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2017 | PB | PB
#Thank you.
Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter 2017 Earnings Conference Call.
This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks.
I am <UNK> <UNK>, Executive Vice President and General Counsel of Prosperity Bancshares.
And here with me today is <UNK> <UNK>, Chairman and Chief Executive Officer; <UNK>
<UNK>
Tim <UNK> Jr.
, Vice Chairman; <UNK> <UNK>, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; Merle Karnes, Chief Credit Officer; and Bob Benter, Executive Vice President.
<UNK> <UNK> will lead off with a review of the highlights for the recent quarter.
He will be followed by <UNK> <UNK>, who will review some of our recent financial statistics, and Tim <UNK>, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Anita.
Before we begin, let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares filings with the Securities and Exchange Commission, including forms 10-Q and 10-K, and other reports and statements we have filed with the SEC.
All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now let me turn the call over to <UNK> <UNK>.
Thank you, <UNK>.
I am <UNK> <UNK>, and I would like to welcome and thank everyone listening to our second quarter 2017 conference call today.
For the quarter, we showed impressive annualized returns on average tangible common equity of 15.39%, and on second quarter average assets, 1.22%.
Our net income was $68,554,000 in the second quarter of 2017 compared to $68,071,000 for the same period in 2016.
Our diluted earnings per share were $0.99 for the second quarter of 2017 compared to $0.98 for the same period in 2016.
Our loans at June 30, 2017, were $9,864,000,000, an increase of $124.7 million or 5.1% annualized, compared with $9,739,000,000 at March 31, 2017.
We are continuing to see the optimism in our customer base, although they are watching the efforts in Washington to change healthcare, taxes and overall regulation.
We are excited with the organic loan growth we have experienced over the last 3 quarters, starting with the fourth quarter of 2016.
Our lenders are upbeat as our loan portfolios and pipelines of approved, but unfunded loans have increased.
On our asset quality, our nonperforming assets totaled $47.6 million or 24 basis points of quarterly average earning assets at June 30, 2017, compared with $52 million or 27 basis points of quarterly average interest earning assets June 30, 2016.
Although there was a decrease year-over-year in nonperforming assets, we saw an increase of $6.4 million in the second quarter of 2017, primarily due to one oil and gas loan placed on nonaccrual during the quarter.
We will go into discuss that further in our comments section of the presentation.
Our linked quarter deposits increased $34.9 million or 20 basis points from $17 million 36 ---+ $17,036,000,000 at March 31, 2017.
Year-over-year deposits were down slightly, primarily due to a decrease in public fund deposits, as those entities were able to get higher rates from other places that were not available to them before the recent increases in interest rates.
We discussed our municipal accounts last quarter, and can go into a little more detail later on in the comments section also.
But the deposits, excluding the public funds, increased approximately 2% annualized for the first 6 months of 2017.
Our noninterest-bearing deposits increased $380.6 million or 7.6% to $5,397,000,000 at June 30, 2017.
That was compared to $5,017,000,000 at June 30, 2016, so a $380 million increase or 7.6% in noninterest-bearing deposits.
We believe that our strong core deposit base will continue to increase in value as rates continue to rise and banks need deposits to fund their loans.
With regard to acquisitions, as we've indicated in prior quarters, we continue to have active conversations with other bankers regarding potential acquisition opportunities.
We remain ready to enter into a deal that is right for all parties and is appropriately accretive to our existing shareholders.
With regard to the economy, Texas and Oklahoma have continued to rebound from the downturn in the oil business.
Texas employers added more than 40,000 jobs in June 2017, which brings Texas to an annualized job growth rate of 2.7%, up from 2.4% in May and in line with job growth nationally.
The Texas unemployment rate fell to 4.6% in June from 4.8% in May.
The recent acceleration in job growth led the Federal Reserve Bank of Dallas to boost its forecast for employment growth in Texas to 2.8%.
With a better economy, loan growth and a strong pipeline of approved, but unfunded loans, we look forward to a solid second half of 2017.
I would like to thank our whole team once again for a job well done.
Thanks again for your support of our company.
Let me turn over our discussion to <UNK> <UNK>, our Chief Financial Officer, to discuss some specific financial results we achieved.
<UNK>.
Thank you, <UNK>.
Net interest income before provision for credit losses for the 3-months ended June 30, 2017, was $152.2 million compared with $158.5 million for the same period in 2016.
The change was primarily due to a $4.8 million decrease in loan discount accretion.
The net interest margin on a tax equivalent basis was 3.14% for the quarter ended June 30, 2017, compared to 3.37% for the same period in 2016 and 3.20% for the quarter ended March 31, 2017.
Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended June 30, 2017, was 3.06% compared to 3.11% for the quarter ended March 31, 2017.
Noninterest income was $27.8 million for the 3 months ended June 30, 2017, compared to $28.5 million for the same period in 2016, a decrease of $700,000 or 2.4%.
Noninterest income was impacted this quarter by a $3.8 million loss on sale of assets, offset by $3.2 million in security gains.
Noninterest expense for the 3 months ended June 30, 2017, was $76.4 million compared with $79.2 million for the same period in 2016, a decrease of $2.8 million or 3.5%.
The efficiency ratio was 42.4% for the 3 months ended June 30, 2017, compared to 42.5% for the same period last year and 43% for the 3 months ended March 31, 2017.
The bond portfolio metrics at 6/30 showed a weighted average life of 4.2 years, effective duration of 3.8 years and projected annual cash flows of approximately $1.5 billion.
The net premium amortization was $9.4 million for the second quarter of 2017 compared to $9.9 million for the first quarter of 2017.
And with that, let me turn over the presentation to Tim <UNK> for some detail on loans and asset quality.
Tim.
Thank you, Tim.
At this time, we are prepared to answer your questions.
Anita, can you assist us with questions.
Well, I don't know if we can bring it down more.
But we gave that range the last quarter somewhere in the 78 to 80 range, so I mean what I could probably tell you is maybe we can run at that lower range if we need to.
But getting below the 76 we posted, that's going to be difficult.
Yes.
One issue is the loan volume that I mentioned of $309 million, that, of course, is not all funded up.
Those are loans that are booked.
Some are construction loans that have yet to fund.
Some are lines that have yet to fund.
So the increase in outstanding resulting from that increased production really hasn't taken hold yet.
There is still a lot of pressure from competition on rates.
So we struggle almost daily with every loan we make in terms of the yield that we can get.
So there really wasn't a lot of increase in yield because of the competitive environment that we're in.
So I don't know whether that totally answers your question or not, but those are some issues that we deal with.
Yes.
This is Dave <UNK>.
I'll take that one first.
I mean we've had a couple of Fed increase over the last 3 to 4 months, and so we haven't moved our cost ---+ our deposit costs up that much.
I mean if you look at the detail on the net interest margin page, we moved them up a little bit, but not significantly so.
The pressure from a kind of a competitive standpoint, there has always been compressed ---+ competition in terms of aggressive rates, that still exists today.
We're not quite seeing that yet.
I think if Feds raised rates, say 50 basis points, you can see on our sheet maybe, we moved our rates 5 to 10 basis points on the deposit side.
Out of that cost increase, the deposits themselves, that increase linked quarters was about 4 basis points.
So going forward, we think we can manage that.
And I think that the loan yields will pick up as we continue to increase loans.
I mean, Tim, did you want to add anything to that.
Yes.
I think, this is <UNK> <UNK>.
Coming on top of what <UNK> <UNK> said, I mean, basically, the Fed's raised ---+ out of last 3 raises that the Fed raised, I think it really ---+ we really increased our rates on deposits, probably 20 basis points on the CD side.
And like Dave said, probably 5 basis points or 10 basis points maybe on the checking or money market side.
So we really haven't been under a lot of pressure so far.
And I'll just add, leading on to the margin kind of question, one thing I'll point out, so in a rising rate environment, what you can see in our numbers, we had some borrowings on average of about $1.5 billion this last quarter, but you see us as we get to the end of the quarter, it's down to $1 billion, that will actually help us out.
That was being replaced by lower cost deposits.
Hopefully, going forward, that will also continue to change and help us.
And then getting to the margin question.
Again, we've said repeatedly on these last few conference calls, we're kind of in a ---+ we call it a neutrally balanced position from a margin perspective, and that, over time, that margin will expand, but in the short term, not much.
And I realize this past quarter, it dropped a little bit.
But that's just a phenomenon of our balance sheet.
Again, we will be able to take advantage of the rising interest rates.
But as <UNK> said, you've got a large part of our portfolio filling out, $1.5 billion roughly in cash flow the loan portfolio throws out, maybe close to $3 billion.
It just takes a while for all that cash to come in, and we can start investing in higher rates.
And I'll also make one other point on the bond portfolio.
Again, with a flatter yield curve, it didn't help us in terms of investing in the bond portfolio.
Luckily, I don't know if this was luck or whatever you want to say, we did buy ahead back when rates were a little higher, so we haven't had to buy as much this quarter.
And in fact, our deposits have come back, and if we continue to get the loan growth, that may not be such a bad thing looking forward.
Yes.
I think what ---+ again, we can probably let this go, we discussed it a lot, I think our deposit cost probably hasn't gone up that much, what probably more pressure on the net interest margin was the borrowings that we had from the federal home loan bank, which at one time, we were paying maybe 25 basis points and it's up to probably 125 now.
So you saw more pressure right there.
But as <UNK> said too, our bank, and I believe if you know our bank and everybody probably on the call has heard this probably the last 5 or 10 years, our bank has a bigger bond portfolio, and we have a lot of money that rolls off, so where other banks net interest margin may go up a lot faster, ours will go up, and we show a lot of ---+ a big increase in earnings in 18 to 24 months.
It just takes a longer time for us.
But overall, it is a positive thing and you probably will see that in ours, too, it just takes a little bit longer time.
I haven't looked this morning.
The 10-year has been up the last couple of days, so we do see the 10-year going up.
So usually, the type of investments that we buy is tied more toward the 10-year.
I think that's one of the issues that we've seen with this net interest margin over the last 1 quarter to 2 quarters as interest rates have gone up, the 10-year has actually gone backwards.
So seeing what we're seeing right now with the 10-year going up and with the Fed taking the position that they're going to be getting out of their mortgage-backed security position, that should be a ---+ that should cause interest rates to go up, and again, in a parallel shift when interest rates go up and that should be positive for us in the longer term.
I think ---+ this is Dave <UNK>.
I think it's ---+ our story, it should revert back.
I mean this quarter is a little of an anomaly.
But you're right, the flatter yield curve, obviously, if we had to reinvest in securities, we're not getting the same yield that we were getting 2 months ago whenever it was.
But on the other hand, if we continue to see that loan growth, that would help the margin because we're reinvesting ---+ we're putting our reinvestments out at higher yields, so just use an average, if you can get 4.75% versus 2.25% in the bond portfolio, that's going to be a benefit to the margin going forward.
So I don't think the story has changed really.
I think we should have a stable margin as we go forward and begin to see improvement based on all things I just highlighted.
Yes.
I concur with <UNK>.
I don't think that our model has changed at all.
In fact, if you look at our model, as we look at all the time, up 200 basis points over a 24-month timeframe and out show significant increases in both our income and margin.
So again, it's the same story.
It just takes us a little bit longer.
We ---+ this customer is paying principal and interest, and as Tim mentioned earlier, and this customer is marketing the company, and we expect this company to be sold, and we expect it to go away by the end of the year perhaps.
I don't know that I can answer a question like that.
I think what I would say is that we're in continued talks with banks all the time.
I think when you look at it, as we mentioned last time, I think a lot of the banks that are publicly traded that are smaller than us are trading at pretty high multiples, some 22x, 23x, 24x P/E, where we're trading more at a 16x or 17x.
So maybe for a publicly traded bank or a smaller bank, it could become harder.
We're still talking to banks that are publicly traded, banks that are thinking about going public and banks that are not publicly traded.
So eventually there will be a deal, but there is nothing to announce today.
I think that in the past, we've always answered that.
The first question is we do think that it is sustainable.
But again, we would even like to even try to hit more than that.
I think that again, a lot of this is dependent on what happens to businessmen and how they view politics.
I mean, right now, you have the healthcare issue going on.
You have the tax issue going on and deregulation.
But I think if those things continue to come through, then, you'll see our growth, that 5% to 6% will be good and it may even be better.
Having said that, if we don't get some of the other issues through, then that could stop things a little bit.
Yes.
I mean, yes, that's kind of what I was trying to get to earlier is to say, with the recent 50 to 75 increases by the Fed, we certainly are going to have to come back at some point.
We can't just ignore the market and not raise rates at all.
So the last, I want to say, 4 weeks or so, we've moved our rates a little bit in reaction to those last 3 Fed increases.
So yes, the question is, as we look forward, no I don't believe we'd be raising our rates on money markets another 10 basis points absent something else happening.
I mean, I think right now, I think we're in a good place in terms of our competitors and where we want to be, and so I don't know we'd see that same move looking forward.
I think ---+ this is <UNK> <UNK>.
Over the last 3 interest rate increases, which is 75 basis points, going up 10 basis points is relatively insignificant compared to the amount of interest rates that have gone up.
But having said that, as interest rates continue to rise, it will become more competitive.
I guess I would put it like this, if there's a 25 basis points rise, I don't think you'll see us raise interest rates 25 basis points on the money market accounts.
But there would be some proportion of it.
I don't know if that's 5 basis points or 10 basis points or something like that.
Generally, your CD market will go up faster than our other transaction accounts.
Yes, absolutely.
And we do want to talk on core level, I'll make that clear, so the other parts get that fair market accretion from the loans.
But yes, on the core margin, we should be stable where we're at, but based on what we'd see on our balance sheet, we should start seeing some improvement absent something else going on.
I mean I think this quarter, to change the amount that it did, that's just an anomaly.
A change that much usually wouldn't happen.
Our balance sheet the way it's set up, it is a stable margin.
When we have that loan growth that we're having, that's going to take effect here soon because we put our loans on during this past quarter, we can't get that full impact.
You're going to start seeing that as it sticks to the balance sheet.
And I think on the cost side, the deposits, if we're driving down our borrowings and replacing it with lower-cost deposits, I think those are all positives.
And I don't want to be super optimistic here because, as somebody else mentioned, if we have to put money back into the bond portfolio, with the flatter yield curve, that's creating a headwind.
But I think the other 2 things happening for a positive will outweigh that.
So coming back to the short answer is, yes, I think we'll have a stable margin and it could go up a few basis points as we move forward over the shorter term.
I think so we do expect to see a rebound, and let\xe2\x80\x99s remember, we had all those extraordinary items in there, the drops in sale of assets, security gains.
But if you pull all that out, it should just naturally snap back a little bit, but I would think it would come back a little bit more on that.
So yes, I don't think it will run at this low level we saw this past quarter.
It is both of those.
It is C&I, and it's construction and it's commercial real estate.
It's all 3 of those.
Most of the growth comes from Houston, Dallas and Austin.
And close behind that is Bryan, College Station.
South Texas and West Texas and East Texas and Oklahoma are a little farther behind in that regard.
So the stronger markets are the same ones that you've been seeing.
And it's diversified among different types of companies and projects.
Obviously, there is not much going on on the oil and gas side in terms of new business.
There is a little, but not much.
So I wouldn't say there is any unusual concentration.
And there is nothing unusual about the direction that it's coming from.
And we anticipate, based on what we see right now, that it's likely to continue that way.
Yes.
I would just add and just add on to what Tim is saying is that most of our growth is really happening in the Houston area, the Dallas area, the Austin area.
And we're not seeing really the growth in the West Texas and South Texas, where we're seeing Houston, Dallas growing sometimes 8%, 9%, 10%.
If we can get the other regions to kick in, that's why we're a little bit optimistic that we can really maybe even do better on loan growth.
It's just, again, really the ones pulling the wagon right now are Houston, Dallas and Austin for the most part.
Thank you, Anita.
Thank you, ladies and gentlemen, for taking the time to participate in our call today.
We appreciate the support that we get for our company, and we will continue to work on building shareholder value.
Thank you.
| 2017_PB |
2015 | VSH | VSH
#Thank you
No, no it's purely costs out.
It's purely costs out.
Otherwise I wouldn't dare to say that, so to speak.
It would not be in our hands.
Basically this is what we intend to do, because of course we will have the impact of our cost reduction program on the one hand.
On the other hand you have inevitable impacts of inflation, named salary increases.
So our cost reduction program, which is going to be implemented as indicated, as promised, will offset the wage increase of next year.
We have built inventory in the third quarter still and we are going to reduce inventory in the fourth quarter, so this makes a difference.
Well, we are on the way to until it gets better.
But at the moment it's still ---+ we are still negative on that.
We are still cash-wise in the US negative.
But it's getting better.
No thoughts at this point in time.
At least nothing which I ---+ we always talk about these things, but there's nothing which is really a decision at all.
Well we have done buybacks in the past, and this is always discussed with the Board by nature and decided by the Board.
And of course this stays on our agenda principally, but at the moment we do not feel that this should be rediscussed.
But I cannot exclude that this will come up again.
There are no firm rules, I believe.
It's an opportunistic thing.
Thank you.
Thank you, <UNK>a.
This would conclude our earnings call.
| 2015_VSH |
2016 | FCPT | FCPT
#Thank you, Andrea.
Joining me on the call today is <UNK> <UNK>, as well.
First, the disclaimer language.
During the course of this call we will make forward-looking statements which are based on beliefs and assumptions made by us and information currently available to us.
Our actual results will be affected by known and unknown risks, uncertainties and factors that are beyond our control or ability to predict.
Our assumptions are not a guarantee of future performance and some will prove to be incorrect.
For a more detailed description of potential risks please refer to our SEC filing which can be found on the Investor Relations section of our website.
All the information presented on this call is current as of today, August 3, 2016.
In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the Company's supplemental report, which can be obtained on the investor relations section of our website.
With that, I will turn the call over to <UNK>.
Thank you, <UNK>.
During the second quarter our portfolio performed as expected.
Since we were spun off approximately nine months ago, we have experienced a significant change in our cost to capital, really, the implied cost to our equity capital.
We now feel that our equity cost to capital is aligned for us to acquire assets, grow the portfolio, leverage our overhead, and increase overall diversification.
Our first acquisitions were announced subsequent to quarter end, and we have numerous additional properties, similar in many ways to what has been announced, that are in diligence currently.
Although forecasting future acquisition activity is always difficult, we feel like we have a robust pipeline of appropriate transactions.
And while our cost to capital has meaningfully improved, meaning that more acquisitions will be accretive to our short- and long-term cost to capital, we will remain disciplined as to price.
I would like to thank the team for their hard work and focus.
From a price perspective, the market for net lease restaurants has been relatively stable, and we believe we can continue to purchase assets at cap rates similar to what we have announced recently.
I would also like to mention that in the current net lease market we're seeing more transactions that, while priced sensibly on their face, have business terms and contractual legal provisions that are not ideal.
For example, a lack of a personal guarantee where it would normally be appropriate, or very weak properties being quoted in portfolio deals, or other permutations of quality degradation.
We tend not to participate in transactions such as these and I've been actively pushing back against aggressive terms in negotiations.
This is a trend I've confirmed with our competitors.
With that, let me turn back to <UNK> for a few comments on our Q2 financial results.
<UNK>.
Thank you, <UNK>.
I'm going to highlight a few items in our financial results for the quarter, which were straightforward.
Cash rental income on our existing rental portfolio of the initial 418 properties leased to Darden was $23.6 million after excluding non-cash straight-line rental adjustments.
A reminder that rents will increase annually by 1.5% for this set of 418 properties each November starting November 1 this year.
With respect to our cash general and administrative expenses, we continue to feel comfortable with approximately a $10 million target for 2016 after excluding non-cash stock compensation and acquisition-related costs that would need to be expensed.
Cash interest expense was unchanged in Q2 from Q1, given we are fully hedged on our $400 million term facility and we did not borrow on the revolver in the second quarter.
This will change in the third quarter and going forward as we start to use the revolver to fund acquisition activity in addition to retained cash from operations.
Finally, a reminder to everyone that we are not providing guidance on acquisition levels or FFO and AFFO for the year, which is highly dependent on acquisition levels.
However, we are reconfirming our expectation that the initial portfolio will produce results that lead to approximately $1.18 in AFFO per share for the year, which is consistent with our prior 8-K filings.
With that, let me turn it back to Andrea to open up the lines for Q&A.
<UNK>, it's really across the board.
We have transactions that we've bid on through brokers.
We've had some sole-source transactions.
It's really across the board.
Our current pipeline has a number of properties that weren't fully marketed, but that will change over time.
Certainly given our liquidity position and our speciality in acquiring restaurant assets, I think it's pretty clear if you're looking to sell a restaurant on a net lease basis to make sure that we see it.
We certainly have some properties that are casual dining or fast casual or in between those categorizations.
But, thus far, QSR has been a sweet spot.
And I think, from the way we look at acquisitions, one of the key components is the strategic value of the portfolio, and obviously QSRs are significantly diversifying as our current portfolio is all casual dining and fine dining.
I would say you're correct that we're looking at medium-sized transactions all the way down to the deal we announced yesterday, sub $5 million.
Significantly sub $5 million.
But we're looking at all sorts of different configurations of transactions.
Sure.
Thus far we've funded deals with cash on hand.
We have an undrawn revolver, as <UNK> mentioned.
We have been in discussions on OP unit-funded deals, so equity funded deals, in essence.
And then our view is that we are long form eligible starting in November to issue equity to make sure our leverage is moderate.
But for now, it's using cash on hand and OP units and then going forward using our undrawn revolver.
We are significantly under the leverage limits that we've talked about of six times.
We have had discussions and follow-up discussions, correct.
If you look nationally, <UNK>, it's roughly ---+ by value we estimate it ---+ it's roughly 50/50 split between QSR and the other categories, with some segments growing quite quickly, fast casual and others growing slowly ---+ family dining, for an example.
As of now we think we have a tremendous amount of capacity to buy QSRs before we would be concerned that we're hitting any internal limit.
The REIT rules are challenging when you buy assets and immediately sell them if it was a very de minimis part of a portfolio.
We try to be practical.
We're working on a transaction now with a half-dozen QSR assets.
One of them was a shared QSR and a gas station and we just refused to buy it.
We will receive a substitute pure QSR asset.
So, it would be a very high bar for us to consider that.
We would contemplate it.
It would be, again, a high bar.
The circumstance in which we are contemplating one now is in a geography that's hard to penetrate with a brand we really like.
And it's not ground-up development, it's reformatting some existing QSRs to another more profitable brand.
But again, high bar.
We have one competitor who is very skilled at that, but it takes a lot of internal resources and, frankly, they've been doing it for a long time.
We'd consider it but it's certainly not the primary focus.
We have different bars for different restaurant types and different tenants, and also reflective of our confidence in the operator to improve performance.
Many small-time franchisee operators are not terribly efficient.
So, a number of the transactions that we're working on now could thematically be described as partnering with larger best-in-class franchisee groups who are buying assets with significant planned improvements.
And we're working with them to understand what's a realistic pro forma operating level.
So, when we look at coverages and rent to sales, we really try to dig in and understand where the trend is going and not just what historical numbers or backward-looking numbers would say.
Great question.
Thus far it has skewed more to working on a basis of assets where there is not an offering memorandum and they have not been put on LoopNet, for example.
But quite often there is a broker involved in some capacity.
That percentage will change over time.
Whether a deal is sole sourced or marketed is, frankly, irrelevant once the deal is closed and the price is set.
We are opportunistic.
We look at all different avenues to get deal flow.
Let me try to untangle that question a bit because there's some interesting comments.
One, some of our peers do have a lower cost to capital.
It doesn't mean they hand that lower cost to capital out freely on acquisitions.
So, that's less of an issue than I think many people think.
The fact that we specialize in restaurants, I think, is critical in OP unit deals.
And I think it also gives a strong sense that we're likely to close.
If you look, the Pizza Hut acquisition is a prime example of that.
That was Four Corners purchasing real estate at the same time as a franchisee purchased the operating business.
They needed to know that we would be there.
And I think a lot of that confidence comes in our speciality, and, frankly, the fact that we can give senior management attention to the details of transactions.
I don't know what those are.
Operator, next question.
Thank you, everyone, for joining the call.
If there's any follow-up questions both <UNK> and I are available.
Thank you.
| 2016_FCPT |
2016 | STI | STI
#<UNK>, thank you.
We absolutely did.
As you know the market in January and February was decidedly weak and decidedly volatile, and we certainly felt that in the first two months of the quarter.
But as the market stabilized in March, our teammates absolutely came through.
And this has been a 10 year strategy for us, investment into our CIB business, and bringing our one team approach across all aspects of commercial, CRE, and corporate banking has really helped.
I think, <UNK>, we've grown market share over the last 10 years, certainly, over the last year also, and that growth in share really showed up this quarter.
I'd add to that what <UNK> said, it's really a continuation of the strategy.
We've had record quarters in the last two quarters, relative to CRE and commercial banking, and the activity that they're doing to contribute to that investment banking line.
And also the continuation of the strategy, year-over-year, our average fee, meaning we're sort of improving in relative importance.
So even if the units aren't the same, the value of those units are a lot higher.
It's up almost 35% year-over-year.
So the strategy also is manifesting itself, and moving down that left side, relative to importance to our clients.
Yes, I mean, relative to this quarter, or to this line item, investment banking specifically, I would expect this is a good jumping off point.
I would expect the second quarter to be better than the first quarter.
All that being said, these are choppy markets.
I mean, we ---+ this was a tale of ---+ the last third of the quarter was really good, and the first two-thirds of the quarter were not.
So we're heading in the quarter with some momentum.
I would expect it to be a little bit better.
But against the second quarter of last year, which was a record, so I'm not sure we'll be at that level.
But I think we can improve relative to this quarter, and have that be a good ---+ as you said launching pad for the year.
Good morning.
<UNK>, I'm not sure how much of that relates to hedges.
I'll tell you one of the reasons why oil field services for us may not be performing as badly as you would expect relative to others.
Part of our oil field services business includes clients who don't cover solely the energy industry.
They've got other businesses as part of their overall business.
And so, even though we categorize that for us as oil field services, it's perhaps a lower risk base, and a broader client base than you might see at other firms.
Yes, well, the overall loan growth in ---+ we think about this segment as sort of consumer direct, LightStream, GreenSky, credit card, other products that fit into our overall consumer direct strategy.
And loan growth there, in that business has been very substantial.
It's a 20% year-over-year loan growth, and we're very happy with that business.
We're very happy also, by the way with the credit quality that we're seeing in that business, and we're continue to expect to be able to meet more clients needs, and broaden out that business over time.
I don't have that number right off the top of my head, <UNK>.
We'll ask <UNK> to get back to you on the yields, in the components of that business.
Well, the way that the submission is structured, as you know there's a extremely adverse case, it's a hypothetical case that the FRB and regulators create, that required to submit against, that assumes basically, not just a recession, but a depression.
And assumes therefore, very high levels of provisioning and charge-offs.
Incorporated within that case, we incorporated a sensitivity on our energy portfolio, and so submitted that.
Our, whatever our result is, and our ability to grow our pay out ratio over time, already incorporates that number within it, <UNK>.
So if we receive a positive result in June, it will already had included that number with that.
Yes, <UNK>, I don't ---+ we sort of start as a framework.
We've been fiduciaries for over 100 years.
So our private wealth business has sort of been dominated by our fiduciary component of our business.
So it's a concept that we're certainly comfortable with.
We're obviously diving through the order, and spending some time.
Our team has been thinking about this for a long time, in terms of structural changes, and being ready.
So I think this is in the highly manageable category.
Will it have a marginal impact.
Maybe.
Will it also have some opportunity, relative to others.
So I don't think this is going to be a big story, in terms of change in direction of our private wealth business.
Well, <UNK>, we've talked with several of our owners, and the kind of feedback that we've received over time, is that they've liked our balanced approach.
They've liked the way we've been able to grow dividends and buyback over the course of several years.
And we would anticipate that, that type of a balanced approach is going to continue to be what our owners would like to see from us in the future.
Well, not a specific one, <UNK>.
A couple of points, and when you think about total pay out ratio, in the past SunTrust has been running between 60% and 80%.
We're glad that we've moved up within that band last year, and we hope to continue progress this year.
And specifically to dividends, you're aware of the regulatory guidance that anything over 30% will require ---+ or will receive increased scrutiny.
I'll tell you, that I don't know exactly what that means, but I know that I don't want it.
So you can probably anticipate that we'll keep that in mind.
The consumer direct.
Yes, the credit metrics overall ---+ well, I think probably the biggest point to make there, is when you think about charge-offs.
Charge-offs for our LightStream and GreenSky businesses combined in the first quarter of this year were less than $2 million.
So if you think about $3.5 billion in portfolio, and less than $2 million in actual charge-offs, that's a pretty terrific set of credit metrics.
And <UNK>, it's also, as you know this is prime, super prime portfolio focus.
So the average FICO scores in LightStream and GreenSky are 760, 750-plus.
So this is sort of a different strategy, related to this portfolio for us.
Well, <UNK>, as we think about expenses you know what we do, is we focus on the efficiency ratio, rather than sort of individual expense line items.
And our philosophy is to continue to try to improve operating leverage, and improve the efficiency ratio overall.
Having said that, if I think about the expense line for this year, one of the things that we've said early this year, is we expect our quarterly expenses to average between $1.3 [billion] and $1.35 [billion], with that number being contingent on revenue, obviously as we focus on the efficiency ratio.
I don't think that there's much of a change to that.
With stable revenues, I would be thinking ---+ I would continue to think about expenses averaging ---+ and I say that carefully ---+ averaging between $1.3 [billion] and $1.35 [billion].
We might get quarters higher or quarters lower.
But that kind of expense base for us, I think is a fair number for you to anticipate and model.
Well, if you look at this quarter, <UNK>, our provisioning for energy was about $30 million, and about half of that was a charge-off, and about half of that was a reserve build, to give you a sense of sizing, that's how to look at Q1.
And if I think about going forward from here though, the rest of the year, our overall energy reserves, I think can play out a couple of different ways, assuming there's no oil price shock, right.
Assuming that energy prices are relatively stable to where they are now, I think a couple things can happen.
One our energy reserves can be relatively stable.
As we have charge-offs, we continue to provide for those and maintain our reserve coverage about where it is.
Or two, energy reserves could decline, as we work through certain credits, and as the formation of problem credits from here slows.
So I think, excluding a big decline in energy prices, I can see either of those scenarios from here.
| 2016_STI |
2018 | WTR | WTR
#All right.
Thanks, Brain, and thank you all for joining us this morning.
Let's run down the plan for this morning's call.
First, I guess, as they say, the big story.
Dave <UNK>, our CFO, will be retiring after 32 years at Aqua.
And so I'll give you a brief rundown on the successor plan and the transitions that we plan.
Then I'll give you some highlights for the quarter.
Dave will run down the financial results for the quarter and Dan will bring you up to speed on the rate activity and acquisitions.
We'll wrap up by reviewing our guidance, and then we'll take some questions.
So last week, we announced the planned retirement of our longtime friend and executive leadership team member, Dave <UNK>, who's been our Executive Vice President and Chief Financial Officer now for many years.
Dave will help lead us through the Pennsylvania rate case and then retire in October of this year.
It's interesting because Dave started in 1986, and he rose to Controller of Pennsylvania, and then Vice President of Rates ---+ President of Rates and Regulatory for Aqua America, finally, the CFO, and then Executive Vice President in 2012.
So Dave started doing rate cases and his last duty will be finishing the Pennsylvania rate case as CFO.
So over the last 32 years, he's really helped shape the Aqua that we all know today.
He helped propel our regional Pennsylvania water utility into the one that ---+ one of the largest regulatory utilities in the country.
And throughout his career, Dave's been committed to not only growing our customer base but investing in infrastructure and then working with regulators to make sure that we get fair recovery of those investments.
And as you all know, Dave's pragmatic approach to corporate finance has helped us successfully navigate the company's growth from a small company to one that's got now a market cap of in the range of $16 billion ---+ I'm sorry, $6 billion.
He has accomplished his work and developed a really strong team around him, and that team is really going to help us with the transition over the next year here or 6 months, and really make it seamless.
During his decades of service, Dave's leadership has really made an indelible mark on the company.
So Aqua's largest and most impactful acquisitions were under Dave's leadership, and the Aqua family is grateful for his unwavering commitment to the company.
And we wish him the best as he enters a new chapter of his life.
Dave will be on the call ---+ on the next call, of course, and then we'll work closely with Dan.
And then Dan will fully take over the call when November comes around.
Now Dave's strong legacy will be carried on by Dan <UNK>, and I think you all know Dan at this point.
Dan served as the Executive Vice President of Strategy and Corporate Development since 2015, and we named Dan just recently now, the deputy CFO, while he works with Dave in the coming months toward Dave's retirement in October.
By way of background, Dan's got his doctorate in engineering from Purdue University and has worked in consulting, banking and now most recently, as a utility executive here at Aqua.
Before he joined us at Aqua, Dan spent 8 years at JP Morgan in the infrastructure investment group and he's been highly effective at leading our growth strategy here the last 3 years, a period where the company has done more municipal acquisitions in those 3 years than the previous 8 years combined.
Depth of knowledge in finance, understanding the business and really, his general management capabilities will serve both Dan and the company well in his new role.
We are very excited about Dan taking over this fall.
Now taking over for Dan will be Matt Rhodes.
Matthew Rhodes comes from Goldman Sachs.
He was the Managing Director in investment bank ---+ in the Investment Banking Division and Matt was at Goldman for 11 years and had lead coverage for ---+ lead coverage responsibility for over 25 utility clients.
So well-known in the utility space, and Matt's going to be a great addition to the team.
We look forward to having Matt join us in the coming weeks.
And finally, we also named a new Senior Vice President and Chief Human Resources Officer, Christina Kelly.
Christina most recently worked as Vice President of HR at AmerisourceBergen, and she brings with her a great amount of experience, 14 years, leading Human Resource departments in organizations and executing on business strategies for corporate organizations.
So very excited about all these new players joining the company.
And the combination of strong new players on our management team, along with those who've been with the company for many years, continues to make our workplace really dynamic, fresh and with these fresh ideas from our new executives are grounded with deep knowledge of the business from our longer-term executives, really makes for a very, very strong management team.
Such a great environment, and we're looking forward to seeing all these new executives join the team.
So with that background, let's talk a little bit about the quarter.
We pushed what I call solid growth in revenue and earnings per share, both up about 3.5% from the first quarter of last year.
We closed 3 acquisitions, one of them in Pennsylvania, that was a water acquisition, and then a water and a wastewater system in Ohio.
Overall, combining these new acquisitions and organic growth, we added about 2,259 customers during the first quarter, and we're still targeting between 2% and 3% total customer growth for the year.
Now Dave, you want to take us through the quarterly financials.
Sure.
Thanks, Chris.
Thanks for the kind words.
Much appreciated.
I have to admit, I do look forward to working with Dan closely over the next several months as we plan our transition.
I'm really pleased to be able to pass the torch to a guy like Dan, experienced leadership and one of the smartest guys I know.
So ---+ and that's not in the script.
So it's real.
But today, I'll review the financial results for the quarter and discuss some of the driving factors that impacted our performance.
So let's start right off with the numbers.
We reported revenues of $194.3 million for the quarter, up 3.5% compared to the $187 million in the first quarter of 2017.
Our O&M expenses were $73.9 million for the first quarter of '18 compared to $67.9 million in the same period of '17.
I'll provide some color on that in a moment.
Now we reported net income of $50.8 million compared to $49.1 million in the first quarter of '17, and earnings per share followed that at $0.29 per share, up from the $0.28 per share last year, a 3.6% increase.
Let's take a look at operating revenue.
Look at the different components of the 3.5% revenue increase.
First, if we dissect the rates and surcharge category, we'll find infrastructure surcharges such as DISC and other rate increases contributed $5.1 million, and they were offset by a $2.5 million revenue reserve related to savings from the Tax Cuts and Jobs Act, which is expected to be returned to utility customers as directed by each of the local public utility commissions.
Higher consumption was also a big driver in the increase in operating revenues at $2.7 million.
And these items, along with customer growth, a decline in market-based revenue and other items brought the total revenue for the quarter to about $194 million.
Looking at operating and maintenance expenses.
O&M expenses were $73.9 million for the first quarter of '18 compared to $67.9 million in the first quarter of '17.
As we said last quarter, we had an unusually low O&M expense in 2017 due to several onetime events, including a milder winter, and so we expected O&M to be higher this quarter.
The increase included a number of things.
First, employee costs.
These include pension cost, overtime related to a very severe winter weather, and salary increases.
Second, maintenance and regulatory adjustments at nearly $2 million.
And third, a lower production cost of about $1.1 million and reduced market-based expenses of about $1.7 million were offsetting the increase in O&M.
On a normalized basis, the O&M expense growth would have been about 1/3 of the reported increase and more in line with our recent trends.
So looking at earnings per share.
We started with the $0.28 we reported this time last year, and increases in rates, consumption and market-based activities, coupled with growth in other items increased our earnings per share by about $0.05.
The increased expenses and reduced tax repair benefit decreased EPS by $0.04.
So as a result, we reported earnings of $0.29 per share for the quarter, up $0.01 from last year.
So next, we'll discuss our rate activity.
And as Chris mentioned, the Pennsylvania rate case was my first assignment in 1986, and now will be one of my last assignments, will be the oversight of that case as that moves forward into the end of the year.
So with that, I'll turn it over to Dan to discuss our rate activity and acquisition activity.
Dan.
Great.
Thanks, Dave, and congratulations, again, on your announced retirement.
So good morning, everyone.
Thus far, in 2018, we completed rate cases or surcharges in 7 of our 8 states, resulting in $23.6 million in additional annualized revenue.
We also have rate cases or surcharges pending in Indiana, North Carolina, Ohio and Virginia, where we're requesting an additional $8.6 million in revenue.
Other rate activity includes a reduction in revenue on an annualized basis of $7.1 million, the income tax savings expected to be refunded to customers due to the Tax Cuts and Jobs Act.
Lastly, as Dave mentioned, we plan to file for rate relief in Pennsylvania this year.
As you may recall, we've not raised rates in Pennsylvania since the conclusion of our 2011 rate case.
We expect to file a full rate case in Pennsylvania during the third quarter with rates effective mid-2019.
Additional rate information can be found in the appendix of the presentation.
As Chris mentioned earlier, we're excited about the strong pipeline of acquisitions that we expect to close this year, and you can see those 6 systems listed here, totaling approximately 16,000 new customers.
We're close to announcing a few additional municipal transactions with over 10,000 total connections, so anticipate having more to share on that soon.
Finally, in the first quarter, we added 3 smaller systems, 2 in Ohio and 1 in Pennsylvania.
With that, I'll turn the mic back over to Chris.
Thanks, Dan.
So as we noted in last night's press release, we expect our full year earnings per diluted share to be in the range of $1.37 to $1.42.
We expect to invest nearly $0.5 billion in infrastructure in '18, and this is a record amount.
We were near to that last year, but we'll top it even again this year, and we'll spend right around $1.4 billion of CapEx over the next 3 years, that's through 2020.
I think it's important always to note before you that this CapEx doesn't include any investment that we would make in acquisitions, either the purchase of or the repairs that would follow on.
And finally, we expect rate base to grow in the range of 7%.
Now year-over-year, we are expecting total customer growth to be in the 2% to 3% range.
And by the end of this year, we'll cross over a big mark, 1 million customers.
And so with that, before we end the call, I'll open it up for questions.
Any questions you might have at this point.
Yes.
Thanks for the question, <UNK>.
It is an interesting time to be in the utility business.
The activity we're watching in Connecticut and in California, we haven't seen before, right, at least to this extent, where proxies are flying and statements are being made.
So it's a very interesting time to observe some of the activity.
You know our history.
We've always been disciplined buyers, and that continues.
And I think when we consider what's happening, let's start in California, and as we watch what CalWater is offering for San Jose, there has to be considerable synergy involved, and we know those 2 headquarters are 1.5 miles apart.
And so I think CalWater can offer a number that probably would be difficult for others to touch just given the local synergies that can be applied.
And I think as you think about Connecticut, a very similar dynamic exists where Eversource is locally there, bought Aquarion, and not considering Connecticut water again, on relatively close quarters.
They are in the same state and probably could apply synergies that most others couldn't.
But when you look at the multiples being offered, they certainly are, you could say, aggressive.
And I think, again, as you look at the broader utility market, <UNK>, as you mentioned, I think you'll see some high multiples being paid, more recent deal in the Midwest in that category.
So listen, a lot happening.
I don't want to say that we aren't watching closely and considering options because we are, but I think we will remain as we always have been, disciplined buyers.
Yes.
It's a good question.
The field is certainly getting smaller.
And so as you look at the possibilities of those that might consider an exit, it becomes a very small field.
And as you know, <UNK>, from your participation in a lot of the meetings that we all go to, it's just a small group.
We all know each other pretty well.
So I think it may cause everyone to kind of think about options, but that's about all I can say about that.
Let me kick it off, and then I'll kick it over to Dave and Dan to have other comments.
But we have a new set of commissioners since we last filed.
We have some new staff people, and so they've got to familiarize themselves with our issues.
I will say ---+ and Pennsylvania has a very excellent reputation, as we all know, from the regulatory standpoint.
I wouldn't expect anything less than professionalism that we've always experienced here in Pennsylvania.
I do believe ---+ and we have regular contact with both staff and commissioners.
I do believe that they wholly understand the tax repair that we applied and have used to keep ---+ to stay out of rates, continue to spend capital over the last 7 years.
So ---+ but there will be clearly some good questions asked on both sides about the path forward.
I don't have what I'll call acute issues, <UNK>, about the case, just the normal concerns that any CEO management team would have as you enter into a major case.
But I believe all of our capital has been spent extremely prudently.
We continue to have a tight rein on expenses.
And so I would expect this to be a normal rate case.
And Dave, you're the expert.
What do you think.
No, I think Chris is spot on.
The interesting component of the case will be some of the newer issues we'll deal with.
So we have a new test year format, for example, right.
We ---+ when I started in '86, we were just fresh with the new future test year and now, we're moving to what's called a fully projected future test year.
So instead of looking 12 months out at the time of the rate increase, you're actually looking 24 months out.
And so that gives you an opportunity to be more current with your costs and probably stay out longer than was available in the past.
So good things.
Certainly, the ---+ our first case post-repair adoption, so that will, no doubt, be an issue.
We don't see any concerns about it, but it will be an important component of the rate case and we could be adjusting, for example, how we deal with the remaining catch-up deduction that's been amortized, so far, component each year.
And the last kind of unique thing I'll just add.
We have over 20 acquisitions that we've done over the years that will be, for the first time, incorporated into a Pennsylvania rate case.
So we're going to do some new things in that regard.
We're going to create some rate divisions and group our customers in various divisions around the state into zones according to their rate and try to keep like rates together and go from 20-some zones today to hopefully, 5 or 6 post rate case.
So there's some of the things we're talking about.
But again, I do agree with Chris.
The fundamentals are straightforward.
We have rate base, we have expenses, we have a good feel for how these things are negotiated and litigated in Pennsylvania and very confident with where we're going with the case.
Thanks, Rich.
I appreciate it.
Sure, Rich.
First, Rick Fox has been a great champion for safety across our company and our employees are very, very engaged in safety at the end.
I think last year ---+ I don't know if Rick reported this at the conference or not, but last year, we posted the safest year on record at Aqua America.
So something that not only management but the entire company is very, very proud of.
And when we think about, it's really tactics, training, and technology that you'd apply to make the company a safer place, and much of that is based on employee knowledge of the risks, and then determining what those mitigating factors are, and then putting them in place.
I don't know that I can articulate on the phone every technology that we use, but suffice it to say we've been applying things like GPS to look at speeds, right.
We like our vehicles to drive at what I would call, at least, below the speed limit.
And so we look at the top 10 speeders in our company vehicles on a monthly basis, and we don't want to report them, but then we discuss it with the employees.
That alone, Rich, can have a big effect on the number of car accidents that you have.
Because when you think about the mileage that we drive in any given year, Aqua America company vehicles drive 17 million miles a year.
And so when you just extrapolate that on a per vehicle, think about your own vehicle driving 12,000, 15,000 miles a year, that's a long time without an accident.
So we've made improvements like that.
We've applied safety training across the entire company, and we've had more safety training hours last year than ever before.
And by the way, we asked everybody in the company, including Dan and Dave who are sitting here with me, to take the same training.
Rick Fox, of the executive team.
So we've tried to create, and we continue.
It's a continuous effort to try to create a safety culture.
And I think we've been very successful in doing that.
But Rich, for more detail, I'd be happy to connect you and Rick and make sure that Rick gives you the detail ---+ more detail on specific technologies that you might be interested in.
Well, I'll tell you, they've been very supportive.
Safety is something that I can't recall, Dave, I don't know if you can, ever getting any pushback on.
I would say, when you think about safety, Rich, cybersecurity, physical security, these are things that commissions are typically very engaged with us on and not only supportive but encouraging us to make the spend.
We put things like tablets.
All of our vehicles now have iPads or tablets, so that people have knowledge of, for example, where utility lines are on the ---+ when they come to a scene.
They have information at their fingertips about what's happening at a well house or in a system.
I think that's very powerful when you think about implication of the safety.
So ---+ but I'd be happy to connect you with Rick and let him give you a lot more detail on the safety functionality and technology that we use.
But I'll leave it with ---+ no pushback from the commissions on safety.
No closing remarks, but Dave's phone line is open for all those who want to congratulate him.
I thank you for joining us today, and as always, if there's follow-up questions, we're happy to answer them.
Have a great day.
| 2018_WTR |
2016 | M | M
#It's hard to replicate Herald Square in other stores.
You're right; it looks fabulous and doing very well.
But we are taking ideas from there and putting them in other markets.
And part of it also is trying to mix experiences in with merchandise.
So I think we learn from Herald Square, although you really can't replicate it, per se.
Well, I think what you've heard us talk about for a long time is trying to have more exclusive products within our stores, whether it be brands completely or private brands, or exclusive products from some of the key vendors.
And that continues to be the case.
We also hope that our organization continues to be the best at curating these brands, and continue to give the best assortments that we can.
We don't give share counts.
You'll have to sort through that.
As we have stated, last fall and again now, being investment-grade is important to the Company.
And as I mentioned, our leverage ratios have fallen above ---+ maybe the word risen above ---+ our target range, and that we are expecting, with EBITDA increases, to get back into our target leverage ratio range.
Well, if you were willing to take on a lot more leverage, obviously that would change the dynamic.
So there is some limitation because of our belief that being a retailer, it is important to be investment-grade.
Thank you all for your interest, and obviously follow up with Matt or me if you have any further questions that didn't get answered this morning.
And thanks so much.
Take care.
| 2016_M |
2018 | HNI | HNI
#Good morning, everyone.
I'll share a brief assessment of the fourth quarter, and then turn the call over to <UNK> <UNK>, who will review some of the specific financial details.
And then I'll come back on and share some thoughts on our outlook.
And then <UNK> and I will open it up for questions.
So to start, our fourth quarter played out as expected.
We stabilized our supplies-driven business and made strong progress working through our operational transformations.
We delivered solid organic sales growth and are excited about our market momentum.
I'd like to take a moment to reflect on the year.
2017 was a year of transition.
We confronted multiple challenges, some planned, some not.
We dealt with rapid and significant changes in our markets.
We took on large-scale transformations involving our operational network, fulfillment models, business portfolio and our enterprise system.
In short, we responded to our challenges, made investments and adjust our business to better deliver long-term profitable growth.
I feel good about where we're headed.
We're nearing the end of our transitions.
The investments we made put us in a position to drive new levels of productivity and take advantage of improving market demand.
Our most significant investment has been our Business System Transformation initiative, we call it BST.
I'm pleased to report we have successfully switched over to our new ERP platform earlier this month.
This new platform is a key enabler for long-term value creation.
And I'd specifically like to take a moment to thank the numerous numbers who have been involved in this project for their significant effort, dedication and success in helping us achieve this key milestone.
Our supplies-driven business is still in transition, but stabilizing.
We have a clear vision for how this business move forward and we're building out strategic capabilities.
This includes a focused effort around dramatically lowering the effort required to buy office furniture and making the whole process more convenient and easier for sellers and customers.
During the quarter, we made the difficult decision to close our Paoli business.
This decision was part of our continued efforts to drive portfolio efficiency and simplification.
We will continue to serve these market requirements through product offerings from the broader family of HNI brands.
I'm excited about our future.
Our office furniture businesses have momentum in the market and delivered 8% organic sales growth in the second half of the year.
Our hearth business continues to perform very well, with solid growth and record profitability.
I'll now turn the call over to <UNK> <UNK>, our Chief Financial Officer, to review some financial details for the fourth quarter, and then I'll return to discuss our views on 2018.
<UNK>.
Thanks, Stan.
For the fourth quarter, consolidated organic net sales grew 3.7% versus the prior year.
When including the impact of acquisitions and divestitures, sales increased 0.5%.
In the office furniture segment, sales increased 3.2% organically or minus 1% in total.
Within the office furniture segment, organic sales in our supplies-driven business were flat or minus 4%, including the impacts of divestitures.
Sales in our contract and international businesses increased 7% organically or plus 2% in total.
In the hearth segment, sales increased 5.1%; new construction sales increased 6%; sales of retail products, including wood, gas and pellet products, increased 4%.
Non-GAAP net income per diluted share was $0.47 compared to $0.82 in the fourth quarter of 2016.
As expected, the earnings decline was primarily due to lower profitability in our supplies-driven business, which mainly resulted from increased strategic investments, higher input costs and unfavorable business and product mix.
Okay, I'd like to take a moment to provide some color around some several nonrecurring items we recorded in the fourth quarter.
You can follow this in our GAAP to non-GAAP reconciliation contained in our press release and also in the earnings presentation posted on our website.
The biggest of these items was the impact of the recent tax legislation, which drove a positive $44.8 million revaluation of our deferred tax liabilities.
We had $20.9 million of impairment charges and a $4.8 million loss on disposal of assets, both of which were primarily driven by our decision to close the Paoli brand.
We incurred restructuring and transaction cost of $9.8 million related to the final stages of our structural cost-reduction initiatives.
And we recorded a $10.3 million valuation allowance on a long-term note receivable.
The net impact of these items was a $0.30 benefits to earnings per share which we excluded from our fourth quarter and full year non-GAAP results.
Stan.
So 2018 will be a return to profitable growth.
We will conclude our operational transitions and deliver record benefits from core productivity improvements and structural cost reductions.
Our profitability will improve over the course of the year.
The supplies-driven market will continue to be dynamic, we're seeing a stabilization in the wholesale channel.
Overall, we're expecting growth from our supplies-driven business, both in top line and profit.
We continue to hold a unique competitive advantage which no other manufacturer can match.
Our brands, products, fulfillment capabilities provide unparalleled value to our resellers and to our customers.
Our contract-driven businesses have strong momentum which we expect to carry through 2018.
We're winning across multiple fronts, strengthening distribution, expanding our product offering and deepening our relationships with key influencers.
The hearth business continues to deliver record results.
We remain optimistic about growth in the hearth business as single-family new home construction remains strong and the remodel/retrofit market expands.
We remain a strong company with leading market positions and the financial capacity to aggressively pursue profitable growth for our shareholders.
I anticipate 2018 to be a good year for HNI.
With that, I'll have <UNK> provide some details on our outlook.
Okay.
Let's start with the first quarter.
We feel good about 2018, but the first quarter profit will be a low point for the year.
We are projecting strong organic growth of 5% to 8%, but this will be more than offset by several factors.
First, we'll have $9 million of incremental costs related to our BST project in the form of amortization, support and switchover costs.
Second, we're seeing a continuation of the unfavorable business mix we experienced over the second half of 2017.
When combined with inflation, we expect a negative $10 million to $12 million price/cost gap.
Third, expect to see higher SG&A expenses of $6 million to $8 million, primarily driven by investments, including our direct fulfillment initiative.
Additionally, the benefits from our transformations will not yet be fully realized.
We expect these trends to reverse as we move through the year.
We expect consolidated first quarter organic sales to be up 5% to 8% or up 2% to 5% when including the effects of divestitures and the closure of the Paoli brand.
Office furniture sales are expected to be up 6% to 9% (Sic-see presentation slide - 6% to 10%) organically or up 2% to 6% in total.
Sales in our supplies-driven business are projected to be up 7% to 10%.
We're forecasting sales in our contract office furniture businesses to be up 7% to 10% organically or down 2% to up 1% in total.
We expect hearth sales to be up 1% to 4%.
Within the hearth segment, new construction sales are forecasted to be up 2% to 5%.
We are projecting retail hearth sales to be flat to up 3%.
Non-GAAP gross profit margin is expected to be similar to our fourth quarter result of 36.1% of net sales.
Non-GAAP SG&A, which includes freight and distribution expense, is expected to be just below our fourth quarter level and be approximately $174 million.
The impacts of the recently enacted tax legislation are included in our estimate.
We expect our tax rate will be approximately 19% to 20% in the first quarter and 23.5% for the full year.
Our estimate of non-GAAP earnings per diluted share for the first quarter is in the range of $0.01 to $0.06.
So now let's shift gears and talk about the full year.
We expect to see improved earnings.
We estimate non-GAAP earnings per diluted share will be in the range of $2.40 to $2.80.
This is based on a 5% to 8% consolidated organic sales growth or 1% to 4% in total.
We're expecting our office furniture businesses to deliver organic growth of 4% to 8%, with our hearth business up 3% to 6%.
The impacts from the recently enacted tax legislation are included in our estimate.
For the full year, the impact of the tax legislation will reduce our estimated effective tax rate to 23.5%.
We expect full year free cash flow to be in the range of $100 million to $120 million, which includes estimated capital expenditures of $75 million to $85 million.
Stan.
Okay.
Thank you, <UNK>.
With those comments complete, we'll now open it up to questions.
Matt, for the full year 2018, we're expecting to reach record-level gross profit margins in the 39% kind of range.
And that's really driven by 2 major factors: The growth that we're expecting, the leverage from that; as well as structural costs and net productivity improvements.
We are expecting SG&A to the up a little bit over prior year.
Including freight and distribution expenses, it should run in the kind of 32% of net sales range.
We're performing well there, Matt.
So you may be right.
But there's all sorts of ---+ it's location by ---+ or regional sort of differences.
There's dealer inventory, et cetera.
So our best guess right now is flat.
But we like cold weather a lot.
We like it to get cold, warm, cold because it takes 2 events to really rock the consumer off their procrastination to get them moving on buying a hearth appliance.
So you could be right.
Our best guess at this point is flat.
Yes.
I think, Matt, we're really talking about new product introductions.
And you said it, the office is changing, moving from traditional products to more open, collaborative sort of spaces.
Casual soft seating is a major initiative for us.
We continue to expand our walls business, moving from traditional panel to more desking-type solutions, sit-stand solutions, more seating solutions at different value profiles, sort for from the entry-level value side in the supplies all the way up to the high end.
And so it's ---+ as you know, Matt, we're a pretty broad, pretty deep company.
And so you're seeing this virtually in all of the companies, all of the categories, all of the price points, just adapting and shifting to this new office.
Yes, Matt.
I think the first quarter is a period of investment there.
I think you're referring to the direct fulfillment.
And yes, there's still investment going on there in the first quarter, and we expect that to moderate as we move through the year as well as see some ramp up in volume.
But the volume is not something we have a clear view of right now that we're willing to share.
Yes.
Basically.
We see this as a growing part of the business.
We are ---+ just overall, the market is looking for better value, performance for price, looking for more convenience, looking for an easier selling process.
We're uniquely positioned, we've invested aggressively.
We have a long legacy of serving that market.
And as we have dealt with the wholesale channel shift, I think we've put in place more direct fulfillment models for our dealers and the large national supply dealers, and I think that will serve us well.
As that market continues to grow, I think we're in the unique competitive advantage, a unique position.
We don't really have anything to call out specifically there, <UNK>.
I think our ---+ the sales trends are solid for our legacy products.
Obviously, we're introducing new categories of products and expanding where we need to do.
But I don't think there's anything specific or unique to call out.
Well, the answer, Greg, is we ---+ like all smart businesspeople, we try to look at the portfolio.
And over the years, you make choices around brands and channels and portfolios and product categories.
And Paoli's been a great company for us.
We just felt like due to the changing office, due to sort of where they're positioned, where some of our other brands and product category's position, it was just best to go ahead and take that business another direction, to exit that business.
We have that coverage through other brands and through other channels.
And so we're always looking at our portfolio and thinking about where do we add.
Where do we delete.
Similar to you and your investment portfolio, we're always thinking about what's the future.
Is there a future here.
Is it generating return or not.
And then we move accordingly.
So we've gone through a period of cleaning up our corporate portfolio.
I think we're in really, really good shape right now for the near term, for the foreseeable future, around how we're positioned and what's in the portfolio and what's not, to answer you more specifically.
Yes, sure.
Greg.
The closure of the Paoli brand will add approximately $8 million of profit to 2018.
Yes.
I think, Greg, that's what we meant included in those comments about largely completing those transitions and the business stabilizing.
So the answer is yes.
We do feel good that we have a handle on those.
Now it's going to take a while to get through.
I think the 2018 results reflect that.
First quarter is going to be a low point, and then we're indicating that it's going to improve as we go through the year.
As <UNK> indicated, we should be at or near record gross profit levels, and that includes getting a handle on resolving these transition issues.
Yes.
<UNK>, our gross profit improvement is really driven by the volume leverage that we're expecting in the organic growth, and then that significant productivity and structural cost reduction that we're expecting in 2018.
So the business mix shift is not a major story there.
As it relates to inflation, we do expect to see some inflation, kind of maybe in the 3% range.
And we expect to offset that with price realization.
So we expect to have a minimal price/cost gap.
Well, I think as we indicated, we've reported some solid numbers in both segments of our office furniture business.
So we see supplies stabilizing.
We are excited about what we're seeing specifically in the dealer channel.
And I would say our wholesale sort of business has stabilized, and so we see positive trends there.
I think that's underlying sort of an overall economic ---+ more positive economic climate uptick.
And then second, we finished the year, the second half of 2017, very strong in the contract segment.
We continue ---+ we expect that momentum to continue, both large projects, the small projects and day-to-day business.
And so it's just kind of across the board, I would say.
And I think the ---+ we had positive momentum rolling into '18.
I think the more positive economic environment helps that.
Let's just hope that keeps happening.
All right.
Thank you so much for joining the call.
We'll talk to you soon.
| 2018_HNI |
2016 | AHL | AHL
#Thank you.
Good morning, everyone.
On today's call, we have Chris O'Kane, Chief Executive Officer and <UNK> <UNK>, Chief Financial Officer.
Last night, we issued our press release announcing Aspen's financial results for first quarter of 2016.
This press release as well as corresponding supplementary financial information and slide presentation can be found on our website at www.aspen.co. Today's presentation contains, and Aspen may make from time to time, written or oral forward-looking statements within the meaning under and pursuant to the Safe Harbor Provisions of US Federal Securities laws. All forward-looking statements will have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the risk factor section in Aspen's annual report on Form 10-K filed with the SEC and posted on our website. Today's presentation also contains non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For a detailed disclosure on non-GAAP financials please refer to the supplementary financial data and our earnings release posted on the Aspen website. With that, I'll turn the call over to Chris O'Kane.
Thanks, <UNK>.
Good morning, everyone.
Aspen has started the year well.
Our results in the first quarter again demonstrate the benefits of our diversified platforms, as both the insurance and the reinsurance businesses delivered solid underwriting performance.
We achieved annualized operating ROE of 11.2% and 4.8% growth in diluted book value per share.
Aspen Insurance had a good quarter with gross written premiums up 5.5%, solid underwriting income, a combined ratio of 92% and an accident year ex-cat loss ratio of 57%.
The result was achieved in a rate environment that continues to pose a number of challenges, although the market ---+ although the impact from rates differs by land and geography.
Overall rates in the US were down by 1%, while in international they were down 2%.
However, within each of these geographies some areas were under continued pressures, while others were steady.
International insurance lines, and more specifically those in the Lloyd's markets are generally experience more variation in pricing.
Professional and technology risk saw a 3% increase, while most lines were modestly negative.
Lines such as crisis management and energy physical damage continued to be among the worst affected with rates down 14% and 13% respectively.
By contrast the US markets generally remained more disciplined with the majority of our business lines seeing rates flat or with small increases.
However, there are areas in US such as property with rates down 7% that continue to face tough conditions.
In an environment like this, we remain selective and focus on the areas that we believe are the strongest and offer the opportunity for the most consistent returns.
Our growth in insurance this quarter was well spread across our businesses with the exception of marine and energy where there were limited opportunities.
I'm pleased to note that we're seeing positive results from targeted areas of growth.
For example, we have reinvigorated our accident and health business and the results were seen in the premium growth this quarter.
While the initial focus was on the US and UK, it now encompasses businesses in Canada, Australia, South Africa and Singapore and was our first global business line launched early last year.
Comprising mostly accident business, we're very pleased with the progress that A&H has been making so far.
Our management liability business also saw very good results from transactions insurance such as reps and warranties.
In addition, P&C growth this quarter includes contributions from our European property joint venture which we launched last year with a focus on managing the complex property and business interruption risks of European-based global corporate clients.
Turning now to Aspen RE, Aspen RE delivered another very good quarter, including successful renewals in January and of quarter ---+ and after the quarter-end in April.
We continue to demonstrate the strength of our relationships with clients and our abilities to find opportunities even in this challenging environment.
We grew GWP by 7% compared to first quarter last year with rates down just 4% overall.
Rates across all reinsurance were flat or down.
Casualty was flat.
Specialty was down 4%.
Unsurprisingly, property cat rates were down 6%.
We continued the managed reduction of our property cat exposure and leveraged third-party capital through Aspen capital markets further reducing these exposures.
Much of the growth in the quarter came from specialty reinsurance, which included for the first time AgriLogic, our new crop insurance business.
We are delighted to work with our new colleagues and are very pleased with the progress that we've been making in integrating this business.
AgriLogic is an important diversifying acquisition for us.
We remain excited by the long-term potential of the combined businesses.
Both our reinsurance and insurance businesses are operating in an environment that provides plenty of competition, but also plenty of opportunities.
We are seeing business and talented people being shaken free by changes in the industry and while we have benefited from this, we're being very selective in how we add business and people.
Now, I would like to turn it over to <UNK> for some comments on the financial results.
Then I will make some further remarks.
<UNK>.
Thank you, Chris.
Good morning, everybody.
In the first quarter of 2016, we achieved operating earnings per diluted share of $1.29 and an annualized operating return on equity of 11.2%.
Diluted book value per share was $48.22 at March 31, 2016, up 4.8% from December 31, 2015.
The movement reflects the positive impact from earnings and the mark-to-market gains in both our fixed income and equity portfolios.
Gross written premiums to the group were $976 million, an increase of 6% compared with the first quarter last year.
Our underwriting income was $56 million.
The combined ratio of 92% included 3 percentage points of net cat losses in the first quarter.
The accident year ex-cat loss ratio was 54.4%, largely in line with a year ago.
Total reserve releases across the Company were $22 million.
All three combined ratio points in the first quarter reflecting favorable prior-year development in both our reinsurance and insurance segments.
So let's look at the reinsurance results first.
The year-over-year comparisons in the segment were impacted by negative foreign currency movements, which impacted our top line mostly and by the inclusion of AgriLogic in our results for the first time.
With regards to FX, this has been a more material item for reinsurance as we brought a higher portion of our European and other non-US dollar denominated business during the first quarter.
With the US dollar continuing to strengthen particularly against euro and a number of other currencies incurring the Aussie dollar and the Canadian dollar as well as Sterling, this has negatively impacted gross written premium growth and net earned premiums in reinsurance in the quarter.
As Chris said, we made good progress integrating our crop business.
We wrote $45 million of premium, of which we have earned very little and anticipate the bulk of this growth written premium to be recorded across the second and third quarters, while we largely earn that premium across the second half of the year.
Relative to other lines in Aspen RE, our businesses like AgriLogic typically have higher loss ratios, but lower expense ratios.
Now with that background, reinsurance gross written premiums increased 7% to $518 million in the first quarter.
Adjusting for the impact of AgriLogic and foreign exchange, reinsurance gross written premium was up 4%.
The increase reflected continued growth in the existing specialty and casualty sub-segments.
Offsetting this was a decline in property cat reinsurance where we have reduced our exposures and chosen to see a greater portion of this business through Aspen capital markets compared to last year.
We've also taken advantage of some certain favorable pricing in the market to purchase some additional retro cover.
Aspen RE delivered underwriting income of $42 million and a combined ratio of 85% in the first quarter.
There were $11 million, or just under 4 percentage points of net cat losses due to weather-related events in the US and the earthquake in Taiwan.
This compares to 3 percentage points from net cat losses in the prior year.
We had $18 million, or 6.5 percentage points of favorable loss reserve development in reinsurance in the quarter, with releases predominantly in our short-tail lines.
This compares to reserve releases of $13 million in the first quarter last year.
The accident year ex-cat loss ratio was 50.7% compared to 44.5% in the year-ago period.
Approximately half of the increase reflected the inclusion of AgriLogic with the balance due to foreign exchange and of business mix.
Adjusting for these items, the accident year ex-cat loss ratio was in line with the first quarter of last year.
Turning now to our insurance segment, which has seen some very good results this quarter, gross written premiums increased 6% to $458 million.
Similar to recent quarters, we saw growth in property and casualty and financial and professional line sub-segments, which were up 6% and 28% respectively.
However, this was partially offset by an 11% decrease in the property elements of our marine, aviation and energy sub-segments, where pricing pressure remains most acute.
The insurance segment recorded underwriting income of $31 million and a combined ratio of 92% compared to $22 million and 94% respectively last year.
The current quarter reflects $8 million or 2 percentage points of net catastrophe losses related to weather events in the US.
The accident year ex-cat loss ratio improved to 57% compared with 60.8% a year ago.
The insurance segment had $3 million, or about 1 percentage point of prior-year favorable development in the first quarter compared to $14 million a year ago.
Reserve releases in both quarters were mainly due to favorable development on our short-tail lines.
Turning now to expenses for the group, as we flagged on last quarter's call, the G&A ratio was slightly higher this quarter increasing to 18.1%.
70 basis points of the increase is attributable to the acquisition of AgriLogic; however, adjusting for this, the expense ratio was 17.4% and largely in line with a year ago.
We still expect the full-year G&A ratio to be broadly in line with last year.
Looking at tax, you've probably noticed that our effective tax rate was lower this quarter at approximately 2%.
This was due to the finalization in the quarter of an open tax position we had in the UK.
However, looking ahead, we expect the effective tax rate for the year to be broadly in line with that of last year at approximate 4%.
I'll now move on to investments.
Net investment income was $50 million in the first quarter, up 4% from the prior year.
This increase is mainly due to the high dividends that we received on our equity securities.
The equity portfolio is larger than a year ago.
We received the largest dividend payout in the first quarter.
So we should not expect this to be the run rate.
The total return on our aggregate investment portfolio was an impressive 2.08% in the quarter primarily reflecting gains in the fixed income portfolio and equities.
The fixed income book yield was 2.56%, broadly in line with the 2.59% at the end of 2015, while the duration of the fixed income portfolio was 3.56 years including the swaps.
Now, I'll make a few comments about capital.
We repurchased $25 million of ordinary shares in the first quarter of 2016 and have approximately $391 million remaining on our current share repurchase authorization.
Additionally, earlier this week, our Board of Directors approved a 5% increase in the quarterly cash dividend to $0.22 per share.
We continue to actively manage our capital as efficiently as possible, taking into account a number of variables when deciding how best to allocate that capital.
We'll continue to assess the variables as we work to balance the competing attractions of investing in business growth and returning capital to shareholders.
So to sum up, both businesses did well in what are challenging conditions in many markets.
But we remain focused on maintaining our trajectory of profitable growth and building valuable for our shareholders over the long-term.
With that, Ill turn the call back to Chris.
Thanks, <UNK>.
This was a good start to the year with targeted growth and solid underwriting contributions from both insurance and reinsurance.
Our first-quarter results yet again demonstrate the strength of the diversified business model we've been building for some time now.
Indeed the Aspen of today is quite different from the Aspen of five years ago.
We expect to keep adapting to the changing environment and to look well ahead to ensure that we have the tools to remain relevant and agile in order to capture new opportunities.
The acquisition of AgriLogic was an example of this.
We added a diversifying, but very complementary business with strong intellectual capital and good opportunities for profitable long-term growth.
Aspen RE's strategy is to maximize opportunities in markets and regions with profitable growth potential.
A further example of this was the recent announcement by Aspen RE of the opening of an office in Dubai to serve as a hub for reinsurance business in the Middle East and Africa region.
Emerging markets continue to offer significant but long-term potential.
We need to be close to our clients wherever they may be to realize that potential.
At Aspen Insurance, we also look to enhance our business by identifying opportunities that position us for success in the long-term.
As an example, on this same call last year, I talked about a couple of new growth initiatives.
Our property joint venture to write major property risk for European multi-nationals and our decision to underwrite accident and health business on a global basis.
Both of these were carefully targeted opportunities that were identified for profit and long-term growth.
Both initiatives were significant contributors to growth this quarter.
We have talked about our global product line strategy; accident and health was the first business that we announced as part of this strategy, which we continue to execute, most recently with the announcement of a head of our global excess casualty business.
We believe that our global products line strategy will drive targeted growth in profitability for the insurance business over the long-term.
We're also continuing to execute our target operating model.
Already in 2016, we have established a global underwriting services team to free up reinsurance underwriters time for support tasks.
We've implemented global procurement and space utilization policies.
These are just a few examples of change that over time will result in business processes that are more robust, more cost-efficient and support additional business scale.
Before we turn the call over for questions, I have been asked by investors on several occasions recently about the potential impact on Aspen if the UK left the European Union in what is frequently called Brexit.
The economic and political case for Brexit has not been made, so it seems to be highly unlikely that the UK will vote to leave in the forthcoming referendum.
However, if we are surprised by a vote to leave, we believe that impact on Aspen will not be material.
I say this firstly as our premiums from the EU will lessen 7% of our total 2015 gross written premium.
Second, any decision by the UK to leave the EU will result in the UK government no doubt seeking to agree new trade agreements to protect its business interests.
Thirdly, if the UK fails to recover its previous trading advantage in this exit process, we would have time to establish an alternative EU presence for one of our operating subsidiaries in order to protect our interests.
So that concludes our prepared remarks.
We're now happy to take your questions.
<UNK>, it is <UNK> here.
So, let me just clarify that, obviously it is early days.
But as we've gotten closer to the business and where were integrating it, we have a better view and a better understanding of particularly the distribution between the winter crop and the summer crop.
As we've got into this, we know that there is a slightly higher distribution towards the summer crop.
Overall, our expectations have not changed, but what that does do is it means it brings a little more of that premium into second and third quarter.
As a result obviously there's a slight knock on there which says that more of that earned premium will be earned in the second half of the year.
But overall it's just purely timing and nothing more than that.
That is correct.
That is the best view of that we have at this point.
We did say $185 million was the number that was written in 2015.
<UNK>, it's pretty hard to give any detail on that at the moment.
It is the first year that we've been in operation with this.
But we bought this with the anticipation of growing that business.
So we're hopeful that we'll see increases over time.
Actually, <UNK>, the way we've structured some of the reinsurance arrangements at this point and under that existing structure there's not a significant component of acquisition costs.
So what I'm doing is I'm talking about the expense ratio as a whole, which includes not only the acquisition but the operating expense ratios.
So, I look at those together for this business.
We would certainly hope so as we get a more volume of earned premium, which again is going to be structured towards the second half of the year.
Yes.
<UNK>, I was expecting the question, but unfortunately I don't think there's much that sensibly we are going to say about this at this early stage.
In Japan, these are a couple small events.
They're well away from the industrial complex of Japan.
They're well away from the area of Metropolitan Tokyo, where all of the oil and gas which exists which would be very dangerous.
There some manufacturing that goes on there.
There's some possibility of business interruption exposure, though actually in Japan business interruption is not much sold.
But it can't be ruled out.
I have not seen any reliable estimate of market loss.
I have seen, like you, some estimates.
I think the truth is until the non-life association of Japan pronounces, until some of the companies actually do some loss adjusting, no one's going to know what to expect.
But that said, I'm not expecting anything in terms of material market loss for the Japanese market from this.
As a reinsurer of Japan, most of our exposures are on an in-excess basis or they're exposures for where the industrial risks are.
So I'm anticipating that will be lightly affected if at all by either of those events.
I think in Ecuador the position is even more remote.
We really do not have much business in that part of the world.
The event itself appears to be quite a bit smaller in economic and insured impact than Tokyo.
Slight to negligible is what we are guessing, although it's early days.
I don't know if you wanted to mention floods in Texas, which I saw some people affected by the other day.
But that's ---+ I think that's really for the primary writers who are big in Texas.
That is not us.
We don't have reinsurance clients in the smaller Texan companies.
They're just really not in our portfolio.
So we don't expect to get it by the regional reinsurance count.
We don't expect that the major clients ---+ the major nationwide companies that we like to underwrite, we'd attach far in excess of the Texas law.
So again, we don't expect much there.
On the insurance side, you can't rule out a few isolated incidents of loss, though we're not really aware of very much in that yet.
But again, my general sense is that we shouldn't be too troubled by what's been a busy period for cat losses.
Thank you very much, <UNK>.
Yes, <UNK>, it's <UNK> here.
We did buyback $25 million of shares in the quarter.
So that's a decent start.
I would say that we definitely have a proven track record of returning excess capital to shareholders.
There is no change in that approach or methodology at all.
Clearly, it can go up and down in various quarters.
But it's very much a balancing act between the demands and opportunities that we see in the business.
But clearly, we're wide-eyed up against the value that we can create through buybacks.
It's going to depend on prevailing share price, interest rate and all the usual considerations.
But all I can say is it's going to depend.
But clearly it's at the forefront of our mind.
Yes.
<UNK>, there is a couple of things going on.
We talked about a little bit of an increase usage of our Aspen capital markets vehicle.
We did also take advantage of some favorable pricing to purchase a little more cat retro.
So there is a little bit of that.
None of these things are individually very large but in combination, there are a couple things.
There is a little bit on AgriLogic as well on the written side.
But not much of that flying through on an earned at this point.
Yes.
<UNK>, it can always be a little bit lumpy in quarters.
But it's off a little bit from this time last year.
It's hard to say at this point, a little bit of a trend downwards.
I think you're right, it is going to vary, very much depending on the mix.
I can't say too much more about that at this point though.
Thanks, <UNK>.
Okay, well good morning, <UNK>.
Thanks for the question.
It's an interesting question.
First of all, I want to remind you that late last year, we announced something of a restructuring of our insurance operations with the creation of 13 global product lines, as well as a new focus on the US regional business and the international, but particularly the UK regional business.
We hired quite a lot of people to help us do that.
We've mentioned David Cohen on these calls before working for Mario.
He's the present CEO of Insurance.
But we hired some really terrific people to lead areas such as cyber risk, such as energy, such as marine, such as excess casualty.
I've got to stop but I hope I don't offend anybody if I didn't actually name them on the business.
We've appointed nine.
We may point up to another four as time goes by.
Those people I think equip us very well to take advantage of some of, let's say, the people ---+ the human capital disruption in the market.
We've hired those people.
And by the way, I think the total hired now is in the region of 50, which for the size of our insurance operation is a substantial significant change.
We're seeing a lot of excitement.
We're getting new insights.
Some of these new guys, the GoPro users, I think, have excellent management capabilities.
To be successful, I think you want to be good at underwriting, but the discipline of management is another advantage that they bring and they bring it more even than we had it before within our insurance operations, which is good.
The kind of ---+ the human capital end of things with a couple of major companies repositioning, I think we're already placed to take advantage of.
We have and we are interviewing one or two more people from some of those sources, but I think the bulk of the hiring is done.
Clearly, the areas of business that some of those companies engage in that I think have done well over time have been very successful.
Done badly, done less well they may not be successful.
I think the opportunity to cherry-pick some of that is now available and that our new bud of leaders are absolutely allowed to wear-off and taking steps to benefit from.
It's too early to give you a premium impact of these changes, we don't know that ourselves, we don't know where it's going to go.
But the flow of business is better and the difficulty of saying ---+ it's always tough to say, we're not going to be cheaper than your current carrier.
But we're going to be a better deal for your clients, you should try and come to us.
But now you can say it, because people are losing faith in the current carrier.
That is good.
The last bit of your question was, so are we seeing any uptick in pricing.
I'm sorry about this, but the answer, <UNK>, no, we're not.
It's just not there yet.
I think logically it ought to come.
It maybe a little bit early days, but at the moment I think those risks are in general being dislodged and moved at comparable pricing to before.
So I think what you have to do is not say we can reprice this whole book of business.
We want to take a lot of it.
I think as I said already you need to cherry-pick and choose those risks, which actually you would write at the prevailing pricing and avoid those ones that look a bit cheap.
Well ---+ in hiring those people clearly, you're adding a bit more costs.
We've opened one more office as a consequence.
That's a little bit of cost.
On the other hand, there were some people who we exited as a consequence of this, so after some severance costs, which are modest, the cost base comes down.
Then as this process works through, a vast majority of our people have got it and they're with the program.
They're excited about it.
There are one or two, who have also continued to leave.
So the net cost impacted it as much as 50 heads would suggest.
Our analysis showed it was pretty much neutral in 2016, accretive in 2017, and highly accretive in 2018.
It's a big upgrade of our underwriting talent of our profile and our potential to simulate the flow of business.
So, as we haven't actually given out numbers and what we think the new teams are going to do in premium terms.
I think it's probably better to do that when they've done it.
We'll tell you what has happened rather than give you a prediction of what might happen.
It's always the case, I think <UNK> that had it in a question, when you're looking at capital and how you're going to put it to work.
You've got to look at the share buyback option.
You've got to look at the growth option.
You've got to look at the acquisition option.
We're very rigorous on that.
I think what's interesting these last, say, 12 months is we have found ways that we might not of anticipated two or three years ago to put our capital to work in ways that we believe are much more value creating for our shareholders than would be buying back our shares.
Yes.
These questions, <UNK>, these get me shot by the property cat underwriters.
(laughter) If I tell you what I think, it's not what they want their CEO to be saying.
I think that probably in a sense is your answer.
There's ---+ it looks like maybe a little bit less buying demand from Florida.
The appetite to write this business ---+ it's not as strong as it was a year or two ago, but it's still pretty strong.
So, I think the supply/demand equation suggests a little bit more rate erosion.
I don't think it's going to be double-digits.
But that would be surprising.
It might be single, but Florida ---+ if you look over three years, pricing in Florida is down 30%, in some cases it's more than that.
Our view is probably the premium is just slightly a little above the cost of claims you can expect now, but only just.
That is not the kind of reward that you want for putting your capital at risk in a place like Florida.
So for us, it's ---+ I wouldn't be surprised if we come out of this season doing a little bit less Florida than we had when we went into it.
<UNK>, thank you very much.
Thank you all for listening this morning.
Thanks for those questions.
Have a good day.
| 2016_AHL |
2017 | KMB | KMB
#Thank you, <UNK>, and good morning, everyone
Since <UNK> covered the financial details for the quarter, I'll focus my comments on our organic sales in the quarter and then on our full year outlook
As <UNK> just mentioned, our organic sales were down 1% in the quarter
So, in January, we said that growth would be higher in the second half of the year compared to the first half largely due to comparisons
That said our first quarter organic sales were somewhat below my expectations, most of that coming from North America
In North America, our organic sales fell 3% in our consumer businesses, and that reflects the combination of category softness, greater competitive activity, and lower promotional shipments
Overall category growth across all channels, including e-commerce, was about 0.5% in the quarter, and that's about 1.5 points below what it was for the full year 2016. In terms of our key businesses in North America, our Personal Care volumes were off by 1%
In infant and child care, our volumes overall were down low-single digits, which is probably in line with the mega category
Category consumption continues to shift out of diapers and into training pants, and volume growth in e-commerce is continuing to accelerate
Our market share overall was even year-on-year and up 1 point sequentially in infant and child care
In Consumer Tissue, our volumes were down 7%, mostly in bathroom tissue
Results were impacted by competitive activity and lower promotional shipments than last year
We've got a stronger promotional calendar scheduled for the balance of the year
We expect better performance going forward in North America particularly the back half of the year when our comparisons get a little easier
Our planned product innovations will also help drive our growth in the near term
That includes the introduction of U by Kotex Fitness in our feminine care business, improvements to Huggies diapers and baby wipes, and some new Kleenex facial tissue offerings
In addition, we're placing even more focus on the execution of our sales and retail merchandising strategies with stronger programming going forward
In terms of the category overall, trends were a little better in the last part of the first quarter, so we're cautiously optimistic that market growth will get back to more normal levels over time
Moving onto developing and emerging markets, we delivered 4% organic sales growth in this part of our business, and performance and category conditions were broadly in line with our expectations from January
Looking at some of our key markets, in China, organic sales in diapers were up low-single digits as strong double-digit volume growth was mostly offset by lower selling prices
While the promotion environment remains competitive, we're optimistic that pricing won't be as negative in 2017 as it was in 2016. We also have several innovations on Huggies launching in the second quarter
In Brazil, our organic sales in Personal Care were up high-single digits compared to a decline of 5% in the year-ago period
Category demand remains down in Brazil and our team there continues to innovate and has product improvements in market on diapers and feminine care
In Argentina, our organic sales in Personal Care were up low-double digits, driven by higher selling prices
We re-launched Huggies diapers late in the quarter and that helped us deliver modest volume growth despite category volumes being down double digits
At Eastern Europe, organic sales in diapers were similar year-on-year
Volumes were up double digits again this quarter with continued benefits from innovations in Russia
Selling prices were down, reflecting price rollbacks last year following the strengthening of the Russian ruble
Lastly, in developed markets outside of North America, organic sales were down 2%, mostly in South Korea
We expect results there to pick up as the year progresses including benefits from innovation launches
Now, moving onto our outlook and our specific targets for the year; we expect sales to increase 1% to 2% in 2017. The currency impact on sales should be neutral overall, which is about 2 points better than what we expected in January
Regarding organic sales, we also expect growth of 1% to 2%, and that compares to our original estimate of approximately 2% and reflects our first quarter results, the category conditions in North America, and slightly lower price realization due to improved currencies
Regarding earnings, while the currency outlook has improved, our cost inflation estimate has increased by $75 million on average compared to our assumption in January
In total though, we're still planning that the net impact of changes in currencies, commodities and selling prices will be a mid-to-high single digit drag in our bottom line
That's consistent with our original plan for the year although with a different mix of these factors
Altogether, we continue to target earnings per share of $6.20 to $6.35 for 2017. And that's up 3% to 5% year-on-year
So, in summary, we're investing in our brands and growth initiatives to help us grow and compete effectively
We're managing our company with financial discipline
And we continue to be optimistic about our opportunities to create long-term shareholder value
That wraps up our prepared remarks, and now we'll begin to take your questions
Question-and-Answer Session
Good morning, <UNK>
I'll let Mike <UNK> give you a little bit more color on that, but we've certainly seen a pretty strong uptick in e-commerce
And that's a trend that's happening in lots of places, but it did seem to accelerate in the U.S
in the last couple of quarters
Yeah, go ahead, Mike
And, <UNK>, fem care was down, I think, mid-singles, and part of that's timing of launch
We've got the fem care U by Kotex Fitness launch coming
That starts in the second quarter
So we expect to see a little stronger calendar in the back half of the year
Thanks, <UNK>
Hey, <UNK>
Yeah, <UNK>, I guess a couple of things I would say
Number one, giving you an accurate e-commerce or online versus off-line share is pretty tough for us to do because there's a lot of our traditional brick and mortar customers that do quite a bit of click-and-collect
And so we don't really have any visibility of that because it goes into their existing distribution system and into their existing stores and they take off their shelves
So Amazon will be a big one that isn't in the tracked data that probably is the gap
And maybe – and again, they've had a strong quarter across lots of businesses, including ours
And I don't know, Mike, if you want to comment any more about anything that you're seeing in that specific space?
I guess I would just call it – if you look at the North American price was pretty neutral quarter-on-quarter
So that would be an indication that we're not funding additional competitive spend activity
Yeah, if you look at the pricing in Q1 versus fourth quarter last year was pretty similar
So we didn't really see further degradation
All the price decline was a carryover effect of things that happened in the first half of last year
So we would feel like it seems to have stabilized at this point in time
And the good news is you're still seeing really strong category volume growth
And so, our pricing comps will get a lot more favorable in the back half, which gives us some confidence on our organic top line outlook
Thanks, <UNK>
Yeah, I guess I'd say, <UNK>, the year started out a little slow
Jan, Feb and March was much better
When we look at that and the plans that we have rolling forward with some of the innovation that we've got coming, that's what gives us some confidence
Our comps get quite a bit easier in the back half
So we knew the first half was going to be a tougher comparison to deliver organic growth
And we've got good momentum in a lot of markets around the world
I'd say the two factors were probably – and the call down of the top line was a little slower start in Consumer Tissue in North America, and then some price rollbacks in markets where there was pretty big price recovery last year and no other currencies have strengthened
So Brazil and Russia in particular have been places where the currency was pretty weak last year, and we took a lot of price and some of that snapped back
But we'll give you an update as the year progresses
We call it, as you know, down the middle of how we see the fairway, and we'll keep updating as we go through the year
Yeah, I guess we would say that 1% to 2%, we still feel like relative to our long-term goal of 3% to 5% reflects some of those secular challenges
Yes
In fact, Mike, maybe will comment on this because he's taking a refreshed look at the long-term strategic plan, which we won't unpack all the details for you this morning, but I'd say we still see strong category growth potential, particularly in a lot of the emerging markets
So maybe, Mike, do you want to comment just a little bit on that?
Thanks, <UNK>
Good morning, <UNK>
Yeah, I think as you look at some of the price competition in China that's rolling off, what we're seeing is the underlying category has been robust from a volume standpoint
It's just been masked by some of the price challenges, and so we feel pretty solid that that's going to continue and flow through
There are other markets like Brazil, Argentina, where the economy hasn't yet really turned substantially
There's still a fair amount of price recovery to go in Argentina to get back to a more equilibrium state, and so there's probably some question marks there
On the other hand, Russia and other parts of Eastern Europe still seeing actually strong category growth there even though the economy hasn't fully recovered
And North America, I'd say it's a mixed bag
On the Personal Care front, we still see good category growth in adult care
We've got good innovation coming in fem care
Actually, the growth in the training pant category and out of diapers favors us given our share with Pull-Ups, so we feel pretty good about that
And Consumer Tissue is one where we just got to step up our execution a bit and make sure we're getting our fair share of that category
So I wouldn't say it's dependent on improvement in category growth, it's more sustaining what we see happening and then executing against it
Yeah, I don't think we could probably give you an accurate read on that specifically
And I think we'd probably say we're still trying to exactly figure it out what happened with the consumer in North America in the first quarter
You've seen a little bit of category weakness across lots of places
So how much of it is broader economic slowdown, which you don't seem to be seeing in other areas? The job report was a little weak but not substantially so
So that's still probably what we're trying to dial in a little bit more precisely
It's a pretty long question, <UNK>
We'll do the best we can with that
I guess I would start
Price competition among retailers is not a new phenomena and it's maybe heating up a bit
Ultimately, finished product selling prices are retailers' responsibility and you didn't see a lot of price change in our North American numbers
So our trade programs are pretty much intact and maybe I'll let Mike comment a little bit more if you want on private label trends or the general nature of discussions there
I will say this though that when you've got good innovation and strong brands (29:14), it leads to a different discussion than if you don't have those things, it becomes more of an item price discussion
Thanks, <UNK>
Yeah, I guess I'd say, and maybe Mike can comment a little bit more on North America, but I'd say our overall plan in North America hasn't changed much
We just didn't get it all executed in the marketplace in the first quarter, particularly in Consumer Tissue, and so our plan for the year hasn't changed in terms of what we plan to spend broadly
I don't know, Mike, is there anything else you want to add to that or?
And then on the commodities inflation, it's not enough to drive finished product selling prices in most places, and particularly, when you see many of the international markets, the currency turning favorable, it's not a calculus that would lead to a lot of price in markets like that
We are getting some pricing in – where secondary fiber has gone up quite a bit in K-C Professional, we're getting some price recovery
I think there's been more broad price increases across the industry that have been announced recently and so that will give us some benefit
But that's about the only one that I can think of that there's maybe a direct commodity driven price change that we'd see coming this year
(32:54), <UNK>
Well, we would say brilliant leadership would be right at the top of the list, but jokes aside, we had a great cost savings quarter
$110 million in FORCE cost savings, a great way to start the year
And then that certainly was a driver of that
Good mix of negotiated material savings, pretty good productivity, some of this material specification changes, then an increasing element of that bucket is in some of the distribution and logistics related savings
I know <UNK>'s a fan of this to see our inventories keep coming down and that not only delivers cash, but also delivers cost savings as we've got less stuff to store and handle
I don't know, Mike, if there's anything else you want to build on that?
I would say there aren't that many tuck-ins internationally, but there are a few in a few places, but we did a lot of that in the 1990s and really bought up a lot of the market positions that we wanted and we've been able to consolidate some joint ventures into being 100% owned over time
And so it's a relatively light calendar of M&A activity
And yeah, we read all the same chatter that you guys read and, quite honestly, we're more focused on running our own business every day and stay pretty focused on that and don't play too much with the speculation process on what might happen
So, I think so far that's served us well
Thanks, <UNK>
Yeah, in terms of retailer inventories, we didn't see a big shift anywhere really, and we have pretty high cube, high velocity categories, particularly in a place like China, where so much of it is e-commerce
Often the e-com players really aren't even holding any inventory
They'll pick up at our distribution center and deliver the same day
And so there's not a lot of inventory in those systems, and I know we've seen some minor shifts in inventory across other channels, but nothing that was significant enough to call out in the quarter
Thanks, <UNK>
Okay
I'll do the best I can with that, Steve, and we'll see, Steve, what I leave left for you to follow-up on
In terms of pulp and oil, we'd say for pulp we're probably up $40 to $50 a ton versus our original guidance in terms of we expect in terms of market pricing for eucalyptus
So we're calling euc at $870 to $900 a ton
And I know the current price is above that, but that's kind of our outlook for the year
Oil we're kind of in the $50 to $60 a ton still, and there may be some upside for us on that depending on where oil shakes
In the meantime, though polymer has actually gone up a bit, as there's been some supply challenges on polymer
And we don't have a lot of direct oil
We do a lot more polypropylene and oils short of the long-term proxy for that, but in the short term, they can go different directions
Swinging to the market share front, if you looked at shares sequentially in North America, they're pretty flat; up in a couple, flat in a few, down in a couple
Year-over-year, particularly in Consumer Tissue is where we had the most negative share comparison
So that was probably a high watermark for Consumer Tissue last year
As you travel around the world, I'd say you'd see relatively stable share positions
Brazil is up in fem care, down a little in diapers; similar story in Argentina
China shares were, I think, pretty flat to down 1-point; Korea, kind of a similar story
Positive shares in Russia, Ukraine, other parts of Eastern Europe on diapers in particular
I don't know, Mike, if there's any other ones that jump out for you? Fem care has probably been our star and that we've had very strong share performance in most markets on fem care
I think that's a fair statement
When we get done with this call, Mike and I are going to go in and talk to our team leaders around the company
And one of the things we're going to tell is we're not satisfied with our market shares in the first quarter
So we'd expect to do better as the year progresses
Thanks, Steve
All right
Maybe I'll have Mike comment on both of those, so on promotional environment broadly and then facial pricing
I'm not aware that there's been any change on their end
Yeah
I think the other point, <UNK>, would be, as we've got innovation coming, you want to use your promotion along with your other strategic marketing tools to drive that
So we've got a pretty strong calendar coming, and so that wouldn't be unusual for us to put more money behind those ideas either
No, I wish I could tell you the clear answer, because then I would have done something about it before now
But it was – and I think everybody was talking about retail store traffic was down broadly
They can't point to weather
There was theories about late income tax refunds
Again, I don't know why that would necessarily affect our category
But, on the other hand, if you're not in the store shopping, you definitely saw that in terms of retail traffic
Now there was some uptick in e-commerce that balanced off a part of that
We are seeing probably, I don't know, Mike, if you want to comment on this, just a little bit less in terms of the fill-in trips may be part of it as some retailers unpacked that
But I think it's still pretty early to figure out exactly what happened
Thanks, <UNK>
Good morning, <UNK>
Yeah, I think on China, a lot of the pricing was really led by some of our other international competitors over the last couple of years almost, and some of that was probably funded by a weaker yen
But I think that seems to have normalized
In the meantime, this is one of the fastest growing markets in the world, and it's not surprising to see everybody chasing after that consumer growth
And so right now, you've got two big U.S
-based players and two big Japanese-based players all chasing growth in the Chinese market
And I think the good news is that pricing seemed to have stabilized in the quarter, although it was down year-on-year, reflecting some of the things that happened in the first quarter last year
On the Brazil front, part of it was we had a lousy start last year in the first quarter, so our comp was easier in that market, and that was why our volume uptick was there
I'd say the shares we've seen in that market are just Jan, Feb, and we had a stronger March, so you could've had a situation there, where maybe shipments were even a little bit ahead of category consumption
But we'll see when we get the next share data
I don't know, Mike, if there's anything else you want to add on either of those markets?
So if you have slower growth and you've got lots of competitors facing it that sometimes results in higher promotional environment
And so you're also seeing retailers get creative across the space in terms of do more with click and collect and there's a lot of innovation happening, not just around price, but also around service and how shoppable the categories are in different environments
And so I will expect that that will continue as we roll forward
I don't know, Mike, if there's any other color you've got on that?
Yeah, and e-commerce does cause great price transparency
On the other hand, retailers have been comp shopping each other's stores in bricks and mortar for 100 years
It's a pretty comprehensive list there so, on the promo front, maybe Mike can comment a little bit on that
On China, I think the question was, have you seen any kind of trade up in e-com and I think, broadly, that is the case
We've just launched a super-premium diaper pant in China that we're really excited about
And moms that tend to shop in e-com tend to skew a little bit higher income and so that should be a positive for us
And then the last question
was tax rate, which <UNK> can comment on
One difference though
You might be looking just that fourth quarter only working capital number
We tend to compare to the full year average, because there is a bit of cyclicality as the year rolls through
Hey, <UNK>
<UNK>, we don't give quarterly guidance as you know, so I think you can do the math as easy as we can and you're correct in assessing that the comps get tougher in the second quarter
But, beyond that, I'm probably not going to give you any more color on quarterly guidance
No, not at all
The volume actually has been pretty strong throughout and so is it's been more of a function of innovation and category growth and consumer spending power and that we expect those stronger results to come through more clearly in the back half of the year
Thanks, <UNK>
Well, once again, we are continuing to execute our Global Business Plan and allocating capital in shareholder friendly ways
And we appreciate your support of Kimberly-Clark
| 2017_KMB |
2015 | TBI | TBI
#Thank you, and welcome.
We appreciate everyone joining us on our call today.
Please note that on this conference call management will reiterate forward-looking statements contained in today's press release and may make or refer to additional forward-looking statements relating to the Company's financial results and operations in the future.
Although we believe the expectations reflected in these statements are reasonable, actual results may be materially different from the forward-looking statements set forth in today's press release and presentation slides which were filed in an 8-K today.
Examples of factors which could cause results to differ materially can also be found in our most recent filings with the Securities Exchange Commission.
The discussion today also contains certain non-GAAP financial measures.
Information relating to the comparable GAAP financial measures may be found in the press release and presentation slides, which were posted on our website at www.trueblue.com.
We encourage you to review that information in conjunction with today's discussion.
On this call today is TrueBlue's CEO and President, <UNK> <UNK>; and CFO <UNK> <UNK>.
I'll now turn the call over to TrueBlue's CEO, <UNK> <UNK>.
Thank you.
Good afternoon, everyone.
Today we reported our first quarter of 2015 revenue grew 45% to $573 million, which produced $19 million of adjusted EBITDA, an increase of 156% compared to a year earlier.
Both revenue and earnings exceeded expectations this quarter.
We are encouraged by the momentum we felt at the end of the quarter and here into the beginning of the second quarter.
The first quarter had severe weather impacts, along with negative impacts of the ports being closed for some period of time.
Even with those setbacks, we are pleased with the success of our growth strategies, which produced record first-quarter revenue and net income.
The recruitment process outsourcing RPO business and the outsourced workforce management OWM business that we acquired on the first day of the third quarter of 2014, are continuing to win in the marketplace and are delivering impressive results.
In addition, strategies we have implemented over the past year in our staffing businesses have produced 50% growth in adjusted EBITDA from these operations.
TrueBlue is well positioned for continued growth in our staffing businesses, given our capabilities to serve small local companies in over 400 industry classifications and to serve large national companies in focused industries such as construction, logistics, manufacturing and hospitality, along with many more.
We see ourselves positioned in the right growing industries with the right service capabilities to continue our momentum in this expanding economic environment.
Businesses are searching for and finding the right mix of contingent and permanent workers to drive their businesses forward.
In this regard, we can now offer more to our customers than ever before and serve new customers because of the investments we've made this past year.
It remains a great environment to be a leader in delivering world-class talent solutions that improve the performance of our customers.
The acquisition of the OWM and the RPO business in 2014, included the industry-leading brands of Staff Management, PeopleScout, and hrX.
We're excited about the future growth opportunities we have in the RPO business.
The RPO business is a fast-growing segment in the global human capital space.
PeopleScout and hrX are positioned well in this space, with award-winning service delivery.
We are seeing an increasing number of deals on a global basis come to market for permanent hire recruiting.
With our leading service provider, PeopleScout, here in North America, along with small pockets around the globe, and with hrX in Australia, we are positioning TrueBlue to be able to respond to these global RPO opportunities.
We are building strategies to become the global leader in RPO by ensuring our RPO delivery model can deliver the same award-winning service we've been recognized for here in North America, in both Europe and Asia.
Our Staff Management workforce management service line is serving some of the largest and fastest-growing companies in North America.
We are proud of the quality service they are delivering and are excited about how they will shape TrueBlue as we continue to grow and develop our service capabilities in contingent labor on a global basis.
Given we operate staff management as a centralized business with on-premise delivery, we believe we can expand this service line globally more efficiently than a branch-based business, especially as we see requests coming in from current customers for us to serve them globally.
For our staffing businesses, we have continued to make progress in building a more efficient business model here in North America, through the use of technology and combining certain leadership, sales, recruiting, and service teams across our legacy business lines.
This has allowed us to close approximately 150 branches over the past two years, while sustaining the revenue base in those combined markets by maintaining strong operations and customer support.
Cost savings related to those closings continue to show up in the operating leverage here in early 2015, and we continue to produce substantially all the revenue with a lower base of costs.
We do expect to see expanding profit margins through 2015, as a result of these closings and consolidations.
We don't expect a significant number of additional closings or consolidations in 2015, as we anticipate a tightening labor market.
And we need to ensure we have adequate resources in the markets to deliver and fill the rising demand.
Given some time to mature, the newer consolidated services and better understand the resource needs market by market, we anticipate we could consolidate additional branches.
We are just not undertaking that initiative here in 2015.
We remain enthused with the growth opportunities in our business.
We are in the right service lines that are showing growth and demand.
With our focus on a broader spectrum of capabilities for our customers, we have the opportunity to improve our growth rates from here and continue to deliver the right workforce at the right time to the marketplace.
From general labor to skilled trades to workforce management and recruiting full-time positions, we find ourselves well positioned in sectors that are growing.
We are also encouraged that our adjusted EBITDA margins expanded in 2014, by 20 basis points, and in Q1 of 2015, by an additional 150 basis points.
Our goal remains to surpass 6% adjusted EBITDA margins and continue to grow it beyond that, which we believe is within reach.
Let me turn the call over to <UNK> for further analysis and commentary, after which, we will open it up for questions.
<UNK>.
Thanks, <UNK>.
As a reminder, we purchased Seaton Corp.
, effective the first day of the third quarter of 2014.
In addition to our consolidated reporting, we have also provided standalone reporting for the legacy TrueBlue and Seaton businesses.
We believe this approach provides the most transparency to help investors assess our performance.
Once we have a full year of ownership to provide prior-period comparisons, we will provide reporting for two new business segments.
The first, managed services, will include the recruitment process outsourcing and managed service provider businesses.
The second, staffing services, will include all of our staffing operations.
Until we reach the anniversary of the Seaton acquisition, we will continue to discuss the business from a legacy perspective.
In my commentary, I will reference two non-GAAP terms - adjusted earnings per share and adjusted EBITDA.
Adjusted earnings per share excludes non-recurring acquisition and integration costs, amortization of intangible assets, and adjusts income tax expense to a 40% marginal rate.
Adjusted EBITDA excludes non-recurring integration and acquisition costs.
These are measurements used by management that, in our opinion, enhance prior period comparability and provide additional value to shareholders in assessing performance.
Adjusted earnings per share for the quarter of $0.20, was $0.07 above our midpoint expectation.
Higher revenue in the acquired service lines, contributed to half of the outperformance, with the remainder from higher gross margin and lower operating expenses in the legacy TrueBlue business.
The strong across-the-board performance this quarter expanded adjusted EBITDA by 150 basis points.
Now let's take a closer look at this quarter's results, starting with revenue.
Total revenue grew by 45%, driven primarily by the Seaton acquisition.
The acquired on-premise staffing and RPO businesses are performing very well.
They continue to deliver impressive results, and revenue pipelines are strong, particularly on the RPO side.
Revenue was largely flat in the legacy TrueBlue business.
A drop in year-over-year green energy produced three points of revenue headwind.
We expect another point or two of green energy headwind next quarter, until the existing revenue run rate anniversaries at the end of Q2 this year.
Gross margin was 22.6%, down 250 basis points.
The Seaton acquisition, which carries a lower gross margin than the legacy TrueBlue business, dropped the blended average by 290 basis points.
Within the legacy TrueBlue business, focused attention in pricing new and existing customer bill rates created 40 basis points of gross margin expansion.
Now let's shift to sales, general and administrative expense.
SG&A was up $20 million, mostly from the acquired Seaton operations.
Lower SG&A in the legacy TrueBlue business was largely offset by one-time integration costs.
SG&A as a percentage of revenue was 19.5%, down 370 basis points, largely due to the blended impact of Seaton, which carries a lower SG&A percentage than the legacy TrueBlue business.
We recognized an income tax benefit equivalent to $0.03 a share, from a higher-than-expected yield of tax credits associated with prior year programs.
Keep in mind that this benefit is already excluded from our adjusted EPS calculation.
Adjusted EBITDA margin improved by 150 basis points, with roughly 100 basis points coming from fundamental improvement in the legacy TrueBlue business.
Another 50 basis points of improvement is from the Seaton business, which carries a higher margin in Q1 versus the Q1 seasonal low in the legacy TrueBlue business.
Net income was $5.7 million, or $0.14 per share on a GAAP basis.
Adjusted EPS was $0.20, which includes $0.02 of add-back for non-recurring integration costs, $0.07 of add-back for intangible asset amortization, and $0.03 of deduction to adjust income taxes to a 40% marginal rate.
Turning to the balance sheet, we ended Q1 with about $110 million of total debt, $90 million less than Q4 2014.
The majority of the debt reduction came from a $70 million drop in accounts receivable, as it deleveraged this quarter from its seasonal peak in Q4.
Total cash was roughly $20 million and credit line borrowing availability was about $150 million.
Looking ahead to Q2 2015, we expect total revenue of $627 million to $642 million, or growth of about 40%, which includes the following assumptions.
Legacy TrueBlue revenue of $462 million to $472 million.
This represents organic growth of 3%, or 4%, excluding green energy.
Also included in this assumption is Seaton revenue of $165 million to $170 million.
Total company adjusted EBITDA which excludes Seaton integration costs, should be $32 million to $35 million, and includes the following assumptions.
Legacy TrueBlue adjusted EBITDA, of $26.5 million to $28.5 million, and Seaton adjusted EBITDA of $5.5 million to $6.5 million.
Here are a couple of remaining consolidated assumptions.
Gross margin should be 23.7% to 24.1%, and CapEx of about $5 million to $6 million.
We expect adjusted EPS of $0.37 to $0.42, which uses a marginal income tax rate of 40% and excludes $1 million of expected Seaton integration costs and $4.5 million of intangible asset amortization expense.
We like how we're positioned for growth.
The Seaton acquisition squarely positions us in the high-growth RPO market, and added on-premise staffing expertise to our core business.
We're excited about the growth opportunities for both of these new businesses, as well as the international prospects.
With healthy gross margin trends and a tight cost structure, the legacy TrueBlue business is prime for strong operating leverage.
Favorable outlooks for construction and small business growth play to the core strengths of the legacy business.
These outlooks, combined with our strategies bode well for the delivery of 15% incremental EBITDA margins in our legacy business.
Strategic acquisitions are an important part of the growth strategy and the balance sheet is in great shape.
With half of the debt from Seaton acquisition paid, debt is now under one turn of adjusted EBITDA.
Finally, I'd like to remind everyone that a variety of additional information on our performance can be found in our press release, earnings release deck, and road show presentation located on our website.
That's it for prepared comments.
We can now open the call for questions.
Yes, the impact of weather.
It was at least a point of revenue headwind.
It's a little challenging to estimate the port shutdown impact.
But I think it's safe to call it 1%-plus for the quarter.
Could you repeat the back part of that question a little louder.
Yes, <UNK>, that's mostly what it is.
This quarter, too, as I said, was a smaller revenue quarter for us.
And the leverage can be moved quite substantially with some change in the costs.
We're talking about a couple million dollars of cost reduction here year-over-year, and most of that was driven by the branch consolidations that we did last year.
Seaton's been growing at a healthy 15% clip, really, if we average it, since we bought the company.
And it's been pretty equal growth across both businesses, both the RPO side and the on-premise staffing business.
Sure.
On the legacy TrueBlue side, let's call it trailing $1.7 billion of revenue, this constitutes about 25%, so let's call it the lower $400 million.
Yes, thanks for that question, <UNK>.
My understanding is we're going to compare and contrast a bit, PeopleScout and Staff Management, what's going on there.
And we have different buzz words and different industry words.
So I just wanted to clarify what we are talking about here.
Yes, they\
Yes.
Well, we appreciate you joining us on your busy afternoon here and to be able to update you on our strategies that we're working on here at TrueBlue.
We remain really excited about the platforms that we're operating and the strategies that are behind that.
And the results that are coming together of the investments we've made over the past two years are continuing to pay off.
And we really are on the front end of something pretty exciting here.
So thank you for joining us this afternoon.
| 2015_TBI |
2018 | CASH | CASH
#Thank you, <UNK>, and thank you to everyone joining us on today's earnings call.
We're pleased with Meta's performance during our fiscal second quarter with strong financial results, numerous positive developments with respect to our consumer credit and prepaid relationships and the proposed Crestmark acquisition and a successful tax season largely complete, it's clear that Meta is well positioned for a strong second half of fiscal 2018.
Meta's highly differentiated financial services model, including our annuity-like and high-fee generation businesses and tax services and payments, combined with our national lending platform and community banking operations, continue to deliver very strong organic growth and profitability in the second quarter.
We are actively making investments in people and systems to build out our platforms for our new consumer credit business line initiatives and to prepare for additional growth with Crestmark and our existing business lines.
And we plan to make significant investments in the next 12 months to lay the groundwork for what we believe will be meaningful drivers for enhancements to earnings, particularly in 2020 and beyond.
However, we do hope and expect to gain some operating efficiencies in our existing business lines over the next year and beyond.
As you know, our fiscal second quarter is by many measures defined by tax season, and we're pleased with the contributions of that business to Meta's overall results.
In October's tax season preview, we anticipated the origination of more than $1 billion of interest-free refund advance loans across our multiple partners during the 2018 tax season.
In fact, we originated a total of $1.26 billion.
Although refund advance and refund transfer volumes came in slightly better than expected, we did experience timing differences with respect to pretax income for the Tax Services business when comparing to prior year periods.
The 2018 fiscal first quarter was higher than the same period of the prior year, while the 2018 fiscal second quarter was lower than the prior year, and we expect 2018 fiscal third quarter pretax income to be higher than the same period of the prior year.
Although we expect positive performance in the third quarter, the overall contribution to pretax earnings in fiscal 2018 is now expected to be approximately $1 million to $3 million below our performance in fiscal 2017.
Brad will provide further information in his prepared remarks.
In the payments space, we announced in March, a long-term renewal through our strategic relationship with Money Network, and today announced an extended relationship with AAA.
We're proud to have this kind of consistency and longevity in our payments programs.
Expanding on the agreement we entered into in January with Liberty Lending, we plan to further capitalize on our SCS leadership team and consumer lending platform, with newly announced agreements with Health Credit Services Corporation and CURO Group Holdings Corp.
or CURO, which Brad will elaborate on his comments.
These consumer credit programs are expected to allow us to leverage the SCS team and our balance sheet to generate significantly higher margins and on a much larger scale than we were able to achieve historically.
We expect to see the positive earnings effect from this in 2019, and expect to see further income growth in 2020 as programs scale and even greater efficiencies take hold.
We believe consumer lending has the potential to be one of our most profitable divisions within a few years.
I also wanted to take this opportunity to update you on the Crestmark Bancorp acquisition we announced in January.
We continue to expect to close the transaction by June 30, subject to customary regulatory and shareholder approvals.
On April 27, we filed our joint proxy statement and final prospectus related to the deal and related proposals.
Our special meeting is scheduled to take place on Tuesday, May 29.
This strategic can transformational merger will provide Meta with access to Crestmark's National Commercial Lending platform, while providing complementary cross-selling opportunities for Meta's commercial insurance premium finance division.
By combining Meta's low-cost deposits, higher capital and legal lending limits with Crestmark's loan platform, we believe there is the potential for significant financial upside in addition to the deal's high strategic value.
Likewise, we will consider opportunities to grow Crestmark's existing business lines and add new business lines, both with existing staff and through external opportunities over time.
We also continue to believe that the acquisition of Crestmark, which historically has been fully funded by wholesale deposits, will enhance Meta's already considerable flexibility for manage our balance sheet.
We expect to able to accommodate continued growth in origination volumes and revenue across our business lines.
While we have no intention of selling loans or assets for the foreseeable future, many of Crestmark's assets are very saleable should we need to manage the growth of our balance sheet at some time in the future.
Our integration efforts are progressing nicely.
I'm very pleased with both the Meta and Crestmark teams work on this front as they continue to meet expectations and work well together to prepare for a successful merger, closing and seamless integration.
Business activities at Crestmark continue to perform as expected, while credit quality remains strong.
Crestmark shows a solid pipeline of activity, and we remain enthused about the opportunities for expansion.
Before I turn the call over to Brad, I would like to touch on the Board's recent ---+ recently disclosed charter amendment proposal we made through our SEC Form S-4 filing related to our common stock.
After careful consideration, our Board proposed a charter amendment proposal to increase the number of authorized shares of Meta's common stock to accommodate a 3-for-1 stock split.
Meta's board believes the stock split would make the shares with Meta common stock more marketable and attractive to a broader group of potential investors, increasing liquidity and the trading of Meta's common stock and raising the awareness of our employees' equity awards.
The proposed stock split is another indication of the confidence we have in our business model.
I'll now turn the call over to our President, Brad <UNK>, who will provide additional detail on the 2018 tax season, our outlook for 2019, and an update on our national consumer lending platform and Payments businesses.
Thank you, <UNK>.
We're pleased with the ongoing support from our partners and the execution from our Meta team during the 2018 tax season.
Starting with our refund advance loan programs, we originated a total of $1.26 billion of these loans above the expectations we shared last October and in line with 2017 originations.
To be able to match last year's volume in 2018 without the participation of H&R Block, the largest U.S. tax preparation company in the country, is a testament to the dedication of our team and the quality of our exceptional partners we have been honored to do business with this past year.
If we include this one relationship ---+ if we exclude the one relationship from the fiscal 2017, originations would have increased approximately $700 million this tax season.
In addition to originating $1.26 billion in refund advance loans this year, we executed on our previously announced plan to retain all of these loans on our balance sheet, more than doubling what we retained in 2017 tax season.
Originations were also bolstered by higher-average refund advance loan sizes, which we saw a nearly 75% increase in average loan size over the prior tax season.
Turning to refund transfers.
We continue to expect the process approximately $2.5 million in transfers through the end of 2018.
This compares to a total of $2.4 million during last year's tax season.
Compared to fiscal 2017, we experienced margin compression in net tax service contributions, even with refund advance and refund transfer volumes coming in slightly better than expected.
This was caused mainly by margin compression and timing issues, specifically, a mix of refund transfer volume and associated pricing; the refund advance margin compressed slightly due to increase in average loan size and provider mix with some partners performing better and others expected to finish under our original expectations; and slower repayment on refund advances from the IRS.
This is more of a timing issue as we expect to see a slight shift of revenue to the third quarter, which would have been in the second quarter, comparing year-over-year statistics.
According ---+ accordingly, we expect the 2018 fiscal third quarter pretax income to be higher than the same period last year.
Although we expect positive performance in the third quarter, the overall contribution pretax earnings in fiscal 2018 is expected to be approximately $1 million to $3 million below our performance in 2017.
Looking ahead to fiscal 2019, we anticipate continued growth for the next year's tax season.
And as we noted in our March 5 tax season update, we continue to believe growth potential of up to 10% based on our existing relationships is reasonable.
Initiatives have already been kicked off related to incorporating additional synergies in our tax divisions between EPS and refund advantage, and we believe there are more efficiencies to gain.
We are privileged to enjoy collaborative multiyear relationships with great partners, and we believe the infrastructure is in place today to enable us to continue our momentum and achieve our organic growth objectives for tax season 2019.
We continue to secure multiyear agreements with outstanding partners in our Payments division.
As <UNK> mentioned, we announced a 10-year renewal of our relationship with Money Network.
MetaBank and Money Network have worked together for 13 years, and we're proud to be able to the extend this strong relationship in order to provide innovative payment products.
We're also happy to announce today an expanded 4-year relationship with AAA, where we will be partnering to expand distribution of the payments products as well as incorporating enhancements and additional product features.
Consumer lending had a strong quarter.
During the quarter, we announced 2 new agreements in diversified financial markets, which continue to support our vision of financial inclusion for everyone, such as Liberty Lending and healthcare services.
In addition, we're pleased to announce today that we have entered into an agreement with CURO.
Our agreement with Liberty Lending helps consumers through debt settlement, while healthcare services will help medical patients throughout the country gain access to the medical procedures they need, while providing them with opportunity to easily and responsibly manage those healthcare expenses.
Likewise, our agreement with CURO will provide consumers with access to the credit they need with the ability to control their cost of borrowing, with an innovative and flexible line of credit product.
This product is expected to have a pilot launch later this year.
As has always been the case, Meta's new programs require start-up costs, primarily in compensation and legal expense and loan loss provisioning during the ramp-up periods.
Accordingly, the new agreements announced in fiscal 2018 are expect to require upfront investment to generate future higher returns, of which management estimates initial start-up cost of $800,000 to $1 million for each of the first 3 programs.
With durations between 1 and 5 years, we expect pretax net yield of approximately 6% to 9% net of credit losses.
We also expect significant volume of consumer credit products over time, and we plan to grow our originations in a controlled and profitable manner.
However, we don't currently have good visibility into how fast these volumes will ramp up.
Given the economic cycles of these loan products, we anticipate more material benefits of these programs to earnings to be exhibited in 2020 and beyond.
Though there are more consumer lending opportunities in the pipeline, we continue to practice disciplined growth as we grow our national consumer lending business.
By leveraging the leadership and talent of our Specialty Consumer Services group, as well as its origination and decision science platform, we are able to develop channels of consumer loan originations with prudent risk management and credit structuring.
Now I'd like to like to turn the call over to <UNK> <UNK>, our CFO, to provide a brief review of our consolidated financials.
Thank you, Brad, and good afternoon, everyone.
We delivered another good quarter, and I'll briefly touch on a few highlights and other items we'd ask you to note as you review our financial results.
Net income for the quarter was $31.4 million compared to the prior year period of $32.1 million.
Earnings per share of $3.23 reflects a $0.19 decrease from the fiscal second quarter of 2017.
Importantly, this quarter's results included $2.2 million of acquisition-related expenses in the quarter; $0.5 million payout of severance costs related to synergy efforts in our tax division; and $200,000 loss on the sale of investments.
Net interest income was $27.4 million in the second quarter of 2018, a 14% increase over the same period last year.
The previously disclosed student loan portfolio purchases and our high credit quality organic loan growth supported by our investment portfolio contributed to our net interest income growth, while holding more tax loans funded with wholesale deposits offset some of that growth in net interest income.
Total net loans of $1.5 billion at March 31, 2018, reflected growth of 31% from one year prior.
Excluding purchased student loan portfolios and refund advance loans, we delivered net loan growth of 27% year-over-year, which was driven in large part by our expanded commercial insurance premium finance portfolio, up 29% year-over-year.
And our community bank portfolio, which grew 26% year-over-year, driven by growth in commercial real estate, even with the reduction of $39 million in agricultural loans.
Importantly, we have maintained our underwriting and risk management discipline even as we continue to grow loans at a high double-digit pace and our asset quality metrics remain strong.
Nonperforming assets represented just 84 basis points of Meta's $4.3 billion in total assets at the end of the second quarter of fiscal 2018.
Outstanding NPAs are primarily related to our previously disclosed nonperforming ag loan relationship for which a deed in lieu of foreclosure was executed on the collateral in January 2018, and the collateral has been transferred to foreclosed real estate and repossessed assets.
We expect to receive all principal, note interest and related expenses from this relationship.
At March 31, 2018, agricultural loans totaled $58.8 million, representing just 1.4% of total assets.
Provision expense totaled $18.3 million in the second quarter.
The provision expense was primarily driven by an $18.1 million reserve related to tax service loans, which is an outcome of retaining all-tax loan volume on our balance sheet this tax season.
Turning to funding.
Our average cost of funds increased to 58 basis points in Meta's second quarter.
This increase was largely due to the use of wholesale deposits and increased overnight borrowing rates, as well as higher average overall funding balances to support the 2018 tax season.
At the same time, our cost of funds remains well below average for comparably sized financial institutions.
We continue to view our growing low-cost core deposit base as a differentiator in the banking space, particularly in a rising rate environment.
Our cost of deposits during the quarter was 33 basis points and just 6 basis points when excluding wholesale deposits, which was improved by 1 basis point from the previous quarter.
We reported a tax equivalent net interest margin of 2.89% for the recent quarter, down 2 basis points from the year-ago quarter.
It's important to remember, particularly for fiscal second quarter, that refund advance loans drive fee income, while having a negative impact on net interest margin.
These assets do not generate interest income, instead, we collect fees for these noninterest loans from our tax services partners, who offer them as a value-add to their clients.
We estimate that when adjusting for certain seasonal tax services loan programs and associated wholesale funding items, a normalized net interest margin for the 2018 fiscal second quarter would have been between 3.3% and 3.33%, which also reflects the adjusted tax rate due to the adoption of the Tax Cuts and Jobs Act.
On Slide 10 of our quarterly investor presentation, available at metafinancialgroup.com, we show the benefit to noninterest income in the fiscal second quarter and the corresponding impact to loan yields and NIM as a result of the refund advance loans.
Tax product income was the primary contributor to our noninterest income growth, which grew by 6% year-over-year to $97.4 million.
Meta's business is cyclical given the contributions of our tax refund advance and refund transfer programs, with the highest revenue levels in the second quarter of each fiscal year.
However, this seasonality is significantly less than in prior years and is expected to decrease further with Crestmark and our consumer lending agreements.
This year, the company grew total revenue to $124.8 million in the 3 months ended March 31, up 7% (sic) [7.5%] compared to the same period the prior year.
Beyond these results is an exceptional team of producers.
We're proud to attract top talent to Meta, individuals who share our commitment to providing diverse financial solutions and products with a customer-centric focus.
And our team is partially compensated based on performance-driven incentives.
As a result, the seasonality of our business holds true for our compensation expenses as well.
And the second quarter is marked by higher bonus accruals.
These factors, combined with the previously discussed expense related to a separation agreement and the overall increase in total FTE count, resulted in a 20% increase in our compensation and benefits cost for the recent quarter compared to the same period the prior year.
To provide deeper insight to the investment in our employees, we saw total FTEs increase to 916 at March 31, 2018, an increase of 38 from the linked quarter and an increase of 134 employees or 17% year-over-year.
The increase in headcount is primarily to support the rollout of our national consumer lending initiatives and the Crestmark merger, as well as overall growth in our existing business lines.
Despite this, total noninterest expense net of merger cost, remain relatively flat compared to the second quarter of last year, reflecting our expense management discipline overall.
However, we do expect to incur future intangible amortization expense, currently estimated at between $6 million and $10 million in 2019, attributable to the proposed Crestmark acquisition, which is subject to regulatory and shareholder approval.
And we will provide an update after further analysis and evaluation is completed.
We believe that our flat, total noninterest expense also illustrates the operating leverage potential for our model, excluding new product program or acquisition initiatives.
We remain focused on creating positive operating leverage at all of our businesses, each of which has inherently different efficiencies.
Each of these businesses is also a different maturity points in their life cycles.
Putting them together, we see significant opportunities for accelerating positive operating leverage, particularly in fiscal 2019 and even more so in 2020.
Overall, we are very pleased with our quarterly results and are well positioned to continue delivering strong financial performance going forward.
With that, I'll turn the conversation back to <UNK>, for any closing comments, before we open it up for questions.
I'd like to thank <UNK> and Brad for their comments and participation today.
As you'll see in our financial results for the second quarter, we're getting strong and growing contributions from all business lines and at the same time making significant investments for future growth initiatives.
While we spent most of our time this afternoon on tax payments and our pending Crestmark deal, our other businesses are firing on all cylinders and continue to have strong futures and opportunities ahead as well.
We're happy to address questions you may have on those operations.
That completes our prepared remarks.
Operator, please open up the line for any questions.
Yes.
Brad talked about a little bit as well.
We try to get the guidance out as soon as we could after tax season between different mix and higher loan volumes has led to the expectation that it will be a little lower than what we expected to be at the start.
Mike, this is <UNK>.
We tried to call some of that with the $800,000 to $1 million, and those are hard start-up costs for the loan programs.
And so we announced 3 of those in the quarter.
There is additional expenses outside of that as we ramp up staff, and have been ramping up staff in underwriting, origination to service these loans, product development.
And so you should expect, if you're looking at legacy business, that we will have higher expenses for a while.
What that amount is, part of it will depend on how fast these loan programs ramp up.
There will be certainly be a fixed cost, some fixed cost staffing primarily, and in investments to support them, but then a lot of the cost will be more variable, once the loans get up and running ---+ once the loan programs get up and running.
Yes.
That's why we talked about the amount per program too.
So if you see us announce additional consumer credit relationships, you now know to say, okay, this is what we expect.
The cost probably is going to be in the quarter that it's announced.
And again, then you can relate that to, again, associated revenue going forward.
Yes.
That's a reasonable way with the caveat of the timing of how fast some of these programs ramp up or need to ramp up, and we need to make investments for those programs.
But you're thinking about it the right way.
Frank, this is <UNK>.
Those amounts have ---+ since those 3 have been announced, you can assume that most of that was spent in this quarter, this recent quarter.
And to the extent we're looking at ---+ and the others, we haven't announced anything yet.
We're not going to do [tenet 1], so we're trying to phase these in where it makes sense and where we find good partners.
I think another good way to look to where some run rate is when we really look at our compensation expense and the number of staff that have been hired either since the prior quarter or a year-ago period.
There were no acquisitions in the last 12 months that would have increased staffing, obviously, we'll add 330-some employees when we close Crestmark.
But that 134 is net adds over the last year to support both existing businesses that have been growing.
You saw what's happening in our Community Bank and our premium finance business, those loan growth rates and then as well as to staff up to do a national consumer lending business and to do it properly.
Right.
So as ---+ I mean, Crestmark, for example, has been under $1 billion, not publicly traded.
So while all of their procedures, controls, et cetera, were perfectly appropriate for the bank, they were, as a large ---+ much larger organization that's publicly traded, we have been spending money and also preparing for the future growth that we think we can come ---+ that we can generate out of there.
But obviously, at the same time, because the deal hasn't closed, we haven't been able to gain any of the efficiencies that we did talk about, and we think they'll be out there with respect to Crestmark as well.
So I hope that helps some too.
May I make one clarification, please.
The 2 previously announced consumer loan deals have been largely incurred in this quarter.
CURO was just announced and will be developed and launched later this year, so we'll still be experiencing some expense related to that one.
And any new ones that we might announce later.
We haven't disclosed that.
Certainly some of the elevated expenses this year over last year in comp will be permanent compensation adds.
One of the other things too as we're moving more and more of our compensation to incentive-based compensation with a higher percentage of our income coming in the second quarter, a higher percentage of that in incentive comp would be recognized ---+ incentive comp expense would be recognized in the second quarter as well.
Yes.
We would expect, excluding Crestmark, depending on the timing of when that closes, we would expect comp to come down next quarter from this quarter.
No.
Well, one reminder too.
As of December 31, that ag loan that was $29-ish million was still in as a loan.
So that's $29 million that in essence came out of the loan growth or benefactor of the retail bank.
So basically you're at 30% at the retail bank in round figures and then 29%.
So frankly, the number is about what it has been in the last, at least, the last quarter as well.
Again, excluding moving that one ag loan to REO.
We see a lot of opportunities in both those in the Community Bank lending and Premium Finance.
Now will it stay at the same rate, we don't know.
Obviously, the denominator becomes larger.
But we're very pleased with the pipeline that we see in both of those businesses.
Yes.
And again, it's probably been 5 years now for the community bank that it's been between 19% and 30%.
And we've more than tripled AFS, the premium finance business in the 3 ---+ little over 3 years that we've had it.
And so, again, we've talked about robust loan growth and the fact, and there's a little seasonality.
There's a little bit of ---+ one's a little higher, one's a little lower, but they've been consistently strong for a lot of years.
And Frank, one follow-up on the comp expenses, just to clarify for ---+ looking at our third quarter, to more specifically answer your question, we would expect them to come down from Q2, but not probably all the way to the 20% that you saw the drop last year.
Again, that Delta being the staffing that we've added to support the consumer lending initiatives as well as prepare for the growth at Crestmark.
Yes.
If you looked at the numbers that we provided on the earnback and the dilution and things like that, we talked about the 2.2-year payback was being based on 15% loan growth out of Crestmark.
They've grown faster than they had in the past.
But, again, that's a number that we were comfortable with putting out there and with the integration and everything else we'll see what the opportunities are.
And again, with respect to AFS and the community bank, we've seen consistent solid growth as they're going to be at exactly the, again, the 26% for the community bank.
Well, I don't know what's been between 19 and 30 every quarter for 5 years and round figures.
And the AFS, again, we continue to see opportunities there whether that stays that 29%, 30% where it's been or not.
Again, we do think there's upside ---+ we think there's positive growth opportunity just like we've seen in the past.
Yes.
Obviously, with rates going up, there are higher opportunities.
We're seeing tax equivalent yields above 4% in things we're buying.
If you go back roughly a year, we talked about the opportunity for growth and the margin and things like that.
If you look at the securities yields on the securities portfolio, it was up 19 basis points from the last quarter.
The mortgage-backed portfolio was up 35 basis points.
So again, one of the things we've talked about with the mortgaged-backed portfolio is even though it was fixed-rate because of the type of securities we're buying, it does have upside potential as rates move up subject to ---+ obviously, there's a ceiling on how low prepayment speeds can go.
But, again, even with the lower tax rates, we are seeing higher yields even over the last quarter or 2 and continue to see opportunity for growth, both because of higher yields overall and because a number of the different ---+ with (inaudible) different baskets that started about a year ago, including more variable rate securities.
So again, if you look on ---+ if you look at the chart you see on Page 10 that was referenced before, you see higher loan yields.
Some of that relates to what ---+ the quasi-variable loans that we're seeing in the AFS portfolio as, again, the student loans that we bought also were tied to 30-day LIBOR.
So you're starting to see the benefit also of all rates going up, but again, much more quickly on those quasi-variable rate loans, again, as well good increases last quarter on the Securities portfolio.
Yes.
It was ---+ so far, it has been in line with expectations.
There ---+ we have not disclosed specific loss rate numbers.
That said, you can ---+ we provisioned $18.1 million this quarter.
Our different partners have very different loss rates, depending on the demographics of their customer base, as well as what their goals are from those programs as it pertains to where they want loan sizes to be and what they want approval rates to be.
But mixing all that in together, our models continue to perform very well.
Really, the history that SCS has had in this market for a number of years, we really continue to see the benefit of that throughout this tax season.
I think it's important to stress what <UNK> just mentioned that some of the partners want to be a little bit more aggressive with the approval rates, and we build in to the pricing and the fees associated with those loans, different pricing to accommodate loss rates so that will be commensurate with the approval rates that are desired by the various businesses.
Yes.
That's a reasonable expectation.
That's ---+ again, if you exclude the advances ---+ the refund advances as well as the associated borrowing, we would have been at that 330 to 333 this quarter and again, I think there is some upside to our margin opportunities just like we saw this quarter.
And Crestmark, once that closes, we'll take that up higher as well as the consumer credit loans that we're making as well.
It should be as we disclosed when the Tax Act came out, Dan, the 21% for the remaining quarters.
The primary carryover that we would expect to see in the third quarter is refund transfer.
So payment processing, Frank, given some of the delays with the IRS that flowed over from March into April.
There will be true-ups of the allowance for tax products throughout the remainder of this season, and we're not expecting those to be material, but we don't know at this point.
But based on what we know today, our primary expectations, refund transfers in the third quarter income will be higher than it was in the same period a year ago.
Correct, in the refund transfer fee income.
We haven't given guidance on that.
It will be a little bit higher than last year.
Thank you.
I'd like to close by thanking all of you for participating in Meta Financial's quarterly investor call.
It's our pleasure to update you on our highly differentiated financial services model, including Meta's annuity-like and high fee-generation business and tax services and payments, combined with our national lending platform and community banking operations.
We appreciate your interest and attention, and hope you have a great evening.
| 2018_CASH |
2016 | CYTK | CYTK
#Good afternoon, everyone, and thanks for joining us on the call today.
<UNK> <UNK>, our President and Chief Executive Officer, will kick us off with highlights from the quarter.
Then <UNK> <UNK>, our EVP of Research and Development, will provide an update on the clinical development program for omecamtiv mecarbil.
<UNK> <UNK>, our SVP and Chief Medical Officer, will then provide updates on tirasemtiv and the ongoing VITALITY-ALS Phase III clinical trial in patients with ALS.
<UNK> will then rejoin us to share an update on CY-5021, the ongoing Phase II clinical trial of CK-2127107 or CK-107 in patients with spinal muscular atrophy, or SMA, as well as another recently started clinical trial of CK-107 in patients with COPD.
<UNK> <UNK>, our EVP of Finance and Chief Financial Officer, will provide a financial overview for the quarter and <UNK> will wrap things up with additional corporate updates before we open the call for questions.
Please note that portions of the following discussion, including our responses to questions, contain statements that relate to future events and performance, rather than historical fact, and constitute forward-looking statements for purposes of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
Examples of forward-looking statements may include statements relating to our financial guidance and goals, our strategic initiatives, our collaborations with Amgen and Astellas, clinical trials, and the potential for eventual regulatory approval of our product candidate.
Our actual results might differ materially from those projected in these forward-looking statements.
Additional information concerning factors that could cause our actual results to differ materially from those in these forward-looking statements is contained under risk factors in our Form 10-Q for the quarter ended March 31, 2016, and our Form 10-Q for the quarter ended June 30, 2016, which we expect to file shortly.
We undertake no obligation to update any forward-looking statements after this call.
And now, I will turn the call over to <UNK>.
Thank you, <UNK>, and thanks again to everyone for joining us on the call today.
As you heard yesterday, we announced that we've expanded our collaboration with Astellas in skeletal muscle activators to include ALS.
Through this expansion, we granted Astellas an option right for the development and commercialization of tirasemtiv, our first-in-class skeletal muscle activator.
If Astellas exercises the option, Cytokinetics will continue to develop and commercialize tirasemtiv in North America, Europe, and other select countries and Astellas will develop and commercialize tirasemtiv in other countries.
Additionally, we have agreed to amend our collaboration agreement with Astellas to enable the development of CK-107 for the potential treatment of ALS and also to extend our joint research program focused on the discovery of additional next-generation skeletal muscle activators through 2017.
This is a significant deal for Cytokinetics.
It enables and funds the continued prosecution of clinical development and commercial planning activities for both tirasemtiv and CK-107 and aligns our interest with Astellas as we together seek to build a market-leading franchise in the pharmacology of skeletal muscle activation.
Moreover, this expanded collaboration with Astellas provides further validation to our long-standing corporate development strategy to leverage and expand partnerships to fund continued research, development, and commercial planning of our drug candidates as we mature our Company operations and advance our strategic vision.
Most importantly, however, this deal affords us additional opportunities to further serve patients with ALS and also their caregivers.
Turning to Q2, we had a very productive quarter, advancing clinical, regulatory, and commercial planning activities across our portfolio of muscle biology-directed drug candidates.
I know many of you are interested in an update on omecamtiv mecarbil and the planned Phase III program in collaboration with Amgen, so I'll get right to that.
I am pleased to tell you that we and Amgen continued to make progress in preparations for an international Phase III outcomes trial during the second quarter.
While Amgen has not yet made a formal corporate commitment to proceed to Phase III, we remain optimistic and hopeful that the program will move forward, given the increasing level of operational activities intended to support the initiation of a Phase III trial that are underway.
<UNK> will elaborate on this in a moment, but suffice it to say that from protocol development to regulatory interactions to the vetting of clinical trial sites, all of the wheels are in motion to initiate a Phase III clinical trial by year's end and we expect a final formal decision from Amgen in Q3.
With regard to our skeletal muscle programs, and in particular tirasemtiv, we are especially pleased to report that we expect to complete screening for new patients in VITALITY-ALS at the end of July, with enrollment targeted to close shortly afterwards.
We also made progress this quarter in our planning activities, leading to the intended initiation of an open-label extension trial that is designed to enroll patients who complete VITALITY-ALS.
We expect the open-label extension trial to start in Q4 of this year.
<UNK> will provide an update on our ongoing Phase II clinical trial of CK-107 in patients with Type II, III, or IV SMA.
Admittedly, we are behind on our enrollment timeline in this trial, but we do believe momentum is picking up.
We should be in a position to complete enrollment of cohort one in the second half of the year.
<UNK> will speak to some of the challenges we've encountered and how we are addressing them.
Also regarding CK-107, I hope everyone saw our recent announcement confirming the start of a second Phase II clinical trial of CK-107, this one in patients with COPD.
This trial is being conducted by Astellas and will evaluate the potential of CK-107 to increase measures of exercise performance in time to muscle fatigue in this patient population.
The hypothesis for this trial relates to the fact that people with COPD experience significant limb muscle weakness and metabolic abnormalities.
Because CK-107 increases forced production of muscle and reduces fatigability in fast skeletal muscles, we are interested to evaluate potential effects of CK-107 on exercise tolerance and stamina in these patients.
Let me now turn the call over to <UNK> so he can elaborate initially on progress with omecamtiv mecarbil.
Thank you, <UNK>.
As you just heard, we had a productive quarter regarding the development and potential progression of omecamtiv mecarbil into a Phase III clinical program in collaboration with Amgen.
Together with our colleagues at Amgen, we participated in a series of regulatory and clinical meetings designed to finalize details of the protocol, statistical analyses, and the conduct of the large Phase III outcomes study.
These preparations included further interactions, both meetings and written correspondence, with FDA and EMA, all designed to achieve consensus with regards to our approach to the planned outcomes trial and the overall clinical development program.
Specifically, we've obtained consensus on protocol design, targeted patient population, clinical endpoint, safety monitoring, and approach to dosing.
Further, as you may have heard on Amgen's Q2 earnings call yesterday, we have submitted to the FDA our heart failure outcomes study protocol for a special protocol assessment, or SPA, and look forward to finalizing the protocol and additional study-specific materials, such as charters, case report forms, fiscal analysis plans, and other materials required for study startup.
Also underway are activities necessary to vet clinical trial sites across the globe, assess the feasibility of their participation in the trial, as well as to begin to prepare for IRB and country-specific regulatory and ethical submissions later this year.
To facilitate entry of Japan into the Phase III program, the Phase II trial of omecamtiv mecarbil in Japanese patients with heart failure continues to enroll.
And finally, in support of longer-term planning, both commercial and manufacturing meetings are taking place with our colleagues at Amgen.
As I hope you can appreciate, there is a tremendous amount of work involved to get a trial like the one we envision ready to enroll patients.
I would like to take a moment to acknowledge my colleagues at Amgen and Cytokinetics who've worked so hard on preparations as we remain on timeline for a Phase III trial that may start later this year.
Additionally, we know that Servier is in receipt of the information they require from Amgen, including a Phase III trial protocol and budget, to inform their decision regarding an option for European commercial rights to omecamtiv mecarbil.
This is an important factor for Amgen, given that in this scenario Servier would contribute meaningfully to the cost of development, including the conduct of a Phase III program.
Turning to other clinical updates, during the quarter we announced the presentation of additional results from COSMIC-HF at Heart Failure 2016, the annual congress of the Heart Failure Association of the European Society of Cardiology, that took place in Florence, Italy.
The results presented indicated that omecamtiv mecarbil improved left ventricular systolic function over 20 weeks of treatment and the reduction in LV end-diastolic volume and NT-proBNP accumulated over time, adjusting potentially favorable ventricular remodeling and progressive reduction in myocardial wall stress.
We are pleased to share these results, as it marked the first time since we began the development of omecamtiv mecarbil that we observed that increasing cardiac contractility by chronic treatment may result in progressive reduction in ventricular size.
Our potential Phase III program may further inform whether effects on cardiac function are durable over longer treatment and may translate to improved cardiovascular outcomes.
As <UNK> mentioned previously, we anticipate a formal decision on omecamtiv mecarbil potentially proceeding into Phase III in Q3 of this year.
And I will turn it over to <UNK> to provide an update on VITALITY-ALS.
Thanks, <UNK>.
I will start with an update on screening and enrollment in VITALITY-ALS, our Phase III trial, which is designed to assess effects of tirasemtiv versus placebo on slow vital capacity, or SVC, and other measures of skeletal muscle strength in patients with ALS.
The most important recent development is that we are completing screening across our 80 centers and 11 countries in the US, Canada, and Europe and we expect to close enrollment in the next week or two.
Like with many trials, the closing of a trial to enrollment is a very busy time, and we are pleased to see that these last few months have afforded us an opportunity to enroll patients with ALS from additional centers and countries, so that we can expect a broad distribution of patients in this important international Phase III trial.
We have also continued to monitor closely the rate of early terminations in the open-label period prior to patient randomization, as well as the early terminations post randomization.
We also observed a standard deviation around the SVC measurement.
While we remain blinded to investigational study drug assignments, we are encouraged that these data are consistent with or even slightly better than assumptions that we made in designing VITALITY-ALS, including constructing our statistical power calculation.
In the last quarter, we made significant progress finalizing the design and making edits to the protocol and statistical analysis plan for our planned open-label extension trial, which will enroll patients who have completed VITALITY-ALS, with the first among them to enter the open-label extension trial in the fourth quarter of this year.
Toward this end, we had productive regulatory interactions with FDA and EMA during the quarter and received advice that informed how we finalize the trial design.
We are now in the process of preparing for submission to IRBs to enable the study start.
We will have more to say about this trial once the first patient is enrolled later this year, but we believe it can provide supplemental data to support a potential registration program for tirasemtiv.
Also during the quarter, we made other preparations for the potential registration of tirasemtiv, including the conduct of manufacturing activity, as well as stability and other studies intended to support registration.
We also have increased pre-commercialization activities, as you will hear more from <UNK>.
Now I will turn the call back over to <UNK> to provide an update on CK 212-7107, our next-generation fast skeletal troponin activator.
Thanks, <UNK>.
Turning to the development of CK-107, with our partner Astellas, as you know, we are currently conducting a Phase II clinical trial in patients with SMA, called CY-5021, and it's progressing as we continue to activate sites throughout the United States and to enroll patients.
As <UNK> mentioned, we are behind versus our initial enrollment objective; however, we believe that the slower enrollment is not due to a lack of investigator enthusiasm or of eligible patients.
Instead, because adolescents and adults with SMA who are eligible for our trial have had fewer current treatment options and have limited opportunities to participate in clinical trials, there is a great interest in our trial.
Because this population has not been eligible for clinical trials in SMA in the past, we now are charting new territory with our trial and with our clinical trial sites.
As a consequence, we've encountered certain start-up challenges associated with securing proper equipment to conduct the various assessments.
We also have seen more screen failures than we had anticipated, given the stringent inclusion and exclusion criteria for the trial.
As said, we believe these challenges are now behind us, and screening enrollment are picking up as we enter the third quarter.
Additionally, we made a decision to expand the trial to sites in Canada, which should also help us with catching up with enrollment targets.
We believe we will complete enrollment of cohort one with new data and progress to cohort two by the end of this year, with trial results still expected in the first half of 2017.
We also recently announced the start of a second Phase II trial of CK-107 in patients with COPD.
Astellas is conducting this randomized, double-blind, placebo-controlled, two-period crossover clinical trial designed to assess the effect of CK-107 on physical function in patients with COPD.
The trial is expected to enroll approximately 40 patients in the United States and is designed to assess the effect of CK-107 compared to placebo and exercise tolerance.
Additionally, the trial will assess cardiopulmonary and neuromuscular effects of CK-107 relative to placebo and the effect of CK-107 on resting spirometry relative to placebo.
Finally, the safety, tolerability, and pharmacokinetics of CK-107 will be assessed.
This trial should afford us an informative investigation of whether CK-107 may have a positive impact on exercise tolerance and stamina in these patients.
As you know, COPD can be a debilitating disease that limits patients' ability to enjoy the activities of daily living, like climbing a flight of stairs or playing with a grandchild.
And finally, in addition to SMA in COPD, with our recently expanded global collaboration with Astellas for the development of CK-107 in patients with ALS, we've agreed to a development plan in which Cytokinetics will conduct a Phase II clinical trial in patients with ALS in 2017 under Astellas's sponsorship.
Based on the outcome of that trial and assuming a positive scenario, Astellas and Cytokinetics will collaborate in the design and conduct of a potential registration program for CK-107 in ALS.
With that update, I will now turn the call over to <UNK> for an update on our financials.
Thanks, <UNK>.
As our press release contains detailed financial results for the second quarter of 2016, I will refer you to that public statement for the details of our P&L and balance sheet.
We ended the second quarter with approximately $98 million in cash, cash equivalents, and investments, which represents over 12 months of going-forward net cash burn, based on our current 2016 financial guidance.
As you know, yesterday we announced the signing of an amendment to our collaboration with Astellas.
Subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act, we expect to receive $65 million in nonrefundable cash, which we believe will extend our runway by nearly another year.
Additionally, we expect to receive $30 million in sponsored research and development through 2017.
Revenues for the second quarter of 2016 were $5.8 million, compared to $6.5 million during the same period in 2015.
Revenues for the second quarter of 2016 included $1.9 million of license revenues and $2.9 million of research and development revenues from our collaboration with Astellas, and $0.6 million in research and development revenues from our collaboration with Amgen and $0.3 million in research and development revenues from our collaboration with ALSSA ---+ sorry, ALSA.
Revenues for the same period in 2015 included $3 million in license revenues and $2.9 million of research and development revenues from our collaboration with Astellas and $0.6 million of research and development revenues from our collaboration with Amgen.
Our second-quarter 2016 R&D expenditures totaled $9.7 million.
From a program perspective for the second quarter, approximately 68% of our R&D expenses were attributable to our skeletal muscle contractility programs, which includes both expenses associated with tirasemtiv and CK-107 development, 24% of our cardiac muscle contractility program, and 8% to our other research activities.
With the recent expansion of our deal with Astellas, we do not expect to update our financial guidance until our Q3 earnings call.
At that time, we will provide updated guidance, including the impact of this transaction on both a cash and GAAP basis.
With that, I will now turn the call back over to <UNK>.
Thank you, <UNK>.
So as you've heard, we had a very busy and highly productive second quarter and are continuing that momentum across the pipeline as we move into the second half of the year.
As we peer forward, we believe these are transformational times for the Company.
We are reminded every day of the urgent need to bring our novel first-in-class muscle activators to patients living with devastating diseases of impaired muscle function and weakness and we are working relentlessly to make that a tangible reality for them.
Just last month, we met with patients, caregivers, and clinicians at the Cure SMA conference and we heard their enthusiasm for what we're doing in our Phase II clinical program for the significant number of SMA patients for whom there are no options today.
During the second quarter, we rang the closing bell at NASDAQ to kick off ALS awareness month, alongside representatives from the ALS Association, as well as the inspiring people living with ALS and their families.
We were also honored to recently receive the commitment to a cure award from the Golden West chapter of the ALS Association.
From a corporate perspective, as we continue to mature the Company and prepare for commercialization over the next few years, based on our Vision 2020, we are taking steps to increase our commitment to compliance.
Toward that end, I am pleased to report that we appointed Caryn McDowell, our General Counsel, as Chief Compliance Officer.
Our management team and Board will be working closely with Caryn to implement a full-scale compliance program to ensure we consistently operate with the highest ethical and professional standards in all of our interactions with key constituencies and stakeholders.
This is especially important because we are dialing up our pre-commercialization activities in support of potential registration and marketing authorization of tirasemtiv in North America and Europe.
During the second quarter, we conducted commercial planning activities to further evaluate the unmet need and potential value proposition of tirasemtiv from the perspective of payers.
Toward that end, we are conducting a series of market research initiatives and pricing analyses to inform commercial strategies, and we are engaging with representatives of payer organizations, government agencies, and health technology assessment, or HTA, organizations in Europe, who will be instrumental in ensuring ALS patients have market access to tirasemtiv following potential regulatory approvals.
Our deal announced yesterday aligns our interest with Astellas with regard to tirasemtiv and CK-107.
As we prepare for potential registration, marketing authorization, pricing, reimbursement, and market access, we are encouraged now knowing that the investments we are making to inform strategies for tirasemtiv and the capabilities that we are building to support this first-in-class fast skeletal troponin activator in both North America and Europe can be further leveraged to support activities for CK-107.
Our extended and expanded deal with Astellas, like our deal with Amgen that has also been extended and expanded over several years, provides further validation that our leading position in muscle biology in both R&D affords us multiple advantages, multiple opportunities, and multiple benefits for patients and all our stakeholders.
Now let me recap our expected milestones this quarter and for the remainder of the year.
For omecamtiv mecarbil, we expect to communicate a decision regarding potential advancement to Phase III in the third quarter.
For tirasemtiv, we expect to conclude patient enrollment in VITALITY-ALS in this third quarter and begin an open-label extension trial of VITALITY-ALS in the fourth quarter of 2016.
And for CK-107, we expect to complete enrollment of cohort one in CY-5021, the ongoing Phase II clinical trial in patients with SMA, that to occur in the second half of 2016.
For preclinical research, we expect to continue research activities under our joint research programs with each of Amgen, directed to the discovery of next-generation cardiac muscle activators, and with Astellas under our joint research program, directed to the discovery of next-generation skeletal muscle activators.
Under our collaborations, we expect to advance at least one of the next-generation potential drug candidates into preclinical development in 2016.
Operator, with that, we can now open up the call, please, to questions.
I will answer the first question.
We can't specifically tell you what the milestone one trigger is, nor the dollar amount related to any Amgen milestones that we might receive.
All we have publicly communicated, though, is that in the next year or so we will have $25 million to $50 million in milestone payments in combination from Amgen and Astellas, and that's the only thing that we have communicated.
And just to get to your second question, I think the study size, we can't be precise about it yet.
We will certainly give a lot more details when we announce the beginning of the study, but I would assume that it is a study that we are intending to be able to definitively look at, at heart failure or hospitalization CV mortality, and it will be in the neighborhood of several thousand patients.
So I think you will find it to be comparable to PARADIGM at the end of the day.
Yes, so the ---+ it's interesting because these sites have done studies with SMA.
But they've all been in infants and very young children, so many of the scales are also applied in adults, or some of the scales that are used in young children apply in adults.
But size makes a difference here.
So when you have adults, for example, you can't use the same exam table that you use for infants and supplying them with the proper exam tables, there is a calibration tool that you need to measure bone length in the forearm that you can't use the same tool in young kids and adults that you need to get to the site.
So the sites, while they do see these patients when they get older, they see them less frequently and they assess them ---+ they don't assess them in the same way because they are ---+ while they are functionally ---+ certainly functionally affected, they tend to not progress very rapidly.
They've gotten to a steady state.
And so, it really is enabling them to make those kinds of assessments now in an older population.
Maybe I will start and turn it over to <UNK>.
So I think it's not surprising to anybody.
I hope that we are, with Amgen, pursuing a spot.
One would naturally, I think, do that when you are committing the kinds of dollars and time and other resources towards such a very expensive, large, international Phase III study.
And in particular, in light of the fact that there are already drugs approved in heart failure and where there are validated endpoints, I think it stands to reason that you would want to make certain that you are on the same page with respect to all of the assumptions included in the trial design and conduct and the statistical plan that would accompany that.
So, I think this was very much always the intention and is hopefully further affirmation of the fact that we are leaning forward here.
Let me expand a little bit, <UNK>.
I think in the case of heart failure, there has been a lot of trials conducted, a lot of outcomes trials conducted, and a lot of reviews, obviously therapeutics and heart failure that have been conducted by the FDA.
And so, maybe you're asking as opposed to ALS, where that is not the case, the FDA has a far better idea of what they are looking for in terms of case report forums, in terms of endpoint definitions, really specific and helpful advice that we thought we could get with reasonably quick speed.
Some of these things have even been published.
So while the definitions are clearly defined, the devil is a little bit in the details, and so we had selected to proceed with SPA in this case to get some of that feedback.
We do expect that we will have feedback on the SPA very soon.
But I think in light of the fact that we are executing on a timeline to start the study by the end of the year, you have to imagine that that speaks to a formal commitment in Q3.
We and Amgen have discussed what's required in order to make that decision, and yes, we think we are comfortable indicating that it will occur in the third quarter.
Firstly, I will comment on your first statement.
I thought it was interesting that following Amgen's earnings call I read a couple of analyst notes that indicated they thought that Amgen had already committed to the start of the Phase III program.
And I want to be clear that that is not the case, that despite I think optimistic comments on the part of both companies and our belief that omecamtiv in the COSMIC study was very positive, a formal decision is still forthcoming.
That said, I am aware of Amgen having interactions with Servier.
And yes, we have had our own direct dialogue with Servier as part of helping Servier inform their decision regarding the exercise of an option on omecamtiv mecarbil.
But our role is really secondary in that Amgen has a direct sublicense to Servier and we participated in some of the conversations with Servier to facilitate their due diligence.
I should not comment, it's not really my business to do so, regarding how Servier is leaning or not.
That's really for Amgen to comment on.
I think using a dose optimization method of delivering drug to patients is really the most innovative thing that we are doing.
So most heart failure trials just basically dose the patient intolerant and they dose the drug up as high as they can until they reach even the top dose they can administer or the patients don't tolerate a higher dose, and then they move on.
And in this case, as you know, we've done a lot of careful work in Phase II to define the dose response, concentration response, and in this case we're using a guided dose optimization, personalized medicine, however you want to describe it, way of delivering omecamtiv mecarbil to these patients.
So, that aspect of the protocol, I think, is the most novel compared to all other studies.
There are other aspects that are ---+ that will be a little unique.
The way we define a primary endpoint will be a little novel.
Other things I think will be a little different, but I wouldn't call them revolutionary or game changers.
No, not really.
We've sort of passed through that already.
I think the ---+ in their prior meeting.
So, I think we have an agreed dosing optimization protocol with them now.
And it will be very similar to what we employed in COSMIC.
The only changes really are to enable more patients to reach what we think is the target range of concentrations that we want to achieve than we were able to achieve in COSMIC.
So, we can elaborate on that when we ---+ at the beginning of our study.
I think you'll find that it's going to be quite broadly conducted around the world, on all continents, probably, and well north of 40 countries, 40 to 50 countries.
So, it's going to be conducted in places that have done heart failure research before and be very ---+ a very highly globalized study.
Yes, there is an entry criterion that is related to patient function, so we use a scale called the Hammersmith scale, and if you are at the low end, your function is really poor.
And if you are at the high end, then your function is close to normal.
So we have tried to exclude people at the very, very low end because we just felt their condition would be too severe to really respond to the drug.
And we excluded people at the highest end of the scale because there would be no room for them to respond.
And that's really where you're finding ---+ I think the sites don't normally perform Hammersmith scale assessments in these patients.
And as they are doing them, I think they are now getting a better sense of what a patient's Hammersmith score will be before they bring them into screen them.
So, we are hoping to avoid more screen failures that way by ---+ as the sites get used to gauging their patients before they bring them in.
It's ---+ I can't remember the name of the machine, but it's more than just a treadmill.
It's a constant work rate exercise protocol.
It's a bicycle ergometer.
That's what I was struggling with.
So we've given thought to it; we've talked about it.
I think we are more likely inclined to see if we can meet the criteria ---+ meet the enrollment targets we have with the expansion of the number of sites, but it's not off the table.
We have considered ---+ we have actually amended the protocol to make it easier to ---+ there are patients that are ---+ we have ambulatory and nonambulatory patients.
There was a little gap in between in the way the definition was laid out that ended up excluding some patients, so we sort of tightened that up.
That was a couple screen failures we had.
But I think the functional criteria kind of needed to stay the same, at least for now, just given the desired outcome in effect on the functional scale.
That's one of the desired outcomes.
I'm sorry, Sarah, can you repeat.
Our what level.
I think you said our desired level of involvement, so we are certainly expecting to proceed to Phase III, and we would very much want to be doing so and participating in that program.
We have two different rights.
One is the right to participate in the conduct of a Phase III program, and as we may move into Phase III, we would very much desire to do that.
That would occur such that certain costs associated with our involvement would be reimbursed by our partner at Amgen.
And then, secondly, you may be referring to the fact that we have an option to co-fund Phase III in order to buy up our royalties, and that is something that we would expect to do.
We have the opportunity to take some of the milestone payments, or, for that matter, any other capital, and deploy it for that purpose and in fixed-dollar increments invest in risk capital in the Phase III program in order to buy up our potential royalties on sales.
We've done the calculations associated with the potential return on investment and we think that could be quite positive for Cytokinetics where we to invest alongside of Amgen in that Phase III program.
So that is something that we are anticipating doing as we may proceed to Phase III.
I'm sorry, it was a little bit mumbled.
I think you said do we think that they will (multiple speakers)
They'll use CROs or will they do all the activities themselves.
I think as a general rule Amgen does engage with outside clinical research organizations for the conduct of certain activities associated with their clinical trials, like do most pharma companies.
It's probably not for us to comment beyond that.
I think it will just stipulate that the patient needs to be on standard of care and that will be increasingly including Entresto.
But I don't think we will be mandating that the patients be on Entresto.
They need to be on an ACE inhibitor and/or an ARB.
They can be on Entresto, and then the study will be omecamtiv mecarbil versus placebo over that background of standard of care.
Sure, to the best that I can, because I am not privy to all of the details of the agreement between Amgen and Servier, but my understanding is that in exchange for Amgen receiving a license to develop and commercialize Corlanor in the United States, Amgen with our consent granted Servier an option with respect to the commercial rights of omecamtiv mecarbil in Europe.
We saw that and why we gave consent is we saw that as a big positive.
Servier, as you know, is the leading company in Europe in the area of heart failure.
And as I understand the option, it affords the right for Servier to participate in certain development meetings and regulatory conversations.
But for the most part, they are buying into the right to commercialize the drug were it to be approved.
And as such, they would be responsible for paying milestones and royalties to Amgen and Cytokinetics.
So our economics are not affected by Servier's participation.
But certainly the IQ of the program is increased by having Servier's involvement.
So, my understanding is that Servier were to exercise its option we'd be responsible for paying a percentage of the Phase III costs in exchange for these commercial rights.
So I don't know what that number is, but I suspect it's a meaningful percentage of the total.
And as we now have a protocol and we have got a plan and budget, I assume that Servier and Amgen are having conversations about that plan and budget.
We are participating in some of the due diligence, as I mentioned.
But for the most part, the conversations are occurring between Amgen and Servier.
I don't think that is all a part to this, not that I've heard anyway.
I don't think that's influencing the decision or in any way affects the ultimate decision that will be made vis-a-vis omecamtiv mecarbil.
Thank you, Operator, and thanks to all the participants for joining us on this call today.
It has been an extremely busy and productive time at the Company, as we highlighted for you, capped off by our recent announcement of our expanded collaboration with Astellas.
Going into the second half of the year, we are very optimistic about how things are shaping up and hopeful as we expect to continue to deliver on key milestones across our pipeline.
We thank you for your interest and also your support.
With that, operator, we can conclude the call.
| 2016_CYTK |
2018 | BKE | BKE
#Good morning, and thanks for being with us this morning.
Our March 16, 2018, press release reported a net income for the 14-week fourth quarter, which ended February 3, 2018, was $42 million or $0.87 per share on a diluted basis compared to net income of $36 million or $0.74 per share on a diluted basis for the prior year 13-week fourth quarter, which ended January 28, 2017.
Net income for the 53-week fiscal year ended February 3, 2018, was $89.7 million or $1.85 per share on a diluted basis, which compares to net income of $98 million or $2.03 per share on a diluted basis for the prior year 52-week fiscal year, which ended January 28, 2017.
Net sales for the 14-week fourth quarter increased 0.4% to $281.2 million compared to net sales of $280 million for the prior year 13-week fourth quarter.
Comparable store sales for the 14-week fiscal period ended February 3, 2018, decreased 3.2% from comparable store sales for the prior year 14-week period ended February 4, 2017.
Online sales increased 4% to $33.5 million for the 14-week fiscal period compared to net sales of $32.2 million for the prior year 13-week fiscal period.
Compared to the prior year 14-week period ended February 4, 2017, however, online sales for the quarter increased just over 1%.
Net sales for the 53-week fiscal year decreased 6.3% to $913.4 million compared to net sales of $974.9 million for the prior year 52-week fiscal year.
Comparable store sales for the 53-week fiscal period ended February 3, 2018, decreased 7.2% from comparable store sales for the prior year 53-week period ended February 4, 2017.
Our online sales decreased 1.6% to $98.2 million for the 53-week fiscal year compared to net sales of $99.8 million for the prior year 52-week fiscal year.
For the quarter, UPTs increased approximately 0.5%, the average unit retail decreased 0.5% and the average transaction value decreased just slightly.
For the full year, UPTs increased approximately 1.5%, the average unit retail decreased approximately 4.5% and the average transaction value decreased approximately 3%.
Our gross margin for the quarter was 47.4%, up 250 basis points from 44.9% in the prior year fourth quarter.
The year-over-year increase is the result of a 225 basis point improvement in merchandise margin and a 35 basis point benefit as the result of the fiscal 2016 sunset of our old Primo Card loyalty program, which were partially offset by slightly de-leveraged occupancy, buying and distribution expenses.
For the full year, gross margin was 41.6%, up 90 basis points from of 40.7% in the prior year.
The current year increase is due to 120 basis point improvement in merchandising margin and 100 basis point benefit from the Primo Card sunset, which, again, were offset by de-leveraged occupancy, buying and distribution expenses, resulting from the comparable store sales decline.
Selling expenses for the quarter were 22% of net sales, consistent with the fourth quarter of last year.
For the year, selling expenses were 22.5% of sales compared to 21.1% in the prior year.
For the year, the increase in selling expense as a percentage of net sales was the result of increases in store compensation, online marketing and fulfillment and certain other selling expenses.
General administrative expenses for the quarter were 3.8% of net sales compared to 3.1% of net sales for the fourth quarter of fiscal 2016.
For the full year, general administrative expenses were 4.4% of sales compared to 3.9% in the prior year.
For both the quarter and year-to-date period, the G&A increase is due to increased professional and consulting fees, home office compensation and benefits and certain other expenses.
Our operating margin for the quarter was 21.6% compared to 19.8% for the fourth quarter of fiscal 2016.
For the year, our operating margin was 14.7% compared to 15.7% in the prior year.
Other income for the quarter was $2.8 million compared to $2 million for the fourth quarter of fiscal 2016, and other income for the full year was $5.4 million compared to $3.5 million the prior year.
Income tax expense as a percentage of pretax net income for the quarter was 33.8% compared to 37.3% for the fourth quarter of fiscal 2016, bringing fourth quarter net income to $42 million for fiscal 2017 compared to $36 million for fiscal 2016.
For the full fiscal year, income tax expense was 35.7% of pretax income compared to 37.3% in fiscal 2016, bringing net income to $89.7 million for fiscal 2017 compared to $98 million for fiscal 2016.
Our press release also included a balance sheet as of February 3, 2018, which included the following: inventory of $118 million, which was down approximately 6% from inventory of $125.7 million at the end of fiscal 2016; and total cash and investment of $237.4 million, which was after payment of $133.9 million in dividends during the year and compares to $264.6 million at the end of 2016 after payments of $84.8 million dividends during that year.
Our year-end inventory in a comparable store basis was down approximately 6.5%, and total markdown inventory was also down compared to the prior year.
We ended the year with $149.5 million fixed assets net of accumulated depreciation.
Our capital expenditures for the quarter were $2.5 million, and depreciation expense was $7.6 million.
For the full year, capital expenditures were $13.5 million, and depreciation expense was $30.7 million.
For the full year, capital expanding was broken down as follows: $12.5 million for new store constructions, store remodels and store technology upgrades, and $1 million for capital spending at the corporate headquarters and distribution center.
During the quarter, we opened one new store and closed 5 stores and completed one full remodel in January, bringing our full year count to 2 new stores, 8 for remodels and 12 store closures.
We also closed one additional store in February after the end of the fiscal year.
For fiscal 2018, we currently do not have any new stores planned and anticipate completing 4 full remodeling projects, which includes 2 for spring and 2 for back-to-school.
Based on current store plans, we expect our capital expenditures to be in the range of $10 million to $15 million, which includes both planned store projects and IT investments.
Buckle ended the year with 457 retail stores in 44 states compared with 467 stores in 44 states at the end of fiscal 2016.
As of the end of the year, 391 of our 457 stores were in our newest format.
Additionally, our total square footage was 2.367 million square feet as of the end of the year compared to the 3 ---+ 2.392 million square feet at the same time a year ago.
And now I will turn it over to <UNK> <UNK>, our Vice President of Women's Merchandising.
Good morning.
I\
Thanks, <UNK>.
Good morning, everybody, and happy Friday to you.
Men\
On the second part of the question, we don't give guidance, so we can't talk about that or discuss that.
But in terms of looking at the gains in gross margin, most of that was merchandise margin-related and Primo-related.
For 220, it was merchandise margins.
We saw the benefit there from reduced markdowns, as <UNK> called out.
Big category was women's denim, where we saw reduced denim markdowns.
We also saw the benefit of increases in private label and reduced shrinkage in the fourth quarter.
This is our annual inventory process, so those things all benefited merchandise margins.
Deleverage was about 10 basis points for the quarter.
And some of that ---+ I mean, there was some benefit from the extra week.
But really, we can compare to the whole year, it probably benefit from a little bit stronger comps in the fourth quarter than the year and then that extra week, but I don't know that we can quantify how much that had.
I'll let <UNK>, answer the second part of that question.
As far as an expectation for next year, we got a little benefit this year with having 1 month in a lower rate.
But I think 26% would be the rate that we expect for next year going forward having the full year benefit.
In regards to investing those savings, we have, actually, forever, had a strong cash basis and has always looked at what we can do to invest in our business to be a better special specialty store.
And our focus is to continually improve our online, keep our stores up to date, invest in our people.
But that is all consistent with what our strategies from almost day 1.
Just as a benchmark.
What was the private label as a percent of sales in the fourth quarter of '16.
In other words, it was 14.5% in the most recently reported quarter, and that compares to what last year, please.
That was up about 1% as a percent of sales for both the quarter and the year.
So it's 39% a year ago.
Okay.
Do you expect that to ---+ you can't give guidance.
As it pertains to the February comp number, I was a little confused about the release.
It was ---+ February comp was down 5%, but net sales increased 2% for the quarter without material store growth.
I don't understand.
Could you explain the differential.
A lot of it has to do with the extra week in the year for fiscal 2017.
So when we're comparing total sales, total sales is fiscal period to fiscal period, which is not necessarily the same 4 weeks a year ago on a calendar basis.
So that's the bulk of the disparity between those 2 numbers.
If there are no further questions, we can wrap up the call and wish everyone a good rest of the day and an enjoyable weekend.
So thank you very much for joining us.
| 2018_BKE |
2015 | SONC | SONC
#Thank you.
Sure.
So during the third fiscal quarter, we saw a little bit of, I'd say about almost two-thirds of our same-store sales growth was driven by check and the remaining portion by traffic.
What we know is that rain does adversely impact some of our traffic, particularly with some of our Spring and Summer promotions.
But again, overall it did not have that much of a significant piece.
We're very pleased to see overall the trend of seeing healthy traffic and check contribute to that same-store sales growth, and we've seen that since the third fiscal quarter of '14 as we move along.
And again, going back to we've seen same-store sales growth across each of our dayparts.
And that's a combination of making sure that we're coming up with new product news, that appeals across different dayparts, and promoting those across that 60- to 90-day time frame.
Well, there were promotions across the daypart, across the dayparts, drinks, food, ice cream.
So you get it in some elements, strictly breakfast focused or morning focused.
So they were across multiple dayparts through the quarter, not necessarily at any one point in time, but through the quarter, it did hit multiple dayparts.
And in fact, we saw nice same-store sales improvement across those dayparts.
Breakfast continues to be our biggest opportunity, just as a percentage of sales.
The sales are not proportional by daypart.
Breakfast is the lowest end.
Evening would be next.
But nice growth across the dayparts on the quarter.
We really won't.
You won't see the impact of those until we start FY16, because we're at the end of this fiscal year.
No.
(Laughter)
That would stand to reason, Bob.
I think the factors that we look at and what you'll notice is last fiscal year and this fiscal year, we have invested some of our capital in doing some partnerships with our operators, so build to suit models, and we've made a couple of acquisitions.
So while on a normalized basis, our capital expenditures are anticipated to go down versus this year, there are opportunities that come up.
And if we think that's a good return on our investment, then we're willing to use it for that purpose.
But again, we'll provide more information for our outlook in FY16 in September and October.
Okay.
Thank you.
I appreciate that.
We appreciate each of your participation today.
We apologize early on for some of the logistical difficulties.
We'll work out those bugs next time.
We continue to be very optimistic about our business, the Spring quarter, in spite of some weather challenges, et cetera, a very strong quarter.
Operators, I think, across our system, whether Company or franchise, very optimistic about the business, reinvesting very handsomely.
So we're very optimistic about the near term and long term future of our business, and we'll look forward to talking to you all about that along the way.
Best of luck and thanks for being with us today.
| 2015_SONC |
2017 | BGFV | BGFV
#Thank you, operator.
Good afternoon, everyone.
Welcome to our 2017 Second Quarter Conference Call.
Today, we will review our financial results for the second quarter of fiscal 2017 and provide general updates on our business as well as provide guidance for the third quarter.
At the end of our remarks, we will open the call for questions.
I will now turn the call over to <UNK> to read our Safe Harbor statement.
Thanks, Steve.
Except for statements of historical fact, any remarks that we may make about our future expectations, plans and prospects constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results.
These risks and uncertainties include those more fully described in our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission.
We undertake no obligation to revise or update any forward-looking statements that may be made from time to time by us or on our behalf.
Thank you, <UNK>.
After producing solid sales for April and May, second quarter results came in below our expectations as a result of softening sales trends in June as we were challenged by weakness in certain outdoor product categories and we began cycling against some of the benefits from the store closures of Sports Authority and Sport Chalet that concluded early in the third quarter of last year.
Despite falling short of expectations, given the challenging retail environment, we were encouraged by the strength of a number of product areas and pleased to have delivered both improved merchandise margins and earnings growth over the prior year.
Now I'll comment on sales for the second quarter.
We generated net sales of $243.7 million, up 0.9% from $241.4 million for the second quarter of fiscal 2016.
Same-store sales increased 0.8% for the period.
As anticipated, same-store sales comparisons for the quarter were negatively impacted by calendar shifts related to the Easter and Fourth of July holidays.
We estimate that these calendar shifts negatively impacted same-store sales for the quarter by approximately 100 basis points.
We experienced small increases in both the number of customer transactions and average ticket during the second quarter versus the prior year period.
In terms of how the quarter rolled out, as mentioned, we comped positively and generally on plan in the low mid-single-digit range in both April and May, but sales fell short of our expectations and swung to negative low single-digit range for the month of June.
The shift in trends for this period was largely due to weakness in 3 aspects of our hardgoods category: Firearm-related products, camping and water sports.
We mentioned in our last call the demand for firearm-related products had declined year-over-year, and we've seen that trend continue.
We believe the soft demand for camping and water sport product in June primarily resulted from unfavorable weather comparisons and the colder and dangerously high water flows in many of the rivers in our markets from record rainfall and snow melt, which has led to closures of camp grounds in California and significantly affected recreational activities in these areas.
Additionally, in the back half of the second quarter, we began to cycle some of the benefits from the competitor store closures that occurred last year, and a comparative spread between the stores that were impacted by the closures and those that were not impacted by the closures began to tighten over the course of the quarter.
And as also mentioned, our June period was negatively impacted by the Fourth of July holiday calendar shift.
From a product category standpoint, apparel was exceptionally strong throughout the quarter, comping up high single-digit.
Our footwear category also comped positively throughout the quarter, increasing low single-digits.
Sales on our hardgoods category comped positively for April and May before turning negative for June and finished in the period down low single-digit essentially due to the factors that I just mentioned related to certain of our outdoor categories.
Excluding firearms-, camping- and water-related products, the rest of our product assortment comped up in the low, mid-single digit range for the period.
Our merchandise margins for the quarter increased by 37 basis points from the prior year, benefiting from favorable sales mix shift, including strong demand for higher-margin apparel product as well as our continued efforts to leverage our vendor partnerships.
Now commenting on store activity.
During the second quarter, we opened 2 new stores in Spokane Valley, Washington and Montrose, Colorado.
We ended the second quarter with 433 stores in operation.
We plan to close 1 store during the third quarter.
For fiscal 2017, our current plan calls for us to open approximately 6 stores and close approximately 3 stores.
A couple of store openings that we had previously forecasted for this year are now expected to shift into 2018.
Now turning to current trends.
We are currently comping slightly down for the third quarter to date with product margins running up nicely over the prior year period.
While we have seen some improvement in demand for water sports products as a result of better weather comparisons over the past few weeks, our camping sales have remained below expectations and we continue to see reduced demand for firearm-related product.
Additionally, we continued to cycle the additional benefit from the competitive closures that occurred last year.
And as anticipated, we're facing a number of new competitive openings in our market, many in former Sports Authority location.
As we anniversary the benefits from the competitive closures and the dust begins to settle, it's apparent that we, like most retailers, are operating in a challenging environment.
We are encouraged by the market share gains that we've worked hard to acquire over the past year as well as by the continued strength that we are seeing across key areas of our product offering.
We are focused on maintaining and building on these market share gains and feel that we are well-positioned from both an inventory and marketing standpoint for the remainder of the summer and for the back-to-school season.
Now I will turn the call over to <UNK>, who will provide more information about the quarter, as well as speak to our balance sheet, cash flows and provide third quarter guidance.
Thanks, Steve.
Our gross profit margin for the fiscal 2017 second quarter was 32.5% of sales versus 31.6% of sales for the second quarter of fiscal 2016.
The increase in gross margin for the period reflects a 37 basis point improvement in merchandise margins that Steve mentioned as well as a decrease in distribution expense resulting from higher-cost capitalized in the inventory.
Our selling and administrative expense as a percentage of net sales was 30.4% in the second quarter versus 29.9% in the second quarter of fiscal 2016.
On an absolute basis, SG&A expense increased $1.9 million year-over-year, due primarily to higher employee labor expense and costs related to information technology systems and services.
Now looking at our bottom line.
We reported net income for the second quarter of $2.8 million or $0.13 per diluted share.
This compares to net income in the second quarter of fiscal 2016 of $2.1 million or $0.10 per diluted share, including $0.01 per diluted share for the write-off of deferred tax assets related to share-based compensation.
Briefly reviewing our 2017 first half results.
Net sales were $496.3 million compared to $475.9 million during the first 6 months of fiscal 2016.
Same-store sales increased 4.3% during the first half of fiscal 2017 versus the comparable period last year.
Net income for the period was $8.1 million or $0.37 per diluted share.
This compares to net income of $1 million or $0.05 per diluted share, including $0.04 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation the first half of last year.
Turning to our balance sheet.
Our chain-wide inventory was $328.7 million at the end of the second quarter, up 7.9% from the second quarter of 2016, when chain-wide inventory was down 9.5% from the second quarter of 2015.
The increase in inventory primarily reflects our strategic decision to enhance in-stock inventory levels for key product areas to meet anticipated demand following the market share gains we have achieved over the past year.
While the weaker-than-anticipated sales of summer recreational hardgoods products have had some of the impacts of our inventory levels, we feel comfortable with our inventory assortment heading through the summer and back-to-school selling seasons.
Looking at our capital spending.
Our CapEx, excluding noncash acquisitions, totaled $7.2 million for the first half of fiscal 2017, primarily reflecting investment in IT systems, existing store upgrades and remodeling and new stores.
We currently expect capital expenditures for fiscal 2017, excluding noncash acquisitions, of approximately $18 million to $22 million.
From a cash flow perspective, our operating cash flow was a negative $19.4 million for the first half of fiscal 2017 compared to a positive $16.4 million last year, largely due to increased funding of merchandise inventory purchases and the timing of payments.
For the second quarter, we also paid our quarterly cash dividend of $0.15.
Additionally, during the second quarter, pursuant to our share repurchase program, we repurchased 6,400 shares of our common stock for a total expenditure of $0.1 million.
We have continued to repurchase shares, and in the third quarter through July 31, we have repurchased 373,847 shares of our common stock for a total expenditure of $4.3 million.
As of July 31, we had $19 million available for future repurchases under our $25 million share repurchase program.
Like we always do, we will continue to evaluate the best use of our cash whether it's for reinvesting in the company, stock buybacks, dividends or paying down our debt.
Our long-term revolving credit borrowings at the end of the second quarter were $47.9 million, which was down 16.5% from $57.4 million at the end of the second quarter last year and up from $10 million at the end of fiscal 2016.
Now I'll spend a minute on our guidance.
For the fiscal 2017 third quarter, we expect same-store sales to be in the negative low single-digit range and earnings to be in the range of $0.22 to $0.32 per diluted share.
Our guidance reflects a small benefit to same-store sales of approximately 40 to 50 basis points as a result of the calendar shift related to the Fourth of July holiday.
For comparative purposes, in the third quarter of fiscal 2016, same-store sales increased 6.8% and earnings per diluted share were $0.38, including $0.03 per diluted share for store closing costs.
Operator, we are now ready to turn the call back to you for questions and answers.
<UNK>, if I understood the question, I think in the 2-year trend, I think we have the benefit of the competitive closures.
And we look to maintain the ---+ certainly, the bulk, and ideally build upon that benefit.
So we comped up Q3 of last year, we're up.
.
6.
8%.
So we were down 1-7 in the ---+ Yes, <UNK>.
Let me just ---+ you're doing your stacked comp kind of routine here.
Let us take a quick look at this.
So in ---+ yes.
In Q3 of last year, Q3 of '15, we were down a very slight minus 0.4% in same-store sales.
Last year, in the third quarter, we were up 6.8%.
All right.
So your ---+ yes.
Your stack comp is in the low positive single-digit range.
<UNK>, I'm a little confused.
Maybe we're a little confused.
Are you thinking we're guiding to a positive comp.
.
In the first quarter, we're guiding low single-digit negative.
Do think we're guiding low single positive.
Yes.
A couple of things to take into consideration.
One, the second quarter was impacted, we've suggested by roughly 100 basis points by calendar shifts.
We also had, we think, some unfavorable weather comparisons in the second quarter that affected the results as well as some challenging firearms comparisons that were, to some degree, exasperated by just going against the Orlando shooting tragedies in June of last year as well as some California legislation that created some surge of activity in that regard.
<UNK>, there're a lot of moving parts out there.
And clearly, we missed some ---+ we missed some sales last year relative to the competitive rationalization.
We were ---+ there were categories where we were ---+ just didn't have the inventory that we needed.
The inventory that ---+ the growth that you've seen now, I mean, the vast majority of that growth was actually planned just to make sure that we are in an inventory position to be able to support some of the missed sales that we had last year.
Also, the impact on our water sports and camping business has been challenged in ---+ for the reasons that we mentioned in our discussion: Camp ground closures, cold water, running water, really hazardous conditions.
And we're hoping that that comes back to us a little bit in the August and September timeframe.
But we'll have to see if that plays out.
Absolutely.
And we really think, trying to factor out all the noise, some improvement in trends in the third quarter relative to what occurred in June.
The issue of the second quarter is primarily a June issue.
And there are a lot of exogenous factors impacting that specific month.
Well, you say on the gross ---+ you're talking about the product margins.
I don't know that that's a tailwind.
I mean, we had some very strong opportunistic buys associated with all the competitive closings last year.
So I think right at the moment, we would look at the environment as relatively normal.
Possibly, we can ---+ it may get better, given some of the challenges that we're hearing out of the marketplace.
But I think where we're driving some of our product margin enhancements is through our continued efforts to leverage the vendor partnerships not necessarily and exclusively through opportunistic buys, but just that we've strengthened our position with a number of vendors, and as a result of the competitive rationalizations, then we think that works beneficially to us to ultimately enhance product margins.
Yes, Mitch.
It's actually going well.
We are in the midst, as you said, of ---+ we ---+ I think we'd anticipated rolling it out in the third quarter.
And we are rolling it out at the third quarter and look to either complete it in the third quarter, the complete rollout, or early in the fourth quarter.
And we're excited about the potential for the new system.
Yes.
No, I mean, we're not currently working with outside consultants.
That was, well, I think now well over a year ago.
And I think we've played through lots of market share gains by taking advantage of the competitive rationalizations.
So I think we've continued to work to enhance the ---+ a number of aspects of our business and inventory, trying to pinpoint our inventory distributions and logistics and marketing and really just add a whole process to take a holistic look at our business.
And ---+ but that's a ways away in the past right now.
I don't ---+ Mike, I don't anticipate it for this year.
I mean, as our inventory grows ---+ your inventory is growing, you typically are capitalizing.
It all boils down to how quickly you're turning your inventory.
But for this year, I don't anticipate a negative effect at the inventory cost gap.
If inventories come down dramatically, say, next year for example, then there could be a slight effect of that.
All right, we thank you for your interest today and look forward to speaking to you on our next call.
Have a great afternoon.
| 2017_BGFV |
2017 | VSTO | VSTO
#I appreciate your recognition of the fact that we've seen this movie before and we've weathered these storms before, you're right about that.
In terms of the duration, I think it is interesting.
I saw their numbers mentioned previously in some write ups that were published.
This one I think is too early to call, I think it is too early to call the duration.
But we have seen durations in that 12 to 18 months as we've gone through these cycles and established whatever new norms are and figure where the bottom of the trough is.
This one we're into at about eight weeks now, following the election primarily, so we'll work our way through that.
And we'll be able to at some point in time, I think, do a better job for you in being able to call the trough and figure out exactly where the bottom is and identify what that new normal is.
This one is a little bit different, maybe just for a couple of reasons.
I think the pre-election inventory build compounds the problem.
This big inventory build that occurred in retail and wholesale in advance of the election compounds the problem at least in the near term as we need to work through those inventories.
There is a little bit of a difference there in that, that was a fairly significant shift prior to what has been a fairly rapid decline.
That may compound it at least in the near term for a little while.
The other thing I think that is interesting is that some of the cycles we have had ---+ we're coming off of what I call, the eight years of plenty under the Obama administration.
Being able to gauge exactly where that correction will be following a strong bull market in shooting sports for eight years is a little bit unique.
So it causes just a little more uncertainty in exactly being able to identify what the new normal is.
That said there is a lot of new shooters in the market.
There is a lot of new people that have come into the shooting sports and purchase firearms for the first time, or the second, or the third, or the fourth.
We know there is a larger installed base of people that consume our products which I think bodes well in the long term.
We know the demographics of new shooters is favorable, 18-34 age group has been where a lot of the growth has come and they are actively engaged in the sport, so I think that bodes well for us.
The demographics shifting most recently to 50% women participants, I think is a great demographic for the long term health of the shooting sports.
I think all of those things are variables, some challenges to think it could be more challenging, others frankly comfort us, but we think it might be a little less challenging.
I guess at the end of the day it's a little too early to tell.
We expect to be able to have more information as we get through our fourth quarter.
As we get into next year and we'll be trying to factor all of that obviously into the guidance which will give for FY18 when we have our standard May call.
That's a good question.
Obviously the retail sector in outdoor recreation supports the $63 billion industry that we have talked about and we have discussed in terms of this highly fragmented $63 billion market that we are operating in.
Obviously retail really impact that item and sell through those items as well.
We will not be immune to challenges from the retail market impacting all of our brands.
However what we have seen today with the exception really of golf, where we saw the golf consolidations and we saw some of our large golf customers either go bankrupt or consolidate.
That was unique to golf and causes some real challenges right around the end of the golf season in that July, August, September, October time frame toward the fall.
That was a specific and unique impact that has settled down a little bit now in terms of the impact of that.
The Sports Authority bankruptcy and the consolidation that occurred there did impact Camelbak, it did impact the Bell Giro business a little bit as those stores carried both cycle, snow, and hydration solutions in backpacks and bottles.
There was some impact we saw clearly from those retail consolidations.
But I haven't seen anything in general in retail which is heightening our exposure to those other outdoor product brands like we were seeing in the shooting sports side.
The only other trend, <UNK>, we have seen in certain categories, strictly in winter sports gear, there was a bit of an inventory overhang from the last season where retailers came into this snow season with more inventory on hand.
This is proving to be actually quite a good snow season and so we've certainly have seen improvement.
Replenishment did lag POS data in the winter market as we ---+ as the retail channel of our existing inventory.
There are also a few inventory overhang issues in the independent bike dealer channel.
All of those added together while they are not insignificant pressures but certainly lower pressures than we face in the hunt shoot market today.
The other thing we're very much focused on, I would just add one last common on the retail environment, we are not necessarily completely tied to brick-and-mortar and in fact our strategy is to continuing to allow us to have other outlets for our products through online distribution and online retailers.
As we see that shift from brick-and-mortar to online, we are very much engaged in taking advantage of participating in that shift.
We're working that [tech] strategy every day and working the sales every day to grow our ability to go direct to these consumer and to grow our ability to be able to go online to these consumers.
Some of our products, it's easier to do that than others.
But frankly, you can sell firearms and ammunition through numerous online outlets.
Traditionally that has not been the case, but that has grown significantly.
We are supporting our brick-and-mortar retailers, they are very important to us and we're working closely with them.
But at the same time we are working to ensure we have a balanced distribution network which allows online markets to become increasingly important for us as well.
Yes, we are very much aware of all the Winchester's earnings call and their anticipation that it takes a couple of quarters.
I'm not sure, and I don't think they are sure, and I'm not sure anyone is sure exactly how this is going to settle out because point-of-sale is also shifting on us.
But we suspect it will take us into the back half probably of next year to be able to be confident that inventory resets have occurred and that we got to where the new demand is balanced to a supply and inventories are being cleaned up.
I think as other companies report going forward that are in the shooting sports space, and you've got a couple more that are going to report here over the next few weeks, I think there will be a common theme around this inventory issue and clearing out that inventory and people trying to assess how long that might take.
We're in such a state of flux now it's difficult but we think the back half of FY18 will begin to work our way through this.
Sure.
The primary driver of the free cash flow guidance of the year of reduction.
It was not unlike, as you listen to my comments on our third-quarter cash flow year to date, where there was a significant working capital impact, particularly in inventory build in third quarter compared to the prior year.
As <UNK> mentioned, this really accelerated from Thanksgiving on.
At that point in time we had a fair amount of product on order or in manufacture at our own plants.
And we can turn on a dime on that output.
Therefore we had not had time to react to our level of inventory.
Adding to that, obviously, we need to collect cash in the quarter so only through the sales of the first half of Q4 even generate meaningful cash flow during the quarter and during the full fiscal year.
We would expect as we head into FY18, while we're not currently providing guidance, we would expect to be able to address a number of those issues.
In particular as I mentioned during my remarks, we have reduced our orders of finished goods and for those finished goods we sell.
We are also reducing the output of our own manufactured products across both segments to address the inventory balance.
We would expect that to work it's ---+ while <UNK> mentioned the inventory retail channels would be the back half of the year before we could work that out.
A lot of our own inventory challenges we would expect to fix certainly by the end of the first half of FY18.
Yes.
I would say that M&A is not our priority now.
Our priority is focused internally on margin improvement, cash generation improvement, driving innovation so it can drive revenue, and doing the kind of things we know how to do to take market share in down markets or up markets.
Our priority is going to be looking internally to drive execution improvement and improve our financials, including the cash flows discussions <UNK> just had with you about managing our facilities and our supply chain, and ensuring next year we have good solid cash generation here; we feel good about that.
We can't guide to that yet but we will when we can.
We're going to be working heavily on those things.
We will not turn a blind eye to M&A opportunities but I will tell you it's not our priority.
Let me take the first one and <UNK> can take the update on Orbital Lake City.
In terms of costs associated with our own internal inventory reductions, largely this will be really pulling back our order quantities in the supply chain and reducing order quantities which we are giving to our vendors on a lot of source product so there's no additional cost here.
Working through our factories, we have been working overtime in many of our factories.
We obviously will be pulling back off the overtime as we go forward, it will not longer be necessary; that's cost savings actually by not having to pay time and a half in overtime.
As we work through our overhead, as we work through other things there may be some additional costs here and there but it is not going to be a material driver.
We will be able to do this very efficiently.
<UNK> do you want to talk about OA.
Sure in terms ---+ as we mentioned before we are actively engaged in the discussion with Orbital ATK about future of long terms flag agreement.
Those discussion are ongoing.
Under that agreement there is a couple month negotiation period spelled out in that agreement.
We are in the middle of that agreement.
There is nothing to report at this stage, when and if there is we will certainly announce it.
Sure.
That is something that we have managed successfully for many years.
As we've told in the past, how we go about this is we exercise a process of looking at our manufacturing schedules and what our demand planning for our factories is going to be for consumption of raw materials, which are generally for us, heavily focused on lead and zinc.
Those are the elements of brass and lead in bullets.
Copper, zinc, and lead our three primary metals which drive our commodities as we buy those for brass and as we buy those for lead cores in our projectiles.
Our process is we are always buying well ahead of demand based on percentage of demand.
Based upon what we believe the market is going.
We have been locking in favorable pricing on materials and we've been locking that in for various periods of time.
Out ahead of us depending on whether it is zinc, copper, or lead.
And then going forward, of course, we as we do with the market we have been one of the leaders in using recycled metals and materials.
We began the process of using recycled lead in our projectile manufacturing many years ago.
And we led the market and we led the industry in thinking about recycled lead at a much lower cost.
We've been pretty good at this over the years and we will stay very focused on this, <UNK>, as we go forward.
Of course if the commodity markets all continue to rise you cannot beat the market forever but we have demonstrated in the past the ability to get certain segments of our ammunition capability even in flat markets where some pricing opportunities there.
We are going to be very focused on not dropping price, as we've said many times.
We are not the low price leader, we want to be the low cost leader.
You will not see us chasing price down or significantly reducing price.
We have lots of other levers we can pull to make our products more attractive in the retail environment.
But we are cautious about this.
We are watching that market and commodities very closely.
This will occur largely as you described, if you are looking at the dealer network, I think there will be some challenges potentially for small dealers.
Whenever you have a period of time like we've experienced where you have eight years plenty and demand is outpacing supply and you have hot category firearms which have been very interesting to consumers like the AR platforms and concealed carry handguns; that has allowed not only retailers and dealers, it has allowed manufacturers to come into this market.
Many small mom/pop manufacturers that have entered this market as well as small mom/pop dealers which have entered this market to take advantage of the favorable market conditions for almost a decade.
My experience has been that they will be ---+ they will find themselves under significant pressure, and many of them will not have the balance sheets and the cash flow and the wherewithal to remain in business.
I think not only on the dealer side, small dealers, but also small manufactures if, depending on the length of this correction that we are in and depending on where the bottom of the trough is and where it settles out, my personal expectation is it will heavily pressure small manufacturers, both of ammunition and of firearms, and some of the newer smaller dealers.
We will be working through that process to try and ensure that our dealer network is healthy, we have great relationships with functional wholesalers and with bigroups who service these independent dealers.
We had very good meetings with those suppliers of independent dealers at the SHOT Show.
We believe we are a premier supplier of choice and I think as we have said in the past, what you will see typically in a market like this is you'll see import products on the ammunition side begin to decline first, then you'll see the small mom and pop domestic manufacturers supply to the market begin to decline; and our goal will be to pick up all that market share and get a larger piece of what could be a smaller pie.
I don't know of anything right now which would cause material impact from the company from the scenario you laid out and in some cases we may benefit from smaller manufacturers which actually have to exit and we will pursue and take that shelf space.
Sure.
Certainly our objective as we've talked before, our goal was during good times and to keep that leverage ratio under three and recognizing that we are in a consumer profits market, which is by it's nature cyclical, as we know there is always the opportunity for cycles to recur and we're currently in one of those cycles, we certainly will be very judicious in our use of cash over the next twelve months.
We will be very careful, as <UNK> mentioned, our priorities for cash flow deployment and value accretion over the next twelve months.
A lot of it is focused on actions we can take internally.
We will work to reduce working capital, we will work to improve efficiency and gain market shares, markets that ---+ it's difficult to guide to an exact leverage basis when I have not given a cash flow guidance for next year, but we certainly do not intend to let our leverage ratio to grow excessively.
You're welcome.
That's a great question, <UNK>.
In fact I'm actually glad you came back around and asked that, I think that's an important question for our investors and for the analysts here today.
Let me just back up a minute here and lay the foundation of this question a little bit.
We announced that we were going to pursue a CapEx investment of up to roughly $100 million over the next several years to address bottlenecks in production, where we knew that if we could address those bottlenecks we actually would have additional capacity we could sell, and that also a large portion of this capital was ensuring that we could be a low cost leader across our categories of ammunition from shot shell, to pistol, to rifle.
We are very much still focused on that.
We are only in tranche one.
The off ramp in terms of what we might do in tranche two is right now, we are looking at those decisions right now of what we may do with tranche two.
The other thing I would tell you is the reconfiguring of capital is an ongoing analysis for us or where we should be investing to reduce bottlenecks and reduce costs and improve our ability to compete and win.
So this is not a ---+ even though we did this in tranches which allowed us to ensure we were not committing to the full $100 million of CapEx and that those tranches have windows, meaning that we are getting into the second tranche window right now for that decision, we also have a lot of flexibility in terms of how we applied this CapEx across our manufacturing facilities across the various components of our ammunition basis.
We are doing this very deliberately and very consciously and we will be making decisions in terms of CapEx spending which we will share with you when we do guidance.
We will talk more about the cash flow and what we will be doing on CapEx next year, but we are in the throes of those decisions now.
We believe very strongly that what we have done already in tranche one is critical and necessary for the long term competitive position of the business and to drive our cost down and to drive these positions of being able to be low cost leader.
We're very happy with how tranche one has progressed.
The team has one a great job executing tranche one so far.
We will be reviewing tranche two and then we will talk to you more about CapEx in general.
<UNK>, I would like to add that you should review the tranches as being synonymous with the years, and tranche one ---+ there are certain expenditures of the tranche one, which are in year two of the plan.
But also, you should be aware that tranche one, as we mentioned this several quarters ago, tranche one is really focused on a couple of types of ammunition which are still fairing strongly even today.
We do still do see some opportunity from tranche one, and as <UNK> mentioned, is also very flexible capacity.
If that demand were to change from that, we can certainly reconfigure those lines, but also they won't reduce our average cost for those calibers and types of ammunition.
We'll be receiving our first benefits from tranche one investments in the back half of FY18.
Those begin to materialize and will allow us to have the ability to capture additional revenue and market share.
You bet.
Well the rounds that are manufactured by Orbital ATK are very well understood.
Those same rounds are manufactured by Florida Induce who make a mill speck product and can be manufactured by us as well.
There is nothing unique necessarily about the configurations of the ammunition manufactured by Lake City but we've had a very productive relationship with them over the years.
They have access capacity which we have helped them get onto the commercial market in a win-win situation.
It seems like it's a good opportunity for both companies going forward.
In the event we couldn't get that supply from Lake City, certainly we could make those products and we would have to make certain investments to do that.
But there is nothing unique about the rounds we purchased from Lake City in terms of an inability to make those elsewhere.
Yes, I don't think we can get into that.
I think those are questions you would have to ask [away] about their own cost over whether they are think they're competitive in the market or not.
The fact that we've been able to have a productive relationship with them is what we are really focused on just seeing if that relationship can continue to be a win-win for both companies.
I wouldn't want to talk about their structures or where they are in terms of being cost competitive or not.
Thank you.
We thank you all for joining us.
I think that was our last question.
We look forward to talking to you again as we wrap up this fiscal year and will be able to give you guidance on FY18 when we do our next earnings call.
Thank you very much.
| 2017_VSTO |
2017 | TMST | TMST
#Thank you, and good morning.
I appreciate you all joining for our second quarter 2017 earnings call to discuss our financial results.
I'm joined here today by Tim <UNK>, our Chairman, CEO and President; as well as Chris <UNK>, Executive Vice President and Chief Financial Officer.
During today's conference call, we may make forward-looking statements as defined by the SEC.
These statements relate to our expectations regarding future financial results, plans and business operations, among other matters.
Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release, supporting information provided in connection with today's call and in our reports filed with the SEC, all of which are available on the www.timkensteel.com website.
Where non-GAAP financial information is referenced, we have included reconciliations between such non-GAAP financial information and its GAAP equivalent in the press release and/or supporting information, as appropriate.
Today's call is copyrighted by <UNK>Steel Corporation.
We prohibit any use, recording or transmission of any portion of the call without our expressed advanced written consent.
With that, I would like to now turn the call over to Tim.
Good morning, and thank you for joining us.
The first 6 months of the year have been a real sprint to ramp production and meet demand.
Sales have grown quickly as markets rebounded, and we continue to increase market penetration.
I'm pleased to say that sales are up 47% year-to-date versus the first half of 2016.
Operations ramped up in the first half, hitting record labor productivity levels, which is remarkable given that nearly 15% of our plant workforce came on board within the last year.
Melt utilization increased more than 25 percentage points since the end of last year, and safety performance continues to be top quartile among our peers.
In fact, OSHA recordables in the first half of the year were at a record low.
This has been a steep ramp in all respects.
We are now in the back side of it and gaining operating cost improvements, which will be beneficial as we expect continued improvements in market demand.
North American light vehicle demand remains at high levels even with some trimming of passenger car inventories.
Industrial markets continue to strengthen, particularly in the mining sector.
The slow and steady improvement of oil and gas market continues.
We also expect raw material markets to remain stable, similar to the second quarter.
As a result of this market outlook, we expect to see an increase in shipments in the third quarter and EBITDA between $10 million and $20 million.
As we manage both the opportunities and the challenges of the market environment, we also remain focused on long-term performance improvements.
We're executing a strategy that I've spoken about often on our calls that will improve and sustain profitability over the cycle.
We announced some leadership changes in the quarter.
Shawn Seanor has wrapped up a 33-year career in sales and marketing leadership at <UNK>Steel, and I want to thank him for helping us make the company we are today.
Tom Moline, who most recently led manufacturing for us, will now lead Commercial Operations.
Tom is uniquely positioned to help us extract every bit of marketplace value from the asset base we've invested in over the last few years.
In a smooth transition in operations, our Head of Supply Chain, Bill Bryan, will also lead Manufacturing, further integrating those 2 functions.
One significant project he takes on in this role is the start-up of our new advanced quench-and-temper facility.
We anticipate that this facility will be operational in the fourth quarter.
These individuals and the entire team at <UNK>Steel have demonstrated agility and perseverance in driving performance.
We put ourselves in a strong position with the actions that we've taken over the last several years to improve market share and operate more efficiently.
Now we have an opportunity to show that the actions that we took in the down cycle will benefit us in better markets.
And while an improved marketplace is a welcome sight, we're not letting up.
We have a long-term strategy to improve the performance of the business over the cycle, and so every decision we make is with that in mind.
At this point, Chris will take you through into more detail on the numbers, and we'll both be back to take questions later.
Chris.
Thanks, Tim.
Good morning.
Our second quarter results came in pretty much as expected.
Total shipments of 295,000 tons in the quarter were 5% higher sequentially and 55% higher year-over-year.
The improvement was a result of strengthened end market demand and increased market penetration.
Mobile shipments were down about 5% from the first quarter 2017.
The mobile sales decrease was in line with the decline in the North American light vehicle production rate from 18 million to 17.2 million vehicles, which resulted from the OEMs' effort to rebalance inventory levels.
For the third quarter, we expect mobile shipments to be about 3% lower sequentially due to seasonal customer production shutdowns.
Industrial shipments increased about 3% from the first quarter 2017, primarily due to market share gains and fundamental end market demand.
Global commodity markets began to stabilize in the first half of the year, which positively impacted our industrial end markets.
Moving into the third quarter, we expect industrial shipments to be about 10% higher than the second quarter as the general economic sentiment remains positive in most of the industrial sectors.
Second quarter shipments to the energy end market increased about 52% sequentially as customer inventory positions became more balanced with demand from the rising U.S. rig count.
We remain encouraged by the steady improvements in market supply and demand dynamics in the energy sector and expect third quarter energy shipments to be similar to the second quarter.
Net sales for the quarter were $339 million, with base sales of $262 million and surcharges of $78 million.
Base sales were $10 per ton lower than the first quarter 2017 due to increased billet shipments, end market product mix changes and price pressure.
Our strategy to broaden our base business includes products that are more carbon (inaudible) and less alloy-intensive compared to our prior mix.
We expect these dynamics to continue into the third quarter.
Gross profit for the quarter was $24 million and included a $5 million onetime supplier refund related to prior periods.
Excluding the refund, gross profit improved 11% sequentially, driven by higher volumes and operating cost improvements.
Melt utilization increased to 76% compared to 71% in the first quarter.
SG&A for the quarter was about $22 million, which was 3% lower than the first quarter 2017.
We remain focused on carefully managing our cost structure, particularly during this time of increasing volume.
In the second quarter, we reported net income of $1 million or $0.03 per diluted share.
EBITDA was $20 million, excluding the supplier refund compared to EBITDA of $18 million in the first quarter.
The income tax rate was about 40% for the quarter, primarily from a $1 million discrete charge related to prior periods.
Looking forward, we expect our tax expense for the rest of the year to be close to 0 due to the valuation allowance that was established last year.
We generated $15 million from operating cash flow in the quarter despite an increase in working capital.
Free cash flow for the quarter was $11 million, including capital expenditures of $4 million.
We expect the majority of our capital spending will take place in the second half of the year, and we maintain our full year capital spending guidance of about $40 million.
Our liquidity increased by about $15 million in the quarter, primarily from the free cash flow generation.
We ended the quarter with $189 million of liquidity and a net debt-to-capital ratio of 17.3%.
Turning to the outlook for the third quarter.
Shipments are expected to be approximately 2% to 5% higher than the second quarter based upon positive sentiment across most of our markets.
We will renegotiate our current labor contract in the third quarter, and we are likely to incur some related incremental expenses.
Our normal outages for plant maintenance are scheduled for the fourth quarter this year, so we won't see heavier-than-normal maintenance costs in the third quarter.
As a result, we expect the EBITDA range to be between $10 million and $20 million, excluding pension settlement charges.
We may incur noncash pension settlement charges in the third quarter, but the amount of the expense cannot currently be estimated.
In conclusion, our operating performance improved in the quarter, highlighted by record-setting shipments, productivity and safety performance.
We've now fully ramped up our operations and manpower to take advantage of improved market dynamics.
The third quarter will likely have some normal sales seasonality and some costs related to the upcoming collective-bargaining negotiations, but we are structurally in a better position than 6 months ago.
This ends our prepared statements, and we'll now take your questions.
If we could start on mix.
Would you guys mind discussing mix in this 3Q and if we could see a drag from mix on potentially seasonally lower auto shipments or increased billet shipments.
If you could just maybe just speak to that for a second.
Yes.
<UNK>, this is Chris.
I'll take that.
We don't expect much in the way of mix differential between Q1 and Q3.
Net net-net, the mix ought to be fairly similar.
Okay.
And then commentary on SBQ was very strong from other steel players, including service centers and mills.
I'm guessing it's probably weighted more towards the smaller diameter.
But I just wanted to see if you guys can comment on if you guys are seeing the same thing.
Where are you seeing the strengths.
Is it small diameter.
Large diameter.
Across the board.
And maybe just give us some context there.
Yes, <UNK>, this is Tim.
I would say it's more or less across the board.
I mean, obviously, automotive has pulled in a little bit, but still running in a pretty healthy rate.
And that tends to consume the ---+ kind of the small size of our range up to maybe into intermediate a little bit.
But as you see the oil and gas markets fire back up or continue to fire up, as you see mining activity coming back through Caterpillar, that's beginning to consume the larger size of our range as well.
And we're also seeing some pretty healthy demand through the seamless mechanical side.
So we're really kind of seeing it across the product line at this point.
Got it.
And then my last question.
On contract negotiations, can you discuss the environment now or this year versus last year going into contract negotiations.
And if you can comment on the overall maybe potential order of magnitude, perhaps, and maybe just rough percentage terms for the potential lift in contract pricing and when we might see that hit the P&L.
Well, let me answer your first question and then not answer your second question.
Obviously, we're seeing a lot better environment this year than we did, really, the last 2 cycles.
Lead times are out.
Markets are firming.
All of the chatter on the trade side has injected an interesting wrinkle into the whole thing.
So we feel pretty good going into the end of the year that we'll be in a position to have good conversations with our customers.
And then on the pricing side, we obviously don't speculate on that.
Sure.
And then when would we see it come up in your P&L once they do reset.
It's calendar year.
So generally, we get most of them done.
A couple might drag into January, February.
But for the most part, we try to get everything wrapped up by the end of the year.
Yes.
<UNK>, this is Chris.
Yes, our ramp-up costs were incurred all through the first half of the year, with a little bit more in the second quarter than the first.
We are fully ramped up.
We don't expect additional cost to come in that are meaningful in the second half of the year.
Yes, <UNK>.
No, we look for Q3 to be pretty much in line with Q2.
At this point, we can see ---+ have clear visibility to both July and August, so we feel pretty good about that.
And September so far, we have no reason to see anything different there either.
So in line with ---+ I think you probably heard this from the other folks in our space that scrap dynamics are pretty stable.
And so I don't think we're anywhere out on a limb on this outlook.
Tim, I had a question on the oil and gas market in particular and why as we look into the third quarter that the outlook is perhaps not a bit more optimistic given the rise in the rig count and the fact that you're coming off of a reasonably low level.
Yes.
Phil, obviously, when you go from the high, high peaks that we ran into the depth of this downturn, reading inventory is always a challenge.
We've said consistently in the last couple of calls that we think it's getting in the balance.
We still think that that's happening.
So the dynamic ---+ end market dynamics are good.
You've seen oil inventories down.
But 14 of the last 16 weeks, it put ---+ Baker Hughes claimed 6 more rigs in the field last week.
So all that is positive.
We just have to continue to kind of churn through the supplies that are sitting on the shelves.
We're seeing good activity in the shale side, both on the completion side and increasingly on the drilling side.
So that should help consume some of the inventories that are sitting out there.
But it's a process.
Would you anticipate at this point in time that once you get the Q&T line operational that you'll be able to tap into a bigger share in the market.
We hope that as the markets continue to grow that, that capacity will come online in a stronger market.
Again, we should be able to take a larger portion of that market.
You remember, in the past, we've been throttled by the amount of Q&T capacity that we've had in place when the markets run, and we're determined not to be in that position this time.
Okay.
And then I just had a second question on the net working capital.
What's the outlook in the second half in terms of source or use of net working capital.
Yes.
If you look at the second half of the year, the main driver is going to be CapEx, right.
We guided $40 million for the year in CapEx.
In the first half, we've only spent $6 million.
So the back half, we will see higher CapEx with probably, call it, $10 million to $12 million next quarter.
And, Chris, I was more asking on the side of inventories and receivables and payables just in terms of the cost to run the business on the net working capital side.
Yes.
We filled up for the year about $50 million of net working capital in the first half of the year, and we don't expect to build more in the second half.
First question just relates to, I guess, the sequential EBITDA guides or the $10 million to $20 million in the third quarter versus the $20 million in the second quarter.
Clearly, your shipments are expected to go up a bit.
Maybe if you can just sort of talk about the headwinds on a sequential basis, seasonal or otherwise, that might constrain third quarter EBITDA, that would be helpful.
Yes.
<UNK>, this is Chris.
Yes, basically structurally, there's not much difference between Q2 and Q3 when you take out the supplier refund and then recognizing you're going to have some bargaining contract-related costs.
When you look at the midpoint of our guidance, there's not much difference there.
So you think midpoint of $15 million and then you make some subtraction for those other 2 items, you'll get pretty close.
Okay.
Is there normally some seasonality in the third quarter.
Just even if shipments are going up, are there any sort of cost headwinds that you would seasonally incur in the third quarter.
Yes.
I think, by and large, SG&A is a little bit seasonal.
Typically, our SG&A gets to be a little bit backloaded.
But other than that, there's nothing significant.
We also normally take some shutdown time that we now pushed into the ---+ later into the year this year.
Yes.
So for Q3, we're not going to have any planned outages.
They'll all be in the last quarter.
Okay, great.
That's helpful.
And the increase for billet shipments in Q3 versus Q2, I think that was mentioned in the presentation, should we expect the Q2 shipment number on the billet side to go materially higher than it was this quarter or just sort of marginally higher.
Yes, marginally higher.
Okay.
Shifting to sort of another topic of questions.
The Section 232, potential tariffs, I'm sure you've done some thinking internally as to what they may or may not mean for <UNK>Steel.
Any sort of color you could provide on how they would affect the grades of steel that <UNK>Steel supplies should they go into effect in ---+ full or a limited version would be, I think, helpful.
Yes.
Well, I mean, step back from 232 for a second and look at the broader market dynamics.
I mean, everybody is concerned, the 232 sliding and that they may not do it, whatever.
At the end of the day, our markets are getting better.
Lead times are going out.
Utilization rates are going up.
So as I said earlier, I think we're in a better position this year than we have been in the last 2 to begin talking with our customers about 2018.
So that's just background.
On the 232 itself, depending on the remedy that is recommended by Treasury, our understanding is that it would be a relatively comprehensive list of products.
So all steel products should be impacted in one way or the other, assuming it gets done.
In our particular case, we've seen imports on SBQ in the first half of this year go up by 20% to 25% on bar.
And tubing is up 50%.
So the imports are definitely returning to the market as markets continue to strengthen.
And so that import volume that we're seeing right now would be directly impacted, depending on the remedy that's put into place.
So it would have a significant impact, but I also would not underestimate just the overall strength of the market and the position that puts us in to have contract discussions going into '18.
Okay.
I mean, would you hazard to estimates ---+ or much of the U.S. or North American SBQ and tube market is imports today.
Let me give you an example rather than talking through all our product.
Let me give you an example that is important for us.
If you look at the 6-inch and above market, kind of 6- to 16-inch for us, we're obviously a significant player in the North American market.
In fact, a very few people who can make that range of products.
Approximately 30% of that product is from overseas, increasingly from China, but also Korea and a little bit out of Western Europe.
So that market itself is a very good one for us.
It's traditionally been our sweet spot.
And increasingly, it's been under pressure from foreign sources.
So that would be one of the areas that we would look at closely, assuming this 232 goes in place.
I just had a question on the Q&T start-up.
Have there been be any start-up cost associated with that and the numbers so far.
And then secondarily, what are you anticipating for LIFO in the third quarter relative to the second quarter.
So just more of a housekeeping standpoint.
Yes.
So Chris, we really haven't had much on the expense side relative to the quench-and-temper.
A lot of that has been capital spending just finishing up the project.
So it's not material.
And the second question escaped me, sorry.
Oh, LIFO.
Yes, our LIFO is going to be ---+ I mean, we'd look at year-end and work backwards.
So LIFO will be, call it, a $2.5 million run rate ---+ $2 million to $2.5 million run rate through the rest of the quarter ---+ through the rest of the year, I should say.
In terms of employee additions, I think, at the start of the call, you mentioned the percentage of employees that had joined in the last year.
Are there further ---+ is there further hiring taking place.
Or have you pretty much completed the hiring that corresponds to current market conditions.
Yes, we brought on about 200 people in the first half of the year.
At this point, we would think that, that will fill out crewing, and then anything after that would just be (inaudible) electrician.
Okay.
And on the continuous caster, I assume it continues to sort of ramp up in the background of sort of the operations of the company.
Could you maybe just give us an update as to where it stands and sort of the potential for further profitability improvement as it reaches higher levels of utilization from here.
Let me talk about loading, and I'll let Chris take a shot at the impact of it.
We continue to load the caster.
Obviously, the billet business that we picked up allowed us to put a pretty significant load through that piece of equipment.
As the industrial and oil and gas markets continue to build, that will help as well.
So we are very much focused on getting that piece of equipment loaded.
Yes.
So I'll give you a little bit more color.
We have continued to move more product to the caster because of the yield benefits, and that will go on through this year and well into next year.
So we have not realized the full benefit of the caster just yet.
And that's more a function of not only having more loaded, but in terms of the mix between our bottom core process and utilizing the caster.
Yes.
I would say, just a high-level statement about lead times, they are out pretty far.
Quite frankly, right now, we're doing our best to try to bring them back in.
From a crewing point view, we are running 4 crew at ---+ through most operations, all operations at Faircrest.
At Harrison, we are 4 crew everywhere but melt, but we are roll-constrained in that operation.
And then tubing, we are ramping tubing with an additional crewing, but we still have more capacity there to take to the market, assuming that the oil and gas markets continue to build.
So we continue to look at ways at breaking constraints.
In our Harrison operation, for instance, we're looking at outside converters, who could take our ---+ who could help us with the roll constraint side of things.
That work has actually gone pretty well.
Hopefully, we'll begin to see the impact of that soon.
So it's really just a matter of working through process by process to make sure we're getting every ton to the street.
Well, thanks for joining us today.
I'm feeling, obviously, optimistic about where we are not just because our markets are rebounding, but also because we've taken the action over the last few years that have positioned us better than ever to deliver value.
We appreciate your continued confidence in the business, and we remain focused on safety and profitability as our highest priorities.
If you have any follow-up questions, please don't hesitate to contact <UNK>.
Have a great day.
| 2017_TMST |
2017 | ENSG | ENSG
#Thank you Shannon.
Welcome everyone, and thank you for joining us today.
We filed our earnings press release yesterday.
This announcement is available on the Investor Relations section of our website at www.ensigngroup.net, and a replay of this call will be available on our website until 5 PM Pacific on Friday, March 13, 2017. Before we begin I have a few housekeeping matters. First any forward-looking statements made today are based on management's current expectations, assumptions, beliefs about our business, and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements, and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by Federal Securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements, when changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, The Ensign Group, Inc. is a holding company with no directing operating assets, employees, or revenues. In addition, certain of our wholly-owned independent subsidiaries, collectively referred to as The Service Center, provide centralized accounting, payroll, human resources, information technology, legal risk management, and other centralized services, to the other operating subsidiaries, through contractual relationships with such subsidiaries. In addition our wholly-owned captive insurance company, which we refer to as The Captive, provides some claims made coverage to our operating subsidiaries, for general and professional liability, as well as for certain Workers' Compensation insurance liabilities. The words Ensign, company, we, our and us, refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center, and our wholly-owned captive insurance subsidiary, are operated by separate wholly-owned independent subsidiaries that have their own management, employees, and assets. References herein to the consolidated company, and its assets and activities, as well as of the use of the terms we, us, our, and similar terms used today, are not meant to imply, nor should it be construed as meaning, that the Ensign Group, Inc. has direct operating assets, employees, or revenue, or that any of their subsidiaries are operated by The Ensign Group. Also we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, that they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release, and is available in our 10-K. And with that, I will turn the call over <UNK> <UNK>, our President and CEO. <UNK>.
Thanks <UNK>.
Good morning everyone.
Although we're disappointed to announce that we did not meet our 2016 annual guidance, there are many lessons that we have learned throughout the course of 2016, that will help us start 2017 much stronger than we were one year ago.
Even though a few of the challenges we experienced in 2016 will impact our performance in only the early part of 2017, most of the challenges we experienced last year have been mitigated, and we expect these lessons to ultimately strengthen us in 2017.
More specifically, the Legend transition had a very different start than we anticipated, but it's improving quarter after quarter---+, the challenges are behind us.
Also, even though our bad debt associated with the large number of transitions impacted our results, we don't see the same impact in 2017.
As we talked about several times over the last few quarters, our bad debt challenges relate to the sheer number of change of ownership applications we have filed over the last two years.
<UNK> will discuss this in more detail later in the call, but our dedicated team of service center resources, have developed better systems that will drive improvements in our billing and collections efforts, and as a result, we expect a significant reduction in our bad debt expense this year.
We're confident that our talented local operators are taking each of their results very personally.
Our recent results have served as a reminder to all of us, that our success depends on our relentless focus on our core operational and cultural principles that have served us so well throughout our history.
We're very encouraged by the progress that we have seen across the organization, and are happy to report that these improvements have already started to take effect, and we expect them to continue into 2017 and beyond.
We did experience a non-operational anomaly over the prior year, namely our self-insurance accruals spiked quite significantly, increasing by more than $6 million over the prior year.
That spike was not expected, and while dramatic increases like this are rare, we're working diligently to structure our employee healthcare programs in a way to provide more predictability.
These lumpy insurance accruals are yet another example of why our results are not symmetrical on a quarter-by-quarter basis, and why we don't provide quarterly guidance.
Without the unexpected spike in our self-insurance costs, we would have achieved the lower end of our 2016 earnings guidance, but we believe that our operational performance can and should have been much, much better.
With that understanding our focus is on the fundamentals of our business and on driving improvements and performance throughout the year, and over the long-term.
The effects of the slow start at Legend, and the distraction to our same for operations will partially carry over into the very early parts of 2017.
However, we are expecting to see meaningful improvement in occupancy, skilled mix, bad debt expense, and our cost of services in 2017.
Most of our challenges on the occupancy and skill mix front were limited to a few geographies, primarily Texas and Utah, while the rest of our mature operations showed steady results.
We also expect the performance in our newer states to accelerate as they mature in their practices of Ensign principles.
On the cash flow front we have opened several new facilities in 2016, which have start-up losses that create an additional drag on our cash flow.
We also made a significant investment in our physical facilities over the last couple of years, in an effort to prepare for the future needs of our patients and their families.
As a result, we also anticipate a large decrease in our capital expenditures for renovations, which will positively impact our cash flow in 2017.
As <UNK> will explain in a few minutes we also announced that we have successfully completed the sale of our urgent care operations in Seattle, Washington.
As one of our first new venture investments, the urgent care business was primarily led by a long time Ensign leader, Michael Dalton, who worked tirelessly to build an urgent care business from scratch, into one of the largest consolidated operators of urgent care clinics in Seattle.
While our intent with new ventures has never been to sell them, in this case we believe the new owners of these assets, MultiCare Health System, are in a much better position than we were to take our urgent care team to the next level.
It also allows us to turn our attention to our post-acute care businesses.
We're very proud of what Immediate Clinic team has accomplished, and very pleased with the value that has been created and realized in this sale, but more importantly, we're excited about the opportunity that MultiCare provided to each of our amazing urgent care leaders and caregivers, and look forward to cheering them on, as they combine efforts to make these state-of-the-art urgent care clinics even better.
Beginning in the fourth quarter of 2016 we separated our TSA segment, which included transitional skilled and assisted living services into two new segments, Transitional and Skilled Services, and then Assisted and Independent living operating segments.
We are anxious to share more detail on the performance of our assisted living operations, and believe that this increased visibility will demonstrate the expanding influence these service offerings are having on our entire organization.
But even more important than the financial contribution, our assisted living operations continue to strengthen our skilled nursing, home health, and hospice operations in many ways, that don't show up in the financial statements, including helping us to seamlessly transition many of our residents into a home-like setting, while improving our organization's reputation of quality in the healthcare community.
On the clinical front we continue to make tremendous progress, with a focus on strengthening outcomes and extending our capabilities to care for more complex patients across the post-acute continuum.
We have continued to direct time and resources into developing outstanding leaders, investing in the best care pathways and new clinical programs.
As a result we're seeing significant improvements in key indicators related to outcomes and satisfaction.
In addition we continue to see steady and large improvements in our four and five star facilities, in spite of the many changes to the CMS star rating methodology in 2015 and 2016.
Across the organization we saw a 21% increase in the number of our facilities that achieved a four or five-star rating in 2016.
And remember most of the operations we acquire are one or two star operations at the time that we acquire them.
As we announced yesterday, we adjusted our 2017 guidance to $1.76 billion to $1.8 billion in revenues, and $1.46 to $1.53 adjusted annual earnings per diluted share for 2017.
Even though we adjusted our annual guidance for 2017 as of today, our organization now has 76 recently acquired operations, for their transitioning of skilled services and assisted independent living services in our portfolio.
Which is the largest number of operations in that bucket in the organization's history.
Our organic growth potential within our portfolio has never been higher, and we anticipate tremendous improvement in the contributions from these operations in 2017 and beyond.
Our operational leaders are fully engaged on all fronts, to identify and overcome weakness wherever it occurs, and because of them we remain confident that Ensign's future, both near and long-term is very bright.
Before we discuss our financial performance in more depth, I would like to have <UNK> just provide an update on our recent investment activities.
<UNK>.
Thank you <UNK>.
During the quarter we announced that our urgent care subsidiary, Immediate Clinic Seattle, completed the sale of substantially all of its assets relating to its 14 urgent care operations in the greater Seattle market.
The sale of Immediate Clinic, together with the sale of Integrity Urgent Care in Colorado in the third quarter, represents all of the Ensign-affiliated urgent care operations.
We recognized a pre-tax gain on the sale of our Seattle and Colorado urgent care operations of $19.2 million dollars, with an aggregate sales price of $41.5 million.
We also recently announced the acquisition of the operations and real estate of Park Lane West Healthcare Center, a 124 bed skilled nursing and 17 unit assisted living facility in San Antonio, Texas.
This asset which was formerly operated by Brookdale, is subject to a 40 year long term ground lease, and represents an ideal turnaround opportunity, because it combines an outstanding physical facility, with a solid core of providers, that truly care about the residents and their families.
Our Keystone team is planning on offering a wide selection of high-quality post-acute and assisted living services, to the residents ever a 400-unit independent living operation, already located on the campus, and to the healthcare community at large.
Also during the quarter, we announced that we purchased the underlying real estate of 15 assisted living operations throughout Wisconsin.
An Ensign subsidiary has been operating each facility since August 2015 under a lease with a purchase option.
With our ownership of this real estate we are excited about deepening our commitment to the healthcare community in Wisconsin.
The purchase further demonstrates that we will continue to acquire and retain real estate.
As those who have been following our story know, our real estate assets provide us with significant flexibility with respect to many of our operations.
Because almost all of the real estate assets we acquire are underperforming at the time we acquire them, each owned asset provides us with a significant opportunity to create value, and to use that value to help maintain a healthy balance sheet, and to prepare for future growth opportunities.
Since we spun off 96 real estate assets in June of 2014, we have acquired the real estate in 51 of our operations, and have purchase options on nine of our leased operations.
And of those 51 assets 48 of them are completely unlevered.
As we have done in the past, we are in the early stages of selecting certain owned assets that we will be taking to HUD for financing.
And as with any HUD financing, the process is long and complex, but we expect to complete a HUD based mortgage transaction during the year.
This will allow us to pay down our revolving line of credit, and to establish a long-term fixed financing at very favorable rates.
As we do so we add to our liquidity and our ability to acquire well-performing and struggling skilled nursing operations, assisted living operations, and start up or early stage hospice and Home Health agencies.
We also announced an increase to our cash dividend of $0.0425 per share during the quarter, which was an increase of 6.3% over the prior year.
This is the 14th consecutive year we have increased our dividend.
We also announced yesterday that we implemented a new stock repurchase program, which allows Ensign to repurchase up to $30 million of our common stock over the next 12 months.
We firmly believe that this new stock repurchase program is an important ingredient of our capital allocation plan, and is a strategic way of creating value for our shareholders.
In addition, our recently upsized credit facility, and our conservative balance sheet, provides us with the flexibility to opportunistically repurchase Ensign shares, while continuing our acquisition strategy.
The share buyback program also demonstrates that we and our Board of Directors are confident in our ability to accelerate revenue growth, and bolster our already strong balance sheet, as we drive improvements in our same-store transitioning and newly-acquired operations.
We continue to see a collection of several smaller attractive acquisition opportunities on the horizon, and believe that the market is slowly beginning to favor buyers.
As a result we are seeing more and more opportunities that are appropriately priced, and we expect to acquire some of these operations later in the first quarter, and early in the second quarter.
We continue to be very picky buyers, and will continue to remain true for our locally driven approach to each and every acquisition.
And with that, I'll hand it back to <UNK>.
Thanks <UNK>.
Before <UNK> runs through the numbers I would like to offer a few examples of how our front line leaders and their teams continue to produce record results in a changing operating environment.
As with our financial results there is much improvement, there is as much improvement as ever that can be made within our same store operations.
As an example, the Springs of La Jolla, located in La Jolla, California, has seen remarkable growth under the leadership of CEO, Matt Stevenson, an COO, Vera Cordova.
They are a remarkable team of physicians and therapists, that transform the Springs into the standard for rehab services in the La Jolla market.
Boasting an overall occupancy of over 90%, and skilled mix of 99% on average over the quarter.
They developed a tremendous reputation for short-term rehab outcomes, lower length of stay, and a very low hospital readmission rate.
As a result they have leveraged these outcomes to become the trusted partner to the key managed-care networks, ACO, and physician groups in their markets.
Because of their consistency in outcomes through state-of-the-art services, demand for their services in this changing healthcare environment has met all-time highs.
The Springs has seen rapid growth in skilled days, which were up 9% over the same quarter last year, additionally their EBITDAR was up 118%, and skilled revenues increased by over 18%, all while improving clinical results and patient outcomes.
As I mentioned earlier, we're excited to provide you with more specific disclosures with respect to our assisted living operations.
Bridgestone Healthcare has been a key part of our success throughout the years ,and has grown significantly over the past three years, going from 24 operations to 61 as of the end of 2016.
As an example of our successes in the assisted living front, we have seen some impressive performance from the team at Mountain View Retirement Village in Tucson, Arizona.
CEO, Tim Nelson, and Wellness Director, Carolyn Grover, transformed Mountain View into a remarkable operation.
Mountain View has a long tenured staff, with most employees being there five years or more, who have collectively achieved superior results for many years.
However, the team has found ways to improve by creating a five-star dining program, achieving a perfect survey in the health department, and securing the best reputation in the greater Tucson market, garnering some of the highest accolades in that community.
Accordingly, net income improved for the quarter by and incredible 118% on much higher occupancy.
In addition, total revenues grew by 667 basis points, compared to the same quarter last year.
We have also been very pleased with the performance of Cornerstone Healthcare, our Home Health and hospice team, as they continue to add strength to our organization.
One example of their progress is Buena Vista Hospice and Home Health in Ventura County, California.
Led by Executive Director, Andrea Doctor, and Director of Patient Care Services, Helen Ottish, Buena Vista Hospice and Home Health is the provider of choice for many referral sources in Ventura County, California.
Buena Vista joined The Ensign family in July of 2015, and Andrea and her team have made extraordinary progress in the last year from a clinical, financial, and cultural perspective.
Quarter-over-quarter Buena Vista's top line revenue grew 11%, and its bottom line financial performance increased 115%.
These outstanding results came as the agency strengthened its processes, and become more efficient in delivering the highest quality patient care.
There are many more such examples across the organization, and we appreciate you allowing us to share them, since to us there is no important information we'll offer today, than to tell you that Ensign is literally full of extraordinary leaders, and stories like these.
These few examples show what makes us different, and they illustrate that the opportunity for organic growth in all parts of the Company remain more compelling than ever.
With that, I'll turn the time over to <UNK>, to provide more details on the Company's financial performance, and our balance sheet and update our guidance, and then we'll open it up for questions.
<UNK>.
Thank you <UNK>.
Good morning everyone.
Before I dig into the numbers, I wanted to clarify a few points in our cash flow.
As <UNK> mentioned earlier, after we acquire a skilled nursing facility, we experience a temporary delay in our ability to collect on our receivables.
More specifically, following the transfer of ownership, we undergo a process with Medicare, Medicaid, and Managed Care Agencies, to transfer the contracts and billing codes to an incentive affiliate account.
Our process results in delays in the receipt of payment of our services provided our recently acquired operations, and certain other operations that are participating in alternative reimbursement programs.
In addition, to the extent that we participate in Medicaid quality enhancement programs, we will experience delays of 9 to 12 months on the collection of revenue.
As a result we experience temporary spikes in our accounts receivable following each acquisition, while we wait for the paperwork to be completed.
This temporary delay in collections results in an increase in our accounts receivable.
And can result in negative free cash flow, which is consistent with what we would expect during periods of significant growth.
In addition, these delays have led to an increase in our bad debt in certain circumstances, because it causes delays in our contracts, and limits our ability to correct errors in a timely manner.
We have developed new system procedures to help mitigate these delays, and expect our bad debt expense to improve in 2017.
In addition, we have opened several new facilities in 2016, with each new opening we experience a drag on our cash flow, as we fully staff and equip a brand new building, and slowly build census over time.
Most of our newly constructed buildings are opening in 2016, and we do not anticipate as many opening in 2017.
Detailed financials for the year are contained in our 10-K and press release filed yesterday.
Highlights for the year ended December 31st, 2016 as compared to the year-ended December 31st, 2015 included, consolidated GAAP EBITDAR for the year was $252.3 million, an increase of 20.4%.
And consolidated adjusted EBITDAR was $262.2 million, an increase of 18.5%.
Consolidated GAAP revenue for the year was up 23.3% to $1.65 billion, and consolidated adjusted revenue for the year was up 21.4% to $1.59 billion.
Consolidated GAAP EBITDAR for the year was $127.7 million, an increase of 5.8%, and consolidated adjusted EBITDAR was $150.1 million.
an increase of 11%.
Same-store revenue for all segments grew by 3.7% to $1 billion, and transitioning revenue for the segments grew by 5.1%.
Same-store skilled nursing revenue grew by 3.1%, and same-store managed-care days grew by 4.7%.
Transitioning skilled revenue grew by 5.7%, and transitioning managed-care days grew by 7.6%.
Bridgestone Health Inc.
, our assisting living and independent living subsidiary, grew its segment revenue by $35.5 million, or 40.3%, EBITDAR by $14 million, or 45.7%, and adjusted EBIT by $4.6 million, or 40.3%.
Cornerstone Health Inc.
our home health and hospice subsidiary, grew its segment income by 22% to $16.6 million, and revenue by $25.5 million to $115.8 million for the year, an increase of 28.2%.
Other key metrics included cash and cash equivalents of $57.7 million at December 31st, and $150 million of availability on our revolving $300 million line of credit as of February 7th.
As <UNK> mentioned, we are updating our guidance for 2017.
We are projecting revenue of $1.76 billion to $1.8 billion, and adjusted earnings of $1.46 to $1.53 per diluted share.
The guidance is based on diluted weighted average common shares outstanding of approximately 53.7 million.
The exclusion of acquisition-related costs and amortization costs related to patient based intangibles.
The exclusion of losses associated with the development of new operations, and start-up operations which are not yet stabilized.
The exclusion of costs related to the system development.
The inclusion of anticipated Medicare and Medicaid reimbursement rate increases, net of provider tax.
And a tax rate of approximately 35.5%.
The exclusion of stock-based compensation, and the inclusion of acquisitions closed to-date in the first half of 2017.
Additional factors contribute to our asymmetrical quarters include, variations in reimbursement systems, delays in changes in state budgets, seasonality in occupancy skilled mix, the implement of the general economy on our census and staffing, the short-term impact of our acquisition activities, variation in insurance accruals related to our self-insurance programs that <UNK> mentioned earlier, and other factors.
We want to remind you that we anticipate the momentum to build over time, and that we do not evenly spread out our performance between each quarter.
As we have said before, we expect to return to our typical pattern of strong performance in the latter half of 2017.
And with that I'll turn it back over to <UNK>.
<UNK>.
Thanks <UNK>.
We again want to thank you for joining us today, and express our appreciation to our shareholders for their confidence and support.
We also appreciate our colleagues in the field and the Service Center for making us better all of the time.
I guess we'll turn the Q&A portion of our call to Shannon.
Maybe you can instruct us on what we should do.
I want to remind everybody that Barry Port, our Chief Operating Officer, is with us as well.
Shannon.
Hey <UNK>.
Well, I know we're not here to talk about the first quarter at all, but I think I mentioned maybe last quarter or the quarter before, I don't remember, you alluded to it, but we have prepared maybe prematurely in certain markets, for the narrowing of networks expecting that maybe some volume would come that didn't come, and the narrowing of networks was delayed.
And we have seen that in a few of our markets.
We even mentioned those markets in the script earlier, but we feel confident with the visibility that we have in the first quarter, that narrowing is actually taking place, while it was delayed we're seeing the impact now, and I guess that's what gives us the greatest confidence, is that we're seeing it happen.
Otherwise, we would just be hoping, I guess.
But I mean I will just use one example, and I don't know, in northern Utah for instance, where we have a dozen or so operations, almost every one of those is included is this narrowing of networks, and you will see the largest participant in Medicare Advantage managed-care programs has narrowed the network from I think 90=some odd, I don't want to get it wrong, so 90-some-odd facilities down to 30-some-odd facilities, and given that half of those are rural, you really are going from about 80-some-odd metropolitan facilities, down to just the teens.
And so you can imagine that those are spread across 80 metropolitan facilities, and now it's spread across just 15, 16, 17, whatever the number is, it's going to be a dramatic increase in our occupancy and dramatic increase in, you will still have shorter length of stay, but with that kind of volume coming through your operations, you will see a dramatic increase in occupancy.
And that's just one example.
In terms of improvement in EBITDA.
It was spread pretty evenly across most of our, we have some smaller operations where we didn't see that kind of growth, but it's spread pretty evenly across the western states in particular.
So if you made me say states, I would say, Idaho, Washington, Colorado, Oregon.
We actually didn't see it as much, we have a lot of opportunity in California, where most of our new acquisitions are, and we haven't really benefited from that yet, so we're pretty excited about what that means for 2017 in the Home Health and hospice arena.
That's probably a smart conclusion.
I don't know that that's the case in these particular markets, though, <UNK>.
I actually until you said that didn't really think about it.
I don't know that they benefited from that delay, or from, I just don't think that that's the case.
But that's smart thinking.
One quick comment on that, though, <UNK>, just to <UNK>'s point.
I think that, ultimately relate, historically relationships have been very important, but I think the environment we're seeing ourselves move into now, it's really performance based.
And so regardless of what relationships we have had in the past, they are important, they get us in the door, they allow for dialogue.
The winners and losers are going to be selected based on outcomes, and so our focus has been on relationships certainly, and we have good ones both with acute hospital providers with ACOs, with managed-care providers, with physician groups.
But our focus really has been on making sure our outcomes are there, that we have the data to measure ourselves against, that we're driving to the lower length of stays, the lower readmission rates.
Because ultimately that is what's going to matter most.
That's where the payment is based out of.
Thanks, <UNK>.
Hey <UNK>.
No.
We talked about that last quarter that we had that supplemental payment in one of our states, that was an increase that we recognized in Q3, that wasn't going to be to the same level in Q4.
And so if you go back on that, you will see that amount was the key format, it wasn't drop per se, but we had a spike in the Q3 when you're looking sequential quarters, and I think that's what you're referring to.
That make sense.
Yes.
Really all.
I will say that they actually did a better job than most of our acquisitions have done it, and we have done a better job in managing that transition from a collections standpoint, which is one of the reasons we don't think we're going to see the same spike in bad debt, as we go through the latter part of a year in that transition, but other than that, even on the collection front in probably a third of the facilities, in terms of the census, the census had declined rapidly prior to us taking the facility, and I think we perhaps foolishly thought we could turn it more rapidly than we really could in a declining environment, and then there are also some lessons to be learned.
I mean there are some expectations we have out of our local leaders, that maybe they weren't accustomed to in terms of daily, consistency of costs.
It's not lowering or highering of costs, it is just being consistent every day, so that we have happier people that are working there, and obviously that saves us money as well.
So it's all of those areas.
And then on the, we are seeing improvement in overall occupancy.
But <UNK>, when you have something that large that's declining the way it was declining, it's probably my fault, but I thought we could get it turned much more rapidly, as we generally do in these acquisitions, but it was just a larger thing for us.
We still think it's a great acquisition.
Over the next ten years, even over the next year, we think we're going to be thrilled that we did it, but boy, it was tough.
I think you saw the impact on the same-store as well, because those people were really helping our existing operators were really helping the new Legend operators to turn it, and so that's why it impacted.
I mean not just the Legend impact.
It's the impact on the same-store occupancy as well, and I think that that's what we underestimated.
We're glad <UNK> is talking, <UNK>.
She's not feeling very well.
It depends on what your stance is.
From where we were it's definitely turned around and heading in the right direction.
From where we thought that it was when we first did the transaction, we're still not there yet.
So I would expect that it will be two or three quarters before it is what we thought it was at the time that we did the transaction, but it's still vastly improved over what it was in the second and third quarter now.
Does that help.
Thank you, <UNK>.
Shannon, thank you for your help, and thanks to everyone again for giving us your time.
We are very excited to have 2016 behind us, and excited about what 2017 is going to bring at Ensign.
So thanks again for your time.
| 2017_ENSG |
2016 | UEIC | UEIC
#Well, we don't speak about the specific products at DISH, but obviously DISH is a major customer of ours, they are not a reported 10% customer.
But they are in our top list of customers.
So we are deploying with some of their next-generation products, yes.
Well, yes, the ASPs typically are higher ---+ some of them are a multiple of what the prior product was.
And again, it is all dependent on what they were deploying before.
Some customers may have deployed in the past a relatively de-featured product which would make the next-generation product the significantly higher ASP.
Other customers were already doing a radiofrequency product so the ASP game may not be quite as big.
I think we estimate that it is roughly at least 2X in terms of the uptick.
And it is both (inaudible) logical and in some cases it is the look and feel of the product.
A lot of customers have opted for zero gap tools where the product doesn't have a gap in the case and laser etched well advanced keypad than they have done in the past.
So, there is look and feel enhancements as well as technological advancements.
They have added voice so there is microphones in the product, two-way RF.
So there is a lot of new features in these products.
Some customers have chosen ZigBee or a flavor of the ZigBee, RF4CE for their two [RF].
Other customers in other regions of the world are using Bluetooth.
But again, all of those are two-way RF products capability of things like voice and other applications.
So yes, but this is a general trend across the world.
It is not just happening here, it has happened here first and there are now a lot of companies here who are either in the midst of deploying or developing or planning for those next-generation products, but it is happening in other parts of the world, Japan, Korea, Europe, etc.
So this appears to be a trend that has legs for the coming years.
Yes, we don't give specific guidance on gross margins we just give guidance on top line/bottom line.
But I will say this, and we've said it before, that as the smart customers transition and they start to ramp, that should help our gross margin rate.
Because they typically won't get the pricing that a real large customer will.
I mean it is good news and bad news for us in that sometimes when you are selling to large customers and they are buying large quantities it puts downward pressure on the gross margin rate and we have seen that.
Even ---+ and what I consider a large customer it's ---+ from a public accounting perspective it's 10% customers.
But you still have customers that are less than 10% but are still I consider significant.
So if I were to look at our top five customers right now comparing Q2 over Q2 the sales have gone up relatively significantly, which is good news for us.
The bad news is it puts downward pressure on the gross margin rate.
But as <UNK> mentioned, Ecolink is going to start shipping in the back half of the year.
Their average gross margin is higher than the Company's average, so that should help.
So I don't want to put a timeline on it, but I think there are some positive trends that should help the margin rate.
And the other thing I want to say about these implementations is that you can imagine that when you have got dozens of players in a time probably 50 to 100 players across the world doing these next-generation implementations, some of them will start slowly.
Some of them will develop the product, put it through testing.
They've got a lot of technology in this next-generation platform that they didn't have before.
But if we use at least the initial sample of people who have done this, if they start off a little bit slowly then they monitor the progress.
They see how engaged the customers are, how much it is lowering churn.
How high ---+ how much people are engaging with the platform and doing more video on demand or other things.
They look out the economic benefit they are getting.
And if the early sample that we have seen is any indication, what happens is the operator will start slowly.
But when they see the positive impact of what they are doing they then get more aggressive in deployment because they see the very positive impact it's having on their customers and on their financial results.
So, if the early sample is any indication into the back half of this year, but more importantly into 2017, 2018 and 2019, in the coming years we should see quite a transformation of the industry where the operators all will begin moving to these types of platforms and then launching them more aggressively as they see the positive impact of the platforms they are launching.
Yes, <UNK>, it is <UNK>.
We just give one quarter out.
Right now we are giving the Q3 guidance and then I will speak to Q4 in a few months.
Yes, it is a good question, <UNK>.
Mix is obviously extremely important.
It is certainly true what you said that the security products that we ship typically will carry a slightly higher margin than our average.
So, to the extent that they make up a higher percentage of the mix it will have an upward lift on our margins.
However, if we have our two largest customers buy record amounts, that pulls it down a little bit.
So this is one of the reasons why we don't like to provide long-term margin guidance because we could have extremely successful quarters with some of our largest customers and that would be good news from an earnings standpoint, but it would affect the margins negatively.
Right.
So these mix effects obviously can swing over a 6-month or 12-month period.
But, it is certainly true that as medium to smaller size customers, if your top two or five customers have now affected the rest of the end of the industry and the medium to small size customers are moving to these next-generation remotes, typically the smaller customers will carry a slightly higher margin than the larger customers and safety and security products carry higher margins than average.
To the extent those things make up a higher percentage of the mix it begins to make the margins move up.
Okay, thank you all for joining us today and for your continued interest in our Company.
Over the next few months we will be participating in a number of tradeshows including IFA September 2 in Berlin, IBC September 9 in Amsterdam; and Cable-Tec Expo September 26 through 29 in Philadelphia.
We will also be participating in the 2016 Deutsche Bank Technology Conference on September 13 in Las Vegas and the Credit Suisse small- and mid-cap conference on September 15 in New York.
So we are going to be on planes a lot this quarter.
We hope to see you at one or all of these events if you can make it to all of them.
Thank you very much for being with us today and goodbye.
| 2016_UEIC |
2016 | WRI | WRI
#Yes, <UNK>, good morning.
Back in the capital, when the capital markets were shut down in 2008 and 2009, we did three secured transactions with live companies to finance the Company and maturities going forward.
This was one of those transactions with a live company that we actually were able ---+ they approached us and we had conversations and were able to push the maturity out.
We actually elected 12 years instead of the typical 10.
And so, and obviously, we reduced the interest rate nicely from 7.5% to 4.5%, and I think they're ---+ on occasion, there are a couple of those, I will tell you, that we do not ---+ our secured debt, the level of secured debt is down dramatically from what it was five or seven years ago.
So there's a little opportunity there to do a little more of that, but I would tell you it is not huge.
We have not.
<UNK>, you are accurate.
That is the highest that we have recorded.
You know, it is interesting.
I would tell you, it is not easy and there is a lot of pushback on increasing rents that dramatically.
There have been some move-outs, and I think, on a case-by-case basis, we have elected to agree with the tenant that we're not going to extend their lease, and so that is just something that our guys on the ground are making their decision, again, on a case-by-case basis.
But, yes, that will increase, you know, the vacancy over a short period of time, but those spaces will be quickly re-leased and, again, that is a trade that we are willing to make today.
When you say we are projecting at the high end, I'm not real sure that, that is correct.
Hey, <UNK>.
This is <UNK>.
Yes, what you are seeing there are a significant number of commencements that we expect in the second half of 2016.
Cash.
Good morning, <UNK>.
You know, it is unlikely that we would get anybody to pay rent by the end of the year ---+ five months left.
By the time we get through entitlements, probably be well past their upgrading windows.
We have got a really great list of people that we are talking to, discount clothing, obviously, is going to be very, very hot.
You know, we are talking to a number of supermarkets, niche guys, hopefully it's 365 Sprouts kind of folks, and it could build some of those boxes pretty nicely.
Sporting goods, again, still in the mix ---+ REI, Dick's, Sportsman's Warehouse, all kind of potential.
Bed Bath & Beyond is obviously somebody who is willing to expand today, and I think it is opportunistic and we will take advantage of some of these things.
The other thing that we are really studying a number of cases is being able to divide these boxes up and create a little more BMR.
You know, people like Michaels, OSH, Carter's, Five Below, DSW, are all kind of in that mix looking at something where they can take a little more depth ---+ not all the depth, but a little more depth, and end up with a better mousetrap.
And then, of course, you've got the fitness guys, there is 24 Hour, LA Fitness, people like that, who ---+ and even some local gyms who are interested in these things.
So these are all of the things that we are weighing and we're working through, and again, most of these spaces, we just got back in the last couple of days.
We're going to take a long-term view of these opportunities and not rush into the first thing we see, and try to make sure that we do things that will create value for the shareholders over a long term.
Yes, <UNK>.
We talked a little bit earlier about the Bed Bath & Beyond and Cost Plus, where we put them into a supermarket.
Anytime you are putting these guys into these supermarket spaces, you tend to have a little bit higher cost, so those are two of those deals.
And then another deal we're, really, again, taking an opportunistic position, re-merchandising one of our centers in Austin ---+ Mueller ---+ and we are placing a furniture store with Total Wine, and we spent a little bit extra on that opportunity.
So those three things really drove it.
It would not surprise me as we look out for the next 6 to 12 months redoing some of these boxes that, that number would trend a little bit higher.
Thanks, <UNK>.
Thanks, Brandon, and thanks to everybody on the call.
We really appreciate the interest.
We will be around today if there's any more questions.
We are really happy with Palms and our team in Florida is happy to show off that great asset.
And, as time goes on, we will also determine if a more formal tour logistically makes sense.
Thanks so much for your interest.
Have a great weekend.
| 2016_WRI |
2016 | IT | IT
#Sales productivity is one of our top focus areas.
We spend a lot of time and effort on it.
The things that we are doing I think are getting better all the time.
It falls into three main categories: recruiting ---+ just making sure we hire people that are the best possible fit with Gartner, where we're really focused on having the right analytics to help us make sure we get the right people and the right process.
The second category is then training, where we have, I think, what is one the best training programs for sales people in the industry.
We continue to improve that training all the time and modify it.
It's not static.
As an example, one of the things we train our sales people on, in areas that are a little distressed, is, how do you deal with those and be very successful in an environment like that, which we know how to do.
The last one is in tools, where we are focused and having better tools for sales force.
Technology is changing everything.
Technology allows tools that help our salespeople to be more productive as well.
We've got investors in all three of those areas focused on improved sales productivity, and we feel really good that those are all ---+ over time we're going to have a great impact on our sales productivity.
Good morning, it's <UNK>.
I think there is two things going on.
One is the labor-based business which makes up the bulk of the consulting revenue.
We've seen pretty consistent performance there, and we had strong bookings and strong backlog coming out of Q4.
That translated into a strong labor-based revenue quarter in Q1.
We also replenished that backlog and entered Q2 with a strong backlog position.
I think that led to the strong labor-based growth, which I talked about earlier.
We were up 10% on our labor-based revenue in Q2 on an FX-neutral basis.
I think some of the volatility still comes from the contract optimization business.
As I mentioned in my prepared remarks, in Q2, we were actually down on a year-over-year basis in contract optimization.
In Q1 we were up a little bit.
On a year-to-date basis, we're up modestly on that business, but that's the place that consistently causes some of that volatility.
I think if you peel the onion back a little bit, you'll see our labor-based business has been performing really nicely and really consistently.
Again, that goes back to a lot of the investments we've made around managing partners and a lot of the things that the consulting leadership team has done to make that business more predictable with people, relationships, et cetera.
I think you are starting to see that ---+ or you are not starting to, but you're seeing that flow through in our results.
Again, gives us confidence around Q3 and Q4 given the backlog position we have during Q3.
I'd like to summarize the key points of today's call.
First, we are doing great as a company.
We see robust demand for our services, and our sales pipeline is incredibly strong with a huge untapped market opportunity.
We attract the best talent in the industry.
We continue to invest in recruiting capability and training tools that drive sales productivity.
We continue to invest in innovations in our content, products, hiring, training, and tools to drive continuing improvements and our operational effectiveness.
We're committed to enhancing shareholder value through investment in our business, strategic acquisitions, and share repurchases.
We are well on track to deliver another year of double-digit growth in contract value, revenue and earnings, coupled with strong cash flow conversion.
And our long-term outlook remains equally strong.
Thanks for joining us today and we look forward to updating you again next quarter.
| 2016_IT |
2017 | PSX | PSX
#It's all planned maintenance.
We typically don't go into where because we feel like it disadvantages our commercial folks when we do that.
But it's going to be a heavy year for us in 2017.
We try to do five-year turnaround cycles, and what's happening, they're just kind of lining up and then you ---+ of course you have regulatory targets you have to hit in terms of bringing assets out of service for inspection, et cetera.
So I think we're going to ---+ 2016 was about where we were in 2015.
We're going to be a little bit higher in 2017 in terms of total turnaround cost.
The first quarter, it's a big lift for us, and you can see that in the core path we give you in terms of op rates.
Just a real quick comment on that.
That's on the refining side.
It's probably around four of those major turnarounds going on around our system.
Chemicals as well has a heavy turnaround schedule, one in the US and one in the Middle East joint venture.
That's why that operating rate's guided lower in chemicals as well.
It's not demand-driven.
It's really the turnaround that drives the chemicals outlook.
There's good demand for storage right now, as you might guess.
So we've done those projects.
We're also in the process of really going through an engineering project to get our dock rate utilization up, to go from [300,000 to 600,000].
That's particularly important for crude.
And so that's a project that would come on here in the next 12 to 18 months, to be able to do that.
As we step back, I think that, that's going to continue to be a benefit as producers look for options beyond just domestic consumption but also to tie into those export markets.
That capacity ---+ we're limited on that, <UNK>.
We're going to de-bottleneck that piece as part of our de-bottleneck plan at Beaumont and the master plan that we have.
On the export.
Hello, <UNK>.
Demand was really good.
We ramped up in the fourth quarter.
You've seen that really around industry data.
So I think it's still there.
I think Latin American refining system on the clean products side has continued to have issues, and that's created an opportunity.
That continues ---+ we still feel bullish in terms of the export side on the clean products.
We really haven't given guidance on exactly how much.
You should expect it will be in-line with our desire to have a strong, secure, growing, and competitive dividend.
We'll look at all those things when we make the decision around the dividend later this year.
Good.
Thank you.
<UNK>, this is <UNK>.
The Secondary Products line is simply a function of the delta between your crude cost and the non-clean products.
So the 15% or so of non-clean production, which typically doesn't track with crude to the same extent.
So as a rule of thumb, as crude prices increase, then the losses on Secondary Products on a per-barrel basis will increase, and that will hurt capture.
You see the opposite apply when crude prices decline.
That drag on capture tends to be reduced.
In the other you have a whole series of items that can actually go in either direction relative to overall capture.
So you've got the RINs expenses is recorded there.
The freight costs for outbound product is in there.
Any of these product differentials ---+ so when we talk about the actual realized product price versus the marker, then that will manifest itself in that part of the calculation.
Well, I think seasonally, <UNK>, you see that this is a weaker driving time.
If you're looking sequentially over, say, the third quarter, you do see an impact.
If you look at year-ago, we continue to see on the same-store growth in that.
I think that our anticipation is as you get back now into the spring and the driving season, that you should begin to see that.
But still, gasoline to us ---+ we had good growth as an industry.
We saw it in our chains.
This year we would expect some gasoline growth as well but probably not as strong as we start to ---+ the impact of pricing and vehicle miles driven, et cetera, begin to saturate.
We're still thinking it's there.
What's interesting, maybe as an aside, is that we're seeing a pickup in distillate on the transportation side, which is I think very important to help bring some strength back into that market, too.
Good morning, <UNK>.
I think that a $3 billion run rate is something we're comfortable with.
And that's $1 billion-ish of sustaining capital and $2 billion of growth capital.
And we think we can get done what we need to get done within those boundaries.
As we think about the hierarchy of how we allocate cash, the first thing is sustaining capital.
That's $1.1 billion or so.
The next goes to our dividend, and that's $1.3 billion.
We'll grow that every year going forward.
Then we think about our investable opportunities and the returns that we can generate from those investable opportunities versus what we think the returns we can generate by buying our shares back can.
We've got a natural tension there, but there's kind of a competition there for that.
And at this point in time, I don't think we see anything different from the guidance we've given in terms of the 60/40 allocation of reinvesting in the business versus distributions back to our shareholders.
Great.
Thank you.
How you doing this morning.
This is <UNK>.
You're exactly right.
The delta there is driven by the hedges that are in place at DCP, which mean from an earning standpoint, you're not going to see the same ---+ as much upside or downside to changes in commodity prices.
And so there's hedges on NGLs and crude, if I've got those details right in my mind.
Of course, the accounting drives it to be not always quite intuitive because the hedges are in place through the end of 2017.
So at the end of each quarter, you're marking those future volumes through the end of the year.
So there may or may not be an offset relative to the gain on the physical versus the paper that you're hedging out through the end of the year.
Obviously as you progress through the year, that effect is muted somewhat.
You can think about the total equity link that we have at the new DCP enterprise ---+ we probably hedged a third of that or so.
That's right.
About 30%.
The other thing is that LLC used to be 100% or 50/50 owned with ---+ and now it's down ---+ the ownership percentage is effectively 38%.
So there's some of that commodity exposure now that's moved into that piece of that, along with the hedge effects.
No, I'm not aware of any ---+ no, not aware of anything there.
I believe that's correct.
Take care.
Good morning, <UNK>.
Okay, so the capital ---+ I think the beauty of a second frac is you can leverage some of the infrastructure you've put in place.
I think our view is the next increment of capital will be lower because you've got all the utilities and some of the caverns, et cetera, pipes in place, and we planned for that.
So that's a beneficial incremental project.
And then in terms of when we could do that, as <UNK> mentioned earlier, we're seeing a lot of NGL looking at the [deramp] or the ramp-up on Sand Hills and the Permian, so producers are beginning to ask that.
I think we're looking to develop that.
Ultimately you look at the Permian, the Eagle Ford, and the recovery that we're seeing in the Mid-Continent as well, and you believe that there's going to be a need for the fractionation.
So the timing we'd like to have, we'd say maybe later this year, but it's one we're always going to keep on the front burner as we develop that.
But we don't want to do that until we're contracted around that.
Well, the current frac is owned by the partners.
And so I think they are getting much bigger.
They're doing a CapEx spend today that's over $400 million.
And so it's getting into a point where they can do that.
It may be a bit early on that, <UNK>, depending on the timing.
But ultimately we'd like to move as much of the Midstream spend into PSXP that it makes sense to do and they can manage.
So I think getting bigger, they've already taken on significant amount of our consolidated capital budget already.
No, I think it's post-2018.
I think the soonest you see FID, based on engineering and where we are working at the CPChem level, that would likely become now 2019, 2020 decision on FID.
Fundamentally, as you look at these, these are major turnarounds, <UNK>, so it's roughly going to approximate that utilization that we guided to.
I said sequentially, you see a decline but year-on-year, same period, you've seen the growth.
We have seen decline sequentially in January, as you would expect from a seasonal input.
No, we still ---+ from our system, our view is that we still see a small increase in the gasoline through our same stores year-on-year.
1%.
Pretty small, but still.
Take care, <UNK>.
| 2017_PSX |
2015 | CBB | CBB
#Hi, <UNK>.
It's <UNK>.
On the ARPU question around voice, I think what you're seeing is kind of the gradual waiting shift of sales as legacy voice declines and sales of Fioptics pick-up, obviously, we're more competitive with the voice-attached rates with Fioptics and as revenues are assigned within a bundle it is a more competitive price and has been for a while, so there haven't been any short-term changes in that.
I think that what you're seeing is effectively the waiting shift as we ---+ as that they shift with that, I can answer the housing market is strong.
Yes.
It's strong and it continues to grow.
It's more growth in the north of the city.
That's where it's headed and we have the product to support that growth.
The churn elevation, every time at this year, July, in June, June-July is really the moving season.
And so, we have every ---+ it is cyclical and seasonal based on that.
The percentage of our base ---+ around 30% of our base is in the MDU market, now obviously that's shrinking, we're selling ---+ the majority of our sales today incrementally are to SFUs, but if you remember, we started the Fioptics strategy in the MDU space, as a test to see that we could actually be successful in this business.
So we do have a higher percentage in the MDU space, but that is lowering overtime.
Well, there's actually two things, one is the backhaul and that's about $4 million.
Then we also handsets sales of ---+ Verizon handset sales and that was about $2 million.
Yes, it should.
Third quarter, we expect to be fairly level.
Yes.
But <UNK>, we're seeing the same pressure on our carrier side as most of the other carriers are seeing, the big carriers are doing network roaming, there's price competition, that does not change, that's been pretty consistent for the last year or so.
We see the same things they're, but the big jump that you see the $4 million was a tier jump specific to us getting fully into discontinued operations from running the wireless business.
So as GAAP ---+ the way GAAP worked it because we were still operating technically in our wireless business in Q1, we had to recognize that backhaul revenue and as soon as we got out that went away.
Well ---+ first of all, we're very bullish on that segment.
It is the segment that we've taken out of territory, we now have a presence in Columbus, Louisville, in Indianapolis.
We have been extremely successful in winning business even though we don't have an on-network offering there.
We have just recently won three big VoIP deals at our territory, we won the state of Indiana, state of Kentucky.
In a large enterprise deal.
Yes.
And so all three of those were in the process of finalizing the documents and will win that.
So yes, we expect continued growth.
It is a big area of focus for us and we're excited about the performance we've generated.
Yes.
Hi, <UNK>.
This is <UNK>.
Yes, it's going very well in territory.
We only see one of the major carriers extremely active from a build standpoint.
And we just ---+ <UNK> and I had just paid a visit to that carrier recently and I think they're overjoyed with the performance at Cincinnati Bell has given them in that space, I think we mentioned in the past our ability to combine our networking experience and our wireless experience.
I think is a clear differentiator.
I think our problem is, we're only in the market and the thing that we hear from especially that carriers, we wish you were in other markets.
But as the market grows, and other carriers get a little more aggressive, I think we have a clear right to win in the area and we'll go as aggressively as we need to go in that space.
It is slow going though as you've probably seen across the nation, I think, most of the carriers are still figuring this out and it's ---+ I think they probably feel it's going pretty aggressively, because it is, but it's going to be a slow rollout from the standpoint of actually kind of delivering numbers to folks like us.
It will mean, eventually it will mean accelerate CapEx, but the returns are nice and we feel like it's definitely an area we can grow in the future.
No.
We haven't.
No.
We don't know.
Thanks, <UNK>.
In the managed services business, popular products are really managed voice, so as Company's state agencies move to a future voice strategy, a lot of them don't look at voice as being core, so they want providers like Cincinnati Bell to provide that as a utility.
So we see that as one of the more popular areas.
Also managed infrastructure, server and storage infrastructure and the management monitoring around that and the outsourcing around that environment is another big one.
With certain customers, we see, if you kind of tick down from those two, we see VDC, virtual data center in certain customers, we've a very, I think well-developed virtual data center product, but that's really ---+ we're seeing success in more mature enterprise companies in that area.
With respect to margins, these are fairly capital intensive upfront endeavors.
So what you see is, you see a capital investment upfront and then you see as you implement and you start to especially like in the VoIP services, as you see implementation and handsets being taken down by the businesses you see increased margins overtime and margins are actually pretty attractive given the capital investment upfront and the fact that we can manage most of it from a semi-centralized operating platform.
Does that make sense.
And the capital spend is, it's success base.
You're not spending the money until you have the deal.
Yes.
And the other thing to highlight, the difference between the businesses, beyond that business ---+ in the managed services business that the capital is a lot less than what you're used to hearing about with respect to like entertainment and communication.
So it is capital intensive, but from a comparative standpoint, the intensity is a lot lower.
Yes.
It's a lot quicker.
No.
Not.
Not that quick.
But it's a good return.
It's within contract terms.
Well, I think some of things that we'll see is, Charter offers a very simple product offering.
Right now, it's like 60 meg for 39.99 in other areas.
They're going to have some work to do when they get here to upgrade the network.
But, we expect to have very competitive offers and they're going to tied in the speed.
So, but I think we're very well positioned to compete with our fiber product and so, that's what we expect.
We expect simpler offerings and they're going to focus on speed.
Yes, <UNK>.
We're still very focused in the short-term on paying down debt as a part of capital structure, but as mentioned in the past, we are starting to change and shift focus to the equity and looking at strategies on how to boost equity as a form of currency and I think you'll see things in the kind of the mid-term from us.
And I think we've said in the past that we're more inclined around buybacks than we are a dividend.
So as we inch closer, we look forward to the opportunity to execute on some of those strategies.
First of all the ---+ your first question, yes, we're ---+ we have a big focus on that and we're seeing great growth on dark fiber.
Dark fiber, I think <UNK> alluded to, in our city we're seeing primarily one carrier that's coming out with contracts, but we are starting to see interest from other carriers and he alluded to that ---+ we met with a large carrier last week, it was very bullish on our performance.
They were very aggressive and trying to get us to travel outside of our Cincinnati area to help them and we'll look at those opportunities.
Yeah, <UNK> we're seeing ---+ we're not only seeing dark fiber opportunities in that area, but we're also seeing opportunities to expand outside of the region with dark fiber, so there are opportunities for us (inaudible) today that would expand our footprint through an IRU structure.
And with respect to M&A, we've always been curious, I think if you look at the two assets that we have on-net and then IT solutions the off-net, as mentioned, we're seeing great success in IT solutions and on the network, on the network side, I think we have to focus on finishing the build.
On the IT solutions side, I think there's opportunities that we could look at over the next several months and expand our footprint, our presence there and I think it's an underserved area.
We're a huge fan of that segment, and I think we need to boost that in the attention of that segment more in the future.
If you look at competitors out in the market, I think we do a fairly good job on higher end of those services and yet it still trades at CBBs multiple, right.
So where it's competitors and recent transactions traded (inaudible).
So we think there's an opportunity there, but we're obviously cautious given everything going on.
And <UNK>, we have a lot of work to do to execute on what we're doing now, but we're always open to look at M&A and as <UNK> alluded too there is opportunities.
Well, we're not going to get into what we have now, but we are looking at a new vendor and we're very excited about the potential, we're in the process, I think we've got about 350 customers on the product right now and we're seeing a lot of positive response.
So, we're very bullish on what we're trying to accomplish there.
Yes.
<UNK>, the guide piece that we're working on, one, the improvements as we look at certain customer surveys, the surveys are coming out to being very comparable or slightly better than even someone like DirecTV.
The improvements also allow us to integrate with other vendors also and you heard us mention DVR, enhanced DVR solutions, over-the-top solutions, so that is the direction, we understand that, that's the direction the industry is going and so, the improvements that you'll see allow us to integrate the platform across the board.
And also just on a personal note, the channel speeds are unlike anything you've seen.
The channel guide speed is unlike anything you've ever seen, so like zero to no delay and channel guide switching, so it's just little things like that, that we focus on making improvements around.
Cost to install has stayed pretty consistent in the [750 to 850] range depending per install.
From a wireless standpoint, we do use it, but we don't use it across the board.
It's something that we are developing, our technical ---+ the technical side of the Company does have a focus on improving the installation from a cost basis standpoint and wireless would be a big part of that.
We're seeing some of the same things and it's over-the-top, we hope to have that offering out early next year and we see that we'll be able to offer a product that will be good, better and best and we'll be able to customize it to whatever the consumer would want.
And that's kind of how we're adjusting our marketing around that piece.
The good part of it is we have a pipe, today that we can get a gig service to a consumer so the build out and the continued ---+ we're about 47% of the city cover.
We'll have by the end of the year, hopefully close to 55% and on our way to 70% to 80%.
So we're going to have the pipe that can handle it.
We're going to have a product offering that we can customize based on what the consumer wants.
Yes.
And on the impact of broadband, we've seen just in the past year in peak hours, I believe, hold me to it, but I believe it's like a 20% increase in broadband usage during peak hours.
So it's definitely having an impact on broadband use.
Well their penetration today is about 25%.
We're actually a seller of DirecTV in our market and obviously with our product in Fioptics we do compete in some areas and our focus clearly is on Fioptics, but again, we're prepared based on the product that we have, we're focused on continuing to improve it and offering solutions to customers and consumers that meets our demand.
| 2015_CBB |
2016 | CINF | CINF
#Thank you, <UNK>, and good morning everyone.
Thank you for joining us today to hear more about our third-quarter results.
Those results represent another solid quarter of carefully executing our strategy.
They reflect personal interactions by our associates working with our agents and others to steadily improve our long-term performance by building one relationship at a time.
While our 92.4% third-quarter combined ratio was quite good, it was above the outstanding sub-90% result a year ago.
However, it's satisfying to see our nine-month combined ratio measures, before the effects of catastrophes, performing about a percentage point better than a year ago.
We are also pleased with another quarter of strong investment performance.
And <UNK> will soon comment on investment income growth and portfolio valuation gains.
Before that I will highlight a few more aspects of our insurance operations.
We believe we are reporting a healthy rate of premium growth for each of our insurance segments.
Our work toward greater pricing precision allows us to underwrite on a policy-by-policy basis and strengthens our confidence in selecting and pricing new business from our agencies.
Pricing was generally in line with the second quarter.
Consistent with where loss ratios for us and the industry indicate the most need for higher premium rates, our commercial auto and personal auto policies experienced third-quarter average renewal price increases that were the highest among our major lines of business.
Both had average percentage increases in the mid-single-digit range with personal auto near the high end of that range.
Our reinsurance assumed operations, known as Cincinnati Re, saw another quarter of steady growth as our team works to selectively build out a diversified portfolio of treaty business.
Third-quarter underwriting results benefited from the June 30 loss reserves that are developing favorably as we obtain additional information on reinsured claims.
The resulting favorable effect for the short tail portion of the portfolio contributed to a $6 million third-quarter underwriting profit for Cincinnati Re.
We also experienced ongoing progress in the expanding personal lines products and services we offer to our agencies' higher net worth clients.
Almost one-fourth of the total $91 million in personal lines new business written premiums for the first nine months of 2016 came from high net worth policies.
We continue to see good performance for our Commercial Lines segment with a third-quarter combined ratio near 90%.
Our Excess and Surplus Lines segment continued to report superb results with a combined ratio below 70% for both the three and nine months ended September 2016.
For our life insurance subsidiary, earned premiums continued to rise at a double-digit clip for both the third quarter and first nine months of 2016, even though unlocking of interest rate and similar actuarial assumptions slowed our year-to-date growth in income.
Our primary measure of financial performance, the value creation ratio, reached 14% on the year-to-date basis with generally higher investment portfolio valuations boosting the strong 6% contribution from operating performance.
I will also briefly comment on estimated effects of Hurricane Matthew on fourth-quarter results.
While it is still early, we estimate the catastrophe incurred loss effect to be between $40 million and $65 million pretax including a net effect of $5 million to $10 million from our reinsurance assumed operation.
While the financial impacts are important, the real story for us lies in the hard work of our field claims representatives.
More than 50 associates volunteered to leave their families to help policyholders in Georgia, North Carolina and South Carolina put their lives back together.
We're here to pay claims.
As our associates fulfill that promise with efficiency and empathy they become our greatest sales advantage.
Satisfied policyholders will share their experience with their neighbors, giving our agents and us the opportunity to write more business and continue growing our Company.
With that, our Chief Financial Officer <UNK> <UNK> will comment on other areas of our financial performance.
Great, thank you, <UNK>, and thanks to all of you for joining us today.
I will begin my comments with a few third-quarter investment highlights.
Third-quarter 2016 was our 13th consecutive quarter of investment income growth as it rose 3% on a pretax basis and 4% on an after-tax basis.
That growth continues to reflect an increase in both interest and dividend income.
Our equity portfolio experienced another quarter of nice growth and unrealized gains and we reported a 1% increase in fair value.
In total, we ended the third quarter of 2016 with a net unrealized gain of more than $2.7 billion, before taxes, including more than $2.1 billion in our equity portfolio.
The bond portfolio's pretax average yield, reported at 4.63% for the third quarter, slightly exceeded 4.62% from the last year's third quarter.
Taxable bonds purchased during the first nine months of 2016 had an average pretax yield of 4.27%, 23 basis points lower than we experienced a year ago.
Tax exempt bonds purchased averaged 2.89%, 45 basis points lower than a year ago.
Our bond portfolio's effective duration at September 30 was 4.9 years, up slightly from 4.8 years at the end of June.
Cash flow from operating activities continued to provide funds for our investment portfolio.
Funds generated from net operating cash flows for the first nine months of 2016 rose 9% compared with a year ago and helped generate $375 million of net purchases of securities for our investment portfolio.
As always, we work to carefully manage our expenses, at the same time strategically investing in our business.
Our nine-month 2016 property-casualty underwriting expense ratio rose slightly, up 0.3 percentage points compared with a year ago.
Moving to the other side of the balance sheet, our loss reserves continue to experience favorable development as we apply a consistent approach to setting overall reserves.
For the first nine months of 2016 favorable reserve development benefited our combined ratio by 4.6 percentage points, very similar to the same period a year ago and full-year 2015.
Reserve development for the first three quarters continued to be spread over most of our major lines and over recent accident years, including 55% for accident year 2015, 24% for accident year 2014 and 15% for accident year 2013.
Overall reserves at the end of September, including accident year 2016 and net of reinsurance ceded, rose 6% from last year with IBNR representing more than half of that.
Our assessment of the Company's capital strength, liquidity and financial flexibility is that they remain at healthy levels.
Capital management objectives include supporting future profitable growth of our insurance operations plus other areas such as returning capital to shareholders.
As usual, I will conclude with a summary of contributions during the third quarter to book value per share.
They represent the main drivers of our value creation ratio.
Property casualty underwriting increased book value by $0.35.
Life insurance operations added $0.05.
Investment income, other than life insurance and reduced by noninsurance items, contributed $0.48.
The change in unrealized gains at September 30 for the fixed-income portfolio, net of realized gains and losses, decreased book value per share by $0.04.
The change in unrealized gains at September 30 for the equity portfolio, net of realized gains and losses, increased book value by $0.51 and we declared $0.48 per share in dividends to shareholders.
The net effect was a book value increase of $0.87 during the third quarter to a record $43.24 per share.
Now I will turn the call back over to <UNK>.
Thanks, <UNK>.
We appreciate this opportunity to respond to your questions and also look forward to meeting in person with many of you during the remainder of the year.
As a reminder, with <UNK> and me today are Jack Schiff, Jr.
, Ken Stecher, J.
F.
<UNK>, Marty Mullen, Marty Hollenbeck and Theresa Hoffer.
Shannon, please open the call for questions.
Paul, this is <UNK>.
And as we look at that, not that we don't see any issues with frequency, but for our auto lines it's been more of a severity issue than it has been a frequency issue.
And so, obviously, I think we've had strong results.
Thanks for the compliment.
There are some areas obviously that we need to work on and that would be the auto lines would be at the top of that list.
And I think there is a lot of action that's taking place that makes us feel good about the progress.
It just does take a while for the various initiatives we've put in place, including rate, but in addition to rate to help the situation.
I don't know if J.
F.
wanted to add anything to that.
Yes, Paul, going along with <UNK>'s comment about rate, we did, particularly relative to commercial auto, we were at The Council of Agents & Brokers meeting a couple of weeks ago, met with 40 agencies, the larger agencies out there and the topic of conversation among those agencies was commercial auto and the fact that that market is firming up and that they are prepared to deliver rate increases.
So that's kind of a big hurdle that there is an acknowledgment throughout the industry of the need for more rate.
So we would anticipate that will continue into the future.
But there's a variety of things we continue to do to try to address the severity issue.
Most of what we would say are the exact same things that others in the industry are talking about.
A whole variety of things.
Newer cars are more expensive to fix.
Aluminum is being used more than steel and that's more expensive to repair.
A lot of the same things.
Distracted driving continues to be an issue.
A lot of accidents that we've noticed, no skid marks.
A lot of distracted walking and biking.
We've had two very severe accidents in the Chicago area, you may have heard about them, where people in bike lanes and maybe not in bike lanes, a lot more biking, for example, in metropolitan areas have resulted in some larger claims.
The issue related to driver shortage continues to be one that's talked about a lot.
Drivers, some statistics from the PCI conference, drivers that are under 30 years old are two times more likely to have accidents.
And there is a lot of discussion about older drivers being brought back, folks that haven't retired, and drivers that are above 60 are 1.5 times more apt to have accidents.
So we are seeing a lot of issues related to that.
So what we're trying to do is to amp up our loss control, making certain that as we visit policyholders that they have driver education programs, things of that nature.
And then as we underwrite business an awful lot of attention, additional attention is being applied to the driver information, age of drivers, the types of vehicles that those drivers are assigned to, in other words young drivers to heavy trucks is a bad formula.
So all of those things are going to be taken into consideration in addition to the rate that we expect to get.
I wouldn't say it's unfair.
I think that we do keep an eye on all elements of the pure premium, the frequency and the severity.
But I think as we see it with our book it is more, it is much more of a severity issue for both the personal and the commercial.
I think that's been consistent with what we've seen and said through time here.
Yes, <UNK>, this is J.
F.
I guess I would probably put top of the list just our model doing business with our independent agents.
Unlike others in the E&S business we are not going through wholesalers.
We are only doing business with established relationships with The Cincinnati Insurance Company.
We test that as far, as the amount of opportunity we have in our agencies they are somewhere in the area of $2 billion of E&S premium that's written with Cincinnati Insurance Company agents.
We visit the agencies in person, in many cases with our excess and surplus lines underwriters, our field reps that are in the E&S side of things.
We include the premium, intermingle the premium with our standard market premiums and losses on the profit-sharing contract.
So I think our agencies appreciate what we are doing.
They want to make certain that the business they put with us isn't, for lack of a better word, the type of thing you throw against the wall and see if it sticks.
It's more carefully placed with us.
I think our appetite is perhaps a little bit more conservative than most.
Having said that, we will finish this year at $200 million at the end of our ninth full year in the E&S business.
And it's not as though we don't write some tougher risks.
But I think the balance there has been good.
Don Doyle and his team have been very disciplined about what we're doing.
About 85% of what we write is on the casualty side and we stay pretty strong with our terms and conditions.
So I wouldn't say there's anything magical about it other than I think our model of doing business with just Cincinnati Insurance Company agencies has probably paid off for us.
Yes, one of the things that we are consistently doing is adding more and more field underwriters in this area.
And so when you are calling on your agents person-to-person you do get more looks.
We visit with a lot of our agency principals about the advantages we think we bring to the table, and as time goes on perhaps some of the habits that they are in using various E&S wholesalers we break through those and once that gets going there is a momentum associated with that.
Well, thanks, <UNK>, good question.
We are confident in the business.
We do, and we appreciate your noticing that we have really hired some very talented people.
Jamie Hole, who we've known for a long time, started that up.
Right on down the line, I won't call them out by names, but every single hire I think has been very strong, very experienced, come with a very variety of strong backgrounds and they are really working together as a team.
I think it's important as we go forward to rely on their expertise and that we are going to take a conservative approach to it.
We didn't set up a Company to do this with capital allocated with a demand to produce a return on that capital.
It's very much just allocated treaty by treaty as we look at them, and so I appreciate your noticing the talent.
We feel confident in the people that we've hired, the business plan they've put together and our prospects going forward.
No, I think we feel confident in the strong results of the Commercial Lines.
We've talked about commercial auto being a bit of an issue, and J.
F.
laid out all the initiatives that we've put in place.
But I think we're confident any uptick can be attributed to noise and we feel pretty darn confident.
Yes, thank you.
No, I think there might be a slightly muted effect from us because of our three-year policies.
Not as many of our accounts go to market every year, so I think that's a real positive from our standpoint.
There is competition out there.
It is muted by the firmness of the commercial auto side of things.
And when we compete, we compete on an account-by-account basis.
And there may be some carriers that may be more line of business oriented about how they compete, they may be seeing a different type of competition or more intense competition, for example.
But there is competition.
It's modest.
If a great account goes to market it will draw, it will definitely draw some attention.
But the types of things that we may have heard in previous soft markets where there's reckless competition we don't see that occurring.
Right.
That's a good question and something we monitor, as well.
It is very much an allocated capital model so we don't even put targets that we are going to have this much in property, this much in casualty and so forth.
But if we look at it, this would be inception to date, so including last year we have just about $89 million in net written premium.
Of that about $43 million is on the property side, so that can give you a feel.
It's almost 50/50.
We feel pretty good that in about a year of existence, including the ramp-up and hiring of the talent and blending the team together, that we have had profitability so far.
And so we feel good about it.
But we are not going to be, as a start-up here we are not going to put demands in terms of growth or particular mixes of business.
We just want them to look at them one by one, try to determine how much capital we would want to allocate to that particular contract, really make sure that we understand it quantitatively and qualitatively and if we do then we will go forward with that contract.
And we will keep you posted as the numbers might move.
But I have to say, it's been pretty balanced as it's turned out.
I think it's mainly United States.
I don't think we have much in terms of international.
We do have a little bit of mortgage insurance but not much at all.
It's a contract or two that they very much have vetted.
So I would say that it's a pretty standard, in terms of reinsurance anyway a pretty standard book of casualty business.
I thought that question might come up.
So I pulled the press release from last November.
And I think we were trying to be pretty transparent then that we were looking at this as a one-time special dividend and that we did cite the increase in operating earnings being up 30% from where they had been the prior year and just wanting to reward shareholders.
And we are going to continue to look at capital management heading in on this 56th year of increasing our dividends and feel very confident in everything that we are doing.
But did want to ---+ I think we were trying to put the message out last year that that was to be considered a one-time event.
Yes, we are again confident in the life insurance business.
We think there are cross-serving opportunities there.
About I think 70% of the premium or so comes from our P&C agencies and as you know whenever multiple policies are involved the retention rate on all of them goes up.
We do have some exciting products I think that are on the development board that we've talked about with our agents and they are excited about.
And it would be an easy-issue term policy that would be marketed through our P&C agents where we would be able to ask just a few questions and draw on data that they've provided through their personal lines applications to be inputs into a predictive model such that we could offer up to $500,000 in term coverage right on the spot, so that we think that's going to roll out early next year.
The early trials that we've been putting that through seem to make it something that we're confident in.
The worksite products that we have on the commercial line side are a nice complement to what we are doing through our commercial insurance.
And so we do think it very much complements what we do on the P&C side, allows us to have higher retention.
And we are confident in the growth of Cincinnati Life going forward.
I think the latter.
I think there will be some competitive advantages to this product.
Just the ease of the issue and how it would be coordinated with the sale of the personal lines P&C products I think makes it relatively unique.
That's correct.
I mean, assuming the questions that are answered are answered and the data that we collect comes back in a favorable light, there would not need to be the blood draw, the medical exam and so forth.
Okay, thank you, <UNK>.
Okay, thank you, Shannon.
Thanks to all of you for joining us today.
We look forward to speaking with you again on our fourth-quarter call.
Thank you very much.
| 2016_CINF |
2016 | SKX | SKX
#Thank you.
Well, it could be anywhere.
When you are ---+ you never know what's going to explode.
It's hard to see, the second quarter has the cost of the comparison to last year it's just a very difficult quarter to get significant growth.
But it could be anywhere certainly China could accelerate with a demand.
It's unlikely that Europe could, South America could accelerate domestic wholesale could certainly accelerate and some of the distributors may move up a significant piece so there is many places the biggest place we usually see given that there is no business shift out in the month of April would be domestic wholesale that can shift from July or June it's just not a phenomena that we see in Europe because their season starts a month later.
I wouldn't anticipate we would see that for another few weeks I think we strongly have a few conversations where I don't see anything significantly definitive because the weather is just turned for those that have are in a good position there their sales just started to open over the last week or so.
And they are all coming in for praline so it's kind of early in the process to seek a significant piece, but the things continue as they had the last week or so I think it certainly would be a positive point as you get out but it's very, very early in the game and we just finished the very first few weeks of April it was very difficult to reach out just about everywhere here.
Like I said it depends on the mix certainly.
Usually we have some upward potential in second quarter because it's such a - it's a smaller wholesale quarter and can be a larger retailer quarter depending on where the mix is so it's too early to say I would say there was slight not significant but slight upward possibilities for gross margin as you get through second quarter.
Well, I think it depends on the mix.
I think it has a possibility to go up certainly because I anticipate without any significant currency changes which we will see now will have those price increases in affect Canada could come back some South America starting to come back as far as currency is concerned.
We will wait to see what happens in England, the Euro certainly is getting somewhat stronger.
So I think if the dollar certainly has bottoms or close to it you get all from the currencies.
And that's some of with mix so like I said it's not necessarily a bet, if it goes down in the back half because of China we will have increased operating margins even with it so it's not a bad thing.
It's like when we have more outlet store business and comp store business because it's cheaper to run them we take a hit in the gross margin but we make a very big positive in the operating margin so something are very positive even if they impact gross margins to a slight degree.
No I think it's just natural growth.
I don't know that it's big a at once piece, certainly you get a benefit just because you don't have the pull up I mean there is 20 million left in that third quarter last year the chances are we will be in third quarter this year.
Both pieces are different for domestic wholesale so I do think we will grow it and I think our goals for top-line growth are still at the higher end of anybody else.
I think we are still very confident but we will wait to see what happens.
We don't want to push it any which way we are very happy with the gross over the last few years and hope it continues as we go into the future.
So where there is mid teens or somewhat higher or gets into 20% range that all happens as the natural progress.
We don't have enough inventory for only at-once to be the only driver.
Absolutely.
Well, if I knew that specifically well I should it would be up significantly because the franchise business in China has grown significant as most of the double digit growth you see whether triple digit growth you see.
It comes from the franchise model.
So that would pair even outside as far as backlogs are concerned.
I think it's fair to say that it's tracking better than the lower end of guidance certainly I don't know if that's significantly higher than the top end I don't know if it's quite at the top end.
There will be not as much acceleration in the second quarter because it is franchise model but it will lead to certainly significantly higher potential in Q3 for China.
So I would tell you that those numbers are still in play.
I would have if I had to do it today I would take up the lower end of that range significantly but I don't know that I would take up the top in that range at all.
double-digit growth you see or the triple-digit you see franchise that would appear as far as backlogs are concerned.
I think it is fair to say I don't know that it is significantly hire than the toppened not as much but it will lead to certainly significantly hire potential in Q3 for China I would tell you those numbers are still in play.
If I had to do it today lower end of that it range significantly I don't know it if I would take up the top end of that range at all.
This quarter's volume, but yes I don't disagree on China we said we try to have it by the third quarter.
So we will try to get that as quickly as possible.
Direct to consumer we still looking into because it's sort of selling everybody your own thought process on your own stores as far as comp store sales are concerned so we hope to have China in by the third quarter and we will make a decision on directive consumer by that time as well.
Thanks.
It's difficult to say because a lot of it has to do with retailers as far as Easter is concerned and what we lost between the port strike and things like that and I think it's always relative to last quarter.
But I wouldn't be surprised if it was on a differential year-over-year basis between first and second quarter that there was somewhere between $70 million and $100 million shift from what would have gone in first quarter last year moved in this year between Easter and everything like that.
If I had it I would tell last year first quarter should have been an access of $800 million and that's the growth you should have gotten that's what moved this year back to first quarter significantly over and that last year second quarter should have probably come in $750 million $760 million range and that's why you will see that growth this year.
All of that has reversed out this year compounded by the fact that Easter has moved from second to first quarter.
The sale through I don't know what that means.
You mean like the sport game information and stuff like that.
Yes, it's very difficult but I think for most cases and a lot of cases we sell through according to plan.
The plans we had with those retailers in some cases and a lot of cases which is why we are up a little bit more in the first quarter we sell better than plan.
So it depends on the retailers I think nobody got heard with inventory so the increased inventory they took in sold through at good rate and it's different for everybody it's hard for me to figure and quantify among on an overall basis I don't know think that inventory.
I would say most cases certainly those retailers that are doing well we sold better than the inventory buildup they had.
| 2016_SKX |
2017 | EQIX | EQIX
#Thank you
Good afternoon, and welcome to today's conference call
Before we get started, I'd like to remind everyone that some of the statements we're making today are forward-looking in nature and involve risks and uncertainties
Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K, filed on February 27, 2017, and 10-Q filed on August 4, 2017. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call
In addition, in light of Regulation Fair Disclosure, it's Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an exclusive public disclosure
In addition, we'll provide non-GAAP measures on today's conference call
We provide a reconciliation of those measures to the most directly comparable GAAP measures, and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www
com
We've made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data
We'd also like to remind you that we post important information about Equinix on the IR page from time-to-time and we encourage you to check our website regularly for the most current available information
With us today are Steve <UNK>, Equinix's CEO and President; <UNK> <UNK>, Chief Financial Officer; and <UNK> <UNK>, President of Strategy, Services, and Innovation
Following our prepared remarks, we'll be taking questions from sell-side analysts
In the interest of wrapping this call up in an hour, we'd like to ask these analysts to limit any follow-on questions to just one
At this time, I'll turn the call over to Steve
[004861-E <UNK> M
And good afternoon, and welcome to our third quarter earnings call
I'm very pleased to share our strong results for the quarter
Our business is performing well as we capture the shift to the cloud and continue to win by providing unparalleled global reach, strong interconnection capabilities, and high service quality
Robust demand on Tier-1 markets is driving higher utilization levels and we are investing in support of this momentum with additional builds and continued land purchases, particularly in our top tier markets
This is complemented by targeted inorganic activity to expand our footprint and extend our scale into more key markets
Strong execution of our strategy is translating to rapid growth in our customer base and our go-to-market teams added record new wins across every vertical with notable outperformance from enterprise and financial services customers
As customers embrace hybrid and multicloud as the IT architecture of choice, our interconnection strength is resonating, and Equinix continues to outpace market growth and gain share
Our healthy bookings in the third quarter were fueled by strong growth in our network and enterprise verticals, in particular strength in both the European and Asia-Pacific regions
As depicted on slide 3 of our presentation, third quarter revenues were $1.152 billion, up 10% from the same quarter last year
Adjusted EBITDA was $550 million for the quarter, up 10% over the same quarter last year, and AFFO growth was 16% year-over-year
These growth rates are in a normalized and constant currency basis, and demonstrate our strong operating performance
Interconnection revenues grew 17% year-over-year, continuing to outpace colocation revenues and reflecting the success of our interconnection and ecosystem centric strategy
We saw a healthy pace of cross-connect ads with over 248,000 cross-connects now deployed
Our Internet Exchange platform, the largest in the world, continues to see healthy growth with traffic volumes up 17% year-over-year, as customers begin to scale capacity in 100 gig port increments
We also saw traction with the Equinix Cloud Exchange, now serving over 950 customers and delivering strong EMEA growth this quarter
Our product strategy is leveraging our unique position in the market as a global interconnection platform for enterprises and service providers of all kinds
We are currently pursuing opportunities to strengthen our interconnection leadership, including expanding the geographic reach of our services, as well as adding new features that provide customers additional flexibility, choice and commerce enablement support
These new offerings are in beta and some will be coming out to market formally before the end of this year
Our geographic reach is unmatched and continues to grow with our global footprint now extending to 190 data centers across 48 markets, comprising over 19 million gross square feet of capacity
Our top-10 customers are deployed on average in 60 IBX facilities and represent the largest cloud, networks and enterprises in the world
This metric is increasing and speaks to both our investment in systems and processes to ensure a globally consistent customer experience, as well as the needs of our customers for a distributed digital edge
This quarter, over 59% of our revenue came from customers deployed across all three regions, up from 58% last quarter, while 84% came from customers deployed across multiple metros
We remain committed to pressing our advantage globally through targeted acquisitions
And early in the fourth quarter, we closed two new transactions in EMEA
We purchased Itconic, a leading connectivity and cloud infrastructure solutions provider in Spain and Portugal for approximately $253 million
This purchase adds five data centers, and extends our footprint into two new European countries
It adds more than 400 customers including many marquee enterprise brands, and more than 100 network and mobile providers
The deal also gives us access to key locations where subsea cables land and connect through Iberia, positioning us to support the growth in direct traffic between Europe, Africa and Latin America and further extends our leadership position in the subsea market
We also expanded in Turkey, purchasing our second IBX in Istanbul for $93 million
This owned data center further strengthens the Equinix's position in Istanbul, a strategic gateway between Europe and Asia with critical economic and geopolitical importance
It provides Equinix with key capacity in a campus environment, and a growth path which enables us to address continued demand for colocation and interconnection services in Turkey
The Verizon data center acquisition completed in May continues to gain momentum
These assets have dramatically boosted our scale in the Americas, delivering strong performance out of the gate across all metrics
We are addressing pent-up demand by unlocking capacity in key facilities, and have approved new expansions in both Miami's NAP of the Americas and in Denver and expect to move forward shortly with additional capacity expansions in the coming year
We have made progress to stem the previous level of churn, and are enjoying significant success cross-selling into the Verizon assets from Equinix customers
Our federal business is also progressing nicely, and we are growing the team to support this opportunity as we scale in this sector
Integration of the Verizon assets is moving quickly and we expect to have the majority of this work done by year-end
Early this quarter, we cut over from Verizon systems to the Equinix operating systems for all 29 data centers, marking a significant milestone for the integration program
We recognize with pride the incredible planning and execution work that all teams have completed to reach this point
As it relates to both the Telecity and Bit-isle integrations, we have now completed the vast majority of these efforts and have recognized substantial benefits from the expanded platform in our European and Japanese markets
Now, let me make a few comments on our organic development activity
We recently opened two new IBX's in Ashburn and Hong Kong adding capacity in some of our most important and interconnection rich campuses
We have 22 expansion projects underway across our platform, half of which are in EMEA, currently our most utilized region
We also purchased our Düsseldorf DU1 asset for $16 million and are progressing well with additional land purchases in EMEA and the United States
Revenues from owned assets now represent 43% up from 42% last quarter highlighting continued progress in this metric
Our capital investments are delivering healthy growth and strong returns as shown on slide 4. Revenues from our 99 stabilized IBX's grew 5% year-over-year largely driven by increasing cross-connects and power density
These stabilized assets are generating 30% cash-on-cash return on the gross PP&E invested and utilization moved up to 84%
Now let me shift gears and cover the highlights from our industry verticals
We are pleased with our progress across our industry verticals as we see seed and curate high value ecosystems
As digital business transformation permeates across all industries, we added a record number of new wins across every vertical this quarter through our channel and direct sales teams
We also added 10 new Fortune 500 wins across enterprise and financial, including a multinational pharmaceutical company, deploying performance hubs for real-time analytics and data management and a global retailer integrating business platforms to enable in-store insights
Now starting with the networks
Our network vertical achieved its third consecutive record bookings quarter
Growth in this vertical is being driven by cable and satellite TV operators as they upgrade their infrastructures to support increased traffic volumes and compute requirements driven by video-on-demand, streaming and other digital services
In addition, many of our global carrier customers are extending coverage in multiple metros and adding Cloud Exchange to their portfolio of services
Expansions this quarter included Charter Communications, China Telecom, Telstra and Verizon
We also see momentum within the subsea space, Seaborn Networks and Aqua Comms two leading subsea cable operators in Latin America and EMEA are interconnecting their submarine cable systems within Equinix's Secaucus campus
This solution will now create the most direct route between Brazil, New York, and London, three of the most vibrant financial exchange markets in the world
In financial services, we continue to diversify capturing growth not only in capital markets but also in insurance and commercial banking sub-segments
This vertical is experiencing strong digital transformation
Firms continue to shift to cloud-based self-service and to distribute customer and risk analytic platforms across multiple locations
In addition, privacy and compliance regulations are driving increased requirements to manage distributed data
Customer wins and expansions included American Family Insurance one of the largest property and casualty insurance groups and Invesco, a Fortune 500 investment management firm expanding to support mobile applications
In content and digital media vertical, we saw solid bookings led by the Asia Pacific region and healthy growth in gaming, e-commerce and publishing
Globally, we continue to see expansion of the advertising ecosystem, enabling of the digital content in the cloud and acceleration of the transformation of content to the edge
Additionally, Chinese content led hyperscalers are increasingly utilizing Platform Equinix to support their growing user requirements, placing content closer to the edge to reduce latency and optimize the user experience
Expansions this quarter included Alibaba, Baidu, Blade, Netflix, Priceline and Tencent
The cloud and IT services vertical saw a continued strength this quarter, particularly with software-as-a-service providers, expanding at Equinix including, Oracle, SAP and Salesforce
com, all of whom can be reached with virtual private interconnections over the Equinix Cloud Exchange
Cloud service providers are re-architecting their networks, further expanding their customer aggregation points with additional access nodes and bringing more core services to the edge
We have the leading share of cloud edge deployments by a wide margin and our global platform is designed to meet the increasing need that many enterprises have for hybrid cloud architectures
And finally, turning to the enterprise vertical, we saw strong growth in the majority of our sub-segments, led by EMEA, as customers begin to expand from single site, single cloud connections to multi-site, multi-cloud deployments
Enterprise use of cloud connectivity continues to evolve, addressing numerous use cases including performance improvement, cost reduction, security enhancement and digital enablement
New wins and expansions included Walmart which continues to invest in digital commerce, utilizing cloud deployments and Westrock, a Fortune 500 global packaging solutions provider
Our focused channel efforts are paying off with 19% of bookings originating from the channel this quarter
Partners are starting to build their value added services around our core offerings including Cloud Exchange and Performance Hub
We are working together with these resellers to productize our joint offering to bring to our customers the benefits of the Equinix infrastructure enhanced by our partner services
Examples of joint offerings include Datapipe delivering reliable voice-over-IP to Ontario Systems as well as NetApp and Datalink working with Equinix to serve a Medical Association customer with a multicloud disaster recovery solution
We believe the continued development of our channel is a critical lever to providing us reach and scale to drive sustained revenue growth and increase our market share
So, let me stop here for a minute and turn the call over to <UNK> to cover the results for the quarter
Great
That concludes our Q3 call
| 2017_EQIX |
2015 | TSN | TSN
#Sure, <UNK>.
On the prepared foods part, we'll take that first.
Typically we spend 5% of sales in MAP.
We're going to be spending a little over that this year as we focus on the Hillshire Snacking and Jimmy Dean launch and the new Jimmy Dean marketing campaign.
We're also investing in price gaps versus the competition.
We've got some room in Jimmy Dean roll sausage.
We've got price gaps in Hillshire Farms smoked sausage.
And we need to get our lunch meat business ---+ we've just moved back the line pricing there as now we've got the turkey raw materials coming back to us from the AI.
It's very important for us that we regain our volume growth in these categories.
So we're going to be investing in trade and investing in MAP spending to drive our growth in those categories.
Switching over to chicken, you have a pretty cheap environment now with fresh meat trading pretty regularly below $0.90 a pound delivered.
You've got leg quarter markets trading sub $0.20.
And depending on how disjointed your logistics are, you're probably FOB the plant somewhere in the $0.12 to $0.13 range.
That's a pretty soft environment for pricing.
We've got a lot of volume that is in RFP now.
So, we feel very comfortable that we'll be better than 10% but we want to be cautiously optimistic until we get through this RFP season on our chicken business.
But let me hasten on to say that our brands give us a good bit of insulation from our competition, plus our quality service and innovation helps set us apart.
And we've done a lot in the last four years to optimize our poultry portfolio and to structure the pricing models within each part of that portfolio to deliver stable results.
And that's what we think will happen again this year.
In chicken, we've actually forecasted sub $0.20 leg quarters for the rest of the fiscal year inside of our projections.
If we get a few of these AI closed markets to open up, that could be a little upside for us but we don't have that baked into the plan.
As we look at pork and beef, we're going to continue to see, based on our strong dollar competition from other regions around the world, you might think that we'll have maybe a little bit of growth in the beef export volume for the year, probably not expecting very much in pork, and then maybe you see chicken exports improve.
One thing to note, though, I think we mentioned in the last call or two that we were taking a lot of our beef items, like short plates and those kind of things, and rolling those into the trim stream.
Those are now going back out into the export markets.
They are going back into the markets at much lower pricing than they were before but it is better than the trim stream.
And one thing that ---+ I say one thing, there's been about three things, sorry ---+ one last thing I'd like investors to think about is we have not projected any impact for MCOOL.
Depending on whether or not Congress fails to act or acts, and there are retaliatory tariffs, those would provide some cautionary note in our export sales.
But we don't have anything forecasted for that And we also don't have any AI impact built into our projections.
So, that's the view.
Difficult to answer with a lot of specificity, but let me say this.
As far as what we would have booked today that have pricing set and has perhaps the cost in commodity futures underneath it, you're talking sub 20% of the portfolio.
But we have a lot of our portfolio that is line priced, we have a lot of portfolio that has very short volume windows.
So, if you ask me what is my expectation about how well we will do through pricing season and how well we'll be able to maintain at least 10% margins or better, I feel very good about that.
A couple of reasons.
We've got the largest branded presence out there in the US in chicken.
Our value-added portfolio, now we've got capacity around this to where we can continue to grow that.
And, by the way, our buy versus growth strategy in a year like this is a competitive advantage because we're able to buy very cheap raw materials and then further process that into value-added items for predominantly foodservice but also some at retail.
We've got best-in-class quality.
We've got best-in-class service.
And I think that drives our customers to us to ask us to help them grow their categories.
And we've got the innovation capabilities that they're looking for to continue to grow their business.
That sets up very well for us and I'm very positive about our chicken business for 2016.
No, it will take us about another 60 days or so to get through it.
I can tell you that the early read is it's going pretty good.
Historically it's been around six to nine months, although I can tell you we haven't very many.
We're about nine months past March 5 now and we haven't had very many regions open the doors yet.
There's a lot of trade negotiations going on.
TPP is up in the air, you've got M-COOL up in the air.
There's just a lot going on around trade.
I don't know how much that's impacting whether or not these countries open up.
We feel very safe about our supply chain.
I don't see any reason there for there to be any reason not to want to take great product from the US.
I'd really hesitate to try to guess on when these things will open up.
So, what we did, <UNK>, is we just put the current pricing in our year for the whole year and if anything breaks loose then it will benefit us.
First, let me explain why we took the action we did.
We really do feel it's important for our investor base to have a really solid understanding of what we feel the margin environment is going to be that we face out over the next few years.
The relatively low cattle supply, you've got too much ---+ well, I should not say too much, that's probably not the right way to say it ---+ but you've got excess industry capacity and that limits our ability to drive margins above the 1.5% to 3%, we think.
I would say this, though, is that are there likely to be quarters out in those future years where we would see margins in the previous.
Yes, I think you should expect that.
But overall, for annual guidance, as we look forward for the next few years, this is the environment we think we'll be operating in.
As you look at the prepared foods business ---+ and I'm going to be painting with a fairly broad brush ---+ it's relatively evenly split between retail and foodservice.
So, if you think about our foodservice prepared foods business, let's look at that first, you've got predominantly a pizza toppings business and other ingredient meat combined with the portfolio of breaded products ---+ tortillas, flatbreads, that kind of thing ---+ and the former, if you will, bakery and sweet goods business from Hillshire Brands.
A lot of the meat in that portfolio is priced on a trailing basis to the market.
So, as the markets go down, and we do expect cheaper pork raw materials, typically our pricing in prepared foods would go down, as well, but we would hang on to the margin and it would recover in some period of time.
We've tried to shorten that window from 90-plus days to 45 to 60 days or so, and that should help stabilize the margin regardless of which way the market is moving.
The bakery and sweet goods business has a very stable low double-digit margin.
So, again, there's opportunities for us to grow a bit in that category, although we do think that the largest potential is to continue to grow the meat business inside of prepared foods on the foodservice side.
Now, let's switch over to retail.
We talked about the core nine on the script.
And what we're seeing is ---+ let's take it apart just a little bit ---+ Jimmy Dean breakfast sausage, Hillshire Brands smoked sausage and our Hillshire Brands lunch meat have been the three categories where we need to drive volume.
Let's go from the bottom up.
Hillshire farm lunch meat ---+ obviously our shortage of raw material in turkey has hurt our volume in that business.
Now, frankly, we've been able to replace some SKUs with some additional ham skews.
We've been able to replace some of those SKUs with chicken lunch meat SKUs.
But, overall, the absence of turkey has hurt our volume.
We're now in a position to where, after the first of the year, say, late January, something like that, we'll be back to full production in our turkey operation after the AI problems, and we'll have the raw material around us we need to reset our pricing in our turkey lunch meat to line pricing, and then drive promotional volume from there.
So, feel great about our ability to get our price gaps right and grow that business.
In breakfast, Jimmy Dean breakfast sausage, the issue there is really around reestablishing price gaps to the competition to drive volume.
We have a lot of promotional activity going on during this holiday season and we feel very good about our ability to drive our volume by getting these price gaps right.
Frankly, some of our retail partners were a little bit slow in reflecting our pricing gaps at that level, so that has slowed our volume a bit, but we'll get there.
And then on rope, frankly, we're seeing unprecedented rope competitive pricing.
We lowered our pricing gaps but probably need to do that again.
And, fortunately, we've got lower raw materials and we've got increased synergies that gives us a lot of power to fuel the growth in these categories.
I feel very comfortable that Andy and the team have a great focus on how to get the volume back and regain the share that we've given up.
And I could not be more optimistic about our prepared foods business.
Sure, <UNK>.
Operational improvements through FY15 were more than we thought, and we see increased opportunity as we get into 2016 there in the operational improvement.
We're just getting started on some of the network stuff.
That's probably going to be more of a 2017 answer for us.
The purchasing synergies, as we've worked with a lot of our great supply partners we've worked on several packaging innovations, just rethinking a lot of the categories.
And together with our supply partners, we're finding ways to lower our cost in a lot of these purchasing categories.
And that has really been the increase that we see the most of in 2016.
It is really a good story and it provides a lot of fuel to fuel our growth.
No not yet, <UNK>.
We're still under contract with other suppliers with our former Hillshire Brands raw materials until those contracts run out.
And that could be anywhere from 12 to 24 months we'll still be buying raw materials for that business from other folks.
I'll take a break and get a cup of coffee.
(laughter)
<UNK>, this is <UNK>.
Our longer-term goal would be to be at 20% ROIC overall.
And just to give you a little bit of perspective around beef, even at a 2% return on sales, we would have about a 15% ROIC.
So, 2.5% gets you pretty close to 20%.
And we see no reason why we can't work our way toward it.
No, <UNK>, you'd be high there.
Obviously it depends on the fundamentals in that region about the cattle that come to market and that kind of thing, but 30 is too high.
As I think through this it's hard for me to put a number on it but you're high at 30, I promise.
Quite a bit of that's tied up in the export markets not being able to ship.
Obviously, I don't know the break out of the $139 million and how much is the chicken export number versus how much is the actual turkey problems but the Turkey part of that should rebound as we get the plant full and we have the raw materials and we regain those sales.
You should see that start flowing in.
We've got it modeled in Q2 so you should see that flowing in then.
You hit the nail on the head, <UNK>.
We feel very good about pork.
There's going to be good hog availability.
Which, by the way, provides good, cheap raw materials for our prepared foods business.
But this is just a cautionary note on exports and the high dollar and competition from other regions in the world for some primary markets.
So, that's the cautionary note there.
If some of that changes then obviously there's upside in our pork segment.
It's hard to say, <UNK>.
My guess is, of the volume that is RFP'd, maybe 10%, 15% at most, something like that ---+ now, you've got to remember, there's a lot of different pricing models that we have, some where we have guaranteed volume and we relook at the price every 30, 60 or 90 days.
We've got a good bit of our chicken business that's just line priced.
But of that volume that will go through RFPs, I'm guessing you're in the low double digits.
There's a lot yet to come there.
Our reaction is to ramp up our buy versus grow strategy.
We're buying a lot of raw material these days.
We're buying breast meat sub $0.90 delivered to our plants.
So, we've got the opportunity to take advantage of this outside raw material in an oversupplied situation to supply our value-added businesses.
As we said in the script, about 90% or so of our volume is really consumer pull and only about 10% is pushed out.
We don't sell very much CDP breast meat.
We're working hard every day to value up our leg quarters and not have any leg quarters to sell.
It's a time like this when our buy versus grow strategy really helps us maintain our stable margins.
I think I'd rather you think about the 15% of our sales that are CDP breast meat, leg quarters and our rendering products, those are the ones that have the most commodity exposure.
Now, there's also a minority portion, for example, of our fresh tray pack business that gets priced off the Georgia dock.
So, there are some market influences in those businesses.
But in terms of just commodity exposure, probably think of the 15% of our portfolio and not the larger percent.
Two great questions.
Yes, this year is about like every other.
So, we're going through about the same amount of RFP that we went through last year.
Again, let me reiterate that it's going pretty good so far.
Still got some room to go but going pretty good.
The second part of your question, remind me of that again.
Oh, yes, the grain.
One thing that we always do is look at opportunities to lock in margins when we do get pricing contracts established.
So, we'll look at that.
So, it's hard to say this early about how much of the impact of that $100 million will drop to the bottom line until we get through this big RFP season because if we can get the chance to lock in our margins underneath that, we will.
But ---+ that's probably enough.
Probably able to do that in pork.
I'd be cautious about doing that in beef.
We had a pretty good October but here in the middle part of November, beef cut out has dropped quite dramatically.
I don't know what Friday's close was but it's probably going to be around 2.05 or something like that and dependent on where cattle are North versus South.
Sometimes it takes you a little while to get that change reflected in the cost of the cattle.
Beef, my guess is that you're probably more back-end loaded.
Cattle, we saw the cattle and feed numbers Friday, our estimates would be that the increase in fed cattle coming to market this year would be in Q3 or Q4.
So, you're probably a little front-end loaded, maybe, in pork, and a little back-end loaded in beef, is the way I'm thinking about it.
No, I can't answer that.
No.
Sure.
That wasn't such a technical term was it, <UNK>.
We're in the process now ---+ you saw our announcement last Friday ---+ of optimizing the production footprint.
We'll be moving lines of products within that footprint to optimize the logistics around the raw material and optimize the cost of the production.
From that point, then, the next move is to really look out into the distribution network and make sure that we have the right nodes of distribution, both from a hub-and-spoke and from a forward positioning basis, to optimize our transportation cost and our service offering.
Once we get the production footprint established ---+ largely, it won't be perfect ---+ then we will begin working on the distribution network.
There's a couple things that we're starting to focus on now around rationalizing some of the SKUs.
We've got some end-to-end opportunities between primarily our pork business but, to some small extent, our beef business and our prepared foods business to continue to work to optimize cost inside that network.
All of that, we will begin working on that in 2016 but largely the effect of those changes will happen in 2017.
Let me hasten on to say, too, that we've got work inside our chicken business, as well.
We've just completed the conversion in South Georgia to tray pack.
We've got a lot of FP capacity around us now, so we're able to go out and bid on business that we weren't able to bid before.
Our antibiotic-free business continues to grow.
As those grow, that will help us optimize the production and the distribution network, as well.
Hope that clears it up a little bit.
Yes, I would spread that cost throughout the FY16 year.
We sell boxed beef out front and buy cattle futures against it to lock in the margin.
Some of those contracts are fairly well out through the year, so just spread that cost on through the rest of the fiscal year.
It's going well.
We did have a problem which, <UNK>, you know my background, it would be hard for me to think about a sweet potato problem, but the flooding that we had in South Carolina actually disrupted our supply chain a little bit on sweet potatoes.
We had a great team around that, worked through it very well, and I think did as good as we could to get as much of our volume into the marketplace as we can.
We just had some heroic efforts on the part of that business and our supply chain.
So, yes, it's going pretty well.
We're a little bit shy of the 10% now.
It's pretty easy for us, frankly, to buy about 100 loads a week.
Most of that will be breast meat.
Some will be breast meat portions.
And then if wings were to soften up and we had good promotional volume for next spring's wing season we will always be out there buying wings and a few tenders when they're available.
Typically the size tenders that we need aren't very readily available.
So, mostly think breast meat.
But, yes, we do spread that around to the other raw materials when we can use them.
<UNK>, honestly, we spend all of our time just focusing on our customers and our margins.
We don't spend a whole lot of time trying to figure out what the industry is doing.
Very much so, removal of a negative.
And I would say that today the dollar impact is probably having more of an impact on pork and beef exports than it would chicken.
I feel comfortable that if the export restrictions based on AI were relieved then we could increase our exports in chicken pretty readily.
So, the dollar wouldn't necessarily impact the chicken as much, but on pork and beef, yes.
Thanks, everyone, for joining us today and certainly for your interest in Tyson Foods.
We wish you all a very happy Thanksgiving.
Have a good day.
| 2015_TSN |
2018 | ITRI | ITRI
#Yes.
I mean, I'll make a comment on your question around, is there some sort of catch-up period, the answer would be no.
So we obviously implemented the new revenue standard this quarter, and are reporting a backlog for the Networks segment that's embedded in our total numbers, is totally consistent from a methodology standpoint.
So we did have to think up the methodologies to ensure that we didn't have any contracts in here that didn't have regulatory approval.
But from an accounting standpoint, there's no difference in the $337 million that we brought in for the 12 months, and the $1.4 billion was essentially what they brought with them.
And <UNK>, I would say that, that's also ---+ yes.
I mean, sorry, strong bookings performance in the Q3, Q4 and even Q1 time frame.
I mean ---+ so the bookings performance in the Networks segment is coming along well.
Generally ---+ so book and ship, a very modest amount.
The business is really primarily project-driven and has a low component of book and ship.
Yes.
We didn't really break that out.
What you saw in the financial performance was a combination of factors.
Certainly, we had a little bit of our own supply chain transition.
We had some acquisition-related factors, some inventory step-up.
But the normal things that you would see in the first quarter after an acquisition as well as the component pricing and the effect on utilization of factories stopping and starting.
So all of those factors are built into the financial results that you saw in Q1.
As we work to establish long-term supply arrangements so that we've got the components coming in on a regular basis, we end up seeing the benefits of our restructuring from the 2016 plan and so forth.
We definitely believe we can even that out, but it was clearly something that affected us in Q1.
And I would point out that in terms of commodity pricing, <UNK>.
I mean, the largest impact is in our Water business.
Although we do have a fair number of composites in our Water business, and there is some steel and aluminum in the gas business.
But that really is primarily an issue within an element of our Water business, the straight out commodity fluctuation.
Well, our normal practice would be to update the guidance on the Q2 call, and we do intend to do that as well.
We gave a little bit of color around the impact of Q2 versus the rest of the year, essentially just a little bit more pronounced than what we had said on last quarter's call.
So we had already provided quite a bit of color that the second half of the year profitably would be quite a bit higher than the second ---+ than the first half.
And so, again, we gave a little color on that, no intent to really update guidance until the middle of the year.
Yes.
Good question, Joe.
Tom here.
The 2016 restructuring plan really had 3 factories ---+ or 3 pieces of business that we were looping around.
We really are completing the ---+ all 3 of those during the first half of this year, and you start to see the benefits into the second half of the year.
So a lot of the things that we had talked about last time, those tend to be timing-related, transients, and they kind of go away for us through the first half of the year.
And this is what we said.
Yes.
I wish I had the crystal ball as to exactly some of the ---+ when some of the supply allocation situations we see in the electronics, world will even out.
You could read the blogosphere as well as I can to try to guess what it would look like.
It usually takes several quarters for these things to work their way through the electronics' industry, but obviously, that's historical data rather than anything that's specific for this time.
That's something we'll have to watch and see.
Yes.
I don't know specifically what you're referring to in terms of ---+ we had a loan ---+ we had a term loan structure or a bond structure, and we talked about that on the last call.
And we're still essentially with that same structure.
There's different pay-down timing of the term loan versus the bonds, but essentially, we're still on the same plan.
Yes.
That should just be a Q1 item.
And that was 70 basis points on consolidated gross margin and 500 basis points on the Networks gross margin, that's all.
Well, again, we did try to provide a little bit of color, Q1 versus Q2 for Networks, because it was an exceptionally high quarter.
They had some projects that had been expected to be recognized in Q4, and some that we expected in the second half of this year actually happened in Q1.
So we try to provide a little color.
We would not expect the same level of revenue and gross margin performance in Q2.
Yes.
<UNK>, it's actually kind of a mixed bag.
I mean, a number of states have already ---+ and regulatory commissions have already intervened, demanding that the utilities return any benefits that they received from the tax legislation directly to the ratepayers.
And there are a number of other jurisdictions in which there is some discussion about the possibility, as you're indicating, of using that benefit for infrastructure investment to make capital investments.
So that ---+ how that is going to sort out is really still in development.
But I would say that it applies only to a portion of U.<UNK> jurisdictions, again, that have not already asked for a pay ---+ almost a complete pass-through of the benefits to the ratepayers.
Sure, <UNK>.
I don't think you need to go very far here and talk about flying cars or trash collection because nearer to home, we are further along in our plans in order to certify Itron metering and end points underneath the Silver Spring Networks in order to create cross-selling opportunities there.
We are very pleased with what we discovered in terms of the opportunities for distribution automation and street lighting and our ability to both cross-sell those back into the sort of legacy Itron environment.
And then looking internationally at how we can use Itron's large ---+ legacy Itron's large geographic footprint in order to target the Silver Spring, the Gen5 network appropriately on a global basis, we have the solid makings here of how it is that we can drive the next level of business out of this acquisition.
All of that being said, we are focusing on a standards-based compliant network with a large partner base in order to create an ecosystem of opportunities for many other partners and speaking at IoT World on Wednesday and we're going to be demonstrating other types of sensors and modules that are connected onto the network.
And we see a longer-term developing opportunity there as well.
But it's going to start out looking at meters and modules and cross-selling of DA and streetlights are the ---+ and software opportunities for the near-term benefits.
Yes.
The biggest commodity movement that we've seen that ---+ it really has a material effect on our purchasing is brass.
And so that's one.
Steel and aluminum is much further down the list.
It's not as big a factor.
But trumping any commodity has been the things that are going on in the electronics industry, really the ---+ what's going on with allocation of supply in the ---+ the passive part of the electronics was probably the biggest cost factor, outweighing the others.
That ---+ again, it's really, really difficult to understand exactly what will happen.
The news of the day tends to be difficult to predict exactly when those things could happen and what the tariffs would look like, but I would expect it to be pretty muted in terms of our impact on steel and aluminum.
So <UNK>, it's ---+ the targeted customer base are largely investor-owned electric utilities.
There are some municipal and locally-owned entities there.
The exposure is predominantly in North America.
Although there are a number of global opportunities.
But this is a space that we're very focused on and familiar with, so almost entirely utility-oriented.
At least, municipalities.
Yes ---+ businesses.
Did I answer your question.
We ---+ I mean, there are opportunities.
I think we're early there.
I would say that legacy Itron customers did have reading and management requirements before, there are some select opportunities where we really see some exciting opportunities within the area of distribution automation and street lighting, as I said, to get back to the ---+ that legacy Itron side.
But as you point out, there were also software opportunities.
And I'd say that even on the legacy Itron side, the acquisition of Comverge and having a demand response is something ---+ capability is something that we're looking at as well.
No, we are not providing that breakout at this time.
Sure.
<UNK>, thank you.
I would say that we are really on plan in terms of that planning process.
Just to refresh everybody on the call both Networks provided by Itron and Silver Spring were radio frequency-meshing networks, using very similar types of technologies, even chipsets.
So there is an announced support for a common standard so there is a real opportunity for the harmonization of these networks.
Our teams have been working since the transaction closed on developing a plan.
We expected that, that would take the first half of this year so that we would be in a better position to discuss the details in the second half.
We also, when we reported the target of $50 million of cost synergies, talked about the fact that we expected that the R&D teams were the most heavily committed in terms of their existing road maps and contractual commitments, and so that we expected that it would take some time in order to be able to free up these teams to both ---+ to get to the synergy numbers but also to really drive ---+ execute on the convergence plans.
So we expect that it's going to take some time to realize that convergence.
Now that being said, what we've in the interim done is sorted out a very detailed go-to-market plan in which there is no ambiguity about what product is going to be used and what context and have discussed this with our customers and prospects, and so have a very targeted plan.
And have also worked with our customers that we will not be in ---+ of course, in any way stranding any assets that are put out in the field, and that we provide a path to upgrade so that we are able to continue very effectively to sell both of these platforms.
Thank you, everyone.
I just want to close with ---+ it was a very busy and productive quarter, and we're very pleased with the results of the ---+ of preliminary integration work we've done.
Somebody made a comment about the ---+ that we have this under our belt or something like that.
No, actually, this is an ongoing task that's going to take many quarters and a lot of vigilance to ensure that we do this properly.
But the initial results are very, very positive.
We're very pleased with the overall market response and our customers' response, which we think the backlog really reflects the opportunity, and the level of activity that we have in the market reflects a tremendous forward opportunity for us.
The very aggressive plans that we have in order to continue to operationally improve and optimize the business give us the tools that we need to weather the kinds of pressures that have been discussed today here on the supply chain.
So while we are recognizing the headwinds of ---+ and particularly component supply, we have very active plans under way in order to offset absolutely as much of that as we possibly can, so see a strong opportunity here for the remainder of 2018.
Thank you all, and look forward to our call next quarter.
| 2018_ITRI |
2017 | ABC | ABC
#Thanks <UNK>, and good morning everyone
We're excited to start fiscal 2017 in a positive way
Our results and business fundamentals were better than we expected
Several of our businesses made key contributions to our results this quarter and I will cover these highlights in my prepared remarks
I have two main topics this morning, I will recap our Q1 adjusted results and our revised fiscal '17 outlook
Please note that all financial comparisons are for the first quarter of fiscal '17 compared to the same period of the prior fiscal year unless otherwise noted
With let's move to our results
Revenues were $38.2 billion up 4%, our pharmaceutical distribution segment accounted for the majority of our revenue growth due to our diverse customer mix and the strength of our ABSG specialty business
Let me highlight that we had one less business day in the current quarter versus the previous year
We also had less of a revenue tailwind this quarter given the slowdown in branded drug inflation from July through December, while still having a meaningful revenue headwind from brand and generic drug conversions
Our ABC consolidated revenue growth would have been nearly 6% on a comparable basis which means adjusting for the one-day difference in business days
The quarter's adjusted gross profit increased by 1% to $1.1 billion and was entirely due to the growth in our other segment
Our pharmaceutical distribution segment was down this quarter with a difficult comparison as we're still cycling through the repricing of two strategic long-term contract renewals which we have discussed in detail the past few quarters and in the current quarter we began to anniversary the acquisition of PharMEDium
Operating expenses we are very pleased with our progress in managing operating expenses which were virtually flat compared to last year
Our businesses continue to make meaningful progress focusing on their cost structures, ensuring they spend in the right areas and leveraging existing scale and capabilities where we can
Operating income, our adjusted operating income was $486 million up about $9 million or 2%
Our adjusted operating margin was 1.27% down three basis points from the prior year driven mostly by the pharmaceutical distribution segment bringing down six basis points this quarter
Moving below the operating income line
Interest expense net was about $35 million up some from last year
The increase is due to a combination of slightly higher average borrowings outstanding and also higher interest associated with the build to suit leases we had to capitalize last quarter
Income taxes, our adjusted income tax rate was 33.1% down some from the prior year as a result of changes in mix of U.S
versus international income
For the quarter our adjusted diluted EPS increased a solid 7% to $1.36 to 7% growth was driven by the outstanding performance in our other segment
The benefit from an improving tax rate and a lower diluted share count
I will highlight that we did have a couple of pennies of EPS benefit in the current quarter from the favorable timing on manufacturer rebates that we previously expected to earn in our March '17 quarter
This finishes our review of ABC consolidated results
Let's move forward and discuss our segment results starting with pharmaceutical distribution
Total segment revenues were $36.6 billion up 4% with our drug company growing just under this level
Our core drug business saw a solid growth better than we expected in its retail, customer segment which includes Independent, Walgreens and other chains
Consistent with the past few quarters I should point out that the business continue to have a revenue headwind of about 1.5% due to lower hepatitis C drug sales primarily in our non-retail customer segment
After this current December quarter, the hepatitis C comparables get better and shouldn't be a meaningful revenue headwind going forward
ABSG which is our specialty business and an overall revenue increase of 10% driven primarily by volume growth
This is the 12th consecutive quarter that ABSG has had top line growth at 10% or more
We continue to see excellent revenue growth in oncology and to a lesser degree in nephrology
Overall the business continues to capitalize on positive pharmaceutical industry trends and we remain a clear leader in this space
Segment operating income was $374 million and was down 2%
Our ABSG business continued their high level of performance producing strong operating income growth through a disciplined expense management combined with a revenue growth
Our drug company was down year-over-year as anticipated primarily due to the two key customer contract renewals, slightly lower contributions from price appreciation and the impact from generic deflation
Last year ended December '16 quarter generic deflation wasn't that meaningful
These headwinds were partially offset by a higher contribution from PharMEDium
I'd like to point out that our drug company's performance was better than we expected and the business is building positive momentum from both top line revenue growth and an improving contribution from generics
We are committed to continuous improvement, the drug company has sharpened it's focus on maintaining high customer service levels and implementing leading customer solutions
As a result we are seeing generic compliance rates gradually improve with customers which translates the higher volumes
We can now move to our other segment which includes Consulting Services, World Courier and MWI Animal Health
In the December quarter segment revenues were nearly $1.7 billion up just over 5% both consulting and World Courier at growth rate in the high single-digits while MWI's growth was slightly impacted by foreign exchange associated with their U.K
MWI continues to see high growth rate in the U.S
companion animal business, that's a percentage in the high single-digits and we are now encouraged as we're starting to see improving growth rate in the production animal side of the business
From an operating income standpoint this segment had an outstanding quarter with operating income of $112 million and the growth rate of 17%
This marks the first time that the segment has surpassed $100 million in operating income
As <UNK> highlighted MWI achieved records in operating income and operating margin
The business has a relentless focus on the customer, a drive to constantly improved capability and terrific expense management
Wrapping up our consulting business was also a strong contributor to the segments growth this quarter due to a solid revenue growth
They delivered these results while continuing to focus on implementing a business process redesign which includes a new ERP system
This completes our segment review
I'd like to now cover key working capital and cash flow items
In the December quarter as expected we had a negative free cash flow of $570 million
As we have discussed in the past, we continue to make a working capital investment with our largest customer Walgreens
This investment will continue to be a cash flow headwind into our Q2 '17 when the investment is complete
When comparing to last year's free cash flow, we also had a sizable positive day of the week cash impact to our Q1 '16 free cash flow
This day of the week impact did not repeat in the current quarter and was a headwind
We ended the quarter with roughly $1.8 billion in cash with $645 million of this amount offshore
The next area I'd like to cover is share buybacks
We purchased $230 million of shares during the quarter and we finished the quarter with $890 million left on our November 2016 share authorization
We're pleased that from late September 2016 through December 2016 we are able to buy back roughly 8 million shares returning over $600 million to our shareholders
Now let's turn to our updated fiscal '17 expectations
As I mentioned before we are very pleased with our strong Q1 results and we are now raising our adjusted EPS guidance to a new range of $5.72 to $5.92 which reflect growth of 2% to 5% versus last fiscal year
I will provide guidance comments in four key areas
First, revenues, our previous guidance was 6.5% to 8% revenue growth even with our Q1 '17 ABC consolidated revenue growth of 4%
We believe we will now be at the high end of this range due to two factors that will enable us to ramp our revenues during the course of the fiscal year
One, our drug company's largest customer Walgreens had added new commercial business which will benefit us and two, brand inflation realized in January will be a better revenue tailwind going forward
The secondary operating expenses given the continued focus by our businesses on managing costs, we are revising our full-year OpEx growth rate to 4.5% to 6%
We expect that our expenses will increase over the course of the fiscal year to support the revenue ramp
Additionally we start to occur incremental costs related to several of our IT and infrastructure investments
The third area, operating income, we are revising and moving to low end of our guidance up
Our operating income dollar growth will now be flat to up 4% versus fiscal '16. And the last area our adjusted share account
We'd expect our share account to creep up somewhat given that we front-end loaded our share repurchases
We expect modest share repurchase activity in the near-term
Our first priority now is to ensure our free cash flow track as planned in a repaid $600 million debt obligation that matures in May 2017. As in the past however, we will remain flexible and opportunistic in terms of capital deployment
Let me point out that the rest of our previously communicated fiscal '17 financial guidance for ABC consolidated is unchanged and reaffirmed at this time
Before I wrap up I'd like to comment on our working assumptions for the pharmaceutical drug pricing environment
I will cover generic drug pricing first
We are not changing our negative 7% to negative 9% generic deflation range for fiscal '17 at this time
After one quarter based on our drug company's generic drug portfolio we are tracking in line with this assumption
As we progress through the year, we'll hopefully have more clarity on generic pricing trends and if needed we will revise our assumption
Moving to brand drug pricing, we are comfortable with our 7% to 9% brand inflation rate assumption based on the WAC price increases we realized in January
Both the number of brand pricing announcements, and the overall percentage increases were right in line with what we had assumed
As a reminder we also anticipate that we will have a certain level of brand price increases in the June, July time period
This is clearly an open item given the unpredictability of pricing actions in the high level of scrutiny
This is part of the reason we continue to have a somewhat wider adjusted EPS range
So in closing a better than expected quarter and a solid start to our fiscal year, as always we continue to deliver outstanding service, solutions and value to our customers each and every day
And at the same time we look to drive operating efficiencies
This is a winning combination that enables AmerisourceBergen to grow and create long-term shareholder value
Now here's <UNK> to start our Q&A
Thanks Bob for the question and I'll take them in order
So the first one we did see brand pricing trail off a bit in our first quarter to December quarter
So that was a little bit of a headwind for our core drug business that we were able to cover
So that's true but then we got the January, we saw the price increases relatively in-line with last year in terms of the number of announcements
The percentages were probably a little bit less overall on a kind of weighted average basis but clearly the January price increases were in line with our 7% to 9% assumptions
So no change there
We're keeping that assumption for the full-year
I think our point in my script was really to say that there is another time period coming June, July
Our guidance still has a certain level of pricing activity in our assumptions and that's an open item but I think with our $0.20 range, I think <UNK> and I and the management team we're comfortable that if that trailed off a bit in June or July, we would still fall within the range okay but again that's just one item but I would say we feel good that if the brand inflation - again I'll repeat myself as it trails off a bit we can still stay in the range but on probably the lower end
Yes, and I think <UNK> you hit it, I mean certainly we benefited – December is always one of the better quarters from MWI as they come down to year end contracts with manufacturers but going forward the consulting business I commented in my script that they will be implementing the new ERP system and they’ll be having some expenses in that area will ramp up a bit in quarters two, three and four
But it’s a great margin, it’s the margin have been fairly high
But I would say that - this probably isn’t the run rate but probably not that far off I mean it should be a good margin business and all those businesses leverage well
Let me go back, I mean I think the brand - your brand question is a good one and I think I should clarify
I think I said when I answered Bob's question first, I said it trailed of a bit we would stay in our range and again I think that's important to me
I'm not going to comment if we had zero price increases for the rest of the year and we didn’t see any pricing activities
I mean we’d had to go back and think about that and understand the impact but certainly it trails off a bit we feel comfortable staying in our range on the brand side
Generic deflation, I mean we've been very consistent on the minus 7% to minus 9%
We've always pegged that off of our acquisition cost of the acquisition cost in our inventory to let people know that that's what we’re seeing in terms of how that price - so how our acquisition cost is changing over period time
We're probably up towards the higher end of that range and so I think I answered your question but again that's how we calculate it’s on our portfolio, our mix of business based on our fiscal year but we still feel good about that minus 7% to minus 9% and as we go through the year we'll update the range
Thanks Bob I’ll start
Certainly we reaffirmed our guidance and so I mean the guidance for free cash flow was at adjusted net income we're just slightly above, so we’re still on that
I know we had a negative free cash flow in Q1, but the cadence seasonality in our business we should see a nice positive free cash flow in our March quarter somewhat neutral to up a little bit the June quarter and then traditionally our fourth quarter is pretty high in terms of free cash flow
So that's how we get back to where we need to be for the year
And CapEx I think we said $500 million roughly - that’s reaffirmed and we should be right about that in that range and most of that is the DC work and the ERP system
So both were consistent and both we still feel good about
I’ll start <UNK> on the first one back to the generic deflation
We have not changed our methodology or approach
We've been very, very consistent
It's always based on our drug company's portfolio of what they have in inventory, weighted average
It's based on our fiscal year
We do exclude generic items that have not been on the market for longer than one year
So we take the ones that too have higher variability in that first year
So we've been very consistent and we track it
We look at the methodology and were still coming up in that range of minus 7 to minus 9 and again I said little on the high end right now at the minus 9. That's why we still feel comfortable at this point
Tax reform, I'm looking at…
Yes, thanks <UNK>
Let me clarify no, there’re couple pennies we called out a little bit of timing and that would be in pharmaceutical distribution so more on the drug company side
Right, yes the couple pennies to clarify - the couple pennies really we thought we would come as we earned in the March quarter they have pulled forward
We hit some triggers early but <UNK> point is right in terms of the MWI that our calendar year there are contracts of manufacturers around our calendar year and you always come down to proving that up based on final volumes and you have two different tiers and that helped us in the December quarter with MWI but that happens every December nothing unusual
I think the manufacturers realize we provide extremely valuable service in terms of the quantities we keep an inventory, the credit, the collections that we provide so I mean I think they realize it, it’s a very good value and very economical
And we had discussions, we had fee-for-service agreements over 10 plus years and we see those continuing and we don’t see those changing going forward though it seems to be very acceptable based on WAC pricing and that's how the industry is compensated
| 2017_ABC |
2017 | PRSC | PRSC
#Good morning.
Sure.
Just to remind everybody, our focus at LogistiCare is helping particularly frail populations, so aged, blind and disabled, those in poverty, and those going to dialysis or some sort of rehabilitation.
And the populations that we serve and where they're going, we think the service is largely preventative in nature and has pretty good preventative benefits.
So, we're focusing every resource right now, and a lot of it has to do with this member experience initiative, on being the most cost-effective service for them, which I think really resonates with the people that we've met with in Washington and at the Governor level.
So, along those lines, we're increasing our research and regulatory resources to prove out that preventative nature of the service.
On the replacement bill itself, obviously there are a lot of different iterations that have been discussed.
What is currently out there in the replacement bill, to a high level, there are no Medicaid benefit changes related to NET, which, again, this is largely a reconciliation process, so they can't make those changes at the moment.
It is possible they could come in future bills, but as of right now, there are no Medicaid benefit changes.
They are moving towards a federal contribution per category of member in Medicaid, adjusted for inflation in Medicaid.
So that actually goes through the end of 2019, and then in 2020 the member contribution is capped.
But again, there are no benefit changes on NET after 2020.
So, in general, we don't see too many things actually affecting us in the current legislation as it's drafted through 2020.
Sure.
So, we actually launched our pilots with Lyft in the second half of last year.
We're now active in 18 states, and it's growing quickly every week.
I would still say the overall volume is fairly minimal compared to our overall scale.
In terms of our Provado mobile health pilot, that is in two states.
And I think we're approaching the utilization of these services cautiously because we've received different viewpoints on the rollout of these services from both individuals and from our clients at the state and MCO level.
I'd say there's a lot of interest, but I think people are very cautious as well.
So, we're looking at ---+ we're actually undergoing a project right now, and have been for a little bit now, looking at each market and really looking at the population, how it breaks down, who the client is, what are the restrictions in the contract.
What are the costs of implementing the network.
What are the costs of recruiting drivers, really compiling a detailed business plan and model around that.
So, it takes some time because each market is different.
But I think over the next few months, we will have a greater view of the penetration.
In terms of specific experiences we've seen so far, we've seen some nice benefits on the service side and on the cost side from the ride sharing.
But again, this is in limited markets and limited usage, and so, we wouldn't want to make any ---+ set out any grand expectations on what this could be in a couple years.
But it would certainly be a key part of our transportation network strategy.
Yes.
That has not come up.
Actually, I'm sorry, we do have subcontracting in some of the areas that we do work in.
And actually, we have had some discussions about subcontracting in some other areas that we are not in.
But in terms of ---+ those discussions aren't formalized, so I wouldn't see it as a huge opportunity at the minute.
And plus with the ---+ there still are five participants in each, at each stage, so there's some opportunity but I don't think we can give too much clarity into that, the potential opportunity there.
I think we're still waiting to sort of get the framework and how that's going to be laid out, so we're barely into the process at this point.
Well, you may have noticed service expense as a percentage was a little bit lower.
<UNK>, anything else.
Yes.
There was a ---+ operationally, it was a good quarter, but again, it was definitely higher than we were expecting.
And one of the items impacting that was the accrual, or the reversal of accrual, for a long-term incentive plan that we have at the LogistiCare segment, which is based on multi-year performance.
So, a couple of things happened.
One, our former CEO did leave that segment, so some of his long-term awards were reversed.
And given our outlook for 2017, again, resulting from the loss of the New York City contract, our 2017 projections did come down in the valuation model for that long-term award.
So, on the whole, we ended up expensing about $4 million less in the quarter than we were expecting to when we last spoke.
Yes.
<UNK> actually did in his prepared comments.
It was a low- to mid-single digits.
Yes, we're still very diligent on corporate costs, and we're trying to take out another couple million dollars of cash costs in 2017.
So, Virginia is mid-year, Philly is new year, and sorry, what was the third one.
Georgia is in the fall.
So, aggregate across those three, it's approximately $150 million to $175 million in annual revenue.
We recently won some portions of Arkansas.
In terms of other new, there are a lot of smaller MCO contracts that we're bidding on.
Go ahead, <UNK>.
I would say, looking at both state contract opportunities and MCO contract opportunities that we're looking at and bidding on right now, it's approximately represents $75 million to $100 million in annual revenue.
I didn't have anything else to add, so thank you very much, everyone, for joining.
And, as usual, please feel free to reach out to us at any time with any questions or comments.
Thank you.
Bye.
| 2017_PRSC |
2016 | GMED | GMED
#<UNK>, so the first thing, I will answer the first part of that.
There were no change in the number of days for us in Q1 versus Q1 of last year.
So they both stayed the same that way.
<UNK>, this is <UNK> <UNK>.
I'll address the second half of your question.
As <UNK> alluded to, we've hired a VP of sales for the robotics division, and we will be looking for a senior executive for the trauma divisions.
Hope to have that slot filled by the third quarter.
And they're going to be beginning their efforts to build out field sales management and then go into the rep level towards the end of this year.
At this point, we're not going to share any target numbers with you but we will keep you posted as we move through.
Tough to answer in the hypothetical sense, but you would think that if you were to have less attrition and more on-boarding I would think that we would deliver higher numbers.
I would always shoot to say they would be in line or better than previous quarters, Kaila.
I think the way to answer that right now is, again, as we look to exit this year at 7% guidance, as we have said, we would talk about the remainder of those years needing a CAGR for the sales of spine to be roughly 10% to 10.5% CAGR.
Right now, I do not think I'm going to set 2017 guidance, I want to get another quarter under our belt, I want to look and analyze where we are with this.
So I guess my advice to the Street would be, let's talk separately and understand where those models are falling out.
But I'm not ready to make a commitment to that level for 2017.
<UNK>, you know we give annual guidance and we feel really comfortable about our annual guidance.
We don't want to comment on quarters.
We are working really hard to make sure that we can improve on our sales force expansion.
And that's all I'm willing to say at this point.
Absolutely.
We had a strong quarter of product introductions.
We launched six products in the quarter, and we have several more in the pipeline with the agency as well as in production.
And we are looking forward to having an extremely strong product introduction year this year.
In terms of trauma, that is correct.
We're going to be going to the FDA for sure by the third quarter with our initial trauma products, and hopefully get through the FDA pretty quickly.
So we will be looking to hire reps early in 2017.
For the imaging, navigation, and robotics division we will be hiring reps this year.
We plan to go to the FDA in the second quarter with that product.
And again, we're not sure how long it will take to get through, but we will be hiring at the rep level for that division during this year.
Thank you for your question, <UNK>.
Not really, I do not think that there's any new information in this article.
It is an article with an extremely small number of patients, and a lot of confounding variables within those patients.
But surgeons to date don't fuse everyone with spondylolisthesis.
It's always defined with the amount of instability that a patient has.
So there is not really a whole lot of new information, and I do not think this is going to affect treatment going forward.
The patients who were treated before with fusions for back pain are really no longer in the system, and that was more the controversial group subset of patients.
Spondylolisthesis patients with instability were getting fusions, and I think they will be getting fusions in the past ---+ in the future.
It is really spondys with less ---+ you have to define spondylolisthesis from grade one through grade four, and then there are so many different factors that a surgeon ---+ before he makes up his mind to fuse or not to fuse.
Thank you.
<UNK>, I would think it's at least the area to grow from.
And so I don't know if we will see sequential growth along those lines.
The anticipation from our model is that we would.
I don't think it's necessarily related to just the timing of distributor, but many other factors.
So, yes, I think I'm looking for a stronger Q2, and as we go forward into the full year, getting up to at least a double-digit number.
So we don't normally throw that out with our guidance, we usually just do the sales and EPS.
We don't think there will be anything special or unusual with cash flow this year that we're aware of currently.
And there's not an increase in restricted cash, rather a constriction of it, because as we settled out our DePuy litigation in Q4, we reflected that on our P&L.
In Q1, we're actually making a payment and returning some items to cash.
So that's really what you see is that restricted cash set aside for that litigation now coming back into the mainstream.
Thank you very much.
At this point, we conclude our first-quarter earnings call.
Appreciate everyone for participating, and we'll be in the office tomorrow if you have any follow-up calls, will be happy to help you out.
Thanks very much for the call.
| 2016_GMED |
2016 | HSIC | HSIC
#Thank you, Sylvia, and thanks to each of you for joining us to discuss Henry Schein's results for the second quarter of 2016.
With me on the call today are <UNK> <UNK>, Chairman of the Board and Chief Executive Officer of Henry Schein, and <UNK> <UNK>, Executive Vice President and Chief Financial Officer.
Before we begin, I would like to state that certain comments made during this call will include information that is forward looking.
As you know, risks and uncertainties involved in the Company's business may affect the matters referred to in forward-looking statements.
As a result, the Company's performance may differ from those expressed in or indicated by such forward-looking statements.
These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission.
In addition, all comments about the markets we serve, including growth rates and market share, are based upon the Company's internal analysis and estimates.
The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 4, 2016.
Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.
I ask that during the Q&A portion you limit yourself to a single question and a follow-up before returning to the queue.
This will provide the opportunity for as many listeners as possible to ask a question within the one hour that we have allotted for this call.
With that said, I would like to turn the call over to <UNK> <UNK>.
Thank you, <UNK>, and good morning, everyone.
Thank you for joining us.
I will provide further information, further color on our performance during the second quarter, expectations for the rest of the year, after <UNK> provides the specific information on our performance in the second quarter.
Generally, though, our North American dental sales were a little bit below our expectations in the second quarter.
However, sales in our medical, animal health, technology value-added services businesses were strong, as well as in aspects of our North American dental business, and we will again provide further color on specifics after you have the details from <UNK>.
Over the years, our business has been quite predictable, and as an organization, Henry Schein has been able to adapt, seize opportunities, and address challenges.
We believe that our business model and strategic plan, including our continued investments, will drive our growth over the long term and, in fact, in the medium term, and we remain extremely well positioned in each of our vertical markets we serve not only to gain market share, but of course to manage our investments very carefully.
We have a seasoned management team that is very good at these points and particularly at gaining market share and managing our investments in a very strategic way.
On a granular level, looking at plans for the UK to leave the European Union, they are on a very early stage, and what is ---+ which is likely to be a two-year process; many say not much thoughts until early next year.
Surely there will be developments along the way, but let me be clear that Henry Schein's commitment to the UK remains unchanged and so does our commitment to the European Union.
We continue to believe that the UK and Europe on the whole represent attractive long-term opportunities in both our dental and animal health businesses and perhaps even in our medical business in the long term.
We expect to continue to execute well in our value-added customer approach, just as we did before the Brexit vote.
In a moment, I will provide, as I said, additional commentary on our recent business performance and accomplishments, but first <UNK> will review the specifics around our financial results.
Okay, thank you, Stan, and good morning to all.
As we begin, I would like to point out that our 2016 second-quarter results include a favorable proposed tax settlement of $4.5 million or approximately $0.05 per diluted share.
Q2 2016 results also include restructuring costs of $20.4 million pretax or $0.18 per diluted share.
Our prior-year Q2 2015 results also include restructuring costs of $7.2 million pretax or $0.06 per diluted share.
I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis, which excludes those restructuring costs, as we believe the non-GAAP financial measures provide investors with useful information about the financial performance of our business, enable comparisons of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to the key metrics used by management in operating our business.
These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures.
You can see our Exhibit B to this morning\
Thank you, <UNK>.
Let me begin my review of our four business groups with dental.
As Steve noted, North America dental sales were impacted by softness in the US that began in early June.
We believe the strength of our relationship with our customers and our commitment to delivering value to their practices will continue to be key to our long-term success and, as in the past, will enable us to continue to gain market share not only in the United States, but globally in the dental market.
Although the sales growth was lower than expected in the second quarter, we believe we have a proven and successful model of delivering value-added solutions to our customers and we have increased our focus on delivering better sales results in the short term.
As evidence of this commitment, during our second quarter we announced an investment in Custom Automated Prosthetics, known as CAP.
CAP is a US digital laboratory supply company with 2015 sales of approximately $30 million.
They offer CAD/CAM equipment, as well as a full line of zirconia materials.
The integration of CAP with Zahn, which is our dental laboratory business, and our custom milling center furthers our commitment to providing dental laboratory customers with a greater selection of digital equipment, materials, and services.
We believe these products will help them, our laboratory customers, to navigate through the important digital transition that is occurring in the dental technology space today and, I might add, at a rapid pace.
Further supporting our commitment to advanced technology and to help prepare the next generation of dental professionals for advances in digital dentistry, in May we announced the opening of the Henry Schein digital dentistry program at Temple University's Kornberg School of Dentistry.
Technology advancements are affecting almost every aspect of the practice of dentistry, and we are committed not only to bringing those advancements to our customers, but also to making sure our current and future customers are well versed in all aspects of running an efficient and profitable practice, while allowing for high-quality patient care.
Dental students and faculty at Temple University now have access to the latest 3D imaging equipment, intraoral scanners, and milling machines made available as the result of this partnership.
Regarding our dental ---+ regarding our digital dentistry efforts, we continued to see strong growth in sales of digital impression solutions with our 3M, 3Shape, and PlanScan scanner offerings.
The breadth of our product offering is reflective of our belief that customers want choice and open architecture for their restorative dentistry needs.
This also creates an opportunity for follow-on software and mill sales when these dental practices are ready to move to full scale in our systems.
With Zahn Dental and CAP, we continue to be well positioned to provide innovative solutions to the lab market for restorations that are outsourced from the practice.
Let me just add that in North America CAD/CAM sales were strong in the second quarter, driven by digital scanner sales, while our traditional sales for ---+ traditional equipment sales were soft, and I might add, partially due to timing.
Lastly, I would like to comment on a recent change in our global dental surgical group.
As of June, BioHorizons has become the exclusive distributor of CAMLOG branded products in the United States and Canada.
This creates a unified sales force in the US for complete dental offerings to specialists and general practitioners.
By combining the two sales forces for these high-quality complementary brands, we are creating a more efficient go-to-market strategy, giving our customers access to a greater selection of products and services, from high-quality branded to high-quality economy implants, with a wide variety of clinical-based products.
It also will afford more robust North American coverage and strengthening our position to effectively compete and grow our market share in, as I said, the premium and the value-added segments of the dental implant market.
We look forward to continued success in this important segment.
These businesses are and actually have been doing quite well for a while.
Now let me turn ---+ and, of course, happy to answer more questions on the dental side during the rest of the call.
On the animal health side, as <UNK> mentioned, when normalizing for animal health results, our internal sales growth in local currencies was 11.4% in North America, reflective of a healthy market, but also reflective of market-share gain.
We have been gaining market share in North America in the animal health arena for a while now.
International currency sales during the second quarter were up 12%, with organic growth complemented by acquisition [growth].
We're making good progress with our diagnostic product portfolio, targeting practices that are nearing the end of their instrument lease agreements, as well as growing clinics with a need for multiple systems for high-volume testing.
Indeed, sales of diagnostic products for North America grew in the low double digits in the second quarter, compared to the prior quarter.
We believe this is ahead of the market growth in this sector.
Axis-Q continues to be an attractive element of our sales proposals as customers are strong ---+ benefits and efficiency ---+ see strong benefits in efficiently linking their practice management software with their diagnostic instruments.
This is a holistic approach.
It is not selling devices, nor is it selling software.
It is the interoperability of devices and software connected to the practice management system, the clinical workstation.
As a reminder, Henry Schein's practice management software is today used by more than 50% of the US veterinary practices.
Again, strategy here in the animal health space is doing very well, well thought out and being well executed, of course not only in the US, but throughout the world in the animal health arena where Henry Schein is, in fact, active.
Let me now turn to medical.
The reported growth in our medical group of 14.5% was impacted by agency sales in the prior year.
When normalizing for this impact, the core internal growth for North America medical was 10.4%, as <UNK> mentioned.
And let me stress this is the sixth consecutive quarter of double-digit sales gains.
We continue to see solid growth from large group practices, including IDNs, the integrated delivery networks, as we on-board new customer wins from the past year.
These are internal growth wins that we've been working on for a while and that are bearing fruit.
In addition, the expansion of large health systems with which we have built strong relationships over the past several years is contributing to our growth.
Our focus on the ambulatory surgery center segment of the market is yielding solid results as well, as we are seeing strong sales in the sector, and our teams are making inroads with our smaller market segments, including universities and sports medicine, where we have a growing base of customers who rely on our broad value-added service model.
Now, let me talk about the technology and value-added services group.
We are pleased again with the second-quarter performance of this business group.
North American technology and value-added services internal sales growth was 8.5% in local currencies, matched the highest growth rate in more than three years.
Strategic acquisitions have bolstered our market share in this business, as sales in local currencies increased by more than 21% in North America during the second quarter and by nearly 15% internationally.
Of course, we are very pleased with these results as reported through the P&Ls of these businesses, but let me remind our investors that, in fact, it is the stickiness of the value-added services that our practice solutions group brings to bear in our customer base that has the real strategic value.
Enhancing digital platforms across the businesses we serve is an important priority for Henry Schein, in fact one of our largest and perhaps most important priorities.
We provide a means for our customers to better connect with their patients and improve overall efficiencies, thereby reinforcing our value to their practices and, in fact, allowing our customers to show their value to their patients.
And we continue to develop innovative solutions to drive interoperability with devices and, of course, the cloud to manage workflows.
We are very, very pleased with the progress we made specifically on our cloud-based dental product and the connection between our practice management software and the devices in the dental space, whether it is in the imaging area or in the prosthetics area, likewise, as I reported earlier on, in the animal health space with our diagnostic and imaging product offerings that are connected so well to our practice management software, which will only get better over time.
So, as you may know, 2015 was a special year for Henry Schein as we marked 20 years as a publicly traded company.
In May, we had the opportunity to celebrate this milestone as we opened trading at the NASDAQ stock market.
20 years ago, we had a vision for what Henry Schein could become.
Since then, more and more people have joined us in sharing that vision, in building our Company and expanding our presence in the global markets we serve.
And all the while, we have demonstrated we can successfully serve shareholders, while also serving society and, of course, our suppliers and our customers and the team.
We are pleased to have accomplished so much as the result of the hard work of Team Schein members across the globe over the past 20 years since we have been public.
We continue to be most optimistic about our strategies.
We are unwavering in executing our strategic plan, which revolves around the notion of helping practitioners operate a more efficient practice while providing better clinical care.
We feel that we have the right strategies and the tactics in place and will, of course, make sure that we manage our expenses in a way that delivers on our commitments to our shareholders.
Lastly, we are pleased to announce that in June Henry Schein moved up to number 268 in the ranking of the Fortune 500, celebrating our 13th year as one of America's largest corporations.
This is testament to more than 19,000 Team Schein members throughout the world who are dedicated to helping our customers build better practices so they can provide better quality care.
We, of course, have been on the list of Fortune's most admired companies for the entire period.
So with that commentary and an overview of our quarterly results from both a financial and operating performance point of view, thank you for your attention and we are, of course, ready to answer any questions that shareholders may have.
Sylvia, can you open the Q&A, please.
Well, there's a couple of things.
Remember, we do want to be cautious and on the conservative side in our guidance.
As we have said, in the US dental we saw slowness of sales that began in June, and while we are not convinced that this is a long-term permanent impact, we do want to make sure that if it continues for a little while that our guidance is sustainable.
We do have foreign-exchange headwinds.
We do expect, although we haven't seen much impact right now in the UK, we do expect that the UK market will soften, and as you probably know, about 8% of our revenues are in the UK market, between dental and animal health.
We also, because I know you know this also, but when you look at profitability, US dental on a distribution business is our most profitable business, so we have a mix issue on profitability where the most profitable business is going the slowest, and while medical and animal health are nicely profitable, they are just not as profitable.
So there's a lot of things going on, <UNK>, and we just feel that right now, given that we were not expecting this June sales slowdown, is the time to be a little bit cautious in the market.
So hopefully that helps you a little bit.
Okay, yes, it is primarily mix driven.
We did not see a significant rebound in US dental sales in July, consumable sales.
It is really right now continuing at similar rates to Q2.
On the other hand, equipment, we did see an increase in equipment demand.
Our backlog is very strong and increasing on equipment.
We do expect an uptick, a modest uptick, in consumable sales in the US, but again we are trying to be cautious.
And I would like to point out when you look at our margin and look at the components of our margin, for the quarter, excluding restructuring costs, our operating expenses are down 35 basis points versus the prior year, and if you exclude the acquisitions in the last 12 months, operating expenses are actually down 55 basis points.
So our restructuring activities are making us more efficient, but on the gross margin level, dental consumable sales for distribution are our highest gross margin business.
So, again, we're trying to be cautious in the market and a little bit conservative until we ---+ we need more data points in the future in order to be able to talk about what we are seeing for longer term in the market.
Thank you, <UNK>.
Let me just add a little bit more flavor.
First of all, there is no IMS data as we have said over the past ---+ in dentistry.
But it is our view that essentially from a units point of view, the market is flat.
It is not going down; it is not going up.
I am talking about the US consumable market.
And we think that the market is growing at about 2%, which is essentially price increases.
We have now ---+ there is an independent market data product out there.
It is not accurate, but it does show modest sequential downturn and it is more or less accurate directionally.
But two months is not a statistically valid view of that market, from our point of view.
We have also spoken to several key manufacturers who support this view that the consumable business in the US is essentially flat with a couple of hundred basis points of inflation.
So, we are talking about 100 basis points, 80 basis points margin of error.
It is very, very small.
And in that context, we believe we are still gaining market share and have gained market share consistently for a while.
We hear this from all of the major, most of the major, if not all the major, manufacturers.
So, we want to take a cautious view.
I would be quick to say that our demand for equipment is good.
One of our key manufacturers was delayed a little bit in the second quarter with providing equipment, a new system which we had taken a lot of orders for.
We believe that that equipment will be delivered in time for the third quarter, so we are looking at a much better second quarter.
But within these hundreds of basis points this way, that way, we want to be on the cautious side.
I also mentioned earlier on that we are doing quite well with CAD/CAM sales, particularly the scanners.
So, we have to be careful not to be too negative, but also want to be cautious here, and, yes, our medical, our animal health, our oral surgery, our dental specialty businesses in general remain solid.
In fact, our corporate accounts business, our special markets business in dentistry is actually doing quite well and so is the midmarket.
The area we just can't put our finger on right now is what is happening to the smaller Main Street dentist in the US.
And again, overall, we do see that we are gaining market share in this country and abroad in all of our businesses.
We don't see any area on the strategic side we want to moderate or change.
Perhaps we want to advance the solutions business leading with software a little bit faster.
But, overall, I think <UNK> is right to be on the cautious side and we want to reduce the top end a bit of our guidance.
So, it is really cautionary, indicative of these numerous areas that may be slightly questionable, including the economy in this country and in Europe.
We're actually quite comfortable that we will deliver good results in the end in Europe, but the economy in Europe is out of our control.
So that's why we would like to be a little bit more cautious and also control our expenses a little bit more carefully.
So, our implant business in general, <UNK>, is doing okay.
And again, we want to be careful about not creating expectations that we are going to report monthly sales on an ongoing basis.
But because of this particular situation, it caught ---+ I must say, it cut us a little bit by surprise heading into our dental national sales meeting in June.
It is possible that a little bit of a downtick occurred because our entire sales force was out of the field for a while.
But to answer that question directly, May ---+ April and May were pretty good in the implant business.
June was a challenge, but it would appear that July bounced back.
But again, <UNK>, we're talking within hundreds of basis points both sides ---+ not even hundreds, 100 or so basis point both sides.
So, I am not sure if this is conclusive on the downside or conclusive on the upside.
I will say the US implant market is quite strong.
We are comfortable with the European markets for implants, but on the margin our implant business has been driven by a few countries, not by Henry Schein on the ground, but through distribution agents in countries like Russia and Turkey and even Japan.
And these are markets that have been very helpful, again driving within 100 basis points year-over-year growth, but we're a little cautious about these markets.
Having said that, let me quickly remind that we are quite comfortable with our two big markets for BioHorizons, the US, Canada, and for CAMLOG, Germany and the DACH region.
It's a good question.
You can imagine, to quote one of our finance people, we have been torturing the numbers.
And really, we cannot come up with anything 100% conclusive.
What we have told you is what we believe, and I think we don't want to create a precedent of having to go into this detail every quarter, but because of this unusual situation that occurred in June, we felt we should provide a little bit more information.
But there are clusters leading one way, but there are clusters going the other way, and it is really very hard to come up with anything conclusive, other than to say that this particular survey, this independent market survey, does show modest sequential downturn, but it is only good from a directional point of view and manufacturers have given us this view.
But I have to tell you there are manufacturers that have shown us that business has been good, and for those ---+ and I would say more or less across the board, Henry Schein has been gaining ---+ continues to gain market share.
And again, I am talking about consumables, because I think the equipment business is quite sound, especially in the digital space, whether it is digital imaging or digital prosthetics.
<UNK>, that is probably the number one vexing question we have.
The animal health market is doing well.
Yes, we are doing better than the market, both here and in Europe.
But it is doing well.
It is alive and well.
We saw similar things, and I don't want to draw any more analogy to what I'm about to say than just the narrow point I'm going to make.
Don't mean any trends into this.
But in 2008, 2009, and 2010, animal health mostly, in most of those quarters, did better than dental.
But I don't want to come to any conclusions because there are a lot of other factors in dental ---+ insurance.
We have to also remember I think we may have gotten a false positive in the first quarter because our growth was significant on consumables and that may have been due to weather.
I think the dental market in the United States has been more or less flat for a while and driven a little bit by inflation, and also perhaps visits to implant dentists a little bit more.
But, again, we are in a few hundred basis points here in dental and it is hard to gauge what is happening specifically within that range.
Having said that, the animal health market is a healthy market around the world, driven by the middle class and, as we have said before many times, the baby boomers.
They are buying more pets.
Again, I'm not really speaking on behalf of the agric side of it, the production side, which has its own dynamics related to the milk price, the meat price, but Henry Schein is not a big player in that space, with the exception of a few markets, like Ireland or New Zealand where we are in the dairy field, and in a couple of markets, Australia and in parts of Europe, where we have some production.
But from a pet point of view, it is growing.
The demand for pets is growing and people are spending more money.
We have seen that with our customers, both the customer that is public and the customers that are not public.
It is a hot space.
It is a good space, and I would say the medical space is good, too, but it is not driven by consumer issues on the medical side.
It is driven by a realignment in the way in which health care is provided.
Obviously, we have shown very good results on the medical side for the past six quarters, but obviously it is not sustainable at that high level, although we remain very optimistic in our ability to gain market share, and the foot traffic into the medical office is not really as important as us gaining bigger accounts.
<UNK>, so for Q3, the first important thing is Q3 was a difficult comp on an EPS level and an easier comp in Q4.
And specifically, Q3 of last year had 15.7% EPS growth, so it is a more difficult comp; that's one thing.
Some of the things that we talked about, cautious view of dental market in the US, Brexit, foreign exchange, but there is also timing of expenses between Q3 and Q4.
There is also restructuring ---+ further restructuring activities, which will only have a modest impact in Q3 and have a greater impact in Q4.
And lastly, a potential for flu vaccine sales timing that could be a little bit negative for us.
But the biggest reason, just I gave you a laundry list, but the biggest reason is that 15.7% EPS growth last year's third quarter.
Yes, so, Bob, let me stress that this is not the first time we have seen this, even in the last three, four, five years.
We do periodically have a month or two months with a challenge.
What happened here is that we had an extremely good April and May and we didn't expect it to fall off this much.
So that's number one.
Number two is I don't think there is any major change in dynamics on the competitive side.
It is a competitive market, to be sure.
There is no shortage of competitors.
Everybody is fighting for that last dollar, so it is a competitive market.
Having said that, we do own some brands in the discount area and they did not see any real change in dynamics.
Their trending is more or less the same as ours.
We have those interests in these businesses just so we can keep an eye on what's going on on that side.
By the way, we do this not only in the US, but throughout the world, and we don't see any major change in the competitive pressures.
In fact, on the contrary, we see equipment doing quite well and practitioners investing specifically on the digital side.
So, if we ---+ what we have said is what we know.
We don't normally go this deep into it, but given this change, we felt we should be more explicit.
And I can't, and nor could Jim Breslawski, the President of Henry Schein, the CEO of our dental business, nor could he point to anything specific on the competitive side.
Yes, and just to add to that, based on the data that we have, we don't see any share shifts of any magnitude that we could ---+ that we can reasonably comment on.
So we don't think that our share really changed dramatically during this period.
We think the biggest issue is we just had a soft June market.
On the share gain, directionally I think we continue to gain share, and this seems to be an issue with the very small practices.
And, yes, the very large ones seem to be growing a little bit and the midmarket ones are growing quite substantially, but the little ones are struggling a bit, at least from a June point of view.
I would not take that and extrapolate it and say the smaller practices are having problems.
But it seems that in this particular two-month cycle, there was a challenge there.
Okay, again, on the previous call I highlighted some of that.
For the current quarter, excluding restructuring costs, now the core operating expenses and excluding acquisitions that were done within 12 months, because they just change the base, we took down operating expenses as a percentage of sales by 55 basis points.
So we are looking to do more.
Right now, we are still determining exactly what additional restructuring activities should be executed on and that's why we can't give an estimate for how much the additional restructurings are, because we haven't finalized that.
But we do expect to take operating expenses down even further, again to reflect this more cautious view.
And there's opportunities there for us, but it is real difficult to pinpoint that at this point.
<UNK>, I think we've mentioned the last couple of calls that sales in medical to some extent is ---+ to a large extent ---+ dependent on bringing on these larger accounts and they come on board in a lumpy way.
So we've brought a lot of these accounts on board in the last two years.
It is obviously not sustainable at these phenomenal rates because the market is not growing by these rates.
The market is probably, and there is no specific data, is growing by a couple hundred basis points and definitely not because of inflation; because pricing is moving from branded to generics on the pharmaceutical side and on the med-surg side.
So we have had very healthy growth in this area, organic.
We are growing on top of that, so I would repeat what we said in previous calls that we are gaining market share.
I think we are gaining very nicely on the market-share side organically.
Of course, the Cardinal acquisition did help, but organically I think that's where the impetus is coming from.
So, I'm not sure, as I said I think in the prepared remarks, that these double-digit growth numbers are sustainable in medical, but we will grow at a multiple of the market and we will increase our profits in this area as we drive a more profitable mix in products in this area.
We are very happy with our medical business.
Now on the Cardinal side, the integration of the Cardinal Health physician office business is substantially complete and we have received positive feedback from the acquired customer base.
There is a lot of change going on in healthcare, and we are in the process of modifying our purchase commitment to Cardinal to reflect the rapidly changing environment that makes more business sense from both of our points of view.
We are creating greater flexibility in our relationship with Cardinal, specifically around the integrated delivery networks.
They are better at servicing aspects of the IDN and we are better at servicing other aspects of the IDN.
So, we are modifying the marketing arrangement with Cardinal and there are certain products that doesn't make sense for us to buy from Cardinal.
They have very good procurement pricing as it relates to hospitals, but the demand for choice in the physician market is much greater than in the hospital, where formularies can be mandated and not so much mandated in the physician space and even in large group practices.
So, we are modifying this thinking right now with Cardinal, but I would say our internal growth is pretty good in the physician space, arguably the best of all the players, the bigger players, and we are very optimistic about this business and actually optimistic about the strategic direction we could take this business in over the next five years.
I would say that on the M&A side we very rarely participate in books that are put out.
We have bought some companies with respect ---+ where a book has been put out, for example BioHorizons.
But, generally, our deals are known well in advance before they close.
It's usually a family company, a private equity firm that understands we are the best buyer.
And so, really, yes, I think prices are higher in that segment than they were before, because interest rates are lower, but we don't participate really in the bubbled pricing where you are seeing crazy multiples on some deals because private equity has a lot of money on the sideline and because interest rates are low.
Our deals are deals that are carved out for specific strategic reasons.
A family wants us to buy 80%.
Somebody wants to stay a partner, wants to merge with us, bring their product through our channels, and I would say we have no shortage of deals.
Our pipeline is pretty good, and I think we're still on line with putting to work, I think, what is it, $200 million, $220 million, $250 million.
Yes.
Sometimes as much as $300 million, but I doubt less than $200 million a year from these (multiple speakers).
These kinds of deals in the end are expensive in the first year from a P&L point of view, because you have got all the deal costs.
Sometimes you have software amortization that has to be picked up in the first year or inventory adjustments, but in the second year or so they become very profitable.
Sure, there is always increased competition.
There is no shortage of suppliers that would like to take these accounts.
And we believe that we have very good value-added services.
Of course, we will lose an account from time to time, but I think in the end we have shown that we can gain more accounts that lose them, especially those that are centrally managed that are formulary driven.
I think our knowledge from the medical space, which we have introduced into the animal health space and into dental, stands us in good stead.
But, yes, there is obviously increased competition.
To my knowledge, there has been increased competition over the past decade, almost, and I think we are doing okay, and we are building more and more value-added services.
That's the nature of the free market.
So, thank you, everyone, for calling in.
We're, of course, very bullish about the future of Henry Schein; nothing has changed there.
We have a good strategic plan.
We start in January 2017 working on the strategic plan for 2018, 2019, and 2020.
I am sure that will result in allocation ---+ reallocation of resources, as you would expect, but overall we are very pleased with the direction, the longer-term results.
Sometimes one business is ahead of another.
That's the nature of business.
Sometimes you have a challenge here and you have a challenge there, and you have a plus here and a plus there.
We have a great management team, a team in the organization that is highly motivated and ready for even more competition.
And so, we remain very, very excited about where we are and the opportunity for the future.
If anybody has further questions, please contact <UNK> <UNK> at 631-390-8105, and thank you for your participation and I look forward to speaking with our investor community again in 90 days.
I believe <UNK>, and I am not sure about myself, but I know <UNK> will be at investor conferences over the next 90 days and certainly are ready to speak about any questions that you may have in the form of clarification of information already disclosed.
So thank you very much.
| 2016_HSIC |
2016 | TCO | TCO
#Thanks, Mike.
I will say, it is close.
We did not see any drop-off in traffic generally, and I would not know how to parse it from the Zika virus.
I will say that when you look at data points on Hawaii ---+ I'm sorry, on San Juan tourism, there are whole bunch of positive data points.
There is a lot of positive data points on the general economy, which seems so inconsistent with all the headlines that we are reading every day about the debt problems of the country.
And it is almost like they are disconnected.
But in the second half of 2015 as an example, employment was up 2.5% and the unemployment rate fell almost 200 basis points to 12%.
The hotel registrations in 2015 over 2014 were up almost 5%.
Visitor expenditures in 2015 were up 3.6%.
Cruise ship visitors were up 25%.
There are incredible positive data points about tourism.
Our sense is that, notwithstanding the dramatic debt crisis that's creating a lot of challenges, I mean, every time you talk about San Juan and Puerto Rico, it is like people ---+ you have to get over that when you first start talking to them.
But the fact is that tourism has actually been trending very well.
At least through 2015, again, I cannot comment specifically on the Zika virus.
I don't think there's any magic number to either.
If we build good, strong assets in quality locations in quality markets, then whether it is 5 assets or 10 assets, people will be attracted, capital will be attracted to those assets.
And from the standpoint of human talent, our human talent will be attracted to wanting to work on those assets.
So it is not three.
We know that.
It is not three.
And how much of the assets we have to own, therefore how much capital are we actually going to put in, and how big are those assets.
The Korea project, Hanam, is a billion-dollar project.
So we don't have to own a billion-dollar project.
We would be very happy owning 34% of that billion-dollar project.
In China the projects are $350 million to $400 million, 100%.
We don't want to own 100% of a project in China.
We want to have a strategic partner.
So it is all based on what the opportunity is, what the capital is that's required, how we capitalize it, and what else we have going on.
We have three Sears stores, and that is one of them.
And we obviously have talked to Seritage and to Sears' parent a number of times about all three of those stores, and we are happy to talk to them about those locations.
But it takes ---+ we both have to be interested in pricing or terms that make sense to both of us.
I don't think I want to comment specifically about any one of the stores, or what our specific negotiations are.
Number one, construction cost, generally.
Number two, we had very significant contingencies in the project.
There were a lot of unknowns when we began.
It was our first construction investment there.
We felt it was prudent to put very significant contingencies there.
And now it is at 70% actually built out, and it is 100% bought out.
Both Shinsegae and ourselves believe that it is appropriate to reduce the overall plans for the project.
We are also on the soft cost side, things like tenant allowances, are doing very well against our budgets.
Yes, it is <UNK> here, in terms of bed debt, it is a little higher now than we typically trend.
It is a highly variable number and hard to predict, and very tenant-specific.
I would say with regard to the bad debt that we have now, or had in the quarter, you should not read anything into overall tenant health from that.
It is a very, very specific to a few centers and to a couple of tenants within that center.
But it is not in our view, one; a read-through for the year, and not in any way predictive or representative of overall tenant health.
We are not seeing the volume of store closings that many others are anticipating, and you can see it in our occupancy and leased-up space statistics, and again I think it speaks to the general quality of our portfolio and the demand for space that I talked about earlier.
Thank you.
It was a negotiated transaction.
<UNK>, we said in the script that we expected $80 million of NOI from the four projects together in 2019.
For the most part that is a stabilized number, you will have an extra year in there for Hawaii, but that represents stabilized ---+ a full-year stabilized number for the three in Asia.
As to exactly how that is going to ramp over between 2016 and 2019, I don't want to give you guidance for future years before we are prepared to do that.
But I think it's reasonable to think that somewhere between 10% and 15% of that number in 2016 is a reasonable number; and it won't ramp ratably over the next few years, but that's probably not a terrible proxy for how you get there.
Directionally that is probably an accurate statement.
If you take this year, you've got FFO ---+ I'm sorry, comp center NOI growth for this year, we're saying is going to be 5%, that's what is in our guidance given the positive CPI outcome.
But if you look at the range of FFO that we have for this year in terms of FFO growth, at the high end of our range is about 8% FFO growth, from the midpoint it's obviously substantially less than that.
And interest expense is part of the reason why that's happening.
In terms of positive FFO impact or contribution, you should start to see that, certainly by 2018 and into 2019.
As it relates to 2017, my guess is you are closer to neutral, but we are not at that point right now where we can give you guidance on 2017, but I think directionally what you are saying is not a crazy way to look at it.
There really shouldn't be, <UNK>.
They really shouldn't be a material difference.
Thank you, everybody.
We appreciate you joining us on our call.
Obviously, if you have more questions let us know.
We really do invite you to come see Xi'an, and perhaps when we get the other two open, we will make a trip.
Thank you everybody.
Chris, thank you, goodbye.
| 2016_TCO |
2016 | AAWW | AAWW
#Thank you <UNK>.
We will update that fly from time to time, but there's not a substantial difference really in a one month or so since we looked at that data.
IATA did talk about an improving June, and so, that's good.
The other thing we talked about on the investor day, IATA doesn't capture a lot of data.
It doesn't capture for example, the express operators, and Deutsche Post DHL, for example, issued their earnings today and the DHL express had an 8% increase in volume in the second quarter year-over-year.
That's not captured in IATA, but it is absolutely captured in our operations, because we operate a large part of that.
To the extent e-commerce is moving on the express operators, that doesn't get captured either and finally the charter market doesn't get captured in IATA.
IATA basically captures a scheduled services.
We were glad to see the increase in June that IATA reports, we are very much positioned in that, plus other markets.
And that's why I was talking about, our sense is there's going to be a peak this period.
I don't think there's one in ocean, but certainly believe there is one in air express and e-commerce.
No.
We had a return of a 747-8, as we were talking about.
In the second quarter.
Yes.
So couple things.
We've all seen the different commentary that Boeing has made over the last several weeks and at some point the 747 production is going to stop.
But as we step back and look at the aircraft that are out there for large, wide-body intercontinental flying, there are two choices, here's the 74, both the 747-400 and the 747-8 and the 777.
One of our prior calls we talked about the lower fuel prices or what may be persistently low fuel prices have added a new competitive life to the 747-400, and as you look at the global freight flows, as one considers global freight flows and what is moving, there is clearly demand for a freighter within nose-door frontloading capability to take oversized pieces and to serve those markets.
So in terms of our 747 platform, I believe there is good, long-term, useful life for the 747.
There are markets that it serves very effective and very well.
The 777 is a very good freighter, it's serves different markets and it serves different routes.
And with Southern, we're agnostic as to which freighter, but we think both have a long term position in the marketplace.
Boeing has obligations to serve that fleet, to support that fleet over time.
Nothing has been announced.
I suspect that for example the next Air Force One or DC-25 is going to be a 747 from Boeing, don't know that, but that it could be.
And in that context there's further reason for Boeing to support their airframe for some time to come.
Sure Steve, it's <UNK>.
It really is an outstanding result.
And if you look at our charter contribution, it's essentially flat and last year it had the benefit of the West Coast port disruption for some portion of the second quarter at the beginning of it.
So really an overall great result.
Your question is more about the yields, and so it's really if you strip out fuel, as you said and as we talked about, our net revenue per block-hour is up, and again, that includes the benefit that the prior year had of West Coast port disruption.
It's is driven by a few things, one, as <UNK> has talked about, we are able to take advantage of where opportunities are.
We've taken advantage of having the 747-8 included in charter, and so we're operating that in South America and doing quite well with it.
It's a terrific aircraft to operate there.
So we have benefited from that.
We've talked about higher demand from the military, so we've seen a pickup in demand for AMC cargo as well as passenger and that's included in the charter segment.
Those are the biggest drivers I think supporting that.
So it's really our opportunity to kind of hand-pick the best routes and rates that we can get.
It's the 747-8 being in charter and it's the incremental military business.
Not authorized to fly Iran yet.
Thanks Steve.
<UNK> as I talked to <UNK> about earlier, you have the incremental contributions from Southern that we haven't seen in the past.
We have a 747-8 that will be operating, our tenth 747-8, so we'll enjoy that for the full quarter.
We have the incremental two 767-300 with DHL.
And so, those really do drive it.
Maintenance, I know you're discounting a bit, <UNK>, but it's huge.
It is over $20 million difference versus 2015.
Last year was very different.
But if you look at the previous years, 2014, the second half of the year was about 71%.
2013 the second half of the year with about 30%.
Last year was different of course because the West Coast port impact.
But this year is starting to feel a little bit more typical, but clearly, heavily weighted in the fourth quarter for the reasons that we talked about.
Yes.
During the second quarter we had an adjustment related to state taxes, and so that drove the rate down in the second quarter.
For the full year, we still expect the effective rate to be somewhere around 31%.
So a couple of things.
We believe the 747-8 is a very viable aircraft.
We are meeting or exceeding the returns that we expected to generate on that aircraft from our business case.
As you think about some of the deployments we're serving today, particularly for someone like DHL, it's slot constrained environments like Hong Kong and Shanghai having 138 tons available to depart when you have one slot, versus a smaller aircraft type, the aircraft works very well.
We had one in charter, that's right, it has performed very well for us in charter.
And we've spent quite a bit of time on the call already talking about the charter results that we been able to drive so far this year and what is not a great market overall.
The lower operating cost for the 747-8 certainly contributes to that.
The one 747-8 is deployed in South America in our charter operations there.
We have a very substantial commanding market share in the Latin America trades.
With very hard utilizations on a round-trip business, given the nature of that trade.
The second 747-8 is returned from the customer, as we talked about, our choice, our preference is to put it into charter now, take advantage of the second half that we foresee, the peak that we foresee in the demand we see for that aircraft and I am very confident we will place that into ACMI, and we will have the opportunity to place the tenth into ACMI if that is the better disposition of that asset.
But the asset is performing very well.
From a [clearance] point of view.
Thank you.
I will let <UNK> answer the fair value part of the question first and I will come back to the market question I think you asked.
Sure.
<UNK>, from the value of the assets, no.
The way the accounting works, we have to look at cash flows from the aircraft over time, and the expected cash flows from the aircraft far, far exceed the value on the books, and so, not an issue from an impairment standpoint.
There's also a potential scarcity value.
These aircraft are excellent aircraft, and they are very young and customers love them.
So yes, a customer may have returned one, but as <UNK> said, we are very confident that it will be placed back in ACMI.
So these are terrific aircraft, and if Boeing is not producing them, if that were to happen, there could be tremendous scarcity value for those who have the aircraft, so they could become more valuable and not less valuable.
So to answer your question on equipment types, the 777 long haul point-to-point intercontinental flying, such as the way, for example DHL and FedEx have that deployed, that's an excellent aircraft.
Because you can't get to the range, the type of traffic that's being carried is lighter weight traffic, so more cube oriented than weight oriented and it works very well in the schedule touches Hong Kong, Cincinnati, Leipzig, Bahrain, Hong Kong.
That the great use of the 777.
The 747, whether it's a 400 or a -8, works very well in the stack yield network.
Hong Kong, Shanghai, (inaudible), Anchorage, Cincinnati in return.
Because you are onboarding and offloading cargo at each point along the way and so the through yield of that aircraft is an exceptional yield compared to just point-to-point flying.
So kind of, [courses for courses], and that is where you see someone like DHL committed to a fleet of both 747 and 777.
The other express operator, UPS, is going with the 747s and FedEx is going with 777 they have their reasons for doing that.
Fleet growth, so fleet growth will depend really on the customer and the market segment or sub segment of the market that we seek to serve.
Can I envision us in more 777s.
Yes.
Can we envision ourselves in more 747-8s.
Do I think our future is with old, expanding our fleet by going into aged 747s.
No.
I think the point on our 747-400 fleet is with this somewhat persistent lower fuel price, we're going to get the full value of the investments we made in those aircraft back in 1998 or so when the company first acquired those factory built player traders.
Thanks <UNK>.
Okay, well thank you very much Stephanie.
<UNK> and I would like to thank everyone on the call today for your interest in Atlas Air Worldwide.
We very much appreciate your sharing your time with us today.
And we look forward to speaking with you soon.
Thank you everyone.
| 2016_AAWW |
2015 | UEIC | UEIC
#Comcast was ---+ they were at 26.6% of sales.
There was.
DirecTV was also a 10% customer.
They were at 13.7%.
I'd add ---+ I'd probably put low to mid-20s.
Right now the R&D tax credit hasn't passed yet so the tax rate runs little higher than (inaudible) finalized it last year.
Well, we communicate with them daily, so it's something that we our salespeople they work with their team in terms of their purchasing departments.
So we are in constant contact with them.
And from our understanding they are going to ship in Q4.
So I think our confidence level is high in that regard.
The one thing Steve, set-top boxes are much more complex than in the past.
So the fact that these customers delayed shipment by month or two isn't ---+ we don't like it but I can't say it's a complete surprise when you're dealing with the ---+ they used to be old analog boxes and now you've got two-way RF, you've got IP connections, you've got voice control.
They are much more complex.
So again we are not happy a got delayed a little bit but in the grand scheme of things from a long-term perspective it's very minor.
Well, I'm not willing to give you the exact figure or guidance for next year but what I'll say is this.
As we said in the prepared remarks that the platforms that are being put into your home today our IP connected or cloud connected so they are connected to the Internet.
They all have built-in two-way RF capabilities.
So this architecture makes a perfect host for these other products, these other services door sensors, window sensors.
You know protection against fire and other types of safety and security products potentially home control products.
All the protocol necessary to bring such services will already be in place.
And basically justified on the back of the video business.
So anyway, these platforms are out there.
We see this is a big opportunity.
It's important to note as we did in the prepared remarks, we're not talking about a market that doesn't currently exist and that we hope will develop.
The market for these products, these home safety and security products is already $1 billion almost $1.5 billion a year and it's projected to more than double over the next four years probably on the basis of some of the smart platforms that are coming out.
Our customers have been talking to us about this for some time.
They obviously realize that the architecture they have put in place will lead to a small incremental investment necessary to bring this type of service revenue to them.
We've talked to current industry players in the home safety and security business and we have some unique innovative product that we think can make a real difference there.
So we do think that we have ---+ we can carve out a real good market position in this new market which is about $1.5 billion going to almost $3 billion.
So that would tell you how big this could potentially be.
Do your market share statistics, take 10% of that market and you've got a very large number.
No, those doors have already been knocked on and we already have projects that are ready.
Well, not ready for deployment yet but are in development for deployment early next year.
It would have, yes.
Yes, I want to say I think Q4's revenue guidance is light.
It's where I think it's going to ---+ where we are going to be.
We think it's going to be between and $159 million and $167 million, which amounts to 15% to 20% growth over the prior year.
So we expect strong growth for all the reasons that we mentioned in the prepared remarks but it's what ---+ it's the range I think were going to fall within.
Sure, I would say that particularly for these advanced platforms the two-way or cloud connected boxes with two-way protocol, that is probably clustered mostly in North America and Western Europe but I would say it's either in development, being ready to be introduced and in a couple of cases will be introduced or has been introduced in the near term.
So this is not something that is isolated to just two players.
We've counted almost 2 dozen now that are again at various stages of development on this type of platform.
So this is becoming a trend or a movement rather than just an isolated incident.
We think that you know the world is changing in the area of home entertainment and so, we're pretty excited about this.
We're going to see some platforms launch in Q4 but we have many more beyond that that we see happening next year and probably the year after that.
Well, OEM is going strong.
On that you'll see some things that will change early next year mainly because they are on typically on an annual product cycle so TVs, AV receivers and other OEM type consumer electronics devices are typically designed once a year.
They are being designed now through this past summer through the end of this year to be introduced early next year.
So, you'll see changes and we'll talk more about that as next year progresses.
The platform for this year though are already designed.
So there won't be an impetus this year other than the sale of products that we are currently in.
No, no, I said the royalties were lower in Q3 of 2015 versus last Q3.
They've actually gone down.
Yes, it's just we had some product introductions so we had some strong ---+ we had a surge in licensing revenue for a while.
We sell into the TV market and some of our customers have lost a little bit of market share.
So it's resulted in an adverse effect on our royalty revenue but we've been able to compensate for it.
And with the transition of the lower end platform to the higher end platform, which is really driving the growth rate now for us.
And we have a much more diverse list of customers this year than ever before, so there's a higher count of customers.
Unfortunately though compared to last year there were two major programs that were relatively new.
One which was brand-new with a major name that has diminished.
So that's what caused royalty to come down a little bit Q3.
This was not a surprise though.
This is really what caused any difference but we knew that before the quarter started.
I believe they were, Steve.
I'd have to go back and look to see exactly what it was.
But I think they were in the low teens but I'd have to go back and double check.
Okay, thank you all for joining us today and for your continued interest in UEI.
Coming up early next year as always we'll be exhibiting at the consumer electronics show or otherwise known as CES in Las Vegas from January 6 through the 9.
And we'll be participating in the Needham 18th annual growth conference in New York health the next week January 12 through the 14.
Hope to see some or all of you there.
Thanks very much, goodbye.
| 2015_UEIC |
2015 | MSFT | MSFT
#Overall and the way I look at it is ---+ first of all, I'm most focused, on obviously, our organic growth, and in there, <UNK> alluded to this, we made significant changes in how we have allocated our own organic dollars, both in R&D as well as in sales and marketing.
And we'll continue to do that because I think there is significant new opportunities for us to go after, and that will require us to just reallocate aggressively and that to me is core.
But beyond that we will look at inorganic means.
When I look at all of the acquisitions that we have made over the course of the last year, and our OpEx guidance for next year, shows how disciplined we are in bringing new talent in.
Be it in R&D, be it in sales and marketing.
So we are not afraid to bring in new capability.
But I'm also questioning what is the allocation we have.
Of course, we have done smaller acquisitions, but they add up, they're pretty significant.
When you add up all of the things that we have done in the Office 365 space, all of the things we have done in the Azure space.
So we'll continue to do that.
And if anything comes up in M&A which allows us to pursue our strategic vision, that we will need to even allocate more to on an OpEx basis, post acquisition, we will look at that.
So I won't shy away from it, because what's important to us is growth in areas where we have something unique to contribute and long-term profitability.
Thank you.
| 2015_MSFT |
2015 | WYNN | WYNN
#At the present time unemployment in Macau is almost 0.
The government wanted us to build highly diversified, non-gaming structures.
We went and did it for $10 billion or more, if you count all of us ---+ the largest being us at $4 billion.
How in the hell can you run those places without employees.
I mean, what are we supposed to do.
Shut down the floor.
Close a restaurant.
Curtail the very thing that they told us that they wanted to see happen ---+ without employees! It so ludicrous that it defies rational conversation.
Some of these places are going to close locally, creating unemployment.
We can absorb them, I think, in the industry.
But still, the extent of the new operations are so comprehensive that in order to operate them appropriately, you still need more people to work.
And the spectacle of these buildings being unattended is beyond ---+ beyond imagination and will have dire consequences in the community on a couple of levels.
The first level will be that it will negatively impact the job security of the local Macau citizens and undoubtedly result in rather severe complaining.
What form that will take, I'm not sure.
The second thing is that the hospitality profile of the city will be severely compromised, and that will take years to recover ---+ years.
You only get one chance to make a good impression.
And if you bogey that impression, if you blow it, it's a long time to fix it ---+ and maybe never.
What is important is that the Macau market, as it's viewed by the world, never loses its viability.
Because the day that it loses its viability, it will lose its long-term longevity.
And the entire thing gets really damaged severely.
That will impact the community of Macau in a very negative way, and that's one of the things that concerns me a lot, because employee attitudes ---+ you know, everybody in the world, including all of us on this call today ---+ it has been established that our present state of mind, our happiness, our sense of security is fundamentally a function of how we view tomorrow or the future.
You tell someone that's feeling poorly, suffering from an ailment or some discomfort, that they are going to be better in three days, and they feel better today.
You tell someone who is feeling great today that they are going to be awfully sick next week, and they get depressed today.
So the attitude of the employees ---+ their since of security, safety ---+ their notion of a positive future for themselves and their families is a critical management responsibility.
Now, to a certain extent we control that within the walls of our buildings.
But every once in a while, depending on public policy, we lose control of that because of factors that are outside of our control.
And my feeling is that Macau at the moment is on the edge of that moment, which should be avoided at all costs.
Well, that's a good question.
And from what we understand, reading the South China Morning Post and other sources of information available to us, President Xi discovered that the people of China felt the government officials were corrupt and feathering their own nest.
And he thought that that was very malignant for the health of his party and the future of his country and made a decision to correct that and have a campaign against corruption.
And considering the amount of people ---+ if you believe the newspapers ---+ that have been charged with misconduct of one degree or another, President Xi did the right thing for the right reasons.
And because of the way mainland China works, every businessman in that country dealt in one way or another with a government official, because the government controls so many aspects of public policy and business interface.
So businessmen who had nothing to hide, as well as those who might've had something to hide, all went into the foxholes or into a defensive posture, because they didn't know if the next shoe was going to drop or what the next thing was going to happen.
And it has caused, across the board, a contraction of all of VIP consumer spending at the higher level, which includes Macau.
And that explains the problem that the junket operators are having, plus the restriction on the credit cards and things like that.
So in one respect the junket operators faced a problem that was part of an intelligent central government policy.
No argument about that.
Corruption is a bad thing, and President Xi did the right thing, just as I would in my Company if I thought there was corruption to that extent.
Fernando Choi, the head of the government of Macau, or President Xi Jinping, or a President of a public company ---+ or a private company, for that matter.
It is bad business to have corruption.
And it should be stopped, because it's unhealthy and goes to the root of the viability of any organization or institution.
So there's something that in our meetings we acknowledged, and we accept as inconvenient, perhaps, in terms of junket operators, but not necessarily a bad thing.
So we adjust to it.
And that was the way we dealt with that in our conversations.
Alternatively, the reason those conversations took 15 or 16 hours is we're juggling the reassessment of our facilities and adjustments to our facilities to cater to the new reality that we face, which, incidentally, is much more like Las Vegas than what Macau was in the past.
And that's fine with me.
I have no argument with it.
But in the process of adjusting, how do we run our facility under the new reality.
And we can do that, but we need tables in the casino to support the restaurants, and the convention and meeting space, and the entertainment.
Of the $4 billion, the casino represents perhaps $400 million of it.
The other $3.6 billion went into other things that weren't part of the old way of looking at things.
So on one hand we understand what went on with the campaign against corruption, and we have no issue with that or the thinking that went into it.
What we have an issue with is the leadership that we need to have in the government to help us make the transition to the new reality.
Yes.
Well, we weren't in the UnionPay card business to the extent of other people.
So it didn't mean that much to us.
And, <UNK>, you should just look at the mass revenues and see how they are doing.
I think that enforcing the rules around UnionPay are overplayed in the media.
Way overplayed.
<UNK>, do you want to deal with that.
Well, we're continuing to see year-over-year where you have a reduction in that high-end play on the international side.
Again, it's like <UNK> said ---+ we're adjusting to it here to make sure that we ---+ we look at all other areas to make sure that we are recovering whatever that loss might be.
We really don't understand what that bottom might be.
We certainly have still a good flow of international business, but it wasn't like 2014 or 2013.
And we're mainly talking on the gaming side.
It's not just Asia.
Latin America, with everything that's going on there in Brazil and in other places ---+ clearly, that's down as well.
So our high-end business was down by about half from a revenue side compared to this time last year.
I'll take the first one.
It's <UNK>.
So, you know, as you see that table mass was up, but that EBITDA increase was offset by ---+ you are exactly right ---+ direct VIP was down, and our slots were down.
So those two offset the increase in table mass.
He asked about holds.
The hold percentage was fairly ---+ was normal in direct VIP.
It was the volumes.
And about <UNK> Diamond.
He wondered about the investment.
The government told us that we could continue to develop our land concessions so long as it was Phase II, which it has always been.
And we have designed a remarkable Phase II.
But until we understand about <UNK> Palace, it's ---+ our ability to look into the future and plan financially is, again, compromised at the moment.
My long-term confidence in Macau is still strong.
I love the position we're in in terms of being part of that community.
The issue here has to do with short-term adjustments, not long-term confidence.
At the end of the day I'm in the same position as the head of the Macau government and, for that matter, President Xi Jinping.
My job is to create a stable environment in terms of Human Resources, job security, and a better future for people.
Isn't that, after all, what governments are doing or hopefully doing.
And I say at the 11th hour, the government does the right thing and supports the health of its citizens, as businessmen will support the health of their employees.
Because the ultimate truth is that the only thing that matters is the happiness of the people ---+ whether they are employees or citizens of a community.
And they are the ones that touch the public, because only people make people happy.
Only people make happy communities.
Only people make successful companies.
And the job of leaders are to do everything and anything in their power to create a happy and positive outlook to the future for their constituencies.
And I strongly believe that when the dust settles, leaders of companies and governments do the right thing.
That's the basis for my long-term confidence in the market and my long-term confidence in the leadership of the government.
We all come to the same conclusion when we've had enough time to see.
Hopefully, we come to the right conclusion before we avoid (sic) catastrophic, unpleasant, or disruptive alternatives.
We anticipate certain results and don't let them occur.
So whether you are a CEO of a company or you are the head of a government, you have to have a little bit of an ability to look around the corner and see what's coming ahead of you.
And if that's not good, turn away from it.
Amend your policies.
Learn from experience and come to a more sound conclusion.
That's what I hope for businessmen, and I hope for ourselves and, for that matter, for the government.
There's no mystery as to who those customers are.
They are people from Taiwan, Hong Kong, mainland China, who want to live life in an exciting way for a day, or two, or three on vacation.
They want to be served well, stay in lovely hotels, eat in good restaurants, enjoy entertainment and attractions that they can't get at home.
And ---+ while they are there ---+ play in a casino, which is exciting, and have fun.
Their experience is under the control of the staff that serves them as well as the environment in which this all takes place.
That's the story in Las Vegas.
That's the story in Boston.
That's the story in Macau.
It's the story in Manila.
It's the story in Biloxi, Mississippi.
Nothing changes, nor will it ever be different than that.
Those are the truths of the hospitality industry in any of its variations or iterations, including Macau or any other city on earth.
We build buildings.
I'm sorry, go ahead.
It's already competitive.
It has been competitive for quite some time.
Look at Las Vegas, with the dozens of hotels, the thousands of tables, the tens of thousands ---+ 150,000 rooms.
Millions upon millions feet of convention and meeting space, theaters, cabarets, public entertainment, volcanoes that erupt, fountains that dance, pirate ships that sink, trees that come out of the floor, gondolas that go across dancing fountains for $100 million.
All of this is a fight for the audience that's here.
Discounts given at the tables, complementaries.
It's so intensely competitive in Macau ---+ and has been for a long time ---+ that it will continue in the same fashion that it is enjoying now.
There will still be a stratification of the public.
People who can afford choice and who demand higher levels of service; better food; larger, more sumptuous rooms; better meeting facilities; more fascinating entertainment attractions ---+ they will migrate to places that provide that.
Other places that deal to the economy end of the market, such as Circus Circus in Las Vegas or other places in Macau ---+ they have their own level of competition.
But you know there's Kmart, and there's Louis Vuitton.
There's Macy's, and there's Neiman Marcus.
They compete.
Neiman Marcus competes with other companies of a similar nature.
We do as well.
Louis Vuitton competes with Chanel, and Christian Dior, and Prada; and we're at that level.
We're the five-star operator.
We offer choices for people that want the best.
And when we do that, we to a certain extent give up another part of the market to other people.
So it's good that a place like Macau or Las Vegas has choice for people.
What's wonderful about Macau and Las Vegas is that if you come to that city, you can go from <UNK> to Circus.
You can go to a lower-end casino to <UNK> in Macau, and you can dial up whatever it is that suits you at the moment.
And that's the secret to making a great destination city ---+ is choice.
The bigger the menu, the more powerful the destination resort.
But I assure you that at every level there is competition.
Am I being helpful to you.
And do layoffs.
---+ and they laid off, and they lowered their expenses, and they laid off thousands and thousands of people.
Not here.
Because in the business that I'm in, I cannot juggle my service levels.
I cannot bounce my staff around because the market gets soft.
No, no ---+ we have to have a capital structure that allows us to maintain our service levels, to protect the job security of our employees.
And hopefully at the end of the downturn, we end up with a bigger market share, which is exactly what happened to us.
But in order to do that, you have to have a strong capital structure.
When the government interferes with the viability enterprise, they take that ability for us to protect our employees away from us! A dangerous thing to do from any perspective.
<UNK>, <UNK> <UNK>, <UNK> <UNK>, Mr.
<UNK>, Mr.
<UNK>, would you like to add anything.
No, you said it all, <UNK>.
Okay.
Well, I don't know that this has been the most satisfying quarterly phone call we've ever had, but at least it's the most candid and the most honest one that we could possibly give everybody that is interested in our Company.
And hopefully it sheds light ---+ it sheds real intelligence and insight on the inevitability of anything that interferes with the long-term health of Macau ---+ or Las Vegas, for that matter.
And I've done my best to shine the light on that subject.
I thank you all for your attention.
And we'll see what happens 90 days from now.
Bye-bye.
| 2015_WYNN |
2017 | IPCC | IPCC
#Good morning, and thank you for joining us for Infinity's Third Quarter Earnings Conference Call.
The live event link on our website contains a slide presentation for this morning's call, if you'd like to follow along.
We also have an Excel spreadsheet on our Investor Relations website on the Annual & Quarterly Reports page that provides more detailed quarterly financial data, and Page 10 of this report contains a definition and reconciliation of any non-GAAP items we discuss this morning.
As noted on Slide 2 of this morning's presentation, certain statements made during this call could be considered forward-looking statements, which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty.
For a discussion of the primary events or circumstances that could cause actual results to differ materially from those suggested by such forward-looking statements, please refer to Infinity's filings with the SEC.
And now, let me turn the call over to <UNK> <UNK>, CEO of Infinity.
Good morning, everyone, and thank you for joining us today.
Rob <UNK>, our CFO, is on the call this morning as well.
Before we get into the slides, I'd like to give you some perspective on my first 90 days in office, so to speak, since taking on the CEO role August 1.
During the last call, I outlined my vision in remaining committed to our strategy in being a leading provider of personal and commercial auto products to urban Hispanic markets.
In executing that strategy, I spoke about diversification on 3 fronts as we build on our well-established insurance brand: first, in terms of geography; a second was our products; and third, distribution.
Let me update you on some of last quarter's accomplishments and initiatives to further our strategic reach.
Organizationally, I expanded Rob <UNK>'s operational role to include responsibility in our commercial lines and pricing actuarial.
In addition, our President, Sam Simon, added Information Technology to his responsibility, which also encompasses General Counsel, Claims and HR.
Reporting to Sam, we appointed a new technology leader and CIO, Matt Varagona.
Matt has been with Infinity 11 years in various product, data and technology roles.
Matt's an engineer with a passion for analytics, who has proven very capable of leading our technology group and building on our progress in modernizing our architecture, software development and operations.
In addition, we reorganized our product management area, which resulted in the selection of individuals for leadership positions at a state and regional level who have track records of P&L growth and profitability.
I am happy to report that the new leadership emerged driven to get things done and make a difference by helping our organization reach its potential.
Related to geography, we have worked hard to expand our footprint in the state of Texas beyond our traditional Houston and Dallas-Fort Worth urban zones.
Much progress has been made in San Antonio and Austin to include the rapidly growing corridor between those 2 cities.
In addition, we've made the decision to expand our private passenger auto programs to the Atlanta urban zone.
New program development is underway, and we expect approval and implementation of that program in the first quarter of '18.
That decision has really excited the company and team as it marks a significant expansion into another large and meaningful urban market.
On the new product front, we launched a third Texas program designed to further segment and serve the Hispanic market.
In Florida, our new program was delayed by the Department of Insurance industry-wide actions to protect consumers after Hurricane Irma.
Restrictions have been lifted, and we now have an effective date in the fourth quarter.
Recent rate and underwriting actions should enable us to grow with confidence that profitability goals will be achievable.
Now is the time to leverage our low-cost structure, both operating and loss adjustment expense, and continue to build both scale and our brand in the markets we choose to write business.
Finally on the distribution front.
I am pleased with our business development team's work in expanding our agency plan in both California and Texas, where new business loss ratios are at or below target.
One notable relationship we executed last quarter was partnering with Liberty Mutual to write their nonstandard auto for their customers who do not meet current Liberty underwriting standards.
So it's been a busy 90 days.
And as I mentioned last August, given my prior experience here, I was eager to step in and make several meaningful moves that will help us achieve our objectives this year and better prepare us for the premium and PIP growth next year.
Now let's turn to an overview of this quarter's results on Slides 3 and 4.
Overall, we had a strong quarter despite experiencing the 2 largest catastrophes in the company's history.
Net earnings per diluted share were $1.35, up from $0.25 in the third quarter of 2016.
Operating earnings per diluted share were $1.38 compared to $0.17 last year.
Our GAAP accident year combined ratio as of September 2017 was 98.6% compared to 99.8% for the same period last year.
Net losses incurred from Hurricane Harvey and Irma were $11.5 million and $3.4 million, respectively, including the cost of reinstatement premium.
I'm exceedingly proud of our claims teams in both Texas and Florida, who responded to the disasters and worked quickly to service claimants.
Our GAAP accident year combined ratio, excluding the first and second quarter premium adjustments and catastrophes, improved to 95.6% in the third quarter and 95.2% year-to-date, compared to 98.7% and 99.2%, respectively, for the same periods last year.
Overall, our gross written premium was up 0.8% during the quarter driven by growth in Texas, Commercial Auto and Arizona.
This growth was mostly offset by a reduction in new business in Florida and California.
With the adequate combined ratios in nearly all of our focus states in commercial auto, we're well positioned to grow in 2018.
So let's go over the details behind the highlights, starting on Slide 5.
In California, premiums declined 6.4% during the third quarter and 9.4% during the first 9 months.
Premium was down during the quarter due to a decline in new business applications.
Our accident year combined ratio of 97.7% includes 3.4 points from the premium adjustments booked during the first 6 months of the year.
Excluding the adjustments, our accident year combined ratio improved to 94.3% from 99.2% in 2016, driven by lower loss cost trends in bodily injury, property damage and collision.
Our rate filings that had been pending approval with the Department of Insurance for over a year were approved in September and implemented in October.
We still have 2 class plans pending before the Department.
We expect those to be approved by early 2018.
While revenue-neutral, these plans will enhance our tactical approach to pricing and will be key to our 2018 growth and profitability.
Moving on to Florida.
A decline in new business applications as well as a shift to more 6-month policies resulted in a reduction in gross written premiums of 11% during the third quarter and 14.8% on a year-to-date basis.
The improvement in the combined ratio from 99.2% for 2016 to 96.6% for 2017 was driven by favorable trends in property damage and collision as well as lower commissions and bad debt.
We implemented a rate increase with an overall impact of 7.1% in March of this year.
We're planning for an additional 7% rate increase during the third quarter.
However, as I mentioned earlier, following Hurricane Irma, implementation of rate increases was suspended by the Florida Office of Insurance Regulation until December 4, and we now expect the increase to go into effect then.
We're also introducing a new business program in November of this year.
The rate increase and new program should help us continue to lower the combined ratio and grow as the new program will improve segmentation and overall risk selection.
Switching to Texas.
Gross written premiums grew 86.5% during the third quarter and 108% during the first 9 months of the year, primarily due to new and renewal business growth and higher average premiums.
Total catastrophes in the third quarter of 2017 were $12.5 million compared with $5.1 million during the same period of 2016.
Excluding catastrophe losses, the combined ratio increased from 88.4% to 94.2% driven by higher bodily injury and property damage frequency.
We are watching ex-cat loss ratios closely and continue to file for rate increases to keep our combined ratio adequate.
We're excited about the growth in Texas, particularly in Houston, as adding another major urban zone is a significant part of our strategy.
Touching briefly on Arizona.
Gross written premiums grew 102.6% during the third quarter and 86.8% year-to-date as a result of an increase in new business applications and higher average premium.
The 2017 accident year combined ratio has increased from last year driven by higher loss costs in bodily injury, property damage and collision.
These increases were partially offset by a lower expense ratio as a result of the growth in new business.
We continue to file for rate changes in Arizona as needed and have implemented increases of approximately 16% through the third quarter of 2017.
As for our Commercial Auto product, gross written premium growth during the third quarter and first 9 months was 9.3% and 14.1%, respectively, driven by renewal policy growth and higher average premiums.
We have seen an improvement in our Commercial Auto accident year combined ratio, primarily as a result of the significant rate increases we've taken over the last 12 months.
These increases have helped offset loss cost trends, which are similar to those experienced in Personal Auto.
As a result, our Commercial Auto loss ratio through the first 9 months of 2017 has improved 2 points compared to 2016.
In addition, the expense ratio has decreased more than 1 point with a larger premium base over which to spread fixed costs.
We really like our Commercial Auto business and expect it to grow double-digits with a solid combined ratio again in 2018.
I'll now turn the presentation over to Rob to review our financial performance for the quarter.
Thank you, <UNK>, and good morning, everyone.
Slide 6 provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on Slides 7 through 9.
So let's turn to Slide 7.
Revenues and earned premium were relatively flat compared to the third quarter of 2016.
Operating earnings increased due to improvement in the accident year combined ratio, as <UNK> discussed earlier on the call.
The 2017 calendar year combined ratio includes favorable development from prior accident years of $4.1 million during the quarter and $17.2 million year-to-date.
In addition, during the third quarter of 2017, we had $14.4 million of favorable development from the first 2 quarters of this year driven by improving trends in bodily injury, property damage and collision.
Moving onto investment results on Slide 8.
At the end of the third quarter, cash and invested assets were $1.7 billion with fixed income securities and cash representing 94% of the total.
Roughly 90% of our fixed income securities were investment grade and the average duration of the portfolio was 3.3 years.
Our quarterly net investment income increased 20.3% or $1.6 million, primarily due to lower premium amortization on mortgage-backed securities and an increase in both make whole interest and bond issuer tender offers.
From a total return perspective, our investment portfolio, which has a double AA- average credit quality, had a pretax total gain in the third quarter of 100 basis points with 61 basis points from current income and 39 basis points from investment gains.
At September 2017, the book yield on the fixed income portfolio was 2.5% compared to a 2.4% at September 2016.
Our new money yield in the quarter was 2.2%.
Turning to Slide 9, I'll make a few comments on our financial position.
Our balance sheet and liquidity remain strong.
We ended the third quarter with $994 million in total capital and a debt-to-capital ratio of 27.7%.
We have $164 million of cash and investments at the holding company, which provides us plenty of flexibility going forward.
Our book value per share at September 30, 2017 was $65.52, a 3.1% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 3.7% since September of last year.
Regarding capital actions during the quarter, we repurchased 58,449 shares for an average per share price, excluding commissions, of $91.
At the end of September, we had approximately $27.1 million of capacity left on the share repurchase program, which has been extended and will expire at the end of 2018.
We expect to return approximately $45 million to shareholders this year through a combination of our dividend and share repurchases.
Finally, we continue to project our GAAP accident year combined ratio for 2017 to be between 96% and 98%, excluding premium adjustments.
We will provide further guidance for 2018 on our fourth quarter call.
This concludes our formal presentation.
So at this time, we would like to open it up for questions.
Sure, Marcos, this is <UNK>, and thanks for calling in.
Yes, let's take California first.
That was a rate increase we did need.
We waited over a year for it, because of the regulatory issues we faced there.
It ---+ we feel like it's substantial.
Our new business combined ratios are adequate there.
However, given that regulatory environment, we have filed for another 6.9%.
You just simply don't know how long that's going to take to get approved, and we just felt like that was a prudent thing to do.
But again, currently in California, we do feel like our new business combined is adequate, and we're aggressively trying to grow that business.
Switching to Florida, a little different story there.
We have taken rate in Florida.
It continues to be somewhat of a problem.
We've got more rate slated to go in there, another 7%.
When we get that rate into the market, we're going to feel a lot better.
In addition, we've got a new program, a completely new program, going into Florida in the fourth quarter.
That's significant because that particular program is, in a sense, our latest product model, which has a higher level of sophistication, greater segmentation, kind of best-of-breed for us.
It's a model that's been proven in Texas.
And so with that, we're really eager to get that into the market, see if that can perform as it has done for us in other states, and get in a position where our comfort level in growing new business in Florida, just simply get comfortable with that.
Switching to Texas.
The regulatory environment there is a little bit easier to work with.
While we're definitely adequate on rate there, our new business combined ratio is actually exceeding the target.
That's why you see the aggressive premium growth there, which has been going on for the entire year, of over 100%.
So we're feeling really good there.
We're aggressively expanding territory there, expanding agency plan, that type of thing, because of that comfort level.
Well, the implementation is for the fourth quarter of this year.
So we'll have that up and running before year-end.
And excited about that, because that will kind of get us going for next year through the buying season.
And again, we're hopeful that, that new product model, which is quite a bit more sophisticated, is going to show the results that it has in both Texas and Arizona, where it is rolled out.
So Chris, this is Rob.
I'll just give you a brief overview of that.
If you look at what we've seen over the course of the year.
If you look at how we do our reserving, we actually look at our reserves and our combined ratio every quarter.
We have an outside consultant look at it all quarters as well.
We look at both the current accident year and the prior accident years.
Each quarter, we'll make adjustments based on the trends that we're seeing at that particular time, particularly the undeveloped trends for both frequency and severity across all of our different coverages.
So what we saw this year was, if you looked at December of last year, 2016 over 2015, our undeveloped trend was about ---+ just over 8%.
For the first 6 months of this year, that same undeveloped trend was about 4%.
And then at September, it was 2.5%.
Principally what we've seen is, we've seen improvements in BI, PIP and collision frequencies over the course of the year as well as some of our property damage severities.
If you look at the combination of those improvements, that's what drove the $14.4 million over the course of the first half of the year.
It really depends by jurisdiction.
On our PPA program we're seeing pretty ---+ we're seeing especially low single-digit trends on the severity side.
On Commercial Vehicle, it's a little bit different depending on by states.
It's more mid-single digits.
Okay, Chris.
Yes, we have been doing business in Georgia with our Commercial Vehicle program, Commercial Auto for quite some time.
It's been very successful, smaller base, but it's one of our fastest growing states for Commercial Vehicle.
And we have a long history in the state of Georgia with ---+ in the past.
We just have not been active in private passenger auto there for, say, the last 3 to 4 years.
So re-entering that state with private passenger auto is the current plan for Q1.
And making that consistent with our strategy, in that it would be an urban zone focus around the metro Atlanta area, and that certainly has a lot of potential.
I believe that marketplace in Georgia ---+ total state is close to $8 billion market, over $7 billion, and that's a nice sized urban zone for us to expand into.
Well, it's certainly a significant relationship.
We will start, of course, in our current footprint ---+ of California, Florida, Texas, Arizona.
We will look to expand that into Georgia, when Georgia becomes available.
We will try to leverage that to the best of our ability as Liberty continues to kind of tighten underwriting, thus spinning off more nonstandard auto.
It's difficult to kind of give you a number on the premium expectation there.
But in their call centers alone, they have about 400 active agents.
And of course, they've got some state-level field agents in representation also.
So just excited about that ---+ adding that to our national account list of distribution points that we have.
And I tell you, an account that large will also give us some data and interest over time that might help us direct our future expansion opportunities.
So with an account like that, you could actually work with them to target new geography as you go forward, which, again, would be added footprint for us.
That is correct.
We would be reunderwriting that business completely on our rates, and of course, that would be written on an Infinity policy with their agency organization being the agent of record.
Thank you, operator.
And yes, before we sign off, I would like to say that this quarter's strong results show our progress in improving our underlying business.
You've heard me talk about the new business combined ratio and the requirement that it had to be at a level where the cohort of business would ultimately project a 96% target combined ratio.
Given current new business combined ratios, my confidence is growing that we can aggressively seek to grow premium and policies in force throughout our markets.
I'm eager to see California and Florida join Texas, Arizona and Commercial Auto, where we're already achieving significant growth.
Thank you for joining us today, and we look forward to speaking with you again in the next quarter.
| 2017_IPCC |
2016 | HMST | HMST
#Correct.
I'm sorry if that wasn't clear.
Sure, because they were sizable loans.
Prepayments fees in the quarter remain high and we're running in excess of 20% annualized rate each of the last several quarters.
I don't think that we thought the prepayment speed was high enough to call it out in terms of what it's been running, but it remains fast.
I think that's true for everyone today.
Most of it was of the unusual prepayments was related to one fairly sizable commercial real estate loan that was restructured during the recession, and it was a sizable prepayment penalty because of a pretty favorable structure that we negotiated to get the loan through the recession.
And the property and the borrowers were covered to the extent that they could get a much better rate and they did it.
It was a sizable prepayment penalty, you got the economic values of even doing it was larger.
And <UNK>, I would just say that that was called out as a primary driver for the Commercial Consumer Bank in terms of servicing income, but overall, it really didn't stand out on a consolidated basis.
So we did give guidance in terms of our forward look on NIM between 330 to 335, which at the top end would be pretty stable to where we ended the quarter last quarter.
And I would expect for the next quarter or two to remain around that level and then trend down over the course of the year.
So there will be some offsetting factors in that.
But by trending down, it's within that range, 330 to 335.
Within that range, exactly.
It does.
It assumes (technical difficulty) into loans held for investment.
I would say one of the key factors is percent of refi volume in the quarter and the industry in total.
So in the second quarter, and I think <UNK> touched on this, our interest rate lock volume was 35% refi.
In the third quarter, that went up to 47%.
So of course, that increased our overall production quite a bit.
And we did not anticipate it with giving guidance.
Thanks, <UNK>.
Good morning
Well, that's part of our goals, right.
Ultimately, yes.
Business customers tend to have higher levels and a higher composition of non-interest-bearing deposits to interest-bearing deposits.
It is a significant goal to grow the balance of our C&I business and related deposits.
We are getting better at it, but of course, these are still small portfolios relative to the whole.
And so we expect that will have a positive impact on our relative deposit cost.
It already is having some benefit and how quickly we can do that is subject to some uncertainty at this point.
I think our track record, though, of growth both in the business accounts and notably consumer accounts, through our de novo branching, that track record's very strong.
I don't know if you caught the statistic in our prepared remarks that our new branch, or de novo branch, deposits grew almost 40% in the quarter.
To me, that's a spectacular number.
And a material part of that growth is in non-interest-bearing accounts.
Many of them are.
The oldest, if they can call it older, the first de novo branch that we opened post IPO has total deposits in excess of $35 million already.
So once you get above, say, $15 million to $20 million, you're above breakeven.
More in 4Q and less in 1Q.
I don't have a solid estimate for you right now, because we're actually negotiating with Fannie Mae as to what we can deliver in the quarter.
They have to manage their origination cap pretty closely.
And for that reason, I'm not sure yet what that reasonable range (technical difficulty) of sales, which for our financial results both are important, because that gain on sale, we don't recognize until sale, and that category of loans, because we carry them at lower cost or market as opposed to our single-family mortgage loans held for sale, which we carry at fair value, so we recognize a lot of that revenue at origination.
In this case, we recognize most of it on the Fannie Mae commercial real estate loans, ultimately on the loans, upon ultimate sale to the securitization of Fannie.
Thank you, <UNK>.
Hello, <UNK>.
Good morning.
We did, <UNK>.
It hasn't changed.
We still ---+
4% to 6%, somewhere in that range.
Obviously this last quarter, we were a little lower, approximately 2%, but we still are modeling and believe that we're going to be able to deliver 4% to 6% a quarter loans held-for-investment growth, on average.
Our markets are so strong, as you know, <UNK>, you're in the Bay area.
We just ---+ I think we hit a new record for cranes in the city of Seattle, at 53 cranes.
And the city of Seattle is not that big, as you know.
We can see most of those outside our windows.
So commercial construction here continues to be very strong and not just in multi-family.
The office market is strong.
Office vacancies are about 8% in the city of Seattle today.
The multi-family market continues to be very, very strong, despite a lot of deliveries over the last several years.
So we will be involved, continue to be involved mostly in multi-family construction on the commercial side in the greater Seattle and Puget Sound area, as well as the greater Portland area.
We haven't done much commercial construction, in fact, I'm not sure we've done a project in California, but we're likely to next year.
And in single-family residential construction this year, we will originate, we believe, somewhere in excess of $600 million.
It's a very strong year, up almost 100% from the prior year.
And those loans are still turning over very, very quickly and not being fully drawn out, as well.
So that business we expect to grow next year, as well.
If we originate in excess of $600 million this year, that number is (technical difficulty) for next year.
And those loans are across a larger regional market, not just Puget Sound and greater Portland.
We also have a very strong business in the greater Boise area, as well as Salt Lake City, which remains one of the busiest homebuilding areas in the United States, and then Southern California and we have a few projects in the Hawaiian Islands again.
It's a solid business that has some regional diversity, as well.
We did not specifically talk to construction in terms of the commitments, but we could follow up with you on that.
We are.
The appetite for new homes, apartments, office, is so strong here in these areas.
Fortunately, we're able to really choose the people we work with and the areas we work, in to the extent that we feel super comfortable with the credit, with the projected absorption of this construction, and it's been a great business for us.
It's interest rate driven.
If you look at the 10-year Treasury rate during the quarter, you'll see there was a couple of pretty significant rallies, where the rate fell pretty substantially, and it remains at a historically low rate.
So despite it being up a little from the lows during the prior quarter, our refinancing volume continues to be above normal for us.
And normal for us is about 25% to 30% of our production.
There's always someone refinancing in every interest rate environment.
Our environment today is characterized by lower rates and a great deal more equity.
If you think about our earlier comments regarding home price appreciation in our markets, many people have created a substantial amount of equity that they're now using for traditional purposes, like debt refinancing, home improvement, automobile purchases, investments.
And so we're seeing a little more activity in cash-out refis and not just rate and term refis.
Well, it's hard to predict, <UNK>.
Earlier this year, we had a pretty substantial rate rally in January and February, if you remember.
And in some of those months, our refinance percentage got as high as 60% to 70%.
So the percentage could be much higher.
It is seasonally dependent, though, right.
The second and third quarters, much higher purchase volume.
If we had this same type of refinance volume in the first or fourth quarter, that would make the composition of the refis as a percentage much higher.
So it's somewhat dependent upon when it occurs.
It's also dependent upon what we call burnout.
When you had low rates for a certain period of time and you've refinance a great deal of the people who would economically benefit with a refi, you'll start to see burnout at ever lower levels of refinancing, despite low rates.
We're never quite sure when we're going to hit that.
Because despite you being able to look at, let's say, our servicing portfolio and say there's a certain percentage of people who would have an economic benefit, they never all refinance, for a variety of reasons.
It may have to do with qualification, them paying attention, a whole bunch of reasons.
And so the absolute level of refinancing is awfully hard to predict at any time.
Sure.
Specifically with respect to the securities portfolio, <UNK> discussed earlier our short-term utilization of the capital that we raised, or downstream to the bank from our second quarter bond offering.
That utilization will be moved ultimately from the securities portfolio to the loan portfolio, as we utilize that capital for the intended purposes of growing our long-term balance sheet.
So we have a slightly higher percentage of assets in securities today than on a normalized basis.
In terms of consulting expenses, we utilize consultants for a lot of different things here.
Some of the largest costs today are in helping us implement our new loan origination system in the single-family area, but we have consultants working on a variety of projects here related to mostly infrastructure.
They may be systems projects or operations-related projects that we're investing in to grow and improve the infrastructure and risk management as we grow the Company.
And these expenses, you'd love to cut them back and avoid them, but given the requirements of growth, they're a necessity right now.
You bet.
Thanks, <UNK>.
Again, we appreciate your patience and your great questions today.
Obviously, we are pleased with the results this quarter and looking forward to talking to you next quarter.
Thank you.
| 2016_HMST |
2016 | BJRI | BJRI
#We like the flexibility of our balance sheet.
We do, <UNK>.
We've got a performance shares that the executive team has.
They received them in 2014 and 2016, I think we disclosed in our proxy, As much as you talk about 10%, I think after everybody does it a little bit differently, I think we might be a little bit better than that.
But if you look at where we were three years ago versus where we are today we made tremendous strides in moving that forward in regards to a total entity level.
Is based on a three-year average over that time frame that has to have progression to it.
So, obviously if you go up in one year but you drop back down in another year, it's not at the end point as much as it's the progression over that three-year timeframe.
And just be perfectly clear, I don't know if we explained that or not, it's a simplified ROIC because it's very difficult to go to every executive and tell them about the tax shield and other things.
But it does entail most of the factors that people use in an ROIC calculation.
Just to be clear, we're not forecasting a negative 2 comp for the quarter.
We're not forecasting any specific comp ---+ I've over said that but the early weeks of July have been.
Right.
No, I think as we go through it and look at the way we've got our labor staffing set up, some of the things that we rolled out from project Q that we've implemented this year whether it's volume metric prep and other things that we're still continuing to evolve, our labor modeling and staffing based on, frankly a lot of the initiatives that we continue to work in our business.
Yes, opening and closing weekends are always pretty tough.
That Friday night of opening weekend everybody wants to either walk into the stadium, that always seems to be a little bit tougher.
The rest of it is kind of a non-event, in that regard, it's really not favorable from that standpoint.
Again, people don't get together and say ---+ let's go to BJ's to watch Michael Phelps swim for two minutes.
You're welcome.
You know, <UNK>, when we look at Texas it's very interesting, the restaurants that are going over a lot of the competitive intrusion, you start to see some of their improvement.
The problem is something else opens on another restaurant in that regard, we just seen that like in Lubbock, Texas.
We've seen it in a couple other places.
Where we are going ---+ hey, there's a nice trend here what just happened to that restaurant.
Oh, the four restaurants in the new shopping center just opened.
And then we look at some of the other existing restaurants and they are starting to see their trend come back.
I think looking specifically at Q2 and going into Q3, Q2 incrementally probably got better and the business overall.
It has some wacky days of some of that weather that was unexpected but I think overall, we are seeing some improvement in some of these markets from that standpoint.
It's just again, amazed at how many new restaurants and new developments don't come online in that state.
We are.
We've been pretty consistent where anywhere from 30 to 50 basis points kind of, is a drag on comp sales for the quarter.
I think I mentioned at this call or on a previous conversation on this call, that I think there was another 40 to 50 bips or something like that, related to the class of 2014 which is now rolling into our comps.
So you pull that out you'd be at basically, what, positive0.2.
You pull out of Texas and the all of a sudden you're in the 1.5 % range of comps for the quarter and you're at kind of flat traffic.
Unfortunately, you can't necessarily cut and dice ---+ cut and slice everything that way.
But it's what we see in our business right now ---+ we've got the Texas drag and we have some new restaurants still at that 40 basis points.
Even in new markets, generally speaking, you have a honeymoon.
People want to see what is this new concept; let me go there; I've heard it and maybe have seen it in a different state; and it opens up relatively big.
Does it open up as big as California.
No, in that regards, we're not expecting it to.
Except occasionally in certain locations, we get some very big openings like [LyCanne] just opened up really big, Lexington, and so on.
If your question is on new restaurant development, <UNK>, we haven't gone through the planning process.
In general, we are very confident given that we're at 177 restaurants, double-digit restaurant week growth is a primary way to keep growing our concept.
But we haven't settled in on a number and specifics this early yet for next year.
We are busy building, Greg and his team are building that pipeline and that's going well.
But we don't know at this point what ---+ if we're in that range we'll fall (inaudible).
Welcome.
Thank you.
| 2016_BJRI |
2017 | ROP | ROP
#Good morning, <UNK>.
Terribly disappointed.
We got 4 inches of sunshine this morning here in Florida, so, sorry.
I think that just because it is historically a little light in the first quarter, and then it's really strong in the second quarter and the rest of the year.
So I think organic is ---+ Q1 and Q4 would be 3% to 4%, and Q2 and Q3 would be 4% to 5% or 6% or something like that.
So for the year we're at 3% to 5% with maybe a little hope for upside.
Our focus will be to continue to compound the cash.
So the more we can grow in the software and network businesses, the happier we are because they just inherently are going to throw off more cash that we can reinvest for further compounding in the future than the products businesses.
But our products businesses are about half of the EBITDA.
Now, a chunk of that, a notable chunk of that is our medical products businesses.
And then you have got the instrumentation businesses and you have got the oil and gas-related stuff.
We may enjoy a little bit of a cyclical spike on oil and gas, but it won't materially affect the balance of the Company's EBITDA profile.
Our businesses ---+ as I said, you look at the OP alone in the fourth quarter, between energy and industrial, it is 30.5%.
So we love the businesses.
They are positive cash; they do not have much amortization in them.
But moving the needle on compounding cash will come from software and networks.
We will let <UNK> comment on that.
Good morning, <UNK>.
So the short answer is we're not expecting much headwind at all, just like we did not expect much tailwind when it came in.
The majority of what we do is not procedure or patient driven; it is more elements that help the totality of the healthcare system do what they do.
And so if we had a lot of things that were consumed in a procedure, then we would have then benefited and we might have some headwinds, but that is not the nature of what we do.
Good morning.
So let's deal with the border tax side first.
There is not much there.
We do have some assembly operations in Mexico that we get subcomponents from, for one, two of our businesses, but it is not a lot.
Most of our international businesses are selling globally, and our domestic businesses don't export ---+ they're really not domestic businesses, they're global businesses.
The locus might be here in the US, but they have manufacturing operations outside the US and they could ship from any of them.
So I don't think the border tax would be a lot; if we did a back-of-the-napkin assessment about that would be, probably 75% to 80% of our operating profit would be generated in the United States.
So if we are telling you about a 30% blended tax rate, the US tax rate, of course, it's 35% and above.
So you can do the math on our net earnings number, and look at 80% of it, and then take a 20% reduction of that or a 10% reduction or whatever you think, and then add back the increased costs to the border tax.
And net-net, it would be quite a material increase in our cash.
<UNK>, of course, there is no proposal yet.
As soon as we see a proposal, we can give you a much better answer.
But the elements of exactly whatever tax change, all of this is headlines in the newspaper so far.
Well, I think that all of our professional services businesses, including these last two acquisitions, ConstructConnect and Deltek, would be dramatically benefited by the number of seats and the number of users that would want to get access to those technologies.
Particularly at Deltek with the Costpoint technology, which is ubiquitous for people that supply the government; that would be very helpful.
In the tolling area, it is interesting, there's actually ---+ we've gone through this huge technology transformation to our sticker tags away from what other people get stuck with, with the plastic box from Austria, and that had a huge rollout in all of the big tolling states.
So that is behind us, that rollout.
So you just have the maintenance.
The maintenance is huge, the number of reorders.
We're always amazed where all these tags go.
So it is good, but the project growth and infrastructure could well be in our TransSuite software and traffic management arena.
That is really what the Saudi project is.
And the electronic tolling project in New York for instance does not have ---+ it is all electronic, so there's no tags.
So it would definitely help us, particularly in revenue.
It will probably not help us as much as it would have historically in the margin where people are also using the tags.
But it would be favorable to us.
Then I think if you get ---+ you've got the various elements that appear to be going through that would get us back into production around shale.
We came down $265 million in two years in Energy and Industrial; we won't go back up $265 million but we won't be going down.
We might go up more than we think.
So that is a little bit of a question mark for us.
Well, I think you just have the situation around ---+ you have got all of the interest cost in Q1 for Deltek, and its contribution doesn't come in as much until Q2 and beyond.
So it's timing.
But in reality, first-quarter guidance is about 22% of the full-year guidance, and that is not that unusual.
Q1 ---+ it would be rare if Q1 was 25% of the full year.
I think it is just an out-of-the-box situation.
Q2 will be critical for us.
Good morning, <UNK>.
A few years ago, people would remember, I said, we already know the next $5 billion we want to deploy.
It's just a question of when it happens.
So we have done that all.
We've really got these things.
The good news is we still know where the next $5 billion of deployment needs to be and who they are and when they're ready to be assimilated.
I think if you look at 2017, 2018, and 2019, I would think we would deploy about $4 billion, just not much of it in 2017.
We want to pay back existing debt to EBITDA unless there's some other source of cash that comes up that we have not talked about.
We are looking to pay down that debt level by $700 million or more.
That still gives us room for bolt-ons this year, and then much larger acquisitions in 2018 and 2019 as the compounding cash is coming up, and we self-generate the ability to do $1.5 billion a year.
We just want to get our debt holders comfortable as this year unfolds.
Fortunately, we look at it differently than the hypothesis there from our perch.
If we're looking at M&A as a category of activity, the big unknown question is, is interest going to be deductible in some kind of change in US tax.
So if interest is not going to be deductible, you can imagine what an effect that has on private equity as they are thinking about what multiples they are going to put to work.
So if you are accustomed to putting 7 and 8 times debt to EBITDA and getting a tax deduction for that, that gives you massive ability to compete with strategics.
If you lose the interest deduction, your ability to compete with strategics goes down.
If you remove one of the biggest acquirer of entities from the market, the strategics should have a field day.
That said, most of the multi-industry people have very complicated import/export arrangements.
So I would imagine that they've got a lot of issues with the border tax; thankfully we don't.
I think the M&A environment for us, as interest rates go up, irrespective of whether you can deduct the interest, as interest rates go up we are in a better position with each passing month that occurs because we have so much self-generated free cash flow.
If we do acquisitions with our own cash flow, and lever them about 3 times debt to EBITDA, which is our model, we wind up with purchase powder requiring very little if any new debt of about $1.5 billion a year.
And that's why I'm very comfortable saying I think over the next three years or a month or two beyond that, we will deploy $4 billion; it's easy for us.
We're going to do it in acquiring things that are going to compound their cash.
We just keep getting more cash to reinvest as opposed to having to do big debt structures.
So that would be my best answer.
Good morning, <UNK>.
There is a lot of bid activity, and there's a lot of the sweat equity that goes into things.
We sell the Title 21 tags into California.
We do the Bay Bridge; we have various other traffic projects that are currently under quote.
But I would not say that we have seen ---+ and we've seen a big increase in the last two years in terms of quotations and project opportunities.
But we have not seen something in the last two months that's a big deal.
I think that you'd want to be careful that if you look at total transportation spending, the tolling and traffic side is not a big percentage of that total.
But nonetheless, if it goes up, there is more money available.
We'll get more growth than we have now.
We have not seen any falloff at all at Neptune.
It's probably going to grow at mid-single digits in 2017, and it continues to have good cash performance.
So there is a little bit of headwind for people that are not vertically integrated like we are around copper pricing.
So I think our competitors will probably struggle more than we will, but we are in good shape.
Also remember that water utilities are generally self contained in terms of, they charge for water, and they use that revenue in order to basically maintain the system.
And so it has generally not been subject to the larger swings in municipal budget spending.
It is generally its own little P&L inside the municipal world.
I think that would just always be related to the quality of what it was that we saw.
And the things that we are hoping to acquire over the next three years, none of them are available today at noon.
So it is not a situation that we have to really be bothered with.
But we continue to monitor everything, and have routine conversations.
If you get the share price up here to what it is really worth, given all this cash, be a consideration I suppose.
But I would not issue equity today.
So, I think that the way to think about this is it depends on where it comes from.
You are absolutely right.
To the extent that we have more growth from the software businesses, that will come in at 50%, maybe even above that.
Across the Enterprise, I think what you will see is that we will have somewhere between 35% and 50% to 55% incrementals, depending on where it comes from.
And I would say that the decrementals that we saw on the Energy side, they might be high relative to others but they were actually low relative to our gross margin.
So we still delevered at a rate below our gross margins.
We were able to take the cost out ahead of just what the decline of revenue would have resulted in.
So I actually think that we did a nice job, and I think our businesses did a nice job on the decremental side there, even though it's a probably higher number than most other companies.
But that is a margin discussion rather than a performance discussion.
No.
We do not have standard products.
We are an application-oriented company.
So you do not call up and order the same thing you bought last year.
You might have recurring revenue.
There may be some built-in maintenance fees associated with that, or if it's SaaS, there may be some annual escalation.
But we are not a product company with standard products.
Even the products that we have are pretty unique products.
So they do not tend to have a standard pricelist that people can work off of.
There is a few exceptions to that, but not many.
And the other thing that ---+ what we do look at with respect to price, is really what is the value capture that we are able to get inside the niche markets and applications that we have.
If you just look at the Industrial Technology segment by itself, the gross profit margin I think is the thing to look at when you think about value and price and cost and things like that.
Our Industrial Technology business is actually a 50.6% gross margin in 2016, up 80 basis points from where it was in 2015.
Energy Systems and controls, still clicking along at 57% gross profit margin.
So, folks who try to say price as a discrete measure, just follow their gross margin and see if any of that price really shows up there.
That is how we think about it, rather than having standard pricelists and what a nominal price change might be advertised at.
The proof is in the gross profit margin.
I think what you will see us do is move to a segment profit description, which would add back the non-cash purchase accounting-related amortization in order to be able to have the same comparability for all of the same reasons at the total.
So of course, Deltek is not included in our organic results or forecast for 2017; that will all be acquisition related.
On an apples-to-apples basis, of course, you always have to take what their prior results were with a little bit of grain of salt.
But we expect that to be a mid-single-digit grower.
I think they are reporting something a little bit higher than that, but we expect mid-single-digit organic growth on a long-term basis out of that acquisition.
No, we'd expect the market is smart enough, and we believe it is, to give the value for us for Neptune being worth more than any of the other water companies.
It's imputed in our price.
There could be other businesses we have that are different, but Neptune is very different.
We're going to move it increasingly into technology and all kinds of exciting things going on there which we're not going to talk about openly until it is too late for people to respond.
But I will say, when you look at some of the deeper product businesses, the legacy product businesses, or some of the instrumentation businesses, you could see something happen there, but people would have to basically pay our tax.
So if tax burden goes down to the acquirer, then, hey, maybe they're more interested, I don't know.
Thank you again, everyone, for joining us, and we look forward to speaking to you in a few months.
| 2017_ROP |
2015 | GEO | GEO
#Thank you, operator.
Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's first-quarter 2015 earnings results.
With us today is <UNK> <UNK>, Chairman and Chief Executive Officer; <UNK> <UNK>, Chief Financial Officer; <UNK> <UNK>, President of GEO Corrections & Detention; and <UNK> <UNK>, President of GEO Care.
This morning we will discuss our first-quarter performance and current business development activities.
We will conclude the call with a question-and-answer session.
This conference call is also being webcast live on our website at www.Geogroup.com.
Today we will discuss non-GAAP basis information.
A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning.
Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters.
These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws.
Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q, and 8-K reports.
With that, please allow me to turn this call over to our Chairman and CEO, <UNK> <UNK>.
<UNK>.
Thanks, <UNK>, and good morning to everyone.
Thanks for joining us as we review our first-quarter results and provide an update of our efforts to pursue quality growth opportunities and create value for our shareholders.
As we disclosed in our earnings announcement this morning, we reported $0.72 per share in adjusted funds from operations for the first-quarter 2015, which is at the top end of our previously issued guidance.
This represents a year-over-year increase despite the impact from the strengthening of the US dollar on our international operations and higher interest expense and share count compared to a year ago.
We are pleased with our strong first-quarter results, and we continue to be optimistic regarding the outlook for our Company and for several reasons.
First, as we have previously announced, we are scheduled to activate our 1,940-bed Great Plains Facility in Oklahoma.
This Company-owned facility was awarded a 10-year contract with the Federal Bureau of Prisons and we expect to start intake in June.
We are also scheduled to complete our $45 million expansion of our Company-owned Adelanto, California, ICE detention facility.
This expansion will provide 640 additional beds and a new capacity of 1,940 beds with intake scheduled to begin in July.
In addition, earlier this week, we announce the mobilization of our Company-owned North Lake Correctional Facility in Michigan during the second quarter.
The decision to mobilize this facility was made as a result of the current demand for out-of-state correctional bed space.
The mobilization will entail hiring staff and purchasing supplies in order to prepare the previously idle facility to receive inmates.
While we do not currently have a contract to house inmates at the facility, we believe that we may secure one or more contracts in the near future and expect we may need to activate the facility in the next 60 to 90 days.
Our $36 million expansion of the Karnes, Texas, residential center is scheduled for completion by the end of the fourth quarter.
The expansion will add 626 beds at this Company-owned facility and achieve a new capacity of 1,158 beds.
In Australia, we've begun construction of the $700 million Ravenhall correctional facility for the state of Victoria.
GEO's consortium is the developer of the facility, which will include a $100 million investment by GEO.
The 1,300-bed facility is on schedule for completion in the fourth quarter of 2017.
Subsequently, GEO will begin a 25-year contract providing secure residential care and state-of-the-art offender rehabilitation services during custody as well as post-release.
We are also pleased with our recent announcement regarding the state of Victoria's 19-year extension of our 947-bed Fulham Correctional Centre, which GEO developed, financed, and has been operating for almost 18 years.
This important contract extension is indicative of the stable nature of our unique business.
While these are all very positive developments, these activations will result in significant startup activity during the second quarter which, coupled with slightly lower and slower ramp-up schedule at our Mesa Verde Detention Facility which opened in March, have resulted in higher than expected startup costs during the second quarter.
Second, our international operations for the balance of the year are expected to continue to be impacted by the strengthened US dollar.
Finally, we have historically discussed federal populations tend to experience seasonal fluctuations primarily during the first quarter and part of the second quarter of each year.
During the first few months of the year, we have experienced additional softness in immigration populations at three of our 11 ICE facilities.
But as we have discussed before, our federal contracts typically include contractual guarantees that ensure the delivery of high-quality services for our customers and to assist and underpin our financial performance.
Our guidance now assumes a more gradual seasonal adjustment, which primarily impacts the second quarter as populations return to more normalized levels during the second half of the year.
Both the budget that was enacted by Congress in March for fiscal-year 2015 and the President's budget request for fiscal-year 2016 provide funding for 34,000 detention beds, as in previous years.
These different factors, primarily impacting our second quarter, have resulted in slightly adjustment of approximately $0.05 per share of our AFFO guidance for the year.
We do not expect this will have a negative impact on our dividend program, which is presently between 73% and 75% of our projected AFFO guidance range.
In spite of these near-term challenges, our Company has accomplished several significant milestones so far this year.
With the potential reactivation of our North Lake, Michigan, facility, we will have successfully reactivated more than 4,000 beds in inventory so far this year.
Additionally, we have integrated approximately 6,500 additional beds from the LCS acquisition last quarter, which involve eight facilities in three states and approximately 700 employees.
With the LCS acquisition, GEO now has 106 facilities, with a total capacity of 85,500 beds, including our projects under development.
Prospectively, we will have approximately 2,000 beds in idle facilities and have several active efforts to redeploy this available capacity.
There are a number of publicly known opportunities in the US and overseas we are currently pursuing totaling several thousand beds.
We are also exploring a number of nonpublic opportunities that relate to both new project development and potential asset purchases.
We are also enthusiastic about the opportunity to expand our delivery of offender rehabilitation services.
As we announced the last quarter, we are beginning this year and making additional annual investment of $5 million to expand our GEO Continuum of Care platform.
As a REIT, GEO is obviously focused on providing infrastructure to service government agencies in the fields of detention, corrections, and post-release facilities.
But additionally, as a service provider, our commitment is to be the world's leader in the delivery of offender rehabilitation and community reentry programs, which is in line with the increased emphasis on rehabilitation around the world.
As the world's largest provider of detention and correctional services, we are pleased to have been successful in combining investments in government infrastructure with best-in-class social services.
At this time I would like to turn the call over to <UNK> <UNK>.
Thank you, <UNK>, and good morning to everyone.
Before addressing our quarterly results, for those investors new to GEO I would like to briefly touch upon our Company's attractive investment characteristics, which are underpinned by a robust real estate portfolio of Company-owned and leased facilities.
Our total real estate portfolio encompasses more than 17 million square feet in owned, leased, and managed facilities; and we own more than 4,000 acres of land across the United States.
We currently own or lease approximately 70% of our facilities worldwide, and approximately 70% of our net operating income is generated by our Company-owned and Company-leased facilities.
We have stable and sustainable income through increasingly longer-term contract arrangements.
We have a diversified base of investment-grade government customers with multiple individual contracts, with no single customer contract representing more than 5% of our revenue.
We have historically enjoyed solid occupancy rates in the mid to high 90%s and strong customer retention rates in excess of 90%.
Our long-term assets have a physical useful life of as long as 75 years or longer and require relatively low levels of maintenance CapEx, estimated at approximately 5% of our net operating income.
Moving to our financial results, we are pleased with our first-quarter results.
As disclosed in our press release today, our adjusted funds from operations for the first-quarter 2015 increased to $0.72 per share, from $0.71 per share for the first-quarter 2014.
Our adjusted EPS for the first quarter was $0.41, which reflects an adjustment for $1.6 million net of tax and one-time transaction expenses related to our previously disclosed LCS acquisition.
On a GAAP basis, we reported first-quarter 2015 net income attributable to GEO of the $0.39 per share, in line with the first quarter a year ago.
Our revenues for the first-quarter 2015 increased to approximately $427 million from $393 million a year ago.
Our quarterly revenues include approximately $22 million in construction revenue associated with our contract for the development and operation of our Ravenhall Prison project in Australia.
For the first-quarter 2015, we reported NOI of approximately $116 million, up from $108 million in the first-quarter 2014.
Compared to first-quarter 2014, our first-quarter 2015 results reflect the reactivation of the 300-bed Company-owned McFarlane Community Reentry Facility in California during August of 2014; the opening of the 400-bed Company-owned Alexandria Transfer Center in Louisiana in November 2014; approximately $22 million in construction revenue related to our Ravenhall Prison project in Australia; and the opening of approximately a dozen new day reporting centers in Pennsylvania, California, and Virginia during 2014.
Moving to our outlook for the balance of the year, as <UNK> mentioned we have updated our guidance to reflect several factors impacting primarily the second quarter.
Additionally, as disclosed in our press release our construction revenue from the Ravenhall, Australia, project is impacted by the strengthening of the US dollar and is now expected to be approximately $120 million for the full year, versus the $137 million previously anticipated.
Therefore, our total revenue for the year is expected to be in a range of $1.87 billion to $1.89 billion.
Our 2015 AFFO per share is expected to be in a range of $3.30 to $3.39.
We expect 2015 adjusted EPS to be between $1.90 to $1.97 per share.
For the second-quarter 2015, we expect revenues to be in a range of $445 million to $450 million, including $14 million in construction revenue related to the Ravenhall, Australia, project.
Second-quarter AFFO is expected to be in a range of $0.76 to $0.80 per share.
EPS for the second quarter is expected to be between $0.40 and $0.43 per share.
With respect to our liquidity position, we continue to have ample borrowing capacity of approximately $240 million under our revolving credit facility, in addition to an accordion feature of $350 million under the credit facility and approximately $70 million in cash on hand.
With respect to our other uses of cash, we expect our project and growth CapEx to be approximately $55 million in 2015; and we have approximately $20 million in scheduled annual principal payments of debt.
With respect to our dividend payments, as we announced this morning we have declared a quarterly cash dividend of $0.62 per share, consistent with our commitment to return value to our shareholders.
As we have previously guided, we expect to maintain a dividend payout ratio of at least 75% to 80% of our AFFO, and our Board remains committed to reviewing our dividend policy at least once a year in November, to coincide with the release of our third-quarter earnings.
With that, I will turn the call to <UNK> <UNK> for a review of our market opportunities.
<UNK>.
Thanks, <UNK>, and good morning to everyone.
I'd like to address select publicly known business development opportunities in our key segments, starting with the federal market and the three federal government agencies that we serve.
As we had previously reported, GEO has a long-standing partnership with the Federal Bureau of Prisons, the United States Marshals Service, and the US Immigration and Customs Enforcement, or ICE; and we provide cost-effective solutions for them at a number of facilities across the country.
We continue to see meaningful opportunities for us to partner with all three of these federal agencies, particularly as increased emphasis is placed on offender rehabilitation programs and community reentry services.
With respect to our 2015 scheduled project activations, in March of this year we began the intake process at our 400-bed Company-owned Mesa Verde Detention Facility in California under an agreement with ICE.
We had previously completed a $10 million renovation of the Mesa Verde Facility, which is expected to generate approximately $17 million in annualized revenues.
During the second quarter we expect to begin intake at our 1,940-bed Company-owned Great Plains Correctional Facility in Oklahoma under a new 10-year contract with the Federal Bureau of Prisons, which is expected to generate approximately $35 million in annualized revenues.
In California, we are scheduled to complete the development of a $45 million expansion of our Company-owned Adelanto ICE detention facility in July 2015.
This important expansion will increase the facility's capacity from 1,300 beds to 1,940 beds and is expected to generate approximately $21 million in additional annual revenues.
Finally, in Texas we are developing a $36 million expansion to our Company-owned Karnes ICE Residential Center, which will add 626 beds, bringing the center's capacity to 1,158 beds.
The 626-bed expansion is expected to be completed by year-end 2015 and is expected to generate approximately $20 million in annualized revenues.
In addition to these projects under development, ICE has issued requests for information for several Company-owned and operated detention facilities ranging from 800 to 2,000 beds in different locations around the country.
Turning to our state market segment, several states continue to face capacity constraints and inmate population growth, and many of our state customers require additional beds as aging, inefficient prisons need to be replaced with new, more cost-efficient facilities.
As previously reported, in the states where we currently operate the average age of state prisons ranges from approximately 30 to 60 years old.
With respect to known opportunities, the states of Vermont and Washington have pending procurements for the housing of approximately 700 and 1,100 inmates, respectively, in out-of-state facilities.
We have submitted our proposals to both states and are awaiting a contract decision.
In Oklahoma the state had previously issued a request for proposal for up to 2,000 beds at in-state facilities.
While this particular procurement did not move forward, we believe that the state of Oklahoma continues to have a need for correctional beds, and we are continuing to monitor this opportunity.
Additionally, there are several states including Arizona, Ohio, and others which are considering public/private partnerships for the housing of inmates as well as the development and operation of new and replacement correction facilities.
With respect to our international markets, our GEO Australia subsidiary recently signed a contract with the state of Victoria for the continuing management and operation of the 947-bed Fulham Correctional Centre.
The contract will have a term of approximately 19 years and three months, effective July 1, and it is expected to generate approximately AUD58 million in annualized revenues.
GEO Australia is also continuing to work on our project for the development operation of the new 1,300-bed Ravenhall Prison near Melbourne.
This large-scale project is expected to be completed in late 2017 and will provide an unprecedented level of in-prison and post-release rehabilitation programs.
The Ravenhall facility will have a unified commitment to providing innovative approaches to reducing reoffending, including the establishment of the world's first fully integrated Good Lives Model, delivered through the GEO Continuum of Care.
The project is being developed under a public/private partnership structure, with GEO making an investment of AUD115 million, with expected returns on investment consistent with our Company-owned facilities.
The contract is expected to generate in excess of AUD100 million in annualized revenues for GEO under a 25-year contract with the state of Victoria.
At this time I will turn the call over to <UNK> for her review of our GEO Care segment.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
Turning to our GEO Care segment, each of our divisions continues to pursue several new growth opportunities.
Our reentry services division continues to work with existing and prospective local and state correctional customers to leverage new opportunities in the provision of community-based reentry services in both residential facilities and nonresidential day reporting centers.
We activated two new day reporting centers in the first quarter; these are in Baton Rouge, Louisiana, and Chatham, Illinois.
We were also awarded four new Louisiana day reporting center contracts in the first quarter, which are scheduled for activation in the second quarter.
These six new contracts are expected to generate more than $3 million in annualized revenues.
With respect to our residential reentry centers, late last year we activated a new Company-leased 240-bed residential reentry center in Newark under a contract with the state of New Jersey, which is expected to generate approximately $5.5 million in annualized revenues.
Our youth services division continues to work towards maximizing the utilization of our existing asset base and has continued to undertake several marketing and consolidation initiatives to increase the overall utilization of our existing youth services facilities.
Our Ohio and Texas facilities have continued to experience a strong census, consistent with the higher occupancy rates experienced last year.
Finally, our BI subsidiary continues to market its supervision and electronic monitoring services to local, state, and federal correctional agencies nationwide.
Overall, BI continues to grow its market share of the electronic monitoring market in the United States; and during the first quarter of 2015 BI's revenues increased 11% year-over-year.
At this time I will turn the call back to <UNK> for his closing remarks.
<UNK>.
Thank you, <UNK>.
In closing, we are pleased with our first-quarter results and remain optimistic about the outlook for our Company.
We have updated our guidance for the balance of the year to reflect several factors primarily affecting our second quarter.
However, despite these near-term challenges, we are looking forward to several imminent drivers of growth.
In the next 60 to 90 days, we expect to activate approximately 4,300 beds at three facilities located in California, Oklahoma, and Michigan.
In the fourth quarter we will activate a 626-bed expansion at the Karnes, Texas, Residential Center.
In Victoria, Australia, we are developing a 700 million dollar, 1,300-bed facility that will have the most expansive offender rehabilitation program in the world.
This new organic growth activity is the most significant that we have experienced in some time.
Additionally, we have successfully integrated 6,500 new beds from the LCS acquisition and are working diligently to improve the operational and financial performance of these new assets, as we have done in the past.
We are pursuing several publicly known opportunities and also exploring a number of other nonpublic opportunities for the development of new projects and the potential purchase of additional assets.
We believe that our diversified growth and investment strategies have positioned GEO as the world's leading provider of corrections, detention, and offender rehabilitation services.
We expect all these efforts will continue to drive growth for our Company, and we remain focused on effectively allocating capital to enhance value for our shareholders.
This concludes our presentation.
I would now like to open the call to your questions.
I think, to summarize, we have assigned the eight facilities to our Eastern and Central region.
Our people had met with the new clients.
We've made some changes in the management at those facilities.
We are doing some physical plant improvements.
We are further strengthening our operations, and letting the clients know that those facilities are under new management and ready for more responsibilities.
And the responses we've gotten so far from the clients have been very positive, and we are optimistic that over some period of time we will be able to improve the operational and financial performance of those facilities, as we have done with past acquisitions.
Well, we see California as an important location for both our federal clients as well as the state of California.
I think it's known that California has met their latest objectives this year for achieving capacity milestones.
But as they approach next year's milestones, they will be considering other options.
Because facilities and capacity just doesn't appear overnight.
These things have to be planned, and it will take several months.
I am not aware of any significant existing available capacity by anybody.
Any new capacity in that state will have to be constructed by somebody.
All of our previously idle facilities have now been recommissioned either for California or for federal clients.
(technical difficulty) facilities in the state of California.
But we do have additional opportunities to (technical difficulty) additional capacity; but it will take new construction to do so.
Well, the session is, I think, abruptly stopped and will reconvene in the near future.
As most of the other states around the country, they are in session and you really don't know the outcome of any new opportunities until the sessions are completed, which is usually late June.
Well, in considering the opening of that facility, we've been focused on the timelines necessary to do an effective recruitment and training of people for an opening; and that requires approximately 8 weeks.
So that has been the focus of our planning that ---+ since we concluded we needed that minimal time period, and when you begin recruitment and training, those are public actions.
We felt obligated to give a public notice of what we're doing with that facility because we are hopeful that we can reactivate that facility over the next 60 to 90 days.
And we need to begin our preparations, which will become very quickly publicly apparent to a number of parties.
Well, we are hoping to activate the entire facility.
Well, there certainly are some states on a state-by-state basis that are continuing to experience overcrowding and in need of capacity.
We've had conversations with them about what we have available.
But as you point out, it's a declining supply, at least on our side.
And in some locations, the only solution will be new construction.
While we have, as I said previously, approximately 2,000 idle beds, I think there is much more need than that around the country.
We expect to see continued growth, notwithstanding any present discussions for judicial reform that may affect prison populations.
Yes, I would think by 2017 we hopefully will not have any idle facilities, and we will be looking at all new greenfield construction projects.
Well, right now what we've put into the guidance for Michigan is the startup costs and the startup-related activity that <UNK> discussed.
We haven't included any revenue or associated profit with potential activation of the facility.
I think FX in the first quarter was probably about $6 million to $7 million, and about half of that is related to construction.
I really can't speak for ICE, but I'm sure they've had planning sessions on how to deal with different situations with (technical difficulty) over the years.
So we don't know exactly what those scenarios are; but as we've indicated, several of our new expansions are on behalf of ICE.
I think we are still looking at that timeline.
Doesn't seem like we can hear him.
Okay.
Thank you all for joining us today.
We look forward to addressing you in the next quarterly conference call.
| 2015_GEO |
2016 | INVA | INVA
#Good afternoon, everyone, and thank you for joining us.
With me on the call today is <UNK> <UNK>, our Chief Executive Officer.
On today's call, <UNK> will review the highlights from the quarter, and I will review our financial results.
Following our comments, we will open up the call for questions.
Earlier today, Innoviva issued a press release announcing recent corporate developments and first quarter financial results.
A copy of the press release can be found on our website.
Before we get started, we would like to remind you that this conference call contains forward-looking statements regarding future events and the future performance of Innoviva.
Forward-looking statements include anticipated results and other statements regarding Innoviva's goals, plans, objectives, expectations, strategies, and beliefs.
These statements are based upon the information available to the Company today, and Innoviva assumes no obligation to update these statements as circumstances change.
Future events and actual results could differ materially from those projected in the Company's forward-looking statements.
Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater details in the Company's press release and Form 10-K for the year ended December 31, 2015, which is on file with the Securities and Exchange Commission, and Form 10-Q for the quarter ended March 31, 2016, to be filed with the Securities and Exchange Commission.
Additionally, adjusted EBITDA and adjusted cash EPS, two non-GAAP financial measures, will be discussed on this conference call.
A reconciliation to the most directly comparable GAAP financial measures can also be found in our press release.
I would now like to turn the call over to <UNK> <UNK>, our Chief Executive Officer.
<UNK>.
Thank you, Eric, and good afternoon, everybody.
Q1 2016 was another strong quarter for Innoviva, which included share and volume gains for both products, positive earnings and cash flow, and a continuation of our share repurchase program.
In particular, we are pleased with the performance of both BREO and ANORO in the US, where prescriptions and market share reached all-time highs.
According to IMS, BREO's TRx market share is almost 9% and ANORO was approximately 7%.
During the first quarter of the year, we saw an acceleration in BREO's market share growth, as the brand gained over 2 percentage points of TRx.
These market shares gains are largely due to improved collaboration productivity and to the successful work of the commercial teams in building BREO and ANORO towards becoming leading global respiratory franchises.
As discussed during our February results call, we expect to see quarter-over-quarter volatility in reported sales compared to the underlying TRx performance on an ongoing basis.
This volatility is related to a number of non-demand factors, such as changes in wholesaler inventory levels, customer mix, accounting reserve screwups, couponing levels, et cetera.
For example, during Q4 2015 this volatility produced a positive effect on revenues, with reported net sales outpacing prescription volume growth, while in Q1 prescription volume growth outpaced reported revenue growth.
As a result, we believe metrics that focus on underlying demand, such as TRx and NBRx prescriptions and changes in market share, are important analytical tools to consider in addition to quarterly revenues when assessing our progress of our medicines.
I'll now turn to our program updates.
RELVAR/BREO is our lead respiratory program, partnering with GSK for the treatment of patients with asthma and chronic obstructive pulmonary diseases, or COPD.
It is a combination inhaled respiratory medicine consisting of vilanterol, a long-acting beta2 agonist, or LABA, and fluticasone furoate, an inhaled corticosteroid, or ICS, both delivered in the ELLIPTA dry powder inhaler.
First quarter 2016 net sales for RELVAR/BREO were $161.9 million, up from $59.9 million in the first quarter of 2015 and from $154.7 million during Q4 2015.
According to GSK, this increase was driven by higher product volumes and market share, offset by seasonal channel inventory fluctuations.
Additionally, during our February call we noted that Q4 2015 revenues were favorably impacted by an accounting screwup booked by GSK that would not recur during Q1 2016.
According to IMS, TRx prescription volumes in the US increased significantly during Q1 compared to the fourth quarter of 2015, up approximately 37% quarter over quarter.
We believe this growth is primarily driven by further improvements in the US sales and marketing activities, the approval of the asthma indication earlier in 2015, and the continuation of the BREO asthma DTC campaign.
Since the US asthma launch in May 2015, IMS reports that BREO TRx and new-to-brand growth have outperformed the LABA ICS market an average compound weekly growth by approximately 2.4% and 2.1%, respectively, through the end of Q1.
We also remain confident in the growth potential for BREO, due to continued strength in new-to-brand prescription performance.
For example, according to IMS, in the week ending April 15 new-to-brand market share increased to 14.8% overall and to 27.1% for pulmonologists.
As we have previously mentioned, we believe that new-to-brand market share is an important forward-looking indicator of the potential growth trajectory of these products.
As a result, we believe BREO is well positioned for a solid year in 2016.
Our second program, ANORO, is a combination dual bronchodilator medicine for the treatment of COPD, consisting of the LABA vilanterol and a long-acting muscarinic antagonist, or LAMA, umeclidinium.
Total net sales for ANORO during the first quarter of 2016 were approximately $48.1 million, compared to $17.7 million in the first quarter of 2015 and to $45.4 million in the fourth quarter.
Sales of ANORO were driven by higher TRx prescription volumes of approximately 23% in the US market, offset by seasonal reductions in distribution channel inventories compared to the fourth quarter.
Overall, we remain optimistic about the long-term potential for both products and look forward to the upcoming clinical study results in the Salford Lung Study of RELVAR in COPD.
Finally, on a personnel note, last week we made a filing that George Abercrombie, our Senior Vice President and Chief Commercial Officer, announced that he was retiring.
I am pleased to let you know that we will be updating this filing shortly to reflect that George will remain with Innoviva in his current capacity.
I'm extremely pleased with this outcome, as George and his organization have contributed significantly to the positive improvement in our relationship with GSK.
Now, I will turn the call back to Eric, to review our first quarter 2016 financial results.
Eric.
Thanks, <UNK>.
We are starting 2016 with a good first quarter in terms of financial performance.
Total revenues included $27.4 million in royalties earned, a 171% increase over the first quarter of 2015, offset by $3.2 million of net non-cash amortization expenses and other revenues.
Royalty revenues included $24.3 million for BREO and $3.1 million for ANORO.
The positive impact of currency movements between the fourth quarter of 2015 and the first quarter of 2016 on our revenues from non-US markets was slightly less than 1%, overall.
The long-term growth trend in our royalty revenues remained strongly positive in the first quarter.
Looking at the prior seven quarters, on average our royalties earned have grown at a compound rate of approximately 36%, which reinforces our confidence in the prospects of the Company for 2016.
Total operating expenses in the first quarter of 2016 were $6.6 million, compared to $6.2 million in the first quarter of 2015, representing a slight increase in expenses, mostly associated with customary public company activities in the first quarter of the year.
On an annual basis, we maintain our guidance level for operating expenses of R&D and G&A costs before stock-based compensation accruals in a range of between $18 million and $20 million.
During the first quarter of 2016, we repurchased approximately $25.4 million of common stock, at an average price of $10.35 per share.
Since the start of the $150 million repurchase program, we've now repurchased a total of $50.2 million of stock.
We continued to generate positive and growing cash flow from our operations in the first quarter of 2016.
Income from operations increased to $17.5 million, compared to $0.7 million in the first quarter of 2015.
And adjusted EBITDA more than tripled, to reach $22.9 million, compared to $6.2 million in the first quarter of 2015.
Looking forward, we are initiating the reporting of adjusted cash EPS, which we believe provides useful information about a company's core operating performance and cash return on investment.
For the first quarter of 2016, our adjusted cash EPS was $0.09 per share, up significantly compared to an adjusted cash EPS of negative $0.05 per share in the first quarter of 2015.
Cash, cash equivalents, short-term investments, and marketable securities totaled $168.2 million as of March 31, 2016.
Additionally, we had $27.4 million of royalty receivables from GSK at the end of the first quarter, which puts us in a strong liquidity position for the remainder of 2016.
And now, I'd like to turn the call over to <UNK> for final closing comments.
Thanks, Eric.
In summary, we had a very positive first quarter of 2016, with increased prescription volumes, higher market share, and continued optimization of commercial efforts for both products.
As a result, we remain optimistic about the long-term potential of our product portfolio.
Our primary focus in 2016 remains the optimization of the commercial success and global rollout of BREO and ANORO and believe that both products have significant untapped commercial potential.
There are many exciting developments happening here, and we remain optimistic about the future prospects of the Company.
I'd now like to turn the call over to the conference facilitator and open the call for questions.
So, to the first part of your question, I think we're feeling pretty good today about BREO and the trajectory of the scrips.
As you take a look at the underlying demand, which is really our primary focus as opposed to the actual revenue dollars each quarter, we had a pretty strong quarter.
As I think I mentioned earlier, we were up 37% in terms of TRx scrip growth from this quarter, looking back to Q4.
So, the underlying trends are very solid.
We've been picking up market share at a rate of about 2% to 2.5% depending upon your starting date here of Q4 to the end of Q1.
And so, we continue to see nice gains across there.
We mentioned some of the big growth factors that are happening there.
One very big important point ---+ I mentioned this last quarter and I will highlight it again ---+ is quite a bit of improvement happening in GSK's US sales and marketing operations.
That group is really performing well, and I think that is a big piece of what's happening.
In addition to that, of course, DTC started here in Q4.
As you know, DTC takes several months to really come up to speed.
And so, we're just starting to see the full impact of that now.
We expect that to continue to deliver here, going forward.
Asthma was launched less than a year ago.
So, I would put asthma very much into the early stages of launch.
There also is sort of a treatment paradigm that a lot of doctors follow, which is, by getting comfortable in asthma they get comfortable in COPD.
So, it's certainly possible that we could see some halo effect from that.
Additionally, recently there was an approval for the open triple.
So, this is a combination of BREO on top of INCRUSE.
That is a detail that GSK is doing now.
And again, we would expect to see additional growth from that.
So, overall, the fundamentals of the market look pretty good.
The execution of the sales and marketing teams is really kicking into gear here.
And I would add on top that at the steering committee level, at the leadership level, the relationship with GSK, the teams have been quite productive and have really implemented a number of important changes in a variety of areas.
So, we look forward here with a fair degree of confidence.
Finally, you had asked about the conversion of new-to-brand scrips into TRx's.
This is a very important metric for us.
If you look historically, you're going to see to date that the NBRx market share, the new-to-brand market share, is converting into TRx market share in the six- to 12-month time frame.
Today, the NBRx is more than double where we are with TRx.
And so, again, one would assume, if history repeats itself, that implies a significant amount of growth, looking forward.
And then, potentially even a little-farther-looking-forward metric is where you look at the market share for NBRx's with pulmonologists, which is again significantly higher than the new-to-brand, in general.
So, all of our indicators here suggest that we have quite a bit of runway left in front of us here.
I think the final piece I would add, patient feedback on BREO and the device has been very, very good.
Andrew Witty noted it on his last call.
We hear very, very good things about the patient experience with the medicine.
So, overall, I think we feel very good.
The second part of your question was with regard to ANORO and STIOLTO.
The message I have around ANORO and STIOLTO I think is very similar to what I've mentioned the last couple of quarters.
This has been much more of a physician education oriented effort I think probably than I certainly had anticipated off of the start.
The standard treatment paradigm frequently for many doctors is to start on a single-agent LAMA.
And education is pretty important to help them understand the benefits of going from that idea of starting out a LAMA to starting with a LAMA/LABA.
So, that has been probably a little slower than I had initially anticipated.
If you look at the relative market shares of STIOLTO and ANORO, looking at the date from launch, you're going to see very similar trajectories.
ANORO on a weeks-from-launch curve looks slightly higher than STIOLTO but I would say they're both fairly similar, overall.
So, this is probably going to be a little bit longer-term effort in terms of building that brand perhaps than I had initially thought, given some of the characteristics of the product.
So, I would call that more of a focus on physician education, particular focus on primary care doctors.
So, more work to do on ANORO, probably more confidence on BREO ---+ is the summary.
I don't have a great metric for you on that one.
That is not a piece of information that we have.
As you probably recall, INCRUSE is GSK's product.
And so, we have less visibility to what's happening there.
I will say that I am and have been a long-time supporter of INCRUSE, because one of the frequent pieces of feedback that you would hear doing market research on patients who were taking SPIRIVA, which is the single-agent LAMA from BI, was that even though many patients were taking it primarily to deal with shortness of breath, many of them were still feeling shortness of breath.
That was one of the primary complaints on that.
And so, it's not unexpected that patients on single-agent LAMAs would progress in their therapeutic needs.
And a very logical next step for a patient going from a single-agent LAMA would be to go to ANORO, where you have a combination LAMA/LABA medicine which is going to provide statistically superior bronchodialation.
And if a patient is already comfortable and familiar with the ELLIPTA device and likes the ELLIPTA device ---+ and as I mentioned, all of the feedback I have seen on that has been very positive ---+ the next logical step would be to maintain the same device and go ahead and step up to ANORO there.
So,we have always assumed that that would be beneficial, in terms of long-term growth prospects for ANORO.
And it could potentially facilitate the further uptake of BREO, as well, as I mentioned, with the open triple.
That is, again, adding BREO on top of INCRUSE.
And so, as that promotional effort continues to get additional exposure and doctor education, we think that that could drive additional sales of BREO, as well.
So, I wish I could give you some really hard metrics.
Those are not something I have a lot of visibility towards.
But we have always looked at INCRUSE as facilitating the uptake of our products here, and it's something that would be very important in the overall portfolio.
So, as you probably know, there are two studies out there.
There's a lung function one, which will be reading out this year.
The primary focus of that is on FEV1.
Our best understanding of the regulatory requirements is that that potentially will be sufficient outside the US, potentially.
Inside the US, the guidance that we've been operating under is that an exacerbation study was required.
And so, that would be with ---+ adding impact.
[Through] that impact right now is currently anticipated to finish up late next year.
So, the best possible expectation, I would say, would be what we've heard from the FDA, which is we need both of those studies.
Whether that ultimately proves to be true or not, we'll have to wait and see.
But I operate under the assumption that, historically, the respiratory division has been pretty predictable in terms of what they were looking for.
So, the impact study, the way it's designed is to compare the closed triple versus BREO and versus ANORO.
The study is towered so there's roughly twice as many patients on BREO as there are on ANORO.
And that was to account for the expectation that the addition of steroids would probably provide a little additional exacerbations coverage relative to medicines that did not have steroids.
And if you were just to go back and look at a guidance of multiple therapeutic classes, you're going to see that you would need to show superiority on both arms.
So, that would be a successful study if you showed an exacerbation benefit on both of the arms.
Whether that ultimately is required or not is hard to say.
I'm just ---+ let's say the expectation that you would need to show superiority and an exacerbation benefit versus BREO and versus ANORO is our going-in expectation on that.
So, we'll have to see how that all shakes out.
I think there is some additional data that came in subsequent to starting this study, which potentially adds some additional wrinkle to it, which is the results of the FLAME study run by Novartis, where they showed the LAMA/LABAs have a pretty significant impact on exacerbations.
And as a result, it's possible that the closed triple versus ANORO arm could be a little tougher comparison that we had initially anticipated.
But we'll have to wait and see what the data looks like.
I don't remember the exact numbers, but you're right.
But again, I don't recall the numbers, actually.
All right.
Thank you very much, Operator.
And thanks, everyone, for joining the call.
Have a good day.
| 2016_INVA |
2015 | LANC | LANC
#You know, <UNK>, that's something we do talk about from time to time.
We do feel it's certainly a potential opportunity for a return to shareholders.
It's obviously relatively easy to implement, so you can do it in a relatively short period of time.
Our priority still remains on investing in acquisition growth potential.
And we do continue to actively look at a lot of opportunities in the market.
Not seeing a lot that we would consider to be great fits, as we speak today, but there are opportunities out there and we continue to explore those.
So, it's something we do consider and will consider.
We don't want to just accumulate cash on the balance sheet indefinitely.
So, as you know, we've done a couple special dividends over the last seven or eight years, when we've gotten into a situation ---+ not a lot different than where we've been today.
So it is something that we do talk about from time to time.
Thanks, <UNK>.
The newest ones are the Marzetti vineyard dressings and veggie drizzles.
And it is too early there to tell, other than the trade reaction has been very positive to both those.
But just now getting on the shelf, so really don't have a strong feel for how that's going to play out with the consumer yet.
<UNK>, at this point, no.
Nothing real specific to talk about there, but we obviously are getting some experience now in working in the deli with the Flatout brand, and with the team that we brought over from Flatout that's been very helpful in helping us learn and understand that category in the supermarket.
So, we do anticipate we can take advantage of that, hopefully, with some product innovation, and perhaps some of our existing products, but perhaps more importantly, acquisition ideas.
It has a fair amount of growth capacity available to it today, yes.
You know, it's kind of a combination of three things, <UNK>.
One is just the general industry, I think, is stronger and is seeing growth.
And then there certainly are some chains that are outperforming, and we are fortunate to be aligned with two or three of those that are doing better than average.
And then the third would be again these limited-time-offers where we had some strong events like that going on during the quarter.
You're welcome.
Thank you.
Well, yes, we do have the uptick that's particularly targeted at Sister Schubert's in the second quarter, which is their seasonal peak period.
But we do anticipate more consumer spend year-over-year throughout the balance of the fiscal year.
And that is across different products, different brands over that period of time.
Yes.
You're welcome.
Thank you.
The ---+ you know, you raise a great point, and we all remain a little anxious as to what might happen as the birds do migrate south.
We are in constant contact with all of our egg suppliers.
And while I don't think any of them can guarantee our supply, they have been working on certainly increased biometric security around all of their egg-producing facilities, and there's been quite a bit of press on that, as you are well aware of.
So I think we are in a good position with our suppliers.
And we have ---+ we use several suppliers, so we are not dependent upon any one.
And we just remain guarded for the next several weeks and months as we work our way through this period.
Sure.
Well, thank you again for joining us this morning.
We'll look forward to talking to you late in January with our second-quarter results.
| 2015_LANC |
2016 | BGC | BGC
#Good morning, everyone, and welcome to General Cable's second-quarter 2016 earnings conference call.
I am <UNK> <UNK>, Senior Vice President, Finance and Investor Relations.
Joining me this morning are <UNK> <UNK>, our President and Chief Executive Officer, and <UNK> <UNK>, our Chief Financial Officer.
Today's call will be accompanied by a slide presentation, which is available on our website at generalcable.com.
If you have not downloaded a copy, we recommend that you do so as we will refer to the presentation throughout our prepared remarks.
On today's call, <UNK> will provide an overview of our progress on our strategic roadmap, our second-quarter performance, and third-quarter outlook.
Before we get started, I wanted to call your attention to our Safe Harbor provision regarding forward-looking statements and Company-defined non-GAAP financial measures, as defined on slide number 2, as we will be making forward-looking statements and referring to adjusted results in today's call.
To begin, please turn to slide number 5.
I will now turn the call over to <UNK> <UNK>.
<UNK>.
Thanks, <UNK>.
Good morning, everyone, and thank you for joining us on the call today.
We are pleased with the strong performance in the quarter that reflects the results of our focused execution and the significant operational improvements that we've made in the Company.
We delivered on our operating performance targets, despite a topline which was burdened by an uneven and choppy end market demand environment.
We also continued to simplify and focus our portfolio through the sale of three businesses and applied the proceeds toward reducing leverage on our balance sheet.
While early in the implementation phase, we have already generated momentum in all of the key initiatives of our strategic roadmap that we believe will unleash our competitive advantages, enabling us to compete more effectively and allowing us to deliver significant value to shareholders over the coming years.
Our strategic roadmap is designed to help us to become the best-performing company in the industry in the markets we choose to serve by capitalizing on scale, leading market positions, innovative capabilities, efficient cost structure, and a vibrant high-performance culture.
Some of these things we already have and some we are developing.
Our roadmap is a comprehensive plan that allows us to capitalize on our strengths as we pivot to become a focused, efficient, and innovative company with substantial operating scale.
As you'll remember, our roadmap has four key elements.
First, we are working to focus and optimize our portfolio based on the criteria of market leadership, operating scale, ability to attain an industry-leading cost structure, and long-term sustainable growth potential.
We are focused on our electric utility, industrial, and communications businesses and we are investing the appropriate resources to drive these businesses to their full potential.
We have also taken many steps so far to exit businesses that we don't believe can meet our criteria over time.
These asset sales have the added benefit of reducing our balance-sheet leverage.
The second element of our roadmap is to develop an industry-leading cost and efficiency position through initiatives to consolidate and streamline our manufacturing operations and to drive supply-chain efficiencies.
This is an area of tremendous activity right now and for the next 18 months.
For example, in our manufacturing operations nearly half of our plants worldwide are undergoing substantive project-driven change.
At the end of this part of our journey, our goal is to have focused, efficient factories, an optimized supply chain, and substantial competitive advantage from an industry-leading cost position.
These efforts are proceeding well.
The third element is targeted, sustainable, profitable growth through product and service innovation and other competitive advantages.
We are very busy right now building a ---+ with a series of projects that should provide all the capabilities we need in order to outpace market growth.
Our customers are already starting to see improvement from our early work in this area.
And finally, the fourth element is to cultivate a high-performance culture.
In my view, culture is arguably the most important component of our roadmap.
It defines how we act and interact to create business success.
Our global team has a clear vision and sense of purpose, a roadmap to follow that they believe in and are aligned with, and a common set of values and behaviors that they all participated in creating.
Culture is a long journey, but I am so pleased to see early improvements in our engagement and Net Promoter metrics, which we measure monthly through Pulse surveys.
I also see the improvement in all kinds of informal ways during my travels within the Company and in particular out with our customers.
When I described this roadmap at our investor day, I emphasized that while our three-year targets are ambitious, and they should be, we believe that we have the initiatives and teams in place to achieve them.
Now I know that our investors are interested in getting more insight into how and when the results will phase in over time.
While we are not ready to provide quantitative guidance on the phase-in of the financial improvements over the next three years, I can at least provide some limited color on impact timing of various parts of the roadmap.
Now early on in the transformation, before any of the key initiatives are completed, we expect to see benefits just from overall improved execution as our organization gets more energized, more focused, more accountable.
These early improvements are really hard to forecast, but they are real, and we are beginning to see them in the execution in the last few quarters.
I can feel the energy when I come to work every day and there is a real momentum internally around what we are trying to achieve.
Now a portion certain of the roadmap initiatives will start to impact sooner than others.
We expect earlier impacts from initiatives, such as global procurement, the acceleration of our lean Sigma programs, and some of our share recovery initiatives.
And we expect them to begin phasing in late this year and be full strength by mid-2017.
The other portion of our initiatives are substantial 12- to 18-month projects.
We expect these initiatives to phase in in late 2017 and be fully in place during 2018.
At that time, we expect to see the full results and benefits that we outlined at our investor day, including improving adjusted operating income by $160 million, improving adjusted operating margin to more than 7%, delivering return on invested capital of more than 12%, bringing the net leverage ratio to below 3 times, and generating cumulative free cash flow in the range of $400 million, while continuing to support the annual dividend.
The momentum we have gained so far in advancing our roadmap initiatives this quarter has been really encouraging, and we will stay relentlessly focused on completing these initiatives and bringing the benefits into the financial results over time.
Next, I want to provide you with an update on some of the achievements we made with respect to our portfolio optimization and simplification initiatives and our July 2014 restructuring program.
As you know, we are simplifying our portfolio so we can focus on bringing our strongest businesses to full potential.
To that end, we completed the sale of three businesses including our North American automotive ignition wire business, as well as the sale of our operations in Venezuela and in Egypt.
Collectively, we generated more than $83 million of proceeds from these divestitures, which we applied toward reducing our outstanding borrowings.
I am also pleased with the execution and continued positive momentum we have achieved since announcing our 2014 Asia-Pacific and Africa divestiture program.
We continue to target cash proceeds in the range of $250 million to $300 million.
So far, we have generated $193 million of cash proceeds, including the sale of Egypt in the second quarter 2016.
We are managing an active process and pressing forward with the divestitures of the remaining operations in Africa, including Algeria, Angola, and Zambia, and Asia-Pacific, including China and New Zealand.
As we communicated earlier this year, we signed a contract for the sale of our operations in Zambia and are working toward completing that transaction in the second half of 2016.
On our July 2014 restructuring program, we generated $9 million of incremental savings and we remain on track with our restructuring savings target of $80 million to $100 million.
Next, I want to touch base on two very important matters before moving on to provide some color on our second-quarter results and outlook.
First, I am pleased to announce that the Board of Directors has named Chris Kreidler to serve as Interim Chief Executive Officer effective August 15, 2016.
Chris will replace <UNK>, who, as communicated in March 2016, is leaving the Company to pursue other interests.
On behalf of the Company and personally, I want to thank <UNK> for his many, many contributions over 17 years.
I really believe that many of the strengths that we have today are due in no small measure to the leadership that <UNK> has shown in this Company for 17 years, and he will be missed.
And <UNK>, I wish you congratulations and success as you move on to your new position in your new company.
Thank you, <UNK>.
The Company's search, with the assistance of Heidrick & Struggles, for a permanent replacement CFO is advancing very well, and we are seeing a good flow of highly qualified candidates.
Chris most recently served as Executive Vice President and CFO at Sysco Corporation, and during his 28-year career, he also held numerous leadership roles across Yum! Brands and C&S Wholesale Grocers.
Chris brings decades of experience in supporting companies with global operations, as well as a distinctive leadership capacity to manage teams and apply financial expertise to business management.
We are confident that he will be a strong asset to the Company as we conclude our active search for a permanent CFO.
Second, I would like to provide an update on our ongoing internal FCPA-related investigations in Angola, Thailand, India, China, and Egypt.
As we previously communicated, we substantially completed our internal review in these countries as of year-end 2015.
Since that time, we have been in frequent communication with the SEC and DOJ regarding the findings of our internal investigation, and I am pleased to report that we are now in the early stages of discussing a potential resolution of these matters with the SEC and DOJ.
Based on these discussions, we presently believe the amount of total probable disgorgement of profits, including prejudgment interest, required to resolve the investigation is in the range of $33 million to $59 million.
As a result, we have increased our existing accrual as of July 1, 2016, by $5 million to $33 million, which represents the low end of this range.
The amount accrued solely reflects profits and prejudgment interest that may be disgorged and does not include, and we're not able to reasonably estimate, the amount of any possible fines, civil or criminal penalties, or other relief that may be assessed or acquired in connection with any potential resolution with the SEC or DOJ.
We look forward to continuing our progress toward an acceptable resolution with the government and bringing this matter to a close.
Next, on our second-quarter performance, on slide 12, overall we delivered another solid performance in the second quarter, despite the continuing challenging operating environment.
We generated adjusted operating income at the top end of our guidance range, excluding the unfavorable metal price impact in the quarter relative to guidance assumptions.
And just to remind you again about the metal price impacts, recall that metals are typically a pass-through cost, but we are affected in approximately half of our business by changes in metal price between the time we buy the metal and the time we sell the cable made with the metal, which typically can average around three months.
So when metals are declining, there is a temporary, typically one quarter, unfavorable impact on EBIT and a corresponding favorable impact on cash flow as we replenish metal stock at the lower metal price.
We believe that identifying the metal price impact gives more transparency on the underlying performance of the business.
It also illustrates the resilience of our business model to commodity price fluctuations.
Recall, also, that our margins are not correlated with metal price levels, as we discussed previously and in depth at our investor day.
Adjusted operating income was up $7 million or 17%, as compared to the first quarter, which shows we're heading in the right direction and focused on performance improvement and operational execution.
In fact, it is interesting.
If you set aside the impact of the previously communicated and anticipated headwinds related to our subsea project business, which is transitioning off a significant multiyear project, that's Baltic 2, and the ongoing market challenges experienced in our specialty cable business, particularly oil and gas, adjusted operating income would have improved more than 50% versus the first quarter.
Year-over-year adjusted operating income for the second quarter was down $6 million, but again, setting aside the easing of subsea project activity and oil and gas, our results for the second quarter of 2016 would have been up 5% as compared to the second quarter of 2015.
So, clearly, our focused execution and operational improvements are materializing, which is significant, given the relatively weak and choppy end-market demand environment that we are all experiencing.
Overall, unit volume increased 3% sequentially.
This increase principally reflects seasonal demand in Latin America and demand for electric utility cables in Europe, specifically the land-based turnkey projects.
In North America, despite being below our seasonal expectations for the second quarter, we were pleased with the momentum of our electric utility business, and the distribution piece of that in particular, and our construction business in nonresidential construction, which are up nicely sequentially and year over year.
Renewables, grid hardening, and nonresidential construction continue to drive demand for these products and the segments were up 1% and 3%, respectively, versus the first quarter and up 10% and 9%, respectively, versus the second quarter of 2015, so clearly strength there.
Another bright spot has been our data communications business, driven by the need for greater connectivity and the development of data centers, which increased 4% sequentially in the second quarter of 2016.
On the other hand, areas where we are experiencing some demand pressure include our industrial and specialty businesses.
Specifically, we continue to experience lackluster demand in oil and gas, which seems to be bottom searching as we move into the second half now.
As a reminder, our plan is not contingent on robust market assumptions.
We anticipated this uneven and low-growth demand environment in our three-year strategic roadmap.
In fact, I am encouraged by the relative demand strength of our electric utility distribution and construction businesses, which were together up mid-single digits year over year for the first half of 2016.
Let's turn to Europe.
In Europe, unit volume improved 7% sequentially, driven by electric utility and energy cable demand.
We continue to experience solid end-market demand for electric utility cables, including land-based turnkey projects, and these are driven by the advancing grid interconnection projects in Europe, which remain on track and are in the plan for many years.
In our subsea turnkey project business, tender activity remains stable and we continue to secure projects.
Our backlog as of the end of the second quarter for subsea and land-based turnkey projects was $225 million, and that was up from the $160 million reported at the end of the first quarter.
That's very positive.
As we have communicated specifically relative to our subsea turnkey business, we are in a period of transition between projects and production activity as we finalize the multi-year Baltic 2 project.
This business is expected to trough over the second half as we complete this transition and ramp up production on some of our new projects.
Lastly, our communication business in Europe is also growing nicely as we leverage our newly installed fiber capacity.
Now turning to Latin America, unit volume for the second quarter improved 16% versus the first quarter of 2016.
Half of this improvement was driven by the shipment of aerial transmission cables in Brazil and the other half was driven by broad-based seasonal demand improvement coming off the typically weak first quarter.
Excluding aerial transmission cables in Brazil, demand declined 1% year over year as construction spending remains uneven throughout the region, driven by low growth rates, volatile currencies, and low commodity prices.
But I think we have a very stable region here.
As summarized on slide 17, net debt for the second quarter of $961 million was down $27 million from the end of 2015 and down $99 million from the end of the first quarter.
As mentioned, we applied divestiture proceeds to reduce our outstanding borrowings.
We also generated operating cash flow from continuing operations of $49 million in the second quarter through tight management of working capital, including inventory levels, as well as the collection of receivables on our subsea turnkey projects.
Again, good news.
We currently have $383 million of availability under our North American and European based credit facility.
In addition, we have approximately $40 million of availability on working capital lines and cash in our Latin American businesses.
We are well positioned to fund the business, including working capital requirements, restructuring and roadmap activities, and the quarterly dividend.
As you'll recall from our investor day, we outlined $125 million of capital spending over the life of the three-year program to fund the various initiatives.
As mentioned earlier, our strategic initiatives are underway and, as a result, our capital budget for 2016 is expected to be in the range of $100 million.
This budget includes $50 million of maintenance CapEx spending and $50 million of spending on roadmap initiatives in the year.
We expect the remaining $75 million of the $125 million of capital spending to come in 2017.
With respect to our third-quarter guidance, we are encouraged by the demand trends in our electric utility distribution and nonresidential construction markets, which have been up mid-single digits year over year so far this year.
And we still expect certain end-market demand to be uneven, mainly in our industrial and specialty markets, particularly oil and gas.
We also expect the normal seasonal slowing in our European businesses, and that we see every year, and further easing of our subsea turnkey project business, as previously discussed and anticipated.
Our third-quarter outlook for adjusted operating income of $35 million to $50 million also reflects at the midpoint a very conservative view of end-market demand.
Finally, I want to reiterate that we've built our strategic roadmap in anticipation of a weak and uneven demand environment, precisely like the one we are navigating now.
Overall, I am very pleased with our progress on all of our strategic roadmap initiatives ---+ portfolio optimization, development of a leading cost position, targeted growth, and highly engaged culture.
Every initiative is on track.
We have line of sight to our goals of 7% adjusted operating margin and 12% return on invested capital.
Our goal for adjusted operating income of $160 million of improvement over three years is backed by very clear initiatives.
Our roadmap is self-funded from current cash flows and we intend to reduce our outstanding borrowings further, while continuing to support the annual dividend.
I want to be very clear that, although our targets are ambitious, I very strongly believe they are realistic and achievable and the initiatives to achieve them are within our control.
Let me wrap up by recognizing and thanking the entire General Cable team for their hard work and strong execution in the quarter.
Every day, I see examples of their extraordinary accomplishments, large and small.
I'm inspired by their passion to win.
That concludes our prepared remarks.
I will now turn the call back over to the operator, who will assist us in taking your questions.
Because that's really ---+ in terms of the range, that is where we need to be and that's where we believe our position at this time in the discussions is centered around that.
It was ---+ the ignition wire business was probably at or slightly above the segment average levels, and that's out of the way now.
In terms of metal impact, we didn't really see a metal impact in the second quarter relative to prior year or previous quarter.
That metal impact was only relative to our guidance assumptions, and so, actually, when you look at guidance, we had a $4 million impact relative to the guidance assumptions, negative in the actuals, and so that is how I see that we on an underlying basis outperformed.
There is a lot of activity going on in North America right now.
I'm very encouraged by what I continue to see is a strong utility environment in our projects, and our capacity to reach those markets directly and through our distributors continue to be very strong.
In particular, the distribution part of that and also in terms of the renewables element of that market continue to be very, very strong, and we participate in that very well.
So, that is certainly helping us.
The other area where we continue to see great strength is the nonresidential construction market, which I think is even ---+ been better than we even thought it would be as we went into this year, and so we are enjoying that as well.
The business around some of the specialty markets, in particular oil and gas, marine, et cetera, that is old news, and I think that has been ---+ it has been a year-over-year headwind for us, but I think we're at a relatively stable level now.
I think it is finding the bottom.
And for the second half, I don't really see a negative year-over-year impact from that.
I think we have made it past those high points of last year.
And then, the industrial business is the one that is still a question.
We think it is flat, possibly slightly down, in the third quarter as we move toward that.
So that's a quick picture of North America.
A lot of things going on.
A lot of good execution by the Company, but our roadmap initiatives have yet to make a material impact here.
That's very encouraging.
I want to point that out, too.
So, I think it was a good quarter from that standpoint.
I think in some areas it is actually better.
I think when we look at across the world our utility businesses ---+ in Europe, I mentioned the grid interconnection work and those are turnkey projects for us, so they are more profitable, bigger projects.
And the kind of things that are happening in the utility distribution side in North America and in renewables are very strong.
I think probably at the beginning of the year I was thinking those might weaken a bit, and I have been pleasantly surprised by where we are at with those, and those continue to be strong.
On the transmission of utility side, that is lumpy business.
We had a strong first half last year with one project in particular and that can skew it a little bit.
I think it is a little bit soft this year, maybe down a couple percent, that segment of utility, transmission, as we look at it versus prior year in the marketplace.
But overall, utility is up when we look at those three components that I just mentioned.
So, that's positive and I think ---+ I'm feeling more positive about that.
I've also feeling more positive about nonresidential construction.
I spent a lot of time with our customers and some end-user contractors and so forth in the last quarter, and there is some optimism that continues there, that there is a fundamental strength in the US economy, and in particular, nonresidential construction will continue to benefit from that.
Oil and gas is old news.
I think it is what it is, so that's pretty much where we thought it would be.
And industrial is a little softer, I think, than we would like it to be, but there is still projects and activity out there.
It is more spotty; it is more choppy.
I think in that market in particular what we are seeing ---+ as I talk to our customers, they are seeing it ---+ is quarter-to-quarter variability, but overall I think when we put the whole year together, it is going to be maybe flat to slightly up from last year.
Does that help.
<UNK>, I will take the first question there around the CapEx spend.
The majority of the CapEx spend is aimed at cost reduction and improving our cost position.
So, I'm not associating revenue with a return on those projects because very clearly they are reducing our costs and on a structural basis.
So those are very sound projects, very good returns, and will position the Company for the long term.
These are things that we need to be doing now, and in some cases we should have done earlier.
So, we are doing it now.
There is some portion of it that is increasing capacity.
You might know I mentioned some of the fiber capacity and so forth.
I think we're also, as we look at the communications market overall, we want to be sure we want to keep up with that, that increased demand through greater connectivity and so forth.
So there is revenue associated with that.
We really haven't broken that out yet.
We might give some guidance on that when those projects get up and running.
Good morning, <UNK>.
It's <UNK>.
On the free cash flow question, just to put it in context, last year the Company did free cash flow of about $200 million before the dividend, and as the Company has talked about 2016, I would say right now I would range it somewhere maybe in the $100 million to $150 million range.
Most of the items, like taxes and interest, are slightly better than 2015, and as you just questioned, CapEx is higher for the reasons mentioned and the working capital benefit last year was about $100 million.
And we have been talking about or targeting doing about half of that amount in 2016.
So putting all that together, it is about ---+ there is some variability here, but call it $100 million to $150 million.
I think the positive is that we are now in those discussions, and we are early in those discussions and I can't comment on the timing, mainly because I don't have anything to say at this point about it.
When we get to the end point, and we will, we will happily let you know.
Yes, I would continue to assume about 50% on the effective tax rate and 25% to 30% on a cash tax rate basis.
Okay, thanks, <UNK>.
It's been a pleasure.
I appreciate that.
Thanks for joining us this morning.
That concludes our conference call.
A replay of this call will be available on our website later today.
We appreciate your continued interest in General Cable.
Thank you.
| 2016_BGC |
2016 | NWL | NWL
#Yes, on your first question regarding Project Renewal, cumulatively, so the annualized savings through the end of 2015 is $360 million.
So that's banked, and that's in the bank.
We have articulated a range of $625 million to $675 million in cumulative savings.
But I just shared with you, my ambition and hope is that we get closer to $700 million when it's all said and done, at the end of 2017 or into early 2018.
2016 is a big year of renewal savings delivery.
We've got a lot of work that was initiated last year, that flows into the P&L in 2016.
We set up the transformation office, in order to really establish a set of very disciplined project management capabilities.
We've got teams organized along, and across many different work streams.
So we expect 2016 to be a banner year, with respect to savings, and it's important to the overall algorithm.
With respect to the Jarden transaction, I'll pass that over to <UNK> to answer.
Sure.
Hi, <UNK>.
With respect to Jarden, we don't anticipate any challenges from a regulatory standpoint or anything else.
We made good progress.
Obviously, both teams have been working hard together with their outside advisors.
So we don't anticipate any challenges.
We're still marching towards a closing sometime in Q2, and no red flags.
So we're in good shape.
With respect to your question on customers, it's a little early.
We're not engaging customers with one voice at this point, because that would be inappropriate as two separate companies.
But the general feedback on the day the deal was announced ---+ and I know Martin got some of this feedback as well, from customers from ---+ on the announcement date.
And we've subsequently had them in our conversations with retailers, has been very, very positive.
As you know, the combination significantly scales our presence in a number of retailers in the US.
We put that into the web deck that we put together, when we announced the deal.
We'll have over $2 billion of revenue at Wal-mart.
I think we'll end up being probably a top ---+ in the eighth or ninth position, in terms of their overall suppliers.
And on the general merchandise side, we'll be at the top, if not near the top.
I think that's very exciting.
That will lead to a really strategic set of conversations with all of our retailers where we scale.
And the other thing about the come combination of the companies is, it opens up access to new channels for some categories.
So Jarden has real strength in mass sporting goods, with the Coleman brand, and with some of their action sports businesses.
That opens up opportunities for brands like Contigo and Avex, where we probably never would have gotten to investing the SG&A and selling expense to access those markets, which we can now access.
And the reverse is true for Jarden.
We have tremendous scale in home centers and hardware, and the distributed trade in the US for commercial products and tools, which can provide the Jarden businesses access to channels.
And so, it's going to be very exciting to unlock all those opportunities.
I don't view scale at customer as being a leverage point with respect to negotiating.
Some people think, oh, we're going to be a able to yield a bigger stick at these customers.
That's not how we think about engagement with our retail partners.
We think about building our business collaboratively.
We have a responsibility as leaders in our categories to own the development of those categories at those retailers.
And, of course, we leverage our branded assets to do that.
So we build share when we do that effectively.
But we share accountability with our retail partners for developing the size of the pie, the size of the categories.
And that's how we approach our relationships, and we expect the combination to now be able to do that across a broader landscape of categories for our retail partners.
And through that, become more of a strategic supplier to them.
So unbelievable set of opportunities connected to the selling, and the potential for a strengthened strategic capabilities in that space.
Thanks.
Hi, <UNK>.
Yes, I gave you some color on quarterly flow in Q1, in that I gave you the Venezuelan impact.
If we had not deconsolidated Venezuela in 2016, it would have been worth $0.03 to $0.04 in Q1.
So that's some color on flow.
I didn't give you the numbers for a year ago, but that's slightly more than what Venezuela contributed in the year ago period.
So there's a little bit of color.
We're pretty bullish on what the first half of the year has to offer, because a lot of our new items ship in the first half of the year.
So Rubbermaid FRESHWORKS goes, InkJoy gels go in the first quarter.
We had good performance last year, very, very good sell-out performance.
So we don't enter the year ---+ you can see it in our receivables numbers.
You didn't see a tremendous movement in our receivables numbers year over year.
So that's a good sign that inventories have come down in the fourth quarter, retail inventories have come down in the fourth quarter.
That's true in a number of places, I suspect.
And the kind of POS and sell-out that we've got going on is really encouraging.
We should have very good ---+ with good sell-through, comes good sell-in.
And that's set up well.
We will spend more in Q1 than we did year-ago, from an A&P perspective with stronger innovation.
And so, we're set up for a good first quarter I think.
And obviously, the proof of the pudding's in the eating, and it's only not even really the end of January yet.
But the green light is in the engine room.
So there are always things that you have got challenges, that you've got to overcome.
And undoubtedly, we will have those to deal with this year.
Hi, <UNK>.
It's <UNK>.
So with respect to the debt, there's a couple of moving pieces.
But overall, the term loan is locked, and that rate is ---+ roughly for your modeling 2% to 2.2%.
It's a variable rate instrument.
The public debt that Mike was talking about earlier.
Right now, we originally said in the S-4, we modeled 4%.
Credit spreads have moved, but there's still a lot of moving pieces.
So we don't know where the tenor will be, or how much we'll go with variable rate debt overall.
So there's still a lot of work to done ---+ to do.
But we're not too worried about the creep off, of the 4%, on the public portion of the debt.
So that part is ---+ again a work in process.
And there's, as you know, a lot of market volatility between now and the time that we ultimately go to market.
Yes, so we get to that ratio, we're committed.
So part of the reason why we structured the deal we did, is the term loan is a three year instrument that we have to pay down, the $1.5 billion that I mentioned earlier in my script.
And so, part of that is a commitment, so we get down to that 3, 3.5 times, two to three years right now, and we've modeled in a number of sensitivities.
So we're very comfortable that 2.5 years from now we will be back in that range, give or take, absent some massive change in the underlying economic culture of the world overall.
So we have good shape, in terms of that.
With respect to tax, right now, obviously, I think the easiest thing to do is model just the blended tax rate between the two companies, but there is opportunity.
Now none of that is reflected as Mike said in the synergy numbers that he's talked about and so forth.
And we're excited about bringing Jarden in together with us, in terms of what we can do with some of our tax structures and so forth.
So we definitely see upside on that.
But it will take some time, obviously to get the two companies together, and into one tax system.
So we're going to push to get the delever as quickly as we can.
If you look at our numbers, and you probably haven't had time to plow through them all, we've got EBITDA around $900 million in for Newell.
And Jarden is ---+ you can figure out what Jarden is.
With synergies coming perhaps a little bit quicker than what was modeled, we'll be very quickly approaching $3 billion of EBITDA.
And so, we're going to have lots of flexibility to pay down the debt quickly, and we will want to do that.
That's the commitment we made to get back into the range of 3 to 3.5 times within two to three years.
But I'm hoping we can do that closer to the two, than to the three.
With respect to the other issues on ---+ potential derailers that's could undermine that.
I really don't see them, because we've been so conservative in the assumptions we've made, on the timing of synergies, the growth rate that we built into the model.
So the tax opportunities, the working capital opportunities, we should have some quick wins there, that are not built into the deal economics.
And it's just going to take a little bit of time to get our arms around that, once we're able to more openly engage with each other, but not much time.
We'll want to go for that type of stuff quite quickly.
And the other thing to recognize is that the leverage ratios look high at the beginning, in part because of the timing of the year we're doing this deal.
Right.
So Q1 is probably the worst moment to try to convert a deal like this with ---+ given the flow of cash flow for both companies.
So the optics of our leverage ratios are pretty high, probably half a click high in ---+ at the end of the first quarter, versus what they will quickly be over the next few quarters.
So there's all those dynamics at play.
We've made a commitment to get down to 3 to 3.5 times.
We're going to do that in a focused way.
We are prioritizing capital allocation to that outcome.
And the only exception to that is the CapEx assumptions we've got in the business, which we have not compromised on CapEx investment on either business.
We've blended the base plans.
And we won't pull back on that front.
And you should expect in the Newell Rubbermaid side for us to be spending around $200 million in CapEx this year, maybe slightly above that.
And then on the dividend, we've assumed that we maintain Newell's current dividend of $0.76 per share.
Obviously, across a higher share count, which means more cash out for that in the combination, but we believe that's an important element of our capital allocation strategy that will be and should be preserved.
That's not in our line of sight right now, and doing an equity deal not in our line of sight right now.
We're going to be really focused on executing both companies' plans.
Obviously, if we get good momentum in the core of the business, we can think of different options as we come into 2017.
But our focus right now will be on execution of the deal, execution of the individual business plans, delivery of the EBITDA progression that's built into those two plans and into the deal economics.
And playing for more EBITDA if we can find it, either through acceleration of the synergies, or through accelerated growth in the businesses, or through other means of influencing gross margin development which are also available to us.
Yes, I don't think you should expect us to go deep into the integration at CAGNY.
Because again, we will not own ---+ we will not be combined at that point, the two companies.
We will lay out where we see the opportunities.
And those opportunities will be articulated based on the thinking that went on in the fall, and conversations that have happened with senior management since that time.
But the planning stages are early on.
It's a little premature for us to be doing a deep dive on exactly what we're going to do when, in a couple of weeks.
That said, I'll lay it out.
I'll visually present what I just described to you in the earnings call, in a little bit more detail to give you some evidence of where the opportunities are, and talk about the ambition we have for the business.
But I would expect the more detailed discussion to happen after the shareholder votes, and after the transaction's consummated.
That's when we'll get into some far more detail.
Our focus though, will be on engaging both sides of the house, in understanding where their business opportunities are, learning the Jarden businesses.
And then after a period of work and thinking about those, bringing that back together into an integrated approach and strategy for the Company.
Of course, we'll provide guidance for 2016, revised guidance for 2016.
And we'll provide perspective on the out years, once the transaction's completed.
Yes, we typically don't guide core sales by segment, but I think you should expect writing to have another very good year, albeit without the benefit of Venezuela.
You should expect baby to have a very good year as well.
We've got terrific momentum there, with great innovation coming.
Commercial products, I think you should expect another year of good progress.
And you'll see probably the most change in home solutions, where Rubbermaid has a whole series of innovations that are coming to market like FRESHWORKS, like Fasten+ Go which is effectively taking our lunch box concept, and executing an adult version of a lunch box for work.
And so, that will come.
And then in the back half of the year, we've got another exciting food storage innovation that I won't disclose now, that really will be very, very cool, and fun to see how consumers respond to.
So you've got three innovations in Rubbermaid coming this year.
You've got a big year in beverages as we continue to develop and build the Contigo, Avex, bubba and Rubbermaid brands in this space so.
And Calphalon is going ---+ Calphalon and Goody will go through complete relaunches.
We saw some weakness in Calphalon in the fourth quarter, as we're transitioning out of product lines and into new product lines, which start flowing in here in the middle of Q1.
So we've got a full facelift going on Calphalon.
And we've got the Goody brand relaunch which set for the second quarter of this year.
So I think home solutions will probably the place where you see the most change.
We will continue in the ---+ to continue optimize the Rubbermaid consumer business by continuing to pull back on consumer storage, the less profitable end of that business.
So some of the positives that I was just referring to, will be partially offset by continued contraction in that portion of the business, as we look to reposition the Rubbermaid brand to play in areas where the brand can be differentiated.
And through differentiation comes higher gross margins, through margins comes higher affordability and to invest in really create the renaissance in Rubbermaid that we hope to deliver over the next couple of years.
Hi, <UNK>.
In any given quarter, the margin will float, depending how much investment we put in.
We said we spent more money in A&P than we were planning on spending in the quarter, and writing was the beneficiary of that, which it is almost always is.
The ---+ but we don't have a target margin for businesses.
I mean, anything over 20% in my experience is a really exciting place to be, because if you grow, you really create a ton of value so.
But I don't envision us drifting down to that level.
But I also don't want to target and peg 25% operating income margin as a target margin for the writing business, because I feel like we might constrain the opportunities for growth.
As we move writing into new geographies, there's sort of an SG&A bubble you have to accept in front of the ---+ ahead of the revenue stream.
And our ambition is to deploy this portfolio as broadly as it is relevant to deploy it over the next 5 to 10 years.
So there will be periods where there's a cost of growth associated with that choice, that will be covered by some other business.
Just like you saw some of the businesses cover tools investment in 2014.
You see other businesses covered baby investment, at the beginning of this year.
We'll now see baby margins come back to fund other investments in home solutions.
And so, we manage this money very dynamically, and we don't let it get trapped in any particular segment.
The leadership team allocates resource.
And in any given period, you should expect operating income margins to flex up and down, depending on what investment bets we're making.
Yes, that's a great question.
But let me answer that one last, and maybe <UNK> can provide some perspective, so that it's not biased by me, because I'm obviously very excited by it too.
I think people are very energized by this, because they've seen what's happened here.
And they now ---+ most people are probably thinking, gosh, there's all kinds of opportunity for me personally, to go work in different types of businesses over time; and I get the sense there's a lot of excitement about this.
The group's been through a ton of change, so they understand how to ---+ and they're resilient as all heck, to be able to absorb the rhythm of change that we've had over the last number of years.
But there's a lot of excitement.
There's pride in the fact that we're creating something big and special that could really be very, very exciting.
But maybe <UNK>, you should answer that last part, rather than me.
Sure.
So <UNK>, I'll add some color in a second, with respect to the system, so part of Jarden is on a version of SAP.
But we're fairly comfortable that we'll be able to get them, and get our arms around their systems relatively quickly.
Obviously, they have a great business, and they've run their business extremely well.
So they certainly understand their numbers, and we're encouraged coming in, that we can get to a common nomenclature, and common vocabulary relatively quickly.
Our IT guys are really excited to work with them.
And certainly, I think we can give them some perspective on things that have worked well for us.
And as Mike said, it's really consistent, with taking the best of both companies.
So we also have some things I'm sure we can learn about them, and get a little more leverage out of our systems overall.
So comfortable, we'll get our arm around the business fairly quickly.
And certainly in our meetings with them, they clearly, they have arms around their business.
So we're very comfortable with that.
In terms of the excitement, certainly, it's not something I think that many of the employees expected, but we're excited.
We're excited about the progress that certainly Mike and the team has made over the past five years to put us in this position, to be able to rewrite the future for this Company.
And that's what people are most excited about you now.
We look at the opportunity now with Jarden and things that we think we can do, as we broadened our set of cable abilities across a number of different new categories and new brands.
And as Mike said, as well as the synergies, places where Jarden has been very successful, and we haven't been as successful in certain channels.
So there's a lot of excitement.
We know it's going to be a lot of work.
It's been a lot of work for a number of people for the past three or four months, but it's going to be a great combination overall.
So it's a ---+ we're a little bit disappointed maybe some people don't see it that way.
But for us, we only see upside.
Yes, I think the market's reaction I ---+ I'm not even going to focus on it to be honest with you, because the opportunity is in front of us.
It's not in the moment.
And so, the opportunity is to bring this combination together, and create the value release that will naturally occur.
But more importantly, strategically to create one of the leading consumer branded companies in the world.
And certainly, a leader in the durable space, where nobody's going to be able to have the capabilities we have.
We'll have the [affordability] to invest in a really advantaged set of brand development capabilities, that should enable us to trump the competition.
We'll compete in category country sales against lesser competition is quite small.
So if we want ---+ as we set this company up to be managed the way we manage things today, where we ---+ a senior group of people, leaders from each of the businesses come together every year to allocate resource, as we allocate those against the businesses with the greatest right to win, we should see really tremendous release of value and growth.
And that will create a very, very exciting story going forward.
We're a risk-on scenario and a risk-off environment at the moment, because of the leverage that we need to raise to bring these two companies together.
And that is fine.
We have the clarity, the security, and the sense of what will happen next, to give us the confidence, that what we've said about maintaining investment grade, getting the deal financed, getting the deal ---+ having the deal deliver high single-digit accretion in year one, and mid-teens to high teens in year two, and strong double-digit accretion in year three ---+ we have the confidence and line of sight, to all the moving parts in that algorithm, to give us the security that the risk-on increase is appropriate for our Company.
The market doesn't have access to everything that we've got access to.
And we don't have the opportunity to talk as explicitly as we'd like to, to the market until the transaction is consummated.
So we're in that period where, there's uncertainty in a risk-off environment, and I'm sure that's creating pressure.
We will over time, in a very deliberate way articulate our vision for the Company, what we believe is going to be possible through the combination.
And I am certain, we will find more opportunity, the more time we have to engage with the partners on the Jarden side.
And we intend to bring the best of both together, to bear on this collection of categories that are really quite strategic.
The opportunity is quite strategic.
These are large, growing categories with unconsolidated markets.
And the brand portfolio is powerful, because we have leading positions in those categories.
And so, there's so much roll-up potential, either organically or through a combination of organic and external development that you just sort of feel like a kid in a candy store, in terms of the potential opportunities ahead.
We're going to do this deliberately.
We're going to do this with putting the best people on the field that we can, to unlock the upside.
And we couldn't be more excited by what's ahead.
But our line of sight goes beyond the next 90 or 30 days, it's the next 3 years.
And it's putting in motion the set of choices, that I think we will illuminate over time for the market.
But we are certain, we'll unlock the value we have represented to you, if not more.
Yes, I wouldn't count on the 10% type of growth levels, as being something that's sustainable every quarter, but we've got a lot of innovation coming in baby.
We're excited about baby.
The combination actually potentially brings together some really exciting opportunities, particularly with Nuk and Baby Jogger.
And there are a couple of European soothing businesses as well that Jarden has.
So we've got some tremendous opportunity here.
We love our baby business.
It's a different business than the rest, in that on our side of the family, we've outsourced the manufacturing to a strategic partner.
So our gross margins are dilutive to the total Company performance.
But because we don't own the assets, our return on invested capital is quite high.
It's just next to writing, in terms of its value creation potential if we grow.
So when you grow baby, you create a ton of value for investors to the ROIC of [RONA], return on that asset is so high, just shy of writing's levels.
And writing's levels are margin-driven, baby's levels are driven by the absence of fixed assets, and a very short value chain because most of our retail partners ---+ so many of them, DI, direct import from the point of departure in Asia.
So we have a very short value chain, inventory chain.
So this is a great business.
We expect to grow it.
I think if I were building a model for the next number of years, I'd be building sort of mid single-digit growth.
There will be a moment in time, when China opens up as a huge market.
There are now car seat legislation, there is now car seat legislation in place, not yet being enforced.
But that will create a car seat market over time.
And when that happens, we want to be right in the middle of the growth that will come with Baby Gear.
Our business is sourced from China, so we've got great presence there.
So that if and when that market opens, we will be in the position to participate in a more material way than we do today.
But that will ---+ when that moment comes, that will trigger a different level of growth for the Company in that segment.
But I think the right planning stance is mid singles.
Hi, <UNK>.
Sure.
Good morning, <UNK>.
So we generally don't guide with respect to cash flow, operating cash flow overall.
So we won't give you any guidance numbers for 2016 or 2015.
I will give you ---+ I'll give you an explanation where we landed for 2015 versus 2014.
Essentially, we were up about 2% if you take out the $70 million pension payment that we made in 2015, to get our pension plan up to about a 93% funded status.
And then, we had a little more cash spend on Project Renewal and some other restructuring costs overall.
In terms of focus on cash going forward, the model was built without any working capital improvements.
But there are plenty of working capital improvements for the transaction, as well as on our side.
As we've talked about before, we ---+ our inventories we can do a little better job on.
Overall, we built some inventories this year for growth and so forth, but we know we can do a better job managing inventory, as well as managing the other pieces of working capital.
So that will be a focus.
It will be part of our incentive plan next year we've talked about, because of the importance of delivering on cash overall for us, in terms of getting our leverage ratio down, as Mike said as quickly as we reasonably can to the 3 to 3.5 times ratio.
But again, a good focus on cash, but we made good progress in Q4, as well on inventory.
So I'm relatively comfortable that we have line of sight to another strong year for 2016.
Just to punctuate the point <UNK> made, we will ---+ we've recommended to the Board, that our 2016, the Newell Rubbermaid 2016 bonus program, the short-term incentive program include a component on operating cash flow.
And so, obviously cash flow matters a lot, and operating cash flow matters a lot, in the context of this deal.
So we will put some skin in the game for our employees, with respect to really moving the needle on operating cash flow.
Like <UNK> said, we don't guide, but you can be you assured it's going to be a focal point for us.
There's a lot of opportunity in working capital as I've said over time.
And this is the time to go get it.
We have not assumed any benefit.
We've just blended the programs that existed from both companies in our deal economic assumptions.
So you can rest assured, cash is king in the coming years, and really ought to be all the time.
And you should expect us to really move the needle on this over time.
And I again, I think we've got a very clear line of sight to being able to get down into the leverage ratio range that we've committed to.
And I'm hopeful that we can do that, closer to the two year horizon, than the three year horizon.
But our commitment is to do that within two to three years.
Yes.
Hi, <UNK>.
Yes.
So with respect to the cash generation and the sources and uses, it ---+ the cash flow write-off, for us going forward, the difference will be about $50 million on an annual basis.
So it doesn't materially change the numbers that we put together, in terms of the sources and uses of cash overall.
The other thing I'd say is that all of the modeling we did with the rating agencies, all the modeling we did on the deal economics, assumed Venezuela out.
So everything that we've articulated externally excludes Venezuela.
Yes.
So we have three different writing businesses.
We have a fine writing business.
We have the Dymo business, which gets consolidated in our writing segment, and then what we call writing and creative expression.
Writing and creative expression is growing very, very well.
This is where Sharpie and Paper Mate, and Expo and Prismacolor, they all live in that cluster.
Fine writing has been less positive to growth rate.
And your observation is accurate, growth in Europe was not as strong, as we believe it can be over time.
In part because WACE growth, or Writing And Creative Expression growth was offset by fine writing declines.
And so, we're in the midst of repositioning our fine writing portfolio in Europe, pulling back on some of the low end portions of that portfolio, so that we focus brands like Parker and Waterman on the high end portions of that portfolio.
So that is what contributed to Europe's modest writing results.
Terrific growth on writing and creative expression in markets like the UK and in France, offset by fine writing contraction in the same geographies.
Over time, you should expect our writing business to become more dominant and present in the core, which is Writing And Creative Expression.
We've got a terrific plan in place for our writing business in 2016.
I think you should plan for like performance in your models for 2016, as we delivered in 2015, ex-Venezuela.
And while we haven't quoted a specific number for writing ex-Venezuela, and you shouldn't expect us to, you're in the general ballpark with your analysis.
Hi, <UNK>.
Yes.
So great questions.
I'll give you some perspective on innovation.
So when we evaluate the impact that innovation is having on our business, we look at what we call the vitality rate or the innovation rate.
And we measure innovation rate, as the percentage of our revenue that's been touched by innovation launched in the last three years.
And when we started in 2013 with the new model, our innovation rates were quite low, in the low teens type of level.
And as we enter 2016, we're getting very close to what we have as our long-term objective for the innovation rate, which is 30%.
And so, this is a vitality rate or an innovation rate that the best consumer goods companies would consider the gold standard.
And we're well on our way to getting there.
We will get there in 2016, with the pipeline of ideas that are coming to market.
We don't typically communicate that.
But I'll let Nancy and you guys try to triangulate around what that would be.
But the way you should think about it ---+ it's not that big of a deal, with respect to its impact on overall margins.
It may be slightly ---+ may hurt us a bit on operating margin, but not at gross margin.
So I think it actually may help us with (inaudible) gross, and hurt us in operating income margin, because we don't spend a ton of money in A&P there.
But just modestly, not as much as you might think.
Well, thank you very much, Leanne.
And thank you to all on the call for your interest in our Company.
And most importantly, thank you to all the Newell people who worked tirelessly to make these results happen, and to our future colleagues at Jarden, who have worked tirelessly as well over the last few months with our team to pull this transaction together.
I think together, we're going to make a great team.
Thank you very much.
| 2016_NWL |
2016 | VAC | VAC
#Thank you.
Hey, <UNK>, it's <UNK>.
So for us, revenue reportability quarter to quarter, it's one of the reasons we don't provide quarterly guidance, quite frankly, because the GAAP accounting requires that you collect a 10% down payment.
And it's not just 10% of the purchase price; it includes things like recovering the value of first-day benefit, closing costs on your loan and things like that.
So we are always adjusting incentive programs, things like that, throughout the year.
Our focus and what we've done every year is, from a full-year perspective, we adjust the programs and the down payment requirement so that, on a full-year basis, the reportability really isn't much impact.
But given whatever programs we're running, higher financing propensity like we saw in the third quarter, that's where you see you can have some outsized impact.
So what do we do.
Like we did ---+ and this was an issue, if you will, in terms of reportability in the third quarter last year.
We had similar things.
We had introduced some new financing incentives back then.
We had higher financing propensity.
We tweaked the amount of the down payment to get a little bit more, and we've already put that in place here for fourth-quarter sales.
So what ends up happening is we get a couple of the payments on the sales in the third quarter on the loans.
We hit the reportability.
That hits ---+ we get the benefit of that here in the fourth quarter.
And then the new sales that we are doing with slightly higher down payments to reflect the incentives and the financing propensity levels, those should for the most part hit reportability in the fourth quarter.
They won't get pushed out into next year.
And that's how you kind of think about it.
You know reportability impacts us quarter to quarter, but it can impact us slightly more or less, and then we adjust for that to balance it out.
Hey, <UNK>.
This is <UNK>.
I'd add one thing to that.
And just a reminder that the way in which timeshare accounting works, you record the sales costs, except for a small amount of the commission expense, at the time that the contract sale is written.
And so there's a disconnect built in to the way in which GAAP works.
You have the costs ---+ sales and marketing costs mismatched from the revenues.
So we have a disproportionate amount of sales and marketing costs in the third quarter not matched up to reportable revenues, which will show up in the fourth quarter.
I think in general that's correct with one minor modification.
Our financing propensity is actually running even higher than we thought it was going to.
That's good news over the long-term because obviously you get financing revenues for a long time to come out of all this.
It does affect your reportability.
So, yes, I would say to you we probably have more reportability in the fourth quarter than we originally thought we were going to have.
But all of the other underlying fundamentals that we've talked about in terms of building this contract sales volume and everything else has remained relatively unchanged.
Thanks very much, Rob.
The third quarter was our best quarter of contract sales growth in over a year, as contract sales growth in our key North America and Asia-Pacific segments were up 8% on strong tour flow from new distributions and new marketing channels.
Even more positive as we enter the fourth quarter, the current trend is on track for solid mid-teens growth through the end of the year, laying the foundation for contract sales growth going into 2017.
I look forward to updating you on our fourth-quarter performance and our outlook for 2017 on our February call.
And finally, to everyone on the call and your families, enjoy your next vacation.
Thank you.
| 2016_VAC |
2018 | AIV | AIV
#Thank you.
Good day.
During this conference call, the forward-looking statements we make are based on management's judgment, including projections related to 2018 results.
These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.
Actual results may differ materially from what may be discussed today.
We will also discuss certain non-GAAP financial measures, such as AFFO and FFO.
These are defined and are reconciled to the most comparable GAAP measures in the supplemental information that is part of the full earnings release published on Aimco's website.
Prepared remarks today come from <UNK> <UNK>, our Chairman and CEO; <UNK> <UNK>, Executive Vice President, in charge of Property Operations; <UNK> <UNK>, our Chief Investment Officer; and <UNK> <UNK>, our Chief Financial Officer.
A question-and-answer session will follow our prepared remarks.
I will now turn the call to <UNK> <UNK>.
<UNK>.
Thank you, <UNK>, and good morning to all of you on this call.
Thank you for your interest in Aimco.
Aimco enjoyed a solid first quarter.
In property operations, revenue was up.
Same-store occupancy was the best first quarter result in the past 7 years.
Blended rent increases were 2.7%, up 60 basis points year-over-year, and this positive trend continues in April.
In redevelopment and development, projects are on time, on budget and creating value.
In portfolio management, we improved our portfolio with paired trades for 2 selected acquisitions, where, even in a fully priced market, Aimco's operational expertise can produce significant value creation, and we funded both with well-executed sales so that the paired trades' increased expected free cash flow internal rate of return by 400 basis points.
In February, we purchased Bent Tree Apartments, a community located close to 2 Aimco communities in West Fairfax County, all 3 built by the same developer in the late 1980s.
We know the market, we know the buildings and we know exactly what to do to increase Bent Tree's profitability.
Later in April, we announced the partnership with Carl Dranoff, a prominent Philadelphia developer, who contributed to Aimco his portfolio of 6-A quality apartment communities in the Philadelphia market, mainly in Center City and University City.
We are pleased to welcome Carl as a partner, and we're gratified that his confidence at Aimco resulted in him becoming a top 20 investor by taking $90 million of OP units valued at $53 per share, consistent with Aimco's published net asset value.
Later in Aimco ---+ later in April, we agreed to sell our Asset Management portfolio and 4 remaining Affordable communities, completing our methodical multiyear exit from this line of business and doing so at a price of $126 million in excess of our published net asset value.
These transactions and indeed, all the good work at Aimco are due to a hard-working team energized and shaped by Aimco's intentional culture of respect, collaboration, customer focus and responsibility for results.
I'm grateful and humbled that Aimco was recognized in April as a top workplace in Colorado for a sixth consecutive year, a record of long-term excellence shared with only 7 other companies across our entire state.
For these successes and all their hard work, I offer sincere thanks to my Aimco teammates, both here in Denver and across the country.
Now for a more detailed report on the first quarter, I'll turn the call over to <UNK> <UNK>, Head of Property Operations.
<UNK>.
Thanks, <UNK>.
I'm pleased to report that we had a solid first quarter in operations.
The same-store revenues up 2.6%, expenses up 2.1% and net operating income up 2.7%.
We had strong average daily occupancy of 96.3% for the quarter, 30 basis points better than the first quarter of 2017.
We continue to provide exceptional customer service.
Residents gave us better than 4 stars for the 18th consecutive quarter with 4.26 out of 5 stars.
Our high customer satisfaction limited our turnover to 45.8% for the quarter, 470 basis points better than the first quarter of 2017.
Low turnover continues to be a key contributor to our operational efficiencies and expense results.
Looking at leases, which transacted in the quarter, same-store blended lease rates were up 2.7%, with renewal rents having solid increases of 4.9% and new leases up 40 basis points.
We saw new lease rates of 4% to 6% in Miami, Los Angeles and San Diego.
These are some of our most important markets, which account for about 1/4 of our same-store NOI.
We had the most pressure on new lease rates in Seattle, Nashville and Baltimore.
These less-impactful markets only represent 4% of same-store NOI.
Turning to the first quarter same-store revenue growth.
Our top performers had revenue increases over 3% for the quarter.
This includes Miami, the Bay Area, San Diego and Denver.
Strong performers, which had revenue growth over 2%, were Boston, Los Angeles, Chicago and Seattle.
With revenue growth of flat to 1%, we had Washington, D.
C.
and New York.
And finally, revenue was down in Atlanta and Philadelphia.
As a reminder, our Philadelphia same-store portfolio is 2 communities and does not include our premier redevelopment properties.
Those Philadelphia redevelopments, along with our substantial portfolio outside of same-store, have started off strong in 2018.
The Sterling is now 96% occupied.
The first 3 towers of Park Towne are about 90% occupied and, while construction of the fourth and final tower is not slated to be finished until September, as of today, we're about 35% preleased and our first move-ins occurred in late April.
We are confident in the Philadelphia market, having in total leased over 1,100 units at these Center City communities at rents in line with our underwriting.
At Saybrook in San Jose, we've leased 267 of the 269 completed units at rents above plan.
Across all of our redevelopment and development properties, 95% of our 2,800 renovated homes are currently occupied with rental rates in line with our projections.
Turning to our new acquisitions.
We are encouraged by the early results where we have applied our operational expertise.
Bent Tree is currently 96.5% occupied, up from 94% on day 1 with solid new lease rates, all of which exceed our underwriting.
And we've hit the ground running with our 4 new communities in Philadelphia.
Our first few days have gone according to plan, and we thank our team for their execution during this transition.
As we look at our as same-store April results, we see a solid start to the second quarter with a continuation of our strong average daily occupancy and a strengthening of new lease rates.
Our average daily occupancy for April was 96.4%, some 80 basis points higher than 2017.
Blended lease rates were up 2.6%, with renewals up 4.7% and new leases up 70 basis points.
April marks the fourth consecutive month of accelerating new lease rates, a trend we expect to continue in May as well.
Finally, May and June renewal offers went out with 4% to 6% increases.
And with great thanks to our teams in the field and here in Denver for your commitment to Aimco's success.
I'll turn the call over to <UNK> <UNK>, our Chief Investment Officer.
<UNK>.
Thank you, <UNK>.
As <UNK> discussed, we identified and executed on a few unique transactions in recent months that are indicative of our pair trade philosophy and our eye for opportunistic investing.
In February, Aimco closed on the purchase of Bent Tree apartments in Fairfax County, Virginia, just a few miles Southeast of Dallas airport for $160 million.
<UNK> mentioned this team's progress increasing rent since acquisition, but the ability to raise rents is only part of the story.
Bent Tree presented an opportunity for us to take advantage of Aimco's specific knowledge to execute a trade we believe will outperform the market in general.
Specifically, we saw opportunities in the following areas.
The market.
As <UNK> noted, Aimco operates 2 very similar properties, located 5 and 10 miles from Bent Tree, Shenandoah Crossing and Berkshire Commons.
The building.
These other 2 properties were built by the same developer that built Bent Tree.
We've taken both of those communities through various capital enhancements in recent years and understand clearly where the market demand is and what it will pay.
The team.
We promoted a new manager to Bent Tree from Berkshire Commons.
She knows the market, knows the property and has quickly set about implementing the Aimco management plan.
And finally, the system.
Aimco's ability to operate efficiently provides us an opportunity to outperform prior operations and the market.
We found a similar opportunity when we announced in mid-April that we had entered an agreement to acquire a portfolio of 6 communities in Philadelphia.
These communities, 3 of which are best-of-class renovations of the storage structures and 3 of which are new construction, fit seamlessly in Aimco's Philadelphia portfolio, with the Center City and University City focus that complements our existing properties and bring a world-class team of local knowledge that will build upon our strength.
We closed on the acquisition of the initial 4 communities on May 1.
Our East Coast acquisitions team, led by Wes Powell and Matt Conrad, has done a great job of identifying, securing and closing on these unique opportunities.
And our East Coast operations team, led by Kevin Mosher, [Jeric] Poley and Jason Kessler and assisted by many others, has done a great job of integrating them into the Aimco family and performing from day 1.
Aimco will sell Chestnut Hill Village, an older community in north suburban Philadelphia, as part of its paired trade for this transaction, and as another step in our continued reallocation of capital from weaker submarkets to stronger.
Upon completion of the transaction, Aimco's allocation to Philadelphia will increase from 8% to 10% of gross asset value with more of that allocation invested in submarkets with higher rents, higher free cash flow margins, greater potential for revenue growth as Center City and University City continue their emergence as thriving residential and professional communities.
With the implementation of Aimco's operating platform, we anticipate this portfolio will generate a year 1 net-operating-income yield of 5.3% for the 5 operating properties.
And when adding in the development community to be completed early next year, we'll have average rents of approximately $2,200 per apartment home and a 10-year expected free cash flow internal rate of return of about 8%.
Now I'd like to remind those of you who missed our Investor Day in Philadelphia a few years ago, what it is that draws us to this market, and specifically, to the Center City and University City submarkets.
First and foremost, as <UNK> noted, we have seen strong demand for our redeveloped apartment homes at The Sterling and Park Towne Place over the last few years.
They have leased up well and add underwriting, even if supplies crept into the market.
We believe that demand is driven by our resurgence in downtown Philadelphia that is largely supported by its high levels of educational attainment and strong job growth in relation to new multifamily supply.
Based on data from Green Street and MPF Research, Philadelphia's ratio of 9.9 new jobs for every new unit of multifamily supply ranks in the top tier nationally.
It is third highest among the top 50 largest multifamily markets, behind Sacramento and the Inland Empire of California.
And that 9.9 ratio is nearly double the 5:1 ratio we believe drives equilibrium in the market.
Much of this job growth is driven by companies looking to tap Philadelphia's highly educated workforce, where, in Center City, 84% of 25- to 34-year olds have a bachelor's degree or higher.
This is a number virtually identical to Palo Alto and Cambridge.
And finally, since 2002, according to REIS, Center City's compound annual rate of rent growth of approximately 3.3% lags only Seattle and the Bay Area amongst Aimco's target markets.
And that growth was delivered with much less volatility.
I'll spend a minute on the sale of our Asset Management business and the remaining Affordable properties.
In late April, we announced an agreement to sell our Asset Management portfolio and 4 Affordable real estate communities to Related for $590 million.
This binding agreement puts a substantial deposit in place as the capstone to a multiyear strategy, first announced in 2011, of exiting our Affordable business and concentrating our capital investment in the market REIT communities.
As you know, this business has been an integral part of the Aimco family for many years, and we appreciate the contributions of hundreds of teammates across the country that have helped make it successful.
We expect this transaction to close in the third quarter of this year.
And not to be entirely overshadowed by our transactional activity, as <UNK> reported, our redevelopment projects are doing well and remain on track in terms of lease-up and construction pace.
With that, I would now like to turn the call over to <UNK> <UNK>, our Chief Financial Officer.
<UNK>.
Thanks, <UNK>.
I'd like to cover today a number of subjects, starting with our financial results for the first quarter.
AFFO per share of $0.54 was up 6% year-over-year and $0.02 ahead of the midpoint of guidance.
One $0.01 of the outperformance is due to stronger-than-guided property operations, including a benefit from Bent Tree, which we own for about half of the quarter.
The other $0.01 is due to the timing of capital replacement spending.
Our balance sheet remains safe, liquid and strong.
We have limited refunding risk, less than 1% of our property debt matures during the balance of this year.
The weighted average maturity of our leverage is 8.7 years, up slightly from year-end.
We are liquid with abundant capacity, more than $0.5 billion available on our revolving credit facility and $2 billion in our unencumbered properties available as dry powder to support additional borrowings.
We have limited entity risk because we continue to use primarily long-term fixed rate nonrecourse property debt.
During the quarter, we closed $242 million of fixed-rate senior loans at a weighted average interest rate of 3.48%, lowering the weighted average interest rate of our total fixed rate debt by almost 10 basis points to 4.55% and reducing annual interest expense by more than $3 million.
We also placed $119 million of 5-year floating-rate property loans with interest at 30-day LIBOR plus 125 bps, an all-in rate today of 3.17%.
The 5-year term fills a hole in our maturity ladder, and after the expected repayment of our term borrowing, reduces our exposure to floating interest rates to less than 7% of total leverage.
Next, I'd like to cover the financial highlights of our year-to-date transaction activities.
Our investment discipline is to fund these acquisitions by paired trades.
Proceeds from the sale of asset management portfolio, the remaining 4 Affordable communities and Chestnut Hill Village will complete the funding for the Bent Tree and Philadelphia acquisitions, funds 2018 redevelopment activities, reduce leverage by 2/10 of a turn, and fund redemption of our Class A preferred stock when it is callable in the second quarter next year.
Taken together, the properties purchased by Aimco have a free cash flow, internal rate of return, 400 basis points higher than we expect from the assets sold to fund the purchases.
While the trade will be mildly dilutive to AFFO for the next couple of years, it redeploys the value of the depleting cash flows of our Asset Management business into high-quality operating communities with durable cash flows and promising future growth.
This trade is a good example of our choosing long-term value-creation and free cash flow growth, even if there is some reduction in short-term earnings.
Now turning to full year 2018 guidance, as updated in last night's release.
Notwithstanding our first quarter beat and good momentum entering the second quarter, we made no change to Aimco's same-store revenue, expense and NOI guidance.
It is still early in the year, and we will take another look after the second quarter.
Given the pending sale of the Asset Management business, we lowered guidance from $36 million for the year to $22 million to $24 million, assuming the sale closes sometime in the third quarter.
We lowered pro forma FFO and AFFO per share by $0.03 at the midpoint to take into account first quarter results and the impact of our transactional activities.
Now I'd like to point out our annual enhancements to our supplemental schedules.
We now present property revenue, exclusive of resident utility reimbursements and expenses net of such reimbursements.
We believe this presentation results in a clearer view of underlying revenue and expense growth rates.
This change was contemplated when we set full year guidance and is expected to decrease full year same-store revenue growth by 7 basis points.
For the first quarter, the impact was a 30 basis point reduction in same-store revenue growth.
We also adjusted how we present Aimco proportionate share.
Schedule 2A now reflects Aimco's consolidated results, while Schedule 2B shows the amount of consolidated AFFO attributable to third parties as well as Aimco's share of AFFO from unconsolidated investments.
Schedule 10 has been slightly revised to present more clearly our redevelopment and development activities and the value these activities create for Aimco.
Last, given investor interest, we added a schedule to highlight some of what makes Philadelphia an attractive place to invest and helpful to diversify the Aimco portfolio.
We would also like to invite all of you to tour our communities in Philadelphia and experience firsthand what we find so exciting.
Several tours are in the process being scheduled for the summer, but should those dates not work, please reach out to me, Lynn or Susie, and we will accommodate you.
With that, we will now open up the call for questions.
(Operator Instructions) Laura, I'll turn it over to you for the first question.
So last quarter, you guys talked about the midpoint of revenue growth it was comprised of an increase in average daily occupancy of 10 basis points and blended lease rate, growth of about 2.5%.
You achieved better results in the first quarter with occupancy of 30 bps, blended lease rate growth was 2.7%.
And those trends continued, if not improved, a bit into April, particularly on the occupancy side.
So just curious if you expect that to trend lower through the balance of the year.
Or if you're just being a little bit conservative as it remains early in the year.
<UNK>, thank you for your question.
This is <UNK>.
And you recapped the facts exactly right.
We're off to a great start to the year, but it is 25% of our business.
So we like what we have achieved so far, but we have the other 75% of our leases yet to transact, and we look forward to reporting our progress as we proceed through peak leasing.
And then, so when you look at the supply picture quarter-by-quarter, do you expect that to ramp, remain fairly steady or decrease as the year progresses.
And then what's kind of the early expectation as you look into '19 versus '18 supply.
<UNK>, this is <UNK>, and then I'll turn it over if anybody else wants to add some additional color.
As I think we collectively all have learned predicting supply is somewhat challenging, particularly when you talk about it on a quarterly basis.
What we see in our submarkets is that, that supply in aggregate is expected to be delivered at a fairly ratable pace throughout 2018, that's always subject to change.
We'll see what actually happens, but that's what the third-party forecasters are currently projecting.
And I just like to remind everybody, as we think about supply, we look at it when supply is meaningful, and in our definition, that is supply as a percentage of existing stock of greater than 2% and that supply is being delivered into a submarket where Aimco has a price-point communities.
And so as we look at supply in that lens, we have roughly about 20% of our gross asset value that would meet that criteria, and that's actually a fairly similar, if not maybe down slightly, from where we were in the end of the fourth quarter.
Thank you, <UNK>.
I think it's one of the things we appreciate and the relative weight to it is, of course, in the eye of the beholder, but I'm very grateful for Carl's belief in what we're doing.
I think he'll be a great partner and help us in our work going forward.
It's a free country, you're entitled to your opinion, <UNK>.
You ask this question each quarter, and I think it's a good one.
And it's something that we think about, we keep in our toolkit.
You know that we've made stock buybacks in scale at previous times and we may yet again, but we haven't done it this quarter.
It's a very good question.
As I've said, it's something we think about, something we've done in the past and we may do in the future, but we didn't do this quarter.
So I'll give you just kind of rough guidelines.
So on the Asset Management business, it is a little tough to apply a cap rate to it per se because this is a fee-based business.
We were not selling underlying real estate, so that's really not the way we looked at it from a value perspective.
We look at it as a valuation of the fee and income stream associated with that over the runoff of the business.
And effectively, we kind of put it into an IRR-based model that they ended up in the 4s.
The Hunters Pointe communities were real estate transactions, and those are 4 caps.
Those are mid 4s on a cap rate basis.
And Shirley, just to clarify what <UNK> said, the free cash flow internal rate of return that he quoted in the 4s, it's 4.4% and that's actually the combined free cash flow IRR for the fee stream that <UNK> described and the 4 Affordable communities in Hunters Point of San Francisco.
Well, in terms of other opportunities, we continue to look all over the country on a regular basis as we've kind of highlighted here this quarter.
When we do make a trade, we are making a trade on paired trade basis where we think we can trade out of assets that have a lower long-term value to the portfolio than what we're buying, and we measure that via free cash flow internal rate of return.
We have an ongoing pipeline of opportunities that we look at.
If you look back to last year, we didn't buy anything.
This year, we've done a couple of deals, and I think as we look forward, I would expect we will do very selective deals when we see an opportunity.
I think it's a little bit of both.
I think that as we look at opportunities, kind of following up on the prior question, when we see things come across, we look at it in relation to the submarket specifically where the property is located.
We look at it in how that submarket fits within our portfolio.
What we have within our portfolio that we could trade out of, that would be an accretive, better trade to come out and go into the new opportunity and so we certainly saw that in Philadelphia.
This was not a portfolio that was on the market.
This was an opportunity that we had to approach a local owner, developer who had a very high quality portfolio in submarkets that we frankly are quite attracted to and we thought it was a good fit for our portfolio, and Weston and his team was able to put together the deal.
Yes.
<UNK>, this is <UNK>.
I believe blended lease rate for this portfolio a year ago we're up about 2.2%.
<UNK>, this is <UNK>.
We basically produced on our plan to this point when we get into May, June and through August, in our peak season.
That is when demand typically accelerates and we see a lift.
It's early days, and we will wait and see exactly how that happens, but we're optimistic about our positioning being highly occupied and having strong rates at this point going into peak season.
Drew, it's <UNK>.
I'll walk you through the Miami piece.
So in Brickell, we have a very specific building, a yacht club that has a lease-up that's going to be happening across the street that's panorama.
This particular building, we had anticipated moving, that will start happening in the fourth quarter.
It's been a little delayed in their deliveries, so we've had a little stronger occupancy there going into the first quarter.
And then the balance of our portfolio also has performed a little stronger than we had anticipated.
So I'd say a bit of it is timing on some supply, specifically in Brickell and the rest of it is doing a little better than we thought.
Thank you for the question.
This is <UNK>.
That Comcast Innovation Center is literally across the alley from The Sterling building that we completed the redevelopment on.
You heard <UNK> say earlier, it's over 96% occupied today.
We anticipate that, that building will do nothing but good for The Sterling.
For Park Towne, that's about less than half a mile away from it and the Dranoff buildings there are also within 0.5 to 0.75 of a mile.
And so as we look forward, yes, we see a lot of good things happening, not just with Comcast, but with other companies in the area.
We've got Vanguard that's bringing some of their operations downtown in the next couple of years.
And just the dynamic in Philadelphia.
We were there last week with our Board, did a walking tour.
We were walking around the streets and there is an element of dynamism, and I realized there are Philadelphia doubters out there, and I candidly have been one of them over time.
And you get out and you walk the streets, and there's a different feel in that town right now than there was 5 years ago, and that's really what we're looking forward to, and that's what we're looking to leverage.
Yes, Drew, thank you for the question.
You're right.
We have about 25% of our 2019 maturities is pre-payable at par, starting in the fourth quarter.
We have started discussions with our lenders on that debt and so the potential benefit from refinancing that debt at today's rates was contemplated in our guidance and we're working to achieve that.
<UNK>, first of all, thank you very much, and I'm confident that you'll have an opinion about Philadelphia as a hometown boy, and maybe you can reassure others on the call, that we do look at markets of changing our weighting, and other markets where we'd like to increase our weighting.
And it's really driven more by investment opportunities than it is by G&A.
Our G&A as a percentage of revenue or GADs right in the middle of the pack, and we want to be careful and frugal about it so ---+ but the main investment issue is where we can put capital and have the highest risk-adjusted returns.
As <UNK> mentioned, we look regularly across the country at lots and lots of deals, but we do very few because we look for ones that have sort of much higher returns than the properties would sell to fund them.
For example, most recently, the spread between buying and selling in the paired trade that <UNK> described is 400 basis points.
Well, of course, what goes on at the board meeting, goes on in the board meeting, wouldn't necessarily be what ---+ wouldn't want to report here on the call.
But broadly, I think they think as our shareholders do, that we should focus on our business and increasing net asset value, and that over time, this will be reflected in the market.
So thank you, and thank you all on the call for your interest.
I reiterate <UNK>'s invitation to tour Bent Tree or Philadelphia, and I look forward to seeing many of you in a month's time at NAREI<UNK>
Thanks again.
| 2018_AIV |
2017 | MTRX | MTRX
#Thank you.
I would now like to take a moment to read the following.
Various remarks that the company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2016, and in subsequent filings made by the company with the SEC.
To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the company's website.
As a reminder, there are supporting slides for the webcast posted on our website.
I will now turn the call over to <UNK> <UNK>, President and CEO of Matrix Service Company.
Thank you, <UNK>, and good morning, everyone.
And thank you for joining us.
During challenging times like these, we must always guard against losing focus on our core values, number one of which is our attention to the safety of all our employees.
I would, therefore, like to highlight just a few of the recent awards given to our teams for a great safety performance.
PSEG, one of the largest combined electrical and gas companies in the U.<UNK>, recently named Matrix NAC as the top contractor in a supplier performance management program, which grades contractors on safety, environmental, cost and schedule, partnership and sustainability.
Matrix NAC was also awarded 7 outstanding safety awards at the New Jersey Governor's Occupational Safety and Health awards for their excellent safety performance on various Atlantic City electric projects.
In early April, the National Electric Contractors Association named Matrix NAC as the recipient of its 2017 NECA national district 2 Safety Excellence Award.
The team also received the Safety Excellence Award at a regional level for the second consecutive year.
Matrix Service's turnaround and plant services team was awarded the Shell Martinez Refinery bronze eagle for their demonstrated goal 0 safety culture within the Shell Martinez Refinery as well as across the company.
Since 2011, Matrix service has worked 245 hours inside the refinery.
In addition, Matrix Service was also awarded 8 contractor safety awards from the American Fuel & Petroleum Manufacturers for work at various customer refineries and their operating facilities.
And finally, Matrix Services Port of Catoosa fabrication facility recently surpassed 2 years and approximately 650,000 hours without a recordable injury.
Congratulations to all of our employees for putting our core value of safety first, which differentiate us from our competitors and brings greater long-term value.
As indicated in the businesses update issued on April 27, 2 key issues have negatively impacted our third quarter and the full year: profit reduction on a major project in our Electrical Infrastructure segment and the cumulative impact of continuing market softness resulting in lower revenue volumes.
The profit reduction on the major electrical project is a result of ongoing factors that are impacting scheduled progress and labor productivity.
Our customer recognizes the impact of these factors on our ability to advance to project, and given our strong long-standing relationship, we believe an amicable outcome for both parties can be achieved.
We appreciate the concerns everyone has over this project, and I want to assure you that as we demonstrated to you in the past, we have the experience, ability, resources and contract structure needed to ultimately work through this issue, and we will work through this.
We're very confident in our project team's ability to complete this project in accordance with our high standards of safety and quality.
The project is expected to be completed in the back half of fiscal 2018.
Because we are in the midst of working through these issues, we are not in a position to provide additional information at this time.
While the electrical project just discussed is the main cause for the loss in this quarter, more impactful to our financial performance in the year has been the cumulative effect of continuing market softness, resulting in ongoing delays in new project awards and starts as well as lower maintenance spending.
The resulting lower revenue volume affects us 2 ways.
First, it means less opportunity for direct gross profit.
Second, it results in under recovery of construction overhead costs.
In spite of strong performance in the quarter by our project teams on earned revenue, the impact of this spending softness alone caused a small loss in the third quarter and is indicative of the challenging market conditions faced by our customers across the segments we serve, including a slower-than-expected recovery in commodity prices, minimal global GDP growth and a regulatory environment that continues to be impacted by issues such as FERC leadership, regulatory uncertainty and California Senate Bill 54.
These ongoing conditions have caused our customers to continue to take a cautious approach to capital investment decisions and maintenance spending.
Yet as we have discussed on earlier calls, there is pent-up demand for maintenance spending as well as a strong pipeline of capital projects that are key to our customers' long-term business plans and operational integrity.
As such, we are confident that these projects are forthcoming.
The challenge is to balance our construction overhead costs, while also ensuring we have the resources necessary to develop, propose and execute on our contractual commitments as markets improve.
Our bidding activity is exceptionally high in many parts of our business, which bodes well for future backlog build and business growth.
We're consistently reviewing our cost structure against the full potential of the business to find the appropriate balance of between construction overhead resources and opportunities.
We'll share more with you about our market and project outlook in a few minutes, but for now I'll turn the call over to <UNK> to discuss third quarter results.
Thank you, <UNK>.
Consolidated revenue for the quarter was $251 million, which compares to $309 million in the prior year.
This decrease was driven by the forecast change in the quarter related to the Electrical Infrastructure project discussed earlier and the reduced revenue associated with the wind down of the Dakota Access project as well as fewer project awards in Storage Solutions.
As you can see in Slide 1, market softness has impacted revenue volumes across the business.
And as a result, our revenue of $251 million in the quarter is the lowest in any quarter over the last 3 years.
However, from a project execution standpoint, our people continued to perform at a high level.
And on a consolidated basis, direct margin performance has met or exceeded our targets, with the exception of the Electrical segment project already discussed.
The company recorded a consolidated loss in gross profit of $2.6 million in the quarter compared to a gross profit of $27.3 million in the same period last year.
The reduction in gross profit is primarily due to the $18.9 million charge recorded in the Electrical Infrastructure segment as well as lower revenue volume as compared to historical norms in the Storage Solutions segment and in portions of the Oil Gas & Chemical and Industrial segments.
For these reasons, reported gross profit declined to a negative 1% in the quarter compared to 8.8% in the same period a year ago.
Consolidated SG&A expense was $18.6 million in the quarter compared to $21 million a year ago.
We have worked to control our expenses in this uncertain environment, and this approach has allowed us to keep SG&A from growing, even though we continue to invest in business improvement initiatives.
The decrease in the quarter is primarily due to a reversal of incentive compensation expense as a result of the financial performance of the company.
Net interest expense was $0.8 million and $0.2 million in the current and prior year quarters, respectively.
The increase in interest expense over the prior year was due to the higher average debt balance in the current period.
Tax rates for our fiscal year will be unusual, because of the respective operating results in the U.<UNK> and Canada.
The tax benefit related to the Electrical Infrastructure segment project is calculated based on Canadian tax rates, which are much lower than U.<UNK> rates.
This income tax rate differential and accounting rules, combined with nominal consolidated pretax earnings, are projected to result in a fourth quarter effective tax rate of approximately 110%.
Looking forward to fiscal 2018, we are expecting a tax rate between 38% and 40%.
For the 3-month period ended March 31, 2017, Matrix reported a net loss of $13.8 million, resulting in a loss per share on a fully diluted basis of $0.52.
For the same quarter a year ago, Matrix reported net income and fully diluted earnings per share of $4.4 million and $0.16 per share, respectively.
Based on year-to-date results and projected results for the fourth quarter, our updated annual revenue guidance is now between $1.2 billion and $1.25 billion.
Given the tax implications I've previously discussed, along with other issues impacting the year, we expect earnings per share for fiscal 2017 to be close to breakeven.
Now let me talk briefly about third quarter segment margins.
Gross margins for the Storage Solutions segment in the quarter were 7.4% compared to 11.4% in the prior year.
In spite of strong project execution, lower volumes resulted in under recovery of construction overhead costs, which in turn reduced storage gross margins.
In our Electrical Infrastructure segment, gross margins in the quarter were a negative 16.3% compared to 11% in the same period last year.
Margins in the current quarter were negatively impacted by the charge on the project discussed earlier.
In Oil Gas & Chemical, gross margins were 6.3% in the current period versus 4.7% in the same period last year.
The higher margin for the current period resulted from higher margin capital work as well as project work associated with our recent engineering acquisition.
However, the lower revenue in the maintenance portion of the business resulted in under recovery, which could continue to impact gross margins.
In our Industrial segment, gross margins were 3.7% in the quarter compared to a negative gross margin of 3.1% in the prior year.
Gross margins this quarter were positively impacted by the addition of higher-margin work from our recent engineering acquisition, offset by continued slowness impacting the rest of the Industrial segment.
Now I will discuss 9-month results.
On a consolidated basis, revenue for fiscal 2017 was $906 million as compared to $952 million in the prior fiscal year.
Gross profit for the 9-month period totaled $58 million, which compared to $92 million in the prior year period.
Gross margins for the 9-month period were 6.4% and 9.6%, respectively.
The decrease in gross profit and gross margin in 2017 is primarily due to the impact of the Electrical Infrastructure project as well as lower revenue across most of the business.
Consolidated SG&A expenses were $57 million and $66 million for the 9 months ended March 31, 2017 and 2016, respectively.
The decrease in SG&A on a year-over-year basis was primarily due to an expected client bankruptcy that resulted in a nonroutine bad debt charge of $5.2 million in the prior year, reduced by fiscal 2017 incentive compensation expense as a result of the company's financial performance.
Net income for the first 9 months of fiscal 2017 was $0.8 million as compared to prior year net income of $19.7 million, with fully diluted EPS of $0.03 and $0.73 in the same periods.
As shown on Slide 4, at March 31, 2017, our cash balance stood at $40 million as compared to $66 million at December 31, 2016, as the company paid down $28 million of debt in the quarter.
The cash balance, along with availability under our senior credit facility, provided liquidity of $147 million on March 31, 2017, a decrease of $82 million since December 31, 2016.
The reduction is primarily due to a senior credit facility capacity constraint triggered by the company's financial performance in the quarter.
Despite this reduction in liquidity, the company's balance sheet and liquidity continues to support its long-term strategic growth plans.
I will now turn the call back to <UNK>.
Thanks, <UNK>.
Want to spend a few minutes on backlog and opportunities in the markets we serve.
We achieved a book-to-bill of approximately 1.0 for our 2017 fiscal second quarter, a noticeable improvement over the comparable periods in 2015 and 2016.
In our third quarter, we saw total project awards of $228 million, achieving a solid book-to-bill ratio of just over 0.90 in this current environment.
As we commented earlier, in the fiscal year, this flattening out of backlog was anticipated as we move through fiscal 2017, with expectations that we'll begin to rebuild through fiscal 2018.
Let me share more with you on a segment basis.
Slide 5 is a look at backlog trending for our Oil Gas & Chemical and Industrial segments, both of which bottomed out in June of 2016.
As you can see, Oil Gas & Chemical is trending up, with backlog at a record high of $241 million in this quarter, up 164% over the end of fiscal 2016.
This increase is driven by the need for new capacity build-out and spending in gas processing and NGLs and the expertise brought to us by our most recent acquisition.
One such example is a recent project announced for a cryogenic gas processing plant in Oklahoma, which would not have been possible without our recent engineering acquisition.
Also contributing to this backlog build are capital projects and expanded maintenance opportunities in refinery geographies that have not been traditional Matrix strongholds.
Excluding these geographies, our traditional refinery maintenance and turnaround business has provided limited impact to the recent improvement in segment backlog.
However, based on market conditions and client demand for our planners, we expect greater contribution in fiscal 2018.
For example, we continue to work with our clients on already scheduled maintenance activities, with fewer limitations on scope.
Additionally, we are experiencing fewer postponements, all of which is indicative of higher spending volumes in the future.
We expect Industrial to begin trending upward with improving commodity pricing that is positively impacting our iron and steel customers.
Maintenance volumes and capital project opportunities are beginning to improve.
And undoubtedly, this trend is supported by escalation of metal prices that we are seeing in our own project procurement activities.
In addition, there's a significant uptick in the demand for thermal vacuum chambers to support increased activity in the aerospace industry.
We have deep experience in the design and construction of these facilities, and with limited competitors, we are in the lead position to pursue and win these opportunities.
Included in our current backlog is a recent award with additional opportunities in our pipeline.
And finally, this segment is benefiting from the additional expertise brought by Houston Interests in material handling, bulk material loading and unloading and marine structures as well as related automation and controls in a variety of markets.
In Storage Solutions, I want to give you a perspective on the backlog trends and status.
As you may recall, we booked the Dakota Access terminal project in June of 2015.
This addition created a major spike in our storage backlog at a critical time in the midstream markets.
This project provided a significant bridge for our operations as our normal storage business began to decline due to the softening market.
This decline bottomed in September of 2016.
A key element of our future growth in this segment is in the extensive storage internal opportunities that currently exist in the marketplace and our project pipeline.
These projects include traditional crude oil storage terminals, export terminals as well as specialty vessel projects in small and large-scale LNG and NGL-related facilities.
One example is our recently announced award of EPC on the 10-tank terminal expansion project for Vopak's Deer Park facility along the Houston Ship Channel.
This facility is designed to receive, store and export ethanol and biodiesel products.
In addition, we are seeing a strong bidding uptick in traditional flat bottom storage tanks across most of North America.
In LNG, forecasts show that world demand will double by 2040.
In the short term, proposed projects and those already under development underpin market forecast indicating that the U.<UNK> is expected to be the world's third-largest exporter in the next 5 years.
To meet near-term supply requirements, construction timing of large-scale export facilities demand that awards be made in the coming year.
Given our leadership position in engineering, fabrication and construction of cryogenic tanks and related infrastructure, we are well positioned to benefit from this growing market.
At the same time, Matrix is uniquely positioned as a contractor of choice in the growing small-scale LNG space.
We are currently completing the work on 2 such facilities with additional bid opportunities, both domestic and abroad.
Finally, as a reminder, the FEED work done by Matrix PDM Engineering has historically provided additional EPC opportunity for our Storage Solutions segment.
Our full life cycle offering, reinforced by a recent acquisition of Houston Interests, gives us the unique position to create project opportunities, rather than just depending on a traditional project bidding process.
In addition, our ability to provide a full EP solution in our storage markets gives us a higher opportunity for a successful outcome as we can control a majority of the variables in the project.
The Dakota Access Project is a great example of this comprehensive ability.
Our project teams successfully executed 6 terminals simultaneously on a fast-track basis, and I want to take this moment to thank our Matrix team for a job well done.
In Electrical Infrastructure, we are not currently pursuing any power generation projects as the EPC or general contractor.
However, there is substantial work to be done in individual packages, such as civil structural, centerline erection, mechanical, piping, electrical and instrumentation that fit our strategy and risk profile.
One example is a recently awarded construction award for the aboveground electrical balance of plant for PSEG's new 540-megawatt combined cycle power plant, Sewaren 7.
In electrical substation, transmission and distribution, immense project infrastructure needs, driven by grid modernization and repairs, represent significant opportunities for Matrix with our strong presence in the Northeast as well as growing opportunities in the Midwest and other parts of the country.
In summary, the takeaway is this: The need for critical infrastructure across the markets we serve has not changed from previous calls.
The long-term opportunities in our end markets is substantial, our people are best-in-class and our diversified platform allows us to manage through the cyclical nature of our business.
Our recent acquisition of Houston Interests has further extended our reach geographically and to new markets, while also adding capacity to respond to increasing volume of domestic and international terminal work in our funnel.
While these past couple of years have been extremely challenging for our customers and for us, we're confident in the long-term opportunities within the markets we serve and our ability to capitalize on these opportunities.
With that, I'll open the call for questions.
Yes.
So if you think about the systems in a power plant or any project, like the systems in your car, right.
Your car doesn't run unless all those systems are operating, so whether it's transmission or your cooling system or your air intake system.
So it's all similar to ---+ in a power project or any project.
So as we complete systems, so they might be a hot reheat system or it might be a high-temperature steam system or it might be an electrical system, we turn those over in pieces to the commissioning team so when they go through the start of plant update, they actually run through performance testing and startup and commissioning protocols on individual systems before they put all the systems together to make the entire plant facility, or in my example, the automobile run.
And so we have to complete what we call bulk construction to curate the systems, and then those systems are commissioned.
And those systems are put together to create a fully operating plant.
So that was what that term meant.
So as we mentioned, that there ---+ we are ---+ are numerous factors, which we're not planning to get into the detail on, that are delaying schedule and result in labor productivity declines.
And those things are ---+ all pushed back the ability for ---+ to complete bulk construction and then turn those systems over.
Again, can't get into a lot of details on the current electrical project, is that the principal difference is the Garrison project was an EPC project.
The Napanee project is a C only.
The engineering and a lot of the procurement and engineering procurement is divided by others.
That's not within our responsibility.
So those are the 2 principal differences.
As it relates to the overall size of the company, we continue to feel strongly in our ability to grow our business and on the back of the 4 operating segments that we report to you on.
And we see opportunities, really, in all of those segments.
Based on our strategic positioning today, and as our markets approve ---+ improve, that we'll be able to continue to grow our top line and improve our bottom line performance.
Yes.
I'll take that one.
So as I mentioned, we've got $147 million of liquidity at the end of the quarter.
And if you look at our balance sheet, taken cash out of the balance sheet, our net current position is net current assets of $100 million.
So we've got more owed to us from customers than we have obligations to expend.
So I don't see a significant issue with us being able to fund the work that we've got in front of us.
That's something that ---+ liquidity is something that we've obviously talked about on every call.
It's something we consistently monitor, and we'll continue to that.
Our intent is to continue to keep a strong balance sheet so that doesn't become an issue.
And quite frankly, keeping a strong balance sheet will help us get through this issue.
So if you'll recall, <UNK>, the original project was around USD 450 million, and there've been some change orders.
And the project now is a little over 50% complete.
So there's still ---+ we still got another 4 quarters or so of work to do on the project.
So <UNK>, before I answer the question, I'm impressed at your project management skills.
So yes, so we are, on various parts of the plant, we are working overtime.
And so ---+ and we're trying to manage that against ---+ too much overtime is not good for productivity, and it's not ---+ certainly not good for safety performance.
So we were on a bit of a sort of a rolling schedule where we're making sure nobody on the job site works longer than 2 weeks straight.
And ---+ but we are working overtime on several elements of the remaining work.
So certainly, in our contract, there are certain requirements for completion.
And those are some of the issues that we're working through with our customer.
And that's really today, all I can say about that.
So <UNK>, I'll just add a little bit.
So if you look at our ---+ what we've done is considered various scenarios in our forecast on the project and just reported to what we believe is the most likely outcome.
The ---+ again, the timing has been challenging.
I think, there's ---+ with our clients in the energy markets, I think they've been looking for some stability in commodity pricing as well, as they sort through how they're going to spend their capital dollars.
I can tell you that our bidding environment related to all aspects of our storage delivery is some of the highest that it's been, to the extent when we talk about construction overhead that ---+ our issues there are really almost gets to be a capacity issue from an estimated standpoint, where we have so much project opportunities that we're in a position now where we're actually sorting through the projects that best fit our risk profile and our ability to be successful, and where we think we can deliver those projects.
And so as we go through the next few months here, we hope to see some of those projects start to get in the backlog.
And that'll give us a better feel for how we're going to judge guidance coming into our fiscal 2018.
As I mentioned in our prepared notes, there are ---+ we have no either EPC or general contractor proposals in-house related to full power plant construction.
So I would tell you over ---+ at least over the near term, and near terms longer than 6 months, so over the next couple of years, you will not be seeing us adding a full EPC power job into our backlog.
We're much more focused, I think, where we have a greater opportunity and a better risk profile for our business in the packages into these projects where we've got maybe a regional dominance in a delivery.
So for instance, the electrical package on the Sewaren job for PSEG, we've got a very, very strong presence in the electrical construction markets up on the Northeast.
And we can deliver a strong A team to that project and so build our resume that way.
So that will be the trend that you see from us, and I would seriously doubt anytime over the next few years, you're going to see us add another large power job.
Thank you to everybody who listened in today and for the great questions.
And we look forward to seeing you on another call.
Hold on.
<UNK> <UNK>, are you ---+ do you have under another question.
Yes.
So if we break it into pieces into the full terminal applications where we are and have been very busy in our bidding environment for projects, majority throughout the Gulf Coast, but some in sort of central parts of the country as well.
So that bidding environment's very strong, and that timing of awards is the thing that we've been ---+ that our clients and us have been struggling with, probably over the next ---+ last 2 quarters, which we explained in some detail on our last call.
And as you get into sort of our basic flat bottom tank business and our tank maintenance and repair business, the amount of opportunities over the last couple of months has been fairly lean, and the competition has been very stiff.
We're starting to see more opportunities break in our flat bottom tank business and into ---+ and with, say, bigger packages.
As we like to say, the onesie, twosie tanks really allow for some stiff competition with more of the mom-and-pop suppliers.
But we're starting to see bigger packages, and so we're ---+ that's why we said earlier in our prepared remarks that we think we've seen the bottom in our flat bottom tank business and expect to see that continue to rise here over the next couple of quarters.
And then just talk about specialty vessels in both large-scale LNG and then smaller scale, midscale LNG facilities for export and for peak shaving.
We're seeing exceptional amount of opportunities there.
Some of those that we're in ---+ actually a lot contract discussions with some of those clients.
Obviously, we have to win that work, and they've got to get through their financial approval process at their board level.
But we're very, pretty comfortable in our position in that market and where we see that going over the next couple of quarters.
Right.
So we have ---+ as <UNK> said in his remarks, our direct margin performance on the work that we have in backlog has been very strong.
It's been at or above what our expectation is, our performance.
And obviously, that's consolidated mix between the business.
But overall, we feel very good about that, including what's going on in our storage business.
And so we've been very careful to not take work that is overly risky or extremely low margins just to run work through the business.
And so we will continue to do that and to have that philosophy.
So I think that going forward, certainly as the market gets a little hotter as labor availability continues to maybe become a little bit more of a challenge out into the future, we're going to see some opportunities for some improvement in our overall pricing.
But I would not expect that largely in the real near short term, but over the long term, over the next, probably year I think, we'll start to see some pricing improvement overall for our industry.
And ---+ but again, the work that we're taking into backlog now, we're meeting our risk and margin profiles that we expect as a business.
Okay.
Again, thanks, everybody, for listening to the call and for the good questions.
And we look forward to speaking with you again in the next call.
| 2017_MTRX |
2015 | CATY | CATY
#Thank you, <UNK>, and good afternoon.
Welcome to our 2015 first-quarter earnings conference call.
This afternoon, we reported net income of $36 million for the first quarter of 2015, and 15.1% increase when compared to a net income of $31.3 million for the first quarter 2014.
Diluted earnings per share increased 15.4% to $0.45 per share for the first quarter of 2015, compared to $0.39 per share for the same quarter, a year ago.
In the first quarter 2015, we had a solid loan growth of $310 million or 3.5% quarter-over-quarter.
This brings our March 31, 2015, total loan balance to $9.2 billion.
Loans increased in every category, with CRE loans increase at $177 million, commercial loans at $52 million, construction loans at $47 million, and residential mortgages by $30 million.
We continue to see our loan growth in 2015, in the range of 10%.
For the first quarter of 2015, our total deposits increases by $330 million to $9.1 billion.
This represents an increase of 3.8% quarter-over-quarter, or 15% on an annualized basis.
Our core deposits increased by $79 million or 6.95% on an annual basis from December 31, 2014.
During the last quarter's conference call, we announced a signing of the merger agreement with Asia Bancshares.
We are looking forward to the completion of the merger with Asia Bancshares, which we now expect to occur in the third quarter of 2015.
With that, I will turn the floor over to our Executive Vice President and CFO, <UNK> <UNK>, to discuss the first quarter of 2015 financials in more detail.
Thank you, <UNK>, and good afternoon, everyone.
For the first quarter, we announced net income of $36 million, or $0.45 per share.
Our net interest margin was 3.41% in the first quarter of 2015, compared to 3.36% in the fourth quarter of 2014, and compared to 3.38% for the first quarter of 2014.
In both the first quarter of 2015 and the fourth quarter of 2014, interest recoveries and prepayment penalties added 4 basis points to the net interest margin.
An additional $50 million of structural repurchase agreements at 3.5% matured on January 8, 2015, adding an additional 4 basis points to the net interest margin for the first quarter of 2015.
Non-interest income during the first quarter of 2015 was $8.5 million.
Non-interest expense decreased by $4 million or 8.2%, to $44.1 million in the first quarter of 2015, compared to $48.1 million in the same quarter a year ago.
The decrease was mainly due to costs associated with debt ---+ debt redemptions incurred in the first quarter of 2014 of $3.4 million, as well as an $835,000 decrease in the amount of employee salaries and benefits expense in the first quarter of 2015.
The effective tax rate for the first quarter of 2015 was 37.3%.
As the result of an investment in a renewable energy tax credit fund made on April 14, 2015, we expect that our effective tax rate for the full year of 2015 will be between 30% and 28%.
The additional pretax amortization expense for these investments would be between $15 million and $18 million for the last three quarters of 2015.
The second-quarter income tax provision will reflect a catch-up adjustment to reflect the lower effective tax rate for the full year 2015, resulting from the investment in the renewable energy tax credit fund.
At March 31, 2015, our Tier 1 leverage capital ratio increased to 13.16%, our Tier 1 risk-based capital ratio decreased to 14.33%, and our total risk-based capital ratio decreased to 15.6%, as compared to December 31, 2014.
Our ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.
At March 31, 2015, our common equity Tier 1 capital ratio was 13.18%.
The new Basel III capital ratio regulations reduced our risk-based capital ratios by almost 30 basis points compared to December 31.
Net charge-offs for the first quarter of 2015 were $332,000 or 0.004% of average loans, compared to net charge-offs of $5.8 million in the fourth quarter of 2014, and net charge-offs of $4.4 million in the same quarter a year ago.
Our gross loan loss recovery stream in the first quarter of 2015 was $4.1 million, and our gross charge-offs were $4.5 million, all of which were from specific reserves set up in prior quarters.
Our loan loss reversal was $5 million for the first quarter of 2015, compared to $2 million for the fourth quarter of 2015, and $0 for the first quarter of 2014.
Our non-accrual loans increased by 14.5% or $10.2 million during the first quarter to $80.3 million, or 0.87% of period-end loans, as compared to the fourth quarter of 2014.
Thank you, <UNK>.
We will now proceed to the Q&A portion of the call.
Thank you.
Yes, Aaron, this is <UNK> <UNK>.
We think the margin would probably decline slightly.
The first quarter is a short quarter, and so for the mortgage-backed securities and loans in February, we earn a full month of interest, compared to when there's only 28 actual days.
In terms of the cash levels, that is just ---+ it's just temporary near the end of the quarter, so the average cash levels were quite a bit lower.
So that should have a fairly low impact on the margin, and then we did have more reliance on CDs in the first quarter.
We borrowed $50 million from the State of California.
That was at 22 basis points, and we hope to be borrowing $50 million a quarter for the rest of the year.
And then we also had about $120 million of broker CDs.
It was due in part to our very strong loan growth in the first quarter, and then seasonally, particularly in the month of February, we have many of our ---+ some of our depositors wiring funds back to mainland China or to Taiwan during the Chinese New Year holidays.
So we think in the second quarter that we'll get better core deposit growth.
That is something that we saw last year.
And then on the loan pricing, <UNK>, maybe you want to talk about what rates we're getting on new loans in the first and second quarter.
I think for the pricing, as far as pricing is concerned, we don't see any more deterioration of pricing.
And typically we are, for C&I loans, we are getting Wall Street anywhere from Wall Street plus zero to Wall Street plus 0.5.
And for construction loans, the pricing is much more favorable, and for that, the pricing will vary from anywhere from Wall Street plus 1 to 1.5, with floors at a higher level.
And CRE loans, there has been a little bit more requests for fixed rate loans, but however, the pricing of that is ---+ for five years, is around about over 0.25 in that area, and for floating rate, we are getting roughly Wall Street plus 0.5, somewhere near that level.
And then residential mortgage we're seeing just a slight drift each quarter, as ---+ mainly because we stopped making 30 year fixed rate residential mortgage, starting in March of last year.
This is <UNK> <UNK>.
As I look through the new loan book, new CRE loan book in the quarter, it's really all over the place.
For example, we have loans to finance a warehouse for our import customers.
We also have loans to office building, and of course, we have some for hotel.
And it's really very varied in terms of category, and there's no one particular category that stand out.
I think geographically, New York, the East Coast region still continues to be the fastest growing region for us in the first quarter.
Right, percentage, right.
Thank you, Aaron.
Yes, we will not give any more guidance.
<UNK>, this is <UNK>, and I really don't see it as yet, and you may recall that our first quarter usually sees a lot of pay-down.
We do see that pay-down.
On the other hand, we also are booking more new loans.
And as a result of that is the increase of these loans was $52 million.
Yes, <UNK>, this is <UNK> <UNK>.
What, in terms of the timing, we moved it to the third quarter, just because we're not sure.
You may have seen that we filed our S-4 back in ---+ when was it, in early April.
And then we have been notified that it's being reviewed, so that process can take ---+ it could take certainly at least one round of comments, and we don't know how long it takes for the SEC to actually review the response.
And so that's ---+ if all goes well, it should close ---+ and then lastly, I'm sorry, we have the ---+ once the S-4 is cleared, under New York law, there needs to be a 20 business day period between when the S-4 is declared effective and proxy is mailed, to when the shareholder vote can occur.
And then we would close ---+ it looks like the shareholder vote is the one that is going to take the longest time.
So we hope to close shortly after that.
And then in terms of buying back the stock, we have, in the S-4, there is a copy of the merger agreement.
We have collars.
The collars were struck back in January when the bank stocks were much lower.
So the top of the collar is that $27 per share price, at the close, so we're not sure.
And then the floating exchange ratio, where at least 45% of the deal would be in stock, but up to 55% will be ---+ but no more than 55% ---+ will be in stock.
So, our guess is that there will be over 2 million shares issued, and we would think to buy those back, depending on the ---+ depending on where our stock is trading.
So that's ---+ and we would probably do that later this year or early next year.
Thank you, <UNK>.
Yes, we have a pipeline.
I mean, just this week we had one of the B notes pay off as we viewed a series of A/B notes placed during the recession.
And there is a good sized one that paid off this week.
And so we have several more that are ---+ that may pay off in the next couple years.
Most of them ---+ all of them are tied to commercial real estate.
And we see commercial real estate being very strong, so the prospects are good.
And then interest recoveries, it was 4 basis points this quarter.
We see a steady stream of that.
We have loans that were charged off or partially charged off a couple of years ago, or they were on non-accrual, where we applied interested collected to the principal, and so you can have a fairly small charge-off bring in almost an equal-sized interest recovery.
So it's still a fairly large pipeline, but we can't predict when it happens.
But given where our reserve is, any gross recovery we have will be in a negative provision, which is, that's what happened in the first quarter.
It's possible.
Yes, I tried to cover it in my comments, you know, the---+
Oh, the catch-up.
Well, in ballpark, the full quarter impact would be around roughly about $0.10, and so, in EPS.
And so we can see maybe $0.04 or $0.05 in Q2.
The catch-up would probably be $0.02 to $0.03.
That would just be the catch-up in the EPS.
Yes, actually we're pleasantly surprised.
At the end of 2014, we had a $1.3 billion securities portfolio.
Of that, $664 million was in treasuries, which yielded 30 basis points, and we have reduced that to $350 million at the end of March, and our plan is to do more of it.
And we had, at the end of December, we had $425 million of 30-year MBS, and at the end of March, we had brought that down to $17 million.
And April, we sold the remaining $17 million, so we have no 30-year MBS.
And you'll see in the P&L there was basically no hit ---+ no security losses on a net basis from reducing our interest rate exposure.
And so we are, in terms of the 15-year MBS, it was $119 million in December.
It's now up to, at the end of March, it's up to $743 million, and we see that going up to about $900 million in Q2.
We're buying the 15-year at 3 now.
We were buying the 2.5, so the 15-year 3s would be ---+ they would be about, maybe, maybe it's about 210 in yield, or something like that.
It was mainly one land loan that had been ---+ that was reserved for, and so we took a small charge-off in the first quarter, and we, as a result, we had ---+ it was a TDR in December, and now it is non-accrual.
But it's just one land loan that's well reserved.
It's on the East Coast.
Thank you for joining us for this call, and we look forward to talking with you at our next quarterly earnings release date.
Thank you.
| 2015_CATY |
2015 | FITB | FITB
#It is, <UNK>.
We are not seeing necessarily an impact of the slowdown yet in our manufacturing base.
All we are doing is we are just recognizing that globally manufacturing is slowing down.
Consumer tends to be stronger.
But we are seeing slowdowns.
And just recognizing, again, where we are in the expansion cycle, recognizing that the global slowdown may impact US manufacturing activity, but this is nothing specific relative to our specific clients or borrowers.
It's more a recognition of the global macro environment.
Fourth quarter tends to be a strong quarter in terms of pipelines.
We've seen good production in Q3, and we are looking into Q4 with similar levels of activity.
This is <UNK>.
We have a very small international book overall.
And again, as we've said before, we have a small number of commodity clients that we value, we've had a long-standing relationship with, that have ties back into the US, back into our Company.
But our overall international exposure is very small.
It's a very small piece of our Company, and our overall commodity exposure, as we indicated before, is very small as well.
We are managing the book appropriately and are comfortable with the relationships that we have in place.
We do not have an appetite to increase our exposure broadly in that sector.
And <UNK> mentioned it's a pretty short-duration portfolio.
This is not a long-term commitment that we are talking about.
We are clearly cognizant of the global environment, and we will make those decisions appropriately.
Just about $5 million.
I think obviously our commercial business is a source of opportunity for us, as is our wealth business, which is growing nicely, traditionally, over the years.
But, in addition to that, we've launched the payments division, and you look at our currency processing solutions and our technology play in that sector supporting our retail and our healthcare sector.
So I think payments as a source of opportunity for us, and we are looking hard at that technology stack, how can we be more additive in that respect through some potential M&A opportunities.
We're also continuing to expand our footprint where appropriate in mid-corporate and also our talent on the middle-market side of the house.
There's opportunities there, I think, to continue to grow.
So it's really, once again, continuing to focus on quality relationships in our commercial business, partnerships and extracting value in our payments business and being additive to our technology stack, and obviously, wealth management, I think, is a key integral part of our one-bank strategy.
So I think those are the three areas where we can see some uplift in revenue.
And if you look at our strategies, they are really focused in those key areas, from a revenue perspective.
<UNK>, that's tough to say, but I would tell you this.
Anytime there's an opportunity to create long-term shareholder value we're going to take a look at that opportunity, and that's important.
But there's really no change to our core strategy around M&A.
If it's bank M&A, we really want to be more relevant in our core markets today where we can better serve our customers and extract more efficiencies.
So if we do a bank M&A opportunity, it's really going to be in our current markets.
But we're also looking at opportunities, as I mentioned earlier, to be additive to our payments business in that technology stack there, once again supporting our commercial business in retail and healthcare.
We think there are some opportunities there from an M&A perspective.
Let me give you my side, and then <UNK> will comment on it as well.
<UNK>, the difficulty is that it's extremely difficult to look back and compare what happens pre-crisis with rate moves because we're operating under a significantly different liquidity structure and market structure.
Our cautiousness is due to the unknowns.
We want to make sure that we discuss with you what the outcomes maybe.
I don't think there is anything specific to Fifth Third that would drive these betas higher compared to our peers.
It's just a fact that under the current liquidity rules, which have never been in place before, it's difficult to extract our future experience, based upon past experience.
And we do use the 70% beta on every move, so it's not a gamma issue.
But, as <UNK> said, we will work very hard to potentially outperform that, and frankly, our concern and why we use the 70% beta is the combination of the LCR impact on our retail deposits and, frankly, on banks that are not LCR compliant, whereas we already are.
So, if anything, you may say we should be able to outperform better than a 70% beta, but you also have technology is definitely at a different state in the banking industry today than it was 10 years ago, in the last Fed tightening cycle.
In the last tightening cycle, we were right on the peer average of a 50% beta, and now we just our conservatively modeling a 70% beta, as <UNK> said, due to the unknowns.
If we are able to operate at a 70% data, a 25 basis point move in the Fed funds rate is about a $70 million NII benefit annually, and if we are able to execute at a 30% data, the number is about $120 million.
So we just want to size up the impacts and just make sure that everyone understands the importance of the underlying assumptions that go into both your deposit betas s and then ultimately your asset sensitivity.
It will be interesting when, if we ever do get that first 25 basis point, when the comments are, we are going to stop and wait and see what everybody else is doing.
If everybody is looking at everybody else, nobody is moving, which just to my mind predisposes to a little bit better beta early on versus later on in the cycle.
So it will be interesting if we get that first move and see what happens.
Correct.
That would be correct.
Well, what I would tell you is, first off, we live in a technology era, and you are seeing that with respect to our user preferences and how they want to bank anytime, anywhere.
If you look at our mobile deposit applications, right now 15% of all of our deposits are coming through our mobile app, 38% through our digital channels.
<UNK>, we've been very mindful of the impact that has on our branches and branch traffic and so forth.
So we are really engineering for a couple of things.
One is how do we touch and sell to our customers differently going forward, and also how do we drive back-office efficiencies and improvement, and what does that mean to our distribution channels, i.
e.
, our branches.
What do they look like and how many do we need.
We think we are at the right level right now.
I can't quantify that at this point.
I think at the end of the game we want to be very efficient in how we serve our channels, and I think retail and a lot of the stress on the retail revenue side of the house drives you really to focusing on efficiencies in how you serve that channel.
That's a benefit for the customer and the bank.
So it's really after efficiency, better service.
At the end of the day, net-net, that's the model we want to be in, and we absolutely are focused on efficiencies here, <UNK>.
I think it's all of the above.
It's hard to quantify.
What I can tell you is, when we look at our strategies in 2016 and 2017, what we are rolling out, we are focused on how do we roll that out faster, how do we drive those efficiencies quicker, and how do we serve the customer better.
So we are really looking at how we sharpen our pencil on the execution side of the house and get a better return quicker on our investments.
And <UNK>, it's also the increase in the average hours of work for <UNK>'s team.
That's also another metric that we (multiple speakers) ---+
We are asking a lot of them.
| 2015_FITB |
2015 | TXRH | TXRH
#Hey, <UNK>.
This is <UNK>.
We might do that if it's a wage rate challenge.
We have actually where you've got, let's say, Alaska or California, maybe in New York, where you've got mid-year pretty big wage rate changes, we might do something in those states.
And we might do it in multiple parts.
We might do it in one whole swing.
It varies.
In the past, we've taken multiple price increases throughout the year if the cost structure changes in a certain way.
But if it's something where we think the prices of some item like beef are coming back down throughout the year and if we are floating a lot of product, we might not take the price increase sooner, if you will, to offset that.
We'll be patient and let that play through.
And so ---+ which means maybe our guys are losing a little bit in Q2, maybe are winning a little bit more in Q3 and Q4.
So we will look at all the angles on that stuff.
I would tell you it depends on how they bought their beef last year.
Were they locked in.
Were they floating.
It also depends on how they are buying it this year.
Are they locked in.
Are they floating.
You sort of can't look at just one quarter.
I would look at what their full-year forecasts are for inflation in those commodities.
And then lastly, I would tell you are they using the same cut of beef year to year, or have they changed the type of beef that they are buying or something in their process.
And I would reiterate what <UNK> just said.
I think you'll find that some of the competitors that maybe used to be selling choice steaks are now selling select.
It could be, depending upon what the cuts are.
Wow, I wish I had a crystal ball to forecast what beef would be a year from now, but we really don't.
We go to the suppliers, and they will give you a contract for next year right now, but it would be significantly higher versus what we think we are going to pay for the overall year, so it's really tough to know.
Say three out of four years, we win the way that we play the game.
And then maybe one year the way we play the game, we don't really hit it like we thought we would.
But that's how we've done it over the last 10 years, and in general we do quite well with it.
Yes, I think it's just sometimes we know going into the year we're not going to take enough pricing to offset inflation.
And so we're going to need to grow traffic quite a bit dollar for dollar.
We're going to make up that difference, and we've grown traffic quite a bit.
And we think based on our sales growth, we are doing a lot of the right things.
Sometimes you take a little bit on the chin in the short term to keep things going great in the long-term.
And our average unit volumes now are going to pass $4.5 million this year.
I think it's more than $1 million more than most of who you would consider to be our steak competitors.
So we think we're doing some things right with this long-term approach we're taking to balance the equation of pricing versus the cost of running the business.
Yes, we're not going to give exact numbers on how much we're locked or how much we're floating except to say we're floating a lot of product.
And so there is some risk there.
There is a lot of seasonal history in where beef costs go.
And there has already been a pretty dramatic change even from where beef prices peaked back in mid April, down quite a bit.
So we are believing that those trends will continue as the year goes on and you get past the Fourth of Julys, the Labor Days, and that kind of thing.
So we've got a very experienced buying team in our Company, and we're standing behind their forecast right now.
| 2015_TXRH |
2016 | RGLD | RGLD
#Thanks, <UNK>.
Let me speak to my thoughts only.
And not put my opinion upon any producer out there.
I think this industry is one that's hungry for margin.
We certainly have seen some escalating gold price over a number of years that really didn't lead to margin expansion.
We saw production expansion during that period of time.
So, I think there will be a natural tendency for people to be looking for margin expansion.
We're seeing some of the larger companies that are starting to right-size, would be my words, not theirs.
Right-size their portfolio for sustainability.
And all that makes good sense to me.
The kind of projects that we're going to be interested in are going to be the higher quality projects.
And I think there will still be opportunity for us in those areas.
Today, I think the biggest opportunity for Royal Gold would be more on the base metal side.
Where there's still balance sheets that are stressed.
And that market hasn't come back as much as gold and silver have in the recent six months or so.
So I think that's just a natural for us.
That's the place where we can get assets that are very long-lived.
It's a natural arbitrage between us and the base metal companies.
They covet the base metal we covet the precious metal.
That's really where I think the future of our business lies, at least in the near term.
Having said that, Bill will not give up on opportunities that might be in the precious metal producer's space either.
<UNK>, thank you for putting that question back to me because I don't want to miscommunicate here.
We're very much looking for base metal mines with precious metal byproducts.
And we really only desire the precious metals.
Thanks, <UNK>.
Sure, <UNK>, thanks for the question.
Actually, for the last three quarters or so we've just been booking the Voisey Bay royalty on a cash basis.
So we are not booking any revenue or expected revenue on an accrual basis for Voisey's Bay.
We're just booking cash when it's received.
That's been the case for all of this fiscal year.
Until we got better clarity or we started receiving payments, we will not have any revenue or accrued revenue for Voisey's Bay.
That's correct.
We really wouldn't have any accounting until he we received some cash or the litigation was settled in some way.
Well, I was going to ask <UNK> to answer that question until you broadened it right there.
I'm just kind of searching through my mind.
Our portfolio's running very, very well right now.
So not anything that we would have had concerns on.
We would have guided the market to that would be material.
So nothing on that standpoint.
You know that the management team's focused on the Voisey's Bay litigation and has been.
We're not taking our eye off the ball but Bruce is working on that.
And with regard to Rainy River's construction there, we're very much focused on a quality project over the long term.
And we have encouraged, and we didn't really need to emphasize this to New Gold, because they know how to do things right.
We want to make sure that they take the time and get the skills and resources they need to build a quality project for the next decade and a half or two decades.
We're quite comfortable with how that's coming together, <UNK>.
Thanks very much.
Thanks, operator.
And thank you for joining the call today.
We surely appreciate your interest and continued support of Royal Gold.
And we'll look forward to updating you on our next quarterly conference call.
Thanks everyone.
| 2016_RGLD |
2018 | FMBI | FMBI
#Good morning, everyone, and thank you for joining us today.
Following the close of the market yesterday, we released our earnings results for the first quarter of 2018 and also issued presentation materials that we will refer to during our call today.
These provide both historical financial information and our outlook for 2018.
If you would like a copy of our earnings release or the presentation deck, they are available on our website in the Investor Relations section, or you may obtain them by calling us at (630) 875-7463.
During the course of the discussion today, our comments and the presentation materials may include forward-looking statements.
These statements are not historical facts, are based upon our current beliefs and are not guarantees of future performance or outcomes.
The risks, uncertainties and safe harbor information contained in our most recent 10-K and our other filings with the SEC should be considered for our call today.
Lastly, I'd like to mention that we will not be updating any forward-looking statements following this call.
Here this morning to discuss our first quarter results and outlook are Mike <UNK>, Chairman, President and Chief Executive Officer of First Midwest; <UNK> <UNK>, our Senior Executive Vice President and Chief Operating Officer; and Pat <UNK>, our Executive Vice President and Chief Financial Officer.
With that, I will now turn the floor over to Mike <UNK>.
Great.
Thank you, Nick.
Good morning, everyone.
Thanks ---+ let me add my thanks to what Nick started here with, and thank you for joining us today.
It's great to be with you.
As we started or as Nick had shared, in continuation of a practice we really started last quarter, we provided a supplemental presentation for you to follow on with as we move through our remarks.
So let me then start with the highlights, and <UNK> and Pat can walk you through the components.
For the quarter, we earned $0.33 a share as compared to $0.02 last quarter and $0.23 versus 2017's first quarter.
We certainly recognize that the quarter-to-quarter comparisons are challenged by the impact of last year's M&A activity as well as tax reform, and additionally, for this quarter, changes in accounting standard that went into effect.
So we'll do our best to bridge to what I would refer to as core underlying performance.
For the quarter, earnings per share, adjusted for 2017's acquisition costs and most responses to 4Q tax reform, was down in comparison to the linked quarter, largely due to about $0.05 per share after tax and comparatively higher loan loss provision expense.
Overall, we were very pleased with our underlying operating performance, which was strong.
Earning asset growth was solid, up on average about 7% annualized linked quarter.
And that was largely led by loan growth.
Deposit funding, on average, was up 3% versus the same quarter a year ago, and recognize that linked quarter comparisons are seasonally impacted, so the fact that we saw a linked quarter flat relative to the fourth quarter was actually a very positive result for us, given that seasonality.
Our mix of core deposits remain stable, and underlying betas were only up modestly.
While reported margin came in at 3.8%, that's down in comparison to 2017, once you allow for the differential impact of lower accretion and tax equivalency changes that came from tax reform, underlying margin actually expanded.
And if you compare it to what it was year-over-year, it's up about 16 basis points.
Similarly, our fee-based businesses also performed well for the quarter.
Again, adjusting for the year-over-year impact of Durbin as well as the required accounting reclassification of expense this quarter, fees improved 6%.
Expenses were also tightly controlled for the quarter.
<UNK> will review in greater detail our Delivering Excellence initiative, which continues to make strong progress.
I would simply emphasize here, execution provides meaningful improvement from our perspective in service levels and the experience that we delivered to our clients, as well as efficiency.
And by extension, both of those we're excited about because they also make our platform more scalable.
So again, <UNK> can speak to that in a little greater detail.
Then as I started, credit provisioning for the quarter was elevated, largely due to comparatively stronger loan growth.
If you look at our first quarter, we actually had about $250 million worth of linked quarter growth.
If you compare that to the fourth quarter for that same quarter on a linked quarter basis, we saw about $50 million worth of growth.
So we had about $200 million more in overall growth for the quarter.
It was also impacted by higher net charge-offs attended to a remediation of 2 independent problem credits.
Again, <UNK> will cover that further, but I would simply offer the recognition that variability in quarter-to-quarter remediation efforts and, by extension, provisioning is natural, and frankly, to be expected in today's historically benign environment.
So with that, let me turn it over to <UNK> and Pat for additional color.
Thanks, Mike.
So starting on Page 3 of our earnings call presentation, you can see the loan growth that Mike talked about, about $240 million in the first quarter, from solid organic growth across our platforms and some targeted transactional activity.
The first quarter is typically our slowest of the year for loan growth.
Given this, we're pleased to post modest increases across multiple business units, which accounted for nearly half of our total growth in the quarter.
Specifically, our C&I lines in regional, health care, franchise and structured finance all reported growth.
Also, our commercial real estate team was able to more than offset pay-downs resulting from sales of a few office and industrial properties, with some expanded multifamily and construction activity.
We monitor these 2 sectors closely but are currently at very comfortable levels in our view, and thus, willing to expand and further.
Lastly, our consumer book posted a solid organic quarter as well, with mortgage continuing to gain momentum.
We also elected to purchase over $100 million of high-quality transactional credits in consumer and C&I.
We have periodically leveraged our strong deposit base as well as future cash flows this way, all with an eye towards attractive risk return assets, and we will maintain flexibility in this area going forward.
In light of this solid first quarter and given our continuing favorable pipelines, we are slightly raising our loan growth target for the full year.
Turning to asset quality on Page 4, we unfortunately experienced deterioration in 2 credits early this year, which caused us to recognize losses at a higher level than we had anticipated at the end of last year.
In conjunction with our strong loan growth, this led to a $7 million increase in provision in Q1 versus the linked quarter.
The issues in these 2 credits were each unique and isolated.
Going forward, our charge-off guidance is 25 to 30 basis points annualized, with some potential variability by quarter.
Thus, despite being elevated in Q1, for the full year, we still expect total charge-offs to remain within our normalized range of 25 to 40 basis points.
The stability we see in our nonperforming, adverse performing and watch credit categories, as well as the overall favorable macro environment, gives us confidence in that guidance.
Deposits, as demonstrated on Page 5, remain a strength of our company.
Our mix remained strong at 84% core even while we added about $150 million in time deposits in the quarter.
We will continue to be market-competitive across all deposit types.
Our average deposits were up about 3% year-over-year in Q1, reflective of our strong underlying platform, but also an indication of how well our Standard integration went.
So Pat will now cover NII and margins.
Thanks, <UNK>, and good morning to everyone on the call or listening in.
Turning to net interest income and margin on Slide 6, net interest income was stable compared to the fourth quarter and up 3% compared to the same period in 2017, consistent with our overall expectations.
On a linked-quarter basis, the first quarter benefited from higher interest rates and growth in loans and securities, offset by fewer days in the quarter, $1 million decline in accretion and higher cost of funds.
Compared to the same period in 2017, the increase was driven by higher interest rates and loan growth, partly offset by lower loan accretion and higher cost of funds.
Acquired loan accretion contributed $5 million to the quarter, down $1 million from the prior quarter and down $6 million from the same period in 2017.
We continue to project relatively stable accretion levels in 2018, with $18 million scheduled for the entire year, $13 million remaining after the first quarter, and quarterly amounts declining from $5 million per quarter in the first half of the year to $4 million a quarter in the second half of the year.
Having said that, we need to remind you that some volatility should be expected.
Moving to net interest margin.
Tax equivalent NIM for the current quarter of 3.80% was in line with expectations, down 4 basis points compared to the prior quarter and down 9 basis points for the same period in 2017.
Excluding accretion, margin was flat to the prior quarter at 3.64% and expanded 13 basis points from the same period a year ago.
Current period margin would have been 3 basis points higher absent the reduction in tax equivalent adjustment, reflecting lower federal income tax rates.
Compared to the prior quarter, margin, excluding accretion, benefited from higher rates, largely offset by higher funding costs.
Compared to the same period in 2017, the increase was principally driven by the positive impact of higher rates.
Turning to earning assets, average earning assets were up more than $200 million linked quarter due to both loan and securities growth, partly offset by lower balances at the Fed.
Compared to the prior year, earning assets were up nearly $550 million, reflecting loan growth.
First quarter results were generally in line with our expectations for both net interest income and margin, and our outlook provided in the January call has not changed.
We continue to expect full year earning asset growth in the mid-single-digit range and GAAP net interest income growth in the mid- to high single-digit range when compared to the full year of 2017.
Net interest margin for 2018 on an FTE basis is expected to be relatively consistent compared to the 3.87% we reported for last year as the benefits of earning asset growth and higher rates are offset by lower annual accretion.
Excluding accretion, we expect modest expansion in NIM on an FTE basis.
And finally, I'd be remiss if I didn't remind you the projections are subject to volatility due to movements in interest rates, pace of loan growth and seasonal municipal deposit flows.
Prior to turning it back to <UNK> to discuss noninterest income, I'll remind you that our results are a bit noisy between noninterest income and expense due to the adoption of revenue recognition standard on January 1 of this year.
As a result, nearly $4 million of card and merchant expenses previously presented in noninterest expense were reclassified and netted against the related fees in noninterest income.
This is done on a prospective basis, prior periods were not adjusted in accordance with GAAP and the practical challenges of such a restatement.
We tried to bridge this change for you through additional disclosure in both the earnings release and on Slide 7 and 8 of the presentation.
Keep in mind this is a reclassification, there's no impact to net income.
I'll turn it back over to <UNK> to discuss noninterest income on Slide 7.
Thanks, Pat.
So again, on Slide 7, our noninterest income was in line with expectations and guidance.
We have a fair amount of noise this quarter, as Pat referenced, but stripping all that out, we were up 6% in Q1 versus the same period last year.
This was driven by our main areas of focus: wealth management, card and treasury management, all of which posted a solid start to the year.
Our outlook going forward is that noninterest income should increase $1 million to $2 million quarterly in 2018 off of our Q1 levels.
So Pat is going to cover noninterest expense.
So moving onto expenses on Slide 8.
As previously mentioned, total noninterest expense for the quarter was impacted by the $4 million reclass of card and merchant fees.
In addition, the prior quarter included $4 million in bonuses and charitable contributions related to the passage of tax reform, while the first quarter of 2017 included $18 million of acquisition and integration expenses.
Away from these items, quarterly expenses remain very tightly controlled at the sub-$100 million level, and our efficiency ratio is stable at 61%.
Our guidance on expense growth remains largely unchanged.
But with all the noise, we felt it'd be helpful to be more explicit.
So for the year, we expect low single-digit growth on reported expenses.
$96 million to $98 million per quarter on average is a good proxy, compared with the $95 million we reported in the first quarter.
Note that this guidance does not contemplate the effect of our Delivering Excellence initiative at this point.
More to come on that in a moment.
A quick word on taxes.
Our effective tax rate for the quarter was impacted by a $1 million benefit related to employee share-based payments.
In addition, the prior quarter was impacted by the deferred tax asset write-down associated with tax reform.
Excluding these items, our effective tax rate would have been 25% for the current quarter compared to 34% in the prior quarter.
For the year of 2018, we continue to expect our effective tax rate to be approximately 25%.
Wrapping up with capital on Slide 9.
Capital and capital generation continue to be strong.
In general, our capital ratios decreased slightly due to the impact of loan growth and the final phase-in of certain Basel III provisions largely offset by earnings.
Compared to a year ago, our tangible common equity, excluding AOCI, is up 22 basis points.
Certain tangible common equity ratios that do not include the impact of AOCI, or accumulated other comprehensive income, were impacted linked quarter by the increase in our unrealized loss on securities available for sale due to the higher interest rate environment.
Now I'll turn it back over to <UNK> for remarks on Delivering Excellence.
So you see, our update on delivering excellence is on Page 10.
You'll recall that at the end of last year, we began a diagnostic review to improve our customer service delivery, processes and efficiency.
We are nearing completion of this broad initiative and are encouraged that it will not only meet these objectives but also provide the scalability for future growth that Mike referenced.
We anticipate more detailed information will be available by the end of the second quarter, but we remain comfortable with our early expectations, namely that while cost of implementation will likely exceed any benefit in 2018, we anticipate at least a 5% reduction in noninterest expense in 2019 as we hit our full run rate early in the year.
So we've provided a brief summary of all that we've just discussed on Page 11, and I'll turn it back to Mike to conclude our prepared remarks.
Okay.
Thanks, <UNK>.
So some final remarks before we open it up for questions.
As we look ahead, our balance sheet remains strong.
Our core deposit base is outstanding.
Credit costs will average out and return to more normalized run rates.
Combined with higher-earning assets, rates ---+ and higher rates as well as lower corporate taxes, we expect to earnings momentum to continue to build and, obviously, strengthen capital as an extension to that.
As <UNK> just shared, Delivering Excellence is progressing nicely.
We expect to communicate more specifics soon and certainly progress toward implementation soon thereafter.
This continues to be a strategic priority for us and obviously has gathered a lot of management effort over the course of the preceding quarters.
But at the same time, we don't view its implementation as either a distraction or an inhibitor to business as usual.
This is just part of being a healthy, growing organization and the steps you need to take to continue to do that.
So with that, let's open it up to questions.
Well, it's good you're not going to hold us to a number.
But I think the best way right now, because we don't have all the details prepared, we'll give more explicit guidance on that, is to think about it as sort of a $20 million reduction in run rate of expenses spread across the year.
So if you take our guidance for the remainder of the year, you would come up with a full year of somewhere in the mid- to upper $380 million range.
And I'll remind everybody, we do have about $6 million of higher occupancy expense in 2019 as our sale-leaseback lease accounting goes into effect, with an offset of having about $50 million of additional Tier 1 capital.
So that's just a onetime thing.
But at this point, just keep it at the 5% of expense rate.
I'd really rather have all the details firmed up, what our costs and ongoing benefits are before I answer that.
We typically do have a 1% to 2% sort of inflationary upward bias, certainly in staffing costs.
But we've been doing a really good job of keeping staffing levels at or even below expectations, which is serving to offset that.
So I'd rather not commit to flat versus inflation for '19 at this point.
We think there's ---+ <UNK> ---+ Chris, it's <UNK>.
We think there will be revenue impact.
We're not building any in yet.
We're not ready to talk at length about that.
But we certainly believe that there are opportunities to generate revenues, both in terms of greater cross-sell and greater penetration in retail client base as well as in treasury management.
Well, I'll just build off of kind of my remarks before I opened it up for questions, Chris.
We put a lot of energy into creating a process and building a road map for what we want to accomplish, certainly off of Delivering Excellence, and that is a strategic priority for us.
But at the same time, we don't view its implementation or execution as being something that would inhibit us from business as usual.
And a part of our business as usual is, as opportunities present themselves for consolidation, if they fit strategically with what we're trying to do, then we'll certainly consider those and don't view ourselves as prevented from executing anything that we think is in the best interest of the company.
I'd say ---+ the first part of your question, Brad, I'll take, which is we got there through, frankly, a bottoms-up look at how we can improve our processes and deliver it to our clients.
And it was not solving to a number.
Certainly, we had goals, but it was around the right answer.
And we felt that the right answer would generate efficiencies, and that's how we got to our 5% number, because we ---+ it does based on our analysis.
The second part of your question again, I'm sorry, Brad.
Oh, ROA and ROE.
.
Yes, Brad, this is Pat.
We historically and continue to really target performing in the top third of our peer group, broader national peer group as a measure of what it takes to be high-performing.
Because things will move around, and to be a higher performer relative to other alternatives we think is the right recipe.
So for us, that historically has been thinking of it in a ROTCE level, something in the 13% to 15% range.
And we have ---+ so we're sort of knocking on that door right now.
And so the ---+ part of the objective of delivering excellence away from is improving the client experience, is to ensure that we continue to make progress in improving our overall performance and profitability relative to others because we know the world is not going to stand still on us.
Yes.
I think that's very well said, Pat.
Brad, just to add to it, going back to the Delivering Excellence initiative.
I ---+ <UNK> hit it on the head.
Our first priority is to create the best experience that we can for our clients.
We have an opportunity to do that.
It creates an ability to make that happen and deliver that service the way the clients want it, which certainly recognizes the expectations that come from a digital world and the investments in technology that go along with it.
Those create the opportunity to do that better.
They also create efficiency that play back out of it.
But most importantly, they also create a skill set and a platform from which we can grow and build off of.
So that's ---+ those are the real positives that come back out of it.
And as we said, you certainly can look where ---+ as we guided to that 13% to 15% ROTCE and say that's probably on the upper end of that now given tax reform and all the earnings momentum that's out there within the industry.
But ultimately, we're looking to consistently perform in that top level among peers.
And to do that, in our judgment, you need to both generate that return and likely continue to drive and leverage greater operational efficiency that ---+ when you deliver that service to the clients.
Our appetite for buying more on C&I is fairly low.
We did a little bit just to supplement and make sure that we hit our earning asset targets early in the quarter, then we ended up with a solid organic growth and perhaps didn't need to.
But ---+ so our appetite going forward on the C&I side, I would say, is fairly low.
To answer the other part of your question, yes, those are larger syndicated deal that are, I would say, of a high quality.
Those are slightly lower margin, we think that's okay given the high quality of the credit we're underwriting there.
No common theme.
And again, the increase was pretty modest, Terry.
I mean, our NPAs had been running in the same 90-ish basis points kind of levels for quite some time now.
So we had a minor tick-up in NPAs this quarter.
I'd say there's probably more to come in the future on that, Terry, than we're ready to delve into now.
I don't think there's major technology investments.
There's a little bit but not a lot, but there are certainly some onetime costs as you try to implement the programs like this.
And again, more will be forthcoming before the second quarter is out.
So C&I demand is solid.
It's not like people are rushing out there to make capital investments based on the tax reform.
But I would say, overall, businesses are optimistic.
And again, positive overall mood.
Our pipeline is strong.
It's actually ---+ it's up a little bit this quarter versus last.
So given the growth we had last quarter, that's what leads us to think that we could continue to hit those guidance that we've given.
Pricing is the rub, if you will.
There's just pressure.
It's been a competitive market for some time.
Nothing unusual in Q1, I would say, but it is very competitive.
And again, as we underwrite, depending on where we are in the risk spectrum, the margins can get a little compressed.
They were a little bit lower new and renewed spreads in Q1.
Again, we don't think it's symptomatic of any great long-term trend, but something we have to fight every day, I guess, I would say.
Wanted to touch on, kind of following up on Brad's question, the consumer loans that were purchased this quarter along with the C&I.
I mean, you kind of increased borrowings in order to fund that this quarter.
So can you just talk about kind of the thought process there and then what the impact will be on margin as kind of those borrowings come down and deposits come back in, if there are some attractive characteristics about loan book you specifically purchased this quarter.
Two pieces to that, <UNK>, it's Pat.
I'll maybe start off a little bit on the funding of that and <UNK> can wrap up with the thinking on the consumer purchases.
So our borrowings are generally a subject of, obviously, where our cash flows are.
And we're at a low cyclical point in the first quarter, as we always are, on cash flows with the municipal and commercial, frankly, deposits hitting their low points of the year as they typically do.
We also, on the borrowing side, you guys have heard us talking about our balance sheet and funding swap strategy, where we'll periodically swap down some of our floating-rate loan production into longer-term fixed rate swaps just to keep our asset sensitivity closer to midpoint.
And as part of that, we entered into forward-borrowing swaps, usually 2 or 3 years out, and so those periodically will come on.
So probably 70% of the FHLB balances that we have are longer-termed out swap balances, where we entered into forward swap agreements 1, 2 or 3 years ago, and there will be more to come on that.
That balance will probably grow to be close to $1 billion by year-end just to take advantage of those rates.
And those rates, the stuff we have coming on this quarter, is at 1 17 for 2-year FHLB money, which is significantly lower than we could get funding otherwise.
And it also keeps us from having to aggressively compete for deposits, which keeps our betas low.
As far as the assets that we purchase, we plan for a modest amount of transactional activity in consumer, I will say, on an annual basis.
Certainly for 2018, this was in our plan.
We did it early in the year because the opportunity was there to purchase high-quality assets at the right price, we thought.
So it was, in Q1, all home equity loans.
You can see that category increase about $50 million this quarter.
So all of our purchase activity was there, prime floating, home equity loans at a really nice credit score.
I mean, I think our average FICO there was in the 730 range.
So really, again, high-quality assets for a good price, we thought.
Okay.
And without putting too fine a point on the Delivering Excellence program and the timing, but the comment that the 5% improvement will be in 2019.
Are you saying for the full year, like it will be fully implemented by the beginning of 2019.
Or is this more kind of a run rate improvement by 4Q '19.
I would say it this way, that while I can't say it'll all be there on January 1, we believe that we will get that 5% fully loaded, if you will, in 2019.
Okay.
And if I can sneak one last one in, just on the credit guide for the remainder of the year.
I understand you said it's unchanged, right.
I had it before at a mid-20s net charge-off range.
And now, we're 25 to 30, so maybe a little extra caution there.
Anything to read into that.
Or is that just falling on kind of the worst credit performance this quarter.
<UNK>, I hate to ask you to do this, but you cut out a little bit there from our end.
Your question was around charge-off guidance, was it.
Yes.
So I think previously, it was a mid-20s range for the full year, and now you're saying 25 to 30 basis points for the full year, so a little uptick.
Is there anything else we should read into that.
No, I don't believe so.
We don't consider a couple of basis points a material change.
So going from mid-20s to 25 to 30, we consider kind of the nuanced ebb and flow of normal credit activity.
And again, outsized in Q1, but normalized the rest of the year, we believe.
I apologize I got on late as well.
But I was just curious if you could provide any additional color on the 2 C&I relationships that were charged-off this quarter.
Any additional color in terms of the industry they're in, if they're long-term clients of the bank, if these are club deals or syndicated.
Just any additional color would be appreciated.
Sure.
And again, I want to point out, we ---+ when we established reserves for both at the end of last year, we didn't anticipate the pace and the magnitude of the deterioration we saw in Q1.
So specifically, the larger of the 2 was in the heavy equipment business.
This was not an ---+ this issue was not reflective of any weakness in the industry.
Rather, I'll just say it's a unique circumstance that we have referred to state and federal authorities.
So while that's incredibly disturbing, I have to say that if you've been in this business long enough, you occasionally see this.
And people misbehave, even people that you've known for a few years.
The other was a syndicated credit with ---+ we're in a club deal with 2 other larger, very experienced banks, where we lent on some assets that are proving challenging in liquidation.
So we'll continue to pursue remedies there, but we felt recognizing the loss now was the right thing to do.
Yes, I appreciate that color, <UNK>.
And Pat, just to clarify on the expense guide for the remainder of this year, does that ---+ that does not ---+ or that does include any onetime costs that you would have along with Delivering Excellence.
Or are some of those onetime costs going to be recognized in 2019.
Well, I apologize.
The connection has gotten very choppy here so you broke up.
I think you were asking about our expense guide for the rest of the year whether it includes any onetime costs.
Right.
Or some of those onetime costs are going to be reflected in 2019.
Our guidance does not include any onetime costs.
In the same fashion, it doesn't include any of the ongoing run rate benefit associated with that.
So those will be incremental.
We are likely and working towards being able to recognize all of our onetime costs upfront in '18.
And as <UNK> said, expect to start giving a full ---+ at least a full run rate to our guidance, if not a full longer-term run rate, in 2019.
Got you.
And can you give us a sense of the magnitude of those onetime costs that we should expect to see this year.
No, that's a more to come.
Hopefully, like this quarter, we'll have that ---+ have all that completed.
We're still probably 10% from being finished with just the design phase of implementation, and part of that is making sure that we've accumulated and validated all of the costs and benefits.
So thanks for your patience.
Well, we're having all sorts of connection problems at this time.
We hope that you can all hear us, but you're talking about noninterest income in our guidance, Chris, I think, right.
Yes.
It's off of the $35 million.
So $1 million to $2 million a quarter off of the $35 million.
Great.
Thank you.
Before closing, I want to take the opportunity to thank all of our colleagues who listened to our call for their contributions to and investment in our performance.
They continue to be the face of our company and our greatest asset.
I would then go on to thank all of you for your interest in and attention to our story as we share our ongoing belief that First Midwest is a great investment.
So have a great day, everyone.
| 2018_FMBI |
2017 | COTY | COTY
#Thank you, <UNK>, and welcome, everybody, to Coty’s fiscal 2017 fourth quarter and full year conference call
Fiscal 2017 was a transformational year for Coty
First, we completed the incredibly complicated acquisition of the P&G Beauty Business, dealing with the complexities of both the carve-out the R&D structure
Second, we fully reorganized into a product and customer focused organizational structure, centered on three vertically integrated divisions
Third, we reached significant milestones in our integration efforts, and fourth, we strengthened our portfolio through the additions of Younique, ghd, and the pending acquisition of the Burberry Beauty license
I am particularly proud of the culture we are building within the new Coty where we embrace the diversity of consumer beauty, focus on destruction, - and welcome the challenge of an increasingly complex beauty industry
Equally important, we believe the strategy we outlined earlier in the year which focuses on strengthening our global brands, shifting more resources to fuel the growth of the brands with higher growth potential, stabilizing the remaining brands, and continue to expand the geographic reach of our portfolio, is beginning to bear fruit as demonstrated by the improvement in the net revenue trends in the second half of the fiscal year
So let’s begin with our performance at high level
In Q4, organic net revenues excluding acquisitions declined 3% in constant currency, which includes a 1% benefit as a result of pre-shipments to customers in advance of exiting the transitional service agreement with P&G for Europe which occurred on July 1. Q4 reflect a much improved and very good growth in both Luxury and Professional Beauty, but continued weakness in Consumer Beauty, which is a key priority for us to address
Include the ghd and Younique acquisitions, our Q4 net revenues grew 5%
Fiscal 2017 organic net revenues declined 5% with flat performance in Professional Beauty, a slight decline in Luxury and pressure in Consumer Beauty, including ghd, Younique and a full year of Hypermarcas Brands, net revenue in constant currency grew 1% versus the combined net revenue of the prior year
From a profits perspective, our Q4 adjusted operating income reflected a materially higher level of investment in marketing to support the momentum in our business and to achieve flawless execution at retail for launches like Hugo Boss Tonic Gucci Bloom, Tiffany debut fragrance, CK Obsessed, as well as the COVERGIRL PDA campaign and the Clairol Colour Crave launch, all of which I will elaborate on later
Profits was also impacted by higher combined fixed cost base which I am not happy about
While some of the cost increase was a result of operating under a TSA with Procter & Gamble, where we had limited visibility and control over certain areas of fixed cost, our cost base is nowhere it should be and we are rapidly working to address this issue as part of our synergy program and organic efficiency initiatives
<UNK> will elaborate more on this point, and we will get back to you on this topic in the coming quarters with specific actions
For the year, our adjusting operating income grew 24% with a margin of approximately 10%
Looking at revenue dynamics by division, momentum at the Luxury division continued to improve as we progress through the year from a mid single-digit decline in the first half to low single-digit growth in the second half
For the quarter, Luxury revenues increased organically by 5% while for the year, organic revenues declined a moderate 1%
By brand, we have continued to see strong momentum across Hugo Boss, Gucci, Chloe and philosophy as well as several of our ultra premium fragrances such as Bottega Veneta, MIU MIU and Alexander McQueen
For Hugo Boss, we recently launched Boss Bottled Tonic and announced Chris Hemsworth at the new face with the brand
The strength of the key Hugo Boss fragrance pillars have agreed with share gains for Hugo Boss across a number of key countries, including Germany, the UK, France and Italy
Our momentum and philosophy with stronger net revenue growth in both the quarter and the year has resulted in the brand continue to gain share in the U.S
Philosophy e-commerce presence already strong in the U.S
should be bolstered by the recent opening of an online store on China Tmall website aimed on engaging young Chinese consumers
If we look to maintain Luxury momentum into FY 2018, we are excited by the brand execution plans we have in place behind the inaugural Tiffany’s fragrance and the launches of Gucci Bloom and CK Obsessed that I mentioned earlier
While it’s still early days, all three launches are off to a good start with sell-through exceeding our expectations
Professional Beauty organic net revenues grew a healthy 3% in Q4. I am pleased to report that in addition to the continued success of our salon hair brands, we have recently seen a significant improvement in OPI revenue trends
In salon hair, Wella maintaining strong momentum behind this Contura collection, the Oil Reflections launch and recent launch of Wella Professional Fusion, while System Professional continue progressing on its global rollout
In OPI, following several quarters of sales declines, Q4 net revenues were down modestly on a global basis, but resumed growth in North America
As we look to FY 2018, we expect farther improvements in the OPI trends driven in part by the launch of the OPI Gel ProHealth System which began to rollout on August 1. OPI new gel can be removed 50% faster and without damage which means healthy looking nails after removal addressing key barrier to consumer gel use
Additionally, new Coty Gel Colors will come in shape match bottles to improve shopability
We are very excited about the prospects for OPI new gel system targeting a fast-growing segment of the salon and nail category
Turning to Consumer Beauty, division organic net revenue declined 10% both in Q4 and for the year
As context, the global consumer beauty industry began to decline moderately at the end of calendar 2016 in the category and countries which we compete
We can far turn the luck in the latest quarter to a low single-digit decline
As we focus on returning the Consumer Beauty division to growth over time, we are working with a significant relaunch and restage of a number of our major brands to better connect them with the changing consumer
We are actively engaging with our traditional retailer customers to amplify the in-store shopping experience to drive category growth
Additionally, we continue to focus on key specialty customers as well as driving our e-commerce footprint
Against this weak market backdrop, Coty Consumer Beauty net revenue have been farther pressured by the shelf space losses in the U.S
and Europe as discussed in the last earnings call
Nevertheless, in the quarter, we are seeing strong performance in a number of our key emerging markets, such as Brazil, Mexico and the Middle East
In Brazil, the acquired Hypermarcas Brands are growing in the double-digits with our Brazil business overall outperforming the underlying market
In Mexico, we have seen steady share gains in retail hair supported by improved in-store execution and stronger support plans
As for the Middle East and Africa, we saw double-digit net revenue growth in the quarter supported by market share gains across many of our brands
Bourjois remains a highlight in the Consumer Beauty portfolio with solid growth in the quarter and full year and strengthened its position in a number of fast-growing markets
Finally, Adidas performance improved with brand growth in Q4 in key emerging markets such as China, Brazil
Our solid Consumer Beauty brand initiative pipeline for the first half of 2018 includes Clairol Colour Crave line of hair make-up, and COVERGIRL Total Tease Mascara, both of which are now hitting the shelves
And while the brand relaunch for COVERGIRL will not fully begin until winter 2018, our project PDA campaign offers a glimpse of the new COVERGIRL positioning centered on confidence and empowerment
The campaign’s digital engagement results significantly exceeded our expectations with 6.4 million video views and 375 million impressions in the first two weeks from launch and somewhat lift in our new market performance for the brand
Shifting to Digital, I would like to share some of the continuous successes we are having both on our Digital Communication and e-commerce expansion
As I discussed earlier, in Consumer Beauty, we saw strong digital engagement in connection with COVERGIRL PDA campaign, which in turn benefited the brand in market performance
In Luxury, the Marc Jacobs Daisy Anniversary digital campaign reached 2.8 million young women with engagement rates in the mid-teens percentage in high target cost per view
The recent launch of MIU MIU L'eau Bleue via Digital-only campaign featured the Shoppable Instagram Story resulting in orders more than doubling on Sephora
com
On the M&A front, the combined impact of the Hypermarcas Brands, ghd and Younique now represents a material addition to Coty’s results and I am pleased with the contribution of these businesses
Speaking about Younique, I am happy to report that it continues to outperform in both net revenues and recruitment of active presenters
Also, we are prepared and looking forward to welcoming the Burberry license in October
The recent improvement in top-line trends is an early confirmation that our strategy to strengthen and grow our key brands, stabilize the remaining brands and expand our geographic footprint is beginning to yield results
From a profit point of view, we still have work to do and it’s key priority for us
In summary, we are proud of the progress that we have made in 2017, a challenging transitional year, but one that we believe has set the stage for Coty to be a global leader and challenger in Beauty
I will now turn it over to <UNK>
No, I think what we have already pointed out is the fact that when it comes to synergies, the synergies is mainly weighted in the first on the second half of the year which will as a result of that impact the first half of year profitability
Now the measures that we are currently taking will yield some results sequentially in the coming quarters
So, first, I think it’s important to remind that, when we comment on the lower profitability in Q4, what we said is that it’s the result of two things
First, a material improvement – increase, sorry, in the specimen in order to support the few momentum that we have in very few brands
So that’s the first one
The second one is indeed is a higher fixed cost base and as we said, this is first the reflection of our new divisional structure
Second the fact that we had limited visibility with the TSA exit and now that we are wrapping things up and exiting the TSA in North America, in Europe and then in EMEA will have everything under our belt and we’ll be able to address these costs very rapidly
So once again, we will come back in the coming quarters with some specific answers
We remain committed on our synergies of $750 million and on the phasing that we have outlined before
So, whenever I comment on specific guidance, we expect clearly to see momentum in the Luxury and Professional Beauty to continue and regarding Consumer Beauty, this is a more of a longer term as we discussed it’s a journey, and – but we are on the right path
We are really working on the relaunch of several brands or most brands in Consumer Beauty, already discussed this in the past
We are receiving very strong positive feedback from the retailer on all of the relaunches and so, we expect the overall momentum to continue for the two divisions, but we are not going to give you guidance for the overall company
We believe that we have the right level of investments behind our brands in our 2018 plan
What you have seen in Q4 is clearly material increase in the investments because we have certain launches that we believe are very important for us and they are going to yield some results and this is why you’ve see material increase behind launches like Hugo Boss Tonic, but also the preparation of Gucci Bloom and the Tiffany new fragrances we just launched but also the launch of the CK Obsessed and a couple of launches or campaigns in Consumer Beauty like the COVERGIRL PDA campaign or the Clairol Colour Crave launch
Early reaction on the GUCCI Bloom has been very favorable among consumers and retail partners
We had the prelaunch in house in the month of August and the results are actually very promising
They are above our expectations and the same is for the Tiffany launch we just did in Bloomingdale again it’s exclusive in the month of August and the results are actually very promising
They are above our expectations and the same is for the Tiffany launch which did in Bloomingdale, again it’s exclusive in the month of August and is also overachieving versus our expectations
So, regarding some of the launches or relaunches, I believe you have asked your question about Consumer Beauty, am I right?
Okay
So, the plan to relaunch COVERGIRL is in the second half of fiscal 2018 and this as we discussed last time includes new positioning, new creative, new packaging and new store appearance
And as I said, the retailer feedback on our plan has been very positive so far
We’ve been working also with a new creative agency Droga5, which is one of the best agency in the world to build on an already strong brand equity
Recently, we have seen a research coming from the outside from an external market research company which highlighted that actually COVERGIRL is the number one cosmetic brand in the U.S
with the most loyal consumer base, especially amongst millennial
So, clearly, when we see this, this was not done by us
This research gives us quite a lot of confidence about the relaunch that we are preparing
And we have done a campaign called Project PDA, Public Display of Application which actually received a lot of positive feedback from consumers but also retailers
And again, it’s all around empowerment of women and the ability of self-distraction because we encourage women to actually apply make-up in public, which is quite a strong stand that we have taken with COVERGIRL and we are fully behind this
The new launch of COVERGIRL Total Tease Mascara has been a great success in Canada and is being now rollout in the U.S
but as I said, it’s going to be a gradual improvement over the performance because the fuller launch will have some four COVERGIRL in the second half of 2018. When I look at some of the other brands, we are also working quite hard on the relaunch of Clairol and we have quite a big initiatives coming again in the second half of 2018. We need to remember that also that most of the U.S
retailers today have their shelf reset in the second half of 2018 or beginning of calendar 2018 and so it’s important that all our plans will be all perfectly set and in tune with the trade windows that are prepared by the retailers
But also quite confident on Clairol and in the mean time, while we prepare for the full launch with this big innovation, we have launched Color Crave which is the line-up of the hair make-up which again goes into the direction of transforming Clairol from a very functional brand into a beauty brand which is one of the key objectives that we have for the brand in the future
Color Crave started quite well although we are part of the beginning, so it’s still early results
And above and beyond these two brands, we are also working on other relaunches in Sally Hansen is another brand that we are working on it for 2018 and in the mean time, I can tell you that the launch of Color Therapy in Sally Hansen is already 5%, 6% of market share of the nail market, plus we are focusing again on developing collections for the Sally Hansen brand
Again, in the attempt of ensuring that this category which is more of an impulse category gets fueled by new innovation and new ideas on a regular basis for our consumers and our retailers
On your second part of your question about $1.53 by 2020, so we expect to achieve these through the use of different levers including one, the achievement of our targeted synergies and ongoing efficiency initiatives
So on our targeted synergies, I’ll remind you that the phasing that we have was 20% this year, 50% in fiscal 2018, 80% in fiscal 2019 and then the full 100% by 2020. So that gives you the hints on the phasing and of course, by the growth program and you see already that out of our three leg start we’ll have some growth momentum and of course, the strategic use of our balance sheet for M&A and you start to see that our recent acquisition Hypermarcas, ghd, Younique start to have a material impact on our growth profile which is in line with our overall synergy
The synergies are really net of any potential reinvestment et cetera
So what we mentioned is that we are going to generate the $750 million and as part of our investment thesis, this $750 million would come line in order to achieve the $1.53 of EPS
So, this is net of any reinvestment and the support that would need to fuel the growth momentum
And so, once again…
The impact of the P&L the $750 million is 20% this year
Then you have 50% that will be achieved in fiscal 2018 impacting the P&L in fiscal 2018, 80% impacting the P&L in fiscal 2019 and then the full $750 million impacting the P&L in fiscal 2020.
20% of $750 million
Sure, sure, but we still – we start to see some growth momentum in two out of our three legs and this is going to continue to progress in the coming years, point one
Point two, you also have a material impact of the acquisition that we have made, ghd, Hypermarcas and Younique which are growing quite substantially and as a result of that, we’ll weight even more on our growth profile going forward
Yes, I believe that’s the right benchmark because of the way the composition of our portfolio both from a brand point of view, channels point of view and markets point of view
So I confirm what Part said in the roadshow
In terms of sales expectation, as we said, the primary program will not be a straight-line wavered over the last couple of quarters we have now reported gradual improvements in our underlying net revenue trends before we had high single-digit decline in the first half
Now are in low to mid-single-digits of decline in the second half
We had two divisions which are confirming a strong positive momentum
And overall, what I can tell is that, we expect that strategic efforts that we are taking to continue to bear fruit in fiscal 2018.
I will start with your second question
So, in terms of balance of e-commerce and work on retailers, what I can tell you is that, we are working quite hard on rebalancing our in-store execution
This is one of our key pillar of growth of our strategy
And so, we are making choices of shifting money to investment at the stores and of course, we are working with our key partners retailers to improve the partnership to bring more value to them and of course to step up the Omni channel
And of course we are working on the relaunches of the brand which will hit the store in second half of 2018. Now that said, e-commerce is a big priority for us and I have already mentioned an announced a new structure with a new head of e-commerce, a new structure which has higher accountability on that
It’s important to say that our agency, Beamly which we acquired around one-and-a-half year ago, is now fully focused on helping us on the e-commerce efforts
And we are working with the key customers also on stepping up the e-tailing business
So the e-retailer business, which is clearly some, a channel that can react much fast as well our program is
We are seeing good results there
And let’s also not forget that Younique, the business that we bought just recently in February is full e-commerce business, 100% B2C where we have over 250,000 brand ambassadors, presenters, who every day are out there selling cosmetics under the Younique brand via the web, via the social media
So that’s – it’s a clear testament also to our new focus on e-commerce which is not done only through the acquisition of Younique, but also internally organically and the team is making big progress on this area
Now, your first question was about Luxury and Professional Beauty offsetting the Consumer Beauty pressure
What I can tell you is that, of course, we expect the momentum on Luxury and Professional Beauty to continue in 2018 and on Consumer Beauty, what I can tell you is, that the shelf space that have impacted us in 2017 truly only now in a certain ways having an impact, because the shelf reset from the key retailers it does happen around the March, April of each year, let’s say
So, we expect these headwinds on shelf space losses to actually lapse and continue until Q3 before 2018 when we start to lapse the current shelf space losses
Now, what’s happening is really the moment we are working with the retailers and presenting all our plans to ensure that we don’t see any more impact, let’s say post the new resets that will happen at the beginning of calendar 2018 - in the second half of fiscal 2018 and I have strong confidence that we will not see any more impact because of the great conversation we are having with the retailers and the positive feedback on our plans
No doubt that our strategy has a channel mix and Specialty Beauty which you are alluding to, your mentioning is clearly a very important part of our channel mix
So we are focusing on that quite a lot and the e-commerce, what I discussed before, so working with our partner retailers and working on the e-tailing business, the e-retailing business is also a big focus
It’s no doubt that consumers are shifting and their behavior and it’s also important that we do deploy strategy that are also in line with this shifting consumer behavior
So, absolutely working with the brick and mortar retailers, specialty, beauty and e-commerce, truly the three key areas of focus for all the relaunches that I mentioned before
So, I would like to thank all of you for the attention and for the questions and I wish you a great day
| 2017_COTY |
2016 | HBAN | HBAN
#Geoff, it is <UNK>.
Starting with the first question.
Clearly, as we went through CCAR this year, the most important outcome for us was getting the FirstMerit deal through the process and getting approval for the deal itself.
Of course, we are still waiting for approval.
We expect that to happen in the third quarter.
But we just thought it best to be a bit cautious and making sure that we got through the process, because we can create so much more value by getting FirstMerit closed early and on time relative to the buyback that we had in for 2016 CCAR process.
What I would tell you, going forward, is that we'll take each year as it comes.
Next year is a different process.
We expect to be in a different position.
Not quite sure what the economic scenarios that the Fed will give to us would look like.
So don't want to comment on what the future looks like.
But that's basically our thought process around this year's process.
We still expect to get the 3Q closing.
You bet.
Thanks <UNK>.
Just a few things to think about.
So the asset sensitivity numbers that we publish are a 200 basis point gradual increase scenario.
If you think about where the rate curve is today, and you think about a flat rate environment going forward, over the next 12 months we have maybe 1 basis point or 2 of margin at risk.
So I'm not totally uncomfortable that position, plus we've got the FirstMerit closing integration and I would say optimization of the two balance sheets as they come together.
So we have that entire process to work through as well.
So that's the way I take a look at it.
We feel good about the margin, and where it's at today, we still believe that we are above 3% for the remainder of the year in core Huntington.
And if you take a look at FirstMerit, excluding any impact on the first accounting adjustments, it's actually additive to the margin.
So that's our perspective, <UNK>.
It's primarily funding the securities, and that's been a bit of the pressure that we've had on the margin over the past year.
Today, we are bringing securities on at probably close to [1.9%], and the next issuance that we that we ---+ if we issued debt today, we'd probably be in the [2.10%] range.
Something like that, swap to floating.
So you can see where some of the pressure starts to build from a margin perspective, but having said that, we are at 115% LCR right now.
We feel good about where we are from a securities perspective, and really, we're just replacing and also keeping in mind the amount of debt that we need from a rating agency perspective and an FDIC perspective.
You bet.
Take care.
<UNK>, so we are still tracking ---+ we said about $420 million we announced the acquisition, and I would tell you that we have probably realized 75% of that in 2016.
Is the way I would think about it.
It's going to start to pick up from here.
We're obviously very deep into the integration process, but that's how I would think about it from a timing perspective.
So there was a bit of a stub period related to the first quarter payment for the period that it was without, about $3 million.
It's going to be 6.25 times the $600 million is the way to think about it.
So about $17 million.
Thanks, <UNK>.
So, thank you.
The second quarter built upon a solid foundation we laid the first quarter.
The performance continues to be solid, delivering revenue growth despite challenging headwinds.
And, our fundamentals remain solid and we are well-positioned to continue to deliver through the remainder of the year.
You've heard me say this before and it remains true: our strategies are working and our execution remains focused and strong.
We expect to continue to gain market share and improved share of wallet.
We expect to generate annual revenue growth consistent with our long-term financial goals and manage our continued investments in our businesses, consistent with the revenue environment and our long-term financial goal of positive operating leverage annually.
We expect modest growth in our economic footprint and continue the gradual transition to more normalized credit metrics, which will be effectively managed.
We've made significant progress, significant progress in our integration planning for the FirstMerit acquisition, and we look forward to completing the acquisition later this quarter, following receipt of all regulatory approvals and our customary closing conditions.
Finally, I want to close by reiterating that our Board and this Management Team are all long-term shareholders.
Our top priorities include increasing primary relationships across our business segments, managing risks, reducing volatility, and driving solid, consistent long-term performance.
So, thank you for your interest in Huntington, we appreciate joining us today.
Have a great day.
| 2016_HBAN |
2017 | IOSP | IOSP
#Yes.
I wouldn't say prices to go up, <UNK>.
What I would say is that as the volume goes up, because of the fact that you're not tracking an SAR cost directly to your volume cost, that you will start seeing better operating margins, not necessarily better gross margins.
That's correct.
You know, I would say obviously if oil prices start dropping back down below that $45 level, you could see some volume movements.
But I think on a pricing ---+ from a ---+ from a gross margin standpoint we're still pretty steady there.
It would be more of a volume impact than it would anything else.
Yes, <UNK>, this is <UNK>.
I think you started to say we didn't really experience that much price pressure.
If you look back the our gross margins in our oil field business over the last four to six quarters, we have been really disciplined in maintaining prices and maintaining gross margins.
So I think the point <UNK> is making is that we've already got that discipline built in.
As volumes increase we will get more operating leverage out of the business.
No.
I'd keep it probably where it is, <UNK>.
Which segment are you talking about, <UNK>.
Sorry, I missed that.
For us the negative mix would mean we're selling at a different proportion of lower-margin business.
Are you referring to oil field here, <UNK>.
Because we didn't have a negative mix in oil field so I guess I'm a little confused, <UNK>, to the question.
We had a little negative mix in fuels but not in oil field.
(Multiple Speakers).
No problem, <UNK>.
Yes.
That's a great question.
You know, obviously when we looked at buying it, it was more for our Personal Care and Home Care sector.
As we got into the business and started looking at the technology trees, we realized a lot of the technologies they have internally and a lot of technology they were working on for quite some time fit other aspects of our portfolio.
So they have technology that goes into the oil field, they have some technology that goes in the AG market, some other areas.
And I think like ---+ as well along that we found it to be a very, very good group of people, very professional, willing to really go the extra effort to build this business.
I think when we start looking at culture and you start looking at purchasing companies one of the first things you look at, what's the culture like.
Because if you have to constantly change culture your going to be chasing your tail constantly.
For us, we felt like the culture fit.
We feel they got a great product line.
We feel like with the right attention that we can really build this business even further than we anticipated.
Sure.
Yes.
We're looking in mostly tuck-in.
We don't need a structural change.
And I think if you look at what other business arrangements be, it could be a situation where we do a joint venture in another country to get a geographical expansion.
It could be a product joint venture.
It could be a shared technology.
So there's multiple ways you can go without always spending money to buy somebody.
That's where I think the creative minds come in and grow this business and that's how we have constantly grown it.
I don't have to go out and buy constantly to grow.
I can do it other means and ways.
Thank you, <UNK>.
Thanks, <UNK>.
Good morning, <UNK>.
Yes.
If you look at our business Fuel Specialties we sell to the mining industry.
So naturally when we bought the Huntsman business and realized a very small portion of their portfolio does sell into the ag, chem and mined market so there are some natural just adjacent markets we could take it into.
Now, the purchase was more for the home care, Personal Care, but these are some adjacent markets that have great products.
The mulsifiers, demulsifiers, products that go into markets we are already very aware of and some of the markets we are already in just not with this specific product line.
So it is an area that we can expand into.
What do you mean by on the market, <UNK>.
Sorry.
They'll sell into a company who makes fertilizers, they'll sell the molecules who then sell it on to the customer.
Yeah.
You won't see us do that.
Thank you.
Thank you all for joining us today.
Thanks to all our shareholders, customers and Innospec employees for your interest and support.
If you have any further questions about Innospec or matters discussed on this call, please give us a call.
We look forward to meeting up with you again to discuss our Q1 results in 2019 in May.
Thanks.
Bye-bye.
| 2017_IOSP |
2015 | EE | EE
#Good morning.
Hey, <UNK>, how are you.
Yes.
That's right.
I mean, we think ---+ we think during the quarter cost us about $3 million is what we think weather cost us, and with those, if we had factored that in, we probably would be in that range of the 1.5%, and that's ---+ like we said, that's continued with our customer growth and that's the ---+ kind of the range that we'd expect.
I mean, at this point, I'd probably say 1.5% is looking like the current trend.
Yes, certainly that's been the trend.
For the last 10 years, our overall load growth has been closer to 3%, and we have had a period of time where it seems that the load growth, particularly at the military installations and the governmental installations in our service territory have had some energy conservation and some energy efficiency efforts been going on at the military ---+ at the government entities and that's kind of hampered the growth a little bit.
Well, we currently ---+ it's currently targeted at before the summer peak of 2016 for unit 3, and then toward the ---+ and then the end of the calendar year '16 for unit 4.
And that kind of meets our needs, so, that looks like that's our realistic goal and probably won't change much.
This is <UNK>, <UNK>.
Nice to hear from you.
Obviously, we're pleased now that we did file a historical test year.
I think it's always easier for a Commission to deal with something that is ---+ it's had a long history of dealing with.
We are hopeful that we will have a settlement in this case, but at the same time, we are also willing to litigate it all the way, if need be.
Thanks, <UNK>.
Well, yes, one component of both ends is weather.
We had an above-average July, although a slight bit below prior year, but it was an above-average July.
And August is starting off very well.
We'll likely to get to 100 degrees today, so that's hot for us in August.
So, the weather has been positive in the third quarter, and the low end of guidance, like I mentioned to <UNK>, would change ---+ there's a lot of factors going in there, but below-normal weather would lead us toward the lower end.
It was factored in slightly, Joe, although, of course, the six months, that was just this one month of the six months.
So, it had a factor, but not a significant factor in that.
Well, that's true ---+
Yes, the eastern part of Texas has been worse than ---+ has been a lot hotter than we have.
I think it's been close to 100 in Houston and those areas.
So, we're ---+ we haven't quite had that extreme temperatures, although we do have forecasted 100-plus-degree temperatures for the next few days.
Thanks.
Thanks, <UNK>.
| 2015_EE |
2017 | AEGN | AEGN
#Thank you, <UNK>, and good morning to everyone.
Let's start on Slide 3 of the presentation.
The first quarter results largely met expectations for operating performance.
Q1 is typically a low period for construction activity in many parts of our business due to weather and a slower pace for work releases from customers at the start of the new fiscal year.
All 3 segments generated strong orders in Q1, and we are entering our primary season with a solid backlog position in all 3 platforms.
We also plan to substantially complete the insulation coatings for the $130 million deepwater pipe project during Q2.
These positive indicators give us confidence to meet our 2017 objectives to deliver strong adjusted earnings per share growth, greater cash generation and an increase in return on invested capital.
We are also making the investments necessary to attain low- to mid-single-digit average annual organic revenue growth through 2019, as outlined in our strategic plan.
Let me provide more details on the outlook for the rest of the year, starting with Infrastructure Solutions on Slide 4.
The North America market procured-in-place pipe rehabilitation is Aegion's largest source of revenues and profits.
We began the year with a lower backlog position due to some ---+ aggressive competition in the fourth quarter of 2016 primarily for large projects.
Market activity so far this year has been robust, with year-over-year growth outpacing the average expected low-single-digit pace.
As a result, new orders increased almost 17% to approximately $120 million compared to the prior year quarter, which drove a double-digit sequential increase in reported backlog in this market to $235 million.
These positive trends give us confidence that we can achieve organic topline growth from our efforts this year in the North America market for wastewater pipeline rehabilitation.
This will be the foundation for Infrastructure Solutions' revenue growth this year.
The anticipated price increases in North America for oil-based raw materials took effect in the second quarter.
Fortunately, the price increases were lower than expected, which improves our chances to mostly offset the cost inflation through productivity improvements in manufacturing and operations.
The higher raw material cost will impact margins for projects awarded in Q4 in early 2017.
A significant portion of our more recent project awards include the higher raw material costs, which we've been able to pass on to the market.
The second cost pressure we faced this year relates to wages for contract installation.
So far, the situation has been manageable as we assess this situation by region and remained focused on maximizing crude productivity.
As we use our scale and experience to address these cost pressures, we remain focused on the longer-term objective to maintain growth and our leading position in the North America wastewater CIPP market.
We have initiatives underway to strengthen our relationship with customers, expand market coverage, improve execution and continuously improve manufacturing processes for our Insituform CIPP product.
With respect to expanding coverage, we are opening additional regional offices, adding sales resources and forming installation crews in targeted regions within North America.
Our plan is to complete the expansion by year-end and participate more fully in these markets which are currently underserved by Aegion.
The expectations in 2017 for our international markets is dependent on improved performance in Europe.
We expect the expansion of our CIPP contract operations in Denmark, Northern Ireland, Scotland and the U.K. to drive growth and increase manufacturing realization over time.
As a result of these acquisitions, and an improving outlook in the Netherlands, we have a good backlog position entering Q2.
The focus will be on delivering strong execution and building momentum for product sales and increased contract-installation activities.
The outlook in Asia-Pacific remains favorable for the Tyfo/Fibrwrap technology in the strengthening and rehabilitation of pressure pipe and structures such as buildings and bridges.
Where we see a challenge is in Australia, because of labor shortages, which is impacting our project execution.
We have an action plan in place to address these issues.
However, the challenges experienced in Q1 will carry over into the early portion of Q2.
Let's turn our expectations to the municipal pipe market in North America.
The market for pressure pipe rehabilitation remained strong and in line with our expectations.
During the first quarter, we secured over $15 million of new orders, which is encouraging given the weak order pattern for Q4 for Fusible PVC and Tyfo/Fibrwrap technologies, and supports our target for full year revenues of $80 million to $90 million.
The rebound and relative stability of oil prices has increased the price of PVC, and is restoring the historical cost advantage versus (inaudible) gasoline alternatives.
Just over half of the new orders were for Fusible PV<UNK>
The enhanced sales team is promoting the improved Tyfo/Fibrwrap solution in a broader market for traditional large-diameter pipe strengthening in addition to emergency repair events.
It will take time to build momentum for us in this expanded market, which we included in our expectations for 2017.
We have a good backlog position and a line of sight for additional projects using InsituMain CIPP and Tite Liner pipe linings is a preferred engineering solution to rehabilitate pressure pipelines.
We are currently performing a large project in Fairfax, Virginia, to rehabilitate a 4,000 foot 36-inch wastewater force main pipeline with InsituMain CIPP.
We just started a large project in Laramie, Wyoming, to rehabilitate 1.7-mile or 17 miles of 20-inch potable water transmission pipelines with our Tite Liner technology.
In both cases, we work closely with the customer to examine all of our solutions to provide the right alternative that meet their needs.
Given favorable markets in North America for municipal pipeline rehabilitation and a solid backlog position, Infrastructure Solutions remains well positioned in 2017 to organically grow revenues faster than the low- to mid-single-digit target over the next 3 years.
Operating margins will likely be somewhat below the full year in 2016, as we invest for future growth and address the cost headwinds we faced this year.
Let's turn to Corrosion Protection on Slide 5.
We are very pleased with the pace of pipe insulation production for the deepwater project.
We expect Q2 to be another quarter of strong production, followed by a wind-down activity on this project in the second half of the year.
While this project will be a significant contributor to Aegion's financial results in 2017, the measure of success this year rests with the performance of our cathodic protection services in the North American and midstream pipeline market.
Market conditions in the U.S. remain favorable and will be the driver for the activity we expect in 2017.
<UNK> will provide the details in a few minutes but we got off to a slow start in Q1 in North America, which was partially offset by strong performance in the Middle East.
However, backlog grew by 8.5% to over $80 million, driven by the favorable conditions in the U.S., and we expect improved performance in the remainder of the year.
If you exclude the deepwater project, Corrosion Protection backlog, as of March 31, grew almost 10% to $137 million compared to backlog at the same time last year.
New orders grew approximately 20% to $100 million, which reflects a stronger bid table in the energy markets.
More than half of the hard orders were for cathodic protection services for midstream pipeline maintenance and inspection services.
We also secured projects for the Tite Liner pipelining technology and our field coatings capabilities in the Middle East and South America.
With the planned completion of the deepwater pipe coating and insulation project and the growth we expect from midstream pipeline maintenance, we continue to believe revenues for cathodic ---+ for Corrosion Protection can grow mid-teens, with an operating margin in the range of mid-single digits.
Let's turn to Energy Services on Slide 6.
The outlook for Energy Services remains unchanged with mid-single-digit expected revenue growth, in line with the 3-year objective, and operating margins expanding above the 2.2% achieved in Q4, which would place us well on the path to expand margins by 300 basis points to 400 basis points by 2019.
We were pleased with the strong performance in Q1, more importantly, contract backlog increased by 22% due to growth in day-to-day refinery maintenance and turnaround services.
Remember that routine maintenance services accounts for the majority of Energy Services revenues and profits.
While we will benefit this year for more turnaround activities the growth and maintenance services provides a stable base of business over the long term.
In 2016, we secured a long-term maintenance contract at an additional refinery from a competitor.
Last quarter, we were awarded a new multi-year maintenance services contract for one of our existing California refinery customers, which included a transition to trade union labor.
Finally, we were able to secure the position as a leading outsourced maintenance provider at a Southern California refinery in Q1.
These contract wins, along with several smaller awards, demonstrate progress in executing our strategy to expand the services we provide to our existing customers.
However, we can't settle for only top line growth.
Our plan to expand operating margins in 2017 depends on strong execution at each facility where we provide time and material services as well as a continuous improvement effort to optimize key business processes.
In 2017, we plan to complete critical process improvements to timekeeping, payroll and the onboarding and offboarding of thousands of employees each year, especially during turnaround events.
We also have plans to drive further efficiencies by optimizing other key business processes.
A healthy market and a focus on margin expansion are the keys for Energy Services to increase operating income and cash contribution this year.
We're off to a good start in 2017, with a solid backlog position entering our peak period of activity.
Our core end markets remain favorable for municipal pipeline rehabilitation, midstream pipeline maintenance and inspection services and to outsource refinery maintenance in North America.
We are pleased with the progress to complete the deepwater pipe coating and insulation project.
We believe 2017 can be a year where all 3 platforms increase revenues and operating income.
That will be a welcome change from what we've experienced over the last 2 years in the energy markets.
We are focused on the necessary work to achieve our objectives, including investments this year to advance a long-term strategy and position the company to achieve the 3-year financial targets.
Let me turn the call over to <UNK> for his perspective on the Q1 results and the outlook for the remainder of 2017.
<UNK>.
Thank you, Chuck, and good morning to everyone on the call and the webcast.
Let's move to Slide 7.
You've seen the quarter's financial results in our press release.
As expected, we delivered much improved operating results compared to the first quarter of 2016, when Corrosion Protection and Energy Services were managing through challenges in the energy markets.
While the typical winter slowdown makes the first quarter a small one for project activity in many parts of our business, I want to provide a view of takeaways from the first quarter results and provide some insights into the outlook for 2017.
There are 3 highlights worth noting from the results for Infrastructure Solutions, as you can see on Slide 8.
First, we continue to execute at a high level in North America from manufacturing to installation of our Insituform CIPP.
Despite an increase in competitive activity in the fourth quarter which led to somewhat lower backlog heading into the quarter, performance exceeded expectations with low-single digit revenue growth and a significant increase in gross margin.
The positive outcome drove the performance for Infrastructure Solutions as this market accounts for more than 70% of platform revenues.
On the other hand, weak quarter pattern in the fourth quarter for 2 of our pressure pipe technologies had its expected effect on first quarter revenues and adjusted gross margins.
As Chuck noted earlier, we anticipate improved performance over the remainder of the year from an increase in new orders for our fusible PPC product and as our sales team promotes Tyfo Fibrwrap technology in a broader market for large-diameter pipeline strengthening.
Third, the key driver in the decline in operating income came from investments and the recent acquisitions to improve sales coverage, expand geographically and enhance our products globally.
These investments are intended to position Infrastructure Solutions for its role in helping Aegion deliver long-term sustainable organic growth and achieve the 3-year financial targets we set last fall.
Now let's turn to Corrosion Protection on Slide 9.
Contributions from the deepwater pipe coating and insulation project drove the performance in the quarter, with revenues of approximately $45 million.
In addition, revenues associated with cathodic protection services, which accounted for over 40% of platform revenues, grew mid-single digits, primarily from activity in the U.S. Partially offsetting the revenue increase was the absence of large projects in South America, completed last year for Tite Liner pipe linings and field coating services.
And limited opportunities to-date for new pipe coating projects at our facility in Louisiana, aside from the deepwater project.
A positive development in the quarter was a sizable turnaround in profit from our Middle East operations, fueled by demand for our field coating services, primarily for upstream oil and gas pipelines, and increased activity and margins associated with our cathodic protection services and Tite Liner pipe linings.
Gross margins increased 410 basis points, driven by the high-margin pipe insulation production on the deepwater project and the absence of costs associated with completing 2 challenging international field coating projects in 2016.
Despite less activity during the winter months, gross margins would have been better if not for certain issues impacting contributions from our cathodic protection services, mainly deferral of higher-margin activity, lower labor utilization on several projects in the U.S. and continued pricing pressures in Canada which significantly compressed gross margins.
A greater volume of activity in the remainder of the year should improve both revenue mix and labor utilization in this key area of the business.
I'll wrap up the operating discussion with Energy Services on Slide 10.
Revenues for refinery maintenance and turnaround services were in line with expectations and partially offset the higher upstream revenues in the prior-year quarter, as we completed the remaining projects as part of the downsizing in Central California.
Gross margins increased 130 basis points to 11.2%, primarily resulting from improved labor utilization in day-to-day refinery maintenance services.
As we discussed last quarter, gross margins in the first quarter of each year are impacted by required state and local employer tax payments.
The absence of these payments will benefit gross and operating margins as we progress through the year.
Now let's review our cash performance on Slide 11.
Cash flow from operating activities is typically a use of cash in the first quarter, because of reduced project activity and an increase in payments to suppliers and for accrued expenses from larger volume of projects completed in the fourth quarter.
This was especially true this year.
Operating cash flow was at $26 million use of cash in the first quarter, the timing of cash collections for the deepwater pipe coating and insulation project as well as maintenance services for several large turnarounds in Energy Services drove the majority of the $56 million use of cash for working capital purposes.
I fully expect these outflows in the first quarter to reverse over the next few months and not impact our objective to achieve free cash flow in excess of adjusted net income in 2017.
We're currently executing a share-buyback program to repurchase up to $40 million worth of shares in 2017.
We spent $8.4 million in the first quarter to acquire nearly 367,000 shares through this program.
It's our intention to spend the majority, if not all, of this authorization this year, using a tiered pricing format that allows us to be consistently active in the market.
In addition, we spent $2.1 million to re-acquire shares related to our equity compensation programs for employee tax obligations.
Capital expenditures of $4 million in the first quarter were significantly below the spend last year, due principally to the construction in 2016 of the new Deepwater pipe insulation plan.
CapEx for the full year should be in line with what was spent in 2016, as we purchased the necessary equipment to support Infrastructure Solutions, geographic expansion in North America and Europe along with other areas of investment in ---+ for the Corrosion Protection segment to drive efficiency and anticipated growth.
Let me briefly update you on several financial metrics on Slide 12 that will affect the financial outlook.
As Chuck addressed in his remarks, we are increasing operating expenses to access new markets, fund future innovations and answer sales capabilities and introduce new services.
Adjusted operating expense as a percentage of consolidated revenues in the first quarter was 16.3%, which was in line with our expectations given a low quarter of ---+ low quarter for revenues.
For the full year, we continue to expect OpEx to be just under 16% of consolidated revenues.
Interest expense paid in the quarter was in line with our expectations.
Interest expense for the full year is expected to be similar to what was paid in 2016 as the scheduled debt repayments are offset by a portion of our borrowings that are on floating rates in a rising interest rate environment.
The 22% effective tax rate on adjusted pretax income was slightly lower than expected as a result of certain discrete reserve adjustments that had a greater effect in a seasonally low period for pretax income.
I expect the full year ---+ the effective tax rate to be around 30%, given the proportion of pretax income expected to be generated in higher tax jurisdictions.
Finally, a portion of the deepwater pipeline insulation project was performed through our insulation coating joint venture.
This accounts for the nearly all of the $1.9 million of noncontrolling interest reported in the first quarter.
We expect noncontrolling interest for the full year to be in the range of $3 million to $4 million, as we expected ---+ as we communicated to you last quarter.
So allow me to conclude the prepared remarks with some high-level thoughts.
First, our operating results reflect continued strong performance in the North American markets for wastewater pipeline rehabilitation, progress on the deepwater pipe insulation project and increasing refinery maintenance and turnaround activities on the West Coast.
The slow start for contributions from cathodic protection services should give way to improve performance in the remainder of the year, because of a strong backlog position and expected higher labor utilization.
Second, we'll soon enter the peak period of our project activity.
We enter the second quarter with solid backlog, and conditions remain favorable in our core end markets, after one of our better quarters in history for new orders.
Finally, while we remain committed to our 2017 financial objectives, we are also looking to the future by making appropriate investments to position Aegion for long-term sustainable growth and achievement of our 3-year financial targets.
Now I'll turn over the call over to the operator to begin the Q&A session.
No, I think we are where we expected to be.
We certainly saw some slowness in Q4 with Tyfo and fusible PV<UNK>
What we've seen in Q1 was we had over $15 million in orders, and I think we're ---+ we still feel good about our target to hit $80 million to $90 million in revenue for the full year.
We have seen pricing firm up, and the price difference between Fusible PVC and HDPE, the gap has increased, and that bodes well for Fusible PVC as we go forward.
So we ended the quarter about where we thought we would be, and I think we certainly feel good about the rest of the year in that marketplace.
We have several parts of the country ---+ several regions across the country.
And in Canada, where we didn't have the sales coverage and the crew coverage that we wanted to have.
So what we've done is, we put a plan together, we're just starting to execute that.
We have added several salespeople.
We've added several crews.
Obviously, we're not going to get into exactly where we've added them, but we'll continue to do that.
As importantly though, on the ---+ we are finally fully staffed with our Tyfo Fibrwrap sales force.
We're up to 12 salespeople and 2 Sales Managers, which is fully staffed for the first time in a couple of years.
And we're starting to see a lot of market out there.
It hasn't ---+ it has not manifested itself in new orders yet, but we expect it will as that sales team comes up to speed.
So we made a solid investment in both the pressure pipe market and also growing our CIPP business organically by having better market coverage.
And I think we fully expect to see the results of that as we get into the second half of the year in 2018.
Yes, <UNK>.
Obviously Q1, if you look at the operating margin, looking ahead it was 1.8%.
We expect to be well on our way to seeing better margins throughout the rest of the year.
So if you think about where we were a year ago, we were basically a breakeven business, and if we can get there by 2019, it'll be because we continue to execute at a very high level on efficiency within the refineries.
We also were able to execute on our strategy to get more ancillary services inside the facilities, which carry higher margins, including small-cap construction, and expanding beyond refineries into some of the more, call it, white spaces, reflecting chemical plants and various other places that we do the same types of services today.
So those are the kind of things we do, but it's not necessarily about turnaround services, because what we want to do is have a base business that can do that and then when we have the higher-margin turnarounds, that's only gravy for us.
<UNK>, we continue to see a real nice momentum on capturing more of the spend at each one of the refineries that we have the majority maintenance position at.
That whole program is going exceedingly well, and so what you'll see is, us be able to leverage off our fixed cost base in that business, and that what's going to provide the leverage to increase the operating margin.
Sure.
Our primary business is in Brisbane, Sydney and Melbourne.
All 3 of those cities are going through very high period of construction ---+ commercial construction activity, and we compete with labor with that commercial construction activity.
What we saw in Q1 was some turnover in our labor force.
And we've done several things.
One is we've improved our position in terms of how we're paying.
The second thing we're doing is, we are also supplementing from a supervisory standpoint and a skill standpoint, the Australian business with some support from the U.S. What we expect is, going into the second half of Q2 and through the remainder of the year that, we'll see solid improvement in terms of our execution.
We also ---+ we're challenged a bit with ---+ we had some large-diameter backlog that didn't get released till recently, and that certainly hurt the Q1 results also.
But the big issue was the competition for labor, and I think we've made the adjustments we needed to make to alleviate that through the rest of the year.
I think ---+ remember that our market is on the West Coast.
Most of it's in California.
The California market, in particular, is a bit of an island because of the gasoline requirements for California.
What we've seen is a solid maintenance market this whole time, and we've also seen that we had a solid turnaround year last year, and we're going to have us better year this year.
And looking out, we feel good about '18, although, it's awfully early to comment on that.
The big issue for us when we look at last year is that, we were exiting upstream business, and substantially reducing our presence in the Bakersfield area.
And it was very time-consuming and focus-consuming from a management perspective, and there's no question that hurt our first half of the year.
But as we look at that downstream business, it continues to perform well and it continues to improve quarter-over-quarter.
In Q1, we always pay payroll taxes for the labor force out there, state and federal, and what that ends up doing is dampening our first one ---+ our Q1 operating margin, but that will normalize as we go through the rest of the year.
That's all behind us now.
We have expanded the business into some chemical facilities in California.
We're predominantly refining, but we do work in several chemical facilities and also some electrical generation facilities.
So we're actively looking for other industrial facilities that have the same maintenance requirements that we ---+ the same type of maintenance requirements we see at the refineries.
We haven't spent time looking outside of the Western part of the U.S. in other markets.
We feel very strongly that we need to stay focused on our core market and make sure that the business is operating as efficiently as it can before we start thinking about any type of geographic expansion.
Sure.
There are a couple of key points I'd make.
The first thing is, relative to the industry, remember that the spend is nationally, while it's fairly stable, moves around.
It moves from city to city depending on what's going on with their current budget.
We need to follow some of that spending, and we do.
The second thing is that, we monitor our win rate on bids.
Remember these are all public opening bids.
We monitor our win rate very carefully.
We also monitor our pricing very carefully at a national level, and we're very cognizant of our position.
We're going to ---+ we have every expectation that we're going to maintain our market-leading position.
But we also have a lot of responsibility as price leaders, and we're very careful with how we do this expansion.
We just saw some areas where we feel there's going to be increased spending over the next couple of years and we weren't represented as well as we wanted to be.
And that's what ---+ that's the basis for our expansion.
The orders were up across all 3 segments, and obviously, we're very pleased with the quarter.
We have spent a significant amount of time and focus over the last year enhancing our sales organization, developing our sales organization, investing in our sales organization.
What we hope to see is this is the beginning of a trend.
So obviously, very early days.
We had a good bid table in North America for the ---+ in the municipal side.
We expect that to continue certainly in Q2, but we're fundamentally trying to drive our sales organization to achieve the growth that we outlined in the 3-year plan.
We ---+ you know, obviously, this is an exceptional quarter, but we expect to drive organic growth with the investments we've made.
And we expect that to continue over the next couple of years.
And it's been very measured from our standpoint, and we have seen stronger energy markets.
I would say that our business in the Middle East in particular is off to a good start.
We haven't seen as much upstream recovery in North America for our products yet, but we're monitoring that very carefully.
But we're pleased with the condition of all 3 markets, particularly as we compare to where we were a year ago.
We are in much better shape as a company.
Sure.
Couple updates of on that.
We have now data from 10 customers in the system.
We have loaded 127 jobs in the system.
We have over 7,000 miles of integrity data in the system, and just as a point of reference, I think last year, we surveyed over 25,000 miles of pipelines.
So it gives you a sort of a point of reference.
Just as another data point, is we looked at growth in North America, we had low-double-digit growth in cathodic protection services in North America revenue in Q1.
Over half of that growth came from our top-10 customers, and ---+ so we're excited about the program.
We've gotten a very good reception from our customers.
They like what we're doing.
It's still early days, and we'll continue to develop the program and develop the output from the program, but everything is tracking really well to the metrics that we've been monitoring.
Just looking at you guys coming up upon the completion of the Appomattox job, can you comment a bit on just the cost structure of the operation.
And how we should think about, you know, you sort of managing costs in between projects.
And then, if you could also just talk about how you're thinking about the outlook for offshore projects.
What the sort of pipeline of potential opportunities looks like.
Okay, great question.
I'm going to reverse the order of my answers.
On the offshore market, we continue to see a nice sales funnel of projects.
We are ---+ we continue to test for a second project that would require the new insulation material that we're using on the current project.
That project's still out a ways.
It's certainly not going to be booked in, and we certainly don't expect it to be in order in 2017.
The characteristic of that business though is that it's lumpy.
And as we look at the business, we certainly take down our cost structure to the extent that we can between projects.
We reduce variable costs almost completely.
We also take a look at the overhead and do whatever we can between projects.
And so we continually assess that as we go forward.
The funnel is better than it was a couple of years ago.
Certainly the recovery in oil prices and the fact that the moratorium on offshore drilling is over with and has been gone for a couple of years enhanced the overall market.
But at the end of the day, it's a lumpy market.
We have forecasted appropriately for the year.
And certainly for our 3-year period, I think in terms of being able to manage through that lumpiness.
Okay.
And then just on the Infrastructure Solutions.
You've talked about this a bit, but given that revenue growth was sort of in the low-single digits in the quarter, can you just walk us through sort of the bridge to how you get to higher than mid-single-digit revenue growth for the year, just given what we're seeing this quarter in terms of both revenue and backlog.
Sure.
Q1 revenue was certainly challenged with Fusible PVC and with Tyfo Fibrwrap.
I think we reported last quarter that we've had a challenging quarter in terms of orders.
The orders recovered nicely in Q1.
That will certainly help us as we go forward, the backlog, and both those businesses is up significantly.
The other thing is though, and this is real important for us, obviously, given the size of the North America market and our position in it is that, we had a very nice orders quarter in Q1.
As we look out in Q2, the sales funnel's strong.
We see no let up for the rest of the year.
And so, from my perspective, I really like our position in terms of order and the momentum that we see in that market going through the rest of the year.
I think as we've projected, we'll see higher than the low- to mid-single ---+ the low-single-digit revenue that we had put forth in our 3-year plan.
I think that's what's left on the project, it won't necessarily all be in Q2 or even Q3, because there's going to be a load out revenue associated with once we do load out next year.
But substantially, a big portion of that revenue will be over the next 2 quarters.
Sure.
So what we're doing, and what we started doing in the second half of last year, and we're certainly in process this year, is we made significant investments, both in sales and in technology.
Our plan is absolutely to hit our 3-year growth objectives through 2019.
I'm not going to comment on 2018 specifically, but we think we feel like we are on track.
We feel like the sales channels are on track.
I think the orders that you saw ---+ what I liked about the orders this quarter was, there wasn't a significant big project in those numbers.
This was typical run rate business for us.
That's a very important fact.
What wasn't in there, was a $25 million or $30 million project, that kind of work that gives us a one-off quarter.
The orders in the quarter were consistently the kind of run rate business that we have to grow this business systematically and organically over the next 3 years.
So I'm very excited about the momentum that we're seeing on the order side and the revenue side.
And obviously, our challenge is to maintain that over the next 3 quarters, but from what we're seeing, we certainly have the market opportunity to do that.
Well, I think we've seen ---+ I think part of the ---+ we do midstream work with cathodic protection services.
As we mentioned, our orders were up in Q1.
We also do weld coating, exterior weld coating, as part of our business mix in North America.
That business is up in Q1 and going into Q2, and those are the areas where we've seen the increases.
We typically don't see a big opportunity for Tite Liner in the shale plays.
And so that ---+ what where we see the opportunity for Tite Liner in oil and gas ---+ upstream oil and gas is more typically where they're doing enhanced recovery with CO2 or steam, and that's where we see the opportunity for Tite Liner, unfortunately, the portion of the market that's booming in North America is the shale plays.
And that doesn't impact us directly.
We have seen a nice opportunity for all the products I just mentioned in the Middle East, where Tite Liner has a really good application.
So as we look at the market ---+ as we look at the upstream market, we have a nice opportunity continuing with gathering with midstream in ---+ with cathodic protection services.
We continue to see a nice opportunity with our weld coating business on the midstream and transmission lines.
And then, our upstream business for Tite Liner and the weld coatings has been strong in the Middle East, where the application is better for our products.
Well, thanks for joining the call.
We expect 2017 to be a good year for Aegion.
Our confidence in this outlook comes from the favorable conditions of our core end markets and improving visibility in the energy markets.
While we remain focused on doing what is necessary for its success this year, we are making investments to build a company able to deliver sustainable organic growth over the long term.
Thank you for joining us.
Have a great day.
| 2017_AEGN |
2015 | AMGN | AMGN
#Thanks.
Thanks for your question, <UNK>.
We are focused on having this matter reviewed on the merits, and as you point out, we are fortunate that it looks like we are going to be able to do that early in the new year.
So we will look forward to again this being reviewed in its entirety.
And as you know and as we have said before, we feel we have a very strong intellectual property patent estate on this product.
And we demonstrated in the past our determination to assert our IP rights and defend them, and that's what we look forward to doing for this product early next year.
Yes, so first of all in Q1 as we said, we are really encouraged by the performance in the business, which was obviously a combination of solid topline growth, as well as the fact that we had very good expense management in the quarter.
If you frame that as to how that evolves through the year then, what I would say is a couple things.
One is we had indicated previously that we expect this year our transformation to deliver about $400 million of incremental savings.
And certainly we saw a share of ---+ a proportionate share of that already land here in Q1, and those savings will continue pretty steadily through the year.
The second dynamic on cost then is around the cost trends.
In particular if I look at SG&A and the sales and marketing area as well as R&D, we do expect to see rising costs, which is a combination of the fact that we inevitably ---+ normally for the business, the first quarter is the low point for expenses overall for the year.
But I think importantly for us right now, we do have these launches that are coming up, we do expect to underwrite those launches significantly with this transformation savings, and we do expect the trend of spending to increase through the year.
So I think you have basically framed it correctly as now we are thinking about this evolving in the year.
<UNK>, not to miss the opportunity to talk about the long-term, as I said and as <UNK> said in his remarks, we feel we are clearly making progress towards our long-term objectives, including that margin objective.
Brian, let's take the next question.
<UNK>, based on our understanding of the legislation, based on the progress we're making in developing adalimumab, we still expect we will be in position in to launch that in 2017.
And of course with respect to the Sandoz matter, we are expecting that that will be heard in the appeal courts later in the year.
<UNK>, do you want to add anything.
It was a little bit hard to hear your question, but I think you were asking about Corlanor and Repatha.
We are excited as we have said to get launched in the cardiovascular field with Corlanor, and we think again an innovative medicine that will require some work to educate the cardiologists about the appropriate use of this medicine with heart failure patients, but we are excited about that.
And we are excited also about the innovative biology behind Repatha and the opportunity for that medicine to make a big difference for patients who are at risk of heart attack and stroke.
So our focus is on those two medicines right now.
To the extent that we have other opportunities to advance innovative biology with big effects in cardiovascular disease, we will look carefully at those.
And as you know, we have one such medicine that is in late stage of development, now which is our omecamtiv mecarbil program which <UNK> referred to in our earlier remarks.
And those constitute three pretty exciting innovative opportunities for us right now, and if we find opportunities to build on those, we will look at them carefully.
Why don't we break that into two parts.
<UNK> will talk about the Humira question first.
<UNK>.
Yes.
In terms of the cost savings, what I would first say is that if you look at the savings we expect this year as well as through the whole program, as we have said before, those are savings that are being accrued across all of the areas of cost.
So it's not concentrated in one versus the other.
Secondly, if you look at the particular pattern of savings in the first quarter, what you can observe as I mentioned is that ---+ and as we have talked before, we are investing freeing up flexibility to invest in our launch portfolio.
So you can expect that a substantial share of what we save in SG&A will be reinvested toward the launches.
And then I think the third thing I would comment as to R&D, that was a combination in the quarter of R&D tends to be rather lumpy in terms of the spend.
So you saw a combination of savings that we are getting from our transformation in the quarter, as well as some of the inevitable lumpiness that occurs from quarter to quarter in that area.
I think bottom line is that we expect going forward through the year to see rising costs, which you typically see in the pattern through the year, but see it a little more accentuated as a combination of rising cost with launch activities, as well as in the case of R&D, we still are continuing to invest in clinical trials.
And we will see some increases there.
And then as to ---+ if I may, one final comment ---+ R versus D, as we have talked before, we have done work to look at all the processes across all of our business activities, and so we are seeing efficiencies in both of those areas broadly.
Brian, why don't we take one last question as we are getting to the top of the hour.
<UNK>, thanks for your question.
As you point out, things are going very well for Kyprolis, and we are excited about the data that we have in hand, as well as the data we may generate.
Thanks for joining our call.
<UNK> and his team will be around if there are questions you didn't have a chance to ask on the call, and we look forward to connecting with you on the next quarterly call.
Thanks.
Thank you, everybody.
| 2015_AMGN |
2017 | UTHR | UTHR
#Thank you, operator.
Good morning, everyone, and welcome to our second quarter earnings call.
My name is <UNK> <UNK>, I'm the Chairman and CEO.
Joining me on the call is our Chief Financial Officer, <UNK> <UNK>; and our Deputy General Counsel and Chief Strategy Officer, Andy Fischer.
I'll provide a couple of introductory remarks and then we'll open the lines to questions.
Our second quarter total revenues reached $445 million, our highest quarterly net revenue level ever.
We continue to believe that Orenitram is well-positioned given the large and growing number of pulmonary arterial hypertension patients in need of a true prostacyclin analog therapy and we believe we are beginning to see the early signs of this transition reflected in Orenitram's 21% growth in second quarter net revenues as compared to the second quarter of 2016.
We are also advancing a growing number of pipeline priorities, such as our new chemical entity, esuberaprost, which has fully enrolled its Phase III BEAT study and our Phase III study of new indications related to pulmonary fibrosis and heart failure.
And finally, our new organ manufacturing technologies since lung transplantation is currently the only curative treatment for pulmonary arterial hypertension.
Also noteworthy are our new developments in the cancer field with the inception of patient enrollment in our small cell lung cancer study.
With these introductory remarks behind us, I'd now like to ask the operator to open the lines to any questions.
Yes, Deanna (sic) [Liana], thank you for the question.
There are additional cancers that we're planning to study that are GD2-positive.
And it's appearing to more and more experts that we have a broad GD2 platform with our dinutuximab or Unituxin antibody.
Among some of the GD2-positive cancers that are of most interest, there are the soft tissue cancers such as sarcomas of various sorts, which today are very poorly treated and highly express GD2.
And in fact, some investigator-initiated activities are already underway with those cancers.
Some patients have already been treated.
So beyond that, there is significant interest in the small cell lung cancer area, breast cancer.
And there are certain orphan cancers that have been largely neglected but are absolutely devastating to the patients who suffer from them, albeit, they are rare cancers.
And some of these are also highly GD2-responsive.
There is a, for example ---+ just as an example of a class of these sorts of cancers, there is a uveal cancer that affects the eye, a rare cancer, absolutely devastating.
But we're very hopeful that dinutuximab will prove to be effective against this.
And we continue to devote substantial resources to our cancer platform.
Just in round numbers, we are committed to spending several tens of millions of dollars per year on developing dinutuximab in these different cancers.
I won't be able to, right now, address your follow up because there are so many people up in the queue.
But if I could, maybe first ask our Chief Financial Officer, <UNK> <UNK>, to comment on the inventory question.
And then he could bounce it back to me for sort of the patient-related dynamics in the field.
<UNK>.
Yes, thank you, <UNK>, and thank you for the question.
At the end of the second quarter, we review all inventory levels at specialty pharma.
And all inventory levels were in line with their contractual requirements.
So we don't feel there was any unusual inventory levels occurring at the end of the quarter.
And just as a little background, we do require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves as the interruption of Remodulin, Tyvaso and Orenitram can be life-threatening to these patients.
And our specialty pharmaceutical distributors typically place monthly orders based upon their current utilization trends and also their contractual inventory requirements so that patients have continued and uninterrupted access to all of our products.
So <UNK>, can I turn the question back over to you.
Yes.
Thanks, Jim ---+ <UNK>, for that clarification.
With regard to the patient dynamics questions.
I think what you're seeing is a reflection of the fact that unfortunately, pulmonary arterial hypertension is a progressive indication.
And there's no therapy that has been shown to be curative for this condition.
So as a result, what happens is that, depending on the functional class of the patients when they first present to a pulmonary hypertension specialist for treatment, they may be placed on more invasive therapies, such as Remodulin or less invasive therapies such as the AMBITION protocol.
But over time, there is an inexorable movement of patients onto the true prostacyclin analogue therapies such as Tyvaso and Remodulin.
And I think it's just this progression of a bulk of the mass of patients that you're seeing reflected in the numbers.
Thanks, <UNK> for the question.
I will talk a little bit about the second part of your question.
And <UNK>, after I do so, if you don't mind, to be able to speak a little more specifically about the margin question that <UNK> asked in the first part of his question.
So generally, <UNK>, what we found is that we've been able to execute a robust research and development program of aggressive pipeline development while overall spending about half of our net revenues each year.
And this metric has been pretty predictable in the past and I believe it's pretty predictable going forward.
Even with any fall off of Adcirca branded revenues from its genericization.
So for example, there are, in the life cycle of a clinical trial, there are times when very, very heavy spending is necessary and then timed when the spending lets up a little bit.
So right now, for example, we've been in a peak spending mode because we are ---+ we have just completed enrollment, which is the most aggressive spend period of the esuberaprost trial, the new chemical entity which is actually even more potent than treprostinil in its binding efficacy.
So that was a peak of spending.
At the same time, we have completed our enrollment in FREEDOM which is the largest trial that we've ever conducted with several hundred patients all over the world.
So again, that's a very peak spending type of activity.
And now, as we move forward over the next 12 months or so, while we do have new Phase III trials ramping up, they're not really in their peak spending mode and the size of those trials are much easier for us to manage than say, the very large FREEDOM EV trial.
Specifically, I'm talking about the SOUTHPAW study in left heart failure and the INCREASE study in different types of pulmonary hypertension associated with different types of interstitial lung disease.
So we look at these overlapping waves of Phase III enrollment, which is the peak R&D activity.
And at that ---+ on the other side of the coin, we look at what's going on in the revenue side and we see continued growth in revenues from the Remodulin franchise, the Tyvaso franchise, the Orenitram franchise.
With regard to Remodulin, we expect continued revenue growth as we move into our RemUnity and RemoPro products.
The RemoPro product, just as a refresher for those who may be new to United Therapeutics, is a pain-free form of treprostinil which is highly convenient to the patient and pretty much obviates for the vast majority of patients the need for any intravenous treprostinil therapy at all because the reason to take treprostinil intravenously is due to the inability to tolerate subcutaneous treprostinil's side effect of site pain.
About half of the patients can't tolerate that side effect so they segue over to the intravenous.
But with RemoPro, which is itself a new chemical entity, we will obviate the site pain from the subcutaneous.
So there's really no need for people to go to intravenous.
So I think you're going to see a large growth, going forward, in Remodulin revenues from RemoPro.
On the Tyvaso side, we have some really exciting developments with the full enrollment of the BEAT trial.
We're very hopeful than when BEAT unblinds in 2018, we'll see that the combination of esuberaprost plus Tyvaso was able to effect a significant increase in longevity and in morbidity-free survival for these patients that will certainly augur further growth of Tyvaso.
On top of that, as there is growing experiences with physicians in the INCREASE trial and seeing the positive results of that trial as well as another Phase III trial where we are rolling out called the [PERFECT] trial, in COPD-affiliated pulmonary hypertension, you're going to get greater and greater payer and physician awareness and comfort with the prescription of Tyvaso for these different types of pulmonary hypertension.
We also have recently embarked on some very exciting MDI in advanced nebulizer technology activities.
But all of this broad array of R&D that we're doing at UT, I believe, can be readily managed within 50% of our revenues in part because the R&D is pretty sequence-able and predictable year-to-year and in part because the overall revenues are set to continue to grow with Orenitram, Tyvaso and Remodulin.
With regard to some metrics around the margins, I wonder, <UNK>, if you could provide some color on that.
Sure.
Thank you, <UNK>.
Thanks for the question, <UNK>.
And just for kind of following on to <UNK>'s, we do manage the annual operating expense budgets and they're developed not to exceed the 50% of prior year net revenues.
And that's something that we've managed and we'll continue to manage going forward.
But to give specificity or clarity on an individual quarter is something that we have stayed away from and probably will continue to do and manage it more just at the annual level for many of the reasons that <UNK> talked about in terms of all the dynamics of the numerous new clinical trials and research and development activity.
Yes.
Thanks, <UNK>.
So we did in fact, this quarter, cross the 154 event threshold necessary for doing the interim look.
So that occurred right on schedule as predicted.
The process of actually achieving the interim look is a little bit more complicated than one might think because each event has to be, at the top of my head I can't remember the word, but basically, it has to be analyzed by an independent panel of doctors to assure that it is in fact like a true event within the meaning of the clinical trial protocol.
And when they do this, there's always some events which are determined that they weren't events within the meaning of the trial or something like that.
So we're actually over 154 events right now.
And we're at a ---+ we're sufficiently over, I don't remember the exact number but I think it's around 160 ---+ the number ---+ the word I'm thinking of is adjudicated.
So the ---+ we are confident that we'll have 154 adjudicated events at this point in time.
But by the time that adjudication process actually occurs and we get the entire data monitoring and safety board together, who will be the individuals to look at the unblinded results and make an exact call, it's going to be September.
So we have in fact scheduled that meeting for September.
And therefore, I expect in September, we'll make an announcement that we have crossed the statistical threshold specified in the interim look or that we will continue the study until its full completion in 2018.
Sure.
Thanks for the question.
So first, I'll talk about the implantable pump and then we'll move over to the DEKA pump.
So the implantable pump, again, for everybody who may not be that familiar, is a joint venture of ourselves and Medtronic.
And this is a pump which has been a difficult product for us to finally launch into the market despite the fact that it's had a superb clinical trial outcome, beating its endpoint by more than an order of magnitude.
Despite this fact, because it is a kind of trailblazing technology, when you are implanting a pump inside a person's abdomen and that pump has a catheter that literally winds through many inches of their blood vessels and is automatically delivering a drug 24x7x365 which if the delivery of the drug is stopped, the results can be immediately life-threatening, and if the delivery of the drug is not precise, it's also very, very dangerous.
So I don't fault the FDA at all for being very cautious in the process of approving the use of this pump called the SynchroMed pump for the delivery of treprostinil.
Also complicating the factor is that there was a consent decree involving Medtronic and involving this same particular pump, which is yet another complicating factor.
So because of the kind of like the three-way situation here between the FDA, Medtronic and United Therapeutics and the multiple issues that the FDA wanted to be satisfied on and then kind of the entire separate arena of issues to be resolved relating to the consent decree, I no longer felt comfortable at the last conference call to give a really precise month or even quarter in terms of when we could launch the product.
Frankly, I was wrong like twice and I was embarrassed about being wrong.
So as a result of that, I just said, our new schedule is to launch in 2018.
Now Chris, further to your question, nothing has changed to make me alter that expectation of 2018 as being a reasonable launch year.
But I remain sorry that I can't pin that down to a month or a quarter in 2018, and you can probably understand why, with all of these different moving pieces involved with the SynchroMed pump.
I will ---+ before moving on to the DEKA pump though, I will add that it's remarkable, the life-changing effect that that SynchroMed pump has had for the patients.
I've received YouTubes, e-mails, you name it, from patients who have said that it has given them their life back.
That they don't even think about their pulmonary hypertension day-to-day.
To have once had a catheter coming out of your body that is ---+ it's like, if this is disconnected I'm dead, to not having to think about that at all, it's transformative.
So we believe so much in this Medtronic pump that I've actually asked our R&D department to work with Medtronic on a further research and development project to advance the implantable pump technology baseline to bring it forward into the latest type of software which is even more fail-safe than this type of software was before, to further miniaturize the device.
It is a little bit to me on the bulky side and for patients who are particularly thin, it would be, I think, a non-starter for those patients to have that pump.
So notwithstanding all of the positive things I'm going to talk about in a moment on the DEKA pump, I do believe that the implantable Medtronic pump has a future and I would like everybody to know that our company is absolutely committed to supporting the dozens of implantable pump patients who have been currently using that pump.
Some of them more than 5 years by the way.
So it is a remarkable product.
And in closing on that note, I'll point out that the average survival of our patients on the implantable pump is, I believe, about double or close to that, the survival of patients taking Remodulin in other ways.
And that very well may be because of the transformative effect it has on those patients quality of life.
Now turning to the DEKA pump.
So again, for people who may just be learning about United Therapeutics, DEKA is a company formed by Dean Kamen who was the inventor of Autoject and the MiniMed type of continuous subcutaneous pump delivery technology and has also now, several years ago, moved forward into redefining the technology of what are called patch pumps.
And these are very, very small pumps that fit just kind of in a small portion of the palm of your hand.
And the amazing invention that Kamen and DEKA have come up with is they've used the latest technology from the integrated circuit industry and Nitinol wires to create a pump using a new [fiscal] principle called acoustic wave sensing technology that allows the pump to have no moving pieces at all and this is huge.
This is truly huge because a moving piece in a pump can break.
And once that moving piece breaks, then the pump can no longer deliver its life-threatening ---+ it's life-saving medicine and immediately put the patient's life in dire jeopardy, certainly in the case of pulmonary hypertension, and oftentimes in the case of insulin or diabetes as well.
So Kamen has patented this broad platform of acoustic wave sensing technology which actually measures the dissipation of treprostinil 10x times more precisely than was possible with our previous pump technology.
So this is really a fundamental breakthrough.
Another beautiful thing about it is that the pump is designed so that it can be ultimately just shipped to the patient with this RemoPro product which is the pain-free form of treprostinil already embedded in it so that the patient doesn't have to feel anything, doesn't have to do anything and can use this patch pump subcutaneously.
And when they're completed with it, just toss it in the trashcan and take the new one out of the box from the distributor.
So I think this is going to truly revolutionize Remodulin therapy and the field of pulmonary hypertension treatment.
In terms of the schedule for this, we are currently expecting to do the first patient doses or, I'd say, I take that back, human volunteer doses of the RemoPro product during this calendar year 2017 and we remain on schedule that in the 2018 to 2021 4-year plan ---+ planning cycle for our company, that we plan to launch the RemoPro product in the DEKA pump.
And prior to having the RemoPro product launch in the DEKA pump, we plan to launch the treprostinil molecule in the DEKA pump.
That in and of itself will be a huge advance over the previous need to have a much bulkier pump and one which is not as precise in its drug delivery.
That product is going through its kind of final back-and-forth with the FDA right now and we would expect to launch that product in the very early portion of that next four-year cycle I referred to.
So Chris, hopefully that gave you everything that you were looking for on the SynchroMed and the DEKA implantable pump ---+ the SynchroMed implantable pump and the DEKA subcutaneous pump.
Operator, we've reached the 10:30 point.
So you can wrap up the call.
And I'd simply like to say to everybody, thank you for taking your time this morning to be in the call.
Thank you for your congratulations.
And please look for us at the upcoming Wedbush Securities Health Care Conference in August.
Operator, back to you.
| 2017_UTHR |
2015 | LGND | LGND
#Thank you, and good afternoon everyone.
Welcome.
Thanks for joining us for our third quarter earnings call.
Ligand posted strong revenue growth this past quarter, strong profit growth, and strong growth in cash flow as well.
Our largest commercial assets are performing very well, and we have had numerous positive updates and developments with our portfolio.
Of note, Promacta and Kyprolis hit again all-time high revenues in the third quarter, which will drive our royalties in the fourth quarter.
These products are Best-in-Class medicines for serious life-threatening diseases, and they are marketed by major and highly respected international companies.
Novartis announced Promacta Q3 revenues of $117 million.
The highest quarterly sales ever, and 11% over the third quarter of 2014.
Of note this quarter there was a significant currency impact that impacted dollarized sales.
We monitor US prescriptions and the prescriptions for Q3 were up nicely and drove solid growth in the US.
In the past quarter Novartis announced the European Commission approved Revolade, the name of the product in Europe for the treatment of severe aplastic anemia in adults with certain conditions.
Novartis announced the FDA approved an expanded use for Promacta, to include children one year of age and older with ITP.
In addition to the continued strong commercial performance of Promacta, it's very encouraging to see the continued market and label expansion for the product now under Novartis' commercial business.
Another product I will add some comments about is Kyprolis, as investors who follow us know Kyprolis is an Amgen drug, that uses Captisol in its formulation.
We have a licensing agreement with Amgen, but are not involved in the commercialization or development of the drug.
Now on Amgen's earnings call last week, Amgen announced Kyprolis third quarter revenue of $137 million.
That's a very significant increase over the prior quarter of $119 million, and over Q3 of last year of $94 million.
Some investors estimated Kyprolis would do about $500 million in revenue in 2015, and by Ligand's estimates it looks like the product is on track to exceed that level this year.
On their earnings call Amgen also announced that they expect approvals for Kyprolis in Europe, Canada, and some South American and Asian countries in the fourth quarter of 2015.
Now a comment about the approval stage drug [Ebamela], partnered with Spectrum.
Spectrum expected FDA approval last month, but instead received a complete response letter from the FDA in relation to a third-party manufacturing question.
Ligand is owed a $6 million milestone on approval, and we had included that amount in our 2015 guidance.
We have talked to Spectrum and have monitored their public remarks.
It is our strong belief that Spectrum can successfully address the issues, and we expect the drug to be approved.
While we now don't expect to receive the approval milestone in 2015, we do expect to receive the milestone and see the product launched in 2016.
We have enjoyed a few years of strong growth in profits and cash flow, and our outlook indicates our cash flow and profits will continue to grow.
With this history and outlook now is the appropriate time to release our valuation allowance, or our tax assets related to our substantial accrued net operating losses.
While the release of the valuation allowance does not impact our core business, it does indicate our strong financial performance, and now will more readily call out in our financial statements this significant tax asset as a result of our past investments in the business, and the NOLs we have acquired through M&A.
We are hosting an Analyst and Investor Day in New York City next week.
The morning of November 18th.
We'll discuss the business, provide updates on the portfolio, and present financial outlook for the Company.
We encourage you to attend in person, or at the very least dial into the webcast.
I will now turn it over to <UNK> <UNK>.
Thanks, <UNK>.
I'm going to provide some additional highlights on portfolio program developments from the last few months, and I'm also going to give a brief update on some progress with our internal unpartnered pipeline, and the expanded uses of our Captisol technology.
Starting with our portfolio, the team at Viking Therapeutics has built significant momentum recently.
As those of you who have been following Ligand for a while may know, Viking was formed around licenses for multiple Ligand assets.
They successfully completed their IPO earlier this year, and are now in active clinical development.
Viking completed a safety tolerability and PK study for their selective androgen general receptor modulator, or SARM, that they call VK-5211 in elderly subjects.
The study showed that their SARM, which was originally discovered by our scientists at Ligand was safe and well tolerated, and that the drug demonstrated predictable PK in elderly subjects.
Viking then announced just last week, that they have now initiated dosing of the SARM in a Phase 2 study in elderly patients who have recently suffered a hip fracture.
There's obviously a large and growing medical need for assisting patients with hip fracture, after breaking a hip elderly patients are known to lose bone and muscle at accelerated rates, placing them at risk for further morbidity, refractures, and prolonged disabilities.
The profile of the SARM suggests it has robust anabolic effect on bone and muscle, which indicates that it could meet an important need in this setting.
Viking has indicated that they expect to have Phase 2 data for SARM in hip fracture in 2016.
Viking also announced that they will be presenting additional data on the SARM program at the Internal Society of Sarcopenia, Cachexia, and Wasting Disorders in early December.
Additionally Viking is actively progressing into clinical development their tissue selective agonist of the thyroid beta receptor in patients with hypercholesterolemia and fatty liver disease.
They plan to file an IND for the TR beta program, and initiate Phase 2 studies prior to the end of this year, and expect to complete the Phase 2 trial in 2016.
We are very proud of our relationship with Viking, as well as Ligand's scientific heritage related to the drugs that they are developing, and we look forward to two Phase 2 data events in 2016.
Changing gears in the third quarter we entered into an expansion of our relationship with Retrophin for Sparsentan as background Sparsentan is a selective dual-acting receptor antagonist with an affinity for both Endothelin and Angiotension 2 receptors, that is in development at Retrophin for focal segmental glomerulosclerosis, or FSGS.
This drug was originally developed as an Antihypertension medicine by Pharmacopeia, a company that Ligand acquired.
Sparsentan's mechanisms of action show that it can reduce proteinuria and nephropathies that are the hallmarks of FSGS, which is what led to our partnership with Retrophin.
As I mentioned we updated our agreement with Retrophin in Q3.
Specifically, this was in relation to potential expansion into the Asia/Pacific region.
We did this because we see Sparsentan as a promising drug with global potential.
Outside of the US Retrophin announced that the European agency for Orphan medicinal products issued a positive opinion for Orphan Drug Designation of Sparsentan in FSGS.
The final decision that generally follows a positive opinion is expected within the next several months.
Retrophin has also indicated that they expect topline data from their DUET trial in Q3 of 2016, and we look forward to hearing that outcome at that time.
Switching gears to our internal R&D and specifically our glucone receptor antagonist that we call LGD-6972.
It continues to progress towards a Phase 2 trial in patients with Type 2 diabetes.
We announced positive Phase 1b data earlier this year at the ADA Meeting and our currently completing non-clinical work, to position ourselves to start the Phase 2 in 2016.
We are excited about the program, and we believe we have the potential to have a Best-in-Class molecule, with a novel mechanism for treating diabetes.
I'm going to wrap-up with just a few quick comments about Captisol.
The week before last was The Annual American Association of Pharmaceutical Scientists Meeting, which is a meeting that brings together leading pharma scientists and formulators from all over the world.
It's generally an important event for Captisol, and this year the interest and visibility for the technology was higher at the conference than it has ever been.
We were pleased to see presentations that referenced Captisol, and specifically will mention one out of Kansas University, that showed Captisol stability under very extreme formulation situations, and also data out of the University of Mississippi that showed enhanced dermal delivery of a testosterone gel formulation that was facilitated by Captisol.
It's great to continue to see the growing body of data showing Captisol used in a variety of new and interesting ways, and it was fantastic to interact with many of our current and future partners, and hear about their experiences with the technology.
And with that, I'll turn the call over to <UNK> <UNK> to run through the financials.
Thanks, <UNK>.
I'll start today with a few highlights from our earnings release issued earlier today.
Total revenues for the quarter were $17.7 million, and included royalty revenue of $9.8 million.
The royalty revenue increase of 30% versus the year-ago period largely reflected higher Promacta and Kyprolis royalties.
Captisol material sales for Q3 were $6 million, and collaborative R&D revenues were $1.9 million, both in line with expectations for Q3.
On the expense side, our cash R&D and G&A expenses were slightly lower compared to the year-ago period, due to lower costs associated with business development activities.
Now a quick comment about gross margins.
We once again saw higher gross margins as compared to the prior period.
Our material sales margins are driven by both the mix of clinical versus commercial sales, and the volume of Captisol we purchased.
As showed previously our margins are better on our clinical sales as compared to our commercial sales, and our overall costs are lower at higher annual volumes.
For the quarter we reported adjusted earnings from continuing operations of $12 million, or $0.56 per diluted share, compared to $7.6 million, or $0.36 per diluted share for the same period last year.
The primary driver of the increase is an increase in royalties from Promacta and Kyprolis, combined with a decrease in expenses.
In the third quarter we had GAAP net income of $224.5 million, or $10.46 per share.
Driven by the release of our valuation allowance related to our NOLs.
As we have discussed previously, Ligand has a useable portfolio of NOLs and other tax assets of more than $700 million.
Through last quarter we had maintained a valuation allowance offsetting the entire balance due to the uncertainty of when we would use the NOLs and other tax assets.
Given the sustained positive performance by the Company, and analysis of our cumulative historical earnings and forecasted future taxable income indicates that it's more likely than not that we'll utilize substantially all of the NOLs and other tax assets prior to the expiration, and therefore, we are releasing substantially all of the valuation allowance effective September 30th, 2015.
The income tax benefit from valuation allowance released net of our current period GAAP tax expense, increased our GAAP net income by $217.3 million, or $10.12 per diluted share for the third quarter.
Roughly the $217.3 million equates to the future tax benefit we'll realize from the utilization of our NOLs and other tax assets.
Now that the valuation allowance has been released, our GAAP EPS will appear as fully taxed on our income statement going forward, at approximately 36% to 38%.
That's prior to any adjustments for differences in book and tax deductions other than the NOLs.
Taking into account the usage of our NOLs and other tax assets, we continue to expect to pay cash taxes of less than 5%.
On the balance sheet we ended the quarter with just over $187 million of cash and investments.
We generated operating cash flow of $10.4 million during the quarter, which is a meaningful increase from the $3.7 million of operating cash flow in the year-ago period.
Our growing royalties and top line revenues combined with our relatively stable low cost infrastructure, continues to allow for significant cash generation.
As <UNK> referenced, we are adjusting our full year 2015 guidance primarily to reflect an expected delay in the timing of receipt of the $6 million milestone payment due from Spectrum upon a approval of Ebamela.
We now expect that milestone to be earned and paid in 2016, and will provide any updates on timing and outlook at our upcoming Analyst Day.
We now expect full year 2015 total revenues to be between $75 million and $76 million, and adjusted earnings per diluted share to be between $3.34 and $3.37.
This compares with previous 2015 guidance for total revenues to be between $81 million and $83 million, and adjusted earnings per diluted share to be between $3.45 and $3.50.
As you can calculate, we are adjusting revenue for the full impact of the delay of the milestone, but on the EPS line we expect that favorable changes to expenses and other items, will partially offset the delay of the milestone.
For the fourth quarter of 2015 we expect total revenues to be between $24.3 million and $25.3 million, and adjusted earnings per diluted share to be between $0.63 and $0.66.
Adjusted earnings per diluted share guidance excludes changes in contingent liabilities, mark-to-market adjustments for amounts owed to licensors, noncash stock-based compensation expense, noncash debt related costs, pro-rata noncash net losses of Viking Therapeutics, and noncash tax expense.
With that I'll turn the call back over to the operator, and open it up for questions.
Yes.
Thanks, <UNK>.
This is <UNK> <UNK>.
As I mentioned earlier remarks, we're obviously real excited about the program.
We are running some additional non-clinical work to facilitate the Phase 2 program.
That work will continue into early next year, and then probably in the mid-year time frame, we'll keep folks updated as things progress, but is when we would be in a position to start the Phase 2.
So we're excited about the program.
We feel like we have got a Best-in-Class med.
The more we see data from our program, the better we feel about it, and we're excited to be moving forward with it.
Yes.
We've got a couple of things, obviously that we continue to invest in.
We maybe don't talk about all of the times, but I will bring up our small module oral G-CSF.
Obviously we have got a history of discovery of successful small module [kinetics], not unlike Promacta of course.
And those are the kind of programs that are more pre-IND, pre-clinical programs, but we feel like we have focused investment, we can continue to position.
We have also got some Captisol-enabled programs, where we feel like Captisol can add specific benefit to maybe an active that is off patent, and could improve a product profile, and we have got some of those at earlier stages as well.
Yes, <UNK>.
It's a combination of both.
I think margins on the gross side are better and that's helping quite a bit, and then the expense base is a little bit lower tracking than we had expected compared to guidance, or our internal focus on guidance.
So yes, it's a combination of both.
Yes, <UNK>.
<UNK>.
You are good to pick that up.
There are really two messages.
One, obviously the Spectrum milestone we do expect to hit.
It's a timing issue, but again our understanding of the technical issues and the like is that it will hit, obviously we won't see the revenue with their outlook in 2015, but you're good to pick up on, I'll say the better than expected performance in the rest of the business.
When we look at higher gross margins, and some other, kind of small changes throughout the rest of the P&L earnings, notwithstanding that change in revenue adjustment, earnings actually is very strong for the business that we had estimated at the start of the year.
So we are pleased with that.
As we move into next year, we think at higher volumes we'll continue to enjoy a bit higher gross margins on Captisol, but we still need to talk about the overall expense structure, as it relates to our investment in Flucagon, but the business from an earnings and cash flow perspective are really strong.
Yes.
<UNK>, as I was saying, just coming off of AAPS, we continue to see increases in the in-bound requests for samples from new partners, new prospective partners, I think a lot of that comes from just the increased visibility of the Captisol technology, the growing safety database in our Type 4 and Type 5 drug master files that are real big value drivers to new partners, in terms of facilitating their dialogue with regulatory agencies, and facilitating their projects more quickly.
So we are continuing to see good increases, real solid increases in Captisol sampling, which we're excited about.
And I will say the mix in terms of clinical to commercial Captisol as we have said in the past, it can vary quarter to quarter.
As a partner embarks on a Phase 3 trial, they may need for that program a big bolus of clinical grade material, so we do see lumpiness from time to time, and quarter to quarter in that mix, but we feel very good about Captisol's prospects.
That is correct, <UNK>.
The last point.
The currency I'll start with that.
It's hard to look at the exact mix of every country, and the dollarized impact, but very roughly when we have looked at Novartis' public disclosures, the currency impact is, we estimate anywhere from 5% to 9% quarter-over-quarter, and it's just really an anomaly given what happened in the international credit markets and currencies.
But having said that, again, all-time high sales report in dollars, and the US, since US is not impacted by currencies, we saw prescriptions what we're looking off of a public report, in Q2 prescriptions were about 10,700 as reported, in Q3 they were over 11,500.
So that's just pure RX growth, and this is a Bloomberg Symphony data.
So obviously we monitor the underlying prescription performance.
It's solid and the overall momentum of the product is also solid, coupled with again, the new approval.
The new territories and new indications, and some large indications, the oncology indications are still to come, with more Phase 3 data, and potential filings coming up in the next year or so.
Yes.
I mean, <UNK>, fair question.
The only cost of goods in our business relates specifically to Captisol.
The other payments milestone royalties are 100% gross margin.
So Captisol is the factor.
The higher volume is driving better pricing or cost for us, and this largely is due to a lot of the good work we're building in efficiencies with our contract manufacturers, but the other part as we talk repeatedly every quarter, it is mix.
We have some visibility on estimated orders for commercial use throughout a year, but the timing of clinical orders is not perfectly known.
So mix does drive a big part of this.
The gross margin, the clinical sales are quite a bit higher, so there are those two factors.
Again, there are some other elements throughout the P&L that also benefited the quarter from an earnings perspective, too.
Yes.
<UNK>, I'll comment.
Obviously we're following the public narrative from Spectrum, obviously direct any detailed questions on to Spectrum, but as we understand they have been clear that there are no clinical issues associated with what was raised in the CRL.
In general those sorts of things are resolvable.
They have said they're in dialogue with the FDA, and again we see this as an approval, and now at this point we see it as an approval next year.
So our view is that things like this are resolvable.
It's a real important medicine, with real solid exciting clinical data behind it, and they continue to produce data actually there was a publication, there will be a publication coming out at ASH as well, but again at this point we're seeing as early, as next year.
Well, fair question.
Appreciate the invitation.
I'll give a general overview, and we encourage investors to attend obviously.
We aren't going to go through the substance of the format now, but typically for those who are newer to Ligand we do an Analyst Day about once a year.
It's not exactly on the calendar, but we really look to have a substantive update as it relates to the body of developments in our portfolio.
The past year we've had a significant string of new deal making, we had the Viking IPO.
Just a number of other new developments, not to mention some fairly significant maturation or progress with the portfolio.
So beyond the updates, it's putting in context for what do these events mean for the Company, the size of the portfolio, the Late Stage, the diversity, and we find its useful at a forum that it will be about a 1.5 hour program, to put these events in context and describe what does this mean for Ligand going forward over the next two to three years or so.
So that is the general focus.
We have invited Brian Lian, the CEO of Viking to join the program.
He will have a presentation on some of the Phase 2 stage programs at Viking, which we have done this in the past, where we invite a particular partner to come and talk about their programs, that are we think are of interest for Ligand and our investors.
So that will be an element of it.
We're also having our General Counsel join us to discuss our investment in intellectual property, and out patent state, this is a very important part of our business, and with the growing value of our royalties, we're going to showcase that.
And also we're going our have one of our senior scientists joint us, Eric Vida, to go a little deeper into our glucagon receptor program for diabetes.
So it's a program that we're looking forward to, and hopefully you will join us next Wednesday.
Well, thank you.
Good turn out on the call today.
Appreciate the interest and the questions, and as we just went through a few minutes ago, we'll be back in front of investors in about a week and a half for our Analyst Day.
Thanks for joining us.
| 2015_LGND |
2017 | AMED | AMED
#We are very excited about the deal, first of all.
We think it is a wonderful opportunity for us.
Obviously, they have some assets that we have acquired.
The issue with Tenet is that they didn't want to disclose the price on this or some of the revenues.
I think I'll have <UNK> weigh in, in terms of how you can kind of come to at least some range on this.
Certainly.
Good morning, <UNK>, and thanks for the question.
We are excited about the opportunity we have with the Tenet transaction.
This is a step in the right direction for us but as you are thinking about this, this is six care centers for us in key markets that opens the door for us for future discussions; so as you think about the size of the purchase price on this, just keep in mind that we are talking about six care centers in these geographies.
Equally divided between home health and hospice.
I think the key thing that is important is, yes, we did this acquisition, yes, I think it is a good deal.
Most importantly, though, when you look at the composition of Tenet in the ambulatory space as well as the hospital space, when you look at the overlap that we have with Tenet facilities and our facilities, I think what we are most encouraged by, when we've had discussions with their management, has been places to partner with them so that their patients are well taken care of and that we can coordinate and deliver really outstanding outcomes for them.
I think we are really excited by this.
I know there was other deals done before, but we've been holding out for this and it we are glad we're able to bring it to a close actually yesterday.
One thing that I would add, <UNK>, as you take about that, we think we can fund this acquisition purchase price with cash on our balance sheet and really would not need to tap into our revolver [a lot] to do that.
Sure.
Thanks, <UNK>.
Good question.
I think the most important thing to take away from the fact that we have Homecare Homebase transition kind of in our rear-view mirror is the fact that it really does create some additional capacity with your existing staff that you have at your care center.
As we are able to really be very proficient with the system, we had the ability to take on more business as our field team, our sales team in the field, are having more and more success out there.
Capacity is oftentimes a limiter in this business and it makes it difficult for you to grow your centers based on either disruption or the system that you are using.
But Homecare Homebase really unlocks that capacity, so as we have more and more of these care centers that have been on the system for some time, we expect to see a corresponding ramp in volume and our ability to take that volume as we move in 2017.
Just add, <UNK>, on this.
We are hoping to banish the words post-implementation, chopped, disruption and all of this from our vocabulary, hopefully in the next couple of months, so we are excited by that.
The other thing I think that we did mention, we talked about is that we have developed a proprietary tool that we been using that fundamentally is a capacity estimator.
And we've been working, we've been rolling it out.
We're almost complete in our rollout and it is been incredibly successful [along] and concurrently with Homecare Homebase.
What it is basically able to do is we can go out and figure out levels of productivity in care centers with the various clinicians that are out there and then we are able to ---+ it is really cut down on what we thought were some of our staffing needs.
Also, when have reduced turnover, you reduce turnover at the level we have reduced turnover, we find that we're in very good shape.
We've have been getting some question on labor, if we have seen issues there.
We haven't, but largely we've been pushing turnover down we will really working on the productivity of our people and making sure that we can maximize the capacity in a way that is good for everybody.
We've been very encouraged by this.
I think the way we are looking at it is, is there's tremendous capacity.
We obviously have tremendous capacity.
We have got some big deals the we are looking at.
We found that over the past two years we have done nine deals, spent a little over $100 million for about $150 million in revenue.
We are thinking at this point is that we would like to do something bigger.
We think in personal care we are still going to play by the ones and play ---+ move very judiciously to build up presence where we think we can combine all three businesses.
We like the hospice business a lot and we find we are really good at it, so I think we'll be aggressive in that space.
We like the bigger deals that are out in hospice.
We are seeing a lot of hospice deals come out.
We're seeing less in home health that we haven't seen before and the pricing is still ---+ we are getting more competition from sponsors.
We haven't seen much strategic competition, but the sponsors are now looking to try to do this.
We are seeing less sophistication in the marketplace in terms of home health.
But we want to do bigger deals and we have been focused on bigger deals.
The deal we announced today is a little bigger deal than obviously what we normally do, so we are going to try to move up that food chain.
I would love to deploy a lot more capital because we clearly have the capacity and with the free cash that we anticipate will start to build up once we get our AR issues under control in the next couple of quarters, we're going to be generating a lot of free cash and so we need to start to deploy that.
Sure.
Great question, <UNK>.
Part of the AR issues is at the care center level.
We're just making sure that the documentation is all in place, that we are working with our referral sources to ensure that documentation is complete and accurate and timely.
We deployed extra internal resources that are really a focus swat team to help us attack that and catch up on any documentation that we need in order to get bills processed appropriately.
The other side of that is with our revenue cycle team and just making sure that we are working through the edits and being able to drop clean claims and then the opportunity to really have the lack of distraction of a new system and the ability to focus in on working with our payers to make sure that we are moving those forward.
We have a very concerted effort now on our AR days and we would hope it will be in the low- to mid-30s on DSO over the next couple of quarters.
It is not a lay up.
It takes some heavy lifting, but we are focused on getting that done.
Thanks, <UNK>.
Appreciate it.
The opportunity, this was an acquisition of their ---+ as you know Tenet had announced last year that they were going to get out of the health plan business and they were going to divest their home health and hospice assets.
We've been in conversations with them for a while.
What we saw there and what we see and what we have been having conversations around is, yes, they have some assets and these are good assets and we are going to take these assets and the people with them.
We are very excited.
These are well-run assets.
They are producing good results.
The star ratings are good.
We need to get them on a common technology platform, which we need to do, but they have good basics.
They are profitable and so we want to do a very good job where there's facilities associated with them and we think there's a lot of opportunity there.
There's a lot of Medicare folks within the geographic footprint of these hospitals.
We are excited by that.
But obviously, what we are most excited by is working with Tenet in the acute side and the ambulatory side.
We believe that as ambulatory becomes more important and sicker folks go into ambulatory that there is a real opportunity for us in the home health business to partner with some of these folks.
Then also, we like the focus in terms of hospitals.
With 79 hospitals there is a large overlap with where we are, so we want to go in and we get a seat at the table and we want to figure out what we can do to help these folks and help ourselves in the process, as well.
So we are quite excited about this.
We believe this is a toehold.
This gets us in there.
This gives us an opportunity to show what we can do and then we move forward and we build a bigger partnership.
Let me talk to it a little and then I will turn over to <UNK> <UNK>, who is really focusing on this.
I guess the way I look at our performance is I think that we got all As and we got a B minus on growth.
I think the idea is we understand that what we need to do is to reinvigorate the growth.
We have brought in a very good experienced team that understands how to do that.
We have taken initiatives as we've talked about before, Project Redwood, which has restructured our business development group so that we can more efficiently deliver and incentivize our folks to bring business in.
We have changed our mix.
We have been very focused on growing Medicare, because, as you all know, that is where the profits are and that is where we can deliver the best care.
I think we have the right strategy in place.
I think we have ---+ I think what we've done is we're going to start to recover from our ---+ as I said, I don't want to use the word chop and self-induced pain and all that sort of thing, but I think you will see descent growth in the next two quarters on a year-over-year basis and then we expect to really start to outperform the industry and expectations in the second half of the year.
I will turn over to <UNK> and he can tell me I am full of it or continue this process.
Cheryl, I'm going to pitch to <UNK> on that one.
Then I will come back in it.
Good morning, Cheryl.
It's <UNK>.
As we mentioned in the previous response, we are talking about six care centers that we are starting this transaction with Tenet.
We believe that we'll be able to evenly fund the transaction when it closes in a few months with cash on our balance sheet.
As a reminder, we had $30 million of cash on our balance sheet at the end of the year.
We don't expect this would require us to tap into our revolver.
We really ---+ this isn't transformative type transaction that we are talking about doing as the year progresses, but this is a step in the right direction.
This is a beginning point for us to show that we're being able to execute on some of our inorganic growth strategies.
We would love able to continue to partner with Tenet in the future as they look to do different things with home health and hospice assets.
This is simply a starting point.
I think one of the things I recall when we were out seeing you, <UNK>, in New York is we talked a lot about the potential of the ambulatory world and we think that as the world ---+ as more and more seems to be fitting into that, we like the opportunities we saw when you combine the hospital world with the ambulatory world in overlap areas.
We saw that as a real potential to start to build up on our skill set in not only the hospital world and gain from what Tenet has there and there is very good overlap there, but also in the ambulatory world where we believe we can partner with folks because a lot of the things that used to go to hospitals, the procedures are now going into ambulatory; and we believe we can start work to with them on protocols to really start to drive some volume into the ambulatory world.
So we are optimistic about that and we're also excited about ---+ our conversations with Tenet have been very good about where they need some help, particularly where their facilities are full.
We are very excited to possibly bring in some of our (inaudible) home ideas, hospital at home ideas, and start to help alleviate some of their pressure on their capacity.
Very good point.
That sounds good, yes.
We have thought about and we ---+ we're obviously, as we started to understand these issues, the last thing that we want to do is generate a lot of LUPAs.
There's places to play, that for us are particularly interesting.
One is at the front door of the hospital to divert people from coming in as we have these protocols for taking sicker patients that we have developed through clinically home.
So our belief is that if we can start to drive some folks, particularly in facilities that are full, into home health and partner with a large hospital system like Tenet to do that, that's one thing.
The other piece is when people are going for more severe type and more acute type procedures in an ambulatory setting, home health makes a lot of sense because if you look at some of the discharge patterns that come out of ambulatory, most of those, in my opinion, should be going to the home whereas some of them are going into SNFs and ERFs and some of these other places.
So that is where we really hope to sit down and understand that.
The last thing that we are going to do, though, is get into LUPA situations.
That's just ---+ we won't go there.
Based on what we are doing now, frankly, this has been a real area of focus.
We meet ---+ the Management Team meets and does a round pound every Thursday on two things, the $46 million, and we have our trackers here ---+ the guys who are teeing this up, Scott Ginn and <UNK> <UNK>, here, so they can answer this as well.
We focus on the $46 million and obviously generating growth.
Thus far, we track it every single week.
We go over it.
We watch the numbers.
The only place that I think that we always have to be watching is on contact labor utilization.
You always have to make sure that, that's staying down and mix, and making sure that we are always aware that skill mix is something that is a big driver.
<UNK>, you have any additions.
Certainly, <UNK>.
This is <UNK>.
We have received a notification from the ZPIC, as we talked about in our 10-K disclosure, around four care centers in Florida that were acquired by Amedisys as part of the Infinity transaction at the end of 2015.
We continue to have those conversations.
The inquiries have escalated somewhat in the last couple of months and that is why we felt it appropriate that at any point that we have a regulatory development and that we share that in a very transparent way with our investors and that is why we chose to talk it on today's call.
But those four care centers, to just give that some frame of reference, represents only about 20% of our Florida market, which is 7% of our home health revenues, so while it is concerning and we are going to continue to aggressively work with the ZPIC auditor because we believe that there are some errors in the way that they are approaching some of this, we don't know the outcome of that.
They have found some things that we have developed an internal team to focus on.
We are reviewing all their claims in those four care centers.
We take these things very seriously.
We are focused on this.
We will continue to move this forward and expect that we'll continue to discuss it with our investors as we progress.
Thanks, <UNK>.
Appreciate it.
Hey, <UNK>.
That is a great question, <UNK>.
I think that our methodology is pretty simple here.
We've taken our managed care business, about $0.25 billion of it.
We put into a separate business unit and what we are doing is we are doing two things.
On the same game ---+ we call it same game, new game.
On same game, what we are doing is we are cleaning up our contracts to make sure that we have good contracts, that we are being paid appropriately, that the contract terms are good.
We are developing a lot of initiatives that we believe will drive out the cost, particularly the back office cost.
We should be talking about that the next couple of months.
We have some very specific initiatives that we are looking to really drive those costs out and get clean, good contracts, drive better adjudications, better authorizations, better reauthorizations, so that we can drive cleaner business.
We're looking at utilization management, trying to make sure that we can generate good profits on what we are getting paid and in some of the situations we aren't.
We are doing a cleanup job there and we believe that is important.
The next thing we are trying to do is, as you saw on our slide deck on the state of Massachusetts, is we want to start to take risk.
We believe that managed care is going to only increase.
Managed care penetration will increase and for us to get out of the commoditization game with the large payers that we have to start to, one, start to cut into other elements of the post-acute continuum, which we are doing, which is to basically take business out of SNFs and ERFs and [LPACs] and so we believe we can do that.
The other things is how do we start to take more risk and get paid more for taking risks, particularly on rehospitalizations, and then how do we get paid for quality and why is it worth it for the plans to pay us for quality.
So we have been having very good conversations with all of the large players out there and starting to say, let's find a place where we can understand what you are looking for, cut some elements out of what are the normal protocols, and then have just home health do the majority of it, start to take some risk on aging in place, start to take some risk on rehospitalization rates, and then we can do that.
The other thing we have been doing, which we are very excited about, is we have a project here called ACE.
ACE is our database.
As you know, a lot of people here are from the payer world and one of the things we learned is you need two things to take risk.
You need to provide great care and then you need to have data.
We've been building our own proprietary database and are starting to experiment now building algorithms so that we can judge based on certain elements of the Oasis, which is a start-of-care plan, starting to basically say, what is the risk of hospitalization of this person.
How do we minimize that.
What is the risk of rehospitalization.
What's it going to cost to age in place.
So we are starting to build these databases and starting to try to use these so that when we do take risks, we can bring data into this and some comparative data so that we actually can say with a straight face, we think we can keep this person out of the hospital or whatever else sort of metrics the payers would want to deal with.
So we are very aggressive in this space.
We understand the payer world.
We understand that it is going to continue to grow.
But right now, same game is not really of interest to us.
We will play because we have to in a lot of places, but what we want to do is transform the dialogue with the payers.
No, you got me worked up on it so I'm just taking a breath.
Yes.
We've been spending a lot of time, and I'll let <UNK> <UNK> address this as well, but we've been spending a lot of time in Washington.
We've been fairly forthright in believing that pre-claims review doesn't accomplish what it's supposed to.
We believe it is an incredibly burdensome from an administrative perspective.
It doesn't add to ---+ it basically assumes you're guilty right at the start, versus is innocent until proven guilty which was the prior methodology, so it means that we have to go through a lot of administrative work to move past this.
We've figured out how to do it.
We get it, but it is not helping anybody, and so what we have offered to CMS, we've gone in with our friends at the partnership level, at the Partnership for Quality Home Health, with other big players and we have gone in and said, if you want a fraud detection tool, we will build one for you.
This is ridiculous.
Thus far CMS hasn't taken us up on it because we believe we can do it very efficiently.
We don't like fraud.
We don't want it.
We know where it occurs.
We know where the hot spots are.
We think it is relatively easy to detect, so you don't need these nuclear weapons in there just destroying everything to look out for fraud when it is easily recognizable and can be detected in a much more effective way.
So that is the conversation we are trying to have on PCR.
The other thing is, we are optimistic because Secretary Price was one of the folks introduced the bill to put PCR off for a year; and also what we have also seen is the two senators from Florida, Nelson and Rubio, have sent a letter in to Secretary Price asking him to reconsider PCR as well as delay it or kill it.
We are hopeful that given Price's orientation and dislike of this initially, that we can move forward and get this thing either sidelined or killed.
But thus far, we are preparing for it to we believe we are adequately prepared for it.
We believe since we've been through it before we can get through it okay.
Not happily, but that we believe it will be very difficult for, particularly people that don't have the system in place to do this.
<UNK>, I don't know if you have anything.
Not much to add on that.
Very well done, <UNK>.
I guess I would just recap and say that we are working closely through the Partnership for Quality Home Health, our trade association, or really, I'd call it more of a coalition then a trade association.
We're working very closely with LHC and with Kindred and Encompass as we go to CMS and do two things, propose alternatives to this to really root out fraud and abuse rather than PCR, and also we are continuing to push for a delay [very much] which <UNK> talked about.
We think there's a much more hospitable environment now for potentially delaying this and a more hospitable environment or open environment to listening to our other ideas.
With the change in administration we think there's potentially some opportunities there.
Again, we are pushing for a delay, as are Senators Nelson and Rubio from Florida, which we think is key.
We will continue to push for a delay, but we also are going to continue to push for an alternative method to root out fraud and abuse that we think we can propose as an industry.
Lastly, but most importantly, we are continuing for payer to be ready on April 1, for a pre-claim review in Florida and we think we are well positioned to do that.
We had experience in Illinois.
We learned there, albeit we only had a couple of care centers there, but throughout the process we were able to perform well by the end of it.
So we feel like we are in a position to perform well in Florida as well, if need be.
Thanks, <UNK>.
I think the key thing what we did ---+ I have to think <UNK> Laborde, who is here with us and I'll let <UNK> talk a bit about it, but I think that what we did initially is, we just separated out hospice and home health.
We really fantastic team with it's [will to break] culture that just doesn't say no to anything and they just move forward.
They have done this thing organically and it has been really inspiring to watch this group come together and then move forward in the way that they have.
I think the benefit is also something that is incredibly valuable.
I think it is a nice business, it's a clean business.
We understand the rules.
They're pretty upfront.
There is a demographic interest in this.
We see a natural very strong wind at our back and as well, the government seems to very much like it.
If you look, obviously we got some gains in terms of we have offset $17 million of headwinds in home health and what we've got is we were able to bring it down to $12 million because we got a positive on hospice.
So we see that opportunity there.
Obviously, to grow it at the levels we have, at some point we are predicting it will come into the low-double digits, the high-single digits, but thus far folks keep outperforming, so more power to them.
We will take it all day.
I'm just going to say, <UNK> do you have any questions.
Sorry, <UNK>.
Comments, sorry.
Thanks, <UNK>.
No, it's about ---+ I'm looking at <UNK>.
This is <UNK>.
I think they are decent sized agencies.
We're not talking about small agencies.
I don't think they would be much larger than our average.
<UNK>, it's <UNK>.
We know those rules have been in development for some time.
They have been discussed at length.
We're the process of working through those.
We believe that the timetable that we were provided was pretty short, so there are some things we have to cover relatively quickly in order to be prepared.
We don't see that as a heavy lift.
We think our team is on target there and that we don't encounter seeing any disruption from that.
Sure.
I would be happy to walk you through that and take those off-line with you.
Basically, it's nonrecurring charges, so the items that we have detailed as the add-backs to EBITDA, we try to detail which line item those impact for you and many of those will show up in that corporate segment.
When you bridge those two together then I think you'll see where the differences are.
Thanks, <UNK>.
Great, great question and your calculator works like ours does, so we would not say that you are off base there.
As it relates to timing, we are going to be focused on getting these deals over the finish line.
We would think in a couple of months we will have these done and a part of our portfolio.
Thanks, <UNK>.
Thank you, Tim.
I appreciate it.
Before we close, I'd like to thank, congratulate and wish the very best to our Vice Chairman, former CFO, COO, Interim CEO, Board Member, <UNK> Laborde.
This is his last Amedisys earnings call.
On April 2, he is slated to retire.
We wouldn't be here today and be where we are today without him.
His sage counsel and calm presence have made a huge difference to me and our teams as we've partnered together to turn Amedisys around.
<UNK> will be sorely missed, so on behalf of our 16,000-member Amedisys family want to think <UNK> for his credible service to our Company.
Thank you very much, <UNK>.
Thanks to everyone who joined us on our call today.
We sincerely appreciate your interest in Amedisys and we look forward to updating you on our next quarterly earnings call.
Take care, everybody.
| 2017_AMED |
2015 | GWR | GWR
#Right now we are about 3.5 times.
Assuming no other acquisitions, just assume that the free cash flow generation that we have next year is all used for paying down debt.
That's one way to look at it.
And that is going to give you something closer to 3 times.
It is all math at that point.
Yes, no, I mean it's a ---+ are you seeing new trends.
I mean, our trends are so negative that is kind of hard; you're talking about relative degrees of negativity.
And so I think about it versus prior expectations back in August.
What you see in our fourth-quarter outlook is some softening in paper due to some rationalization in that industry, with some plants being taken down in the fourth quarter.
And we've seen some softening in the steel order books.
And we've seen the price of gas drop very low, which makes you a little nervous about your coal.
And you have seen our coal outlook come down accordingly.
And so those are ---+ in terms of what you are comparing that AAR data to in our world, we have seen some of that softness, and that is cast in our outlook right now.
Well, you know, you actually ---+ we've had good visibility into when mines have been closing and are accordingly able to very carefully adjust our cost structure.
If you look at our Australian results, we've made some huge adjustments in order to mitigate the losses of a tremendous amount of iron ore revenue, and part of that is because of the visibility to when those mine closures took place.
And then the redeployment of the equipment ---+ it depends on the service, but in some cases you are able to cascade certain newer equipment to replace older equipment and realize immediate efficiencies in that regard.
And then you look at, through that cascade, perhaps deploying that excess equipment to bidding on new business in other geographies in other sectors that are not as ---+ you know, Australia does not just produce iron ore.
There is a lot of other stuff that is shipping there.
So we ---+ and it is open access, so you're able to take that equipment with limitations on gauge and geography to some degree, and participate in other parts of the market.
So it's ---+ there is ---+ we are constantly attentive to it, worrying about it, thinking about it, and have been able to make the adjustments really on a real-time basis, as you can see in the numbers.
The Australian team has done a very good job.
I mean, there parallel projects that we have not talked about on the outside.
But some of the reasons the costs have come down is we have done things like we completely insourced all track maintenance.
We completely insourced all mechanical maintenance.
And with that, we've been able to bring the productivity and the cost structure down as well.
So there is ---+ these savings don't just happen.
They are requiring a lot of advanced planning and work.
No, it should be ---+ all the stuff I am talking about is just incremental.
That is why you speak to it very comfortably, because you are taking a fixed cost and turning it into a piece of business immediately.
Well, it depends on how you allocate costs.
But it is actually a lower-margin business, and that is not obvious right now, because you've got a bunch of lease costs that are fixed right now that you are absorbing.
But if you actually look at it, that is the more competitive part of the market in that area.
So it is the least painful part of the business to lose.
Great, well, thank you all for joining us this morning.
And we look forward to speaking with you on the next call.
| 2015_GWR |
2016 | GMED | GMED
#Thank you.
Thanks very much for joining us.
Feel free to call if you have any questions.
We'll be around all day tomorrow.
| 2016_GMED |
2015 | LXU | LXU
#As you probably know, we've worked with CS on multiple occasions over the last two years, and so we did work with CS and there was a process that was run.
We did have a number of people that were interested.
I think we ran an efficient process to try and figure out what were the best terms for us.
Ultimately, we decided that these were the most appropriate terms that management and the Board were comfortable with.
And we were extremely comfortable, as <UNK> said, with Security Benefit as a partner.
If there was someone willing to do it, we would have done it.
Look, they had a combination of about three things.
Number one, they came with a total financing package, which in our mind and the Board's mind was an important component.
Then they put the two components together with us that we thought served as a good basis, either individually or in the aggregate, they were very competitive.
We did that.
We went out and we looked at, as <UNK> said, Credit Suisse, went out and helped us look at multiple different sources.
Number one, the total package was the best total package and that was something that we were looking for.
And it, quite frankly, came late in the process but it was a good package.
That was number one.
Number two, they believe in the opportunity and value creation for the Company and that was attractive to them, so they showed a strong interest in wanting to participate.
Number three, we look at them as long-term focused partners.
And during the process of their due diligence they visited every single location and had discussions with plant management and the like.
We just felt like that that was a type of long-term financing partner that we wanted to have, and their rates were the most competitive when you look at it on a total package basis.
Well, there's nothing other out there in the form of warrants other than what we've disclosed this morning.
There are management options out there that have been issued and are outstanding, and that's outlined in our public filings.
There's nothing significant that has changed this quarter, so you'll be able to see that.
They're in the 30s.
You can look at our public filings.
They're out there available in the public filings on the most recent 10-Q.
There haven't been any material [additions] since then.
I wouldn't know off the top of my head the exact number.
Great.
Thank you, Donna.
First of all, thanks, everyone, for participating in this morning's conference call.
I think we've outlined things and tried to provide as much clarity as we can.
We're optimistic that completing the project.
The construction schedule at El Dorado is progressing very, very well.
We're pleased with the weekly progress they make.
We measure it on a weekly basis at a detailed level in every area.
We have a robust process around that.
I think the financing that we've secured is going to put us in a good position to complete that construction.
As <UNK> and I both indicated, we look to improve our capital structure cost as soon as we possibly can and we will focus on that.
Then again the Board is also focused on creating the best shareholder value for the shareholders, and that's something that we'll continue to do and something we're actually looking forward to delivering.
Once again, I appreciate your time, and have a good day.
| 2015_LXU |
2015 | FL | FL
#It's ultimately driven by great product.
Great product and we had some exciting things going on in special shops.
Look, <UNK>, I think we've got the ability to walk and chew gum with all of those categories.
I think that there is strength across our banners, there's strength across our categories, there's strength across our channels, and there's strength across our geography.
We obviously have internal plans that we work off of but I think our guys, our teams are all driven to find success.
Retail is sort of a perpetual game.
It's not like we can't repeat.
It's more difficult in some of the team sports to repeat but our team certainly believes that they can repeat.
And I don't think it makes any difference what banner they represent, what channel they represent, or what geography they represent.
I think there's a nice strength across our business.
All of those levers that you enumerate, all of those levers are what make us excited about the future and give us confidence.
And we'll be talking a lot more about that excitement on the 16th.
Our categories are always ebb and flow, <UNK>.
Our buyers and our merchant teams do a great job of identifying hot categories and shifting ultimate buy dollars to be in the right place.
We work closely with our vendor partners to have a view of the future but we don't get into where we see categories going up and down dramatically.
I just think that we have a strength across all of the pillars that you mentioned, and that really, to <UNK>'s point, is what has us excited about 2015 and certainly beyond.
Feel better.
Thanks again for participating on today' call.
We hope to see many of you here on the 16th.
And please join us on our next earnings call which we anticipate will take place at 9 AM on Friday, May 22, following the release of our first-quarter results earlier that morning.
Thanks again and goodbye.
| 2015_FL |
2016 | KRA | KRA
#I would tell you that, specifically in the example you gave in terms of paving, we go to market now as one face for the customer benefit.
We report to you obviously through our financials reflective of the fact that one of the business is chemical sourced and the other business is traditional polymer sourced.
But with respect to what's most important in terms of driving growth, the view of the customer is that this is now a newly extended off-product offering to the customer face that comes from both primarily our road marking business, in the case of the Chemical segment, and our traditional bitumen modification in the case of the Polymer business.
And the customers obviously view that as quite a positive development.
We report extremely based on how we allocate capital and the way <UNK> makes decisions, which is in the segments of Polymers and Chemicals.
We have a head of Commercial who runs the commercial organizations and we've set up the commercial organization essentially around end-use markets tucked within each of the reporting segments.
And then we also run a global operational organization that ensures the plants, whether they are in the Chemical or the Polymer segments, are running optimally.
| 2016_KRA |
2017 | DHX | DHX
#Good morning, everyone.
On the call today is Mike <UNK>, President and Chief Executive Officer of DHI Group, Inc.
; and <UNK> <UNK>, Chief Financial Officer.
This morning, we issued a press release describing the company's results for the second quarter of 2017.
A copy of that release can be reviewed on the company's website at dhigroupinc.com.
Before I hand the call over to Mike, I'd like to note that today's call includes certain forward-looking statements, particularly statements regarding future financial and operating results of the company and its businesses.
These statements are based on management's current expectations or beliefs and are subject to uncertainty and changes and circumstances.
Actual results may vary materially from those expressed or implied in the statements here due to changes in economics, business, competitive, technological and/or regulatory factors and the client divestiture of our non-tech businesses and the possibility that such divestitures do not occur.
The principal risks that could cause our results to differ materially from our current expectations are detailed in the company's SEC filings, including our Annual Report on Form 10-K and Quarterly Report on Form 10-Q, and the sections entitled Risk Factors, Forward-looking Statements and Management's Discussion and Analysis of financial conditions and results of operations.
The company is under no obligation to update any forward-looking statements except where it is required by federal security laws.
Today's call also includes certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin.
For details on these measures, including why we use them and reconciliations to the most comparable GAAP measures, please refer to our earnings release in our From 8-K that has been furnished to the SEC, both of which are available on our website.
With that, I'll turn the call over to Mike.
Great.
Thanks, <UNK>, and good morning, everyone.
Thanks for joining us today.
So today I'll update you on our alignment around our tech-focused strategy, including progress against key initiatives, then discuss our goals for the remainder of the year, provide an update on the competitive landscape and discuss how we'll return the business to growth.
Then I'll turn it over to <UNK>, who will provide a financial overview and update on where we stand with the divestiture of the 4 businesses.
And lastly, we'll open up the questions.
So we made progress since our last update, however, we have a ways to go.
We've rolled out some big changes internally to move us forward and return the business to growth.
Our vision, which we articulated in May, is to serve tech professionals and resolve pain points for customers who recruit tech talent through next-generation products and tools.
When we laid out the strategic initiatives for the company last quarter, we outlined several key objectives.
Last time, we discussed initiative number one: focusing resources behind our core tech talent brands.
In the second quarter, we realigned our organization to streamline management and decision-making.
As part of this adjustment, the senior management team has taken a more hands-on role in the day-to-day operations of our tech-focused brands, which include Dice, ClearanceJobs and eFinancialCareers.
This functional structure is designed to accelerate the implementation of our strategy, and we've already seen efficiencies gained from this realignment.
We've organized our product, development and marketing teams into 2 focused areas: customer performance and professional engagement.
This brings the absolute focus we need in serving these 2 constituents.
Today, we'll discuss the next 2.
We set 5 goals for ourselves for the remainder of 2017: number one is returning the Dice business to growth.
Dice represents a significant part of the business today and has the greatest opportunity.
Driving usage among customers, while also attracting professionals during the arc of their career is paramount to moving Dice forward and ultimately optimizing shareholder value.
Number two is repositioning our brands to be the go-to resource to find and connect with the best talent.
Our specialized tech-focused and deep understanding of professional communities we serve are key differentiator for DHI.
This comes from our specific focus on skills and the proprietary data we have related to skills.
Number three is develop new products, services and insights to help professionals manage their careers.
Tech professionals should have the tools and insights they deserve to achieve the career they desire and we'll be there to guide them along the way.
Number four is to create an efficient organizational structure to serve the changing needs of clients and professionals.
We have the operational pieces in place, so now we need to execute on pulling them together, given our organizational changes.
And number five is employ a highly-engaged team to drive performance.
We have passionate employees here and our team members are key to success.
We've established a number of measurements against these goals and we'll share those with you going forward to demonstrate our progress against the goals.
So let's start with discussing initiatives and key highlights on the customer side.
The rate of decline in the Dice customer count receded slightly in the second quarter.
This is probably due to pursuing initiatives that improve our relationship with customers and provide more flexibility for customers and reestablish the overall value of Dice.
Our sales approach of leading with Open Web First has proven to be successful since launch and is driving our penetration of the social-sourcing tool with recruitment package customers.
The bucket-view model has driven up active Open Web clients twofold from a year ago, and today, over 1/3 of Dice annual customers are Open Web clients.
As more customers use Open Web, we work to solve the pain point employers encounter trying to hire hard-to-find candidates.
Social continues to be an opportunity for companies to recruit candidates, and we offer customers the ability to target desired professionals with tailored messages in social forums.
Lengo leverages Open Web data to assemble candidate list based on skill sets, work experience, employer, location or interest.
As employer branding becomes more important in recruiting, we see the great potential of Lengo.
Even [as Hcareers] is broadening Lengo and its sales offering, and as an example, business schools in the U.K. appreciate the benefit of targeting candidates through social media.
Financial services companies and large defense contractors have also launched Lengo campaigns to get in front of professionals.
Even [Hcareers] has a tremendous presence in the U.K., and we're building on our a strong position there to expand our fin tech and new products offers.
The market there is fairly stable, although Brexit uncertainty remains, many firms appear to be in a wait-and-see approach until further clarification, and Brexit is driving some firms to move roles out of high-cost locations like London to other areas of the U.K. or Eastern and Central Europe.
This creates an opportunity for us in less developed markets.
One impact has been on recruitment agencies in the U.K. They have the client mandates for searches, so the demand side is healthy.
They are having a harder time extracting professionals from their current jobs, so the supply side is restricted.
But we have seen growth in the first half in other markets like France, Germany and Benelux.
The market for security-cleared professionals is at critical juncture, as the demand for candidates with active security clearance rises, while the number of skilled professionals continues to fall.
The time to clear professionals is the highest we've ever seen as is the number of open roles for security-cleared talent.
ClearanceJobs has over 25,000 posted jobs today, up 67% year-over-year.
Employers using ClearanceJobs are having tougher time finding, engaging and hiring cleared professionals, and budgets are tight.
The supply/demand imbalance in security clearance is really significant.
And ClearanceJobs is working to provide clients with flexible pricing options and attractive recruiting solutions.
The time to hire professionals across all industries in the U.S. reached a record level of over 30 working days in this quarter according to our proprietary DHI hiring [interim] report.
It's a real challenge as employers have initiatives to move along yet can't find the qualified talent to work on projects.
There are number of ways for employers to be competitive and quick in the time to hire.
One option is pipelining and building a bench of talent before a position opens like with getTalent, which we offer with our suite of solutions.
With the Lengo, Open Web, FreshUp and access to professional talent communities through Dice, eFinancialCareers and ClearanceJobs, the combination of these services we offer is unique in the market.
Improvements to our ATS and API strategy have driven an uptick in customers integrated with these products.
A common problem for us and our competitors is attribution.
Customers can't understand the value provide if they don't accurately measure the source of their new hires.
So in the APAC region, for example, our Match Back program has successfully shown clients how many candidates they've hired through our services.
We exchange data with clients to determine the number of hires made with influence by our sites.
Here, we're developing a relationship as a trusted partner in their hiring process.
In our Chrome extension and improvements to our search platform are several ways for driving efficiency and accuracy for customers sourcing candidates on Dice.
As part of our strategy, to elevate Dice's brand recognition, we've expanded our marketing efforts.
In the quarter, we secured a partnership with digital media site Bustle, in which Dice sponsors content for Bustle users.
The Bustle audience is predominantly millennial women, and we view this relationship as a good collaboration as we advance our leadership position with women in tech.
We've also partnered with Spiceworks, a networking community for tech professionals to seek advice and purchase tech-related services.
Dice is the exclusive provider of jobs to Spiceworks and all Dice jobs are cross posted to its (inaudible).
There's more to come with partnerships and we'll announce those in due time.
We've created the local campaigns in the number of secondary tech markets across the U.S. to amplify the Dice presence.
In our targeted social ads, together with radio spots on NPR and Spotify are putting Dice top of mind for employers and tech professionals.
Deepening our engagement with professionals also has a positive effect on our relationship with customers.
When employers come to Dice, they'll find active, highly-skilled tech talent.
Our services are more than just a place for tech professionals to find new jobs.
That's certainly a large part of what we do, however, we also offer unique content with proprietary data to help tech pros navigate their careers.
Tech professionals want employers to find their information efficiently, to have the ability to easily demonstrate they are qualified for positions, and to find useful advice on how to grow and manage their careers.
Dice is solving for all of these 3 new products coming such as including a designation on tech-professional profiles to show they've completed assessments through our partnership with HackerEarth.
While not the only reason that tech candidates choose their new job, salary plays an integral role in the life of tech professionals.
The Dice Careers app, which provides tailored salaries, job recommendations and career mapping based on tech-pros information has had over 470,000 downloads to date.
Monthly unique visitors grew 52% year-over-year.
This shows users continue to engage with the app to discover relevant salary information, while learning about skills they should acquired to boost their value.
A new home screen launched in the quarter resulted higher engagement with market value and career-path features.
We've extended this functionality of the app into the on-site experience too, and there's more to come on this as we fully launch the product and push forward the career-exploration features.
Security-cleared professionals are benefiting from a dedicated time when employers are signaling they're available for virtual networking, which we call the happy hour.
And it promotes the time each week when a large number of candidates, employers are logged into the ClearanceJobs platform.
Candidates and employers make use of ClearanceJobs newly-launched live text and voice chat to engage, exchange opportunities and network.
The happy hour resolves the major pain point among employers and professionals of catching each other when the time best suits them.
It's this effort to actively engage and improve the career-search experience that's setting DHI up for further success.
As we think about our strategic goals of driving professional engagement, repositioning our brands to be leaders in the communities they serve and returning the Dice business to growth, we'll continue to explore ways to expand our addressable market that could be through small tuck-in acquisitions, partnerships or developing innovative products and services in-house, enabling us to remain competitive in the crowded recruitment marketplace.
We have competitors in every direction, from large established companies to startups, constantly entering our space.
We're happy to report our job ads are included in the new Google for Jobs widget, which optimizes relevant jobs from our sites to the top of Google search results.
There's a fair amount of chatter surrounding Google's launch, however, as we were a launch partner for their Cloud Jobs API, and this widget improves the search experience for their users, I believe, Google use career-site providers as partners and, ultimately, that's a positive thing for our industry.
The competitive nature of our industry has implications for a topic that's important to investors, which is capital allocation.
In a dynamic industry like ours, incumbents need to innovate and evolve.
It's critical we increase investment to reinvigorate and sustain the tech franchise.
For that reason, reinvesting in our core tech businesses are top capital-allocation priority.
Similarly, we need to increasingly move at speed today to address market changes and extension opportunities, and often times, it's faster and more effective to acquire an existing product or feature set.
So our second priority is strategic bolt-on acquisitions.
To be clear, we mean small complementary transactions, not large or transformative deals.
After ensuring investments supporting our tech franchise is funded, we'll allocate capital in the manner we believe most effectively enhance the shareholder value over the long term.
This will change over time depending on number of factors like the economy, interest rates and our share price point of view.
But in the meantime, we've taken our free cash flow and paid down $15 million on our revolver in 2017.
This is an exciting time for DHI as we look ahead to refining our tech focus, while continuing to deepen engagement with professionals and drive usage amongst clients with the unique combination of solutions we provide.
We're accomplishing a lot and beginning to see a positive impact from the objectives we've put in place.
We are eager to build on our strategy in the near term, and return our business to growth.
And so with that, I'm going to turn it over to <UNK>.
Thank you, Mike, and good morning, everyone.
Today, I'll review the key points of our second quarter 2017 financial performance.
I will address the outlook for the rest of the year, and I will finish with an update on the divestiture process of our non-tech businesses.
Note that all my comments today exclude the results of Slashdot Media, which we sold in early 2016, and other items noted in the adjusted EBITDA reconciliation of the press release.
Second quarter results were consistent with the recent trends and within our expectations, with total company revenue down 9%, led by the decline of 8% in our Tech & Clearance segment.
While the downtrends we discussed in the first quarter continued, we are seeing progress in the adoption of our new Dice solutions to solve customer pain points, which we expect will start improving customer metrics in the next few quarters.
Dice U.S. revenue declined 11% in the quarter and continued to be impacted by competition and customer ROI perceptions.
However, this quarter's customer count of 67 ---+ 6,750 reflects the smallest sequential drop ---+ 1% ---+ since the third quarter of last year, and other metrics have remained in line with recent trends, including a 66% customer count renewal rate, average monthly revenue per customer of 1,108 and with 95% of our contracts for 12 months or longer.
ClearanceJobs revenues grew 21% with billings growth slowed to 8%, due to the tightening labor supply for cleared professionals.
On a constant-currency basis, eFinancialCareers revenue declined 5% and was mainly impacted by Brexit-related concerns.
In total, when you add our tech-focused businesses, which include the Tech & Clearance segment and eFinancialCareers, we had a revenue decline of 7% in constant currency for the second quarter.
Our non-tech business trends were in line with what we've seen in recent periods, with aggregate revenue down 9%.
Energy was the exception here, with a billings increase of 4%, its first positive quarterly growth since 2014.
Operating expenses before depreciation, amortization, stock-based compensation and disposition-related and other costs were flat year-over-year, as higher spending in sales and marketing was offset by savings in the other areas.
The marketing expense increase was driven by Dice, with a greater focus on tech professionals and driving traffic.
General admin expense decreased as a result of cost we had incurred in 2016, namely, the prior year's strategic planning exercise.
Adjusted EBITDA for the quarter was $9.5 million, and was impacted by $1.1 million of costs related to the reorganization and divestiture process we're going through.
Our adjusted EBITDA margin, excluding that impact, was 20.3%, in line with the first quarter.
Depreciation and amortization expense declined $1.2 million against last year, and that's mainly due to the energy-related impairment charges that were taken in 2016.
Stock-based compensation was down 26% due to forfeitures and lower grant aid values.
Interest expense declined slightly with lower borrowings offset by higher interest rates.
Our second quarter effective tax rate of 43% had a 6-point impact from discrete items related to tax accounting on employee stock option ---+ stock compensation, sorry.
Net income for the quarter was $1.8 million or $0.04 per share, compared to $4.9 million or $0.10 per share in the prior year.
Disposition-related severance cost had a 1-penny impact on the quarter.
We generated $9.2 million of operating cash flow in the second quarter, down $3 million from the last year, and so far this year, we've reduced the balance of our revolving line by $15 million.
Deferred revenue was $86 million at the end of the quarter, which was in line with the prior year.
Looking ahead at the remainder of 2017, we expect the rates of decline to abate progressively in the last 2 quarters.
Key drivers for our tech-first business include: one, increasing adoption of new Dice solution-based offerings, demonstrate ROI and attribution, which should improve our customer retention rates and win backs; secondly, continuing growth at ClearanceJobs, although we don't expect to sustain the first half level of growth as the market for security-cleared professionals is tightening, as Mike mentioned.
The effective external factors that impacted our business are not expected to change significantly.
While foreign exchange comps are expected to ease in the second half of the year, we expect the uncertainties caused by Brexit to persist.
We expect the current trends in our non-tech businesses to continue in line with the first half.
The operating expense run rate for the remaining quarter should be in line with the second quarter, as organizational efficiencies will offset increased tech-focused spending in marketing and product development.
With slowing revenue declines, but holding steady the level of spending, we expect second half margins to remain in line with the first half of the year.
As we've pointed out before, the benefit of our ---+ to our top line from most of our 2017 tech-focused incremental spending has a delayed effect.
So 2017 is not reflective of our ongoing run-rate margin of our business.
By successfully executing on our tech-focused strategy right now, we believe that we can return the margins to 30% or more.
Depreciation, amortization, stock compensation and interest expense should be consistent with second quarter run rates.
The tax rate for the remaining quarters this year should be approximately 38%, and diluted share count about 49 million.
Finally, we have not assumed any divestiture transaction in this outlook.
Regarding our non-tech divestitures, we have engaged a banker in the second quarter to assist us with the process, and we're making good progress.
We're seeing considerable amount of activity with numerous parties looking at our businesses, individually or in combination, but indications of interests are not due in for several weeks.
We will keep you apprised as material developments occur here.
These are good businesses and leaders in their respective categories, and we intend to maximize their value out of this process.
Until we gain more clarity on the outcome, we will continue to preserve our liquidity for potential internal uses, namely, investing in our tech-first business and making opportunistic bolt-on acquisitions.
Once we have sufficiently progressed through the divestiture process, and have a more definitive view of expected proceeds, we will reevaluate our current capital allocation policy along the lines Mike just outlined.
In summary, while the top line results don't yet show it, we are making progress on multiple fronts in our tech-focused strategy.
We're refining our portfolio, reshaping our organization and implementing strategic initiatives.
All of which should contribute to changing the trajectory of our business and should return us to growth.
So thank you for your interest.
I'll now turn the call back to Mike.
Great.
Thanks, <UNK>.
So as you hear, we have a number of initiatives, both operational and strategic.
Some are having an immediate impact, some will take a longer time to show results.
But we're incredibly optimistic about our direction.
I'm thankful for the hard work and dedication and passion of our employees around the world, and thank them for everything they do each day.
And with that, we're going to turn it over to questions.
Yes.
They're mostly severance costs that relate either to people affected by our current divestiture process or the reorganization that we just went through.
So I think the plan is to sell those.
We think there's sufficient interest in all of the businesses, it varies among the 4, but as <UNK> said earlier, the amount of activity people are engaged with is pretty high, of course, there's no assurance that will get to anywhere for all 4 of the businesses.
But we think there is a fair amount of interest that we're going to continue to pursue.
If nothing comes to fruition on 1 or more of them, then we'll make a decision on how we operate them going forward, and there are a handful of plans: B, C and D, if that doesn't happen.
Sure.
So we start with the number of products.
Starting with Open Web, it's the first one, and then Lengo and getTalent.
Open Web, we've talked about more specifically, because it's got more longevity in the marketplace.
GetTalent has only been in the market for a little more than a year.
The adoption rate has been spotty.
We're continuing to refine how we bring the product to market, what the features and functionality are.
It has not met our own internal expectations to date, but we're continuing to refine how best to incorporate it into the core of what we do and bring the value to market.
I think there's a number of things we can do with getTalent, both as a standalone product and incorporating it into the core.
On Lengo, the adoption rate's been really good.
It's been stronger in the U.K. in part because we have a small sales team that's been dedicated to it in the U.K., and they work very closely with the development team, which is also in the U.K., but we have plans to roll it out into the U.S., and early indications are that there's a fair amount of interest.
I think it will take some time as we focus on moving people from active to passive as the [WorldwideWorker] candidates in those 2 buckets is active and passive.
But I ---+ we think that Lengo has a lot of value supplementing what we do in the core Dice, [even] [Hcareers] and ClearanceJobs businesses, together with Open Web.
Sure.
So I think overall the macro environment continues to be really strong for tech professionals.
People with specific skill sets, who are the superstars of tech are really hard to find and really hard to engage.
We've said this forever and more than 15 years I've been here, the supply-demand imbalance, for us to be really successful, has to be somewhat calibrated in.
For the last couple of years, it has not been calibrated, because the demand for people ---+ for professionals and the skills required and the mix of skills required are so specific that finding those people is incredibly difficult.
So for us to be optimized, getting that supply-demand imbalance more aligned would certainly be better, but there is certainly a need and having a need drives our business ultimately.
Thank you, Austin.
We appreciate your interest in DHI Group.
If you have any follow-up questions, you can call Investor Relations at (212) 448-4181 or e-mail [email protected].
| 2017_DHX |
2017 | HRL | HRL
#Thanks, <UNK>.
Really, we've got stronger performance for the balance of the year in both refrigerated and specialty foods.
On the refrigerated side, the big driver there is going to be continued strong value-added sales, both on the retail side of the business and continued strong performance from our foodservice team.
And then on the specialty food side, like we said, the CytoSport business continues to do well, gaining distribution, but also some great new innovative items that are really starting to take hold in the marketplace.
Between those two things that's really what is going to offset some of the difficult market conditions for JOTS.
<UNK>, it's <UNK> <UNK>.
That's a fair statement.
In terms of expenses, obviously advertising was up on the quarter there.
As you would expect, expenses associated with the Justin's integrations that are one-time expenses.
So, certainly advertising will play a benefit for the rest of the year.
We won't have the ongoing integration charges.
But the bigger driver in all of this is really the sales momentum for grocery products.
SKIPPY continues to do really well.
Our MegaMex portfolio of products is doing well.
And then we do see some favorable market conditions that will help them out.
And then, again, the full-year benefit of Justin's.
That's really what's driving our outlook for grocery products.
I think, <UNK>, we have talked a lot about the continued growth, the migration up the value ladder, if you will, in our refrigerated foods segment.
And it occurs not just in packaged items.
We are doing it across the entire refrigerated foods organization, in fresh pork, in meat products.
It's happening everywhere.
So, we will continue to work on that and we have been very successful.
The other part to really consider is the, once again, strong growth of our foodservice business.
That's a business that continues to deliver quite well for our organization.
We don't expect that to slow down.
And then a lot of the innovation work that we are doing on the go with our party trays and some of our other items that we have developed.
So, is it a structural difference.
It certainly is a structural shift.
And we will continue to be working on that so that we do eliminate volatility over the long term.
Thanks, Rob.
To your first question, the answer is yes.
We are committed to that long-term margin guidance.
And clearly the impact of Jennie-O on just this one quarter moved us back a little bit.
But we do believe that this business is going to rebound and will emerge stronger.
It's going to be a key part of that journey in the margin improvement.
So, so the answer is yes, we are committed to that.
And to your second question, certainly there are elements of both, I think.
We're still gaining back some distribution, but you're gaining back distribution because there is consumer demand.
Again, the underlying fundamental there is we feel really good about the business.
It's connecting with consumers and it's on-trend and we expect to continue to see that.
Sure, <UNK>, good morning.
<UNK> <UNK>.
Just following up on the earlier question around Justin's, the $13 million in the first quarter does account for some seasonality in the business in the whole confectionary space.
But we do want to point out that the volume is up 20% year over year.
So, we do believe that we are on track for $100 million for the full year, and still remain very positive about that acquisition and that business going forward.
As you get to the Applegate business, our team there continues to work through the rebound of the supply situation, both on the pork side, and then that was compounded with turkey supply shortages through AI.
And as you think of that business in specific parts of the store, the walled deli space is extremely competitive.
The team is making progress there but that's been a battle.
Really, a lot of continued success in the meat case and the freezer.
Hot dogs, dinner sausage, the nuggets, the chicken breakfast sausage ---+ those items are doing well.
And we're working now on developing business in the foodservice channel, as well.
So, we think that that business is very healthy and is going to continue to do well.
<UNK>, good morning.
<UNK> <UNK>.
Thanks for those questions.
I'll try to break those down here.
The first one around avocados ---+ and you are correct, we have taken pricing increases on Wholly Guacamole.
Those prices have been in the marketplace a little while now but consumer demand remains strong for the products.
In terms of the avocado market there are a couple of things.
Prices are historically high but they are down from some of their October peaks.
The other thing to understand is that there is adequate supply.
We have a lot of supply that comes out of Mexico but we have other sources for supply, as well.
So, there is adequate supply in that space and we, again, feel really good about the business going forward.
From a grocery products perspective, our guidance is consistent with what we laid out in the fourth-quarter call.
The business is very healthy, a lot of sales momentum.
And you are right, once we get through some of these one-time expenses we will be able to deliver the guidance we laid out.
And, yes, there is a mix shift as we think about the Justin's and SKIPPY and all of those product lines that really continue to build a nice broad base in the grocery products portfolio.
So, we feel really good about what grocery products is doing and where they are headed.
I think we're on track for the 5% organic growth number.
As you go around all the differences and segments, refrigerated foods, the strong value-added sales, will continue to deliver there.
JOTS will be slightly lower.
We are going to see some volume growth but obviously we understand the market conditions.
Specialty foods will continue to perform well.
And then international grocery products are all on track for what we said they were going to do.
So, we do believe, <UNK>, that we're going to be able to deliver that 5% organic number.
We said our stronger performance will come from refrigerated and specialty, but there are some really nice sales momentum in grocery products and we don't expect that to slow down.
Specialty foods, you've got to remember that that is still a mix of CytoSport, HHL, and our specialty products group.
So, when we talk about that business we're talking across all those different categories that are performing well.
We expect that business to continue to be strong.
And even within that segment there's a bit of a balance that goes on at any given time.
We have seen some nice growth with CytoSport in some more traditional channels.
Remember, the C-store business, which is a big part of the CytoSport business, isn't measured.
The team has done a great job not only gaining distribution but creating innovative new items to meet the needs of that channel.
So, it's all of those things that are really setting it up for a strong 2017.
<UNK>, just as a reminder, fresh pork exports, they are a decent sized part of the international business.
They are not, I would say, a huge part of the overall company.
And on any given year obviously we've had strength and then we've had some challenges with pricing pressure with products coming out of the European markets the last several years.
But it does look like the markets are setting up for a strong full year.
Certainly you've got the China conditions, but I think we've also all read what's happened or what is happening in South Korea, which is a strong export market for us.
So, we do feel like it will continue to be strong throughout the year.
We are less than that, <UNK>.
<UNK>, this is <UNK> <UNK>.
Really, what's happening with the lower commodity prices is the pricing pressure that it's putting on to the sales price.
That's really where we are feeling the impact.
I think to understand what occurred in the first quarter, one of the things you shouldn't lose sight on is the bird performance, because the birds that we raise, we've talked about that we had some additional cost in those flocks.
The flocks that we raise cost more and then they provided less meat than they typically will provide, especially less breast meat.
So, the cost of raising the birds was the same price.
Yes, there is some advantage in the commodity prices for breast meat that we are buying on the outside, but it's really the pricing pressure.
Thank you all very much.
While unfavorable market conditions in the turkey industry challenged our Jennie-O Turkey Store business, the balance we have intentionally built into all of our businesses allowed us to deliver earnings growth this quarter.
Our team has a track record of delivering results and we clearly understand what needs to be done this year to deliver the guidance range we provided.
On behalf of the team here at Hormel Foods, thank you for joining us today.
| 2017_HRL |
2015 | CHUY | CHUY
#Thanks, <UNK>.
On the D&A ---+ the depreciation.
It is really kind of a ---+ just an increase in new stores and higher asset base.
They are still in that frame of anywhere from $2 [million] to $2.3 [million].
But that is net, Bob.
The deal is, we've got a little more TI dollars this year, that is bringing that down.
So your gross cost is up a little bit.
No, I don't think so.
I mean, it was similar to last year, and we opened up the same number of stores as we did last year.
So it is pretty consistent.
We are looking at that $375,000 to $425,000 depending on when we get access to the store, and how much straight line rent we have in there.
Got you.
Very good.
Great quarter.
Congratulations.
Thank you.
Well, everybody, thank you so much.
Jon and I appreciate your continued interest in Chuy's.
We will always be available to answer any and all questions.
Again, thank you, and have a good evening.
| 2015_CHUY |
2016 | GOV | GOV
#Yes, <UNK>, this is <UNK>.
They were up.
They were a bit higher this quarter.
I think it was a few things that drove that, some of it one-time items such as cyclical painting for a couple of tenants, as well as just we had an increase in salaries and benefits expense over the prior year, where we had a number of open positions.
But we'd expect growth in other operating expenses to moderate in the fourth quarter.
For the year, we've done a pretty good job managing expenses.
Total operating expenses on a same-property basis are up only 1.7% through the first three quarters.
So we've been fairly successful in managing that, and I'd expect growth in operating expenses to moderate in the fourth quarter.
<UNK>, we don't anticipate that would have any impact for us.
We have one building leased to the FBI in Stafford, Virginia.
It's the headquarters for the Behavioral Analysis Unit.
They need to be near Quantico, and we're right across the entrance from Quantico.
So we feel pretty good about that particular location and don't think we'll be impacted.
<UNK>, I think it's an accurate statement.
I mean, the US government in particular tends to pay higher rents than private-sector tenants.
Part of that's due to their security requirements.
We also tend to have slightly higher tenant improvement costs with non-government tenants, which generally is just an upgrade to the quality of the tenant build-out.
That is why you see us very focused on trying to renew government tenants in place and backfilling vacant space with government tenants versus private-sector tenants.
I think ---+ it's a good question, <UNK>, and I'll give you my opinion.
It's always hard to know exactly where things stand, because this has become very political.
I think on the one hand, Congress will continue to focus on increasing utilization rates and trying to save as much money as they can in leasing real estate.
With that said, I think the vast majority of buildings around the country that are occupied by GSA-related agencies are meeting or have met their utilization rates.
So I think we're in certainly the latter half, maybe the seventh inning, of government right-sizing their space.
We're working on leasing plans, and we've had some showings on both of those spaces.
We are also taking a hard look at whether we think it makes sense to own those buildings long term or go ahead and move them out as dispositions.
So we may have an update for you on the next earnings call, but we're thinking through both of those strategies right now, <UNK>, to see what makes the most sense for the Company.
Thank you for joining us this morning.
<UNK> and I will be at the NAREIT conference in November and hope to see many of you there.
Operator, that concludes our call.
| 2016_GOV |
2016 | COL | COL
#What I would say is I think Commercial Systems margin in the back half of the year is going to be pretty close to what it was for the first half of the year.
I don't see it changing significantly, <UNK>.
Now I do want to clarify, I guess, a couple of points.
The margin headwind that we had from this mix shift was significant, and we're talking about going from very high margin product sales to lower margin customer funded R&D, and that was a big impact.
And I think going forward we'll still see some of that mix issue, but it won't be quite as dramatic.
And I think we feel pretty comfortable that we're at the margin targets that we've laid out for Commercial Systems are achievable.
Just to add to that, <UNK>.
The margin mix issue is what <UNK> said, it's losing the biz jet revenue and increasing the NRE or engineering revenues.
It's not a mix of new products coming into the market.
We have very good profitability with the new products coming into market.
It's part of our common product line strategy where we are reusing, so you shouldn't view 787 anymore as a new product.
We been in rate manufacturing for that, we're now a 12 month rate, so that's very, very good performance from us.
And I'm not worried about new product versus old product mix looking forward.
First of all, I didn't say that the Company funded R&D is going to be flat.
It's going to be down a little bit it, it will be closer to flat for the third quarter.
So that's part of the answer.
And then the other answer is, continued cost reductions, we're continuing to see benefit from the retirement program flowing through the numbers.
If you think about it from an operations perspective, that benefit gets deferred by a quarter because it's in inventory.
So we will see that benefit flow through as well.
Hello, <UNK>.
I think what you're going to see ---+ you are right.
The IMS segment margins were higher than they normally would be, so I think what you will see is the IMS, I'll say, more normalizing in that 15% to 16% range.
I think Commercial Systems, as I mentioned, is going to be pretty flat quarter to quarter Q3 and Q4, and what you'll see in Government Systems is that the margin is going to maybe tick up a little bit in the third quarter, not much, and the bulk of the margin expansion is going to be in the fourth quarter.
Yes, pretty much.
Unfortunately, every year it seems like our cash flow is fourth-quarter loaded and it continues to be.
And I'd say, if anything, it's probably a little bit more, a little heavier, than normal just because of the sales profile we are looking at.
So, yes, very heavily weighted toward the fourth quarter.
Good morning, <UNK>.
Okay, a lot of questions there.
So let me walk through the program.
First of all, we've won the initial award with two other suppliers.
We'll be delivering roughly 30 radios, I think, into the Army.
They will take those through two test regimes, a development test regime and a contract test regime, to validate those radios against the overall requirements.
So there will be no revenues in FY16 associated with that program, because these are free of charge radios.
We're just providing them to the Army to go through the test.
From the results of the test, then they will go to what I would call a call for improvement for the participants who pass the test to then provide an updated price for the next fiscal year buy.
So I would say, <UNK>, it will probably be this time next year before they make that decision.
Their current plan is is that they would down select from three, if there are still three viable suppliers through the test phase, they would down select from three to two for that annual buy.
Obviously if that's at time next year, there's actually very little revenue opportunity next year either because the revenue will go when the radios are delivered, so it really has moved to an 2018 growth item.
The other thing I will say is that $12.7 billion while I like the top line numbers what that is, is that's the max quantities in every case under the IDIQ contract.
So think of this contract as a huge matrix with max quantities all priced, and they are all added together.
This is not going to be a $12.7 billion contract in my mind, however, it will be very significant maybe more like $4 billion to $5 billion of revenue.
How much comes to us depends on how many contractors, what percentage that we win.
We've said hey, look, at we can easily see $100 million a year revenue stream from this program if not more.
No.
In air transport, it was Intertrade down because we ---+
Right.
Mandates down, you didn't say mandates, pretty substantial headwind in mandates.
MRO roughly flat, and Intertrade up, I'm sorry, Intertrade down.
We've said Intertrade is, I'd say, between $100 million and $150 million of sales a year.
Most of that is in the air transport market.
There was a little bit of both, but I would say primarily globals.
Morning.
That's correct, yes.
I'm sorry, most of that is in the fourth quarter, yes.
Like I said, I think it's going to be relatively flat from the second quarter to the third quarter, and then we're going to see a large significant increase in the fourth quarter.
And that's driven, one, just by the sales volume.
The fourth quarter is always the highest sales volume for Government Systems, and it's going to be especially so this year.
And a lot of those sales are these international programs that <UNK> referred to earlier, and those international programs come at very good margins relative to the average Government Systems margin.
Yes.
In terms of third quarter to fourth-quarter expansion, yes.
I think we are pretty aligned with what the market demand is for challengers going forward.
When we deliver the airplanes versus when they are delivered, I'm going to let them comment on that.
Again, I'm not going to get ahead of Bombardier here.
I think we are pretty well aligned with, again, with what we expect the market to be on those.
I don't want to project Bombardier.
Again, I think it's the furlough time.
I'm certainly watching what's going on at Gulf Stream.
That would probably be the area I would highlight.
We don't have a lot of content on the Gulf Stream programs.
The G650 program is a good content aircraft for us, so we will just watch what they do there.
I think we are pretty well aligned at Bombardier.
Good morning.
That's a program specific question.
Most of that work is sustainable into 2016.
I'd say very little of it is orders that we can completely convert to sales throughout the year.
So think of ---+ even the product sales where we get orders for our 210 or our mids product line.
We will make some sales this year, but we won't sell all that backlog out next year.
So, yes, while this is a second half loaded year, it also gives us the opportunity for next year as well as long as we book these orders.
I would target, Rob, probably around 30%.
We'll always be trying to beat that goal, but with the R&D tax credit I'm thinking about 30%.
I would say this, if I heard your question right.
We are planning on having growth, year-over-year growth, from Government Systems in the third quarter.
Now it will be higher in the fourth quarter on a year-over-year basis, but we're going have growth both in the third and the fourth quarter.
And the things that are going to drive the fourth-quarter growth higher are again some of the international programs that we're in the process of closing out right now.
Yes, the mix, and I'd mentioned also the transition to increased Company funded R&D and that's going to happen on the Government side as well.
Operator, we have time for one more question.
Yes, absolutely, and that will come to us in a couple different ways.
We will provide ---+ in cases, we will be providing services to the airlines, we're also working with engine OEMs where we are providing service to deliver the data to them.
Then they provide a service to the airline around the predictive maintenance.
It depends on where the intellectual property resides.
We'll be able to do that for the things that we have the intellectual property.
We'll be a ---+ think of us as a data delivery source to other companies who own the intellectual property going forward.
So there is great opportunities.
We'll be able to put apps in our aircraft and the ground, we'll be able to drive services and support that.
Again, to the OEMs, to the product OEMs, as well as the airlines.
Thank you.
We plan to file our form 10-Q later today, so please review that document for additional disclosures.
And thank you for joining us and participating on today's conference call.
| 2016_COL |
2015 | PAYX | PAYX
#And to build on that, <UNK>, I think when you look at how we are going to market and how we sell that product, ASO tends to be, as Marty mentioned, tends to be a little bit lower, typically worksite employees and within the base.
PEO tends to be a little bit bigger, and a combination of inside the base and outside the base.
So, our PEO sales are not just to existing Paychex clients, but also outside the base.
I think they're generally comparable.
They're pretty close on both sides.
It's just the preference for what, how the client thinks.
I think the other thing that we probably didn't mention is selling this more upfront, we have found that typically our model was sell them payroll, then come back and say do you need HR services in three months or six months.
We're selling much more up front, if we think the client is of a 20 plus in a complexity we will go in and team sell.
I think we're winning more clients right up front an ASO or PEO basis.
Good question.
The answer is yes, we do.
Although, for example, we reported, I believe last year about 580,000 clients.
We think we had in excess of 20,000 clients that don't take payroll but take other ancillary products.
I think, <UNK>, it points to the fact that the company that we were prior to the recession is very different than the company that we emerged out of the recession.
We're much more of an integrated full-service provider to small and medium-size businesses and you're starting to see that in the client base.
We'll update some of that information when we get to the end of the year.
I would say on the average, not necessarily the smallest clients, although new business formation has picked up some, obviously, and we're kind of getting back to where we were pre-recession levels.
And, I think our sales to new businesses are back up over last year, at this time.
So, I think there's some small, but I think primarily it's net average base, if not slightly higher I'd say, meaning one or two employees or something like that.
I think we're right in the average, and in the midmarket I think it's about the same.
We focused very heavily on the 50 to 500 in that midmarket space and I think that's been a very good sweet spot for us.
We certainly have clients that are above that, but we're really focusing the team on that 50 to 500.
It's a very hot space right now for multiple products.
Those are the clients that need multiple products that are integrated and SaaS-based and we fit really well there.
What I mentioned earlier is over the next six months you'll see even stronger integration.
So, all on kind of the same user interface and so forth.
They're integrated today from different levels but over the next six months, stratustime that we acquired last year, myStaffingPro and BeneTrac will see even enhanced integration.
Which will make that even a stronger product then right from applicant tracking, right through to retirement, as they say.
Particularly on the front end of the applicant tracking and the benefit enrollment.
Building on what Marty said, the way we segment markets, <UNK>, is under 50 and 50 to 500.
If you look at it from a unit basis, the growth is pretty comparable.
I guess I'd say, if this is what you mean, we sell a lot more bundled services.
Certainly, than stand around payroll.
That's gone up dramatically over the last four years.
I'd say from low double digits as a percent to mid, almost.
Okay.
Double-digit.
Where we used to sell, probably standalone payroll ---+ and this is a change in the whole sales team ---+ bundled services right up front 10% to 20% of the time, now we're selling a complete bundle probably 40% to 50% of the time.
It's pretty dramatic.
We've bundled the products, as well, and the way that sales has looked to increase the revenue per client and really to sell the client everything they need right up front as part of a bundle.
I'd say it's still close to half.
Still close to that 50%.
I think so, yes.
<UNK>, it's really been typically between about 45% and low 50%s, 52%, 53%.
It's hard to envision that that changes that much.
Part of what distinguishes us from a lot of companies is that we're mining that new base to get our customers.
So, we got the three person payroll and they eventually become an 8, 10, 20 person payroll because we mine that base.
So, that's part of the way we sell how we do that, how we go-to-market over time may change, but that's really core to how we're approaching the market.
That's a very wonderfully elliptical, euphemistic way of saying we typically have a pretty tough target.
Management doesn't get paid.
We don't start having conversations until we're getting close to double digits.
So, we will expect that we will have a double-digit target and we'll expect that if we don't meet it, we'll suffer the consequences.
So, that's kind of where we're at from management's comp perspective, obviously, sales has its own set of comp.
Thanks, appreciate it.
Wages we generally seen around 2%.
So, it wouldn't say it's anything overly strong.
I think we saw, <UNK> mentioned earlier, from a bonus perspective, which we watch, bonuses were higher.
There didn't seem to be as many, necessarily, or much of an increase as we thought, but they were higher.
General wage has been pretty consistent at around 2% increase.
Think you're picking up, <UNK>, on the 3% client fund balances.
So, that incorporates not only wages but anything else that we're paying.
It looks like it's ticking up moderately.
I would say, in the PEO side, I think it's probably 60/40.
I haven't seen that number lately, but I would say more new.
When you think about ---+ it trends tends to be with our overall business.
We're 50% new businesses, I think if that's what you're asking from a payroll standpoint.
I think the PEO is similar to that, maybe a little bit more on the new side, but I think it's right in that range of 50/50.
I have been in Germany, now, for 9 or 10 years.
We doubled our size last year with an acquisition and continued sales growth.
So, we've got a nice base there.
Brazil, we started last year and we're kind of chugging along.
It didn't help that the kind of Brazil, the economy slowed down at a time where we were starting up there.
We're learning there and breaking into the business.
Winning over the CPAs so that they'll refer more of their payroll business out to us.
We're still very interested in it.
We were going to focus on two or three countries, kind of the third country.
We haven't quite found a good entryway in, yet.
We've looked at a number of them.
It'll always, I think, at this point, it tends to be small.
It's going to tend to be a small part of where we are as we approach $3 billion in revenue, but it's still of interest to us and we continue to look at acquisition opportunities and ways to increase sales and profit there.
Sure.
We don't really ---+ the, SaaS, most of our products now, most of our clients are on SaaS.
So, well over 80% of them.
From a growth standpoint, we don't break out SurePayroll anymore.
But, they're doing fine.
Really, they've had good client growth year over year and I think they're competing very effectively with, particularly, the micro businesses for payroll.
All of that is done through web.
<UNK>eting and sales on the phone, once people call in.
I think they've been very effective at that in growing their client base.
We continue to be pleased with that and continue to always watch who we're competing against.
Not a lot of new competitors, there.
Some startups, got quite a bit of press for a while, but then it's dropped out a little bit because they're not a full product and as sure.
So, I think primarily, it's Intuit that we run into as a competitor there.
Folks just wanting to stay manual and doing their payroll manually.
The other thing I'd add, you surf the web, there's a bunch of these different rating services, but they just won a recent award in terms of user access and appearance.
So, they are very, very formidable competitor in platform in that micro enterprise space.
<UNK>, two things.
In a quarter when we have particularly strong sales execution, then our expenses tend to ramp up.
So, we had probably a little higher expense growth in the quarter and then in the back half of the year based on the performance we're seeing.
Hopefully, obviously, that leads to a little bit better build revenue going forward.
So, unless we set our plans too low and they constantly beat them, that's not the way we tend to do it.
We tend to set them pretty high.
The sales force has done a great job of rising to the challenge.
With respect to expense, you know, I think there's really going to be no change in terms of the approach we take.
We're going to leverage on operating expenses as much as we can.
We're going to continue to invest in IT, probably a little bit more of a moderate rate than you've seen in past years, more than has been embedded in the SG&A number, which is where it appears.
And then we're going to continue to make selective investments in sales where we think there's opportunities to grow the business.
So, I think that will not change dramatically.
Quarter over quarter, you might have some changes, as results are higher than where we expected.
Yes.
As you know, double-digit increases in IT investment for many years, and I think what we're saying, it tends to flatten out.
We've reached a very good point of the amount of productivity we're getting and the development needs and that's still ---+ it's become a very large part of our investment, as you would expect, with a SaaS-based company that's very much technology driven service.
The biggest, now, certainly, as I say, is HR outsourcing.
Both ASO, PEO, and what we call our HR essentials product which is more telephonic support, HR light, HR outsourcing light, the second is our retirement services business and third, insurance.
Nothing's changed there.
Those are all businesses that are growing nicely and performing well within the portfolio.
Your biggest followed by the next biggest followed by the smallest.
All right.
Thank you.
At this point we will close the call.
If you're interested in replaying the webcast for this conference call, it will be archived until approximately April 25.
We thank you for your interest in Paychex and for your participation on the call.
Have a good day.
| 2015_PAYX |
2018 | CPE | CPE
#Thanks, <UNK>, and thanks, everyone, for joining us this morning.
Our first quarter earnings release is out yesterday along with earnings slide deck that we'll be referencing during today's call.
We had an active first quarter with the addition of a fifth rig in mid-February ahead of the 2 dedicated completion crews, setting the stage for a steady level of activity through 2018.
As we all know, the Permian had a rough start to the year with extremely cold conditions in January.
Our operations team did an excellent job of bringing wells back online and importantly, keeping us aligned with our operational plans and expectations for wells placed on production.
In fact, we did better than planned with realized efficiencies of both the drilling and completion side that we will talk about in more detail.
With that, I'd like to focus on Slide 3 of the deck.
Production for the quarter was 26,600 BOE per day.
It was slightly ahead of the last quarter in which we posted a sequential increase of almost 20%.
The production was right in line with our expectations during a quarter where we built a small backlog for operational flexibility and also had a lower than our normal average working interest in gross ---+ wells placed online.
Almost all the wells placed on production this quarter were in the Ranger and Monarch areas, with Reagan wells placed on production in WildHorse and Spur early in the second quarter.
Production for the second quarter has begun to ramp as the 5-rig program hits its stride with average April volumes in excess of 28,000 BOE per day.
On the financial front, we generated first quarter EBITDA of approximately $92 million driven by sustained high oil mix combined with strong price realizations and a decrease of approximately 20% in LOE per BOE produced in the first quarter of last year.
We also had a few operational results and achievements across our position worth highlighting.
In the Midland Basin, our first down-spacing test of the Wolfcamp A in Howard County has been online for over 4 months and has performed above our results for offsetting wells completed on 8-well section spacing.
In addition, we are nearing completion of the drilling of our first mega pad concept in Midland County that we expect to be a model for larger pad developments in other areas going forward.
In the Delaware Basin, our first 2-well pads, which is targeting both the upper and lower Wolfcamp A, has been producing for almost a month and is posting strong early time rigs with very high oil cuts and formation pressures.
Given the results we have seen from our Spur area over the last few quarters, combined with the recent addition of a second rig in the Delaware, the Spur area will be an increasingly important driver of production growth and capital efficiency in the future.
Moving to Slide 4.
We continue to deliver amongst the strongest operating margins of any producer with an operating margin of $44.31 per BOE in this past quarter.
Consistent wells productivity, timely pipeline offtake arrangements, thoughtful infrastructure investments and continued focus on operate ---+ operating cost improvements have all contributed to sustained increases in this critical measure of internal cash flow generation over the past 2 years.
Despite an increasing level of industry activity, we expect that our leading cash margins will continue to be a differentiator for Callon given the investments we have made in our team and critical facilities to preserve this advantage for the long term.
Importantly, this internal cash generation provides a clear path to align with the growth capital we are spending per BOE produced in the near term.
As an example of this progression, in the first quarter, our operational capital is $28 per BOE versus operating margin of $44 per BOE.
I'll now move to the ---+ Slide 5 and discuss our capital spending for the quarter.
You can see that our first quarter operational capital spending came in at just under $117 million for the quarter, better than the anticipated total that we discussed in March.
While we factored in 10% service inflation for our 2018 CapEx estimates, E&C cost inflation has been limited thus far in 2018, but we continue to work on areas of cost improvement and efficiencies to mitigate any unexpected increases that may be working their way through a tight labor market.
In terms of big-ticket items, 4 of our drilling rigs are on longer-term contracts with only 1 rig coming up for renewal this year.
In addition, we recently entered into a long-term agreement for 2 dedicated frac crews.
As I highlighted earlier, you can see in the right-hand graph that we're able to deliver above our expectations for wells placed on production in the quarter as the team has efficiently integrated a new rig and frac spread into our program.
Looking at the balance of 2018, we expect the pace of wells turning lines to be fairly balanced over each of the remaining quarters after updating our E&C schedules to optimize operations over our larger pad development.
Ultimately, this should result in a more linear growth profile for the year with production increasing approximately 10% per quarter throughout the remainder of the year.
With that, I'd like to call ---+ turn the call over to <UNK> <UNK> for our operations update.
Thank you, Joe.
I will start on Slide 6 with activity in the Midland Basin.
As Joe stated, during the first quarter, we were moving rigs around the basin, but the majority of the wells placed online were from Ranger and Monarch.
As we move into the second quarter, we will have Wolfcamp A wells from our Fairway area coming online as well as additional wells from our Monarch area.
Very successful recycling efforts at Monarch resulted in sourcing 40% of our frac water needs from recycled produced water.
This is quite an accomplishment and sets a strong precedent for what we expect as we prepare to frac our 6-well mega pad and further illustrates the high expectations for use of recycled water at Spur.
As Joe mentioned earlier, we are making excellent progress with our first mega pad at Monarch.
We've completed drilling of 5 of the 6 wells and are currently drilling the lateral section of the sixth well.
We currently have these on the completion schedule for late second quarter with first production in the third quarter.
We're seeing very encouraging results from our Wolfcamp A down-spacing test in Howard County, which I will talk more about on the next slide.
We've also had the opportunity to begin utilizing some intra-basin sand and have seen no performance issues thus far.
We will continue to integrate local sand into our completion strategy as we will have access to local supplies through our pressure pumping partner, Schlumberger, beginning Q3 2018.
Moving to Slide 7.
Our Wolfcamp A down-spacing test in WildHorse has performed extremely well during the first 120 days of production as compared to 2-well pads that are direct offsets in the same area of our Fairway asset.
This is an important data point as we transition to program development with larger pad concepts this year.
We will continue to watch these wells for the next couple of months before we make any decisions about added down-spacing testing in the Wolfcamp A in Howard.
I will now highlight activity in the Delaware Basin on Slide 8.
We have ramped activity as promised and are starting to see some excellent well results along with improvements in our well cycle times.
As you can see in the bottom left-hand graph, our first 2-well pad at Spur, which includes an upper Wolfcamp A and a lower Wolfcamp A, has been performing extremely well through the first 20 days of production.
It is early, but average oil production from these 2 wells is beginning to significantly outpace the average of our first comparable wells at Spur.
Both wells have exhibited high reservoir pressure following drill-out of the frac plugs.
The wells have achieved production rates of 1,700 barrels oil equivalent per day with 85% oil cuts while continuing to clean up.
We are very encouraged and expect to have additional wells at Spur online later this quarter as our activity in the area is reaping the benefits of our recent drill rig addition and infrastructure work.
As shown on Slide 9, we have become more efficient in our drilling at Spur as we get a few more wells under our belt.
We have achieved better than 25% improvement in our drilling footage per day since our first operated well and feel there is much more to achieve in cycle time reductions, which will offset cost pressures throughout the year.
As shown on the graph on the right, we compete very well against peers in the Spur area.
Our average footage drilled per day through our first 6 operated wells is ahead of the peer average by 18%, and our most recent well was even more improved.
The team continues to look for ways to safely reduce cycle times while drilling highly economic wells.
We spend a fair amount of time talking about infrastructure and how it relates to our operational efficiencies and ability to effectively ramp production on new wells.
On Slide 10, we have provided an update on the significant infrastructure milestones at our Spur asset, which enables us to develop the asset in the most economical and responsible manner.
As I have said on many occasions, we feel recycling is going to be the right answer in the Delaware Basin as it reaps the benefit of reducing costs while pairing that economic incentive with the environmental benefit of reducing locally sourced water for frac operations.
The business is significantly impacted by logistics, and water management is a major part of that planning process.
As shown on the slide, we are ahead of the curve on constructing new tank batteries.
And even more importantly, we have made significant progress towards tying in saltwater disposal lines across nearly our entire position.
We've also installed 2 separate 1 million barrel recycle frac pits connected by water transfer lines.
Also shown is the central gathering facility and interconnect to the Goodnight Midstream saltwater disposal pipeline to carry non-recycled volumes off-lease to the Central Basin Platform for disposal.
We expect added efficiency gains as we complete the most significant portions of the Spur infrastructure project in September with the commissioning of the Goodnight tie-in and pipeline system.
With that, I will turn the call over to Jim <UNK>, our CFO.
Thank you, <UNK>.
You can see on Slide 11, we continue to maintain a recently enhanced liquidity position with an increase to the borrowing base of $125 million, bringing the facility up to $825 million with an elected commitment level of $650 million.
Along with the increase in the facility, we pushed the maturity date out to May of 2023 and saw a reduction on the pricing grid of 75 basis points.
This further reduces our cost of borrowing.
With the recent changes, our net liquidity position at the end of the first quarter was just under $600 million.
This leaves us in a very strong financial position as we continue to see robust margins supporting the planned spending associated with our annual capital program.
Our debt metrics continue to remain in check, and we are closing the gap on reaching a state of cash flow neutrality.
Moving to Slide 12.
We continue to have some of the stronger 2018 Mid-Cush hedges among our peers with approximately 60% of consensus oil production covered at less than $1.
We have continued to add to our hedging position in recent weeks with 9,000 to 10,000 barrels of oil per day covered with collars in the 2019 timeframe.
Those collars have a floor of just under $54 and a ceiling that has been increased to just under $64.
Given recent movements in the Midland-Cushing differential, coupled with the lack of longer-term liquidity in hedging volumes, we are being patient in putting 2019 differential hedges in place.
Along with addressing pricing for oil out of the basin via hedging, we have recently agreed to 2 incremental firm sales agreements, each providing up to 10,000 barrels per day through December of 2019 with firm takeaway on various long-haul pipelines where both parties hold FT capacity.
This only further enhances our ability to move volumes as we continue to ramp our production over the next several quarters across both the Midland and Delaware Basins.
We also continue to look at the potential for longer-term physical deals on long-haul pipelines, and we'll review opportunities that may be attractive.
With that, I would like to hand the call back over to Joe.
Thanks, Jim.
That concludes our prepared remarks.
And operator, I'd like to turn it back to you to open the line for questions.
Yes, <UNK>, we think about infrastructure a lot.
We recognize that in order to be efficient out here, we've got to move ---+ be able to move this product from the well, both water and oil and gas, all 3 components of it, in an efficient manner.
So we worked hard on water disposal systems, water infrastructure systems to be efficient with the way that water moves to best ramp up oil and gas.
And that's why in every area, we've actually invested in our own infrastructure, as you've mentioned.
We've been ---+ we've actually partnered with third-party service providers that are aligned with our goals of going to either deep disposal in the Ellenburger to where we can avoid shallow drilling hazards or we're going to take the water offsite to make certain that we don't cause significant future problems while we're accessing this valuable resource.
So we've done a lot of that throughout all of our assets as we've brought them on.
And as you know, in my detailed description of our Spur asset, that being our newest asset, that's where our greatest focus is today because we see so much opportunity there.
Now we still work on that every day, and I think the key to success is to make certain that you have an operating team that's there, planning for that, being ready to move that fluid just as soon as those wells are drilled and fracture stimulated.
And I think we're well positioned across all of our assets to do just that.
As far as the disposition of some of the assets that we've invested in ourselves, as we've developed these longer-term relationships with third-party providers, we think it's only the right thing to potentially divest some of those assets at competitive market pricing for their benefit and for ours so long as we don't put pinch points in our plans to ramp development in the areas that we've invested in.
So we think it's the right thing to do.
We've always thought it to be the right thing to do, and we'll continue to focus on that as we get better and as we continue to think about ramping in the future.
So you asked about '18 and '19 capacity.
We think beyond '18 and '19 when we think about infrastructure.
So we're well covered at least for the plans that we have throughout that timeframe.
That's a good question.
Again, we think about pad size and cycle time in similar ways because it's all related to value, and we're focused on value.
And that's why the 6-well mega pad that we're doing in Monarch, that was drilled with 2 rigs.
That was 3 wells each.
It didn't change our cycle time at all with what we've done in 2017 and 2018 in Monarch, and we'll continue to do that and we'll have simultaneous operations like you see throughout the Midland Basin by those who are doing this in a very capital-efficient manner.
So the mega pad size, if that's what we're getting to, is we think 6 wells is probably good to start.
We may expand that in the future depending on how we go, but we want to see how that works.
Our infrastructure that we've built has plenty of capacity to manage the flowback of those wells.
That's one of the biggest challenges the industry has is whenever they go out and do big mega pads, how do they move that much fluid of both water, oil and gas from a single point ---+ single take point going forward in a short period of time.
Again, that's part of the reason we've been so focused on infrastructure is because we knew we were going to get to very efficient program development across all of our assets going forward.
We were always focused on getting positioned to be efficient with moving those fluids.
So for now, I would say it's ---+ in the Midland Basin, we're 2 to 3 well pads per rig, and we're multiple rigs on some sites.
And in the Delaware Basin, we've been very transparent about we're still doing single-well pads throughout most of this year as we define the real opportunity across the Delaware Basin, the Spur assets.
Understanding any variation in geology or performance across that asset position is important to us before we then jump into the most value-added program pad development going forward in 2019.
Yes.
I can talk a little bit about that, <UNK>.
Again, we ---+ it\
Yes, <UNK>, this is Joe.
As I've talked about in the prepared remarks, we had moved some things around to accommodate some of the larger pad development concepts we had talked about.
So I think the previous slide we had out there, there was a big ramp in the second quarter that's sort of spread a little bit more evenly throughout the year at this point.
No big changes, but I think just directionally, that's how the schedule has been modified.
Yes, <UNK>, again, recall that we actually intentionally slowed down a little bit in the first quarter because we had to build a bit of a DUC inventory.
And so as a result of that, we kind of ---+ even though we did outperform in the first quarter, we tried to slow down.
We did a little bit.
We've got a couple of DUCs now, which I'm kind of happy to have, to give me a little bit of optionality on timing.
But at the end of the day, it only makes sense to, as we ramp activities, to smooth that activity level out.
I'm very happy with the start-up activities of both the new rig that we got from Cactus Drilling Company.
That started up very efficiently.
And I'm pretty happy with at least the initial results of the startup of our second frac crew from Schlumberger.
They're all going through growing pains, things to learn, but we're only going to get better from this point forward.
<UNK>, this is Jim.
I would just further add, <UNK> mentioned we have a favorable differential position.
We're 60% hedged for the remainder of 2018.
What I think is interesting to note is that position took us 12 months to build, and that meant that we had to be in the market, talking frequently with key market makers because that's very different than WTI and we're doing that today.
It is a thinly-traded market, but we will continue to watch very closely and look for the right opportunity to start to lay in a position for 2019.
Yes, Gabe, the data looks very strong.
So we're happy with it.
We're pleased with it.
Those wells are strong wells.
And so we'll look at it for a few more months.
But as we get into the pad development there, the ---+ especially the mega pad development that we're involved with going forward with program development in WildHorse, it was just an important data point.
But the data is what it looks like.
It looks like it ---+ the additional 2 wells seem to work.
So it always takes a little bit more time to make certain that you don't have a little bit steeper decline on those wells as you go forward.
But so far, it looks very good.
Not for us.
Again, we maybe had 1 day or 2 delay on a pad, but it wasn't significant for us.
And we haven't jumped all in to the intra-basin sand yet.
We've done it on a couple of pads because we had access to it through our direct sourcing agreement with Hi-Crush as well as through our sourcing agreement with Schlumberger.
But at the end of the day, our direct access to look into intra-basin sand really kicks in, in Q3 2018 with our longer-term agreement with Schlumberger.
No issues for us so far.
We're happy with what we're seeing.
The lower cost is a real advantage to us.
Getting that logistical challenge worked out within all the mines, I think, will be helpful for the entire industry.
But we weren't ---+ we hadn't planned for large volumes in Q1 or Q2 simply because we fully expected that it would take a little bit of time to ramp up efficiency at many of those local mines.
So we're in good shape.
Brad, thanks for asking that.
No update at this point in time.
We're still very happy with the performance of that well.
We just got a sub-pump in it last week, so we're ramping that up as we go.
And so still more time before we report definitive results on those wells.
We have already participated in another well that was drilled by another operator.
Anxious to see that one completed in the next month or so and the results associated with that and compare those results with the results that we've gotten.
But again, the well is a good well, and I think I told you on the call last time that it's not acting like a Taylor well that Parsley had, just to be clear.
I want to be clear on that expectation.
And the only other color I'll give you is, it is making a little bit more water than I would've hoped.
So a little bit of tidbits there, but we're not really ready to define any future infill potential at this point in time.
Yes, Brad, that's a good question.
Again, our expectation is as we get these new assets ---+ we're very blessed for having phenomenal assets in all 4 operating areas.
And as we get these new assets, we quickly jump in, and having very high confidence in the resource and how it's going to perform, we jump in and invest in infrastructure as you've seen us do it over the last several years.
Paying dividends already at Monarch, paying dividends already at WildHorse and the Spur assets will be greatly improved in efficiency beyond the third quarter of this year.
And all of those significant pipeline systems will be in place, and there will only be minor adjustments going forward.
So that infrastructure spend will significantly drop off in future years.
So I would expect it to be primarily focused on just drilling and completing wells.
Yes, no, we're going to make this decision pretty quick, Ron.
We just need to see a few more months on it.
But we are going to pad development now in Howard, as you know.
We're bringing 2- and 3-well pads on.
And so we're going to look at it.
There're couple of steps here, right.
One case doesn't make it all work.
Now you've got to go in and do it in a pad development manner and make certain that that works.
And we're going to go in it.
We're going to jump into it.
We're going to believe in it because then ultimately, we need another 6 months to 1 year even to watch the decline of those wells just to make certain that we're not then overinvesting, because we don't want to underinvest.
We don't want to lose opportunity, and we don't want to over-invest.
So this is just a maturity curve, a learning curve as we and the industry gets very comfortable with the right spacing across the basin for each individual landing zone.
So that's the only reason we have ---+ always I'm a bit cautious about these types of things.
We're very comfortable with the [13 wells per] spacing in Lower Spraberry.
But now I'm going to go in and do a mega pad opportunity in the Lower Spraberry and say, wow, we were right.
I've just got to ---+ I always have to calibrate results with what our expectations are, and that's why I'm always just cautious about saying this is the right answer.
It clearly looks like the Wolfcamp A in Howard given the results we have, justifies 10 wells per section and we're moving in that direction.
I think, Ron, what we've typically done there is first remind folks that we have a very high oil cut in the 77%, 78% range.
We've said we have firm transport to Waha and a downstream point in the Delaware.
We've got a strong kind of diversified network in Midland.
And I'm not sure, <UNK>, you want to add anything beyond that.
Well, I would kind of break this into a couple of pieces.
First, we're really focusing on what the ultimate realized price is, and that means we're going to continue to watch very carefully.
We've been layering in higher WTI positions.
I talked about the fact that we were very methodical working into the 2018 position, and we'll continue to do that in 2019.
This is ---+ I know I've said it repeatedly, but this is a very thinly-traded market.
We've put targets out there, and we will be patient until market conditions improve.
I think one of the things that we've also talked about is that we want to have a longer view, and I think it's prudent to step back and take a look at a portfolio approach of complementing what we do on the hedging side with the physical term commitments.
We are reviewing some opportunities there.
I think it's a bit early to give specifics.
But again, this will be kind of a balanced approach and we will do whatever makes the best economic sense for us over the longer term.
We're always tweaking things.
We did frac these wells with less sand than we fracked some of the earlier wells.
We fracked them with a little bit different spacing on stages.
But at the end of the day, we're still trying to get to the right recipe.
But no, in general, we still pump our general recipe that we think works very, very well in the Delaware, only making minor tweaks to it.
Yes, we're just, again, drilling the single-well pads across the base ---+ across the asset position just to make certain we understand any type of drilling hazards, any type of cycle time challenges, any type of changes in geology that is of any concern whatsoever before we get into a significant program development.
But we'll continue to expand across the asset position just as we have.
It helps us on a couple of fronts.
It helps us to understand not only any type of challenges to cycle times or drilling hazards.
It also helps us understand, just like Mike was talking about, any performance differences from well to well because we know all this isn't exactly the same, but it's all still really good stuff as we bring these other wells on in the future.
So it's just as, as you see on that map where all those Central tank batteries are, we'll expand that as we go throughout 2018.
And <UNK>, I think ---+ I'm not sure if you're getting this on the question, but we also had some tests in other zones that were planned in the Wolfcamp C as well as a second from Shale later this year.
So on the back of all that, getting into early '19, we will have wells in those 2 zones as well as in upper and lower A as well as the B as we think about the longer-term development of the resource here.
So in addition to what <UNK> was talking about in terms of the aerial extent testing known zones, we are doing some work in new zones as well that we've seen some encouraging data on offsetting wells.
Again, <UNK>, we just need more time.
We'll have to ---+ we're very encouraged with what we see on these wells, especially with the oil cut.
But again, we just need more time on these wells as we see it continuing to mature.
So encouraging results.
Happy to have them.
No, it was very comparable to it.
It's an apples-to-apples comparison.
In terms of the efficiency rate of change in 2018, you provided some great details on the drilling side in the Delaware, and I think you mentioned that the second Schlumberger crew was doing very well.
And apologies if I missed this, but can you go into more detail on the completion side of things in both the Midland and the Delaware.
Specifically, if you could quantify where you are now versus say, I don't know, 3Q or 4Q last year on whatever metric you use internally to judge yourself, so whether that's stages per day or [pound sum] per day or foot or anything.
<UNK>, we're constantly looking at how we can improve overall cycle time from drilling through completions.
And we're very pleased with the level of efficiency we get, especially on multi-well pad development and doing zipper fracs on these crews today as focused as they are on efficiency.
We only get better each and every day.
And so in the Midland Basin, where we've got a strong track record of wells as we're doing multi-well pads, we're continuing to improve cycle times on stages per day or lateral feet per day and we'll continue to do that.
It's really focused on getting the right team of people, and that's why we really like this whole relationship between frac crews, wireline crews, pump down crews, all the logistical challenges around getting profit to the location, that last-mile delivery.
That all matters when it comes down to measuring cycle time for wells.
And of course, the quicker we do that, the more ---+ the faster we move oil production forward.
The new crew, it's got some growing pains with it, but it's not quite where the existing crew is.
But the relationship we have now, they're comparing themselves with each.
They're comparing themselves with themselves.
So Schlumberger understands what our expectations are.
They've set the bar pretty high with the first crew, and they're committed to getting the second crew to the same level of efficiency.
It will take them a couple of wells, a couple of pads, but we're happy with where they got started.
Thank you, and thanks, everyone, for thoughtful questions and for joining us this morning, and we'll look forward to talking again soon.
Thanks.
| 2018_CPE |
2017 | ABC | ABC
#Thanks, Steve, and good morning, everyone
We are now in the home stretch of our fiscal year 2017, and considering the healthcare environment that we operate in, we are pleased with our results after nine months
This morning, I'll provide a detailed review of our third quarter financial results, an update on our full year 2017 outlook, and then make some high-level comments around our thoughts for fiscal 2018. We finished slightly better than expected in the third quarter, with adjusted diluted EPS at $1.43, an increase of 4%
Despite some challenges in operating income in our Pharmaceutical Distribution Services segment, we are able to overcome these headwinds and still grow our adjusted EPS
I will review the segments a little later
Let's begin with our consolidated results
ABC revenues were $38.7 billion, up 5%, helped by solid unit volume growth across several of our businesses
As discussed in prior quarters, we again experienced a decline in year-over-year hepatitis C revenues of about 20%, causing a drag on our quarterly growth rate of about 120 basis points
The quarter's adjusted gross profit was down by about 1% to just under $1.1 billion
Our Other segment, which consists of global commercialization services and animal health, continued with its excellent growth
But this segment currently offsets the gross profit decline in our Pharmaceutical Distribution segment
Operating expenses, we continue to be laser-focused on spending in the right areas and leveraging our infrastructure
Overall, our OpEx was up about 2%
On a year-to-date basis, our positive expense trends have in part been related to effectively managing the opening days of several new distribution centers
As Steve mentioned, it was impractical to delay the openings any longer and we've now opened four state-of-the-art DC this year
The uptick in our third quarter operating expenses, including depreciation, is primarily the result of these openings
We will open one more DC in Q4 and the last two new DCs will open in early fiscal 2018. Operating income, our adjusted operating income was $471 million, down about 5%, with operating margins down 12 basis points due to the decrease in gross profit in our Pharmaceutical Distribution segment
Moving below the operating income line, income taxes, our adjusted income tax rate was 27%, down significantly from the prior year due to two primary drivers
The first tax item, as discussed on prior calls, we again recognize the benefit to income taxes related to the accounting rule change and share-based compensation
This benefit impacted our quarterly tax rate by roughly 2%
In the second and third quarters, our share price has been higher, which has resulted in a large number of employee exercises
Given the nature of the tax benefit, it is very difficult to forecast the timing of exercises and the ultimate impact to our tax rate and financials
The second tax item, in conjunction with our filing of our fiscal 2016 federal tax return, we finished our combined R&D credit and Section 199 tax projects with excellent first time results
We mentioned this work on our call last quarter
The tax projects contributed a tax benefit to the current quarter
However, about $10 million of the tax benefit was related to prior fiscal years, and is a discrete one-time item
Consequently, we had a non-recurring 2% tax rate benefit in the quarter or a positive $0.05 benefit to our adjusted EPS
Our adjusted net income was up roughly 2% to $318 million
We continue to find ways to grow despite headwinds and an evolving healthcare market
Our adjusted diluted share count decreased nearly 7 million shares or 3% year-over-year to 222 million shares
We did not repurchase shares during the June quarter as we repaid our $600 million of senior notes upon maturity in May
We have about $890 million remaining on our Board authorized share repurchase program
Wrapping up our consolidated results
In the June quarter, we had negative free cash flow of $354 million which was lower than anticipated due to its lower wind-down of extra inventory related to holiday timing and, to a lesser degree, the working capital impact from the new Prime JV business, which had a heavy brand drug inventory and sales mix
Our year-to-date fiscal 2017 free cash flow was a negative $248 million
Let me highlight, we continue to expect meaningful positive free cash flow in our Q4, similar to the cash flow performance we've had in Q4 of our last two fiscal years
We ended the quarter with roughly $1.3 billion in total cash, a little lower than normal due primarily to repaying the May senior notes and the inventory timing I just mentioned
Our total cash amount we held – of the total cash amount we held about $800 million offshore
This finishes our review of ABC consolidated results
Now let's turn to segment results, starting with Pharmaceutical Distribution Services
So segment revenues were $37 billion, up a solid 5%
Our independent customer segment had very good organic growth at nearly 7%
We continue to see the benefits of working with our customer buying groups to improve overall compliance rates, which has translated into reduced leakage
We have been able to demonstrate value to our pharmacy customers when they source a higher percentage of their generics from us
Because of these efforts, the business had another solid quarter of generic volume growth
Our ABSG specialty business, which primarily focuses on physician-administered drugs, had another strong revenue quarter, with growth of just over 10%, driven mostly by increased volumes
This is the 14th consecutive quarter of 10% or better revenue growth
We continue to see excellent revenue growth primarily in oncology, but also in several other therapeutic classes
Let me highlight one more time that the Distribution segment had a revenue headwind of about 120 basis points due to lower hepatitis C sales in the quarter
The good news, our hepatitis C revenues on a sequential basis, so between our March and June quarters, were flat
This is the first time in the last eight quarters that sequential hep
revenues did not decline
Segment operating income was $377 million, down about 9%
This segment benefited from the continued growth in our businesses that primarily service physician practices with specialty drugs, with income up just over 10%
The segment also benefited from overall brand and generic volume growth
However, the overall decline in the segment's operating income was caused by three meaningful headwinds
First, on the drug pricing side, the 2016 June quarter was the last quarter we had instances of impactful generic drug price increases
We had a nominal contribution in the current June 2017 quarter
To a lesser degree, we also had a headwind from lower brand inflation in the current quarter
Second, we renewed a key contract with Kaiser last year
This repricing was a gross profit headwind in the June 2017 quarter
As we enter the September quarter, this contract renewal headwind is now anniversaried
And the third item, we continued to experience lower throughput or shipments in our PharMEDium business
The business team is working diligently to complete the QC process
In addition to enhancing compliance, this will also lead to a superior quality offering and provide a further competitive advantage in the market
So, in summary, the segment continued to make progress in several key areas
But positive contributions weren't enough to offset the headwinds this quarter
We can now move to the other segment
This segment includes World Courier, AmerisourceBergen Consulting and MWI, businesses that focus on global commercialization services and animal health
In the June quarter, revenues reached a record $1.7 billion, up 11%
Our MWI and consulting businesses had revenue growth just over 10%
Our World Courier business had a record number of shipments in the quarter
And on a comparable basis, revenue growth in U.S
dollars was 7% or 10% in local currency
To provide a little more color on MWI we had a strong revenue quarter with comparable U.S
companion animal revenue growth of 11%, primarily from sales of new innovative drugs, organic growth with existing customers, and the addition of new customers
From an operating income standpoint, this segment had an excellent quarter with operating income of $95 million and a growth rate of 15%
We are especially pleased with the results this quarter of World Courier and Lash and Xcenda consulting businesses
This completes our segment review
Let's move to our full year fiscal 2017 expectations
With one quarter to go we are updating our guidance
Revenues, we are revising the full year growth rate to a range of approximately 5%
At this point in the year, we have a better understanding of market and customer dynamics, related manufactured drug pricing trends and scrip growth rates
Let me highlight it's a bit of an unusual year that we will have two less business days in fiscal 2017 versus the prior year
Moving to operating expenses, we continue to expect an overall increase of 2% to 3% in full year OpEx
Next, operating income
We now expect operating income dollar growth to be relatively flat versus fiscal 2016, primarily due to lower revenue growth, a slightly lower contribution in Q4 from brand drug price increases, and a slightly lower contribution from PharMEDium
Income taxes
Based on favorable year-to-date tax benefits and initiatives, we now expect that our full year tax rate will be approximately 31%
Adjusted EPS
We are now revising our full year guidance to a new range of $5.82 to $5.92, which reflects growth of 4% to 5% versus fiscal 2016. And we currently expect to end the year in the mid to upper half of that range
Free cash flow
We now expect to finish the year between $750 million and $1 billion in free cash flow
The $260 million litigation reserve that we highlighted in our press release and 8-K this morning is likely to be paid by September 30. Additionally, and to a lesser degree, we expect our cash flow to be negatively impacted by the investments related to onboarding the Prime JV business and lower overall revenues
That concludes our discussion on our full-year fiscal 2017 financial guidance
Looking ahead, while we have a strong handle on our business, our corporate process moving forward will be to provide comprehensive financial guidance at the end of the fiscal year
Our guidance needs to be informed by and reflective of the formal output of our completed business planning process
As Steve discussed, we are also working through our new ABC organizational structure
Consequently, we are still in the early stages of our fiscal 2018 business plan process
However, we are in a position to share some select commentary on headwinds and tailwinds
Starting with the headwinds
First, pricing
For brand inflation, based on the actual pricing activity to date, it's likely that the inflation rate we modeled for fiscal 2018 will be at the low end or slightly below our fiscal year 2017 range
For generic deflation, it's important to remember that deflation is a headwind that we have to work to offset, primarily achieved by increasing volumes
We have yet to see generic deflation ease from its current high single digits, where it's been for about three quarters now
We are still evaluating the probability of this continuing into fiscal 2018 as part of our planning process
Next, operating expenses
As mentioned previously, we decelerated the opening of our new DCs, minimizing the fiscal 2017 OpEx impact
This strategic phasing means that the fiscal 2018 related DC OpEx will be considerably higher
It's likely there will be a mismatch of new DC OpEx with any associated incremental revenues
Also, in relation to our reorganization, we are currently evaluating possible investments in IT systems
These investments may yield organizational benefits and efficiencies over time but would be a short-term headwind
Overall, we will be diligent in our strong management of OpEx, but we do anticipate a higher OpEx growth rate in fiscal 2018. The last headwind to call out at this point is taxes
We will see an increase in our overall tax rate as we expect the favorable benefit from employee option exercises to slow
Additionally, we have to lap certain one-time discrete tax benefits recognized to-date in fiscal 2017. And finally, as a reminder, the addition of any significant new U.S
business, like Walgreens' pending acquisition of the Rite Aid pharmacies, would change the mix of our pre-tax income and increase our overall tax rate
Let's close the fiscal 2018 discussion with tailwinds
First, revenues
Our customer base, which includes our strategic partner relationships, has us well-positioned to continue to grow in today's healthcare environment
This, combined with our leadership in specialty, differentiates us and will enable strong top line revenue growth
The next tailwind, compliance rates for our independent customers
We have made steady progress during the last 12 months reducing leakage and improving our market share
We expect to make further progress in fiscal 2018, but likely at a slower pace
Let me point out once compliance rates reach higher levels, it becomes increasingly difficult to capture incremental volumes especially since we aren't willing to sacrifice fair compensation
And the last tailwind, PharMEDium
As I mentioned, we anticipate that we will complete the quality initiatives this fiscal year
Customers are already seeing the value in our superior quality standards
We expect sales volumes and growth rates to ramp during fiscal 2018. Wrapping up my comments this morning, at this point, we expect the healthcare environment will be similar in fiscal 2018 to this year
We have shown our ability to execute within the current market
Therefore, we are uniquely positioned and we remain confident in our ability to grow our business in the coming year
As always, we continue to focus on achieving our core objectives: delivering outstanding service, solutions and value to our customers and also delivering long-term value to our shareholders
Thank you, and here's <UNK> to start our Q&A
Yeah, I would just add, Bob, quickly, I think it's important to remember, our deflation basket is unique to ABC
We may look at it differently than others
How we exclude launches, launches that lose exclusivity, and after a certain period, we exclude those
So again, everybody looks at us slightly differently
We have more than 15,000 SKUs broad-based
But as Steve mentioned, we're on the high end
And I think, it's important that for us, as we talk about fiscal 2018, it's still an open item
It's clearly one of the macro items that we're evaluating and is critical in terms of our plan assumption in 2018. So we are watching it and monitoring it
Yes, I'll – good morning, <UNK>, I'll start and Steve can jump in
I mean, we think it's really important to have our planning process complete and make sure that we're transparent and it's very comprehensive
We're just not in a position yet to do that
We have to finish our planning process
There are just a lot of moving parts
So at this point, we felt it was appropriate to call out headwinds, items that we think – headwinds and tailwinds, items that we think that we're monitoring, that are impactful
We're contemplating that we need to work through
That's really the best we can do at this point
But I would say also we're also working through the new organizational structure
So I think in a lot of ways, there are just several moving parts right now
And hopefully, we'll have better clarity on our top line revenue
I mean, I – just one more thing I'll say quickly is that revenue drives the P&L, it drives the cash flow
We need to spend more time looking at our top customers' revenue forecast
It could be organic or inorganic product mix
Pricing, that's critically important
So we still have a fair bit of work to do
And when we're prepared, which is at the end of the year, we'll provide full complete guidance
Just quickly so we can move along, I think, <UNK>, for 2017, one of the bigger impacts on revenues will just be in brand inflation
We do a large percentage in brand business and having that inflation move to the lower end of the range at just the sheer amount of dollars that we do is a big headwind, and that was a little bit of a moving target this year on where brand inflation would end
As we look forward to 2018, I mean I think our largest customer, strategic partner, Walgreens, I mean they're ramping up certain aspects – certain commercial business activities
And just like Prime, we'll have that commercial business for a whole year next year in 2018, so we'll have that benefit
But as we contemplate fiscal year 2018 and good solid revenue growth, we're not factoring in acquisitions or inorganic growth
It's just the full year impact of the organic growth
Yeah, I mean, I would say certainly, we're behind a little bit in terms of where we are for the year, where we thought we'd be for our third quarter, but most of that is timing and will reverse in Q4. We still expect pretty solid free cash flow for fiscal year 2017. I think it's important to really stress that
Just from a foundational standpoint, nothing's changed
We are a little bit lower in free cash flow this year in 2017 than we expected originally, but the core cash flow metrics are still all in place
So, I mean in terms of next year, I wouldn't say to call anything out
We expect we're still committed to our target
I think that's really important
We're still committed to our target of free cash flow add to about approximately 125% of adjusted net income, given the mix and how we expect to grow generics
So, I mean, I think, that's a real positive point to make to everybody
Thanks, <UNK>
Again, my comments that from earlier were definitely that we would see OpEx growth, I mean, we're going to be very mindful and do what we can, but we're going to have the full year impact of the DCs open
Some will still have the new DC and the old DC
We mentioned ABC Order, Steve mentioned Fusion, I mean, these are fairly large systems that, again, as you think about it, we bring on a new system and we still have the expense of the old system
So in many ways next year, we have some duplication and we don't have the full year benefit of gross profit or savings or revenues
So, there is – I call that a little bit of a mismatch
I don't think we're ready to tell you specifically, but we just know that we've done a terrific job this year and we're going to be up 2% to 3%, which is just outstanding for the company
We're just telling our investors in the sell side, as you think about 2018 in your model, just make sure you contemplate that it's going up because of these items
Yeah, let me just jump in here
The change in our cash flow guidance, free cash flow guidance for 2017 is strictly due to, one, the litigation reserve which we highlighted this morning, $260 million that we fully expect to pay and fund by the end of the year
And then almost equally is really the investment in the Prime business, which is heavy brand, and the cash conversion cycle just isn't as optimized as generics
So that's really the change of why we had to drop the free cash flow guidance for full year fiscal 2017.
Steve, I'll jump in and take the last one just about OpEx
Again, Ricky, I just can't be real specific at this point
We're still working through all that
But, I mean, year-to date, we were – through March, through six months, we were relatively flat on OpEx
This quarter, we were up 2%
In Q4, it's certainly going to be higher in order to glide into the 2% to 3% that we said for the year
So I mean – and again, a lot of the duplication from 2017 is coming in the second half or even late in the year
So, I just – the point is, you need to – as we communicate out externally and you model, you just – you need to just be thoughtful like we're being, in terms of next year it's going to be a little bit higher, certainly, as you think about our OpEx trend
Yeah, I'll jump in and say, <UNK>, I mean, Steve mentioned it, that capital deployment is critically important to us
It's certainly part of the equation to get back to that aspirational mid-teens
We – our balance sheet, we're in terrific position with our balance sheet
We've worked hard to do that, and we talked about earlier on the call, we expect to get back to a very solid free cash flow in 2018 and beyond
So we're going to be positioned very well to deploy capital to grow our business long term
Yeah, I don't – <UNK>, thanks
I mean we listed out the headwinds
We didn't necessarily put them in any type of rank order
There are items that we're looking at and evaluating, so I'd prefer probably not to evaluate them
But again, we're being transparent, we let you know what we're thinking about
In terms of generic deflation, certainly, there's a top 10 list that has higher deflation
The deflation that we see in our basket is maybe a little bit more broad-based
So, again, I think, we – in our comments I think we expected not to ease, at least where we're at right now, we don't think anything will change
We're still saying it's going to be in that 7% to 9% and not easing and not getting worse
So that's positive, it's stable, but still in that 7% to 9%
Oh, no, I – Steve, I just thought it's important to – I think, <UNK>, maybe you're asking just about a headwind or impacts, and we wouldn't expect – as we convert those over, we wouldn't expect to have a headwind and convert those – convert the economic or the fee-for-service
We provide substantial value to manufacturers and we believe we should be fairly compensated for that
And that's what we're always working to do
| 2017_ABC |
2016 | MASI | MASI
#Thank you, hello everyone.
Joining me today are Chairman and CEO <UNK> <UNK>; and Executive Vice President of Finance and CFO <UNK> de <UNK>.
This call will contain forward-looking statements which reflect Masimo's current judgment including certain of our expectations regarding fiscal 2016 financial performance.
However, they are subject to risks and uncertainties that could cause actual results to differ materially.
Risk factors that could cause our actual results to differ materially from our projections and forecasts are discussed in detail in our SEC filings, including our most recent Form 10-K and Form 10-Q.
You will find these in the Investors section of our website.
I will now pass the call to <UNK> <UNK>.
Thank you <UNK>.
Good afternoon and thank you for joining us for Masimo's first quarter 2016 earnings call.
Our first quarter results were above our expectations.
Growth for rainbow in Q1 was especially strong, rising by 39% to nearly $17 million, a growth rate influenced by the final portion of the initial large Middle East order.
Overall, our total product revenues grew by nearly 11% to $163 million.
Here are some highlights from our first quarter.
We had continued strong demand for our technology as we shipped 46,300 SET and rainbow SET oximeters, excluding our handheld and finger pulse oximeters.
Our OUS sales grew by approximately 24% and 28% on a constant currency basis.
We also repurchased approximately 1.1 million of our shares.
Our Q1 2006 (sic - see press release - 2016) GAAP earnings per share were $0.53, up from $0.38 in the prior-year quarter, an increase of approximately 39%.
On the product side, we were happy to have received FDA clearance for the full featured version of Root with noninvasive blood pressure and temperature monitoring.
Increasingly, the utility and appeal of this innovative product is reaching our customers.
Our stronger-than-expected Q1 results and our continued positive outlook for the rest of 2016 are causing us to be more optimistic about the year and hence, we are increasing our 2016 financial guidance for product revenues, gross product margin, and earnings per share.
Next, <UNK> will review our first quarter financial results in more detail and also provide updates to this new financial guidance for 2016.
I will then provide some additional detail on our achievements and expectations.
<UNK>.
Thank you, <UNK> and hello everybody.
Our first quarter 2016 total revenues were $171.2 million, which was up 10.8% from $163.3 million in the prior year period.
Similarly, total product revenue rose by 10.8% or 11.7% on a constant currency basis, versus the first quarter of 2015.
Our Q1 2016 product revenues were reduced by $1.4 million, due to the effects of foreign exchange rate movements.
Product revenues for Q1 exceeded our expectations, due to both the impact of the late flu season and the acceleration of the final portion of a large Middle East order in Q1 ---+ an order that we expect to recur in future periods.
Q1 2016 rainbow product revenue totaled $16.9 million, up by 39.2% from $12.12 million in the prior-year period.
The strength in rainbow revenues was largely due to the impact of the Middle East order, which also contributed to our growth in single patient-use rainbow sensors.
Our Q1 SpHb revenues surged by 164%, to $6.1 million versus $2.3 million last year with a substantial portion of this increase also attributable to the Middle East order.
Our worldwide end-user or direct business, which includes sales through just-in-time distributors, grew 12.7% in the first quarter to $140.9 million versus $125.1 million in the year ago period.
Our direct business represented approximately 86% of total product revenue in the quarter versus 85% in the prior-year period.
OEM sales comprised the remaining 14%, and rose by 0.2% versus the prior-year period.
By geography, total US product revenue increased 5.8% to $113.5 million, compared to $107.3 million in the same quarter of 2015.
Our Q1 OUS product revenues of $49.8 million rose by 24.2%, versus $40.1 million in the same prior-year period, and up 27.6% on a constant currency basis.
In constant currency, OUS year-over-year revenue growth rates were the highest in the EMEA and Japan regions.
OUS revenue has represented approximately 30% of total Q1 product revenues or 31% on a constant currency basis, which was up from 27% in the prior-year quarter.
Our first-quarter 2016 GAAP gross profit margin was 65.1%, level with the prior-year quarter.
Our Q1 2016 financial results, for the first time ever, will no longer include the financial results of our variable interest entity or VIE, Cercacore.
This change, which we have discussed in our prior 10-Qs and 10-Ks and which we will discuss in a little bit more detail later, included the impact of reducing our Q1 GAAP gross profit margins, as well as our total GAAP operating expenses.
However, as we have noted in the past, this change will have no impact on Masimo's reported earnings per share.
In fact, had we continued to consolidate Cercacore, our Q1 adjusted product gross margins would have been 66%, up nearly 100 basis points over our original expectations for Q1.
This was due primarily to the favorable product mix shift resulting from a higher percentage of our total product revenues coming from adhesive sensors versus capital equipment than we had expected.
Reported first-quarter 2016 total operating expenses were $76.9 million, an increase of $1.1 million or 1.5% versus $75.7 million in the prior-year period.
As I just noted, our Q1 2016 operating expenses were reduced by approximately $1.8 million due to the deconsolidation of Cercacore.
Adjusting for the impact of this deconsolidation, our adjusted operating expenses would have increased by approximately 4%.
In addition, as a reminder, our year-over-year operating expenses were also lower due to the impact of the two-year medical device tax suspension.
While we still intend to reinvest those tax savings over the next two years, the amount of the new incremental investment in Q1 was relatively small.
Regardless of the reduction in operating expenses due to both the deconsolidation of Cercacore and the impact of the medical device tax suspension, the rather modest year-over-year increase in operating expenses continues to demonstrate our commitment to exercising tight control of expense growth.
Specifically, our SG&A expenses were $62.5 million, an increase of $1.7 million or 2.8%, while our R&D spending was $14.4 million, a 3.8% decline versus the year ago period, due primarily to a small reduction in clinical trial and engineering project related expenses.
First-quarter 2016 operating income was $37.3 million, compared to $27.4 million in the prior-year period.
This significant increase in year-over-year operating income is the result of all of the factors I previously noted, including strong product revenue growth, higher-than-expected product gross margins, and continued operating expense control.
Q1 2016 nonoperating income was $500,000, compared to $200,000 in the prior-year period.
Importantly, the $500,000 in Q1 income includes approximately $660,000 in net interest expense related to borrowings under our line of credit.
The remaining benefit in other income is due largely to the favorable foreign-exchange translation impact of movements in foreign exchange rates from January 2, 2016 to April 2, 2016 on our OUS local currency denominated balance sheets.
Our first-quarter 2016 effective tax rate fell to 27.1%, down from 28% in the same period last year and below our expected rate of approximately 30%.
This lower than expected Q1 2016 effective tax rate was due to our decision to early adopt ASU 2016-09, the new accounting guidance regarding the tax reporting of gains resulting from the exercise of stock options.
As you probably know, the new guidance, which came out on March 31, 2016, essentially shifts the movement of the tax gains and losses from equity into the P&L through the quarterly effective tax rate.
This is considered a discrete benefit in the quarter and as a result we expect our effective tax rate, absent any other discrete items, to continue to be approximately 30% for the remaining 9 months of the year.
Our average shares outstanding for Q1 was 51.9 million, down from 54 million in the year ago period and down from 52.9 million in Q4 2015.
This decline was due mainly to the impact of our Q1 stock repurchases partially offset by stock option exercises.
Recall that in Q4 2015, we repurchased approximately 600,000 shares, bringing our total six-month repurchases to 1.7 million shares.
First quarter GAAP net income was $27.6 million or $0.53 per diluted share, up 39%.
Included within this amount is a $0.02 per diluted share benefit related to the discrete Q1 2016 accounting change related to the stock option exercises.
Just one final comment regarding the deconsolidation of Cercacore.
As you will recall, Cercacore, although a completely separate company spun off from Masimo in 1998, has been consolidated into Masimo's financial statements for over 10 years.
This was done to comply with generally accepted accounting principles.
Over the past couple of years, a variety of changes have occurred within the Cercacore business environment, including a recent capital infusion.
As a result of these changes, the GAAP literature no longer requires that Cercacore be consolidated.
We also, though, wanted to be clear that while we are reporting our Q1 2016 financial results on a deconsolidated basis, our prior-year Q1 2015 financial statements, again required per GAAP, are presented in the same manner in which they were presented in last year.
So as a result, when comparing year-over-year quarterly product gross margins or operating expenses, it is an apples and oranges comparison.
However, what is consistent is that the consolidation and now the deconsolidation of Cercacore has never had any impact on Masimo's net income and diluted earnings per share.
As of April 2, 2016 our days sales outstanding was 52 compared to 46, as of January 2, 2015.
Over the same period, our inventory turnover declined slightly from 4.2 to 3.7.
Total cash and cash equivalents as of April 2, 2016 were $139.9 million, compared to $132.3 million as of January 2, 2016.
During the quarter we generated $18.8 million in cash from operations, $2.6 million from stock option exercises, and borrowed an incremental net $40 million on our line of credit.
These funds were used in part to repurchase approximately $48 million in stock in the period.
Now I would like to update our financial 2016 guidance, which is based on the best information we have available to us.
We are now projecting our total fiscal 2016 GAAP revenues to be approximately $677 million, including $647 million in product revenues, up from our prior estimate of $640 million.
We are maintaining our projection for $30 million in royalty revenues.
We continue to expect 2016 GAAP revenues for rainbow to be approximately $68 million.
We now expect, after the deconsolidation of Cercacore, for our new annual GAAP 2016 product profit gross margins to be approximately 64.7%, down from the prior GAAP guidance of 65.5%.
However, it is important, as I alluded to before, to remember that the impact of the Cercacore deconsolidation was to reduce the prior GAAP guidance of 65.5% by 110 basis points.
In other words, our prior gross profit margin guidance would have been 64.4%.
Therefore, in reality, we're actually increasing our full year gross profit margin guidance from what would have been 64.4% on an adjusted basis to the current 64.7%, primarily due to the stronger-than-expected Q1 2016 gross profit margins.
We now expect, after the deconsolidation of Cercacore, for our new fiscal 2016 operating expenses to be approximately $312 million, down from our prior guidance of approximately $317 million.
This $5 million decline is due to the elimination of approximately $7 million in Cercacore operating expenses, offset slightly by higher Q1 2016 operating expenses that we incurred, which were consistent with the higher-than-expected Q1 2016 product revenue.
Despite the 27.1% effective tax rate in Q1 2016, as I noted earlier, we expect our tax rate for the remaining nine months of fiscal 2016 to be approximately 30%.
We also continue to expect that our quarterly other expense will be approximately $1 million per quarter, due mostly to interest expense tied to borrowings under our line of credit facility.
We are projecting that our average quarterly weighted shares outstanding for the rest of fiscal 2016 to be approximately $52 million to $53 million.
As a result of all these changes we are now expecting our 2016 GAAP EPS to be approximately $1.83, up from our prior estimate of $1.69 per share.
With that, I will turn the call back to <UNK>.
Thank you, <UNK>.
Thank you very much.
We have started 2016 strongly, and we're excited about our prospects for the rest of the year.
As you just heard from <UNK>, we have raised our projections in response to a stronger pace of business.
The pace expansion for our installed base remains steady, while the acceleration of growth for rainbow and new product sales gives us confidence that we will be able to grow our top line at a higher rate than originally projected.
Our continuing ability to win new hospital conversions to Masimo SET pulse oximetry, further reinforces our belief that we will grow sales faster than the pulse oximetry market.
We attribute this strong demand to the proven clinical superiority of our technology for improving the quality of care while reducing cost of care.
A key facet of our growth is the contribution we are realizing from newer products.
Good examples of our success can be seen in the growth for Root with capnography, Root with SedLine brain function monitoring, as well as our RAM, respiratory acoustic monitor, which had sales growth of greater than 40%, 50%, and 100% respectively in Q1.
During Q1 we were delighted to see two new publications that support the use of our latest rainbow parameter ORI, which is Oxygen Reserve Index.
In a prospective study published in Anesthesiology and conducted at Children's Medical Center in Dallas, Dr.
Peter Szmuk and colleagues evaluated whether ORI could provide a clinically important warning of impending desaturation in pediatric patients with induced apnea after pre-oxygenation.
The researchers concluded that during prolonged apnea in healthy anesthetized children, the ORI detected impending desaturation in median of 31.5 seconds before noticeable changes in SpO2 occurred.
Another study published in Anesthesia and Analgesia and conducted at Loma Linda University by Dr.
Richard Applegate, involved patients in which arterial catheterization and intraoperative arterial blood gas analysis were planned during surgery and showed similar findings.
The conclusions of the study included a finding that suggests that intraoperative ORI can distinguish PaO2 between 100 and 150 mmHg when SpO2 is greater than 98%.
In addition, decreases in ORI to near 0.24 may provide advanced indication of falling PaO2 when SpO2 is still greater than 98% and above the PaO2 level at which SaO2, which is arterial oxygen saturation, declines rapidly.
Shifting to our financial performance, our plans to achieve earnings growth that is twice the rate of sales growth are solidly on track for 2016.
In fact, our Q1 product revenues rose by approximately 11% while our diluted earnings per share rose by approximately 39% including the $0.02 tax benefit from the new accounting rules that were previously noted by <UNK>.
While we do not anticipate this continued level of earnings-per-share year-over-year quarterly growth, our new guidance does now suggest top line product revenue growth approximately 7% and diluted earnings per share growth of 18%, still more than twice the rate of sales.
As we have previously described, the major factors contributing to increased leverage in our P&L include: consistent year-over-year sales growth, continued adjusted year-over-year gross profit margin increases resulting from the value engineering investments that began a few years ago, and continued controlled growth in operating expenses.
Our outlook for 2016 therefore continues to be very positive as we head for what we expect to be a very strong finish to our 10 year plan in 2017.
A plan that is built on our mission to improve patient outcomes and reduce the cost of care by taking noninvasive monitoring to new sites and applications.
With that we will open the call to your questions.
Operator.
Certainly.
First of all of this Middle East order, we discussed it I think last quarter and we said that we expected it to be in the range of $17 million, which about half of it we got in 2015 and the other half we were expecting between Q1 and Q2 of this year.
However, we ended up, due to their demand, accelerating both and we shipped it all in Q1 of this year.
The good news and the reason we expect this business to recur, is we've also recently won the tender again for that same business.
So that is the size and the timeframe of what we expect going forward.
Sure.
As I said, they went up from 46 in the prior quarter to 52.
And ironically as we were just talking about, all of that is attributable to slightly longer terms that we made available related to this large initial Middle East order.
All of that is related to that one contract and we expect that the repayment plans for that will commence sometime in Q2 and will continue through the rest of this year.
First of all we believe our growth rate in the US will be in the upper-single digits, which is we think 2 to 3 times the normal pulse oximetry growth in the US.
As far as your second question, O3 and ORI ---+ both products have not yet been cleared by the FDA so they are currently not in our projections for US business.
We do hope they will get approved this year and once they do, depending on when it does, we may even adjust our revenue plans for the US.
Because they are both very successful products that we rolled out in Europe and Japan and the customer demand has been very high, so we hope the same thing will happen in the US.
Sure, I think as we discussed at the beginning of the year, we decided to consolidate the blood management team within the normal sales organization.
But what we did, instead of just having them be part of the normal account management, we created the ORICU sales team, which not only had noninvasive hemoglobin and PBI in their bag, but they also would have SedLine capnography as well as, once the FDA clears it, O3 and ORI.
And then we also created a special sales force to focus on the post surgical ward.
As far as the funnel for that business, it still remains strong and, as you notice, our revenues picked up nicely, although some of that was from the Middle East order that we talked about ---+ but it is looking very good.
We have some very large customers who are seeing very good results clinically with SpHb and TDI and we expect that will convert to accelerated adoption of the products.
I think also the other thing, <UNK>, I want to note is, you may have seen the announcement from Phillips that they did launch their high-end monitors with rainbow.
I think that will also be a benefit because about 60% of ORs and ICUs, if not in the whole world, at least in the US, are Phillips monitors and for them to now have integrated rainbow, it should make it easier for customers to do what they want to do instead of having an additional product in the room.
Thank you <UNK>.
<UNK>, we are constantly looking at opportunities to repurchase the stock.
There are various ways, as you know, to do that.
We do have various structures in place that will ensure the continued repurchase of stock at certain levels.
And then we give ourselves the opportunity to also strategically enter the market any time we think the opportunity is appropriate.
So yes, absolutely the intention of our expanded credit facility, that we put in place earlier this year, is intended to facilitate that kind of activity should the opportunity present itself.
Sorry, <UNK> ---+ the $5 million delta.
I think the two biggest areas in R&D, as I noted in the comments we just made, those were reduced due to some selective spending in areas of clinical activity and other product-related expenses.
The change, if you will, year-over-year in SG&A, as I alluded to in the prepared comments, really are due to a couple things.
Number one, the fact that we are deconsolidating Cercacore, so as I indicated, that was ---+ that had the effect of reducing Q1 operating expenses by about $1.8 million.
We then also of course did not begin the accelerated reinvestment of the med device tax costs that were in prior years' SG&A numbers ---+.
We tried, by the way (laughter).
We've tried but the recruiting is not something that happens overnight.
Right.
So those, by themselves I think represent the greatest reason for, as I said on the call, the flatness, if you will, in year-over-year operating expenses.
Because, while we won the tender for the exact same products, we will not learn about the full scope of the business until June.
Last year when we won the tender and it was announced in June, the revenues did not begin until towards the end of Q3.
So it is hard to understand how that will potentially impact us.
But I think more broadly speaking, <UNK>, we are trying to be conservative with our guidance so that we don't disappoint.
We hope we will continue meeting and maybe beating ---+ as you know in the last five quarters, we have beat our revenue guidance and earnings guidance and we raised it each quarter, and we hope to continue to do that.
But at least we feel good about the numbers we've given you ---+ that we should meet them.
Thank you <UNK>, thank you very much.
I think it's a busy earnings season so I think that may be our last question.
I don't know if, <UNK>, if you have another follow-up question you want to ask.
If not, I will adjourn our call.
It looks like there are no other questions so we'll go ahead and end this call.
Thank you so much for joining us for our Q1 earnings call, we look forward to our next one in a few months, thank you very much.
| 2016_MASI |
2016 | HST | HST
#Yes, I would agree with you that we certainly ---+ as we looked at our results and compared them to what we saw in the industry, we were very pleased to see the occupancy growth that we had.
Now, some chunk of that was due to the fact that there were rooms out of service, but I think largely we attribute it to the fact that we had very good leisure demand.
Perhaps not in Florida, but in pretty much all of our other markets.
And on a relative basis to the industry, I suspect our group demand was fairly strong, too.
So, as we look through the rest of the year, given the fact that we've got a very strong group base, we are expecting to see ---+ I don't know that we would necessarily expect to see occupancy growth at the same rate going forward as we have right now.
We probably would expect to see our RevPAR growth lean a little bit more towards rate growth going forward, just because these next couple quarters are months where we start off with a really strong occupancy base.
But we would still expect to see some gains in occupancy throughout the rest of the year.
We are always tempted.
But I guess what I would say is that we were pleased with the way the first quarter played out.
I think that we took what we thought was an appropriately conservative perspective on RevPAR at the beginning of the year.
Our properties are more optimistic right now than we are.
But on the other hand is what was demonstrated in first quarter GDP is the economy's maybe not quite as robust as we all would like to see.
So, I think for right now, sitting where we are and feeling very comfortable with where we are, it was the right answer for us.
Yes, so I think what ---+ I don't know that we necessarily were commenting on tough comps in Q1.
I think what I was saying in my prepared remarks, and I will elaborate a bit, is that we have exceptionally strong group bookings in Q2 and Q3.
And those are months where we run at higher occupancy levels.
And it is what we have been seeing of late, is in general, when we are running at higher occupancy levels that seems to be when we have the best opportunity to push rate.
So that is why we feel pretty good about Q2 and Q3.
And I would confirm what you said, which is that today our group bookings for Q3 are the strongest that we have throughout the entire year.
Q4 is impacted by a number of things.
I think what probably matters most is the shift in the Jewish holiday, which will now impact October.
And secondly, the fact that this year's election will probably be one that most people want to pay attention to.
The net of those two things is we would expect less group business in the fourth quarter.
And then finally, the other reason why we expect the fourth quarter to be a hair weaker is the fact that November and December tend ---+ the second half of November and December tend to be lower occupancy months.
So what we experienced last year was that it was more difficult to push rate in those months.
We are expecting that same sort of a scenario will apply again this year.
Well, I am not going to try and speak for what other owners might think, but I guess I would say from our perspective, we see both positives and benefits from this.
I think what probably matters in some ways in the near-term, assuming that they navigate and we expect that they will, the challenges that exist around the integration.
When we compare our cost structures leaving out management fees, between Starwood and Marriott, right now Marriott ---+ if our Starwood hotels sat within the Marriott system, we would be able to save costs and improve margins.
So we are hoping that they execute as we expect they will, and that we ultimately get the benefit from that.
I think that the challenge that the industry in general has identified with the combination is that there will be a number of brands that will all sit beneath one family, under one company, and it will be important to be thoughtful about how to continue to distinguish those brands.
We look forward to working with Marriott in order to make certain that happens in a cost-effective manner.
Steve, it's a little hard right now for us to get a clear indication on how some of the booking direct programs were impacting us.
We do know that, in an effort to drive more bookings directly to the website, there were some ---+ there are some rate reductions.
I would say I think that's probably contributed to less growth in our transient rate than what we might have normally seen in the past.
Maybe and from that standpoint, a slight negative.
The flipside is, of course, is that when you look at what gets through the bottom line, the cost of booking a reservation directly with an operator is significantly cheaper than if it were to happen through one of the OTAs.
So we are certainly supportive of the overall strategy and we look forward to working with them to fine tune that as they move forward.
As it relates to the asset sales, I think that market is clearly not as robust as it was last year.
We do ---+ as I indicated in my prepared remarks, in addition to the assets that are under contract at this point that we identified in the press release, we have another $0.5 billion of activity that we are working hard on and I would feel we are making good progress on.
At this point, we would expect to attempt to sell additional assets in the second half of the year, but a lot of that will depend upon how we see the market evolve over the course of the summer and what the outlook seems to be for the second half of the year for transaction activity.
So I feel relatively good about where we stand right now.
I think we certainly were one of the first in the industry to begin to look to sell assets.
We did not just come up with this idea in the last 6 to 8 months.
And I think we're made great progress overall on the sale program.
I am hopeful that we will be able to keep going.
But at this stage, I think we will have to take a little bit of a wait-and-see attitude for the second half of the year.
I would guess it's a little hard to judge that in a vacuum.
But I think we are probably about halfway through.
My guess is we have implemented more than half of those measures already.
And I would also tell you that we are not ---+ just because we are ---+ when I say we are halfway through, we are halfway through the first, call it, 20 to 25 hotels that we ran the program on.
We are operating on a scaled down basis; been executing the program on some of our mid-sized hotels.
The benefits there will not be as significant in a total dollar context as they were on the larger hotels, simply because the hotels are smaller.
But as we work our way through getting the benefits from this, part of the structure of this program is that there is a bit of a cost-sharing relationship with the company that is helping us with that.
And so, part of what we are ---+ the second year of the benefit we don't really pay for anything.
Consequently, there is an opportunity for further pickup there.
So, I would say we have certainly gotten meaningful benefits.
We would expect to continue to get more going forward.
<UNK>, it's probably a little early for us to try to have any informed comment on that.
We have talked with them about some of their preliminary thoughts.
And it certainly ---+ the issues that you are identifying and the concerns that you are identifying are concerns that we have.
But specifically how they are going to approach that, they have not given us any details on that yet.
So, I am sure we will learn more as they move forward with consummating the merger and then working towards the integration.
But they are not at the point now where they have given us significant detail on that.
Generally, the answer is that we have not seen corporations pulling back on the businesses that they already had on their books.
There were some markets where we saw some slight ---+ we saw some reduction in production compared to prior levels on smaller groups.
But the larger ---+ we are not seeing any ---+ certainly not seeing any trend of significant cancellations.
We are not seeing a trend of significant attrition compared to the levels that might have been under contract.
It was interesting on the food and beverage side, just because that is something that we are clearly watching in this area, we actually saw in the first quarter that our spend for our food and beverage spend per group room night actually was up somewhere between 2.5% and 3%, which we viewed as fairly favorable, especially given some of the overall economic headwinds.
That is always a little tricky to get information that we fully trust on that area.
Our sense was that we were still down in the first quarter on international travel.
Now, I would say we were fairly encouraged by some of the arrival data that we have been tracking, which goes through February, which showed that Europe was up mid-single digits, that China was up nearly 20%.
Japan, actually ---+ arrivals from Japan actually trended up, which was a nice change compared to what we saw last year.
The two major inbound markets that we saw were down from the standpoint of air arrivals were Canada and Brazil, which were both down about 5%.
So those were two markets where ---+ I think in Brazil it is probably an economic situation; in Canada I think that's really being hit by the dollar.
There was some discussion that ---+ actually at our recent GM's meeting, that there was a feeling that we may start to see international improve in the summer, both because of some better circumstances in some of those countries, and also the fact that ---+ if the US dollar does not continue to strengthen, then the year-over-year change in the dollar is not as dramatic as what we saw in 2015.
But that is on the come.
We don't know whether or not that is actually going to happen.
I think to answer the last part of your question first, I think that the group activity that we have is very strong.
And of course, as you know, it represents 37%, 38% of our overall business.
We have always been more significantly weighted to group than the industry.
I am comfortable that with that base, that to the extent that we saw a reacceleration in corporate transient, that we would ---+ that would not present a problem for us, because that would just be directly reflected in the form of higher rates that we would be able to charge transient customers.
And in fact, that is one of the reasons why we like to have a very solid group base.
I think if you look more broadly at why we are where we are and others may be where they are in terms of outlook, I think some of this is the fact that we do have a very diversified portfolio.
So, no market represents more than 11% of our EBITDA.
We have got some exposure to some lower supply markets, whether it's Phoenix, Atlanta, or maybe New Orleans, where we are looking at very strong growth this year out of those markets.
The fact that we have a significant chunk of our portfolio in some key resort assets I think also helps, because so far the trend we have been seeing this year is very strong leisure demand, and we hope that that continues.
Then lastly, back to the group point, the large number of big group hotels that we have, which contribute meaningfully to our profitability, they are all in good physical condition.
We've invested significantly in them, and this is the part of the cycle where they have an opportunity to truly perform, both at the top and the bottom.
So, as I stated in response to a question before, we continue to be conservative in our approach to guidance.
But we are ---+ we feel very comfortable with where we are right now based on the information that we can evaluate.
I guess what I would say is that we are certainly concerned, as anyone should be, that when two large companies that represent a significant chunk of your portfolio are merging, you hope that that merger happens and that integration happens as effectively and as quickly as it can.
We have no doubt, based on our conversations with the folks at Marriott, that they understand the importance of getting that right.
Not just for our own sake but obviously for their own success.
They are a talented group of people.
And the one thing that Marriott has always been very good at execution.
So, I don't want to underestimate the challenges that they face, but I certainly think that they are aware of what they are heading into and doing the best they can to manage that process.
At the property ---+ some of the ---+ there obviously is activity that happens above the property on the marketing side.
But I don't want to leave everybody with a sense that ---+ when you look at who is running the hotel on a day-to-day basis, those folks are on-site at the property.
As we just ---+ again, we had a meeting with all of our GMs a week ago, and it was clear that in talking to both the Starwood and the Marriott GMs, they are all very enthusiastic about this combination.
It dramatically improves their opportunity.
It will facilitate cooperation in an appropriate manner in various markets where we may have assets branded under both companies.
And I think in a lot of ways, at the property level, they are very fired up about what the future might bring.
So, we are very focused on making certain that they stay focused on what they are doing, but we are very much aligned with those property GMs in terms of their activities.
Again, we are certainly paying attention to this and we will be staying as close as we can to making certain that every effort is being made to complete the integration as quickly and completely as they can get it done.
But I suspect we will be okay.
No, I think in general, what you described is generally what we expect, which is to see some improvement in Q2 and Q3, especially in Q3.
And then I think Q4 is the part that is a little harder to judge at this point.
<UNK>, I am not sure 90 basis points of margin growth with 3.6% RevPAR growth was stronger than what we would have predicted, so maybe we will be pleasantly surprised as we move forward as well.
But sitting here today, as <UNK> said, we are expecting stronger RevPAR growth in both Q2 and especially in Q3.
So that certainly should be helpful in margins.
Obviously <UNK> also mentioned that we expect to continue to have occupancy increases, but it will be more ---+ the RevPAR increase will be more balanced between rate and occupancy, which also will be helpful for us.
But having said that, I don't know that we can sit here and count on utility costs always being down 11% or more.
So we will see.
Obviously, we tried to take into account the success that we had in the first quarter and then we tried to ---+ frankly, my view for the rest of the year is slightly stronger than what it was just a quarter ago.
So we tried to take into account both of those things to come up with our new guidance of 25 basis points to 65 basis points.
<UNK>, I always appreciate fuzzy math to come up with multiples.
But I think if you look at the eight assets that we talked about in our press release, the three that we have sold and the five under contract, and look at an aggregate EBITDA multiple, it is around 11 times.
And so it is pretty ---+ obviously pretty close to the multiple where our stock trades today.
It varies by asset.
So in some cases, there is a sizable PIP, and in other cases there is virtually no capital required.
There are three new ones and two that we had ---+ two assets that were identified on the fourth quarter call have just not yet closed.
New York City Hotel is not in the group of assets we've identified so far.
That continues to be a priority.
And I would hope that we would be able to announce further progress down the road on that, but we are not there yet.
Yes, I think that is certainly one of the issues that needs to be studied as part of this.
And it's a unique thing to each individual market, so we don't have anything there that we are necessarily prepared to disclose, but that is certainly something that we are looking at as part of evaluating the overall impact of the merger.
As tempting as it would be to discuss M&A activity, I just ---+ I've generally found that the best answer to those sorts of things is to just not try to comment on potential M&A transactions until they are announced.
Yes, I would say that we are ---+ I would probably would say we are somewhat ---+ we are in the 3% to 4% range, and then we're expecting to be at the upper end of that range right now.
I don't know that we have got a clear delineation on what it is between occupancy and rate, but I would imagine it is about a 50-50 break.
I think there has been a high volume of transactions on the market from New York, for more than just the last six months.
I would also say that there is a high degree of buyer interest in the transactions that are there.
As I mentioned on the last call, our sense is that the properties that have attracted the most interest are ones where there is potentially brand flexibility, or use of the building flexibility.
Because that broadens the pool of folks that would be interested in a particular asset.
So, I don't think there's any doubt that a lot of people are interested in looking at New York right now, but I would also agree with what you are implying, which is there's a lot of assets on the market.
Well, thank you, everybody, for joining us on the call today.
We appreciated the opportunity to discuss our first quarter results and our outlook for the rest of the year.
We look forward to providing you with more insight into how 2016 is playing out in our second-quarter call in July.
Have a great weekend, everybody.
| 2016_HST |
2017 | CBG | CBG
#Thank you, <UNK>
As <UNK> noted, CBRE continued to produce great results in Q3. Let me start with a few highlights on Slide 5. First, adjusted EBITDA growth was broad based, up in all 5 business segments and up 17% in total versus last year
Second, leasing revenue in the Americas increased 13%, led by the U.S
, which is up 16%, as we continued to take market share
Third, adjusted EBITDA margin on fee revenue in our regional businesses was up 20 basis points to 15.9% despite a year-over-year decline in gains from mortgage servicing rights related to GSE lending
Excluding this impact, the margin on fee revenue in our regional businesses increased by 70 basis points
Margin on fee revenue for our entire business increased by 120 basis points overall to 17.7%
Fourth, we continued to deploy capital into attractive M&A opportunities
We have closed 9 acquisitions thus far this year and maintain an active pipeline
These investments enhance our core strategy and reflect our continued underwriting discipline
Slide 6 summarizes our financial results
CBRE produced strong top line growth in Q3. Gross revenue and fee revenue increased by 10% and 9%, respectively, with virtually all growth being organic
Adjusted EBITDA for the quarter grew 18% in U.S
dollars to $412 million, reflecting positive operating leverage
Adjusted earnings per share increased 28% in U.S
dollars to $0.64 for the quarter
Our adjusted tax rate improved to 28.3% in Q3 '17 versus 33% in the prior year third quarter, and we continue to take steps to enhance our tax efficiency
The benefit of our lower tax rate in the quarter was mostly offset by increased depreciation and amortization when compared to prior year
You'll notice that we enhanced our segment-level and income statement reconciliation disclosures
We are also including a detailed history of revenue and EBITDA by segment as a supplemental disclosure posted on our website
These enhanced disclosures should further improve the overall financial transparency of our business for our investors
Slide 7 summarizes our three regional services businesses, which, as Bob mentioned, are all at record levels for adjusted EBITDA in the trailing 12 months
Adjusted EBITDA for the quarter was up 8% in the Americas, 12% in EMEA and 31% in Asia Pacific, excluding all currency effects
The regions together produced fee revenue growth of 10%
Asia Pacific was a notable performer in the quarter, posting an 18% fee revenue increase, supported by outsized growth in Greater China, India, Japan and Singapore
In the Americas, fee revenue increased 9%, with double-digit growth in occupier outsourcing and leasing
Brazil, Canada and the United States all exhibited strong overall growth
Growth of 8% in adjusted EBITDA in the Americas would have been 18%, excluding the gains from mortgage servicing rights
EMEA fee revenue rose 8%, paced by strong gains in the United Kingdom
Slide 8 reviews the performance of our major global lines of business in Q3. Revenue growth across these lines of business was almost entirely organic
As mentioned, leasing revenue rose 13% in the Americas and 16% in the U.S
, paced by strong performance in New York City
Leasing increased by 4% in EMEA and 17% in Asia Pacific, where growth was especially strong in Australia, Greater China, India and Japan
Property sales revenue rose 9%, reflecting market share gains in an environment where global market volumes were relatively flat year-over-year
Our performance in property sales was paced by robust growth in Asia Pacific, which increased 33%, led by Australia, Greater China and Japan
Americas sales revenue improved 7% as robust gains in Brazil and Canada offset relatively flat revenue in the United States
CBRE extended its leading position in U.S
investment sales, with market share increasing by approximately 190 basis points versus last year's third quarter, according to Real Capital Analytics
EMEA sales revenue declined 2%, reflecting fewer, large transactions in Continental Europe, although growth remained strong in the U.K
Commercial mortgage origination revenue declined 12%, driven almost entirely by lower gains on mortgage servicing rights related to our GSE businesses, which more than doubled in Q3 of the prior year
Notably, our loan servicing business saw a 24% increase in recurring revenue from our portfolio, which now totals $165 billion
We have begun to separately disclose our loan servicing revenue, which has more than doubled over the last 3 years and now represents nearly 30% of our year-to-date revenue from commercial mortgage services
Our supplemental disclosure includes a 3-year quarterly history of our loan servicing revenue, providing an enhanced view of this recurring revenue stream for our investors
Property management services produced solid fee revenue growth of 10% for the quarter
Revenue from our valuation business increased 4%
Slide 9 summarizes results for our occupier outsourcing business, where we continued to see strong growth, with fee revenue up 13% for the quarter
To illustrate our value proposition, let's look at a contract expansion we signed this quarter
Our client, CSC, was merging with a large division of Hewlett Packard Enterprise to create DXC Technology
CBRE provided key support during the premerger period and subsequently expanded the relationship to include their entire 32-million-square-foot global portfolio for facilities management, transactions, project management and strategic consulting
In the most basic sense, for clients like DXC, we could be providing services that include managing the day-to-day operations of thousands of facilities and related capital improvement projects, advising on leasing new facilities and identifying and disposing of facilities that no longer meet the client's needs
In summary, we dedicate an experienced leadership team to the client, supported by a global platform that includes market-leading technology, data analytics and the expertise of over 75,000 CBRE employees on the ground in over 100 countries
This is what we mean when we talk about our competitive advantages of scale, service scope and sector expertise
Slide 10 summarizes our Global Investment Management segment, where adjusted EBITDA increased 21% in Q3 and is up 10% year-to-date
Our Investment Management business continues to attract significant equity capital
Total commitments reached $9.4 billion over the past 12 months
AUM rose in the third quarter to $98.3 billion, up $10.4 billion from a year ago in U.S
dollars or $2.6 billion, excluding the Caledon Capital acquisition, which was completed in August 2017. Positive FX movements added $2.2 billion to total AUM versus the prior year
Please turn to Slide 11 summarizing our Development Services segment
This business continues to produce outstanding results
Adjusted EBITDA contributions increased to $35.9 million from $15.7 million in Q3 2016. Year-to-date, adjusted EBITDA is up 29% versus the prior year
I'll remind you that the timing of realizing incentive income can vary quarter-to-quarter
Our in-process and pipeline portfolios remain healthy, and we expect to realize meaningful income in the fourth quarter, though less than last year's fourth quarter
Our development pipeline stands at $5.4 billion, with fee-only and build-to-suit projects representing more than half of our pipeline
Please turn to Slide 12. This quarter represents the 2-year anniversary of our closing on the Global Workplace Solutions acquisition and is a good time to reflect on our performance since then
Over this period, growth in employment and GDP has been slow and steady but not great, and property sales volumes have declined
Against this backdrop, I'd like to highlight 2 metrics
First, our trailing 12-month adjusted EPS has increased by 38% over the last 2 years compared to 5% growth in EPS for the S&P 500 over this period
Second, our leverage over this period has declined even after making a $1.5 billion acquisition
As of Q3, our leverage ratio is only 1x net debt-to-adjusted EBITDA versus the 1.2x level we had immediately prior to our acquisition of Global Workplace Solutions
This reflects our strong cash flow and earnings growth over the past 2 years
We believe this performance highlights the strength of our company and our strategy
One housekeeping item before I turn the call back to <UNK>
We are moving our Annual Investor Day to early March of 2018. This will give us the benefit of having full year 2017 results when providing our outlook for 2018. We look forward to speaking with you again in early 2018. With that, please turn to Slide 13 as I turn the call over to <UNK>
<UNK>, this is <UNK>
I don't think we're going to give any forecast at this point
But we'll come back to that at year-end
We haven't broken down that detail
Yes, our origination business is heavily weighted to multifamily
Not all GSE but definitely heavily weighted to multifamily
I don't think we said that volumes doubled
But volumes are up, so the ---+ but you do get ---+ depending on the mix of the type of origination, where it's coming from, factors relating to that, fees can be quite different from one origination to another
So revenues don't always follow level of origination
So the ---+ we have hit a ---+ if you look at the overall impact, if you try and assess the overall impact on our numbers from GSE, it was a $21 million negative impact to pretax earnings
And the way you can ---+ the details of that are, we had $35 million of gains in Q3, we had $26 million of amortization
But if you're comparing, the gains are down by $13 million, the amortization is up by $8 million
The net impact is negative $21 million
Volumes are up
Like I said, they're up
So you ---+ but you can have time for ---+ where volumes and revenue just are different just by the nature of the size of the deals, the types of deals, fee structures in different deals
Yes, we have taken a look at the bill that came out yesterday
Our initial take is positive
Obviously, we're going to be cautious and waiting
There could be a lot of twists and turns between now and when legislation is finalized
But net-net, we see it as positive for the industry
| 2017_CBG |
2016 | XEL | XEL
#Thank you.
Thanks, everyone, for participating in our call this morning.
Please contact <UNK> <UNK> or Olga Guteneva with any follow-up questions.
| 2016_XEL |
2018 | KHC | KHC
#Thank you, Chris, and good afternoon, everyone.
Let me start by saying that we are feeling more confident about our outlook, with Q1 in line to do slightly better than our expectations from the February call.
If you recall, there were several factors that lead us to be cautioned on our top line performance for the first half of 2018, including the headwinds in United States from Planters and Ore-Ida, the impact from retail inventory reductions in Canada and the risk we saw in Brazil from our [SAP] implementation.
At EBITDA, we spoke about near-term pressures in the United States and Rest of the World from accelerated investments in go-to-market capabilities, big bet launches and increasing working media dollars and best-in-class customer service as well as significant cost inflation, especially freight at the beginning of the year.
On the whole, it played out as expected.
And we continue to expect many of the same factors to remain in Q2 as we anticipated in the outlook we provided in the February call.
Outside these transitory factors, we are seeing ongoing improvement in consumption trends in most countries and in most of the key categories that we believe will drive both top- and bottom-line growth into the second half of the year.
These includes positive trends brands in the first quarter ---+ it's actually the fourth quarter in categories such as natural cheese, meals and desserts and ready-to-drink beverage in the United States; cheese and coffee in Canada; condiments and sauces across Europe; soups and meals in U.K.; and baby food in Russia; condiments and pasta sauce in Latin America as well as soy sauce in Indonesia.
More important to highlight for the balance of 2018, for 2019 and beyond is that these gains are being driven by the investment and progress we are making to build capability for sustainable advantage to our iconic brands.
On Slide 3, we show 6 goals from our framework presentation that we set to fulfill the Kraft Heinz vision to become the best food company [worthy] of that award.
For instance, we set a goal to be the industry's number 1 in marketing... (technical difficulty) ...possibilities, and we are investing in our portfolio of brands to a data-driven approach to win with consumers.
It's fair to say that we have spent the last 2 years on the necessary renovation for our portfolio, largely by focusing on marketing and efficiency and product renovation.
We are playing more offense with higher commercial investments, especially behind incremental innovation.
In data-driven marketing, we continue to develop proprietary in-house tools to better measure quality impressions across new mediums like mobile and to understand the impact of how digital initiatives have on net sales, all at a faster, real-time pace.
In the first quarter alone, our Super Bowl ad kicking off the Kraft master brand campaign generate more than 2 billion impressions.
We executed a data-driven target digital campaign in U.K. Soups, helping us gain more than 1 point of share during strong soup season and grow sales 10%.
Also in U.K., our campaign behind an In-N-Out product, chocolate favored mayo during Easter season, generate 3.5 billion impressions for Heinz series good mayo.
Think about that.
More than 3 billion impressions in a country 1/5 the size of the United States.
And in a classic definition of adaptable, data-driven marketing, our U.S. team's quick response around consumer and social media interests in Mayochup generate more than 1 billion impressions within 48 hours, this coming at a time when we are just launching Heinz Real Mayonnaise in the United States and Canada.
In innovation, we are pushing into new categories, new segments, new locations, in many cases, to premium position.
And we are doing this with a focus on incrementality, not just grow sales from new items.
In the United States, for instance, our innovation funnel has gotten wider every single year.
And in 2018, we plan to launch roughly 60% more innovation projects than we did in 2016.
And more launches are designed to be incremental to our current base such as breakthrough innovation in new daypart like we are doing with Just Crack an Egg for breakfast, a refrigerated product that's now selling faster than we can make it.
Disrupt innovation like Heinz Premium Mayonnaise in building on our presence in snacking by complementing P3 with Oscar Mayer Natural Meat and Cheese Plates, Philadelphia Bagel Chips & Cream Cheese Dips and Planters' signatory nuts as well as partnering with growing equities to bring specialty items to market with our new springboard platform and through joint ventures, items like Momofuku sauce.
(inaudible)... (technical difficulty) ...that's good wholesome foods, and Food Network meal kit and cooking sauces.
Outside of the United States, you've already seen the impact of incremental sales from the Kraft brands in Europe and should soon see the same in Australia.
And in our Rest of the World markets, we expect gains from whitespace launches under Kraft, Heinz and Planters to show more strongly in the second half of the year.
In our effort to maximize category managers, we have significantly impacted [fewer hats].
At retail in the United States, for instance, we still have room to improve the effectiveness of our promotional activities.
We expect key summer and winter reset windows to improve SKU adoption, distribution and velocities to our assortment management and planogram tools.
In U.S. foodservice, we have started to streamline our product catalog, emphasizing high-velocity SKUs, which also reduce supply chain complexity.
And across our results, we recently made our global Center of Excellence in the Netherlands, our global hub for assortment management, adding this capability to the revenue management team to drive value and growth.
In go-to-market capabilities, we continue to take actions that will enable us to improve our ability to get the right product at the right place at the right time for our consumers and capture what we believe could be significant incremental organic growth.
Our in-house, in-store sales teams in the United States is now 80% larger than this time last year.
And we have seen incremental returns we expect versus the previous brokers-only approach in-store everywhere we have implemented this new model.
In foodservice, we are capturing whitespace opportunity in some of our most developed markets: the United States and Europe, a good indication that there is more untapped potential in this channel.
And in e-commerce, our team is developing in-house data science and consumer analytics expertise with a focus on building consumer baskets that, together, with single-item purchase, can leverage the breadth of the Kraft Heinz portfolio and make it a better partner to our retail customers.
We are also making significant progress in our goal to create best-in-class operations.
We are pacing ahead of aggressive industry-leading targets in quality, safety and customer service in nearly all geographies we operate, even as we ramp up to get new state-of-the-art factory in Davenport, Kirksville, China and Brazil, producing to their potential.
And on costs, while inflationary pressures have continued across procurement, logistics and manufacturing, we viewed a solid pipeline of projects in each area to minimize these pressures, which should come through in the second half of the year.
In other words, even though we substantially complete our Integration Program in Q4, we remain in a strong position to both offset cost inflation and fuel high-return investments in our brand.
These include investing in the development of our people where, in the first quarter alone, Kraft Heinz employees completed nearly 60,000 courses through our interactive or diversity online platform.
We cannot underestimate how critical it is in this rapidly changing environment to develop our people to new competencies and skill building in areas like sales, marketing, leadership, problem-solving and R&D because we know that our people are what we will need Kraft Heinz to adapt to these new times and to win in the marketplace.
So to summarize.
One, we are building capabilities to create brand and category advantage to achieve profitable growth.
Two, we are investing aggressively now in order to see the benefits sooner.
And three, these are key factors shaping what's likely to be an atypical balance of net sales and EBITDA between first half and second half in 2018.
So let me hand over to <UNK> to explain how these factors impact Q1 results and how the commercial momentum we are investing to build is likely to play out in our financials.
Thank you, <UNK>, and hello, everyone.
Turning to Slide 4.
From a total company perspective, organic net sales were down 1.5 percentage points in Q1, consistent with the expectations we laid out on the last call.
Pricing was positive for the third consecutive quarter, up 1 percentage point and driven by favorable pricing in the United States and Rest of World markets.
Volume/mix was 2.5 percentage points lower in Q1 due to known headwinds in the United States and Rest of World markets that overshadowed solid retail growth in EMEA and Canada, strong Easter programming in the United States and foodservice growth in both the U.S. and EME<UNK>
By segment, the U.S. was slightly better than our initial expectations.
Planters and Ore-Ida had a negative 1.5% impact, and trade spend timing was a 1.2% headwind to Q1 net sales.
Excluding these factors, underlying U.S. consumption was significantly better than reported results and continue to show sequential improvement.
In Canada, as expected, results reflect earlier go-to-market agreements with key retailers, with growth tempered by retail inventory reductions at a key retailer versus the end of 2017.
EMEA had a strong first quarter, driven by Soups and Meals growth in the U.K. as well as Condiments and Sauces growth across the zone, including Southeast and Central Europe, where we are now selling the Kraft brand.
In Rest of World, top line growth was supported by pricing, while vol/mix was held back by distribution-related issues, primarily realignment in Mexico and continued disruption in Puerto Rico, a seafood shortage in Southeast Asia that is impacting our canned business in Indonesia and the implementation of SAP in Brazil.
That said, we do expect sequential improvement moving forward.
At EBITDA, Q1 performance was slightly better than expected, although the drivers were consistent with our expectations, specifically: solid gains from productivity savings in net pricing; gains that were offset by inflationary pressures, primarily elevated freight and resin costs; as well as costs associated with our aggressive commercial investment agenda.
At adjusted EPS, we were up $0.05 versus Q1 last year, driven primarily by a roughly 730 basis point reduction in the adjusted effective tax rate versus Q1 last year, while other below-the-line items largely offset one another.
One final note I'd like to make about Q1 results that's not on the page is our cash generation.
In Q1, we delivered nearly $500 million of additional cash versus the year-ago period.
This came from a combination of lower capital expenditures, lower cash taxes and lower working capital.
In sum, our Q1 financial performance was in line to better-than-expected and provides a solid start to delivering our full year outlook outlined on Slide 5.
To start, we continue to expect 2018 will be a year where just less than 1/2 of our net sales and EBITDA will be delivered in the first half of the year and more than 1/2 in the second half.
And this is compared to 2017 where net sales and EBITDA were roughly equally split between first half and second half.
In fact, in Q2, while the set of sales and cost headwinds will be similar to Q1, and we will continue to press our aggressive commercial investment agenda, we will be up against our strongest EBITDA comparisons of the year in every reporting segment versus last year.
But as <UNK> said, with 4 months now behind us, we are getting visibility on a number of trend-bending drivers, both commercially and operationally, that are giving us confidence in a strong second half and solid momentum heading into 2019.
To be more specific, we see 4 tangible drivers in the turnaround in the second half of 2018.
First, the transitory headwind in the U.S. during the first half should not just fade but are likely to turn into positive year-on-year contributors, given strong go-to-market plans for Planters nuts, Oscar Mayer cold cuts and our Frozen business.
Second, and also in the U.S., we expect to begin seeing more benefit from the investments in category management and go-to-market capabilities, benefiting both the strong innovation agenda we have planned as well as our in-store presence with key customers.
Third, is international growth, driven by a combination of innovation and whitespace initiatives in virtually every market: Canada, EMEA and Rest of World.
And fourth is leveraging greater net savings as the benefits from the initiatives we have at work across procurement, logistics and manufacturing ramp up.
From an overall perspective, we remain confident in delivering positive constant currency EBITDA growth and strong adjusted EPS growth for the full year, as we outlined in February.
And to be clear, we're targeting EBITDA growth versus the revised 2017 base, following the new accounting standards we've implemented.
For earnings per share, we now expect an incremental $40 million of depreciation and amortization versus $70 million previously, and we continue to expect incremental interest expense of roughly $100 million versus last year and effective tax rate of approximately 23% for the full year.
And in terms of cash generation, as evidenced by our strong Q1, we continue to expect a significant step-up in cash generation from a combination of lower capital expenditures, lower cash taxes and lower working capital.
To close, I'd echo <UNK>'s earlier thoughts on the year and our path forward that we're developing capabilities to create brand and category advantage to achieve profitable growth that we're investing aggressively now in order to see the benefits sooner and that these are the key factors shaping what is likely to be an atypical balance of net sales and EBITDA between the first half and the second half in 2018.
Now we'd be happy to take your questions.
<UNK>, this is <UNK>.
Thanks for your question here.
So let step back on pricing a little bit and give you some more color on Q1 and then going forward.
So in Q1, we realized a fair amount of carryover pricing from last year.
So you saw that we're up 1% overall for Kraft Heinz.
And this is really in the places that we planned, okay, outside of key commodities.
So this is something that will likely lap going into the rest of the year.
Outside that pricing, pricing-added commodities was pretty stable for the quarter, and we expect that to maintain stability going forward.
So that's kind of our Q1 pricing.
Going forward, as a matter of practice, we don't talk about potential future pricing actions, so I won't get to that.
But what I will say is we continue to be very confident in the strength of our brands, and we will continue to strike a balance between market share and profitable volume for each of our categories.
Ken, this is <UNK>.
Thank you for the question.
So as I said earlier, 2018 is likely to be a bit less first half and a bit more in the second half.
And that compares to the roughly 50-50 split that we had last year in 2017.
So obviously, shifting very few percentage points can cause significant year-over-year percentage changes.
And on top of that, particularly in Q2, given what we're up against in terms of having the strongest EBITDA comparisons on a margin perspective last year in every geographic segment.
So that's something that will be relevant for next quarter.
That being said, again, I think there are 3 very highly tangible drivers to our kind of second half outlook.
First, as I said, the transitory headwinds in the U.S., including Nuts, Cold Cuts and Ore-Ida.
These are 3 significant factors that should fade into the second half.
Second, we have a very strong innovation pipeline and whitespace agenda across the company this year that, I think, EMEA is actually already kind of proving out for us, and that will gain traction in the U.S., Canada and Rest of World.
Finally, on the bottom line, our savings curve should catch up to inflation that we've seen in the business and the investments that we made in the business as the year progresses.
So that's kind of, again, our breakdown for the year.
And again, just to kind of reiterate what we said, the capabilities we're building in category management, brand building and go-to-market that we're investing this year aggressively, this will benefit us both later into 2018 and will benefit us in 2019 and going forward.
Just to complement <UNK>, adding to the Rest of the World.
You're going to have the same ---+ the similar story that an extensive number of projects, right, renovation and incrementality, and a set of projects that you call the big bet strategy, Ken.
That's why it's totally connected.
That's what we call the platinum launch, right.
Just to name a few, on international markets, we have Max Boost in Canada.
We have several in Kraft territory in Europe, right, now coming to Australia as well.
We have Jif Jaf cookies in China.
I have the entire Heinz baby food renovation in Europe.
And Asia, I have the premium line in soy sauce; in Indonesia, pasta sauce; in Japan, salts.
Those are some of key platinum innovation that master the big bets concept that you just addressed.
At the same time, we are wider, widening our innovation pipeline worldwide.
<UNK>, this is <UNK>.
Thank you for the question here.
So as you know, broadly, we manage EBITDA dollars, not to margin, whether it's EBITDA margin or gross margins.
We're very focused on growing our EBITDA dollars.
That being said, in Q1, you saw our gross margin overall was essentially flat versus prior year.
I think the 2 things to note on that: one, we did have a small benefit from the timing of pension and postretirement costs, and this is something that's not going to repeat.
And two, we did have another small benefit from a mix impact from the Easter shift into Q1 from Q2 that's going to work against us next quarter.
Going forward, again, I'd expect sales growth to improve before EBITDA growth and before EBITDA improves.
And again, coming back to the fact that we have inflation coming into this year, any accelerated investments that we're making in the business that run ahead of our savings curve and the ramp-up in our commercial growth.
No, it's ---+ again, I'm not going to speak to the gross margin by segment or by zone for us but again, we're happy with the performance in Q1.
We're running consistent with our plan for the year.
And again, that plan is going to be very second-half weighted with the 3 kind of tangible drivers that I talked about with the headwinds in the U.S., including nuts, cold cuts and Ore-Ida savings through the year, with the strong innovation and whitespace agenda in EMEA and Rest of World and the U.S. and Canada and our savings curve that should catch up with inflation and investments.
Thanks, <UNK>.
It is <UNK>.
Look, let me try to address your question and direction, right.
I think the disrupted market and change in channels, consumer habits and so on, that's happening for quite some time, and that's something we have been acknowledged also for, for some time, right.
Part of a ---+ a significant part of our commercial investments, right, that we announced at the end of last year, the $250 million to $300 million is behind new digital initiatives, right.
Behind e-commerce, behind new channels, behind go-to-market, behind the innovation that's coming to market to support it and behind working dollars in media as well as service.
With that being said, I think the big message here is really that there will be ---+ we don't ---+ we cannot have any compliance with the brands we have.
It's actually the opposite.
We believe in the big brands when you support them, right, when you give them the right relevancy, the right product offering in the marketplace, they go really well.
The key, for example, as you think about Heinz in the United States has been growing 15% every year since 2015.
The relaunch of the Kraft brand with the Super Bowl campaign with Family Greatly is giving us a lot of excitement behind Kraft with new offers in cheese and other segments that can be very relevant.
But it's also true to say that these big brands have the scale that have the profitability, right.
They will need to come with new offers from different angles and different categories for smaller brands and so on, and we are doing that if you think about the case of Devour on the frozen territory.
If you think about Just Crack An Egg going for breakfast in refrigerated, right.
If you think about the things we're doing with brands like Classico, like Cool Whip, like A1.
If you think about extension of the Planters, the Planters signature work and nutrition, right.
So the combination of the 2 things are extremely important.
So in ---+ to answer your question, it's changed our capital allocation mindset.
My answer is no.
Actually, I think it's very in line with what we have been saying for quite some time, right.
Our framework for capital allocation, organic and inorganic has not changed.
We continue to like big brands.
We continue to like business that can travel and continue to like business that we can generate efficient ---+ that can be invested behind growth, brands, products and people.
<UNK>, this is <UNK>.
Thanks for the question there.
So let me walk through a little bit zone-by-zone or geography-by-geography for Q2 on the sales side.
So from a top line perspective in the U.S., we expect to be kind of sequentially similar to Q1, okay.
So we still expect to see the impact of the headwinds from Planters in [Club] and from Ore-Ida and Cold Cuts, as we talked about.
And again, this will be about a 1.5 percentage point headwind for us.
In addition to that, we have a combination of trade phasing and the Easter shift, the reverse that we saw in Q1, which, combined, should be about a 1-point headwind for us.
So overall, pretty similar to what we saw in Q1.
If you look for each of the other zones in Canada, we will see the most difficult Q2 comparison, driven by 3 factors.
So first, we had a retailer inventory kind of rebuild in Q2 that we'll be lapping, and this was particularly strong in Cheese.
Two, we had a strong summer 2017 program ---+ programming, which is primarily in our Condiments business.
And three, the fact that our innovation pipeline in 2018 is a little more second-half weighted than it was in 2017, okay.
And then if you look to Rest of World, we expect to see kind of sequential improvement through the year as the investments we're making and that we accelerated in 2018 really materialize.
And then in Europe, excited and continue to be confident in our strong growth for the year.
<UNK>, it is <UNK>.
Addressing the first question you had about M&<UNK>
I really don't think it changed the framework and the way we think about that.
We are very long-term focused, right.
We are very disciplined in the approach.
We have about M&A really looking at things that 2 plus 2 is more than 4.
Like I mentioned in the question before, our framework to look that ---+ of liking brands, business that can travel and synergies that can capture, that allows us to revamp is still in place.
So I don't think, though, those [movements] that you're talking about is top [right], getting in the way ---+ or interest rates getting in the way of this framework and this long-term framework.
What is right that you said that the valuations you are seeing today are more attractive than we have seen 6 months ago and 12 months ago even for us in a relativity basis.
<UNK>, this is <UNK>.
Let me take freight for you.
So I'll split this into kind of 2 pieces.
So first up on footprint, when we did the initial modeling on each of these footprint projects, we took into consideration potential kind of variable changes, whether it's fuel or other kind of costs that could potentially cause fluctuations going forward.
And I'd say, all that being the case, we're still very happy with what we did on the footprint side.
Second, in terms of kind of inflationary pressures we're seeing, so not surprisingly, we are seeing inflationary pressures similar to what some of our peers have talked about, whether it's in packaging, whether it's in oil or freight but what I will say is while these things ---+ these costs are definitely higher, we certainly feel it's manageable from the context of our savings curve, and we're still kind of on plan to our 2018 targets despite that.
<UNK>, this is <UNK>.
Let me address the first part of your question, then I'm going to ask <UNK> to comment.
On the portfolio, what I can say that we ---+ as you have been saying, we're happy with the existing portfolio.
I think, each brand and category does play a role.
For sure, they're in a different stage of their life and the categories have different performance, as expected.
But in general terms, we're happy with that.
Also true that after 2.5 years of integration, our understanding of each one of the category is much deeper.
It allows us to measure the returns of each one of them and their perspective looking 5, 10 years in a much better way than we would say that 1.5 years ago, right.
So we do look at each category, in each transaction in a different way.
But in general, I'd say we're happy with our portfolio.
<UNK>, you want to complement the question, please.
Thanks, <UNK>, and thanks for the question, <UNK>.
This is <UNK>.
So in terms of balance sheet, what I'd say is, again, as I said before, we continue to be very focused on delevering.
We are fully committed to investment-grade status.
That is nonnegotiable for us.
That is top priority for us from a capital policy perspective.
So I think I just want to reiterate that point.
Second, on the year, we may not get all the way to our intended run rate in 2018.
That's largely going to be in part due to the fact that we prefunded our postretirement, medical and part of our pension at the end of last year.
But bottom line, we're very happy with where the balance sheet is.
We believe our credit's very strong and getting better.
We significantly derisked the balance sheet.
We expect significant cash benefits from the Tax Cuts and Jobs Act that I talked about last quarter.
And we expect considerably better post-integration free cash flow as well.
So again, we feel very good about the balance sheet and are committed to our investment-grade status.
<UNK>, thanks for the question.
This is <UNK>.
So in terms of the investment profile, I'd say, from a P&L perspective, should be pretty consistent through the year.
So I wouldn't expect a lot of volatility there.
I think it's important to kind of talk a little bit about where we're investing, again, which we talked about on the last call.
So first, we're investing in go-to-market, and that's both in the U.S. in-store sales that <UNK> talked a little about earlier.
We're investing in e-commerce, like <UNK> mentioned, as well as distribution expansion in some of our key international markets like China and Latin America.
And these types of investments will largely be through our SG&A line.
Second, we're investing heavily in service, and that's primarily North America but we're also investing in Europe as well.
And this type of investment will largely flow through our cost of goods sold line.
And then finally, we're investing in working media dollars, which we plan to drive in 2018 and we'll also be more concentrated in our SG&A line.
<UNK>, I think it's a fair question.
Well, I think a lot to what <UNK> already highlighted before, right, the trends answer we're seeing here, <UNK> and <UNK>, are pretty much related to contracts that we're able to regain on the Nuts territory will be behind us.
The constraint we are having capacity on the potato territory.
Our innovation is coming really strong as we speak, right.
And even with all the inflation pressure described by <UNK>, the actions we have put in place on the cost side, especially on the procurement manufacturing side, they are very weighted towards the second half of the year.
So when I look about sales and EBITDA, for sure, we need to execute.
But all the drivers of the joint business plans with the main client in the United States and Canada and in Europe, Asia and Latin America are in place.
The main trend bands we are seeing in the top categories where we are still suffering decline are in place.
And the innovation is coming to market.
So by all means, we are seeing consumptions to continue to get better in most parts of the countries we operate.
So there is a lot for us to do like we have in our analogy.
We know still there are headwinds against us coming in Q2 but we are confident that the actions we are taking today and the investments we are putting in place will start to pay out in the second half of the year, carrying this momentum into 2019.
Look ---+ thanks, <UNK>.
Look, as a matter of practice, we don't like to comment on rumors and speculations or on peers' transaction, right.
I think what we can say, again, that we ---+ our framework for M&A has not changed, like I highlighted before.
And we are disciplined in a sense of seeing price and then return and long-term shareholder value because remember, the way we operate and invest as owners, that we have a very long-term perspective, right.
We're definitely not traders in that sense.
We look those things that we can own and create value for a longer-term view.
So in that sense, we do believe the valuations are definitely more attractive today even if you think about relative valuations.
If the price is right, we believe we can move when we do find a situation that 2 plus 2 is more than 4.
<UNK>, this is <UNK>.
So look, I think our #1 goal, as <UNK> said, is to generate shareholder value over the long term.
So we'll look at any opportunity that comes our way but we're not going to speak to any sort of hypotheticals.
But again, that's our #1 goal, and we'll look across a number of different potential opportunities.
Thank you, everybody.
| 2018_KHC |
2016 | COG | COG
#Let's see.
We will put that number out in October.
But it probably, <UNK>, it would be probably be about 50%, 60% higher than where the guidance is this year.
The duck count we anticipate at year end is approximately 15 wells in the Eagle Ford, and 30 to 35 wells in Pennsylvania.
Not really.
We have been ---+ we were forced curtail by virtue of the unscheduled downtime.
But our analysis, including the volumes for Cabot, it is our analysis that the gas that can move up there is moving, not only by us, but our peers.
And we think that the day of the curtailed volumes is behind us.
Thanks, <UNK>.
Hello, <UNK>.
We would have to build upon that, <UNK>.
We have, again, the ramp-up into that infrastructure will start with our 2017 capital program.
And, again, a swag number and it is anywhere from the [$650 million] to [$675 million] for 2017 as a swag number.
And then as we go into 2018, I do plan on putting out a little bit more forward-looking statements in either October or November of what we see building into that infrastructure buildout.
I probably would not get granular with numbers on capital at all in 2018 at that time.
But I do plan on and we will have a discussion on how much of a look do we want to give of what we look ---+ and our comfort level of our 5-year plan.
And with that, I think that would give the market a great deal of comfort on what Cabot is going to be able to do to deliver value.
And some of this, what you do need to keep in mind, something different than where we are in 2016.
We stripped out of 2016 our investment capital, pipeline investment capital, out of 2016.
And we have that number that I'm giving you out there as a swag of $650 million to $675 million, we have in that number plus or minus $125 million of that investment capital back in the 2017 capital number.
For the pipelines, that's right.
So it is a risk of throwing numbers out here, because I'm not being granular on it.
But I don't want it to be confused that we are not including the investment capital in that number I threw out.
Yes, it is.
You're accurate.
It is a ---+ it was discussed early on trying to get the budget approved.
But it is not a topic of conversation at this time.
Thanks, <UNK>.
I don't have that number handy.
And we have slides that show a percentage or efficiency gains through the process, and <UNK> had showed some of that to the Board.
And some of it was the example where we are on the quarter on more rapid penetration rates, and running pipe, and spud to spud moves.
But I don't have it in the form you're asking.
Well we are looking at that right now.
It is part of forming our buildout of our plan in the fourth quarter of 2016, and how we finalize our recommendation to the Board in October for our 2017 program.
So we are just ---+ we are looking at the utilization of that crew for the entire second quarter, but I thought it was prudent to represent that at this stage that it's for a portion of the quarter.
Thanks, <UNK>.
Hey, <UNK>.
You noted in your most recent presentations that you added 15% more locations with recent spacing tests.
I was just wondering is this effort more or less complete, or are you still testing down spacing in the Marcellus.
We will continue to test not only how tight we can get locations, and <UNK> has a couple of downspace opportunities or wells that we look at.
But we will also continue to explore with the both stage loading and spaces and spacing between clusters as part of our efforts to see how we can enhance the program.
One of the July period for Cabot at our Board meetings is the opportunity for our geologists to stand before the Board and talk about our exploration projects ideas that we have.
And we do have some, and we did present several to our Board on Wednesday.
But one of the things also the technical group has done in the north is taking a step back.
And we have a huge database, as you can surmise, and look at the entire space and determine what we might do different with a blank piece of paper, starting over, to try to look at all the different aspects.
All the way from the landing areas, steering, penetration rates, how we initiate fracs, how we bring back the wells.
All of that is being scrutinized in a project orientated fashion that I imagine <UNK> would come back and discuss at a later date.
<UNK>, do you want to make any ---+ .
Our guys are doing a great job.
And like <UNK> said, we are looking at every aspect of it.
So stage spacing, clusters, number of clusters, landing points, challenges breaking down each component of the reservoirs.
So again, it is an ongoing effort here to continue to optimize our potential out there.
And one of the things also is not only looking at the upper Marcellus and all the way through the Purcell, lower Marcellus, but the complexity of the geology.
Looking at the relationship to production profiles within some of the proximity to some of the larger faulting systems, and also looking at a couple of different zones in the section that we think hold for what I would couch today as exploratory promise.
Well the Utica is certainly out there, and my reference was from an exploratory standpoint and the data that we have.
And actually, the shallower section above the Marcellus is an area that we have significant data points that we think holds the potential I was specifically referring to.
But certainly, the Utica is the deeper section.
I don't have that yet, <UNK>.
I would say it is probably going to be between 10 and 15 wells.
We have a little bit of scramble looking at the piece of paper that might have that on there, but my guess is going to be 10 to 15 wells.
<UNK>, I just got it pointed to me.
The number is 11.
I will let <UNK> answer that.
Yes, so we have ---+ let me back up.
We watch this very closely, of course, and we are very comfortable with where we stand with the permitting process and the regulatory process.
So we are content that the project is moving forward, and excited that it is moving forward and has an in-service opportunity late 2017.
That said, we do have plan B and plan C and plan D to move volumes in different directions and to different places to ---+ or should I say, just in case that the project is delayed a month or three months or something to that extent.
So it probably wouldn't be able to find a home in day one for 850,000 a day to the premium markets.
But we would be able to adjust to that based on the deadline that we would see if was delayed.
I think it is a good question, <UNK>.
And it is one that we try to plan the contingencies around, and certainly we have had an ongoing education and effort doing that by virtue of the delays that we have seen with the New York DEC and Constitution.
Thanks, <UNK>.
All right, Erickson, I don't have any additional remarks, but just to reemphasize that we are extremely pleased with the operational side of our program.
We are building into the infrastructure buildout, starting the early stages of some excitement about seeing some tangible results in that area.
And I think it is going to be fun for our operating group to now diligently start being able to use their talents, secure the services and equipment, and start a very diligent process in building these significant volumes.
If you look out there in the space, I don't know of any other company that has an opportunity and the rock to be able ---+ and the balance sheet to be able to grow production, double production, in the next couple of years.
And have the benefits its shareholders as Cabot does.
So thank you for your interest, and we are excited about presenting our 5-year plan to our Board in October and we do anticipate offering maybe a little bit more color either in October or February.
We haven't made that call, of a little bit longer outlook, for what Cabot has to offer.
So thanks again, and look forward to the next quarterly call.
| 2016_COG |
2016 | THG | THG
#Thank you, <UNK>hew.
Good morning, and thank you for joining us for our first-quarter conference call.
We will begin today's call with prepared remarks from <UNK> <UNK>, our President and Chief Executive Officer, and our interim Chief Financial Officer, <UNK> <UNK>.
Available to answer your questions after our prepared remarks are: Jack Roche, President of Business Insurance; <UNK> <UNK>, President of Specialty Lines; <UNK> <UNK>, President of Personal Lines; and <UNK> <UNK>, Chief Executive Officer of Chaucer.
Before I turn the call over to <UNK>, let me note that our earnings press release, financial supplement and a complete slide presentation for today's call are available in the Investor section of our website at www.Hanover.com.
After the presentation, we will answer questions in the Q&A session.
Our prepared remarks and responses to your questions today, other than statements of historical fact, include forward-looking statements, including our 2016 outlook.
There are certain factors that could cause actual results to differ materially from those anticipated with this press release, slide presentation, and conference call.
We caution you with respect to reliance on forward-looking statements, and in this respect refer you to the forward-looking statement section in our press release, slide 2 of the presentation deck and our filings with the SEC.
Today's discussion will also reference certain non-GAAP financial measures, such as operating income and accident sheer loss and combined ratios excluding catastrophes among others.
A reconciliation of these non-GAAP financial measures to the closest GAAP measure on a historical basis can be found in the press release or the financial supplement which are posted on our website, as I mentioned earlier.
With those comments, I will turn the call over to <UNK>.
Thank you, <UNK>, and good morning everyone, and thank you for joining our first-quarter earnings call.
I'm pleased to share with you we're off to a solid start to the year with strong financial results and continued earnings momentum.
We delivered net income per share of $1.80 and have a record first-quarter operating per share of $1.64, yielding an operating ROE of nearly 11%.
(technical difficulties).
Excuse me, operator.
Sorry about that.
Okay.
(laughter) For a minute there we were in a new business, but that's okay.
(laughter) So as I said, we recorded a first-quarter operating earnings per share of $1.64 which was a record for us, and we yielded operating ROE of nearly 11%.
Our success during the quarter was fostered by strong execution of our business strategy that resulted in an improvement of our consolidated accident year ex-CAT combined ratio of 93%, 1 point better than the same period last year.
A relatively low level of catastrophe losses, domestic growth of 4%, and a strong business mix which favorably positions our Company for the current-market environment.
Strong investment income and stability in earned yield and some thoughtful capital management actions.
Our results through the quarter are fundamentally in line with our expectations, and we remain confident that we will be able to achieve continued progress and deliver earnings growth going forward this year.
I will now turn the call over to <UNK> to go forward over financial results, and then I will further discuss our outlook and accomplishments of each of our businesses.
Thank you, <UNK>, and good morning, everyone.
Our first-quarter results were strong, underscoring the breadth and balance of our underwriting portfolio and our operating and financial expertise.
Net income was $78.2 million or $1.80 per diluted share, compared to $54.9 million or $1.22 per diluted share in the first quarter of last year.
Operating income was $71.5 million or $1.64 per diluted share, compared to $57.1 million or $1.27 per diluted share for the first quarter of last year.
The combined ratio was 95% in the quarter, compared to 97% in the prior-year quarter.
Catastrophe losses added 3 points to the combined ratio, 2 points lower than in the prior-year quarter, virtually all stemming from domestic business.
Loss-reserve development was again favorable but somewhat lower than the prior-year quarter.
In commercial lines, we were able to drive over 2 point\
Thanks, <UNK>.
We're very pleased with the progress we made in the first quarter in both our domestic and our international businesses.
Overall we performed in line with our expectations.
Specifically, we grew our personal-lines business, achieving strong profitability, we grew in targeted segments and commercial lines while continuing to prove mix, and we continue to navigate through challenging market conditions at Lloyd's, while continuing to invest in our specialty portfolio.
We feel good about our progress made to date and the prospects that lie ahead.
More specifically, in personal lines, net written premium gross was slightly ahead of our expectations at 3.2%, driven by our strategic focus on account business, new business momentum and strong pricing disciplines.
We held rate at approximately 5%, which remains above loss costs, and our retention improved to 83%, up 1/2 point over the same period last year.
We have several initiatives underway to capitalize on the momentum we have established in our personal-lines business.
We continue to gain strong traction in our Hanover Platinum product, now fully deployed across all our target states.
This enhanced coverage and service offering associated with high quality account business, high umbrella penetration as well as much stronger retention.
Our Platinum product has elevated the overall quality of our personal-lines business and has allowed us to write more of our agents' best business.
Additionally, we continue to make investments to improve ease-of-use for agents and to help them address business opportunities.
We expect these investments to strengthen our market position and accentuate our value proposition to our agency partners.
Additionally, we remain on track to enter into Pennsylvania personal lines at the end of this year.
While this will not have meaningful impact on 2016 results, it's a significant milestone that marks our momentum and confidence in our ability to strategically expand our geographic footprint across the US and with our value-added offerings.
The benefits of the hard work we have done over the last few years to improve our mix, both geographically and through the launch of Platinum, have come to fruition and are clearly evident in our results.
We delivered a very good underlying performance, improving our accident-year combined ratio, excluding catastrophes, by over 3 points to 88.3%, compared to the same period last year.
Overall, we're very pleased with our strong first-quarter results in personal lines, and we believe we can continue to deliver improved underwriting profitability and grow at a steady, deliberate pace of low single digits in 2016.
Turning to commercial lines, we delivered solid net premium growth of 4%, remained disciplined in our approach, balancing price and retention to drive needed margin, while maintaining steady growth momentum.
We achieved pricing increases of 4.3% in the core lines in the quarter with solid retentions of 83%.
While the market continues to exert rate pressure, we have been tightly executing our pricing segmentation in both our small and middle-market businesses.
We continue to prudently balance retention on our best business while simultaneously driving higher price increases on less profitable risks.
As we have said in the past, pricing sophistication is not the only one of the levers we use to improve margins in today's competitive environment.
We implemented property and exposure actions, we have taken substantial action in auto, and we have over the last handful of quarters taken targeted underwriting and pricing actions in CMP liability in response to the elevated prior-year activity we experienced.
Additionally, we are building upon industry specialization and target segments to better align customer risks to our capabilities, enhancing our value-based offering and mix to achieve consistent performance through the cycle.
This approach better positions us to help our agents consolidate their business, and to compete more effectively in the current-market environment.
In specialty lines, we continue to build scale and momentum, as these businesses are benefiting from the market disruption and the addition of top-quality talent.
In healthcare, our expanded allied capabilities focusing on facilities risks has given us strong momentum coming out of 2015 and into the first quarter of 2016.
In management and professional liability, the 2015 launch of our updated private company and not-for-profit DNO package is gaining real traction with true best-in-class product claims and service center capabilities.
Additionally, our launch of Merit, our transactional A&S business, in its fourth year of operation, is beginning to make notable contribution.
We expect that specialty will be a strong source of profitable growth going forward.
Overall, we're very pleased with the composition of our business, the pace of growth and the overall quality of the commercial-business portfolio.
And we continue to be on the path to deliver profitable growth of mid single digits this year.
Turning to Chaucer, overall earnings were in line with our expectations, although lower than in prior quarters.
As we reported in the past, underwriting performance in our recent years have benefited in part from very benign claims experience.
Given the competitive market of Lloyd's, we are being cautious with out approach to growth and focusing on our areas of distinctive capabilities.
We believe will be able to deliver our long-term financial target with a combined ratio in the mid-90%s.
On the premium side, the decline of 20% in the quarter at Chaucer, ex-UK motor, was at the high end of our expectation but very consistent with our strategic approach.
Underwriting margins and profitability remains the utmost priority at Chaucer.
As discussed, we're actively using reinsurance to manage our risk appetite, while retaining leadership and influence in our chosen specialty classes.
This enables us to effectively exchange top-line premium for greater earning stability.
About half of Chaucer's net premium decline in the first quarter was due to this strategy, as most of our reinsurance renews in the first quarter.
Additionally, in the quarter we responded proactively to a challenging energy market, reducing our position in certain parts of this business.
As you know, these actions have been and will be offset by our investments in a number of specialty areas that we have pursued over the last couple of years.
These initiatives will continue to develop and provide increasing benefit to our top and bottom line in 2016 and beyond.
For example, we recently introduced a new freight forwarder and logistics insurance unit, which will work closely with the Hanovers in the marine team to deliver new solutions for the cargo logistics industry.
Early in the quarter, we had added a new team and we created political risk solution for emerged markets that builds on our emerging market offering to provide brokers and clients a broader solution set for their political risk requirements.
Additionally, we recently joined in a strategic partnership with AXA to expand our access to new business opportunities in Africa through our extension distribution network.
Though we expect Chaucer's top line to reflect the challenging market this year, we will continue to leverage our access to business through Lloyd's, the Hanover Agency Network and other production platforms to create profitable growth opportunities.
All in all, Chaucer remains on target to reach our outlook and financial plans for 2016.
We also had an active quarter for capital actions.
Our main capital priority remains to support our growth.
We continue to return capital to shareholders, repurchasing $48 million worth of shares in the first quarter, and additionally we actively managed our debt and took advantage of the low interest rate environment by issuing $375 million of 10-year notes at 4.5%.
As a whole we look ahead with confidence as we track in line with our original earnings guidance.
We have good momentum in our businesses, which sets us up for this year and for next, as we enjoy the impact of improved retention, positive rate, and a strong quality of the business we are riding.
In regards to our progress to name my successor, I expect an announcement will be made relatively soon.
In the meantime, as you can see from our results, the business is performing well, we are not skipping a beat financially or strategically, as demonstrated by the numerous business initiatives domestically and at Chaucer, as well as our capital management actions.
The Board remained rock solid on selecting the right candidate for the job, and I'm confident that it is succeeding and you will learn the fruits of its efforts before long.
With that said, this is all in all likelihood my last conference call with you.
It has been an honor and privilege to serve here, and I have every confidence that the Company will continue to prosper and that my successor, the Leadership Team, our employees and our partner agents will succeed in taking this Company to the next level.
I appreciate the support you've show me over these last 13 years, and I will miss these quarterly calls with you.
At least most of you.
(laughter) And with that said, we would like to now turn it over to the operator for questions.
(Operator Instructions) <UNK> <UNK>, JMP Securities.
I would say no more than that.
We will continue to be opportunistic and it's one of the levers that we use to achieve our overall performance targets.
So I wouldn't necessarily take it and multiply it times 4.
It's a question of what the opportunities ---+ (multiple speakers)
<UNK>, you know that what we try to do is make sure we're thoughtful and not carry a lot of excess capital.
We think we have ---+ what we have done is build a pretty resilient earnings, and in my view much more consistent earnings and earnings growth power.
We try not to hold a lot of capital.
So we will continue to do it.
Now it's an interesting time, right.
There's a lot of different ways to do that.
We're trying to be opportunistic on the shares, price given the volatility, but you'll see a continuation of thoughtfulness as far as getting capital back there.
I am going to hit if off a little bit to my colleagues.
One of the things, what I look at as we look at what happened in the first quarter, as you know for the last three years or something, what we try to do is react very quickly to any activity and take as much of it to the bottom line that we see immediately.
I would tell you that it is all in areas that we've kind of been focused on.
It's within kind of the context of our plan and our outlook.
So I think, for me, we're right on track to continue the earnings increase, there's really no surprise.
The current accident years are holding up really quite nicely.
And so there hasn't been any emergency or anything in areas that at all new or surprising.
And <UNK> do you want to get some more color on this ---+
Chuck, this is <UNK>.
Not ---+ as <UNK> said, there isn't really a great deal of change in terms of what we saw from the prior quarter.
There's a little bit of a tilt towards GL, that was driven by four specific claims, two of which were of large settlements, which were considerably above our case reserves, and two that we moved to limit its losses.
What I would say is, slightly different is that where last quarter, some of what you saw was IBNR strengthening in this particular case, most of what you saw or nearly all of what you saw is case strengthening.
And I think that the decision here is that after the fourth quarter movements, we didn't want to erode the IBNR strengthening that we have put up.
There's a little bit of that going on, but in terms of the underlying trends, there's not a great deal of change from the last quarter.
So when we see this, I think in general, we are as an Organization, and I think it cuts across the Organization, we are very attentive to go back and ask ourselves to what extent we have the right case strength in light types of exposure.
Because you can start to see, while those four examples are rather random, some of them fit with some other things that we've seen in the past.
So we do go back and we asked ourselves for similar types of legacy claims.
Do we have the right case strength.
Frequently we will do a bit of a sort of volatility analysis on our claims.
And then we will adjust case if we believe there's like situations that require that kind of adjustment.
I would say we feel very good about what our picks are, as I said, and that we are on track.
That's what I meant by ---+ within our plan and in our focus.
And on track to do kind of what we said we were going to do and increase earnings.
And I would also say that our balance sheet, for me, last year/this year is stronger.
We are in a good place.
Chuck, this is <UNK> <UNK>.
We are excited and happy with the performance on the top line, so that when you look at all of the KPIs associated to that buildup to that top line number, feeling really good about the retention lift.
We do think there's some room there still, Platinum will contribute to improved retention going forward.
Our new business was strong, up 7%.
So yes, the answer is Platinum, which now makes up close to 20% of our book, and you know, 75% to 80% of our new business is absolutely going to lead to improved performance, we think.
And we hear from our agent partners that it's a first-rate, kind of best-in-class product offering.
So going forward, we continue ---+ we will see that mix improve.
I think I've cited before some of the nice kind of mix statistics that come along with Platinum, like 44% of the time we are selling an umbrella with the full package.
That overtime leads to higher retention.
We know from kind of our analytic work, so all things kind of point to the right direction.
That said, we feel comfortable that a low single-digit growth is the right number for us to see into the rest of the 2016 ---+ you know, our PIF is, as you may have seen, kind of flat sequentially from prior quarters, so we're happy about that.
Meanwhile, our account PIF has been growing really since the first quarter of 2015.
So that we expect to continue as well.
So all in, you should expect from us kind of a thoughtful measured growth plan.
As we think about expansion into other states, we're also going to be very thoughtful about that.
<UNK> referenced that we'll be heading into Pennsylvania, tail end of this year into the winter.
That will open up some nice growth opportunities for us going forward.
But you should expect kind of what you're seeing from us this year.
Hello, Chuck.
I'll respond.
It's <UNK> speaking.
In general the commodity prices we're referring to is in the steel and iron ore area.
And most of this is IBNR rather than case reserves.
As a result of the deterioration, you can imagine the scenario whereby autos have been placed in prepaid and a declining commodity price whereby the trader receives the goods at a substantial lower value.
And that will continue to put pressure on the trade credit exposure.
So from that perspective, we're anticipating there will be deterioration, so we have put in an IBNR to reflect that in the first quarter.
It splits into two different areas.
There is energy, outside of the trade credit and political risks scenario, where we have a number of larger than expected losses across ---+ or an additional turret loss which reflects low deck.
And then we have had one or two other smaller ones.
But there is 50% of it is energy, the other 50% would be our political-risk-type credit exposures.
Thanks, I appreciate it.
Appreciate it.
That's exactly right, <UNK>.
Our efforts to improve profitably and shed some of the monoline business will start to tail off and that has been the drag.
So we ---+ you'll start to see that PIF take up.
As you know, we did a lot of exposures stuff early on, this is really just the monoline, right.
Letting the monoline go.
In various ways.
Sometimes proactively with arrangements with other competitors where we facilitate it and some places it's just through the planning process.
And so that ---+ what's exciting about where personal lines is to me is that ends.
And then you're really living off the partnership.
The other thing I would tell you is that we just came back from our partnership meeting with our best partners, and what's interesting to me is they all, the importance to their business of this account oriented business is quite significant, and they see our product distinctively better.
So what we're all working hard with them is actually transitioning some of their install base business to our product set, because it would be better for them long-term, which will give us a boost at the tail end of this year.
And going into next year, I think we have really good momentum in that product.
Just one final comment, <UNK>, to put it into perspective, we sort like to boast about this number, but 86% of our new business coming on the books today from our partner agents is account business.
So you can really feel that our distribution plan understands the kind of business that we write.
It doesn't mean we don't write any monoline, obviously, but the majority of it is account business, and we ---+ that's a coveted thing to be able to achieve in this industry, we think.
81% of our install book is account business.
The demographics are perfect.
It's really ---+ it is their sweet spot for account middle-market and upper-middle-class customers that really want the full-service, which really bodes well for our future retention.
So as you heard me say, that account PIF has been growing since earlier last year, so it is this kind of drag that will soften as we go forward from the monoline business.
Yes, I think that's true.
I think as an industry, commercial auto is far from back to where it needs to get to in terms of overall profitability, but we feel more confident than ever that our current trajectory with our accident years are looking good.
The amount of claims that are vulnerable to this kind of delayed litigation phenomenon that we've experienced is the pool of claims is going down, it has gotten to a pretty finite level.
So yes, we look back into the rear view mirror, we are seeing that accident year or prior accident drag diminish, and we're feeling as good as we ever have about our current accident year pics.
You're also seeing across the industry, and certainly in our results, again real strong pricing.
As I said at the last call, we had roughly 7 or 8 points of pricing over the last three years in this line.
This year, we're still in that mid-to upper single digit range.
And the market is continuing to allow us to both get price over loss trend, but also continue to drive our mix in a favorable way.
It's 267.
So a couple of things, so <UNK> has agreed to stay on as long as we need him.
But what one of the issues we have right now ---+ or one the opportunities we have is I'm ---+ in parallel, we have been working on the CFO search and I feel very good about that, so as soon as we finalize the CEO, I will be working with him to make the selection, and so what's going to happen is that's going to be quite accelerated from the announcement.
It won't be like this, with the length of this one.
It will be shorter, but it won't be simultaneous.
We've done a lot of work and reached out and had a lot of good conversations, so I feel very, very good about being able to move on that in short order after the CEO pick.
They're really transcending over the last three, and as I described in the last call, they are coming from a finite group of claims in primarily major metropolitan areas, heavily out of New York and Southern California and the like.
That are for the most part slip, trip and falls that we are getting kind of late notice of the medical buildups and the litigation from these claims.
In that regard, it's similar to some of what you saw in commercial auto, but what's different is that these are ---+ it's much smaller portion of claims, it's even more sensitive to the major metropolitan areas where we believe that there is an increased focus on litigation on soft tissue, and the light type injuries, that are showing up in a delayed fashion and a more pronounced fashion than historically seen.
So this is our third quarter of acknowledging some prior-year development and in the GL line as part of CMT, and as promised, we're trying to deal with this as we go and we don't see this being an outsized issue.
But we are diligently working not only on the claims side, to make sure that we're getting it right ---+ but also have taken some substantial actions in the major metropolitan areas to make sure we don't have outside exposures that primarily are coming from slip, trip, and fall type occupancies, whether that be real estate or retail.
Well I would say it's less driven by kind of a cash-on-cash analysis than it is the market opportunity that we see and the fact that we think that that has a window that isn't sustainable forever.
We know that we want to continue to use leverage in our capital structure, so we felt that this was an ---+ the right opportunity.
The issue of kind of the cash-on-cash calculation, I mean from another perspective is economically, that higher cost of our existing debt economically has already been incurred, the question is how long do you want to take to pay it.
It is already built-in to basically the fair value of that liability.
So we just felt that really there are two separate situations that we have going and we do need to manage our leverage sort of in the low 20%s.
All in all we felt this was the right time to do it because the market was available to us.
And we didn't want to miss it.
I think in general, what I would tell you is as I said, our view is that the balance sheet is stronger today than it was at the end of the year and stronger than last year.
So in that business, we are conservative about our reserving, and so we believe that you will see a similar pattern to what we've done over the last year into the future year, likely.
And again, we do not believe in any shape or form that it was outsized this quarter from our track record (technical difficulty).
I'll just add a few more comments to that, in terms of what we are seeing in the diminishing margins, you would automatically assume that the loss ratios will creep up.
However, to <UNK>'s point earlier, as we are purchasing reinsurance in a slightly different shape to avoid that.
We don't see a significant deterioration in the current year loss ratios.
Yes it is.
I'm not going to be that specific, but yes, it is.
Thank you so much, <UNK>.
I appreciate it.
What's interesting about <UNK>'s question in my view is that I think the outlook for the next two years is the brightest the Company has ever been, and I think what you've seen in the trends and most of the businesses is that our ability continue to grow earnings and be well-positioned is probably as strong as this Company's has ever had.
It's pretty exciting right now.
Thank you so much, <UNK>.
Do we have any more questions.
Thanks to all of you for your participation today, and we'll look forward to speaking to you next quarter.
| 2016_THG |
2016 | SXT | SXT
#No, I think there is a ---+ the answer is that fundamentally operating profit margin will be a very good metric to think about.
We have ---+ so part one of that answer would also include the notion that we've probably culled about half of what we would intend to cull from that portfolio.
Okay.
Now the future of that culling could be very much related to a number of factors: pricing actions; it could be related potentially to the sale of a product line or an asset; it could be any number of factors.
So the timing of those things is not necessarily always highly predictable.
But certainly the intent and the strategy to essentially divest ourselves of some of these nonstrategic and lower profit margin products is very prevalent throughout these businesses.
So, I think as you look at this year, my guidance is essentially flat revenue for Flavors for the year, and that's about where we are.
So there's been, clearly, some culling activity there.
As you look at 2017, there's going to be more culling, and that is expected.
I don't want to try to give you a sense of is it a Q1 or Q3 or Q4.
That's harder to say.
What's easier to say is that, yes, I think there will be a fair amount of activity in 2017 as I look here in my crystal ball.
So, yes, I think operating profit margin will be very, very important.
It's somewhat analogous to the Color Group over that six- or seven-year period were there were times where you saw a lot of flat revenue but you continued see operating profit growth.
That was very much intended, because there was a lot of culling that was associated with that effort.
So I think you're going to continue to see a similar analogy here for Flavor at that ---+ sort of the highest level.
We don't necessarily need in every quarter to see revenue growth to see profit growth.
And it's going to be driven ---+ that mix, that restructuring, pricing where we can get it, and then of course culling.
Great.
Appreciate it.
Have a good day.
(Operator Instructions) <UNK> <UNK>, Sidoti & Company.
Morning, guys.
So, just a quick update on the timeline for the restructuring for Flavors & Fragrances.
Still first-half 2017.
And do we have an update for additional costs to be incurred.
No, I think that what we've been highlighting in the Q each quarter here is fairly consistent.
I think most of the big charges that we've taken I think we've taken.
You've probably noted by now that the majority of these costs, approximately two-thirds of them, are noncash in nature, obviously related to closures and writing off some assets or writing down other assets and property and the like.
But the cash components ---+ the severance, most notably ---+ I think that's probably about ---+ mostly the hay is in the barn on that one.
I think we're more or less there.
There could be some other smaller activity, but the bulk of that activity is complete.
In terms of the operational side of restructuring, we fully anticipate to close our last site the end of this year, transfer those products.
There will be a little bit of a carryover of restructuring into other related costs that you'll see in 2017.
To some degree that will be related to things well beyond our control like pension accounting, which is a bit of a nebulous topic for mere mortals; but for others, it's pretty garden-variety staff.
So you'll see some of that bleeding over into 2017, but I think the vast bulk of the cash has been done and even the vast bulk of the noncash has been completed as well.
It was just a housekeeping item for me.
I just want to move on to, I guess, where the conversation with <UNK> was.
Just keeping with the macroeconomic trends that you were discussing previously and just how food and beverages ---+ you see a lot of potential at retail supermarkets it sounds like.
Are you running into any product reformulation challenges as you were seeing what could be some really nice growth for a lot of new product categories coming around.
Well, I would say as a product ---+ and I think what you're getting at here is as companies convert maybe some of their existing brands to a brand that embodies a more natural look and feel and taste, that tends to be fairly complex.
And that's been probably one of the biggest factors in why you see some brands moving slower, whether they're converting to a natural sugar to a natural color or some other element of naturalness in their product.
Synthetic products, they work really, really well.
They are very robust.
They can survive a lot of production complexity.
They can be stored on shelves at 150 degrees.
There's a lot of great things that you get obviously with synthetic chemicals.
God didn't necessarily intend some of these natural products to exist in the way we want them to in a manufactured product.
This is why innovation in this industry is so incredibly important, and this is why we've been managing innovation so closely and investing so much money in that, because the nature of these products is such that ---+ hey, for every different application, and even in cases some products, you may have a totally different underlying technology associated with getting to that conversion from a synthetic to a natural color.
So I think this bodes very well for Sensient, who has really invested heavily in this area not only on the capital side but on the innovation, the people that we've brought in to really spearhead this effort.
And I think just the broad-based capabilities that we have throughout the world has suited us very well.
Just one thing about the Colors, I think it's a little bit more apparent as you transition from synthetic colors to natural colors.
But when we look at the Flavors & Fragrances side, you had mentioned that Flavors will be a rather interesting component going forward.
When we look at the product mix within Flavors is it going to be more like sweet products or savory products that you think will help drive top-line growth.
Or will it be a rather fair mix between the two.
Ideally I'd like it to be a fair mix.
Now, these businesses are not all the same size, but the one thing that is different about the business is that, as you look back at the history of this Company, some of these segments ---+ whether beverage or savory or sweet ---+ were far more involved with selling flavors.
As I've noted a number of times in the past, when you look at our savory business, the history of that business has essentially largely been attached to selling ingredients, things like yeast extract and hydrolyzed vegetable proteins, which in some markets constitute the flavor, but in the markets that we're really focusing on they are really more just like a building block.
So from that standpoint I would expect to see the largest percentage growth of flavors to be in businesses like savory flavors.
But I see, based on the customers and the markets that we are pursuing, the technology that we're developing, we intend to have a very broad-based approach.
The chemistries that separate beverage and sweet are not great.
The chemistry that maybe separates beverage and sweet from savory are much greater, but not impossible.
But I think that's a little bit of the difference as well.
So, yes, this is very much a broad-based approach, because many of the customers we deal with and work with, they have a broader portfolio.
They deal in perhaps any one of these flavor categories.
But as you look at each of the markets, we may have a stronger outcome in some, simply because of macroeconomic trends.
But in other cases, the stronger outcome just simply may be related to the size of the current Flavor business today.
So, yes, you're not going to ---+ I don't think you're necessarily going to hear me say: Hey, we're going to really focus in on beverage and maybe less so on sweet and flavors.
That's not my thinking on it.
Okay.
Just when I think about your end-market customers ---+ and I don't know if maybe there's a data point that you have, and if you do, I would think it would be more skewed towards retail as compared to food service.
But what percentage of your food and beverage products end up at retail as compared to food service.
Well, the vast majority, I would say, would be retail.
But that's not to say that we don't have a significant presence in food service.
I would say our presence in food service would be stronger in Color than it is in Flavors.
But to give you the distribution, I don't have that off the top of my head.
We would have to do a little work on that one to get you an answer there.
But I can tell you this, that certainly the majority of it is related to retail.
I'm speaking with more and more management teams; and depending upon where they are situated, the concern has been that food service is losing share to these retail supermarkets, which I think positions Sensient well to capture a changing consumer and a changing consumer's habits.
When I just look at some of the differences between the Colors Group and the Flavors & Fragrances Group, is it fair to say that we should continue to expect Colors to outperform Flavors & Fragrances at retail.
I think for the time being, sure.
I think the macroeconomic trend towards natural colors at this point is very compelling.
In our position across a broad base of A, B, C customers ---+ food service, you name it ---+ it's quite considerable in Colors.
A few years ago, in anticipation of this perhaps slowdown in growth in certain segments of the market, we invested very heavily in a sales and technical force.
So rather than try to go out and find some little color company and go after little customers, we just invested organically in that effort.
So I think that has positioned us very well to be successful, whether our growth is going to come from the A, B, or C, customers.
Now on Flavors, we have a little bit of a different scenario.
We weren't as invested in those big A customers because, again, we weren't necessarily traditionally focused exclusively on Flavors.
So much of our effort on Flavors is more of these B and C local, regional generics; in some cases quick-service; in some cases, what you would call a retail-type outfit.
And I think that positioned us very well to take advantage of the fact that, to be perfectly frank about it, they're launching more products more quickly, and they are more perhaps dependent upon a supplier to bring a product to market ---+ certainly more so than what you would view as or I would call a big multinational or an A customer.
So yes, I think the fact that we invested there in Colors, that's positioning us well for whatever shift you may see in the market.
But I think because Flavors were not as invested or we don't have as much business with those bigger brands, I think it positions us to be fairly nimble in terms of where we spend our time today.
Okay; that color was helpful.
The last thing before I jump back into queue, when it comes to your raw material costs, I get that no single raw material accounts for more than 3% of cost.
But it always seems like something pops up every quarter, whether it was like garlic powder or onion raw material costs.
Anything that we should really be focusing in on that's moving one way or the other, whether it's going to crimp margins or help margins, over the short term.
No.
I think certainly there is a well-documented shortage of garlic in the market, the global markets.
That's not just a US phenomenon.
Garlic, as you probably know, is grown in a lot of places ---+ the US, China, many parts of the world.
That would be an area that, just due to shortages from lower crop yields, that has been an area where raw material costs have certainly ---+ we talked about this year.
But, yes, beyond that, most of the other products there are substitutes.
Sure, we could talk about vanilla; we could talk about citrus, things of that nature.
But as you read it back to me in the first part, it's only 3 or 4 percentage points of the overall business.
The reality is, some of these things come suddenly without warning.
So to that end, whether it was eggs last year or vanilla this year, there's invariably going to be a raw material that you're going to have to try to mitigate the impact of that inflation.
Ideally, pricing is an avenue.
But in a lot of cases we work directly with the customer to substitute the product.
So if it's a raw material X, and you have a substitution which consists of raw material Y and Z, many, many customers are very interested in taking that approach.
Okay.
We understand; help us to formulate out of that raw material.
Now some products and based on some labeling requirements, that can be very, very difficult.
And quite practically speaking, that's not a solution in a six- or nine-month period.
For smaller brands, oh, yes; you could do that much more quickly.
But that is always a lever as well that you could utilize.
But I think between those two levers I think we fared pretty well over the years, despite a lot of inflation in some unusual raw materials that we've utilized.
But, other than garlic, you may not necessarily hear us talk about those because the impact we've been able to mitigate.
I know you guys have been mentioning over the past couple calls about garlic.
I just wanted to make sure nothing else popped up, as it seems ---+ nothing has, but it could always be a surprise.
That's it for me.
Thanks again for your time, guys.
<UNK> <UNK>, KeyBanc Capital Markets.
Hey, guys.
Hey, on Flavors & Fragrances, just as far as the top line, you mentioned culling being a big piece of that.
Did that accelerate relative to 2Q.
Would the top line have been closer to flat or positive potentially, excluding culling.
Yes, I think that's a fair assessment on both counts.
Oftentimes when you cull on Q2, well then you'll feel a similar impact on Q3 or 4.
But there is a seasonality effect on some of these products.
So in other words, if you cull say a dairy-related product, yes, the impact would more than likely be greater in certain quarters over another.
Same goes for a beverage because again there is some seasonality in those products.
So that may be some of the effect that we would feel as you cull.
Okay.
That makes sense.
You mentioned in your prepared remarks Natural Ingredients and the beverage business both being pretty strong in the quarter.
Were there any categories that potentially look a little softer or are showing signs of weakness at all.
Or would you characterize it more as relatively stable in some of the other businesses.
Yes, I would say that in addition to the beverage and the SNI that you mentioned, certainly we had a lot of very good wins in our sweet flavors business, a lot of very good wins in our fragrance business in the fragrance compound area.
I would say probably, when you're thinking about the other parts of the business, savory would have trailed those segments in terms of its wins.
There was probably a little bit of a trailing factor in Europe as well versus North America and certainly versus Latin America, where growth was s quite strong.
And the same go ---+ ditto for Asia Pacific where growth was quite strong.
So, does that clarify that a bit.
Yes, yes.
Then if I could, just a quick one on Colors.
Obviously you guys have shown really nice growth there.
It last quarter was up double digits, moderated to the mid single-digit range, and I know there's these transitions going on.
So I guess the question is, how should we think about just variability ---+ and I'm talking about the top line ---+ variability in the top line quarter to quarter as these new wins that you've talked about occur and these conversions occur.
Should we think of or expect more variability than maybe in the past, or what are your expectations around that.
Well, if I off the top of my head remember, I think Q2 top-line growth in Colors is about 8.6%; and in this quarter it was about 7.4%.
So in local currency, they were both above 10%, so I'm pretty happy with that.
If it's plus or minus a percentage or two at that level, I can probably live with it and let the guys in Color go on without being punished.
Great.
Thanks.
(Operator Instructions) If anyone has a follow-up question that we were unable to get to, you may contact Kim Chase at Sensient Technologies at 414-347-3972.
<UNK> <UNK>, Roubaix Capital.
Hi, good morning.
Could you just speak to when you think you'll be complete with the culling in Flavors & Fragrances, and what you think the growth rate might look like after that.
Then secondly, do you care to comment at all on the Ink business and some of the growth initiatives that have been in place there.
Sure.
So culling, I would expect the bulk of that activity to be completed by the end of 2017, although given my earlier comments that that's ---+ there could be a little bit of plus or minus on that one.
But I think we will be substantially to where we want to be by the end of 2017.
In terms of the Inks business, as I referenced in the prepared comments, we showed a tremendous improvement versus prior year in that business.
I think this is a market that is very, very interesting, from my standpoint.
You've got a massive conversion opportunity here ---+ not unlike, although very different, but not unlike what you're seeing in the food market, this conversion from a synthetic to a natural.
But in the industrial inks world you're seeing a conversion from an analog solvent-based product, with all the related environmental problems and the like, converting to a digital, which is to say variable data type transfer of information to a printer based on water-based inks.
So to me this is an inevitability of the market.
When you consider the fact that there is a tremendous amount of pollution in the world generated from analog solvent-based inks, and the opportunity to convert those to a water-based product, that to me is a very obvious and compelling market to be going after.
Now when you also consider the fact that it's a very technically driven market in many of these segments, that, too, is a very appealing market to us, because we see technology in that type of industry as a real broad-based differentiator for us.
Now we've historically operated in a lot of the textile world.
Polyester was our ECS acquisition that dates back to I think the late 1990s; and then as well our acquisition of Xennia, which got us into products that were suitable for natural fibers ---+ cotton, in other words.
So, the sky is the limit there in terms of where you could take that market and where that conversion will take place next.
Because if you look around you, just about anything you see with a color on it ---+ furniture, rugs, apparel, many different products ---+ they are printed in such a way that they could be suitable or they could be eligible for a conversion to digital aqueous inks.
We think this is an enormous opportunity.
This is a big part of why we made the big investment in Switzerland a couple years ago.
Yes, last year was a bad year.
But you know what.
I'm undeterred.
This is a terrific market.
The investments we made are right.
If I'm wrong ---+ I don't think I am, because all the indicators in the market and all the activity we see from the OEMs, printer and otherwise, are that this is the future.
This is where the printers are being developed for.
This is what the customers want.
And it's our goal to be on the tip of the spear of that market.
Great, thank you.
Thank you.
| 2016_SXT |
2017 | AMPH | AMPH
#Thank you, operator.
Good afternoon and welcome to Amphastar Pharmaceuticals' fourth quarter earnings call.
My name is <UNK> <UNK>, President of Amphastar.
I'm joined today with my colleague, <UNK> <UNK>, CFO of Amphastar.
We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have.
I will now turn the call over to our CFO, <UNK> <UNK>, to discuss the fourth quarter financials.
Thank you, <UNK>.
Sales for the fourth quarter decreased 17% to $63.5 million from $76.9 million in the previous year's period.
Sales of enoxaparin declined to $8.3 million from $19.9 million as a result of the termination of the distribution agreement with Actavis.
Due to this agreement, we were unable to ship units for the retail market from August until the end of December.
Other finished pharmaceutical product sales increased 10% to $50.6 million, primarily due to increased sales of epinephrine, which offset pricing-related sales declines in our naloxone business.
Our insulin API business generated sales of $4.7 million, a decrease from the $10.8 million we reported in the fourth quarter of 2015, as we restructured the MannKind purchase agreement to delay their API purchase obligations.
Cost of revenues remained relatively unchanged in dollar terms at $43.6 million, but our margin as a percent of revenues declined to 31% from 43%.
In the quarter, we booked a net realizable value inventory reserve of $3.1 million for enoxaparin, as our forecasted average selling price dropped below our cost of goods.
Additionally, we had an inventory obsolescence reserve for epinephrine of $3.3 million, as the FDA has informed us that they no longer consider our vial product to be in drug shortage, and we will no longer be able to sell it as a grandfathered product.
At this time, we do not know when we will have to discontinue selling this product, but we have asked the FDA for additional time to sell our existing inventory.
Selling, distribution and marketing expenses increased slightly to $1.5 million from $1.3 million.
General and administrative spending increased to $10.7 million from $8.7 million, primarily due to increased legal expenses.
Research and development expenditures increased 40% to $12.3 million from $8.8 million due to a $1.1 million expense related to Primatene component inventory we purchased and finished goods inventory we manufactured ahead of our PDUFA date.
This change is also due to an increase in API and component material expenses related to our ANDA pipeline.
The company reported a net loss of $2.7 million or $0.06 per share compared to last year's fourth quarter net income of $7.5 million or $0.16 per share.
The company reported an adjusted net income of approximately $500,000 or $0.01 per share compared to an adjusted net income of approximately $9.1 million or $0.19 per share in the fourth quarter of last year.
Adjusted earnings excludes amortization, non-cash equity compensation, and impairments.
On December 31, 2016, the company had approximately $74.3 million of cash, restricted cash and short-term investments.
In the fourth quarter, cash flow from operations was approximately $14 million and was positive for the 11th quarter in a row.
Let me review a few of the financial assumptions we are using as we look to 2017.
As I mentioned earlier, the price of enoxaparin has dropped even further.
Additionally, we will have to discontinue selling our epinephrine in vial, since the FDA no longer considers this to be a drug shortage item, and we do not know how long we will be able to continue selling this product.
We expect shipments of RHI API to be flat this year, as we expect decreased demand from MannKind to be offset by other customers.
We expect one large ANDA approval, which will provide meaningful sales in the year.
We expect that our gross margins in the coming quarters will be relatively flat compared to the average 2016 gross margin until we are able to launch new products which we believe will be able to sell at higher average margins.
We expect incremental G&A spending increases related to legal expenses and compliance costs.
We expect research and development spending will increase in both dollar terms and as a percentage of sales, as we are planning to begin several expensive clinical trials, although a material portion of our planned increases for clinical trials won't occur until the second-half of the year.
Also, during the first quarter of 2017, we sold the ANDAs we had purchased from Hikma last year and realized a $2.6 million gain.
We sold these, so that we could focus on other priorities, including our planned reentry into the U.K. market in 2018 and our R&D pipeline.
I'll now turn the call back over to <UNK>.
Thanks, <UNK>.
Since our last earnings call, we filed three additional ANDAs and removed two ANDAs for market reasons.
That brings the total number of ANDAs on file with the agency to five, which represents a market size of over $1 billion.
With respect to our CRL for Primatene Mist, we have been in communication with the FDA regarding their request for an additional human factors study, and we have scheduled a meeting with the agency to discuss this issue.
With respect to our CRL for intranasal naloxone, the FDA identified four primary issues that need to be addressed prior to approval of our ANDA.
The four issues are comprised of, one, improving on our human factors validation study; two, modifying the delivery accuracy verification method; three, improving the standards of device reliability; and four, adjusting the volume per actuation to account for pediatric use down to birth.
We continue to assess the CRL and intend to work with the agency to address their concerns.
As <UNK> stated, the FDA recently requested that the company discontinue the manufacturing and distribution of our epinephrine injection USP vial product, which has been marketed under the grandfather exception to the FDA's Prescription Drug Wrap-Up program.
The company is currently in discussions with the FDA regarding the timing of this discontinuation.
We're also in discussions with the agency regarding our application for this product.
We have a planned shutdown of a portion of our IMS facility in the month of December 2016, in order to perform construction to increase capacity and modernize the facility.
We believe that this will be very helpful to our efforts to launch some of our future pipeline products, as well as our IMS U.K. products that we acquired last year.
On February 9, 2017, the First Circuit Court of Appeals heard oral arguments regarding the District Court's dismissal of our antitrust lawsuit against Momenta and Sandoz, which alleges that the defendants deceived the U.S. Pharmacopeia regarding the setting of a standardized test method for enoxaparin.
On March 6, 2017, less than one month after oral arguments, the First Circuit Court of Appeals issued its decision, in which it held three to zero that the District Court of Massachusetts erred in dismissing the company's antitrust case, and sent the case back to the District Court to consider additional arguments.
We are very pleased with the decision by the U.S. Court of Appeals, and look forward to progressing with our antitrust case.
We also intend to raise the issue of deception in the USP in the upcoming jury trial in the patent infringement case, which is scheduled for July 10, 2017.
With that update, I will now turn the call over to the operator to begin Q&A.
We haven't focused on the ampule, since we don't sell the ampule, so I probably can't answer that question.
And all of the opportunities are $100 million-plus in terms of IMS sales.
Yes.
Yes.
So we, yes, I'll stand by where I said before is that, we're expecting that the average 2016 margin across the year will be what we start the year with the first couple of quarters, and until we can get some new products launched.
Then, the reality is that on the enoxaparin product now that that price has come down.
And at some point during the year, we'll also have to stop selling epinephrine, most likely during the year, and that's a very high margin product.
Yes.
So we're looking to do two to three more filings this year, and so hopefully, we'll get some approvals.
But without knowing what the FDA will do, internally, we're targeting two to three filings additionally this year.
Right now, most of our volumes have kind of flattened off from the increase that we had previously.
And the pricing decreases are year-over-year, I think, we characterized it as like $1 million-plus.
So they're material, but they're not that major.
All of the Hikma ANDAs were sold.
Our plan is to launch those in the first quarter of 2018.
As far as the customers go, we've pretty much stayed flat.
As I kind of alluded to in my last question, we did lose some minor enoxaparin retail side customers, but some smaller ones.
But we held on to a majority of the customers including the largest one there.
So there will be that change.
But there were really, no other products had any significant changes.
And then in terms of our filings, so we removed two that were older.
But the one that remains that's the most mature is the pre-GDUFA product.
That's the one we've been sort of signaling that we expect approval this year and it could be meaningful to our earnings.
And then the additional three that we filed, they all have GDUFA dates for this year.
Yes.
Obviously, with the PDUFA, you've got a set series of meetings and communications, and we received information requests on both products throughout the process, and felt positive.
So we were and more recently on the naloxone very surprised by the CRLs, and we do believe there may be some misunderstanding with some of the data that we've submitted, and that's the reason why we're seeking meetings with the agency for clarification.
Yes, we are committed to both products and believe that they both are approvable.
Oh, yes, sorry.
So we have - we are aware of some potential competition in terms of the injectable naloxone.
Of course, we don't know any specifics, but we have heard some rumblings that, but just like any drug, there's always that potential.
Good question.
This is the second CRL, and they have acknowledged that we've made good headway since the last one.
But it was frustrating to hear that they think an additional study is needed.
It sort of comes down to the data that was submitted, and they think that some further improvements to the label could be made to even further increase the ability of potential consumers to understand this.
We have a meeting scheduled with them to clarify some of the data that we've submitted.
We believe that we could do another study relatively easy in a short period of time.
But to your point, we don't want to just run another study, resubmit, only to get another CRL.
So we want to make sure, we're on the same page with them.
We think that last study that we did, the pivotal study passed, and meets the criteria.
So that being said, the most recent response letter is relatively straightforward, and we could just move forward with a study.
I think the meeting will help clarify some of these issues.
And we are very optimistic about the new administration and the recent nomination of the FDA commissioner.
I think there has been a lot of talk about the 21st century Cures Act, which instructs FDA among other things to consider the use of real-world evidence to support new drug applications.
So overall, we are committed to this product.
We will continue to work to get it approved.
But we think having another meeting with the agency to make sure we're all on the same page makes the most sense.
Sure.
Great.
Thank you, operator.
I want to thank everybody for participating on the call today, and this concludes the call.
I hope you enjoy the extra hour of sunlight this evening.
Have a great day.
| 2017_AMPH |
2016 | JCI | JCI
#So when you look at it overall, how <UNK> mentioned in the high hazard, heavy industrial piece, that is down in the low mid single-digits, but the oil and gas specifically is down closer ---+ in the mid-teens level, kind of similar to what we have seen, and very much in line with our expectations.
Up a couple ---+ maybe up 1 point or 2.
Yes, I think overall, again, I'd attribute some of our improvement to the work that we've done from a commercial standpoint, in making sure that our resources are positioned where the activity is, and that we've got the right fundamentals in place.
So some of that improvement that we're seeing, I think is purely operational.
I would say where we are seeing some strength is in the commercial space, and being able to capitalize on that, as well as some of the institutional.
Certainly, we're still seeing weakness in oil and gas.
It's mainly in the marine space in Korea.
The ---+ when you look at hospitality, we have a big presence and have been very successful in Macau.
There has been some weakness there, although recently we start to see some pick-up in activity, and I think that now is being recognized more broadly.
So what I would I say is that some of it is operationally, the ability to be able to capitalize on where the growth is occurring, and then maybe additional stabilization within the overall economic environment.
Operator, we have time for one more question.
Good morning.
Hi, Jeremy.
Sure.
When we laid out our three year plan ---+ or the second three year plan, it was over a year ago November, when we laid it out.
We said that we were still positioned with the productivity initiatives to generate about $35 million of net productivity on an annual basis.
And that was through all of our key productivity initiatives, continuing to drive savings on cost of goods, as we focused on the buy, a pretty significant buy, streamlining that, and getting leverage on the buy.
It was continuing to simplify our footprint, on not only North America, but also across Rest of World to be able to leverage our real estate footprint.
And then, more important, with consolidation of the services that support that footprint.
And we were, as we now enter this merger, we were about halfway through the progress that we're making, relative to really getting towards entitlement of that cost.
And so, we're continuing that activity, and in some cases accelerating that now with the planning that we've been doing with the integration with Johnson Controls.
And that's where you can get the additional savings above and beyond what was planned.
Sure.
This is <UNK>.
You might recall, the IRS settlement earlier this year, and as a result of that IRS settlement on the intercompany debt matter, we reviewed the status of all our reserves associated with both our 2007 and 2012 tax sharing agreements.
Based on this analysis, we reduced our total reserves by $71 million, of which $54 million went through the other income line, and $17 million represented a benefit to the income tax line.
And both of those are special items in the quarter.
Thanks, Jeremy.
I'd like to turn the call back over to <UNK> for some final comments.
So once again, I'd like to thank you for joining us for what was our last official earnings call as standalone Tyco.
As we head into the merger and closing, I'm looking forward to working with Alex and our new leadership team.
I have been continually impressed by the level of talent and depth of expertise demonstrated by the employees of Johnson Controls, and I have been extremely pleased by the way our teams have come together.
I would also like to thank <UNK> for his leadership and guidance over the last year.
He quickly learned the business, and has made significant contributions to the team.
He has been a strong partner to me on our journey, and I wish him the best in the future.
I look forward to speaking with you on future calls, and at our Analyst Day on December 5 in New York.
Thank you, operator.
That concludes our call.
| 2016_JCI |
2017 | KSS | KSS
#Thanks, Bruce
Let me start with a few comments on the overall results for the quarter, and then I'll provide more color and the progress we're making around each of our key pillars and the Greatness Agenda
Most importantly, we returned to a positive comp increase in the third quarter and we continued the steady improvement in sales results we've seen all year
As you know, driving traffic is one of the two key priorities for our company
And as Bruce shared, there was sequential improvement again in our store traffic metrics and this increase in traffic was the driver of our improved sales performance
From a timing perspective in the quarter, we had a strong back-to-school selling season with sales from the beginning of August through Labor Day, up low single-digit
This was driven by particularly strong performance in kids and footwear, and continued strength in Activewear
The rest of the September sales period was weak, affected substantially by the impact of hurricanes in some of our regions and unseasonably warm weather throughout almost all of our regions
Sales turned positive again in October, driven by particular strength in the back half of the month
Regular price sales for the quarter were up 1%, while clearance sales were down 7%
This was driven by lower levels of clearance inventory
On an overall basis, a portion of our improvement in our sales trend is attributable to our targeted efforts to capture share from competitive store closures in some of our trade areas
And we expect this will continue, if not accelerate, through the holiday seasons
From a category standpoint, the positive comp performance was broad-based with nearly all categories improving their sales trends
Men’s, footwear, kids in home, all reported positive comp increases in the quarter
Our core women’s business was negative, but we did see continuing improvement in the trend, particularly in our private brands
The accessories category continued to lag the company was down mid single-digit
Looking at our progress on our individual key pillars, on the product front, our active business increased almost 20% for the quarter, an acceleration of the year-to-date trend
Both apparel and footwear categories in Active were strong and this was driven by large increases in both Nike and Adidas, as well as continued strong performance from Under Armour
We continue to gain market share in Active and we expect the very strong holiday performance in both Active apparel and footwear categories
Our national brand penetration rose to 56% for the quarter, up 300 basis points
This was driven primarily by the Active growth, but we also had growth in several other important national brands, including Levi’s, Carter's, Van Heusen, Tag Heuer, Columbia and Fitbit
We also launched the Clarks footwear brand to further expand our footwear offering
Our private brand performance saw significant improvement and substantially all brands reported improve trends
This was driven by the growing impact of our speed to market efforts and improved performance of our Jumping Beans children’s brand at back-to-school and the re-launch of our Apartment 9 brand
Our exclusive brand performance continued to lag the total, but that’s primarily result the paring down of brands and categories in that area of the business
Two of our most important exclusive brands, Vera Wang and <UNK> Conrad, grew by double-digits for both the quarter and year-to-date
In our efforts to provide a seamless and easy experience, we continue to make great progress in delivering the best in class omnichannel experience
Online generated demand sales grew 15% for the quarter and we continued to grow the percentage of those online orders that are fulfilled by stores
Stores fulfilled 30% of the total units for the quarter with both Opus and ship from store growing significantly compared to last year
Productivity metrics improved again, resulting in lower cost of shipping and fulfillment as a percent of total digital sales, which aided profitability
We also opened our 5th DFC, which we expect to contribute significantly to our ability to grow our business and improve efficiency, beginning next year
Improved experiences in our mobile applications increased digital conversion at a low double-digit rate and mobile accounted for 67% of our traffic in the quarter
In the area of personalization and savings, we continue to enhance our capability in using data and analytics to drive our marketing, digital and personalization efforts
In the quarter, we increased our level of personalization and key marketing events, as well as leveraged our new insight based pricing tools to deliver new promotional events that are resonating with our customers
We completed the rollout of Your Price during the third quarter
Your Price shows the personalized price of individual items based on the customer specific offers and provides immediate visibility to the value of those customers receive at Kohl's
Our personalized search initiative makes it easier for customers to find what they’re looking for based on shopping preferences from previous online and in-store purchases
And finally, our smartcard application continues to provide customers an opportunity to save more by choosing to pick-up in-store versus ship-to-home on their online orders
During our second quarter earnings call, I mentioned that we would pilot a further evolution of our loyalty program next year
Our royalty program includes the Kohl's Charge, Yes2You Rewards and Kohl's Cash Elements
The objective of the pilot is to simplify the program, broaden the reach and provide even more rewards to users in a program that already is best-in-class
With over 30 million unique customers utilizing at least one of the elements of our loyalty program, we believe this next evolution has great opportunity to drive a step change in traffic and sales
The timing of the pilot has now been set for the second quarter of next year and approximately 100 stores will participate
We would then include the learning from this pilot in an expected companywide roll out intended for fiscal 2019. Finally, in the area of store optimization
We continue to make progress in amplifying the role and the relevancy of our physical stores across a number of fronts
Success many of these efforts has built further conviction and the importance of our physical stores and our long-term success
First, we opened four new 35,000 square foot stores in dense trade areas in the third quarter, and the openings were extremely successful
We now have 12 of these stores across the country in both secondary and major markets
Beyond the potential for growth these stores provide us, they importantly provide us insights into how we can operate our other stores more effectively in the future
Second, our standard to small store strategy continues to drive lower inventory levels and is resulting in improved profitability in over 300 of our stores
As Bruce indicated, inventory per store at the end of the third quarter was down low single-digits and is expected to be down mid single-digits at the end of the year
This is our seventh consecutive quarter of lower inventory per store
And on two years stack basis, our inventories are down in the low teens
More importantly, we still believe we have the ability for future multi-year contraction in our average inventory per store
Obviously, there’s significant positive implication for improving our work getting capital and our cash flow metrics
Third, in the last quarter, we continued to refine the opportunity on rightsizing some of our lower volume full size stores with new tenants base being developed as a result
You should expect to hear further developments on this effort in the fourth quarter call as we expand this
We also continue to test and iterate our future store experience through our Your Store initiative, and we’ll share more details on this initiative on the fourth quarter call as well
Finally, there have been a number of questions regarding the test of Amazon smart home experiences in 10 of our stores, and Amazon returns at goals in maybe two of our stores
I’m pleased to say that both test launched successfully in mid-October in select stores in the Chicago and the Los Angeles markets
At this time, we won’t share any other details in the test, beyond the store location
And while this contained previously on our press release in the subject
But the objective from our perspective is very simple and very straight forward
We believe both of these tests have the potential to drive incremental traffic to our stores, which as you know, is our number one priority
In summary, the third quarter showed continued improvement in our financial results
We are on track to achieve the goals we established with investors at the beginning of the year
Just as importantly, the results further reinforce to us that are two key priorities of the right ones
On the number one priority of driving traffic, we feel we’re very well positioned for the fourth quarter with lien and well balanced inventories, compelling products, more fully developed personalization tactics in place and a strong digital business trend going into a period when online demand is at the highest penetration of the year
On our other priory of operational excellence, we have made additional investments to support our long-term omnichannel strategy
These include moves like building out our fulfillment infrastructure, moving much of our technology to the cloud and launching new applications to make the customer experience easier
At the same time, we’re innovating with new smaller store concepts, rightsizing some of our stores with other retailers and piloting concepts like our initiative with Amazon
In spite of these investments, we remain on track to reach or exceed our goal of $250 million in expense savings over the next three years
Managing operations has always been strength for us and we believe we can continue to build further on that
And with that, Bruce and I will be happy to take your questions
Question-and-Answer Session
As it relates to the competitive activity, now competitive activity had no impact at all on our margin
From s margin perspective, as Bruce indicated in the call, gross margin obviously decreased and that was a function of certainly higher shipping cost due to the growth that we had online, that's not new
But also various reserves required simply because of when the timing of sales came, we had a lot of sales late in October that I think were probably driven by pent up demand during the weak September sales period
Merchandize margin actually improved in the quarter and that was not a surprise to us
We had expected that
So in terms of just managing our business, managing the mix of our business, managing our inventory levels that's really, for the most part, all good news from our perspective
Looking into the fourth quarter, I think you can probably tell from how we’re describing our business trends that we’re very confident about what's in front of us
Our inventories are very lien
They were really well positioned
We had an very strong trend in the third quarter
We had a great trend coming out of the third quarter
Our home business, which as you know, penetrates more highly in the fourth quarter than the rest of the year, is extremely strong
I think it was up mid single-digits low to mid single-digits again in the third quarter as it has been for the year
And very importantly, from our standpoint, our digital business grew double-digits again and as you know that this is for entering the most important quarter for digital
So I think we're super confident as we go into the fourth quarter
I think the guidance that we gave at the beginning of the year, the only thing we've really done in this quarter is to raise the low end of the earnings guidance up in recognition of the strong performance we've had all year
And the components of the guidance, I don’t think really have much changed
I don’t know if you have anything to add there
The impact of ship from store and by online pick-up in store during in the fourth quarter is, as you can imagine, very high
And in particular, the impact of buy online pick-up in the store as we get closer to the holiday season accelerates really dramatically
So said another way, I guess, the changes that we've made and initiative we have put in place to drive customers to consider picking up in store, I think will pay us big dividends in the fourth quarter
We tested smart card and then roll smart card to our desktop platform in the third quarter
And the results of that are very encouraging
It is definitely driving increased decision making of customers to choose pick up in store, because we give them a benefit to do that
Well, I mean overall for---+ and jump in here Bruce if I get this not exactly right
But the overall for the fourth quarter we’ve increased our marketing
That was planned to increase our marketing
We think we have a big business opportunity
Clearly, leveraging marketing this year has been successful
I think for the year, we’ve done a really good job in terms of leveraging marketing
So I’m hopeful that platform we have in place for the fourth quarter from marketing spend will continue to drive that
Some of the initiatives that we launch new in the third quarter for instance the tactics and strategy around taking advantage of competitors’ closures look to have paid dividends and those stores definitely outpace the company and we got a lift in those stores
So I don’t know if that answers everything for you
Bruce, I don’t know if you have anything to add
Vera Wang business is great
It’s been running super-strong all year long
I suspect the effort that we’re putting around celebrating the anniversary of our partnership with her is going to probably accelerate that, Bob
And Vera is the largest and most important exclusive brand we have
So I’m thinking it’s going to help lift our exclusive brand sales
You’ll probably remember from the call, the biggest improvement we had in our overall brand portfolio was in our private brands where speed to market some resurgence in our Jumping Beans business and the re-launch of Apartment 9 drove that
Overall exclusive brands have definitely trailed the company but the brands that we’re betting on, brands like Vera or brands <UNK> Conrad, those are growing dramatically
It’s more a case of us editing and pairing down and eliminating categories or other brands that aren’t performing
I can probably answer the first part and then Bruce can answer the other part, <UNK>
Back-to-school, which we characterize from 1st of August through the Labor Day date, the 1st week of September
We were up about 3%
And there was consistent performance the whole quarter and consistent performance across the most important categories, things like footwear, Activewear and children's
September was very weak from that point on
So second week of September through 1st week or so of October, we were down low single-digits
But frankly, I attribute that completely and totally to certainly the hurricane
Bruce, I think quantified that to the best extent we can and we've got pretty good handle on that part
But also unseasonably warm weather
We had warm weather in all of our regions
So that part of the quarter really suffered as a result of both of those things happening
And then the end of October, we were up again
So for October, we were up, let's say, closer to 1% with the end of October being stronger than that to drive that 1% number
And there wasn’t anything unusual
Though, we did, I think as you know <UNK> in these kinds of seasonal businesses when you have periods of low demand due to weather and hurricanes then you’re going to get pent up demand and it's going to come back stronger towards the end
And to some extent, you can almost see that even in our gross margin performance because one of the reasons why our gross margin was down certainly shipping cost impacted gross margin, merchandize margin up, gross margin down, shipping cost was a factor than a factor all year of course
But the other big factor would just these end of quarter reserves and accruals we had to put in place because the sales came really, really late and that’s just sometime how it happens
And in this case, that’s how it happens
So there wasn’t anything unusual from a promotional perspective that we did to drive that
On the first part in terms of the traffic drivers, like everything, <UNK>, it’s a multiple of factors that are going to lift our traffic continuing going forward
Some of it is of course very straight forward, which is all these efforts that we have in place around personalization and particularly in our digital marketing, which is now our largest marketing spend where we’re delivering more specific offers based on customers past preferences and reaching them more directly
So I think that’s a big, big role
Product of course where retailers of product plays a massive role and as we think about driving traffic, having more relevant product in our stores, is a big part of, I think, the resurgence in traffic
People are finding what they want more regularly
I would say the third piece is, as you know, we’ve made very large investments to be best in class from an omnichannel standpoint
And therefore, what we present to customers digitally online giving them access to everything we offer is a big component of this
And then giving them the opportunity to make the decision where they are going to buy it whether we ship it them whether from our stores at EFC, or they visit one of our stores to pick-up in store, I think that's probably the third big factor
In terms of the two businesses that have been lagging, I wouldn’t want to get ahead of myself too far
But I think I would say that we're more optimistic on our women's apparel business turning positive
You just see it in the trends
It's consistently improved
The private brand penetration in women's apparel is extremely high
And therefore, when we start seeing improvement in our private brand performance, we can anticipate more improved performance in the overall women's apparel business
I would be less optimistic on accessories
I think that's a tougher business for us right now
You can see it in the numbers
We talked about that in this call
But women's is an important component
And if we can get the women's business to move positively that is going to pay big dividends for our overall business
<UNK> <UNK>g And our last question is on the loyalty evolution
This is a really nice catalyst and opportunity as you simplify and embrace, and I'm sure you can leverage it to drive enhanced personalization, even more than you’re doing
So how ---+ what are some of the parameters around the test and the evolution? Because it looks like you will have to integrate a lot of pieces
I'm just curious about the opportunities and risk, and what you think will happen when you step change and embrace that? Thanks
I mean, as we look at it, there is no risk
We have ---+ we're building from a massively successful program to begin with
And what that’s allowed us to get is great insights and great information to build it better
Fundamentally, in the easiest way possible, we talk about it by saying, hey, we got to simplify it, there is multiple components and so making it easier for customers to understand would help engage more people
We have to broaden it, meaning we have to reach more people outside of our charge base, because a large percentage of our loyalty program realizing that charge base
And then without question at all, we want to engage more over the course of time
So I think our sense is that this is going to be a positive for the business
Beyond that, the details of it, I think I would want to wait till the February call and we’ll give you a lot more specificity around what the program looks like
I don’t know if you have anything to add there, Bruce
On the second part of the question, I can definitely give you a quick answer, which is the drag due to shipping fulfillment was very typical of what we see each and every quarter
So there is no change there
There is no change in trend
And it is pretty much as expected
In the fourth quarter you’re right, the penetration is much higher, I think Bruce has got the number roughly
And of course that's all built into our forecast and our thinking in terms of how we give you the guidance
Well, I mean fundamentally at the end of the day, what we believe is that we’re going to get an increase in our merchandize margin
We’ve had an increase in our merchandize margin
We expect to continue to have an increase in our merchandize margin
And the reason though we do is, are the components of the merchandize margins are working in our favor
Inventories are better managed, inventories are leaner, inventories are more relevant because receipts see are coming closer to sales
And as a result of all of that, we have improved merchandize margin
And then of course, working against this is the headwind of shipping and fulfillment
But we’ve done a pretty good job of anticipating that impact, and it’s been very consistent
So I would expect it to be consistent in the fourth quarter as well
I mean, generally, I don’t want to get over my skis on this
But generally, the warm weather in those four weeks in September negatively impacted sales in total for the quarter
And you see it because the seasonal categories, which are significant percentage of our total business, ran down, let’s say, mid single-digits
And in spite of that, we had a positive overall comp
So that’s the main indicator that you have that it has an impact that puts the hurricane to the side that’s just looks at the seasonal categories
And then we’ve continued to see strength
So you combine those two things together and you got to say that is a good signal
Well, non-credit is definitely running better
It’s leading
You can see that from a share perspective Kohl’s Charges as a percentage of our total business
That is not by accident or by chance
As you know, Chuck, we’ve had a strong initiative in place to broaden the reach of Kohl’s to more customers
And by default, that means make some of our value more appealing
So a lot of these technology implementations do that and make it easier for more casual customer to consider Kohl’s and get the kinds of value that typically might have only been seen clearly by our charge customers
So usually growth in non-Kohl’s Charge business is a very good signal for us that we’re on the right track to improve performance, looking forward
And the other piece that I think is important that varied in there Chuck is that for the first time in quite a long time, we have begun to see new customer acquisitions grow
And that has not been the case for us for quite a long time
And so that’s another indicator that the offering, both product and marketing that we’re delivering, is more appealing to people who haven't traditionally shopped at Kohl's
Well, I mean, we've staked out our space, Matt
I think, we've looked at our business and recognized that our long-term success hinges on our ability to deliver best-in-class omnichannel experience
So that means recognizing that on the digital side of the business, we have to compete with virtual retailers, like Amazon, as well as general merchandize retailers, let's say, in our private brands, like Target and Walmart, as well as general merchandize department stores who offer similar categories that we do
But the biggest asset we think we have is our stores
And the fact that we’re non-mall based, 95% of our stores are in strip or freestanding locations, gives us a huge advantage to be an omnichannel retailer in the future
And so everything we're working on is to fundamentally make that happen
And our sense and we're probably sounding very optimistic, because we are, is that this is working and it's delivering
And you’re seeing it in the results
And traffic is improving sequentially all year sales are improving sequentially all year
Bruce just updated our guidance by raising the low end, which tells you that we're very confident going into the fourth quarter
So I think our focus is how do we continue on this path to be the best we can from an omnichannel standpoint and so many of our investments are targeted there
I mean the store competitive closure strategy or the tactics that will continue in the fourth quarter
And we're probably more optimistic on that just because we now have the third quarter results behind us, so we can see we actually got a lift
From initiative perspective, I think we covered a lot of the things we're doing in the fourth quarter
But the trend of the business coming out of the third quarter and now into the fourth quarter, just indicates to us that the things we’re doing are working
I mean, I can probably provide some of your answer and Bruce can give you any specifics he wants to add
We did talk about national brand mix in call it grew 300 basis points as a percentage of the total, which means that it grew in the mid single-digits as an increase, which by default means that our proprietary brands were modestly down as a result of that
But it was functionally all because of the edits and pairing down of the brands and categories we offer in the exclusive brand portfolio
So our actual private brands performed pretty well
It was a nice increase step up in trend
On an active business, yes, I’d say mid-teens is a good number to use
We have aspiration of it going higher as customers continue to move into that lifestyle
So I think we’re well positioned to take advantage of that, for sure
But third quarter continued the same trend
On a sales basis, it accelerated but as a percentage of the total, yes, I’d use a mid-teens number
On Amazon, there is really not anymore color other than to reinforce what I said in the call
We have a really very simple straight forward objective here
And that is driving traffic is a number one priority we have as a company
And initiatives that might help us drive traffic and allow customers to consider Kohl’s as a stop instead of somewhere else, we’re going to consider
And we think these are two companies that share a lot of common trades in terms of their pursuit of excellence
And so, it just made a ton of sense for us given the objective we have
I mean, the two big things are home over penetrates always has, you can imagine there were obvious reasons that that happens
And the second piece of course a little bit connected to the first is national brands over penetrate, as well
But those two things are tied together right, because home is more highly penetrated than national brands, as well
So national brands more important online and home definitely important online
Again, we’re back to this discussion with the fourth quarter one of the reasons we’re relatively bullish on the fourth quarter beyond the trend of the business coming into the quarter is just that online business has been very strong all year, home business has been very strong all year, national brands have been strong all year
I can do the first part
Bruce will answer you on the SG&A
And the speed the market initiative, we continue to make really good progress there
Without going into all of the details about the individual brands percentage of products receives, which is on speed to market versus not on speed to market, the way I would characterize it
And I think you can watch the performance of two metrics as indicators as to whether or not we're making progress
Number one if speed to market is working then inventory should go down, while sales should outpace inventory
So I think third quarter is a great example of that
They came into the quarter with less inventory than last year we came out of the quarter with less inventory than last year
And yes, we had a positive sales increase
So what that says to me is we’re delivering more relevant merchandize more closely to need and overall very-very positive
And the obvious metric watches our merchandize margins improve
Though, particularly in our private brands, do we start to get improved performance and I think all three quarters this year we've stepped up performance with our private brands and a lot of it is due to the speed to market initiative
On the SG&A stuff, I think, Bruce would have that
<UNK> on the competitive store closures, the way ---+ the only way I would characterize it is that obviously we have a relatively sophisticated tracking system for this looking at the sales of the stores and trend in and the sales of the stores in the trend out
And there is no question that in the markets in which we’ve targeted competitive store closures, we have lifted sales
I wouldn’t want to quantify it for you and I wouldn’t want to at all try to project that until like some future performance, because I think that’s dangerous to do
But there is absolutely no question that sales have lifted in those markets
For sure, when we have opened stores in markets, omni sales are positively affected and when we closed stores in markets omni sales are negatively impacted
I can’t tell you and I don’t think we have the numbers on these specifics stores
So I wouldn’t want to go there with you right now
But there probably be a point in time down the road where we could give you more information on that
But there is absolutely no question that omni sales are positively or negatively impacted based on the scale of the physical environments you have
And so that’s why ---+ again, we’re back to this why we feel so strongly about our store base
Continue to make progress, again without going into all the detail in the various areas inside the business, some are making more than others
As you can imagine some regions or country are more positively impacted by localization than others
But I always ---+ the two metrics that I look at is if localization is working what we’re seeing we’re doing is effective then you should see inventories become more productive
I think we would say they have been and you should see merchandize margins improve
And I think actually that has happened as well
So those are the two primary impacts
Of course, it should have a positive impact on sales, as well
And I think as you look at this year, we were down close to 3% the first quarter
We were down still modestly in the second quarter and we were up in the third quarter
So it’s definitely having an impact on sales
| 2017_KSS |
2015 | MOV | MOV
#So basically, in all the ---+ we have very limited distribution for <UNK>ge.
We are launching it very similar to how we launched Bold about four years ago.
And at every retailer that we are operating in, we are obtaining incremental space for <UNK>ge.
It is ---+ the whole collection today is 14 SKUs.
It will grow.
But we are very pleased with the initial results and have gotten great reviews from our retail partners; the press; and, even very early on, also from consumers.
So we are pleased with that.
I think it is still too volatile an environment.
What we have seen is ---+ and we've been talking about this, as you mentioned, for quite a while now ---+ we have been working with our retail partners, and they've been great partners to us.
In some cases, we are where we need to be; other cases, given slow retail that they faced in Q3, they are making other adjustments.
So this is a work in progress.
And obviously Q4 ---+ sig sales for all of us.
This will affect what the number ends up being.
But like we have said before, we are very confident in our innovation pipeline.
Our product offering for this holiday season is really very strong ---+ not just because we are saying it, but our retail partners are also commenting on the strength of our product offering across our portfolio.
And we believe that innovation and beautiful product will attract consumers to purchase.
That is the thesis behind our success, and that is something we are focusing on for great execution in the fourth quarter.
So in Europe it's mostly our licensed brands that are having great performance.
And obviously, it is our bigger brands that are driving it.
Hugo Boss has had spectacular results in Europe, and we are particularly pleased because this is happening in big markets.
So the UK, France, and Germany, as I mentioned, are having spectacular results.
We are also seeing this on Tommy Hilfiger.
And there is different pockets growth for the rest of the brands.
But overall, we are very happy.
We are also very pleased with the results of the Movado brand in the UK, which is one of our focus markets ---+ still very small, but the sellthrough results have really accelerated.
So we are very pleased with that.
Well, we don't operate in a promotional environment, but obviously our retailers do.
It's been quite promotional over the last several holiday seasons.
I think there is possibilities you will see a scaling back of that in the future.
I don't think you'll see that this holiday season.
You will see a very strong newspaper campaign as well as a digital campaign on Movado Motion.
In fact, this weekend there was a full-page ad in the New York Times.
There is a full-page ad today in the New York Post on Movado Museum's forward motion.
And most of that will be in newspaper and digital this fall.
So we can't give you the breakdown.
But what I will tell you is that our like-for-like growth was there for most of our brands, and certainly for the Movado brand, which is our flagship.
But our performance basically in the US ---+ and I will add to <UNK>'s point ---+ is 100% in existing stores.
We really did not open up any new distribution this fall.
You know, might be selected few doors for certain products, but not any large distribution growth.
I think the opportunity now comes really more in newness, where you focus on making sure that you are able to protect your gross margins versus price increases.
There may be some opportunities in Europe down the road, but it's not built into our plans right now.
I just want to build on that.
We are very committed to expanding gross margin; and there are other initiatives, as I mentioned in my prepared remarks, of managing other levers of gross margin in terms of product mix, channel mix.
And we have this thing internally called the magic quadrant, where we are focusing on these categories and these products.
And the entire organization has embraced this, and we are going to continue to see results coming from these initiatives ---+ along with, of course, supply chain improvements to this.
The reality is we are fortunate to have ---+ I will speak to Movado first.
This is a very powerful brand, and many of our retailers benefit by having Movado in their stores.
So I think they understand this very well, and they have been supportive along those lines.
Of course, there are ---+ some of them have thought about connected technology and made initial forays into creating either new sections or awarding more inventory there.
And we will see what the result is.
For the time being, they have been supportive of our connected technology initiatives.
And like I said my prepared remarks, we are very confident that what we are offering is what consumers want for the Movado brand.
So we will see at the end of the quarter how we perform.
But we are very confident, both in the design of the watch; the functionality; and the app is really fabulous.
So we are very confident.
I will take the first part of that, and then I will hand ---+ I will turn the currency part over to <UNK>.
I think we are excited, as <UNK> mentioned, and I mentioned in my prepared remarks, about the innovation pipeline that we have introduced in Q4 for this holiday season.
And both the connected initiatives as well as major product introductions like <UNK>ge.
But, also, new products and innovation across all of our brands ---+ things like a men's assortment in our Coach brands that is performing very well.
So I think there's a ---+ it's really driven by newness and marketing initiatives across our brand portfolio.
And I will turn the currency part over to <UNK>.
Yes, so <UNK>, just a quick one on the currency.
Obviously we don't guide to a constant currency number.
We guide to an as-reported number.
But this year to date, we've had $20 million already on our top line related to currency.
And if you recall, last year during the fourth quarter is really when we had the big change in currency.
So we will continue to have a few months where there is definitely a difference between this year and last, and take it through the end of the year ---+ obviously, 2 1/2 months of three being somewhat different on our constant currency comparison.
But even on an as-reported basis, you could do the math with your models, and you will see that there will be ---+ we are counting on some growth, based on the initiatives that we have talked about the fourth quarter.
You will find that today in major department stores as well, and on their website as well as in major chain jewelers and fine jewelry independents.
So it will be available in-store as well as online.
We are rolling it out.
We are doing a lot of training in-store.
We have special visuals for the product that highlight the technology and highlight the app on the phone that is available for Android and iOS.
And it is a well-tested app, so we are really excited about that.
I will address a few things, and then I will see if anyone else wants to jump in, <UNK>.
So, obviously, we are talking just about fiscal 2016 at this moment.
We haven't gone out with anything further going into next fiscal year and beyond.
We've had the benefit this year in SG&A, where currency has taken our numbers down.
So we have continued to invest this year in people, in marketing, in all the things that we need to do to support the brand.
And this year, we have performance-based compensation in our number, where a year ago we didn't.
So we are very happy with the way that we invest ---+ although, as you know, we are very good here at running things lean and really watching how we spend our money.
So it's a combination of the two.
But we are not giving anything up.
We are definitely supporting what we need to as far as the growth and the health of this business.
The Q will be out later today, <UNK>.
A lot of that detail will be in there.
And if you have any further questions after that, I am sure we can help you.
I would like to thank all of you for participating today on our call.
I wish everybody a fabulous Thanksgiving and a great holiday season.
Thank you again for being with us.
| 2015_MOV |
2016 | CHD | CHD
#There's no question you hit the two that are leading the pack.
And one is vitamins, where I said in my opening remarks that we have 5% increase in distribution, which is pretty significant because obviously that carries over into future quarters.
And then BATISTE is just a craze.
So it's getting more and more shelf space.
And there are more and more retailers becoming more interested in it, so it seems like, almost every quarter now, we are gaining more distribution.
And then that has a compounding effect.
That's why we ---+ although it's a small brand, we continue to talk about it, because it is influencing our numbers.
So, you hit on the two big ones there.
Spot market.
I think we will be more favorable than spot as we go into 2017.
So, a couple of things.
I think I went through the detail of why it's not just the incremental promotional spending, but up against higher some comps for vitamins and the category comps for laundry for example and the whole international strong growth, the deceleration.
We are spending quite a bit of money back on marketing, and that's going to take some time to really pull through demand.
On the incremental trade and really couponing spending, those investments are really to drive trial for new products.
That's the crux of it.
So, we want to get that repeat rate up.
I think it's too early to call volume upside from driving trial.
We're just early in the process, <UNK>, and we think that, when we get back up to our competitors' levels of promotion, just on par with what we had a year ago even, we think that will be a nice momentum as we exit 2016.
Just add to that, if you went to first quarter 2015, the laundry category declined round numbers 1.5%.
And then first quarter 2016, it was up 6.5%.
So on a stack basis, I know a lot of people like to talk on a stack basis, you would say laundry was up 5% on a two-year basis.
And Q2 on a two-year basis stacked was 4%.
If you go to three and four last year, Q3 was 2.5% and Q4 was 3.5%.
So that would suggest you're going to see deceleration in laundry if you are a believer in the stack theory.
And if we think it's going to be around 4% to 5%, we are seeing a deceleration in the laundry category on a year-over-year basis.
So who knows, that's just math, but it's something to think about.
I was introduced to it by the analysts.
(multiple speakers)
When it's convenient, I think you like to talk about it.
Yes.
So we've talked about capacity utilization in terms of vitamins a few times, and we said when we made that investment it was a 75% increase in capacity.
In round numbers, when we said that, our business was around $300 million.
And that would take us up to around $525 million, so we have a lot of runway for capacity.
We feel great about that.
We've made some great strides from a manufacturing perspective we touched on earlier, and even on distribution related to vitamins as well.
What was the second part of your question.
We are not going to give you where our sales are today, but we have plenty of room to run.
Your other part of the question was contribution margin.
And I talked about that a little bit last quarter and I said it's going to take us a few years to grow into those fixed overheads.
And it really goes back to the fact that, you are right, we have to get some more revenue and more scale.
But every quarter that goes by, we get better and better at manufacturing vitamins in Pennsylvania and our skill set just improves all the time.
So we are ---+ it's within reach within a few years, so we feel great about that.
Yes, absolutely.
The other piece I've tried to explain once or twice, there's also a disconnect between when consumption is down and we don't promote in certain categories, our organic growth could be flat or up.
And so that's also a disconnect between shipments and organic growth.
That's right.
We touched on that a little bit earlier as well.
We are pretty much agnostic because margins are tougher sometimes in the household business.
It's also slanted more towards the personal care type of portfolio that wants to go online.
So net-net, when you blend those two together, we are pretty much agnostic.
With respect to what our sales are by country, we wouldn't get into that.
And one thing I would like to dispel is the belief that BATISTE is the sole driver of the international business.
ARM & HAMMER is growing quite a bit in Canada and Mexico, and this is kind of anchored in the benefits of baking soda, and that seems to be resonating with people, both in developed and emerging markets.
Femfresh is another one I talked about, which is feminine hygiene.
One interesting phenomenon you might be interested in is there's a lot of product being purchased in Australia and then shipped to China, like shelves being swept.
We are not the only ones that have benefited that from time to time, so that can help ---+ has helped us really from here and there.
Sterimar is the other one I talked about.
So, that is the nasal hygiene product.
It had fabulous growth in Mexico this year and France last year behind the strong marketing and lots of new products that we bring out.
So it's a nice balance between our export business and our country growth.
It's a little early; it's only August.
But you may be familiar with our evergreen model.
So every year, we try to expand our operating margins 50 basis points, and generally half of that will come from SG&A and half of it from gross margin.
And we try to keep marketing pretty level and not save our way to prosperity by cutting our advertising.
All right.
There are no further questions.
I want to thank you all for dialing in today.
We'll talk to you again at the end of October.
| 2016_CHD |
2015 | JCP | JCP
#<UNK>, we were really pleased with the Home catalog.
It's incremental.
We sent 88% of them to lapsed customers.
So the fact that we got such a great response, it was a customer that we wanted to come back; but they didn't particularly have an invitation until they got the catalog.
So we are repeating it again in the fall.
We're not going back to the 1,000-page several times a year book.
That's, frankly, with paper and postage, not a good proposition; and, frankly, that's not the way the customer wants to shop.
The advantage of the Home catalog, is we may have 150 beds online and only 25 beds in the store.
One advantage of the catalog is you can show more imaging and let the customer use the catalog as a guide to shopping online.
That's what we've learned.
We think it's going to pay off not only in terms of getting the customer back to us online, but also might encourage them to come into the stores.
So we are very pleased with that.
We don't see it going into a lot more categories at the moment; but we will obviously test and if we find something that resonates, we'll do it.
On the real estate side, I will let <UNK> speak to that overall.
But generally, our real estate is encumbered at this point.
We don't really have a big real estate play, so to speak.
It's not about the real estate for us as much as it is getting back our operating business, and that's where we are focused.
<UNK>, do want to add anything else.
Yes, <UNK>, this is <UNK>.
I would just add that, as <UNK> said, it is encumbered by a real estate term loan.
Our no-call provision actually rolls off this month.
That's something we continue to look at.
We know it is probably over-collateralized, and there may be some opportunity there.
We also know that it doesn't come due until 2018, so we don't have a gun to our head to have to do anything anytime soon.
We will continue to monitor rates and see if there's any opportunity to do something there.
Obviously, we continue to look at what's happening in the industry between the sale/leasebacks and the REITs that our competitors are doing.
We spend a lot of time looking at that, and we'll continue to look at it.
But given the real estate term loan and just the overall complexity of those deals, there's a tremendous amount of complexity there.
As <UNK> said, it's not top of our priorities right now.
We're focused on driving EBITDA and driving top-line results.
We'll continue to look at it.
And there may be an opportunity for us down the road, but it's not top priority right now.
I will take that, <UNK>.
There are two things really going on.
One is our plans for the year actually were above our guidance at the beginning of the year.
We now have the confidence to put into our guidance; we feel good about executing that.
We knew we had to perform above our guidance to hit the free cash flow earlier and expected to do that, and now we are within the guidance range.
But in addition to that, we continue to make investments, as you saw in the CapEx numbers, but also in inventory as we roll out initiatives.
The shoe initiative we talked about.
As we go more to open-sell, we expect a very positive consumer response there.
And we bought it that way.
So we are making investments.
<UNK> talked about getting back into stock in the Home store.
We continue to make investments in inventory where we see response or a return on that.
So it's twofold.
One is, we knew it didn't quite add up when we did it to begin with, and now we're up in some of the investments because we have more confidence.
It's a little bit of a complicated set of topics.
First of all, we had to change the mix of Home.
It was two-thirds hard home, one-third soft home.
We've made that transition and we're back to two-thirds soft home, one-third hard home.
That's one.
Second, it was a very modern aesthetic.
Our customer is really pretty much 80% traditional.
That has been changed.
We are trying to make better use of the space.
Space allocation was disguised by a series of shops that make it difficult for the customer to see the whole assortment.
So there are a variety of things including Home is a very promotional category.
So getting back into successful promotions that customers recognize Home as an attraction, those are starting to work for us.
The furniture, mattress, window covering business is a very specialized.
We happen to be very strong in soft window.
That space was diminished during the previous strategy, so we're putting space back into those businesses.
We're using some of the excess space that exists in Home.
It's just taking longer than any of us like.
The good news is that it's trending very well online.
It's also trending very well in the stores that did not receive the major remodels.
As frustrating as it is, because we know the customer likes our products, it's just going to take longer than some of the other categories.
It just doesn't respond as quickly.
We have a strong team there, and they are very motivated to make it an attraction.
We know that people like to come and shop Home while they shop for other categories.
So the fact that we're not as penetrated as we used to be tells you the customer is not ready to return to full spending at this point.
<UNK>, this is <UNK>.
And I will be very honest, it was one of the key questions I had in joining the Company because the conventional wisdom is the business should respond back quickly, just go in and fix the issues.
But I think <UNK> just outlined the complexity of getting the business back to where it should be so it resonates with the customers.
What I can tell you is that the other complex part is, as you start to fix the business, then you have to forecast the sales trends.
And that's key because you have to buy into the inventory effectively.
In my prepared comments, I talked about one of the key initiatives in Home is simply getting back in stock.
And part of that is because the complexity of solving the problem, getting the assortment correct, getting the right brands, the right prices, and then predicting the sales so that you can make the proper buys.
And, as you know, these are not short lead time purchases.
All of those things have added to the complexity.
But the good news is, is that it was one of our best growth categories for the quarter.
We have a really good team in place.
We are continuing to add talent in that area, and we really believe we are headed in the right direction.
The key component to Home ---+ one of the keys, I should say ---+ is the dot-com business and the omnichannel piece because, you have to realize, Home was significantly penetrated online pre the strategy that took it in the wrong direction.
It's still significantly penetrated, and that's going to only grow.
But we think the combination of dot-com, in store, omnichannel, is going to help us get it back on track in the near future.
Thank you for joining the call.
As you can tell, we're quite pleased to be able to shift gears and move into growing the business.
The team is very motivated.
Our engagement scores for our associates are up double digits over a year ago.
And our customer experience scores are up 48 points on every metric.
We feel like we're back in business and we're ready to compete.
We offer no excuses for any of the issues in the quarter.
We feel like we executed well, and we look forward to the next few quarters doing even better.
Thanks for joining the call.
| 2015_JCP |
2016 | TREX | TREX
#Thanks.
Good morning, <UNK>.
Yes.
We anticipate when the year finishes up, we will see a very modest expansion in market share driven by either expansion with existing dealers or in some cases a few new dealers.
There have not been any significant changes that have occurred with the dealer base as you saw several years ago, though.
I believe that the growth that we see will primarily be driven by conversions from wood, which will have the effect of allowing us to gain additional share but not necessarily taking share from competitors in the alternative wood products category.
There is always a little bit of that that occurs but I do not see any significant opportunities on the horizon at this point.
We haven't talked about capacity utilization in the form of a percentage significantly because of the continuous improvement programs that we have in place.
A number of years ago we saw significant improvements which made modeling based off of that capacity utilization almost irrelevant at that time frame.
We're continuing to see opportunities within our operations to improve both of our rates, yields, and overall operational efficiencies.
We talked in prior quarters that from an overall capacity perspective this year we thought we would be running between 50% and 55%.
We are still on track with that with where revenues are at this point so no change from that perspective.
And, as we move forward I expect we will continue to drive improvements within that number and you can gauge a revenue based off of that.
Yes.
<UNK>, my expectation by the time that we get done with the year I think that the industry will see roughly mid single-digit growth.
You will see some people with growth at the high end of that, you will see some of our competitors who will see growth at the lower end of the single-digit.
As I mentioned, our trailing 12 months including the third quarter forecast is roughly at 11%.
So, that implies to me that we are clearly outpacing the general market conditions.
Yes, it will be primarily in building material related products and investments within our operations for future efficiencies.
The B&Q relationship is progressing well.
We have been advertising extensively in the UK and that appears to be having the desired effects that we anticipated.
We look forward to expanding that relationship over the next several years and hopefully build a much closer relationship with them.
No, I would not expect this to be a one-year test.
B&Q is part of the Kingfisher Group and we continue to have discussions regarding other opportunities in Europe.
Well, I do not think it was significant.
We adjusted in our guidance where we felt the quarter would lie.
I can also tell you that as we looked at the month of June we actually saw a little bit of softness in the latter part of June.
Typical market timing.
Sometimes you find that the consumers decide to take a little sabbatical on their projects.
Now, coming out of the month of June, they were back in the market and we did see it strengthen.
I would say that the month, I'm sorry the second quarter, is a typical second quarter, a little bit slow in the front-end, maybe a little bit slow in the rear end but the middle was very strong.
Thank you.
Good morning, <UNK>.
Yes.
With regard to conversion of wood, we just started the campaign this year.
As we mentioned before this will be a multi year campaign while directionally we are seeing the interest we believe the drive to wood will take place, begin to really take place more in next year and the following year.
So it is very difficult to see that in the numbers, especially as we look at the numbers throughout the year.
Really you need to look at a full year to really determine whether or not that movement is occurring.
We are seeing good growth across the full breadth of the market.
Big box as well as the two-step distribution model.
So, it is a very balanced growth that we are seeing and I believe that is probably representative of the entire market since we are such a large portion of that share.
I think what we saw in July was the fact that inventories went down a little bit too far and they were right sized in the July time period.
But we believe that the market continues to be strong.
When we look at the activity we see on our website, we anticipate that the third quarter is going to continue to be a fairly strong business environment for decking and railing.
No significant one-time projects.
We announce our pricing to our distribution and channel partners prior to any other actions that we would do.
We did take pricing on our Transcend Classic line in October of last year, but as of right now there is nothing on the drawing board.
We will be meeting with our distributors late in the fourth quarter and any pricing actions would be talked about in that timeframe.
Again, thank you for joining us for our business outlook and financial results.
We look forward to talking more about the third quarter in our next conference call.
That conference call will be scheduled to also be after our distributor meeting so we will be able to give you a little bit more color on where we believe the market is headed in 2017 as well as the end to the period in 2016.
Thank you again for joining us.
Have a good day.
| 2016_TREX |
2016 | VFC | VFC
#Yes, <UNK>.
As it relates to price, we do have price.
It will be a little back-half loaded.
We have talked about the FX impacts over the last couple years.
We do have price, which more than offsets that FX in the back half.
Well, our Vans business, as it celebrates its 50th anniversary, has been doing some really creative things, certainly with the Nintendo collaboration.
You will see some new ideas coming into the market place end of this month and early next month that I will leave for you to discover.
It's not something I really want to talk about here on the call.
But in the case of The North Face, we'll be really anchoring ourselves in these new brand territories I have talked about, driving our Summit Series collection, which continues to evolve after its re-launch last year on a global basis, and also driving Mountain Athletics and footwear.
In the case of Timberland, we will continue to drive our boots.
The boot trend is still alive and well, and we have got some great offerings, along with our SensorFlex platform that has been in place now for three years, and continues to gain momentum and grab share, not only here, but mostly how we see it in our international markets.
Good morning, <UNK>.
Hi, <UNK>, this is <UNK>.
The imbalance from a Timberland standpoint is, as I mentioned, boots.
It's across the dealer distribution that the brands work with.
It really is inventory that's been carried out of fourth quarter last year.
As they work through it, with the strong sell-throughs we see in the first half, we will return to growth in the second half.
Otherwise, we don't see inventory issues, other than what we've called out at the beginning of the year.
Caution in the specialty outdoor, reflecting The North Face order book.
The rest of our business is sitting in a really strong place.
With our new, innovative products, we'll have great opportunities to be placed, and be put in front of consumers.
I would say that there's two ---+ it's a complicated answer, because we're very active.
The two biggest categories would be some of the properties that we're not ---+ that we're most interested in aren't available now, and some that we're interested in are not available at a price that we think is prudent to pay.
Sure.
Thank you all for your interest in our Company.
It's been an interesting year for us.
In the first half, as I said earlier, consumer engagement and purchasing of our brands in our stores and online is right in line with our long-term organic growth goals.
That gives us great confidence that our brands are strong and our teams are executing well.
Unfortunately, our wholesale business growth is off.
That's following a very weak winter last year, and all the implications of that on inventory in the channel.
But that will get solved with time.
With that, I will just say that we are very confident about our outlook for the second half.
We have good visibility and strong execution skills, and we look forward to giving you guys another update in 90 days.
Thanks so much.
| 2016_VFC |
2016 | TSS | TSS
#So maybe I will start with the first part, <UNK>, and then you may want to add on, as it relates to the confidence side.
But <UNK>, you're approaching it exactly right.
Is the $40 million is the new product revenue, as it relates to this.
<UNK>, you want to talk about as it relates to our confidence.
Yes, I would be glad to, <UNK>.
Certainly, would we have been contemplating some of this for some and looking at these two new products and we actually mentioned the small business product, if not last quarter maybe two quarters ago.
But more importantly, we have been looking at, based on some customer demand and some degrees that our distribution partner desires to have a DDA product, been looking at it for some time, we have had these pre-paid rules, the proposed rules in front of us for a while.
So we are looking at those.
We've done a lot of modeling, as you might expect.
As the end of the day, there is no crystal ball.
But we feel quite confident in our management team at NetSpend, the way they have looked at it, the way they have modeled it, that we feel reasonably confident, of course.
And <UNK> gave you some caveats that obviously we've got to get out there.
We've got to see what the adoption rates are.
We've got to make sure we understand consumer behavior changes, if there are any, et cetera, et cetera.
But if we didn't feel pretty confident, I don't think we would be giving you these kind of high level numbers to model with.
But I think as time goes on, we will be able to put more clarity into it as well over the coming quarters, as we move through 2017.
Yes, you know we don't give quarterly guidance by ---+ we don't give quarterly guidance by the consolidated level, and we certainly don't give it at the segment level.
I would make a couple of points.
Obviously, on the North America side, to get to the 5% number, you see a deceleration of growth between the third quarter and the fourth quarter, and we are at 2.4% reported.
And it declines on a sequential quarter basis, down from that 2.4%.
So that is one test of the componentry that you might want to start with.
As I said earlier, you know, if you back out those two items as it relates to prepaid, and the E&V piece, that 2.4% looks more like the revenue guidance range that <UNK> talked about.
But as it relates to the fourth quarter, where those items are playing a significant impact, we do have sequential quarter deceleration.
In the fourth quarter, from International, as we said, we would have commensurate expected level of currency on a reported basis to reflect the changes that we have seen in the pound primarily there.
On the merchant side, there isn't anything I would necessarily call out that is dramatically different between third and fourth quarter.
But I did say in my prepared remarks, a deceleration sequentially between the third quarter and the fourth quarter for NetSpend, due to a variety of factors, but the one I called out was a lower level of increased spending as it relates to marketing.
So using those as the tonal guides, at the segments, I do think that range that you get back to does put us at the overall revised guidance revenue ranges that we provided on the call here today.
Yes, well, I will take it, <UNK>.
Yes, our growth on TransFirst is commensurate with what we had expected.
And it is very commensurate with what we saw in the second quarter.
So as I said, I think earlier, to one of the earlier questions, there is no change to the revenue growth picture between where we were last quarter and where we are this quarter.
And as I said also, TransFirst is meeting their profit expectations and our synergy target and the integration targets.
I will take the second part of that, <UNK>, and <UNK> maybe can address the financial side.
As it relates to Brexit, outside the financial impact of the pound, as I indicated last quarter, it is just a little bit early to tell.
But with that said and talking to Galen and Kelley and our leadership team, it does create a lot of uncertainty.
And as we have indicated on several occasions, uncertainty can usually mean good things for us because it creates an opportunity for people to look to outsource, to cut costs, to find efficiencies in their operations.
And so as our team travels around Europe, particularly in that area, again, they are seeing opportunities.
So beyond the financial side of it, it is an uptick for us.
Or a potential upside for us.
And as it relates to the other question, as it relates to the head wind, yes, we will see, for the first half of next year this current heads wind.
Obviously, with the Brexit vote occurring roughly mid year, we are going to have a first half currency head wind pressure on the International business for the first half of next year, compared to the first half of this year.
And that is assuming there isn't that much more that we are going to be dealing with in the second half, assuming everything kind of holds.
But for sure, we will be dealing with a first half currency head wind picture on International.
<UNK>, I wouldn't say we were at a real disconnect there.
All along, we knew exactly what our revenues were that had the potential of being negatively impacted by the proposed rules, primarily of course around overdraft that we have talked about, and some additional fees [out of yours] and other type of fees that we knew would go away if the proposed rules were adopted.
So there was no surprise there in any shape, form or fashion.
Well, <UNK>, I think you might be mixing a couple of things up.
Let's see if we can clarify that.
I did talk about, during the quarter, primarily focusing on our issuing business.
We hired a new Executive Vice President to be more focused on product delivery and innovation and that and was primarily around the issuing business.
I mentioned it during my North America comments.
And if you recall, we talked about that on many occasions, that we must continue to innovate and deliver new product for the entire Company, but we are talking about specifically, now, about North America, to grow new products.
And no, we don't have any to talk about here today.
The $20 million to $25 million you were making reference to, I'm not sure.
We talked about $20 million to $25 million of lost revenue in 2017, around the impact of the pre-paid rules, and an additional $20 million to $25 million of lost revenue associated with those rules in 2018.
So I'm not sure where you got the $20 million to $25 million in new product.
Thank you.
| 2016_TSS |
2016 | PG | PG
#So first of all, <UNK>, we have maintained our organic sales growth guidance for the year, which is flat to low singles.
So there's really no change in the overall outlook, which as you rightly say was for acceleration in Q2 and then further improvement in the back half of the year.
As I mentioned, the extent of that improvement in the back half of the year is going to be potentially impacted by what happens with access to dollars for imports into Venezuela.
It will obviously be impacted by other things as well.
But even with that, we remain confident that we can continue to grow in the second half.
In terms of the businesses in the US and the comparison to scanner data, as you know, we pretty dramatically accelerated our growth in the US from minus 2% in the quarter before to plus 3% in this quarter.
I mentioned that there was about 1 point of sales that's ahead of consumption.
That's on things like the ProShield razor that we shipped into the market.
But still, even adjusting for that acceleration as we expected.
It's getting increasingly difficult to look only at scanner data as a measure of a market's health or a business' health.
That's particularly true in markets like China, where a huge portion of the growth of the market is coming in the e-commerce channel, which doesn't cross a scanner.
You have some of that same dynamic in the US.
So, for example, the Shave Club sales, depending on how they're executed, may or may not cross a scanner.
I think that's part of the dichotomy.
But generally, if we look across several quarters to dampen out some of the short-term volatility and the noise, we continue to be pleased and encouraged by increasing strength in the North American business.
We expect it to grow going forward.
Thanks, <UNK>.
So first, China.
It depends on the individual category, but the market growth rates range roughly from, call it, 5% to 8%, so mid to high singles across the categories.
As I mentioned ---+ we see significant opportunity remaining in China: with those very attractive growth rates, albeit somewhat slower than they were two and three years ago; with the conversion from a manufacturing to a consumption based economy; with the dramatic potential that exists as a result of larger family sizes from the possibility of two children versus just one; and with the premiumization of the market, which I indicated, admittedly we have not been as agile as we need to be in exploiting.
But really, as I mentioned, I was there last week.
I was there a week before the <UNK>tmas holidays.
I walk away with a tremendous sense of encouragement while acknowledging that we have work to do.
In terms of pricing, the pricing dynamic should continue to be a favorable contributor to top line growth as we move forward, even if all we do is take forward the price increases that have already been executed.
They're not fully annualized yet.
So that should continue to be a positive on the top line.
The pricing calculus or algebra is fairly complicated.
You really have to look at the combination of currencies, commodities and competition to determine a course of action going forward in any individual product category or market.
The sum of those three things is very different depending on what markets you're in, as influenced by both currencies and by competition.
In general, the companies in our industry continue to price at some level for foreign exchange.
I mentioned in our prepared remarks that we expect our ability to price to be somewhat lower than it has been historically.
We'll make up for that over time with productivity and other savings.
In the US ---+ first of all, the commodity impacts aren't as significant as you would assume just looking at the headlines on oil prices, for example.
If you look at everything from diesel to resin to other inputs that are derived from the petrol complex, while the pricing benefit or cost reduction has occurred, it is not anywhere near the level yet of the crude price reductions.
So I think that's a potential source of disconnect as people think about this.
Generally, we're taking pricing behind very strong product innovation.
We're looking to improve the strength of our overall value equations, the combination of pricing, product performance, consumer usage, experience aesthetic.
Done in that way, I think that continues to be a contributor to growth and value creation.
So we expect, for example, our media spending to be up double-digits in the second half versus year-ago.
So as reinvestment as compared to the prior year, that will definitely be increasing.
As we look at those choices, we're obviously not encumbered by the math.
We're looking at the value creation potential that exists behind those investments in both the short and importantly the mid and longer term.
We'll invest where we have opportunities to do so.
So I think that you should think of the level of investment, reinvestment sequentially increasing as we go forward.
I think ---+ I know that will be the case this fiscal year.
I expect that will be the case next fiscal year.
In terms of the over-delivering and then maintaining the constant currency guidance, yes, that definitely is reflective of additional investment.
I mentioned in our prepared remarks that in North America, for example, we have increased our budgets by about 100 basis points since the start of the year, most of that occurring relatively recently.
That's driven both by our encouragement from a response standpoint to the spending that we have in the market and the acceleration of growth, particularly in the US.
So, yes, your interpretation is correct in terms of the various moving pieces.
The guidance range is really reflective of what the underlying constant currency range of outcomes could be.
Then we just apply the current FX math on top of that.
There's a lot of ---+ we're operating in a more volatile environment than we ever have.
I think our range is reflective of that reality, as it should be.
Some of those impacts in that 8 to 9 point impact of things like Venezuela de-consolidation and the beauty transition costs and the non-operating income difference are all in the EBIT line.
So that's a significant driver of lower EBIT comparisons second half versus first half.
As I mentioned, most of those hit the second half disproportionately.
In terms of currency, there is some let-up but not a lot in the back half.
I expect our margin progress to continue to be reasonably strong, certainly constant currency on both gross and operating.
So it's really ---+ the comparison is most dramatically driven by FX and by things like the Venezuela de-consolidation, the transition costs associated with the beauty business that are not in discontinued operations.
For example, if we have employees in our global business service organization that are working to stand up to the new Company in terms of building the systems that are required, et cetera, those are employees that are going to remain with Procter & Gamble; therefore, their costs are not in discontinued operations, they're in continuing operations.
Then as I mentioned, the divestiture gain in non-op is a big driver as well.
Good morning.
Thanks, <UNK>.
Duracell, as I mentioned earlier, should close this quarter.
The exact date will depend on work that still needs to occur.
But that's on track.
Coty is currently scheduled to close as well in the timing that we initially indicated, which would be in the back half of the calendar year.
So no changes in either of those, both progressing towards the desired end points as we would hope.
In terms of market share, our objective is balanced growth and value creation, with the growth objective being over time at to slightly ahead of markets.
So market share does matter but particularly in a time when we need to restore structural economics in response to currency moves, we can get ourselves in big trouble if that becomes the driving metric.
So as we've said, we're prepared to lose some share in two situations, one is where we're restoring a structural economic attractiveness.
Having a higher market share with a negative gross margin isn't helpful to anyone.
Also where we're doing some of the portfolio cleanup that I mentioned on the core categories, where we'll be in a much better position longer term from both a growth and value creation standpoint if we can focus on the parts of our portfolio that are really working for us.
So if you look at the percentage of business that is holding or growing share, it's about 45% globally.
Currently, we would expect that to be higher going forward.
In the US, where we're further ahead in the strengthening of our portfolio, et cetera, we've got about 60% of the business holding and are growing share.
The current guidance does expect an improvement in China in the back half.
That should be very doable, just based on the math alone, in other words, the annualization of some of the changes that we made in our go-to-market and inventory levels in the back half of last year.
So we do expect that will improve.
Again, as I said, our view on China is an opportunistic one, not a pessimistic one.
We really think that there's significant continued opportunity there, both top and bottom line.
I think ---+ we picked the categories that we're going to compete in, in the new portfolio based on our view of our capability to be more than competitive, to win.
These are categories that we have won in.
We're global leaders in almost every single one, I think 7 out of the 10.
We're among the leaders in the balance.
There's a margin structure that allows for significant investment and growth in each of these businesses.
These are our higher margin businesses.
They're businesses that importantly leverage our core capabilities as a Company.
So they've been deliberately chosen for success.
So the two drivers of the volume reduction, one as you indicated is the portfolio cleanup within the core categories that are still reported within continuing operations, and as you rightly indicated that's had about 1 point worth of impact.
The other is the market reaction from a consumption standpoint and in some cases the share price evolution as we take pricing to offset foreign exchange impacts in large devaluation markets.
So if you take Russia or the Ukraine as an example, where devaluation has been 70%, 80%, 110%, we have negative gross margins.
We need to price over time as well as do everything we can from a savings standpoint to restore those margins of at least to a positive level so that growth is meaningful.
During that process both at a market level, markets tend to contract in response to higher price points and sometimes from a share standpoint and Russia and the Ukraine are good examples where we're competing against strong European competitors.
In the case of Russia, Japanese competitors as well.
Sometimes there's a modest share impact that comes with the pricing that we deem necessary to take.
We are not prepared to lose share indefinitely.
Our history in this area is that we ---+ it takes six to nine months to work your way through this.
Some of the pricing that we've taken has been recent because a lot of the devaluation has been recent.
So I haven't actually looked at it quarter by quarter to see, what's the quarter where volume will re-inflect positive.
We'll have to work our way through this pricing.
I don't believe ---+ go back to the comments on market share.
We fully intend to grow at market growth rates or slightly ahead of market growth rates over longer periods of time.
That requires volume growth.
I mentioned markets growing 3%-ish.
We're not going to be able to take 3% pricing indefinitely, nor is that our intent in any way.
So we will ---+ also, we're not ---+ in markets where competitors don't respond from a pricing standpoint, remember, we, because we're the market leaders, typically have to lead or nothing happens.
So we're exposed for that period of time.
Competitors can take six to nine months sometimes before they respond or they cannot respond at all.
In the cases where they don't respond to the levels that are necessary to maintain our value equation comparisons, or where they don't price at all, we will reduce price.
We're not going to be uncompetitive.
We're not going to lose share on a sustained basis.
Thanks for the bigger picture question, <UNK>.
That's actually something we'll spend some time talking about at CAGNY.
It's interesting, the market on a relative inflection point ---+ standpoint that's growing the strongest, which is the US, is one where these changes were made first.
They were made about a year ago, were basically ---+ in addition to the 10 categories and their ability to operate somewhat independently, we've sectorized our sales force.
So we're going end-to-end from the GBU all the way through to the customer with dedicated sales support.
We're not moving people as rapidly across categories.
The GBUs have full decision rights on the amount of resources that are supporting their business from a go-to-market operations standpoint, which has led to some choices quite frankly to increase coverage.
In some channels, it's led to choices to hire mid-career talent that has experience in a category that extends beyond the experience of our current employees.
So it's having a dramatic impact.
Every change has a slightly different time line in terms of, one, it gets reflected in business results but I think we can ---+ I think we're making good progress in this area.
I think we have more to do.
Again, we'll talk about that at CAGNY.
I don't think it takes a long period of time to make a difference.
So first, sorry, I did miss the first part of <UNK>'s question.
Thanks for bringing that back.
The relationship of organic volume to organic sales in the October/December quarter, developed markets organic volume was plus 2%, organic sales were plus 3%.
If you look at developing organic volume was minus 6%, organic sales were flat versus year-ago.
If you look at those comparisons, they are indicative of exactly what I've said a couple times in this call in terms of what's driving the volume reductions.
It's pricing in developing markets to offset FX.
Where you don't have as much of an FX impact, for instance, in the developed markets, our volumes grew at 2% on the quarter.
In terms of ---+ you mentioned Mexico can as an example.
We actually had a very good quarter in Mexico.
The changes that we've made there we're very pleased with.
Organic sales were up 4% in Mexico in the quarter.
Remember, I talked about the tissue/towel impact or the fact that tissue change in the portfolio which has negatively impacted organic sales, that's in Mexico.
Excluding that, Mexico organic sales were up 8% in the quarter.
Volume was up as well.
So again, there's a bit of noise as we work through the combination of the portfolio and foreign exchange.
But we expect volume will grow as we go forward and share will also be something that becomes increasingly attainable.
Thanks, <UNK>.
Brazil, for the quarter, organic sales were up 11%, that compares to minus 12% the prior quarter.
I think that again is another good example of the volatility that's going to occur here as we get the right pricing set in the market and as well, our ability to pull that through and generate growth on a sustainable basis.
So again, Brazil was up 11% on the quarter.
In terms of commodities, looked at as a single variant, so just the reduction of input costs, that impact is about $500 million on the fiscal year.
Some of that we anticipated going into the year, of course, but that's the amount.
I would argue that, in total, in other words, inclusive of consumption impacts in oil producing countries where there's been massive disruption and instability, if you think about markets like Saudi Arabia, markets like certainly Venezuela, I would say that the net impact in our P&L is likely neutral to negative but the pure cost impact is $500 million.
The amount is the correct amount, you're right.
It was about 1 point on the quarter.
We would expect ---+ we really started this work in terms of execution in July/September, maybe some in the latter part of last fiscal year.
So we would expect this continue through the next couple quarters, but then it should dissipate going forward.
There may be a few additional choices we need to make but in general, you'll see it for the next couple quarters and then it should start to dissipate.
On the FX multiplier, as you can imagine the different currencies that have ---+ we have no ability to forecast which currencies are going to move and how much they're going to move.
The top and bottom line relationship between currency movements is very different depending on the market.
It depends on how the market's sourced.
It depends on the balance sheet of the market.
I mentioned balance sheet revaluations.
So for example, in Argentina, we talked about the balance sheet revaluation that occurred there.
So it's really a function of what actually is happening in the marketplace country by country, how we source the markets and what the balance sheet exposure is in different markets.
So I guess I'm saying we don't really have a good ability to forecast exactly what the currency impact is going to be on either the top or bottom line.
Frankly, we spend very little time thinking about the relationship between the two.
In terms of the comments on trade inventory reduction, that is largely a China dynamic.
I've mentioned in prior calls that our inventory levels were too high, particularly in the wholesale channel in China.
As a result, our pricing was too low, which was driving a bit of distortion and difficulty for our distributors.
So we have made some choices to address that and that has a short-term volume impact.
That's really what that comment was designed to indicate.
Relative to senior executive engagement with the investment community, we tend to be fully engaged with the investment community through a combination of quarterly conference calls, investment conferences, meetings here in Cincinnati.
David will be on the road frequently as well interacting with the investment community.
So again, our strategy is one of very high engagement.
| 2016_PG |
2016 | FII | FII
#Good morning, and welcome.
Leading today's call will be <UNK> <UNK>, Federated's CEO and President; and <UNK> <UNK>, Chief Financial Officer.
And joining us for the Q&A is <UNK> <UNK>, our CIO for the money markets.
During today's call we may make forward-looking statements and want to note that Federated's actual results may be materially different than the result implied by such statements.
We invite you to review the risk disclosures in our SEC filings.
No assurance can be given as to future results.
Federated assumes no duty to update any of these forward-looking statements.
<UNK>.
Thank you, <UNK>, and good morning.
I will briefly review Federated's business performance, and then <UNK> will comment on our financial results.
Federated's Q1 equity business results were solid against a backdrop of challenging market conditions.
We again posted sales results that place us among the industry leaders.
In Q1, the all-in, net equity flows exceeded $2 billion, which represents an annualized organic growth rate of about 15%.
And we've had positive equity net flows in 9 of the last 10 quarters.
Over 40% of our actively managed equity strategies, that's 14 to 34, had net positive sales in the first quarter, led by Strategic Value Dividend Funds.
Other funds with positive net flows include Prudent Bear, International Leaders, International Strategic Value Dividend, MDT Stock, Muni Stock Advantage.
Federated's 10% first-quarter annualized equity fund organic growth rate ranked in the top 2% of the industry, based on strategic insight data.
This places us 14th out of 693 competitors.
Looking forward, our equity business is well positioned, with a variety of strategies producing solid performance and sales results.
Using Morningstar data for ranked funds at the end of the first quarter, five of Federated's funds, or almost 20% were in the top decile for the three trailing years.
We had 13 funds, or 50%, in the top quartile, and over 2/3 in the top half for the trailing 3 years.
Performance highlights include seven of the eight MDT strategies outperforming versus benchmarks, for the trailing three years and since inception.
We've also had solid results from the Federated Strategic Value Dividend Strategies; and, while we've noted over the years that industry relative rankings don't always properly measure the investment success of these strategies, it is worth noting that the mutual fund version of this strategy ---+ it had 8% return in the first quarter, and that placed it in the top 2% for the quarter, top 1% for the trailing 1 year, and top 3% for the trailing 3 and 5 years.
Federated's Muni Stock Advantage Fund offers another solid product, with an income mandate.
The fund ranked in the top 3% for the trailing 1 year, top 14% for 3 years, and top 3% for 5 years at the end of the first quarter.
Federated International Leaders Fund won the Lipper Award as the best-ranked fund for performance over the 10-year period ended December.
The Federated Kaufmann Large Cap Fund, another bottom-up, concentrated portfolio, is rated four stars, and has solid long-term performance records.
And while the last year's been challenging, the fund's more recent performance has improved.
Looking now at early Q2 results.
Equity funds and SMAs, combined are net positive, a little over $360 million.
This is at a comparable rate to the Q1, through the end of last week.
The Strategic Value Dividend Strategy continues to lead the net sales results.
Positive net sales funds also include International Strategic Value Dividend, Muni Stock Advantage, and Pru Bear.
Now turning to fixed income.
Net outflows occurred in ultra-shorts, total return, corporate- and mortgage-backed funds during the first quarter.
High-yield Fund strategies were slightly negative and have returned to net positive inflows here in the second quarter.
During Q1, the Federated High Yield Trust Fund won the Lipper Award as the top-performing fund for the five-year period ended December 2015.
At quarter end, we had nine fixed-income strategies with top-quartile, three-year records, including strategies for high-yield floating rates, short intermediate, total-return, government and munis.
Fixed income fund sales are net negative early in the second quarter, at a comparable rate to Q1.
Now looking at money markets.
Assets increased by nearly $6 billion from year end, and were up about $14 billion from the first quarter of 2015.
Average money fund assets increased about $12 billion from year end and $7 billion from Q1 of 2015.
Our money market fund mutual share ---+ market share, at quarter end was 8.12%, up slightly versus a year-end 8.02%.
As you are all aware, we are moving into the later innings of the substantial effort to position our money market products in advance of the October 2016 requirement for floating NAVs for institutional, prime, and muni funds.
We recently announced further operational details, including the FMAV strike times for institutional, prime, and muni funds.
We also made the required disclosures to provide additional money market information on our website for our funds.
This includes daily reporting of daily and weekly liquid-asset percentages, net shareholder inflows and outflows, and shadow NAVs.
We also conducted a road show for our planned new private fund, with a targeted midyear launch, and are developing a new collective fund.
We will have a robust set of products and choices for all of our institutional customers as they navigate the new landscape for cash management during 2016 and beyond.
Taking a look now at our most recent asset totals: as of April 27, managed assets were approximately $364 billion, including $255 billion in money markets, $58 billion in equities, and $51 billion in fixed income.
Money market mutual fund assets were $218 billion, and average assets in money market mutual funds are running about $219 billion.
Looking at distribution, our SMA business reached new heights in the first quarter, with record gross and net sales.
Gross sales exceeded $2 billion and net sales were over $1 billion.
In fact, first-quarter net sales were greater than the total for all of 2015.
Total SMA assets ended the quarter at just under $19 billion, an increase of $2 billion in the quarter.
The SMA assets are up nearly 80% over the past three years.
Federated ranked sixth in the rankings of the largest SMA managers at the end of 2015, which is the most recent data available.
We also added a $150 million EFA, equity, separate account in the first quarter, and have $45 million in fixed income separate-account additions, expected to fund here during the second quarter.
RFP activity remains solid and diversified, with interest in value, dividend, EFA, growth strategies for equities, and high yield and short duration for fixed income.
On the International side, we saw our first trades in our new Canadian-domiciled, Strategic Value Dividend Fund product in the first quarter, as we seek to continue our growth in Canada.
Our assets at the end of 2013 were a little over $1 billion and today they stand at approximately $1.7 billion.
We continue to see success in Europe, Asia, and the Mideast, from a subadvised, high-yield product, working with a large private bank.
These assets reached $350 million in the first quarter, and we were selected to subadvise another high-yield fund, beginning sometime around the third quarter.
We continue to seek alliances and acquisitions to advance our business in Europe, the Asia PAC region, as well as, of course, the US and the rest of Americas.
<UNK>.
Thank you, <UNK>.
Revenue was up 23% compared to Q1 of last year and 12% from the prior quarter, due mainly to lower money fund yield-related fee waivers.
Equity contributed 36% of Q1 revenues, and combined equity and fixed income revenues were about 53% of the total.
Operating expenses increased 22% compared to Q1 of last year, and 18% from the prior quarter, due mainly to higher money market fund distribution expense, as a result of lower waivers.
Comp and related increased about $8 million from the prior quarter, due mainly to higher incentive compensation expense and payroll tax and benefits seasonality.
An early estimate on Q2 comp and related expense is about $76 million.
Pretax impact of money fund yield-related waivers of $9.4 million was down from the prior quarter and Q1 of last year; the decreases were due mainly to higher fund gross yields.
Based on current assets and yields, we expect the impact of these waivers on pretax income in Q2 to be about $6 million.
Increase in yield of 25 basis points could lower this waiver impact to about $2 million per quarter, and a 50 basis-point increase could nearly eliminate these waivers.
As we've previously discussed, the impact of the change in one of our customer relationships may reduce pretax income by about $6 million per quarter when fully implemented late in 2016.
Multiple factors affect yield-related waivers levels and the ability to capture related income going forward.
These factors are covered in the press release and in our SEC filings, and we expect these factors and their impact to vary.
Looking at the balance sheet, cash and investments totaled $342 million at quarter end, of which about $314 million is available to us.
That concludes our prepared remarks and we would like to open the call up for questions now.
Naturally, we've already covered the key point that this is tax season and people do pay their taxes, and so that is still going on.
What we are seeing is some movements in the marketplace, as some firms have taken the occasion to alter their own money market fund structure and what their funds are doing.
It's very difficult for us to see input or monies coming to us from those moves, but you can pick those moves up by others.
This is not to say that customers are yet figuring out exactly what they want to do.
It's still the era of the firms and the funds making their moves on that point.
<UNK>, would you add to that, please.
And we did see here, with <UNK> mentioning the money market assets, the normal tax season, April, decline.
Well, what we gave you was the EFA account ---+ that was one; and the $45 million of fixed income that is to be funding in the second quarter.
And we listed some of the mandates.
And, what I like to do is always look at the mandates that we won and 2015 and 2016, and you get a pretty good variety.
You get money market, you get International, EFA, fixed income on multi-sector; you get municipal mid-cap growth; you get high-yield.
So, in large-cap growth, so you've got a good variety of different mandates.
And as I mentioned in my remarks, the RFP activity remains strong and it's up for this timeframe, over the same timeframe from last first quarter.
So that would be what I would say.
<UNK>, just to add ---+ it's <UNK> ---+ what we did see in the first quarter was a bit of a shift to fixed income, in terms of the RFP composition.
And, while high-yield has historically been an area of strength for us and where we have a differentiated record and long-experienced team, we've continued to see good activity from high-yield, as well as short-duration on the fixed income side.
But if you look at the activity year-over-year ---+ and, again, just grabbing one quarter, which can ---+ you'd want to look at it over longer periods, but there was a shift to fixed-income in the RFP pipeline.
It's a fascinating thing.
When the most recent return, or reducing of waivers, actually, nixed the margin, and the remaining waivers that are on there, when they go away, will decrease the margins also.
Answering the question, specifically only to the money markets ---+ basically, one of the things I mentioned is that we were coming up with a collective fund; a collective fund is utilized for retirement assets only.
And we think this will be a good addition to the pot and will be a good DOL proper fund, that will have good staying power into the future for cash.
In terms of the DOL's direct impact on cash, at Federated we just don't see it as that big of a deal at this point.
First of all, most of the assets that are in those accounts, those types accounts, are in other types of assets ---+ meaning fixed income and equity.
On the money market fund side, what you're going to be left with here is a question of whether or not the intermediary can meet the fiduciary standard of reasonable compensation on receiving payments from the fund.
This applies to the money market fund as well as all the other funds, and this is the standard question that's asked under fiduciary law, and has been asked for a long time.
Our experience in this goes back into the 1980s, when, with trust departments, we went through their mechanisms inside a trust department, and were able to show to the trust world that receiving a 25 basis-point shareholder-service fee was, in fact, reasonable, because their costs were in the low 20%.
So, if you do the work, do the homework, you can meet that particular standard, and that's part of the routine aspects of trust law that we've gone through in the past.
On the institutional side, we think there are opportunities in Canada, which is why we have a salesperson up there.
We also think there are opportunities in Latin America, specifically in with our RJ Delta arrangement.
We are exploring other things in the Far East, as well, but is not something I can size.
And as I mentioned in the call, we are having good success with our high-yield offerings on institutional separate accounts, subadvised, et cetera, in Europe.
But it's really hard for me to give you some size of where I think that will go and how big.
It's certainly an excellent opportunity for us in all of those areas.
As I mentioned to the other Mike, if you look at the press release and the margin of the waivers that we are doing, it's lower than our existing margins.
So, as those go up, that's a headwind to increasing margin.
But the seasonality and the benefits and payroll things go away, and you see that in first quarter of 2014, first quarter of 2015, first quarter of 2016, and we would expect the margin to improve over the year.
And then, absolutely, I'm willing to say that, as the waivers go away, once that is out of the mix, and we continue to grow like we are doing on the equity side, we should expect margin improvement at the Company.
We are about as well positioned, I think, as anybody.
I'll cover it with respect to the DOL, first.
Then, I'll comment on the liquidity you mentioned, and maybe we'll even throw in derivatives to boot.
On the DOL ---+ don't forget, I began my sales career as a lawyer, calling on trust departments in the 70s.
And we have had fiduciary relationships with trust departments since then, doing a lot of good work for them, understanding the two-pronged nature of fiduciary activity, namely the duty of loyalty, and the duty of care.
So we have those things and they are part of our ethos.
We also have, at Federated, one of the nation's experts in fiduciary law, that has been an employee here pretty much forever.
So, with respect to the DOL, we think we are in a excellent position to help them implement what is necessary and what needs to exist.
Because if you look at some of the various businesses, I will show you how they meet, in our view, both the loyalty and the prudence aspects of it.
You take our SMA business ---+ we think we are very well-positioned here.
And when you think about the SMA business, it is transparent, it is a level fee, the disclosures are generally very clear about who is getting what, and this addresses successfully the duty of loyalty.
Then, if you look at the duty of prudence, which was well articulated in the rule, but it wasn't the principal focus of the original issue of the rule, you have research-approved product that go in; you have actual monitoring of both the products that are used and the underlying account; and you have honest, thorough client profiles, so that you actually know the customer and what's going on.
There are people there to call, so it isn't a 10,000-to-1 ratio, if people are interested in difficult times, like what was going on in January.
And the SMA is also politically correct in the view of the Fed, because you have individuals owning individual securities, which they like.
Now, there's one other thing that has to happen, which we are very good at helping people with, and that is to document all the fiduciary processes.
And this is critical.
This is one of the new things that has to happen.
Another thing that I think we will do well in is the R-6 classes.
We have six or seven of them now and R-6 classes are priced without the other service fees in 12B-1 fees, but we'll probably have 18 of them by the end of the summer.
And we think these are going to be very important.
You already mentioned some of the things we think about, and that is that you've got to have good performance.
And that's going to remain important.
And we think we do here very well, too.
And this addresses, again, the area of prudence.
And I already talked and answered the other question about how we think we have cash opportunities here as well.
So I think we are very well-positioned on the DOL side.
Now, on the liquidity side ---+ and I would say most people will give you this kind of an answer ---+ that the essence of managing a mutual fund and the sacramental thing in a mutual fund is the right to redeem.
And, therefore, everybody is very sensitive to the redemptions and to the potential thereof.
So, it's fine.
People want to study it and focus on it more and I think there will be some very good improvements from what the SEC came up with.
I don't think they'll end up with six buckets; they've gotten a lot of pushback on that.
And so I think were going to see some improvements.
We've had meetings with them down there, as have others, and see an openness and willingness to do what is necessary to meet what the Fed or the (technical difficulty) and to do things that don't destroy the underlying efficacy of the mutual fund.
And I think the same kind of overall (technical difficulty) on the derivative side.
We wouldn't be that much affected if they stuck with their hard numbers, but it [will be the followers] of flexibility inside all sorts of other funds and, perhaps, some of ours, so I think they are far better off going to a principles-based arrangement with the derivatives.
And I think they will consider it, or at least give you some choices, depending on what kind of fund you happen to be in.
So overall, I think we are in a good position to respond to these various regulatory activities.
I will take the second part, because <UNK>'s done some pretty good work on the movement of various funds inside categories.
And so I will let her cover that.
But as I mentioned, the clients ---+ you could say they're waiting for the NDS; that is true.
Some are just getting aware of the fact of what is going to happen, and what is important in [shaking] more action is the movement by some of the funds to do different things.
The most recent thing we did was announce strike times.
And that does move assets, but (technical difficulty) as yet, another communication that something else is different, and you're going to have to decide where to go.
So, as I mentioned, we just haven't seen the big movements of the underlying clients yet.
We will have a $3.5 billion redemption out of a tax refund, because of the one client, but that isn't going to occur until the summer, and I think that's when you'll see the biggest movements occurring.
<UNK>.
Well, <UNK>, first of all, on the first-quarter costs, there was a reversal, a bit of prior-year accruals, that you would've seen a higher number in Q1.
And so, when <UNK> said $76 million for the second quarter, you would've seen more of that traditional drop-down.
But it would be hard to speculate going forward on the same pace as last year or any year, because the main drivers, of course, are the incentive comp and the variability there, and that's going to be tied into what you would expect the sales levels and investment performance levels, as well as earnings.
So, no, I wouldn't necessarily guide you to the prior year.
It would be more driven by the factors I mentioned.
Well, I think that, overall, that has not yet been fully decanted.
And most of these firms are aggressively reviewing these rules in order to determine what their duties are, under the duty of loyalty.
What about the duty of prudence.
What about the documentation.
And what about reasonable fees.
Don't forget that they did grandfather all the existing products.
And so that means you're not under an immediate panic.
They also said that you could keep variable comp.
And what that means is that, if you can defend it as being reasonable, which is why I went through that routine about old trust departments before, you can keep it.
So, obviously, the firms are going to try to retain as much of the revenues as they can from their business.
And we'll have to see whether they are up to the task of allocating costs, studying them, in order to meet the standard of reasonable.
The DOL was very careful to say that more or less any pricing mechanisms are going to be fine.
You also haven't yet determined exactly what it means to have a level fee.
We all know sort of what they want, which is ---+ okay, you charge the customer 1.5% and then there's nothing else around.
But how is that going to compare with how all the products are done.
Which is why I highlighted that pricing routine in the SMA as being very consistent with what the DOL has.
So, I don't have answer to that.
I will tell you that it is going to change how they function and how they think.
And we'll be Johnny-on-the-spot with them.
We feel we understand it and can be helpful in executing and implementing, but we just don't have a definitive answer to that.
So, our first choice has always been acquisitions.
Of course, right with it has been our current dividend and the yield related to that and our payout ratio.
But on the margin, we have looked at our track record in acquisitions and are happy to spend the money there, because we think we can get an excellent return; and, based on our past history, it's what we're doing that on.
And, like you said, getting those is hard and so, we continue to try to do that.
Are we going to let cash build up to some huge numbers at the Company.
We don't have a history of doing that.
And take an eclectic view of, is it better to pay out, increase the dividend, pay out special dividends, as we've done many times in the past, and do share buybacks.
So, basically, if we don't get the acquisitions at some point, then we will go to the other two, and determine at the time what we think is best for shareholders and best for the Company.
Yes, you are.
And what occasions this is, that the first draft of the DOL proposal had in it that it was going to be a low-fee harbor and there was not nearly as much articulation about fundamental trust law.
And when you get into basic fundamental trust law, you have to look at the duty of loyalty.
And that means not that you go simply to the lowest fee ---+ and they articulate this very clearly in the opening section of the rule.
And so you have to be able to defend the compensation as reasonable.
And whether 12 B-1 funds fees can be defended as reasonable will depend on the facts and circumstances as these things evolve out over time with [point of spar] et cetera, and how much work distributors do on justifying and saying that these things are reasonable.
And that will be the standard.
And so we don't look at it as though they implemented what everybody was worried they would implement, because they did not.
Now this is not to say that, that's not what they really want in their heart of hearts, because of this level fee, because of the (fit) contract ---+ all these other influences are still there.
So, there's a lot of balls up in the air in terms of how this shakes out.
But you have interpreted what I had in mind very well.
That was a well-planned-for retirement, with good solid backup and succession in place, and Walter has earned his retirement and we are very thankful for all of his contributions here to the Company.
I remember one of the questions that would come in as we were talking to the clients, and they would say ---+ now, wait a second ---+ which guy was it.
The guy that wrote the book, or the other guy who retired.
Well, the guy who wrote the book is still there.
In fact, he's written two books.
We are adding resources, as we move ahead on this, and we are looking to also expand the product line and are examining various ways to do that, as well.
So the retirement has not, in any way, shape, or form, injured or altered the performance or the sales flows, the enthusiasm, the morale, or the activity of the fund.
Yes.
Well, thank you for joining us today.
That concludes our comments.
| 2016_FII |
2015 | CRR | CRR
#Yes.
So maybe looking at it from a gross profit or operating profit standpoint, <UNK>, taking a look at the first quarter, if you exclude the charges in DD&A, I think our result would have been a positive gross profit, something approximating something close to $7 million.
After G&A, we're at a loss of about $7 million.
So it's a little bit complicated to answer that question only from the standpoint that your depreciation's going to ---+ depreciation plus some component of net settlement of natural gas is going to be fixed.
That's going to vary based on how much natural gas we use.
The other is going to be variable.
And so I would say, as a reasonable estimate, it's probably in the 60%-plus range that's fixed versus variable.
But again, it's all going to be dependent on how we ---+ on our utilization of the plant.
Unfortunately, it's not just a simple answer.
It flips the other way.
That's right.
That's difficult to determine, I think.
We only know our own and what we can do there, but we do track the trends around the world, and we have for years, on the imports and where it all goes.
That's a difficult one to put it into months.
I think the second half will be better than the first half is probably the best way to describe it.
There's a lot of folks there that are in pure panic mode out there, trying to move inventory right now and that will start to dissipate as time goes on.
Yes, I think those are the folks, right, that are just looking to convert to cash and stuff because they've got ---+ sometimes you get caught in a trap with stuff in rail cars.
Sometimes you've got it sitting in warehouses in Seattle and all those things.
It's not a whole lot different than the last down cycle, although given the decline this year compared to last down cycle, it's probably more frantic, I would say.
Quite honestly, I like that, because this is a temporary problem in our world, in CARBO's world.
It's good for them to feel some pain on that lower quality imported stuff and it means some pain for all of us, but eventually maybe people learn.
And we know the path we're on and we can't really correct all the other people.
<UNK>, was your question also associated with ---+ when you said assets, do you mean like producing assets.
No.
I'm very confident that there won't be any new building for a while.
That much I'm very confident in.
There are fellow competitors in the US, they've mothballed some things and maybe they'll mothball some of their older facilities that they announced permanently.
I don't know.
China, of course, is kind of shut down, which it should be.
But why would you want to buy those assets.
We're trying to put out a positive message here to the E&P too.
Besides being lower quality, all this import stuff, it doesn't burn the natural gas that those of us that produce in the US use to make good proppant and it doesn't support American jobs or anything.
So we try and approach this on all aspects and that's the order in which it's importance.
It hurts the wells and doesn't use the product that you produce and it hurts American jobs.
So I realize I'm getting on a soap box there a little bit but it's true.
And as far as asset buying, no, we haven't heard any of that, nor is that really going to affect CARBO that much.
We are going to separate ourselves.
Once again, we're the lowest cost, highest quality and that will only get more separated as we get KRYPTOSPHERE in the platform technologies developed.
So not going into specifics but just in general, when you don't consume the natural gas, you net settle it based on that month's NYMEX price and the contracted price at which you agree to.
And so it changes and varies month to month.
But that's the basic formula.
We know the Chinese have been.
Some of our customers have told us that and everything.
But that's a normal practice there, right, it's the Chinese way, right, build overcapacity and to solve that problem, build more capacity.
For sure, yes, I mean, even recently we knew 50% of the plants were shut down.
It's probably, whatever, 90% now.
It is what it is.
There's always been overcapacity there for the last decade.
So we've touched on continued under absorption and idling type costs, just because of the levels of production.
Our cost reduction initiatives are not complete.
We will continue to look at that, which may include some additional severance-type costs as we go in the second quarter, as we go through the second quarter.
We have got most of the majority of the work behind us, however.
That is correct.
That's part of what <UNK> is talking about.
And then there's other things involved with just having a larger footprint, of course, that gets challenging.
But I tend to think the second half in the industry will be better and probably in the camp that 2016 would logically be better.
It's a wait-and-see thing and we'll adjust if it doesn't show up.
We do know what to do there.
We had previously mentioned a target of ---+ on an absolute dollar basis of a reduction of 20%.
That's still the objective for the year.
No, it's very similar to when we move proppant around the world, across the water.
Those logistics are the same.
In this case, we just take it ---+ it's loaded on a boat by one of the great fracturing companies and they go out and pump it.
Really isn't anything for us.
One of the things that our clients have been asking us for is to develop something at a little bit less density which helps them in some of these very deep wells.
It may ease in the process of circulating out or the various things that could happen.
So it's been a client request and for us it just provides more products in the platform.
It's still a high-density product, but it's just a little bit lighter.
And so it has all those benefits and it ---+ remarkably we have almost the same conductivity.
So it's quite a breakthrough by our folks there.
And that means it has more applications, literally, on any well wherever it may be, globally, on land or wherever.
So you'll see us, we have a low density that we know what we're going to do there.
We have a high density.
We've tried to reduce the weight of that high density if our clients want it.
You'll see, this isn't just an offshore product.
I needed to say that, right.
This is for people that really want to make wells produce.
And one of the incredible other breakthroughs for KRYPTOSPHERE was that the incredible surface of the pellet helps E&P operators in these deep wells to where they can pump and it won't wear out the downhole jewelry.
And conversely, it helps the pressure pumping companies because it doesn't wear out their pumps.
So this incredible surface we put on KRYPTOSPHERE helps.
And we've seen cases where some of our theoretical competitors pumping some of the lower quality proppant literally wash out pumps and things like that of the service companies and jobs have to be stopped.
KRYPTOSPHERE will be a benefit to pressure pumping companies from a maintenance cost on their iron.
We hope that all service companies do the right things for wells and increase production and recovery.
And if we all join in that effort, because that's our religion at CARBO, is increasing production recovery.
So if everybody does that, we'll all be happy.
Thanks, everyone, for joining us today.
As we've mentioned, we've taken and will continue to take the actions to manage this down cycle with a focus on cash preservation and cost reductions.
We've been through this so many times before.
We know what we need to do.
We're comfortable with our current cash balance today and liquidity outlook for 2015.
Extremely excited about the technologies that we're rolling out and the ones that are in the pipeline and what they can mean for the future of the Company.
And the industry will recover eventually and when it does we think our production enhancement technologies will continue to differentiate CARBO.
Thank you.
| 2015_CRR |
2016 | FTNT | FTNT
#Sure.
Well, just talking about the top line, we have more visibility into Q3 than we have in Q4.
I look at the international business is doing very well, we have a mature model in place, we have added people, as we add people the productivity correlates very nicely to growth and what we would expect.
In North America there was more change and I think it takes a little time.
As we said we've looked more to the second half.
Right now we are extremely focused on productivity in Q3, quite frankly, and driving that.
So, I think we have better line of sight into Q3 than Q4, and hopefully our productivity picks up and that translates into something better longer term.
The compares are tough versus last year; we're getting into a wall of big numbers as well.
But when you look on the op margin side in you're asking about the bridge, again, we have talked that we know the levers.
We've talked before very consistently that we know the levers.
First of all, we have been hiring quite a lot of people, we could taper off at any time we want.
<UNK> and I are very focused on reviewing critical hires right now, for instance, and making sure that anybody we add is accretive to productivity.
The second thing we do is, again, laser focused on productivity, the way you get there, again, first and foremost manage performance.
Be very focused on who is doing what in the pipeline, make sure that you're building pipeline and your lead gen engine is working; again, we're laser focused on that.
We have been seeing pipelines build; I think we mentioned that in the script.
And then AccelOps is opportunity to find synergies, which we're going be very focused on.
And beyond that, gross margin, again, if you look at the product line, it suggests that there's less upfront revenue.
That revenue is now on the balance sheet, and as that comes off the balance sheet, we've seen this tailwind in the gross margin, that can hopefully provide a continuing tailwind to the gross margin line.
As far as G&A and R&D go, again, we can if we need to delay hiring, manage without ---+ not manage without, excuse me; but I mean manage the rate of hiring there.
And those are really the levers.
We're very much about headcount.
There's some other discretionary spending in the Company that we'll simply look at and we'll manage as well.
But when you do look at spending in a Company us, it is very headcount concentrated, so driving productivity is the best thing we can do.
Yes.
Fair enough.
I would start with North America.
I think the realignment, again, <UNK>, we were talking more about the second half of the year.
We did not see much, it was not a strong quarter in North America, obviously.
That's certainly a piece of the overall growth in the Company.
It's easy to see when you see EMEA growing 35% and APAC growing 36%.
A bit out of balance there.
Within the Americas, I would say Canada did not have a good quarter.
I would say it was fairly soft compared to Q1.
Brazil same thing.
Brazil's had continuing struggles I think due to, not only the commodities ---+ low price of commodities, but also the political headwinds down there.
And those continue, I think we called those out continuing.
Is far as the service providers space, I don't have a number for you, but again, we've been in the low 20%s and we were at 19%, I think it could give you some sense of that impact.
I think people in Q1 might have been clearing out their pipeline, there was pipeline there.
I think it was a rebuild, more of the new, look ---+ why I'm trying to contrast internationally, what happened internationally was that really you're adding people to a model that exists.
In Q1 we rebuilt the model, not completely rebuilt, but there was new lead gen engine and I think there was more newness to it than the international piece.
Yet there were deals on the table, and I think those deals closed.
And then also we had a decent service provider quarter in Q1, Canada also had a very good quarter in Q1, by the way.
So, I think those were the things.
I don't think there's much more to it than that.
I think basically the newness ---+ the new pipeline being built and the new model in the Americas really pays off, hopefully more in the second half of the year
This is <UNK>, we (inaudible), we also tried to make the team more efficient, more responsible for their account.
So we reduced overlay and we and also we making (inaudible) account sales compared to more overlay in the past in some vertical, in some (inaudible) account manager.
We try to make in the sales more like own some account, responsible for account, and also reduce overlay.
So that will take some time to make sure they also do the pipeline and also make the change.
LIke <UNK> said, it will probably take about 6 to 12 months to make some of the change.
We feel we have the team in position, we've pretty much done all the change and we are going to be improving the productivity going forward.
Yes, I think, <UNK>, it just goes back to there as more change in the US than internationally and it takes a little bit of time to the newness of it.
The major [strength] with this model and doing well we can see the growth is higher than any other competitor and also it's very efficient.
The (inaudible) we just want to make sure we make the right change and then for the future allow some growth, not just the sort term one to two quarter result.
But you can look and go back to the last few years, in fact to 10 years we constantly compare to our international.
US is the model to be back and forth.
Now we have the global leader proven on the international and also in some other region, and we want to implement the model and also make sure we have long-term benefit from the model.
<UNK>, I really, I'd go back to what I said to, I think it was <UNK>.
I do not have a better answer, we don't really guide on product versus subscriptions.
But I can't predict what people will buy our what the duration will be, how much cloud content will be, metered model type of business; so it is hard to predict that.
I think we just really have to go off of the top level guidance.
But I would say the bias again is more towards subscriptions, more towards the deferred stream for all the reasons I previously mentioned.
I think the [ISOS-E-3] will be more driving into the low end of branch office solution.
The first part that we announced, actually two days ago, is actually the FortiGATE-60E].
We are reshipping, and this model actually is the highest selling model worldwide than other competitor, any other product.
You can see the improvement over the old model and also our competitor is really a factor of 10 x.
That's definitely what's helping drive the gross and also we improved the margin a little bit, because also, this can be bundled some additional service, like (inaudible) bundle with some other Fortica 360 we're going to launch later this year.
That's what has been driving the growth and also the profitability there.
On the CP9, mostly go through high end, this called a [condum] processor like the one we announced before, whether the 2000 or the 7000 series.
So that's the one still takes some time because high end take long time to evaluate and that's probably ---+ we also will gradually, like each quarter when they have [wonderful] product will be refreshed using the new AC chip.
And so where we're keeping driving the better product technology quarter by quarter.
I'm sorry, I did not hear the last part of the question, <UNK>.
Fair question.
First of all, that's about net adds, I think versus hire.
I think gross hire is probably a little higher than less, and people leave for whatever reason.
But think of it as [medac].
Anyway, the balance of headcount is really about, what I am investing in.
When I add people, the way that we think about it is, when <UNK> and I look at it ---+ I'm actually going bring him into this conversation ---+ but the way we look at it is, where can we get in incremental dollar of revenue for whatever cost of spend.
Or where do we get the appropriate productivity return for our investment.
Right now, internationally we continue to see those opportunities, but those aren't forklift investments in the model.
We used to get ---+ we've been asked the question many times, what inning are you in.
Two years ago we would have said early innings, few quarters ago we would have said middle innings, now we would say late innings.
And, the point there is there is some forklift investment early and then you're just adding people to a model that you basically should be able to put people ---+ add people to and they drive higher productivity.
And the bias there would be right now on sales people internationally, we would probably, certainly are trying to let the North America productivity catch up to the investment, so to speak.
So that is how we do it.
<UNK>w far would we bring it down.
You could bring it down substantially.
We are committed, we're very focused on getting the hygiene and discipline in the Company and focus on that margin leverage.
We've talked about the 2020 and we're adding point over the next five years, getting to 15% this year and adding 1 point over the next years.
And we are focused on doing that.
I think if you really want to try to exercise that muscle so that reflex is built, and you are building that hygiene into the system today.
And <UNK> and I are putting a high level of scrutiny right now into all of the headcount and making sure that we just don't ---+ one, just don't replace people because they were here, that's the first thing you do.
Then second thing you do is you make sure that people coming in really are accretive to the top line and the margin as well.
But, what we are trying to do is really exercise our commitment to driving that higher leverage over time.
<UNK>, anything to add there.
Yes, I think all the improving margin is in two way: one is to grow the topline, and the other way is really control the cost.
You can see the model we have on international, that is really the most (inaudible) capacity we had, the more topline growth and also activity efficiency that is keeping at a pretty high level.
US, we gradually added some people early this year.
We also changed some other reorg and also the other part.
Now its more, try to see how we can make the team more productive and also more efficient.
So that is the part we're most focus on, improving the productivity in North America, and at the same time.
International, just keeping at sales capacity because we have the best product.
And if we can build a more efficient self marketing model we can gain a lot of market share and can beat pretty much all competitors.
That is why we are very disciplined to work (inaudible) to the operating margin goals.
We pay like 15% ACM then you improve 1% every year to 2020 reach the 20% operating margin.
Even during the acquisition that brought our sales up] last quarter we still maintain the goal of margin 15% this year.
So that is where we are very disciplined that we make sure we deliver what we model and at the same time keeping, driving both the top lines [off] the bottom line.
It is really the former, <UNK>.
Just go run the growth on sales and marketing spend over the last year, years, and the growth is not ---+ I think that has outpaced the growth in the top line in the regions, certainly in North America.
So there is a capacity to grow there.
We're going to mine that, again, we've planted the seeds, we're going to hope that they bear fruit and we're going to make sure that the model works before you keep adding to it.
There's some adjustment to it in terms of, there's still a few new people coming in, we have a few key hires.
But again there was a lot of hiring going on.
You can still hire.
But, I think you can be very focused on making sure that we are laser focused on productivity as we go forward and we do have the discipline and hygiene in place to ensure that you are investing in things that really do provide the return that we want.
Yes, the model try to make in the people more responsive to the account, whatever, reduce overlay.
So that's really helping, improving the productivity and also making more accountability improving there.
I think you are, again, ---+ definitely the price increases helped.
I will also attribute it to the factors that the caused the damp in the productivity line.
Because ultimately what dampens the productivity line, if you look at overall billings and you are not getting the same product, billing or product revenue yields, and that is following deferred revenue, which then generally falls into the subscription line.
And so it is the elements that I mentioned earlier.
Which is more software, more of the cloud, selling through the cloud and then even some of the duration impact that I mentioned.
The bias on an overall ---+ the way to think about price, the bias on an on overall import now is more towards subscriptions, people are buying that relationship.
And I think as we sell the breadth of our portfolio it becomes more software oriented, more subscription oriented.
Again, kind of reflecting the fabric.
And so again, the bias continues to be on subscription line.
I think it's more the price increase.
From an attach rate standpoint, we've always said this, that most customers buy the bundle anyway, so it's not like we're adding one service to another service to another service.
We've had two things happen: price increases helped across the board.
The other thing, but to a much smaller extent because it's still early, is having us being able to upgrade customers to the enterprise bundle, which is the broader bundle, a more rich bundle and it is also higher priced.
I think that is what we have been talking about, where one, we're driving productivity.
<UNK>pefully, you get the top line benefit from investments that we have made.
Those investments are obviously ---+ reflect on the sales and marketing line.
Then the other piece, again, you just focus on driving productivity, which is making sure that your training is correct, you focus on how to close the deal.
For Fortinet, that you are managing the pricing relationship and the pricing conversation correctly, things like that.
And then, I think finally we talked about managing headcount to make sure that we are not over hiring, that we can manage hiring to the point now where we are ---+ that it's accretive and when we hire someone they're really bringing in revenue.
<UNK>pefully more near term with really certainly trying to make this operating margin.
You can manage that account, you can manage productivity, you can manage performance, and then even with AccelOps there is an opportunity to drive synergies there in the model as well, and those are the things we are very focused on.
This is <UNK>.
The technology we developed also helped a lot.
It's a more competitive compared to other competitors like ISOC 3.
You can look at the price release we made two days ago, it's got a 5 to 10 times faster and more function that other competitors, the same time maintain pretty healthy margin there.
None of our competitors have the technology to be able to develop the chip as a [sussing] single chip, which also helping driving.
We've become a number one unit shipped three years ago.
Now we are more than double the number two, as a lot are driven by the technology we have.
In my script it says leading the competitor 5 to 10 years.
And some other bigger players also like different technology like Google, some other selling to the TPUs, the modern TPU.
You can see the advantage of leveraged ASIC [howers] that play out very well.
I'm just going to go back to what I've been saying.
One, we can manage the rate of hiring.
And we've been hiring quit a few people every quarter, net adds certainly north of 200, close to 250.
That's the first thing.
By the way, that also drives down the recruiting fees, just keep that in mind, there's some element of that.
There is some variable spending that you tamper on, as well as you do that, that we can control internally, so that'd be another piece.
And then we're very focused on managing performance making sure that people are productive and dealing with that as we move forward.
You have synergies along with AccelOps.
On the face of it, it's dilutive, but if you merge the model we're very focused on finding synergies along there as well.
<UNK>pefully going forward, again, going back to the revenue conversation, there's less upfront revenue, more gets deferred.
But that brings more into the services line, which tends to have a ---+ which is a far richer margin.
So hopefully, we'll continue to see a tailwind from the gross margin line as well.
And R&D and G&A seem to be in very good shape.
This is <UNK>, you can see we're IPO for seven years.
In three, four years ago we've proven we can be more profitable, so that's where we reach over 20%, 22%, 24% of the operation margin.
I think that's where we discipline to control the growth and the cost with the [best] model to provision going forward.
So that's where we are pretty confident about the target we set.
I think we have pretty good visibility into the pipeline.
I think I said a short while ago that one of the interesting things throughout the quarter, we were talking about linearity, is the fact the pipeline did not really shift around, it was the deals in there all along that we thought would close that did close, they just took a little longer.
I think the point there is there is not a lot of volatility, wasn't as volatile as one might expect.
There were a couple of deals, we talked about service provider space that slipped.
But other than that, it's pretty good view, and those deals aren't out of the pipeline, so to speak, right.
So, it's good.
In terms of productivity, we do not really share that, but you can impute that it is better internationally than it is in North America.
And again, that is where we are laser-focused on driving productivity
I think, <UNK>, overall, I think there is efficiencies globally, right.
But the model internationally is working really well.
We can add people to that and they are accretive to the model.
So, we're very focused on contribution margins by country, by geo, looking at pipeline by people just to see where we are.
We can see where it make sense to add people, that visibility is very strong.
In North America again, because the growth hasn't taken off, it takes a little more time to see that.
But I do not want to say that we are not going to keep hiring internationally because it does make sense to keep doing that.
But the model is in place.
I think the differences in the Americas the model is just newer, and that's more of an upfront investment that takes some time to mature in real life the pullback.
I think it is probably like ---+ it depends.
It's in a copy of our brochure, also you can (inaudible).
It's probably like ---+
We'll get back to you <UNK>, but I think it might even be online, I think the brochure is online.
I don't want to make you do that, we'll do the work for you.
But there is a three-year tranche and a five-year tranche, and we're ---+
Wireless business is still less than ---+ 10% less than 9% of the business.
I think first, don't recall we mentioned Meru has a good quarter Q1.
The reason we acquired Meru is really we wanted to have an integrated solution, basically bring the security into the Wi-Fi space and like FortiGate as the controller and also manage our wireless together.
So that's the reason we have, and so far we integrated the product well, and that's also helping the long term growth there.
But I don't feel we have much change on the percentage-wise compared to before.
I think they were probably similar overall.
I don't think there's much difference compared over company.
| 2016_FTNT |
2015 | ZEUS | ZEUS
#Thank you, Operator.
Good morning and thank you all for joining us to discuss our third-quarter and year-to-date progress.
Joining us on the call are <UNK> <UNK>, President and Chief Operating Officer; <UNK> <UNK>, Chief Financial Officer; and <UNK> <UNK>, the President of our Chicago Tube and Iron business.
As discussed on our last conference call in August, we continued to advance the same initiatives in the third quarter that we have been focused on all year.
We lowered operating expenses by more than $9 million in the quarter, bringing year-to-date operating expenses down by almost $20 million.
$24 million of debt was eliminated in the third quarter.
So far this year we have reduced debt by a total of $60 million.
Inventory declined by more than $14 million in the quarter, which has reduced inventory on hand by $82 million since the beginning of the year.
Our inventory turnover velocity has improved this year to 4.2 turns as compared to 4.1 at the end of the year of 2014.
And we have accelerated our collections on receivables to best-in-class 38.7 days versus last year's 39.1 days.
These achievements are principal components of our multi-pronged profit improvement plan launched last year when the economic down cycle in the metals industry began.
Unfortunately, as we have continued with our disciplined approach, the challenging market environment has also persisted throughout the third quarter and into the fourth quarter, as I am sure everyone on this call is keenly aware of.
Pricing for the steel-making input, such as scrap metal, iron ore, coking coal and energy have all deteriorated further in the third quarter and now into the fourth quarter.
There has been little reduction in the record high levels of steel imports, regardless of trade action, pouring into the United States, most of which which is being subsidized by foreign governments.
The US dollar remains very strong in relation to other currencies.
And to top it off, in the third quarter industry-wide demand weakened in a number of end markets, including industrial equipment, mining, energy, and agriculture.
None of these factors are within our control, and all have contributed to consistently deteriorating metal prices and decreasing demand for steel.
For more than 60 years Olympic Steel has successfully managed numerous market cycles by sticking to our core values and this cycle will not be any different.
In prior peak markets we have been criticized for being too conservative and underlevered compared with other service centers.
These assessments never influenced our long-term growth strategy, capital structure, or the level of debt we assumed.
By adhering to the disciplined style of managing the business for long-term success, we have always rebounded from poor markets as a better and stronger company and expect to do so again.
Despite the current weak market conditions we've been able to strengthen our balance sheet, lower operating costs on a permanent basis, and improve internal efficiencies.
The combined efforts of everyone throughout the Company have positioned us to not only survive but thrive when the market turns.
Given current valuations in the metal sector and our strong cash generation, last month the Board of Directors authorized a share repurchase program of 550,000 shares.
Our shares have been trading at a substantial discount to tangible book value, and we believe a share repurchase program provides opportunities for a better return on shareholders' capital than other investment alternatives in the market.
In addition, this morning we announced that the Board also declared another regular cash dividend of $0.02 per share, which marks the 40th consecutive quarterly cash dividend paid to shareholders since we began paying dividends 10 years ago.
Over that period we have returned more than $22 million of capital to the shareholders through cash dividends.
This latest dividend is payable on December 15, 2015, to the holders of record on December 1, 2015.
And, with that, I'll turn it over to <UNK> for the financial review.
Thank you, <UNK>, and good morning, everyone.
Industrywide shipments declined in the third quarter compared to last year and our shipping volumes followed that same pattern.
Sales volume of plate products was down the most and accounted for the bulk of the decline in our carbon flat products segment.
A number of our plate customers participate in the heavy equipment sectors, which have been under intense pressure lately, particularly customers selling into the heavy construction, mining, energy, and agricultural markets have experienced softness in their end markets.
Compared with last year, our 2015 third-quarter and year-to-date sales volume in all three of our operating segments was lower.
The largest volume decline was in the carbon flat products segment, where quarterly volume declined by 51,000 tons, or 16.7%, to 254,000 tons.
This resulted in nine-month shipments being off by 9.9% in this segment compared with last year.
We did generate a small year-over-year increase in tolling tons in the carbon flat products segment.
Sales volume of higher value-add specialty metals flat products declined 1,600 tons, or 8%, in the third quarter and was down 2.1% in the nine months versus the respective 2014 period.
We do not disclose shipping tonnage of pipe and tubular products because weight in this product category is not considered meaningful.
However, shipments of pipe and tube were also down in line with the rest of the industry from a year ago.
Compounding the impact of lower sales volume, prices were sharply lower than last year in all product categories.
Average prices declined by 13% on a consolidated basis during the quarter.
Consequently, third quarter consolidated net sales decreased 26.5% to $277 million compared with last year.
For the nine months, consolidated pricing was off 7%, pushing net sales down 15.5% to $938 million versus $1.1 billion in the same period of 2014.
On a segment basis, average pricing in our carbon flat products segment was down the most, declining by 17% from last year in the quarter and by 10% in the nine months.
In our higher value specialty metals product segment, nipple prices have continued to slide lower, which resulted in average price declines of 11% in the quarter and 3% for the year to date.
Average pricing in our tubular and price product segment was also down from last year, decreasing 8% during the quarter and by 3% for the nine months.
Nevertheless, gross margin, which has been under pressure all year as a result of the perpetual market price decline, expanded to 21.2% of sales in the third quarter versus 19.0% of sales last year.
Most of that margin improvement came from higher year-over-year pipe and tube margins and a larger mix of sales in the pipe and tube products segment as well.
We increased our LIFO income this year and recorded $1.1 million of LIFO income in the third quarter.
This boosted third-quarter gross margins by approximately 40 basis points and had a positive impact of $0.06 per share in the quarter.
For the nine months gross margin was unchanged from last year, at 19.6%.
Year-to-date LIFO income was $1.7 million, which increased gross margin by 18 basis points for the nine months.
In 2014, when average metal prices were increasing, we recorded LIFO expense of $600,000 through the first nine months of 2014.
Operating expenses in the third quarter declined by more than $9 million, or 14%, to $58.3 million, down from $67.4 million last year.
Excluding the second-quarter noncash impairment charge, 2015 year-to-date operating expenses were $19.9 million, or 10% lower compared to last year on a 9% volume decline.
Operating expenses declined in all categories for the quarter and nine months, with the majority of cash operating expenses declining by double-digit percentages compared with last year.
This was due to our ongoing profit improvement initiatives and lower sales volume in the current year.
Operating income was $500,000 in the third quarter compared with operating income of $4.1 million in last year's third quarter.
Year to date, our reported operating loss in 2015 was $20.6 million.
However, this loss was due to the $24.5 million impairment charge recorded in the second quarter.
Excluding that charge, operating income in the nine months was $3.9 million, down from $17.5 million last year.
Interest expense was $1.4 million in the quarter, which is 12% lower than last year.
For the nine months interest expense was $4.4 million, or 14% below last year's level.
The lower interest expense was due to lower debt balances and lower interest rates compared with last year.
Our effective borrowing rate was just over 2% through the first three quarters of this year.
We reported a net loss of $600,000, or $0.05 per share, for the third quarter versus net income of $1.6 million, or $0.14 per diluted share, in the third quarter of last year.
For the nine months the net loss was $21.8 million, or $1.95 per share, compared with net income of $7.8 million, or $0.70 per diluted share, in 2014's comparable period.
The second-quarter impairment charge reduced this year's nine-month earnings by $1.91 per share.
Now, shifting to the balance sheet, accounts receivable at quarter end were down $23 million since the end of the June quarter.
The quality of our receivables continues to be very good.
Given the current market environment, we remain alert to any signs of credit issues that may arise in our customer base.
Our days sales outstanding so far this year have actually improved to 38.7 days, down from 39.1 during last year's nine months.
As <UNK> already touched on, our inventory declined again in the quarter.
At September 30, inventory stood at $229 million, which is $14 million lower than the end of the June quarter, and we are now down $82 million, or 26%, from the $311 million at the beginning of the year.
Inventory turnover was 4 times in the third quarter and 4.2 times for the year to date.
We are targeting faster inventory turns in the fourth quarter to keep pace with declining metal prices and demand.
As we stated during our last call, we further reduced debt by $24.2 million during the quarter.
At the end of the quarter our total debt stood at $187.9 million.
That's down $59.8 million from the start of the year.
That equates to a reduction of more than 24%.
We ended the third quarter with $87 million of availability and we are well within compliance of all of our debt covenants.
Subsequent to the quarter end, debt was reduced by another $10 million, bringing our total debt down to $178 million at October 31.
And we anticipate further debt reductions by year end.
Working capital management has significantly contributed to higher cash flow this year.
We generated $58.9 million in cash during the nine-month period, from lower working capital needs and another $10.4 million in cash was generated from our operation.
This totals $69.3 million in total cash generated from operations in the first nine months of this year.
That's compared with a $59 million use of cash from operations in the same period last year.
Our year-to-date capital spending in 2015 was $6 million, down from $7.2 million for the same period last year.
This compares with $13.6 million of depreciation recorded through the nine-month period.
Our full-year CapEx for 2015 spending is currently expected to be under $10 million, while total depreciation is expected to be between $18 million and $19 million for the year.
As of September 30, shareholders' equity stood at $260 million, or $23.63 per share, versus $281 million, or $25.55 per share, at the end of 2014.
Our tangible book value at September 30 was $21.31.
Before I turn the call over to David, I'd like to add one comment on the repurchase authorization.
Since the share repurchase was authorized by our Board in early October during the quiet period under our internal trading policy, we have been prohibited from purchasing any shares until our window opens tomorrow.
We intend to update you quarterly on any repurchase activity in conjunction with our future results disclosures.
Finally, we plan to file our Form 10-Q later today, which will provide additional details on our operating results.
Now, with that, I would like to turn the call over to David for his operating review.
Thank you, <UNK>.
Let me start out my comments by noting the obvious: It was a tough quarter.
Though I seldom look forward to third quarters, we usually find our expectations are elevated as we move out of the summer doldrums and into late August and September.
Unfortunately, as you're all aware, the back half of the third quarter was anything but friendly to steel distribution.
Nevertheless, Olympic Steel's entire team galvanized its efforts in responding to these challenging market conditions.
As <UNK> indicated at the outset of this call, we have lowered our operating expenses by almost $20 million this year.
Mike also noted, and I want to echo, that we vacated $24 million in debt over 3Q 2015, continuing our pledge to rightsize our enterprise according to market conditions.
Inventory has been reduced, as <UNK> noted, by $82 million year to date, and we've kept pace with the sharp pricing declines of the past quarter.
We've seen a collective team effort from every department to execute on our well-defined objectives.
It's traditional in a service center business to say that the calendar third quarter has never saved anyone's year, and during the third quarter of this year not only were metal prices sharply lower and seeking a bottom, but demand was soft.
Typically, the industry will experience some seasonal slowing related to summer plant shutdowns and vacations.
Then, as we near the bottom of the quarter, business rebounds as activity starts to ramp up again.
With lead times for steel as short as one to two weeks, we did not experience a normal late-quarter rebound this year, as I noted a moment ago.
Price declines did pause briefly in July, but as we got into August and September price degradation actually accelerated.
Average prices have slipped even lower as we entered the fourth quarter.
Hot rolled coil prices have now tumbled by more than 40% since last year's third quarter, going from $675 a ton last August down to under $400 a ton in October.
This is the most prolonged down cycle we have endured in a dozen years.
In fact, these prices are reminiscent of early 2004.
The strong US dollar has also been a magnet attracting scrap as well as steel imports.
Scrap price has fallen by more than 50% in this cycle, from approximately $380 a gross ton last summer down to $180 a gross ton currently, with more than $50 of that decline occurring in the last 30 days.
Needless to say, it's been an extremely tough business atmosphere.
That said, this is certainly not the first down cycle we've navigated as a management team and our response to these circumstances has been strong and targeted and adjusted to the market conditions.
Now, we manage to today's conditions by reducing inventory, debt, and expense levels while continuing to move up the value chain with our processing capabilities.
We continue to invest for long-term success, as evidenced by our new Butech stretcher leveler line in our Winder, Georgia facility that came online at the end of June.
We continue to onboard parts and increase Olympic Steel's participation supplying the nearby Caterpillar Athens, Georgia manufacturing plant.
Financially, as <UNK> detailed, the elimination of debt and the fortification of our balance sheet, which positions Olympic Steel to be able to navigate these market challenges.
Our customers appreciate that we have the experience and financial wherewithal to navigate this cycle.
They know that we are going to be here for them over the long term.
As for our vendors, the domestic mills, they appreciate our loyalty and credit worthiness.
Olympic Steel is able to consistently purchase our products without any credit anxiety, as we continue to discount pay for our purchases in a continuing effort to support our supply chain.
We have made terrific progress during the quarter on our efficiency efforts by improving our inbound and outbound transportation logistics.
This demonstrates the kind of permanent productivity enhancements we are galvanizing, irrespective of external market conditions.
As they say: When the going gets tough, the tough get going.
And that's precisely what we've done and what we will continue to do moving forward.
Nobody expects prices to go to zero, and when they finally find a bottom and demand stabilizes, Olympic Steel is exceptionally well positioned to capitalize on all these initiatives and thrive, just as <UNK> indicated at the outset of this call.
With that, Operator, let's open the call for questions.
Well, I think ultimately with short lead times, as David indicated, nobody's buying anything more than they need, again, typical three weeks, in some cases one to two days.
Obviously you're seeing ---+ a lot of statistics are out in the energy sector and the mining sector and listening to our politicians talk about the elimination of fossil fuels and what that means to the energy sectors gives us pause.
We are listening to our customers.
It's really a market share game, <UNK>.
We're very positive about our ability to improve our market share.
But ultimately it is the market that we don't control.
And so I think we have a government that's worked against basic industries.
An activist EPA hurts the long-term interests of steel.
And ultimately I think we have some national interest concerns.
But I don't think I'm any more concerned about the market than anybody else.
Well, every time the market goes down I hope we're closer to the bottom.
I don't know if we're close to the bottom, but I know we're closer.
I would say, <UNK>, there's really no signs yet that as we head into, quote, the typical December scenario that there won't be a lower price coming down the road.
We just don't know if it ---+ again, it's a factor or supply and demand.
And so, all of us would hope that in the typical scenario of the first quarter we would see increasing demand which would lead to the opportunity to have at least some price stability.
But clearly we've got issues around imports that seem to be unfettered.
And we see a strong dollar, which has the potential to go stronger.
So, those are not factors that ultimately lead to essentially a marketplace where we're comfortable that we're at the bottom.
My mother used to tell me ---+ God helps those who help themselves.
Okay.
I'm going to stick with that, <UNK>.
I'll let David answer that.
He has probably a better accommodation to that question than I do.
<UNK>, I don't think that my commentary is any different than what you read in the paper, whether it's Caterpillar, or whether it's Deere, or Terex or whomever it might be.
What we see is a little bit of a softening demand schedule from some of our customers who may have built a little bit more inventory than they're comfortable with.
So we have a staccato approach as we get toward the end of a calendar year or their respective fiscal years.
I mean, overall, they're going to continue to make product and we're going to continue to earn greater share of their marketplace.
But there's no question but that we see a little bit of a downturn, or continued downturn, from 3Q to 4Q.
Well, I'm sure I've got some of my team on this call, so I thank you for acknowledging that, because it certainly didn't come easy.
And it's probably the one area that we're most proud of.
And three things specifically contributed to that.
So, somebody that we're selling a widget to this year that we were selling a widget to last year, we are not enhancing that margin.
The marketplace does not allow that opportunity.
But what we are doing is going ---+ (inaudible) with our customers to do more enhanced value-added.
So we're moving them up the value-added chain.
We're doing laser.
We're doing some six-axis laser, doing some engineering, and helping them reduce their total costs, so in that case further embedding ourself as a strategic partner with that customer.
The second thing that we're doing is we're moving towards more of the [light] metals.
As the carbon prices are so compressed, when you pick a ton of metal or steel up it doesn't know the value per ton, so we are really looking at some of the more exotic alloys or white metals to enhance that value.
And the third thing, which I think is the greatest attribution to the success, has been a very critical look with our team at customers that aren't bringing value to the party.
And there are customers and accounts that you will sell on a potential basis.
And we've gone back and we've strategically looked at putting time limits on that potential.
So if that potential is not being materialized in a certain period of time, what we do is we will make a concerted effort to increase prices to where it is attractive to us.
In those situations, a number of those accounts go away and, ironically, it enhances your profitability.
And those that do stay are willing to pay the higher price.
So, again, we're very proud of that achievement.
And those would be the three reasons for it.
Operator, you cut off Mr.
<UNK>.
I don't know that he was done.
Well, <UNK>, as I remarked, we've kept pace by adjusting our inventories, as <UNK> indicated early on, and <UNK> gave you some great detail.
But we've kept pace with the pricing.
And so, the degradation, as sharp as it is in terms of overall pricing on all products, we're in good shape.
So we really don't see further compression in the margins.
Thank you.
Once again, we'd like to thank you all for joining us this morning.
We're going to continue to execute on our profit improvement initiatives and manage the Company for the long-term success according to the market conditions.
And we like to say, every day in a down market is one day closer to the up market.
So we're closing in on the up market.
Next month I will be presenting at the Goldman Sachs Metals and Mining Conference in New York on December 1 and hope to see you there.
In addition, <UNK> <UNK>, Matt Dennis and I can always be reached to answer questions between our quarterly calls and conference appearances.
So, thank you, everyone, and have a joyous day.
| 2015_ZEUS |
2017 | IVZ | IVZ
#Thank you very much, Dan
So quarter-over-quarter, you’ll see that our total AUM increased 59.2 billion or 6.9% and that was driven by the acquisition of Source ETF, which added 26 billion, including approximately 18 billion of Source-managed AUM and 8 billion of externally managed AUM
We also benefited from market gains of 15 billion
We had long-term net inflows of 6.3 billion, positive FX translation of 6.7 billion and inflows into our money markets capability of 5.4 billion
And these factors were somewhat offset by a small outflow from the QQQs of 0.2 billion
Average AUM for the third quarter was 890.8 billion, up 4.9% versus the second quarter
And our annualized long-term organic growth rate in Q3 came in at 3.4% compared to negative 0.3 in the second quarter
Before turning to net revenue yield, I just wanted to highlight one quick update on a change this quarter and how our long-term inflows are being reported
In previous periods, any dividends or capital gains that were reinvested in the funds were included in market gains and losses line item
So beginning in the third quarter and for future periods, these flows will now be included within our long-term inflows to conform Invesco’s flow reporting with general industry practices
As you also note from the footnote on Slide 20, the amount included in the long-term inflows related to this particular item was 1.1 billion
So let’s now next turn to the net revenue yield analysis
You’ll see that our net revenue yield came in at 43.9 basis points and our net revenue yield, excluding performance fees, was 41.9 basis points
That was an increase of 0.1 basis points over the second quarter
Now looking at what the causes were, we had sold one additional day in Q3 that added 0.4 basis points and we also saw the positive impact of FX and mix added 0.2 basis points
So these positive factors are within somewhat offset by the dilutive impact of the Source ETF business, as we discussed in last quarter, which reduced our yield by 0.4 basis points
And we also saw a decrease in other revenues which reduced the yield by 0.1 basis points
So next on Slide 21 is our U.S
GAAP presentation
My comments today, however, are going to focus exclusively on the variances related to our non-GAAP presentation adjusted measures, which are found on Slide 22. Net revenues increased by 70.3 million or 7.8% quarter-over-quarter to 976.6 million, which included a positive FX rate impact of 13.4 million
Within that net revenue number, you’ll see that our adjusted investment management fees decreased by 54 million or 5.3% to 1.08 billion, and that reflects our average – higher average AUM, an additional day during Q3 as well as incremental management fees from the acquisition of Source
Foreign exchange increased our adjusted investment management fees by 16.2 million
Adjusted service and distribution revenues increased by 6.3 million or 3%, reflecting higher average AUM in the quarter and FX increased our adjusted service and distribution revenues by 0.5 million
Our adjusted performance fees came in at a much higher level, obviously, 43.3 million in Q3. And they were earned by a variety of investment capabilities, but most notably 37 million from Invesco’s mortgage recovery fund
Our FX increased adjusted performance fees by 0.2 million in the quarter
The adjusted other revenues in the third quarter were 16.7 million and that was a decrease of 0.6 million from the prior quarter
FX impact on adjusted other revenues was 0.2 million positive
And next, third-party distribution service and advisory expense which we net against gross revenues, that increased by 14.7 million or 4% and that’s consistent with increased revenues derived from the related retail AUM and the additional day in the quarter
FX increased our adjusted third-party distribution service and advisory expenses by 3.7 million
Now let’s move to expenses
As you move down the slide, you’ll see that adjusted operating expenses at 579.2 million increased 29.4 million or 5.3% relative to Q2. FX increased our adjusted operating expenses by 7.3 million during the quarter
The adjusted employee compensation came in at 383.9 million
That was an increase of 23.3 million or 6.5%
And this was driven by higher variable compensation, primarily related to performance fees and as well a 5.5 million non-cash charge related to the company’s UK defined-benefit plan
FX increased adjusted employee compensation by 5 million
The adjusted marketing expenses in Q3 increased slightly by 0.4 million, 1.3% up to 30.1 million in line with the guidance that we provided last quarter
FX increased our adjusted marketing expense by 0.5 million
The adjusted property, office and tech expenses came in at 93.7 million
That was an increase of 5 million or 5.6% over the second quarter and this reflected increased depreciation cost on long-term technology projects that were recently brought into service
FX increased the adjusted property, office and tech expenses by 0.9 million
Next on to G&A, the adjusted G&A expense came in at 71.5 million
That was an increase of 0.7 million or 1% up, in line with the guidance that we provided last quarter
FX increased G&A by 0.9 million
And then going on down the page, you’ll see that our adjusted non-operating income increased 1.5 million compared to Q2 and that was driven by increases in earnings from our real estate investments that was somewhat offset by lower earnings from our private equity investment
And then moving to tax, the tax rate, effective tax rate on pre-tax adjusted net income in Q3 came in at 27.6%, a little bit higher than guidance
We do believe going forward that our tax rate should drop to again roughly 27%
That brings us to our adjusted EPS of $0.71 and adjusted net operating margin of 40.7%
So let me just quickly touch on business optimization
This is an ongoing multiyear kind of effort
As you’ve heard, given the opportunity on a number of initiatives, including those around outsourcing or back office functions, we expect the optimization work to actually exceed our original target for run rate savings
We’ve achieved the run rate savings in Q3 of 38 million and we expect to deliver an additional savings by the end of 2018 of a total run rate savings of about 65 million, which is up
And then finally, because I know we’ll get questions, we’ll just address it
Quarter-to-date, net flows through October roughly flat
We do continue to see very strong net inflows from Europe as well as from Asia Pacific
These were somewhat offset by outflows in the U.S
on the institutional side, largely quant, as well as some sub-advised U.S
retail early days, October we are obviously feeling very good about the flow picture
Marty had mentioned the robust pipeline
So again, we think the trend is going to continue
And with that, I’ll turn it over to Marty
In terms of quantifying, I think it’s a very much moving target in terms of what the impact is
I think we’ve sort of indicated it was not material, maybe tens of millions kind of without negotiations really taking place around the pricing
All that is sort of happening as we speak and therefore you’ll have a clear view as we sort of get into 2018. But I do think even as we get through 2018, it’s going to be a moving target because there is no expectation of setting sort of one price in the last – it’s locked in
I think it’s going to be an evolving topic over time
Good question, Bill
So we certainly had indicated on the last call that the Guggenheim impact itself was probably going to add 10 percentage points to our incremental margin
That’s a very positive thing to the original guidance that we provided, which was in that 40% to 50% range
We’ve also benefited from stronger markets, which has been helpful
Foreign exchange has generally been a positive impact as well
The MiFID II quantification, as I mentioned, is a moving target
And so at this point, I think we’d be hesitant to sort of give real numbers around that
If we gave you the worst case, it would be probably a reasonable offset to some of the good things we were just talking about
We’re hopeful that’s not going to be that case
So our thought is that we’d be in a better position as we get into year-end and maybe the next call or the one after that to provide much more solid guidance around incremental margins
But I’d say the overall trend to incremental margin has been more positive than negative for sure relative to that original guidance
You’re talking about October, right?
Okay, it’s a partial month
So again, I wouldn’t read too much into and I was hesitant to even talk about it
But I knew if I didn’t, people would misread it
We’ve actually seen very good strength into Europe
I think about 1.2 billion of flows just coming into EMEA on a long-term basis
We’ve also seen very solid long-term flows into Asia Pac
So again, where is it coming in Europe, it’s the same elements that have been flowing before well across a wide range Pan-European equity, corporate bond, GT<UNK>, all very, very helpful
Institutional pipeline in Europe is the highest it’s been I think ever
And so they’ve had really great success
And so we think that is an accelerating positive thing
Asia again had a little bit of a slow down as we mentioned earlier, but they seem to be sort of recovering from that into the third quarter
in particular, we’re just a little bit lumpy
So I talked about sub-advised
So there was one sub-advised termination that was kind of lumpy as one sub-advised client went to index, as we’ve seen that happen a few times
So that’s sort of episodic, not a trend, I would say
And then quant, we’ve seen some outflow on quant in the U.S
but that’s been offset by quant inflows elsewhere
So again, I think it’s really just too soon a timeframe to really draw a conclusion about anything
And so as I said, we’re pretty optimistic about the flow picture into Q4.
<UNK>, I think you’re probably picking up something that we are seeing, which is certainly a continued interest in a fair amount of our equity
If you’re talking about in the U.S
, it’s probably going to be more on the PowerShares side than necessarily our value capability
And then in Europe, absolutely the case and we’re also seeing that in Asia as well
So I think the interest in equity seem a little bit stronger globally and perhaps most in terms of the active most strong outside the U.S
And in terms of the U.S
clients, I think it’s around the normal things we’ve seen in the past
<UNK>eal estate would be a big continued draw
We certainly see continued interest in some of our fixed income capabilities including stable value, multi-asset capabilities as well and then increasingly GT<UNK>-type offering has been of interest
So it’s certainly a third – at least a minimum, a third of our pipeline is coming from the U.S
and the rest from Europe and Asia
Mike, you know how good I am at forecasting performance fees
So yes, I think the performance has been quite good on the alternative side
The idea that we may continue to see some good performance fees into 2018 is something we would certainly support and offer up
In terms of the actual guidance and when they hit, very, very hard for us to really nail that down
I think obviously this one very large performance fee coming from the mortgage recovery fund I’d say is a little bit unique and unusual and isn’t something that I would necessarily say is going to happen again with certainty into 2018. But real estate bank loans continue to offer performance fees, as does some of the private equity offerings that we have as well
So I think the level of performance fees maybe ex what we’ve seen in this particular mortgage recovery is certainly something you should build into the thinking for next year
And into Q4, again, I just don’t have a line of sight that I can offer with great certainty other than sort of – I think we said 5 million to 7 million is kind of the guidance
And I know it’s not helpful, but that’s what I would offer again for Q4.
Yes, we’ve seen GT<UNK> really grow much more rapidly outside the U.S
right now
Although I’d say on the institutional side it’s beginning to get rated and so we’re actually quite hopeful that we’re going to see growth maybe on the institutional side even faster than the retail side in the U.S
The take on has been extremely robust, as you know, over the last year and plus
We are in the midst of launching new product GTI, which is the income-oriented flavor of GT<UNK> in the UK and that’s a fair amount of marketing is going to be put behind that effort in Q4, and we’d expect to see some takeoff if the performance has been good
Asia has really been the door that has opened much wider now in terms of using GT<UNK> and we’re seeing some big wins in places like Australia and China in terms of the use of GT<UNK>
On the retail side, I think the story around GT<UNK> is still excellent, but it’s not probably as well known or understood as it is in the UK
And I think generally, we’re seeing the product get through kind of the gatekeepers and get a better understanding of that, but it’s still been slow, which has generally been the case I’d say for alternative offerings in retail that we’ve seen sort of a slowdown of the take-on of the alternative retail product
And so I think that’s somewhat consistent with an overall theme in the U.S
as opposed to a GT<UNK>-specific story
Dan, do you want me to – <UNK>, do you want me to handle the flow part and then you can talk a little bit on the other aspect?
So in terms of flows, it’s been good, probably not off the charts good
I think they contributed about 0.5 billion in the last two months, which is about a 12% organic growth rate
I think there has been some degree of slowdown just as the integration has been going forward and the repositioning of the brand and so forth is being contemplated
There are a number of new product launches that are in the pipeline, which I think will help really sort of reboot the growth and the efforts there
So there’s a lot of work that’s being done right now to sort of improve the competitive positioning of the products and the lineup and really sort of accelerate the growth opportunity around Source
And certainly, some of the synergies that we haven’t explicitly been talking about have taken place
And so I think in terms of the profitability of the business, as we originally said it wasn’t really making money, is beginning to sort of all come into play in a positive way
So Dan, I don’t know if you want to get a little more explicit about kind of some of the things that are happening around repositioning of the brand overall on a global basis
Dan, thanks for asking that question
Again, I think as we described related to the Guggenheim acquisition and similar to what we’ve done with respect to financing the Source acquisition, we’ve curtailed the buyback program as we are building up cash right now in order to largely pay for the acquisition through the use of our credit facility and also through spare cash
So our thought is through the course of 2018, we’re going to curtail the buyback – continue to curtail the buyback, still being opportunistic if certain situations present themselves
But largely, we want to make sure that our leverage ratios are going to be, by the end of 2018, in line with where they are pre-Guggenheim acquisition
So I would say, generally, put in minimal, if any, in terms of buyback expectations through the course of 2018 until those leverage ratios get back in line
So the last part of your question I didn’t quite get the full thing
Let me get the first parts and then you can just clarify the last one
So in terms of the guidance, I think we’re roughly in line with what we provided before
The only sort of deviation in guidance this quarter relative to last quarter was with respect to compensation, which was really due to the some of the outsized performance fees
So I think we originally said around 370, and so that’s roughly kind of where we would expect
All the other elements are in line with what we prior guided, which again was, if you need it was, adjusted marketing was 36 to 38. We provided guidance on the adjusted property, office and tech of 92 to 94 and then G&A was in the range of 70 to 73. So all that is kind of roughly in line, barring some FX and other things, right, which obviously have a little bit of a inflation factor on those levels
So that was kind of your first question
Could you just make sure I cover the other two?
So I think we had said the fee rate was going to – in the second half was going to be largely in line with the second quarter
Obviously, it’s slightly off
There was more money market and some other sort of passive lower fee product growth coming into play
So I think sort of in line with current levels ex-performance fees is probably the right guidance for now
Yes, exactly
Chris, it’s actually quite benign
The flow picture is not – we haven’t seen accelerated outflows at all
Sales may have come down just a bit
But overall, the levels of flows in that product, in those products are as good as they’ve ever been in terms of history
So I think people understand the rationale
Mark Barnett and his team have described their position and why they believe some of the holdings that they have are smart and are going to ultimately pan out
And so they’ve been through periods of underperformance in the past and have gone through that with significant outperformance following it
So I think people are being patient and not sort of reacting on a short-term basis
In terms of the trend, I don’t think we’re seeing a significant trend one way or the other in terms of use of performance fees
Certainly on the retail side, not
I think on the institutional side as we continue to build out our capabilities, it’s probably growing in line with our overall institutional business
So we may see more performance fees just generally as we become more institutionally-oriented
But I don’t think it’s something that has a philosophy where sort of saying let’s deliver more performance
The one thing I would just add too, that really makes it even more unique is the fact that we’ve got this incredibly robust offerings around models and solutions that we can bring alongside it
So it’s just not a technology solution that is being offered, it’s actually – some of the most valuable part is the ability to tailor models to the clients’ needs at a very attractive price
And so I think when you add all those things in, in terms of the open architecture, the fact that we’re integrating this into people’s systems, and it’s not a black box, and we’ve got the models actually positions it almost in a way that is – does make it stand out as a unique offering
So I think, again, in terms of the guidance on the ultimate need for investment, I think we’ve already built-in into that guidance our need for investment
More savings helps offset some of the – or boosts the incremental margins
So that’s a positive thing in terms of the things that help improve our incremental margin outlook
We still think we’re in a situation as a firm and the industry that there’s so much change going on that the need and the criticality of investing behind some of these trends are key for success in the future
But again, there’s only so much you can actually invest in at once and do it well
So that’s kind of some context to thinking why generally the things that we’re talking about are helpful for our incremental margin story
In terms of – I’m sorry, the other question that you had was ---+
…see the savings
Yes, so because of the – a large part of it has to do with outsourcing really in looking at moving expenses out of compensation and then moving them into that property, office, tech, which is where we have all the third-party payments for outsourced services
And so it would really be a movement into expenses, into that category off of comp
Thank you everybody
| 2017_IVZ |
2015 | PM | PM
#Well, there is a pricing in Europe which is ahead of the ---+ or higher than the pricing we used to have in the first half of the last year.
But ---+ so yes, there is some impact on volumes.
But on the other hand, I think the underlying macros in many European markets or consumer sentiment is somehow helping us with a better elasticities that we would ---+ which we remember from a 2012, 2013 period.
I think ---+ I mean, there is not exact math how much is coming from the illicit trade, because you will have to go from market to market.
I think a contribution from illicit trade to the German volume is presumably higher; contribution of illicit trade in some other places might be the difference.
E-vapor products, they didn't contribute that much in Germany because this was not really any sizable sort of a category.
But I think they're more helping France or Spain or other geographies.
One thing which we also have to remember, we observed a very serious slowdown in the dynamics of the finecut or [other] tobacco products, which is also the outcome of a tax and price, and I guess also the better consumer sort of a sentiment.
You remember this is a category which used to grow say 2012, 2013 in the tune of 6% to 7% per annual; and these volumes now are growing, I think, around 1% max.
So you could see the drastic change in the dynamics, which obviously was pushing or pulling the consumers from the manufactured cigarettes to the finecut product much stronger in the past that we see now.
I mean, I can't give you the number how much each of these on the total ---+ of these drivers on a total EU basis contributed.
I think we will have to go market by market and put some weight, where is more of the weight, where is less of the weight, which helps the total market performance.
But look, let's enjoy the good total market performance.
We know what are the drivers; we've been looking that finally one day all these things which were the significant headwind for us will unwind, and will start converting into tailwinds, and hope this is a more sustainable trend for the [EU].
Well, I mean, everything depends obviously how TPD is going to be transposed into the member states' legislation, and that's the process which started.
There are some member states which already are advanced; there are some member states which still are before the parliamentary etc.
discussion.
The deadline, as we know, is May 2016.
We will be in a position to say how individual member states ---+ what sort of a framework they create for both the novel tobacco product and the e-cigarettes.
As you remember, in TPD there is a distinction between both, group of both categories.
Then we'll see how that's going to play out.
Well, it's not much really of a development which happened, right.
I mean, the JT case in Ireland was retained in Ireland, which I think is a good news because it will otherwise result in a clash of two similar, if you like, cases at ECJ level.
I think it's fair to assume that ECJ, because I think it's the most important part of a challenge against the directive, that ECJ ---+ which will reach the European Court of Justice, or it will reach the conclusion before the due date for the transposition implementation of the directive, which I said earlier is May 2016.
And that's it, essentially.
Okay.
So, on LAC I think we had a strong pricing coming from Argentina, Brazil, Mexico, Canada; so essentially for all our key geographies there we enjoyed a strong pricing.
I think it should continue.
LAC last year and this year, they're really performing very strongly.
I think they had a good momentum.
As I mentioned earlier answering other questions, there is a bit of a share pressure in Mexico.
But on the other hand, Mexican total industry volumes are doing better; so overall in the financials, we're looking pretty okay.
On South Korea, it looks that our initial guidance for the total market for the year, 20%, 25%, decline is now lower; total closer to the 20%.
It's still significant, but let's remember ---+ I'll let you remember how big the price increase was.
So I think overall it's going better or slightly better than expected.
And our share is up.
So I think, yes, I mean we have the tax increase, price increase behind us; let's see how this is going to unfold.
But so far it unfolds pretty strong.
And, on Australia, not much really as I mentioned earlier, which would happen there.
The prices went up.
There continues some sort of discounting.
The down-trading is there maybe to some extent at the lower level.
Australian total market volume is obviously distorted year on year due to the tax price changes.
I think on the year-to-date basis, Australia is 0.7% actually up total market size.
But, this doesn't mean that the market grows; I think it's a little bit of a distortion there.
Not really.
I mean just one thing to clarify always when we talk about the pricing is the pricing variance.
When we report the volume/mix, we report the mix with the volume (multiple speakers)
But yes, there was some negative mix for EEMA, and I think largely driven by Russia.
On the other hand very encouraging ---+ and I haven't seen these results for the long time: we've had zero mix impact in EU.
Okay.
So that on the total PMI basis, the mix is not that much of a major issue.
Obviously, you have the mix in Australia due to the down-trading, but in a few isolated geographies.
Well, I think many markets have returned to what we would call the standard sort of tobacco product elasticities: minus 0.3%, minus 0.5%; and I see more and more markets which are squarely fitting into this range, even maybe some of them in the lower end of this range.
So in a minus 0.3% territory.
So that's good.
I will start with the second one, important geographies in which we're in the middle of the rollout of the commercial approach is Indonesia, from the large OCI market.
Coming to how much one could attribute to the commercial approach and how much to 2.0, I would put like this.
Marlboro 2.0 is the concept, right.
It's a great concept; it's a great design; it's a great product lineup; it's a great support materials.
And at the end of the day you need to have a damn skilled organization to properly implement this in a market.
So that's your commercial approach.
So this comes both together.
I mean if a great idea, lousy implementations, no result.
If you have a lousy idea, great salesforce, who cares.
No impact.
So I think you need to have always the optimum, the right mix of both.
And I guess we're at this stage now.
From the ---+ no.
There are markets which are ---+ no, from a significant market I guess it would be Indonesia, which pops up to my mind now.
I mean in many other markets, we're well advanced.
Maybe there are some territories in some places, but we also don't necessarily aim at covering 100% of any given market territory.
It has to have the economic sense.
I mean we're running the details, cost-benefit analysis.
And, no, I think Indonesia would still stay on the list.
I would think about Indonesia.
That concludes our call today.
Thank you for joining us.
If you have any follow-up questions, please contact the Investor Relations team.
We are currently in Switzerland today.
Thank you again and have a wonderful day.
| 2015_PM |