wonder if you could spend a minute reflecting on the 2017 margin objectives.
Its always nice to hear how the thinking there is evolving and I would say particularly here, given how strong the margins were in the quarter.
Of course, we appreciate that you want to continue investing in the business, but then it begs the question, if we have now more flexibility to invest in the business considering how well we are doing in terms of the efficiency initiatives, maybe that positions you to talk a little bit more about how you think about organic growth evolving over the next couple of years.
How do you think about the interplay between those dynamics given the progress that you are seeing here.
Okay.
<UNK>, this is <UNK>.
I will take a stab at that.
Certainly, we are ahead of where we thought we would be in the margin expansion program and it is beginning to gain traction now, strong traction.
And that creates flexibility for us.
You might remember, this is not, and you alluded to in your question, this is not just a cost-cutting exercise, this is an exercise of taking fixed costs and turning them into variable costs so that we can accelerate investments where we see growth opportunities.
And thus, that is probably the most important part of the program, frankly.
But we are ahead of where our internal targets were on the margin expansion program.
That's going to allow us to bring some of the investments forward and which should generate growth sooner in the program as well.
I will say with respect to the 20% operating margin target in 2017, we are ahead of where we thought we would be now and I think you should view that 20% operating margin target as an interim target.
And we will reassess that target with respect to where we are in the program when we get to that program.
Now we are at 19.9% for the first six months of this year so we are doing pretty well, which is what's giving us the flexibility to invest in the growth initiatives and move forward.
So I don't want to get too far out in front of ourselves here on trying to describe the impact on internal growth, but of course, we would not be making those investments if we did not think it would accelerate internal growth going forward.
<UNK> or <UNK>, do want to add anything.
No.
I think that's accurate.
Obviously, we're headed where we thought we would be.
We are getting some help from FX on that line but we're also getting some good help in terms of the efficiency program.
That's regaining traction and based on the moves on the initiatives in play, it looks like it's going to accelerate which is in line with our expectations.
I would also say there is transition area FX too.
Obviously, as we go through this and we create new territories, we create new positions, we transition businesses, there is a time phase until those things become totally efficient.
And just one followup to a comment that was made in the prepared remarks for you, <UNK>.
Thanks for calling out the cash flow in the business and how that relates to what's going on in net income.
We've been wondering about the balance sheet and the extent to which you might, with working capital efficiency, be able to drive fast or free cash flow growth over time.
Have you guys thought much about how much or how sustainable that is, the ability to drive free cash flow growth ahead of net income given what you see on the balance sheet today.
Are there any parameters around that, that you could share with us.
We certainly believe that there is some sustainable improvements possible here for the next several periods.
Obviously, it is going to vary quarter to quarter.
I don't want to set the expectation on a quarterly basis, but I think over the next couple of years you should expect us to continue to make improvements in terms of working capital.
We are still over 115 days of inventory.
That's not exactly world class.
That's better than where we've been.
But we've got some significant opportunities in a number of initiatives in play to drive that down both in terms of how we operate but also how we structured.
Again, I think you should expect to see that gradual improvement.
Again, not necessarily quarter to quarter but over time.
The fact that historically, I think if you went and looked back, last year we increased the inventories in the second quarter by three days.
If you go back to 2013, and I believe they went up by six days in the quarter.
So to get inventory down by three days in the second quarter which is typically one of our largest build periods, I think is indicative of the traction that we're getting.
Okay.
Thanks again, guys.
Have a good morning.
<UNK> <UNK>, <UNK>eries.
<UNK>, with respect to Europe, I mean if we look back over the last two years we've seen a real sawtooth pattern in the trend there.
Realize there's been several moving parts between CIS and discontinued products.
Do you feel comfortable enough at this stage to say we are perhaps back on a more sustainable consistent growth trajectory in that region.
I think that's an interesting question, because the sawtooth pattern, <UNK>, occurred because of different countries moving in different directions all at the same time.
Whereas today, the pattern is, it's much more consistent meaning many more countries are moving in the right direction than ---+ before there was a balance, more moving down and more moving up, et cetera.
Now there seems to be more momentum in more countries.
And the results today, we still have countries where there were slight declines in sales growth but there were many, many more that had slight increases in sales growth and thus, it appears to be a more sustainable pattern to us.
Time will tell.
We've been surprised before, but I think the region in total seems to be more stable today.
They are still dealing with some issues in Greece, et cetera, but that doesn't seem to create any contagion to the other countries at this point.
Its hard for me to make that call at that point other than to say what we see right now would tell us that it looks to be more sustainable.
Thanks, that's helpful.
Maybe one for <UNK>.
I did not hear you mention the ortho business.
Has their been any change in the ASP environment there.
And any update you could give us on where you are with MTM in terms of the rollout and the traction you are seeing there would be helpful.
Thanks.
Certainly.
From the standpoint of the ortho business, I would say the pattern is pretty similar to what we've seen in the past few quarters.
The market is a still very competitive.
I would say that we are seeing some improvement in our North American business.
Europe and the rest of the world still reads very, very competitive.
From a standpoint of our MTM business, obviously that is a smaller business but we are seeing some excellent growth.
We are pleased at the case uptake that we see in that business.
A lot of it is going to be our continued investment in the clinical education program and our sales efforts to ensure we get continued adoption and increased case volume.
We are pleased with the performance of the MTM business.
Jon Block, Stifel.
This is <UNK> <UNK> on for Jon Block.
Maybe first, on the margin expansion.
It's been critical to the story and you can see to the 2017 goal of 20% in the quarter which is allowing you to reinvest a portion of the savings, fund growth initiatives.
I know that you mentioned that you were ahead of plan, but looking beyond 2017, what do you consider to be the peak operating margin for the overall business.
Clearly this business can and has produced operating margins about 20% and that's why we continue to describe the 20% target as an interim target and a net target.
Meaning it's net of the reinvestment.
And it is an interim target which we would expect to meet on the time frames we've established.
As we get closer to that timeframe, we will be able to update that target and the guidance based on the maturity of our efficiency program and what we see the reinvestments generating in returns.
So I don't want to put a stake in the ground at what the maximum operating margins are for this business but it's above that 20% target that we have today.
Okay, great.
I know you mentioned that momentum has picked up in the business and the Q2 internal stack growth stepped up a bit sequentially.
But your comps get more difficult in the back half of the year.
Do you think it's realistic to think you can maintain this 3% plus internal growth just given the momentum of the business.
We don't publish an internal growth target for the year, although the reason I went through what we see in the regional markets was to give you some indication of what we see the underlying conditions to be.
So at this point, we see stable to improving results in both the US and Europe and that is 80% of our sales base so that is a big factor.
The wild card has always been the rest of the world countries and there is 120 countries in that category so it's a little bit more difficult to make a firm call on that.
Based on the underlying trends that we see in the markets today, we feel pretty good about growth prospects for the back half of the year and I don't think ---+ we're not too concerned about what the baseline is in making those kinds of calls at this point.
Okay, <UNK>.
That's difficult for us to know what those underlying trends are at the dentist office themselves.
We buy surveys and so forth and some of those show that patient traffic is improving.
From our perspective, the General Consumables, the products we sell through distributors, are really the strongest category we have right now and those products really don't move other than through patient traffic.
So that tells us, if we had to guess, we would say there has been an acceleration of patient visits and these patients are getting back into the office.
And generally when that happens, then you see the specialty business pick up on a little bit of a trailing basis.
So if we had to guess, patient traffic trends have improved for where they were, for instance, a year ago.
And with the job growth coming, we would think that that would continue.
Do you guys have anything to add on that.
No, I think that's correct.
Yes, if you look at the 180 basis points in the quarter, a bit over half is currency.
Again, recognizing that with the cash flow hedges, the impact on our bottom line is less than the translation impact headwind on the top line.
About one-third of it, a little over a third on a gross basis, is the efficiency program.
And price and mix are helpful, but then we add headwinds from reinvestments and then also, headwinds from absorption, as I mentioned earlier; where again, last year we built inventories by three days and this year we brought it down.
Thank you
<UNK>, we did not intend to do that.
As those products come out, it does create a slight drag on internal growth.
Our plan was to report internal growth to you each quarter and then let you know what the drag was.
But we were not going to attempt to normalize it for a product dropping out here or there.
And we've kind of quantified the range of that drag going forward here.
And of course, that is a temporary drag.
Once we anniversary those discontinuances then that's going to drop out.
But also, new products being launched in that business as well.
<UNK>, that's a very picky question.
(Laughter).
I think it fluctuates around.
A lot of things can affect that.
Dealer inventories can affect that and so forth, by 50 basis points here to 100 basis points.
We are not troubled by the ---+ it's slightly stronger in the first quarter.
It's a little bit, just a little bit weaker here, but overall this year, we are up around 4% organically in the US and probably a little bit above the market.
If we had to guess on the market, we would say between somewhere between 3% and 3.5% is what the market is growing.
We will know a lot more than that as we see more distributors report, et cetera.
But we feel pretty good about the number.
We feel good about the momentum, the execution is good and the seed investments we have put in are bearing results here.
So I don't think we are overly troubled by that US number.
I will take implants and then you can comment on medical.
Implant unit growth was pretty nice for us in US in the second quarter.
If I had to characterize it regionally, I would say the rest of the world was our strongest region and that was followed by Europe and the US.
The trends seem to be favorable there.
It varies by technology at this point but we think we are picking up momentum on implant unit placements.
And that is being driven by the new product that we've been talking about for the last year or so on these calls, ASTRA TECH EV.
You want to comment.
<UNK>, as it relates to the medical business, we're seeing really good mid-single digit growth in that business.
We are pleased with the performance.
We are seeing some nice growth in our US market and in addition, we have some fairly significant new products coming in the coming quarters.
We look for continued improvement in that business.
Well yes, the unit growth does differ a little bit, meaning the point that you raise is important and that is that the price is higher on EV than some of the legacy products.
So as the mix shifts to EV, the effect on revenue is a little bit higher than the effect on unit growth.
I am using unit growth here to give you a perspective on what is happening to the number of our own dental implant screws that are being placed irrespective of which brand it is.
Thank you very much, everyone.
That concludes our conference call today.
I will be around for follow-ups this afternoon.
Have a nice day.
| 2015_XRAY |
2017 | CMA | CMA
#Good morning, everyone
Turning to Slide 6, average loans in the fourth quarter were relatively stable compared to the third quarter
As a result of seasonality, our mortgage banker business decreased almost $200 million due to the fall slowdown in home sales, while our auto dealer floor plan portfolio increased $300 million as dealers took delivery of the 2017 models
We had a reduction of over $150 million in the energy portfolio
We also saw more robust declines in environmental services and general middle market partly due to some customers taking advantage of attractive valuations to monetize their investments
Finally, the strong growth in commercial real estate earlier this year has slowed as we remained focused on well-structured, attractive opportunities with existing customers as well as maintaining the diversity of our total portfolio
Growth in November and December resulted in period end loans above the average for the quarter
As you can see, the quarter ended with loans at $49.1 billion down from the third quarter with mortgage banker contributing the largest decline
As of December 31, commitments decreased $576 million, including a $220 million decline in energy and almost $300 million seasonal decline in mortgage banker
Average line utilization was stable at 51%
Interest earned on loans increased $1 million quarter-over-quarter and our loan yield increased 3 basis points
The increase in interest rates provided a $6 million benefit, which was partially offset by a lease residual valuation adjustment and lower loan balances
Deposit growth was robust again this quarter as you can see on Slide 7, increasing almost 3% over the third quarter
Our deposit costs remained low at 14 basis points as we continue to prudently manage pricing for our relationship-oriented deposits
We have not instituted any standard pricing adjustments in response to the increase in short-term rates
We are closely monitoring our deposit base as well as the market and we believe we are well positioned
We continue to maintain our securities book at about $12.5 billion as shown on Slide 8. The yield on the portfolio was stable
Recently, the increase in yields had allowed us to invest prepays at a higher rate than the portfolio average
For example, in the last couple of weeks, we purchased some mortgage-backed securities in the 230s with only modestly longer duration and extension risk than the portfolio average
Hopefully, this marks the end of the yield erosion we have been experiencing
The recent rise in mortgage rates has not had a significant impact in the pace of prepayments and the estimated duration of our portfolio sits at about 3.5 years and the expected duration under a 200 basis point rate shock extends it modestly to 3.9 years
Finally, the increase in rates resulted in the swing of the portfolio position to a small net loss of $42 million
Turning to Slide 9, net interest income increased $5 million, while the net interest margin decreased 1 basis point
As I discussed earlier, all loan-related impacts netted to $1 million and added 2 basis points to the margin
Wholesale funding costs decreased $1 million as the increase in 6-month LIBOR was more than offset by the benefit from the maturity of $650 million in sub-debt that was repaid in mid-November
Finally, the $1.5 billion increase in average balances at the Fed contributed $2 million, but had a 4 basis point negative impact on the margin
Our overall credit picture remains strong as outlined on Slide 10. Total criticized loans declined over $400 million and are now under $3 billion at quarter end
This includes a $49 million decrease in non-accrual loans, which now represents only 1.2% of our total loans
Net charge-offs were $36 million or 29 basis points, which is at the low end of our normal historical range
Our allowance for credit losses and allowance-to-loan ratio remains stable
Our reserve is built from the bottom-up every quarter and takes into consideration changing economic risk factors that may have an impact, but have not yet been reflected in our risk ratings such as the recent strength of the U.S
dollar
Energy loans now represent less than 5% of total loans
E&P loans make up about 70% of our energy portfolio
Fall re-determinations have resulted in an increase in borrowing basis of about 11% on average as many of our customers have increased reserves through acquisitions, improved production and new drilling as well as slightly higher prices
As criticized and non-accrual energy loans continued to decline and charge-offs remains manageable, the reserve currently allocated for energy loans declined slightly
Slide 11 outlines non-interest income, which fell slightly from very robust levels seen in the third quarter
We had nice growth in card fees as well as fiduciary and foreign exchange income
This was offset by decline in commercial lending fees primarily due to a slowdown in syndication activity
In addition, non-fee categories declined, including a $2 million net securities loss related to an adjustment for our Visa derivative and a decline in deferred compensation plan asset returns
The reduction in expenses, as shown on Slide 12, was a highlight in the quarter
Non-interest expenses decreased $32 million with our GEAR Up initiative contributing more than $25 million to the decline
Salaries and benefits expense declined $28 million, primarily due to the reduction in workforce as well as reduced pension expense as a result of the redesign of our retirement program we announced last quarter
In addition, a decrease in consulting expense and a gain on the early termination of certain leverage lease transactions more than offset the increase in outside processing expense, which is tied primarily to growing card fees
Moving to Slide 13 and capital management, we continue to maintain strong capital ratios while returning excess capital to our shareholders in a meaningful way
As we have previously indicated, our 2016 capital plan includes share repurchases of up to $440 million and the pace of our buyback will be dependent on balance sheet movements, our financial performance and market conditions
In the fourth quarter, we again increased our share buyback
Through the buyback, together with the dividend, we returned $139 million to shareholders or 85% of our fourth quarter net income
Of note, as a result of warrants and employee actions exercised during the quarter, we issued 5.1 million shares
Also, our average diluted share count increased by 1 million shares to 177 million as a result of the rise in our share price during the quarter
Turning to Slide 14, there are a number of potential developments that could enhance our financial performance
On the left side of the slide, we outlined the impact of rising rates
As I mentioned earlier, with our asset sensitive balance sheet, we have benefited from the recent increase in rates
Over 90% of our loans are floating rate
Therefore, as rates move, our loan portfolio re-prices relatively quickly
Assuming our deposit prices move with a 25% beta, our model indicates that the recent Federal Reserve rate increase of 25 basis points, we should gain about $70 million more in net interest income over a 12-month period
Of course, deposit pricing is only one assumption in our interest rate sensitivity modeling
We provided a range of possible outcomes as rates continue to rise based on various assumptions around positive base, pace of deposit decline and the incremental funding dates
Additional scenarios, other key variables and a list of assumptions are in the appendix
In addition, there has been much discussion about the new administration in Washington’s plans to reduce taxes, provide regulatory relief and fiscal stimulus to drive economic growth
While there is no certainty as to what changes may prevail, the table on the right provides a reconciliation of our 2016 income taxes to assist you in your analysis
We believe we are well positioned and can act quickly no matter what changes are enacted
Now I will turn the call back to <UNK>
We don’t really look at it that way
We really focus more on the non-interest bearing, which is predominantly our commercial customers
And while we certainly have a large base of customers that drive a significant balance, there clearly are, I don’t know, a dozen, two dozen customers that carry very significant balances with us, but do tend to move week to week, month to month
But in any event to reemphasize <UNK>’s point, we are not looking to be changing our deposit pricing, but we will be watching as I said in my prepared remarks, we will be watching the market and our competition very, very, very closely, but let me make it clear we won’t be leading the way, but we certainly will be looking to match competition if there is first movers
No, I would echo that <UNK>
The forecast is assuming no incremental rate hikes throughout the balance of 2017. We would be pleased to see them, but they are not embedded in the forecast as the expense side would be absolutely de minimis
Well, <UNK>, you actually did pick up on the biggest piece of it and that is the revenue side, a lot of that big card fees, merchant side activity
As you are well aware of, there is outside processing associated with that
And in fact, the single biggest impact that we expect to see in expense growth next year is in fact that very point
It’s the cost of outside processors
Do keep in mind we do also expect to see the growth in not only fees but growth in loans
Accompanied with that is increased incentive payments as you would expect as we grow that book
We also have the standard merit increases such as due to inflationary pressures, which I know our employee base appreciates
We also have the FDIC surcharge coming through for the full year and then quite frankly, we just have ongoing increases, albeit well controlled, in technology
So on balance, that’s kind of the framework of what we expect to see
I should add remember, we also had $13 million and <UNK> mentioned this in his prepared remarks, $13 million in lease termination gains last year that we do not expect to repeat
Well, our GEAR Up initiatives are completely underway
We will be significantly focused this year on an element of GEAR Up, that being the technology piece
That will be a significant contributor in 2018. So we do, as <UNK> said, we do fully expect to execute on every element of GEAR Up
No, I would agree
Great number <UNK>, we have recently picked up some mortgage back in the 2.30s
And quite frankly remember you are locking into that for a 3-year, 3.5-year period
So if we continue to see rate increases, that could be a challenge in terms of not having locked into that fixed rate
I would much rather see that go into loan growth and as <UNK> said, we will continue to stay with our standard pattern here and until a better picture emerges
I think our confidence level is certainly increasing as it relates to completing the $440 million buyback as our CCAR plan has articulated
The increase in the capital ratios, we did indicate we did have warrant conversions in place, stock option conversions with that a little over 5 million shares has certainly a significant increase to the capital ratio and then quite frankly, our risk-weighted asset calculation also declined so both kind of contributing to that increase
In terms of next year, obviously, we will take a very hard look at that knowing where our capital ratios are, knowing our confidence in our forecast, including the expense saves and revenue enhancements coming from GEAR Up, we will have to coalesce all those thoughts as we work through our CCAR plan for its submission during the few months
I think we are going to stand down, can wait and see of what if anything is actually moving through Congress and what if anything the new President maybe inclined to sign
It’s obviously very difficult to do any kind of real forecasting with taxes other than to use today’s tax regulation to focus on
I think we have been saying for long that we are – part of our strategy here is to manage the level of capital
And as I said earlier, we need to look at all those factors
As we pulled together the CCAR submission here for this year, obviously our confidence level is higher than the impact of GEAR Up, the fact that the economy is improving
We have some positive interest rate movement here in December
You may or not see more increases
It certainly increases our level of confidence and when it comes to making the submission
No, <UNK>, the 33% that we are telegraphing is simply a result of an expectation of a higher level of pre-tax earnings being offset with the same level of expected low income housing tax credits and the current same level of tax exempt income, which in our case has been from life insurance
But if the other discrete items we don’t expect to repeat, which is mainly the lease termination transaction and then do remember there is about a 1% or 1.5% impact from state income tax that’s embedded in that 33%
Well, there is three pieces that – there were four pieces that could impact that
One, what would be the new corporate tax rate? Today, it’s 35%
What does that corporate tax rate move to? The second would be does any congressional action modify the ability for us to fully utilize low income housing tax credits? Don’t know
The third would be bank-owned life insurance
From time to time over the last 20 plus years, Congress has entertained either limiting or eliminating the benefit of that tax exempt income
And then lastly and this would be a one-time adjustment, but remember, we now have a net deferred tax asset and that net deferred tax asset is recorded at 35%
So to the extent corporate tax rates decline, you have to write-down that deferred tax asset to remember the new corporate tax rate would be
That’s a one-time item, but there is significant moving pieces
So you can probably use whatever assumptions you choose to use as you see Congress move on tax legislation and that will give you a good idea of what the impact would be to Comerica?
Yes, all of it
I want to clarify because I am not 100% sure I heard the last statement that <UNK> made correctly, but I want to make sure I am very clear on this corporate tax rate
To the extent there is a reduction in corporate tax rates that drops to our bottom line, we expect that to enhance EPS, but I think <UNK>, I may have misunderstood you, you may have been suggesting that we would trade that away in competition
That was not my intent to answer yes, all of it
Yes, all of it falling to the bottom line to EPS, but I just want to make sure I am clear
I am not sure I heard the last point of your question correctly
Well, clearly, balance sheet growth would be a great use of capital
But at the moment, given where we are with balance sheet growth, we continue to believe stock buyback is an appropriate use of our excess capital, so if we begin to see those dynamics change, we will obviously reevaluate
But given the alternatives, we continue to believe stock buyback is the right action for us to be taking at this time
And we will continue to focus on that dividend and that will be another consideration as we look at next year’s CCAR submission
Well, there is a couple of ways you can approach that
One is with and without restructuring charges
So I will focus on the GAAP component, which will be including restructuring charges
Absent at least one more, if not two more rate increases, I would say that, that would be a high hurdle
But again, our focus remains more on driving that number to or below 60% for 2018.
If all other elements of our forecast fall in place exactly as we would expect, I think we will be extremely close
Another rate increase would make it a lot easier to lay up as opposed to a longer shot
No, I will agree
So far, no pattern has been the same
But keep in mind, only a month into the rate increase and like I said, but we won’t be first mover on standard pricing, but we will watch the competition
Anytime there is a rate increase, we do have, as I said, we have some very, very, very large corporate customers
They tend to reach out to see if they are willing to park some of those funds for an extended duration if we might be willing to be somewhat more competitive in terms of pricing
We tend to be very focused on that
We had a handful of calls last year
We have got handful of calls again this year, but nothing in that pattern has really changed
Most of that it’s really our treasury management
The way we have that rolling in, in 2017, we are just beginning to roll that program out
We did a fair amount of site testing throughout the third and fourth quarters with various markets, with various customers
And if we just we will begin the full ramp up of that here early in ‘17. So I think it’s reasonable to expect some minor component of that in the first quarter, but you could expect the balance of that to really be more second half as opposed to first half
| 2017_CMA |
2015 | CRZO | CRZO
#I think the most activity in our area has been from BHP and also from EOG and the well results just seem to get better and better.
So we still don't have a good handle on cost because we haven't drilled or fracked a well yet.
We are still working on a farm out.
We're closing to getting it than we were two weeks ago.
But looking at the BHP wells, the Horseshoe Springs wells are the best thing to compare to.
I think at Analyst Day, we're predicting the generation-three rigs to go from about 1.8 wells per rig per month to about 2.1 wells per rig per month.
We seem to be on schedule for that.
So that is what I would use in your model.
This is <UNK> <UNK>, I will address the inning for the efficiency.
I think probably the bottom of the eighth.
I think there is smaller gains to be made but they are going to be more slug-it-out type stuff.
Our average Eagle Ford well is running 10 days to 12 days on a 6,700 foot lateral.
And we see incremental gains but they are small.
We talked about it at Analyst Day.
It is kind of slugging it out from here.
We do get a little bigger jumps when we bring on these new generation rigs and new generation tools.
I think the eighth inning is where we are at.
On the EUR side, this is <UNK> <UNK>, I think we're probably six to seventh inning.
One thing that we have to remember here is the most mature Eagle Ford well has probably been online for five years or less.
And I think if we have been able to prove anything in this industry and in particular with respect to resource plays, shale plays, is that we have figured out ways to get more out of this rock.
We have started out with pretty low recovery efficiencies and we've consistently been able to up that.
<UNK> earlier talked about a couple of different things we are trying on the completion front.
And there may be some things down the road that we don't even know of yet, but these are 30 year to 40 year life type wells.
And I think we will see continued improvement in the EUR.
Good morning, <UNK>, this is <UNK> <UNK>.
With respect to the Brown and Wagler and Rector wells, it is important to understand their relative structural positions and location north to south in the play.
The Rector and Wagler wells are at about the same structural depth.
Some 20 miles apart.
And when we tested the Wagler wells, we primarily tested those for a short timeframe because since they are on strike with the Rector, we expected them to be very good wells.
And indeed, they were.
And we were more interested in getting fluid samples to kind of refine our understanding of the facilities that we would need and stabilization around those wells.
The Wagler wells were very Rector-like.
The Brown well is some 6 miles up depth of the Wagler wells.
So if you go up depth, it's about 6 miles away and about 400 foot to 500 foot shallower from a structural standpoint.
And we are very pleased with the Brown well relative to other wells in that structural position.
We have averaged over 400 barrels a day.
For the Brown and we are on day 100 of the flow test for the Brown, so the well is doing well.
It is some 30% less almost than our type well in length.
Our type well is 8,000 foot and it is on order of 6,200 foot in length.
So it continues to flow.
The last test a day or so ago was 340 barrels a day plus and over 1 million cubic feet a day plus.
With respect to be exact pressure differences, between the Rector, Wagler and the Brown, we view that as somewhat competitive and prefer not to get into that.
Hey <UNK>, this is <UNK> <UNK>.
I think getting back to my comment earlier about whether that ash bed seals.
If it does not, our anticipation is that the Upper Eagle Ford is going to look very much like a Lower Eagle Ford well.
If it does seal and it is an independent reservoir, it will be more chalk like.
We're not sure at this point what the EURs are going to look like in that scenario.
It would be hard to comment at this point.
As far as the Permian comparing it to the Eagle Ford.
There are a lot of moving pieces there in terms of well costs, differentials, the amount of gas.
We think the better performing Permian wells look very Eagle Ford-like in terms of economics.
And so for us, we think where we are going to be drilling we're in, our initial wells will be in that area.
We believe it will be competitive with our Eagle Ford.
I guess I support your plan as somebody who wants to make acquisitions.
But I read way too many reports where people think it is going to be a U-shaped recovery.
And it just depends on where the right leg on the U is, whether it's a year from now or five years now.
But, the contango dropping like it did should help us eventually to bid-ask should start shrinking and people will start getting a little market therapy and be willing to sell something.
I think it all depends on oil price.
Not only because it gives us more cash flow to invest but the affect of the big differentials has less bearing.
The Eagle Ford right now has a low differential like $2 below WTI, whereas the Niobrara is still higher than that, $6 to $10.
The Permian is higher than ---+ or is around $10.
Utica seems to be around $8 to $10.
So, as long as those differentials stay there, then Eagle Ford is going to always command the dollars.
But if prices go up enough, then that shrinks ---+ or the impact of that differential doesn't have the same bearing, and we'd probably think more about drilling in some of these other areas.
Yes, that would be safe through 2016.
And 2017 we'd probably start thinking about holding acreage in the Utica.
We don't really have to spend much money until 2017 on Utica acreage holds.
We really don't have to spend much money anywhere else on that.
<UNK>, this is <UNK> <UNK>.
So far, we are a bit ahead of what we projected.
Right now, we are running on the oil ---+ or on the Eagle Ford side.
We are at about 10% on the drilling and about 23.5% almost 24% on the completion side.
If we kind of hold that constant for the rest of the year, assuming we maintain that, we're going to basically come out just a little bit of ahead of what we predicted in our models.
Going forward, on the drill-and-completion side, I think there is a little bit of room there.
Once again, I think it will be kind of slugging it out from here forward if we see commodity prices start to come up and we see activity pick up, the discounts are directly tied to activity levels.
So if activity levels come up, the discounts are going to stay stable and at some point they are going to start to erode.
At the price level we are at right now, it is hard to fathom that they are going to erode a lot more but I just don't see them coming up a lot on the drill-and-complete side.
If there are no further questions, we will wrap it up.
Just to sum up, I think we are one of the healthiest small-cap Company's at these oil prices.
We have been able to improve the balance sheet in the first quarter both with the equity offering and the restructuring of our bonds.
We had ---+ we beat the high end of our oil production guidance and now we should have sequential growth all through this year.
We are poised to be able to ramp up if we see a significant increase in oil prices.
And maybe the market for acquisitions is going to get a little better as some people start saying that they need the money as we get closer to the next re-determinations.
With that, I would like to thank the staff and the Management for doing such a good job of dealing with these low oil prices.
And we'll talk again in 90 days.
| 2015_CRZO |
2016 | HUBG | HUBG
#We, of course, don't really divulge that information.
But you can see from the way that truckload pricing was down and assume that overall, the intermodal pricing was down approximately the same.
I'll address the intermodal; I'll let Don address the truck brokerage.
But no, we are not seeing the type of tightness that we in fact had forecast for this peak season.
We did not see it in October.
We don't believe we are going to see it in November, December either.
We do think, again, that it will be an extended peak, as some of our customers ship deeper into peak season.
But we really don't forecast that we are going to see a real tightness during this peak shipping from an intermodal perspective.
And Don, from truck.
No, truck is fluid.
There was some tightness in the Southeast with the impact of the hurricane.
The only slightly tight market now is the West Coast.
But it's just slight.
It's nothing like it normally is.
So trucks are fluid.
That's a really good question.
We have gotten better.
I do think there's still a substantial room for improvement.
If it was when the Cubs beat the Indians tonight, I'd say we are in the middle of the fifth, maybe.
So there is still is room.
I think we did pick, in all candor, some of the really low-hanging fruit that was ---+ but there still is more.
And with some of the systems we are implementing, I do think that we'll be able to achieve those over time.
I think you'll see some improvement in 2017, yes.
But I do think that it's going to be something that is not just for next year.
It's going to go into 2018 and 2019.
Okay, that's a good question.
And really, we were focused on this as we went through the first few months of this year and we saw that if in fact we continued and just try to protect margin that we could shrink in double-digit numbers.
We chose that as a bad decision and so we became focused on being more cost competitive.
I think the criteria as we look at it is there's certain markets where we have either an inherent advantage or is very, very favorable within the US.
And so we focus very much on those.
And we also focus on the longer-term relationship clients that we have versus the transactional clients who will switch for a buck.
So we very much worked with them to make sure that we could get to the cost levels that they required in the markets that we were hoping to gain their business, and were able to execute on that strategy.
So while our gross margin is down, I think that if you look at our network today, it's better than when we started the year from a balance perspective.
And I think that we have also further engaged those clients that we see as long-term customers that we want to continue to grow with.
Yes, if I'll add to it, too, I think it was a disciplined approach by customer.
And what that customer contributed to our network, how they offered us across on our service lines.
And also we were disciplined in not going to the market in some markets where it just didn't make any sense to us.
So I think it's positioned well.
Inasmuch as current capacity, pricing, etc.
.
Of course, we don't really want to go into what the specific market areas are.
Because each carrier, whether any of the bimodals, we all have slightly different networks.
So I'd really prefer not to go into the geographic regions that we feel as though we have an advantage or is really desirable.
You know, we haven't done the budget for next year yet.
So I'll give you more guidance on that during our fourth-quarter earnings call.
You know, obviously, forecasts are just that.
They are forecasts.
They are inherently flawed.
And in particular, we have won several customers that are ---+ I wouldn't say relatively new to us, but are growing quite rapidly that I think that had forecasted some numbers that were just off a bit.
And as Don had said, some of the logistics was more so instead of actually just missing the forecast, it was delaying the actual onboarding.
So these aren't lost business.
It's more so that we've had delays.
There has been some forecasting which has probably not 100% accurate, but that's something we usually try to build in with various clients.
Because we know nothing is going to be perfect for forecasting.
Our first use of cash for this year and next year would be acquisitions.
And that's what we and our Board think is best.
We'll also talk to our Board about share repurchases at our meeting in November if for some reason we don't come up with an acquisition.
But we are confident that we'll be able to find something, hopefully within the next year.
And in terms of what our capital expenditures are, we are planning that now for next year.
And so we'll give you more color on that during our fourth-quarter earnings call.
From an acquisition perspective, we have been ---+ as you know, Geoff DeMartino came on as our Vice President of Corporate Development.
We've been very active in looking at a variety of acquisition opportunities that would allow us to continue to diversify our product mix.
We haven't landed on anything yet, but in all candor, I think when we started this process in February, I didn't think we'd have anything done by now.
I think that we have been successful inasmuch we've looked at a variety of different businesses, and it's enabled us to talk even more thoroughly about what is the best fit for Hub going forward.
So we are moving forward.
As <UNK> said, that's going to be our number one choice for use of cash in the coming years.
But also we'll certainly consider stock repurchases and discuss that with the Board.
As Don mentioned, the logistics pipeline is pretty strong.
So that would be potential upside for next year because hopefully we would onboard accounts near the end of this year and that would flow into next year.
So that will certainly help.
And the recent logistics accounts that we are onboarding in the third quarter and that we onboarded in the second quarter will be good to have in 2017 since we've had pretty strong growth in logistics.
And truck brokerage has really done an amazing job of growing margin and growing with new customers and existing customers and providing the value-added services.
So that, too, is more upside.
Because of our diversified business model, we think we'll be able to offset some of the compression in intermodal.
It is.
It is, yes.
That's a really good question, <UNK>.
We are not asset adverse, obviously.
We have 32,000 containers.
We've got 1,200 Company truck drivers.
And so we do believe that in certain cases, asset ownership is required to participate in the business.
As we've talked in the past with our customer surveys show, that has been the number one area that our clients would like for Hub to provide additional services.
So we find it very attractive.
We find some of the demographics as far as being able to supply truck drivers on constant routes is very attractive.
And as you had said, there's several of our large competitors that in fact, their dedicated was really the highlight of their quarter.
And we think that dedicated trucking will continue to grow.
And so we are ---+ we remain very interested in that.
We are also very interested in our non-asset-based businesses.
If you look at our truck brokerage business and the way that that has been able to grow, it really is a very bright spot for us.
And there could be certain acquisitions within that market which would be quite attractive for us and allow us to continue to leverage that growth through 2017 and beyond.
And the same holds true for our outsourced logistics business, Unyson, which again is experiencing double-digit growth.
We see the demand being there and there's a lot of room for that business to grow.
So it could be different industry verticals that could be interesting acquisition targets.
There's really a variety.
So we are not necessarily biased against anyone.
It's depending upon the assets we need to deploy.
We like dedicated, but we also like the non-asset-based businesses as well.
So we've got a broad swatch of industries to look at and individual companies as well.
You know, I think that we'll see it quicker than normal.
We are always a little bit slower, but I don't think it's going to be quarters.
I think it will be months that once we begin to see the pricing change ---+ we never price as high during the peak markets and we never price as low during the markets such as we are in today.
But I do think that we'll be very quick on it.
I think that the other intermodal providers are also very focused.
I'm hoping they are very focused on price increases and what we may be able to do if in fact we see some type of tightening in capacity.
Yes, if I could add to that, I think you'll see it.
Because the length of haul in that local east market, you'll see that quickly.
And that will be the growth vehicle to get the prices.
Again, thank you for joining us for our third-quarter earnings call.
As always, <UNK>, Don, and I are available if in fact you have further questions.
Thank you again.
| 2016_HUBG |
2017 | AEO | AEO
#Okay.
Sure.
And thank you.
We're really excited about the swimwear business.
In fact, that business has been a growth category for us.
And that's the other position of strength with Aerie.
We do have other categories.
We believe obviously in our core categories of intimates and that's our maintained margin business, so to speak.
But when we think about swimwear, we got pretty aggressive in that business prior to any competition exiting the business.
And on top of getting aggressive, we really distorted the right trend and stood for the correct trend, which was one pieces.
And we really went after that trend.
And we've seen strong results in that category.
So we're really excited about swim.
And our Chill Play Move, that has been an outstanding launch for us.
We launched back in September.
And the innovation in that category has been phenomenal.
The design team did a great job really building the legging business for us, which is really dominating that category.
And in thinking of that business, what's also nice is we've tied it into our platform as well.
So about being Aerie, being healthy, living life, enjoying life, it really, it's everything we believe in being part of AerieREAL.
So another natural adjacency for the business.
And to your question on the impact of the 53rd week, so the 53rd week represents about a little less than $50 million in sales and will have an approximate $0.03 impact on EPS.
Thanks.
Yes.
So, the businesses that we're looking to potentially change our business model or our business in the UK where we have three retail locations, Hong Kong where we have six and within China where we have 10.
And all three of those markets and those businesses are currently unprofitable.
And we feel as though that we've got a much better chance of success proven by our existing franchisee or licensing models and relationships that we enjoy in other markets, that we're better off with a larger ---+ a few larger partners that have a proven track record, that understand the market.
They know the real estate, they have access to the real estate, they know the target customer, they're in tune with fashion trends, local fashion trends, et cetera.
So we feel as though we have got a better opportunity partnering up with the right people.
Relative to Canada and Mexico, both of those businesses represent our most profitable international businesses.
We're early days in international digital.
To be honest with you, it represents about 5% of our total digital business.
But it is an area that we're focusing on continuing to grow and improve going forward.
Thank you.
Sure, So, taking the men's question, we have already pulled back CC's in men's.
In the total box, we've actually pulled back some CC's trying to drive higher productivity and really make sure that we have the depth of inventory and in-stocks that we need to have.
We might ---+ as time goes on, we might pull CC's back a little bit further in men's.
We have expanded starting the spring season, we've given some more floor space to women's apparel in the store.
But we want to make sure that we continue to look strong in both genders as we move forward.
So, as we've said, we've pulled back slightly in men's already.
And I don't anticipate this year really pulling men's CC's back much further.
In fact, hopefully, as we get men's returning to growth, there won't be any demand to do that.
As for the new stores, we have some ---+ we're working on the prototype now.
We hope to have a prototype store open by the end of this year.
We will definitely keep you informed as to where it's going to be and hopefully we can take people through it.
The idea is really to modernize the shopping experience for the customer.
We've talked a lot about channel shift.
We've talked about the shift to mobile.
I think the way customers experience stores today is different than the way they've experienced stores in the past.
It's going to be more modern, a little more open, but really also leverage and emphasize our leadership in volume.
So you walk in our store today and we have a huge market share leadership in bottoms.
But I don't really feel like you feel that as much as you could in the store.
So we're looking to emphasize that, to have a new experience for the customer and really make it ---+ make the brand resonate more strongly through this new store and the new store experience.
I think with all the omni-channel capabilities we have, I think it becomes even more important for the stores to be a way to feel ---+ to experience the brands in person, to learn about the product and for us to have positive outreach for the customer.
So we will keep people informed and we will hopefully be able to take people through that store when it opens.
And, <UNK>, we've seen double-digit increases pretty steadily as far as customer acquisition in Aerie.
And I would like to call out the marketing team.
They've been doing an amazing job just tirelessly reaching out to our customer in new and innovative ways.
For instance, we just opened up in December a pop-up store in Soho, a pop-up shop, which is very experiential and it's an entirely different experience for Aerie but it calls to, again, the DNA of our brand and what we stand for.
So ideas like that we continue to generate.
And it's really helping us with the customer acquisition as well as, <UNK>, leveraging the AE brand, our big brother, I like to say, or big sister.
We are ---+ we're on the ---+ we share the NAV.
And that's certainly introduced Aerie to millions of new young women who are excited about the brand.
So I wouldn't go as high as the 12% range for FY17.
But it's clearly one of our long-term strategies for sure.
And that's in line with some of our historical highs.
Yes, we do believe that we'll be able to improve both gross margin rate and operating margin rate for the year.
A significant portion of that is going to come from increased IMUs, which has really been an area that we've demonstrated we can deliver on and is probably the single biggest contributor to our gross margin expansion on the year for 2016.
That also affords us the opportunity to be a little more promotional in certain of these categories, like men's and women's tops as we talked about, really getting in deeper into men's and women's bottoms so that we've got an every day pricing strategy that is really enticing to the customer coupled with product innovation, product quality, et cetera.
So increased IMU, cost reductions is going to be the biggest contributor to that.
And then in addition to that, another contributor to operating improvement is really, we're very focused on disciplined expense management.
I feel, and I know the team feels, we have additional opportunity to be more efficient and effective with where we spend our money, how and how much.
It's something that we challenge and look at every day.
So, those things combined are what make us feel very comfortable that we'll be able to drive overall margin improvement.
Well, it's pretty simple, <UNK>.
And when you think about the Aerie business, we were well underpenetrated our file, when we began this journey on the AerieREAL campaign.
So to put it in perspective, now we're more in line with where we sit from a sales penetration to the AE business.
So it has grown nicely, like I said, double-digits year-over-year.
And as <UNK> mentioned, we have amazing analytics around our customer and who she is and where she lives and what she buys.
And so, of course, we're digging in every day and looking at that girl and speaking to her in new ways.
And as I mentioned earlier, she literally can go through and be introduced to our brand through the AE channel.
We exist on the AE page.
We have ---+ and, like I said, we share the NAV.
So it's really just leveraging these analytics and speaking to her more and with social media today, you have to think about that as we build our awareness through that channel, that's exponential.
So it's really through those (multiple speakers) ---+
I would just add to that, <UNK>, that with the increased penetration of multiple on-site and that trend is going to continue, it's just another opportunity for us to capture new customer and new customers names for the file.
As advanced as our customer analytics, CRM analytics are and we've gotten confirmation from some outside organizations that have been very impressed with that, I think we still have additional analytic capabilities to harness that even more.
So as good as we are, I think we could be and get even better.
So, <UNK>, I just want to jump in on this one.
The AE file, you asked about that specifically, has undergone some transition over the past few years.
As we've increased the product, the strength of the product and as we've reduced promotions, we've transitioned that file.
We've shrunken the size of the total file and some of the bargain hunters have fallen out.
But overall the file today is healthier than it's been.
We have more omni customers who are spending more money and that is what's really allowed us to grow.
But right now, we are in a position where we really feel like we have got a healthier file and we're going to focus on acquisition and on retention.
That's ---+ we have Kyle Andrew on board now, and that's one of our highest priorities for the year.
And part of that's going to be our loyalty program that's going to roll out in Q2.
We have a very high percentage of our customers participate in loyalty today.
But our program is outdated, if not digital.
We think some of the perks that are in it are not as compelling as they could be.
So for AE, we are looking to focus on acquisition and retention and we think our loyalty program is going to be a really great benefit there.
And Aerie is participating in that program as well.
Yes, it's an AE, Inc loyalty program.
| 2017_AEO |
2016 | EV | EV
#Good morning.
In our first quarter, we were reminded once again that the business of investing exposes both clients and investment managers to market risk.
Over the course of the quarter, market price declines lowered our managed assets by $14.1 billion or 5% ---+ more than offsetting the quarter's $5.3 billion of consolidated net inflows.
Principally reflecting adverse market effects, our first-quarter revenue fell 7% from the first quarter of FY15, and 3% sequentially.
Lower revenue, combined with substantially unchanged ongoing expenses, drove Eaton Vance's adjusted earnings per diluted share down to $0.51 in the quarter, a decline of 16% year over year, and 4% sequentially.
In terms of revenue and profits, the first quarter of FY16 was certainly nothing to write home about.
While market effects adversely affected our financial results in the first quarter, in other respects, this was an outstanding period for us.
As noted previously, we realized consolidated net inflows of $5.3 billion in the quarter, which equates to an annualized organic growth rate of 7%.
As in most recent quarters, our internal growth was led by Parametric's portfolio implementation and exposure management franchises, and Eaton Vance Management fixed income, which had a collective $7.4 billion of net inflows.
Net inflows within fixed income were led by our high-performing municipal bond and high-yield franchises, with net flows of $800 million and $600 million, respectively.
Also contributing positively to first-quarter flows were our alternative mandates and EVM and Atlanta Capital managed equities.
First-quarter net outflows were concentrated primarily in two areas: floating-rate bank loans and Parametric emerging-market equities, which had net outputs of $1.5 billion and $500 million, respectively.
In both cases, net outflows appear to be somewhat exacerbated by year-end tax-loss selling, and abated in the month of January.
In addition to favorable net flows, the quarter also saw strong investment performance across a broad range of Eaton Vance and Parametric investment strategies.
As indicated in slides 13 to 15 accompanying this call, we ended the quarter with 54 mutual funds rated four or five stars by Morningstar for at least one class of shares, including 21 five-star rated funds.
Our top-performing funds include value, core, growth, small- and SMID-cap US equities, developed in emerging-market international equities, balanced and multi-asset funds, global macro, and floating-rate high-yield government income and strategic income funds, as well as a wide assortment of national and single state municipal income funds.
Given the large number of top-rated funds, it should not come as a surprise that high performers account for a significant percentage of our current mutual fund assets.
As shown on slide 12, as of December 31, 52% of our mutual fund assets were in funds in share classes ranked in the top quartile of their Morningstar peer group for one-year performance.
43% of our fund assets ranked in the first quartile on a three- and five-year basis, and 58% of fund assets were top quartile over 10 years.
The superior performance of our fund lineup was recognized in the annual Barron's/Lipper Best Fund Family rankings released earlier this month.
On a one-year basis, Eaton Vance ranked number one among 67 fund complexes for US Equity Performance, and number two overall for 2015 Fund Family Performance.
Since Barron's began its annual rankings in 1995, this is the third time Eaton Vance has finished either first or second, joining a small handful of fund sponsors with that distinction.
Our 5- and 10-year rankings were also strong, at the 28th percentile of rated fund families over five years, and at the 20th percentile over 10 years.
This is the fourth year in a row, and 12 for the past 13 years, that our 10-year returns rank in the top one-third of the fund-sponsor universe.
Our largest equity fund, the Eaton Vance Atlanta Capital SMID-Cap Fund, has been a particularly strong performer, closing the fiscal quarter ranked at number one among more than 600 funds and share classes in the Morningstar mid-cap growth category for one-year performance, and also ranking top decile for three, five and 10 years.
The fund's co-managers Chip Reed, Bill Bale and Matt Hereford, were named as finalists for Morningstar Domestic Equity Manager of the Year for 2015.
Another investment team with exceptionally strong near-term performance is our 49%-owned, Montreal-based affiliate Hexavest, which manages primarily global equity mandates following a distinctive top-down investment style.
The past three months of market turmoil has given Hexavest an opportunity to demonstrate what they do best, which is to outperform in down-markets.
Over the three-month period ending January 31, the Eaton Vance Hexavest global equity fund beat its benchmark by approximately 470 basis points in the average of its Morningstar category peers by roughly 440 basis points, placing the fund's class-by-shares in the top quintile of its peer group on both a one-year and three-year basis.
Hexavest reports that as of January 31, all of their institutional client accounts are now ahead of benchmark over the life of the mandate.
On an overall basis, it's fair to say that our investment performance has never looked stronger than it does today.
Not surprisingly, one of our key business objectives for 2016 is to translate the strong investment results we are seeing into strong net sales across our lineup of active strategies.
Although active managers as a whole are not growing in most major asset classes, there remains a tremendous amount of money in motion each year, creating significant opportunities for high-performing managers to grow their business by gaining market share.
Active management is increasingly a game by winners and losers, and our favorable performance positions Eaton Vance to be a winner.
During the quarter, we made progress advancing a number of important strategic initiatives.
We continued to build out our suite of Custom Beta separate account strategies, and gained broader distribution access for these products.
Over the past 12 months, we have grown managed assets and tax-managed core equity in laddered bond separate accounts, from $27.3 billion to $34.2 billion, an increase of 25%.
Our grouping of these and related strategies under the Custom Beta banner reflects their use in client portfolios to provide customized exposure to a range of markets, including a wide assortment of equity indexes and municipal and corporate fixed income.
Value-added elements of the strategies include direct holdings of securities that can be highly customized to reflect client needs and preferences, light-level tax management and the pass-through of realized losses.
And for the bond strategies, laddered portfolio construction and initial and ongoing credit oversight.
On the equity side, Parametric offers a range of strategies that track a client-designated benchmark, but which can deviate from the benchmark holdings to reflect ongoing tax management.
Client-specified, responsible and impact-investing screens and overlays and/or portfolio factor tilts, that may include value-quality momentum, dividend yield and low volatility.
All is established and maintained by the client.
In many respects, this is an ideal product for meeting investor demand for equity index investing.
Like an index fund, Custom Core provides low-cost, benchmark-based equity market exposure.
But unlike an index fund, Parametric can potentially enhance returns through ongoing tax management, and can deviate from the benchmark to reflect the wants and needs of the individual client.
It's a compelling offering that's experiencing growing demand.
In the first fiscal quarter, net inflows into Parametric Custom Core strategies offered to the high-net-worth and retail-managed account channels totalled $2.1 billion.
Based on these mandates, average approximately 23 basis points, which is highest among product groups in our portfolio implementation category.
On the fixed income side, our Custom Beta offerings currently consist of laddered municipal bond and corporate bond separate accounts.
Corporate ladders are a new product for us that began to pick up tracks in the first quarter, with managed assets increasing more than 50% to $400 million.
While more established laddered municipal bond separate account assets also grew strongly, from $5.8 billion to $6.7 billion in the quarter, reflecting over $600 million of positive net flows and favorable market action.
Here again, our Custom Beta products offer significant value over both bond index funds and unmanaged bonds held in a broker's account.
For reporting purposes, laddered bond mandates are included in our fixed-income category, and account for a significant percentage of the category growth.
Our Custom Beta products are well-suited for an environment in which a growing percentage of investors and advisors seek low-cost passive market exposures, yet recognize the benefits that custom-built portfolios of directly held individual securities can offer over bulk beta mutual funds and index ETFs.
We continue to view this as a huge market opportunity that remains at an early stage of development.
On both the equity and income sides, we have first-mover and scale advantages that position us well versus potential competitors.
The second strategic initiative that continues to progress from an earlier stage of development is the build-out of EVM's global equity and global income capabilities.
During the first quarter, we completed the build-out of our new London-based global equity group, transitioned approximately $6 billion of global and international equity mandates to the team, and lost three new global and international equity mutual funds.
On the fixed income side, we also continue to add our global capabilities, and to increase staffing in our London office.
In April, we are taking new space in London that will increase our office footprint there by approximately two-thirds.
By increasing our global investment capabilities, we seek to achieve two important business objectives: first, meeting the growing demand among US investors for global and international investment solutions.
And second, positioning ourselves to address markets outside the United States, which represent huge and relatively untapped potential for Eaton Vance.
Another new product development this quarter saw the introduction of the first-ever Eaton Vance-sponsored unit investment trust.
Our first three sponsored UITs raised nearly $50 million during their offering period, an impressive start for a new market entrant.
We view this is an attractive business that fits well with our distribution strength and product development capabilities.
While it will likely take time for this to develop into a meaningful part of our overall business, we're encouraged by the strong start.
Finally, I want to report on the progress we are making with our NextShares Exchange-Traded Managed Fund initiative.
In January, we announced plans for the first NextShares fund to list to begin trading on NASDAQ on Friday of this week.
And for the fund to be available for public purchase through the online broker-dealers Folio Investing and Folio Institutional, beginning next Monday, which is February 29.
As of now, the first fund will be Eaton Vance Stock NextShares, which will seek long-term capital appreciation by investing primarily in the diversified portfolio of common stocks, following a research-driven actively managed core investment style benchmarked to the S&P 500.
The fund will utilize a master-feeder structure to invest in the same portfolio as used by Eaton Vance Stock Fund, an open-end mutual fund whose load weight [ratios] are currently rated five stars by Morningstar.
This is the first of what we expect will be several NextShares fund launches this year, with the next scheduled for the month of March.
I'm pleased to report that the Stock NextShares launch is on track and expected to take place on the announced timeframe.
Getting to this point in the NextShares initiative has been a multi-year process, with many twists and turns.
And we certainly could not have gotten here without an extraordinary effort by many people, both within and outside Eaton Vance.
While the introduction of the first fund is a critical step in the development of NextShares, we still have a lot of work to do to get where we want to be.
We have a broad consortium of 11 other fund sponsors that have already filed and received approval of their exemptive applications to offer their own families of NextShares funds.
We will continue with our efforts to enlist more fund sponsors to become NextShares licensees, and are hopeful that seeing a NextShares fund up and running will spur additional fund sponsors to consider entering into licensed agreements.
Most critically, we need to broaden distribution by enlisting more broker-dealers to offer NextShares to their customers.
While there are no breakthrough to announce today, we continue to make progress in discussions with major firms, and are encouraged by what we see and hear.
In-depth discussions are now taking place with firms that have meaningful market share in each of our three primary distribution channels ---+ wirehouse, independent and RIAAs.
One of the objectives of the staged rollout of NextShares is to demonstrate to broker-dealers that NextShares are straightforward to implement, and trade and perform consistent with expectations.
If we are successful in gaining broad distribution access, we continue to believe that NextShares have a very bright future, with the potential to transform the delivery of active investment strategies to US fund investors.
Stay tuned, as we expect continued positive developments with our NextShares initiative over the coming months.
As we look forward to the remainder of the fiscal year, we see both significant opportunity and significant uncertainty.
If macro headwinds and a difficult market environment continue to take their toll on our managed assets and revenue, we will be prepared to adjust our discretionary spending accordingly.
However, we seek to avoid making decisions based on short-term market moves that could impair or impede our ability to grow over the long term.
In fact, the most opportune time to invest in our business is very often during periods of market disruption.
Wherever the markets take us, we believe our lineup of high-performing and value-added strategies, innovative new product offerings, and strong financial characteristics position Eaton Vance very well versus competitors.
That concludes my prepared remarks.
I'll now turn the call over to <UNK>.
Thank you, <UNK>, and good morning.
We are reporting adjusted earnings per diluted share of $0.51 for the first quarter of FY16, compared to $0.61 for the first-quarter FY15 and $0.53 for the fourth-quarter FY15.
On a GAAP basis, we earned $0.50 per diluted share in the first quarter of FY16, $0.24 in the first-quarter FY15, and $0.53 in the fourth quarter of last fiscal year.
As you can see in Attachment 2 to our press release, adjustments from reported GAAP earnings in the first quarter of FY16 reflect changes in the estimated redemption value of non-controlling interests in our affiliates, that are redeemable at other than fair value.
Adjustments from reported GAAP earnings in the first quarter of FY15 primarily reflect the payment of $73 million, or approximately $0.37 per diluted share, to in-service and additional compensation arrangements for certain Eaton Vance closed-end funds.
Although average managed assets of $308.3 billion for the quarter were up slightly from the $306.4 billion reported in the prior quarter, and up 3.6% over the year-ago quarter, first-quarter revenue decreased 3% sequentially and 7% year over year, reflecting shifts in asset mix in a down market.
The shifts in managed asset mix reflects strong net inflows and lower fee strategies ---+ such as portfolio implementation, exposure management and bond ladders ---+ in a quarter when higher-fee strategies such as floating rate and emerging markets were net outflows.
Performance fees, which contributed approximately $2 million in the prior fiscal quarter, were negligible this quarter, creating an incremental headwind in terms of our sequential quarterly revenue comparison.
As <UNK> noted earlier, market losses this quarter reduced assets under management by just over $14 billion, more than offsetting the $5.3 billion in net inflows.
And the assets under management were $5.8 billion lower than average assets under management for the quarter, which will put additional pressure on revenue in the second quarter.
Product mix continues to be the most significant determinant of our overall effective investment advisory administrative fee rate.
As you can see in Attachment 10 to our press release, our average annualized effective interest advisory and administrative C rate, excluding performance fees, declined to 36.7 basis points in the first quarter of FY16 from 37.7 basis points in the fourth-quarter FY15 and 40.6 basis points in the first-quarter FY15.
Although mandate-level annualized effective B rates were relatively stable, we did see some downward pressure on our effective equity and fixed income fee rates this quarter, primarily reflecting the loss of higher-fee, emerging market equity assets, and the growth of lower-fee bond laddered managed assets, respectively.
While our asset base remains highly diversified, we anticipate additional downward pressure on our overall average effective investment advisory and administrative fee rate if growth in our Custom Core exposure management and bond ladder franchises continues to outpace that of our active equity and income franchises.
That said, even if average fee rates continue to trend downward, we can achieve organic revenue growth by reducing outflows from higher-fee strategies, which appears to be happening.
Our operating margin decreased to 30.3% this quarter from 32.5% last quarter and 34.8% in the first-quarter FY15, reflecting the impact of lower revenue in a period when total expenses were held largely flat in both sequential and year-over-year comparisons.
After adjusting for the $73 million charge in the first quarter of last year to terminate certain closed-end fund service and additional compensation arrangements.
Although variable expenses, such as distribution and servicing expenses,, declined with the decrease in related distribution service fee revenue, compensation expense ticked up both sequentially and year over year.
Sequentially, compensation expense increased 3%, largely due to seasonal compensation factors, including fiscal year-end merit increases, as well as calendar employee benefit and payroll tax clock resets, partially offset by lower operating income-based bonus accruals and lower sales-based incentives.
Year over year, compensation expense increased 2%, driven primarily by increases in headcount at Parametric to support growth, add to staff in our London office to support the build-out of our global equity capabilities, and incremental adds to staff to support our NextShares initiative.
Year-over-year increases in base benefits, stock-based comp, and another compensation expense to support these initiatives were partially offset by lower operating income-based accruals and sales-based incentives.
Compensation as a percentage of revenue ticked up to 37% in the first-quarter FY16, compared to 35% in the prior sequential quarter, and 34% in the first quarter of FY15.
Given current market headwinds, second-quarter compensation as a percent of revenue is forecast to stay in the 37% range.
Other operating expenses were up 12% in the first quarter versus the same period a year ago, primarily reflecting increases in information technology, certain professional services and other corporate expenses.
Other operating expenses declined modestly on a sequential basis.
Expenses related to our NextShares initiative, which are included in multiple expense categories, including compensation expense and other operating expenses, totalled approximately $1.8 million for the first-quarter FY16, compared to $1.3 million in the first quarter of FY15, and $2.3 million in the fourth quarter of FY15.
As <UNK> highlighted earlier, fiscal discipline around of both hiring and other discretionary spending will remain top-of-mind in FY16, given the revenue headwinds we are facing.
We remain committed to investing for growth, despite these headwinds, but are certainly mindful of the current market environment and the associated profitability pressures we face.
While we will be very careful with our spending going forward, we have no plans for staff cuts.
That said, we are certainly aware of the levers that we can pull in terms of the timing of project launches, and the hiring to support in those markets remain unsettled.
Net income and gains on seed capital investments contributed roughly a penny to earnings per diluted share in the first quarters of FY16 and 2015.
And we do [stern] pay a penny per diluted share in the fourth-quarter FY15.
In quantifying the impact of our seed capital investments on our earnings each quarter, we take into consideration pro rata share of the gains, losses and other investment income earned on investments and sponsored products that are accounted for as consolidated funds, separate accounts or equity method investments as well as the gains and losses recognized on derivatives used to hedge these investments.
We then report the per-share impact of non-controlling interest expense and income taxes.
We continue to hedge our seed capital exposure to the extent we reasonably can, which allowed us to avoid significant investment losses this quarter in volatile markets.
Changes in quarterly equity and net income of affiliates, both year over year and sequentially, primarily reflect changes in the Company's position in 49%-owned Hexavest.
Our 49% interest in Hexavest, which is reported net of tax and the amortization of intangibles and equity in net income of affiliates, contributed approximately $0.02 per diluted share for all quarterly periods presented.
Excluding the effect of CLO entity earnings and losses, our effective tax rate for the first quarter of FY16 was 38.4%, as compared to 36.4% in the first quarter of FY15, and 38.6% in the fourth 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 2.3 million shares of non-voting common stock for approximately $73.3 million in the first quarter of FY16.
When combined with repurchases over the preceding three quarters, average diluted shares outstanding decreased 4% compared to the first quarter of FY15.
Shares outstanding of 115.2 million at the end of this quarter are down 3% from the 118.4 million reported a year ago, and down 1% from the 115.9 million reported on October 31, 2015.
We finished the first fiscal quarter holding $419.1 million of cash and short-term debt securities, and approximately $268.4 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, five-year line of credit, which is currently undrawn.
Given our strong cash flow liquidity and overall financial condition, we believe we are well-positioned to continue to return capital to shareholders through dividends and share repurchases.
This concludes our prepared comments.
At this point, we would like to take any questions you may have.
In terms of the comp, we are looking at that in relation to the assets that we came out of at the end of the quarter, assuming flat markets now.
Obviously if markets continue to be volatile, that could ratchet up.
But approximately ---+ in terms of our compensation, about 40% of it is variable, 60% fixed.
So I think the 37%, as it looks today, looks like a pretty good number for the second quarter.
But again, things might change.
In terms of our NextShares spend, we were a little bit later this quarter.
I would anticipate in the first quarter and the second quarter, we may be ramping up a little bit.
I think we had given previous guidance that we anticipated our overall spend in 2016 would probably be in the $8 million to $10 million range.
I don't think that we're moving off of that at this point.
I'm looking at <UNK>, just making sure, and he's nodding his head.
Yes, I would say if there's any change of significance from the current run rate level, it would likely reflect significant progress with a distribution partner, where we are contributing or helping them in their implementation costs.
So that would be the only driver.
But even there, we don't see a major change from that ---+ or, we don't see a significant risk of change from the indicated guidance.
It's primarily priorities, resources, uncertainty, particularly related to the DOL initiative.
We argue, and I think this is right, that on balance, a world that is more tilted towards advisory solutions than brokerage solutions ---+ which is likely the direction of the DOL initiative ---+ is clearly favorable for NextShares.
The uncertainty as to the effect of that, and certainly as to the technology requirements of that, is a somewhat chilling factor in NextShares.
So that we've had major broker-dealers that say: we find this interesting, but we really need to get our hands around this DOL initiative, what's going to be required, both in terms of the rules themselves, as well as perhaps the systems of business modifications that will flow from that.
We need to get our hands around that before we do something that we view as discretionary.
The DOL affects their core business every day.
Arguably, this is an add-on.
This is something new that they don't necessarily need to do.
I would certainly say in terms of our ---+ more broadly, the conversations, I think there's a significant change that we expect to happen when we have a product in the market.
I think my view was that, that would not be all that significant.
We've known this was going to happen.
We don't expect any surprises.
But there are significant constituencies out there in the world where this is a big deal, the fact that we will have funds that are demonstrated to trade and to perform, and they can watch those and see how they perform every day.
A lot of the questions, a lot of the mystery of NextShares get taken out by when we are in the marketplace, which starts at the end of this week.
So we're not hearing objections, people that say this is a bad idea, I don't want to do this.
What we're hearing overwhelmingly is, interesting concept, let's see how this develops; let's see how this fits into our time frame.
But we are ---+ I do want to reemphasize, we are making significant progress with major broker-dealers from all three major channels.
And our view, which I think is right, is that you get one major in each category, it makes it much easier for others in that category to want to follow.
They will have business reasons, maybe even a business imperative, to want to come in if one of their closest competitors is seeing any kind of movement in their business toward NextShares.
No, at this point, I think that we're very comfortable with our cash position and with our ability to continue to generate cash from operations.
We don't generally give any guidance on what our intention is in terms of repurchases for the quarter, outside of saying that we intend to be in the marketplace.
So we're watching the markets, like everyone else is.
But at this point, we don't see any particular cash constraints that would keep us out of the market.
So those are pretty well reflected in the first quarter.
The big hiring initiative there was in connection with our equity team that's now based in London, though we have one person in Tokyo, and there are a handful of people in Boston connected to that team as well.
That's done.
The people there that were hired in that group, I think the last ones came the first week of November or something like that.
So think of those numbers as effectively baked in.
I did mention that we are taking some new space, expanded space in London.
But that's a relatively small item.
I think I said we are expanding by two-thirds.
That means we're going to stay in the same building.
We're going from half a floor or thereabouts to ---+ or two-thirds of a floor to a full floor.
So it's not enough to be meaningful.
But it's a significant initiative for us, that we are optimistic that we're going to be in a position to bring in international assets that will produce revenues to offset that incremental spending.
I was over there last week, and quite encouraged by the pipeline and the level of activity.
Primarily today, on the fixed income side, I would say particularly high-yield, but also we are starting to see some interest in equity products also, as well.
But I would say the hope would be that over the coming quarters, that we will see significant flows of international income assets, and the beginning of flows on international equity assets.
So January was a significant ---+ while it was still negative on an overall basis, January was an improvement from November and December.
We would attribute that primarily to year-end effects, tax-loss selling or anything else that might be happening around the end of the year.
I would say the flows have maybe moderated a bit.
It still befuddles us that we are seeing net outflows.
We see bank loans as an incredibly attractive asset class today, really offering a compelling risk-reward opportunity with floating-rate income, but from current levels, the opportunity for capital appreciation ---+ unless this credit cycle proves to be an unusually weak one.
If we're staring into the face of a recession, and recovery rates on defaulted loans, or the rate of default itself, is significantly worse than historical norms, people will have some credit effects.
But from our point of view, those are more than priced in to current bank loan prices.
My theory is that we saw a big growth in both our business and the mutual fund assets in bank loans going back to ---+ 2013.
2014.
What was the big growth year.
2013.
And to some degree, we're still working through those assets.
These are people that perhaps didn't really understand the asset class and what they were buying.
At that point, you might remember there was a significant fear that interest rates were going to go up sharply, at the short end, as well as the long end.
And obviously that hasn't happened.
And as that hasn't happened, we've been seeing ---+ again, this is my theory ---+ a lot of those relatively new players in the asset class come out of the asset class.
Demand on the institutional side remains solid.
I wouldn't say it's a spectacular, but it is certainly solid.
People get, that have been through this asset class, get that it's a significant diversifier.
It has potentially no exposure to interest-rate risk.
These are dollar-based loans, so for a US investor, there is essentially no exposure to currency risk.
But it does have exposure to credit risk.
But we've been doing this for many years, going back to the late 1980s, more than 25 years, and we have experience in knowing what a typical experience through a credit cycle is, in terms of losses to credit events.
All of that experience tells us that the asset class is compellingly attractive today.
And we're certainly doing what we can to make that case to both current clients and potential clients.
So couple of answers.
One answer, from an exchange perspective, the amount of capital is quite minimum.
What is it.
$1 million or something like that.
Two creation units, which is $1 million.
So not significant.
We do expect to have larger positions than that, but from where we sit today, we don't see the need to build materially large positions in NextShares compared to our currency capital portfolio, which is ---+ how much.
$268 million.
So we don't think it is likely that it will move the needle on that.
Sometimes a driver of seed capital needs is minimum investment requirements that a particular broker-dealer may impose on a new strategy.
For the most part, we would expect and hope that those requirements wouldn't apply to NextShares, because these are not new strategies.
In all cases, these are established strategies, where we're just applying that same strategy in a lower-cost, more efficient vehicle.
And we would expect in our work with broker-dealers that we should be able to convince them that there should be no requirement for significant Eaton Vance investment in NextShares to validate those strategies.
So bottom line, we don't expect it to be a major factor, a major use of cash over the next year, based on everything we know today.
The opportunity for us is really to take advantage of the strong performance record that a lot of our strategies have today.
I mentioned high-yield as an area of significant activity.
Honestly, I don't think that's reflective of a huge demand incrementally for new allocations to high-yield, more than the fact that ---+ more so it reflects the fact that there are other managers who have disappointed a client, and there are searches that are driven by replacements.
And because we have one of the top track records, and certainly a compelling story related to the size and strength and longevity of our team, we are in a position to compete very effectively for those transfers.
I did ---+ when I was in London, I did meet actually with a potential new client, who is attracted to risk-reward characteristics of high-yield today.
They look at spreads in the marketplace and historical levels of the market, and historical returns from current spread levels, and they are looking at potentially adding to the asset class.
I think that's probably the exception, rather than the rule, today.
I mentioned Hexavest has had very strong performance of late, that really, in many ways, validates their approach, which has been one of general caution on the markets.
They made up a lot of ground in the fourth quarter, and now have very compelling performance, and also particularly attractive performance on a risk-adjusted basis.
We expect to see increased activity of Hexavest in searches.
Atlanta Capital ---+ again, another very high-performing manager in our stable.
They have a relatively new strategy.
It's been offered institutionally for the last three or four years, it's called Select Equity, that had some meaningful wins.
That's approaching $500 million in assets in the strategy that, potentially, if things go right ---+ that is, we have another quarter or two of favorable performance and we can get over that $500 million threshold ---+ that we put ourselves in a position to compete effectively for new business there.
So I would say those are three areas I would highlight away from bank loans and away from the more implementation- and exposure-oriented parts of our business, which continue to see very strong demand.
But again, our key charge to our sales organization currently is, we need to figure out ways to translate high-performing investment strategies into strong business performance.
And that applies to both retail and institutional.
So I think, as you're referring to, there was an SEC proposal that came out late last year that would impose additional regulations and new limitations for mutual funds ---+ or I should say, I believe it is registered investment companies ---+ and their use of different kinds of derivatives.
We have a number of strategies that are fairly intensive users of derivatives.
Those fall generally into two categories.
One is, we have ---+ primarily on the closed-end fund side, we have equity funds that write call options.
In some cases, it's single stock options, and in other cases, it's index options.
In some cases, they write call options in connection with also selling, or in some cases buying, put options.
So we have strategies that are primarily equity funds that have an options overlay.
That is one category of derivative-intensive product that we offer in a registered investment fund format.
The other broad category of products we have is in our global macro area, where, often, the most efficient way to gain a desired market exposure is through the derivatives market.
So a credit-default swap or a forward position in a currency would probably be the two most typical ways of gaining exposure.
How this affects those businesses, how these proposed regulations affect these businesses is still up in the air.
These regulations are being proposed.
Eaton Vance is part of the ICI, our fund industry association, and is participating in the development of the comment letter to be submitted by the ICI.
We also expect to submit our own comment letter on this.
We expect our comment letter to focus on, as you would expect, the areas of how we use derivatives.
We believe the intent of that initiative is primarily to limit the use of derivatives for leverage purposes, which primarily is not how we use leverages.
We are using ---+ in the case of writing call options, that doesn't add market exposure to a fund.
Arguably, it takes away market exposure.
And similarly, with our derivative strategies on the global income side, often these can be replicated in a very similar way by operating in the cash markets.
So I guess, bottom line, we are monitoring this quite closely.
We expect to have a comment submitted to the SEC.
We are participating in industry comments.
Depending on how things go, there could be changes in the implementation of some of our strategies that, at the margin, could increase fund costs, lower fund returns.
But there's nothing that would cause us to say that something we're doing today likely we couldn't do if these proposed regulations are implemented.
Rather, they may require us to do things in a somewhat different way.
Yes, so we are not in the robo-advisor business.
We do offer these custom beta strategies on a retail basis through relationships we have with broker-dealers, financial advisors, generally with a minimum of investment of $250,000 in the strategy.
So we're not, today, placing these tools in the hands directly of retail investors.
That not necessarily would be a bad thing, but that is not our focus today.
The range of customization that we offer, down to the client or advisor level, does vary by firm.
In some cases, a firm, even some that use some of the strategies quite actively, give a limited ability for a financial advisor to choose a custom solution.
While these are customizable, sometimes that customization sort of stops at the firm level.
In other cases, the firm will allow customization down to the advisor group level within agreed-upon constraints.
But in no case currently do we provide customization down to the individual client level, at least in terms of retail clients.
I guess, first, I would say, not materially.
We don't have a big international business.
This was ---+ as I said, I was in London last week, and this is certainly a topic of discussion.
I can pass on what I heard, though the impact on our business rounds to zero.
Because we don't have a big base of operations in the UK.
We are moving from two-thirds of a floor to a full floor in a building there.
But I think the concern there in the financial sector is that London could lose its status as the financial center of Europe, which is maybe somewhat arguable today, but probably not something that the French or the Germans are happy about.
And my guess is that if Britain is not part of the EU going forward, that, that could change.
With implications not only for markets, but also for how and where investment managers, like Eaton Vance, staff to serve clients and meet market opportunities in Europe.
Because we are really at the beginning stage of our development, we don't have a particular commitment to UK.
If the new center of Europe is in Frankfurt or Paris or wherever, it wouldn't be a significant disruption to our business to pick up and move, effectively.
I think the bigger concern, the more likely concern, the more significant concern for Eaton Vance, is just what does this do to the markets.
We're in the business where our revenues go up or down with the markets.
And to the extent that the possibility of a British exit from the EU is weighing on markets, the primary financial impact of that on Eaton Vance is that, if that weighing on the markets caused market prices to go down, our revenues go down.
That's the way it works in the asset management business.
So I would put it in the same category as, other things that are bringing uncertainty and adding risk to global financial markets today is much more significant to us than the specifics of how we address markets in Europe.
Certainly something we're interested in.
I don't believe it's accurate that today, a core offering of most robo-advisors is individual holdings of securities and lot-level tax management.
I believe the ---+ my understanding is, the predominant model is that they invest in ETFs primarily, and perhaps other pooled vehicles, as their primary way of gaining market exposure.
I'm not familiar that, that [wells] front has an offering with individual securities.
So I believe, with that exception, the robo-advisor world is essentially a world of investing in ETFs and other fund vehicles, as opposed holding direct investments in securities primarily.
Clearly there is an interest here, and a potential overlap with our capabilities.
I don't think there is great market data on this.
But we believe it's highly likely that our affiliate Parametric is today the largest player in, what I will call the tax-managed separate account business.
We have the largest account base.
I'm sure we would claim the most sophisticated technology.
And potentially could consider ramping that up to potentially bring down minimum investments and service clients to robo-advisors, or other means on a broader basis than we are doing today.
So I don't see it as a threat our business, but I do see it as potentially an opportunity.
And we're certainly open to discussions on additional ways to gain access for this product suite.
Which, as we've talked about in previous quarters and as I emphasized in my remarks today, continues to be a growing part of our business, and something that really sets us apart from what I will call other traditional active managers.
Yes, so, to date, the only fund sponsor that has approved fund registration statements is Eaton Vance.
So any near-term launches would be of Eaton Vance-sponsored products.
A key milestone for other licensees, the other 11 fund sponsors that have exemptive relief to offer NextShares and have entered into preliminary agreements with our affiliate to permit that ---+ a key milestone for them was when Eaton Vance got our registration statement approvals in December.
Because by design ---+ I would say both by design from our end, as well as from the SEC ---+ that was intended to be a template that other fund sponsors could use.
So in other words, the language that was agreed to and negotiated by us and the SEC, that essentially can be plugged into registration statements for other fund sponsors.
Certainly one of our objectives in including 18 registration statements in that initial filing, was to make sure that we essentially covered all the bases, in terms of asset classes and issues that might arise, to make it easier for follow-on managers to expedite the process of getting their own registration statement approvals.
We are certainly in contact with other fund companies.
We understand that they are making progress towards filing registration statements relatively soon.
But we obviously can't control the timing of that.
But I would say here, again, as with our conversations with broker-dealers and other fund companies, the fact that we have a product alive with the market is a stimulus for action by the fund companies that have already entered into agreements with us and are trying to make decisions about the timing of their law options.
But again, also important to them is, what does the distribution landscape look like.
They are happy for the test phase of the development of NextShares to be dominated by Eaton Vance.
They, like we, are permanently interested in the commercial development, which requires a broader range of distribution outlets than we have today.
But we expect to see registrations filed for NextShares funds by other sponsors in the coming weeks.
| 2016_EV |
2016 | MTDR | MTDR
#Thank you, <UNK>, and good morning to everyone on the line.
Thank you for participating in today's call.
We appreciate your time and interest in Matador very much.
In addition to our earnings press release issued yesterday, I would like to remind everyone that you can find a short slide presentation summarizing the highlights of our first-quarter 2016 earnings release on our website on the Presentations and Webcasts page on our website under the Investors tab.
Now I would like to introduce the senior members of our operating staff joining me this morning who are standing by for any questions you may have.
They are <UNK> <UNK>, President; <UNK> <UNK>, Executive Vice President and Chief Financial Officer; Craig Adams, Executive Vice President of Land, Legal and Administration; Van Singleton, Executive Vice President of Land; <UNK> <UNK>, Senior Vice President of Reservoir Engineering and Chief Technology Officer; <UNK> <UNK>, Senior Vice President of Operations; <UNK> <UNK>, Senior Vice President and Head of Marketing and Midstream; <UNK> Spicer, Vice President and General Manager of Midstream; Trent Green, Vice President of Production; and Rob <UNK>alik, Vice President and Chief Accounting Officer.
Before I turn the call over to your questions, I want to briefly highlight a few key points from the first quarter which we felt progressed consistently with the guidance and projections we provided at Analyst Day.
First, the highlights were the increases in our proved oil and natural gas reserves, up 14% year over year to 90.2 million BOEs; and the increase to our proved oil reserves of 56% year over year to 50.7 million barrels.
Two, in the release we have detail on our new well results including completions on the Dick Jay and Dorothy White multi-well pads and our update from our exploratory well in Twin Lakes.
And then on the Dick Jay and Dorothy White, we would particularly call to your attention the outcome and the improvements to the second Bone Springs and to well results in the lower Wolfcamp in what we call the [Fat Zone].
Third is the second quarter is off to a strong start with production increasing at the start of May to approximately 27,300 BOEs per day, consisting of 13,700 barrels of oil per day and 82 million cubic feet of natural gas, up almost 14% from the average first-quarter production of 23,800 BOEs.
The last thing is just to mention again that our teams are doing a lot of little things and throughout the organization that are bringing out back piece good results, and I hope we get a chance to discuss them with you today.
And with that, I will turn it back to you, operator, for questions.
<UNK>, the way we thought about Twin Lakes is the way we do all of our exploration.
We go into it very methodically and want to thoroughly test.
When we drilled Twin Lakes, that area has produced 1.3 billion barrels of oil.
So we knew that it's a petroleum-rich environment, active petroleum system.
And we were confident that we would have a chance to look at a number of different zones.
As we drilled that pilot well and got the information, we expected to see some potential in the Strawn, but the data point was very encouraging and we wanted to test it before we moved on to the Wolfcamp.
The well has performed very well, as you can see from those details, and we still think the Wolfcamp B is still going to be our primary.
But just as we have discovered in Wolf, it's going to be potentially a multi-pay area.
And I would like to invite comment from <UNK> <UNK>, our Chief Geoscientist, because among the other things that we have, it has given us a lot of data and we will drill a Wolfcamp D test later in the year.
But this was just too good of an opportunity to pass up without testing.
The oil is in the area ---+ it comes from the Wolfcamp and we fingerprinted it and it looks promising.
And I think it's important to note this is a vertical well.
So those results that you see are from a vertical well, and it has held up very well.
<UNK>, would you talk about how your teams came to this.
<UNK>.
I would like to add to what <UNK> and <UNK> both said.
This was one of four or five different intervals, <UNK>, that we had identified based on our initial studies to have potential for more oil production.
So, we weren't that surprised by the results, because we had originally identified ---+ there have been over 200 Strawn wells drilled in this area of the county.
And we have been looking at those very diligently in an attempt to find some additional locations.
If I just might add one final comment, <UNK>, just to underscore that what <UNK> and <UNK> were saying, I do think one thing that was interesting to us was, given what <UNK> said, that there has been a lot of strong production in this area before, that we weren't sure but with this location might be a little bit depleted.
But it wasn't at all.
It came in at original reservoir pressure.
So I think that was also a little bit of a surprise to us and they suggest that there is more potential going forward here within the Strawn.
We have been advised that's a trick question, and about going to the fourth rig.
And there are no immediate plans.
It's going to be a combination of circumstances that we are going to visit as a group is that one is the sustainability of the price.
The second is, where would we put the rig to best effect.
And there are just a number of things going into question.
And we are in no hurry to do so because one of the advantages that we have is the three rigs we have are drilling these wells faster.
So, they are more productive.
But we will continue to look at it, and it's about adding value for the shareholders is that we are in no rush to just grow for the sake of growth.
It's all ---+ like <UNK> <UNK> likes to say, it's profitable growth at a measured pace.
So we hope that prices continue to improve and the vendors continued to work with us.
But there's nothing immediate on the horizon until we all feel more comfortable with the prices and the economics of drilling.
<UNK>.
I just was going to say, <UNK>, one of the things that I think is really important is what we have been able to do with the three-rig program.
What has allowed us to do in these lower commodity prices is really get ahead not only on our efficiencies and drilling the wells fast but also efficiencies and optimization, if you will, on completing these wells.
We are able to do this in a time that service pricing is lower, and we are able to really figure out these efficiencies going forward.
So we are set up.
As <UNK> said, it's going to be profitable growth and a measure is.
We do feel really good about where we are at in that timeline and in that system of drilling better wells for less money.
I might add just one other thought, which is that even though we are not willing to do that today I can assure you that our teams are actively planning for when that day comes.
And each of them have many locations that they are excited to get the chance to drill when and if that opportunity comes back to us again.
So they are very active in terms of their planning for when we feel like it's time to go forward.
I think, as we indicated at Analyst Day, our focus at Rustler Breaks this year was principally going to be in the Wolfcamp A, X, Y, the upper part, and also in the Wolfcamp B.
And so we do have ---+ we're going to be drilling essentially all Wolfcamp wells there in 2016, and they will be divided between the A and the B.
I will say, though, that there is a little variety within the B.
There are currently three different landing targets, two of which we have actually released results on and a third of which we have now drilled through but don't have enough information to release the results from, as yet, just getting ready to frac that.
So I think that, as we go forward, we will continue to further refine and define the best intervals within the B, in particular.
But for the most part you are going to see us drilling the As and Bs at Rustler Breaks this year.
Neil, the first Matador grew primarily by acquisition and exploitation.
This Matador has grown almost exclusively from the drill bit and organic growth, other than the merger with Pako, where George and I thought we would be better combining.
So we've done it both ways, doing it the way this Matador has done it with the drill [bed] and organically is more profitable generally because acquisitions are expensive, it's a very competitive process and it's difficult to make them work.
We are always looking around for that kind of opportunity.
We would love to make another HEYCO-like deal.
But they are hard to do.
We will continue to add acreage in our various areas, bolting on additional joining tracks and trying to acquire additional interests in our units.
Our geological teams, I think, do a very good job of picking out good buy areas.
Our exploration has worked out well for us as we move from Cotton Valley to Haynesville to Eagle Ford to the Delaware and then up there at Twin Lakes.
So, they have got some very interesting ideas that we are considering.
So, we consider it an opportunity-rich environment.
And it's the kind of rating opportunities out there ---+ good, better, best.
And for the most part, opportunities that we've seen have come from buying undeveloped acreage and incorporating them into our plan.
But we would welcome another HEYCO-like merger.
We would welcome other opportunities.
But we are not planning making that critical to our growth or development.
We want to be sure that we have those opportunities in hand that assure us of our continued growth.
And in that regard I think you know we still stand by, we've got 3,500 locations out there, and 1,400 net.
And at drilling 50 or 60 wells a year, that's 20 years.
So we have got a lot in hand.
But we're like that rancher.
All we want is what we have and what adjoins us.
I just want to build on what <UNK> is saying there, to your question about the opportunity set and how you expand that.
The recent success we've had that we just mentioned on the second Bone Springs down at Dorothy White and the lower Wolfcamp and even the other interval that we've targeted at Rustler Breaks and the Wolfcamp B ---+ that's three different opportunities right there for us to expand on the assets we already own.
<UNK>, thanks.
We would like to compliment our drilling and completions group and our production group and all of our team.
They have all contributed to this cost improvement.
And we are really, really proud of them; and our area teams for our different prospects, we are really proud of them.
And there are a lot of little things that our production group, for example, sometimes doesn't receive all the recognition.
But cutting some salt water disposal costs in half is one example, and changing out the comps.
It doesn't get the headlines that some of these discoveries in these big wells do, but all those little things are important, too.
And <UNK> <UNK>, our Head of Operations, is just a fantastic leader.
And he and his group ---+ they take great pride in finding ways to drill these wells faster and better and complete them faster and better, which are very sustainable savings.
And <UNK> <UNK>, our President, has always had a policy of working with the vendors, he and <UNK> have, of trying not to beat them down but ways to add value.
Patterson has done a good job with the rigs and the bigger pumps that have made a huge difference.
And we have been working with Halliburton recently.
Their crews are efficient.
Schlumberger has done a real good job (technical difficulty) company.
All these people, we feel like they are working with us.
And that's just making a difference.
I just want to underscore what <UNK> is saying there.
What we really look for in our vendors, and we have been very pleased with our vendors during this downturn, is how we create value together.
We do expect a good price, we expect a great price.
But when we go to our vendors what we really ask them is, how can you help us create value.
How can you help us do things.
And one example that I will ask <UNK> to talk a little bit about is just, on the drilling side, how we are able to improve the great efficiencies in drilling these curves.
You're going from vertical in a well to 80 or 90 degrees, and they have been able to do this at over 90 feet per hour.
So they drilled the curve recently in a little bit ---+ in around 10 hours.
It's pretty amazing.
Just like <UNK> is saying, the improvements in technology and our guys working with the vendors are finding different bit/motor combinations and making little well pads and deciding exactly how to drill each part of the well, and that has led to the faster curves down to 10 days now ---+ I mean 10 hours, I'm sorry.
(laughter) And we expect more to come.
The guys are working hard together.
They get together and sit down and go through each segment of the well and find ways to get faster and faster right now with our contractor over the next month and a half will be sitting down with everyone that works on the rig, all the tool pushers, crews, superintendents, sitting down and going start to finish on every well, and identifying any place there we can continue to get better.
So we are not happy with where we are.
We are happy with drilling wells fast and setting records and meeting all our goals for the year, early in the year.
But we're not going to stop there.
We're just going to keep getting better and better.
And with the faster curves, one of the things that I think you saw was down in the Wolf area.
We recently worked together, figured out a way to eliminate one of the casing strings.
Just that alone saved $600,000 in a reduction in costs in that well.
That opens up a lot more drilling and development for us in that area.
That's a big deal.
We've gotten better with our frac crews.
And where we were getting 3-4 stages the day, now we are getting 5-6 stages a day.
That efficiency ---+ that's super for us.
We are trying new technologies now while the costs are down and efficiencies are down.
And some of the things we are doing there ---+ we have done the diverters and surfactants to improve well performance, also cut costs.
We are using the [burst port subs] and [dissolvable ball] technology.
That eliminates coiled tubing work, eliminates drillout costs and it hits the wells back faster.
They are online.
Since we don't have to go in and drill out the plugs, if we got four wells on the pad, while we are moving over and fracking the next one we can go ahead and start flowing the other one back.
That gets production back two weeks quicker.
So, there's a lot of good things going on.
We are always big into the bigger frac jobs.
We've had opportunities to try new things there, bigger designs, moved up over time, from 20 to 50 barrels a foot and 1,300 to 3,000 pounds per foot.
So all of these things are big.
We are getting to see the improvements now and really happy with our success and really happy with all the teams and guys in completion drilling, production and everything they've done for us.
It's amazing.
Did that answer your question.
All those things are true.
This is the area that George Yates and I met.
This is how we came to work together is in the Strawn ---+ there was a Strawn play in the early 1980s, 1984-1985, up through the rest of the 1980s.
And these were great wells.
This is, at that time, about the only place in the country you could find drilling rigs.
And so these were great wells then.
They deserve another look now with all the modern technology.
We drill down to get to the Wolfcamp and do the course.
We have the course in the Wolfcamp and the Strawn.
And it was just that this was ready to test.
You have a vertical well, an inexpensive vertical well.
We wanted to measure that opportunity because we knew ultimately, after this one, since it was above the Wolfcamp it was logical to test that first and then move on to the Wolfcamp.
And it has performed well, so now you have two proven zones of interest because when you drove the Wolfcamp it's charged the Strawn, just like other parts of the Wolfcamp, there are several different members.
And we like the outlook on this.
I think it sets up, obviously, other locations.
But as we approach this, you know how deliberate we are about exploration.
We tried to be very methodical process and this data.
And it's a great data point, but we think we've got others behind it.
<UNK>.
Yes, I think it's a really great result in Strawn.
But it doesn't change our expectations, our focus on the Wolfcamp in this area.
Just the notion you're able to drill down into the Strawn and make a nice well is great.
To be able to identify that the oil in the Strawn does come from the Wolfcamp in this area is also encouraging to us.
And we are evaluating the data from the core.
We want to make sure we picked the right landing targets and get off to a good start in the Wolfcamp D there as well.
And that's really what our teams ---+ <UNK> is really, one of the focuses he's on is rating the different landing targets good, better, best.
And this will be an important point on that.
They will look at that, and the engineering teams.
And I think that's something that we really learned over the past four or five years as these teams ---+ the more they work together and the more they seem to like it and the better they do and there's intermixing as guys move from leadership of one team to another.
And I think that's cross-pollination, in agriculture terms.
But it works here.
Tom Elsner is an example.
Tom has worked all of our different areas at one time or another.
And so have the other guys.
And they will just all pitch in.
And really, the whole [executive team] ---+ I couldn't be more proud of them and what they are accomplishing.
And we just think the outlook is really encouraging and we are adjusting to these lower prices, the whole industry is.
And if things get better, that's going to be wind at our backs.
But we like the outlook for the remainder of the year.
Wait, wait.
<UNK> has ---+ he's raised his hand, wants to ---+
You asked about horizontal potential here.
And we are definitely looking at that, given in the Strawn.
Of course, we were thinking horizontal all along in the Wolfcamp, in this area.
Given these results, these are more conventional reservoirs.
Not only is it a vertical well but we did not have to pump the hydraulic fracture treatment.
This is all natural flow that we are seeing out of this reservoir.
And so, we are evaluating our data right now to look at going horizontally in this interval.
And so, the core lab is finishing up the analysis.
We're going to get a final report here in the next few weeks and we're going to be looking at all of that to decide not only what we are going to do with the Strawn in the future but where we're going to be landing our Wolfcamp test later this year.
<UNK>, that question sounds like someone who once worked as a geophysicist for Exxon.
<UNK>, do you want to ---+.
And Arrowhead is working.
As you know, most of Arrowhead is HBP, so we have been delivered about going in there.
But our activity is going to be picking up.
We have gotten approval to drill three extended-reach tests in there from the forced pooling and we have got approval on that.
So those ---+ they are the Mallon wells that will be coming up.
We had a good test, operated by Yates, in there as part of our legacy acreage from Yates.
There has been good tests by Concho, some not operated.
But we're certainly going to be more active there soon.
<UNK>.
Just to your question there about costs, I think <UNK> mentioned that there are going to be longer laterals.
Each lateral is scheduled to be about a 7,500-foot lateral in the third Bone Springs, and they are near to our Cimmaron well that was also drilled in the third Bone Springs, which has been a good well for us.
We are anxious here to be able to drill the three longer laterals; our acreage sets up for the ability to do it.
And the cost of the wells will probably be about $7 million each, I would say.
But a lot of that is due, of course, to the fact that they are longer laterals.
It's a good question and something that we look at and evaluate on a continual basis.
If you go all the way back to our Eagle Ford design, you can see we went through we characterize as seven different evolutions.
And in reality, it's probably 27 or 47, whatever it is, just different little knobs that we turn all along the way.
So we are right square in the middle of that same process in the Delaware Basin.
So, when you hit on a few of the key things.
We've gone anywhere from 20 barrels a foot all the way up to 50 barrels per foot on fluid volumes and all the way from 1,200 or 1,300 pounds per foot to 3,000 pounds per foot on the proppant volume.
And so we're continuing to evaluate those.
The initial wells we did, let's say at Dorothy White, were 2,000 pounds per foot in the Wolfcamp.
So we've got a couple years that we are looking at some of those.
The 3,000 pounds per foot jobs are newer.
We've got months as opposed to years.
But we are continuing to evaluate those.
And the nice thing about it, and we said it earlier in the call.
But we're able to do this in s low-cost environment.
So we are able to take some bigger steps as we go along the way.
So all that's in the evolution process.
Some of the other things that <UNK> was talking about, the diverters that we have been using, that's the initial things you saw in the release, the initial tests on that is very favorable, showing a 38% increase in production in the first 180 days of the well.
Still, that's pretty early.
But that's favorable.
We've tried two different approaches on surfactants.
We've tried an increase in one surfactant compared with the use of a different form of nanosurfactant.
That test is still too early for us to call.
We changed first cluster spacing on some of the wells; we've tightened them in an effort to ---+ as we did in the Eagle Ford, when we are fracking offset wells, to try to frac more of the rock, get more stimulated rock value near wellbore, using it in conjunction with the diverters, which I think is an interesting concept that we have done on some more Dorothy White wells.
So it's continuing to evolve.
The notion that bigger is better, I think, is typically true.
But there is a point of diminishing returns.
So I think at this point we are leaning more towards the larger jobs and I think that's probably where it's going to land out.
But we'll wait and see.
I think that, yes, the answer is just we would like to see just a little more well performance before we look at doing that.
I suspect that we probably will end up scheduling a few more Bone Spring wells.
This latest one that we drilled in Wolf, the Big J 124, I think, really exceeded our expectations.
We expected to see a good well, but we did change the frac design on it.
We went to a little bit larger job and it really seemed to make an impact.
So we will, I'm sure, do another well or two and see if we can replicate that kind of result.
I really am very encouraged by that because I think that you are getting ---+ with this well, you've got a little bit of Wolfcamp kind of performance out of the well that costs a couple million dollars less to put together.
The pressure isn't quite as high, of course, so the [ERs] may be a little bit less.
But clearly, this was a very, I think, significant well for us.
And given the fact that, as <UNK> said a minute ago, we can cut out an intermediate string of casing here, save ourselves $650,000 that way, and that the guys continue to make improvements with the frac design, I think we're going to get these wells under $4 million.
And if we can deliver those kind of results for under $4 million, these will be highly economic wells for us to drill.
So we're probably going to ---+ we are going to probably take a chance and take a shot at drilling a couple more of them just to see if we can replicate this.
And I think we are all optimistic that we well.
What I would say is begin by saying this is we have we have Midstream assets in North Louisiana and the Eagle Ford and we have other gathering and saltwater disposal and an oil gathering still on that in the [Mentone] Wolf area.
And in addition we had this last one at Rustler Breaks.
So there are four distinct areas.
All of them have received attention.
The two areas that have received the most inquiry or people, expression of interest, have been Rustler Breaks and the remaining Midstream assets at Mentone.
And we are continuing to evaluate ---+ when we receive an expression of interest, we give it what we feel is an appropriate consideration.
That we are not running a process, but ---+ and one of the resources that we're continuing to receive these considerable expressions of interest.
We are looking for a long-term partner on it that ---+ and we expect to be the anchor tenant.
Most of the inquiries have been from PE, but you are getting expressions of interest from other companies as well.
They are not lining up outside to come in, but it's consistent and it's regular.
And we are evaluating those opportunities because, with the success both in seeing how they are affected by the successes both in Wolf and in Rustler Breaks, well, how will it fit into the overall strategy.
That was one reason we elected to raise money, as we did, so we would not feel pressure.
We'd have a little more time to evaluate and decide strategically how it all fits in.
Very impressed with the work that our Midstream team has done in finding new markets, saving money here and there.
The technology is working.
Inlink has done a very good job operating that plant.
So the design work at our Midstream deal worked out very well.
That plant is now, with our gas that's running through that, is at capacity.
So I think that has been a win-win deal.
But it's also proving that the design work that our team has done is on target, too.
And the only hesitancy at Rustler Breaks is design this to fit the increased output that we have there.
With the better results we want to be sure that we have designed it for the right fit in the Right way.
<UNK>, what did I leave out there.
I think you pretty much hit it, <UNK>.
Yes, we have had quite a bit of inquiry as far as for our assets, especially in the Delaware Basin.
We get phone calls probably on a weekly basis, anyway.
But there has been quite a bit of traffic coming in.
Does that answer your question then.
So we haven't decided.
The fortunate thing is we don't have to rush into this.
We, again, have nothing borrowed on our commercial line of credit and we have money in the bank, over $100 million.
So we are trying to do it in the same methodical fashion that we try to do most everything.
And we will ---+ again, it's all aimed at building value for the shareholders.
I don't think I said that very eloquently, the whole thing.
But it's really encouraging and it's becoming an important part of our business.
And I think our Midstream team has really knocked it out of the park since it came together a couple of years ago.
<UNK>, that's an excellent question.
And I can't give you a very precise answer because our ideas and valuation are evolving.
Two years ago, as we were getting started, it would have been easier to say oh, yes, we will put this together and do something.
That is clearly ---+ when we meet, we discuss it.
There's just a lot of circumstances to consider.
And it's a high-class problem.
I will just say that, because the Midstream is really doing good.
The E&P are doing good, and fortunately we haven't had to pick, well, we have money enough for one but not for the other.
Or (technical difficulty) ---+ you know, that they get the leftovers.
It just hasn't worked out, and fortunately the market has been open and we have been able to do both.
And that seems to have generated, I think, a lot of value for our shareholders.
The Inlink deal was a real boost.
(technical difficulty) [Sofring] was a real boost.
And the way Rustler Breaks is coming on, we are going to be really happy.
We built the plant and didn't sell it off the first chance that we got.
Same thing down there in Mentone having right now where we are having this gas come on to the point where it's filling that plant at capacity, we are glad we have a gas gathering system to divert some of the gas to enterprise so that we're not having to flare.
And I really commend our production group because, as of today as we were preparing this, I asked how much we are flaring.
And the answer was nada.
And you couldn't have done that if we didn't have either control, operational control, or influence on this Midstream and if there has not been close coordination between Midstream and production.
So we see not just financial advantages, some operational advantages.
At the same time, some of the expressions of interest have been interesting enough that it's hard not to give them some serious consideration.
So it's like ---+ <UNK>.
I was just going to add to that, <UNK>, I think one of the things, <UNK>, that we take comfort in is how we approach these midstream assets, where we build and what we build.
And <UNK> said it earlier; we build them.
They are need-based.
So we are not going out and having to find people to come on to our systems to make these things work.
They're going to work.
So the option for us to monetize part of it is a good option.
The option for us to keep it is also a great option, you know.
So we don't have any have-tos in here.
It's a good problem for us to be looking at.
Well, I think that we have pretty well always talked about the X and the Y as being these little individual 20-foot or so thick sands, the X being a little bit shallower than the Y, that we have been completing wells in.
So at times we drill wells in the X zone, and at times we drill wells in the Y zone.
And we have been developing those in a bit of the W pattern across our acreage there.
So it's really not ---+ it wasn't really intended to signal anything other than some of those wells penetrated the X targets and some of them penetrated the Y target.
But it's, I think, pretty consistent with the messaging that we've had about the upper Wolfcamp all along.
What we typically do there is we will go ahead and we will set up our perf cluster spacing.
Let's say it's 50 feet.
But what we will do when we are using the diverters is actually put more per clusters, per stage.
And the idea is we will pump a portion of the stage, say half of it for discussion purposes, and then we will drop these diverting agents.
And the notion is that some of the perf clusters are taking most of the fluid at any time during the frac jobs.
So the diverters go down and plug up the perf clusters that are taking the most fluid, and when that happens you will see another fracture initiation point on your pressure curve while you are fracking these wells.
So what we believe is we will frac part of the perf clusters during the passive stage and then we will look those up temporarily; they are dissolvable material.
And then the second half of the frac stage will go into different perf clusters.
The one that you talked about on our <UNK> Burton Wells, we figured that we saved around $75,000 on the completions by going with the diverting agents.
And it's related to the fewer frac stages.
So you are paying less hydraulic horsepower.
The volumes, the fluid and profit volumes are the same either way.
It's just how much horsepower you used to get it in place.
Yes.
First is, those are great assets and we think that in the Eagle Ford that gives us another oil bank.
We've got 250 locations to drill down there.
The economics, just the direct economics of drilling down to the Eagle Ford and completing there are very comparable to put we are experiencing out there in the Delaware.
The difference is it's just basically one zone.
You drill down to the Eagle Ford, you turn right, you make your horizontal.
But out there in the Delaware, you've got a number of different pay that, once completed, you pick up more PUDs, you pick up more probable and possible reserves.
That's why right now it has a higher allocation base.
But we gained a lot of skill.
<UNK>'s team did a great job in reducing the days on well from close to 20 days to the last ones were six to seven.
They really learned how to drill them and complete them.
And again, if someone were to come in and make us a really strong offer, we would make a deal.
Now, we are not going to sell it on the basis, I don't think, of $35 oil.
You've got to project in what we think is the comparable value.
But we've showed, over the years, in selling first Matador, in selling Inlink, and selling Haynesville, part of Haynesville, Chesapeake.
If someone comes in and makes an offer, we are a public company, we are value-oriented, we will make a deal.
Haynesville also has a lot of promise.
We've got a lot of locations over there that ---+ those are great wells.
Some of those are 10-12 BCF wells.
They have upheld very well.
We've got a lot of locations and we can put a rig there to work if we wanted to when gas prices are better.
We are advantaged currently over there because we have ---+ in our deal with Chesapeake we kept those rights.
So we have close to 90% net revenue interest.
We've got favorable gas prices our marketing group has achieved.
We have wells to operate and then we also reserved all of our Cotton Valley.
So it's a wonderful gas asset.
We get calls from time to time.
But again, I don't think selling at $2 is a good deal unless we really needed the money.
And at this time, we don't.
So it's going to have to take a strong offer from somebody for us to want to do something because that gives us some valuable options in that we could drill there if we needed to and earn good rates of return.
But in the meantime, the gas and oil is not going anywhere.
It gives us valuable oil and gas options that, as prices strengthen, they are just going to go up in value.
We also like the diversification of risks.
That helps us with our ---+ from the ratings services.
It's an incidental thing.
But again, we are open to it.
But we also see value in retaining it and giving us those valuable options.
<UNK>, would you had anything to that as CFO.
No, I don't think so, <UNK>.
I think you handled that very well and were very complete with it.
In terms of capital allocation I think you know, <UNK>, that we have very little of our capital for 2016 allocated.
And we have got about, I think, about $6 million going to the Eagle Ford and about $5 million going to the Haynesville.
So it's only 2% or 3% of our budget for this year.
And honestly, we operate some, other companies operate some.
Chesapeake operates some.
I would say the other companies and Chesapeake have all done a good job, and we feel good with the small allocation but the big option.
It's all HBP.
So as prices improved we were probably get more looks.
I think that is, again, still a bit early days for us.
But I think we are beginning to certainly make progress there.
But in the Wolf area I think we've got enough drilling behind us that we are pretty much in development mode.
We've got our facilities and infrastructure pretty well built out there, so that certainly will begin to pay dividends as we go forward.
But even at that, from time to time we still want to be able to branch out and test another zone like the second Bone Spring or drill another well down into the lower.
I think before too long you will see us wanting to jump up and test the Avalon in this area.
So, there's still exploration opportunities in each of these areas.
I think in Rustler Breaks we're still a little earlier there.
Clearly, we are building out the infrastructure.
But there's still a little bit of that to go.
And in all these areas, as we get more into development mode I think you will see us benefit from economies of scale on the production side that go with that.
So we will be able to take advantage of the operations there to help to further reduce our cost.
As our production goes up I think that on a unit basis that you will see our costs go down.
So I think all those things will help.
But again, as we continue to drill better wells for less capital investment, that also will help to improve the returns.
So I think things are headed in the right direction.
To add to that, <UNK>, you make a really good point that when you think about doing these different things ---+ second Bone Spring, Wolfcamp X and Y, lower Wolfcamp, Wolfcamp B ---+ they are all a little bit different.
So, as you go through and do these things, you learn something from each one of those that may translate to something else.
So, every time we drill down to a Wolfcamp B, we drill through the Avalon, we drill through the second Bone Spring, we drill through all these different intervals.
And so we are getting better at doing that in anticipation of when to do this it will be something else.
For instance, the Avalon ---+ we will know how to get there quicker.
One thing I might just add in closing on that question, <UNK>, is that I do think that the finding costs of a lot of these wells are really quite good.
I think that a lot of the Wolfcamp ---+ we're probably beginning to look at plus or minus $10, sometimes sub $10 finding costs.
So, I think that also is very attractive and something that also helps with the returns.
<UNK>, I would add a couple of things that I've learned from my 35 years' experience.
One is look at the other side of the coin.
Following up what <UNK> says, you are getting your [finding] costs down there in the range of $10.
Where some say, well, you shouldn't be spending the money now, go down to two rigs, one rig ---+ if you believe that prices will strengthen over time, that the laws of supply and demand work and they will increase in the coming year and years to come, then establishing finding costs down there in the sub $10, as those prices rise, analysts will be commenting on what great margins we have.
Well, the great margins won't be just because prices return in 2018 because what we do in 2018 ---+ part of those great margins will be observed because, at a time like this, we cautiously but methodically kept up the pace and delivered $10 finding costs.
That will help these (technical difficulty) assets that provide better to average margins for someone who is coming in to a new entrant.
And then the other thing that we are establishing again on the record reserves that we are establishing ---+ yes, that isn't necessarily cash flow all today.
But those are assets that will provide assumptions and increase value in years to come.
That's the way we see it.
I think prices are much more likely to go up than down.
It feels like the worst is behind us.
But if there's another spate, we think we are aware of that.
We were very pleased with the offering and the indications of interest that we had.
And we are really excited about the progress.
But what ---+ and what I found over the years is that one is better off to look at it not from a single point of view, what is your precise rate of return today, but also look at the value you are establishing, the options you are establishing, the organization, the innovations you are establishing, the new technology you are learning.
All these things will factor in when you think of yourself as a going concern.
Also your outlook on prices, all these ---+ you know, it's just more [complex] (technical difficulty) sometimes, and that's why you have to be cautious, you don't go too fast or you will miss out on some things and make it risky.
But if you go too slow, you're going to miss out on some wonderful opportunities that are only available today.
We think this year is off to a really strong start.
We are where we wanted to be and where we projected we would be at the analyst.
And the outlook for this next quarter is, look, we are going to have an increase in production.
We've already experienced an increase in reserves.
And the organization is stronger.
We are better in every area ---+ Midstream production, drilling, completions.
And the teams are coming up with lots of ideas, good technical work.
I don't want to ---+ and the macro environment, I think, is improving.
Relationships with vendors is, I think, excellent.
So, there's some real intangible progress going on, along with just the simple rate of return, the cash flow coming back.
And I think you will continue to see that progress as it goes along.
And we try to be long-range thinkers and worry about the long-range price.
And when we first went public, people worried about us because we were 90% gas, weren't oily enough.
And we went down in the Eagle Ford and established ourselves there, and then we were pushed back because we were not putting all of our money back into the Eagle Ford.
But we were establishing the Permian position.
We think those were the right decisions.
And even out here in the Permian, we ---+ a couple years ago, you may remember that on these conference calls, people were giving us no value for the Rustler Breaks.
That is turned out to be a good move.
Midstream ---+ until recently, we were getting no value on the Midstream.
So I think Matador has a lot of assets that are not always appreciated because I think we think of ourselves as being fairly low-key and waiting till they actually prove themselves.
That's an example.
And now Twin Lakes, for which we are receiving no credit, is an exploratory success with room to grow.
And so I give a lot of credit to our Board and our management staff to have reached those decisions.
And I hope that answers your question, <UNK>, that I think you have to hope that you ---+ or you all evaluate however you want.
But in fairness I think you have to look broader and look at the intangibles and look at the decisions that we made, like going to the Delaware before it was cool.
We didn't get much value, but it turned out to be right.
Going to the Eagle Ford and being on the 9,000-foot contour didn't receive a lot of credit until it happened.
And Midstream has been the same way.
Thank you all I'll do a good job, the analysts.
It's just we have the advantage of more information that we try to get out to you.
And in that regard, I hope you and others that have commented ---+ we've had some comments that our press releases are too long.
We've tried to condense it.
So if there's a comment card, also let us know.
If you want us to condense it more or you like the detail, and we will try to comply because we are really trying to get it out to you in the form that is best suited to you all.
I'm serious about the comments.
Let us know if we are getting the right information to you.
It's a great question.
And we are pursuing along parallel lines a number of opportunities.
We are pursuing increasing our interest in the sections from the non-op, if they want to sell.
We want that to be a volunteer basis, don't want them to feel they have to.
But if they are interested, we would welcome that discussion.
And the same thing with adjoining acreage to any of ours.
And we are looking at some new areas.
<UNK> and his team are full of ideas on other areas that we might go.
But it's fitting all those things into a puzzle.
We are pursuing all those lines.
And we can't ---+ we have got to let the sellers decide that ---+ you wait to see where the thing breaks.
You call a number of plays.
It's like you pitching, you know, you serve up fastball, curves, sliders.
You just hope they bite on each of them.
Well, no, any time, <UNK>.
Come see us.
All of you, come see us.
Thank you, operator.
I think that we appreciate your questions and interest and want to extend an invite to all of you to come see us.
This is something we are really inviting institutional investors, in particular.
Come see us and have lunch with either our executive committee or our young professionals and get to know us because we've found that we like to know our shareholders.
And we want you all to know us and see that we are planning not just for today but two years from now, three years, five years, whatever.
We will continue to try to uncover and convert these various opportunities we discussed today into value for our shareholders.
And just by way of a personal note of Matador trivia, you've heard the Dick Jay being prominently mentioned in this conference and in this news release.
Dick Jay is my friend from my boyhood in Amarillo.
We had a paper route together beginning in fourth grade and have been business partners involved, ever since, which is now over 50 years.
So when we needed a good well, we called his name out of the bullpen and we put it on the bulk oil pad.
And we have advised Dick that we are glad he came through.
And they are some of our best wells.
So when you need a little boost in the oil business, just go back and get your fourth-grade paper route throw and name a well after him.
I don't recommend family members, but I do recommend (laughter) I do recommend friends like Dick to name wells after.
And a number of our other wells are being named for some of our long-term shareholders in New Mexico.
So I hope that adds the least bit of color that we are really serious about when you to come see us get to know us and us get the chance to know you.
And thank you again for your interest.
The teams are back to working this afternoon, and we will see what we can do.
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