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I'll now discuss the financial results.
We reported revenue of $212.1 million during the third quarter of 2020, compared to $238.5 million during the third quarter of 2019.
The decrease was primarily attributable to lower volume related to the COVID-19 pandemic.
More specifically, our two manufacturing facilities in the U.K. were shut down in compliance with government orders on March 25, 2020, and manufacturing operation at those manufacturing plants did not restart until mid to late May.
However, volume across all segments increased significantly in June, and net sales in July exceeded prior year on a consolidated basis.
We reported net income of $10.8 million or $0.33 per diluted share for the three months ended July 31, 2020, compared to $11.8 million or $0.36 per diluted share during the three months ended July 31, 2019.
On an adjusted basis, net income was $11.1 million or $0.34 per diluted share during the third quarter of 2020, compared to $13.7 million or $0.41 per diluted share during the third quarter of 2019.
The adjustments being made to earnings per share are for restructuring charges, impairment charges, certain executive severance charges, accelerated D&A, foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis, EBITDA for the quarter was $27.7 million, compared to $32.8 million during the same period of last year.
Moving on to cash flow and the balance sheet.
Cash provided by operating activities was $45.1 million for the three months ended July 31, 2020, which represents an increase of 50.8% compared to the three months ended July 31, 2019.
Cash provided by operating activities was $47.6 million for the nine months ended July 31, 2020, which represents an increase of 58.7% compared to the nine months ended July 31, 2019.
Free cash flow improved significantly during the third quarter to $40.7 million, which represents an increase of 57.1% compared to the third quarter of 2019.
Year-to-date 2020, free cash flow more than doubled to $26.9 million compared to the same period of 2019.
Our focus on managing working capital continues to provide benefit, but we realize most of the heavy lifting on this front has been accomplished.
Our balance sheet is healthy, our liquidity position is strong and getting stronger, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 1.1 times as of July 31, 2020, which is lower than where we exited fiscal 2019.
We will continue to focus on generating cash and paying down debt in the fourth quarter, which should allow us to exit fiscal 2020 with a leverage ratio of net debt to last 12 months adjusted EBITDA at or below one time.
We will continue to be opportunistic with respect to repurchasing our stock.
As previously disclosed, due to the uncertainty related to the ongoing pandemic, we withdrew full-year guidance and reduced our capex budget for fiscal 2020.
Having said that, the recovery has been more robust than expected on all fronts, and we are now comfortable providing the following full-year 2020 guidance: net sales of $832 million to $837 million, adjusted EBITDA of $97 million to $102 million, capex of approximately $25 million and free cash flow of approximately $50 million.
It is important to note that although free cash flow increased significantly in the third-quarter and year-to-date 2020 compared to 2019, much of that improvement came from systemic improvements to our management of working capital.
Looking ahead, it will be more challenging to continue this rate of improvement in working capital.
In addition, we expect that a higher pension contribution and an increase in cash tax payments will make fourth-quarter comps more challenging.
Overall, we are very pleased with the results we delivered in a quarter that again presented many unprecedented challenges.
As we began our third quarter, there were still many unknowns related to COVID-19 and its impact on our company and the worldwide economy.
were closed by government mandate through mid to late May.
In North America, we still have many employees on furloughed status for the first few weeks of the quarter.
Fortunately, those headwinds changed directions very quickly and demand rebounded swiftly as we entered June.
All facilities are now operating at pre-pandemic run rates and consolidated revenue in July actually exceeded prior year.
As discussed on prior earnings calls, our cost structure is highly variable and allowed us to anticipate this change and effectively meet a rapid run-up in demand.
I'll now spend a moment discussing results from each of our segments, beginning with the North American fenestration.
Revenue in this segment was $122.4 million, down 10.2% from prior-year third quarter.
This shortfall was primarily driven by the pandemic's negative impact on demand, especially during the month of May.
Adjusted EBITDA of $17.8 million was $4.8 million less than prior-year third quarter.
Volume-related impacts and higher overtime costs in June and July, combined with pandemic-related delays to the upgrade project in our vinyl extrusion business in North America, all negatively impacted the results.
We generated revenue of $38.3 million in our European fenestration segment, which was 13.7% less than prior year or down 12.9% after excluding the foreign exchange impact.
As mentioned earlier, our U.K. plants were shut down through mid to late May and effectively had very little revenue during that month.
However, volumes rebounded quickly and revenue in June and July was actually stronger than prior-year levels.
In Continental Europe, spacer volumes remained steady, with strong demand continuing in Germany, Austria, Switzerland and Scandinavia.
Despite low volume in May, this segment was able to realize adjusted EBITDA of $7.7 million in the quarter, which represents margin improvement of approximately 290 basis points over prior year.
This margin expansion was driven by favorable material costs, efficient ramp-up and productivity gains.
Our North American cabinet components segment reported revenue of $51.9 million, which was 11.5% less than prior year.
However, revenue was only down 7.5% if you adjust for the customer that exited the cabinet manufacturing business in late 2019.
We saw a significant increase in demand in June and July driven by opportunities created by supply chain disruptions in the cabinet component import markets.
Adjusted EBITDA for the segment was $3.1 million, down $1.7 million from prior-year third quarter.
It is important to note, though, that EBITDA was negatively impacted by a $1.7 million accrual for writing off the final amount of customer-specific inventory associated with a customer that exited the cabinet business.
Absent this write-off, we would have realized margin expansion of approximately 90 basis points in this segment as well.
Finally, unallocated corporate and SG&A costs were $1.4 million better than prior-year third quarter.
The primary drivers of this improvement were lower executive compensation costs and a favorable medical cost true-up for the quarter.
As Scott also mentioned in his commentary, we are focused on generating cash flow, and those efforts have allowed us to continue deleveraging our already strong balance sheet.
While the potential to benefit from a further improvement in working capital will be limited on a go-forward basis, the increased demand we are seeing provides us with confidence in our ability to maintain a healthy balance sheet, generate cash and opportunistically repurchase stock.
Market fundamentals and demand for our products, combined with our ongoing focus on operational efficiency gains, give us further confidence in our ability to meet the full-year 2020 guidance.
All that said, there's still much uncertainty for the mid to long term.
COVID-19 continues to be a problem around the world and the timing and successful distribution of a potential vaccine is questionable.
presidential election is right around the corner, and the result could have long-lasting economic and societal impacts regardless of who the winner is.
With these things in mind, we feel our current strategy of focusing on operational excellence, maintaining a healthy balance sheet, generating cash and opportunistically repurchasing shares remains our best near-term strategy.
We have demonstrated our ability to execute on this strategy, and we feel that our efforts have positioned us well to capitalize on opportunities when and if they arise.
And with that, operator, we are now ready to take questions. | quanex building products sees fy 2020 adj. ebitda of $97 mln - $102 mln.
sees fy 2020 sales $832 million to $837 million.
qtrly diluted earnings per share $0.33.
qtrly adjusted diluted earnings per share $0.34.
qtrly net sales $212.1 million versus $238.5 million.
sees full year 2020 adjusted ebitda of $97 million to $102 million.
quanex building products - volume across all segments increased significantly in june & net sales in july exceeded prior year on consolidated basis. |
I'll now discuss the financial results.
We reported net sales of $279.9 million during the third quarter of 2021, which represents an increase of 32%, compared to $212.1 million during the third quarter of 2020.
The increase was largely due to increased demand across all product lines and operating segments, combined with increased pricing mostly related to pass-through of raw material cost inflation.
More specifically, we posted net sales growth of 20.8% in our North American Fenestration segment; 19.3% in our North American Cabinet Components segment; and 85.8% in our European Fenestration segment, excluding the foreign exchange impact and despite the challenges presented by flooding in Germany during the quarter.
As a reminder, both of our manufacturing facilities in the U.K. were shut down in late March of 2020 and did not resume operations until mid to late May 2020.
We reported net income of $13.7 million or $0.41 per diluted share for the three months ended July 31, 2021, compared to $10.8 million or $0.33 per diluted share for the three months ended July 31, 2020.
The increase in net income was mostly due to higher volumes and improved operating leverage.
However, this improvement was somewhat offset by higher taxes, inflationary pressures, and an increase in SG&A during the quarter, which was mostly attributable to more normalized medical costs combined with an increase in stock-based compensation expense.
tax rate was enacted on June 10, 2021.
The increase from 19% to 25% will not be effective until tax years beginning on or after April 1, 2023.
However, companies are required to include the effects of changes in tax laws in the period in which they were enacted.
Therefore, in Q3, we remeasured the deferred tax assets and liabilities that will reverse in 2023 at a new tax rate of 25%.
So to account for this change, we now estimate our tax rate to be approximately 28% this year.
On an adjusted basis, EBITDA for the quarter increased by 18.8% to $32.9 million, compared to $27.7 million during the same period of last year.
The increase was again largely due to increased operating leverage from higher volumes.
Moving on to cash flow and the balance sheet.
Cash provided by operating activities was $18.5 million for the three months ended July 31, 2021, compared to $45.1 million for the three months ended July 31, 2020.
Free cash flow came in at $12.3 million for the quarter, compared to $40.7 million in Q3 of last year.
Higher inventory balance was the driver for the lower free cash flow during the quarter.
This inventory growth is being driven by increases in raw material pricing and its related valuation, along with the strategic purchasing of some critical raw materials as they become available.
The first item is self-explanatory and it's just the proper valuation at lower of cost or market and the nature of first-in-first-out accounting for inventory.
The building of raw materials is needed to compensate for ongoing supply uncertainty and significant increases in demand.
Despite this pressure on inventory costs, we were still able to both repay $15 million in bank debt and repurchase approximately $1.8 million of our stock during the quarter.
Year to date, as of July 31, 2021, cash provided by operating activities was $47.4 million, compared to $47.6 million for the same period last year.
Free cash flow year to date as of July 31, 2021, was $31.4 million, compared to $26.9 million during the same period of 2020.
Our balance sheet is strong.
Our liquidity position continues to increase, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.2 times as of July 31, 2021.
We will remain focused on managing working capital and generating cash in the near term.
However, we do expect inflation, labor costs, and supply chain challenges to continue pressuring margins throughout the fourth quarter of this year.
We will continue to pass these incremental costs to our customers through index pricing, surcharges, and price increases.
However, there are time lags in each case.
In summary, on a consolidated basis, we are reaffirming net sales guidance of approximately $1.04 billion to $1.06 billion, and adjusted EBITDA of $125 million to $130 million in fiscal 2021.
Not unlike others in the building products space, our fiscal third quarter was affected by significant inflationary pressures and material shortages that impacted manufacturing schedules and taxed our operations.
Late in the quarter, the growth of the COVID delta variant led to a resurgence of illnesses and required quarantines, which further impacted the already tight labor market.
In addition, our plant in Heinsberg, Germany flooded in late July during the dose stating rainfall that fell over Western Europe.
Despite these demanding challenges, we are pleased that we were able to announce another strong quarter of financial results and reaffirm our full-year guidance for fiscal 2021.
Within just 14 days of the storms, the facility was back up and operating at full capacity, and not one customer was shut down because of this weather event.
The team there worked long, hard hours to make sure our customers were supported.
And they did a tremendous job under unbelievably difficult circumstances.
Now looking at the macro environment in North America, demand for windows and doors remains very strong.
Supply chain pressures remain the constraint and have resulted in extended backlogs for our customers and longer lead times for end consumers.
Demand for cabinet components also continues to be strong.
And according to KCMA, the number of average backlog days within the industry has risen to 66.9 days versus prior-year levels of 37.7 days.
Although the summer months in Europe usually bring a slight drop-off in demand due to holiday travel, current demand for our products in the U.K. and Europe remains consistently strong.
This trend continued into the third quarter, and we expect the same through the end of our fiscal year.
From a supply perspective, material shortages continue to present a major operational headwind throughout the quarter.
The biggest challenges remain in most chemical feedstock products and aluminum, and we are seeing allocations and short shipments of orders on a regular basis.
While it is still too soon to tell, these shortages could be exasperated -- exacerbated by the impact from Hurricane Ida.
The rapid rate of material inflation continues to be the largest financial headwind we face.
As a reminder, for the most part, we have contractual pass-throughs for the major raw materials we use in North America but there is often a contractual lag that can generally be anywhere from 30 to 90 days long.
These pricing mechanisms are working but will not be fully realized until we see a flattening or decrease in pricing that allows for the catch-up period.
We anticipate that we will begin to see prices peak and possibly begin to drop toward the end of the calendar year.
At the time when index pricing does turn, there will be pressure on our revenue.
However, we do expect to see improved profitability at that time.
The labor market continues to be tight in every market we serve.
During the quarter, we made progress in our recruiting efforts.
But in North America, we are still looking to fill over 400 open positions.
To improve both retention and employee acquisition, we have increased wages in almost all of our domestic plants.
On an annual basis, we have raised wages in North America by approximately $5.1 million, which is being covered largely by price increases that have been passed on to our customers.
We believe these increases will offset the structural change in the labor market and allow us to remain margin neutral.
We are confident that the wage increases will continue to relieve pressure in this area.
With that said, the growth of the COVID Delta variant and related spike in U.S. COVID cases has certainly added pressure, both because of ongoing positive cases and required quarantines for employees.
I will now provide my comments on performance by segment for our fiscal third quarter.
Our North American Fenestration segment generated revenue of $147.8 million, which was approximately 21% higher than prior-year Q3 and compares favorably to Ducker window shipments growth of 14.2% for the calendar quarter ending June 30, 2021.
Strong demand across all product lines, share gains in our screens business, increased capacity utilization on our vinyl extrusion assets, and an increase in index and surcharge pricing all contributed to the above-market performance.
Adjusted EBITDA of $18.3 million in this segment was approximately 2.4% higher than prior-year Q3.
Volume-related operating leverage, the implementation of annual pricing adjustments, operational improvements, and lower SG&A all contributed to the improved performance year over year.
These items were offset by timing lags for index pricing and higher levels of overtime utilization.
For the first nine months of fiscal 2021, this segment had revenue of $422.1 million and adjusted EBITDA of $55.2 million, which represents year-over-year growth of 23.6% and 38.1%, respectively.
This also represents adjusted EBITDA margin expansion of approximately 340 basis points when compared to the first nine months of fiscal 2020.
Our European Fenestration segment generated revenue of $71.1 million in the third quarter, which is $32.8 million or approximately 86% higher than prior year.
Excluding foreign exchange impact, this would equate to an increase of approximately 68%.
As a reminder, our European facilities were shut down for part of last May.
Robust demand for our products continues in both vinyl extrusion and spacers as the repair and remodel markets in the U.K. and Continental Europe remains strong.
Adjusted EBITDA of $14.4 million for the quarter was $6.7 million better than prior year.
This improvement was driven by prior-year COVID impact, along with volume-related operating leverage and pricing actions, which helped to offset inflationary pressures.
On a year-to-date basis, revenue of $181.9 million and adjusted EBITDA of $38 million resulted in margin expansion of approximately 540 basis points as compared to the first nine months of last year.
In our North American cabinet components segment reported net sales of $61.9 million in Q3, which was $10 million or approximately 19% better than prior year.
Favorable index pricing and high order demand contributed to solid revenue growth in the quarter.
Adjusted EBIT in this segment was $2.5 million, which was $0.6 million less than prior year.
As discussed earlier, the timing lag of our contractual pricing index has added significant pressure on margin percentage for this segment.
Although we are being impacted by this timing lag on hardwood, the inflation impact versus prior year Q3 was somewhat minimized by operating leverage from higher volume, along with incremental price increases on certain products.
Year to date, this timing lag has impacted adjusted EBITDA by $6.4 million.
But if we adjust for this inflation, we would have realized approximately 400 basis points of margin expansion in this segment on a year-to-date basis.
Operational improvements and volume-related leverage gains have helped offset the timing-related material impacts.
And when hardwood prices flatten or drop, we can expect to realize margin expansion at that time.
Unallocated corporate and other costs were $2.2 million for the quarter, which is $1.3 million higher than prior year.
The primary drivers of this increase were stock-based compensation expense, operating incentive accruals, and more normalized medical expenses as compared to 2020.
As Scott discussed, our balance sheet continues to improve.
Our operational teams continue to focus on metrics they can control, and our cash flow profile remains attractive.
Our management team and Board are actively engaged in evaluating our capital allocation strategy for fiscal 2022.
But in the short term, our top priorities are to continue paying down debt and accumulating cash.
There appears to be growing confidence that the current cycle within the building products sector will extend for several years, and we are seeing more and more M&A opportunities across our desk.
Given the strength of our balance sheet, we will evaluate potential acquisitions that are both strategic and accretive to our growth and margin profile.
So despite the near-term supply and inflationary pressures, we continue to outpace 2020 for both quarterly and year-to-date revenue, net income, adjusted EBITDA, and EPS.
We have executed on our plan and we have put the company in a position to capitalize on various paths to create shareholder value.
We remain very optimistic on the future.
And, operator, we are now ready to take questions. | q3 sales $279.9 million versus refinitiv ibes estimate of $272.6 million.
qtrly earnings per share $0.41.
expect inflation, labor costs, and supply chain challenges to continue pressuring margins throughout q4 of this year.
reaffirming net sales guidance of approximately $1.04 billion to $1.06 billion in fiscal 2021. |
On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer, and Roland Caputo, Executive Vice President and Chief Financial Officer.
These statements are based on our current expectations and assumptions, which may change over time.
Our actual results could differ materially due to a number of risks and uncertainties that are described in the company's 2020 10-K and subsequent SEC filings.
Given the impact that the COVID-19 pandemic had on our business in 2020, we will also present certain comparisons of our operating results in 2021 to 2019, which we believe in many cases provides useful context for our current year results.
The Times had a strong third quarter, with the power of our subscription-first strategy on full display.
It was our best third-quarter in both News and total net subscription additions since the launch of the digital pay model more than a decade ago.
And, outside of 2020, it was our best quarter ever for digital subscription additions.
We hit an important milestone during the quarter.
The Times now has more than 1 million international digital subscriptions.
We've said for some time that we see a huge opportunity to reach curious, English-speaking people not just in the US, but around the globe, and we continued to prove that out in Q3.
We added a total of 455,000 net new digital subscriptions in the quarter, including 320,000 for News and 135,000 for Games, Cooking and Wirecutter.
This progress reflects the enduring demand for quality, independent journalism, and our long-term potential to mean more to more people across a range of news and life needs.
Total revenues grew 19% in the quarter, with digital subscription revenue rising 28% and advertising up 40% for both print and digital.
As a result, adjusted operating profit grew 15%, despite a 20% increase in adjusted operating costs.
The quarter was a busy one in news.
While COVID remained the dominant story, as it has for the last 20 months, a wide range of topics also captured the public's attention, including the Afghanistan withdrawal and the tragic events in Haiti, the resignation of New York's governor, and our ongoing climate reporting.
These are the kinds of stories that our 2,000-person journalism operation is uniquely positioned to cover with depth and thoughtfulness.
The news cycle no doubt played a role in the quarter's performance, but so too did our improved command over the levers of our model.
I've talked in the past about our efforts to build enduring daily habits whatever the news cycle.
Those efforts are now bearing fruit.
That, plus improved marketing messaging, makes it a steady source of new subscriptions.
We improved conversion in the quarter with a variety of planned experiments across the customer journey.
We're using data and machine learning in increasingly sophisticated ways to identify the right moment to ask a reader to become a subscriber; tests involving our algorithmic meter and paywall have been particularly promising.
We also continue to experiment more broadly with friction and value exchange to find the right balance between converting readers into paying subscribers and growing the pool of prospects at the top of the funnel.
Some of those experiments entailed more aggressive limiting of access to our journalism for non-subscribers, which had a meaningful, positive impact on starts in the quarter.
We've loosened those restrictions somewhat in the current quarter as we fine-tune and balance the model.
We're also working to improve and differentiate the subscriber experience to showcase the benefits of subscribing to prospects and also to drive retention.
To that end, we introduced a portfolio of subscriber-only newsletters in the quarter, leveraging some of our existing newsletters with strong followings, like Paul Krugman, Watching and Well.
We also launched several new newsletters, including Professor John McWhorter on race and language and Tressie McMillian Cottom on culture, politics and the economics of our everyday lives.
As a result of strong demand for news and strength in conversion in the quarter, we were able to profitably increase media spending.
That, too, contributed to our record quarter for net additions, and we did so while our mix of paid and organic starts remained heavily weighted to organic.
We continued to pay close attention to churn, which will require increased focus and energy as our subscription base grows.
As I've said in prior calls, we generally view our churn rate, which has vacillated within a relatively narrow band over the last few years, as a strength.
That continued in the third quarter, with a slight improvement.
We expect pressure on churn in the fourth quarter as promotional pricing ends for the cohort that started last year around the presidential election and as credit card regulations tighten in some markets.
We continue to believe that our focus on driving repeat engagement and on enhancing the subscriber experience will reduce reasons to cancel over time.
One of the ways we intend to boost engagement and showcase the benefits of subscribing is by getting more people to experience the full value of The Times, including our current stand-alone products -- Cooking, Games, and Wirecutter.
The success of these stand-alone products alongside the growth of our core news product begins to demonstrate the potential of our multi-product bundle.
As we experiment more with cross-promotion, we are seeing more News readers also engaging deeply with Cooking and Games.
Over time, we expect that a bundle, offering all of our products, can play a big role in driving conversion and in giving subscribers more reasons to engage and retain.
But in the meantime, Cooking and Games continue to show promise as compelling propositions for subscribers in their own right, with each product nearing a million total subscriptions.
Net subscription additions to Games were 35% higher in Q3 than the prior quarter, and more than 20% higher than last year.
Cooking net additions more than doubled quarter-over-quarter and were on par with last year's elevated Q3, with a first-time price promotion and access model experiments driving the results.
We also launched paid subscriptions to Wirecutter in the quarter.
While a relatively small contributor to overall subscription additions, it's off to a promising start, especially among existing Times subscribers, with 10,000 net subscriptions in the first month.
It's been a fertile period for product development at The Times, both within and beyond our existing products.
Last month, we announced that we'll test a new digital experience we're calling New York Times Audio.
It's a single destination for listeners to enjoy the full range of our audio storytelling, which today reaches 20 million listeners a month.
We also officially launched a beta for a digital kids how-to product, inspired by our popular monthly print kids section.
Costs were higher in the third quarter, largely driven by higher paid media expenses, as well as the strategic investments we're making in journalism, product development and technology to allow our digital subscription business to scale efficiently.
As I've said in the past, you can expect us to continue to invest into our long-term opportunity to lay the foundation for a larger, more profitable business over time.
Turning to advertising, we had another strong quarter of revenue growth.
While year-on-year growth slowed in the third quarter compared with the second, as expected, digital advertising revenues grew 22% compared with 2019, the same rate of growth as we reported in the second quarter.
Our third quarter results continue to reflect the benefits of the overall market recovery, as well as marketer interest in our proprietary products, including the first-party data that stems from our subscription business and our growing offering of captivating podcasts.
I'll close by reiterating that our business success is tied inextricably to our mission of helping people understand the world.
Key to that is hiring the best journalistic talent available.
Several exceptional journalists joined us in recent months, including Lulu Garcia-Navarro from NPR; Peter Coy from Bloomberg BusinessWeek; and Paul Volpe, who returned to The Times from Politico, where he was executive editor.
These Afghan colleagues -- and so many others fleeing the country -- went through a harrowing experience, and it has been nothing short of awe-inspiring to watch this institution come together to help.
I'm incredibly grateful to the many colleagues who supported their journey to safety and continue to do so as they resettle.
And with that, over to you, Roland.
Fundamental strength in the underlying business exemplified by strong digital subscription unit growth and healthy growth in both subscription and advertising revenues, resulted in strong financial performance in the third quarter.
Adjusted diluted earnings per share was $0.23 in the quarter, $0.01 higher than the prior year.
We reported adjusted operating profit of $65 million, higher than the same period in 2020 by $9 million and $21 million dollars higher than 2019, which we continue to believe is an important comparison point given the impact that the pandemic had on our 2020 results.
As Meredith noted, we added 320,000 net new subscriptions to our core digital news product and 135,000 net new stand-alone subscriptions to our other digital products, for a total of 455,000 net new digital-only subscriptions.
As of the end of the quarter, we had approximately 980,000 Games subscriptions, approximately 900,000 Cooking subscriptions and 10,000 Wirecutter subscriptions, the Wirecutter subscription offering having launched at the beginning of September.
The international share of total news subscriptions remained at 18% as of the end of the quarter.
Total subscription revenues increased nearly 14% in the quarter with digital-only subscription revenue growing nearly 28% to approximately $200 million.
Digital-only subscription revenue grew as a result of the large number of new subscriptions we have added in the past year, continued strength in retention of the $1 dollar-per-week promotional subscriptions who have graduated to higher prices, and to a much lesser extent, the impact from our digital subscription price increase.
Digital news subscription ARPU for the quarter increased approximately 5 percentage points compared to the prior year and nearly 1 percentage point compared to the prior quarter.
This improvement in both the year-over-year and sequential result was primarily due to subscriptions graduating from their introductory price to either full price or an intermediate step-up price in the quarter, as well as the continued benefit from price increases on our more tenured, full-price subscriptions.
ARPU related solely to domestic news subscriptions increased 6.5 percentage points versus the prior year and approximately 1.5 percentage points versus the prior quarter.
We continue to expect the impact from subscriptions graduating from discounted promotions and the price increase on tenured digital subscriptions to provide a tailwind to digital news ARPU through the balance of this year.
Print subscription revenues declined 1% as overall volume declines more than offset the benefit from the first quarter home delivery price increase.
Total daily circulation declined approximately 7% in the quarter compared with prior year, while Sunday circulation declined approximately 5%.
Compared with 2019, print subscription revenues declined 5%, as single-copy and international bulk sale copies declined, while revenue from domestic home-delivery subscriptions grew 1.7%.
Total advertising revenues increased 40% in the quarter, as both digital and print advertising grew approximately 40%, in large part as a result of the impact of the comparison to weak advertising revenues in the third quarter of 2020.
Digital advertising continued to be buoyed by our proprietary first-party targeted ad products and expanded audio product portfolio.
Compared with 2019, digital advertising grew more than 22% as a result of higher direct sold advertising, including traditional display and audio.
Meanwhile, print advertising increased 39% compared with 2020, primarily driven by growth in the luxury and entertainment categories.
However, print advertising remained below 2019 levels by 25%.
Other revenues increased 19% compared with the prior year to approximately $56 million, primarily as a result of higher licensing, commercial printing associated with the addition of the Dow Jones family of products to our operations, and Wirecutter affiliate referral revenue.
Adjusted operating costs were higher in the quarter by approximately 20% as compared with 2020 and approximately 16% higher than 2019.
Cost growth came in at the top end of the guidance we issued in early August largely due to the profitable deployment of additional marketing media above initial estimates.
Cost of revenue increased 9% as a result of growth in the number of newsroom, Games, Cooking and audio employees; higher subscriber servicing costs; a higher incentive compensation accrual and other costs in connection with the production of audio content.
Sales and marketing costs increased more than 65%, driven primarily by higher media expenses, which had been reduced last year in light of the historically strong organic subscription demand.
When compared to 2019, sales and marketing costs increased more than 30% while media expenses were approximately 54% higher.
We expect media expenses to remain elevated in the fourth quarter.
Product development costs increased by approximately 18%, largely due to growth in the number of engineers and a higher incentive compensation accrual than had been recorded in the third quarter of 2020.
General and administrative costs increased by 26%, largely due to a higher incentive compensation accrual and increased headcount in support of employee growth in other areas, stock price appreciation on stock-based awards, and higher consulting costs.
We recorded one special item in the quarter, a $27 million gain related to a non-marketable equity investment transaction, which is reflected on the interest income and other line of our income statement.
Our effective tax rate for the third quarter was approximately 27%, which is in line with the rate we expect on every dollar of marginal income we report with the possibility of significant variability around the quarterly effective rate.
Moving to the balance sheet, our cash and marketable securities balance ended the quarter at $1.043 billion, an increase of $96 million compared with the second quarter of 2021.
The company remains debt free with a $250 million revolving line of credit available.
Let me conclude with our outlook for the fourth quarter of 2021.
Total subscription revenues are expected to increase approximately 12% compared with the fourth quarter of 2020, with digital-only subscription revenue expected to increase approximately 25%.
Overall, advertising and digital advertising revenues are expected to increase in the mid-teens compared with the fourth quarter of 2020.
The expectation that the rate of digital advertising growth will slow compared with our third quarter is partially a result of more difficult comparisons in the fourth quarter.
Other revenues are expected to increase approximately 15%.
Both operating costs and adjusted operating costs are expected to increase approximately 17% to 20% compared with the fourth quarter of 2020 as we continue investment into the drivers of digital subscription growth and compare against another quarter of low spending last year. | quarterly adjusted earnings per share from continuing operations $0.23.
paid digital-only subscriptions totaled about 7,588,000 at quarter end, net increase of 455,000 subscriptions compared with end of q2 2021.
new york times sees q4 subscription revenue up 12%.
total subscription revenue in q4 2021 are expected to increase about 12 percent compared with the fourth quarter of 2020.
total advertising & digital advertising revenue in q4 of 2021 expected to increase in the mid-teens compared with q4 of 2020. |
I know many of you have had the opportunity to speak with Amber, our new Director of Investor Relations.
Ken has a proven track record of leading high-performing teams and delivering results at several diverse global organizations.
We are excited to have Ken on our team.
Ken will then provide additional financial details on the third quarter and then I'll come back to discuss our outlook for the fourth quarter.
Our global team continues to demonstrate tremendous resiliency, adapting the changing market conditions and working hard to service the demands of our customers.
I'm incredibly proud of how our teams have worked together during these challenging times to achieve such strong financial results, delivering record quarterly EBIT, double-digit EBIT margins in all three businesses and record free cash flow.
All of this was accomplished while maintaining our focus on keeping each other as well as our customers and suppliers healthy and safe, ramping up manufacturing operations throughout the quarter to service increasing customer demand and supporting our communities as we continue to operate through this global health crisis.
Before discussing our markets and financial results in more detail, I'll start with safety.
As you know, safety is a top priority for our company.
Year-to-date 57% of our global facilities remain injury free.
In the third quarter, while we continue to perform at a high level with a recordable incident rate of 0.73, this result was above our third quarter 2019 performance and reminds us of the daily focus we must have on safety in order to achieve an injury free workplace.
Turning to financial results, our performance this quarter was better than what we outlined during our last earnings call as we saw customer demand continue to improve throughout the quarter in most of our end markets.
Revenues were $1.9 billion, up 1% compared with the same period last year and adjusted EBIT was $289 million, up 4%.
These results continue to demonstrate the strength of our company's market leading position, broad product offering and improved operating efficiencies to generate substantial free cash flow and deliver sustainable shareholder value.
On our last two calls, I've discussed four key areas, we have focused on this year to ensure the strength and continuity of our business.
First, keeping our employees and other key stakeholders healthy and safe, second, staying closely connected to our customers, our suppliers and our markets, third, rapidly adapting our businesses to near-term changes in market conditions, while remaining focused on positioning us for long-term success, and fourth, ensuring a strong balance sheet with access to capital as needed.
We have managed these four priorities well through the pandemic and expect to finish the year strong, while we position ourselves for 2021.
Overall, we continue to see our end markets recover during the quarter, but at different rate.
Our residential markets, especially, in the United States are being fueled by robust demand for new single-family housing as well as increased repair and remodeling investments as owners upgrade their homes and expand their living spaces.
Our commercial and industrial markets are also seeing improvements, but we continue to expect these to recover at a slower pace as we finished 2020.
In the third quarter, our Roofing business delivered revenue and earnings growth.
Increased storm activity and continued remodeling growth drove significantly higher market demand in the quarter.
While our manufacturing and supply chain teams worked hard to service the higher demand, our volumes trail the overall market growth due to limited inventory levels entering the quarter.
We remain focused on improving our service cycles and plan to continue running our facilities at full capacity to meet near-term demand, while ensuring we are positioned to support our customers and service expected market demand in 2021.
In composites, volumes also continue to improve throughout the quarter with revenues down just 2%.
Our focus on specific end markets, such as building and construction and wind energy combined with our local supply chain model in specific geographic regions, continues to pay dividends as we grow our volumes.
This along with our continued focus to drive operational efficiencies through manufacturing productivity and network optimization led to double-digit EBIT margins in the quarter.
And in insulation, revenues also finished down 2% with EBIT margins of 11% driven primarily by the additional growth we saw in our North American residential fiberglass business.
As I stated earlier, we continue to see the U.S. housing market strengthening with demand around 1.4 million units on a seasonally adjusted basis for the last three consecutive months.
Given the market demand we are currently seeing and that is forecasted for 2021, we have initiated work to restart our batt & roll insulation line at our Kansas City facility.
We would expect to have this line back up and running during the second quarter of next year.
Our focus in this business has been to operate the most efficient and most flexible manufacturing network, which positions us to quickly respond to changing market conditions to service our customers and deliver strong financial performance.
As we continue to adapt our operations to service the changing market environment, we remain focused on generating strong free cash flow and maintaining an investment grade balance sheet.
Last quarter, we discussed our focus on evaluating our liquidity needs, prioritizing deleveraging the balance sheet and maintaining our dividend.
In the third quarter, given our cash flow, we were able to execute on all these areas, finishing the quarter with more than $1.7 billion of liquidity.
Before turning it over to Ken to discuss our third quarter financial results in more detail, there is one other item I would like to cover.
She will become the Senior Vice President of Corporate Affairs and General Counsel at Whirlpool Corporation.
During her five years with Owens Corning, Ava played a key role in shaping the direction of our company and driving our success.
We are currently exploring alternatives to identify her successor, and we'll make an announcement when our evaluation is complete.
First, let me say that I'm honored by the opportunity to join the OC team and to contribute to the future success of this company.
While only on day number 50, I'm already impressed with the resilience of the company and the dedication of our people.
Every day reaffirms for me that OC is truly global in scope and human in scale.
His leadership during this unprecedented time was crucial, and the company's financial strength is a testament to the quick and decisive actions taken by Prith and the leadership team.
Now turning to our results.
On Slide 5, the company's third quarter performance demonstrates the strength of Owens Corning and its ability to generate strong financial results in an improving, but still challenging environment.
The company has reduced its debt position and retains ample liquidity in light of the continued market uncertainty.
For the third quarter, we reported consolidated net sales of $1.9 billion, up approximately 1% over 2019.
In the quarter we saw solid revenue growth in our Roofing business while revenues in our Composites and Insulation businesses declined slightly.
Through the quarter, the residential recovery in the U.S. has continued to accelerate while commercial, industrial and non-U.S. residential markets have recovered at a slower pace as expected.
Adjusted EBIT for the third quarter of 2020 was $289 million, up $12 million compared to the prior year, highlighted by the continued recovery in residential end markets, primarily in the U.S. All three businesses achieved double-digit EBIT margins as a result of the company's market-leading positions and continued focus on our key operating priorities.
Net earnings attributable to Owens Corning for the third quarter of 2020 was $206 million, compared to $150 million in Q3 of 2019.
Adjusted earnings for the third quarter were $186 million or $1.70 per diluted share compared to $176 million or $1.60 per diluted share in Q3 2019.
Depreciation and amortization expense for the quarter was $120 million, up $8 million as compared to last year.
Our capital additions for the third quarter were $68 million, down $114 million versus 2019.
On Slide 6, you see adjusted items reconciling our third quarter 2020 adjusted EBIT of $289 million to our reported EBIT of $296 million.
During the third quarter, we recognized $7 million of gains on the sale of certain precious metals.
We've excluded these gains from our adjusted EBIT.
I would also like to highlight one item related to adjusted EPS.
We've adjusted out a $13 million non-cash income tax benefit related to regulations that were issued during the third quarter associated with U.S. corporate tax reform.
This adjustment is described in more detail in the notes of our 10-Q.
Slide 7 provides a high level overview of the changes in third quarter adjusted EBIT from 2019 to 2020.
Adjusted EBIT of $289 million increased $12 million as compared to the prior year.
Roofing EBIT increased by $53 million, insulation EBIT decreased by $11 million and composites EBIT decreased by $12 million.
General corporate expenses of $35 million were up $18 million versus last year, primarily due to higher incentive compensation expense associated with our improved financial outlook.
In addition, the timing of smaller one-time items more than offset benefits from our ongoing cost control initiatives.
Now I'll provide more details on each of the business results, beginning with Insulation on Slide 8.
Insulation sales for the third quarter were $681million down 2% from Q3 2019.
During the quarter, volume growth in North American residential fiberglass insulation was more than offset by lower selling prices for the overall segment and lower volumes and technical and other building insulation.
Volumes were down in technical and other due to the impacts of COVID-19, however, we saw some sequential improvement within the quarter.
EBIT for the third quarter was $73 million, down $11 million as compared to 2019.
The decline was driven by lower year-over-year selling prices, the negative impact of lower volumes in technical and other, and slightly higher delivery costs.
The benefit of higher sales volumes from the recovery in North American residential and favorable manufacturing performance, partially offset these impacts.
For the Insulation business overall, our sequential operating leverage from Q2 to Q3 was 48%, in line with the outlook provided on the Q2 call.
Sales in composites for the third quarter were $521 million, down 2% as compared to the prior year due to lower selling prices and unfavorable product mix.
Overall, sales volumes were flat year-over-year.
During the third quarter we saw certain regional markets began to recover and continued to see strong performance in our wind and roofing downstream specialty applications.
EBIT for the quarter was $55 million, down $12 million from the same period a year ago but up significantly from EBIT of $6 million reported in Q2 of 2020.
Our results continue to be impacted by COVID-19 demand variability.
The EBIT decline in the quarter was primarily driven by the negative impacts of production curtailments and lower selling prices, partially offset by favorable manufacturing performance.
Unfavorable customer mix and negative foreign currency translation were largely offset by lower selling, general and administrative expenses, input cost deflation and lower delivery costs.
Sequentially, from Q2 to Q3, we generated operating leverage of 40%.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $761 million, up 7% compared with Q3 of 2019, driven by 12% volume growth, which was partially offset by lower year-over-year selling prices and lower third-party asphalt sales.
In the third quarter, the U.S. asphalt shingle market grew significantly as compared to the prior year, primarily due to continued strength in repair and remodeling as well as increased storm activity.
EBIT for the quarter was $196 million, up $53 million from the prior year, producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes, input cost deflation and favorable manufacturing performance, partially offset by lower selling prices.
The current pricing environment has improved sequentially with the realization of our August increase, partially offsetting the year-over-year headwind from the lack of a spring price increase.
In addition, the benefit of asphalt cost deflation and slightly lower delivery cost more than offset the negative impact of lower year-over-year selling prices.
As a result, we maintained a favorable price-cost relationship in the quarter and cash contribution margins were solid, as we exited the quarter.
Turning to Slide 11, I'll discuss significant financial highlights for the third quarter of 2020.
We continue to manage our working capital balances, operating expenses and capital investments.
As a result of disciplined actions taken and the recovery of U.S. residential markets, our third quarter free cash flow reached a record quarterly level and our year-to-date free cash flow of $514 million was $232 million higher than the same period last year.
In the last earnings call, we highlighted the company's focus on strengthening liquidity, deleveraging the balance sheet and maintaining the dividend.
Based on our strong cash flow performance and deleveraging activities, we're operating within our target debt to adjusted EBITDA range of 2 to 3 times with ample liquidity.
I'd like to highlight our progress and evolution in this space.
During the quarter, we repaid the remaining $190 million that was drawn on our revolver at the end of the first quarter.
We also repaid the remaining $150 million balance of the term loan in advance of the February 2021 due date.
We maintained our dividend in the third quarter and have returned $159 million to shareholders so far this year through dividends and share repurchases.
As of September 30th, the company had liquidity of more than $1.7 billion, consisting of $647 million of cash and cash equivalents and nearly $1.1 billion of combined availability on our revolver and receivable securitization facilities.
We continue to focus on maintaining an investment grade balance sheet and are evaluating additional U.S. pension contributions in the range of $50 million to $100 million to further delever the balance sheet and improve our credit metrics.
Through our teamwork and consistent execution, we are positioned well to capitalize on both the near-term market recovery as well as longer-term secular trends.
However, we continue to face uncertainties with the pandemic and potential government responses and expect our financial performance to be impacted by market disruptions caused by COVID-19.
Broadly speaking, we have experienced a much faster recovery in our residential end markets, while commercial and industrial end markets are following at a slower pace.
Given this continued market performance, we would expect the company to deliver revenue and adjusted EBIT in the fourth quarter at or above last year, driven by our innovative product offering and broad market reach.
Based on trends we are seeing in October, I'll provide some additional details by business, starting with Insulation.
Within our North American residential business, we saw continued strengthening in U.S. new residential construction.
While lagged housing starts in Q4 will be higher versus prior year, we expect our volumes will be relatively flat based on current supply constraints and limited inventories.
In our technical and other building Insulation businesses, October volumes are trending down mid-single-digits versus prior year.
We expect year-over-year volumes will continue this trend through the fourth quarter based on a steady but slower recovery in commercial and industrial end markets.
Prices through the third quarter remained relatively stable in both our North American residential and our technical and other Insulation businesses, however, we continued to face a negative year-over-year price carryover.
While we are seeing positive traction from the mid-September residential insulation price increase, we don't expect to come positively yet in the fourth quarter.
As we move into 2021, we recently announced an 8% price increase for our U.S. residential Insulation business effective January 11th.
Overall for our Insulation business in the fourth quarter, we expect results to be slightly better than our EBIT in Q3.
In Roofing, third quarter industry shingle shipments were up about 25% with our volumes tracking below the market due to supply constraints driven by low inventories entering the quarter.
Our October shipments have started the quarter higher than prior year.
Based on current trends we could see year-over-year market volumes for the fourth quarter up a similar percentage to what we saw in the third quarter, depending on the timing of winter weather.
Given our third quarter volumes, we would expect to outperform the market in Q4 to service out-the-door demand and improve distributor inventory positions of our products.
In the fourth quarter, we should continue to see realization from our August price increase, offsetting the year-over-year headwind from the lack of a spring price increase.
However, we expect to see some continued pricing headwinds in the quarter driven by higher rebates versus 2019, due to this year's increased Roofing demand.
Deflation from expected seasonal declines of asphalt costs should result in another quarter of positive price cost mix.
Based on all these factors, roofing EBIT margins in the fourth quarter should remain strong, but could be slightly lower than Q3 due to seasonally lower shipping volumes.
In Composites, Q3 shipments improved throughout the quarter.
Given this trend, we could see volumes in Q4 similar to the first quarter with overall demand continuing to recover.
While transactional pricing remains relatively stable, we continue to expect a similar pricing headwind in Q4 as we realized in Q3.
As we work through our annual contract negotiations with customers, we've announced price increases in most of the regions we serve, which could impact 2021.
We remain committed to tightly managing our inventory levels, which will continue to impact our manufacturing performance in the fourth quarter as we curtail production to meet demand.
Similar to the last several years, we expect to see our overall fourth quarter revenue and EBIT performance similar to what we saw in the first quarter with an additional $5 million headwind related to rebuild costs.
With that view of our businesses, I'll discuss a few key enterprise focus areas.
We continue to closely manage our operating expenses and capital investments.
We expect corporate expenses for the company to be approximately $125 million, primarily due to additional incentive compensation tied to our earnings outlook.
And we expect capital investments to be at the high end of the range we previously provided of $250 million to $300 million.
In terms of our capital allocation, we remain committed to generating strong free cash flow into our target of returning at least 50% to investors over time.
So far this year we have returned $159 million through share repurchases and dividends and we'll pay our third quarter dividend of approximately $26 million next week.
In our last call, we said we would focus on deleveraging the balance sheet and maintaining our dividend, we increased liquidity to over $1.7 billion, paid down the revolver and term loan and paid our dividend in the quarter.
Going forward, we will continue to manage our liquidity needs, remaining focused on supporting the dividend, while evaluating additional pension contributions and potential share repurchases.
As I stated at the beginning of the call, our team continues to execute very well, adapting to changing market conditions while remaining committed to operating safely, servicing our customers and creating value for our shareholders. | compname reports q3 adjusted earnings per share $1.70.
q3 adjusted earnings per share $1.70.
q3 sales $1.9 billion versus refinitiv ibes estimate of $1.81 billion.
expects covid-19 pandemic will continue to create uncertainty in its end markets. |
Joining us today are Brian Chambers Owens Corning's Chair and Chief Executive Officer and Ken Parks, our Chief Financial Officer.
In order to accommodate as many call participants as possible, please limit yourselves to one question only.
Please reference Slide 2 before we begin where we offer a couple of reminders.
We undertake no obligation to update these statements beyond what is required under applicable securities laws.
Adjusted EBIT is our primary measure of period over period comparisons, and we believe it is a meaningful measure for investors to compare our results.
Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.
We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.
We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities to enhance shareholder value.
The tables in today's news release in the Form 10-Q include more detailed financial information.
I hope all of you are staying healthy and safe.
Owens Corning posted strong 3rd quarter results today consistent with our July outlook and building on the momentum of an outstanding first half of the year.
Our global team continued to execute extremely well in a very dynamic environment overcoming higher inflation as well as some supply chain disruptions to deliver another great quarter.
Our results continue to demonstrate the resiliency of our team, the strength of our commercial and operational execution and the durability of the earnings power of our company.
I'll start with an overview of our 3rd quarter performance before turning that over to Ken who will provide additional details on our financial results.
I'll then come back to talk about our business outlook for the remainder of the year.
As always, I will begin my review of safety.
During the 3rd quarter, our commitment to safety resulted in an RIR of 0.64, which is a significant improvement compared to the same period last year, with more than half of our facilities operating injury-free for more than a year.
While we are generally encouraged by the recent decrease in COVID cases and gradual increase in vaccinations, It's clear the impacts of the pandemic will persist in the near term.
We will continue to follow enhanced safety protocols and operate our facilities with a strong focus on working together to keep each other, our customers and our suppliers healthy and safe.
Financially, we delivered record 3rd quarter revenue of $2.2 billion, an increase of 16% compared with the same period last year and adjusted EBIT of $400 million.
Our performance during the quarter was again a combination of strong market volumes and outstanding execution with each business delivering a positive price cost mix and great manufacturing performance.
This resulted in an adjusted EBIT margin for the Company of 18% with all 3 of our businesses, posting double-digit EBIT margins for a 5th consecutive quarter.
Demand for our US residential products which account for about half of our enterprise revenues as well as our commercial industrial products remained strong in Q3 and we continue to operate with extended lead times for many of our products.
Within this tight supply chain environment, our global teams, especially in supply chain, manufacturing, customer service and sales continue to work extremely hard to increase our production and meet the needs of our customers.
In addition to our focus to finish the year strong, we continue to make strategic choices to enhance the earnings power of the company and create additional growth opportunities by allocating resources to product lines where we can strengthen our market position and provide a sustainable solution.
I would like to take a few moments now to share more about the work we are doing with 2 of our product lines to position us for the future.
As part of our focus to build market-leading positions, we continuously evaluate the strength of our products and position in the market.
Based on this analysis, we have decided to explore strategic alternatives for one of our glass reinforcements product lines within our composites business thermoplastic dry use chopped strands.
The Dutch product line is primarily used in automotive and electronic applications and generates annual revenues of approximately $270 million.
The focus of our valuation will include divesting or repurposing these assets to manufacture other product lines, whether it's material science capabilities and relationships across a variety of core markets, applications and geographies, our composites business is an integral part of our company and a key contributor to our growth strategy.
The decision to explore alternatives for these production assets and product line is consistent with our approach to focus on high-value material solutions where we can develop market-leading positions, such as in building a construction, renewable energy and infrastructure.
Product and process innovation continues to be keyed how we drive growth, improve our operating performance and create value for our customers.
A great example this ongoing work is our PINK Next Gen Fiberglass Insulation launched in August.
This latest product innovation leverages advanced fiber technology to create a sustainable product that is faster and more comfortable to install compared to existing products in this space.
This is particularly important given the performance expectations and tight timelines of today's contractors and builders.
Given our commitment to sustainability, I'm pleased to note that PINK Next Gen insulation is made with 100% wind powered electricity in such an industry standard for recycled content.
Our launch of Next Gen fiberglass insulation, is the most recent example of how our industry leadership and innovation is expanding growth opportunities for our customers and Owens Corning.
We are also excited to see how our sustainability leadership and mission to build a sustainable future through material innovation is creating new growth opportunities across the enterprise.
As we engage with more and more customers to develop solutions which achieve their key sustainability goals.
The priority topics for collaboration focus on decarbonization including product specific embodied carbon reduction, circular economy, which includes both recycled content and end of life recycling solutions and product design transparency specifically related to the impact of our products throughout their lifecycle.
We look forward to sharing more details about these exciting developments to help our customers and grow our company during our upcoming Investor Day.
As Brian commented Owens Corning delivered another outstanding quarter with strong revenue and earnings growth across all 3 businesses.
While demand conditions remain strong across the markets we serve, our ongoing execution was fundamental to driving this performance, allowing us to manage through supply chain challenges and accelerating inflation.
As we talked about in our second quarter call, inflation continues to impact almost all material input costs especially asphalt and other petroleum based materials along with transportation and energy costs.
Overall positive price realization more than offset the inflation headwind in all 3 businesses in the quarter and year-to-date.
As a result, 3rd quarter operating margins reached 18% nearly 300 basis points higher than the same period last year.
The expanded earnings combined with focused working capital management and capital investments drove healthy free cash flow generation in the quarter and strong free cash flow conversion year-to-date.
Now beginning on Slide 5, we can take a closer look at our results.
Wwe reported consolidated net sales of $2.2 billion for the 3rd quarter, that's up 16% over 2020 and produced double-digit revenue growth in all 3 segments.
Our commercial and operational execution were instrumental in delivering these results as demand conditions remain strong in the markets we serve and we overcame supply chain disruptions with limited inventories.
Adjusted EBIT for the 3rd quarter of 2021 was $400 million, up $111 million compared to the prior year.
Earnings grew year-over-year, in all 3 businesses, resulting in double-digit EBIT margins for the 5th consecutive quarter.
Adjusted earnings for the 3rd quarter were $162 million or $2.52 per diluted share compared to $193 million or $76 per diluted share in the 3rd quarter of 2020.
Depreciation and amortization expense for the quarter was $129 million, up $9 million compared to Q3 2020.
our capital additions for the 3rd quarter were $90 million, up $22 million as compared to the 3rd quarter of last year.
We'll continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and prioritizing investments that drive growth and productivity.
Slide 6 reconciles our 3rd quarter adjusted EBIT of $400 million to our reported EBIT of $394 million during the quarter we recorded $20 million of restructuring costs associated with previously announced actions, which includes $19 million for the Santa Clara facility sale.
Those charges were partially offset by a $15 million gain on the sale of land related to a previously announced facility closure.
In addition, we had $1 million of acquisition related charges for, which was acquired during the quarter.
These items are excluded from our adjusted 3rd quarter EBIT.
Slide 7 provides an overview of the changes in 3rd quarter adjusted EBIT from 2020, 2021.
Q3 adjusted EBIT increased $111 million over the prior year, reaching $400 million.
Despite supply chain challenges and accelerating inflation, all 3 segments delivered year-over-year EBIT growth.
Now turning to slide 8, I'll provide more details on the performance of each of the businesses.
The insulation business, continue to build on the strong performance demonstrated in Q2, delivering double-digit year-over-year EBIT growth and 400 basis points of EBIT margin expansion.
Q3 revenues were $815 million, a 20% increase over the 3rd quarter of 2020.
We saw solid realization on announced pricing actions, as well as volume growth across the business.
Reflecting continued strength in both US new construction and the commercial end markets we serve globally.
In North American Residential Fiberglass Insulation, we saw year-over-year growth driven by positive pricing and stronger volumes benefiting from incremental capacity additions over the past year.
In technical and global insulation, demand remained strong for our highly specified products with the most notable year-over-year growth coming again from North America and Europe, with growth in both foam glass and mineral wool.
Pricing was positive versus prior year and more than double what we achieved in Q2.
For the Insulation business overall, positive price more than offset the impact of accelerating energy, material and transportation inflation.
In residential insulation, we continue to maintain a positive price cost mix in the face of accelerating inflation.
While technical and global insulation price lagged inflation, the price cost gap narrowed considerably versus Q2.
We continue to execute well in our manufacturing operations and benefited from the recovery of $18 million of fixed cost absorption on higher production.
We delivered margins of 15% and EBIT of $124 million a quarterly record and up from $73 million in the 3rd quarter of 2020.
The composites business produced another record earnings quarter.
Sales for the 3rd quarter were $591 million, up 13% compared to the prior year.
The top line growth was driven by strong commercial performance with our ongoing strategy in the business to focus on higher value applications driving favorable mix, which more than offset slightly lower volumes.
We continue to see strength in demand for our higher value applications as well as demand in key geographies where our local supply for local demand model is being valued by customers.
We also continue to see positive pricing in composites resulting from contract negotiations, as well as price increases for non-contractual business.
In the quarter, positive price more than offset the inflation headwinds from materials, energy and higher transportation costs.
Operationally, we continued to execute well with solid manufacturing performance and recovery of $29 million of prior year curtailment costs.
In the 3rd quarter composites delivered record EBIT of $101 million, up $46 million over last year and EBIT margins reached 17%.
Slide 10 provides an overview of our Roofing business.
The roofing business produced a strong 3rd quarter, sales in the quarter were $869 million, up 14% compared to the prior year.
The US asphalt shingle market was down 9% in Q3 as compared to the prior year, while our US shingle volumes were up slightly year-over-year.
We continue to see good realization on our announced price increases more than offsetting accelerating asphalt, other material and delivery inflation.
Contribution margins remained strong.
For the quarter, EBIT was $12 million, up 16 million from the prior year, achieving 24% EBIT margins.
Turning to Slide 11, I'll discuss significant financial highlights for the 3rd quarter and full year 2021.
Earnings expansion along with continued discipline around management of working capital, operating expenses and capital investments resulted in strong cash flow.
Free cash flow for the 3rd quarter of 2021 was $400 million bringing year-to-date free cash flow to $925 million, up $411 million over the same period last year.
Year-to-date free cash flow conversion remains strong.
With this cash flow performance, we further strengthened our already solid investment grade balance sheet by repaying in the quarter the remaining $184 million due on our 2022 senior notes.
At quarter end, the company had ample liquidity of approximately $2 billion, consisting of $920 million of cash and nearly point $1.1 billion of combined availability on our bank debt facilities.
During the 3rd quarter of 2021, the company repurchased 1.7 million shares of common stock for $160 million.
Through September 30, 2021, the company returned $516 million to shareholders through share repurchases and dividends equating to approximately 56% of year-to-date free cash flow.
We remain focused on consistently generating strong free cash flow returning at least 50% to investors over time and maintaining an investment grade balance sheet.
Now turning to our 2021 outlook for key financial items, general corporate expenses are expected to range between $150 and $155 million.
Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $500 million.
For interest expense, we've narrowed our estimated range to be between $125 and $130 million and finally, we expect our 2021 effective tax rate to be 26% to 28% of adjusted pre-tax earnings and our cash tax rate to be 18% to 20% of adjusted pre-tax earnings.
During the 3rd quarter, our company continued to perform well, giving us great momentum as we finish the year.
In the 4th quarter, we expect US residential repair and remodeling and new construction markets as well as our global commercial and industrial end markets to remain strong.
Based on current trends we are seeing across the enterprise, we anticipate the impact of inflation to be at or slightly above what we experienced in Q3.
Given our pricing actions throughout the year, we expect each of the businesses to maintain a positive price cost mix in Q4.
Moving through the quarter, we will continue to closely monitor and manage inflation supply chain disruptions and the regional impacts of COVID on our businesses.
Through the first 3 quarters of the year, our commercial and operational execution has generated strong financial results and we expect this to continue in Q4 delivering earnings in the quarter close to last year.
Now consistent with prior calls, I will provide a more detailed business specific outlook for the 4th quarter.
Starting with Insulation, we expect year-over-year growth in our North American residential fiberglass insulation business and anticipate our volumes to be up mid to high single digits versus prior year.
We expect price realization, similar to what we experienced in Q3.
With the recently announced December increase having more impact as we get into the first quarter of next year.
In our technical and global insulation businesses, volumes should grow low to mid single digits with ongoing demand for our products in global building and construction applications.
Similar to residential installation, we would expect price realization in these businesses to be similar to what we saw in Q3.
In terms of inflation, we expect material and energy cost increases in the 4th quarter to be higher than what we experienced in Q3 and anticipate that continued price realization will result in a positive price cost mix in the quarter.
Additionally, we expect our fixed cost absorption to improve by approximately $5 million versus prior year.
Given all this, we expect to see strong earnings growth in Q4 versus prior year with EBIT margins of approximately 15%.
Moving on to composites, in the 4th quarter, we expect revenue to improve year-over-year primarily driven by continued price realization and favorable mix which we would expect to more than offset volume declines of mid-single digits for the quarter.
We anticipate composites pricing will improve by mid single digits offsetting the impact of additional inflation and that we should benefit from the recovery of $15 to $20 million of curtailment costs versus 4th quarter 2020.
Overall, we expect to realize strong earnings growth in the quarter versus prior year with EBIT margins of approximately 14% and in roofing, we anticipate the market to finish up for the year, but expect a more difficult comparison to the 4th quarter of prior year with market volumes down mid-teens driven by the expectation for a more normal winter season,;ower storm demand and the likelihood of ongoing supply chain disruptions.
We would expect our volumes to largely in line with the market.
Roofing pricing is expected to be favorable in Q4 based on the continued realization of our previously announced price increases.
Although, less than what we saw in Q3 due to the lower volumes.
Additionally, in terms of revenue, we expect a headwind from mix in the quarter, similar to what we saw in Q3.
Overall, we anticipate 4th quarter Roofing EBIT margins of approximately 20% on lower volumes and a narrowing but positive price cost mix.
With that, view of our businesses, I'll close with a couple of enterprise items.
Our team remains committed to generating strong operating and free cash flow.
In terms of capital allocation, our priorities remain focused on reinvesting in our business especially productivity and organic growth initiatives returning at least 50% of free cash flow to shareholders over time through dividends and share repurchases and maintaining an investment grade balance sheet.
In addition, we continue to evaluate investments and acquisitions that leverage our commercial, operational and geographic strengths and expand our building and construction material product and system offering.
One last note before moving on to the Q&A session, I'd like to remind everyone, we will be hosting a virtual Investor Day on Wednesday.
Ken and I will be joined by members of our executive leadership team to discuss the company's strategic priorities, financial objectives and initiatives to drive long-term stakeholder value.
We hope you will join us in 2 weeks.
In closing, our team is proud of the outstanding operational and financial performance we delivered in the 3rd quarter and are excited by the opportunities we have to grow our company, help our customers win in the market and deliver value to our shareholders. | compname reports q3 adjusted earnings per share $2.52.
q3 adjusted earnings per share $2.52.
q3 sales rose 16 percent to $2.2 billion. |
The global pandemic created unprecedented challenges for all of us, as we saw the virus impact our family and friends, our end markets and disrupt our daily lives on a scale we have never experienced before.
But throughout the year, our company faced into these challenges showing the resolve of our people, the strength of our market positions and the value of our enterprise.
As a team, our collective focus was and continues to be working together to keep each other healthy and safe, to adapt to changing market conditions and service our customers and to provide needed support to the communities where we work and live.
These efforts are aligned with our company's purpose and resulted in strong operational and financial performance.
During today's call, I'll start with an overview of Owens Corning's fourth quarter and full-year 2020 results, before turning it over to Ken, who will provide additional details on our financial performance.
I will then come back to talk about our outlook for the first quarter and how we are positioning the company to capitalize on both near-term market opportunities and longer-term secular trends.
I'll begin my review with safety, where we continue to perform at a very high level.
Our commitment to the health and safety of our employees is unconditional.
In the fourth quarter, we achieved a recordable incident rate of 0.4, representing a 37% improvement over the same period in 2019.
This lowered our full-year 2020 RIR to 0.61, which is an 8% improvement over the prior year.
I'm pleased to note that over half of our global locations worked injury free in 2020.
I'm pleased to note that over half of our global locations worked injury free in 2020.
For the quarter, we delivered revenue of $1.9 billion, a 14% increase compared with the fourth quarter of 2019, and adjusted EBIT of $306 million, up 50% from the same period one year ago.
All three of our businesses delivered double-digit EBIT margins for the second consecutive quarter.
For the full-year, we delivered $7.1 billion in revenues, down 1%.
Adjusted EBIT was $878 million, a 6% improvement over 2019.
Increasing demand for our products, combined with strong manufacturing performance and improved operating efficiencies resulted in earnings growth for the year despite a slight decline in revenues.
During the back half of the year, we continue to see our end markets recover and improve.
In the US residential market, which impacts all three of our businesses and accounts for about half of the company's revenue.
Demand grew at a strong pace, driven by increased repair and remodeling activity, as well as higher new construction start.
Most of our commercial, industrial markets also strengthened throughout the second half as projects restarted, manufacturing activity increased, and customers replenished inventories.
In 2020, Insulation EBIT margins grew to 10%, despite a 2% revenue decline.
In addition to higher residential insulation demand, our ongoing focus on network optimization and manufacturing performance drove the earnings growth in the business.
Our composites business also benefited from increased demand, delivering double-digit EBIT margins in both the third and fourth quarters.
Our focus on higher value downstream businesses and key geographies where we have strong market positions, combined with increased manufacturing productivity continues to drive our financial performance.
And in roofing, revenues increased 2% compared to 2019 and EBIT margins grew 22% driven by strong volumes and a positive price cost mix.
Overall market demand for shingles grew by 10% versus 2019, driven by above-average storm demand and the strong second half remodeling market.
Across our businesses, rapidly improving markets and high demand for our products have created supply shortages and extended lead times.
Our manufacturing and supply chain teams continue to work hard to increase the availability of our products and reduce our lead times, leveraging the benefits of both improved productivity and capacity expansion investments.
In Insulation, as I shared with you last quarter, we have initiated work to restart our Batt & Roll line in Kansas City.
I'm pleased to report that this line is on track to start production in this month.
We've also increased some additional loosefill production and took actions in our US mineral wool plants to meet growing customer demand.
In composites, we are expanding our glass non-woven capacity, adding a new production line next to our current facility in Fort Smith, Arkansas.
This will add needed capacity to our network and allow us to optimize costs by replacing our existing smaller production line at the site.
We expect to start production in mid-2023 to service a growing number of building material applications.
And in roofing, capital investments over the past two years have increased incremental capacity at several of our manufacturing facilities.
Our strong earnings performance in 2020, combined with working capital management and disciplined capital investments, led to record operating and free cash flow of $1.1 billion and $828 million.
During the year, we also returned approximately $400 million of cash to shareholders through share repurchases and dividend payments.
At Owens Corning, sustainability is central to our purpose and represents a competitive advantage for our company.
It also is becoming increasingly important to our customers and other key stakeholders.
Even as we face near-term uncertainties from the pandemic, we continue to invest in achieving our 2030 sustainability goals, one of which is to double the positive impact of our products.
Our new FOAMULAR NGX product line used in a variety of residential and commercial applications is a great example of this commitment and a testament to our teams who found creative ways to continue this important work remotely.
NGX launched last month, uses a new blowing agent chemistry with 90% lower global warming potential compared with traditional products without sacrificing performance, demonstrating how product and process innovation can reduce the environmental impact.
In addition, we were honored to be recognized as a leader in ESG, earning a position on the Dow Jones Sustainability World Index for the 11th consecutive year and being named Industry Leader for the DJSI World Building Products group for the eighth straight year.
In early April, we'll release our 15th Annual Sustainability Report in which I invite you to read more about the full scope of our sustainability performance and progress.
As Brian mentioned, Owens Corning delivered solid results in 2020 against the backdrop of global uncertainty from the pandemic.
Our company results were highlighted by record performance across a number of key financial measures.
The actions taken by the company enhanced by the recovery in US residential markets have driven the earnings growth, robust free cash flow conversion and a strong liquidity position for the company.
Now, turning to our results on slide five.
For the fourth quarter, we reported consolidated net sales of $1.9 billion, up 14% over 2019, as all three segments delivered revenue growth in the quarter.
Adjusted EBIT for the fourth quarter of 2020 was $306 million, up $102 million compared to the prior year.
Adjusted earnings for the fourth quarter were $207 million, or $1.90 per diluted share, compared to $125 million, or $1.13 per diluted share in Q4 2019.
For the full-year 2020, our adjusted earnings were $566 million, or $5.21 per diluted share compared to $500 million, or $4.54 per diluted share in 2019.
The full-year earnings per share comparison was affected by a few below the line items in 2020.
In addition to tax items adjusted out in the first three quarters, we adjusted out at $32 million non-cash income tax benefit in the fourth quarter resulting from the inter-company transfer of certain intellectual property rights into the US.
Depreciation and amortization expense for the quarter was $141 million, up $21 million as compared to last year.
The growth in the fourth quarter of 2020 was mainly impacted by higher accelerated depreciation from this quarter's restructuring actions.
For 2020, depreciation and amortization expense was $493 million, up from $457 million in the prior year, primarily due to higher accelerated depreciation from our restructuring actions and incremental amortization from new finance leases.
Our capital additions for the year were $320 million, down $131 million versus 2019.
Given the uncertain market environment early in 2020, we took actions to reprioritize capital investments and preserve liquidity.
Looking ahead, we will continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and will prioritize investments that drive growth and productivity.
On slide six, you see adjusting items reconciling full-year 2020 adjusted EBIT of $878 million to our reported EBIT loss of $124 million.
For the year, adjusting items to EBIT totaled approximately $1 billion, largely driven by $987 million of non-cash goodwill and intangible impairment charges recorded in the first quarter.
In the first three quarters, we recognized $26 million of gains on the sale of certain precious metals.
We've excluded these gains from our adjusted EBIT.
During 2020, we recorded $41 million of restructuring costs, with $31 million of costs being recognized in the fourth quarter.
The bulk of these fourth quarter costs are non-cash and are primarily associated with restructuring actions in our insulation and composites businesses as part of our ongoing network optimization activity to improve manufacturing productivity and reduce our cost position.
Slide seven provides a high-level overview of full-year adjusted EBIT comparing 2020 to 2019.
Adjusted EBIT of $878 million was a new record for the company and increased $50 million over the prior year.
Roofing EBIT increased by $136 million, Insulation EBIT increased by $20 million and Composites EBIT decreased by $82 million.
General corporate expenses of $128 million, were up $24 million versus last year, primarily due to higher incentive compensation expense associated with improved adjusted EBIT results and the absence of small one-time gains realized in 2019.
Now, I'll provide more details on each of the business results, beginning with Insulation on slide eight.
Insulation sales for the fourth quarter were $728 million, up 1% from Q4 2019.
In the North American Residential Fiberglass Insulation business, while lagged, housing starts in Q4 were higher than the prior year.
Supply constraints and limited inventories coming into the quarter caused volumes to be down slightly year-over-year.
We continue to be encouraged by US residential new construction demand and the realization of our September price increase.
In the technical and other Insulation businesses, volumes improved from the time of our Q3 earnings call and finished the quarter up slightly versus the prior year, driven primarily by strong performance in our US formular and global mineral wool businesses.
EBIT for the fourth quarter was $106 million, up $17 million as compared to 2019.
The EBITDA increase was driven by positive manufacturing performance and higher selling prices in North American residential.
Overall volumes for this segment were relatively flat.
For the full-year, sales in Insulation were $2.6 billion, down 2% versus 2019 with growth in North American residential more than offset by COVID-19 related declines in the technical and other Insulation businesses.
Overall volumes for the segment were flat.
The decline in revenue was driven by lower selling prices, unfavorable product and customer mix and the divestiture of a small business in the first quarter.
In 2020, Insulation EBIT increased by $20 million to $250 million, primarily due to favorable manufacturing performance and strong cost controls, partially offset by lower selling prices and unfavorable product and customer mix.
The business delivered EBIT margins of approximately 10% in 2020 with increased EBIT on lower revenues.
Sales in Composites for the fourth quarter were $547 million, up 14% as compared to the prior year, driven primarily by higher sales volumes.
During the quarter, we experienced robust volume improvements in many regional markets, particularly North America and India.
Additionally, we saw a strong performance in our wind and roofing downstream specialty applications along with continued improvement in automotive.
EBIT for the quarter was $60 million, up $4 million from the same period a year ago with the benefit of higher sales volumes and favorable manufacturing performance, partially offset by furnace rebuild and production curtailment cost and continued pricing headwinds.
Composites delivered a 11% EBIT margins for the quarter.
Full-year sales were about $2 billion, down 5% as compared to 2019.
The decline was driven by weaker volumes due to COVID-19 primarily in the second quarter, lower selling prices from negative year-over-year carryover, unfavorable customer and product mix and negative foreign currency translation.
In 2020, EBIT declined by $82 million to $165 million.
For the year, favorable manufacturing performance and lower SG&A costs were more than offset by weaker volumes, the negative impact of production curtailments and negative pricing carryover.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $702 million, up 33% compared with Q4 2019.
The increase was driven by 36% volume growth, partially offset by lower third-party asphalt sales.
Price in the quarter was flat with favorable transactional shingle pricing on realization of the August increase offset by higher rebates associated with stronger 2020 shingle demand.
In the fourth quarter, the US asphalt shingle market grew significantly as compared to the prior year.
The market growth, which was higher than the expectation we provided in last quarter's call, was a result of milder weather that extended the Roofing season.
Our volumes trailed the market in the fourth quarter as we continue to operate in sold out conditions with low inventory levels.
EBIT for the quarter was $183 million, up $96 million from the prior year producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes in both shingles and roofing components and the continued deflationary impact of asphalt.
Roofing sales for 2020 were $2.7 billion, up 2% versus 2019.
The increase was driven by higher sales volumes of about 6%, partially offset by lower selling prices and lower third-party asphalt sales.
In 2020, Roofing EBIT improved by $136 million to $591 million.
The increase was driven by strong market volumes in both shingles and components and strong manufacturing performance.
We experienced additional EBIT improvement from a price cost perspective as the benefit of asphalt cost deflation and lower transportation costs more than offset lower selling prices.
For the year, the business delivered EBIT margins of 22%, up approximately 500 basis points from 2019.
Turning to slide 11.
I'll discuss significant financial highlights for 2020.
As a result of disciplined actions taken to manage working capital, operating expenses and capital investments and the recovery of our markets, US residential in particular, we delivered record full year levels of operating and free cash flow.
Our free cash flow for 2020 was $828 million, up $238 million as compared to 2019.
Free cash flow conversion of adjusted earnings was 146% in 2020, as compared to 118% in 2019.
In December, the Board of Directors approved a new share repurchase authorization for up to 10 million additional shares.
During 2020, we returned $396 million of cash to shareholders through stock repurchases and dividends.
At the end of 2020, 9.5 million shares remained available for repurchase under the current authorization.
During 2020, we completed several deleveraging activities to further improve our credit metrics.
These actions included repaying the term loan in advance of the February 2021 due date, repaying the mid-2020 borrowing on our revolver and contributing $122 million to our global pension plans.
Based on our strong cash flow performance and deleveraging activities, we've maintained an investment grade balance sheet and are operating within our target debt-to-adjusted EBITDA range of 2 times to 3 times with ample liquidity.
At year-end, the company had liquidity of approximately $1.8 billion, consisting of $717 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities.
Earlier this month, the company's Board of Directors declared a quarterly cash dividend of $0.26 per share payable on April 2nd.
Since inception in 2014, the dividend has grown an average of 7% per year.
We remain committed to strong cash flow generation returning at least 50% to investors over time and maintaining an investment grade balance sheet.
General corporate expenses are expected to range between $135 million and $145 million.
Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $480 million.
While we're expecting growth in both capital and operating expenses as conditions begin to normalize over the course of the year, we remain committed to closely managing these investments.
Interest expense is estimated to be between $120 million and $130 million.
And finally, our 2021 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings.
We expect our 2021 cash tax rate to be 18% to 20% of adjusted pre-tax earnings.
The growth in our cash tax rate as compared to our guidance in the last few years approximating 10% is due to the utilization of substantially all of our US federal net operating losses and foreign tax credits by the end of 2020.
Our 2020 performance demonstrated the value of our enterprise and the ability of our global teams to successfully execute on our operating priorities even during challenging conditions.
While uncertainties remain, we are well positioned to deliver another strong year in 2021 as we see the strength in our residential markets and improving conditions in our commercial and industrial markets continuing into the first half.
In keeping with prior practice, I will focus my outlook comments on the current quarter.
Based on trends we are seeing to start the year, we expect the company to deliver significant revenue and adjusted EBIT growth in Q1 versus prior year.
Starting with Insulation, we are seeing continued strength in new US residential construction with lag starts in Q1, up 12% versus Q1 2020.
Our North American residential volumes are expected to largely track with the market during the quarter, and we continue to see favorable pricing based on positive traction from our January price increase.
We are beginning to see some inflationary pressure in the business, particularly transportation cost, and recently announced a price increase for April.
Our technical and other building insulation businesses are expecting modest volume improvement in the first quarter, as we continue to experience a gradual recovery in our commercial and industrial end markets across the globe.
Pricing in these businesses is expected to remain relatively stable.
Overall for Insulation, we expect first quarter EBIT to be about double what we delivered in the first quarter last year.
In Composites, we expect Q1 volumes to increase mid single-digits versus Q1 2020, given our strength in a few key regions and downstream applications supporting the wind and building and construction markets.
We also expect to start realizing price gains from actions implemented as part of our annual contract negotiations.
This along with continued strong manufacturing performance should generate first quarter EBIT generally in line with Q4 2020.
And in Roofing, January shingle shipments were substantially higher than last year, reflecting the strength and carryover demand from 2020.
Based on this, we expect to see market volumes of approximately 25% in the first quarter.
Against this backdrop, we continue to ship our available capacity and would expect our volumes to increase in line with this growth.
From a price cost perspective, we expect to deliver another strong quarter with some incremental price realization from our February increase combined with continued asphalt inflation, albeit at a slower rate than in Q4.
We are seeing asphalt cost increasing and expect this to continue through the quarter turning to inflationary in Q2.
Similar to our other businesses, we are also seeing an increased inflation and recently announced a price increase effective the first week in April.
Based on these factors, Roofing EBIT margins in the first quarter are expected to be up year-over-year and more in line with the long-term operating margins we have discussed for this business of about 20%.
With that view of our businesses, I'll turn to a few key enterprise areas.
Our team remains committed to generating strong operating and free cash flow.
In terms of capital allocation, our priorities remain focused on reinvesting in our business, especially productivity and organic growth initiatives, returning at least 50% of free cash flow to shareholders over time through dividends and share repurchases and maintaining an investment grade balance sheet.
In addition, we are also evaluating investments in bolt-on acquisitions that leverage our commercial, operational and geographic strength and expand our building envelope offering.
Overall, Owens Corning is well positioned to capitalize on our near-term market opportunities as well as several longer-term secular trends that will fuel our revenue and earnings growth moving forward, including the demand for new housing in the US, which has been under built for several years and continued remodeling reinvestments as homeowners renovate their living spaces and upgrade their homes.
We also see growing opportunities to benefit from the drive for increased energy efficiency in homes and buildings, product safety and sustainability, material durability and performance and investments in renewable energy and infrastructure.
Each of these trends creates opportunities for Owens Corning to leverage our material science, building science and unique product and process technologies to partner with our customers and help them win in the market through additional products, systems and services.
Our team is proud of the results we delivered in 2020 and are excited about the opportunities we have in 2021 to service our customers, grow our company and deliver value for our shareholders. | q4 adjusted earnings per share $1.90.
q4 sales $1.9 billion versus refinitiv ibes estimate of $1.8 billion.
capital additions are expected to be approximately $460 million in 2021. |
We are still in a virtual environment, so our usual cast of characters will be on the call, but we're all in different places or most of us are anyway.
Susan Kreh, CFO; Molly VandenHeuvel, our COO; Jessica Moskowitz, vice president and general manager of the consumer products division, Fred Kao, our VP of global sales for Amlan International; Laura Scheland, our VP and general counsel; and Leslie Garber, our manager of investor relations, are all on hand today.
And Leslie, please walk us through the safe harbor.
Actual results in those periods may materially differ.
We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock.
As you guys know, I took over as General Manager of Amlan International, right around November 1, and we have made some really, really good changes together.
It's been a complete team effort cross-functionally.
We brought in some new players.
I can distill it to people, poultry, clay and target markets.
And let me start with the people.
I mean, Fred and I, Fred Kao, who's our global VP of sales, have worked really hard at building our team.
Fred joining Oil-Dri was an initial badge of validation for the incredible opportunity we have because he's a 20-plus year, very successful career.
He's made great contacts, and people took notice when he joined the company.
And so we've been in the enviable position of being able to attract a lot of talent quickly as these people first got to know Oil-Dri through Fred, but then spend a lot of time with Molly and Hangyu and our team out at the research center, getting to get comfortable with our data that they knew had to have existed because they knew Fred was joining us for a reason.
And it's because this global vacuum that's been created by the elimination of antibiotics in the food chain, has created an incredible market opportunity for Oil-Dri.
So just in this short period of time since November 1, we've been able to onboard Heath Wessels, who is covering all North America for us; Jay Hughes, who is our Americas tech service; , who's covering APAC; and then Dr. Wade Robey, who is our vice president of marketing and product development, who has had a stellar career in the animal health.
We've put out news releases on this, so I encourage our investors, if you miss them, to track them down.
You can just search Amlan, and you'll find our latest news releases.
But we really have created a dream team in general, but in particular, they have incredible poultry experience.
So no means are we walking away from dairy or swine, but we are going to lean heavily into poultry.
Poultry represents about 40% of the $3 billion global opportunity that's been created by the elimination of antibiotics in the human food chain.
And so you're talking a $1.2 billion opportunity, where from Fred to that team that I just mentioned, their -- with a quick phone call, they can get to every level at all the major decision-makers around the world, and we are getting interest like never before.
So it's very, very exciting.
So I mentioned people, poultry.
Why didn't I mention clay?
Because clay is our unique entrée into this market.
We are the only player that has quality to the source.
So we have, as you well know, if you're a long time Oil-Dri investor, we have hundreds of millions of tons.
We have 100 million proven, but we have to equal that amount inferred, meaning we don't even bother doing the drilling because we're not going to need it in any of our lifetimes, but mother nature put it there.
So we have hundreds of millions of tons of clay to choose from, and we have specifically identified a particular reserve that has given us the highest quality and quantity of these animal health products that we're actually discovering new applications for as we speak because the more we understand our mineral, the more beneficial things we realize it's doing in the animals gut and to the animals well-being.
And so we selectively mine these.
We have always a minimum of 40 years reserves in every product line.
So you have no worries.
As this product explodes, we have the capacity to mine and supply this industry.
You look, we may have to spend some capital along the way, but we have the reserves, and that's very exciting.
So our people, our poultry and our clay.
And then, finally, our target markets.
We're going to fish where the fish are.
And 11 markets really are where we think we have a unique position to go after a large percentage of that $1.2 billion opportunity.
My math is it's between $700 million and $800 million of that $1.2 billion, so maybe two-thirds.
Don't hold me to it, but it's, obviously, large enough to dramatically change the financial landscape of Oil-Dri.
And the best part is one of our most exciting markets is pristine because we have stayed away from it.
I'm not really sure why, honestly, but our prior management had decided that the South America and Asia was more important than North America.
But our current team realizes we have a great right to win in America, and we are getting a lot of interest right in our backyard.
It's a language I speak.
It's a currency we trust.
It's contracts that are honored.
And so -- and we don't have to open up new business entities to do business here.
So very excited about the opportunity in the United States, and we are hitting the ground running.
But as I mentioned, things financially were going to get worse before they get better.
We put on a lot of SG&A, a lot of infrastructure.
And while these guys are getting a lot of interest, we are not getting a lot of orders.
We've actually gotten some orders, but not enough to cover the investment we're making in people.
So you're going to see our SG&A continue to trickle up in the short run, but these are all long-term investments for Oil-Dri.
None of them will impact -- it is expected, I don't think I have to qualify.
Laura will definitely want me to do this, I will qualify, that it is expected that none of these will impact our ability to continue our dividend policy.
These are all just using cash flow in a very wise investment pattern for the B2B side.
You'll be hearing from Jessica on the retail side, and we are continuing to really gain share both with our brand and our private label lightweight.
You did see in our news release that short term, we got hit with a lot of cost pressures, all at once and what she's been able to do to offset those going forward.
But none of that was -- none of that pricing was able to impact the second quarter, but the cost certainly did.
So that's my color.
And today, I'm going to recap the second quarter for you.
So in our second quarter of fiscal 2021, Oil-Dri delivered another solid quarter of top-line growth with net sales of $74.5 million, growing 5% over net sales during the same quarter in the prior year.
Both our business-to-business products group, which grew 7%, and our retail and wholesale products group, which grew 4%, contributed to this growth, demonstrating that as Dan said, we are achieving success in two of the key areas of our strategic focus, and those are mineral-based animal feed additives and lightweight cat litter.
Additionally, it was a very strong quarter within our business-to-business products group as all product lines experienced year-over-year growth in net sales.
We are seeing evidence that the focus on our mineral-based strategy in animal health and nutrition products is paying off, with 20% net sales growth during the quarter over the second quarter of the prior year.
During the quarter, we saw the benefit of enhanced distribution of Varium and natural alternative to antibiotic growth promoters for poultry.
We also experienced strong growth in China, Latin America and Mexico.
So an all-around good story for Amlan and the investments that we're making there.
Now switching to other business-to-business products.
Agricultural and horticultural products also had a strong quarter, achieving 10% growth over the same quarter in the prior year, driven primarily by increased sales with existing customers.
And in our fluids purification products, the decrease in sales of our jet fuel purification products that have been adversely impacted by the reductions in air travel due to the global pandemic were more than offset by the growth of our other products as our overall fluids purification products grew 3% in the quarter over the prior year.
This growth was favorably impacted by increased sales to our foreign customers during the quarter.
And finally, our co-packaged cat litter product, which sits within our business-to-business products portfolio, grew 5% during the second quarter of fiscal 2021.
Now similarly, within our consumer products group, cat litter sales grew 6% over the prior year.
We believe that our continued strategic focus on growing our lightweight litter products contributed to this growth in both the U.S. and Canada.
We also experienced increases in private label and branded scoopable litter sales, as well as growth through e-commerce sales.
Our second-quarter gross profit of $18.2 million was down $800,000 from the same quarter in the prior year, representing a 4% year-over-year decrease.
Despite the favorable growth in net sales, the quarter was unfavorably impacted by cost increases particularly in the categories of freight, which was up 13% per manufactured ton over the same quarter in the prior year due to domestic trucking supply constraints that resulted in significant increases in transportation costs.
Our packaging costs were also up 13% per manufacturing ton as increased resin pricing resulted in increased costs, particularly in our jugs and pales, and natural gas costs were up 8% per manufactured tons, which we used to operate kilns to dry our clay.
Overall, our cost of goods sold per manufactured ton was up 8% over the same quarter in the prior year, driven, in large part, by these market-based factors that were partially offset by operating cost reductions and efficiencies during the quarter.
We responded to the significant cost challenges posed by these economic headwinds through implementing mid-fiscal-year price increases.
So all of our products are impacted to various extents.
consumer cat litters particularly impacted due to the amount of freight and resin-based packaging costs that are included in those products.
Switching to our total selling, general and administrative expenses for the second quarter of $13.9 million, they were $843,000 higher than the prior year, representing a 6% increase.
However, the second quarter of the prior fiscal year included a onetime curtailment gain of $1.3 million related to the freeze of the company's supplemental executive retirement plan, which has since been terminated.
Excluding that $1.3 million onetime gain in the prior year, SG&A was down 3% during the quarter.
However, there was also an underlying shift in costs as corporate expenses, including the impact of the fiscal 2020 onetime gain or excluding the impact of the onetime gain of $1.3 million, decreased from the prior year and SG&A costs to support our business-to-business products, particularly the investments that we're talking about in our animal health and nutrition products, grew 26% or approximately $600,000 over the same quarter of the prior year.
This incremental expense is consistent with our commitment to invest in this high value-add product line to drive growth for our future, and Dan did share some of those highlights at the beginning of the call.
Our second-quarter other income of $1.1 million included an $800,000 gain upon the annual actuarial valuation of our pension plan.
So as a reminder, during the fourth quarter of fiscal 2020, the company executed a lump sum buyout for the terminated vested participants in our defined benefit pension plan who had elected to take this buyout payment option.
A majority of the participants that were eligible for this lump sum buyout opted to take it, which contributed to the favorable annual actuarial valuation of this obligation.
And finally, net income attributed to Oil-Dri for the second quarter of fiscal 2021 was $4.3 million, which represents an 11% decrease from the prior year for the cost and investment reasons we just reviewed.
Our financial position remains strong, as is reflected in our balance sheet.
We ended the quarter with cash and cash equivalents of $31 million and have very little debt, equating to a debt to total capital ratio of only 6%.
The one of the primary uses of our cash flow is to fund our trade working capital.
During the first six months of fiscal 2021, our accounts receivable increased $3.8 million, reflecting our sales growth and a shift in our customer mix, including an increase of sales to foreign customers who tend to have longer payment terms.
We also use our cash to fund capital investments in our business, including those required for growth and those required to drive cost reductions, in addition to normal repair and replacement capital.
Because of our strong position during the quarter, we also repurchased 33,594 shares of Oil-Dri common stock for $1.2 million at an average price of $36.09 per share.
So based on our strong financial position, we often get asked if we are interested in pursuing acquisitions.
And the answer is, yes, for the right opportunity.
Because of our low leverage, we are well-positioned to capitalize on strategic investment opportunities that may become available.
So that's my summary for the second quarter.
So yes, at this time, I'd like to open up to Q&A. | q2 sales rose 5 percent to $74.5 million. |
Our unique strategy of concentrating assets around U.S. defense installations executing priority missions continues to produce highly resilient, growing cash flows, as demonstrated by our strong first quarter results, representing a great start toward shaping up to be another strong year.
Driven by solid operations and interest savings from our recent bond financing, first quarter FFO per share, as adjusted for comparability, of $0.56 met the high end of guidance and is 10% higher than the first quarter results in 2020.
Additionally, NOI from real estate operations in the quarter was up 6% from a year ago.
And AFFO increased an impressive 26%.
As these year-over-year comparisons demonstrate, we are clearly on a path of sustainable and highly visible growth.
First quarter leasing results were solid, totaling 258,000 square feet, and second quarter leasing is off to a blistering start.
In April, we've completed 662,000 square feet of renewals and vacancy leasing, eclipsing first quarter volume by 2.5 times.
Better-than-planned outcomes on vacancy and renewal leasing are driving our increased guidance for same-property results for the year.
Development leasing in the quarter totaled 11,000 square feet.
However, we're in advanced negotiations on nearly 900,000 square feet that should close in the coming months.
Bridging to financing activities, we completed a second landmark bond offering last month.
The $600 million 10-year issuance has a 2.75% coupon and was the strongest debt financing in the company's history.
The bonds priced a full notch higher than our current ratings, reflecting the market's growing recognition of the durability of our portfolio, our strategy and our cash flows.
So for the second time in six months, the fixed income investor community unequivocally recognized and rewarded our company with robust demand for and exceptional pricing of our bond offerings.
The improved outlook for same-property cash NOI and interest savings from the bond refinancing are driving the $0.03 increase in the midpoint of 2021 guidance for FFO per share as adjusted for comparability, which at the midpoint implies 4.7% growth over the elevated 2020 results.
And with that, I'll hand the call over to Todd.
First quarter total leasing of 258,000 square feet included 154,000 square feet of renewals.
Renewal economics were in line with expectations, with cash rents rolling down 2.2%, annual escalations averaging 2.6% and leasing capital being only $1.93 per square foot per year of term.
This month, we renewed 596,000 square feet of expiring leases, achieving an 88% renewal rate.
Cash rents on April renewals rolled up 0.5% and carried an average lease term of 4.8 years.
To date, we have completed 750,000 square feet of renewal leasing with a 77% retention rate and average lease term -- or an average term of 4.5 years and cash rents rolling flat.
Based on our renewal achievement to date, we are increasing our full year retention guidance to a new range of 70% to 75%.
We completed 93,000 square feet of vacancy leasing in the quarter and 66,000 square feet in April, bringing our total to 159,000 square feet, and our leasing activity ratio remains strong.
One lease to highlight from the quarter was a 2-floor 55,000 square foot lease at 6721 Columbia Gateway with Rekor Systems, a provider of real-time technology to enable AI-driven decisions.
Recall that the nonrenewal of that building's anchor tenant a year ago left it 20% leased.
We took the opportunity to reposition the asset, creating amenity areas which appeal to a growing list of high tech and cyber companies in the market.
This property is now 80% leased with strong demand for the remaining availability.
In April, we completed a 7,000 square foot expansion with IntelliGenesis, a cybersecurity defense contractor at 6950 Columbia Gateway, bringing that 2020 redevelopment to 100% leased.
We believe our leasing success at both properties demonstrates the value we add by repositioning buildings, as well as Columbia Gateway's growing importance as a preferred location for cyber and high-tech companies.
Development leasing in the quarter was light at 11,000 square feet at Redstone Gateway.
So far in the second quarter, we have 265,000 square feet of development leasing out for signature, and are in advanced negotiations for another 610,000 square feet.
Our development leasing pipeline remains deep and diversified across our Defense IT locations and customer base.
We are tracking up to 2.1 million square feet of development opportunities, and are confident we will meet or exceed our one million square foot development leasing goal.
During the quarter, we placed 7100 Redstone Gateway into service.
The building is a build-to-suit for Cummings Aerospace.
Our pipeline of active developments totals 1.4 million square feet that are 85% leased.
During the remainder of the year, we expect to place 739,000 square feet of these projects into service, bringing our total for the year to 785,000 square feet.
Regarding DC-6, our discussions with the 11.25-megawatt customer continue to progress.
The original lease continues until such time as either party exercises a termination or the lease is amended or replaced, and we continue to believe the tenant will remain.
First quarter FFO per share as adjusted for comparability of $0.56 met the high end of guidance, driven primarily by operations and interest savings from the recent bond refinancing.
Similar to our transaction last fall, our March bond deal was an enormous success.
Our original plan and guidance for 2021 assumed a $450 million bond issuance to repay or refinance some higher coupon debt.
On March 3, we launched a new 10-year offering at initial price talk on credit spreads of 175 basis points.
The offering was 8 times oversubscribed with an order book that totaled close to $3.5 billion.
Strong demand from many high-quality investors allowed us to upsize the offering to $600 million and significantly drive down the credit spread.
The deal priced at 140 basis points over the 10-year treasury, resulting in a 2.75% coupon and a 1% discount.
We used the proceeds to retire two higher-cost issuances, blocking in annual interest savings of $7 million.
The fixed income investors were highly focused on our ability to deliver large volumes of highly leased, low-risk development to continue to grow EBITDA and FFO.
They also appreciated our strategy of concentrating assets around mission-critical defense locations, which greatly insulates our cash flows from the impact of any work-from-home trends.
The March bond issuance represented the fifth most oversubscribed book of all time in the office sector, and the seventh lowest coupon of any length note ever issued by an office REIT.
This offering reset our credit spreads, which now are well within the band of spreads of peers who are rated one notch higher.
Fixed income investors have expressed their views with their wallets, and clearly value the performance of our portfolio, the resiliency of our cash flows and our growth from low-risk developments.
Regarding operations, same property cash NOI was roughly in line with the low end of our first quarter range.
As forecasted, weather-related expenses were at normal levels compared to extremely light levels in the first quarter of 2020, and parking income continued to be lower than last year, as employees start to return to our urban locations.
Based on current negotiations, we expect several positive leasing outcomes that increase our forecast of same-property cash NOI from our original midpoint of negative 1% to a new range that is flat at the midpoint.
As a reminder, our full year guidance continues to assume same-property occupancy declines modestly during the year, due to the diminished vacancy leasing volume last year and the projected impact of joint venturing additional wholly owned data center shells this year to raise equity.
Our central strategy of value creation through low-risk development, deeply concentrated adjacent to Department of Defense priority missions that support the U.S. government and its contractors, has and continues to provide an average of one million or more square feet of new development opportunities, and by extension, high-value defense IT assets each year.
Our strategy also has created a portfolio of high-credit tenants, whose business cycles are not correlated to the general economy, who have durable and growing business demand, and who are supported by healthy defense spending on priority national defense programs.
These attributes allowed both our company and our tenants' businesses to outperform during the pandemic shutdowns, and continue prospering now during the emerging recovery.
Our 2021 business plan had a great start in the first quarter and adds accelerating achievement and demand levels thus far into the second quarter.
Our recent experience in the debt markets, achieving landmark results for our company, combined with our stock's relative outperformance last year, demonstrate that the investment community recognizes the strength of our strategy, our assets and tenants that result in the strength of our franchise.
Our increased midpoint of full year FFO guidance of $2.22 implies 4.7% growth over the elevated 2020 results and 4.8% compound growth from 2019.
We're firmly on a path of sustainable growth, driven by a durable operating portfolio, a strong balance sheet and a reliable low-risk development program that is producing incremental NOI annually.
We look forward to capitalizing on the growing set of impressive opportunities we have before us. | compname reports first quarter 2021 results; raises midpoint of full year guidance by 3-cents, implying 4.7% growth.
q1 adjusted ffo per share $0.56. |
After almost 17 years as CEO, this is the most optimistic I have been on Puerto Rico and OFG.
We're certainly not out of the woods yet, but the island has been a far better place today than we were last year and our outlook is much better than the previous almost two decades.
Looking at the macroeconomic environment, we're a lot more optimistic about the flow of federal stimulus and reconstruction funds, the increased liquidity for individuals and small- and medium-sized businesses, the rate that people are getting their vaccination and the airlines bankruptcy resolution.
All these resulted in the overall improvement of Puerto Rico's economy.
I hope this perspective helps investors understand the inflection point we are in and our potential to deliver consistent solid result as more of the macro distractions of the past finally are being resolved.
At OFG, all our businesses are gaining very good momentum and we are in an excellent strategic position to grow our market share in the years to come.
Combined with the continued success of our strategies focused on our agility and service, we generated very strong first quarter results while also increasing our dedication and purpose to help our customers, our people and our communities through the pandemic and beyond.
For our customers, our proprietary digital PPP portal once again facilitated access by small businesses to another $126 million in credit to keep their doors open and staffs employed.
Our teams helped our former Scotiabank customers to on board and take advantage of our more robust online mobile ATM and ITM offerings.
For our people, we enabled vaccination for our staff.
And so far, more than 40% have been inoculated.
We continued our COVID-related spending to protect our staff and customers, and we stepped up our investment, as planned, to create a more secure hybrid infrastructure to make it easier for our teams to work seamlessly from the office or home.
For our communities, we established a new outreach program to provide advice to small businesses affected by the COVID situation.
We want to help them find better ways to manage through the pandemic.
We also provided a series of virtual seminars doing Women's History Month and we sponsored virtual seminars for the next generation of college entrepreneurial leaders to help them better understand how innovation can solve business and community challenges.
Please turn to Page 4.
Confirming our multi-year strategy to bring digital solutions to our customers and help them simplify their lives, our overall digital adoption continue to grow.
You can see this -- you can see it in this slide the adoption levels across different digital solution.
These adoption levels confirm how much we have advanced our digital strategy, especially during COVID but more importantly how customers are sticking to digital online solutions even as restrictions subside and the economy reopens.
A great example is how our customers are continuing to use our online or mobile platforms to schedule branch appointments.
During the first quarter, we scheduled approximately 8,800 such appointments.
Our goal is to convince customers that it is easier and more convenient to use our digital online technology for routine transactions, allowing our people to provide customers more [Technical Issues] service, build stronger relationships and in the process, increase business development opportunities.
Please turn to page 5 to review our first quarter results.
We reported $0.56 in earnings per share compared to $0.42 in the fourth quarter and breakeven in the year ago quarter, which was the first quarter to be impacted by the pandemic.
Total core revenues were $128 million.
Net interest income of $98 million benefited from PPP loan fees and lower cost of deposits.
Provision was $6.3 million, primarily due to improved economic and credit trends.
This included the release of some COVID-related loan reserves, partially offset by provisioning for a commercial loan in workout before COVID.
Allowance remain virtually the same.
Net interest margin picked [Phonetic] up to 4.26% from the fourth quarter.
Banking and wealth management revenues totaled $29 million.
That's roughly equal to what we did in the fourth quarter when you eliminate seasonal items.
First quarter fee revenue reflected strong mortgage banking activities as we have consistently generated a higher level of origination and servicing fees, both benefits of the Scotiabank acquisition.
Non-interest expenses totaled $78 million.
This was relatively flat after excluding merger expenses in the fourth quarter and non-core items in this first quarter.
First quarter expenses were also in line with our previously announced plans for spending this year.
The effective tax rate was 32% compared to 22% in the fourth quarter.
Looking at the balance sheet compared to December 31, assets increased reflecting higher cash balances.
Loans declined due to higher mortgage refinancing activity and to a lesser degree, businesses with higher liquidity levels paying down lines of credit.
Loan production total an impressive $528 million.
We have good pipelines and momentum going forward in all business lines.
We also saw strong deposit growth due to new PPP loans and COVID relief payments.
Capital continued to build nicely and we are starting to return some of that to shareholders via increases in common dividends and optimization of the capital stack via redemption of preferred shares.
In January, we increased the regular quarterly cash dividend -- common cash dividend 14%.
In March, we announced the redemption of all three outstanding series of preferred stock in addition to improving our capital structure.
This enables us to effectively deploy excess liquidity and increase net income available to shareholders -- to current shareholders by $6.5 million on an annualized basis.
Stockholders' equity climbed to $1.11 billion.
I would like also to point out that as of the first quarter, we more than earned back all the tangible book value per common share dilution anticipated in the Scotiabank acquisition significantly ahead of schedule.
To sum up, the first quarter demonstrated another strong performance supported by the island's economic recovery, solid loan generation, improving payment activity and credit credit trends, and good banking and financial services fees.
Now here is Maritza to go over the financials in more detail.
Please turn to Page 6 for our financial highlights.
First quarter core revenues were $127.7 million.
This compares to $132.8 million in the fourth quarter.
First quarter revenues included $1.6 million in interest income from $92 million of PPP loans that were forgiven.
First quarter revenues included three items: $3.9 million in non-interest income from annual insurance commissions; $3.1 million in interest income from acquired loan prepayments; and $2 million in mortgage sales that were held back from the third quarter.
When you take all that into consideration, core revenues increased $2.3 million or 1.9%.
This was driven by $1.4 million in lower cost of deposits and higher mortgage banking activities.
First quarter non-interest expense totaled $7.7 million.
This compares to $89 million in the fourth quarter.
The first quarter reflected previously announced cost savings.
It also included $1.8 million primarily in gains on sales and improved valuation of foreclosed properties.
The first quarter included $10.1 million in merger and restructuring expenses.
As a result, the efficiency ratio improved to 60.84% from 67.06% in the fourth quarter and 66.49% in the year ago quarter.
Our objective is to return to the mid-50% range.
Looking at our performance metrics.
Return on average assets increased to 1.21% from 94 basis points in the fourth quarter and virtually nil in the year ago quarter.
Our objective continues to be a -- to be on return on average assets above 1%.
Return on average tangible common equity rose to 13.11% compared to 9.99% [Phonetic] in the fourth quarter and virtually nil in the year ago quarter.
Our objective continues to be achieving return on average tangible common equity of above 12%.
We were pleased to see that all of our key performance metric significantly improve.
Tangible book value was $70.39 per share.
That's an increase of 11.5% year-over-year and 2.5% from the fourth quarter.
The CET1 ratio increased to 13.56%.
Please turn to Page 7 for our operational highlights.
Average loan balances were $6.6 billion, a decline of 1% from the fourth quarter.
Most of that was in our mortgage portfolio.
This is to be expected considering the high level of refinancing activity in Puerto Rico and our own strategy of selling most of our own new production.
Average core deposits were $8.5 billion, an increase of 1% from the first quarter.
This reflected continue high liquidity in the economy from federal stimulus, which is especially meaningful in Puerto Rico, as well as our first quarter PPP lending.
As Jose mentioned, loan generation totaled $528 million or $401 million excluding PPP originations.
In addition to PPP production, loan generation was driven by a strong year-over-year increases in mortgage, auto and commercial lending.
Mortgage reflect that new home sales and refinancing.
Auto reflected the strong sales of new and used car.
Most of our commercial lending was with small- and medium-sized businesses.
Loan yield was 6.61%, an increase of 6 basis points from the fourth quarter, largely due to PPP loan forgiveness.
As anticipated in our last call, a reduction in CD balances helped drive the decline in cost of funds.
Cost of core deposit was 48 basis points, a decline of 5 basis points from the fourth quarter.
We expect cost of core deposits to continue to improve this year as more CD balances be priced lower.
During the first quarter, we acquired $127 million of mortgage-backed securities for our held-to-maturity portfolio.
The result was that NIM increased 2 basis points from the fourth quarter.
We expect a stable NIM this year.
Please turn to Page 8.
Although credit trended positive across all portfolios, our credit metric is also in line with general improving trends we have been seeing on a fairly consistent basis.
Total net charge-offs were $9.1 million or 55% of total loans.
This is a decline compared to net charge-off of $44.8 million or 2.67% in the fourth quarter, which included $31.2 million to charge-off to acquire Scotiabank loans that were substantially and previously reserved.
With the exception of the fourth quarter of 2020, the charge-off rate has been improving steadily from the fourth quarter of 2019.
I would like to highlight the auto net charge-off rate.
This fell to 0.85% in the first quarter from 1.56% in the fourth quarter and 2.31% in the year ago quarter.
Our non-performing loan rate on our early and total delinquency rate all fell as well from the fourth quarter.
In particular, the early delinquency rate fell to 2.15% in the first quarter from 2.68% in the fourth quarter and 3.16% in the year ago quarter.
Provision declined from $14.2 million in the fourth quarter.
It should be noted that the fourth quarter included $4.7 million to cover the unreserved amount of disclosure loans that we [Technical Issues].
First quarter provision included a reserve release of $3.7 million.
This reflects changes in our probability weight to the results of simulation using Moody's S3 and baseline scenarios.
The first quarter also included a provision of $3.5 million for our commercial loan in workout prior to the pandemic.
Excluding the large COVID-related provision in the year ago, provision also has been declining steadily from the first [Phonetic] quarter of 2019.
Now here is Jose.
Please turn to Page 9 for our conclusion.
Culture, history, team and our facil, rapido, hecho approach are continuing to prove both successful and adaptable.
As I said earlier, we're building good momentum in all our businesses.
Our excess low-cost core deposits continue to provide us with significant dry powder.
Our most recent capital actions solidify our record of deploying and returning capital to shareholders.
Our agenda remains the same.
We will continue as plan to invest for the future in transforming our business model.
Our goal is to further simplify operations to improve efficiency and enhance our ability to serve customers.
Our business focus is to utilize our excess liquidity, increase loan generation and grow fee income.
We still face challenges from COVID, high unemployment levels, our government's ability to effectively deploy federal stimulus and reconstruction funds, and high cost of electricity, but the future is looking brighter.
The island is experiencing early signs of recovery with individual and businesses benefiting from COVID relief and stimulus, vaccination being extensively deployed, reconstruction projects getting under way and a consensual agreement in principle to restructure Puerto Rico's debt and an end to out-migration last year with signs of possible in-migration this year.
At OFG, we're more than ready to benefit from and play a major role in the recovery of Puerto Rico and the U.S. Virgin Islands.
We want to help our customers rise up and fulfill their lives again.
Operator, please start the Q&A. | q1 earnings per share $0.56.
quarterly total core revenues were $127.7 million. |
We had an outstanding performance in the second quarter, generating $0.78 per share.
This reflects our larger scale and our focus on digital utilization and customer service differentiation.
From a big picture perspective, it also reflects several key factors that are coinciding at this time that puts OFG in an excellent strategic position.
One, Puerto Rico's economy is clearly benefiting from the massive amount of federal reconstruction funds now starting to be received, as well as COVID stimulus funds.
It's important to note that these funds are more meaningful here as compared to mainland states, given how reconstruction funds and the amount of stimulus payments compared to average income levels on the island, as well as the size of our economy.
Two, Puerto Rico has managed well the COVID pandemic and today vaccination levels are in the top quartile of US states and territories with 55% of the population fully vaccinated and 63% with at least one dose.
And three, OFG's operating in a much different competitive environment than years past, with only three commercial banks serving the market.
All these continues to validate the comments I made last quarter regarding our optimism on Puerto Rico's economy and OFG's future.
Our second quarter results confirm this across all businesses.
Let's take a look at our income statement as compared to the first quarter.
Total core revenues were $133 million, an increase of more than 4%, results were enhanced by a 12% reduction in cost of funds.
Interest income grew more than 2%.
Banking and financial services revenues rose more than 5% due to increased economic activity.
Asset quality trends continue to improve.
As a result, provision for credit losses was a net benefit of $8.3 million.
Earnings also benefited by our recent deployment of excess capital to redeem all three of our outstanding series of preferred stock, which eliminated $1.6 million in quarterly preferred dividends.
We will continue to explore ways to deploy this excess liquidity.
Looking at the June 30 balance sheet.
Customer deposits increased $350 million to $9.1 billion, reflecting even greater liquidity on the part of both commercial and consumer customers.
As a result, both cash and assets grew.
Loans declined 1.2% to $6.4 billion mainly due to pay-downs in our residential mortgage portfolio and forgiveness of our first round of PPP loans.
Most of that decline was offset by growth in commercial and auto loan balances.
New loan origination increased 28% from the first quarter to $674 million.
We're starting to see optimism on the part of our commercial clients.
Originations now total more than $1.2 billion as of the first half of the year.
All this bodes well for the second half of the year.
Please turn to Page 4.
At OFG, we believe better banking is built upon fulfilling our purpose.
Namely helping our customers, our people and our communities achieve their financial goals.
During the second quarter, for our customers, we quickly process forgiveness for about 75% of our first round of our PPP loans, once again, using our proprietary all digital solutions.
Our business model is putting us closer to existing and potential commercial clients to help them finance their operations and strategies.
As part of this effort, we launched a series of online educational videos to help small businesses improve their capabilities and optimize our business potential.
Even though the pandemic is subsiding here, digital utilization of our banking services has continued at high levels among both our commercial and retail customers.
Online and mobile banking 30 and 90 day utilization continue well above pre-pandemic levels.
This validates our long-standing digital strategy and its growing acceptance by our customers and the market in general.
For our people, we continue to facilitate COVID vaccinations.
As of Monday, 81% of our team members are already fully vaccinated.
We expect to reach 90% vaccination levels during the third quarter.
In 2015, we started a college scholarship program for the children of our staff.
This year, we are proud to announce that we increased the average scholarship awarded by 19%.
In our communities, we have been working on several new corporate social responsibility programs.
One program launched on the second quarter helps high school students in lower income communities to improve their personal and technological development.
We are extremely proud of all of these achievements.
At the end of the day, there is nothing more rewarding them being part of a team that delivers on its purpose.
This quarter's overall performance energizes us at OFG to work harder and to aspire for more.
Now, here's Maritza to go over the financials in more detail.
Please turn to Page 5 to review our financial highlights.
Total core revenues were $133 million.
That's an increase of about 4% from both the first and year-ago quarters.
Most of the increase from the first quarter was due to higher income from non-PCD loans.
This reflects higher revenues from commercial and auto loans, which more than offset lower interest income from pay downs in residential mortgages and forgiven PPP loans.
Net interest income also benefited by approximately $7,000 due to one extra day compared to the first quarter.
In addition, total core revenues also reflected growth in banking services from financial services.
Revenues from banking services grew 11% from the first quarter and 34% year-over-year.
These were due to expanding economic activity.
Revenue from financial services increased 12% from the first quarter and 30% year-over-year.
This was largely due to increased asset values and higher commercial insurance income.
Non-interest expenses totaled $83 million.
That is an increase of $5 million from the first quarter and a decline of $2.9 million year-over-year.
Second quarter expenses reflect that our previously announced cost savings; a $2.2 million technology write down and a higher variable expenses related to increase cost savings.
Adjusting for the write-down, our efficiency ratio would have been similar to the first quarter.
We continue to see expenses in line with our previously announced plans for the year.
Our goal by the end of 2022 is to continue to improve our efficiency ratio to the mid to lower 50% range.
Return on average assets was 1.58%.
This was significantly higher than the first year and a year-ago quarters.
This also exceeded -- it also exceeded our baseline target of more than 1%.
Return on average and tangible common equity was 17.8%.
This was also up significantly from the first year -- for the first and year-ago quarters and also exceeded our baseline target of more than 12%.
We continue to build capital.
Tangible book value per share was $18.13.
There is an increase of 4% from the first quarter and 13% from the year ago quarter.
This is the highest increase sequentially over the last five quarters.
Please turn to Page 6 to review our operational highlights.
Average loan balances total $6.6 billion.
That's a decline of $37 million from the first quarter, due primarily to residential mortgage pay downs and PPP forgiveness as I have mentioned before.
This was mostly offset by new commercial and order loans.
The change in mix enable us to expand loan yields to 6.69%, eight basis point higher than in the first quarter.
Higher levels of residential mortgage breakdown reflect increased liquidity on the part of the -- of consumers.
Our residential mortgage portfolio consists of legacy oriental [Phonetic] mortgage loans and mortgage loan from the UVA and the Scotiabank acquisition.
Almost all our new residential mortgage loan originations are confirming USA agency [Inaudible].
So, we don't typically add new production to our residential loan portfolio, instead we convert more production into Fannie Mae's and Freddie Mac's and sell them.
And we converted the FHA loans into the Ginnie Mae's and retain them in our securities portfolio.
During the second quarter, we added $54 million of these Ginnie Mae securities into our investment portfolio.
Total new loan origination was $674 million.
That is an increase of 28% from the first quarter.
There are gains in all major categories.
This was led by commercial and auto, followed by consumer and residential mortgage.
Approximately 50% of new commercial orders were for new money to expand business operations; building new store, warehouses, buying inventory, or making acquisitions, Our core deposits totaled $8.96 billion.
That's an increase of 5% or $427 million from the first quarter.
Increases in non-interest bearing accounts, savings accounts and non-accounts were partially offset by the declines in customer CDs [Phonetic].
Core deposit costs continue to fall.
They were 38 basis points in the second quarter.
That is a reduction of nine basis points from the first quarter.
This reflects rate reductions and the continued maturing of older, higher price CDs.
As a result of the increase in deposits average cash balances totaled $2.5 billion.
That is an increase of 14%, offset $350 million from the first quarter.
Our current strategy is to continue to look for opportunities to deploy this asset liquidity through lending, capital actions, or into investment once interest rates move up.
Net interest margin was 4.22%, a decline of only four basis points from the first quarter.
They increased amount of cash, reduce NIM by 13 basis points.
Most of that was offset by nine basis points from the lower cost of deposit.
We believe NIM is still in the range of our expectations for remaining approximately level this year.
This tends to pay [Indecipherable] review our quality and capital strength.
Asset quality trends continue to improve.
Reconstruction and the stimulus funds provided significant liquidity to businesses and individual.
Some use this to pay down their loans and lines of credit.
Our net charges hit a historical low of only 13 basis points.
The yearly and total delinquency rates at 1.86% and 3.90% respectively were at their lowest level in five quarters.
Non-performing loan rates at 2.06% was also its lowest level in five quarters if you exclude the effects of our pandemic related deferral program.
As a result of these provision for credit losses, was a net benefit of $8.3 million.
This is based on $2.1 million in net charge-offs and $10.4 million net reserve reviews.
[Technical Issues] forward as continuous elevated.
There are still concerns about COVID uncertainty for our consistent robust economic recovery.
Our [Technical Issues] service was 2.95% on a reported basis and 3.06% excluding PPP loans.
The CET ratio continues to climb, reaching 13.95%.
The stockholders' equity was $1.8 billion, a decline of $28 million from the first quarter.
This was due to the redemption of preferred stock, Series A and B, and a good portion of which was offset by the increase in retainer.
The tangible common equity ratio continues to trend to 9.06%.
Ladies and gentlemen, please standby.
Please turn to Page 8 for our conclusion.
Our performance this quarter reflects what we had anticipated to see a year after the Scotia acquisition.
Our larger scale, business approach and improved strategic positioning is coming to fruition adding to our franchise value.
Following the first quarter and now this quarter we're seeing incremental optimism on the part of the business sector to invest for the future, slowly but surely giving us confirmation of Puerto Rico's economic revival.
We at OFG are more than ready.
We have a lot of dry powder in the form of cash to deploy for growth on the loan side, but we will also continue to look closely at capital management strategies.
Operator, please open the call for question and answer. | q2 earnings per share $0.78. |
They have done an excellent job and our results show it.
I'd like to start [Technical Issues] on the big picture.
Once we got through the earthquakes in January, the economy and OFG performed well.
[Technical Issues] started to see the benefits of the Scotiabank acquisition, then the COVID-19 pandemic hit and by mid-March, the Puerto Rico government had shut down the island.
These tough measures, however, enabled Puerto Rico to begin to relax restrictions on economic activity by the end of the second quarter and beginning of the third, with a noticeable rebound in the economy.
At the same time, we began to see an increased flow of federal funds for stimulus and the construction related to Hurricane Maria, the earthquakes and the COVID-19 pandemic in addition to the benefits provided by the bank loan deferrals.
All these added to the third quarter's economic rebound and resulted in increased liquidity on the part of businesses and consumers.
Altogether, the impact has been much more beneficial on a relative basis than what's happened on the mainland.
As it relates to the local banking industry, consolidation, the natural rebound in economic activity, and the growing amount of stimulus, combined with the Federal Reserve Bank's significant rate cuts in March, created a number of banking cross-currents in the third quarter.
By acting with agility and speed, OFG has been able to take advantage of them, to the benefit of our customers, communities and people.
The increase in liquidity resulted in continued growth in deposits and cash.
This caused, virtually, all our net interest margin dilution compared to the second quarter.
It also encouraged consumers and business customers to step up their loan repayments.
Taking advantage of the situation, we continue to expand our customer base and digital migration.
There was a large increase in new total sales which we translated into a noticeable increase in our own auto loan generation.
Mortgage production quadrupled, fee income grew across the board and deferrals dropped to 2% of loans from 30% in the second quarter.
Our commitment and preparation enable us to manage these changes facil, rapido, hecho, as we say at OFG.
Branches continue to operate safely, enhanced by our technology.
Full service ATMs and ITMs, our mobile app and online bill paying tools continue to facilitate routine transactions in a contactless manner.
Online and mobile appointment scheduling continue to make COVID-safe customer meetings possible at branches.
In addition, the Scotiabank integration continues on track and we're starting to see improved operating leverage.
In the end, we generated strong momentum in our core businesses, as we continue to help our customers, communities and people build better and stronger financial futures for themselves.
Let's turn to Page 4.
We have continued to see strong digital migration trends among both our retail and business customers.
More customers are becoming online and mobile users, but they're are also using an increasing number of digital features.
Here are some new highlights comparing September to January of this year.
P2P volume is up 40%, digital money transfers have increased 55%, online loan payments are up 87%, retail and commercial photo deposits have doubled, and we scheduled more than 34,000 COVID-safe appointments with customers through our online mobile tool, almost all of them in the second and third quarters.
Clearly, customers are using these features to avoid contact during COVID.
But as they experienced the ease and convenience of banking like this, their habits will surely stick.
More and more, customers in Puerto Rico, are asking themselves, why would you drive to the branch to deposit a check when you can take a photograph?
Why will you even write a paycheck these days?
These are positive trends that have accelerated due to the pandemic and play nicely to our retail banking strategy.
We continue to look for new and innovative ways to help our customers interact with us in an agile and easy way.
Earlier this week, we became the first financial institution in Puerto Rico and the U.S. Virgin Islands to launch a digital portal to make it fast and easy for our commercial clients to apply for PPP loan forgiveness.
Let's start on Page 5 to talk about our financial results.
We reported earnings per share of $0.50, a 28% increase from the second quarter and more than four times the year-ago quarter.
The effective tax rate was 19% compared to 25% in the second quarter.
Total core revenues were $127 million, excluding one-time interest recoveries from acquired Scotiabank loans.
Net interest income of $99 million was level with the second quarter, while fee income rose 19% to $27 million.
Net interest margin was 4.3%.
When you exclude interest recoveries in both quarters, net interest margin was 4.28% versus 4.5% in the second quarter.
Virtually, all the difference was attributable to the increase in cash balances.
Non-interest expenses of $83 million fell more than $2 million compared to the second quarter and that number includes merger and COVID-related costs.
Excluding those in both periods, the efficiency ratio improved 369 basis points compared to the second quarter as increased operating leverage from the Scotiabank acquisition began to kick in.
Customers' deposits grew more than $212 million from June 30 to $8.5 billion.
Due to the increased deposits, as well as repayments of loans and securities, cash increased $383 million to $2.3 billion.
As a result, total assets grew $84 million to $10 billion.
We do not anticipate exceeding these total asset level, come December 31, 2020.
Loan production was strong, totaling $458 million.
Excluding Paycheck Protection Program loans in the second quarter and third quarter, production increased $228 million.
The allowance coverage increased to 3.64%, excluding PPP loans.
Capital continued to build, shareholders' equity increased to $1.06 billion, all regulatory capital ratios remained significantly above requirements for a well-capitalized institution.
The CET1 ratio was 12.55% on September 30, 2020.
Please turn to Page 6.
The effects of all this is that we are building tangible book value per share.
These increased $0.50 in the third quarter to $16.51.
In addition, all three of the key performance ratio we track improved sequentially.
Efficiency ratio improved to 65.69% on a reported basis.
On an adjusted basis, it was 62.17%.
Return on average assets was 1.11%, and return on average tangible common stockholders equity was 12.23% and 12.10% on an adjusted basis.
Return on average tangible common equity is now exceeding our performance as compared to the year-ago second quarter before all the transactions related to the Scotiabank acquisition and increased provisioning affected the business.
Please turn to Page 7 for our operational highlights.
Average loan balances declined $54 million from the second quarter, reflecting net loan repayment in mortgage, commercial and consumer; auto increased.
Average core deposits, excluding brokered, grew $524 million from the second quarter.
End of period core deposits are now up more than $1 billion from the end of the last year, that is on top of the $2.8 billion that came with the Scotiabank acquisition.
Loan generation, excluding PPP loans, by order of magnitude was driven by $174 million in commercial lending, $156 million in auto, $94 million in residential mortgage and $24 million in consumer.
Loan yield at 6.57% declined 40 basis points from the second quarter.
This was mainly driven by PCD loans due to lower interest recoveries.
Non-PCD loan yield declined only 16 basis points.
The cost of core deposits declined 5 basis points to 56 basis points.
Please turn to Page 8 to review credit quality.
Credit quality continued to be under control.
The net charge-off rate declined 30 basis points from the second quarter, mainly due to declines in auto.
Provision declined $4 million, largely due to a decline in COVID-related provisioning.
Otherwise, provision was approximately level.
The non-performing loan rate increased 52 basis points quarter-over-quarter, mainly mortgage and auto.
We believe this is more about getting customers back in the payment cycle, now that most deferrals are over.
But we surely are keeping a close watch on it.
As for our customer relief program, if you recall, as of June 30, we had processed relief for more than 44,000 retail customers for $1.4 billion or 32% of our retail loans.
For our commercial customers, we had processed relief on $685 million in loans or about 27% of our commercial portfolio.
As I mentioned earlier, our deferrals are now down to 2% of total loans.
Most of that relates to about $112 million of commercial loans, mostly long-standing solid customer relationships in the hospitality industry.
Please turn to Page 9.
The allowance for loan and lease losses increased $2.6 million from the second quarter and is now equal to 3.48% of total loans.
Excluding SBA guaranteed PPP loans, the allowance was 16 basis points higher than in the second quarter.
Please turn to Page 10.
We're in a very strong capital position.
Our CET capital ratio is now up 164 basis points since last year after the Scotiabank acquisition.
Please turn to Page 11.
To conclude, we believe our history, culture, team, and approach to business, as well as our most recent results demonstrate our ability to quickly respond and adapt to changing economic environments.
During the second and third quarters, we have built momentum in our core businesses and developed a strong pipeline of new loans.
Looking at our liquidity, capital and balance sheet, we are well-positioned financially and strategically.
We have $8.5 billion of sticky core deposits with an excess of more than $1 billion giving us significant amount of dry powder.
Our agenda remains the same: finish integrating the former Scotiabank operations by year-end; achieve the full benefits of the acquisition by the end of next year; continue to invest for the future to further simplify our operations and enhance our ability to serve customers; and continue to play a significant role in the economic rebound of Puerto Rico and the U.S. Virgin Islands.
From a macro perspective, the increased liquidity from ongoing stimulus should continue to benefit the economy.
This favorable environment should be further enhanced by the fiscal board finally working toward a resolution with Puerto Rico creditors and by pharmaceutical companies as they onshore more production back to Puerto Rico.
We are now incrementally more confident that the economy will improve further.
Let's be clear, we still face tremendous challenges with -- from COVID-19, the elections in Puerto Rico and the USA and completing our Scotiabank conversion and integration.
But, we believe the economy is starting to move in the right direction and the future is beginning to look brighter.
By staying close to our customers and communities, we should be able to continue to deepen our relationships and grow the financial services we provide to them as we enter what appears to be a nascent and potentially expanding recovery.
Crises bring out the best in people to help others.
Our team demonstrates that every single day.
Operator, let's start the Q&A. | compname reports q3 earnings per share of $0.50.
q3 revenue $127 million versus refinitiv ibes estimate of $103.5 million.
q3 earnings per share $0.50. |
First, I want to wish all a Happy New Year and that you all remain safe and healthy.
If there was ever a year where we fulfill our purpose to our customers, our people, and our communities, it was 2020.
We were more than ready.
Our job as managers is to lead through good and bad times.
When we look back at 2020, we are so proud of our people who have been so dedicated, so resilient, and who have persevered through all the challenges of 2020 while maintaining our high levels of service to our customers, giving back to the communities we serve, and delivering excellent results for our investors.
We're extremely pleased with our results.
For our customers, despite everything, we swiftly processed their service requests, applications for loan deferrals, and the rapid influx of stimulus checks.
For commercial customers, we implemented an easy to use 100% digital service for applying, processing, disbursing, and forgiving PPP loans.
Both retail and commercial customers took full advantage of the digital technology we have been providing.
As we say at OFG, [Foreign Speech].
Our people adapted quickly to working remotely.
We stepped up spending for COVID-related items such as testing, healthcare, and worksite safety.
We made significant investments to ensure our teams had robust remote work capabilities.
We also worked to do our part for our communities.
At the beginning of 2020, we supported the earthquake-affected towns in the southern part of Puerto Rico.
After that, it was COVID-related donations and securing more than $100,000 in grants for non-profits in Puerto Rico and the U.S. Virgin Islands.
In addition, we converted our internship, scholarship, and financial seminar program to virtual formats to maintain a sense of continuity during these challenging times.
We will continue in 2021 to help our customers, people, and communities to adapt to the challenging and changing COVID conditions.
Please turn to Page 4.
As you can see in this slide, we continued to see higher percentage adoption in all banking technologies.
I am particularly pleased with the 50,000 online appointments made through our digital platforms and our online bill and loan payment solution.
All of this made life easier for our customers during the pandemic.
It also helped further our strategic and operational goals.
In all likelihood, digital migration should build on the progress we achieved in 2020.
Please turn to Page 5 to review our fourth quarter results.
We reported earnings per share of $0.42.
It is important to note that this included three major items; $6.4 million in merger and restructuring charges [Indecipherable] Scotiabank systems conversion and integration; $3.7 million in merger and restructuring charges for branch consolidation in 2021; and $1.5 million in COVID-related spending.
All of these amounts are pre-tax.
Also keep in mind, our tax rate was 22%, that's higher than the third quarter because of the greater proportion of higher tax income, but it is also lower than our estimated tax rate in 2021, which we currently anticipate being in the 30% to 32% range.
Total core revenues were a record $133 million.
Net interest income was $99 million, similar to the third quarter.
Banking and wealth management revenues were a record $34 million.
Wealth management included $4 million in annual insurance commissions, approximately $3 million of that was from additional insurance business that came with the Scotia acquisition.
Mortgage banking included $2 million in revenues from secondary market sales of mortgages that were held back from the third quarter due to our systems conversion.
Non-interest expenses were $89 million.
Excluding the merger restructuring charge and COVID-related costs, non-interest expenses amounted to $77 million.
This reflects significant cost savings, which Maritza will discuss in a few minutes.
Regarding the balance sheet, total assets were under $10 billion as we had anticipated.
Loan production continued to be solid at $485 million and capital continued to build with the CET1 ratio increasing to 13.08%.
Looking at our numbers, we continued to see signs of recovery with solid loan production, regular payment activity, stable credit trends, and a sequential quarterly increase in banking service fees, which reflect improved day-to-day economic activity.
Now, here's Maritza to go over the financials in more detail.
Please turn to Page 6 for our financial highlights.
Let me start with tangible book value per share, one of our key areas of focus.
At close to $17, it increased more than $1 year-over-year and by $0.46 from the third quarter.
The efficiency ratio increased [Phonetic] sequentially to 67%.
When you adjust for mergers and COVID expenses, it improved about 400 basis points to 58%.
Return on average assets and tangible common equity was close to 1% and 10% respectively on a reported basis.
Excluding the merger charge and the COVID expenses, these two metrics would have been more in line with our general performance objectives.
Please turn to Page 7 for our operational highlights.
As Jose mentioned, loan generation was a solid $485 million.
That included commercial lending of $224 million, auto lending of $138 million, and mortgage lending of $98 million.
Average loan balances declined slightly from prior quarter due to paydowns and loan yields stood at 6.55%.
Average core deposits increased, but end of period balances declined $170 million on a linked quarter basis.
This was primarily due to our decision not to renew certain additional higher cost deposits.
As a result, the cost of core deposits continued to fall to 53 basis points.
Average cash balances increased $162 million during the quarter.
The result was a 6-basis point sequential decline in net interest margin to 4.24%.
Please turn to Page 8 to review credit quality.
The net charge-off rate increased to 2.67%.
That reflects our decision to charge-off to acquire Scotiabank loans that were substantially and previously reserved at the time of the acquisition.
Provision was $14.2 million.
This includes $4.7 million to cover the two chargers [Phonetic] of commercial loans acquired from the Scotiabank that I just mentioned.
Fourth quarter 2020 loan deferrals fell to 1.4% of total loans from 2% in prior quarter and 3% in the second quarter of 2020.
The non-performing loan rates for non-PCD loans remained fairly steady at 2.35%, while non-performing loan rates for PCD loans decreased from 4.26% to 2.11%.
Turning to capital, stockholders' equity increased 2% sequentially and 4% year-over-year.
The tangible common equity ratio increased to 9%, ahead of both the prior quarter and the year-ago period when we made the acquisition of Scotiabank.
Please turn to Page 8.
After holding off for most of the first half of 2020 due to the pandemic, we completed the Scotiabank cost savings program in the fourth quarter.
With the completion of the system conversion, we realized $32 million in annualized savings, exceeding our original estimate of $35 million by about 9%.
Looking ahead, we expect to benefit from our -- we expect to benefit from about two-thirds of these savings in 2021 as we plan to step up investment in the continuing transformation of our business model.
Long term, we are committed to reducing expenses and increasing operating leverage.
Our objective is to return to an efficiency ratio in the mid-50% range.
Now, here is Jose, for his outlook for 2021.
Please turn to Page 10.
We believe our history, culture -- please turn to Page 10.
We believe our history, culture, team, and approach to business as well as our most recent results demonstrate our ability to respond quickly and adapt to changing economic conditions.
During the fourth quarter, we continued to build good momentum in our core businesses and develop a strong pipeline of new loans.
We have a strong balance sheet.
We're well positioned financially and strategically.
Our agenda for 2021 is clear; advance our strategic plan to further grow and improve performance in all operating areas.
For that, we need to further increase loan generation and grow fee income.
And as I mentioned, we plan to continue to invest for the future to further simplify operations, increase operating leverage, and enhance our ability to serve customers.
Our outlook is more optimistic than last quarter.
We still face challenges from COVID, high unemployment levels, and largely ineffective government operations to name just a few, but we believe the economy is starting to move in the right direction and the future looks brighter.
With the new administration in Washington, Puerto Rico is on the cusp of receiving significant amounts of approved [Technical Issues] reconstruction and stimulus funds for several years to come.
Key areas that should benefit from the influx of federal funds might be production and distribution of resilient and diversified electricity, improved infrastructure, telecommunication, and government efficiency.
We are also very hopeful with regards to the multiple vaccines that have been proven effective against COVID.
I am not talking about their effect on the economy here and around the world, although that's very important, but the effect they will have on human lives and the people in Puerto Rico, the U.S. Virgin Islands, and elsewhere.
A lot of families, small businesses, and their employees have suffered because of the pandemic.
If the vaccines are as successful as expected, we'll see the end of COVID in a relatively short period of time.
We at OFG are more than ready to help our customers rise up and fulfill their lives again, while we all play a major role in the recovery of Puerto Rico and the U.S. Virgin Islands.
Operator, let's start the Q&A. | compname reports 4q20 & 2020 results.
q4 earnings per share $0.42. |
s First Quarter 2021 Earnings Call.
Im Jason Bailey, Director of Investor Relations.
; and Bryan Buckler, CFO of OGE Energy Corp.
In terms of the call today, we will first hear from Sean, followed by an explanation from Bryan of first quarter results.
In addition, the conference call and accompanying slides will be archived following the call on that same website.
Earlier, we reported first quarter consolidated earnings of $0.26 per share, which includes utility earnings of $0.06 per share, earnings associated with our investment in Enable of $0.19 per share, and earnings at the holding company of $0.01 per share.
We've accomplished a lot, and I'm pleased to report that we've made great progress in mitigating the impacts of Winter Storm Uri.
We are back within the guidance range we reported last quarter, and we are not done.
We are one quarter into the year, and we're focused on a great year.
Our efforts to mitigate the impacts of Uri are ongoing as we work consistently to deliver shareholder value.
Bryan will provide additional details when he discusses our financial results.
We've had a productive and busy first quarter, starting the year off by announcing our support of the merger between Enable and Energy Transfer.
And as we work to finalize that merger agreement in February, our service territory experienced Winter Storm Uri, and I'm pleased to say that our operational performance during the storm was strong.
Our employees and our generation fleet performed admirably, and our customers experienced minimal disruptions.
Importantly, we performed our work safely, improving our year-over-year first quarter safety results by 60%, which is a great accomplishment when you consider that 2020 was our second safest year on record.
And particularly when you consider that our members worked in some of the most difficult winter conditions imaginable during the storm.
Then we quickly got to work on legislative and regulatory solutions to address the financial impacts of Uri.
We now have a regulatory asset for the recovery of the winter storm cost in Oklahoma and in Arkansas.
We now have securitization legislation in Oklahoma and in Arkansas.
And we have filed for securitization in Oklahoma and in Arkansas.
Turning to other positive regulatory outcomes in the first quarter.
In March, the Arkansas Public Service Commission approved the settlement in our Third Formula Rate and new rates were implemented April 1.
In Oklahoma, under our grid enhancement mechanism, the work is going well.
We file regulatory reports each quarter as projects are placed in service.
And I'm pleased to say that the entire program is going smoothly.
On the last call, I mentioned that we have a lot of really exciting projects in and around our communities in various stages of development.
The two projects I'm sharing today are only the first, and there are more to come.
We announced an innovative deal with Dobson Fiber to upgrade the resiliency and capacity of our utility communications network to accommodate new grid automation and mitigate the risk of wireless interference.
This is part of our continued grid enhancement efforts to deploy increased automation, monitoring and operational technologies.
This initiative enables us to essentially future-proof our communications network while saving more than 60% of our standard capital deployment and O&M costs.
Those are just real savings for our customers.
We also announced an expansion of the Choctaw Nation/OG&E Solar Energy Center.
And we're proud to continue our work with the Choctaw Nation and expand our commitment to renewable energy.
This commitment is based off customer-driven demand for our renewable energy offerings.
We now have included $25 million to our 2021 capital investment forecast to reflect the inclusion of these two projects in the first quarter.
These are just two examples of the kinds of innovative projects you can expect from us in the future.
We are seeing the recovery we anticipated at the beginning of the year.
Last quarter, we stated our expectations for 2021 weather-normalized load being 2.4% above 2020 levels.
After the first quarter, we still expect full year 2021 weather-normalized load to be at that level.
Adding to our confidence around the return of load is the fact that even during the pandemic, we've continued our trend of strong customer growth, which is up 1.4% over the same period in 2020, driven primarily in our residential and commercial classes.
Add to this, the fact that in Oklahoma, gross receipts are up 38% for the month of April, adding to the confidence we have in our business.
Today, as I've said before, our electric rates are lower than they were in 2011.
And let me share an interesting data point.
When adjusted for inflation, our rates are actually 14% below what they were in 2011.
Business and economic development is active in our service territory.
These low rates are a significant driver of companies coming to or expanding their operations, including electrification in our service territory.
So far, this year, those efforts expect to bring an additional 50 megawatts of load by the end of 2021.
This combination of strong customer growth and outstanding business and economic development activity puts us on track for sustained load growth of at least 1%.
We will continue to work on the many opportunities that will bring more load, more jobs and more investment to our communities in Oklahoma and Arkansas.
So let me put all of this into perspective.
We've continued to achieve positive regulatory outcomes, we've added new innovative projects, we see strong customer growth.
We have some of, if not the lowest rates in the nation, combined with annual load growth and better unemployment rates than most of the nation.
This is all part of our great story that further supports our sustainable business model of growing revenues by attracting new customers, managing expenses by utilizing technology and becoming more efficient, this helps us maintain the low rates, which in turn attracts more customers.
This virtuous cycle continues.
Our results this year will rest on our operational execution, and I'm very confident in our ability to achieve that.
For the remainder of the year, we will achieve final regulatory approval of cost recovery plans for Winter Storm Uri, submit integrated resource plans in Oklahoma and Arkansas, file our Fourth Formula Rate in Arkansas, including a request for an extension of its term, finished construction of the two solar farms, continue our grid enhancement investments in Oklahoma, which are on track to deliver results to our customers.
And finally, we continue to prepare for our next Oklahoma rate case, which we plan to file later this year.
So we've accomplished a lot already in the first quarter, but we're still going.
And this all sets us up for a great year in years to come.
We expect the transaction to close in 2021, subject to the satisfaction of customary closing conditions, including the HSR clearance.
Our intention to prudently exit our midstream investment remains the same, and we will provide information upon closing of the transaction.
On our last call, we talked about our solid compelling investment thesis, supported by a track record of performance.
We put in motion our vision to become a pure-play utility, targeting 5% earnings growth based off lower risk investments that will enhance our customers' experience.
We have some of the most affordable rates in the nation helping to drive economic growth in our communities.
Weve made great progress toward getting back to our 2021 guidance.
Our ability to meet guidance rests on our operational execution, and I'm confident in our ability to do so.
Our company is strong, and while COVID and extreme weather have presented challenges, it's important to understand that we have always been determined to more than simply manage the downturn instead, set our sights on excelling through the recovery.
Starting on slide nine.
For the first quarter of 2021, we achieved net income of $53 million or $0.26 per share as compared to a loss of $492 million or $2.46 per share in 2020.
The loss in 2020 was driven by the impairment charge recorded on our Enable midstream investment.
At the utility, OG&E's first quarter results were $0.04 lower than 2020, primarily driven by the previously disclosed losses that occurred during the extreme winter weather from the Guaranteed Flat Bill program.
As I discussed during our fourth quarter call, the GFB program represents approximately 3% of our load, whereby variabilities in fuel and purchase power costs are not trued up.
The financial impacts of the weather event are consistent with the estimates we provided you on the fourth quarter call.
Excluding the impact of the extraordinary fuel costs in our GFB program, OG&E's core operations performed very well during the first quarter, including strong cost management.
I'll speak to our updated full year 2021 projection in a moment.
Our natural gas midstream operations were income of $0.19 per share in the first quarter compared to a loss of $2.84 in 2020.
The increase in earnings was primarily due to the 2020 impairment of our investment in Enable.
The current quarter was also marked by higher net income from Enable's transportation and storage business resulting from higher natural gas prices.
Turning to our economic update on slide 10.
As Sean mentioned, we are seeing strong employment figures in our service territory, and we are especially pleased with the customer growth of 1.4% year-over-year, illustrating the attractiveness of living and working in Oklahoma and Arkansas.
Furthermore, our commercial segment is showing encouraging strength, with year-over-year load growth of approximately 6% in the month of March alone, leading to the 1.8% quarterly load increase figure you see on the slide.
For the full year, we continue to expect total weather normal load results to be approximately 2.4% higher than 2020 levels.
Let's move to slide 11.
We've made outstanding progress in the quarter toward mitigating the aforementioned GFB program impacts and currently project OG&E full year 2021 results within the lower half of our original guidance range of $1.76 and to $1.86 per share.
On the fourth quarter call, we outlined our initial estimate of approximately $0.10 of headwinds associated with the weather event.
As I mentioned earlier, our estimates continue to come in at approximately this level, included in the $0.10 of headwinds was estimated financing costs associated with the incremental fuel and purchase power, which is no longer an earnings headwind as we were recently able to obtain regulatory orders in Oklahoma and Arkansas for the deferral of the financing cost.
The OG&E team has worked hard during the quarter to further mitigate these impacts and already has line of sight to $0.03 to $0.04 of favorable mitigations, including strong O&M management.
Thus, our current estimate of 2021 full year earnings per share is back in the lower half of guidance with three quarters in front of us.
Looking more long term.
The very solid start to 2021 for our core operations, coupled with the capital investments we are making for our customers and communities in 2021, position our company well for sustained earnings growth into 2022 and beyond.
As I mentioned to you on our fourth quarter call, our business fundamentals are strong, and we have great confidence in our ability to grow OG&E at a 5% long-term earnings per share growth rate through 2025 off the midpoint of our 2021 guidance of $1.81.
On slide 12 and 13, I'd like to update you on the fuel and purchase power costs, the status of our regulatory filings and the securitization path in Oklahoma and Arkansas.
As of March 31, fuel and purchase power costs of approximately $930 million were recorded on the balance sheet, consistent with the initial estimates.
In Oklahoma, approximately $830 million has been deferred to a regulatory asset with the initial carrying charge based on the effective cost of debt financing.
In Arkansas, we have incurred approximately $100 million of cost with the case pending that allows interim recovery of these costs over a 10-year period, including an initial carrying cost that approximates the effective cost of financing.
As Sean mentioned, both Oklahoma and Arkansas have passed securitization laws.
And some of the key parameters of those laws are shown on the slide.
In Oklahoma, we filed an application on April 26, seeking authorization from the OCC to securitize the costs associated with the extreme February weather.
Based on the timeline outlined in the legislation, we would expect to receive proceeds from the securitization by mid-2022, which would restore our credit metrics due to levels we expected prior to the weather event.
In Arkansas, on May 4, we made a filing indicating OG&E's intention to pursue securitization of the fuel and purchase power costs.
As a reminder, the Arkansas legislation dictates that a carrying charge equivalent to a WACC is the appropriate -- is appropriate from the date of cost occurrence to the issuance date of the securitization bonds.
This securitization is pursued in Arkansas, it will replace our open docket that is requesting a 10-year recovery period with a carrying charge at our weighted average cost of capital.
As we noted on our fourth quarter call, we closed on a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs.
We intend to refinance this short-term loan by issuing longer-term debt in 2021, likely with the call feature that coincides with the expected timing of the securitization of the fuel and purchase power cost.
Our balance sheet continues to be one of the strongest in the industry, and our equity plans have not changed.
While our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred, we believe the metrics will return to the targeted 18% to 20% level once the securitizations are complete.
Separately, as a procedural matter, later today, we will update our standard S-3 Chef filing with the SEC, which ensures our continued access to the capital markets.
Finally, we remain confident in our ability to drive long-term OG&E earnings per share growth of 5%, which when coupled with a stable and growing dividend, offers an investors an attractive total return proposition. | compname reports q1 earnings per share of $0.01.
q1 earnings per share $0.01.
og&e's 2021 earnings guidance remains unchanged and is between $352 million to $373 million, or $1.76 to $1.86 per average diluted share.
oge energy-is not issuing 2021 consolidated earnings guidance due to enable not issuing an earnings outlook.
oge energy-currently projects full year results in lower half of range. |
's Second Quarter 2021 Earnings Call.
I'm Jason Bailey, Director of Investor Relations.
Bryan Buckler, our CFO, has a cold.
His voice doesn't sound great.
So Chuck Walworth, our Treasurer and Head of Financial Planning, will cover our second quarter financial results.
In addition, the conference call and accompanying slides will be archived following the call on that same website.
It's certainly great to be with you again.
While weather was $0.03 below normal for the quarter, we remain within our previously reported guidance range.
I'm proud to say we keep moving forward.
I'm so proud of everyone here and we are encouraged by our exceptional utility operations and all of our employees as they focus on energizing life for our customers and our communities.
Chuck will provide additional details when he discusses our financial results in just a moment.
As we move ahead, I'm pleased to note that in June, OGE received its 19th EEI Emergency Response awards since 1999 for our power restoration efforts during the 2020 New Year's Eve snowstorm.
We've been recognized with this highest national distinction for emergency recovery 11 times for major storms affecting our system and eight times for assisting others.
Additionally, for the third consecutive year, OGE has been recognized by S&P Global as having the lowest rates in the nation, demonstrating the affordability of our service.
Systemwide, growth in customer load is driving $75 million of increased capital investments.
Investments include substation enhancements, projects at Tinker Air Force Base and upgrades of our 69 kV line to support the load of larger and growing customers.
Construction on the five-megawatt solar farm in Branch, Arkansas, and the 5-megawatt expansion of the Choctaw Nation OGE solar farm remain on track for completion by the end of the year.
As we seek innovative ways to increase efficiency across the organization, yesterday, we announced that OGE will pilot utilizing artificial intelligence to inspect distribution poles for damage.
This technology will allow our teams to respond more efficiently and utilize a consistent approach for repair and replacement.
We will continue to leverage these results and this technology to improve the customer experience.
Our grid enhancement programs in Oklahoma and Arkansas continued to deliver.
The work we're undertaking on our substations and distribution circuits and other portions of our grid will have a significant positive impact on the reliability and resiliency of the grid for the benefit of our customers.
On Monday, we submitted our draft integrated resource plan with both the Oklahoma and Arkansas commissions, detailing our resource needs over the next several years.
As you can see on slide five, our resource needs are driven by expected load growth as well as the retirement of aging, less efficient, less reliable gas plants that were built more than 50 years ago.
We expect to retire approximately 850 megawatts over the next five to six years.
Key components of our IRP include a successful energy efficiency and demand side management program combined with replacing retired generation with a combination of solar- and hydrogen-capable combustion turbines.
We plan to execute this in 100 to 150-megawatt annual increments, beginning with solar over the next five to six years to really smooth out the customer impacts.
When complete, our overall carbon intensity will drop by more than 6% and the overall fleet efficiency will improve even more.
This plan is a significant step forward to meet our objectives of fuel diversity and provide our customers with cleaner energy solutions while maintaining our affordable rates.
We begin the stakeholder engagement process now and we'll submit the final IRP on October 1, after which we will lay out the time line for the next steps, including an RFP process.
Our securitization filing in Oklahoma is on track for recovery approximately 85% of the total cost associated with February's winter storm year.
A hearing is scheduled for October and in orders expected by the end of the year.
The Arkansas securitization statute is somewhat different from Oklahoma's, and we continue to work through that process and plan to file later this year with every expectation of a positive regulatory outcome there.
Speaking of Arkansas, we will file a formula rate update in October with rates going into effect in April of 2022.
We will also file for a five year extension of our formula rate at the same time.
We will file a rate review in Oklahoma toward the end of the year.
A significant portion of this case will involve a continuation of our grid enhancement work and the recovery mechanism that has already been established.
The process is working quite well, and we want to continue to work to enhance the resiliency and the reliability of the grid for the benefit of our customers.
And finally, we're working with the Oklahoma Corporation Commission on a three year energy efficiency filing for the years 2022 to 2024.
These efficiency programs provide energy savings and peak demand reduction for OGE customers to better manage their energy use.
We expect to achieve savings of more than 100 megawatts in demand, nearly 500,000 megawatt hours of energy saved, helping us to efficiently operate our generation fleet as we grow our customer base and maintain affordability.
So clearly, these are programs worthy of continuing into the future.
Turning to slide seven.
Recovery of our load continues.
With the first half of the year now behind us, we expect 2021 weather normalized load to be more than 2% above 2020 levels.
Chuck will give more details around the load in just a moment.
In addition, our strong customer growth of 1.3% reflects the combination of highly affordable rates and our ability to service commercial expansion in our markets, which leads me to our business and economic development activities.
Last quarter, we discussed the additional 50 megawatts of load we will add by the end of the year due to our slate of business and economic development activities at that time.
I'm pleased to say that the pace of these activities has ramped up even further, enabling us to increase that estimate up to 75 megawatts, of which 36 megawatts is already connected, and we're far from done.
Again, these are larger loads and do not reflect residential or commercial impacts, and we believe we will add to this number in the months ahead.
In addition to low growth, these projects also bring new jobs to our communities.
Through the first half of 2021, the new projects secured by our teams have helped to add more than 4,100 new jobs, all across our service territory.
One such project, Pierre Foods, is completing a 200,000 square foot regional fulfillment center in Oklahoma City, adding 10 megawatts of load and 550 jobs.
The affordability of our rates is essential to our sustainable business model as the cost of electricity is a significant factor that companies consider when deciding where to relocate.
And affordability remains a key competitive advantage, that is evident in our business and economic development activity as well as customer growth, which combined have us on track for sustained load growth of approximately 1% going forward with still many opportunities ahead.
We expect the transaction to close later this year, subject to the satisfaction of customary closing conditions, including the HSR clearance.
Our intention to prudently exit our midstream investment remains the same and we'll certainly provide information upon closing.
Before I hand the call over to Chuck, I do want to take a moment to touch on three key points.
First is that we continue to execute on our plan.
While the weather was below normal, we remain within our previously reported guidance range, and we're going to keep moving forward.
Secondly, the strength of our economies across our service territory is strong.
Oklahoma's unemployment rate in June was 3.7% compared to the national average of 5.9%.
In Oklahoma City, the largest metro area in our service territory, had a rate of just 3.7% in June, the third lowest from a large metropolitan series.
Similarly, Fort Smith, Arkansas, had a rate of 4.4% in June.
These economies are strong and continue to grow stronger.
And all this leads to the third and final point of our sustainable business model of growing revenues by attracting new customers, managing our expenses by utilizing technology.
This all helps us maintain some of the most affordable rates to nation, which in turn attracts more customers and grows our business.
Starting on slide nine.
For the second quarter of 2021, we achieved net income of $113 million or $0.56 per share as compared to $86 million or $0.43 per share in 2020.
At the utility, OGE's second quarter results were $0.03 higher than 2020 despite mild weather, primarily driven by higher revenues from the recovery of our capital investments and improved load from customer growth, partially offset by higher depreciation on a growing asset base.
OGE's core operations performed very well during the second quarter.
Our natural gas midstream operation results were $0.16 per share in the second quarter compared to $0.10 in 2020.
The increase in net income was primarily a result of higher commodity prices, improved gathering and processing volumes and a decrease in income tax expense, driven by the Oklahoma State corporate tax rate reductions impact on deferred taxes.
Turning to our economic update on slide 10.
As Sean mentioned, we are seeing outstanding employment figures in our service territory.
Once again, we are also pleased to see customer growth coming in strong at 1.3% year-over-year.
Furthermore, our commercial and industrial customer classes are showing real momentum with year-over-year load growth of approximately 12% and 9% in the second quarter more than compensating for the lower residential volumes we are experiencing as employees begin to return to the workplace.
Overall, we saw a 5.7% total load increase during the quarter, generally in line with our expectations.
For the full year, we still expect total weather normal load results to be more than 2% above 2020 levels.
Let's move now to slide 11, and where I'd like to update you on our 2021 full year earnings per share forecast.
As discussed during our Q1 call, we began the year with a midpoint earnings per share target of $1.81 per share, but immediately faced a net headwind from the February weather event of $0.07 per share.
As I'll speak to in a moment, in June, we were a net receiver of cash from the second round of SPP settlements, reducing the earnings per share impact of the Guaranteed Flat Bill program by $0.01 per share.
Thus, as of June 30, the net impact to earnings from the February weather event is $0.06 per share.
Second quarter was on plan with the exception of an additional headwind of mild early summer weather.
When you exclude the weather impact associated with the winter storm, unfavorable weather has been approximately a $0.05 loss year-to-date.
During the first and second quarters of '21, OGE's employees have worked hard to deliver for customers and shareholders.
To date, we have identified and activated $0.07 to $0.09 of mitigation initiatives, including continued O&M agility.
The company's outstanding O&M reduction efforts in '20 and '21 will help moderate future rate increases for our customers in our upcoming rate proceedings in Oklahoma and Arkansas.
Based on our progress to date, we remain within our earnings per share guidance range of $1.76 to $1.86 per share for full year 2021.
Looking more long term, a very solid start to '21 for our core operations, coupled with the capital investments we are making for our customers and communities, position our company well for sustained earnings growth into 2022 and beyond.
Our business fundamentals are strong, and we continue to have great confidence in our ability to grow OGE at a 5% long-term earnings per share growth rate through 2025.
On slide 12, I'd like to update you on the securitization process.
Following the additional SPP resettlement that took place in June, the overall impact of fuel and purchase power costs incurred have been reduced by approximately $100 million.
As of June 30, fuel and purchase power costs of approximately $850 million were recorded on the balance sheet.
In Oklahoma, $755 million has now been deferred to a regulatory asset with the initial carrying cost based on the effective cost of debt financing.
In Arkansas, the updated fuel and purchase power costs deferred are approximately $92 million.
Recall in Arkansas, we have an order that allows us to recover fuel and purchase power costs associated with the winter storm over a 10-year period while we pursue securitization and filings to be made later in the year.
In Oklahoma, we filed testimony in June, which supports our request to recover and securitize the cost associated with the extreme February weather event.
The OCC issued the procedural schedule with the hearing to begin on October 11 and a commission order expected by the end of the year.
Based on the time line in the legislation, we would expect to receive proceeds from the securitization by midyear 2022.
As we noted previously, we initially secured a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs.
In May, the term loan was refinanced by issuing $1 billion of senior notes to serve as a bridge until securitization takes place.
These two year notes carry an average rate of 63 basis points and are callable at par after six months, providing flexibility for early repayment depending on the timing of the securitization transactions.
As we discussed on our last call, our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred.
We believe our metrics will return to our targeted 18% to 20% level once securitization is complete.
Speaking in more broad terms, our balance sheet remains one of the strongest in the industry, providing the foundation for the company to continue to make important investments on behalf of our customers and communities.
Finally, we remain confident in our ability to drive long-term OGE earnings per share growth of 5% based off the midpoint of 2021 guidance of $1.81 per share, which, when coupled with a stable and growing dividend, offers investors an attractive total return proposition. | compname posts q2 earnings per share $0.56.
q2 earnings per share $0.56.
emerging projects driving increase in 2021 investment plan of $75 million.
oge energy- reaffirms 2021 og&e earnings guidance in lower half of range between about $352 million & $373 million of net income, or $1.76 to $1.86 per share. |
During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD and EBITDA.
Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the Financial Information section of our website at www.
In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega.
Today, I will discuss our first-quarter financial results, the COVID-19 pandemic and various industry issues and the vaccine rollout.
We are very pleased with our strong first-quarter results.
Our adjusted FFO of $0.85 per share, and our funds available for distribution of $0.81 per share allowed us to maintain our quarterly dividend of $0.67 per share.
The payout ratio is 79% of adjusted FFO and 83% of funds available for distribution.
Additionally, for the first quarter end in April, we collected virtually all of our contractual rents.
Over the last six months, we have issued $1.4 billion in bonds, and we have recast our $1.5 billion bank credit facility with a four-year maturity in 2025.
Our liquidity and our debt maturity ladder have never been stronger as we move forward facing the uncertain timing of pandemic recovery.
The allocation and distribution of additional government funding, along with the communication and evolution of clinical protocols, has been critical in protecting and saving lives as we combat this unprecedented deadly pandemic.
Looking forward, the key to our industry recovery is the return of occupancy to prepandemic levels.
Although we have seen occupancy stabilize and increase slightly as vaccines have rolled out, it is not clear that the pace of occupancy recovery will be sufficient to avoid industry-level cash flow issues.
With an estimated $24.5 billion remaining in the Provider Relief Fund and the likelihood of provider funding requests well in excess of this amount, we expect certain providers in the industry may have shortfalls.
Furthermore, although many states have provided meaningful support, there are many states where additional support will be necessary to avoid facility financial stress and potential closures.
We continue to strongly believe in the positive long-term prospects for our operating partners while acknowledging the possibility of near-term stress that some skilled nursing and senior housing providers may face.
Turning to the vaccine rollout.
We continue to gather vaccination data from our operators and can report the following.
As of April 30, all free clinics have been conducted at substantially all of our facilities.
Based on operators representing over 90% of our facilities reporting in, the vaccination rate for residents is approximately 81% with the vaccination rate for staff at approximately 49%.
This is a vast improvement over what we reported last quarter of 69% and 36% for residents and staff, respectively.
Turning to our financials for the first quarter.
Our NAREIT FFO for the quarter was $170 million or $0.71 per share on a diluted basis as compared to $181 million or $0.77 per share for the first quarter of 2020.
Revenue for the first quarter was approximately $274 million before adjusting for nonrecurring items.
The revenue for the quarter included approximately $12 million of noncash revenue.
We collected over 99% of our contractual rent, mortgage and interest payments for the first quarter, as well as for the month of April.
Our G&A expense was $10.4 million for the first quarter of 2021, in line with our estimated quarterly G&A expense of between $9.5 million and $10.5 million.
Interest expense for the quarter was $56 million.
Our balance sheet remains strong, and we've continued to take steps in 2021 to improve our liquidity, capital stack and maturity ladder.
In March, we issued $700 million of 3.25% senior notes due April 2033.
Our note issuance was leverage neutral as proceeds were used to repurchase through a tender offer, $350 million of 4.375% notes due in 2023 and to repay LIBOR-based borrowings.
As a result of the repurchase, we recorded approximately $30 million in early extinguishment of debt cost.
At March 31, we had $135 million in borrowings outstanding under our $1.25 billion credit facility, which matured at the end of the month, and $50 million in borrowings under a term loan facility that had a maturity in 2022.
On April 30, we closed a new $1.45 billion unsecured credit facility and a $50 million unsecured term loan facility that both mature in April of 2025.
We have no bond maturities until August 2023.
In March of 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of 0.8675%.
These swaps expire in 2024 and provide us with significant cost certainty when we refinance our remaining 2023 bond maturity.
The repurchase of 50% of our 2023 bonds and the completion of the credit facility and term loan transactions extended our debt maturities, improved our overall borrowing cost and reinforced our liquidity position.
In the first quarter, we issued 2 million shares of common stock through a combination of our ATM and dividend reinvestment and common stock purchase plan, generating $76 million in cash proceeds, but we believe our actions to date provide us with flexibility to weather a potential prolonged impact of COVID-19 on our business.
It also provides significant liquidity to fund potential acquisitions.
In 2021, we plan to continue to evaluate any additional steps that may be needed to further enhance our liquidity.
At March 31, approximately 97% of our $5.5 billion in debt was fixed, and our funded debt to adjusted annualized EBITDA was approximately 5.2 times, and our fixed charge coverage ratio was 4.5 times.
When adjusting to include a full quarter of contractual revenue for new investments completed during the quarter, as well as eliminating revenue related to assets sold during the quarter, our pro forma leverage would be roughly 5.1 times.
As of March 31, 2021, Omega had an operating asset portfolio of 954 facilities with over 96,000 operating beds.
These facilities were spread across 70 third-party operators, located within 41 states and the United Kingdom.
Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio as of December 31, 2020, stayed relatively flat for the period at 1.86 times and 1.5 times, respectively, versus 1.87 times and 1.51 times, respectively, for the trailing 12-month period ended September 30, 2020.
These numbers were negatively impacted by a number of external factors as a direct result of COVID-19, including a significant drop in patient census and a dramatic spike in operating expenses, particularly labor costs and personal protective equipment.
These negative results were more than offset throughout 2020 by the positive impact of federal stimulus funds which were distributed in accordance with the CARES Act.
During the fourth quarter, our operators cumulatively recorded approximately $115 million in federal stimulus funds as compared to approximately $102 million recorded during the third quarter.
Trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the fourth quarter of 2020 to 1.38 and 1.04 times, respectively, as compared to 1.53 and 1.18 times, respectively, for the third quarter when excluding the benefit of the federal stimulus funds.
EBITDAR coverage for the stand-alone quarter ended 12/31/2020 for our core portfolio was 1.33 times, including federal stimulus, and 0.78 times, excluding the $115 million of federal stimulus funds.
This compares to the stand-alone third quarter of 1.44 times and 0.97 times with and without the $102 million in federal stimulus funds, respectively.
Cumulative occupancy percentages for our core portfolio were at a pre-COVID rate of 84% in January 2020.
While they flattened out to around 75% throughout the fall months, they subsequently fell to 73.3% in December and further in January to 72.3% before starting to show signs of recovery at 72.6% in February and 73.1% in March.
Based upon what Omega has received in terms of occupancy reporting for April to date, occupancy has continued to improve, averaging approximately 73.4%.
We are cautiously optimistic that the rollout of vaccines, which began in late December of 2020 and continued in earnest throughout the first quarter of 2021, will provide a much-needed catalyst for improving occupancy statistics as infection rates continue to decline and visitation restrictions continue to ease.
Turning to new investments.
As previously announced, on January 20, 2021, Omega closed on the purchase of 24 senior housing facilities from Healthpeak for $510 million.
The acquisition included the assumption of an in-place master lease with Brookdale Senior Living, the leading operator of senior living communities throughout the United States.
The portfolio primarily consists of assisted living, independent living and memory care facilities with a total of 2,552 units located across 11 states.
The master lease with Brookdale will generate approximately $43.5 million in contractual 2021 cash rent with annual escalators of 2.4%.
Additionally, during the first quarter of 2021, Omega completed an $83 million purchase lease transaction for six skilled nursing facilities in Florida.
The facilities were added to an existing operator's master lease for an initial cash yield of 9.25% with 2.25% annual escalators.
Omega's new investments for the quarter totaled $610 million, inclusive of $17 million in capital expenditures.
During the first quarter of 2021, Omega divested 24 facilities for total proceeds of approximately $188 million.
As Taylor previously mentioned, there is approximately $24.5 billion left in the provider relief fund.
Additionally, $8.5 billion was allocated to rural providers with the passing of the American Rescue Act on March 11, 2021.
While it is likely that SNFs and ALFs will see some funds out of these remaining amounts, our operators are really looking to their states for new or increased stimulus, given the substantial amount of funding to states via the American Rescue Act.
This would be in addition to or as a continuation of FMAP increases previously allocated by states to SNFs.
Our hope is that those states who have previously not made any allocations to the sector will reconsider based on the new availability of funds.
With large outbreaks experienced across the country and therefore in the long-term care space in fourth quarter and into January, the preliminary results of the vaccine rollout, which Taylor mentioned earlier, have been a sign of hope.
There has been a substantial reduction in resident and employee cases since the rollout with our current reporting as of last week, showing less than 550 cases, resident and employee, across less than 250 of our buildings, which low numbers have not been seen since April of last year.
Likewise, we were extremely pleased last week to see revised CDC recommendations, both on the visitation and testing front.
Removing the regular requirement to test already vaccinated employees, unless symptomatic or during an outbreak, will go a long way in reducing the cost burden associated therewith.
And the relaxation of visitation restrictions, including the reduced need for social distancing and mask wearing in certain circumstances where visitors and residents have been vaccinated, will not only benefit the mental health of the current resident population, but it will also remove the disincentive previously in place for family members who want to place their loved ones in a long-term care setting.
Census will take time to rebuild, and reduction in expenses will be gradual over time, all while the ability to scale in place will be reduced with far less COVID cases.
Specifically, as it relates to expenses, labor shortages continue to be a huge concern for our operator base.
Prepandemic operators were faced with shortages due to low unemployment rates.
During the pandemic, the issue has been exacerbated by employees leaving the long-term care space, both permanently and temporarily, as the environment is understandably much tougher since the onset of COVID and unemployment benefits have been increased substantially.
This expected slow, long-term recovery means that continued financial support of both federal and state governments is critical, and we hope that they will be mindful of that as they determine how to spend any remaining or newly allocated stimulus funds.
In conjunction with Maplewood Senior Living, in late March, we completed license and opened our ALF Memory Care high rise at Second Avenue, 93rd Street in Manhattan.
The final project cost is expected to be approximately $310 million.
Lease-up momentum has been solid with 35 move-ins through April, the first full month of operations.
The COVID-19 pandemic posed certain challenges unique to senior housing operators, including increased costs, the challenges of managing COVID-positive patients and meaningful practical limitations on admissions.
While they very much appreciate the help they've received, private pay senior housing operators have not seen the level of government support provided to other areas of senior care.
We saw continued challenges to our senior housing occupancy throughout the fourth quarter, with variations tied to when and where COVID outbreaks were encountered.
However, we have seen evidence of stabilization and strengthening of census in certain markets.
By example, our Maplewood portfolio, which is concentrated in the early affected Metro New York and Boston markets, saw meaningful census erosion early in the pandemic with second-quarter census hitting a low of 80.4% in early June.
That said, their portfolio occupancy level had returned to 85.6% in the month of November.
Census has plateaued at this level for the time being as COVID-driven census challenges in select buildings offset further occupancy increases in the remainder of their portfolio.
Including the land and CIP, at the end of the first quarter, Omega Senior housing portfolio totaled $2.2 billion of investment on our balance sheet.
This total includes our recent Brookdale investment, which closed during the first quarter.
All of our senior housing assets are in triple net master leases.
This portfolio, excluding the 24 Brookdale properties, on a stand-alone basis had its trailing 12-month EBITDAR lease coverage fell 4 basis points to 1.08 times in the fourth quarter of 2020.
With COVID outbreaks having affected different markets at various times, this decrease in performance was to be expected.
Rising vaccination rates among residents and staff are a critical step to restoring occupancy and performance.
While we remain constructive about the prospects of senior housing, the COVID-19 outbreak has warranted a far more selective approach to development.
While we make further progress on our existing ongoing developments, we continue to work with our operators on strategic reinvestment in our existing assets.
We invested $16.8 million in the first quarter in new construction and strategic reinvestment.
$9.4 million of this investment is predominantly related to our active construction projects.
The remaining $7.4 million of this investment was related to our ongoing portfolio capex reinvestment program. | compname reports q1 adjusted ffo per share $0.85.
q1 adjusted ffo per share $0.85. |
During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD and EBITDA.
Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.
In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega.
Today, I will discuss the pandemic and the related government response and support, our fourth-quarter financial results, the vaccine rollout, and our new Brookdale relationship.
The allocation and distribution of additional government funding, along with communication and evolution of clinical protocols has been critical in protecting and saving lives as we combat this unprecedented deadly pandemic.
Continued federal and state government support will be critical for the skilled nursing and assisted living care settings.
The latest round of CARES Act funding targeted operators that have been disproportionately impacted by the pandemic.
We believe at least $23 billion of CARES Act funding under the Provider Relief Fund remains unallocated.
We are hopeful that new legislation will add to Provider Relief Funding and hopefully will support the industry through its 2021 recovery.
Turning to our financial results.
We are very pleased with our fourth-quarter results.
Our adjusted FFO of $0.81 per share and our funds available for distribution of $0.77 per share allow us to maintain our quarterly dividend of $0.67 per share.
The payout ratio is 83% of adjusted FFO and 87% of funds available for distribution.
Additionally, for the fourth quarter and in January, we collected virtually all of our contractual rents.
We continue to gather vaccine rollout data from our operators and can report the following.
As of January 31, based on 92% of our facilities reporting in, 95% of facilities have conducted or are scheduled within the next week for first-dose clinics.
The vaccination rate for residents is approximately 69%, and the vaccination rate for staff is approximately 36%.
For most facilities, the second-dose clinic, which occurs 21 days after the first dose, will also incorporate a new day of first doses for those residents or staff who are not available or who are not prepared for the vaccination during the first round clinic.
We are very pleased to have established a relationship with Brookdale via the senior housing facilities and related master lease that we have acquired from Healthpeak.
We believe that Brookdale is exceptionally well equipped to address the current COVID-19 environment and to prosper as we emerge from the pandemic.
They have an excellent leadership team; substantial liquidity to sustain and grow their operations; low rate, long-dated secured debt tied to their owned assets; and valuable integrated home health and hospice companies.
We look forward to working with the Brookdale team and possibly identifying new opportunities where we might partner in the future.
Turning to our financials for the fourth quarter.
Our NAREIT FFO on a diluted basis was $173 million or $0.73 per share for the quarter as compared to $176 million or $0.77 per diluted share for the fourth quarter of 2019.
Revenue for the fourth quarter was approximately $264 million before adjusting for the nonrecurring writedown of straight-line receivables as well as other nonrecurring favorable revenue items.
Revenue for the quarter included approximately $12 million of noncash revenue.
We collected over 99% of our contractual rent, mortgage and interest payments for the fourth quarter and for January as well, excluding, of course, rental payments due from Daybreak, which is under a forbearance agreement and has not been making payments.
Our G&A expense was $10.4 million for the fourth quarter of 2020, in line with our estimated quarterly G&A expense of between $9.5 million and $10.5 million.
Interest expense for the quarter was $56 million, with a $4 million increase over the third quarter of 2020, primarily resulting from our October issuance of $700 million of 3.375% senior notes due February 2031.
Our note issuance was leverage-neutral as proceeds were used to repay LIBOR-based borrowings, some of which were hedged.
As a result of the repayments, we terminated $225 million of LIBOR-based swaps and recorded approximately $12 million in early extinguishment of debt.
Our balance sheet remains strong.
Throughout 2020, we continued to take steps to improve our liquidity.
Our October bond issuance repaid $683 million of short-term LIBOR-based borrowings.
borrowings outstanding under our $1.25 billion credit facility and had approximately $163 million in cash and cash equivalents.
We have no bond maturities until August 2023.
In March 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of approximately 0.87%.
These swaps expire in 2024 and provide us with significant cost certainty when we refinance our 2023 bond maturity.
In the fourth quarter, we issued 4.2 million shares of common stock through our ATM program, generating $151 million in net cash proceeds.
But we believe our actions to date provide us with flexibility to weather a potential prolonged impact COVID-19 on our business.
It also provides significant liquidity to fund potential acquisitions.
In 2021, we will continue to evaluate any additional steps that may be necessary to maintain adequate liquidity.
At December 31, approximately 95% of our $5.2 billion in debt was fixed and our funded debt to adjusted annualized EBITDA was five times.
Our fixed charge coverage ratio was 4.3 times.
When adjusting to include a full quarter of contractual revenue for new investments completed during the quarter as well as eliminating revenue related to assets sold in the quarter, our pro forma leverage would be roughly 4.99 times.
It's important to note, we have lowered our leverage five consecutive quarters with the goal of maintaining our leverage at less than five times.
As of December 31, 2020, Omega had an operating asset portfolio of 949 facilities with over 95,000 operating beds.
These facilities were spread across 69 third-party operators and located within 39 states and the United Kingdom.
Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio increased during the third quarter of 2020 to 1.87 times and 1.51 times, respectively, versus 1.84 times and 1.48 times, respectively, for the trailing 12-month period ended June 30, 2020.
These numbers were negatively impacted by a number of external factors as a direct result of COVID-19, including a significant drop in patient census and a dramatic spike in operating expenses, particularly labor costs and personal protective equipment, or PPE.
These negative results were more than offset in the second and third quarters by the positive impact of federal stimulus funds, which were distributed in accordance with the CARES Act.
During the third quarter, our operators cumulatively recorded approximately $102 million in federal stimulus funds as compared to approximately $175 million recorded during the second quarter.
Trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the third quarter of 2020 to 1.53 times and 1.18 times, respectively, as compared to 1.61 times and 1.26 times, respectively, for the second quarter when excluding the benefit of any federal stimulus funds.
EBITDAR coverage for the stand-alone quarter ended September 30, 2020 for our core portfolio was 1.44 times, including federal stimulus funds, and 0.97 times excluding the $102 million of federal stimulus funds versus 1.87 times and 1.05 times with and without the $175 million in federal stimulus funds, respectively, for the second quarter.
Overall, operator performance continued to be significantly affected in the third and fourth quarters of 2020 due to the ongoing impact of COVID-19.
While the third quarter and the start of the fourth quarter of 2020 saw moderating of new COVID cases, the spike in outbreaks reported nationwide during the holiday season did not spare nursing home residents and employees late in the fourth quarter.
Cumulative occupancy percentage for our core portfolio were at a pre-COVID rate of 84% in January of 2020, flattened out to around 75% throughout the fall months and subsequently dropped to 72.9% in December of 2020.
Based upon what Omega has received in terms of occupancy reporting for January to date, occupancy has continued to decline slightly, averaging approximately 72.1%.
We are cautiously optimistic that the rollout of vaccines, which began in late December of 2020 and has continued in earnest throughout January 2021, will provide an important catalyst for improving occupancy statistics as infection rates decline and visitation restrictions begin to ease.
In addition to COVID's negative effect on occupancy, the virus has also caused a significant spike in operating expenses, particularly labor costs and PPE.
Per patient day operating expenses for our core portfolio increased approximately $40 from pre-COVID levels in January 2020 to November 2020; the latest stats available.
Turning to new investments.
On November 1, 2020, Omega completed a $78 million purchase lease transaction for 7 skilled nursing facilities in Virginia.
The facilities were added to an existing operator's master lease for an initial cash yield of 9.5% with 2% annual escalators.
New investments for the year ended December 31, 2020 totaled approximately $260 million including $113 million in capital expenditures.
Turning to subsequent events.
As mentioned by Taylor, on January 20, 2021, Omega closed on the purchase of 24 senior housing facilities from Healthpeak for $510 million.
The acquisition included the assumption of an in-place master lease with Brookdale Senior Living, the leading operator of senior living communities throughout the United States.
The portfolio primarily consists of assisted living, independent living and memory care facilities with a total of 2,552 units located across 11 states.
The facilities will generate approximately $43.5 million in contractual 2021 cash rent with annual escalators of 2.4%.
During the fourth quarter of 2020, Omega divested 16 facilities for total proceeds of $64 million.
For the year ended December 31, 2020, Omega strategically divested a total of 35 facilities for $181 million.
Last, but certainly not least, I would once again like to recognize and applaud our operators' tireless, selfless efforts, particularly those employees on the front line.
Since our last earnings call, the $175 billion Provider Relief Fund was increased by $3 billion as a result of the $900 billion stimulus package signed in December 2020.
Of that fund, approximately $23 billion remains unallocated.
In terms of previously allocated funds still in the process of being paid out, as previously mentioned, on July 22, a Medicare-certified nursing home targeted infection control fund of $5 billion was announced.
$2.5 billion was paid out in August and an additional $2 billion was set up as a quality incentive payment program with payments based on a facility's ability to maintain a rate of infection below the county infection rate and a death rate below a national performance threshold for nursing home residents.
Payments are made based on monthly performance from September through December.
The September payout was made in October at $330 million, with the October payout being made in December at $530 million and the November payout just starting to go out last week.
With respect to the Phase 2 general distribution announced in September, due to the fact that HHS hadn't previously tracked assisted living facilities, a lengthy tax identification process delayed the payout for many assisted living providers to December and early January.
This allocation was an application process for up to 2% of 2019 patient revenues from Medicaid, children's health insurance program and assisted living providers.
The $20 billion Phase 3 general distribution announced in October was increased to $24.5 billion once all applications were received and reviewed.
Available to all healthcare providers previously eligible for payouts, both SNFs and ALFs were able to apply.
$10 billion was paid out in December with the remainder expected to be paid out within the coming weeks.
Payouts were based on the change in net operating income related to patient care for the first half of 2020 as compared to the first half of 2019, with a stated payout of 88%.
That said, all previous federal stimulus money received offset these numbers, bringing that percentage down substantially for many.
In addition to financial support, with COVID cases on the rise in the latter part of the year and the corresponding increased testing requirements, the federal government's efforts to provide more cost-effective testing capabilities through the distribution of rapid antigen test has been critical.
Supplies provided by the government, coupled with easier and cheaper access to testing supplies, has provided for quicker turnaround of test results, and therefore, the ability to respond timelier to outbreaks.
It cannot be stressed enough how crucial the government support thus far has been to the long-term care industry during this turbulent time.
However, even post vaccine rollout, the effects of this pandemic will be long-lasting.
We are hopeful that the new administration will recognize the urgency of this matter and will quickly expand on support efforts to this vital industry.
In conjunction with Maplewood Senior Living, we have completed work on our ALF memory care high-rise at Second Avenue in 93rd Street, Manhattan.
The opening of the project is pending licensure by the New York State Department of Health.
We are in ongoing communication with the DOH and understand that while they are conducting licensure surveys, and it is reasonable to expect ours shortly, the challenges of the ongoing pandemic is understandably forcing a reallocation of resources.
The final project cost is expected to be approximately $310 million.
The COVID-19 pandemic posed a certain challenges unique to senior housing operators, including increased costs, the challenges of managing COVID-positive patients and meaningful practical limitations on admissions.
While they very much appreciate the help they have received, private pay senior housing operators have not seen the level of government support provided to other areas of senior care.
We saw challenges to our senior housing occupancy throughout the third quarter, with variations tied to when and where COVID outbreaks were encountered.
However, we have seen evidence of stabilization and strengthening of census in certain markets.
By example, our Maplewood portfolio, which is concentrated in the early affected Metro New York and Boston markets, saw meaningful census erosion early in the pandemic, with second quarter census hitting a low point of 80.4% in early June.
That said, their portfolio occupancy had returned to 84.5% at the end of August and increased further to 85.6% in the month of November.
We find this resiliency and occupancy to be encouraging, but still have a way to go before the pandemic-driven top and bottom line risk to our ALF operators is behind us.
Including the land and CIP at the end of the fourth quarter, Omega's senior housing portfolio totaled $1.6 billion of investment on our balance sheet.
This total does not include our recent Brookdale investment, which closed after year end.
All of our senior housing assets are in triple-net master leases.
and U.K. As expected, this portfolio on a stand-alone basis had its trailing 12-month EBITDAR lease coverage fall four basis points to 1.12 times in the third quarter of 2020.
With COVID outbreaks affecting different markets at different times, it is reasonable to think that coverage may see additional downward pressure during the course of the pandemic before we see a rebound.
While we remain constructive about the prospects of senior housing, the COVID-19 outbreak has warranted a far more selective approach to ground-up development.
While we make further progress on our existing ongoing developments, we continue to work with our operators on strategic reinvestment in our existing assets.
We invested $19.4 million in the fourth quarter in new construction and strategic reinvestment.
$12.8 million of this investment is predominantly related to our active construction projects.
The remaining $6.6 million of this investment was related to our ongoing portfolio capex reinvestment program. | compname reports q4 adjusted ffo per share of $0.81.
q4 adjusted ffo per share $0.81.
q4 ffo per share $0.73. |
Joining us on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; Alan Curtis, Chief Financial Officer; and Marvin Migura, our Senior Vice President.
Our comments today also include non-GAAP financial measures.
What a difference a quarter makes?
We began 2020 with the expectation of marginal growth and improving business fundamentals across all of our segments and then the COVID-19 pandemic erupted and fueled the further deterioration of the crude oil market fundamentals, as well as the theme park business.
This deterioration has brought about swift changes to our customer spending plans that will negatively affect our businesses as long as these conditions persist.
As a result, we're taking decisive action to reduce costs in order to drive financial performance in this environment.
With the continuing threat and uncertainty around COVID-19, Oceaneering is actively taking steps to support the safety and well-being of our employees and their families, our customers, and the communities where we live and work.
We've implemented preventative measures and developed corporate and regional response plans based on guidance received from the World Health Organization, Centers for Disease Control and Prevention, International SOS, and our corporate medical advisor.
Our goal is to minimize exposure and prevent infection, while ensuring the continued support of our customers' operations.
Now for our results.
For the first quarter, we reported a net loss of $368 million or negative $3.71 per share on revenue of $537 million.
These results included the impact of $393 million of pre-tax adjustments, including $303 million associated with goodwill impairments, $76.1 million of asset impairments and write-offs, $13.7 million in restructuring costs and foreign exchange losses recognized during the quarter.
Adjusted net income was $3.5 million or $0.04 per share.
Despite significant global challenges, we are pleased that our first quarter adjusted results exceeded expectations.
The key factor in achieving these results was better-than-anticipated performance within our energy-focused businesses, which included the benefit from cost reduction measures implemented during the fourth quarter of 2019 and the first quarter of 2020.
Each of our operating segments generated positive adjusted operating results and positive adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA.
And our consolidated adjusted EBITDA of $51.6 million surpassed both our forecast and published consensus estimates.
Now let's look at our business operations by segment for the first quarter of 2020.
Compared to the fourth quarter of 2019, ROV average revenue per day on hire decreased 4% on flat days on hire.
As expected, ongoing cost control measures and efficiencies, along with fewer installations and mobilizations, resulted in improved adjusted operating performance and adjusted EBITDA.
Adjusted EBITDA margin increased to 32% and ROV utilization improved slightly to 65%.
Keep in mind that although reported fourth quarter 2019 utilization was 58%, it did not include the impact of the 30 ROVs that were retired at the end of the fourth quarter.
For comparison, pro forma fourth quarter utilization, reflecting these vehicles as if they had been retired at the end of -- at the beginning of the quarter, was 64%.
During the first quarter, our fleet size remained at 250 vehicles, the same as year-end 2019.
Our fleet use during the first quarter was 68% in drill support and 30% in vessel-based activity compared to 64% and 36% respectively for the fourth quarter of 2019.
At the end of March, we had ROV contracts on 95 of the 153 floating rigs under contract, resulting in a drill support market share of 62%.
Turning to Subsea Products, first quarter 2020 adjusted operating results exceeded expectations and were comparable to the results of the fourth quarter of 2019.
Manufactured products revenue and operating results met expectations.
Service and rental results outperformed largely due to higher activity in Norway and West Africa.
Our Subsea Products revenue mix for the quarter was 74% in manufactured products and 26% in service and rental compared to a 72-28 split, respectively in the fourth quarter.
Our Subsea Products backlog at March 31, 2020 was $528 million compared to $630 million at December 31, 2019.
Reflecting the higher level of throughput and lower level of market activity, our book-to-bill ratio for the first quarter was 0.5.
Subsea Projects sequential adjusted operating results declined on lower revenue as a result of seasonally lower vessel and survey activity.
Asset Integrity adjusted operating results improved, benefiting from cost reduction activities undertaken in the fourth quarter of 2019 and the first quarter of 2020.
For our non-energy segment, Advanced Technologies, our first quarter 2020 adjusted operating result was sequentially flat.
Adverse impacts of COVID-19 to our entertainment theme park business results offset gains from our government service businesses.
As compared to the fourth quarter of 2019, unallocated expenses declined during the first quarter of 2020 as a result of lower accruals for incentive-based compensation.
During the first quarter, we used $32.2 million of net cash in our operating activities and $27.2 million of cash for maintenance and growth capital expenditures.
These two items represented the largest contributors to a $66.2 million cash decrease during the quarter.
As anticipated, our cash balance decreased during the quarter, primarily as a result of a difference in timing associated with customer progress, milestone cash collections, and payments to vendors on several large contracts.
Additionally, during the quarter, we disbursed accrued employee incentive payments related to attainment of specific performance goals in prior periods.
At the end of the quarter, we had $307 million in cash and cash equivalents, no borrowings under our $500 million revolving credit facility, and no loan maturities until November 2024.
As a clarification, our revolver debt-to-cap covenant is based on adjusted cap, not equity on the balance sheet.
To determine adjusted cap, we get to add back all previously recognized impairments.
Based on our determination, as of March 31, we could draw down the entire $500 million and still be in compliance.
Moving on to our second quarter and full-year outlook.
We are not providing operating or EBITDA guidance for the second quarter and full year of 2020 due to the lack of visibility in the majority of our businesses.
Many of the markets we serve are being profoundly affected by the effects of and the associated responses to COVID-19, as well as the significant reductions in our oil and gas customer spending as a result of the lower crude oil price environment.
We maintain our guidance that unallocated expenses are forecasted to be in the mid -- excuse me, in the high-$20 million range per quarter.
We are further revising our capital expenditure guidance by lowering the range to $45 million to $65 million and 2020 cash tax payments guidance by lowering range to $30 million to $35 million.
Directionally, we expect decreased demand for our services and products within our energy businesses.
We anticipate further COVID-19-related impacts to our entertainment business.
Theme park operators are dealing with significant challenges, including the reduction in revenue as a result of closed facilities and the uncertain timing of their reopenings.
Our government-supported businesses, which represented approximately 16% of our consolidated 2019 revenue, are not closely tied to the crude oil or public entertainment markets, so contracting activities should be relatively unaffected, absent any COVID-19-related delays.
Now turning to our liquidity and balance sheet.
In any environment and especially during this complex time, the top priority is to preserve our liquidity and balance sheet.
We are taking decisive action to reduce costs by resizing and restructuring our businesses and leaning our operations in this evolving energy environment.
We are currently targeting a reduction of annualized expenses in the range of $125 million to $160 million by the end of 2020, inclusive of $35 million to $40 million of reduced depreciation expense.
Cost reduction actions being taken include efficiency-enabling projects are for some process improvements and rationalizing facilities, which include increasing focus on remote operations to reduce the number of people working offshore, the consolidation, reduction, or elimination of facilities to reduce lease and operating expenses, and driving our quality tenants throughout the organization to eliminate non-value-added cost.
Simplification of our operating structure.
We've recently and will continue to take actions to simplify the way in which Oceaneering does business by better aligning like-for-like activities to leverage people, assets, and facilities to perform services and provide products in a more efficient way.
Actions taken to-date include permanent headcount reductions and elimination of management layers and [Phonetic] compensation reductions.
The base salaries for our senior leadership have been reduced by 15% for myself, 10% for all of our Senior Vice President positions, and 7.5% for our Vice President positions.
In addition, we have reduced the Company match on our 401(k) plan by 50% and reduced the expected payouts under our short-term and long-term incentive plans.
Other cost reduction activities being undertaken include implementing supply chain savings, where we can bundle purchases across business lines to achieve lower pricing and renegotiate contracts with vendors in light of current market conditions.
We're also taking steps to eliminate non-productive assets, which will benefit us with lower inventories and lower carrying costs.
In addition to these categories, we also expect to see a benefit from an estimated $35 million to $40 million reduction in depreciation cost as compared to 2019.
Although this is a non-cash expense, it is worthy of highlighting because it will benefit our operating performance and position us to return to profitability sooner.
Since launching this effort, approximately $70 million of annualized cost reductions have been initiated, and that's net of depreciation expense.
Additional savings are expected to be achieved throughout the remainder of the year, with the majority occurring in the second and third quarters.
We expect the cash costs associated with these actions to be around $15 million.
Over the past 25 years, Marvin has served as our Chief Financial Officer, Executive Vice President overseeing all of Oceaneering support functions, and over the past several years as a strategic advisor to me and our executive management team.
And did you know that Marvin has not missed one quarterly earnings call during his 25 years?
Marvin's extensive knowledge of the Company, his ability to focus on the critical issues at hand, [Technical Issues], common sense, business guidance, and sense of humor have made him an invaluable asset to Oceaneering.
Best wishes for your retirement, Marvin.
So in summary, I'm pleased with our first quarter results.
I believe these results show that Oceaneering had successfully adapted to the market realities in place at the beginning of the quarter.
Clearly, significant changes have occurred since then that have drastically changed the anticipated activity and pricing for our services and products moving forward.
While there will undoubtedly be many challenges presented as a result of these new realities, I'm confident that with the actions already under way, the quality of our services and products and the health of our balance sheet, we will be successful in adapting and succeeding in this changing market environment.
We appreciate everyone's continued interest in Oceaneering and we'll now be happy to take any questions you may have. | oceaneering international q1 adjusted earnings per share $0.04.
q1 adjusted earnings per share $0.04.
q1 loss per share $3.71.
q1 revenue $537 million versus refinitiv ibes estimate of $537.4 million.
for q2 and full year of 2020, we are not providing operating or ebitda guidance.
maintain our guidance that unallocated expenses are forecast to be in high-$20 million range per quarter.
revising q2 capital expenditures guidance by lowering range to $45 million to $65 million.
still believe that we should generate positive free cash flow during 2020.
currently targeting a reduction of annualized expenses in range of $125 million to $160 million by end of 2020. |
Joining us on the call today are Rod Larson, president and chief executive officer, who will be providing our prepared comments; and Alan Curtis, senior vice president and chief financial officer.
Our comments today also include non-GAAP financial measures.
We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021.
These results reflect a marked sequential increase in activity as four out of five of our operating segments delivered a revenue increase on average of more than 19%.
As announced yesterday, we are raising our EBITDA guidance range to 200 to $225 million for 2021.
And to avoid any doubt or confusion, we are not changing our free cash flow guidance.
The confidence in increasing our guidance range stems from our strong first-half 2021 financial performance, the increase in demand, energy demand as a result of the increasing number of COVID vaccinations allowing for an easing of restrictions.
The OPEC Plus production discipline yielding supportive commodity prices and the positive trend in the global economic recovery.
Confidence is returning to the energy services industry and especially to those companies that can help their customers with carbon reduction goals.
This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpin our general expectation for increased activity levels over the next several years.
Now I'll focus my comments on our performance for the second quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2021, and Oceaneering's improved consolidated 2021 outlook, including a higher adjusted EBITDA guidance range, continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position.
Now to our second-quarter summary results.
We were very pleased with our adjusted operating results.
For the quarter, we generated adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA of $60.6 million, exceeding consensus estimates.
During the second quarter, we generated $50.5 million in cash from operating activities and used 12.6 million for maintenance and growth in capital expenditures resulting in free cash flow generation of $37.9 million.
In addition, during the quarter, we retired $30.5 million of our 2024 senior notes through open market repurchases.
In total, our cash position increased by $13.3 million, resulting in a cash balance of $456 million at the end of the second quarter.
Liquidity remains strong with no borrowings against our $500 million revolving credit facility and no loan maturities until November of 2024.
The positive operating results were attributable to a seasonally influenced 14% sequential growth in revenue, complemented by continued operating discipline and incremental efficiency gains.
As expected, compared to the first quarter of 2021, our energy segments in aggregate posted double-digit revenue growth and improved adjusted operating results in the second quarter.
Our Aerospace and Defense Technologies or ADTech segment delivered sequential growth and solid adjusted operating results.
Sequentially, consolidated adjusted operating results increased by $9.1 million with all of our operating segments generating positive adjusted operating results and EBITDA.
Now let's look at our business operations by segment for the second quarter of 2021.
Subsea Robotics or SSR, adjusted operating income improved on nearly 20% higher revenue.
Our SSR quarterly adjusted EBITDA margin of 31% was consistent with recent quarters as pricing remains stable.
Operating activity in our SSR segment resulted in sequentially higher ROV days and related tooling activity and higher survey activity.
The SSR revenue split was 80% from our remotely operated vehicles or ROV business and 20% from our combined tooling and survey businesses, compared to the 78-22 split, respectively, in the immediate prior quarter.
As we forecast sequential ROV days on hire increased on standard seasonality and recovering offshore activity.
With an increase in days for both drill support and vessel-based services, days on hire were 14,005, as compared to 11,887 during the first quarter.
Our fleet use was 58% in drill support and 42% in vessel-based services versus 64% and 36%, respectively, in the first quarter.
We maintained our fleet count at 250 ROV systems, and our second-quarter fleet utilization was 62%, up significantly from 53% in the first quarter.
During the second quarter, we retired five of our conventional world-class ROV systems and replace them with three upgraded conventional world-class systems and two Isurus world-class RV systems that are currently engaged in renewables work.
Average ROV revenue per day on hire of 8,056 was 2% higher than average ROV revenue per day on hire of $7,874 achieved during the first quarter.
At the end of June, we had ROV contracts on 73 of the 126 floating rigs under contract or 58% market share, which was flat with the quarter ending March 31st, 2021, when we had ROV contracts on 78 of the 105 floating rigs under contract.
Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%.
Turning to manufactured products.
Sequentially, our second-quarter 2021 adjusted operating income line on lower segment revenue.
Adjusted operating income margin decreased to 1% in the second quarter from 4% in the first quarter of 2021 as lower revenue increased the ability to leverage our cost base.
Activity in our mobility solutions or nonenergy business remained muted during the second quarter of 2021.
Our manufactured products backlog on June 30th, 2021, was $315 million improving on our first-quarter backlog of $248 million.
Our book-to-bill ratio was 1.3 for the six months ended June 30th, 2021, and was 0.8 for the trailing 12 months.
Offshore projects group or OPG's second-quarter 2021 adjusted operating income declined as compared to the first quarter of 2021 despite a meaningful increase in revenue.
Revenue benefited from ongoing field activities in several projects in Angola and a seasonal increase in intervention, maintenance, and repair or IMR work in the Gulf of Mexico.
The sequential decline in adjusted operating income margin from 10% in the first quarter of 2021 to 7% in the second quarter of 2021 and was primarily due to unplanned downtime and related costs associated with the Angola riserless light well intervention project, which was partially offset by higher IMR activities in the Gulf of Mexico.
Integrity management and digital solutions or IMDS, sequential adjusted operating income was higher on a 19% increase in revenue, higher seasonal activity and the start-up of several new multiyear projects contributed to the revenue increase, continuing efficiency improvements, including utilization of field personnel resulted in adjusted operating income margin increasing to 7% in the second quarter of 2021 from 5% in the first quarter of 2021.
Our ADTech second-quarter 2021 adjusted operating income improved from the first quarter of 2021 on a 20% increase in revenue.
Adjusted operating income margin of 18% was better than forecast due to project mix and favorable rate base adjustments.
Adjusted unallocated expenses of $30.3 million was slightly lower sequentially due to lower expense accruals related to incentive-based compensation forfeitures.
Now I'll address our outlook for the third quarter of 2021.
We are projecting a decline in our consolidated adjusted operating results on moderately lower revenues with adjusted EBITDA in the range of 50 million to $55 million.
We expect commodity prices to support good activity levels in our energy segments, particularly for short-cycle work.
For the third quarter of 2021 as compared to the second quarter, we expect relatively flat adjusted operating profitability in our energy segments to be more than offset by lower than -- by lower ADTech adjusted operating results and higher unallocated expenses.
For our third-quarter 2021 operations by segment as compared to the second quarter of 2021, for SSR, we are projecting relatively flat activity and adjusted operating profitability in our ROV, survey and tooling businesses with similar ROV utilization as compared to the second quarter.
SSR adjusted EBITDA margin is anticipated to remain consistent with the prior several quarters.
For manufactured products, we anticipate relatively flat revenue and adjusted operating profitability.
Board activity continues to look encouraging in our energy products businesses.
However, activity continues to lag in our mobility solutions businesses.
For OPG, we forecast lower revenue and relatively flat adjusted operating results.
We expect the Gulf of Mexico IMR activity to remain at a relatively high seasonal level through the third quarter.
The riserless well intervention project and field support contract in Angola are expected to continue for a portion of the third quarter.
Our expectations for relatively flat adjusted operating results takes into account the above-described levels of activity and improved uptime as compared to the second quarter.
For IMDS, we expect both revenue and adjusted operating results to remain relatively consistent for the second quarter -- with the second quarter of 2021.
For ADTech, we forecast lower revenue and lower adjusted operating results due to a change in project mix as compared to the second quarter.
Unallocated expenses are expected to be in the mid-$30 million range due primarily to increased information technology infrastructure costs and normalized accruals for incentive-based compensation.
Directionally, for our full-year 2021 operations by segment as compared to 2020, for SSR, we expect adjusted operating results to improve on slightly higher revenue.
Our ROV days on hire are projected to remain relatively flat year-over-year with minor shifts in geographic mix.
Results for tooling-based services are expected to be flat with activity level generally following ROV days on hire.
Survey results are expected to improve on growing international activity.
SSR forecasted adjusted EBITDA margin is expected to remain relatively consistent with what we achieved in 2020.
For ROVs, we expect our 2021 service mix to remain about the same as the 2020 mix of 62% drill support and 38% vessel-based services with higher vessel-based percentages during the seasonally higher second and third quarters.
We estimate overall ROV fleet utilization to be in the mid- to high 50% range, again, with higher seasonal activity during the second and third quarters.
We continue to forecast that our market share for the drill support market will remain around 60% for the foreseeable future.
As of June 30th, 2021, there were approximately 28 Oceaneering ROVs onboard 37 drilling rigs with contract terms expiring by year-end.
During the same period, we expect 33 of our ROEs on 40 floating rigs to begin new contracts.
For manufactured products, we forecast lower operating results due to the long cycle nature of this business and reduced customer capital commitments during 2020.
Operating results in 2020 benefited from contracts awarded in 2019 that allowed for beneficial cost absorption through the year.
In 2021, we expected the improved order intake seen during the first half of the year will drive increased activity in the fourth quarter.
Our nonenergy mobility solutions businesses continue to see reduced activity and order intake, however, is building that we will see order intake improvement in 2022.
We forecast that our operating income margins will be in the low to mid-single-digit range for the year the segment book-to-bill ratio will be in the range of 1.1 to 1.5 for the full year.
OPG, we forecast a meaningful annual improvement in adjusted operating results on higher revenue.
Good vessel utilization is expected to continue through the third quarter with operators remaining active with IMR work in the Gulf of Mexico.
However, we also expect a typical seasonal decline in activity during the fourth quarter.
Our expectations for utilization are driven by the commodity pricing which remains supportive to short-cycle call-out work, which is the majority of the work performed in this segment.
Utilization of our vessels, both owned and chartered has improved to the point that may lead us to entering the spot charters on an as-needed basis this year.
For IMDS, we forecast improved operating results on higher revenue.
We expect second-half 2021 revenue to continue to benefit from incremental multiyear contracts that began during the first half of 2021.
We forecast that our adjusted operating income margin will continue to improve through the end of the year as we continue to drive more efficiency in this business.
Adjusted operating margins are expected to average in the high single-digit range for the year.
For ADTech, we expect to improve adjusted operating results on increased revenue with an annual adjusted operating margin approximately the same as that achieved in 2020.
We continue to see good growth opportunities in all three of our primary ADTech business lines, defense subsea technologies, vessel modification and repair services, and space systems.
Our estimated organic capital expenditure total for 2021 remains between 50 and $70 million.
This includes approximately 35 to $40 million of maintenance capital expenditures and 15 to $30 million of capital expenditures.
We forecast our 2021 income tax payments to be in the range of 40 to $45 million.
We continue to expect $28 million in Cares Act tax refunds.
However, the timing of receipt of these payments, whether in 2021 or 2022 is uncertain.
Unallocated expenses are expected to average in the mid-$30 million range per quarter for the second half of 2021.
Now turning to our balance sheet.
Our net debt position improved during the second quarter as we repurchased $30.5 million of our 2024 senior notes, and we're able to build our cash balance by $13.3 million.
We had $456 million of cash and cash equivalents at the end of the second quarter.
We continue to expect free cash flow generated in 2021 will be in the excess of that generated in 2020.
We are well positioned to address the maturity of our 2024 senior notes and will continue to be opportunistic and proactive as to how and when we will address the remainder of this pending maturity.
And as a reminder, we continue to have our $500 million undrawn revolver available to us until November of 2021 and $450 million available until January 2023.
In summary, based on our first-half financial performance and expectations for the second half of 2021, we are raising our adjusted EBITDA guidance to a range of 200 to $225 million for the full year.
This confidence, despite ongoing uncertainties associated with COVID-19 stems from our strong first-half 2021 performance, positive client interactions support of oil price expectations, and growing backlog.
This, combined with an expected rebound in our mobility solutions businesses and continued growth in our government businesses underpin our general expectation for increased activity levels over the next several years.
Our focus continues to be on generating positive free cash flow in 2021, retaining and attracting top talent, addressing our 2024 debt maturity, maintaining financial flexibility, and growing our businesses by leveraging our technologies and capabilities into new markets.
We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you might have. | on a consolidated basis, we expect a sequential decline in q3 2021 results. |
With me on the call today are Rod Larson, president and chief executive officer, who will be providing our prepared comments; and Alan Curtis, senior vice president and chief financial officer.
Our comments today also include non-GAAP financial measures.
There's an old saying that says what doesn't kill you makes you stronger.
And after the events of last year, I feel Oceaneering is stronger on many fronts.
And I'm very proud of what we accomplished in 2020.
With all the challenges presented by the global COVID pandemic, including the crude oil demand destruction and resulting price collapse and the many challenges faced in protecting our workforce, while still satisfying our customer obligations, Oceaneering still delivered improved consolidated adjusted operating results and adjusted EBITDA as compared to the prior year.
We also generated meaningful free cash flow with our cash balance increasing by $78 million from $374 million at December 31, 2019, to $452 million at December 31, 2020.
Today, I'll focus my comments on our performance for the fourth quarter and full-year 2020, our market outlook for 2021, Oceaneering's consolidated 2021 outlook, including our expectation to generate positive free cash flow in excess of the amount generated in 2020, and EBITDA in the range of $160 million to $210 million and our business segment outlook for the full year and first quarter of 2021.
Now, moving to our results.
For the fourth quarter of 2020, we reported a net loss of $25 million or $0.25 per share on revenue of $424 million.
These results include the impact of $9.8 million for pre-tax adjustments associated with asset impairments and write-offs, restructuring and other expenses and foreign exchange losses recognized during the quarter, and $9.6 million of discreet tax adjustments.
Adjusted net income was $1.8 million or $0.02 per share.
We were pleased that our consolidated fourth-quarter adjusted earnings before interest taxes, depreciation, and amortization or adjusted EBITDA was $47.1 million and was sequentially higher than the third-quarter 2020 and exceeded both our guidance and consensus estimates.
Each of our five operating segments recorded sequential improvement and adjusted operating income and adjusted EBITDA despite lower revenue in three out of the five segments.
Fourth-quarter 2020 consolidated adjusted operating income of $9.6 million was the best quarterly performance in 2020 and $4 million higher than the third quarter.
We generated $104 million of cash from operating activities.
And after deducting $15 million in capital expenditures, our free cash flow was $89 million for the quarter.
As a result of good operating cash flow, working capital efficiencies, and capital expenditure discipline, our cash position increased by $93.2 million during the fourth quarter of 2020.
As of December 31, 2020, our cash balance stood at $452 million.
Now, let's look at our business operations by segment for the fourth quarter of 2020.
Subsea Robotics or SSR adjusted operating income improved sequentially on lower revenue.
Adjusted fourth-quarter operating results included recognition of approximately $3 million of cost-structure improvements achieved throughout 2020.
Consequently, our SSR quarterly adjusted EBITDA margin of 33% was better than expected up from the 31% achieved during the third quarter of 2020 and consistent with the margin achieved during the first nine months of 2020.
The revenue split between our remotely operated vehicle or ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 80% and 20% respectively compared to 82% and 18% split in the prior quarter.
As we had anticipated ROV days on hire declined as compared to the third quarter due to expected lower seasonal activity.
Our fleet utilization for the fourth quarter was 54% down from 59% in the third quarter and our days on hire declined for both drill support and vessel-based services.
Average ROV revenue per day on hire of $7,325 was 1% higher as compared to the third quarter.
Days on hire were 12,456 in the fourth quarter as compared to 13,601 in the third quarter.
We ended the quarter and the year just as we began with a fleet count of 250 ROV systems.
Our fourth-quarter fleet use was 60% in drill support and 40% for vessel-based activity as compared to 56% and 44% respectively during the third quarter.
At the end of December, we had ROV contracts on 75 of the 129 floating rigs under contract or 58%, a slight market share increase from September 30, 2020, when we had ROV contracts on 76 of the 133 floating rigs under contract or 57%.
Subject to quarterly variances, we continue to expect our drills support market share to generally approximate 60%.
Turning to manufactured products.
Our fourth-quarter 2020 adjusted operating income improved from the third quarter on lower segment revenue, which was adversely affected by supplier-related delays in our energy products businesses.
Adjusted operating income margin increased to 9% in the fourth quarter of 2020 from 5% in the third quarter of 2020 due primarily to favorable contract closeouts and supply chain savings.
The COVID-19 pandemic continued to dampen demand for our mobility solutions products during the fourth quarter of 2020.
Our manufactured products backlog at December 31, 2020, was $266 million, compared to our September 30, 2020 backlog of $318 million.
Our book to bill ratio was 0.4 for the full year of 2020, as compared with the trailing 12-month book to bill a 0.5 at September 30, 2020.
Offshore Projects Group or OPG, fourth-quarter 2020 adjusted operating income improved sequentially of lower revenue.
Revenue declined less than expected as the Gulf of Mexico experienced higher amounts of installation work and intervention maintenance and repair activities with customers having pushed work into the fourth quarter due to the several third-quarter 2020 hurricanes.
The sequential increase in adjusted operating income was due to better activity-based pricing in the Gulf of Mexico and continued costs improvement.
During the fourth quarter, engineering work continued on the Angola riserless light well intervention project.
For Integrity Management and Digital Solutions, or IMDS, fourth-quarter 2020 adjusted operating income was higher than third quarter of 2020 and a marginal increase in revenue.
The improvement in adjusted operating income was largely driven by more effective use of personnel, as we continue to transform how and where work is performed.
Our Aerospace and Defense Technologies or ADTech fourth-quarter 2020 adjusted operating income improved from the third quarter on higher revenue.
Adjusted operating income margin rose as a result of project mix and better-than-expected performance in our Subsea Defense Technologies business.
Unallocated expenses were higher primarily due to increased incentive compensation accruals related to better fourth-quarter operating and financial performance.
Now, I'll turn my focus to our year-over-year results of 2020 compared to 2019.
For the full-year 2020, Oceaneering reported a net loss of $497 million or $5.01 per share on revenue of $1.8 billion.
Adjusted net loss was $26.5 million or $0.27 per share reflecting the impact of $481 million of pre-tax adjustments, primarily $344 million associated with goodwill impairment and $102 million of asset impairments.
Right now, it's in write-offs recognized during the year.
This compared to a 2019 net loss of $348 million or $3.52 per share on revenue of $2 billion and adjusted net loss of $82.6 million or $0.84 per share.
For the year, activity levels and operating performance within our energy segments were lower than originally projected for 2020.
The COVID-19 pandemic negatively impacted operator investments in oil and gas projects due to a decline in crude oil demand and pricing and entertainment business spending due to limited theme park attendants.
Activity levels and performance within our ADTech segment met expectations for the year.
Compared to 2019, our 2020 consolidated revenue declined 11% to $1.8 billion with revenue decreases in each of our four energy segments being partially offset by the revenue increase in ADTech.
ADTech's contribution to our consolidated results continues to grow representing 19% of consolidated revenue in 2020 as compared to 16% in 2019.
Despite the headwinds of lower activity in our energy segments consolidated 2020 adjusted operating results and adjusted EBITDA improved by $59.6 million and $19.5 million respectively, led by our manufactured products and ADTech segments.
In 2020, each of our operating segments with the exception of OPG contributed positive adjusted operating income, and all our operating segments contributed positive adjusted EBITDA.
2020 operating performance benefited considerably from the cost improvement measures recognized during the year.
We generated $137 million in cash flow from operations and invested $61 million in capital expenditures, resulting in free cash flow of $76 million.
We ended the year with $452 million in cash.
In 2020, we continue to adapt to the challenges posed in our markets as we dealt with the significant challenges presented by the COVID-19 pandemic by establishing and implementing protocols that have allowed us to protect personnel and customers while delivering on our promises.
We implemented a cost and process improvement program and enhanced the performance of our businesses.
This program targeted the removal of $125 million to $160 million of costs, including depreciation.
Some examples of these efforts are efficiency enabling projects, which some may describe as process improvements, rationalizing facilities, restructuring our operating segments to better leverage common attributes, thereby enabling improved productivity and how and where work is performed, initiating supply chain savings, and eliminating nonproductive assets.
Through the end of 2020, we've implemented improvements that put us on the high end of that range.
The majority of these reductions are structural in nature and are expected to benefit our results in 2021 and beyond.
We maintained our commitment to capital discipline by reducing capital expenditures to $61 million as compared to $148 million in 2019 and we maintain focus on our core values.
We're pleased with the notable achievements accomplished during 2020.
We achieved significant improvement in our IMDS business with adjusted operating results, improving by almost $10 million as compared to 2019.
With over $250 million in contract awards during the fourth quarter of 2020 and early 2021, 45% of which is incremental business, this segment is positioned for growth in 2021.
Our Subsea Robotics business, a recognized leader in world-class ROV services secured more than $225 million of contracts during the fourth quarter of 2020.
Our ADTech business met its original performance targets created at the beginning of 2020 before the COVID-19 pandemic.
The business also recorded several important incremental contract wins, including partnering with Dynetics to support their design of the Human Lunar Landing System for NASA and a contract to operate and maintain the U.S. Navy Submarine Rescue systems worth up to $119 million assuming annual renewals over a five-year period.
We maintained our commitment and focus on safety.
The team remained very focused on our life-saving rules, identifying high hazard tasks, and developing engineered solutions to mitigate risks.
Our total recordable incident rate or TRIR of 0.3% for 2020 is a record low for Oceaneering.
The following financial metrics improved in 2020.
EBITDA of $184 million surpassed the $165 million generated in 2019.
Positive free cash flow of $76 million surpassed the $10 million generated in 2019.
Cash increased to $452 million and consolidated adjusted EBITDA margin of 10% surpassed the 8% margin achieved in 2019, despite an 11% decrease in revenue.
We continue to make good progress on our sustainability efforts or environmental, social, and governance initiatives.
From an environmental perspective, we continue to advance our capabilities as a technology delivery company to help our customers meet their reduced emission goals.
We continue the development of clean energy technologies to assist our customers in mitigating carbon emissions.
These initiatives include our Liberty, Isurus, and Freedom ROVs.
We also continue implementing measures to reduce the amount of greenhouse gases emitted from our own operations, including facility consolidations and our employee remote work options, as well as increased recycling efforts.
From a social perspective, we continue to explore new ways to make positive contributions in the communities where we operate and to increase workforce diversity within the company.
During the year, we created Diversity and Inclusion Council to focus on implementing new initiatives that will further diversify our global workforce.
We are leveraging Employee Resource Groups or ERGs, including Oceaneering women's network and our recently launched Oceaneering veterans' network to foster a diverse and inclusive workplace.
From a governance perspective, we are taking action at the board level as well.
We recently announced the addition of two new board members, which expands the diversity of the board while adding new skill sets and perspectives that are crucial as Oceaneering focuses on energy transition strategies.
We also formalized our ESG reporting through our boards nominating and Corporate Governance Committee.
During 2020, Oceaneering filed its first sustainability report, which is posted on our website using the disclosure methodology outlined by the Sustainability Accounting Standards Board or SASB.
Oceaneering continues to hold an ESG index A rating with MSCI.
Now, turning to our 2021 outlook for the markets we serve.
Coming into the year, most analysts and research pointed to continued headwinds for the offshore oil and gas market due to the low level of project sanctioning in 2020 and continued uncertainty surrounding COVID-19.
With the opex plus actions taken at the very beginning of 2021 and growing optimism associated with numerous vaccine approvals, many analysts and energy researchers are now forecasting Brent pricing to stabilize in the $55 to $60 per barrel range for 2021 and longer-term pricing to be in the $50 to $70 per barrel range.
We expect Brent pricing in the $55 to $65 per barrel range will support reasonable levels of IMR activity in 2021.
Similarly, we believe that longer-term Brent pricing forecast of $50 to $70 per barrel will support increased offshore project sanctioning activity in 2021.
Analysts and research service projections for other key metrics we track also support these expectations.
Analyst data suggests that the floating rig count has stabilized and throughout 2021 will remain close to the year-end 2020 levels of approximately 130 contracted rigs.
There were 123 Tree Awards in 2020 and raise that forecasts a modest recovery to around 200 in 2021 and back into the 300 range in 2022, raise that also forecast Tree Installations of 273 in 2021, which approaches the 2020 total of 299.
Also, according to raise did offer projects with an aggregate value of approximately $46 billion were sanctioned in 2020, a 53% decrease from 2019.
Sanctioning levels are expected to increase in 2021 to around $55 billion and return to 2019 levels of around $100 billion in 2022.
Raise that forecast global installed offshore wind capacity to increase by 11.8 gigawatts by in 2021, 37% over 2020.
Our entertainment business will continue to innovate as pent-up demand is expected to grow theme park attendance to pre-pandemic levels by 2022.
And finally, government-related markets we serve are expected to remain relatively stable with continued modest growth for the foreseeable future.
Now, to our 2021 consolidated outlook for Oceaneering.
We anticipate our full-year 2021 operations to yield positive free cash flow in excess of the amount generated in 2020 and the midpoint of our consolidated adjusted EBITDA range to approximate 2020 consolidated adjusted EBITDA.
Based on year-end 2020 backlog and anticipated order intake, we forecast generally flat consolidated revenue with higher revenue in AdTech and IMDS to offset substantially lower revenue from our manufactured product segment.
We forecast relatively flat revenue in our SSR and OPG segments.
These projections assume no significant incremental COVID-19 impacts and generally stable oil and gas prices.
For the year, we anticipate generating $160 million to $210 million of adjusted EBITDA with positive operating income and adjusted EBITDA contributions from each of our operating segments.
Apart from seasonality, we view pricing and margins in the current energy markets to be stable.
We forecast improved annual operating results in our SSR, OPG, IMDS, and AdTech segments and lower operating results in our manufactured products segment.
Our liquidity position at the beginning of 2021 remains robust with $452 million of cash and an undrawn $500 million revolver available until October 2021, and thereafter $450 million available until January 2023.
We expect to further strengthen this position in 2021 by generating positive free cash flow in excess of the amounts generated in 2020.
As has been the case over the past several years, it is our intent to continue to strengthen our balance sheet to ensure that we are well-positioned to deal with our $500 million bond maturity in November 2024.
For 2021, we expect our organic capital expenditures to total between $50 million and $70 million.
This includes approximately $35 million to $40 million of maintenance capital expenditures and $15 million to $30 million of growth capital expenditures.
We continue to closely scrutinize our maintenance and growth capital expenditures focusing on opportunities that will provide near-term revenue, cash flow, and return.
We also continue to invest in new, more efficient technologies that will help our customers and meeting their goals to produce the cleanest safest barrels to help meet their carbon-neutral goals.
In 2021, interest expense, net of interest income is expected to be approximately $40 million and our cash tax payments are expected to be in the range of $35 million to $40 million.
This includes taxes incurred in countries that impose tax on the basis of in-country revenue and bear no relationship to the profitability of such operations.
These cash tax payments do not include the impact of approximately $28 million of CARES Act tax refunds expected to be received in 2021.
Directionally in 2021 for our operations by segment, we expect for Subsea Robotics, our forecast for improved results is based on essentially flat ROV days on higher, minor shifts in geographic mix, and generally stable pricing.
Results for tooling-based services are expected to be flat, with activity levels generally following ROV days on hire.
Survey results are projected to improve on higher geoscience activity.
We forecast adjusted EBITDA margins to be consistent with those achieved in 2020.
For ROVs, we expect our 2020 service mix of 62% drill support and 38% vessel services to generally remain the same through 2021.
Our overall ROV fleet utilization is expected to be in the mid to high 50% range for the year with higher seasonal activity during the second and third quarters.
We expect to generally sustain our ROV market share in the 60% range for drill support.
At the end of 2020, there were approximately 24 Oceaneering ROVs onboard 21 floating drilling rigs with contract terms expiring during the first six months of 2021.
During that same period, we expect 28 of our ROVs on 24 floating rigs to begin new contracts.
For manufactured products, we expect segment performance to decline primarily as a result of the decreased order intake in our energy businesses during 2020.
We continue to closely monitor the impact of COVID-19 pandemic on our mobility solutions businesses, and currently expect to see marginally higher activity and contribution from these businesses in 2021.
We forecast that our operating income margins will be in the low to mid-single-digit range for the year.
For OPG, operating results are expected to improve in 2021 on generally stable offshore activity and margins comparable to the last half of 2020.
Operating results and adjusted EBITDA are forecast to improve largely due to the efficiency and cost improvement measures implemented in 2020 and improved year-over-year contribution from our Angola riserless light well intervention campaign.
Vessel day rates remain competitive but stable, and we expect to see opportunities for pricing improvements during periods of higher activity.
We also anticipate reduced charter obligations and increased flexibility on third-party vessels and an overall improvement in fleet utilization.
As has been the case over the last several years, this segment has the highest amount of speculative work incorporated in our guidance.
For IMDS, results are forecast to improve on higher revenue, with the operating income margin averaging in the high-single digit range for the year.
Good order intake at the end of 2020 is expected to begin benefiting the business in the second quarter of 2021.
We will continue to focus on the effective use of personnel and transforming how and where work is performed.
For ADTech, revenue is expected to be higher, producing improved results with operating income margins consistent with those achieved in 2020.
Growth in this segment is expected to be broad-based, with revenue growth in each of our three government-focused businesses.
For 2021, we anticipate unallocated expenses to average in the low to mid-$30 million range per quarter as we forecast higher accrual rates for projected short and long-term performance-based incentive compensation expense, as compared to 2020.
For our first-quarter 2021 outlook, we expect our first-quarter 2021 adjusted EBITDA to be in the range of $45 million to $50 million on sequentially higher revenue.
As compared to the fourth quarter of 2020, we anticipate higher revenue and relative flat operating results in our ADTech segment, lower activity in operating results, and our SSR and manufactured product segments.
Higher revenue and operating results in our IMDS segment and in our OPG segment, operating results are forecast to improve on substantially higher revenue as we have commenced operations on the Angola riserless light well intervention project.
In closing, our focus continues to be generating free cash flow, maintaining our strong liquidity position, demonstrating meaningful progress in advancing our ESG and energy transition efforts and improving our returns by driving efficiencies and consistent performance throughout our organization, engaging with our customers to develop value-added solutions that increase their cash flow and remaining disciplined in our pricing decisions and capital deployment strategies.
We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you may have. | q4 adjusted earnings per share $0.02.
q4 loss per share $0.25.
q4 revenue $424 million versus refinitiv ibes estimate of $425 million.
in 2021, expect to generate positive free cash flow in excess of amount generated in 2020.
q1 2021 adjusted ebitda is forecast to be in range of $45 million to $50 million. |
Our comments today are also -- also include non-GAAP financial measures.
Let me start by saying I'm pleased with our achievements in 2021 as our $200 million -- $211 million of adjusted EBITDA slightly exceeded the top end of the adjusted EBITDA guidance range provided at the beginning of the year, exceeding the guidance midpoint by 14%.
Except for manufactured products, which is tied to longer cycle market drivers, all of our operating segments delivered improved sequential operating results in 2021.
We delivered robust free cash flow in 2021, which supported our ability to repurchase $100 million of our 2024 senior notes and increased our cash position by $86 million during the year to $538 million on December 31, 2021.
I'm encouraged by the support of market fundamentals that emerged last year and expect this drive -- this to drive increased activity across all our segments in 2022.
Today, I'll focus my comments on our performance for the fourth quarter and full year of 2021, our market outlook for 2022, Oceaneering's consolidated 2022 outlook, including our expectation to generate positive free cash flow of between $75 million and $125 million, and EBITDA in the range of $225 million to $275 million, and our segment outlook for the first quarter and full year of 2022.
Now, moving to our results.
For the fourth quarter of 2021, our consolidated adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA was $46.7 million.
Fourth quarter 2021 consolidated adjusted operating income of $17 million, was $1.2 million higher than in the third quarter on the strength of increased throughput and margins in our manufactured products segment, which more than offset the decline in our ad tech segment and higher unallocated expenses.
Unallocated expenses increased due to a material increase in medical and information technology cost recognized during the quarter and additional incentive compensation accruals tied to our strong free cash flow and annual results.
We generated $140 million of cash from operating activities.
And after deducting $14.4 million of capital expenditures, our free cash flow was $126 million for the quarter.
We made additional progress with debt reduction during the fourth quarter with $37 million of open market repurchases of our 2024 senior notes, bringing total repurchases to $100 million for the year.
Good operating cash flow, working capital efficiencies, and capital expenditure discipline allowed us to increase our cash position by $90.4 million during the fourth quarter of 2021.
As of December 31, 2021, our cash balance stood at $538 million.
We made the decision during the fourth quarter to terminate a number of entertainment ride systems contracts with the financially embattled developer and its affiliated companies.
As a result, we recorded a net loss of $30 million in connection with these Evergrande contracts in our fourth-quarter financial results.
In conjunction with these terminations, we reclassified $20 million of contract assets into saleable inventory.
Now let's look at our business operations by segment for the fourth quarter of 2021.
Subsea Robotics, or SSR, operating income improved sequentially despite lower revenue.
The performance was led by improved pricing in our ROV and tooling businesses.
SSR EBITDA margin of 31% during the fourth quarter improved as compared to the 29% achieved during the third quarter of 2021 and was consistent with the average margin achieved during the first nine months of 2021.
The SSR revenue split was 77% from our remotely operated vehicle or ROV business and 23% from our combined tooling and survey businesses compared to the 79-21 split, respectively, in the immediate prior quarter.
As anticipated, ROV days on hire decline as compared to the third quarter due primarily to typical lower seasonal vessel activity.
Fleet utilization declined to 55% in the fourth quarter 2021 from 63% in the third quarter 2021 and our days on hire decline for both drill support and vessel-based services.
Our fleet use during the quarter was 62% drill support and 38% in vessel-based services, compared to 57% and 43%, respectively, during the third quarter.
Fourth quarter 2021 average ROV revenue per day on hire of $8,162, was 4% higher than in the third quarter of 2021.
Days on hire were 12,747 in the fourth quarter or 12% lower as compared to 14,474 in the third quarter.
We ended the quarter and the year just as we began with a fleet count of 250 ROV systems.
At the end of December, we had ROV contracts on 75 of the 137 floating rigs under contract or 55%, a slight decrease from September 30, 2021, when we had ROV contracts on 77 of the 133 floating rigs under contract or 58%.
Turning to manufactured products.
Our fourth quarter 2021 revenue of $103 million was 37% higher than in the third quarter of 2021.
Adjusted operating income and adjusted operating income margin of 9% were substantially higher sequentially primarily due to better absorption of fixed costs and a favorable project mix.
Bidding activity across our Energy products businesses was active but continues to lag in our Mobility Solutions businesses.
Our manufactured products backlog on December 31, 2021, was $318 million, compared to our September 30, 2021, backlog of $334 million.
The backlog decline in the fourth quarter of 2021 reflects a $38 million reduction associated with the Evergrande contract terminations.
Our book-to-bill ratio was 1.1 for the full year of 2021 as compared with the trailing 12-month book-to-bill of 1.0 on September 30, 2021.
Offshore Projects Group, or OPG, fourth quarter 2021 operating income declined sequentially on lower revenue.
Revenue declined 11% due to seasonality in the Gulf of Mexico and the third quarter completion of the Angola riserless light well intervention project.
Fourth quarter 2021 operating income margin of 8% remained consistent with the third quarter 2021 as improved margins from intervention, maintenance, and repair or IMR activity positively offset the fixed cost margin effect of lower revenue.
For Integrity Management and Digital Solutions, or IMDS, fourth quarter 2021 operating income increased sequentially on slightly lower revenue.
Operating income margin improved to 10% in the fourth quarter of 2021 from 9% in the third quarter of 2021 as the business continues to benefit from operational improvements implemented since the beginning of 2020.
Our Aerospace and Defense Technologies, or ADTech, fourth quarter 2021 operating income declined from the third quarter of 2021 on a 6% decline and rapid decrease in revenue.
Operating income margin declined as expected to 13% due to changes in project mix.
Fourth quarter 2021 unallocated expenses of $36.7 million, were sequentially higher due to a combination of increased accruals for incentive-based compensation higher-than-expected healthcare costs, and increased information technology costs.
Now, I'll turn my focus to our year-over-year results of 2021 compared to 2020.
For the year, consolidated adjusted operating income improved on a slight revenue increase as compared to 2020.
Adjusted operating income in our energy segments improved by $57.3 million and operating income margin improved by 376 basis points over 2020 results to 9%.
The improved results were a result of a shift in the mix of revenue and a continued focus on operational excellence programs.
Our AdTech segment continued to be a steady performer delivering another record year of operating income and margins consistent with 2020.
Compared to 2020, our 2021 consolidated revenue increased 2% to $1.9 billion with revenue increases in our SSR, OPG, IMDS, and ADTech segments being partially offset by a decline in our manufactured products revenue.
Consolidated 2021 adjusted operating income and adjusted EBITDA improved by $51.4 million and $26.3 million, respectively, led by our OPG and SSR segments.
Overall, we generated adjusted EBITDA of $211 million, a 14% increase over 2020.
we generated $225 million in cash flow from operations and invested $50.2 million in capital expenditures.
Significant free cash flow of $175 million, allowed us to repurchase $100 million of our 2024 senior notes while also increasing our cash balance by 86% -- $86 million, excuse me, to $538 million.
We are pleased with the following notable achievements accomplished during 2021.
Each of our five operating segments achieved positive adjusted operating income and positive adjusted EBITDA during each quarter in 2021.
Our OPG business achieved the most significant improvement of our five operating segments growing revenue by 31% in 2021.
Adjusted operating income improved by almost $37 million and operating income margin improved to 8% as compared to an adjusted operating loss margin of 2% and in 2020.
Our Subsea Robotics business, a recognized leader in world-class ROV services, continue to achieve best-in-class drill support performance with a 99% plus uptime achieved during the year.
We continue to advance our new technologies, adding three new ISRS vehicles during the year to serve the renewables market and advancing the technical readiness of freedom, our hybrid ROV and autonomous underwater vehicle EV which we expect to be fully commercialized in 2022.
We continue to see significant improvement in our IMBS business with adjusted operating income improving by more than $12 million as compared to 2020.
Our AdTech business grew its revenue by 8% while maintaining its operating income margin over 16%, leading to a new record annual operating income and EBITDA performance.
Our ability to generate substantial free cash over the past several years has allowed us to mitigate the risk relating to our 2024 debt maturity.
And we maintained our commitment and focus on safety.
The team remained very focused on our life-saving rules, identifying high-hazard tasks, and developing engineered solutions to mitigate risks.
Our total recordable incident rate, or TRIR, of 0.4 for 2021 remained comparable to the record performance achieved in 2020.
The following annual financial metrics sequentially improved in 2021.
Revenue of $1.9 billion was modestly higher than the $1.8 billion achieved in 2020.
Adjusted EBITDA of $211 million exceeded the top end of the guidance range from the beginning of the year and was 14% higher than the $184 million generated in 2020.
Positive free cash flow of $175 million significantly surpassed the $76 million generated in 2020.
We maintained our commitment to capital discipline by reducing capital expenditures for a second year to $50 million as compared to $61 million in 2020.
Cash increased by $86 million to $538 million.
Outstanding debt decreased to $700 million, following $100 million of open market repurchases of our 2024 senior notes.
Net debt-to-adjusted EBITDA ratio decreased from 1.9 on December 31, 2020, to 0.8 on December 31, 2021.
Consolidated adjusted EBITDA margin of 11% improved from the 10% margin achieved in 2020.
We continue to make good progress on our sustainability efforts for environmental, social, and governance initiatives.
From an environmental perspective, we hired an environmental consulting firm and instituted a project to gather greenhouse gas emissions data for our global office facilities, manufacturing facilities, and vessels.
This project started in 2021, will allow us to establish a baseline that will be used to identify gaps and develop targets for future emissions reductions.
We continue to develop and evolve technologies such as remote piloting and autonomous mobile robots to assist our customers in mitigating carbon emissions.
This includes offshore environments for clean production of hydrocarbons and energy transition projects, and onshore environments for manufacturing, hospital, and entertainment facilities.
We also added a reducing CO2 emission tab to the sustainability portion of our website to highlight the technologies we are using and developing to reduce environmental impacts.
From a governance perspective, we formalized our management and board oversight structures relating to sustainability.
We renamed our board's Nominating and Governance Committee to the Nominating Corporate Governance and Sustainability or NCGS Committee and created an executive-led Sustainability Committee to guide and oversee the company's ESG priorities.
The Sustainability Committee reports to the NCGS committee on a quarterly basis.
During 2021, Oceaneering filed its second annual sustainability report, which is posted on our website using the disclosure methodology outlined by the Sustainability Accounting Standards Board.
Oceaneering continues to hold an ESG index A rating with MSCI.
Now, turning to our 2022 outlook for the markets we serve.
Brent pricing of about $70 per barrel, sustained a modest level of offshore project sanctioning and good IMR activity in 2021.
The forecast of nearly $90 per barrel in 2022 and anticipated higher prices in the out years, should support increased levels of E&P, opex, and capex spending in 2022.
Analysts and research service projections for other key metrics we track also support expectations for increased activity in 2022.
Research source data indicates floating rig day rates are increasing, which we view as an indication of increase in demand.
There were approximately 200 tree awards in 2021 and Rystad forecasts a 55-plus percent increase in 2022 to around 320 and remaining near 300 into 2023.
Rystad had -- also forecasts 317 tree installations in 2022 to be essentially flat to 2021.
Analysts also project substantial growth in offshore renewables markets over the next decade.
Rystad estimates that offshore wind capex and opex spending will average around $50 billion per year in 2022 and 2023, an 85% increase from the average annual spend between 2016 and 2020.
Rystad also sees continued double-digit growth through the end of the decade with spending projected to increase to $126 billion by 2030.
And finally, notwithstanding the current government continuing resolution the government-related markets we serve are expected to remain relatively stable with continued modest growth for the foreseeable future.
Now, to our 2022 consolidated outlook for Oceaneering.
As a result of our first-quarter seasonality in our energy businesses, uncertainties regarding U.S. government appropriations due to the continuing resolution, and anticipated expenses needed to prepare for higher activity in 2022, we expect our first quarter 2022 financial results to be significantly lower as compared to the fourth quarter of 2021.
However, based on the year-end 2021 backlog, projected start dates on new contracts, anticipated 2022 order intake, and supportive market fundamentals, we project a greater than commensurate ramp-up in the second quarter activity and financial results, which are expected to be sustained throughout the remainder of the year.
We are projecting our 2022 consolidated revenue to grow more than 10% with increased revenue in each of our operating segments, led by manufactured products.
We expect sequential improvement in our 2022 financial results based on our expectations for higher operating income and higher margins in each of our energy segments, led by SSR and OPG, and higher operating income and stable margins in our ADTech segment.
For the year, we anticipate generating $225 million to $275 million of EBITDA with increased contributions from each of our segments.
At the midpoint of this range, our EBITDA for 2022 would represent an 18% increase over 2021 adjusted EBITDA.
We anticipate our full year 2022 to yield positive free cash flow of $75 million to $125 million.
These expectations assume the continuing trend of supportive commodity prices and no significant incremental COVID-19 impacts.
We remain committed to generating cash, which allows us to continue developing and delivering technologies that help our customers produce hydrocarbons in a cleaner, safer manner while increasing our investments into new markets, including energy transition, digital asset management, Aerospace and Defense Solutions, and mobility solutions.
For 2022, we forecast our organic capital expenditures to total between $70 million and $90 million.
This includes approximately $40 million to $45 million of maintenance capital expenditures and $30 million to $45 million of growth capital expenditures.
We anticipate commodity prices to support growth and free cash generation for traditional customers of our energy businesses during the 2022 to underpin these investments.
In 2022, interest expense net of interest income is expected to be approximately $38 million, and our cash tax payments are expected to be in the range of $40 million to $45 million.
This includes taxes incurred in countries that impose tax on the basis of in-country revenue and bear no relationship to the profitability of such operations.
Directionally, in 2022 for our operations by segment.
Our expectation for improved results for Subsea Robotics is based on increased revenue -- increased ROV days on hire, minor shifts in geographic mix, and stable to improving pricing.
Results for tooling-based services are expected to improve with activity levels generally following ROV days on hire.
Survey results are projected to improve on higher survey and positioning activity, and we expect revenue growth in the high single-digit range and EBITDA margins to average in the low 30% range for the full year.
For ROVs, we expect our 2021 service mix of 60% drill support and 40% vessel services to generally remain the same through 2022.
Our overall ROV fleet utilization is expected to be in the mid-60% range for the year with higher seasonal activity during the third -- excuse me, the second and third quarters.
We expect to generally sustain our ROV market share in the 55% to 60% range for drill support services.
At the end of 2021, there were approximately 23 Oceaneering ROVs on board 20 floating drilling rigs with contract terms expiring during the first six months of 2022.
During the same period, we expect 39 of our ROVs on 33 floating rigs to begin new contracts.
For manufactured products, we project the segment performance to improve on a significant increase in revenue primarily as a result of increased order intake in our energy businesses during 2021.
We are seeing increasing interest in our Mobility Solutions businesses and currently expect to see marginally higher activity from these businesses in 2022 and see an opportunity to build backlog for a more meaningful contribution in 2023.
We forecast our operating income margins to be in the mid-single-digit range for the year.
For OPG, operating results are expected to improve in 2022 on a marginal increase in revenue.
This expectation is based on better-anticipated pricing, improved vessel utilization, and increased diving activities more than offsetting the lower revenue from riserless light well intervention activities.
Overall, for 2022, we forecast operating income margins to average in this high single to low double-digit range.
Vessel day rates are increasing, and we anticipate some challenges with vessel availability in the Gulf of Mexico and finding vessels at affordable rates in other geographic areas.
However, while we anticipate higher direct costs from labor and third parties, we expect these increased costs to be offset by better pricing.
As per usual, this segment has the highest amount of speculative work incorporated in our guidance, and energy commodity prices will need to remain supportive for us to achieve our plan.
For IMDS, results are forecast to improve on higher revenue, continuing the trends seen over the last several years.
We believe customers continue to see the value in our service offerings and see good global opportunities for our renewals and business expansion, particularly in the U.K. and West Africa.
Operating income margin is projected to remain in the high single-digit range for the year.
For AdTech, revenue is expected to be higher producing improved operating results.
We anticipate growth in all three of our government-focused businesses.
Operating income margins are expected to average in the mid-teens range for the year.
For 2022, we anticipate unallocated expenses to average in the mid-$30 million range per quarter as we foresee higher information technology expense and higher cost due to inflation as compared to 2021.
For our first quarter 2022 outlook, sequentially, as previously noted, we forecast our first quarter 2022 EBITDA to be significantly lower on lower revenue.
As compared to the fourth quarter of 2021, we anticipate higher cost for hiring and training of personnel, mobilization of equipment, and inflation as we prepare for a significant increase in activity forecast for the remainder of 2022.
Lower revenue and operating results in our Energy segment and relatively flat revenue and lower operating results in our AdTech segment.
In closing, our focus is to continue generating meaningful free cash flow, growing our service and product offerings, continuing to advance our ESG initiatives and improving our returns by driving efficiencies and consistent performance throughout our organization, engaging with our customers to develop value-added solutions that increase their cash flow and remaining disciplined in our pricing decisions and our capital deployment strategies.
And most importantly, remaining dedicated to the safety and well-being of our employees and our customers.
I haven't been able to say this for a while, but I'm excited to see the growth opportunities across all of our businesses over the next several years.
The operating efficiency that we put into place over the last several years position us to benefit from this growth while increasing our profitability.
We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to answer any questions you might have. | expect our q1 2022 financial results to be significantly lower as compared to q4 of 2021. |
Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer.
We're also joined by Chris Cragg, Oil States' Executive Vice President, Operations; and Ben Smith, President of GEODynamics, our Downhole Technologies segment.
To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
As you can imagine, the market dislocations caused by the global response to the COVID-19 pandemic have been unprecedented.
The impact on the energy industry is even more extreme due to the rapid demand destruction for crude oil and the resulting massive inventory builds across the globe that have resulted.
Partially cushioning this very negative industry backdrop is the agreement reached at the OPEC+ Summit earlier this month, whereby both short-term and long-term supply cuts were agreed to.
The announced duration for the short-term cuts totaling 10 million barrels per day, extend for two months through May and June.
This is the single largest coordinated output cut in history, but nonetheless, it falls far short of the estimated 25 million to 30 million barrels per day of demand destruction.
Importantly, the longer-term cuts extend to April 2022, with supply reductions compressing over the extended term.
Given the duration of the cuts, the industry should be able to better manage through the unprecedented crude oil demand destruction once we get beyond the immediate impact of inadequate storage globally with well shut-ins and supply constraints that follow.
We have important matters to discuss with you today beyond just our results for the first quarter.
In conjunction with our discussion of the quarter, we plan to highlight our initiatives undertaken to shore up liquidity, give you our thoughts on near-term market conditions and summarize our efforts to mitigate costs, both capital and operating, as we navigate this difficult market.
First, I'd like to provide a brief update regarding COVID-19 and its impact on our global operations.
We have implemented stringent protocols in an effort to protect our employees, customers, suppliers and the broader communities within which we work.
Measures applied include working remotely, we're able to do so, adhering to social distancing guidelines, limiting visitors to our work sites to essential personnel, adjusting shifts and work schedules to minimize close contact, mandatory stay-at-home principles when employees show symptoms of illness, performing enhanced cleaning protocols, along with other safety measures.
To date, we have only been notified of two confirmed cases of COVID-19 in our global workforce with one of the two now testing negative and returning to work.
As various states began to reopen nonessential businesses, we have stressed how critical it is that we maintain our diligence to help prevent a second wave of cases developing in our communities.
Demand for oil and gas, and therefore, our products and services depends on a fully functional economy, and we intend to set an example for others in working safely during this pandemic based upon what we have learned.
Moving on to the quarter.
We reported a large headline loss during the quarter resulting from various impairments taken due to impacts on our business from the global response to the COVID-19 crisis.
However, our first quarter results, excluding the impairments taken, exceeded our guidance issued in February.
During the first quarter, our Completion Services revenues were modestly up sequentially with margins improving 370 basis points.
In our Downhole Technologies segment, revenues improved 7% sequentially and margins increased 420 basis points.
Revenues in our Offshore/Manufactured Products segment decreased sequentially due to delays in our project-driven sales arising from global disruptions in our own operations and in various parts of our supply chain.
Segment backlog at March 31, 2020, totaled $267 million, a decrease of 4% sequentially.
Our segment book-to-bill ratio for the quarter approximated one times.
Despite exceeding our first quarter guidance, we are acutely aware of the challenging market conditions that we will face during the remainder of 2020 and into 2021.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs through such a downturn.
Lloyd will review with you our efforts taken with our lenders to amend our current cash flow-based revolving credit facility and convert it into an asset-based lending arrangement.
We have also taken significant actions on the cost side of our business to adjust to significantly declining revenues, particularly those ties to shale completions in the United States, which are currently in three fall.
We will closely manage our debt, working capital and cash flow generation in the quarters to come.
Lloyd will now review our consolidated results of operations and financial position in more detail, before I go into a discussion of each of our segments.
During the first quarter, we generated revenues of $220 million, while reporting a loss of $405 million or $6.79 per share.
Our first quarter results were reduced by significant noncash impairment charges, including the following: a $406 million or $6.48 per share of goodwill written off; a $25 million or $0.34 per share inventory impairment; and a $5 million or $0.07 per share fixed asset impairment, driven by the expected duration of this unprecedented market downturn.
Our first quarter EBITDA totaled $22 million with an EBITDA margin of 10%.
The goodwill impairment charges were taken in all segments but related primarily to our Downhole Technologies and Completion Services businesses, arising from, among other factors, the significant decline in our stock price and that of our industry peers, along with reduced growth expectations in the next couple of years, given weak energy market conditions resulting from demand destruction, caused by the global response to the COVID-19 pandemic.
In addition, given the negative market outlook, our estimated weighted average cost of capital increased approximately 500 basis points compared to year-end 2019.
We remained essentially cash flow neutral during the quarter with $5 million in cash flow from operations, offset by $6 million in capital expenditures.
In the first quarter, we collected $4 million in proceeds from the sale of equipment and repurchased $6 million in principal amount of our convertible senior notes at a 17% discount to par value.
For the first quarter 2020, our net interest expense totaled $4 million, of which $2 million was noncash amortization of debt discount and issuance costs.
At March 31, our net debt-to-book capitalization ratio was 23%, which increased from year-end 2019 due to the noncash asset impairments recorded during the first quarter.
At March 31, our liquidity totaled $132 million, and we were in compliance with our debt covenants.
It is important to fully understand our leverage position, which, at March 31, consisted of $72 million of senior secured revolving credit facility borrowings and $217 million of other debt, consisting primarily of our 1.5% convertible senior notes due in February 2023.
Our credit agreement underlying our revolving credit facility is the only debt agreement that is subject to leverage covenants.
Accordingly, we are working with our bank group to amend our existing cash flow-based revolving credit facility to convert it into an asset-based lending arrangement, giving a negative market outlook and the uncertainty regarding the level of EBITDA to be generated as we progress through to 2020, coupled with the leverage covenants, governing both total net debt and senior secured debt to EBITDA.
The amended facility is expected to be subject to a borrowing base based on our accounts receivable and inventory with differing advance rates depending on the age and geographic location of the various assets.
While the amount of the borrowing base has not yet been finalized, we expect the amended facility size to range from $175 million to $200 million, and it will not contain similar leverage covenants.
At March 31, 2020, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $348 million compared to borrowings outstanding under our revolver totaling $72 million, which yielded a 4.8 times coverage level.
In terms of our second quarter 2020 consolidated guidance, we expect depreciation and amortization expense to total approximately $25 million, net interest expense to total approximately $4 million, of which $2 million is noncash, and our corporate expenses are projected to total $8.5 million.
Corporate expenses in the first quarter of 2020 and forecast for the second quarter reflect reductions in both short-term and long-term incentive compensation expense.
We are reducing our capex spending during 2020 to a range of $15 million to $20 million, which at the midpoint is roughly 70% less than our 2019 capital expenditures.
In our Offshore/Manufactured Products segment, we generated revenues of $91 million and segment EBITDA of $13 million during the first quarter.
Revenues decreased 16% sequentially due primarily to delays in our project-driven revenues due to global disruptions in our operations and in our supply chain.
Segment EBITDA margin was 14% in the first quarter of 2020 compared to 15% in the prior quarter.
Orders booked in the first quarter totaled $87 million, resulting in a quarterly book-to-bill ratio of approximately one times.
At March 31, our backlog totaled $267 million, a 4% sequential decrease, but it, nonetheless, reflected a 14% increase from the $234 million of backlog that existed at March 31, 2019.
For 75 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical deepwater and offshore environments.
Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers.
In 2020, we are bidding on potential award opportunities to support our subsea, floating and fixed platform systems, drilling, military and wind energy clients globally.
However, with reduced market visibility, given much lower crude oil prices and reduced customer spending, we now believe 2020 bookings will be lower than the levels achieved in 2019.
In our Well Site Services segment, we generated $88 million of revenue, $12 million of segment EBITDA and a segment EBITDA margin of 14% compared to 10% reported in the preceding quarter.
The sequential improvement in our results was driven by sound cost controls during the quarter.
However, we know the sequential improvement cannot be sustained, given expected materially lower U.S. land completion activity and the reduced number of frac spreads in operation.
International and Gulf of Mexico market activity comprised 20% of our first quarter Completion Services revenues.
As announced last year, we have discontinued our drilling operations in the Permian, reducing our marketed fleet from 34 rigs to nine rigs with the remaining assets serving customers in the Rocky Mountain region.
We recorded an additional $5 million noncash fixed asset impairment charge in the first quarter, given the negative outlook for the vertical rig market for the remainder of 2020.
As of early April, none of our marketed rigs were working.
We are highly focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
While focusing on value-added services in 2019, we closed or consolidated eight North American operating districts or 19% of our locations and reduced headcount in our Completion Services business by 20%.
Sadly, these headcount reductions and facility closures must continue in 2020 in order to sustain the company through this extreme market downturn.
We will continue to focus on core areas of expertise and actively develop new proprietary products to differentiate Oil States' completions offerings.
In our Downhole Technologies segment, we generated revenues of $41 million and segment EBITDA of $5 million in the first quarter.
First quarter revenues and EBITDA were sequentially higher due to improved sales of our perforating products and frac plugs, coupled with sound cost control.
Segment EBITDA margin averaged 13% in the first quarter compared to 9% in the preceding quarter.
We continue to develop, field trial and commercialize new products in our Downhole Technologies segment.
Sales trends for our vapor gun integrated perforating system and addressable switches are gaining customer acceptance following their respective commercializations late in the fourth quarter.
In addition, our premium integrated gun system, named STRATX, was formally launched in the first quarter.
As noted on our last earnings conference call in February, we announced the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.
Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality and increased performance while ensuring the highest level of safety and reliability.
Given the current market weakness, we recognize that revenue uptake of these new technologies will be delayed.
Given rapidly declining spending on U.S. land operations by our customers who are facing dunning challenges, we are not comfortable providing specific revenue or EBITDA guidance for the second quarter of 2020 for either of our Well Site Services or Downhole Technologies segments.
However, we will attempt to do so directionally.
The first quarter 2020 U.S. rig count average was 785 rigs, which was down 4% sequentially.
The U.S. rig count totaled 465 rigs on April 24, 2020, down 41% from the first quarter 2020 average rig count.
Current analyst estimates are calling for a 40% to 70% sequential decline in Completions activity, which will negatively impact all of our segments with short-cycle U.S. shale-driven exposure.
As a result, we expect our U.S. onshore businesses and product lines to feel the dramatic effects of lower well completions consistent with that of our U.S. peers.
Accordingly, we are aggressively reducing our cost in order to stabilize our financial results as we manage through this unprecedented downturn.
In our Offshore/Manufactured Products segment, we are more confident in our ability to forecast revenues, given our backlog position and the relatively low level of short-cycle product sales in the first quarter.
We project our second quarter revenues in this segment to range between $96 million and $104 million with segment EBITDA margins expected to average 10% to 12%, depending on product and service mix, along with absorption levels.
Our margins are expected to be compressed in the near-term due to the closures of our India and Singapore facilities until at least May four and June 1, respectively, as mandated by their governments, along with reduced cost absorption globally as we deal with supply chain issues and other inefficiencies.
Management teams have to make difficult decisions during market downturns such as this to protect the health of their companies.
We wanted to provide a summary of actions that we are taking to mitigate the expected material decline in revenue during 2020.
As Lloyd mentioned, capex will be reduced by approximately 70% year-over-year.
Direct operating cost will be reduced in line with activity declines.
Headcount has already been reduced approximately 30% in our Well Site Services and Downhole Technologies segments since the beginning of this year.
SG&A headcount has been reduced by approximately 15% since the beginning of the year as well.
Short-term incentives have essentially been eliminated for 2020.
Our 401(k) and deferred compensation plan matches have been suspended for the immediate future.
Various salary personnel, including executive management, have taken salary reductions in addition to other reductions in short-term and long-term compensation.
Discretionary spending has been substantially reduced or eliminated.
When we summarize the impact of our actions taken, we estimate that we will reduce 2020 cost by $225 million when compared to 2019.
Of that total, 87% is estimated at cost of goods sold and 13% relates to SG&A.
We believe that 20% to 25% of the cost reductions are fixed in nature.
Now I'd like to offer some concluding comments.
We believe that we are making substantial progress in terms of shoring up our liquidity with the planned amendment and conversion of our cash flow-based revolving credit facility to an asset-based lending arrangement.
With our strong working capital position, we believe that we can manage through this extreme downturn with a safe balance sheet position.
We recognize that cost management has to be a primary focus in this lower activity environment.
To that end, cash flow generation remains a top priority with near-term plans to manage working capital and secure balance sheet stability.
Oil States will continue to conduct safe operations and will remain focused on providing value-added products and services to meet customer demand globally.
That completes our prepared comments. | q1 loss per share $6.79.
compname says reduced capital spending plans for 2020 by approximately 70%.
compname says expect to receive u.s. income tax refunds of about $41 million in 2020 under provisions of cares act. |
Our call today will be led by our CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer.
To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
First, I would like to extend my sincere hope that all of you have been able to safely navigate the horrendous weather that we've had over the last week, along with the associated power outages and impacted water supplies.
Our prayers are extended to you for a speedy return to normalcy.
December 31st marked the end of the year that will go down into the record books for the oil and gas industry.
Energy companies face the dawning challenges of excess supply, a demand crisis triggered by COVID, an OPEC supply management problem, and investor apathy toward the sector.
Already six years into an extended downturn, the industry took a notable turn for the worst in 2020 with the onset of the COVID-19 pandemic, leading to epic levels of demand destruction for crude oil and associated products.
With commodity prices in dangerous territory, coupled with deteriorating activity and financial results, energy companies had to respond quickly.
Rig counts and customer CAPEX spending collapsed in the second and third quarters of 2020.
In response to these events, we took immediate action to shore up liquidity and stabilize cash flows.
We will update you on these matters, give you our thoughts on near-term market conditions, and summarize our continued efforts to mitigate costs, both capital and operating as we navigate the early stages of a U.S.-led market recovery.
shale-driven activity, while at historic low levels, was improving as we entered the fourth quarter with stronger crude oil prices.
Activity in the U.S. shale basins has historically been the first market to decline in a downturn, but it is also the first to recover.
completion activity steadily improved during the fourth quarter, albeit off a low base, ending the quarter up 67% sequentially in terms of the average frac spread count as reported by primary vision.
Our fourth-quarter results reflected 2% sequential growth in revenues and a significant 55% improvement in gross profits before DD&A, reflecting the cost mitigation measures implemented earlier in the year.
Partially offsetting these benefits was $2.7 million of severance and restructuring charges.
During the fourth quarter, our well site services revenues were up 3% sequentially, and adjusted segment EBITDA margins improved.
Our completion services incremental adjusted EBITDA margins came in at 89%.
In our downhole technologies segment, revenues continued their recovery and were up 24% sequentially, with adjusted segment EBITDA margins also up nicely.
In contrast, revenues in our offshore/manufactured products segment, which is a later-stage business, decreased 4% sequentially due primarily to weaker connector product sales.
Segment backlog at December 31, 2020, totaled $219 million, a decrease of 4% sequentially.
Our segment bookings totaled $65 million for the quarter, yielding what appears to be an industry-leading book-to-bill ratio of 0.9 times for the fourth quarter and 0.8 times for the year.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs.
To that end, we had an exceptional year in 2020, generating $133 million of cash flow from operations.
With our significant free cash flow, we materially delevered during the year, reducing our total net debt by $128 million.
In addition, despite capital being extremely tight in the U.S. for banks lending to the industry, we successfully syndicated a new four-year asset-based credit facility with our key banking relationships last week.
Lloyd will review additional details with you shortly.
We believe that we have managed the company effectively during a very difficult period, and we'll continue to closely manage our debt, working capital, and cash flow generation in the quarters to come.
Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
During the fourth quarter, we generated revenues of $137 million, while reporting a net loss of $19 million, or $0.31 per share.
Our revenues increased 2% sequentially, and our adjusted consolidated EBITDA improved significantly due to better cost absorption in our U.S. businesses.
After generating significant free cash flow in prior quarters, we were essentially cash flow-neutral after CAPEX during the fourth quarter.
For the fourth quarter of 2020, our net interest expense totaled $2.6 million, of which the majority are $1.8 million was noncash amortization of debt discount and debt issue costs.
At December 31, our net debt-to-book capitalization ratio was 12.8%, and our total net debt declined $128 million during 2020 through opportunistic open-market purchases of our convertible senior notes and repayments of borrowings outstanding under our revolving credit facility.
As Cindy mentioned, on February 10, we announced that we had entered into a new $125 million asset-based revolving credit agreement with a group of our key commercial relationship banks.
Our existing revolving credit facility was terminated upon entering into the new asset-based revolving credit facility.
Borrowing availability under the new facility is based on a monthly borrowing base on eligible U.S. customer accounts receivable and inventory.
The maturity date of the revolving credit facility is February 10, 2025, as Cindy mentioned, a four-year credit facility.
With a springing maturity 91 days prior to the maturity of any outstanding debt with a principal amount in excess of $17.5 million.
Excluding the seller promissory note associated with our acquisition of GEODynamics.
Borrowings outstanding under the new revolving credit facility will bear interest at LIBOR plus a margin of 2.75% to 3.25% based on our calculated availability under the facility with a LIBOR floor of 50 basis points.
We must also pay a quarterly commitment fee of 0.375% to 0.5% on the unused commitments.
At the closing of the new facility, we had approximately $29 million available, which was net of $12 million in outstanding borrowings and $29 million of standby letters of credit.
Together with $72 million of cash on hand at the end of December, pro forma liquidity would have been approximately $101 million.
At December 31, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $215 million.
In terms of our first-quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $23 million; net interest expense to total $2.1 million, of which approximately $1 million is noncash; and our corporate expenses are projected to total $8.4 million.
In this environment, we expect to invest approximately $15 million in total CAPEX during 2021, which is essentially flat when compared to 2020 spending levels.
In our offshore/manufactured products segment, we generated revenues of $76 million and adjusted segment EBITDA of $7.5 million during the fourth quarter.
Revenues decreased 4% sequentially due primarily to continued slow connector product sales.
Adjusted segment EBITDA margin of 10% compared to 12% margins achieved in the third quarter, reflecting lower revenues and reduced cost absorption.
As I mentioned earlier, orders booked in the fourth quarter totaled $65 million with a quarterly book-to-bill ratio of 0.9 times.
At December 31, our backlog totaled $219 million.
For over 75 years, our offshore/manufactured products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical, deepwater, and offshore environments.
Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients, while experiencing an increase in bidding to support multiple new clients actively involved in subsea mining, offshore wind developments, and other alternative energy systems globally.
While our 2020 bookings were lower than the levels achieved in 2019, our book-to-bill ratio for the year averaged 0.8 times, providing visibility as we progress into 2021.
In our downhole technologies segment, our revenues accelerated for the second quarter in a row, increasing 24%, while generating incremental adjusted segment EBITDA margins of 68% sequentially due primarily to cost savings measures implemented at the segment level.
Sales trends for our STRATX integrated gun systems and addressable switches continue to gain improved customer acceptance, and we experienced a 49% sequential improvement in international sales of our traditional perforating products.
We also continue to focus on the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.
Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality, and increased performance, while ensuring the highest level of safety and reliability.
In our well site services segment, we generated $39 million of revenue with sequentially increasing adjusted segment EBITDA.
land completion activity in the quarter but was partially offset by seasonal fourth-quarter declines in operator spending in the Northeastern United States.
Excluding the Northeast region, revenues increased 20% sequentially.
International and U.S. Gulf of Mexico market activity comprised 26% of our fourth-quarter completion service business revenues.
We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
We will continue to focus on core areas of expertise in this segment and are actively developing and conducting field trials of selected new proprietary service offerings to differentiate Oil States' completions business.
Moving on to outlook.
COVID-19 disruptions continue to hamper activity in domestic and international markets.
The fourth-quarter 2020 U.S. rig count average was 311 rigs, which was up 22% sequentially.
As we are now a month and a half into the first quarter of 2021, the average frac spread count has increased by about 26 spreads or roughly 20% since the fourth quarter.
This increase gives us optimism that the first quarter is setting up more favorably for our U.S. shale-driven product and service offerings.
Given improvements in the frac spread count over the last several months, we expect our well site services and downhole technologies segments to grow sequentially in 2021, with increasing EBITDA contributions.
Revenues in our offshore/manufactured products segment will continue to lag into the first half of 2021 until our book-to-bill ratio exceeds one-time and our short-cycle product demand improves.
Our outlook for 2021 suggests that our consolidated revenue will be flat or declined modestly, given this very strong first quarter of 2020, which, of course, was pre-pandemic, with EBITDA growth resulting from cost mitigation efforts.
We expect 2021 full-year consolidated EBITDA of $35 million to $40 million, with roughly 60% of the total generated in the second half of 2021.
The first quarter will undoubtedly be the weakest quarter of 2021, given the impact of severe weather that has gripped the nation this week.
Record-breaking temperatures and dangerous conditions have limited our field operations and manufacturing locations for several days.
Now I would like to offer some concluding comments.
We believe that we made substantial progress in 2020 in terms of shoring up our liquidity with exceptionally strong free cash flow generation coupled with associated debt reduction initiative.
As I mentioned earlier, we stabilized the company during a very difficult period and have managed our debt, working capital, and cash flow generation throughout the period.
Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product lines with value-added products and services to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic, which dramatically reduced travel and business activity, thereby depressing global oil demand and correspondingly, demand for our products and services.
That completes our prepared comments. | compname reports q4 loss per share $0.31.
q4 loss per share $0.31. |
Our call today will be led by our president and CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer.
To the extent that our remarks today contain information on historical information, please note that we are relying on the safe harbor protections afforded by Federal Law.
Any such remarks should be made in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
During the fourth quarter of 2021, the company generated revenues of $161 million and adjusted consolidated EBITDA of $13.4 million representing sequential increases of 15% and 57%, respectively, despite global challenges associated with the COVID-19 pandemic, supply chain disruptions, and a modest seasonal decline in U.S. customer completion activity.
Fortunately, the illnesses associated with the latest variant of COVID-19 have been relatively mild and of shorter duration.
We expect less impact from COVID-19 as we progress into 2022.
Highlighting our fourth quarter was a 34% sequential increase in our Offshore/Manufactured Products segment revenues, coupled with another quarter of strong orders booked into backlog yielding a 1.1 times book-to-bill ratio for the period and a full-year ratio of 1.2 times.
Expanding global economic activity and increasing backlog levels support a stronger outlook for this segment going into 2022.
During the fourth quarter of 2021, the industry experienced a 9% sequential quarterly increase in the average U.S. frac spread count compared to the same period in 2020, the average U.S. frac spread count has doubled.
Increases in completion activity have favorably impacted all of our segments.
Completion activity in the U.S. shale basins continues to increase and the outlook for 2022 looks constructive for continued growth and demand for our products and services.
Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
During the fourth quarter, we generated revenues of $161 million adjusted consolidated EBITDA of $13.4 million and a net loss of $19.9 million or $0.33 per share.
These quarterly results were burdened by a $9.3 million reclassification of unrealized foreign currency translation adjustments and $2.2 million of noncash inventory and fixed asset impairment charges due to the decision to exit certain nonperforming regions and service lines.
In addition, we recorded $0.8 million or $800,000 of severance and restructuring charges in the quarter.
Excluding these charges, our adjusted net loss was $0.14 per share.
We ended the year with $53 million of cash on hand, compared to $68 million at the end of the third quarter.
The quarterly decrease in cash was attributable to a $24 million build in working capital, essentially all of which related to trade receivables associated with the sequential increase in revenues in our Offshore/Manufactured Products segment.
As of December 31, no borrowings were outstanding under our asset-based revolving credit facility and amounts available to be drawn totaled $49 million, which, together with cash on hand, resulting in available liquidity of $102 million.
At December 31, our net debt totaled $126 million, yielding a net debt-to-capitalization ratio of 15%.
We spent $6.5 million in capex during the fourth quarter, which was substantially offset by proceeds received from the sale of assets totaling $5.4 million.
In 2022, we expect to invest approximately $25 million to support the expected market expansion.
For the fourth quarter, our net interest expense totaled $2.6 million, of which $0.5 million was noncash amortization of debt issuance costs.
Our cash interest expense, as a percentage of average total debt outstanding, was approximately 5% in the fourth quarter.
Fourth-quarter corporate expenses were lower than I previously guided to due to certain adjustments for employee benefits and incentive accruals.
In terms of our first quarter 2022 consolidated guidance, we expect depreciation and amortization expense to total $18.2 million, net interest expense to total $2.7 million, and our corporate expenses are projected to total $9.3 million.
Our Offshore/Manufactured Products segment reported revenues of $92 million and adjusted segment EBITDA of $13.7 million in the fourth quarter of 2021, compared to revenues of $69 million and adjusted segment EBITDA of $8.6 million reported in the third quarter of 2021.
Segment revenues increased 34% sequentially, driven primarily by increases in project-driven and service revenues of 72% and 17%, respectively.
Adjusted segment EBITDA margin in the fourth quarter of 2021 was 15%, compared to 12% in the third quarter of 2021.
Backlog totaled $260 million as of year-end, a 4% sequential increase culminating in our highest backlog level achieved since the first quarter of 2020.
Fourth quarter 2021 bookings totaled $105 million yielding a quarterly book-to-bill ratio of 1.1 times and a year-to-date ratio of 1.2 times.
During the fourth quarter, we booked one notable project award exceeding $10 million.
Our fourth-quarter bookings were broad-based across many product lines and regions.
Approximately 11% of our fourth quarter bookings were tied to non-oil and gas projects, bringing our full-year non-oil and gas bookings to 10%.
During the fourth quarter, we completed several strategic milestones, including the successful installation of riser equipment on a major project in South America; qualification of a new subsea tree connector with significant market opportunities on upcoming Brazilian projects; received a third-party certification on our new condition-based monitoring program for marine drilling riser systems; and the securing of our third rental contract for a newly sized proprietary Merlin high-pressure drilling riser to a customer in the Middle East.
For nearly 80 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical deepwater and offshore environments.
As the world expands investment in alternative energy sources, we will be working diligently to translate our core competencies into the renewable and clean tech energy space.
Recent product developments should help us leverage our capabilities and support a more diverse base of customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients while experiencing an increase in bidding to support multiple new clients actively involved in subsea minerals, offshore wind developments, and other renewable and Queen Tech energy systems globally.
In our Well Site Services segment, we generated revenues of $43 million in the fourth quarter of 2021, and adjusted segment EBITDA increased sequentially to $6.2 million, excluding severance and restructuring charges in the comparable periods.
Adjusted segment EBITDA margin in the fourth quarter of 2021 increased to 14%, compared to 13% reported in the third quarter of 2021.
During the most recent quarter, we made a strategic decision to exit certain nonperforming service offerings within this segment, resulting in $2.2 million in noncash inventory and fixed asset impairment charges and $300,000 in severance and restructuring charges.
Considering all Well Site Services lines that were exited during 2021, both domestically and internationally, we have streamlined our operations and we'll allocate capital going forward to our strongest equipment and service offerings.
The service line and region exits will temper our revenues going forward, but are expected to improve segment margins.
We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
As market expansion opportunities unfold in 2022, we will continue to focus on core areas of expertise in this segment and are actively developing improved equipment offerings to differentiate our completions service offerings.
In our Downhole Technologies segment, we reported revenues of $26 million and adjusted segment EBITDA of $0.1 million in the fourth quarter of 2021, compared to revenues of $26 million in adjusted segment EBITDA of $1.4 million reported in the third quarter of 2021.
The increased sales of our perforating products in the U.S. were essentially offset by declines in international perforating products, sales, and completion product sales due to seasonality and transitory reductions in customer demand patterns.
The latest variant of COVID-19 had a larger impact on our Downhole Technologies segment relative to our other segments as staffing during the pandemic was challenging and restaffing our operations in support of increasing market activity and demand has been somewhat slow.
We expect international sales of our perforating equipment and U.S. sales of our frac plugs to improve in the first quarter and throughout 2022, based upon current market drivers.
Going on to our overall market outlook.
COVID-19 disruptions and supply chain challenges have hampered activity in domestic and international markets for two years now, but these disruptions appear to be easing.
Global oil inventories are now below their pre-pandemic five-year seasonal averages, leading to higher commodity prices and expectations of a significant increase in U.S. customer spending through 2022.
Shale regions, as well as seeing an improved outlook in international and offshore markets, which should support our product and service offerings.
Given improvements in the frac spread count over the last several months, we expect our Well site Services and Downhole Technologies segments to grow in 2022 with increasing EBITDA contributions.
Revenues in our Offshore/Manufactured Products segment are also expected to improve given the increased level of backlog coming into the year along with improved short-cycle product demand.
Our outlook for the full year 2022 suggests that our consolidated revenues will increase 20-plus percent with much of this growth in the second quarter and beyond due to seasonality that we typically experience in the first quarter, coupled with COVID-19 and supply chain disruptions.
We expect 2022 full-year consolidated EBITDA to range from $60 million to $70 million with roughly 60% of the total generated in the second half of 2022.
Now, I'd like to offer some concluding comments.
The COVID-19 pandemic has negatively impacted global activity for two years now, but the pandemic appears to be winning.
crude oil inventories have now drawn down considerably with expanding economic activity, leaving the U.S. at 411.5 million barrels in inventory as of February 11, which was about 10% below the five-year range.
Crude oil prices have responded with spot WTI crude oil over $90 per barrel, setting up a very favorable outlook for 2022.
Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product and service offerings, with value-added products and services available to meet customer demands globally.
In addition, we will continue our product development efforts in support of emerging renewable and clean tech energy investment opportunities.
That completes our prepared comments. | compname announces q4 loss per share of $0.33.
q4 adjusted loss per share $0.14 excluding items.
q4 loss per share $0.33. |
Our discussion today will be led by Andres Lopez, our Chief Executive Officer; and John Haudrich, our Chief Financial Officer.
Today, we will discuss key business developments and review our financial results.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
We appreciate your interest in O-I Glass.
We're very pleased with our performance during the second quarter.
We reported adjusted earnings of $0.54 per share.
Results exceeded our guidance range and reflected a stronger-than-expected shipment levels as well as favorable ongoing operating performance.
We continue to see favorable performance across key business levers.
Shipments improved 18% and production rebounded 27% compared to the prior year, which was impacted by the onset of the pandemic.
The strong demand also reflected consumer preference for healthy, premium and sustainable glass packaging as markets reopen.
Furthermore, the benefit of higher selling prices substantially offset the rated cost inflation and continued favorable operating performance was driven by the positive contribution of our margin expansion initiatives.
Second quarter cash flow was also very strong as a result of solid operating performance.
As I noted last quarter, O-I has reached an inflection point.
We have seen a step change improvement in our ability to consistently perform and deliver on our commitments, which is underpinned by advanced capabilities across many disciplines developed over the last few years.
I believe current quarter results underscore this view.
As I will discuss shortly, we continue to advance our bold plan to change O-I's business fundamentals.
In addition to better-than-expected earnings and cash flow, I'm very pleased with the progress we made advancing our strategy.
Our margin expansion initiatives are exceeding our expectations, and we achieved a major milestone with MAGMA this past quarter.
Likewise, we continue to rebalance our business portfolio and advance our efforts to resolve our legacy asbestos liabilities.
As we look to the future, we remain optimistic about our business outlook.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52, which is a significant improvement from the prior year.
Our full year earnings and cash flow guidance has improved.
We now anticipate full year earnings of between $1.65 and $1.75 per share and $260 million of cash flow.
Let's move ahead to slide four to discuss recent volume trends.
As you can see on the chart, second quarter shipments were up significantly over the prior year, which was impacted by the onset of the pandemic.
Total shipments increased 18% this year compared to a 15% decline last year.
In the Americas, second quarter shipments were up 17%, with all geographies improving from the prior year.
The rebound was most pronounced in Mexico and the Andeans, which were significantly disrupted in 2020.
In Europe, shipments were up 22% and all geographies improved double digits from last year.
While the pandemic was very disruptive, underlying trends point to a stable or modestly improving demand.
For example, second quarter shipments were in line with 2019 levels, reflecting a return to pre-pandemic levels.
Glass has proven to be very resilient despite significant market volatility.
This includes supply chain disruptions, transportation challenges and major channel shifts between retail and on-premise consumption patterns.
The chart on the right illustrates how food and beverage consumption patterns should evolve across channels over the next 18 to 24 months.
As you can see, on-premise consumption is expected to rebound after the depths of the pandemic, while retail purchases should remain elevated compared to pre-pandemic levels.
While we first shared these analysis last quarter, the evolution of packaging demand over the past couple of quarters, supports these trends and continues to reinforce the projected consumption patterns in this chart.
As we look to the future, we expect continued volume growth.
While markets had already rebounded well in the third quarter of last year, we expect our shipments to be flat to up 1% in the third quarter of this year.
Reflecting solid demand year-to-date, we have increased our full year 2021 growth outlook.
While our prior guidance called for 3% to 4% growth, we now expect growth of between 4% and 5% in 2021.
In addition to a strong operating performance, we also achieved a number of key milestones during the first half of the year as we continue to advance our strategy.
On this page, we released our 2021 priorities as well as some highlights on our progress.
I'll touch base on each of our three platforms.
First, we aim to expand margins.
We have targeted $50 million of initiative benefits as well as continued performance improvement in North America.
We have made good initial progress with our margin expansion initiatives.
Benefits totaled $40 million during the first half, and we now expect to exceed our original $50 million target for the full year.
North America in turn has demonstrated a strong resilience responding to severe weather, high freight inflation and a tight supply chain situation, and sales volumes are comparable to 2019 levels.
Next, we seek to revolutionize glass.
To support this, we successfully validated several technology milestones for MAGMA Generation one line in Germany as well as continue to advance our Glass Advocacy campaign and reposition ESG.
Similarly, we remain on track to pilot the Generation two MAGMA line in the Streator, Illinois, in the second half of the year and continue to make solid progress developing Generation three.
Additionally, we're actively working on a R&D lightweighting program we call Ultra, targeting significant container weight reductions to improve even further the convenience and sustainability profile of glass.
O-I's Glass Advocacy campaign aims to rebalance the dialogue about glass.
Our digital marketing campaign is well underway with over 660 million impressions program to date and the campaign has reached over 80 million people across the U.S.
We are building a community of glass advocates, who regularly engage with our content, which demonstrates the relevance of our message.
Like in our technology developments, we are very encouraged by the positive response and progress made, and we'll continue to advance these marketing efforts.
I'll touch on ESG momentarily.
Third, we will continue to optimize our structure.
This includes a number of efforts ranging from portfolio adjustments, improving the balance sheet, simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have completed or entered into agreements for $930 million of assets sales to date.
So we are over 80% of our way toward our targeted divestitures by the end of 2022.
As John will expand, on our cash flow during the first half of the year was quite favorable given historic seasonal business trends, reflecting very good working capital management, which support debt reduction.
In March, we entered into a long-term strategic agreement with Accenture to manage our global business services activities, and we completed the first phase of this transition in July.
In addition to reducing G&A cost, we expect to accelerate capability enhancement by leveraging world-class processes and technologies.
As you know, we reached an agreement in principle back in April for a fair and final resolution to our legacy asbestos-related liabilities.
Efforts to complete the reorganization for Paddock are proceeding as expected.
Before I turn over to John, let me add a few comments on sustainability.
At O-I, our ESG and sustainability vision is holistic, grounded in innovation and touches every part of our business.
In our vision, we see a future where the innate circularity of glass meets O-I's disruptive technologies and other innovations to change how glass is made, sold and recycled.
This sustainable future of glass involves the development of significantly lighter glass containers through Ultra, which implies a lower carbon footprint per container.
It also involves the use of cleaner gas oxygen fuels and improved technology in traditional furnaces.
On top of that, O-I's revolutionary MAGMA melting technology will be capable of using biofuels and other carbon neutral renewable sources of energy, like hydrogen, as well as more grades of recycled class.
MAGMA includes a more flexible manufacturing process, including the ability to turn the unit on and off to optimize the use of energy and efficiency.
It also can be co-located at manufacturing and filling facilities.
This will reduce freight and potentially leverage the use and reuse of wastage, water and other resources.
In addition, we're building a future where innovative approaches, such as glass for good, enhance glass recycling while providing a benefit to the community, elevating O-I's ESG profile.
We are looking forward to sharing all of this and more in our coming 2020 sustainability report, which will be available at the end of Q3.
Now over to John.
I plan to cover a few topics today, including a recent performance, progress on our capital structure as well as our most current 2021 business outlook.
I'll start with a review of our second quarter performance on page seven.
O-I reported adjusted earnings of $0.54 per share.
Results exceeded our guidance of $0.45 to $0.50, given stronger-than-anticipated shipments and favorable cost performance.
In particular, sales volume was up more than 18% from last year compared to our expectation of 15% or higher.
Segment profit was $232 million and significantly exceeded prior year results, which were impacted by the onset of the pandemic.
Higher selling prices substantially offset elevated cost inflation linked to higher energy and freight costs.
Naturally, higher sales volume and favorable mix boosted earnings.
Likewise, favorable cost performance was driven by a 27% improvement in production levels as the prior year was impacted by forced curtailment due to lockdown measures.
Keep in mind that maintenance and project activity costs have normalized for the disruption last year.
Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.
The slide includes additional details on nonoperating items.
Let me point out that we did record a gain on an indirect tax credit in Brazil after a favorable court ruling, which has been excluded from management earnings.
Overall, we are pleased with favorable performance trends.
Moving to page eight.
We have provided more information by segment.
In the Americas, segment profit was $124 million, which is a significant increase compared to $52 million last year.
Higher earnings reflected 17% higher sales volume as the prior year was impacted by the onset of the pandemic.
Higher prices substantially offset cost inflation, which was elevated due to higher freight costs.
In Europe, segment profit was $108 million compared to $42 million last year.
The significant earnings improvement reflected a 22% increase in sales volume, while the benefit of higher selling prices partially offset cost inflation.
In the case of both regions, very good operating performance, mostly reflected higher production, which increased 28% in each segment, while supply chains remain very tight across the globe.
Likewise, very good operating performance also benefited from our margin expansion initiatives.
Keep in mind that we no longer report in Asia Pacific region following the sale of ANZ last summer.
In addition to comparing results to last year, we have added a comparison to 2019 to better understand our performance with pre-pandemic trends.
As illustrated on page nine, our current underlying performance exceeds pre-pandemic levels.
Adjusted primarily for the divestiture of ANZ, segment profit was up $7 million in the second quarter of 2021 compared to the same period in 2019.
Overall, higher selling prices have nearly offset elevated cost inflation, while sales volume and mix were comparable to 2019 levels.
Favorable results were really driven by improved operating and cost performance reflecting our margin expansion initiatives.
Let's shift to cash flows in the balance sheet.
I'm now on page 10.
We are following a specific set of guiding principles that are aligned with our strategy to increase shareholder value.
As we focus on maximizing free cash flow, we expect significantly higher cash flow this year and key working capital measures should be in line or favorable compared to 2020 levels.
As illustrated on the chart, our second quarter cash flow was $117 million and was comparable to the prior year, which benefited from significant inventory reduction due to forced production curtailment.
Over the past year, we have improved the consistency of our cash flows and now reflect normal seasonality of our business, solid operating results and very good working management.
Second, we preserved our strong liquidity and finished the second quarter with approximately $2.2 billion committed liquidity well above the established floor.
Third, we are reducing debt.
We expect net debt will end the year below $4.4 billion, and our BCA leverage ratio should end the year in the high 3s compared to 4.4 times at the end of 2020.
We expect to receive divestiture proceeds over the next several months, which will further improve our balance sheet position.
Please note, these targets could shift if the Paddock trust funding occurs prior to year-end.
At the end of the second quarter, net debt was down almost $1 billion from the same period last year, reflecting improved free cash flow and proceeds from divestitures.
Furthermore, our bank credit agreement leverage ratio was around 3.8 times as of midyear, which is well below our covenant limit.
Finally, we intend to derisk legacy liabilities as we advance the Paddock Chapter 11 process.
As previously announced, we have an agreement-in-principle for a consensual plan of reorganization, whereby O-I will support Paddock's funding of a 524(g) trust.
Total consideration is $610 million to be funded at the effective date of the plan.
Importantly, the agreement provides a channeling injunction protecting Paddock, O-I and their affiliates from current and future liability.
The Paddock reorganization is proceeding as expected and timing will be a function of the remaining legal and court actions to conclude this matter.
As previously noted, we have ample liquidity to fund the trust in the future.
And for clarity, we are not considering equity as a funding method.
Likewise, we remain highly focused on reducing our total debt obligations over time through free cash flow and proceeds from divestitures.
Let me wrap up with a few comments on our business outlook.
I'm now on page 11.
As Andres mentioned, we anticipate our business performance will improve in 2021 as markets stabilize and recover.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52 per share.
Naturally, this is a meaningful improvement from the third quarter of 2020, which was impacted by ongoing COVID required production curtailments in Mexico and the Andeans.
Overall, we expect shipments will be flat to up 1% from the prior year.
Keep in mind, demand had already rebounded in the third quarter of 2020 from pandemic lows.
Production should be up about 8% to 10% from last year, which was still impacted by lockdown measures in some markets.
At the same time, certain costs like maintenance and depreciation have normalized following the pandemic-induced disruption last year.
Likewise, the current supply chain is fairly stretched across the value chain, reflecting the impact of prior year production curtailments as well as a strained transportation situation in many markets.
Finally, we expect continued solid operating performance and benefits from our margin expansion initiatives.
Our full year 2020 outlook has improved as we've tightened our earnings expectations to the high end of our guidance range and increased our free cash flow estimate.
We now expect adjusted earnings of $1.65 to $1.75 per share and free cash flow of approximately $260 million.
This adjustment reflects higher expected shipment levels, which we now anticipate will increase 4% to 5% compared to 2020.
Likewise, we expect the benefit of our margin expansion initiatives will also exceed our original goal of $50 million.
We anticipate the benefit of higher shipments and improved cost performance will more than offset the impact of winter storm Uri, which, of course, was not included in our original guidance.
During this session, we will update our plans that will include more details on MAGMA.
Likewise, we will share key company targets and milestones.
Subsequent investor events will expand on these key topics.
Let me wrap up with a few comments on slide 12.
Overall, we are very pleased with our second quarter performance, which exceeded our guidance due to stronger sales volumes and improved cost performance.
In fact, our underlying performance was favorable across key business levers.
Selling prices and volumes were up and costs were down.
Our margin expansion initiatives are working well, and our ability to deliver on our commitments has improved, underpinned by advanced capabilities across business functions, rigorously built over the last few years.
I'm very pleased with the progress we are making on our bold plan to change O-I's business fundamentals.
Our business is more stable.
We have well-structured business planning processes, and we are a much more agile and resilient organization.
Likewise, we are removing the constraints of the past, like legacy asbestos liabilities, while successfully advancing breakthrough innovations, such as MAGMA.
Finally, we are encouraged by market trends, which is reflected in our improved earnings and cash flow guidance for 2021.
Over the past several years, we have been hard at work, improving the foundational capabilities of our company as well as staging the company for continued transformation.
We look forward to our Investor Day on September 28.
During this event, we will share our exciting plans to align glass and O-I with the future packaging for decades to come.
We are confident this plan will increase shareholder value and all share a new period of prosperity for life. | q2 adjusted earnings per share $0.54 excluding items.
currently, o-i expects q3 2021 adjusted earnings will approximate $0.47 to $0.52 per share.
now expects 2021 sales volume in tons should increase 4 to 5 percent compared to 2020.2021 adjusted earnings per share should approximate $1.65 to $1.75. |
Our discussion today will be led by Andres Lopez, our CEO, and John Haudrich, our CFO.
Today we will discuss key business developments and review our financial results.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
I appreciate your interest in O-I Glass.
We are pleased to report third quarter adjusted earnings of $0.58 per share.
Despite a number of macro challenges, O-I is once again delivering on its commitments as earnings exceeded our guidance range.
Demand for glass containers is strong yet our shipments were down about 1% in the quarter due to choppy demand patterns stemming from low inventory levels and ongoing global supply chain issues.
On the other hand, production levels rebounded nicely from the prior year which was impacted by the final stages of mandatory curtailments at the onset of the pandemic.
Also higher selling prices and the benefits of our revenue optimization initiative fully offset elevated cost inflation.
Overall, better than expected results primarily reflected the strong operating performance and cost management enabled by our margin expansion initiatives.
As we will discuss shortly, we're making great progress on our 2021 priorities including today's announcement of intend to sell our Le Parfait brand and business at an attractive valuation as part of our portfolio optimization program.
We are also accelerating O-I's transformation as we shared at our Investor Day last month.
The combination of favorable market conditions for glass containers, O-I's ongoing transformation and the introduction of MAGMA is building the path to 'yes.
' Yes, to an agile and resilient company.
Yes, to a new paradigm for glass and yes to profitable growth.
We are confident these plan will enhance value for all our stakeholders and ensure sustainable prosperity for O-I.
Reflecting growth momentum, we are increasing our full-year earnings outlook.
We now anticipate 2021 adjusted earnings will range between $1.77 and $1.82 per share and we expect at least $260 million of free cash flow.
We expect 4th quarter adjusted earnings will approximate $0.30 to $0.35 per share and with elevated cost inflation pending price recovery starting in early 2022.
Let's turn to a slide 4.
As we continue to deliver on our commitments, we are also making very good progress advance in O-I's strategy.
On this page, we list our 2021 priorities, as well as some highlights on our progress.
I'll touch base on each of our 3 platforms.
First, we aim to expand margins.
We have targeted $50 million of initiative benefits as well as continued performance improvement in North America.
As you can see, we have already achieved our full-year initiative target and now expect benefits with total around $60 million in 2021.
Next, we seek to Revolutionize Glass, our new Magma Generation 1 line has been commercialized in Germany and our Generation 2 line in Streator, Illinois is being piloted in the second half of 2021.
Our glass advocacy and ESG efforts are also gaining steam.
Third, we will continue to optimize our structure.
This includes a number of efforts ranging from portfolio adjustments, improving the balance sheet, simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have entered into agreements for over $1 billion of asset sales to date including the recently announced intent to sell our Le Parfait brand and business in Europe.
As laid out during our Investor Day, we are investing up to $680 million over the next 3 years that include up to 11 Magma lines to enable profitable growth.
Expansion plans are focused on our sole markets across Latin America, premium spirits in the US and the UK and premium beer in Canada.
As John will expand upon, year-to-date free cash flow is quite favorable compared to past trends and we continue to advance other important efforts including the Paddock Chapter 11 process.
Overall, we're very pleased with our progress.
Moving to slide 5.
We have laid out the key elements of our strategy shared during Investor Day.
As I've noted earlier, the combination of favorable market conditions for glass containers, O-I's ongoing transformation and the introduction of Magma are building the path to 'yes'.
Yes, the profitable growth, glass is poised to benefit from key mega trends such as wellness, sustainability, premiumization, and harm leaving.
Reflecting these tail winds, global market growth is anticipated to rise 1.6% a year and higher in the principal regions where we operate.
Given these trends and a revitalized commercial approach, we are investing in new capacity to enable key growth opportunities within our strong organic commercial pipeline.
Yes, to an agile and resilient company.
Our transformation is well underway and I believe recent performance demonstrates the momentum we are building.
We expect significant benefits from our ongoing margin expansion initiatives.
We are expanding our portfolio optimization problem to realign our business portfolio, fund organic growth and improve our return on invested capital.
Also we intend to resolve legacy asbestos and pension liabilities that have hamstrung the organization for decades.
Finally, yes to a new paradigm for glass enabled by MAGMA.
This new breakthrough solution provides a host of additional capabilities to build on top of our world-class heritage network.
With MAGMA, we can meet the needs of an evolving market and span our business.
These efforts are set to accelerate O-I's transformation through profitable growth, improved financial performance and value to all the stakeholders.
We are excited about the future and we believe O-I represents a compelling investment opportunity.
Now over to John.
I plan to cover a few topics today, including recent performance progress on our capital structure as well as our current 2021 business outlook.
I'll start with a review of our 3rd quarter performance on page 6.
O-I reported adjusted earnings of $0.58 per share.
As noted during our Investor Day, we expected results would be at the high end or slightly exceed our guidance of $0.47 to $0.52.
Stronger results reflected good operating momentum as we exited the quarter.
Segment operating profit was $243 million, which significantly exceeded prior year.
Higher selling prices fully offset elevated cost inflation linked to higher energy and freight costs.
While demand remains strong, sales volumes dipped 1% due to choppy demand and ongoing supply chain challenges in several markets we serve.
Likewise, favorable cost performance was driven by an 8% improvement in production levels as the prior year was impacted by forced curtailment due to lockdown measures.
Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.
The slide includes additional details of non-operating items.
Overall, we are pleased with favorable performance trends.
Moving to page 7, we have provided more information by segment.
In the Americas segment profit was $133 million, up from $113 million last year, despite significant cost inflation pressures, favorable net price reflected timely pass-through on cost and the benefits of our revenue optimization initiatives.
Sales volume was down 3%.
In particular, we have seen some food categories rebalance as on premise reopens but food volume still remains above pre-pandemic levels.
Likewise, we have intentionally mixed managed certain low value categories given tight inventory conditions and ongoing supply chain challenges.
On the other hand production rebounded 9% and earnings benefited from good ongoing operating performance as well as our margin expansion initiatives, which offset elevated freight costs.
In Europe, segment profit was $110 million compared to $88 million last year.
Sales volume was up nearly 2% with strong growth in the wine category, while higher selling prices, partially mitigated elevated cost inflation.
Significantly lower operating cost reflected an 8% improvement in production levels very good operating performance and benefits from our margin expansion initiatives.
Keep in mind that we no longer report an Asia-Pacific region following the sale of ANZ last July.
Let's shift to cash flows in the balance sheet.
I'm now on page 8.
We are following a specific set of guiding principles for our cash flow and capital structure that are aligned with O-I's strategy to increase shareholder value.
We expect significantly higher free cash flow this year and key working capital measures should be in line or favorable compared to 2020 levels.
as illustrated on the chart, our 3rd quarter free cash flow was $213 million.
Over the past year, we have improved the consistency of our cash flows, which now reflect the normal seasonality of our business, solid operating results in working capital management.
Year-to-date cash flows approximated $181 million, so we are well positioned to achieve our full year guidance of at least $260 million of free cash flow.
Second, we preserved our strong liquidity and finished the 3rd quarter with approximately $2.1 billion of committed liquidity well above the established floor.
Third, we are reducing debt.
At the end of the 3rd quarter, our net debt was $4.3 billion, the lowest level since 2015 and our BCA leverage ratio was around 3.6 times.
Both net debt and our leverage ratio compare favorably to our full year targets.
So far this year, we have entered into agreements to sell $128 million of assets as part of our portfolio optimization effort.
This includes today's announcement of a binding commitment from a subsidiary of Berlin Packaging to acquire our Le Parfait brand and business for EUR72 million or about $84 million.
The EBITDA for this business was EUR7.5 million in 2020 with a similar performance on a 12 month trailing basis.
This represents a compelling valuation in excess of a 9 multiple.
We expect the proposed sale will be completed by year end or early next year.
The agreement also includes a long-term supply agreement for O-I to sell glass containers to Berlin to support expansion of this attractive and growing brand.
Finally, we intend to de-risk legacy liabilities as we advance the Paddock Chapter 11 process.
As previously announced, we have an agreement in principle for a consensual plan of reorganization where O-I will support Paddocks funding of a 524 (g) trust.
Total consideration is $610 million to be funded at the effective date of the plan.
Importantly, the agreement provides a channeling injunction protecting Paddock, O-I and their affiliates from current and future liability.
The Paddock reorganization is proceeding as expected and timing will be a function of the remaining legal and court actions to conclude this matter.
Overall, we continue to improve our cash flow and balance sheet position.
Let me finish up with a few comments on our business outlook.
I'm now on page 9.
We have increased our full year earnings guidance to between $1.77 and $1.82 per share reflecting favorable 3rd quarter results.
We now expect free cash flow will be at least $260 million.
We anticipate 4th quarter adjusted earnings will approximate $0.30 to $0.35 per share.
Fourth quarter results should be down from the prior year as cost inflation peaks.
Importantly, we are preparing to implement annual price increases early next year to recapture the impact of inflation.
Given ongoing global supply chain challenges, we anticipate sales buying will be about flat with the prior year.
Additionally, we expect continued strong operating performance and benefit from our margin expansion initiatives.
This outlook is based upon current FX rates as the dollar has strengthened some in the recent weeks.
Keep in mind that maintenance and engineering activity will be at their highest levels for the year during the 4th quarter.
Also our outlook reflects current conditions, which could shift given the level of macro uncertainties across the markets we serve.
We have also shared some additional themes for 2022 which are consistent with our longer term outlook shared at our Investor Day.
Let me wrap up with a few comments on slide 10.
Overall, we are pleased with our performance during the 3rd quarter.
Importantly, O-I continuously achieve its commitments despite a number of macro challenges and uncertainties.
I believe these represent a step change improvement in our ability to consistently perform and deliver.
At the same time, we continue to advance our key priorities for 2021.
Our multi-year margin expansion initiatives are gaining steam, MAGMA is advancing and we continue to improve our structure.
We are now a much more agile and resilient organization that is well positioned to accelerate our transformation.
Finally, we're building the path to yes that we outlined last month at our Investor Day.
Lawrence you are ready? | compname reports q3 adjusted earnings per share of $0.58 excluding items.
q3 adjusted earnings per share $0.58 excluding items.
q3 sales $1.6 billion.
sees fy adjusted earnings per share $1.77 to $1.82.
sees q4 adjusted earnings per share $0.30 to $0.35. |
Before we begin, let me remind you that this discussion along with the associated slides and the question-and-answer session that follows will include statements regarding estimates or expectations of future performance.
A copy of today's transcript and slides will be available on our website in the Investors section under Past Events.
I'm pleased to report the Olin team has once again proved to be the most unique and agile in the industry in meeting the clear expectation of our shareholders.
Again, I just have to say that the solid performance by the complete team sets me up to be able to focus on the items that drive our future which are enhancing our contrarian value model, turning our ratchet on undervalued products, call in to grow accretive capital allocation, building out our interlinked matrix of activation knobs, growing shooting sports participation and lifting all Olin people.
This is a company that is focused on continuing to grow adjusted EBITDA and coupling that with balanced capital management to deliver more than $10 of earnings per share in the near future.
So I'll make some brief commentary on a few slides and get to the Q&A quickly.
2021 is expected to be a solid result for Olin for the reasons shown on Slide number 3.
While the longer term fundamental of demand that grows faster than supply is starting to be exposed here in 2021, our leading actions to get a higher value for our scarce resources is proving to be successful.
Current highlights of that success are that we continue to exit business that was based on non-negotiated pricing allowing our product chain mix with the intended impact from purposeful settings of our interlinked matrix of activation nodes start accelerating the value capture of epichlorohydrin and drive expansion in shooting sports participation with our Shoot United movement.
While there maybe some end-of-year holiday slowdowns, which are really supply driven, not demand driven, and some seasonality that result in a sequentially flattish fourth quarter results, we still expect 2022 to exceed 2021.
The reason thematic for better results in 2022 is shown on Slide number 4.
The minor reason in our thematic is that the previously mentioned demand growth versus supply growth dynamic just gets better and better across all our businesses.
More people are enjoying shooting sports, demanding clean wind energy and expanding their homes to have us.
The major reason in our thematic is that all of Olin's activities are designed around a foundational cultural principal of only selling into value.
We know who we are.
In October, we took the decision to close some more undervalued assets and simultaneously used other existing global asset and product liquidity to grow Olin's value.
As our own ECU assets are getting rightsized, we are a global buyer of ECUs to satisfy our higher value products demand.
Even though we have grown our earnings for five consecutive quarters and delivered a levered free cash flow that is approaching 20%, we still must show that our performance will continue to improve, but maybe more importantly, we must demonstrate our ability to manage uncertainty and volatility.
Slide number 5 has an illustration.
Olin has three substantial businesses, each with a meaningful contribution to segment earnings.
For reasons that we previously discussed, the Winchester, which is shown in red on the slide, Consumer and Defense business offer solid and sustainable growth.
For reasons we will discuss in just a moment, the Epoxy, which is shown in green on the slide, Engineered Materials, offer differentiated growth as we expand margins in that business.
The Chlor Alkali products and Vinyls industrial essentials are largest organic and inorganic growth opportunity.
We expect the Chlor Alkali segment results to be slightly volatile across a brief transitional window when we have a model profile shift between the relative strengths on the two sides of the ECU.
We think of the net company volatility as ripples on a deep ocean, not waves on a shallow lagoon.
We should control our destiny here.
Continuing with the theme of good fundamentals on Slide number 6, our perceived old world chemistry has new world application and value.
I won't read all of these mega trend multipliers, as I'm sure they're familiar to you, but instead jump to Slide number 7 and hit on the differentiated growth profile of Epoxy.
Epoxy sets itself apart from other engineered materials by offering nearly non substitutable performance.
Almost every end use category is growing faster than global GDP.
Consider the outlook for more and larger wind turbines for clean energy, consider the outlook for electrical laminates for the New Mobility trends and broad electrification trends, consider the outlook for infrastructure expansion and replacement and so on.
Even though we recognize the value of this business in Epoxy resin sales and in Epoxy systems sales, the value driver is really epichlorohydrin and we will be expounding on our globally leading epichlorohydrin position in future earnings calls.
We expect it won't be long before our Epoxy business delivers greater than $1 billion of EBITDA and carries the same enterprise value that all of Olin carries today, more representative of a highly engineered materials company.
Finally, I will close on Slide number 8.
We are going to start talking more about earnings per share in conjunction with EBITDA and segment earnings.
We are advancing in our evolution and expect our activities in debt reduction, refinancing, share repurchases and M&A to be big contributors of forward value and that value shows in EPS.
No doubt that a majority of our forward discussion will center on leadership, our linchpin products, great supply demand fundamentals, parlaying and lifting Olin people, however, new ways to create shareholder returns are evolving for Olin and help us earn above $10 of earnings per share.
So that concludes my opening comments and Tom, we're now ready to take questions. | qtrly adjusted ebitda achieved despite production interruptions from hurricanes, raw material cost volatility, & supply-chain disruptions.
expects q4 2021 adjusted ebitda to be comparable to or slightly lower than q3 2021 levels. |
Before we begin, let me remind you that this discussion, along with the associated slides and the question-and-answer session that follows will include statements regarding estimates or expectations of future performance.
A copy of today's transcript and slides will be available on our website in the Investors section under Past Events.
I'll kick off my comments by saying just how proud I am of our entire Olin team for bucking traditional stale paradigms.
Our fourth quarter results demonstrate the team's resolve and leadership.
Olin people are masters of the ECU and we are prioritizing value first, above all else, across the entire ECU, not just in one or two products.
That means we don't sell excessive volumes into poor quality markets.
Instead, we withdraw supply and we generate purposeful activations on both sides of the ECU, up and down our derivative chains, resulting in margin improvements on both sides of the ECU.
Slide Number 12 in the appendix demonstrates this activity and effect.
In fact, maybe the most important slide we have ever published is Slide Number 12.
Our model also rejects the notion that this business must be deeply cyclical and will always have its co-products moving in opposite value directions, thus generating mediocre ECU returns over the cycle.
It is not cyclical and is quite steady when Olin does not push excess volume and chase the poor quality side of the ECU down across an inflection point on Slide Number 12 into an over-supplied swamped of poor pricing.
Now, turning your attention to Slide Number 3, Olin's quarterly ECU profit contribution index chart, even though the global Chlor Alkali market configuration is in the poorest state for Olin, in other words when strong, back integrated PVC production, which Olin does not directly participate in, pushes out lots of co-produce caustic into a weak caustic demand environment, really the emphasis being on the weak caustic demand point here, we still sequentially lifted our ECU PCI by lifting margins across chlorine, EDC and virtually every chlorine derivative while simultaneously not allowing Olin caustic to decline in price as much as industry indices would have anticipated.
The ECU PCI shows our commitment to quality and our adjusted EBITDA improvement shows the result of that commitment.
I will also comment here that our fourth quarter adjusted EBITDA result is pure as there are no non-recurring items included.
And speaking of quality and moving to Slides 4 and 5, Winchester delivered the best quarterly performance in the business's 155-year history with even better quarters expected throughout 2021.
The Olin Winchester team relishes its commitment to support both the U.S. war fighter and the more than 55 million of us who enjoy shooting sports.
These things are woven into the fabric of America and we expect that elevated shooting sport participation is here to stay.
U.S. military modernization initiatives are expected to create additional opportunities for Winchester as well.
So wrapping up my opening comments with Slide Number 6, our first half quarterly average EBITDA should be better than the fourth quarter of 2020 across every business.
Note that we do have a number of turnarounds in the second quarter to contend with and we expect a 10% improvement in the ECU PCI across the first half.
Here are some key points specifically for the first quarter.
Point number 1, Epoxy will be the star of the show and is expected to surpass our prior quarterly EBITDA record as the team lifts the permanent earnings foundation of that business to match the value of our product offering.
Point number 2, our merchant chlorine net-backs go to a multi-year high, following our fourth quarter activations, which included shifting an additional 30% of our ongoing business away from arbitrary external trade indices.
Point number 3, our broad productivity gains start to show up as our fourth quarter project pipeline grew by 20%.
We start 2021 with 633 active projects.
Please see Slide number 15 in the appendix for some more detail on that.
Point number 4, the early redemption of $120 million of the high cost acquisition bonds this month was funded a 100% with cash from operations, as was the additional $100 million of bonds repaid last October.
Through a combination of improved adjusted EBITDA, disciplined capital spending and debt reduction, we expect our net debt to adjusted EBITDA ratio to improve to roughly three times within the next 12 months.
So looking out just a bit beyond 2021 we have the team, the skill, the operating model and the assets we need to achieve at least $1.5 billion in EBITDA.
Additionally, we have adjusted down our forward annual capital spend requirements to around $200 million, reflecting a better match of our physical plant assets to our model.
This adjustment in turn enhances our levered free cash flow and that cash flow inflection point should be clearly evident in 2021.
At the same time we rinked $1.5 billion in EBITDA, global ECU supply demand fundamentals are likely to be improved and Olin will expand our strategy to incorporate fixed asset light structural moves to take us to the next higher EBITDA level, as more molecules move through our sphere of influence.
Those moves are likely to be just as disruptive to conventional paradigms as is our current model.
We will look forward to speaking with you in the future about the next EBITDA tranche above $1.5 billion and those supporting activities.
So that concludes my opening comments and so operator, we're now ready to take questions. | expect q1 2021 adjusted ebitda to improve sequentially from q4 2020. |
We have posted to www.
I hope everyone on the call is staying safe and healthy.
I'm pleased to update you on how we continue to respond to and overcome the challenges of the pandemic.
I'll first discuss our financial results, then we'll cover our performance with respect to our strategic priorities and operations and will end with our expectations for the remainder of 2021.
For the first quarter, organic growth was negative 1.8% which positions us for a very strong recovery for 2021.
Going forward, we expect to see positive organic growth.
The new disciplines, we have disclosed are as follows.
CRM Precision Marketing which includes our market consulting, digital and direct marketing agencies, CRM Commerce and Branding Consultancy includes our branding consultancies, shopper marketing and specialty production agencies, CRM Experiential includes our events agencies and CRM Execution & Support is unchanged for the most part, from our prior reporting and includes primarily our field marketing research agencies and our agency servicing the not-for-profit sector.
We believe this additional level of disclosure will allow you to have a better understanding of our operations.
Getting back to our organic growth by geography, in the United States organic growth was down 1% an improvement of over 8% from the fourth quarter.
Advertising and Media and CRM Precision Marketing were positive in the US while the rest of our disciplines, continued to be negative with CRM Experiential having the largest negative impact on our growth.
Europe continued to face significant challenges due to the pandemic in Q1.
Although overall, the markets continued to improve while the rollout of vaccine in Europe lags that of the United States and the UK.
Some countries like Germany and the Netherlands are starting to make progress.
The UK was down 6.4%, about half the decline in the fourth quarter.
CRM Precision Marketing, CRM Commerce and Branding Consultancy and health were all positive in the UK, primarily offset by a significant reduction in CRM Execution & Support due to our field marketing operations.
The Euro and the non-Euro markets were down 3.2% as compared to a negative 9.2% in Q4.
Multiple countries had positive growth in the quarter and the majority continued to improve sequentially.
As you turn positive in Q1 with organic growth of 2.5% Australia continued to perform well and we saw a significant return to growth in our events business in China which combined with improvements in the other operations in the market resulted in double-digit growth.
Latin America experienced negative 2.4% growth in Q1 and meaningful sequential improvement compared to the fourth quarter.
EBIT margin in the first quarter was 13.6% as compared to 12.3% in the first quarter of 2020.
EBIT improved due to the repositioning and cost management actions we took in 2020.
In 2021, our management teams are continuing to align cost with revenues and we're also seeing continued benefits from reductions in addressable spend.
While we expect addressable spend will not return to pre-COVID levels, travel and certain other addressable costs will likely increase during the course of 2021, as conditions improve.
Overall, our expectation is that operating margins for the full year of 2021 will exceed our 2020 operating margin, excluding repositioning costs incurred in Q2 of 2020.
Net income for the quarter was $287.8 million, an improvement of 11.5% from 2020 and earnings per share was $1.33 per share, a year-over-year increase of 11.8%.
Turning to our liquidity, the refinancing steps we took earlier in 2020 combined with our enhanced working capital processes and the curtailment of our share repurchase program, have positioned us extremely well.
We generated $383 million in free cash flow in the quarter and ended with $4.9 billion in cash.
Given the continuing improvements in our operations, strong liquidity and credit profile, our Board has approved the resumption of our share repurchases beginning in the second quarter.
This follows our recent decision to increase our dividend by 7.7% to $0.70 per share.
Both actions are a testament to the steady improvement in our results and our expectations for further improvement for the remainder of 2021.
Our traditional uses of our free cash flow paying dividends, pursuing accretive acquisitions and using our remaining cash for share repurchases is now fully back in effect.
Phil will cover our first quarter performance in more detail during his remarks.
Turning now to our strategy and operations.
In the midst of the pandemic, our key strategic objectives served us well.
These strategies are centered around hiring and retaining the best talent, driving organic growth by evolving our service offerings, improving operational efficiencies and investing in areas of growth.
As part of this process, we continue to make internal investments in our agencies across all practice areas during a very difficult year.
We made good progress on enhancing our capabilities throughout our portfolio, and we will continue to pursue investments with a specific focus in precision marketing, MarTech and digital transformation, commerce, media and healthcare.
We are also accelerating our pursuit of acquisitions in these areas and we've recently completed two transactions; Omnicom Health Group acquired US-based Archbow Consulting.
Archbow helps pharmaceutical and biotech companies design, build and optimize market access operations, product distribution and patient access.
These capabilities will deepen Omnicom's health group's consultative services to biotech and pharma companies across a broad spectrum from operations to marketing.
Also in the quarter Credera, our MarTech and digital transformation consulting business and part of Omnicom's Precision Marketing Group acquired Areteans.
Areteans will extend through their depth in digital transformation, digital marketing and e-commerce.
The company specializes in the design, delivery and implementation of real-time interaction and digital customer relationship management for some of the world's largest brands.
It expands our operations in Australia, India, New Zealand, Singapore and the UK.
Turning to Omni our data and insights platform, as I've mentioned in our last call; looking beyond our media business our practice areas are increasingly leveraging Omni to identify insights for their specific disciplines and clients.
Last quarter Omnicom Public Relations Group launched OmniEarned ID a solution that allows clients to evaluate the outcomes of Earned Media with the same precision as paid media.
More recently, our Health Group launched Omni Health which integrates key healthcare data sets within a privacy compliant ecosystem.
Since we launched Omni 3 years ago, we've continued to [Indecipherable] and insights platform.
As compared to other solutions built on limited -- open source approach -- connects more data sources across more media and commerce platforms to deliver better outcomes to our clients.
In Q2, we will be launching Omni 2.0 using next generation API connections to seamlessly orchestrate, identity sources and platforms -- insights and superior decisioning for our clients across all our networks and practice areas.
Just as important Omni 2.0 continues to build on our commitment to consumer privacy and transparency.
Our data neutral approach, which results in the most diverse compilation of data sets continues to be rooted in a robust data privacy compliance methodology.
This approach puts us in a strong position for a post-cookie world; a few points on this are, through our pioneering work creating data clean rooms, we have direct connections to the first-party data of many of our clients.
Because we are open source and data neutral, Omni works seamlessly across walled garden environments, as well as the broader ecosystem.
At the same time, we orchestrate datasets from about 100 privacy compliance sources to provide a comprehensive view of the consumer across devices.
As the marketplace and technologies continue to rapidly advance, we are confident, our talent, platforms and the strategies built on a foundation of our creative culture, give us a competitive advantage in effectively serving both new and existing clients.
As testament to this success, we've had several key new business wins this past quarter, including a multi-year agreement with Alliance, a leading financial services provider for creative development and production services.
Through this master framework agreement, Omnicom will produce work for Alliance on a global and local level, offering creative solutions to activate the global brand strategy for more than 70 countries, where Alliance operates.
In addition, after recently selecting OMD as its US media agency of record Home Depot has named BBDO as its creative agency of record.
Avocados from Mexico hired GSD&M as its agency of record.
TWBA\Chiat\Day LA was named Agency of Record for three new clients; Behr Paint, Moderna and Schwan's Company.
Through the strategic and creative accounts for Vanguard and Vantage and OMD won the media business for Dr. Scholl's.
In summary, we've made significant strides in evolving our services, capabilities an organization to better service our clients with data science and technology, while remaining grounded in our core strength of creativity.
I'm proud to lead a company with an extraordinary group of people who continually deliver the best creative work in our industry.
From their unwavering dedication, creativity and innovation came the number of industry awards and recognition.
Here are just a few highlights.
For the drums, wealth creator rankings Omnicom was the number one holding company for the fourth year in a row and BBDO won the network category.
[Indecipherable] was named campaign US's 2020 advertising agency of the year.
Critical Mass was named Ad Age's 2021 best places to work with.
BBDO, TBWA and Goodby Silverstein & Partners, were all named to Fast Company's prestigious list of Most Innovative Companies for 2021 making Omnicom the only holding company -- there are three agencies ranked in the top 10 in the advertising sector.
And PHD was named EMEA's Media & Network of the Year and UK Media Agency of the Year Campaign's UK Agency of the Year Award.
Our people have a wealth of knowledge, experiences and perspectives that lead us to this innovation and forward thinking look.
The diversity of our group is something that needs to be celebrated, prioritized and improved upon and it's a strategic focus for us in the year ahead.
With our launch of OPEN2.0 last year, we have made a clear action plan for achieving systemic equity across Omnicom.
We have more than doubled the number of DE&I leaders throughout Omnicom and we are establishing specific KPIs for our networks and practice areas to deliver on and to be measured by.
I look forward to sharing the progress we are making on DE&I on our future calls.
As I discussed earlier, we are confident in both our organic growth expectations and EBIT performance for 2021.
It has taken some time to turn the corner and we are now on a clear path to return to growth.
At the same time, we know that we must continue to monitor the COVID-19 situation and to adapt to any unforeseen challenges that may arise.
As we continue to enhance our operations, we are also evaluating what the future of work looks like at Omnicom; our leadership on a local and office level are working on gathering feedback from employees and clients to help us decide what the new normal will be; one where we can service our clients efficiently while also connecting with colleagues in the safest and most flexible way possible.
The incredible talent within Omnicom has helped us maintain business continuity through the lows of 2020 and overcome its challenges.
As John said, as we move through the first quarter of 2021, we continue to see an improvement in business conditions particularly when compared to the peak of the pandemic during the second quarter of 2020.
As we anticipated, we again saw a sequential improvement in organic revenue performance, a decrease of 1.8% in the first quarter of this year which is a considerable improvement in comparison to the last three quarters of 2020.
And now that we've cycled through a full year of operations since the start of the pandemic, we expect to return to positive organic growth in the second quarter and for the full year.
We continue to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories and the benefits from our repositioning actions taken back in the second quarter of 2020.
Turning to slide 3 for a summary of our revenue performance for the first quarter, organic revenue performance was negative $60.6 million or 1.8% for the quarter.
The decrease represented a sequential improvement versus the last three quarters of 2020, including the unprecedented decrease in organic revenue of 23% in Q2 11.7% in Q3 and 9.6% in Q4.
Regionally, although we continue to experience declines in the Americas, we continue to see improvement when compared to what we experienced over the previous three quarters.
In Europe, FX gains helped to offset negative organic growth and our Asia-Pacific region saw positive organic growth with a mixed performance by country.
The impact of foreign exchange rates increased our revenue by 2.8% in the quarter.
Above the 250 basis point increase we estimated entering the quarter, as the dollar continued to weaken against some of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 0.4% in line with our previous projection, and as a result our reported revenue in the first quarter increased 0.6% the $3.43 billion when compared to Q1 of 2020.
I'll return to discuss the details of the changes in revenue in a few minutes.
Returning to slide one, our reported operating profit for the quarter was $465 million, up 10.8% when compared to Q1 of 2020 and operating margin for the quarter improved to 13.6% compared to 12.3% during Q1 of 2020.
Our operating profit and the 130 basis point improvement in our margins this quarter was again positively impacted from our actions to reduce payroll and real estate costs during the second quarter of 2020, as well as continued savings from our discretionary addressable spend cost categories including T&E general office expenses, professional fees, personnel fees and other items, including cost savings resulting primarily from the remote working environment.
Our reported EBITDA for the quarter was $485 million and EBITDA margin was 14.2% also up 130 basis points when compared to Q1 of last year.
As we've discussed previously, we have and will continue to actively manage our cost to ensure they are aligned with our current revenues.
In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization.
Focusing on real estate portfolio management, back office services, procurement and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
They increased by about $7 million in the quarter but excluding the impact of exchange rates, these costs were down by about 2.6%.
While it was a reduction in base compensation overall from the staffing actions we undertook during the second quarter of last year, it varies by agency, and certain of our agencies have added people as business conditions improved in their markets.
In addition third-party service costs were effectively flat on a reported basis and down slightly on a constant currency basis.
In comparison, these costs which are directly linked to changes in our revenue decreased nearly 40% in the second quarter of last year, 20% in the third quarter and 12.7% in the fourth quarter of 2020, consistent with the decline in our revenues across all of our businesses in those quarters.
Occupancy and other costs, which are less linked to changes in revenue declined by approximately $18 million reflecting our continuing efforts to reduce our infrastructure Call as well as the decrease in general office expenses since the majority of our staff has continue to work remotely.
In addition, finally, depreciation and amortization declined by 3.7 million.
Net interest expense for the quarter was $47.5 million compared to Q1 of last year and down $500,000 versus Q4 of 2020 -- 2020 our gross interest expense was down $1.5 million an interest income decreased by $1 million.
When compared to the first quarter of 2020, interest expense was down -- from $4.7 million, mainly resulting from $7.7 million charge we took in Q1 of 2020 in connection with the early retirement of $600 million of senior notes that were due to mature in Q3 of 2020.
That was offset by the incremental increase in interest expense from the additional interest on the incremental $600 million of debt we issued at the onset of the pandemic in early April 2020.
Net interest expense was also negatively impacted by a decrease in interest income of $6.4 million versus Q1 of 2020 due to lower interest rates on our cash balances.
Based on -- effectively flat in 2021 when compared to 2020.
Our effective tax rate for the first quarter was 26.8% up a bit from the Q1 2020 tax rate of 26% but in line with the range, we estimate for 2021 of 26.5% to 27%.
Earnings from our affiliates was marginally positive for the quarter, representing an improvement compared to the last year.
And the allocation of earnings to the minority -- year in our less than fully owned subsidiaries.
As a result, our reported net income for the first quarter was $287.8 million up 11.5% or 29.7% million when compared to Q1 of 2020.
Our diluted share count for the quarter decreased 0.3% versus Q1 of last year to 216.8 million shares.
As a result, our diluted earnings per share for the first quarter was $1.33 up $0.14 or 11.8% per share when compared to the prior year.
Returning to the details of the changes in our revenue performance on Slide 3, organic revenue performance improved again compared to the reductions in client spending, we experienced during the last three quarters.
We continue to see our clients across a wide spectrum of industry sector -- modify spending as they -- pandemic on their businesses.
While helped by FX -- was [Technical Issues] or up $20 million 0.6% from Q1 of 2020.
CRM precision marketing which includes our precision marketing and digital direct marketing agencies which were previously included in our CRM Consumer Experience discipline.
CRM commerce and brand comprised of the Omnicom Commerce Group and our brand consulting agencies; both previously included in CRM Consumer Experience CRM Experiential which includes our events and sports marketing businesses which was also included in CRM Consumer Experience and our CRM Execution and Support discipline which includes our field marketing, merchandising and point of sale, research and not-for-profit consulting agencies and remains largely unchanged.
Turning to the FX impact, on a year-over-year basis the impact of foreign exchange rates was mixed when translating our foreign revenues to US dollars.
The net impact of changes in exchange rates increased reported revenue by 2.8% or $95.7 million in revenue for the quarter.
While the dollar weakened against some of our largest major foreign currencies, we also saw some strengthening against the handful of others.
In the quarter, the dollar weakened against the euro, the British pound, the Chinese yuan and the Australian dollar while the dollar strengthened against the Brazilian real, the Russian ruble and the Turkish lira.
In light of the recent strengthening of our basket of foreign currencies against the US dollar and where currency rates currently are, our current estimate is that FX could increase our reported revenues by around 3.5% to 4% in the second quarter and moderate in the second half of 2021 resulting in a full year projection of approximately 2% positive.
These estimates are subject to significant adjustment as we move forward in 2021.
The impact of our acquisition and disposition activities over the past 12 months resulted in a decrease in revenue of $15.1 million in the quarter or 0.4% which is consistent with our estimate entering the year.
Our projection of the net impact of our acquisition and disposition activity for the balance of the year, including recently completed acquisitions and dispositions is currently similar to Q1.
As previously mentioned, our organic revenue decreased $60.6 million or 1.8% in the first quarter when compared to the prior year.
The impact of the COVID-19 pandemic on the global economy and on our client's planned marketing spend appears to be moderating in certain major markets.
As long as the COVID-19 pandemic remains a public health threat, global economic conditions will continue to be volatile.
We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy moderates.
We expect to return to positive organic growth in the second quarter and for the full year.
For the first quarter -- the split was 59% for advertising and 41% for marketing services.
As for the organic change by discipline, advertising was up 1.2% Our media businesses achieved positive organic growth for the first time since Q1 of 2020 and our global and national advertise -- when compared to the last three quarters although performance mixed by agency.
[Technical Issues] 7.2% on a continued strong performance and the delivery of a superior [Technical Issues] service offering.
CRM commerce and brand consulting was down 4.2% mainly related to decreased activity in our shopper marketing businesses due to client losses in prior quarters.
CRM experiential continued to face significant obstacles due to the many restrictions from holding large events.
In the quarter, the discipline was down over 33%.
CRM Execution and Support was down 13% as our field marketing non-for profit and research businesses continue to lag.
PR was negative 3.5% in Q1 on mixed performance from our global PR agencies, and finally, our healthcare agencies again facing a very difficult comparison back to the performance of Q1 2020 when they experienced growth in excess of 9% were flat organically.
So the businesses remained solid across the group.
Now, turning to the details of our regional mix of business on page 5 you can see the quarterly split was 54.5% in the US, 3% for the rest of North America.
10.4% in the UK, 17.1% for the rest of Europe, 11.7% for Asia-Pacific, 1.8% for Latin America and 1.5% for the Middle East and Africa.
In reviewing the details of our performance by region, organic revenue in the first quarter in the US was down $18 million or 1%.
Our advertising discipline was positive for the quarter on the strength of our media businesses and our CRM precision [Technical Issues] which once again experienced our largest organic decline over 34% in the US while our other disciplines were down single-digits [Technical Issues] down 3.2%.
These were down 6.4% organically.
Our CRM precision marketing, CRM commerce and brand consulting and healthcare agencies continued to have solid performance.
They again were offset by reductions from our advertising, CRM Experiential and CRM Execution and Support businesses.
The rest of Europe was down 3.2% organically.
In the Eurozone, among our major markets Belgium, Italy and the Netherlands were positive organically.
Germany, Ireland and France were down single-digits while Spain was down double-digits.
Outside the Eurozone organic growth was up around 5% during the quarter and organic revenue performance in Asia-Pacific for the quarter was up 2.5%.
Positive performance from our agencies in Australia, Greater China and India, were able to offset decreases in Japan, New Zealand, Singapore and Indonesia.
Latin America was down 2.4% organically in the quarter.
Our agencies in Mexico and Colombia were positive in the quarter, a double-digit decrease from our agencies in Brazil offset that performance.
And lastly, the Middle East and Africa was down 10% for the quarter.
On Slide 6, we present our revenue by industry information for Q1 of 2021.
Again, we've seen general improvement in the performance across most industries when compared to the previous few quarters.
But the overall mix of revenue by industry was relatively consistent to what we saw in prior quarters.
Turning to our cash flow performance on Slide 7, you can see that in the first quarter, we generated $382 million of free cash flow, excluding changes in working capital which was up about $20 million versus the first quarter of last year.
As for our primary uses of cash on Slide 8 dividends paid to our common shareholders were up $140 million, effectively unchanged when compared to last year.
The $0.05 per share increase in the quarterly dividend that we announced in February will impact our cash payments from Q2 forward.
Dividends paid to our non-controlling interest shareholders totaled $14 million.
Capital expenditures in Q1 were $12 million, down as expected when compared to last year.
As we mentioned previously, we reduced our capital spending in the near term to only those projects that are essential or previously committed.
Acquisitions including earn-out payments totaled $9 million and since we stopped stock repurchases, the positive $2.7 million in net proceeds in net proceeds represents cash received from stock issuances under our employee share plans.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $210 million in free cash flow during the first 3 months of the year.
Regarding our capital structure at the end of the quarter, our total debt is $5.76 billion, up about $650 million since this time last year, but down $50 million as of this past year end.
When compared to March 31 of last year, the major components of the change were the issuance of $600 million of 10-year senior notes due in 2030, which were issued in early April at the outset of the pandemic.
Along with the increase in debt of approximately $80 million resulting from the FX impact of converting our billion-euro denominated borrowings into dollars at the balance sheet date.
While the change from December 31 was the result of just the FX impact of converting the euro notes.
Our net debt position as of March 31 was $863 million up about $650 million from last year-end, but down $1.5 billion when compared to Q1 of 2020.
The increase in net debt since year-end was the result of the typical uses of working capital that historically occur which totaled about $840 million and was partially offset by the $210 million we generated in free cash flow during the past three months.
Over the past 12 months, the improvement of net debt is primarily due to our positive free cash flow of $860 million.
Positive changes in operating capital of $537 million and the impact of FX on our cash and debt balances which decreased our net debt position by about $190 million.
As for our debt ratios, our total debt to EBITDA ratio was 3.1 times and our net debt to EBITDA ratio was 0.5 times and finally, moving to our historical returns on Slide 10. | q1 earnings per share $1.33.
q1 revenue rose 0.6 percent to $3.427 billion.
expect to achieve positive organic revenue growth beginning in q2 of this year and for full year 2021.
negative effects of covid-19 pandemic began to have a significant impact on our businesses late in q1 of 2020.
operating margin for q1 of 2021 increased to 13.6% versus 12.3% for q1 of 2020. |
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I hope you're staying safe and healthy.
We are pleased to kick off today's call by reporting that we've rounded the corner into positive growth.
We had extremely strong results top and bottom line and continue to make very good progress on several of our strategic initiatives.
Organic growth for the second quarter was a positive 24.4%.
This growth was broad based across our agencies, geographies, disciplines, and client sectors.
We experienced a significant increase in spend from existing clients as the effects of the pandemic subsided and we benefited from strong new business wins.
EBIT was $568 million in the quarter, an increase of 67% versus the second quarter of 2020.
Q2 2021 included a gain of $50.5 million from the sale of ICON International in early June.
In Q2 2020, EBIT included $278 million of charges related to the repositioning actions.
Excluding gains and charges, EBIT margin was 14.5% in the quarter compared to 12.2% in Q2 2020.
Phil will provide further details on expected impact of the sale of ICON on our results for the balance of the year.
As we stated on our last call, we view 2019 as a reasonable proxy for our ongoing margin expectations.
Excluding the sale of ICON, our six months 2021 EBIT margin was 14% which is in line with our EBIT margin of 13.9% for the first six months of 2019.
Net income was $348 million in the second quarter, an increase of 75% from the second quarter of 2020 and earnings per share was $1.60 per share, an increase of 74%.
The net impact on the gain on the sale of ICON, which was offset by an interest expense charge related to the early retirement of debt increased earnings per share in Q2 2021 by $0.14 per share.
Our leaders took difficult and effective actions over the past year and a half.
At the same time, they remained laser-focused on the health of their teams, servicing our clients, winning new business, and managing their cost structures.
Our ability to navigate in this environment and come out the other side with such strong results is a testament to their commitment as well as the dedication and tireless effort of our people around the world.
Turning now to our performance by geography.
Every region had double-digit growth in the quarter.
The U.S. was up just shy of 20% in the quarter.
All U.S. disciplines had double-digit growth except for healthcare, which was up in the low-single digits.
It was the one discipline that grew in Q2 of 2020.
Other North America was up 37.1%, the U.K. was up 23.8% with all disciplines in double-digits.
Overall growth in the Euro and non-Euro region was 34.5%.
In Asia Pacific, we had 27.9% increase with all major countries experiencing double-digit growth.
Our events business in China had another quarter of strong performance.
Latin America was up 20.8% and the Middle East and Africa increased 42.8%.
By discipline, all areas were up year-over-year as follows: Advertising and media 29.8%; CRM Precision Marketing, 25%; CRM Commerce and Brand Consultancy 15.2%; CRM Experiential 53%; CRM Execution and Support 22.7%; PR 15.1% and Healthcare 4.5%.
Looking forward, we expect to continue to see positive organic growth as client spend increases albeit at a slower pace than we experienced in Q2.
Our management teams are continuing to align costs with our revenues as markets reopen around the world.
Many of our companies are hiring staff to service an increasing client spend and the new business wins and we are seeing some pressure on our staff costs, particularly in the U.S. as the labor markets remain tight.
We are also beginning to see a return of travel and certain other addressable spend as government restrictions have eased.
Based on our use of technology during the pandemic, we are developing practices, particularly with respect to travel that should allow us to continue to retain some of the benefits we achieved in addressable spend.
We expect that the increase in addressable spend in the second half of the year will be mitigated in part by the benefits we will achieve from a hybrid and agile workforce.
Turning to our cash flow, we again performed very strongly.
For the first half of the year, we generated approximately $800 million in free cash flow.
As we indicated last quarter, in addition to our dividend increase, in May, our Board approved the reinstatement of our share repurchase program.
In the second quarter, we repurchased $102 million in shares.
We took further actions to reduce our debt during the quarter.
In late April, we issued $800 million of senior notes due in 2031.
The proceeds from this issuance together with cash on hand were used to repay $1.25 billion of senior notes due in 2022.
As a result of these actions, our balance sheet and credit ratings remain very strong.
While we are very optimistic about our future prospects, we remain vigilant and are maintaining flexibility in our planning as conditions can quickly change.
As we recently experienced in markets like Brazil, India, and Japan, the pandemic remains a significant health risk.
Overall, we are extremely pleased with our performance this quarter and proud of how we've navigated through the pandemic.
Our results reflect Omnicom's ability to adapt and respond to changes in the market and deliver through down economic cycles.
Let me now turn to the progress on our strategic and operational initiatives.
As I mentioned in early June, we completed the sale of ICON International, our specialty media business.
The divestiture was part of our continuing realignment of portfolio of businesses and is consistent with our plan to dispose of companies that are no longer aligned with our long-term strategies and investment priorities.
With the closing of this transaction, we are substantially complete with disposals.
We expect our primary focus moving forward will be on pursuing accretive acquisitions in the areas of precision marketing, market [Phonetic] and digital transformation, commerce, media and healthcare.
We have ramped up our M&A efforts in these areas and are pleased with the opportunities we are seeing.
We remain disciplined with respect to our strategic approach and valuation parameters.
Operationally, Omnicom continues to successfully deliver to our clients a comprehensive suite of marketing and communication services supported by technology and analytic capabilities around the world.
The leaders of our practice area agencies and global clients have used this formula to strengthen our relationships and grow with existing clients as well as pursue new business.
Importantly, our organization allows our leadership teams to quickly mobilize our assets to deliver strategic solutions for our clients from across the group.
Whether their need is for integrated services across regions or more bespoke individualized solutions in specific countries, we can simplify and organize our services in a manner that meets our clients' needs.
For example, we have a long history of providing integrated services to some of the world's largest brands such as Apple, AT&T, Nissan, and State Farm and we continue to be successful in winning new business.
A good example of this is our win with Philips who named Omnicom as their global integrated service partner for creative, media and communications.
Over months long and highly competitive pitch, we were able to demonstrate the strength of our agencies and the delivery model that connects creativity, culture, and technology to position Philips as a leader in the changing health industry.
Another example of our integrated creative, media and communications offerings is our recent win of the baby wipes brand WaterWipes.
We also serve clients and consistently win new business across dedicated service areas and geographies.
For example, some of the wins this quarter in addition to the ones mentioned above were BBDO being named global lead strategic and creative agency partner for the Facebook App; Discover naming team TBWA its brand creative agency of record; JetBlue hiring Adam & Eve as its new global creative partner; Red Bull awarding PHD in its media business in North America; BBDO being awarded Audi creative duties and social media communications in Singapore; and PHD winning Audi media business in China; and Virgin Atlantic selecting Lucky Generals as its lead creative agency.
Our comprehensive suite of services and our ability to simplify how we bring them to our clients will continue to drive our success.
In the second half, we expect to see an increase in new business activity across industry sectors including CPG, luxury, healthcare, retail and automotive.
I'm confident that our exceptional talent, range of services, and our ability to organize our ability to organize our offerings to meet the needs of potential clients will allow us to capture more than our fair share of new business.
Our constant innovation and service delivery has also resulted in highly regarded industry awards.
At Cannes Lions Live 2021, our agencies were recognized for their excellence in both the creative and media disciplines.
Omnicom's global creative networks BBDO, DDB, and TBWA placed in the Top 10 of the network over the festival competition taking the highly coveted title, AMV BBDO was named Agency of the Festival.
Omnicom media agencies, PHD and OMD earned first and second place respectively in the Media Network of the Festivals competition and overall, more than 160 Omnicom agencies from 45 countries won more than 180 Lions.
This impressive showing at Cannes Lions is just one example of how our agencies excel.
They received a number of other industry awards, which include FleishmanHillard being named Campaign Global PR Agency of the Year and TBWA APAC winning Digital Network of the Year.
Goodby Silverstein & Partners making Ad Age's A-List and TBWA being named as an Agency Standout.
DDB Worldwide winning 2021 Network of the Year at the 100th anniversary of the ADC Awards hosted by The One Club and DDB Germany being named Agency of the Year.
These awards are a direct reflection of our relentless pursuit of creative excellence.
Our best-in-class talent is what defines Omnicom and makes us an award-winning company.
With this in mind, we are constantly looking to invest in our people and create opportunities across the enterprise including at the C-Suite level and throughout our senior leadership.
A recent addition to our practice area leadership is Chris Foster, who was appointed CEO of Omnicom's Public Relations Group.
Chris will oversee our entire PR portfolio focusing on talent, innovation, and cross-agency collaboration to drive growth.
I'm confident that his track record of leading global growth initiatives, counseling executive level clients, and driving business development will lead to continued success of OPRG.
John Doolittle has been elevated as new Chairman of OPRG.
Another key leadership position we recently created is focused on our environmental sustainability initiatives.
Last week, we appointed Karen van Bergen as Chief Environmental Sustainability Officer.
Karen will be responsible for overseeing our climate change initiatives and processes which includes setting measurable goals, policies, and partnerships that will reduce our carbon footprint.
This new position will be in addition to Karen's current role as EVP and Dean of Omnicom University.
Environmental sustainability is an area where we are doubling down on our efforts.
We established goals five years ago to lessen the impact of our operations on the environment and we are now looking to drive even more progress.
We are currently establishing new goals and commitments to reduce the carbon emissions produced by our operations and increase the amount of electricity we derive from renewable sources.
In addition to these internal goals, Omnicom has joined numerous industry initiatives that will serve as catalysts for change.
For example, several of our U.K. agencies have joined Ad Net Zero, the industry's initiative to achieve real net zero carbon emissions from the development, production, and media placement of advertising by the end of 2030 and we are a founding member of Change the Brief Alliance, which calls for the agencies and marketers to harness the power of their advertising to promote sustainable consumer choices and behaviors.
Karen is just the right leader for driving our initiatives in this critical area given her long tenure with Omnicom and excellent previous experience working on environmental initiatives at multinational corporations.
I have no doubt we will continue to raise the bar on our global operations in our work with organizations and clients to reduce our impact on the environment.
Another critical area we have intensified our efforts over the past 12 months is DE&I.
We have doubled the number of DE&I leaders throughout Omnicom over this time and we have established specific KPIs to measure our progress.
The KPIs are focused on hiring, advancement, promotion, retention, training, and employee resource groups.
This is a key step to ensuring DE&I is embedded across the leadership agenda with a full commitment and accountability of our network and practice area CEOs.
For Omnicom, DE&I starts at the top with our Board of Directors.
Currently, our Board is the most diverse in the S&P 500 with six women and four African American members including our Lead Independent Director.
We're also pleased that three of our 12 network and practice area CEOs are people of color or female.
While it is still too early to measure our progress, I'm pleased to report that a preliminary review of our employee diversity in the United States shows a meaningful increase in the number of diverse employees as of June 30th, 2021 compared to the end of 2020.
I look forward to a lot more progress being made in the months ahead.
Continuing to focus on our people, we are pleased many of them have returned to the office as government restrictions are reduced or eliminated.
We are encouraging our people to begin to make plans to return to offices as conditions improve in their local markets.
Overall, we believe a return to an office-centric culture will enable us to invent, collaborate, and learn together most effectively.
In turn, it will allow us to best serve our clients.
The return to office will be grounded in safety and flexibility and local leaders will determine what combination of office and remote work is most effective for their teams.
I personally look forward to reengaging in-person with our people and our clients over the coming weeks and months.
As John discussed in his remarks, while the impact of the pandemic continues to be felt across the globe, that impact has moderated significantly as evidenced by our return to growth in Q2.
We expect our return to growth will continue in the second half.
However, as long as COVID-19 remains a public health threat, some uncertainty regarding economic conditions will continue, which could impact our clients' spending plans and the performance of our businesses may vary by geography and discipline.
Organic growth for the quarter was 24.4% or $682 million, which represents a significant increase compared to Q2 of 2020 which reflected the onset of the pandemic when revenue declined by 23% or $855 million.
In addition, in early June, we completed the disposition of ICON, our specialty media business, which resulted in a pre-tax gain of $50.5 million.
The sale of ICON was consistent with our strategic plan and investment priorities and the disposition is not expected to have a material impact on our ongoing operating income for 2021.
Flipping to Slide 4 for a summary of our revenue performance for the second quarter.
In addition to our organic revenue growth of 24.4% for the quarter, the impact of foreign exchange rates increased our revenue by 5.4% in the quarter, higher than we anticipated entering the quarter as the dollar continued to weaken against most of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 2.2% primarily related to the sale of ICON.
As a result, our reported revenue in the second quarter increased 27.5% to $3.57 billion from the $2.8 billion we reported for Q2 of 2020.
I'll return to discuss the details of the changes in revenue in a few minute.
Turning back to Slide 1, our reported operating profit for the quarter increased to $568 million including the $50.5 million gain on the sale of ICON.
As you remember, our Q2 2020 results included a $278 million COVID-19 repositioning charge, which included severance actions, real estate lease impairments and terminations and related fixed asset charges as well as a loss on the disposition of several small non-core underperforming agencies.
Our operating margin for the quarter was 15.9%, up significantly from Q2 2020 even after excluding the gain on the sale of ICON in the current period and adding back the repositioning charge recorded in Q2 of 2020.
We also continued to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories including a reduction in travel and related costs as well as reductions in certain costs of operating our offices given the continued remote work environment as well as benefits from some of the repositioning actions taken back in the second quarter of 2020.
Our reported EBITDA for the quarter was $590 million and EBITDA margin was 16.5%.
Excluding the $50.5 million gain on the ICON disposition, EBITDA margin for Q2 2021 was 15.1%.
EBITDA margin in Q2 of 2020 after adding back the $278 million repositioning charge, was 12.9%.
We've also included a supplemental slide on Page 15 that shows the 2021 amounts presented in constant dollars to exclude the effects of the year-on-year FX changes.
As we've discussed previously, we have and will continue to actively manage our costs to ensure they are aligned with our current revenues.
We also continue to evaluate ways to improve efficiency throughout the organization focusing on real estate portfolio management, back office services, procurement, and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
They increased by about $300 million versus Q2 of 2020 or $220 million on a constant dollar basis driven by the increase in our overall business activity.
We would also note that the Q2 2020 salary and service cost amounts were reduced by reimbursements received from government programs of $49.2 million.
Third-party service costs increased by $275 million or $242 million on a constant dollar basis.
These costs include expenses incurred with third-party vendors when we act as a principal when performing services for our clients.
Occupancy and other costs, which are not directly linked to changes in revenue, increased by $4 million.
Excluding the impact of FX, these costs declined by $10 million in the quarter as we continued our efforts to reduce infrastructure costs and we benefited from a decrease in general office expenses as the majority of our staff continue to work remotely in Q2.
SG&A expenses increased by $21 million or $18 million on a constant dollar basis, again related to the return to more normal activities in the quarter.
And finally, depreciation and amortization declined by $3.6 million.
Net interest expense in the second quarter of 2021 increased $26.3 million period-over-period to $73.5 million.
Because of our solid working capital and cash flow performance during the pandemic period, in Q2 we determined we no longer needed the liquidity insurance we added in early April 2020 when we issued $600 million in debt and added a $400 million 364-day revolving credit facility.
In April 2021, the credit facility expired unused.
In May, we issued $800 million of 2.6% senior notes due 2031.
In June, the proceeds from the issuance of the 2.6% notes plus cash on hand were used to redeem early all of our outstanding $1.25 billion 3.625% notes that were due in May of 2022.
Gross interest expense in the second quarter of 2021 increased $26.6 million resulting from the loss we recognized on the early redemption of all the outstanding $1.2 billion of 3.625% 2022 senior notes.
Additionally, the impact of this refinancing activity reduced our leverage ratio to 2.2 times at June 30th, 2021 and is expected to result in lower interest expense on our debt in the second half of approximately $6 million as compared to the prior year.
Interest income in the second quarter of 2021 was relatively flat.
Our effective tax rate for the second quarter was 24.9%, down a bit from the effective tax rate we estimated for 2021 of between 26.5% to 27% primarily due to nominal taxes recorded on the book gain on sale.
Earnings from our affiliates was marginally negative for the quarter while the allocation of earnings to minority shareholders of certain of our agencies increased to $23.4 million.
As a result, we reported net income for the second quarter was $348.2 million.
While we restarted our share repurchase program during the second quarter, our diluted share count for the quarter increased slightly versus Q2 of last year to 217.1 million shares resulting from the year-over-year increase in our share price and the increase in common stock equivalents included in our diluted share count.
As a result, our diluted earnings per share for the second quarter was $1.60 versus the loss of $0.11 per share we reported in Q2 of 2020.
The gain on the sale of ICON and the loss on the early redemption of the 2022 senior notes resulted in a net increase of $31 million to net income or $0.14 to EPS.
As we previously discussed, the prior year period included the net impact of the repositioning charges which reduced last year's second quarter net income and earnings per share by $223.1 million and a $1.03 respectively.
On Slide 2 for your reference, we provide the summary P&L, EPS, and other information for the year-to-date period.
Now returning to the details of the changes in our revenue performance on Slide 4, our reported revenue for the second quarter was $3.57 billion, up $771 million or 27.5% from Q2 of 2020.
Turning to the FX impact, on a year-over-year basis, the impact of foreign exchange rates increased our reported U.S. dollar revenue by 5.4% or $150.8 million, which was above the 3.5% to 4% increase that we estimated entering the quarter.
The strengthening of foreign currencies against the dollar was widespread.
It included most of our largest major foreign currencies.
In the quarter, the largest FX increases were driven by the strengthening of the euro, the British pound, the Chinese yuan, and the Australian dollar.
In the quarter, the U.S. dollar only strengthened against the Japanese yen and the Russian ruble.
In light of the weakening of the U.S. dollar compared to 2020, assuming FX rates continue where they currently stand, our estimate is that FX could increase our reported revenues by approximately 1.5% for the third quarter and 1% for the fourth quarter resulting in a full year projected increase of approximately 2.5%.
The impacts of our acquisition and disposition activities over the past 12 months primarily reflecting the ICON disposition as well as the recent acquisitions of Archbow and Areteans, during the second quarter of 2021 resulted in a net decrease in revenue of $62 million in the quarter or 2.2%.
Based on transactions that have been completed through June 30th of 2021, our estimate is the net impact of our acquisition and disposition activity for the balance of the year will decrease revenue by between 6% to 7% for the third and fourth quarters resulting in a full year reduction of approximately 4%.
While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning, as John has said with regard to dispositions, we are substantially complete.
Our organic growth of $682 million or 24.4% in the second quarter reflects strong performance across all of our major geographic markets and across all of our service disciplines.
Turning to our mix of business by discipline on Page 5, for the second quarter, the split was 56% for advertising and 44% for marketing services.
As for the organic change by discipline, advertising was up nearly 30% primarily on the growth of our media businesses reflecting a strong recovery of activity within the media space.
Our global and national advertising agencies achieved strong growth this quarter although the pace of growth by agency remains somewhat mixed.
CRM Precision Marketing increased 25%.
Through the strength of their service offerings, the agencies within the discipline have delivered solid revenue performance throughout the pandemic and they continue to perform well.
CRM Commerce and Brand Consulting was up 15.2% but the performance within this discipline was mixed as our shopper marketing agencies cycled through the effects of recent client losses.
While organic revenue for CRM Experiential was up over 50%, it should be noted that events were virtually shut down as lockdowns took effect in March and April of 2020.
While government restrictions on events have been eased recently in certain markets, these businesses still face challenges regarding when they will return to pre-pandemic levels.
CRM Execution & Support was up 22.7% reflecting a recovery in client spend compared to Q2 of 2020 in our field marketing and merchandising and point-of-sale businesses while our non-for-profit businesses continue to lag.
PR was up 15.1% coming off pandemic lows in 2020.
And finally, our Healthcare discipline was up 4.5% organically.
Healthcare was the only one of our service disciplines that had positive organic growth in Q2 of 2020.
The performance of these agencies remained solid across the Group.
Now turning to the details of our regional mix of businesses on Page 6.
You can see the quarterly split was 51.5% in the U.S.; 3.3% for the rest of North America; 10.6% in the U.K.; 18.6% for the rest of Europe; 12.5% for Asia Pacific; 2% for Latin America; and 1% [Phonetic] for the Middle East and Africa.
In reviewing the details of our performance by region on Page 7, organic revenue in the second quarter in the U.S. was up nearly 20% or $316 million.
Our advertising discipline was positive for the quarter.
Our media agencies excelled in the quarter as did our CRM Precision Marketing agencies and our PR agencies and our Commerce and Brand Consulting category rebounded to growth in the quarter while our Healthcare agencies are flat versus last year when organic growth was 3.7% in the quarter.
Our other CRM domestic disciplines, Experiential and Execution & Support also performed well organically versus Q2 of 2020.
We expect it will take a bit longer for them to return to 2019 revenue levels as social distancing restrictions and pandemic concerns subside.
Outside the U.S., our other North American agencies are up 37% driven by the strength of our media and precision marketing agencies in Canada.
Our U.K. agencies were up 23.8% organically led by the performance of our CRM Precision Marketing, Advertising, and Healthcare agencies.
The rest of Europe was up 34.5% organically.
In the Eurozone, among our major markets, France, Germany, Italy and The Netherlands were up greater than 30% organically while Spain was up in the mid-single digits.
Outside the Eurozone, organic growth was up around 35% during the quarter.
Organic revenue performance in Asia Pacific for the quarter was up 27.9% with our performance from our agencies in Australia, Greater China, India, and New Zealand leading the way.
Latin America was up 20.8% organically in the quarter with our agencies in Mexico and Colombia growing more than 20% and Brazil was up almost 17%.
And lastly, the Middle East and Africa was up over 40% for the quarter.
On Slide 8, we present our revenue by industry information on a year-to-date basis.
We've seen an improvement in performance across most industries with the overall mix of revenue by industry remaining relatively stable.
The travel and entertainment sector was boosted in Q2 of 2021 by increased activity related spend by clients in the entertainment category, which mitigated continued reduced spend levels for many of our travel and lodging clients.
Turning to our cash flow performance.
On Slide 9, you can see that the first six months of the year, we generated nearly $800 million of free cash flow excluding changes in working capital, up over $70 million versus the first half of last year.
As for our primary uses of cash on Slide 10, dividends paid to our common shareholders were $292 million, up about $10 million when compared to last year due to the $0.05 per share increase in the quarterly payments effective with the dividend payment we made in April.
Dividends paid to our non-controlling interest shareholders totaled $39 million.
Capital expenditures in the first half of 2021 were $23 million.
Acquisitions, which include our recently completed transactions as well as earnout payments, totaled $36 million and stock repurchases were $95 million, net of the proceeds from our stock plans reflecting the resumption of our share repurchases during the second quarter of this year.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $311 million of free cash flow during the first half of the year.
Regarding our capital structure at the end of the quarter as detailed on Slide 11, our total debt is $5.31 billion, down about $410 million since this time last year and down just over $500 million compared to year-end 2020.
Both changes reflecting the early retirement in Q2 of 2021 of $1.25 billion of 3.65% senior notes which were due in 2022 partially replaced with the issuance of $800 million of 2.6% 10-year notes due in 2031.
In addition to the net reduction in debt of $450 million from the refinancing, the only other meaningful change was the net balance for the LTM period, was an increase of approximately $65 million resulting from the FX impact of converting our EUR1 billion denominated borrowings into U.S. dollars at the balance sheet date.
Our net debt position as of June 30th was $922 million, up about $710 million from last year-end, but down $1.5 billion when compared to where we stood 12 months ago.
The increase in net debt since year-end was a result of the typical uses of working capital that occur over the first half of the year totaling just under $1.1 billion which was partially offset by the $311 million we generated in free cash flow in the first half of the year.
Over the past 12 months, the improvement in net debt is primarily due to our positive free cash flow of $790 million, positive changes in operating capital of $525 million, and the impact of FX on our cash and debt balances which decreased our net debt position by $154 million.
As for our debt ratios, as a result of our overall operating improvement versus Q2 of 2020 and our recent refinancing activity, we've reduced our total debt to EBITDA ratio to 2.2 times and our net debt to EBITDA ratio to 0.4 times.
And finally, moving to our historical returns on Page 12, the last 12 months our return on invested capital ratio was 25.9% while our return on equity was 46.8%, both significantly better than our returns from 12 months ago. | q2 earnings per share $1.60.
worldwide revenue in q2 increased 27.5% to $3,571.6 million.
experienced an improvement in our business in q2 of 2021 as compared to q2 of 2020.
operating margin for q2 of 2021 increased to 15.9% versus 2.2% for q2 of 2020.
qtrly increase in revenue from organic growth of 24.4%. |
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We recognize the challenges you are facing personally and professionally.
We will continue to support you and to maintain our unwavering commitment to keeping you safe as we continue to effectively service our clients and preserve the strength of our business.
As we expected, the negative impact of COVID-19 on our business peaked in the second quarter and we experienced significant improvements in third quarter.
Organic growth declined by 11.7% or $424 million, which includes a decline in our third-party service costs of $194 million.
Sequentially, we saw improvements across all geographic regions and most countries with the only few exceptions, including Brazil, India, Japan and Singapore.
Similarly, our largest industry sectors had significant sequential growth, with pharma and health as well as technology growing in the third quarter versus the prior year.
As anticipated, some of our clients' industries that have been hit the hardest, such as travel and entertainment, as well as our events businesses continue to be challenged.
Our EBIT margin in the third quarter was 15.6% as compared to 13.1% in the third quarter of 2019, driving year-over-year growth in operating profit and net income.
The performance can be attributed to a number of factors, including repositioning actions taken in the second quarter, significant reductions in addressable spend, voluntary pay cuts across the group, which will be phased out by the end of the year, and reimbursements and tax credits under government programs in several countries.
As you know, earlier in the year, we took measures to provide additional liquidity during the COVID crisis, and we further enhanced our working capital processes.
We also stopped our share repurchase program.
We don't expect to restart share repurchases this year and will be reviewing the policy with our board in December.
I'm pleased to report that our efforts continue to pay off.
Year-to-date, we generated $1.1 billion in free cash flow and paid dividends of $423 million.
Phil will discuss our liquidity and balance sheet in more detail, which remain very strong.
Let me now turn to our strategies and business performance.
It goes without saying this year has been a period of significant change with COVID-19 causing shifts in consumer behavior, which, in turn, have augmented the services we provide our clients.
Across almost every sector, our clients pivoted their operations to accelerate their digital transformation, e-commerce, and direct-to-consumer initiatives.
Further, leverage data analytics and insights to drive their marketing and communication programs and seek ways to reinvent and differentiate their brands in an always-on environment.
These initiatives were already well under way before COVID, but they've taken on a new urgency for our clients with the main purpose of achieving the best outcomes in reaching their customers.
I'm pleased with how our agencies have responded.
They've had to reimagine marketing strategies, move quickly to provide our clients with relevant insights into how consumers were thinking, feeling and behaving, and provide counsel on where, when and how brands should show up differently.
In fact, these COVID-19-induced changes in consumer behavior are profound and will have a lasting impact.
With the exponential shift to virtual and online activities and its effect on almost every routine, consumers, more than ever, expect effortless, interconnected brand experiences that need to be delivered through increasingly dynamic and non-linear paths to purchase.
Fortunately, we are well-positioned to excel in this environment as a result of our long-term growth strategies.
For more than a decade, we have invested a substantial amount of time and money in the areas of analytics, insights precision marketing and digital transformation services.
These investments enable our companies to put the consumer at the center with data-driven digital and personalized offerings.
Omni, our world-class people-based data and analytics service platform is being leveraged by our creative, media, precision marketing, CRM, healthcare, PR and e-commerce agencies across the group.
The power of the platform is providing our clients a unique understanding of their audiences as people, not just as consumers, enabling us to develop targeted and coordinated marketing programs across multiple mediums.
Omni is being deployed by our client service teams using process-driven frameworks that can be applied to their specific client situations and for new business opportunities.
This combination of our platforms, processes, and people allows us to offer flexible programs and solutions that can be customized to meet the rapidly changing demands of today's market.
We also continue to invest heavily in growing our precision marketing, mark tech and digital transformation businesses through a series of strategic investments and acquisitions.
We've realigned several agencies into Omnicom Precision Marketing Group, a practice area we formed several years ago and we've expanded its capabilities through the acquisitions of Credera, Smart Digital and in the third quarter, DMW.
These investments have been instrumental in the relative performance we have achieved in these disciplines over the past few quarters.
We expect them to continue to be a key driver of our growth as digital transformation and precision marketing initiatives accelerate.
As I said earlier, demand for our transformation work cuts across industries, whether it's auto, retail, FMCG or healthcare, we are helping our clients design and deploy new technology platforms, develop online strategies and personalized digital experiences, optimize content creation, and automate content delivery.
These consumer-centric engagements deliver measurable outcomes that improve time-to-market and ROI associated with marketing investments.
Another area fueled exponentially by COVID is e-commerce.
For a period of time this year for many of our clients, e-commerce is the only way to transact with their customers.
From CPG to retail to autos to education and virtually every other industry, e-commerce adoption accelerated in a period of days and weeks, where in normal times it would have otherwise taken years.
During the quarter, we strengthened our practice area grounded in e-commerce space, led by Sophie Daranyi, our newly formed Omnicom Commerce Group is a center of excellence for commerce and conversion marketing.
The group brings together best-in-class creativity and consulting capabilities from several agencies and will partner closely with our media and precision marketing practices to help clients achieve reductions in the gap between awareness and sales, leverage our e-commerce offers across the group, and accelerate our speed and agility in connecting our expertise and capabilities for our clients.
Whether in-store or online, brands that are best-known and trusted are ones that people have turned to during the pandemic and will continue to turn to as these shifts in behavior take hold for the long term.
Helping to build that familiarity, affection and trust in a brand is at the core of what our creative agencies have done for decades.
We have the creativity to think differently, to design and create relevant experiences that are resident, more importantly rewarding.
We know it is what will drive long-term growth for our clients.
While 2020 has been a time of disruption and reinvention, a constant through it all has been the resiliency of our people.
Despite the challenges thrown our way, our agencies and our people have continued to step up and display world-class creativity, innovation and ideas.
Their performance is demonstrated by our recent new business success.
Peugeot chose Omnicom's O.P.EN.
, which is an acronym for Omnicom for PEUGEOT Engine, as its new agency of record.
Creative precision marketing and strategy teams from across 17 different markets put together the winning proposal.
BBDO was selected by AARP as its brand agency of record.
Cox Automotive appointed Hearts & Science U.S. media agency of record for its Autotrader and Kelley Blue Book brands.
Fiesta [Phonetic] was awarded the multicultural advertising for Frito-Lay brands, Cheetos and Doritos.
And in pharma and healthcare, our companies continue to outperform with significant wins across our practice areas, including advertising and creative services for key products for Gilead, CSL Plasma and AbbVie.
Digital innovation services for Novartis across their pharma and oncology business units.
And in PR, we had wins with J&J Pharma, UPenn Medical Center and KKI Pharma.
The common denominator across these business wins and our work during the quarter is it happened with most of our people are working remotely.
Looking ahead, we know when we enter the post-COVID phase, the way we work will be different.
With that in mind, we have formed a committee dedicated to our agency leaders, evaluate how our business should operate post-COVID.
The objective of the group is to rethink the way we work to best serve each agency specific services, people, clients, space and culture.
We've also accelerated how we use technology and share information well beyond video calls and virtual meetings.
For example, we're using technology platforms to deliver more training programs, on-board new talent and clients, collaborate on creative ideas, and produce shoots.
In fact, the accelerated adoption of technology has improved almost every aspect of our operations, both in servicing our clients and in our back office.
I'm certain that we will take away many learnings from the current environment that have allowed us to work more efficiently and effectively.
Let me now provide an update on our DE&I initiatives and some key changes.
Over a decade ago, we hired one of the industry's first Chief Diversity Officers.
Tiffany R. Warren, who was instrumental in developing our DE&I strategy and framework.
Since then, she has helped us build the core of our DE&I programs.
As announced earlier this month, Tiffany has decided to join Sony Music and we are in the process of finding a new diversity leader, who will lead us in the next phase of our efforts.
As mentioned last quarter, our DE&I strategy aims to create supportive environments and is led by the Omnicom People Engagement Network or OPEN.
OPEN provides structure and counsel and visibility to DE&I initiatives and policies throughout our organization.
Our OPEN2.0 actions focus on four key tenets, culture, collaboration, clients and community, and is organized into eight action items.
These include the development and retention of our diverse talent, client and community involvement, mandatory training, and accountability of our leaders.
One of our first action items is the expansion and empowerment of our OPEN leadership team, which is responsible for leading the implementation of our framework.
To date, through a combination of new hires and promotions, we've expanded the OPEN leadership team from 15 to 25 diversity champions and we're making good progress on our initiatives.
I look forward to sharing more with you on this front in the future.
Before turning it over to Phil, let me provide an update on our expectations for the fourth quarter.
While the third quarter trend was positive and we expect to see continuing improvement in several industries and markets, there are a number of challenges and uncertainties as we look at the fourth quarter.
First is the trajectory of the virus globally, which will impact the pace of economic recovery in each country we operate in.
Next is the outcome of the U.S. election and the potential delays in its results.
Third is the timing and effect of government stimulus programs in the U.S. and around the world.
And last, our labor market conditions, especially as stimulus programs end and their effect on the overall rate of economic recovery.
All of these factors create greater uncertainty in our financial forecasts and a much lower level of visibility than we've experienced in the past across our businesses.
This is especially so in our project-based services, as well as in the year-end project spend that we normally expect to see from our clients.
As a result, we continue to focus on the things we can control.
Our agencies are dedicated to ensuring the safety of their staff, servicing their clients, pursuing new business opportunities, aligning their staffing levels with revenue and aggressively managing their costs.
Each of them is being asked to plan for alternative scenarios for accelerated growth, as well as potential declines in client spend.
While 2020 has been a difficult year in many ways, I'm incredibly pleased with how we've operated and the progress we've made in executing our strategies.
As John said, the negative impact on our business caused by COVID-19 peaked in Q2 and as business conditions improved, our results improved considerably in Q3.
Our performance reflects the benefits from the actions we took to align our cost structure with the current operating environment.
And while the decline in revenue was in line with our expectations, our margin improvement exceeded our expectations.
I will cover that in more detail later.
Turning to slide 4 for a summary of our revenue performance for the third quarter, our organic revenue performance was negative $424 million or 11.7% for the quarter.
The decrease was an improvement from the unprecedented decrease of 23% in the second quarter and was in line with our internal expectations throughout the quarter.
And while we still experienced declines across all regions and disciplines, except for the continued growth of our specialty healthcare businesses, those reductions were about half the levels we saw in Q2.
The impact of foreign exchange rates increased our revenue by 0.5% in the quarter versus a slightly negative impact we anticipated.
This was due to the moderation of the strengthening of the dollar compared to the prior period.
And the impact on revenue from acquisitions net of dispositions was relatively flat or a decrease of 0.3%.
As a result, our reported revenue for the third quarter decreased 11.5% to $3.2 billion when compared to Q3 of 2019.
I'll return to discuss the details of the changes in revenue in a few minutes.
Turning back to slide 1, our reported operating profit for the quarter was $501 million, up from $473.3 million in Q3 of last year.
Our operating profit in the quarter was positively impacted from the cost reductions resulting from the repositioning actions we undertook in the second quarter, and good management of our addressable spend cost categories by the leaders of our agencies.
The results for the quarter included the benefit of reductions in salary and related costs, which increased operating profit by $68.7 million, related to reimbursements and tax credits under government programs in several countries, including the U.S., Canada, the U.K., Germany, France and others.
Operating margin for the quarter increased 250 basis points to 15.6% compared to point 13.1% in Q3 of last year.
Excluding the benefit of the reductions in salary and related costs from the government reimbursements and tax credits, operating margin for the quarter increased 40 basis points to 13.5%.
EBITA for the quarter was $522 million and EBITA margin was 16.3% compared to 13.6% in Q3 of last year.
Excluding the benefit of the reductions in salary and related costs previously referred to, EBITA margin for the quarter increased 50 basis points to 14.1%.
You will recall we estimated that the severance and real estate actions taken in the second quarter would generate approximately $230 million in savings over the second half of 2020.
We also expected to generate additional savings in excess of $75 million in the second half from reductions in discretionary costs.
Through the end of Q3, the reductions in our payroll and real estate costs were in line with those estimates.
And we experienced greater cost savings resulting from the active management of our discretionary addressable spend cost categories, including travel and entertainment, general office expenses, professional fees, personnel fees and other.
As we previously discussed, we have and will continue to actively manage our costs to ensure they align with our revenue structure.
In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization, focusing on our real estate portfolio management, back office services, procurement and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
Salary and related service costs declined by $223 million in the quarter, reflecting both the impact of our staffing reductions during the second quarter and the impact of the benefits from government reimbursements and tax credits discussed previously.
Third-party service costs, which include expenses incurred with third-party vendors when we act as a principal, when we're performing services for our clients, primarily related to our events, field marketing and merchandising and media businesses, decreased by $194 million in the quarter or 20%.
In comparison, the decrease in third-party service costs in the second quarter year-over-year was nearly $400 million or 40%.
Occupancy and other costs, which are less linked to changes in revenue, declined by approximately $18 million, again reflecting the decrease in the cost structure from the actions taken in the second quarter and from our people not being in our offices during the quarter for the most part.
And SG&A expenses declined by $7 million in the quarter.
Net interest expense for the quarter was $48.5 million, down $800,000 versus Q3 last year and up $1.3 million compared to Q2 2020.
When compared to the third quarter of 2019, our gross interest expense was down $8.4 million resulting from debt refinancing actions over the last 12 months.
This includes the impact of the additional $600 million of 10-year 4.2% senior notes that we issued as liquidity insurance in early April of this year.
As we've discussed on our previous calls this year, these actions reduce the effective interest rate on our senior debt by 60 basis points when compared to Q3 of 2019.
This reduction was offset by a decrease in interest income of $7.6 million versus Q3 of 2019, primarily due to lower interest rates.
When compared to the second quarter of 2020, interest expense increased slightly by $700,000, while interest income was down $600,000.
As we enter the final quarter of the year, we expect that our refinancing activity over the past year plus will continue to more than offset the increase in interest expense, resulting from the issuance of the 4.2% notes this past April.
We believe adding this additional liquidity while maintaining our interest expense levels was a prudent step to take.
We expect net interest expense to increase in Q4 of 2020 by approximately $10 million compared to Q4 of 2019, largely driven by an estimated reduction in interest income.
Our effective tax rate for the quarter was 26.7% in line with our expectations.
For the nine months ended September 30, 2020, the rate was 28.5%, an increase from 26% for the comparable period in 2019.
The increase in the nine-month rate for 2020 was primarily attributable to activity from Q2 related to the non-deductibility of certain repositioning costs in certain jurisdictions and the loss on dispositions.
Excluding the impact of these items, the year-to-date effective rate was 26.3%, which was in line with our expectations.
We anticipate that our effective tax rate for the fourth quarter will approximate 27%, excluding the impact of share-based compensation items, which we cannot predict because it is subject to changes in our share price.
Earnings from our affiliates totaled $2.9 million for the quarter, up a bit versus Q3 of last year.
And the allocation of earnings to the minority shareholders was $21.6 million during the quarter, relatively flat with the prior year.
As a result, net income for the third quarter was $313.3 million, up 8% or $23.1 million when compared to Q3 of 2019.
Our diluted share count for the quarter decreased 1.6% versus Q3 of last year to 215.8 million shares, resulting from share repurchases prior to the suspension of our share repurchase program, which we announced toward the end of March.
As a result, our diluted earnings per share for the third quarter was $1.45, which is an increase of $0.13 or 9.8% when compared to our Q3 earnings per share for last year.
On slide two, we provide the summary P&L, earnings per share and other information for the year-to-date period.
As a reminder, in response to the pandemic during the second quarter, we undertook a comprehensive review of our operational structure to reflect the current and expected economic realities of the COVID landscape.
The repositioning actions included severance actions to reduce employee head count, real estate lease impairments, terminations and related fixed asset charges that will allow us additional flexibility to match our additional changes in the need for space based on our head count, as well as the disposition of several small agencies.
These repositioning charges totaled $278 million, which reduced our year-to-date net income by $223 million and diluted earnings per share by $1.03.
Additionally, our results for the nine-months ended September 30 include the benefit of reductions in salary and related costs, which increased operating profit by $117.8 million related to reimbursements and tax credits under the government programs we've previously discussed.
Returning to the details of our revenue performance on slide four, while the decrease was significantly better than the reductions in client spending we experienced during the second quarter, demand for our services continued to decline compared to last year's levels, as marketers continued to manage expenditures due to the economic impact of the pandemic on their businesses.
Our reported revenue for the third quarter was $3.2 billion, down $417 million or 11.5% from Q3 of 2019.
As you can see on slides eight and nine, and as you would expect, certain client industry sectors continued to be more negatively affected than others.
Our clients and industries such as travel and entertainment and energy, as well as non-essential retail, are continuing to reduce their marketing communication expenditures to match the declines in those business sectors.
However, during the quarter, we continued to see clients in the pharma and healthcare industries, as well as the technology and telecommunications industries fair better.
The disciplines that are most negatively impacted were CRM consumer experience, primarily from our events businesses, and CRM execution and support, primarily due to our field marketing and non-profit agency businesses.
And our advertising discipline, including media, experienced declines similar to our overall organic decline.
A considerable amount of the revenue decline in these businesses resulted from reductions in third-party service costs incurred when providing services for our clients when we act as a principal.
These third-party service costs, which fluctuate directly with changes in revenue, declined across all of our disciplines by just under $200 million in Q3 of 2020 versus Q3 of 2019.
Turning to the FX impact, on a year-over-year basis, the strength of the U.S. dollar moderated against our foreign currencies.
For the first time since Q2 of 2018, the FX impact increased our reported revenue.
The impact of changes in exchange rates increase reported revenue by 0.5% or $18 million in revenue for the quarter.
On a reported basis, the dollar's performance was mixed this quarter, weakening against some of our major foreign currencies, while strengthening against others.
In the quarter, the dollar weakened against the euro, the U.K. pound and the Australian dollar, while the dollar strengthened against the Brazilian reais, Russian ruble and the Mexican peso.
Looking forward, if currencies stay where they currently are, we anticipate that the FX impact would slightly increase our reported revenue by approximately 50 basis points in Q4.
And for the full year, the FX impact would be negative by about 50 basis points.
The impact of our recent acquisition of DMW in the U.K. that we completed at the beginning of the third quarter, net of our disposition activity, decreased revenue by $11.3 million in the quarter or 0.3%, which was in line with the estimate we made entering the quarter.
Inclusive of the disposition activity through September 30 and not including any acquisitions or dispositions we may complete before the end of the year, we estimate the projected net impact of our acquisition and disposition activity will reduce reported revenue by approximately 50 basis points in the fourth quarter of 2020.
Our organic revenue decreased approximately $424 million or 11.7% in the third quarter when compared to the prior year.
As mentioned earlier, our revenue was down in Q2 across all major geographic markets.
But the percentage decreases in organic revenue were significantly lower than those we experienced in the second quarter.
Within our service disciplines, our healthcare agencies saw increased activity across all regions, resulting in organic revenue growth for that discipline, while both of our CRM disciplines, particularly our events and field marketing businesses, continue to face significant disruptions to their businesses due to the impact of COVID-19.
Turning to our mix of business by discipline on page five.
For the second quarter, the split was 56% for advertising, and 44% for marketing services.
As for the organic change by discipline, advertising was down 11.7%, with our media businesses seeing a significant improvement organically compared to the second quarter, when media activity slowed considerably.
Our global and national advertising agencies also improved their organic performance this quarter compared to the second quarter, although performance by agency was mixed.
CRM consumer experience was down 19% for the quarter.
The strongest performance in the discipline came from our precision marketing agencies, which were down globally around 5%.
Our events businesses in the discipline continue to face significant challenges as they adapt their business models to the new operational realities due to COVID.
And our shopper and brand consulting agencies continue to experience COVID-19 headwinds.
CRM execution and support was down 19.4% as our field marketing and non-profit consulting businesses lagged for the quarter.
PR, while mixed by market, was down 3.4%.
And our healthcare agencies continued to turn in strong performances across the portfolio, this quarter up organically 3.8% with growth across all geographic regions.
Now turning to the details of our regional mix of business on page six.
You can see the quarterly split was 55% in the U.S., 3% for the rest of North America, 10% in the U.K., 17% for the rest of Europe, 12% for Asia-Pacific, 2% in Latin America and 1% for the Middle East and Africa.
The mix in Q3 is fairly consistent with what we saw by region in the first and second quarters of the year.
In reviewing the details of our performance by region on slide seven, organic revenue in the second quarter in the U.S. was down $227 million or 11.4%, which is an improvement over the Q2 results when organic revenue fell by over 20% domestically.
For the quarter, our events businesses again experienced our largest organic decline in the U.S.
Our domestic specialty healthcare agencies were positive organically, while we again saw decreases in our advertising and media businesses, but at decreased levels from Q2.
And our domestic PR and precision marketing agencies were just about flat compared to Q3 of 2019, solid performance considering the overall environment.
Outside the U.S., our other North American agencies were down just under 8% or $8 million.
Our U.K. agencies were down $43 million or 12.5%.
Positive performance from our precision marketing and healthcare agencies was offset by reductions from our other businesses.
The rest of Europe was down 9.6% organically, a significant improvement over Q2 when organic revenue fell nearly 30%.
In the eurozone among our major markets, Germany and Italy were down single-digits.
Ireland, the Netherlands and Spain were down between 10% and 20%, while France continued to lag behind the other markets.
Outside the eurozone, our organic growth was flat during the quarter.
Organic revenue growth in Asia-Pacific for the quarter was negative 12.8%.
Our agencies in Greater China and Australia were down single-digits, while in Japan and India, we saw similar decreases in Q3 as we did in Q2.
Latin America was down 22.3% or $22 million organically in the quarter, driven by the continuing weakness from our agencies in Brazil.
And lastly, the Middle East and Africa was negative again for the quarter.
Turning to slides eight, nine and 10, we present our mix of revenue by our clients' industry sector.
When comparing the year-to-date revenue for 2020 to 2019, we continue to see a small shift in our mix with increased contribution from our pharma and technology clients, while travel and entertainment and financial services decreased.
Turning to our cash flow performance on slide 11, you can see that in the first nine months of 2020, we generated $1.14 billion in free cash flow, excluding changes in working capital, down when compared to the same period in 2019.
But the $412 million generated in the third quarter was up a bit versus the $394 million generated during Q3 of 2019.
As for our primary uses of cash on slide 12, dividends paid to our common shareholders were $423 million, effectively unchanged when compared to last year.
Dividends paid to our noncontrolling interests shareholders decreased to $58 million.
Capital expenditures in the first nine months of the year were $50 million, down when compared to last year.
As we've talked about on our prior calls, we have limited our capital spending in the near term to only those deemed essential.
Acquisitions, including earnout payments, totaled just under $105 million and stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled just over $216 million, a decrease compared to last year, reflecting the suspension of our share repurchase program in mid-March.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $284 million in free cash flow during the first nine months of 2020, $141 million of which was generated in the third quarter alone.
Turning to our capital structure as of September 30, our total debt was a little under $5.8 billion, up $670 million since this time last year.
Major components of the change were the retirement of $600 million of dollar-denominated senior notes, which were due earlier this year, replacing those borrowings with $1.2 billion of 10-year senior notes due in 2030, along with the FX impact of converting the EUR1 billion of euro-denominated borrowings into dollars at the balance sheet date.
Versus December 31, 2019, gross debt at the end of the quarter was up $641 million, primarily as a result of the $600 million issuance of U.S.-denominated senior notes in early April.
Our net debt position at the end of the quarter was just over $2.5 billion, up about $1.7 billion compared to year-end December 31, 2019, an improvement of $166 million for the comparative prior-year last 12-month period, reflecting the results of our improved cash management.
The increase in net debt since December 31, 2019 was a result of the use of working capital of about $1.8 billion, plus the impact of FX on our cash and debt balances, which increased net debt by $120 million.
Partially offsetting those increases was the free cash flow we generated during the first nine months of the year of $284 million.
Over the past 12 months, our net debt is down $166 million, primarily driven by our excess free cash flow of approximately $500 million.
Offsetting this was the reduction in operating capital during the past 12 months of approximately $230 million and the negative impact of FX, which totaled around $55 million.
As for our debt ratios, our total debt-to-EBITDA ratio was 3.1 times and our net debt-to-EBITDA ratio was 1.4 times.
And finally moving to our historical returns on page 14.
For the last 12 months, our return on invested capital ratio was 17.7%, while our return on equity was 37.7%, both reflecting the decline in operating results, driven by the economic effects of the pandemic, as well as the impact of repositioning charges we took back in the second quarter. | compname reports q3 earnings per share $1.45.
q3 earnings per share $1.45.
worldwide revenue in q3 decreased 11.5% to $3,206.5 million from q3 of 2019.
worldwide revenue in q3 of 2020 decreased 11.5% to $3,206.5 million from $3,623.8 million in q3 of 2019.
reduction in co's revenue continued during second and third quarters of 2020 and is expected to continue for remainder of year.
operating margin for q3 of 2020 increased to 15.6% versus 13.1% for q3 of 2019.
qtrly decrease in revenue from negative organic growth of 11.7%.
qtrly change in revenue included increase in revenue from positive impact of foreign currency translation of 0.5%.
reductions in revenue could adversely impact ongoing results of operations and financial position and effects could be material. |
An archived version will be available when today's call concludes.
During the course of today's call, we will also discuss certain non-GAAP financial measures.
We will begin the call with an overview of our business from John, then Phil will review our financial results for the quarter.
I'll now hand the call over to John.
We're pleased to share our fourth quarter and full year performance.
We exceeded our expectations for the quarter and for the year.
Our organic growth for the fourth quarter was 9.5%, and was broad-based across geographies and disciplines.
The full year finished at 10.2% organic growth.
Our improved performance was underpinned by our precision marketing discipline, which is helping clients transform their business so they can engage directly with their consumers through digital platforms.
We also benefited from the continuing rebound in our experiential discipline as more in-person events resumed in Q4.
Our revenue performance flowed through to our operating profit and bottom line.
Our operating profit margin for the fourth quarter was 16.1%, resulting in full year margin of 15.4%.
Earnings per share for the quarter was $1.95, up 6% versus 2020.
For the full year, earnings per share increased 49%.
Finally, our cash flow and balance sheet remain very strong.
Overall, I'm very pleased with our financial performance for the quarter and year and optimistic about our prospects heading into 2022.
Looking forward, we're forecasting organic revenue growth of between 5% to 6% for the full year 2022, and we anticipate delivering the same strong margin that we delivered in 2021.
With the pace of change in the digital space accelerating, we've continued to evolve our existing capabilities and invest in new and innovative offerings to meet the needs of our clients and future prospects.
These efforts have allowed us to be extremely competitive in the marketplace by providing a suite of services and capabilities that position us to reimagine and strengthen our clients' businesses brands, services and products; seamlessly connect them with their consumers across the marketing journey by leveraging Omni, our insights and orchestration platform; transform their marketing and customer relationship technology platforms; and innovate in digital, e-commerce and new media channels.
One area where these investments are making a demonstrable impact is in our Omnicom Precision Marketing Group, which offers MarTech and digital transformation consulting, decision sciences, customer experience design and targeted customer marketing programs for our clients.
In November, we closed on the acquisition of BrightGen, a Salesforce Summit Partner that will extend OPMG Salesforce capabilities and reach in Europe.
The success of Omnicom's Precision Marketing offering is reflected by the group's wins with some of the world's largest brands such as Philips, Mercedes, Nike and Diageo and by its financial results.
The Precision Marketing discipline grew by 19% in 2021.
Much of the work conducted within Omnicom Precision marketing is supported by foundational AI decisioning layer and technology integrated with Omni, our open operating system that orchestrates better outcomes.
Omni is built for collaboration across the entire company, acting as a single source of data and process workflow from insights to execution.
It empowers our people and clients to make better and faster decisions, maximizing efficiency and ROI.
A key emphasis for us going forward is to continue to fill the demand for services across the marketing journey by offering more services to our existing clients and winning new business relationships.
Our objective in part is to increase the number of clients who consolidate more of their services with Omnicom.
These are significant growth opportunities for us where our suite of services, creativity and culture of collaboration, all supported by Omni give us a competitive advantage.
In addition to our integrated wins, our world-class talent and agencies had numerous recent new business wins within their specialties and across geographies.
Our success on our wins in 2021 has resulted in us expanding our services and continues to inform our priority investments and M&A strategies.
We are also increasing our investment in such areas as AI and automation, e-commerce, performance media, data and analytics, as well as in high-growth industry opportunities such as gaming and the metaverse.
We recently completed the acquisition of Propeller a digitally native engagement agency that specializes in healthcare, another area we expect will continue to see strong growth.
Propeller is a fast-growing omnichannel strategy, content and delivery agency that embraces and mobilizes data to deliver meaningful results for its clients.
At Omnicom today, our emphasis is around developing our future talent and continuing our disciplined succession planning.
With this in mind, we made important senior management changes this past quarter.
Daryl Simm moved into the newly created position of President and Chief Operating Officer of Omnicom.
After serving as CEO of Omnicom Media Group for more than two decades, Daryl will now work directly with me to oversee business operations across Omnicom.
Florian Adamski, who was previously CEO of OMD Worldwide, and help the agency earn back-to-back Adweek Global Media Agency of the Year titles in 2019 and 2020, has succeeded Daryl as the CEO of the Omnicom Media Group.
After more than two decades of overseeing the growth of our DAS network, Dale Adams, as planned, stepped down as Chairman at the end of 2021.
Michael Larson and John Doolittle have been promoted to CEO of DAS and CEO of the newly created Communications consultancy network, respectively, reporting to me.
Both of them have worked closely with Dale and have been a driving force within DAS for many years.
They are highly talented executives who are skilled at managing agencies in a range of disciplines.
With these leadership changes, I couldn't be more confident about the continued success of our group.
Our people are our greatest asset, and we are constantly looking to invest and create opportunities for them across the enterprise, especially during the time when the war for talent is fierce, attracting and retaining talent is a top priority.
We have made many changes.
We've also instituted new programs that provide greater career mobility across our agencies, allow for agile and flexible work arrangements, and expand our investments in technology, learning and development programs while maintaining competitive benefits and compensation programs.
We also want Omnicom to be a company that our people can be proud of and want to work for.
Over the years, we've been focused on the role we play in critical areas such as environmental, sustainability and diversity, equity and inclusion.
In 2021, we named new leadership and expanded our teams in these high-priority areas so that we can continue acting on our goals and implement new initiatives.
In fact, this past year, we are the only company in our industry named to Newsweek's list of America's most responsible companies.
We aim to achieve more in the new year so we can ensure Omnicom agencies are a destination of choice for top talent.
We're entering the new year in a very strong position with a sharp eye on our key strategic initiatives, which remain our talent, dedication to creativity and building our already strong capabilities in precision marketing and MarTech consulting, e-commerce, digital and performance media and predictive data-driven insights, all of which are fully supported by Omni.
You are the reason we delivered such strong results this quarter and for the full year.
You kept your focus and commitment to Omnicom's client and operations, even with the ongoing challenges of the pandemic.
Your efforts in these tough times are noticed and appreciated.
Our fourth quarter results continued the momentum of the third quarter and helped us finish the year in a strong position.
While the world isn't the same as it was pre-pandemic, we are in a stronger position to serve our clients in 2022 and beyond.
Let's begin with a brief look at our income statement on Slide 3.
Growth in revenues and operating profit flowed through to net income for both the quarter and the year.
Combined with the resumption of our share buyback program, we had 6% growth in diluted earnings per share.
Dividends grew 7.7% in 2021, and we're pleased to resume this growth after maintaining our dividend payments throughout the pandemic.
Our total revenue growth in the quarter was 2.6%, while our organic growth for the quarter was 9.5% or $358 million.
The impact of foreign exchange rates decreased our revenue slightly in the quarter by just 30 basis points.
However, if rates stay where they were at January 31, we estimate that the impact of foreign exchange rates will reduce our revenue by approximately 2% in both the first and second quarters of 2022.
The impact on revenue from our net acquisitions and dispositions decreased revenue by 6.6%.
This was consistent with our expectations and is primarily the result of disposition activity from Q2 of 2021.
We have also acquired some excellent businesses in key growth areas, which I will discuss later.
Based on transactions completed to date, we estimate the impact of acquisitions net of dispositions will reduce our revenue by approximately 9% in the first quarter and by approximately 5% in the second quarter of 2022, and we expect positive acquisition growth in the second half of 2022.
Slide 5 presents the changes in our total revenues by business discipline.
Advertising, our largest category, posted 7.4% organic growth in the quarter.
Both our media agencies and our creative agencies contributed nicely to this growth.
Precision Marketing grew 19.6% organically in the quarter and is now 8% of our total revenues.
As John discussed, the businesses in this discipline are doing exceptionally well and have a great pipeline for their work in digital and marketing transformation consulting services, e-commerce, marketing sciences and digital experience design.
Commerce and Brand Consulting was up 12.4%, with widespread strength across our larger agencies.
In Commerce, our agencies experienced strong growth, although off a reduced base.
In Brand Consulting, we're seeing benefits and good activity in the technology sector and from corporate branding aimed at reputation, ESG and DE&I.
Experiential's growth in excess of 50% benefited from a return of some in-person events throughout the fourth quarter before the Omicron variant took hold, and we expect continued growth in 2022, although likely choppy, as brands look to engage with consumers in person.
Execution and support was up 5.2%, with growth in the U.S. businesses exceeding the performance of our businesses in Europe, where our field marketing business was impacted by the new variant.
PR was up 4.4% and healthcare was up 4.5%.
Both of these disciplines reflected strong performance across their agencies.
It's worth remembering that they performed relatively well throughout the pandemic.
So we are pleased with the results.
Flipping to Slide 6, you can see that we grew organically in each of our regions and growth came from most of our disciplines within these geographies.
In the U.S., our 7.8% organic growth was slightly higher than last quarter, led by advertising and media, as well as precision marketing, where growth remains over 20%.
Also, results for our experiential business in the U.S. this quarter were quite strong, as I mentioned.
and the Asia Pacific region, with strong PR, media and commerce and consulting results in the U.K. and broad strength across the board in Asia.
It's worth mentioning the strong organic growth of 48% for the Middle East and Africa, our smallest region.
Revenue in Q4 of 2020 was down over 35%.
In Q4 2021, advertising and media performance was strong.
And this quarter's results were also positively impacted by experiential revenue related to the Dubai Expo, which was initially scheduled for 2020.
Looking at revenue by industry sector on Slide 7.
Relative to full year 2020, there was a two-point increase in our revenue mix from technology clients, offset by a 1 point reduction in the revenue mix from pharma and health.
Salary-related service costs, our largest category, increased by 11.1%.
As expected, these costs, which include freelance support increased along with our increase in revenue as did travel and entertainment costs, which aligns with the fact that our people are slowly going out in certain markets and meeting with clients in person.
The next line item, third-party service costs, were down 11.2%.
They decreased by approximately $220 million from dispositions and were offset by an increase of approximately $100 million from growth in our businesses.
Occupancy and other costs, which are less directly linked to changes in revenue, were up 4.2% year on year due to higher general office expenses as we return to the office, offset by lower rent and other occupancy costs as we continue to use our spaces more efficiently.
SG&A expenses were up 8.4% on a year-over-year basis due to an increase in marketing, professional fees and new business costs.
In total, our operating expense levels were up slightly, less than 3% from the fourth quarter 2020 to 2021.
We're comfortable with this growth because it is linked to a return to the pre-pandemic environment, as well as our continued revenue growth, new business opportunities and investments for future growth.
For the quarter, operating profit increased 1.3% and represented a 16.1% operating margin.
This is a slight margin decline from the fourth quarter of 2020 when expense levels were well below normal.
Our fourth quarter EBITDA change in margin performance was similar.
For the full year, operating profit was up 37.5% with a margin of 15.4%, and EBITDA was up 35.4% with a margin of 15.9%.
As we look forward, while we expect to continue to see a return of certain costs to more normalized levels, we also expect that they will be offset in part by reductions in certain discretionary and infrastructure costs resulting from new ways of working and efficiencies achieved during the pandemic.
As John mentioned earlier, for the full year 2022, we anticipate delivering the same strong reported operating profit margin of 15.4% that we delivered in 2021.
And as always, we will continue to focus on growing our operating profit dollars.
Let's now turn to our cash flow performance on Slide 10.
We define free cash flow as net cash provided by operating activities, excluding changes in working capital, which are generally positive for us on an annual basis.
Free cash flow of $1.8 billion, grew 5.4%.
We're pleased with the strength of this important metric.
Regarding our uses of cash, we used $592 million of cash to pay dividends to common shareholders and another $113 million for dividends to noncontrolling interest shareholders.
We maintained our dividend throughout the pandemic in 2020 and increased it by 7.7% in 2021 to a quarterly rate of $0.70 per share.
I'm going to discuss capital expenditures in two pieces.
Our normal capital expenditure levels were unchanged from 2020.
Additionally, in the fourth quarter of 2021, we had a very unique opportunity to purchase our primary office building in London for approximately $575 million.
Subsequent to the purchase during the fourth quarter of 2021, we issued GBP 325 million sterling notes due in 2033, with an attractive 2.25% coupon.
To give you some background, we have more than 5,000 people at work there for multiple agencies.
It's our largest office building globally in our second largest market.
We've been consolidating space in London for some time and have exited 31 buildings since 2015.
London is a key market for our future.
And this building is in the South Bank area west of London Bridge near to Tate Modern, culturally vibrant area of London key to attracting and retaining talent.
Financially, it's an attractive opportunity for our business.
And we will avoid expected market increases on our rent that didn't compare favorably to outright ownership.
The purchase of this building has not changed our capital allocation strategy and did not impact our credit rating.
Acquisitions picked up relative to 2020 at $202 million.
As we talked about last call, we are investing in the areas most important to our clients and therefore, to our future revenue growth.
Two acquisitions in the fourth quarter of 2021 are highlighted at the back of this deck.
Jump 450 Media, a performance media agency that is now part of Omnicom Media Group; and BrightGen, a digital business transformation specialist that is a significant implementation partner for the Salesforce marketing stack.
BrightGen is now part of our Precision Marketing Group.
And lastly, we ramped up our stock repurchases during the fourth quarter, bringing the year to $518 million.
As you know, our pre-pandemic annual range was $500 million to $600 million.
So we are solidly back on track with this important total return component for our shareholders.
Our historical capital allocation has been very consistent.
Using our free cash flow for dividends stock repurchases and acquisitions.
We don't expect this to change going forward.
Although we do see more opportunities for acquisitions similar to those we completed in 2021.
These tuck-in type acquisitions are efficient for us because the acquired agencies and their service offerings can contribute across our group to serve an embedded base of clients and to help win new ones.
Slide 11 shows our credit and liquidity.
Notwithstanding the sterling note I just mentioned, you can see that our other financing activities throughout the year lowered our outstanding debt from December 2020 to December 2021.
At year-end, our total leverage was 2.4 times.
In addition to the $5.3 billion of cash on the balance sheet at year-end, we also have a USD 2 billion commercial paper program backstopped by our $2.5 billion revolving credit facility.
We chose our strong return on invested capital of 33.4% for the fiscal year 2021 and 44.3% return on equity.
Both of these took notable steps up from 2020 and remain very healthy indicators of the strength of our business and its attractiveness to shareholders. | q4 earnings per share $1.95.
q4 revenue rose 2.6 percent to $3.856 billion. |
I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section.
The company has explained some of these risks and uncertainties in its SEC filings, including the Risk Factors section of its annual report on Form 10-K and quarterly report on Form 10-Q.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer; and Andy Long, our Executive Vice President and Chief Financial Officer.
I would like to start with a high-level recap of the strategic priorities that the Owens & Minor leadership team and I outlined during our Investor Day meeting in late May.
I spoke about our transformation based on our business blueprint that focused on; one, our culture, a culture that is based on hard work, stellar execution and an unrelenting focus on our customer, while being anchored by our mission and our ideal values.
Next our discipline, which is based upon the Owens & Minor business system that is laser focused on continuous improvement.
And third, our investments, our investments that are implemented in a disciplined manner enabling us to achieve our strategic priorities.
These three elements are ingrained in our corporate DNA, have set the foundation of our business blueprint, and have enabled us to ignite long-term profitable growth.
As committed during the Investor Day meeting, I will provide periodic updates.
Today let me start with an update on some of our investments, which we spent time at our Investor Day detailing.
These investments remain on track and are designed to provide attractive returns for our stakeholders.
Let me remind you of a few; one, we continue to expand our own manufacturing capability for nitrile gloves in our existing facility in Thailand.
This will put us in an advantaged position allowing us to have greater control and improved cost structure.
Our new capacity is expected to go live in early 2022.
Two, we remain focused on leveraging our manufacturing strength and brand value through the expansion of our product portfolio.
During the second quarter, we doubled our wound care product line and we remain on track to expand our incontinence care portfolio later this year.
Furthermore, we continue to identify additional product category opportunities to expand our proprietary product offering in the future.
Three, we are also diversifying into new verticals to sell specialty higher-margin products into new end markets.
For instance, we expanded into cleanroom glove market space under the HALYARD PUREZERO brand.
In addition, we recently launched our Safeskin consumer brand of gloves.
Next, we continue to invest in technology-based offerings that provide our customers with actionable data through our service solutions.
And finally, we are focused on the balance between technology and touch in our distribution centers, with continued investment in automation, AI and human capital, all of which expand our leading ability to be flexible and scalable to provide best service for our changing customer demands.
These initiatives are just a few examples of how we are investing to generate long-term profitable growth, while providing significant benefits for our customers.
In addition to having the Owens & Minor business blueprint in place and the investments that I just discussed, I'm equally proud of our focus on corporate social responsibility.
We are committed to delivering on both our financial and our corporate social responsibility obligations.
So far this year, we have launched the Owens & Minor Foundation, which is committed to improving our communities in which we operate and live.
Two, we released our first sustainability report, detailing the advancement that Owens & Minor has made in ESG.
And three, we undertook a first step in reducing our carbon footprint, with our electric fleet pilot initiative.
Our ESG efforts, just like our business blueprint, are part of who we are and that good corporate citizenship is fundamental to our mission and values.
Let me now shift gears to our second quarter performance.
I am extremely pleased to report another strong quarter that continues to build upon the solid performance from 2020.
A year ago, we were in uncharted waters due to the pandemic, but our ability to be flexible and adjust to meet the critical needs of our customers and the nation help to establish momentum that is carried into the second quarter.
Additionally, we continue to find ways to keep driving efficiency and be more productive, as markets begin to return to pre-pandemic form.
Now let me update you on the segments and I will start with our Global Solutions segment.
Within this segment, the medical distribution business performed well and posted much improved results.
We continue to bring in net positive wins, as a result of our market-leading service, combined with the trust we gained during the pandemic.
In addition, we saw volumes associated with elective procedures return to pre-pandemic levels during the second quarter.
Related to our patient direct business, we continue to grow through new patient capture in this rapidly growing patient direct markets.
And finally, our ongoing investments in our Global Solutions segment are expected to provide continued growth in an attractive long-term outlook.
Moving on to the Global Products segment.
This segment produced significant top line growth, as sales of our surgical infection and prevention products, including PPE, remained strong.
The strong sales are a result of our increased output of previously added capacity to fulfill continued high usage, share gains made during the pandemic, stockpile fulfillment and increased elective procedures.
In addition, we saw favorable timing for cost pass-through on gloves adding to the top line growth.
In addition to the solid performance in our two reporting segments, our balance sheet remains strong, with net leverage at 1.8 times and total net debt of less than $1 billion.
This gives us the latitude to continue to make well thought-out investments to improve our operations and drive growth.
Moving from the second quarter and looking to the rest of 2021 and beyond.
We are excited about the long-term future.
We expect the rest of the year to be driven by S&IP utilization, elective procedures, opportunity pipeline and continued strength of our patient direct business.
In addition to this, we will continue to have a tenacious focus on operational excellence and continuous improvements.
As we have said, we believe that the usage for S&IP products, including PPE, will be defined by the new normal; the new normal in the healthcare industry.
We continue to believe that usage for many PPE categories will settle somewhere below the peak of the COVID-19 outbreak, but in excess of the pre-pandemic levels as a result of established healthcare protocols, stockpile requirements and our share gains obtained during the pandemic.
In addition, we expect the expansion of our PPE into new markets like clean room and consumer to provide incremental opportunity.
However, as the year progresses, we expect moderation in both pricing and demand for PPE.
But let's not forget another factor to consider.
That is the elimination of PPE emergency use authorization which will create opportunity for our Americas-based, manufactured medical-grade PPE.
Let me give you a few examples.
First, most recently the FDA revoked emergency use authorization for non-NIOSH-approved disposable respirators, which will prohibit the use of these devices in the healthcare setting.
Second, the CDC has recommended that healthcare facilities return to conventional practices, and no longer use crisis capacity strategies like bringing in non-medical grade supplies.
And third, the EUA for Decontamination and Bioburden Reduction System has been revoked.
All of these actions by the federal agencies bring to light the significance of authorized medical-grade PPE in the healthcare setting.
Our unique value chain of vertically integrated Americas-based manufacturing footprint and supply chain will remain a distinct advantage for us, as we continue to work closely with the government and industry to help address the current and future needs for PPE requirements.
Next, on elective procedures, by the end of the second quarter we saw elective procedures return to pre-pandemic levels.
And we expect this to continue through the second half of the year.
This expectation is consistent with our customers' outlook and assumes COVID rates don't get markedly worse across the country.
Moving on to our pipeline, our medical distribution continues to provide best-in-class service and is backed by our complete suite of products and services.
These together provide one of the industry-leading offering to best serve our customers.
We will continue to advance with a large pipeline of opportunity, while capturing net new wins.
Again, our medical distribution continues to provide market-leading operational performance and stability, that supports our customers' need for continuity supply and supply chain resiliency.
And lastly, our patient direct business, our patient direct business enjoys a leading national presence as the partner of choice for referral sources.
We are uniquely positioned to meet the needs of our customers in this fast-growing home health space.
We expect this business to continue to grow across our major product categories with an annuity-like recurring revenue model.
I'd like to conclude by underscoring the success we've achieved during the quarter.
Our strong second quarter gives us the confidence to affirm the range of our 2021 guidance for adjusted earnings per share and of $3.75 to $4.25 and adjusted EBITDA of $450 million to $500 million as well as affirm our previously issued 2022 guidance.
We continue to be excited about, what's ahead.
We have one of the strongest value chains in the healthcare solutions market while having the ability to be flexible and scale, along with the financial flexibility to invest as appropriate.
And finally, we have our great teammates that exemplify our high deal values everyday and live our humble mission to empower our customers to advance healthcare, as we continue to deliver on our commitments to our stakeholders.
Today I'll review our financial results for the second quarter and the key drivers for our quarterly performance.
And then, I'll discuss our expectations and assumptions for the balance of the year.
I'd like to start by saying that, we're delighted to report a record second quarter with solid growth in revenue, EBITDA and earnings per share.
We're maintaining our expectations for adjusted earnings per share in 2021 to be in a range of $3.75 to $4.25 and adjusted EBITDA in the range of $450 million to $500 million.
Also we are affirming our previously announced guidance for 2022.
I'll provide additional color on this later in my remarks.
Let's begin with the results for the second quarter.
Starting with the top line, revenue for the second quarter was $2.5 billion, compared to $1.8 billion for the prior year.
This represents 38% growth with strong performance in both of our segments.
Top line growth in the quarter was driven by ongoing recovery of elective procedures glove cost pass-through and higher levels of PPE.
Gross margin in the second quarter was 16.1%, an improvement of 117 basis points over prior year due to revenue mix from higher margin sales in the Global Products segment and patient direct business, timing of the pass-through of glove costs and improved operating efficiency.
These were partially offset by higher commodity prices in Global Products and transportation costs across the business.
Also compared to Q1, gross margin was lower by nearly 300 basis points due to margin compression in gloves as anticipated and discussed last quarter.
We also began to see commodity and transportation inflationary pressures in the beginning of the quarter and expect this to continue through Q3.
Distribution, selling and administrative expense of $294 million in the current quarter was $52 million higher compared to the second quarter of 2020.
The increase represents higher variable cost to support top-line growth, funding of ongoing investments across all business lines and higher incentive compensation, driven by our financial performance.
This performance coupled with the efficiency gains from enterprisewide continuous improvement led to adjusted operating income for the quarter of $116 million, which was $77 million higher or three times the same period last year.
Adjusted EBITDA for the second quarter was $128 million, which increased by $76 million or over two times year-over-year.
Interest expense of $12 million in the second quarter was down 47% or $10 million compared to last year, driven by lower debt levels and effective interest rates.
On a GAAP basis, income from continuing operations for the quarter was $66 million or $0.87 a share.
Adjusted net income for the second quarter was $80 million, which yielded an adjusted earnings per share for the quarter of $1.06, which was over five times our performance from Q2 of last year.
The year-over-year foreign currency impact in the quarter was unfavorable by $0.02.
In the second quarter, the average diluted shares outstanding were 14.7 million higher year-over-year as a result of our equity offering in the fourth quarter of prior year and the impact of restricted shares for compensation.
Now I'll review results by segment for the second quarter.
Global Solutions revenue of $1.98 billion was higher by $429 million or 28% year-over-year.
The segment experienced continued growth, driven by ongoing recovery in volumes associated with elective procedures of approximately $300 million along with higher sales of PPE as well as continued strong growth in our patient direct business.
During the quarter, elective procedures continued to move toward pre-pandemic levels, while we recognize that a number of COVID hotspots remain throughout the country.
Global Solutions operating income was $18.5 million, which was $29 million higher than prior year as a result of higher volumes coupled with productivity and efficiency gains in our medical distribution business.
In our Global Products segment, net revenue in the second quarter was $689 million, compared to $370 million last year, an increase of 86%, which was led by higher S&IP sales particularly PPE volume as we benefited from our previous investments to expand capacity and the previously discussed impact of passing through higher acquisition costs of approximately $200 million.
Operating income for the Global Products segment was $95 million, an increase of 84% versus $52 million in the second quarter last year.
This was driven by higher PPE sales, favorable timing of cost pass-through on gloves, productivity initiatives and improved fixed cost leverage.
These were partially offset by higher commodity prices and elevated transportation costs.
Next, let's review cash flow, the balance sheet and capital structure.
In the second quarter, our cash flow was negatively impacted by our investment in working capital to support top line growth, inventory build to ensure supply given numerous supplier issues, global transportation delays and continued unfavorable payment terms with glove manufacturers.
We expect working capital to improve throughout the second half of the year as global supply chain issues subside and as payment terms to glove manufacturers return to historical levels.
As a result, we continue to expect 2021 cash flow to be back half loaded.
Total net debt at the end of the second quarter was $964 million and total net leverage was 1.8 times trailing 12-months adjusted EBITDA.
I'd like to highlight that despite our working capital consumption, we maintained our leverage profile below two times adjusted EBITDA.
Still the improvements we've made to enhance our capital structure provide us with the operational flexibility and put us in a strong financial position to implement our growth strategy.
Our achievement in this regard was recently rewarded with another credit upgrade from S&P last month.
Finally, turning to the outlook.
Earlier today, we affirmed our guidance for 2021 and 2022.
The confirmation of our guidance range for 2021 is a result of our strong Q2 performance and improved visibility into the second half of the year.
Let me provide some context on the assumptions for our outlook.
Our recently installed PPE-related capacity has been fully deployed and our previously announced glove manufacturing capacity expansion is on track to begin contributing to our financial results in early Q1 of next year.
We now expect the full year top line impact of glove cost pass-through to be in the range of $675 million to $725 million.
Any sudden unforeseen declines in the market price of gloves could result in downside to our revenue and adjusted earnings per share projection.
In addition, we believe our patient direct business will continue to perform above market and demonstrate attractive patient capture and retention rates.
As I mentioned earlier, elective procedure-related volumes are at or very close to pre-pandemic levels in much of the country, and we expect the trend to continue in the second half of the year.
As experienced in Q2, we are now including a headwind from elevated commodity pricing and transportation costs and expect this to continue through Q3.
Guidance for adjusted earnings per share is based on 75.5 million shares outstanding.
The increase in our dilutive share count is related to the treatment of certain performance share grants and incremental restricted stock grants driven by our strong financial results.
Even with the 6% increase in shares and new inflationary headwinds, we are confirming our outlook for 2021, 2022 and targets for 2026.
In terms of the calendarization of our guidance, starting with revenue, we expect Q3 revenue to decline slightly from Q2 as the pass-through of glove cost begins to ease.
The 2021 quarterly earnings pattern is contrary to our typical seasonality with most of the year's profitability weighted toward the first half of the year.
Specifically, we continue to expect Q3 earnings to be softer than Q2 due to the timing of glove cost pass-through.
However, we expect Q4 to improve due to the seasonal impact of healthcare utilization across our businesses.
Also, remember that cash flow is expected to improve in the back half of the year, as working capital headwind soften as previously discussed.
Please note that these key modeling assumptions for full year 2021 have been summarized on supplemental slides filed with the SEC on Form 8-K earlier today and have been posted to the Investor Relations section of our website.
In closing, I'm delighted with another strong quarter and proud of the efforts of our teammates around the world.
As we further embed our business blueprint into our day-to-day activities, we'll be well positioned to deliver on our long-term objectives. | sees fy adjusted earnings per share $3.75 to $4.25.
q2 gaap earnings per share $0.87.
qtrly adjusted earnings per share $1.06.
affirms previously announced 2021 and 2022 guidance. |
The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its Annual Report on Form 10-K and quarterly report on Form 10-Q.
Additionally, in our discussion today we will reference certain non-GAAP financial measures.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer, who will provide commentary on the third quarter and an update on our ongoing efforts to help those on the frontlines of the COVID-19 pandemic.
And Andy Long, our Executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provide additional insight into our outlook for the remainder of the year.
I'm extremely pleased to be here today and report another strong quarter.
The strength of this quarter has been driven by our exceptional operating performance supported by our dedicated teammates.
It is our ability to support the complete value chain which makes us different.
The value chain starts with our America's owned and operated manufacturing facilities, combined with our broad external supplier base, and finally integrated with our robust distribution network.
This approach allows us to operate at the highest levels of performance and provide an enhanced customer experience, enabling us to best serve our customers and fulfill our mission to empower our customers to advance healthcare.
While the performance in the third quarter was strong, it doesn't stand alone.
In the past 18 months, we have significantly repositioned our organization by focusing on the customer, investing in the business and delivering on productivity and operational improvements.
This strategy has delivered compelling results for the third quarter, as well as accelerating performance during the past year plus.
Let me start by sharing a few examples from Q3 that demonstrate the strong performance.
First, we achieved an increase of more than 250% in adjusted net income per share compared to the third quarter in 2019.
Two, we expanded adjusted operating margin by 240 basis points versus prior year.
Three, we generated operating cash flow $118 million as a result of increased earnings and working capital improvements.
Fourth, we continue to make investments in infrastructure, service and technology.
Fifth, we reduced total debt by $70 million in the quarter.
And six, we launched a $200 million follow-on equity offering, which has since closed.
Specifically related to the global solutions segment, we grew revenue $317 million sequentially from Q2 to Q3.
The segment returned to profitability and we maintained our industry leading service levels.
Next, related to our global products segment, we achieved record profit levels, and we manufactured record levels of PPE.
And finally, we reached a milestone in the COVID fight, with nearly 11 billion units of PPE delivered, of which approximately 4 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, all of that being done since the beginning of this year.
While the third quarter was strong, this is just a continuation of our demonstrated track record of strong performance.
Here are a few examples of our consistency.
One, we achieve year-over-year gross margin expansion for the sixth consecutive quarter.
Two, we generated positive operating cash flow, again, for the sixth consecutive quarter.
We paid down debt by $231 million year-to-date and by $402 million in the last six quarters.
In addition to that, we have another $130 million in cash on hand that is specifically earmarked to pay down additional debts.
Next, we delivered a fourth consecutive quarter of year-over-year adjusted earnings per share growth on a constant currency basis.
And finally, today we are pleased to raise our 2020 full year adjusted earnings per share guidance to a range of $1.90 to $2.
And we are reconfirming double digit adjusted earnings per share growth in 2021.
It is clear that a robust operational execution combined with strategic investments have fueled increased output and improved efficiency across the entire business, thus enabling us to better serve our customers.
Continuing with this approach as a foundation of our strategy, we are well positioned to address the current and future needs of healthcare.
I will now talk about our focus areas that will shape the remainder of 2020 and the future of Owens & Minor.
These areas of focus are investments, operational improvements, and continued financial strengths.
Let's begin with our investments.
Our disciplined investment strategy has been and will continue to focus on infrastructure, technology and operational effectiveness into the future.
Let me start with investments in our global products segments.
During the third quarter, we continue to expand our manufacturing output through capital investment, operational improvement, and long-term partnerships with our customers.
Here are just a few examples of these investments.
One, we completed the installation of new N95 production line in our US based manufacturing facilities.
Next, we continue to invest in nonwoven fabric manufacturing in our Lexington, North Carolina facility.
And we continue to expand our isolation and surgical gown production capacity.
These investments in our America's based locations enable us to continue to be a leader in the manufacturing of PPE across the broad continuum of PPE products.
It should be noted that we also expect the PPE supply demand imbalance to continue into the future.
Moving now to investments in our global solutions segment, where we expanded our low unit of measure warehouse infrastructure system, we improved our inventory planning process and algorithms, we enhanced our data management services offering through myOM and QSight and improved our B2B and B2C offerings in our home healthcare business.
These investments differentiate Owens & Minor in supporting our customers across the value chain.
Again, this starts with products, products that are manufactured in our factories, most of which are in the America's, with our teammates, with our technology, with our patents, with our processes, with our quality control, with our regulatory affair.
I think you get the picture.
We know how to manufacture products and seamlessly get them into the hands of the healthcare providers through our distribution channels.
As you can tell, we are in a strong position to meet the demands of the changing landscape in the healthcare industry, as regulations and protocols call for increased usage of PPE and as more patients return to care and also as more patients rely on home healthcare.
Let me now discuss operational improvements.
In the past several quarters we have significantly transformed the operational landscape to deliver an improve customer experience and do it more efficiently.
We are doing this by focusing on operational effectiveness and continuous improvement.
Let me give you a few examples.
One, we invested in technological process improvements to increase accuracies within our distribution centers.
Next, we continue to partner with our suppliers using data to better manage demand planning and supply chain efficiency.
While doing these, we continue to emphasize on the safety of our teammates so we can retain our skilled workforce.
Finally, we are enhancing our business system approach to ensure that continuous improvement will be at the core of our organizational culture.
All of these will allow us to remain at the forefront with our industry leading service levels.
Finally, let's talk about our financial position.
As noted in the beginning of my comments today, our financial profile is strong.
We are deleveraging the balance sheet and investing in our future.
Based on the achievements I've walked you through, we have created a track record of delivering on our commitments.
The midpoint of our guidance represents a threefold increase improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
The long-term outlook is based on our improved companywide operating performance from operating efficiency initiatives combined with investment.
Here are a few reasons for the expected continued positive momentum.
First, we expect the demand for PPE to continue to remain high.
With changes in healthcare protocols, stockpiling requirements, new win markets we believe higher demand for PPE is here to stay.
As a result, we continue to invest and ramp up our production to help service this demand.
Secondly, as elective procedures continue to recover toward pre-pandemic levels, we are able to leverage our distribution infrastructure to service our customers.
And finally, our home healthcare business continues to see an increase in demand in one of the fastest growing healthcare markets.
As I've just discussed, we had a solid third quarter and I'm immensely proud of our accomplishments over the past several quarters.
But we recognize we're not done yet.
And good evening, everyone.
Today, I'll review our third quarter financial results and the key drivers of our better than expected quarterly performance.
And then I'll discuss our expectations and assumptions for the rest of 2020.
We are pleased to report a strong third quarter and we're excited about our recent equity issuance and continued deleveraging of the balance sheet.
Our Q3 performance is a testament to our ability to adapt and execute during challenging times.
Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial position despite the challenging business environment.
Earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $1.90 to $2 per share with a continued expectation of double digit growth in 2021.
Later in my remarks, I'll cover the details of the factors that gave us confidence in raising our guidance.
Let's start with the highlights of our Q3 performance.
Beginning with the top line, net revenue in the third quarter was $2.2 billion, compared to $2.3 billion for the prior year.
This change was primarily driven by the impact of past account non-renewals from 2019 and to a lesser extent by the COVID-19 pandemic related reductions in elective procedures.
This was partially offset by greater sales of PPE coupled with growth in sales from existing customers in our home healthcare business lines within global solutions.
Although the revenue impact of elective procedures was better than expected, we continue to trail pre-pandemic levels.
Gross Margin in the third quarter was 15.7%, an improvement of 350 basis points over prior year, as a greater portion of sales came from the higher margin global products segment and is evidence of the increasing level of operating efficiencies, productivity and fixed cost leverage we've achieved.
This represents the sixth consecutive quarter of year-over-year gross margin expansion, illustrating our improving performance.
Distribution, selling and administrative expense of $263 million in the quarter increased $14 million compared to the third quarter of 2019, primarily as a result of continued investments in the business, partially offset by ongoing productivity gains.
Interest expense of $21 million in the third quarter was $3 million lower than the prior year as a result of lower debt levels due to improved operating cash flows and working capital.
In addition, lower base rates and utilization of our accounts receivable securitization program have contributed to the reduction in interest expense.
The combined impact from the strong operational performance and execution resulted in income from continuing operations for the quarter of $46 million, an improvement of $43 million compared to prior year.
GAAP income from continuing operations per share for the quarter was $0.76, an increase of $0.70 versus the same period last year.
The resulting adjusted earnings per share for the quarter was $0.81, which represents a year-over-year increase of over 250% and a fourfold improvement sequentially versus Q2.
The foreign currency impact in the quarter was $0.06 favorable.
Now let me review results by segment for the third quarter.
Revenue for the global solutions segment was $1.9 billion, compared to $2 billion for the same period in the prior year.
The change comes from a decline in our medical distribution business due to the previously mentioned impact of customer non-renewals from 2019 and the impact that the COVID-19 pandemic has had on elective procedures, partially offset by another quarter of solid growth in the home healthcare business.
Relative to the second quarter, global solutions revenue grew by $317 million attributable to the increase in elective procedures.
To help put this in perspective, revenue improved from about 80% of pre-COVID levels in Q2 to the mid 90s in Q3.
Global solutions posted operating income of $11 million for the third quarter compared to income of $25 million last year, driven by lower volume.
Sequentially, global solutions operating income increased by $21 million or 7% of incremental revenue as volumes improved against our largely stable cost base.
Now turning to the global products segment, revenue was $474 million, compared to $360 million in the third quarter of last year, driven by growth in PPE sales net of the impact of lower elective procedures.
Sequentially, global products revenue increased by $103 million.
As new America's based PPE production capacity expanded, and elective procedures began to ramp up.
Global products reported operating income of $90 million, which increased by $73 million over last year.
The increase is attributable to higher revenue of PPE products, favorable product mix, productivity initiatives, improved cost leverage, operating expense discipline, and favorable foreign exchange.
We continue to operate at very high levels of efficiency, and these factors should continue for the remainder of 2020 and are reflected in our revised projections for the year.
Let's turn our focus to cash flow, the balance sheet and capital structure.
In the third quarter, we generated operating cash flow of $118 million and $268 million year-to-date on a consolidated basis as a result of improved profitability and stringent working capital management.
Looking ahead to Q4, we expect a number of factors to weigh on cash flow.
First, we anticipate carrying higher levels of inventory in preparation for the traditional flu and holiday seasons, and an expectation of a slight increase in elective procedures above our previous forecast.
These inventory changes will help ensure that we are prepared to meet customer requirements in a very dynamic environment.
Also, the fourth quarter will experience a higher level of capex spend compared to earlier in the year.
These actions demonstrate our continued commitment to invest in the business to help ensure long term profitable growth and to provide customers with the highest level of service.
Total debt was $1.3 billion at September 30, representing a sequential reduction of $70 million since the second quarter, and $231 million decline since year-end.
Recently, we executed the next step in our financial strategy to further strengthen our balance sheet with a successful equity raise netting $190 million, closing on October 6.
This offering resulted in the issuance of 9.7 million additional shares, which is expected to negatively impact earnings per share by $0.05 for 2020.
The impact of dilution is reflected on our revised annual guidance.
We've already used the net proceeds from our equity offering to reduce debt early in the fourth quarter.
In addition, we have recently issued a redemption notice for our outstanding 2021 notes to be completed by the end of the year.
We plan to utilize $134 million held as restricted cash at the end of September, plus other available funds to retire these notes.
Our leverage profile is well enhanced.
And as we continue to strengthen our balance sheet, we are very well positioned financially to execute our growth strategy by continuing to invest across our businesses.
Finally, let me provide some color on our outlook for the remainder of 2020.
As I mentioned earlier in my remarks, we revised our full year adjusted net income guidance upwards to a range of $1.90 to $2 per share, inclusive of the dilution from our recent equity raise.
The midpoint of our current guidance represents a threefold improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
Let me walk through the assumptions that went into developing the revised guidance.
First of all, we expect the demand for PPE products to remain strong.
And our America's based manufacturing capacity expansion programs will remain on schedule for the rest of the year and into 2021.
We also expect strong performance in Byram, our home healthcare business to continue.
The level of elective procedures across the nation continues to influence our performance.
In Q3, we experienced a faster than expected recovery in this area contributing to our over performance in both segments in the quarter.
Q3 revenue associated with elective procedures increased to the mid 90% of pre-COVID levels.
And our expectation for the fourth quarter is that these volumes will remain at Q3 levels.
We do not expect to see elective procedures return to pre-COVID levels until the middle of 2021 at the earliest.
Furthermore, our outlook on the strong demand for PPE going forward, along with our ability to leverage our captive North American centric supply chain for raw material input through distribution gives us confidence in achieving double digit earnings growth in 2021.
We are seeing increasingly strong indications of sustainable PPE demand for the many reasons we have previously cited.
Please note that key modeling assumptions for the full year 2020 have been updated on supplemental slides filed with the SEC on form 8-K earlier today, and posted to the investor relations section of our website.
We are moving forward with sustainable operational and financial improvements that will provide the roadmap for years to come.
While improving Owens & Minor's financial profile remains a top priority, our core focus continues to be on our customers.
We put our commitment to serving clinicians and caregivers at the center of everything we do. | sees fy 2020 adjusted earnings per share $1.90 to $2.00.
continues to believe that it remains positioned to deliver double-digit earnings growth in 2021. |
Hosting the call, today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Actual results may differ materially from those projected as a result of certain risks and uncertainties.
For a discussion of such risks and uncertainties, please see Risk Factors as described in Ormat Technologies annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.
In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA.
Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.
Doron, the call is yours.
During the third quarter, we completed several strategic initiatives that support our long term position, including a sizable geothermal acquisition in Nevada, new resource adequacy contract for our Energy Storage segment, a joint venture for exploration in Indonesia and several new product wins, providing further evidence that the COVID related disruption in our product segment is abating.
This development support our long-term goals and further our efforts to expand our generation capabilities toward our goal to achieve a run rate of $500 million in annual EBITDA toward the end of 2022.
Looking at the third quarter, our results were negatively impacted by operational challenges at three plants.
We are making progress to resolve these challenges and expect them to gradually recover by the first half of 2022.
Even with these challenges and the ongoing slowness in our product segment, we reported continued growth of more than 15.4% in the electricity segment, leading to revenue that was essentially flat year-over-year.
This enabled us to deliver over $100 million in adjusted EBITDA for the quarter.
We continue to view 2021 as a buildup year.
The strategic acquisition of two operating plants and an underutilized transmission line in Nevada is an example of this buildup.
The new long-term resource adequacy agreement with PG&E for our Pomona-2 project is another example as other product segment wins in Nicaragua and Indonesia, which boosted our product segment backlog.
With a portfolio of over 1.1 GW of generation, a rebounding product segment and a growing energy storage offering.
We are well positioned to maintain our industry leadership and deliver consistent profitable growth.
As we look into 2022, we anticipate increased growth as we put the short-term challenges behind us and reap the benefits of the hard work of the last year.
Let me start my review of our financial highlights on slide five.
Total revenues for the third quarter were $158.8 billion, essentially flat year-over-year, reflecting the contribution of the Terra-Gen acquisition, offset by lower year-over-year product sales.
Third quarter 2021 consolidated gross profit was $63.1 million, resulting in a gross margin of 39.8%, up from the gross margin of 34% in the third quarter of 2020.
Gross margin including $15.5 million of BI income compared to $2.6 million in the third quarter last year.
We delivered net income attributed to the companys stockholders of $14.9 million or $0.26 per diluted share in the quarter compared to $15.7 million or $0.31 per share in the same quarter last year, representing a decrease of 5% and 16.1%, respectively, mainly as a result of a lower operating income, driven mainly by a $9 million increase in the G&A expenses.
Adjusted net income attributed to the company stockholder was $17.8 million or $0.32 per diluted share in the quarter compared to $0.31 per share in the same quarter last year.
Net income attributed to the company stockholder was adjusted to exclude the transaction cost of $3.7 million pre-tax and $2.9 million after-tax related to the Terra-Gen Geothermal acquisition.
Our effective tax rate for the third quarter was 9.2%, which is lower than the 38.8% effective tax rate from the third quarter of 2020, mainly due to the movement in the valuation allowances for each quarter.
We still expect the annual effective tax rate to stand approximately between 30% to 34% for the full year 2021.
That assuming no material one-time impact or no impact from changing of lows.
This will result in an overall higher tax rate in the fourth quarter of 2021.
Adjusted EBITDA decreased 5.1% to $101.6 million in the third quarter compared to $107.1 million in the third quarter last year.
Id note that compared to second quarter 2021, adjusted EBITDA increased 20.2%.
The lower year-over-year adjusted EBITDA was due to a combination of approximately $4.6 million, lower business interruption income and approximately $4.7 million of higher G&A costs, mainly related to the special committee legal costs.
I would like to note that we do not expect to incur significant costs on these issues in the remainder of 2021.
Moving to slide six.
Breaking the revenues down, electricity segment revenues increased 15.4% to $142.7 million, supported by contribution from new added capacity to our McGinness Hills Complex, Punas resumed operation and the contribution of the recently acquired plants in Nevada.
This new added generation was partially offset by lower generation in Olkaria and Bouillante power plant due to a lower resource performance that caused a capacity reduction.
And surface leak in one of the broader injection wells, which also reduced generation.
We made progress in resolving these challenges and expect to gradually recover from them by the first half of 2022.
In the product segment, revenue declined 64.5% to $101 billion to $10.5 billion, representing 6.6% of total revenues in the third quarter.
The decline year-over-year is expected to continue throughout 2021 due to the lower backlog at the beginning of the year.
Energy Storage segment revenues remained flat year-over-year at $5.7 million in the third quarter.
This quarter, we had an increase in the revenue from our storage operating facility of 26%.
That was offset by approximately 67% reduction in demand response revenue as we expect to diminish over the next few quarters.
Lets move to slide seven.
Gross margin for the electricity segment for the quarter increased year-over-year to 42.8%.
This was the result of $15.8 million in business interruption insurance, of which $15.5 million was included in the cost of revenues for the electricity segment, partially offset by higher costs related to the repair and the recovery of Olkaria, Brawley and Bouillante power plants.
Excluding the impact of the business interruption in Q3 2021 and Q3 2020, gross profit increased 2.8% compared to the same time last year.
In the product segment, gross margin was 12.8% in the quarter compared to 18.9% in the same quarter last year.
The Energy Storage segment reported gross margin of 12.2% compared to gross margin of 25.6% in the third quarter last year.
The decrease was primarily due to the reduction in demand response and associated profit.
Electricity segment generated 96% of Ormats total adjusted EBITDA in the third quarter.
The product segment generated 2% of the and the Storage segment reported adjusted EBITDA of $2 million, which represents 2% of the total adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
On slide nine, our net debt as of September 30 was $1.5 billion.
Cash, cash equivalents, marketable security at fair value and restricted cash and cash equivalents as of September 30, 2021, was approximately $402 million compared to $537 million as of December 31, 2020.
Marketable securities were at fair value of $46 million.
slide nine breaks down the use of cash for the nine months and illustrated our ability to reinvest in the business, service debts and return capital to our shareholders, all from cash and cash dividends, all from cash generated by our operations and our strong liquidity profile.
Our total debt as of September 30th was $1.9 billion, net of deferred financing costs, and its payment schedule is presented on slide 32 in the appendix.
The average cost of debt for the company reduced to 4.4% compared to 4.9% last quarter.
During the third quarter, we raised $275 million of new corporate debt to support the Terra-Gen asset acquisition and capex needs.
On November 3, 2021, the Company Board of Directors declared approved and authorized payment of quarterly dividends of $0.12 per share pursuant to the companys dividend policy.
The dividend will be paid on December 3, 2021, to shareholders of record as of close of Business Day on November 17, 2021.
That concludes my financial overview.
Turning to slide 12 for a look at our operating portfolio.
During Q3 of 2021, our power generation in our power plants increased by approximately 13.8% compared to last year.
We benefited from the incremental contribution of the recently expanded McGinness Hills and the generation from Puna that is operating now at a stable level of 26 megawatts.
In addition, we had the contribution of the Dixie Valley and Beowawe plants acquired from Terra-Gen, with a total net annual generating capacity of approximately 67.5 megawatts.
These contributions were partially offset by the lower performance of our Olkaria and Bouillante power plant.
As noted on slide 13, Puna resumed operation in November 2020.
We stabilized Puna generation to approximately 26 megawatts as we continue reservoir study and improvement of existing wells to maximize the long-term performance of the power plant.
We have continued discussions with HELCO and PUC about our new PPA and continue selling electricity under our existing PPA, which is in effect until 2027.
Turning to slide 14.
Let me discuss some of the challenges we experienced this quarter in a few of our property assets, and I will start with a known one in Kenya.
Our revenue in the Olkaria complex was down year-over-year as a result of a reduction in the performance of the resource, which has resulted in an approximate reduction of 25 megawatts.
This reduction in capacity and associated repair costs reduced our quarterly gross margin by approximately $3.6 million compared to last year.
We are taking a few actions to restore the complex generating capacity.
We reduced one of the wells that we plan to connect to the power plant by the end of the quarter.
We are upgrading the equipment that will enable us to generate more capacity, utilizing the same resource.
And we continue with our planned drilling campaign, which includes drilling and redrilling of wells.
We are very optimistic that following these actions, we will see an increase in the production through the first half of 2022.
In the Bouillante power plant in Guadeloupe, we experienced limited injection availability due to scaling that we expect to resolve by cleaning the well.
We finished cleaning the well, and we are waiting to get the permit to restore capacity in the coming days.
In the Brawley complex, we had a leak in one of the injection wells and a pump failure in one of the production wells that caused the reduction of the generating capacity to three megawatts since the second quarter.
We are working to restore production and expect a full recovery by year-end.
The lower performance of the Olkaria, Bouillante and Brawley power plants are reflected in our annual guidance.
We continue to monitor the recommendations of the task force created by the President of Kenya related to the review of all independent power producers PPAs.
Based on a review done by the task force and the report issued by the task force of the President in September 29, Ormats rates in Kenya are significantly lower than many IPPs, as you can see in the chart that shows energy rates of other IPPs compared to Ormats rates.
In the task force report, they indicate that Ken-Gen geothermal average tariff, including steam cost, is $8.05 per kilowatt hour, which is not significantly lower than our rate.
Having said that, we believe that Ormat rate cannot be compared to Canadian tariffs as it is a government-owned company that receives financial benefits, grants and preferred financing terms that we are not qualified for.
We remain committed to providing clean, renewable base load energy to Kenya and continue to work with KPLC for many years to come.
Turning to slide 16.
In July, we closed the accretive acquisition of the Terra-Gen assets.
As a reminder, this acquisition added a total net generating capacity of approximately 67.5 megawatts to our portfolio, along with the greenfield development asset adjacent to Dixie Valley and an underutilized transmission line, capable of handling between 300 to 400 megawatts on a 230 KV electricity connecting Dixie Valley in Nevada to California.
With this acquisition, we now own 10 operating plants in Nevada, generating a total of 443 megawatts, which is roughly equivalent to approximately 7% of Nevadas overall generated energy.
We are currently working to increase the capacity of the acquired Dixie Valley in 2022 by adding Ormats acquisition.
Turning to slide 17 for an update on our backlog.
Our results for the product segment continued to be impacted by the lower backlog at the beginning of the year, we continue to see encouraging signs of recovery.
We have seen clear signs of improvement in this business, including an expansion of our backlog, reinforcing our confidence that this is a short term phenomenon.
We signed a few new contracts during the quarter, including a new contract with Salak energy geothermal to supply products to a new 14 megawatt Salak geothermal power plant in Indonesia.
And another contract to supply equipment to a project in Nicaragua.
As of November 3, 2021, our product segment backlog increased for the third quarter in a row to approximately $67 million compared to $56 million in early August this year, giving us a good start for this segment in 2022.
Moving to slide 18.
The Energy Storage segment continues to become a more important part of our consolidated results.
This quarter, we see an increase in our storage facilities contribution.
And as Assi, indicated, they were up 26%.
The increase was offset by diminished contribution of the demand response activity inherited from the Viridity acquisition.
Moving to slide 19 for an update on legislation.
The global support for renewable energy by government continues as can be seen in the Glasgow Climate Change conference.
In the U.S., the negotiations between the White House and Congress have made substantial progress over the past weeks.
Last Thursday, the House released a draft bill that will serve as the basis for the final negotiation.
Although not final, the new bill suggests extending the PTC and ITC until the end of 2026 for geothermal, and it includes storage to be eligible for ITC.
The bill draft also allows taxpayers to elect the option to receive the tax credits in cash.
The commitment of the government to renewable energy is also reflected in the inclusion of credit plans beyond 2026.
We believe that assuming the bill will pass, this enhanced flexibility and long-term clarity will encourage and accelerate the use of renewable energy, and we expect to be in the forefront of this growth in geothermal and in the energy storage as well as in energy storage and solar.
Moving to slide 21 and 22.
As we have communicated, 2021 will be a significant buildup year, comprised mainly of geothermal project.
The buildup supports our robust growth plan, which is expected to increase our total portfolio by almost 50% by the end of 2023.
One of the main challenges in our efforts to achieve our gross growth is obtaining permits on the time frame, we were used to before COVID.
The delays we experienced in obtaining the permits results in delays in the commissioning of our future projects.
Although we have delays within 2021 to 2023, we are still aiming to add an additional 240 to 260 megawatts by year-end 2023, in addition to the 83 megawatts we added since the beginning of 2021.
In our rapidly energy storage portfolio, we plan to enhance our growth and to increase our portfolio by 200 megawatts to 300 megawatts by year-end 2022.
Achieving this growth target is expected to help us reach an annual run rate of more than $500 million in adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and beyond.
slide 23 displays 14 projects underway that comprise the majority of our 2023 growth goals.
While we are experiencing significant delays in the permitting process, we still expect to be on track to meet our growth targets for the end of 2023.
Moving to slide 24 and 25.
The second layer of our growth plan comes from the Energy Storage segment.
slide 24 demonstrates the energy storage facilities that have started construction.
The other projects included in our growth plans are in different stages of development, and their release will require site control and execution of an interconnection agreement, obviously, all subject to economic justification.
The storage facilities listed in this slide are expected to generate in todays pricing, approximately $15 million annually, with EBITDA margins of 50% to 60% approximately.
Since the majority of the revenues are merchant based, we may see volatility in revenues once they will be in operations.
As you can see on slide 25, our energy storage pipeline stands at 2.1 gigawatt and currently include 30 named potential projects, mainly in California, Texas and New Jersey.
Moving to slide 26.
The significant growth in both our electricity and storage segments will require robust capital investment over the next couple of years.
To fund this growth, we have over $780 million of cash and available lines of credit.
Our total expected capital for the remainder of 2021 includes approximately $177 million for capital expenditures, as detailed in slide 33 in the appendixes.
Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives.
Before I move to the guidance, I would like to update you on some ESG initiatives.
We are moving to strengthen our ESG commitment.
We build our approach and policy on four significant valuable issues as water management, taxation, suppliers and procurement policies and political communication.
The purpose of the move was to reflect in the most up-to-date and accurate way, our approach envision and courses of action on these issues.
Im also happy to update that we are planning to publish our corporate sustainability report in the next few weeks.
We expect total revenues between 652 and $675 million, with electricity segment revenues between 585 and $595 million.
We expect product segment revenues between 40 and $50 million.
Guidance for energy storage revenues are expected to be between 27 and $30 million.
We expect adjusted EBITDA to be between 400 and $410 million.
We expect annual adjusted EBITDA attributable to minority interest to be approximately $31 million.
Adjusted EBITDA guidance for 2021 includes the $15.8 million insurance proceeds received in the third quarter. | q3 earnings per share $0.26. |
Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Actual future results may differ materially from those projected as a result of certain risk factors and uncertainties.
In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA.
Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.
Doron, the call is yours.
Ormat continues to successfully navigate the challenges of the COVID pandemic, delivering year-over-year improvements in our overall profitability and making significant progress in executing our long-term plan to increase our geothermal, storage and hybrid solar geothermal capacity.
For the year, we met our adjusted year guidance during last to improve gross margins within our electricity and storage segments.
Importantly, we achieved profitability in our energy store segment and this part of our business is growing rapidly.
We also strengthened our balance sheet through a combination of long-term debt and an equity offering.
We achieved this while bringing Puna back online and successfully resolving all pending Kenya tax assessment.
These achievements amid the global environment facing unprecedented challenges from the COVID pandemic positioning us for long-term success.
This year, we laid a solid foundation to accelerate the growth of our electricity and storage segments.
Our expectation is that 2021 will be a significant buildup here as we work to bring new geothermal, energy storage and solar PV projects online.
These projects are expected to increase our generation portfolio by 50% to approximately 1.5 gigawatts by 2023, with a significant contribution coming from our energy storage business.
This next step-up in the size of our overall portfolio represents approximately 29% increase in our geothermal and solar capacity, and up to approximately 400% increase in our energy storage assets by the end of 2023.
As a result of our ambitious plan, we estimate that we will reach an annual run rate of $500 million in adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and onwards.
Let me start my review of our financial highlights on slide five.
Total revenue for the full year 2020 were $705 million, down 5.5% from prior year.
In the quarter, revenues were down 6.8% over last year.
Both in the full year and in the quarter, the drivers for the decrease was the product segment, which was impacted by COVID-19.
Full year 2020 consolidated gross profit was $276.3 million, resulting in a gross margin of 39.2%, 310 basis points higher than in 2019.
Same increase noted in the fourth quarter with our growing electricity and Energy Storage segment driving the improved performance.
2020 ended with a net income attributable to the company stockholders of $85.5 million.
Diluted earnings per share for 2020 declined by 4% compared to last year, mainly impacted by a nonrecurring tax benefit recorded in 2019.
Excluding this tax benefit, diluted earnings per share increased by 13%.
For the quarter, diluted earnings per share increased 62.5% to $0.39 per share.
Adjusted EBITDA increased 9.3% to $420.2 million in 2020.
For the quarter, this was 7% increase compared to 2019.
Moving to slide six.
Breaking the revenue down, the electricity segment revenues slightly increased compared to 2019, supported by contribution from new added capacity at our Steamboat complex, and better performance of other projects in our portfolio, offset by lower generation at the other facilities and increased curtailment in Olkaria complex, mainly due to COVID-19.
In the product segment, revenue declined 22.5%, representing 21% of the total revenue in 2020.
The decline year-over-year is expected to continue in 2021, as the continued global pandemic limited and still limited ability to sign new significant contracts.
Energy Storage segment revenues increased 7.6% year-over-year, to $15.8 million and represented 2% of our total revenue for the full year 2020.
This growth mainly driven by revenues from the acquired Pomona energy storage assets and the contribution of Rabbit Hill in Texas.
In the fourth quarter, the electricity segment revenues grew 1.3% to $146 million while product segment revenue decreased 37.5% to $27 million in the fourth quarter of 2020.
Energy Storage segment revenue were $5.8 billion, increasing 36% year-over-year compared to $4.3 million in the fourth quarter of 2019.
Let's move to slide seven.
Gross margin for the electricity segment for the full year expanded year-over-year to 44.6%.
For the fourth quarter, gross margin was 45.2%.
The improvement was primarily due to improved efficiency at some of our power plants as well as decrease in lease expenses related to the Puna due to the termination of the lease agreement.
Electricity gross profit in the full year 2020 was positively impacted by $7.8 million in business interruption insurance payments compared to $9.3 million in 2019.
In the product segment, gross margin was 22.4% in the full year of 2020 compared to 23.6% in the prior year.
The product segment gross margin in 2020 was impacted by higher cost of revenue related to the NASA project that we build in New Zealand, which was impacted by, among other things, restrictions and limitations associated with COVID-19.
In the fourth quarter, we saw an increase in gross margin in the product segment of 160 basis points to 29.8%.
Energy Storage segment reported a positive gross margin of 11.1% for 2020 compared to a negative gross margin in 2019.
The improvement was primarily driven by our acquisition of the Pomona Energy storage assets.
Turning to slide eight.
The electricity segment generated 92% of the total adjusted EBITDA in the full year of 2020, and electricity segment adjusted EBITDA increased 11% over last year.
The product segment generated 7% of the total adjusted EBITDA for the full year of 2020.
The Storage segment reported, for the first time, a full year positive adjusted EBITDA of $3.2 million, including $1.7 million in the fourth quarter.
The key takeaway here is that all of the three segments are now contributing positive adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
Turning to slide nine.
For the full year 2020, we successfully raised approximately $760 million in the aggregate, including $340 million net proceeds from the issuance of common stock, [$290] million profit from the Bond Series four and approximately $130 million of proceeds from senior unsecured loan.
Our net debt as of December 31, 2020, was $920 million.
Cash and cash equivalents and restricted cash and cash equivalent as of December 31, 2020, was $537 million, compared to $153 million as of December 31, 2019.
The accompanying slide breaks down the use of cash for the 12 months and illustrate our ability to invest back in the business, service the debt and continue to return capital to our shareholders in the form of cash dividends, all from cash generated by our operation.
Our long-term and short-term debt as of December 31, 2020, was $1.46 billion, net of deferred financing costs.
And it's a payment schedule is presented on slide 31 in the appendix.
The average cost of debt for the company is currently 4.7%.
On February 24, 2021, the company's Board of Directors declared, approved and authorized a payment of quarterly dividend of $0.12 per share pursued to the company dividend policy.
The dividend will be paid on March 29, 2021, to shareholder of record of the close of Business day on March 11, 2021.
In addition, we expect to pay dividend of $0.12 per share in the next three quarters, representing a 9% increase over Q3 2020 dividend.
That concludes my financial overview.
Turning to slide 12 for a look at our operating portfolio.
Power generation in our power plants declined by 3.1% compared to last year.
This decline is mainly due to the lower generation at our oil facilities and increased customer in Olkaria power plant.
However, revenues of our electricity segment remain unchanged with higher average rate per megawatt hour of $89.6 compared to $86.6 million for last year.
We adjusted the generation capacity of our existing power plants based on their performance this year, as detailed on the slide, and the current portfolio stands at 932 megawatts compared to 914 megawatts last year.
This year, the main addition was 19 megawatts in Steamboat complex following the completion of the Steamboat enhancement.
As noted on slide 13, Puna reserved operations in November 2020, 2.5 years after the eruption of the Kilauea volcano, currently, at low output relative to its generating capacity before the eruption.
In November, Puna reached 10-megawatt generating capacity, and now it is offering at 13 megawatts.
We continue our field recovery work and drilling of news, and we expect Puna to increase power generation during the second quarter of 2021.
We target close to full production at Puna by the middle of this year.
On the insurance front, for the entire 2020, we collected $29.1 million insurance proceeds, the $7.8 million were recorded under cost of revenues and the balance in other operating income.
We are still working with our council to collect the rest of what we believe should be paid to us.
Turning to slide 14, for an update on our international fund and specifically in Kenya.
As discussed earlier, one of the impacts COVID had on our operations in Kenya relates to increased curtailment there by KPLC, which was the main driver to a reduction in revenue of approximately $6.5 million compared to prior year.
The curtailment continued into the fourth quarter in a lower frequency compared to the first three quarters in 2020.
We are also encouraged by the improved collection from KPLC that continues reducing the overdue amount.
Also in Kenya, we had an important achievement, concluding all open tax audits with the Canadian tax authorities and reached a favorable settlement related to the 2019 Flex assessment originally totaling $200 million.
The settlement agreement extended or this period for the issues addressed within the main assessment to cover the period from 2013 through 2019.
Full financial impact was recorded in the fourth quarter of 2020.
Turning to slide 15 for an update on our backlog.
Our product segment has been the part of our business most impacted by the COVID-19 pandemic, with our customers' projects around the world being delayed.
However, we believe this is a short term phenomenon.
In Turkey, a new feed-in tariff was announced that although it is lower than the previous feeling tariff, we expect the market to adapt to it, and we anticipate new potential projects in Turkey in the coming months.
As of February 24, 2021, our product segment backlog was $33 million.
We anticipate continued weakness in our product backlog and a result our 2021 guidance for this segment's revenue is significantly lower than recent years.
Our business that is resilient and a key part of it relates to a vertically integrated structure, which enables us to better allocate our manufacturer capacity and resources while focusing on internal initiatives to support our electricity segment growth.
We started to see this shift already in the second quarter of 2020 and in the full year 2020.
Inter-segment revenue increased more than 30% over 2019 and 130% over 2018.
Ormat is the only vertically integrated company in the geothermal industry.
We can efficiently transition from manufacturing components for third-party customers to develop components for our company-owned projects.
This means we can bring projects online more effectively by using internal resources and expertise.
This will also extend our energy storage segment as well as our construction expertise is tough to help development at energy storage products.
As a result, we are also able to feed capacity at our manufacturing segment, avoiding unutilized expenses.
However, we firmly believe that there's a demic base, we will see increasing demand for our products around the world.
Partially offsetting the weakness of the product segment, has been a consistent improvement in our Energy Storage business.
Energy Storage discussed on slide 16 continues to grow and to become more profitable, as Assaf presented in his financial remarks.
This year, we commissioned the Rabbit Hill 10-megawatt storage facility in Texas, which provides auxiliary services and energy optimization to the wholesale markets managed by Ormat.
On February 13, weather conditions in Texas caused abnormal reduction in electricity supply, along with record demand for electricity.
Some assess that events that are unfolding in airport represents one of the worse shots to U.S. electricity market in the recent decades.
The extreme weather conditions resulted in shortage of electricity supply, which caused electricity and prices to reach record of thousands of dollars per megawatt hour, probably all-time high.
Starting February 16 and until February 19, our Rabbit Hill facility could not charge from the grid due to the energy emergency alert which resulted in limited ability of the Rabbit Hill storage facility to provide our services.
In order to reduce our merchant risk and increase our contracted in 2021, the company signed a transaction for 80% of the volume at a fixed rate, exchanging the floating RF revenue -- for a fixed our revenue at the end of 2020.
Due to the inability to operate the facility during these times, we expect to record in Q1 financial results, up to approximately $11 million of nonrecurring loss associated with this hedge.
This event is still unfolding, and our goal is to minimize our exposure.
This year, we also completed two acquisitions: One, an operating facility in California, Pomona to shift the EBITDA margins in this business from loss to profit.
The second acquisition was an asset under development upfront in Texas that will contribute for the growth of this business.
Before I move to a discussion on our growth plans, I would like to briefly discuss our commitment to sustainable future and step we took this year to support the environment our community and our employees, in slide 18.
Sustainability is the core of our business and our way of life, saving emissions by generating clean energy that replaces the meeting conventional forms of energy.
Our goal to increase our clean energy portfolio aligns with sustainability values and further sales emissions to the environment globally.
In 2020, the health and safety of Ormat employees, our contractors and the communities in which we live, work and do business are of utmost important.
Throughout this global pandemic, Ormat followed strict protective measures necessary to safeguard every stakeholder health and safety.
This includes adhering to all government regulations and maintaining clear comprehensive plans and protective measures for employees who work in our energy plants, manufacturing facility, offices and elsewhere.
We believe that our success depends in large part on our ability to create and engage with us.
Accordingly, investing in our employees is a key element of our corporate strategy.
Since the beginning of the pandemic outbreak, we did not lay off any employee due to COVID-19.
In the communities we operate, we have created special social projects, adding thousands of people and donating food and medical supplies.
Also, we presented personal protective equipment to hospitals in Kenya, Guatemala, Honduras and the U.S. Moving to slide 20.
Our operating portfolio stands to date at over one gigawatt, comprising of 873 megawatts of geothermal, 53 megawatts offering, 7-megawatt of hybrid solar and 73 megawatts of energy storage.
We have a robust growth plan to increase by 2023, our total portfolio by almost 50%, with a significant contribution from the Energy Storage business, as detailed in the following slide.
This increase is subject to obtaining all permitting and regulatory approvals required as well as completing the development and construction of these power plants as planned.
Moving to slide 21.
Our medium-term goal is to increase the capacity of the electricity segment.
From our previous estimate of approximately 170 megawatts by end of 2022 to between 250 and 270 megawatts by the end of 2023, representing a total increase of up to 29%.
In our rapidly growing energy storage portfolio, we are planning to enhance our growth and to increase our portfolio by up to approximately 400% -- between 200 megawatts to 300 megawatts by the end of 2023.
This represents a significant increase compared to our previous growth target of 80 to 175 megawatts, we set for 2021, 2022.
Additionally, we believe that we may see additional increase coming from potential M&A activities.
The next slide explains 14 projects under way that comprise the majority of our 2023 growth plans.
We already secured long-term PPA for the majority of these projects and affirm the resource viability.
While our electricity segment has navigated the pandemic well, we had some challenges and changes to the timing of projects coming online.
The current expected commercial operation of CD4 inhibitor is during the first half of 2021, a change that was caused mainly due to delays in permitting due to COVID-19.
Slide 23 shows the geoterminal pipeline we hold for long-term growth.
These are additional prospects that are in different states of exploration.
Moving to slide 24 and 25.
The second layer of our growth plan comes from Energy Storage segment.
Slide 24 demonstrates the energy storage facilities we have announced or started construction.
The other projects included in our growth plans are in different stages of development, and the release will require a site control and execution of interconnection agreement, all obviously subject to economic justification.
Our current pipeline presented in slide 25, which is updated frequently include 33 names, potential projects with a total potential capacity of over one gigawatt, which are in different stages of development.
As I mentioned earlier, we believe that we can develop from this potential pipeline between 200 to 300 megawatts by the end of '23, mainly in Texas, New Jersey and California.
This target excludes any add-on for M&A activities that we are proactively seeking.
Moving to slide 26.
The significant growth in both our electricity and storage segments will require robust investments over the next couple of years.
To fund this growth, we have over $900 million of cash and available and restricted cash and lines of credits.
Our total expected capital expense for 2021 includes approximately $450 million for capital expenditure for construction of new projects of geothermal, solar and storage; enhancement to our existing geoterminal power plant at management release for construction; maintenance of capital expenditures, including our work at the Puna power plant; and enhancements to our production facilities as detailed in slide 32 in the appendix.
Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives.
We expect total revenues between $640 million and $675 million, with electricity segment's revenue between $570 million and $580 million.
The electricity segment includes $32 million from the Puna power plant in Hawaii, assuming we are without plans, mainly close to full operations in mid-2021.
We expect product segments revenue between $50 million to $70 million.
Revenues for energy storage is expected to be between $20 million and $25 million.
We expect adjusted EBITDA to be between $400 million and $410 million.
We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million.
Moving to the last slide.
The winter of 2020, 2021 brought away the beneficial legislation to the renewable energy industry in the United States.
In December, the Congress package included extensions to the production tax credit and investment tax credits for renewable projects, including geothermal, solar and storage and recovered energy projects.
While the December legislation did not provide a tax credit for stand-alone energy storage facilities, storage facilities related to the functioning of the solar facility were determined to be eligible for the IT fee, and we believe that our after energy storage facility can benefit from it.
In addition, safe harbor provision for renewable energy developers to claim this tax credit was extended from five to 10 years.
This enhanced flexibility, will encourage renewable developers to get construction going on more projects over the next decade.
Finally, a few days ago, the California Public Utility Commission, the CPUC issued a ruling requesting comment on a proposal for 1,000 megawatts, each of new geoterminal and long duration storage procurement between 2024 and 2026.
With the tailwind of this support, 2021 is going to be a significant buildup year, accelerating our growth in the storage and electricity with a goal to reach $500 million of annual run rate of adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and onwards.
This goal shows that our way to deliver accelerated profitability growth in the geothermal business is also applicable to our storage business.
This will happen by applying our vertical integration approach, mitigation, the partial inherent merchant risk through diversification, using our stable geothermal portfolio as a solid foundation to our storage business and maintaining a strong capital position with access to various sources of capital.
We are planning to conduct an Analyst Day likely in May of this year, where we expect to discuss in more details the growth goals in our electricity and storage segments, and our plans achieving the adjusted EBITDA goal. | qtrly earnings per share $0.39.
sees 2021 total revenues of between $640 million and $675 million.
sees 2021 adjusted ebitda to be between $400 million and $410 million.
sees 2021 electricity segment revenues between $570 million and $580 million. |
Both of the documents are available at Old Republic's website, which is www.
Risks associated with these statements can be found in the company's latest SEC filings.
In the past, Rande Yeager, our Title Group Chairman; and Mark Bilbrey, our Title Group CEO, have joined us on the call.
Appreciate having you join us for the discussion today.
As we work through the challenges resulting from COVID-19, we certainly want to send all of you, your families, friends and coworkers our very best wishes.
Although in most states, we're recognized as an essential industry and essential workers, currently more than 95% of our General insurance group and approximately 80% of our Title Insurance associates are working remotely.
The small number of associates we have in the offices are working to ensure that mail gets processed, checks get mailed and that our IT infrastructure remains vibrant to support all of those working remotely.
I'd also note that we're among the fortunate to be able to say that we have not furloughed any of our associates during this time.
So before handing things over to Karl, I'll offer a few initial comments regarding our first quarter.
As you saw in our release, Old Republic posted strong first quarter 2020 operating results relative to the first quarter of 2019 and these results were driven by an exceptionally strong quarter for our Title Insurance segment.
As noted in our release, COVID-19 had minimal effect on our first quarter results.
Our first quarter operating results, again, demonstrate that our strategic diversification between Title Insurance and General insurance works very well to produce consolidated revenue and earnings growth over time.
So at this point, I'll turn matters over to Karl to discuss our overall consolidated financial results.
I'll also ask him to address our small RFIG run-off segment.
After which, he'll turn things back to me to discuss the General Insurance segment.
Then Carolyn will discuss the Title Insurance segment.
I'll make a few closing comments and then finally, we'll open up the discussion to Q&A.
So with that, Karl, take us away.
Before commenting on the first quarter results, I'd like to add to Craig's earlier comments and recognize our accounting and financial reporting associates for their diligence and commitment during this period of turmoil resulting from the COVID-19 pandemic.
Despite the fact that most of our employees were working remotely, we were able to complete the financial close without significant disruption while at the same time, retaining the integrity of our internal control process.
Job well done by everyone.
Turning now to the quarterly results.
On a diluted per share basis, that equates to $0.47, which is an increase of 17.5% from the prior year.
However, the resulting disruption to the financial markets led to substantial declines in the fair value of our equity portfolio.
The pre-tax fair value decline of approximately $963 million was really the main contributing factor to the first quarter reported net loss and corresponding reduction in book value.
Consolidated net premiums and fees earned registered strong growth of a little over 10% to $1.5 billion.
The General Insurance group increased about 2.5%, and our Title group grew by almost 24%, as Carolyn will address in a few moments.
Net investment income grew nearly 2% to a due to a larger invested asset base and greater dividend income, which arises from the relatively higher-yielding equity portfolio and that was offset by slightly lower yields on the bond portfolio.
From an underwriting perspective, this quarter's consolidated combined ratio of 94.9%, marked about a 1.1 percentage point improvement over 2019.
The quarterly claims ratio trended lower, and the expense ratio ticked upwards slightly primarily due to a mix of business shift.
And then that shift was more toward the Title segment, which as you know, carries a lower loss and a higher expense ratio.
Consolidated claim reserves developed slightly favorable in both periods, reducing the reported claim ratio by 0.8 and 1.6 percentage points for the current and prior year quarters, respectively.
We experienced favorable prior year development on the reported claims ratios for each of our operating segments to varying degrees during the quarter.
Turning now to our financial condition.
Total cash and invested assets decreased to $13.5 billion at the end of March.
Driving this change was the combination of strong operating cash flow of $216 million offset by, as I mentioned earlier, the substantial unrealized market depreciation in both the equity as well as the fixed income portfolios.
As a reminder, the composition of our portfolio is approximately 76% allocated to bonds and short-term investments and 24% to equity securities.
Our equity portfolio consists of approximately $100 million that are predominantly large-cap, value-oriented, dividend-paying companies.
We manage the portfolio within our risk management framework, which does take into consideration expected price volatility.
The value of our portfolio equity portfolio declined by approximately 24% during the quarter to an unrealized loss position of roughly $22 million at the end of March.
As of yesterday's close, the portfolio had rebounded to a $175 million unrealized gain.
Despite this significant downdraft in valuation at the end of March, we are still operating within our risk tolerance thresholds.
And consequently, we have not made, nor do we expect to make any material changes to our investment strategy.
Old Republic's book value per share decreased from $19.98 at the end of 2019 to $17.29 at the end of March.
As previously noted, the most significant contributor to this decline relates to the $2.53 per share reduction in the fair value of the equity portfolio.
Operating income of $0.47 was additive to the book value, and we returned capital to our shareholders in the form of the regular cash dividend, and that amounted to $0.21 per share or $0.84 on an annual basis.
And this year's annual dividend payout represents about a 5% increase over last year's regular cash dividend rate.
This year, 2020, marks the 79th year of paying uninterrupted regular cash dividends as well as consecutive years of increasing the dividend rate for the past 39 years.
We ended the quarter with $6.1 billion of total capitalization, low debt leverage ratios and adequate liquidity throughout the enterprise.
As highlighted in the release, we believe that our strong financial position will enable us to weather these challenging times.
So as Craig mentioned, let me now just briefly discuss our run-off mortgage insurance segment.
From a capital management perspective, we entered this year with the anticipation of beginning to withdraw excess capital from our mortgage guaranty run-off operation.
During the quarter, we did, in fact, obtain regulatory approval and received a $37.5 million extraordinary dividend from our two principal mortgage insurance companies.
Total statutory capital at the end of March continues to remain strong and registered $410 million.
The first quarter mortgage insurance results were not significantly affected by the COVID-19 pandemic, as Craig mentioned earlier.
The impact on unemployment levels in real estate markets, along with the mitigating effects of the government loaned forbearance programs are areas that we are monitoring closely.
By definition, a mortgage in forbearance is not considered to be in default.
Let's also keep in mind that this is a mature book of business.
We've not written a new policy since 2011.
A large percentage of the in-force file was written in 2009 and earlier years.
In addition, approximately 60% of the loans that are insured have previously been modified or refinanced under the government's home affordability programs, the HARP and HAMP programs.
So these factors, along with the rate at which the U.S. economy recovers, could affect future claims experience and potentially slow the return of capital from the run-off business, until there is greater clarity.
So that said, we continue to pursue all previously mentioned options in the interest of producing the most beneficial long-term outcome for all stakeholders.
With that, I'll now turn things back to Craig for discussion of the General Insurance group.
So as the release indicates and as we show in the financial supplement, compared to first quarter 2019, General Insurance saw quarter-over-quarter operating revenue increase by 2.9% and quarter-over-quarter operating income was up 1.7%.
Net premiums earned in commercial auto rose by 3.6% quarter-over-quarter, attributable to the positive effect of rate increases that we have continued to attain on the commercial auto line.
And in the first quarter, those rate increases remained in the high teens.
On the other hand, premiums were somewhat offset by a decline in the exposure base.
As can be seen in the financial supplement, workers' compensation experienced a 9% drop in net premiums earned quarter-over-quarter.
This is attributable to the negative effect of rate decreases that continued in the low single digits for us during the first quarter and also from a decline in the exposure base.
Thus far, the lower rate level that we have in the workers' compensation line continues to correspond with the lower claim frequency trends that we and the industry are seeing on that line.
Quarter-over-quarter, the General Insurance overall composite ratio rose slightly to 95.6%, up from 95.3%, and this was attributable to a slightly higher expense ratio.
The first quarter expense ratio came in at 25.8% compared to the first quarter of 2019 when it stood at 25.5%.
So turning to claim ratios.
Our first quarter commercial auto claim ratio came in at 77% compared with 79.1% in the same period of 2019.
As demonstrated by our continuing level of rate increases for this line, along with our reduction in exposure from our risk selection efforts, we continue to work very hard to bring this claim ratio back into line with our target in the low 70s.
Turning to workers' compensation.
The first quarter claim ratio came in at 71% compared to 70.7% in the first quarter of 2019, and we continue to remain very pleased with this result, obviously.
For commercial auto, workers' comp and GL combined, given that we typically provide these coverages together to an account, we like to also look at that combined results, and the quarter-over-quarter claim ratio for those three combined was flat at 74.1%.
Still looking at the financial supplement, you can see that the remainder of our claim ratios are very much in line with our target.
And of course, all of the claim ratios we report are inclusive of favorable and unfavorable prior year claim development.
And in the latest quarter, we saw favorable development of 7/10 of one percentage point.
So for General Insurance, as I mentioned earlier, the remaining quarters of 2020 could prove challenging from a top line perspective, but we will continue to seek the appropriate price that we need for our products.
And we'll continue to focus on the long-term when it comes to managing our expense ratios.
So on that note, I'll now turn the discussion over to Carolyn for her comments on Title Insurance.
While these have really been challenging times, the employees in the Title division have embraced this challenge and are working through the chaos in order to continue business and serve our customers.
Despite the COVID-19 pandemic, residential and commercial sales and refinances continue to fund and transactions need to close.
Amidst this, we are ever mindful of the safety and well-being of our employees and customers.
Access into our offices is generally restricted to employees only, which has really caused us to be very creative in carrying out our business.
Our direct operations and our Title agents have conducted drive through closings, set up tents outside of offices, provided single-use pens for signing documents, all while continuing to practice social distancing My heartfelt appreciation goes out to all of our employees and our Title agents on their creativity and most importantly, the positive and really collegial attitude that we hear about on our daily calls with the leadership team in our Title group.
The COVID-19 disruptions have led to a variety of emergency state orders that impact our business.
Many motorization statutes have been amended in order to comply with distancing requirements and to create avenues through which closing transactions may continue.
Based on these orders, our Title technology company Pavaso, which was originally designed for electronic closings and law legislation, was able to pivot and adjust its technology to allow our agents and offices to continue conducting closings through a secure platform, which allows for adherence to social distancing restrictions.
This platform provides an essential notary function that allows for the entire notarization of documents to be completed remotely.
Between the ingenuity of our offices and agents and the supportive technology like Pavaso, we have been able to keep pace in our current environment.
The Title group kicked off the first quarter of 2020 on a record pace.
The market experienced near record lows on mortgage rates.
All-time first quarter highs were set in terms of both direct and independent agency revenue and operating profitability.
For the first quarter, total premium and fee revenue was $628.1 million, which was an increase of nearly 24% over the first quarter of 2019.
Agency premiums were up around 21% and direct operating revenue approximately 31%.
In terms of operating profitability, the Title group reported pre-tax operating income of $43.3 million for the quarter compared to $20.5 million in the first quarter of 2019, an increase of 110.6%.
We ended the first quarter with some of the highest open order counts in the history of our company.
We continue to adjust to doing business while operating under the various state shelter in place orders and social distancing requirements.
We are mindful of the challenges ahead for our organization and our nation in general.
Our firm belief is that with the continued unwavering commitment of our employees and the support of our Title agents, we will be more than ready for these challenges.
We will rely on the same guiding principles of integrity, managing for the long run, financial strength, protection of our policyholders and the well-being of our employees and customers that have served us well over the last 100-plus years.
So again, our first quarter operating results indicate that our business continues to perform very well.
We continue to focus on underwriting excellence during these challenging times.
And our capital position remains very strong with significant dry powder to weather the macroeconomic disruptions and to be well positioned when the economy eventually rebounds.
I'll also note that our MD&A discussion in our upcoming 10-Q will provide additional more detailed disclosure around the risk factors associated with COVID-19. | old republic international- impact on u.s. economic activity from covid-19 and the associated governmental responses occurred in the final weeks of q1. |
Both of the documents are available at Old Republic's website, which is www.
Risks associated with these statements can be found in the company's latest SEC filings.
I have to say that in the interest of full disclosure, I need to note that this will be the last call that I'll be on as a part of Old Republic's management team.
As we announced in the spring of last year, I've turned over the baton to Craig Smiddy, as will become CEO of our venerable Old Republic Company and that took place effective October 1, 2019.
And at that time we split therefore, the Chairmanship and the CEO positions.
And as a result, we got -- we've established a good transition period during which the CEO's position as our Chief Enterprise Risk Manager that transition can take place in a flawless and manner.
So the manner in which I will participate, I have decided after these few words is to turn our discussion over to our three -- three of our most senior executives at the head of our organization.
And of course that's Karl Mueller, our CFO; Craig Smiddy, our CEO; and Rande Yeager who was the Executive Chairman of our Title Insurance Group.
Having said this, I'll now turn as you Karl to address some financial matters and then call will be followed by Craig Smiddy, will speak to the overall consolidated results.
In addition to whatever Karl will be covering and our General Insurance group of which Craig is also CEO.
And then Craig will be followed by Rande Yeager, whom as I've said is the Executive Chairman of our Title business, who will over happenings in that business.
And when they are finished, I'll have a few closing remarks and as has already been said, we'll turn the meeting to any questions that any connected participant may have.
So here's the mic Karl?
As usual, I will comment on a few key elements of our financial results for the fourth quarter and the full year.
For the full year 2019 net income, again excluding investment gains and losses, was $1.84 per share, or $554.2 million, which is essentially flat with 2018.
These earnings produced a 10.8% return on beginning equity for 2019 and you compare that to an 11.8% return for 2018.
From a growth perspective, net premiums and fees earned, grew by 11.4% in the fourth quarter to $1.6 billion.
This was largely driven by our Titles group for the year.
Premiums and fees grew 5.1%, this was attributable to both our General Insurance as well as our Title operations, which more than offset the expected decline in mortgage guaranty run-off business.
Net investment income grew by 2.3% and 4.4% for the fourth quarter and for the full year respectively, as a larger invested asset base and greater dividend income that was attributable to higher yielding equity portfolio, offset a slightly lower yields on our bond portfolio.
From an underwriting perspective, this year's fourth quarter and full year consolidated composite ratio of 95.1% was substantially unchanged from 2018.
On a year-over-year basis, the claim and expense ratios also remained relatively consistent.
Fourth quarter claims ratio however trended lower and the expense ratio ticked upward and that's primarily due to a mix of business shift toward the Title operation, which as you can see operates with a lower loss and higher expense ratio.
Turning now to the balance sheet.
Total cash and invested assets increased by 10.2% to $14.5 billion at the end of 2019.
The change was driven by a combination of strong operating cash flow, which totaled $936 million for 2019, as well as substantial unrealized market appreciation for both the fixed income and equity portfolios.
Composition of the portfolio remains relatively consistent compared to year-end 2018, whereby 72% is allocated to cash and bonds and the remaining 28% to equities.
And that portfolio continues to focus on high quality long-term dividend paying companies.
On a consolidated basis, claim reserves developed without significant favorable or unfavorable development for the 2019 period, and that's compared to favorable development for 2018's fourth quarter and full year of 2.4 percentage point and 1.4 percentage point respectively.
Old Republic book value per share increased to $19.98, up 16% for the year.
Inclusive of our regular quarterly dividends and the $1 per share special dividend that was paid in the third quarter of last year.
The total return on beginning book value amounted to just a little bit above 26%.
That special dividend was evaluated in light of capital adequacy and liquidity needs, along with the anticipation of withdrawing capital from our run-off mortgage guaranty operations.
I will say with regulatory approval, we currently expect to receive a return of capital totaling $150 million from this run off business during the course of 2020.
Looking ahead, with respect to our MI operations, we continue to proceed along the lines that we've previously disclosed.
We said that the options available to us include a continued profitable run-off of the business over the next several years or alternatively a reactivation of the business under new ownership or finally a reinsurance of the remaining book of enforced policies.
We continue to assess all of our options in the interest of producing the most beneficial long-term outcome for all stakeholders.
So overall Old Republic's balance sheet remains in very strong condition, is well capitalized, and is well positioned for future growth.
So with that I'm going to turn things over to Craig for some additional commentary.
So as the results Karl covered demonstrate our strategic diversification between our Title insurance business and our general insurance business works very well for us.
The uncorrelated nature of these two businesses help produce steadier earnings for ORI overall which is underscored by some of the figures Karl referenced.
I'll reiterate a few of those.
95.1 composite ratio, the 10.8% return on equity, the 16% increase in book value per share and including dividends a total return on book value of 26%, all for the 2019 year.
So specific to the General Insurance group, as the release indicates and as we show in the financial supplement, the Group's mid-single-digit growth quarter-to-quarter and year-over-year in both net premiums earned and in total operating revenues.
Quarter-over-quarter operating income was relatively flat while year-over-year operating income was up 1.7%.
Net premiums earned in commercial auto rose by 6% year-over-year and this mostly reflects the positive effect of the rate increases that we've been achieving in this line that currently stand in the high teens for the 2019 year.
However premiums have been somewhat offset by a decline in the exposure base due to lower US freight shipments in 2019 compared to 2018.
As can be seen in the financial supplement, workers' compensation experienced a 1.9% drop in net premiums earned year-over-year.
And this is mostly resulting from rate decreases.
And for 2019, those are in the low single-digit and those rate decreases correspond with lower claim frequency trends that we've seen in the past several years.
Quarter-over-quarter the Group's overall composite ratio rose slightly to 98.8 from 98.5, while year-over-year it stands at 97.5 for 2019 compared to 97.2 for 2018.
The Group's fourth quarter expense ratio came in at 25.8%, while the full year 2019 expense ratio came in at 25.7% up from 25% in 2018.
This higher expense ratio in 2019 is largely due to differences in the mix of business.
For example, workers compensation, ratings as we just spoke about are less than they were and that typically comes with a lower commission rate.
So that's what we mean by differences due to mix of business.
Turning to claim ratios, our fourth quarter commercial auto claim ratio came in at an elevated 91.3%, with the year-over-year ratio coming in at 84%.
The systemic increases in claims severity trend in the US commercial auto line continue.
These are from the same underlying causes that we've spoken about now for several quarters.
And we will continue to respond through rate increases, risk selection accompanied with better levels of technology to help us in that risk selection and we'll continue to perfect this until such time, we see this claim ratio come back in the line with our target, which remains in the low 70s.
Turning to workers compensation, the fourth quarter claim ratio declined to 57.4% from 67.5% quarter-over-quarter.
And year-over-year this claim ratio declined from 70.7% in 2018 to 63.2% in 2019.
And obviously, we remain very pleased with this is improving result in workers compensation.
General liability experienced an elevated claim ratio quarter-over-quarter and year-over-year, but as is the case we have said in the past we write less premium in this line of coverage.
So results tend to be more lumpy, more volatile quarter-to-quarter and year-to-year.
For commercial auto workers' comp and GL combined, given that we typically provide these coverages together to an account, the quarter-over-quarter claim ratio increased by 2.2 percentage points, while year-over-year this claim ratio held relatively steady.
Still looking at the financial supplement, we note that financial indemnity claim ratio quarter-over-quarter and year-over-year dropped significantly, coming back in the line with our targets.
And we think this improvement reflects actions that we've taken to address the higher incident of guaranteed asset protection, GAP claims as well as the higher incidence of D&O claims that we experienced over the last few years.
And as we spoke about in prior quarters, we were taking some fairly aggressive action in those regards.
All of the claim ratios we report of course, we are inclusive of favorable and unfavorable development, and in the latest quarter we saw unfavorable development of 2.9 percentage points mostly resulting from commercial auto.
While year-to-date, the development was unfavorable by 0.4 percentage points.
So again speaking for the General Insurance group, we continually seek to selectively grow our business, make investments to sustain long-term growth and profitability while proactively responding to loss trends that we're seeing.
Underwriting profitability remains paramount and there is a keen focus on improving our claim ratios, particularly our commercial auto claim ratio.
So on this note, I'll turn the discussion over to you, Rande for comments on ORI Title Insurance Group.
In the fourth quarter, we set an all-time record for underwriting revenues $717 million.
For the 5th consecutive year and six of the last seven, we surpassed the $2 billion mark for total revenues.
Last year's 2019's $2.53 billion number is an all-time high of favorable prior year claim development continued during the year, albeit at a slower pace than we've seen in the past few years.
But backing out these adjustments, records were set for both quarterly and annual pre-tax profitability.
We surpassed $200 million in pre-tax operating profitability for the fourth consecutive year.
Looking at the market when the dust settles, residential mortgage originations are expected to be up about 23% in '19 over '18, exceeding $2 trillion for the year.
Refinances accounted for almost 40% of that total or about 70% higher than in 2018.
The latest Mortgage Bankers Association estimates call for similar origination markets in 2020 with refinances down moderately and purchases up slightly.
On the commercial side of the business, the MBA predicts that a new record of 628 billion will have been established in 2019 and their optimism actually rises in 2020 as our projections increase about 9% into a new high of $683 billion.
Certainly all of this is good news, and would provide for a healthy marketplace in 2020.
Our market share indication, last was 15.1% and when the final numbers are tallied, I think that number will hold for the year.
For 2019 our agency premiums were up about 5%, direct operating premiums and fees were up about 12%.
Our commercial title operations continue to perform at a high level with title premiums from the source commercial accounting for almost 20% of our total premiums.
We believe that our offerings of commercial and residential services are of course in the [Indecipherable] in terms of underwriting expertise and customer support.
Over the years we've enjoyed a great deal of success in the Title group.
And like all the other ORI business units, we emphasize integrity, expertise, and culture.
We like to say that we're steady as it goes and we stick to the basics.
We're not chasing market share and don't try to buy our way to the top.
Our acquisitions, when we make them have strategic value in terms of where they are, the geography, and our people's intellectual capital.
And our reputation is for professional services.
Our success, when you look back, put it all together is a byproduct of a job well done, in all of these regards.
So that's my report on the Title business.
As my three colleagues have just reported, our business continues to perform very well.
Last year, by the way, we posted the highest pre-tax earnings in the entire history of our company.
And as always, we are managing our way, as you know way out of a few parts of the General Insurance business in particular, which are and have been experiencing some temporary cases of hiccups, if you will, but we see this as part and parcel of what we do and what we do in terms of the underwriting risk management process that our people from top to bottom are well equipped to deal with throughout the cycles of our business.
As Karl said, at both the ORI Holding Company and that the most critical insurance operating levels, we are very well capitalized to at once support the obligations on the right side of our balance sheet; two, protect the capital account on behalf of all of our stakeholders; three, maintaining sufficient dry powder always to contain the possibility of negative eventualities and as well provide for the strategic growth of our company, both organically and through well thought out external additions.
I believe that we have put together over the years and have now a fortress balance sheet and that we are in tip-top shape to do all of this, always with -- with the style that Old Republic has been known for in all the years ahead.
So on that note, I think this is a good time to conclude and to open up our visit to any questions that participants may have.
So there you go. | old republic international corp qtrly revenue of $1,929.3 million versus $1,280.9 million. |
The circumstances affecting all of us as a result of the COVID-19 pandemic are exceptional in our lifetimes.
These statements are subject to uncertainties and risks.
Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control.
For a discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31st, 2019.
Our Form 10-Q for the first quarter of 2020, which we anticipate being filed shortly and our other filings with the SEC, which are available at the SEC's Internet site, www.
sec.gov, as well as our own website, www.
More than ever, the future inhabits our thoughts as questions abound as to when and how we can move beyond lockdowns, social distancing, and the economic chaos that has arisen in the weeks since my last remarks.
Celebrating the achievements in the recent past feels distinctly discordant.
COVID-19 has changed our lives.
In some respects, these changes will be short-lived, and we can expect to see a return to normal in the foreseeable future.
In other respects, our lives, our work practices, our entire approach to how we interact with each other will be fundamentally and permanently altered.
In the face of this uncertainty, focusing our energies on those things over which we have direct control has become our most pressing day-to-day imperative.
An overall assessment of these matters has seen that we have managed the aspects of our business well since the onset of COVID-19 with both our Jones Act and internationally trading vessels able to load, transit and discharge cargo without material interruption.
This outcome is a testimony to the courage and commitment from the men and women working on our vessels.
We've continued to provide essential services critical to maintaining not only OSG's operations, but also the functioning of our broader community.
It is important to remember that our business is not one that can be done remotely in all respects.
Frontline individuals make what we do possible with the support of those working-from-home.
Expressions of appreciation for what is being done in this respect cannot be made too frequently.
Keeping our employees safe remains our number one priority.
Recognizing them for the service they provide is our shared responsibility.
As Dick will detail more fully in his remarks, the deep book of time charters, which we added into at the end of last year has provided considerable insulation from exposure to the current market turmoil that has followed not only the outbreak of COVID-19, but as well the extraordinary drop in transportation fuel demand, affecting both crude oil and refined product pricing.
OSG's vessels were employed at healthy charter rates for close to 100% of available days during the first quarter, with only eight of a total of 1,916 available days seeing vessels idle without employment.
Costs were managed to levels consistent with historical performance.
And as a result, cash flow from operations was strong.
It is gratifying that the results that we have announced today give credence to the narrative of the strong potential of our businesses that we have been speaking to in recent quarters.
Given the high percentage of fixed revenue streams during the first quarter, which will continue for much of the rest of this year, most important management challenges have become sustaining operational readiness at all times and containing the cost of adapting to developing logistical health and safety protocols.
Importantly, none of our current employees has yet tested positive for COVID-19.
And to-date, we have incurred no loss of hire due to virus-related matters.
Unlike other sectors of the economy, we have not found it necessary to lay off or furlough employees as a result of the pandemic.
And all of our seagoing and shore-based employees have continued to work full-time for their normal salaries and benefits.
Nonetheless, we recognize that the systems within which we operate are under escalating stress, presenting new risks and vulnerabilities that have previously not affected our performance.
This include to our thinking; first and foremost, getting crew to and from our vessels in a manner that both protects their personal safety and endeavors to assure with the highest level of confidence that joining crew member is not bringing the virus onto a vessel or otherwise affecting the vessel's acceptability and service.
Second, working with all relevant constituencies to develop and implement policies and procedures that are consistent from port to port and from company to company to facilitate a common approach to coping with the very real and very difficult problems presented by COVID-19.
And finally, planning for the new normal, once this crisis period is passed, so that we can achieve delivery of the critical services that we provide with the least amount of disruption.
These are all difficult challenges, creating heightened risks in the current environment.
We expect increased costs in developing and implementing policies and procedures to deal with these challenges.
It is not possible at this time to quantify these costs with precision.
Nonetheless, it would be imprudent to expect that the past will be an accurate guide in this area.
Heightened risks of off-hire periods resulting from managing virus-related delays, as well as potential and yet unknowable new costs for testing, cleaning, quarantine, immunization and certifications are to be anticipated.
In addition, difficulty in easily accessing critical supplies, in particular, face masks and other personal protective equipment, as well as in some cases, spare parts and the services of specialized technicians pose additional operational burdens on our crews.
Reliability and effectiveness of testing methodologies and PPE in compliance with mandates and recommendations of various regulatory agencies as they seek to react to continuously evolving inflammation also pose significant risks.
Whether these systematic stresses ease with time and what cost they ultimately impose on us will only be known with hindsight.
As these contingencies become clearer, we will seek in the future to release and provide you with better guidance on their long-term financial impact.
As far as the effective recent legislative initiatives on our business, we are not expecting any material impact on either our liquidity position or our financial results arising out of the application of provisions in the CARES Act.
Turning now to the impact of the virus on our Jones Act trades, we note reduced cargo volumes and increased idle times of vessels, a derivative of falling refinery runs and unprecedented demand disruption for transportation fuels, arising out of stay-at-home policies in most populated regions.
The Energy Information Agency reports refinery runs in the US in recent weeks at less than 70% of capacity and transportation fuel demand at levels ranging from 15% to 60% below normal levels.
Over the past four weeks, motor gasoline consumption has averaged 5.5 million barrels per day, a 40% decline from year ago levels.
Jet fuel consumption declined to levels 60% below year ago levels, as passenger flights in the US operated close to 96% below their normal capacity.
Clearly, no forecast models imagined the extent of demand destruction that we've witnessed in the wake of this health emergency.
A survey of numerous new forecast indicates that a V-shaped recovery is not expected in transportation fuel demand.
Even an anticipated swift recovery in gasoline consumption in the United States should leave year-end levels at an expected 1.5 million barrels per day below normal.
Jet fuel will take many more months, if not years, to recover to pre-pandemic levels.
The shape and speed of jet fuel recovery could prove significant for one of our key customers, Monroe Delta.
Currently, three of our vessels are contracted to serve Delta's trainer refinery.
Delta has stated in their recent earnings call that the trainer refinery remains an important part of their fuel strategy.
Nonetheless, a protracted or permanent closure of this refinery would likely have a material impact on both domestic tank vessel demand, as well as on OSG's expected forward revenue streams.
Importantly, for OSG's business, however, the rebound of gasoline consumption in key states, in particular, in Florida, offers some cause for optimism in the medium term.
Mobility data indicate that the bottom of the market was seen in second week of April and that mobility and by implication, gasoline consumption has begun to recover.
In contrast to the broader market expectations, Florida's gasoline consumption levels are forecast to recover to pre-pandemic levels by the end of 2020.
Diesel consumption has held up relatively well and is expected to regain near-normal levels for the balance of this year.
Given the dominance of Florida's role in the market for Jones Act vessels, improving trends in the demand for marine transportation should thus be expected.
International tanker rates continue to enjoy record-setting levels, as cargoes loaded remain on board, either voluntarily by traders playing the forward contango curve or involuntarily by those with no place to put crude and product inventories.
Vessels are being used for storage rather than transport, resulting in a significant reduction in vessel availability to move new cargo and a spike in rates.
A strong international tanker market offers support to rates in the domestic market.
In a highly unusual development, some Jones Act vessels have completed -- have competed recently for business in the US Gulf Coast, East Coast, South American trade.
Our newly acquired subsidiary, Alaska Tanker Company, has seen the odd impact of sky-high international rates, where last week, a cargo of ANS crude was sold to China and shipped on the Alaskan Navigator, a highly unusual move, but one enabled by the fact that the TCE rate on the Navigator was $100,000 per day lower and that of an equivalent international Suezmax tanker.
The unusually high rates seen in recent international trades are not expected to last.
Declining crude oil production, coupled with the increase of tonnage released back into the market once product stored is delivered for consumption, will likely weigh on future rates.
It bears repeating that these developments act only indirectly on domestic market conditions.
More significant will be the overall level of crude oil production cuts in the US over the coming months and the impact of these cuts on the relative price differentials between domestic and comparable international crude oil.
Three of the biggest oil explorers in the United States, ExxonMobil, Chevron and Conocophillips, have announced plans to curb as much as 660,000 barrels a day of combined American output by the end of June.
Across the country, crude production by oil companies has already tumbled about 1 million barrels per day since mid-March and could fall more than 2 million barrels per day by the end of the year.
Wells and fields with high cash production costs are particularly vulnerable to production cuts.
We are watching carefully, for example, the offshore Gulf of Mexico field served by our shuttle tankers.
Time charter commitments on these vessels should, in the near-term, ensure consistent revenue streams to OSG from these contracts.
However, should either of these fields be shut in, in response to persistently low oil prices, the result could be an increase in effective available tanker supply as these shuttles would likely be redeployed as conventional tankers by our charterers.
It is too early to know with much certainty how supply, demand and price of crude oil will unfold in the months ahead.
However, as always, relative price remains the critical variable from our perspective.
Irrespective of the overall quantity of domestic production cuts, should we continue to see domestic prices at a sustained discount to international prices as has been the case for most of the past several years.
Coast-wise transportation of crude oil should continue to be demanded.
OSG is well positioned to benefit from what we are anticipating to be improving trends in the markets within which we operate.
OSG's 21 vessel US Flag fleet consists of three crude oil tankers operating in the Alaskan crude oil trade, one conventional ATB, two lightering ATBs, three shuttle tankers, 10 MR tankers and two non-Jones Act MR tankers that participate in the US Maritime Security Program.
OSG also currently owns and operates two Marshall Islands flagged MR tankers, which trade internationally.
In addition to the currently operating fleet, OSG has on order two Jones Act-compliant barges scheduled for delivery in May and October of this year.
During the first quarter, we purchased three Alaskan tankers capable of carrying approximately 1.3 million barrels of oil each.
They're engaged in transporting crude oil from Alaska to the West Coast refineries.
Additionally, we acquired a 62.5% interest of our partners in Alaskan Tanker Company.
As a result, we now own 100% of ATC.
We financed these transactions with a $54 million loan.
The loan bears interest at 4.43% fixed rate, maturing in March 2025 and has a 12-year amortization schedule.
In late March, we also completed the financing of the OSG 204, our barge currently under construction in Oregon.
We drew $28 million of this loan at closing.
This monetizes the excess equity that we had previously invested during construction.
The remaining amounts will be drawn and will fund the final construction payments due.
We expect barge delivery to occur during the last week of May.
This loan has a five year maturity and amortizes also over 12 years.
The first quarter continued to reflect the positive impact of our fleet, principally operating under time charters in an improved rate environment.
During the first quarter, the Key West operated under a short-term time charter, while the rest of our Jones Act Handysize tankers were on long-term time charters.
Our first quarter TCE revenues grew $14.3 million or 17%, when compared to the first quarter of 2019.
We benefited from additions to our fleet of the Gulf Coast, Sun Coast, Key West for the full quarter and of the three Alaskan tankers from March 12th.
Offsetting this was the continued reduction in our rebuilt ATBs from last year to this year.
After the quarter end, we completed the sale for scrap of one ATB, reducing the operating rebuilt ATBs to one.
Sequentially, TCE revenues were up $3.3 million from the fourth quarter.
The fourth quarter included three Government of Israel voyages, while the first quarter didn't include any.
We experienced an increase in off-hire days as anticipated due to dry dock activities.
The Alaskan tankers added late in the quarter were responsible for the increase as all other changes offset one and other.
Adjusted EBITDA was $52.8 million for the quarter, a $29.2 million increase from the first quarter of 2019.
As part of the transaction acquiring the remaining interest in ATC and three Alaskan tankers, all prior time charter relationships were terminated.
This termination of a preexisting relationship resulted in a $19.2 million net non-cash gain.
We recognized this gain in the first quarter.
Excluding this gain, we experienced almost a 43% increase in adjusted EBITDA from the first quarter of 2019.
We benefited from our increased time charter days and higher rates, the operations of the Gulf Coast, Sun Coast and Key West as well as the late quarter addition of the Alaskan tankers.
Excluding the $3.2 million of annual earnings, which is recorded in the fourth quarter when it's earned from ATC, our adjusted EBITDA sequentially increased by $3.2 million.
And again, the fourth quarter of 2019 included a concentration of three Government of Israel voyages during the quarter, while we conducted no such voyages for Israel in the first quarter.
Although the mix of vessels changed, we operated 21 vessels for the full quarter of 2020 and 2019.
Since the first quarter of 2019, we have reduced the number of operating rebuilt ATB to two and added the Key West, Gulf Coast and Sun Coast, and in the late third quarter, the three Alaskan tankers.
Looking at our TCE revenues on a more granular basis, our lightering business TCE revenues sequentially increased $2.3 million from the fourth quarter of 2019.
The OSG 350 operated under time charter in the first quarter of 2020, compared to primarily spot market activity during the fourth quarter.
Effective day rates for both the OSG 350 and 351 increased, due to higher utilization and increases in contracted rates.
The TCE revenues from our rebuilt ATBs increased $1.3 million, due to increases in the rate environment.
Our non-Jones Act tankers recorded a $2.7 million decrease in TCE revenues during the quarter, when compared to the fourth quarter of 2019, this is due to the reduction in the Government of Israel voyages that we had from Q4.
We operated under international time charters for 182 days, maintaining the effective utilization of our vessels by reducing the number of days of spot market exposure.
Our Jones Act tanker fleet TCE revenues decreased $1 million from the fourth quarter to $69.1 million in the first quarter of 2020.
This resulted from an increase in off-hire days, due to dry dock activities.
Spot market effective TCE rates increased significantly, driven by increased rates.
Looking at year-over-year changes, lightering revenues were down $700,000 in comparison to the first quarter of 2019.
ATB revenues declined from $7.5 million to $4.8 million, compared to the first quarter due to the decreased number of operating vessels.
The non-Jones Act tanker revenues increased from $3.7 million to $7.3 million, driven by the addition of the Gulf Coast and Sun Coast.
Conventional tanker TCE revenues increased $10.7 million.
This was driven by reduced spot market presence, higher rates, higher utilization due to the increased time charter activity.
Additionally, our three Alaskan tankers added on March 12 contributed $3.4 million in TCE revenues for the 19 days they were in our fleet.
We continue to see a widening of the spread between fixed and spot earnings as a portion of our fleet operating on time charters continues to increase.
With the addition of the Alaskan tankers, all of which operate on time charters, we expect that this trend will likely continue.
Conventional tanker spot market TCE revenues continued to represent a decreasing portion of our total tanker revenues.
To classify short-term time charters to spot market activity and in the first quarter of 2020, the spot activity resulted from a single short-term time charter.
Our niche businesses continue to provide earnings stability, which serves to underpin our overall operations.
This continues to be true as we have been successful in generating business for the OSG 350 in the Gulf of Mexico.
Although non-Jones Act tanker revenues decreased from the year ago quarter, it decreased from the fourth quarter due to the lack of GOI voyages in the first quarter of 2020.
Revenues for our shuttle tankers decreased during the quarter as planned due to the dry dock-related off-hire days.
Vessel operating contribution, which is defined as TCE revenues less vessel operating expenses and charter hire expenses increased $10.8 million or 39% from Q1 2019 to $38.8 million in the current quarter.
The largest contributor to the increase was the $10 million contribution, the vessel operating contribution from our conventional Jones Act tankers.
This reflects the increased time charter employment as well as higher rates.
The overall increase in operating contribution also reflects the addition of 3 tankers and the late quarter acquisition of Alaskan tankers, all partially offset by the reduction of our rebuilt ATBs.
Our remaining ATBs provided a strong quarter due to high utilization at increased rates.
The Alaskan tankers provided $1.9 million of operating contribution after they entered our fleet.
Vessel operating contribution from our niche market activities decreased $900,000, resulting from an increase in dry dock-related off-hire days.
Sequentially, vessel operating contribution increased $3.4 million from Q4 2019.
The contributors to the increase were higher rates for Jones Act tankers and the inclusion of the Alaskan tankers.
Niche market activities declined from the fourth quarter, primarily due to increased off-hire lost revenues.
First quarter 2020 adjusted EBITDA -- sorry for the dog.
That's one of the benefits, I guess, of working from home.
Anyway, first quarter 2020 adjusted EBITDA $52.8 million, compared to fourth quarter adjusted EBITDA of $33.7 million.
The first quarter of 2020 included the aforementioned gain associated with the acquisition of the tankers in ATC.
The fourth quarter included our annual profit distribution of $3.2 million from ATC.
First quarter adjusted EBITDA increased $29.2 million from $23.6 million in Q1 2019.
The increase resulted from the previously mentioned gain, increased rates across the fleet, improved utilization due to the shift to time charters and new vessels that entered service after the first quarter of 2019.
Net income for the first quarter of 2020 was $25.1 million, compared to net income of $3.2 million in the first quarter of 2019.
Operationally, the increased TCE Jones Act tanker revenues and new Jones Act -- and new non-Jones Act tankers as well as the addition of the Alaskan tankers drove the increase in net income.
Non-operationally, $15 million of the increased earnings came from recognition of the previously described gain.
During each year, we performed scheduled maintenance as required by regulation.
This slide provides information for scheduled maintenance and ballast water treatment system installations.
Does not include unplanned repairs, which should they occur could impact the schedule.
While vessels are in dry dock or otherwise unavailable for use, they are off-hire even if otherwise employed on a time chart.
We work to minimize the number of off-hire days to reduce the revenue loss we sustained.
This year, because of COVID-19, estimating the timing of dry dock activities on a quarterly basis is particularly challenging.
Shipyards are deferring scheduled dry-docks, because of their staffing issues related to COVID-19 lockdown.
Technical personnel from third-party vendors necessary to accomplish certain aspects of the maintenance process have been and are unable to travel to repair those gauges.
This has resulted in a series of backlogs throughout the industry.
ABS has been understanding through this time period, it's likely that they will need to continue their flexibility.
This slide presents our best estimates of the timing of dry dock activity for the remainder of the year.
It is possible, perhaps even likely that these estimates would change as to timing.
We expect that although the timing may shift, the annual totals will remain reasonable estimates.
2020 will be an active dry dock year for us.
We estimate, which includes the three recently acquired Alaskan tankers that our investment will be $43.8 million in dry dock expenses and $16.1 million for ballast water treatment systems in 2020.
We will experience approximately $20 million in lost revenue for the full-year, resulting from 377 off-hire days.
Again, in all cases, we endeavor to work through this process expeditiously to minimize the cost occurred in the number of days of plus hire, off revenue and off-hire, lost revenues.
This slide presents the cumulative amount of progress payments made and for future progress payments, the estimated payments we expect to make in each quarter.
The timing of actual payments will depend on the dates when the shipyard achieves the required milestones.
At the end of the first quarter, we had $5.1 million of progress payments remaining on the OSG 204 and $20.1 million of progress payments on the OSG 205.
As previously discussed, we financed the OSG 204 during the quarter and all remaining payments will be funded from this loan.
OSG's equity in the OSG 204 will be approximately $17.7 million upon delivery.
We anticipate obtaining similar financing for the OSG 205.
There has been no change to our estimates as to the timing and future amounts of profit sharing that may occur for the AMSC ships that we bareboat.
The chart provides information for 2020 through 2023.
And as we've previously stated, we do not anticipate any profit sharing obligation will be created in 2020.
We look here what the profit share picture might be for assumed average TCE rates based on estimated future market rates.
In 2020, if we were to achieve an average TCE rate of 62,000 across the 10 AMSC vessels, there would be no profit sharing.
The minimum average rate required to result in a profit-sharing obligation in 2020 is $69,000 per day.
This would create an aggregate payout of approximately $300,000.
Years beyond 2020 assume that the rate earned in the prior year was the market range.
Based on the assumptions for trade here, the first year in which profit sharing obligation would exist is 2022.
Given the assumptions used, profit sharing payout would be $8 million.
The minimum average rate necessary to achieve any level of profit share in 2022 would be $61,000.
Again, using the assumptions here, the profit sharing earned in 2023 would be $14 million.
Profit share is paid out in the year subsequent to the year earned.
Finally, it's worth noting that if certain costs are recovered to minimum rate, it will result in profit share declines.
The calculations are complex and have a variety of factors involved.
This chart is meant to be indicative of possible outcomes based on the assumptions made.
We began 2020 with total cash of $42 million, including $200,000 of restricted cash.
During the first quarter of 2020, we generated $53 million of adjusted EBITDA.
During the quarter, we issued $81 million net of issuance costs of new debt to finance the Alaskan transaction in the OSG 204.
We extended net of cash received $17 million for the acquisition.
The $19 million adjustment is to remove the effect of the non-cash gain we've discussed.
We expended $3 million on dry-docking and improvements to our vessels.
We invested $21 million in new vessel construction and other capex.
We also incurred $6 million in interest expense and made debt repayments of $8 million.
The result, we ended the quarter with $102 million of cash, including $20.1 million of restricted cash.
Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we have $102 million of cash at March 31, 2020, including $20.1 million of restricted cash.
Our total debt was $450 million.
This represents a net increase of $75 million in outstanding indebtedness since December 2019.
A $325 million term loan has an annual amortization requirement of $25 million or $6.25 million per quarter.
With $367 million of equity, our net debt-to-equity ratio is 1 times.
This represents no change from December 31, 2019.
As we addressed our capital structure during the first quarter, we planned with one of our lenders for them to sell an interest in one of our term loans.
It was expected that they would complete the transaction prior to the March 12th closing of our vessel acquisition.
They were not able to complete it in that time frame.
The effort was then expected to be completed shortly after the 12th.
In order to support the sale process, we established a $20 million escrow that could be used to prepay a portion of that loan, if it were not sold within 90 days.
COVID-19 has disrupted many financial activities, including the proposed transaction.
As a result, our escrow is still being held pending the sale.
As noted earlier, the level of uncertainty about the extent, duration and ultimate impact of the forces that are currently unsettling our markets has never been greater.
Nonetheless, there are certain things that we can state with some confidence as regards to the immediate future.
Our time charter coverage remains substantial for the balance of this year.
We've contracted employment covering 95% of available operating days during the current quarter and 86% of available operating days for the balance of the year.
The key contributing element of this forward visibility of earnings is the contribution to be made by the Alaskan Tanker Company vessels purchased at the end of last quarter.
The benefits of the contracted employment for these three vessels obtained through this transaction will likely become more apparent as the year progresses.
Absent an increase in off-hire days potentially caused by virus-related events, this contract coverage gives us a high degree of visibility into the expected time charter equivalent earnings for the rest of the year.
For the second quarter, we expect to achieve time charter equivalent earnings of $100 million.
A small sequential gain -- incremental gain over the first quarter results, due primarily to the first full quarter of our ATC vessels contribution.
Taken together with our first quarter results, this should put us squarely on track to be within the range of $395 million to $400 million of time charter equivalent earnings on an annualized basis through the first half of this year.
Similarly, we expect consolidated adjusted EBITDA through the first half of the year, excluding the effects of this quarter's gain related to the ATC transaction accounting to reach $60 million, a level which again tracks closely with our full year expectations provided during our last call.
Including the ATC transaction accounting, overall EBITDA for the first half of this year should exceed $80 million.
However, beyond the end of the second quarter, the picture becomes much less clear.
The extent of increased costs incurred in adapting to the new protocols demanded by operating in a COVID-19 active environment is not and cannot be known at this time.
While we are hopeful that these costs can be contained, there is simply no way of knowing the full extent of what may be required in the coming months or what the ultimate financial impact may be.
Similarly, while we are optimistic that recovering trends forecasted by many analysts will serve to underpin continued strengths in spot and time charter rates over the second half of this year, the range of possible outcomes is wide and the possible impact on actual rates achieved unknowable at this time.
Again, a large percentage of fixed contractual days should serve to deliver solid operating cash flow and profitable results overall.
The rate and utilization assumptions for those vessels, which come open to the spot market in the coming months must cover a wide range of possible scenarios.
Providing helpful guidance under these conditions is difficult.
Like many, we prefer to stay silent on the topic unless and until we can understand with more certainty key factors that will shape our future.
Notwithstanding the heightened demand uncertainty, we continue to consider that given a normalized demand environment, the fundamentals of our market remain in healthy equilibrium.
The barriers to entry for any prospective new entrants are high.
And with the exception of our two new barges to be delivered this year, no new capacity is on order or will be delivered within the next several years.
Significantly, Philly shipyards, one of the few domestic yards capable of building Jones Act tankers, has taken on a government contract to build training vessels, a contract which could fill the yards for years to come to the exclusion of other work.
Another domestic yard, Marinette Marine Corporation, was recently awarded a contract to design and produce the next-generation of up to 10 guided-missile frigates.
Detailed design of the ship will start in May, and construction on the first frigate for the class will start no later than April 2022.
With its delivery scheduled to the Navy in 2026, tying up further construction capacity.
The supply side picture thus remains very promising.
Especially in these difficult times, OSG's ability to sustain its good standing in the community of our customers, our peers and our regulators is a valuable asset.
Safety and consistent service quality remain above all the key focus of our operations.
While commercial success is one measurement of achieving our goals, we also place paramount importance on maintaining our established culture of achieving the high standards in both protecting the environment and ensuring the health and safety of all of our employees.
Our acquisition of the Alaska Tanker Company is harmonious with this culture and these standards.
Challenges remain as to opportunities.
But overall, we believe steps taken over the past several years to improve the promise of OSG's future have positioned the company well to sustain its recent performance and to adapt well to the current environment.
We have strengthened our balance sheet, invested in new assets, lengthened our contract cover at profitable rates, reduced costs and achieved material improvements in our key safety and operational performance measures.
We are focused on achieving high health and safety performance in the COVID-19 environment.
While we foresee greater uncertainty in the immediate future, we remain confident in the long-term success of our business model and of OSG's ability to maintain its position as the leading US flag tank vessel operator in the years to come. | q1 revenue rose 15 percent to $100.9 million. |
Earlier today, we published our first quarter 2021 results.
A copy of the release is available on our website at oshkoshcorp.com.
Our presenters today include Wilson Jones, Chief Executive Officer; John Pfeifer, President and Chief Operating Officer; and Mike Pack, Executive Vice President and Chief Financial Officer.
Our performance in the first quarter demonstrated the perseverance and disciplined execution of our team.
Just like everyone listening today, Oshkosh team members are navigating the challenges brought on by COVID-19.
And once again, I'm proud of the hard work and efforts of our people.
As I did last quarter, I want to give a shout out to all 14,000-plus team members and our dedicated suppliers that have consistently stepped up during this difficult period to continue serving our customers.
For the first quarter, we delivered sales of nearly $1.6 billion, and adjusted earnings per share of $1.13, both of which exceeded our expectations.
Much like I said on our last call, we've controlled what we can control, while responding quickly to challenges outside of our control.
It's no secret that our operations in Wisconsin faced challenges related to significant COVID-19 spread earlier this fall, particularly in the counties where our primary defense and fire truck facilities are located.
This showed elevated levels of absenteeism for us and similar challenges for our suppliers.
Our people have done an exceptional job of adapting to changing situations where flexibility and resiliency have helped keep us moving in the right direction.
Going forward, we may face further challenges with absenteeism in our facilities or those of our suppliers.
We may also face broader supply chain execution risk as the economy rebounds, so daily focus remains critical in the weeks and months ahead.
During the quarter, we announced our intent to acquire Pratt Miller, which closed on January 19.
Pratt Miller's technology and capabilities are a great fit with our company, and John is going to share more about this in his remarks.
Revenue was softer than prior year in our Access Equipment and Commercial segments, consistent with our comments last quarter.
As expected, we are seeing improvement in our Access Equipment segment on a sequential basis as the decline in sales is moderating.
Compared with last quarter, we are more confident in the second half recovery, although our precise timing and magnitude are still uncertain.
And of course, our overall outlook is bolstered by the visibility we have with our Defense and Fire & Emergency segments, which both have backlogs that extend into 2022.
A little over five years ago, he became our CEO and has been an outstanding leader and motivator for our entire company around the globe.
He's been responsible for driving dramatic improvement in our culture, and he is a true leader in all aspects.
Wilson has been a great mentor for me and the entire leadership team at Oshkosh.
While Wilson will be with us through the end of the quarter, this will be his last earnings call.
Let's get started with our segment updates with Access Equipment.
Since our last earnings call, we've seen improvements in our major markets versus expectations, led by North America, where we've had favorable negotiations with key customers for calendar 2021 equipment needs.
Given the current environment for the Access Equipment market, we're pleased with the orders our team at JLG booked in the first quarter and are very encouraged with a strengthening backlog.
We also benefited from some late first quarter orders and deliveries as some customers had available capital they deployed late in the calendar year.
We remain confident that this segment will return to year-over-year growth beginning in our third quarter as rental companies begin to refresh their aging fleets.
JLG ran its production facilities at reduced rates during the first quarter, as we discussed on the last call.
We are gradually ramping up our manufacturing rates and expect to exit the second quarter at more typical production levels.
Our operations and supply chain teams have managed this difficult process very effectively.
And it shows on the strong adjusted decremental margins we've been delivering throughout the pandemic.
We've kept expenses low during a time of lower demand and lower production, and I am confident in our ability to perform in a difficult environment.
Going forward, we're closely monitoring steel prices that have continued to rise and will be a cost headwind later in the year.
Our global supply chain team is working diligently to manage this important raw material.
We are also very excited about our recent formal launch of the revolutionary new all-electric DaVinci scissor lift.
With 0 hydraulics and 0 emissions, the DaVinci AE1932 scissor lift represents the next-generation of electrification and elevates our position in the access industry once again.
DaVinci's innovative design reduces energy consumption by up to 70% compared to a traditional scissor lift, as JLG continues to push the innovation envelope.
We are very encouraged by the strong customer response we've had for this outstanding new product.
Our Defense segment kicked off 2021 by overcoming significant operational challenges caused by the pandemic.
Early in the fall, Wisconsin, and more specifically, our local area in the -- were in the national spotlight for high levels of coronavirus spread.
The intensity of the spread in this region drove high absenteeism in our workforce and with many of our suppliers, which made it very difficult to plan and execute operations for much of the quarter.
I'm proud of our team as they responded effectively to these issues to deliver solid results during the quarter, including a 10% increase in sales, and continued to be a reliable source of vehicles and aftermarket support for our U.S. government customer.
In recent weeks, we have seen improvement in absenteeism.
During the quarter, we received another large JLTV order valued at more than $900 million that included units for several international customers.
We continue to believe that the international portion of our JLTV business will be meaningful over the next several years.
This JLTV order also contributed to our large quarter end backlog that provides outstanding visibility in 2021 and beyond.
As Wilson mentioned, in mid-December, we announced plans to acquire Pratt Miller, a well-respected technology and innovation company that provides outstanding capabilities with robotics, autonomous and connected systems and electrification, among other strengths, including a rich motor sports heritage.
We worked with the team at Pratt Miller for many years, so we already have a great partnership.
Leveraging their speed and agility in addition to their functional strengths will help us in our new product development road maps going forward.
They will be part of our Defense segment, but other Oshkosh segments will also benefit from their expertise.
We believe that Pratt Miller will have an important impact on our company going forward.
The U.S. defense budget was recently signed and contains funding for our FMTV, FHTV and JLTV programs that supports our goals and objectives.
It's important to note that the budget action appropriated an additional $86 million in funding for FMTVs and $55 million for FHTVs that we supply for the U.S. armed forces.
Fire & Emergency performed well during the quarter and has continued to make the right investments in innovative technologies and dealer development that have supported their consistent success.
Additionally, you've heard us talk about the benefits F&E has generated in recent years with its focus on simplification, which is reflected in a solid operating margin performance.
Similar to our Defense segment, F&E experienced high absenteeism and supplier challenges during the quarter as a result of COVID-19.
They worked hard to deliver strong results in the face of some significant challenges as they improved operating margins to 12.8% in the current year quarter.
The segment finished the quarter with a robust backlog of $1.2 billion, up over 9% from the prior year.
Orders in the quarter were lower year-over-year as we expected, largely due to the pandemic.
Of course, we continue to monitor tight municipal budgets and spending that we've discussed in the past, as we believe that the North American fire truck market may experience some pandemic-related softness.
Finally, Fire & Emergency made a big announcement a little over a week ago as they introduced the all-new redesigned global Striker, the world's most capable ARFF unit.
The airport products team has taken the market-leading Striker and made it even better by upgrading the cockpit with improved ergonomics, updated safety systems and intuitive vision systems.
We've also increased cab visibility while modernizing the styling.
We encourage you to check out our website to learn more about this exciting new truck.
Our Commercial segment continues to make progress on simplification initiatives and driving improvement throughout its business from design to manufacturing, to sales, to product delivery.
You may recall that we implemented a focused factory strategy last year that included relocating our rear discharge concrete mixer business to London, Ontario, as well as divestment of a noncore business.
We are pleased with our progress to date and the relocation project remains on track, but it's been more challenging due to the pandemic, particularly with regard to travel.
I'm proud of our team's ability to adjust and achieve solid results during the move.
As expected, volume was impacted in the quarter due to the pandemic as some customers delayed purchases and OEM chassis availability was constrained.
However, customer demand is starting to normalize for RCVs and mixers from this recent volatility.
We expect some continued choppiness as these markets rebound, but backlog is consistent with prior year levels and trending up.
As I've mentioned in prior earnings calls, we're pleased with customer demand for our all-new S-Series 2.0 front discharge concrete mixer.
The ramp-up is continuing, and we expect revenue growth for the business in 2021.
We continue to integrate innovations and technology into our products and remain on track to deliver several electric RCV units working with our OEM partner for a key U.S. customer in 2021.
We will talk more about this opportunity later in the year when we plan to ship these groundbreaking electric RCVs.
This wraps it up for our business segments.
We delivered a solid start to 2021 with sales and adjusted operating income higher than our expectations.
Consolidated net sales for the quarter were $1.6 billion, down 7% from the prior year quarter.
The decline was driven by decreases of 22% in Access Equipment sales and 13% in Commercial sales, partially offset by increased sales in both the Defense and Fire & Emergency segments.
Access Equipment sales continued to be impacted by lower customer demand as a result of COVID-19.
However, the year-over-year rate of decline has moderated compared to Q3 and Q4 of 2020.
As John mentioned, we did achieve higher sales in the quarter versus our expectations, as several customers deployed more capital than previously expected near the end of December.
Defense sales increased in the quarter as a result of higher aftermarket parts and service sales.
Fire & Emergency sales increased due to higher aircraft rescue and firefighting truck shipments.
And Commercial segment sales were down on lower RCV sales as customers have remained cautious in deploying capex during the pandemic and due to the absence of concrete batch plant sales this year as the business was divested in the fourth quarter of 2020.
Consolidated adjusted operating income for the first quarter was $104.6 million or 6.6% of sales compared to $109.1 million or 6.4% of sales in the prior year quarter.
Access Equipment adjusted operating income declined on lower sales, unfavorable manufacturing absorption due to planned facility shutdowns during the quarter and unfavorable price cost dynamics as a result of the prior year benefit of price-protected sales.
This was offset in part by the benefit of favorable spending as a result of the ongoing global pandemic, lower intangible asset amortization and favorable product mix.
Defense adjusted operating income increased as a result of more favorable cumulative catch up adjustments, favorable mix and higher sales volume, partially offset by increased new product development spending.
Fire & Emergency operating income increased in the current year quarter primarily as a result of increased sales volume and the benefit of lower spending as a result of the COVID-19 pandemic.
And Commercial segment operating income decreased due to lower sales volume and unfavorable material costs offset in part by lower spending.
Adjusted earnings per share for the quarter was $1.13 compared to earnings per share of $1.10 in the prior year.
First quarter 2021 results benefited from a discrete tax benefit of $0.09 per share related to a favorable resolution of a tax audit.
We're pleased with our solid start to the year, including strong consolidated adjusted decremental margins of 4% in the first quarter.
While we face significant workforce availability challenges in Wisconsin affecting both our Defense and Fire & Emergency segments, our teams were resilient and persevered through the challenges we face to deliver higher sales in both segments compared to the prior year quarter.
The pandemic has and will likely continue to drive variability in our businesses as infection rates evolve around the country, creating challenges for our customers, our suppliers and our operations.
Further, we expect higher steel cost to introduce additional headwinds for the back half of our year.
As a result of the dynamic environment and moving variables, we are not providing quantitative expectations for 2021 at this time.
As John discussed, we're pleased with our annual negotiations with our key Access Equipment customers over the past several months.
We're also -- we also experienced higher demand for Access Equipment in the first quarter versus our expectations.
We expect that the second quarter of 2021 will be down versus 2020, and the third and fourth quarters will return to year-over-year growth.
We now expect that the second half growth will be sufficient to yield growth on a full year basis for the segment.
However, the magnitude of the expected full year sales growth in Access Equipment is uncertain and remains highly dependent on the ongoing evolution of the COVID-19 pandemic and the trajectory of recovery as vaccines increase in availability.
In this segment, we are planning one-week shutdowns per month in U.S. factories to start the second quarter as we align production with customer requirements.
This represents an increased production rate versus the first quarter when we were shutdown for approximately two weeks per month.
We expect the segment to be back to normalized production levels as we exit the quarter.
In our Commercial segment, demand is improving for RCVs and concrete mixers, while our strong backlogs at Defense and Fire & Emergency provide good visibility for the year.
During our last earnings call, we discussed an $85 million pre-tax cost headwind we expect to face in 2021, consisting of $120 million of temporary cost reductions in 2020, returning in 2021, offset by approximately $35 million of permanent cost reduction benefits.
Looking at the second quarter, we will face year-over-year headwinds of about $25 million from a combination of last year's temporary cost reductions, offset by the benefit of permanent cost reductions we previously announced.
We are also forecasting higher second quarter spending levels, particularly at Access Equipment as we ramp up for the expected second half recovery.
As we look to the back half of the year, we are closely watching steel prices which have increased even more rapidly over the past several weeks than earlier in the fall.
We expect to start seeing the impact of higher steel prices in the third and fourth quarters.
However, the magnitude and duration of the inflated costs are unknown at this time.
Our balance sheet remains strong with further strengthened during the past quarter with solid working capital improvements yielding available liquidity at the end of the quarter of approximately $1.7 billion consisting of cash of approximately $900 million and availability under revolving line of credit of over $800 million.
We believe our strong liquidity will continue to provide flexibility as demonstrated by our recent cash acquisition of Pratt Miller.
While we are not providing quantitative financial expectations today, we strive to provide more detail later in the year when we have better visibility to the trajectory of the pandemic, the timing of deliveries in the Access Equipment segment and the evolution of steel prices.
We just announced a solid quarter to kick off 2021, and once again, control costs and managed our operations, allowing us to deliver higher adjusted earnings per share on lower sales compared to the prior year quarter.
Challenges remain, including rising steel prices and the potential for further challenges as a result of the pandemic that has stayed with us much longer than anyone wants.
We believe we're in a great position to take advantage of opportunities to deliver sales and earnings growth as our markets recover.
As John mentioned, this will be my last earnings call, and I just wanted to say that I've appreciated working with all of you who have participated with our company.
I am proud of the engaging dialogue that we've had over the years whether it's on one of these calls, a conference, a trade show or even doing a visit here at Oshkosh for one of our investor events.
I'm even more proud of our people and the leadership team we have in place at Oshkosh, and I want them to know, it's been an honor to work with all of them in these past 16 years.
I'll be working closely with John and the team to ensure a smooth transition over the next couple of months, and I'm confident that the company is in good hands with John Pfeifer, leading the way, backed by a very strong leadership team.
We all know there are a lot of work.
Anyway, let's get started, everybody. | q1 adjusted earnings per share $1.13 excluding items. |
Earlier today, we published our third quarter 2020 results.
A copy of the release is available on our website at oshkoshcorp.com.
Our presenters today include Wilson Jones, Chief Executive Officer; John Pfeifer, President and Chief Operating Officer; and Mike Pack, Executive Vice President and Chief Financial Officer.
I want to start today by sharing how proud I am of the hard work and disciplined execution our Oshkosh team members have demonstrated, as we manage through the current pandemic-induced environment.
The underlying strength we derive from our people-first culture has been a key enabler to our success, as we navigate through these challenging times.
We often talk about how we are better together, and we are exhibiting that with our results this quarter.
For the third quarter, we delivered sales of nearly $1.6 billion, adjusted earnings per share of $1.29, and our consolidated backlog is up nearly 6% versus the prior year, as we controlled what we can control, while responding quickly to challenges outside of our control.
Given the conditions present in our markets in the U.S. and around the world, we believe this represents solid performance.
The duration impact of the pandemic on the economy remain uncertain, but the resiliency of Oshkosh team members has been impressive, as we responded to a variety of challenges, including changing customer demand, new working protocols and supply chain disruptions, among others.
We believe our values and strengths as a different, integrated global industrial are even more pronounced versus our competitors in times like these.
We implemented the temporary cost reductions we discussed last quarter.
Those actions are evident, not only in our third quarter results, but should also benefit us as we manage through the ongoing uncertainty.
Recently, we also announced some permanent cost reductions in areas of our business most significantly impacted by changes in customer demand as a result of the pandemic.
John and Mike will discuss those actions and the related impacts in their sections.
Also I want to take a moment to congratulate John on his recent promotion to President.
It's a testament to John's strong leadership and dedication to a people-first culture.
I look forward to continuing to work with him, as we lead this great team here at Oshkosh.
Before I provide an update on each of our segments, I'd like to provide a brief update on our operations, including our people and supply chains.
Across the company, we are focused on maintaining the safety of our team members and preventing the spread of the virus, with increased social distancing, both in the offices and throughout our manufacturing facilities.
While this can make completing work more challenging, we have maintained strong efficiencies.
I am proud of the way our team has remained disciplined in maintaining these strict protocols.
We also successfully navigated through over 200 supplier shutdowns early in the quarter to continue production without any major supplier induced line stoppages.
This is a true testament to the focused efforts of our supply chain team, our integrated capabilities and our strong supplier partners.
While we've largely stabilized our operations and supply chains, elevated infection rates in parts of the U.S. extend production and supplier risks, and we will remain diligent in our actions.
Additionally, we've carried out our return to work or return to the office actions for our team members.
I won't go into all the details, but about half of our office workforce physically enters our facilities for work each day with appropriate social distancing and cleaning protocols in place.
Essentially, we implemented changes that enable Oshkosh team members to work-from-home when they need to and work in our facilities when they need to and they can do it seamlessly.
Now I'll move to our segment updates and kick it off with Access Equipment.
Our Access Equipment segment has experienced the negative impacts of the current business landscape more intensively than any other segment in our company with year-over-year revenues down more than 60% in the quarter.
Despite these challenges, our team rallied quickly with aggressive steps to reduce production at the factories and to lower our costs, resulting in solid, adjusted decremental margins of just under 20% and an adjusted operating income margin of 8.4%.
This performance is impressive given the significant declines in access equipment markets in North America, Europe and other parts of the world.
On our second quarter call, we discussed temporary manufacturing closures in the segment during the third quarter.
And with market recovery timing still uncertain, we shutdown production for the month of July, and we will have two-week shutdowns in both August and September.
Wilson mentioned that we also have taken some permanent actions to reduce our costs, particularly in this segment.
We announced the closure of our Medias, Romania facility at the end of June, which will occur over the next 12 months.
We remain committed to the EMEA market and will be able to serve it more efficiently from our existing global manufacturing footprint, including plants in France and the U.K. in addition to the facilities rationalization, we also reduced our office staffing in the segment with a modest workforce reduction.
Our simplification framework has been an important enabler for our ability to deliver robust margins throughout the business cycle, as well as relocate production so that we can operate with improved logistics and customer service levels.
While COVID-19 has impacted access equipment markets around the world, we are staying flexible and nimble in our approach to managing the business.
However, given the uncertainty around the broader economic recovery, we are not in a position to provide an industry or Oshkosh specific outlook at this time.
We know that access equipment will come back, but we do not currently have a time frame.
We will control what we can and make the right decisions that we believe will facilitate our success when demand returns.
We are further encouraged by the age of access equipment fleets, particularly in North America, that we expect will be a positive demand driver in future quarters.
Finally, just as we discussed last quarter, our facility in China is back online, and we retain our positive outlook for this market as demand is returning.
Our team in China has plenty of experience in both the demand and supply sides of the market, and we remain very bullish on our prospects for long-term growth in China.
Please turn to page five, and I'll discuss our defense segment.
Our defense segment performed well in the quarter as the team continues to ramp up the JLTV program, which helps provide a solid foundation for the company with a large backlog and multiyear visibility.
Department of Defense and our allies.
We continue to work with a number of foreign governments on JLTV opportunities.
And while we are not making any announcements today, we have a strong pipeline of opportunities and expect that we will be discussing additional international successes in future quarters.
Our defense backlog remains solid at nearly $3.3 billion, up over 15% from the prior year which provides good visibility, especially given the current environment where the pandemic has limited visibility across many industries.
During the quarter, we announced a joint venture to manufacture tactical wheeled vehicles in Saudi Arabia.
We have been working with our partner, Al-Tadrea, for the past two years to finalize the agreement.
This is part of our longer-term plan to be an integrated strategic partner with his key U.S. Ally for defense vehicles and life cycle services.
This is an important milestone for our international defense activities.
Before I wrap up my comments on our defense segment, I want to congratulate both our production UAW team member in Oshkosh and our leaders in the business for agreeing to a new collective bargaining agreement which provides continuous coverage through September 2027.
This is a great example of the benefits of working together and reaching solutions that provide security and peace of mind for our team members as well as continuity for our company.
Fire & Emergency delivered a strong quarter with a 15.7% adjusted operating income margin.
Last quarter, the segment experienced some challenges with a supplier issue that impacted both our shipping schedule and our margins.
This supplier issue is behind us, which paved the way for a great quarter as the team focused on operations and delivered impressive results despite lower year-over-year sales.
Customer travel restrictions implemented during March, eased midway through the third quarter.
This was a positive development for the team, but given the recent increase in COVID-19 cases and states reinstating quarantines for travel, we may experience temporary sales headwinds in the fourth quarter.
As we discussed on the last earnings call, we expected third quarter orders to be down year-over-year and sequentially and that was the case.
Remember, we are coming off a quarter that was an all-time record for orders and we expected there to be a pause in orders due to the pandemic.
The backlog continues to be robust, providing visibility well into 2021.
Even with strong year-to-date orders, we will continue to monitor the pandemics impact on municipal budgets which could impact spending on fire trucks in the future.
It's clear that customer demand for both concrete mixers and refuse collection vehicles has been impacted by the pandemic.
As construction work was limited and often stopped at various locations across North America over the past three months, we expected concrete mixer sales and orders to slow.
That has been the case.
RCV demand tends to be more stable and we've seen residential trash collection remains strong and even elevated in some cases, but we've also seen nonresidential refuse collections slow during the shutdown and this has had a negative impact on demand for RCVs in the current environment.
Despite these challenges, commercial really came through with a solid margin quarter.
This can be attributed to quick actions and a passionate culture that permeates throughout the business.
Those of you that have followed us for the past few years know that we are committed to simplification throughout Oshkosh and we began journey a couple years ago in the commercial segment.
As part of this journey, we are transferring concrete mixer production from our facility in Dodge Center, Minnesota to consolidate production in our other mixer facilities in North America.
Thus, Dodge Center will become a focused RCV operation.
This will reduce costs and better position both the mixer and the RCV businesses for success in the future as they'll benefit from focused facilities.
The transition will occur over the next six months for this important step in our simplification journey.
Also, we recently sold our concrete batch plant business, Con-E-Co.
We regularly review all of our business for value and strategic fit within our company.
We determined that Con-E-Co was a better fit with a different owner and closed on the transaction last week.
We think this will help us more effectively focused our resources in the commercial segment.
Before I leave this segment, I wanted to mention the ramp-up of our new front discharge concrete mixer, the S Series 2.0 complete with industry-leading connectivity and productivity technologies.
We're pleased with customer orders and interest levels, even against the backdrop of the pandemic.
We believe this redesign mixer will be a long-term driver of solid performance for the company.
Watch for new megatrend technologies applied to this vehicle in the future.
This wraps it up for our business segments.
During our last earnings call, we commented that we expected the third quarter to be a challenging quarter and it was.
However, strong execution by our teams, combined with rapid implementation of cost reduction actions allowed us to effectively manage the business and deliver solid adjusted consolidated decremental margins of 15.9% for the quarter on a significant decrease in year-over-year sales.
Consolidated net sales for the quarter were $1.6 billion, down 33.9% from the prior year quarter, a significant decrease in access equipment sales and, to a lesser extent, decreases in fire & emergency and commercial sales were the primary drivers of the lower consolidated sales, offset in part by higher defense sales.
Access equipment sales were negatively impacted by customer pushouts, some cancellations and lower order intake rates as a result of COVID-19 and the related shelter-in-place restrictions driving low levels of job site activity throughout much of the U.S. and the world.
Defense sales growth in the quarter reflected the continued JLTV production ramp and higher aftermarket parts and service sales, partially offset by lower FHTV volumes.
Fire & emergency sales were lower than the prior year quarter, primarily as a result of decreased production line rates necessitated by COVID-19 related workforce availability and supply chain disruptions offset in part by a catch-up of units affected by the supplier quality issue we noted last quarter.
And commercial segment sales were lower than the prior year quarter, driven by a combination of lower demand for refuse collection vehicles and concrete mixers as well as some production disruptions, both caused by COVID-19.
Consolidated adjusted operating income for the third quarter was $128.8 million or 8.1% of sales compared to $257.8 million or 10.8% of sales in the prior year quarter.
Access equipment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of the facility shutdowns during the quarter, offset in part by favorable price cost dynamics, lower incentive compensation expense, the benefit of temporary cost reductions, and more amortization expense.
Defense operating income increased as a result of an unfavorable prior year cumulative catch-up adjustment, higher sales volume, and the benefit of temporary cost reductions, offset in part by higher warranty costs.
Fire & emergency third quarter adjusted operating income declined due to lower sales volume and adverse sales mix, largely offset by improved pricing, lower incentive compensation expense, and the benefit of temporary cost reduction actions.
Commercial segment third quarter operating income increased compared to the prior year quarter as a result of the absence of inefficiencies caused by a weather-related partial roof collapse in the prior year and favorable price cost dynamic, offset in part by lower sales volume.
Adjusted earnings per share for the quarter was $1.29 compared to earnings per share of $2.72 in the third quarter of 2019.
Third quarter results benefited by $0.03 per share from share repurchases completed in the prior 12 months.
During the second quarter, we withdrew our financial expectations as a result of the evolving impact of COVID-19.
While we have seen stabilization in our supply chain and operations, recent increases in infection rates in parts of the U.S. continue to drive potential supply chain and production risk.
Further, the cadence of customer demand in our access equipment and commercial mixer businesses remains uncertain.
As a result, we're not in a position to provide updated expectations for the fiscal year.
Last quarter, we announced decisive actions to reduce pre-tax cost by $80 million to $100 million for the year in response to the uncertainties caused by COVID-19.
These cost reduction actions include salary reductions, furloughs, temporary plant shutdowns, limiting travel and reducing project costs, and other discretionary spending.
As a result of the outstanding focus by our teams, we now expect these temporary cost reduction measures to exceed $100 million in fiscal 2020.
As John discussed, we have also announced permanent restructuring actions in our access equipment and commercial segments, which are expected to yield combined annualized cost savings of $30 million to $35 million once complete.
We expect to begin realizing some benefits of these actions in 2021, with the full impact of these actions by 2022.
As we shared with you on the last call, we established a playbook of options to respond to the pandemic.
With recovery trending at a slower pace, permanent cost actions were prudent.
Our balance sheet remains strong with available liquidity of approximately $1.1 billion, consisting of cash of approximately $300 million and availability under our revolving line of credit of approximately $800 million at the end of the quarter.
Share repurchases remain paused during the quarter and we will reevaluate them as we gain further clarity on the recovery of our end markets.
On the second quarter earnings call, we discussed our target of achieving mid-20% adjusted decremental margins, both on a consolidated basis and within the access equipment segment for the year.
We were able to exceed those targets during the third quarter with disciplined execution and the help of our cost reduction initiatives.
We expect the benefit of cost reduction activities to be lower in the fourth quarter compared to the third quarter as shelter-in-place restrictions have eased, leading to increased expenses.
Nonetheless, we expect to achieve the targeted mid-20% adjusted decremental margins, both in the fourth quarter and for the full year on a consolidated basis.
We have a strong culture with strong leaders at Oshkosh.
Our revenues and earnings were down in the quarter from last year, but given the challenges we've been facing, we're proud of our performance.
We have a strong balance sheet with ample liquidity.
Our defense and fire & emergency backlog provide visibility well into 2021 and we took aggressive actions early during the pandemic to lower our costs.
Our team has managed production and supply chain disruptions very effectively and has kept Oshkosh on the right path during these challenging times.
I am reassured by our strength and resourcefulness and believe we can deliver solid sales and earnings performance over the long term.
After the follow-up, we ask that you get back in queue if you'd like to ask additional questions. | compname reports q3 adjusted earnings per share $1.29 excluding items.
q3 adjusted earnings per share $1.29 excluding items. |
Earlier today, we published our fourth quarter and full year 2020 results.
A copy of the release is available on our website at oshkoshcorp.com.
Our presenters today include Wilson Jones, Chief Executive Officer; John Pfeifer, President and Chief Operating Officer; and Mike Pack, Executive Vice President and Chief Financial Officer.
I continue to be very proud of the hard work and disciplined execution of Oshkosh team members as we continue to work through the challenges brought on by the COVID-19 pandemic.
We've talked about it before but it bears repeating, our people-first culture has been a key driver for our strong results in the face of adversity.
Proud Oshkosh team members and their commitment to our strong culture allowed us to overcome significant headwinds this past year, including uncertain customer demand, supplier delivery interruptions, workforce availability issues and many others.
A big shout-out to all 15,000 of our team members and our dedicated suppliers that have worked hard and stepped up during this difficult period to continue meeting our customers' needs.
As a reminder, our fourth quarter call is always a little different from our other quarterly calls as I'll review both the quarterly highlights and the full year results before turning it over to John and Mike.
For the fourth quarter, we delivered sales of nearly $1.8 billion and adjusted earnings per share of $1.30.
Much like I said regarding our third quarter performance, we've controlled what we can control while responding quickly to challenges outside of our control.
This is important as we were able to grow adjusted operating income in our defense, fire & emergency and commercial segments over the prior year while achieving consolidated adjusted decremental margins of 19%.
In our largest segment, access equipment, we delivered 23% adjusted decremental margins during the quarter where revenues were down nearly 40%.
John will go into more specifics on the segments, but the access equipment markets in North America and Europe remain soft and the timing of recovery remains uncertain.
We are encouraged by utilization data that is approaching pre-pandemic levels and believe the market is stabilizing.
We'll be paying close attention to rental industry metrics as well as engaging in annual purchase discussions with our customers over the next few months.
Finally, we are announcing a 10% increase to our quarterly cash dividend to $0.33 per share.
This is our seventh consecutive annual increase and reflects the confidence we have in our business model and the longer-term outlook.
There's no doubt that 2020 has been one of the most memorable years in recent history as the global pandemic has created disruptions of significant proportions, and I'm proud of the efforts and results that our people were able to deliver.
For example, our access equipment segment overcame a nearly $1.6 billion year-over-year sales decline to deliver an impressive 8.5% full year adjusted operating margin.
Our fire & emergency segment delivered two consecutive quarters of record adjusted operating margin percentages to end the year.
Our commercial segment posted a decade-plus high full year adjusted operating income margin of 7.5%.
And defense successfully executed our ramp-up of the JLTV program despite a host of headwinds brought on by the global pandemic.
All of these represent significant accomplishments in the midst of the pandemic and demonstrate our strengths as a different integrated global industrial.
We ended the year on a high note with solid performance in the fourth quarter.
During the year, we executed a combination of companywide temporary and permanent cost reductions.
And Mike will talk about how these actions will impact our cost structure in 2021 in his section.
I also want to call out some of the great work our teams have been doing regarding corporate responsibility with a focus on ESG.
We don't typically talk about ESG metrics on earnings calls, but our efforts to reduce greenhouse gas emissions and energy usage, along with our team member engagement and safety performance, are among many areas that we believe help differentiate Oshkosh from other companies.
We continue to earn recognition from agencies that track and evaluate company performance for these important nonfinancial measures, and we believe they further underscore our commitment to excellence, long-term value and sustainability.
Wilson mentioned the pandemic, and I'd like to provide an update since several of our facilities, including our headquarters, are located in the region of Wisconsin that is currently experiencing some of the highest rates of COVID-19 spread in the nation.
Across the company, we've been focused on maintaining the safety of our team members and preventing the spread of the virus, and we have a good track record in doing that.
However, the recent resurgence is creating some workforce availability and supplier delivery challenges.
It's important -- it's as important as ever that we maintain strong safety procedures that meet or exceed CDC guidelines.
Of course, this is challenging as many of us are experiencing pandemic fatigue.
But like Wilson, I'm proud of our team members and our ability to stay focused and effective.
Let's kick off our segment discussions with access equipment.
We've been closely managing our access equipment business during a time of significant double-digit sales declines while still delivering strong adjusted decremental margins and impressive overall adjusted operating margins.
In fact, we've been able to set a new benchmark for financial performance during an industry downturn.
We appreciate the efforts and performance our team members have delivered during these times.
Our positive fourth quarter results are significant, considering the low demand for access equipment, which has resulted primarily from lower equipment utilization, leading to lower capex spending by rental company customers in North America and Europe.
Sales for the quarter were down nearly 40%, and we're therefore continuing to operate our facilities on reduced schedules.
We've taken both temporary and permanent cost reduction actions in the business as we weather the storm.
We believe this is a responsible approach.
It's important to emphasize that we have continued to invest in the business as JLG is the innovation leader in the industry, and we remain confident in the long-term outlook for this business.
We look forward to future product innovation releases as a result of our continuing investment.
We're carefully balancing our cost reductions with the ability to ramp up when the market recovers.
Through the first quarter, we'll keep production lower by operating our U.S. facilities for approximately 50% of the available production weeks.
We will make decisions for the remainder of 2021 as conditions evolve and our customers share their plans.
We are keeping our workforce engaged to be able to meet demand when the market returns.
We are also staying in close communication with our suppliers as they are key to our ability to ramp up when the market comes back.
We know that fleets in North America are aging with the aerials in the 55-month average age range according to the latest data, and we believe this elevated figure bodes well for future demand.
The bottom line for North America is that we are confident in the recovery for the access equipment market, but the specific timing of the recovery remains uncertain.
For the first half of the year, we expect lower year-over-year sales.
We are early in our discussions with our rental company customers, and we expect to gain more clarity on the second half of the year before our next earnings call.
Finally, just as we discussed last quarter, China's economy continues to recover, which we believe offers an opportunity for double-digit sales growth in the region for the foreseeable future.
Our defense segment performed well in the quarter but has been dealing with workforce availability issues that I mentioned earlier as the pandemic is having a notable effect on our ability to schedule people and production.
Despite these challenges, which we experienced more intensively late in the fourth quarter and continued to experience earlier this month, our operations teams have delivered solid results for our U.S. government customer and grew revenues in the year by more than 11%.
Our successful ramp-up of the JLTV program throughout the year led the way and provides a strong foundation as part of our large backlog in the segment.
Our team was happy to receive an expected order for 322 JLTVs from the Belgian Ministry of Defense in October.
The contract with our NATO ally valued at more than EUR115 million further demonstrates the success we are having with the world's best light protected tactical wheeled vehicle.
We expect to begin shipping the vehicles in 2023, and we expect to announce more international JLTV orders in 2021.
We competed against an incumbent competitor to win this order, and we believe it demonstrates the superior cost and performance characteristics of the JLTV product.
I want to comment on the recently enacted Continuing Resolution, or CR.
It used to be rare that the government required a CR to fund spending, but over the last 10 to 12 years, CRs have become the norm.
Our programs of record remain funded under the CR so it does not present an issue for 2021.
Fire & emergency delivered an all-time record for quarterly adjusted operating income of 16.4% in the fourth quarter.
Our team's performance at F&E has been nothing short of phenomenal as they have navigated through supplier issues, customer travel restrictions and other operational challenges, many of which were brought on by COVID-19.
The simplification philosophy that F&E adopted several years ago, along with state-of-the-art product innovation, provides the framework for the team to run its business at such a high level.
We are exiting the year with a strong backlog, supported by a record order year of nearly $1.3 billion despite the negative impacts of COVID-19.
Aged fire truck fleets, combined with the availability of new technologies, underpin our favorable long-term outlook for the F&E market.
That said, tight municipal budgets may constrain demand in the near term.
Fire & emergency is ready for the challenge with a market-leading lineup of high-quality, custom and commercial fire trucks and RF units.
And we continue to invest in new technologies, such as our Fotokite Situational Awareness System in alternative powertrain options that you'll hear more about in future quarters.
Our commercial segment has continued to drive improvement throughout the year despite headwinds caused by the pandemic.
The team delivered strong margins and higher year-over-year adjusted earnings in the fourth quarter despite lower revenues.
Our commercial team posted its highest full year adjusted operating income margin in more than a decade.
This is particularly impressive, given the market impacts from COVID when construction was halted in many areas of the country and shelter-in-place restrictions temporarily reduced demand for waste collection at businesses earlier in the year.
Much of our recent success stems from simplification efforts and disciplined cost management as well as the ramp-up of our new S-Series 2.0 Front Discharge Concrete Mixer, which is driving a lot of excitement and helping us win new customers.
On our last call, we announced restructuring plans to transfer rear discharge concrete mixer production from Minnesota to Ontario, Canada as the team simplifies the business with a focused factory approach.
I'm pleased to report that the transition is progressing according to schedule, and we anticipate a successful completion over the next several months.
We believe this will put us in a prime position to drive sustained margin improvements.
Before I leave this segment, I want to mention our commitment to electrification as a way to reduce greenhouse gas emissions and provide our customers with options as they plan their fleets.
Early in the fourth quarter, there were numerous announcements of plans for electric RCVs in the U.S. market by some companies.
We are proud to be working on electrification solutions across all of our businesses at Oshkosh.
This is particularly true for RCVs as we are partnering with a chassis OEM to deliver five electric RCV units to be used in Boise, Idaho in the summer of 2021.
I'd like to close with a comment about the culture and positive mindset we see from the team at commercial.
They have been working very hard driving business and operational improvements, and their efforts and dedication to task are second to none and we can see it in our results.
This wraps it up for our business segments.
Strong execution allowed us to deliver 19% adjusted decremental margins on a consolidated basis and 23% adjusted decremental margins at access equipment in the fourth quarter.
Consolidated net sales for the quarter were $1.8 billion, down 18.7% from the prior year quarter.
A 39% decrease in access equipment segment sales was the primary driver of the decrease.
Access equipment sales were negatively impacted by lower customer demand, primarily as a result of COVID-19.
As John mentioned, our customers remain cautious with equipment purchases in light of uncertainty surrounding the pandemic and associated softness in nonresidential construction activity.
Consolidated adjusted operating income for the fourth quarter was $124.1 million or 7% of sales compared to $203.1 million or 9.2% of sales in the prior year quarter.
Access equipment segment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of planned shutdowns during the quarter, offset in part by the benefit of COVID-19-related temporary cost reduction actions.
Defense segment adjusted operating income increased as a result of improved product mix and higher sales volume, partially offset by less favorable cumulative contract adjustments and higher engineering and proposal spending in the current year quarter.
Fire & emergency segment operating income increased in the current year quarter as a result of improved price cost dynamics and improved absorption, offset in part by lower sales volume.
And commercial segment fourth quarter adjusted operating income increased due to lower spending in response to the COVID-19 pandemic and favorable material costs, offset in part by adverse product mix and lower sales volume.
Adjusted earnings per share for the quarter was $1.30 compared to earnings per share of $2.17 in the fourth quarter of 2019.
Fourth quarter results benefited by $0.02 per share from share repurchases completed in the prior 12 months.
Finally, we generated strong free cash flow during the quarter to drive full year free cash flow of $238 million.
This is a solid accomplishment during a year where we saw rapid declines in customer demand, which put pressure on working capital.
The COVID-19 pandemic has continued to drive uncertainty in the cadence of customer demand in both our access equipment and commercial segments.
Conversely, strong backlogs in our defense and fire & emergency segments provide good visibility well into 2021.
However, as John mentioned earlier, recent spikes in COVID-19 infection rates are creating workforce availability and supply chain issues, particularly in Wisconsin, where a significant portion of the production occurs for our defense and fire & emergency segments.
The situation is causing production and labor efficiency risks for these two segments and is also likely to impact final truck inspections by customers in the fire & emergency segment.
Taking these factors into account, including the ongoing uncertainty of the pandemic, we're not in a position to provide quantitative expectations for 2021 at this time.
We are actively engaged in discussions with our key customers in the access equipment and commercial segments to understand the requirements for 2021, but we do expect softer year-over-year demand in the first half of 2021 compared to 2020.
Demand for access equipment remains uncertain for the second half of the year, but we expect to have better clarity during the first quarter earnings call as we gain further insight into the trajectory of the pandemic and our customer requirements for 2021.
At access equipment, we are implementing 2-week production shutdowns per month in the United States in the first quarter of 2021 to better align production with customer requirements.
In the second quarter of 2020, we implemented decisive actions which reduced our 2020 pre-tax cost by approximately $120 million.
The reductions were evenly split between three areas: first, salary reductions and furloughs; second, incentive compensation; and third, project travel and other discretionary spending.
As we previously discussed, these cost reductions were largely temporary in nature, and we expect them to return to our expense run rate in 2021.
Additionally, we discussed permanent cost reduction actions during our last earnings call in the access equipment and commercial segments totaling $30 million to $35 million once complete.
We expect these actions will benefit 2021 by approximately $20 million.
Recently, we implemented additional permanent cost reductions totaling $15 million for 2021, which reduced corporate and segment operating expenses.
So we expect to benefit from a total of $35 million of permanent cost reductions in 2021, growing to $45 million to $50 million by 2022.
Return of costs that drove the temporary cost reductions in 2020 will be a headwind to margins in 2021.
However, we are continuing to manage our business in a disciplined manner and will respond to the ongoing uncertainty with our playbooks.
Our balance sheet remains strong with available liquidity of approximately $1.4 billion, consisting of cash of approximately $600 million and availability under our revolving line of credit of approximately $800 million.
We expect a modest increase in capital expenditures to approximately $120 million in 2021.
While we are not providing quantitative financial expectations today, we expect to provide them later in the year.
We just completed the year in which we delivered nearly $5 of adjusted earnings per share in the midst of a global pandemic, and we believe we are in a great position moving into 2021 with our strong balance sheet and cash position.
Our defense and fire & emergency backlogs provide visibility well into 2021, and we took aggressive actions early during the pandemic to lower our costs.
Our culture at Oshkosh is strong, and we have an outstanding group of leaders and team members who have effectively managed production and supply chain disruptions and kept Oshkosh on a positive path since the pandemic began.
We can't let up as the threat is still with us, but I'm reassured by the strength and resilience of our people and believe we will deliver solid sales and earnings performance over the long term. | q4 adjusted earnings per share $1.30 excluding items.
compname announces 10 percent increase in quarterly cash dividend to $0.33 per share.
not providing a quantitative outlook for fiscal 2021.
consolidated net sales in q4 of fiscal 2020 decreased 18.7 percent to $1.78 billion. |
Earlier today, we published our fourth quarter 2021 results.
A copy of the release is available on our website at oshkoshcorp.com.
As we highlighted in our business update on October 8, 2021, we are changing our fiscal year to the calendar year.
The October to December 2021 quarter will represent an abbreviated fiscal year or stub period to facilitate the transition to our first full calendar year, which will begin on January 1, 2022.
This change should provide us with better visibility as our planning and reporting cycles will be aligned with those of many of our customers and suppliers.
All references to 2022 or later years as to a quarter or a year are to a calendar year.
Our presenters today include John Pfeifer, President and Chief Executive Officer; and Mike Pack, Executive Vice President and Chief Financial Officer.
As we discuss our fourth quarter and full year results, I want to provide some color on the current business environment.
It's clear that we're in a unique period of time with robust customer demand for our market-leading products while facing one of the most challenging global supply chain logistics and workforce availability environments in decades.
These factors are limiting production and also contributing to manufacturing labor inefficiencies.
At the same time, we're facing significant material cost inflation.
We view these challenges as temporary, and we believe we are taking the right actions to position our company for success as we emerge from the current environment as a stronger, more resilient business.
Some examples of the actions include: implementing multiple price increases in the last several months in our non-defense segments to mitigate cost inflation; redesigning many of our JLG products to accept higher capability microprocessors, which are produced in higher quantities by chip makers to reduce our risk of shortages; shifting production within our existing facilities to better align with labor availability; and we're undertaking a rigorous qualifying process to identify and engage hundreds of new suppliers to drive a more robust supply chain for key materials and components.
Our long-term outlook is attractive based on strong market fundamentals, strategic program wins and a comprehensive offering of innovative new products that will drive continued market leadership.
With this backdrop, we reported 15.6% higher revenues on sales growth in our access equipment, defense and fire & emergency segments.
This led to fourth quarter adjusted earnings per share of $1.05, slightly above the estimated range included in our October eight business update.
The modest increase was driven by a lower effective tax rate.
And we continue our commitment to responsible capital allocation with increased share repurchases in the quarter, which Mike will discuss.
I'm also pleased to announce that our Board approved a 12% increase in our quarterly dividend from $0.33 to $0.37, which represents the eighth consecutive year of double-digit percentage increases.
Now let's move to the full year.
We grew revenues by just under 13% for the year and adjusted earnings per share by 16.4%.
This led to a full year record for free cash flow of more than $1.1 billion.
Importantly, we have an opportunity to grow revenue and earnings per share over the next few years based on our innovative products and strong market drivers.
We also have a strong foundation of programs in our defense segment, bolstered by our significant recent program wins, including the United States Postal Service Next Generation Delivery Vehicle and the U.S. Army's Medium Caliber Weapons System.
2021 was a year of significant electrification announcements for our company.
Beyond the USPS win, we launched our revolutionary new Volterra family of electric firetrucks, including the Pierce Volterra electric custom pumper currently in service in Madison, Wisconsin; and the Volterra electric ARFF truck, which was a major highlight for attendees at the Advanced Clean Transportation Expo back in late August.
The expo brings together participants from across the globe to discuss and demonstrate clean technologies for commercial applications.
The customer response to these electrified products has been outstanding.
We made several important investments in 2021, including the acquisition of Pratt Miller and a strategic investment and partnership with Microvast.
We wrapped the year up with a minority investment and strategic partnership with Carnegie Foundry to build upon our autonomy and robotics capabilities.
We also announced a minority investment in wildland firetruck market leader, Boise Mobile Equipment.
These investments highlight our commitment to advance into new markets and leverage technology to both enhance our product offerings and drive profitable growth as part of our long-term strategy.
We have also continued our commitment to environmental, social and governance leadership, as evidenced by our investments in electric vehicle technologies while fostering an inclusive culture and continuing to deliver on our high governance standards.
For many years, MOVE, M-O-V-E, was our strategy.
Over the past year, we evolved beyond MOVE and have introduced our strategy summarized with three simple words: Innovate.
We believe this strategy provides the necessary framework to continue to drive long-term sustainable growth, and it is grounded in our purpose: making a difference in people's lives.
We innovate customer solutions by combining leading technologies and operational strength to empower and protect the everyday hero.
We serve and support those who rely on us with a relentless focus throughout the product life cycle.
We advance by expanding into new markets and geographies to make a difference around the world.
We're excited about the direction we're headed and believe that Innovate.
provides the road map to get us there.
I invite you to check out the details of our strategy on the Oshkosh website.
Much like we discussed on our last call, demand for our industry-leading access equipment remains very strong, but near-term results are being meaningfully impacted by supply chain and logistics challenges as well as higher input costs.
Access equipment, which faced an extreme decline in demand in 2020 as a result of the COVID-19 pandemic, has since experienced the most rapid rebound of any of our businesses.
The rapid return of demand in 2021 exacerbated the supply chain challenges we have been facing, and we believe it will remain choppy well into 2022.
Our access team continues to work hard to source components to build and shift products to customers around the globe.
Despite these challenges, we delivered strong revenue growth of 37% in the fourth quarter, leading to 22% revenue growth for the full year.
We have taken multiple pricing actions over the past several months based on rising input costs, which we expect will largely address price/cost challenges by the end of the second quarter of 2022.
And of course, we will continue to be diligent in our pricing approach should input costs increase further.
Orders came in at $1.9 billion in the fourth quarter, representing a quarterly record for the segment, leading to a record backlog of $2.8 billion at September 30.
The rental equipment market is strong, and the access leadership team has taken measured steps to preserve the health of the industry by addressing unfair competition through our trade case.
We believe that we are in the early stages of a multiyear growth cycle for access equipment as the rental companies work to lower the overall age of their fleets, which were at historically high levels entering 2021.
I want to emphasize that our growth outlook is underpinned by strong market fundamentals, and our continued launch of innovative product offerings such as the DaVinci all-electric scissors that you've heard me talk about, and many other new product launches in recent quarters.
Our trend of new product launches continues -- continued in the fourth quarter.
We're entering the North American telehandler market for agriculture in a more significant way with a new 9,000-pound capacity model.
We are also expanding our industry-leading U.S. telehandler family with a new line of rotating telehandlers with our Italian partner, Dieci.
I look forward to discussing additional new products with you in the coming quarters.
Our defense team delivered a solid fourth quarter, leading to a full year revenue of $2.53 billion, an increase of almost 10% and an operating margin of nearly 8% in this very challenging supply chain environment.
You're all familiar with the JLTV, one of our foundational and enduring programs.
We've been showcasing the vehicle's ability to serve as a long-range weapons platform in either manned or semiautonomous modes.
These capabilities directly support the Department of Defense's focus on near-peer threats.
Domestic and international customers continue to be impressed with the JLTV's outstanding versatility.
We are also preparing for the upcoming recompete scheduled in 2022 and believe we are well positioned to win the follow-on contract.
As we've discussed over the past several quarters, we are actively competing for a number of adjacent programs, including the CATV, a track vehicle for Arctic climates; the OMFV, which is planned to replace the Bradley Fighting Vehicle; and the EHET, or the Enhanced Heavy Equipment Transporter, among many others.
The acquisition of Pratt Miller significantly enhances our ability to win adjacent programs just like it helped us win the MCWS contract earlier in 2021.
Before I leave defense, I'd like to make a few comments about our Next Generation Delivery Vehicle contract with the United States Postal Service.
We continue to work with the customer to finalize some of the vehicle's parameters.
We are also on track with setting up our new facility in South Carolina and expect a successful product launch in the back half of 2023.
This is a 10-year contract that calls for between 50,000 and 165,000 vehicles, with a mix of both zero-emission battery electric vehicles and fuel-efficient ICE vehicles and allows the USPS to electrify its fleet.
The fire & emergency segment delivered another strong quarter with an operating income margin of 14% despite the challenging supply chain environment and extreme cost inflation.
Even more impressive is the fact that our team at F&E delivered an all-time record for operating income margin for the full year at 14.2%.
Of course, we expect to overcome these hurdles in time, and we are planning an expansion of our Appleton manufacturing sites that will support long-term growth.
As I mentioned earlier, our Volterra electric custom pumper is serving frontline duty in Madison, and we recently announced an agreement with Portland to work with them on Volterra as well.
Boise is the industry leader in wildland firefighting trucks.
Our minority investment will bring the Boise product into our dealer network and allow both Pierce and Boise to take advantage of this growing segment of the market.
Similar to our other segments, commercial delivered solid results in 2021.
In fact, the team posted its best full year adjusted operating income margin in the past 15 years.
That's an impressive accomplishment in this difficult supply chain environment with record high steel costs.
As many of you are aware, we build RCVs and rear-discharge concrete mixers on third-party chassis either purchased by us and supplied to customers with a body and a complete package or furnished by our customers.
This represents a meaningful risk as chassis availability has worsened over the past couple of months, and we expect it will remain challenged for much of 2022.
Demand for RCVs and mixtures has been strong, and we have a solid outlook for both markets.
Residential construction as well as other construction indicators are positive, and elevated customer fleet ages are creating additional demand for replacement.
Our outlook is further supported by solid orders in the quarter for both RCVs and mixers as the U.S. and Canada moved beyond the pandemic.
These orders led to an all-time high backlog of just under $570 million, providing good visibility into 2022.
As John highlighted, we faced significant supply chain and logistics disruptions in the fourth quarter, well beyond our experience in the third quarter.
We also experienced meaningful material cost inflation.
Recall that we account for inventory on a last-in first-out basis, so the additional cost escalation we saw in purchases in the fourth quarter negatively impacted price/cost dynamics, particularly at access equipment.
We previously expected a consolidated year-over-year price/cost headwind of $35 million in the quarter.
The actual price/cost impact increased to approximately $60 million.
Supply chain disruptions, unfavorable price/cost dynamics and labor constraints all contributed to fourth quarter financial results significantly lower than the expectations discussed on our third quarter call.
Consolidated sales for the fourth quarter were $2.06 billion or $279 million higher than the prior year, representing a 16% increase.
The consolidated sales increase was driven by a 37% increase at access equipment, a 5% increase at defense and a 10% increase at fire & emergency, partially offset by a 6% decrease at commercial.
Access equipment sales increased by $230 million over the prior year quarter due to improved market demand led by North America.
As the impact of the pandemic has waned, the sales increase was lower than our prior expectations by approximately $130 million, largely due to the previously mentioned supply chain disruptions.
Defense sales increased in the quarter due to higher JLTV sales as well as the benefit of Pratt Miller sales, which we acquired in the second quarter, partially offset by lower FMTV and international sales.
Fire & emergency sales increased in the quarter on higher ARFF deliveries and commercial sales were down on lower package sales.
Consolidated adjusted operating income for the fourth quarter was $104.2 million or 5.1% of sales compared to $124.1 million or 7% of sales in the prior year quarter.
Access equipment adjusted operating income decreased as a result of unfavorable price/cost dynamics, the return of spending subject to temporary cost reductions in the prior year and unfavorable product liability largely offset by an increase in sales and improved manufacturing absorption.
Defense adjusted operating income decreased as a result of unfavorable product mix, increased material costs and unfavorable production variances partially offset by higher sales volume.
Fire & emergency adjusted operating income decreased in the current year quarter as a result of higher material costs, unfavorable manufacturing efficiencies and the return of spending subject to temporary cost reductions in the prior year, offset in part by higher sales and improved pricing.
The commercial segment adjusted operating income decreased as a result of unfavorable material costs and the return of spending subject to temporary cost reductions in the prior year, offset in part by improved manufacturing absorption and improved pricing.
Adjusted earnings per share for the quarter was $1.05 compared to adjusted earnings per share of $1.30 in the prior year.
During the quarter, we repurchased approximately 821,000 shares of common stock for a total cost of $95 million.
We expect that the challenges we faced in the fourth quarter of 2021 will continue into the stub period.
Demand remains robust across the company as indicated by our strong order rates in the fourth quarter and record year-end backlogs in several segments.
However, the current supply chain and logistics disruptions are making it difficult to forecast sales volume.
While our backlog supported a 10% to 15% sales increase in the stub period versus the first quarter of 2021, we expect parts availability will likely constrain our ability to deliver higher sales.
As a result of this uncertainty, we are unable to provide quantitative expectations for the stub period at this time.
We do expect that stub period earnings per share will be significantly lower than the first quarter of 2021 and may approach breakeven levels on a consolidated basis.
We expect that unfavorable price/cost dynamics will be a $75 million to $85 million headwind versus the first quarter of 2021.
Steel and other component costs have continued to increase.
We have taken multiple pricing actions in our non-defense businesses over the past several months, and in many cases, prices are now greater than 10% above early 2021 levels.
We believe these price increases will enable us to achieve price/cost equilibrium but will still need to -- but we still need to work through large backlogs, so will take until the end of the second quarter of 2022 for these pricing actions to largely catch up with cost escalation.
If we experience further escalation, we expect to take further pricing action.
We also expect higher spending levels in the stub period versus the first quarter of 2021.
Last year, COVID-19 infection rates spiked early in our first quarter and our spending levels remained low.
Since then, our spending levels have begun to normalize in areas such as travel, advertising and medical.
We also expect that parts availability constraints will continue to drive labor inefficiencies.
While the current environment is challenging, we are taking appropriate actions and believe that supply chain constraints will subside over time and the longer-term outlook for our businesses remains very strong.
We'll provide further updates on 2022 during our January earnings call.
We just completed a challenging quarter and expect those challenges to remain for the next few quarters.
However, we believe we're taking the right actions as we manage through this period, position ourselves for success as supply chains improve.
We also won significant programs in 2021 and are committed to driving long-term profitable growth as we innovate, serve and advance the company.
Okay, Pat, back to you. | q4 earnings per share $1.30.
q4 sales rose 15.6 percent to $2.06 billion. |
Before providing you with an update on our response to COVID-19 and our first quarter financial and operating results, I'm going to spend a few minutes on recent events.
What has happened across the country over the last few weeks has brought into sharp focus that we as a country are still falling well short of our national aspiration of racial equality and equal economic opportunity for all.
It is time for us all to listen, learn, and act.
We can feel heartbroken, fearful or uncomfortable, but we must get busy and take action to change things for the future.
With this in mind, Oxford is making a $1 million commitment of additional support over the next four years to help our local communities address economic and racial inequality through education.
Every child regardless of race or economic circumstance deserves the chance to learn and be successful.
The likelihood of success increases exponentially when a child has access to a quality education.
All too frequently, particularly in economically disadvantaged communities and communities of color that access does not exist.
Our commitment builds on Oxford's long history of supporting education programs that improve access to quality education for economically disadvantaged use and predominantly African-American communities.
Now let's talk about what's going on in our business.
It goes without saying that this year is a very unusual year.
In any other year, our key objective is always delivering the sustained profitable growth that drives long-term shareholder value.
With the shutdown of the economy in response to the COVID pandemic, this is a year that given the nature of our business makes it almost impossible for us to achieve this objective.
That said, we believe this situation is temporary and that by focusing on our people, our brands and our liquidity, we will emerge from this year positioned well to thrive in the new and very different post-COVID marketplace.
With respect to these three objectives, people, brands and liquidity, I am very pleased with what we have accomplished since March and the track we're on for the rest of the year.
With respect to people the COVID pandemic and the resulting shutdown have been incredibly disruptive for people at both personal and professional level.
To navigate through this difficult situation, we have had to take a number of painful but necessary actions that have added to the disruption in people's lives.
These have included layoffs, furloughs, pay reductions and other actions, including work from home that have added to the challenges that people face.
We do not take these actions lightly at all, and I am deeply appreciative of how our teams have rallied.
Their commitment, resourcefulness and focus has far exceeded what I could have possibly hoped for.
As we are beginning to emerge from this shutdown or in the early stages of recovery, I believe our team is stronger than ever and better suited to take on the new challenges facing our industry.
Secondly, with our bricks-and-mortar operations substantially shut down for several months and only now slowly beginning to reopen, we have done a terrific job of protecting and preserving the integrity of our brands and our relationship with our customers to ensure we remain in a strong position for the post-COVID consumer marketplace.
We took actions to help us mitigate an over-inventoried position which would undoubtedly require us to engage in the heavy discounting and promotional activity that could damage the integrity of our brands.
We reduced and canceled existing orders, we reduced the amount of our previously planned forward orders, and we delayed and remerchandised inventory that was already in the pipeline.
Through our digital marketing and e-commerce capabilities, we have also done a great job of keeping our customers engaged with our brands in ways that are relevant during this unusual time.
The key takeaway is that some of the most effective messages were those where we really leaned into our brands and their messages of optimism in the happiness.
Customers really look to our brands as an escape from some of the realities of living in a quarantined, work from home, home-schooled world.
Reemergence from the shutdown has also accelerated our efforts to become truly omni-channel.
We believe that all of these actions put our brands in great shape for the future of the lives ahead.
Finally, and very importantly, we have managed our cash outflows very carefully and as a result have reserved a strong liquidity we had going into the shutdown.
We are confident that we will finish the year with more than adequate liquidity to grow and thrive going forward.
Some of the key steps that we've taken have included painful but necessary reductions in employment expense, including the elimination of cash bonuses and reductions in executive and other employee salaries, reducing the forward inventory commitments, slowing down capital expenditures, negotiating equitable rent arrangements with our landlords and a reduction to our dividend and the Board of Directors' cash compensation.
Many of these actions are ongoing, including our discussions with landlords as we work to resolve the current situation.
To reiterate, our key focus this year is making sure our people, brands and liquidity are in an excellent position for the post shutdown consumer marketplace.
I'm very proud of what we've accomplished and believe we are on the right track toward achieving these critical objectives over the remainder of the year.
Our first quarter of 2020 began strongly.
In February, we were very excited to open two new Tommy Bahama Marlin Bars both in the Fort Lauderdale area.
Our retail and e-commerce businesses were posting positive comps, and we were on track to add to our multi-year positive comp trend.
As we approach mid-March, the spread of COVID-19 started to accelerate and began impacting the retail marketplace.
From March 17, to protect the health of our employees and customers, we temporarily closed all of our North American stores and restaurants.
Our corporate offices successfully adopted work from home strategies and with appropriate safety measures in place, we have been able to keep all of our distribution centers open.
The impact to Oxford from the COVID-19 crisis is exacerbated by the seasonality of our business.
Our Tommy Bahama Lilly Pulitzer and Southern Tide brands are oriented primarily to spring-summer with March through June being four of our strongest months of the year.
Our stores and restaurants, which make up 47% of our overall sales in 2019 just began to reopen in early May, and we expect to have almost all of our locations open by the end of June.
As our stores open, however, they are operating with many restrictions in place and consumer traffic that is rebuilding slowly.
The stores that are open are operating at about half prior-year levels on average, with significant regional variations.
But we don't expect revenue from stores to reach prior year levels at anytime during 2020.
We do anticipate steady improvement as restrictions ease and consumers' comfort level increases around travel and shopping.
Turning to our wholesale channel.
It appears that the pandemic is likely to accelerate the closure of a number of department and specialty stores.
Over the last several years, we have very carefully managed our exposure to these accounts as it become increasingly difficult to find partners with whom we can maintain a mutually beneficial business.
In 2019, wholesale sales at Tommy Bahama decreased to 20% of revenue, and at Lilly Pulitzer 21% of revenue.
Most of our wholesale partners have excess inventory and we believe it will take them a while to work through what they have on hand, but we believe the demand for new product will be soft in 2020 and therefore we expect wholesale revenue to be significantly lower than 2019.
Throughout this challenging period, we were able to successfully use our digital platforms to stay connected with our customers.
E-commerce, which was 23% of our revenue in 2019 grew by 12% in the first quarter and the positive momentum has continued into the second quarter as we reap the benefits of the long-term investments we have made in digital and e-commerce, such as upgrades and redesigns of websites, enhanced search engine optimization and new enterprise order management systems.
In the first quarter, adjusted gross margins declined 220 basis points due to higher inventory markdowns and a modest increase in promotional activities.
We expect to continue to experience pressure on gross margin, as we expect to be modestly more promotional throughout the rest of the year.
We have made significant strides in reducing expenses in the first quarter with the reductions across most spending categories, reducing SG&A by $17 million compared to last year.
Employment costs were reduced by $11 million in the first quarter as we made the difficult decisions affected our employees.
We furloughed substantially all of our retail and restaurant employees, eliminate positions throughout the organization, reduced salaries for certain employees, and we suspended our bonus and 401(k) match programs.
We expect SG&A to be lower year-over-year, with the largest percentage decrease in the second quarter.
Then as we expect all locations to be open for the full third and fourth quarters, the year-over-year percentage decreases in SG&A are expected to narrow.
Managing inventory is a critical component of ensuring the health of our brands, and we have taken meaningful actions to reduce and defer our inventory orders, with approximately a 25% reduction in forward orders.
By repurposing some of Tommy Bahama spring-summer collection, we've taken about $25 million of inventory, moved it out to Tommy Bahama's resort line in December, and we have been working with our vendors to extend payment terms.
We are pleased with our efforts and inventory at quarter end increased only 8% despite the significant sales decline.
While it's incredibly difficult to project results in this uncertain environment, I want to add some color on how we currently view the remainder of the year.
The timing of the COVID-19 pandemic created significant headwinds to our top line and similar to the first quarter, we expect a significant year-over-year decrease in second quarter sales.
However, in the second quarter, we expect a larger percentage year-over-year decrease in SG&A, resulting in a smaller loss than in the first quarter.
The third quarter is always a difficult quarter due to seasonality, and we expect it to be even more difficult this year.
Right now, we are projecting the fourth quarter to be modestly profitable with some recovery in our direct-to-consumer channel, but sales will still be below last year.
As Tom mentioned, preserving a high level liquidity is essential during these uncertain times.
We have ample liquidity to meet our ongoing cash requirements, reflecting the strength of our balance sheet entering the pandemic, as well as the recent actions we have taken to mitigate the COVID-19 impact.
During March 2020, as a proactive measure to oyster cash, and we drew down $200 million of our $325 million asset base revolving credit facility.
At the end of the first quarter, we had $208 million of borrowings outstanding, an additional $114 million of unused availability and $182 million of cash and cash equivalents.
Our cash flow from operations used $46 million in the first quarter compared to a use of $6 million in the prior year period.
As we ended the second quarter, our cash burn rate has decreased and we expect it to continue at lower levels throughout the remainder of fiscal 2020.
In the first quarter of fiscal 2020, net sales in each of our operating groups decreased from prior periods, resulting in significant lower operating results, including operating losses in each group other than Lilly Pulitzer.
As a result this triggered first quarter goodwill and indefinite lot intangible asset impairment assessments in accordance with our accounting policies.
Our assessments included at the fair values of the Southern Tide goodwill indefinite-lived intangible assets as of May 2, 2020 did not exceed their respective carrying values, resulting in a $60 million non-cash impairment charge.
Last quarter, the Board of Directors reduced our quarterly dividend from $0.37 per share to $0.25 per share.
The Board has determined that it's appropriate to keep the dividend payable on July 31 at $0.25 per share.
The Board has also elected to reduce its cash compensation by 50% for the remainder of the fiscal year.
We appreciate your support.
Please stay safe during these challenging times. | oxford industries - q1 e-commerce sales grew 12% over q1 last year & positive momentum has continued into q2.
oxford industries - expect to have almost all locations open by end of june.
oxford industries - confident it has ample liquidity to satisfy ongoing cash requirements in fiscal 2020 & for foreseeable future.
qtrly inventory increased 8% to $169 million compared to $157 million in prior year period.
oxford industries - not providing financial outlook for fiscal 2020. |
Due to the material impact of COVID-19 on our business in fiscal 2020, we will also include comparisons to fiscal 2019 results.
We are extremely pleased to be reporting an incredibly strong start to fiscal 2021.
We took decisive actions at the start of the pandemic to protect our people, our brands and our liquidity.
This combined with our focus over the past year on delivering happiness to our customers and investing in enhanced digital, marketing and store capabilities, as well as in our bars and restaurants, have strengthened our foundation for profitable growth.
As consumers have become increasingly more comfortable returning to physical shopping, our overall engagement levels have greatly accelerated, leading to strong momentum across our entire portfolio of brands.
Given conditions last year, it is not surprising that we were able to post strong sales gains across all brands and all channels of distribution during the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020.
What's much more impressive about our first quarter 2021 performance is how it compares to the first quarter of 2019.
We believe that the comparison to 2019 is much more informative for most purposes than comparing to 2020.
Accordingly, during our discussion today, we will focus on the positive traction we have made toward returning to and even exceeding our 2019 levels of performance.
First quarter sales came in at $266 million compared to $282 million in fiscal 2019 and versus our guidance range of $220 million to $240 million.
It is worth noting that $14 million of the $16 million sales decrease from the first quarter of fiscal 2019 is due to lower sales in Lanier Apparel, which, as you know, we are in the process of exiting.
On an adjusted basis, earnings per share increased to a $1.89 compared to our earnings of a $1.30 in the first quarter of fiscal 2019.
Scott will provide more detail in a few minutes, but these results were driven by very strong performance in our e-commerce businesses and outstanding gross margins.
Our bar and restaurant business also performed very nicely during the quarter.
In our bricks and mortar stores, we generally saw a sequential improvement in traffic and sales in the quarter with regions in Florida, the Southeast and Texas showing the most strength while the Mid-Atlantic, the Northeast and the Midwest are recovering at a somewhat slower pace.
There is no question that we are benefiting from some pent-up demand so far this spring and summer and the alignment of our brands' focus on products related to travel, vacation and social occasions with the consumers' desire to travel and reengage socially.
We expect this to continue as more regions of the country begin to normalize.
That said, we believe that the results we have seen thus far this year and that we are projecting for the balance of the year also demonstrate the value of staying true to our brands during the challenges that we faced last year.
Our commitment to the happy, upbeat and optimistic messages of our brands and delivering those messages to our consumers through our products and services is paying off handsomely as the world reengages.
In addition, we are seeing positive returns on the investments we have made and continue to make in enhancing our brands' creative content in improving our omni-channel customer service and continuing to hone our digital marketing capabilities, and in our stores, bars and restaurants.
In our biggest brand, Tommy Bahama, we are anchored in the relaxed island lifestyle.
We deliver this lifestyle to our guests through our amazing products, our wonderful stores and e-commerce website, and very importantly through our bars and restaurants.
By staying true to our Live the Island Life brand message and making the types of investments outlined above, we were able to deliver outstanding first quarter results.
Sales overall came close to 2019 levels, driven by healthy gains in e-commerce and restaurants while stores in the wholesale continued to improve sequentially.
Very importantly, increased full-price selling and stronger initial IMUs, coupled with excellent expense control, helped contribute to a marked improvement in gross margin, operating margin and a 36% increase in operating income over first quarter of 2019.
We are delighted with the margins we achieved for the quarter.
Finally, we were pleased to see that while performance in our men's business was strong, our women's business at Tommy Bahama was even stronger.
We are honored to have the dedicated cadre of true Tommy Bahama fans that comprise our very loyal customer base.
That said, we believe there is room on the island to delight even more customers.
Through the investments we are making and the priorities we have established, we are intent on expanding our customer reach while continuing to serve our loyal guests.
Staying anchored to its resort chic lifestyle and as we say being the sunshine served Lilly Pulitzer very well during the first quarter.
Lilly's product priority for spring '21 was feel-good fashion with a focus on the happy color and print, easy chic comfortable pieces and a resort state of mind.
This focus together with the investments that we have made in enhancing our brand creative and enhancing our store and digital capabilities paid off in strong first quarter results.
We continue to see strong growth from e-commerce while our stores in the wholesale business continue to improve as consumers feel increasingly comfortable engaging in the physical world.
In total, first quarter '21 sales exceeded first quarter 2019 sales, and operating margin came in at an impressive 27% as compared to 21% in 2019.
Our Luxletic and lounge product continued to drive growth and we saw a healthy rebound in our dress business as for social calendar begins to fill up.
At the same time, our golf and tennis collections have also been bright spots and the consumer is showing strong renewed interest in swim as she thinks about travel and vacation this summer.
Our recent results demonstrate that we have the product she wants and our brand message is resonating with her.
We look forward to continuing to drive a strong business through the balance of the year.
Our smaller brands, Southern Tide, The Beaufort Bonnet Company and Duck Head, also had a great first quarter, all posting meaningful sales gains above first quarter 2019 levels.
All three are poised to contribute to our profitability this year.
We are very pleased with our first quarter results and are excited about the balance of the year.
Scott will provide more details in our guidance momentarily, but I will say that we do expect to have a strong year, particularly in terms of profitability.
Our enthusiasm is based on both external factors as well as the internal priorities that we have been focusing on for the last year.
I'll start with the external factors.
As the summer progresses, we expect some of the regions that have been slower to recover for us, namely the Mid-Atlantic, the Northeast and the Midwest, to pick up momentum.
We also believe that consumers will continue to have a high degree of interest in travel, vacation and social events through the year.
Finally, after a long pandemic, consumers appreciate the highly differentiated happy, colorful, upbeat nature of our brands and products more than ever.
All of these external factors portend a strong 2021.
We are also excited about the benefits we are seeing as the result of our internal priorities.
There are many, but I will highlight five here.
First, in our brand message, we are taking care to ensure that our messages are both true to our core brand values and relevant for today's consumer and marketplace.
Second, we have realigned our creative teams and are enhancing our creative content to make sure it is delivering the full impact of our powerful brand messages.
Third, as part of our effort to enhance our digital capabilities, we are improving our ability to capture and analyze customer data in a way that respects her privacy but also puts us in position to serve her in a better and more personalized way.
It also helps us identify and reach new audiences of potential customers.
Fourth, we are honing our skills in measuring the effectiveness of and optimizing the various channels, many of them digital media that we used to reach both existing and potential new customers.
Fifth, we continue to enhance our store order fulfillment capabilities.
This allows us to use inventory located anywhere in our footprint to satisfy demand from anywhere.
The implications for inventory efficiency sell-through rates and ultimately gross margin are huge.
We believe the combination of the positive external factors as well as the benefits from our work on our internal priorities gives us ample reason to be bullish on 2021.
In closing, please allow me to express my sincere appreciation for our wonderful and loyal customers and for our world-class employees, an incredible group of women and men who worked harder than ever over the last year and a half to deliver happiness to those customers.
As Tom just mentioned, fiscal 2021 is off to a great start with record earnings in the first quarter.
I'll walk you through how we got there.
Sales were stronger than expected, and excluding the impact of the exit of the Lanier Apparel business were comparable to 2019 levels.
Our full-price e-commerce channel was 55% higher than in 2019, with significant growth over 2019 in all of our branded businesses.
Our retail store performance reflects the significant regional differences in the pace of recovery.
We saw real strength in the Southeast and Southwest, particularly in Florida, where retail sales achieved 2019 levels.
However, we are experiencing a much slower recovery in other parts of the country where sales levels in the Northeast, Mid-Atlantic and Midwest while improving versus Q4, were still over 30% lower than in 2019.
Overall, our retail sales were 16% lower than in 2019.
We continue to see improvement so far in the second quarter and expect that improvement to continue as restrictions lift and as summer arrives in these areas.
Our restaurants benefited from the addition of five Marlin Bars and the strong recovery in certain regions with a sales increase of 7% compared to 2019.
All restaurants are now open except for New York, which we plan to reopen this fall.
We are particularly proud of the work we have done to improve our gross margin, which on an adjusted basis expanded 520 basis points over 2019 to 64%.
As demand remained high, more of our sales in the first quarter were at full price than in the first quarter of 2019.
Gross margin also benefited from our focus and investments in our direct-to-consumer businesses and lower sales in Lanier Apparel, which has resulted in a meaningful shift in our sales mix to these higher margin channels of distribution.
In the first quarter of 2021, our direct business was 72% of revenue compared to 64% in the first quarter of 2019.
We have also increased our IMUs by reducing product cost and selectively increasing prices.
SG&A modest -- decreased modestly from 2019 levels with lower employment costs, occupancy costs, variable expenses and travel costs, partially offset by increased performance-based incentive compensation.
Putting it altogether, in the first quarter, our consolidated adjusted operating margin expanded 410 basis points over 2019 to 15%, with operating margin expansion in all operating groups.
Our business is supported by our strong balance sheet and cash flow from operations.
Here are some highlights.
On a FIFO basis, inventory decreased 29% compared to the end of the first quarter of 2020.
Excluding Lanier Apparel, which we are exiting, FIFO inventory decreased 22% compared to the end of the first quarter of 2020.
Tommy Bahama, Lilly Pulitzer and Southern Tide each decreased inventory levels significantly year-over-year with conservative purchases of seasonal inventory and higher-than-expected first quarter sales.
Ongoing enhancements to enterprise order management systems are also contributing to a more efficient use of inventory.
On a LIFO basis, inventory decreased 36% compared to the end of the first quarter of 2020.
Supply chain challenges, including higher transit cost and production and transit delays, are ongoing.
However, our emphasis on direct-to-consumer channels gives us more flexibility on product release dates.
Our liquidity position is strong with $92 million of cash and no debt at the end of the first quarter.
In the first quarter of 2021, cash provided by operating activities was $41 million compared to cash used in operating activities of $46 million in the first quarter of 2020.
Turning to our outlook.
The positive momentum we experienced in the first quarter has continued, and we expect to deliver strong revenue and earnings in the second quarter.
Sales in the second quarter expected to be in a range of $300 million to $310 million compared to $302 million in the second quarter of 2019.
Impacting sales in the second quarter is the wind down of our Lanier Apparel business.
We estimate Lanier Apparel revenue to decline to approximately $5 million in the second quarter of fiscal 2021 compared to $20 million in the second quarter of fiscal 2019.
Strong full-price sales, a shift of our sales mix toward our brands and our direct-to-consumer channels, and higher IMUs in the second quarter are expected to contribute to a meaningful increase in consolidated gross margin over 2019.
On an adjusted basis, earnings per share for the second quarter of 2021 are expected to be in a range of $2.15 to $2.35 compared to $1.84 per share in the second quarter of 2019.
Our third quarter is historically our smallest sales and earnings quarter due to the seasonality of our brands.
We also cleared end-of-season inventory in both the third and fourth quarters with the highly profitable Lilly Pulitzer after party sales as the most notable of our events.
High sell-throughs in the first quarter and elevated sales plan -- levels planned in the second quarter are expected to reduce the availability of excess inventory for these clearance events.
As a result of lower planned revenue from clearance events in the third quarter and the impact of the Lanier Apparel exit, we are projecting an adjusted loss in the quarter in a range of $0.20 per share to $0.35 per share compared to adjusted earnings of $0.10 per share in the third quarter of 2019.
With our better-than-expected first quarter results, combined with our projection for a strong finish to the year driven by continued strength planned in our full-price e-commerce channel, retail and restaurant channels of distribution, we are raising our previously issued guidance for 2021.
We now expect sales in the range of $1.015 billion to $1.05 billion compared to net sales of $1.12 billion in 2019.
For the full year, Lanier Apparel sales are expected to be approximately $20 million or $75 million lower than 2019, with no Lanier comparable sales planned in the fourth quarter.
Adjusted earnings per share for 2021 are expected to exceed 2019 levels, benefiting from meaningful gross margin expansion.
SG&A for the full year is expected to be comparable with 2019, with lower employment cost, occupancy cost and travel cost partially offset by increased performance-based incentive compensation and investments in marketing, including top-of-the-funnel expenditures.
We now expect adjusted earnings in a range of $4.85 per share to $5.15 per share compared to $4.32 per share in 2019.
We plan to continue investing in our growth opportunities, primarily in information technology initiatives such as the redesign and relaunch of the Lilly Pulitzer mobile app and additional development of digital marketing and customer service enhancements.
We also plan to open new retail stores and a new Marlin Bar at Town Square in Las Vegas, which will replace our full service restaurant in the center.
In 2021, capital expenditures for the full year is expected to be approximately $35 million comparable to 2019 levels. | sees fy 2021 gaap earnings per share $4.55 to $4.85.
q1 adjusted earnings per share $1.89.
sees fy adjusted earnings per share $4.85 to $5.15.
sees fy sales $1.015 billion to $1.05 billion.
q1 sales $266 million versus refinitiv ibes estimate of $233.1 million. |
Before I start, I would like to wish you and your families my personal best for your health and safety during these difficult times.
Our strategy at Oxford is a simple one, to own brands that make people happy, to delight our customers with memorable experiences and products they love.
During 2020 we have faced a myriad of new challenges.
Nonetheless every day we are finding ways to successfully execute this strategy.
In order to do this in the current environment, we've leaned heavily into our advanced digital capabilities.
The investments we made in our e-commerce channel over the past several years allowed us to capitalize on the accelerated shift to online spending.
Each of our brand, Tommy Bahama, Lilly Pulitzer and Southern Tide, positively contributed to the 52% year-over-year increase in e-commerce sales in the second quarter.
Lilly Pulitzer was the standout, up an extraordinary 142%.
The Lilly product collection this summer was very strong and in many ways offered exactly what the customer was looking for, fun, happy, easy-to-wear apparel.
The collection was highlighted by very effective digital marketing to which we shifted more resources in the quarter.
A non-comp flash sale in June also added to the success of Lilly's second quarter results.
Historically, the Lilly website offers sale items only five days a year.
To ensure excellent inventory control, an additional two-day flash sale was held in the second quarter, which generated $15 million from sales at a solid 40% margin.
Even absent flash sale, Lilly Pulitzer's e-commerce business grew 74% over last year.
We continue to invest in our digital platforms and evolve our digital capabilities, including upgrades and redesigns of websites, enhance search engine optimization and enterprise order management systems.
We believe the accelerated shift to online shopping brought on by the coronavirus health crisis is likely to continue.
While bricks and mortar will continue to be a key part of our distribution strategy, we believe our e-commerce channel will be stronger, bigger and a more critical component to our overall strategy coming out of this crisis.
In contrast to our e-commerce business, consumer traffic in bricks and mortar locations was understandably very challenged in the quarter, driving meaningful revenue decreases in our stores and restaurants.
In addition to operating under restricted hours and limited capacity, important markets which rely heavily on fly in tourists such as Hawaii, Las Vegas and New York City were pressured even further.
Despite the temporary headwinds we are currently experiencing, we believe our modest physical footprint holds true competitive advantages for us.
Across all of our brands, we have only 187 full-price stores and restaurants with most located in premium, off-mall locations such as lifestyle centers, iconic resorts and resort towns and prestigious street fronts.
Our beautiful stores and restaurants engage our customers and immerse them in our brands and function as an important guest acquisition tool for us.
While we look forward to the time when the store traffic improves, we are taking advantage of this opportunity to judiciously prune underperforming and non-brand enhancing locations.
By the end of 2020 we will have closed approximately 10 locations, including five, which closed in the first half.
At the same time, we are also making some exciting additions to the line-up this year.
We have already opened a Marlin Bar at Dania Pointe near Fort Lauderdale and converted two existing Tommy Bahama locations on Las Olas Boulevard in Fort Lauderdale and St. Johns Town Center in Jacksonville into Marlin Bars.
In the back half of the year, we plan to open Marlin Bars at Fashion Valley in San Diego and Lahaina on Maui.
During the pandemic our Marlin Bars with their casual bar and dining concept and outdoor seating have been a bright spot.
Every day we are serving existing customers and attracting new customers to the brand.
We strongly believe in the Marlin Bar strategy and are optimistic about the role the concept will play in our future growth strategies.
Southern Tide, which has just begun its foray into owned retail, now has two stores, both in Florida, with another opening in the Destin area this fall.
While it is difficult to fully assess performance under current conditions, the results that we have seen so far are encouraging.
Lilly Pulitzer has done an outstanding job leveraging their bricks and mortar locations by adding a concierge level of service for their customers with private appointments and curbside pickup.
Their talented store associates are also assisting with customer service calls, further blurring the line between our online and store channels.
Our wholesale channel, which we have been strategically pruning prior to the pandemic and represented approximately 30% of our revenue in 2019, has been significantly impacted by current conditions in the consumer marketplace and the weakness of many retailers going into the COVID crisis.
Our wholesale sales in the second quarter were less than half of what they were a year ago.
As part of our plan to focus on only the strongest partners in this channel of distribution, we meaningfully reduced our exposure to department stores, which made up only 11% of our total revenue last year.
We are expecting sales reductions in this channel to continue through the back half of the year and are addressing this trend by very carefully managing our inventory levels.
Across all channels, our sourcing, planning and merchandising teams have done an extraordinary job and our inventory levels are in very good shape as is the rest of our balance sheet.
Cash flow was quite strong in the second quarter as we made significant expense reductions related to employment across the enterprise and reductions in occupancy costs.
We ended the quarter with a strong liquidity position with over $30 million in net cash and over $250 million of availability under our credit facility.
In March, I outlined our priorities for this year as; one, the safety of our people and our customers; two, protecting the integrity of our brands; and three, preserving liquidity.
These have been the right things to focus on during this crisis.
But it is also important to remember that while dealing with the issues at hand, we haven't lost sight of our future and what a future we have at Oxford.
With the strength of our brands, the resilience of our people, an enviable balance sheet and the competitive advantage as mentioned earlier, we look forward to returning the Company to growth and resuming our long-term track record of generating increased value for our shareholders in 2021 and beyond.
As Tom discussed, our sales in the second quarter were significantly lower year-over-year.
The 36% decrease was driven by lower sales in our retail, restaurant and wholesale channels, partially offset by an increase in e-commerce.
Our gross margin was 55% in the quarter, down from 60% in the second quarter last year.
We were modestly more promotional across our brands, including the addition of successful Lilly Pulitzer flash sale and we took inventory markdowns across all operating groups.
We're pleased with the cost-reduction efforts taking across Oxford as SG&A decreased 19% or $28 million.
It's important to note that in the second quarter we incurred $10 million on an adjusted basis related to credit losses, including the Tailored Brands bankruptcy, inventory markdowns and fixed asset and operating lease impairments.
Our adjusted loss for the quarter, which included these charges, was $0.38 per share.
Managing inventory is a critical component of ensuring the health of our brands and we have inventory levels that are appropriate for our plans for the second half of the year.
We ended the quarter with inventory 3% lower than last year, despite the significant sales decline.
As Tom mentioned, preserving a high-level liquidity is essential during these uncertain times.
We have ample liquidity to meet our ongoing cash requirement, reflecting the strength of our balance sheet entering the pandemic, as well as the recent actions we have taken to mitigate the COVID-19 impact.
During March 2020, as a proactive measure to bolster cash, our cash position, we drew down on our $325 million asset-based revolving credit facility.
With strong cash flow, we ended the second quarter with $65 million of borrowings, $97 million of cash and unused availability of $257 million.
As we move into the back half of the year, we'll continue to face the challenges and uncertainties created by the pandemic.
In our third quarter, which is typically our smallest quarter of the year, we're expecting the year-over-year decline in bricks and mortar traffic to be slightly less pronounced than it was in the second quarter.
In addition, our Lilly Pulitzer flash sale, which has been a bright spot in the third quarter, is expected to be significantly smaller as some of the inventory that would have been available for the September event was pulled forward into the non-comp event in June.
As a result of the reduced traffic, a smaller flash sale and continued softness at wholesale, we expect year-over-year revenue to decline in the third quarter at a rate similar to that of the second quarter.
For the month of August, e-commerce continued with strong positive comps.
We continued to see year-over-year decreases in brick and mortar and wholesale with modest sequential improvement.
For the fourth quarter, while we don't anticipate a significant rebound in bricks and mortar traffic and wholesale, we believe we will move closer to break-even and expect to return to profitability in fiscal 2021.
Our dividend is an important component of our commitment to our shareholders.
Our Board has declared a quarterly dividend of $0.25 per share. | compname posts q2 adj. loss per share of $0.38.
q2 adjusted loss per share $0.38.
declares dividend of $0.25 per share.
oxford industries - consumer traffic in brick and mortar locations remained very challenging in quarter.
oxford industries -in q3 expecting year-over-year decline in bricks and mortar traffic to be slightly less pronounced than it was in q2.
expect q3 revenue to decline year over year at a rate similar to q2.
for q4, don't anticipate a significant rebound in brick and mortar traffic.
for q4 believe we will move closer to break-even and expect to return to profitability in fiscal 2021.
oxford industries - believes it has ample liquidity to satisfy ongoing cash requirements in fiscal 2020 & for foreseeable future.
not providing a financial outlook for fiscal 2020. |
Our disclosures about comparable sales include sales from our full-price stores and e-commerce sites, and excludes sales associated with outlet stores and e-commerce flash clearance sales.
Just two weeks ago, I would have wanted to spend a good amount of time on our fiscal 2019 results and share with you the details of our exciting plans for 2020.
With the recent events associated with the COVID-19 outbreak that no longer seems as relevant.
First and foremost, our thoughts are with the people who have been affected by the COVID-19 virus as well as everyone who is working to protect and serve impacted communities.
During these unprecedented times, our priority is and will continue to be the health and well-being of our employees, our customers and the communities in which we live and work.
To the extent it provides a framework for our current environment, I'm going to spend just a moment on our fiscal 2019 results and then spend the rest of our time on how we are responding to the current environment.
Our consolidated financial results for fiscal 2019 were fairly consistent with fiscal 2018.
However, looking at our performance in more detail shows that big strides were made in the right place.
Our direct businesses which are 70% of our sales were strong with positive comps in all quarters of the year by brand and on a consolidated basis.
Importantly, our e-commerce business led the charge with 10% year-over-year growth and 11% comp and now represents 23% of sales.
At the same time, our wholesale sales declined in 2019 as many of those retailers continued to face strategic challenges with sales to department stores representing only 11% of our consolidated revenue.
We would love to continue to partner with these retailers, but in some cases their business model is becoming more challenging and our strategy reflects that.
Our adjusted earnings of $4.32 per share, which were flat with fiscal 2018 included the negative impact of increased tariffs as well as an increase and our effective tax rate, importantly as we ended the fiscal year with very strong liquidity, including $53 million of cash and no borrowings under our $325 million asset-based credit facility which leads us to the topic of the day.
In our 78-year history, Oxford has weathered many crises and we are highly confident in our ability to weather the impact that COVID-19 outbreak is having on our business and the retail marketplace.
We are approaching our businesses with three top priorities; our people, our brands and our liquidity.
First, we have been and will continue to make the health and well-being of our employees, guests and communities in which we live and work our priority.
All of our North American stores and restaurants have been temporarily closed since March 17th and our Australian stores closed earlier this week.
All of our distribution centers are operational and we've implemented a comprehensive program of prudent measures in all of our distribution centers to keep our people safe.
Most of our associates in our corporate and brand offices are working remotely.
As we come out of this crisis, it is critical that any actions we take preserve our ability to have the team we need in place for the future.
Second, our lifeblood is the strength of our compelling brands and we will zealously protect them.
We have a tremendous portfolio led by Tommy Bahama, Lilly Pulitzer, Southern Tide as well as our collection of smaller brands like the Beaufort Bonnet Company and Duck Head.
We will not take actions to try to prop up our top line in the short run that could harm our brands over the long term.
Each of our brands engages their customers with exciting websites and memorable digital marketing programs.
Our technological capabilities will serve us well as we stay connected with our customers during this period of self-isolation.
Our third priority is liquidity.
Importantly, we entered fiscal 2020 with the inventory levels in very good shape.
We had a strong start through the middle of March.
However, as concerns about COVID-19 virus began to impact our business, sales have substantially deteriorated.
We are taking steps to mitigate the risk of the inventory increases by working with our suppliers to cancel delay or reduce our forward purchases.
We are also taking advantage of our strength in digital to remerchandise and remarket our seasonal offerings for this channel.
Finally, preserving our liquidity will be paramount over the near term and we are extremely well positioned on this front.
As I mentioned earlier, we entered 2020 with over $50 million in cash and an undrawn $325 million credit facility.
To further bolster our cash concession and maintain our high level of liquidity, we have drawn down $200 million from the facility.
On the expense side, we are pulling levers across most spending categories.
One of the largest is employment costs which were approximately $260 million in fiscal 2019.
As store and restaurant closures persist, we are using furloughs and layoffs as needed and warranted.
Where possible our plans will include preserving employee benefits at least for a period of time.
At all times, our priorities will be protecting the health of our employees and ensuring Oxford remains well-positioned for the future.
Today Tommy Bahama announced a furlough of most of its retail and restaurant team to begin on March 31st.
Through March 30th these employees will have received full pay and benefits.
During the month of April, Tommy Bahama will continue to cover the cost and benefits for furlough employees.
We are also focusing efforts, including partnering with our landlords as appropriate on mitigating our occupancy costs which were over $100 million last year.
Marketing expense, which was over $50 million last year is being addressed in phases.
Our reliance on digital marketing affords us opportunities to quickly modify our messaging and our spend as needed while continuing to stay engaged with our customers and generate traffic for our e-commerce websites.
Meanwhile reductions are being taken in other areas such as catalogs and photo shoots.
Also other variable costs such as credit card transaction fees, royalties on licensed brands, sales commissions, packaging in the supplies were approximately $50 million in fiscal 2019.
All capital expenditures are being reevaluated with many, including new store openings and remodels, as well as certain IT projects being deferred in this uncertain environment and our Board of Directors reduced our quarterly dividend from $0.37 a share to $0.25 per share.
We believe these measures, among others, position us well to successfully navigate through these unprecedented times.
Ultimately, it's the character and the quality of our people that will help us navigate these troubled times.
By focusing on our people, our brands and our liquidity, we are confident in our ability to continue our history of delivering long-term shareholder value. | oxford industries - during march 2020 has drawn down $200 million of $325 million asset-based revolving credit facility.
oxford industries - due to uncertainty created by covid-19 pandemic, is not providing financial outlook for fiscal 2020 at this time.
oxford industries - board declared quarterly cash dividend of $0.25 per share, a reduction from previous level of $0.37 per share. |
Pardon the interruption, Anne Shoemaker, I believe you are muted, please unmute your line.
Pardon the interruption, we seem to have lost the presenters.
Please stay on the line as we attempt to retrieve them.
Pardon the interruption, please stay on the line as we retrieve the presenters.
We apologize for the technical difficulties that we experienced, and we'd like to assure you that they are not COVID-related.
Like most, we are delighted to have 2020 behind us and are excited about the possibilities that lie ahead in 2021 and beyond.
2020, of course, presented enormous business challenges as we faced a myriad of shutdowns, restrictions, the need to change operational procedures to protect the health and safety of our people and customers, remote work and the list goes on and on.
In addition, we know that our people faced tremendous personal challenges, both known to us and not known to us.
These challenges included personal concerns about COVID among their family and friends, home-schooling children, concerns about their own or spouse's job and many others.
While we will never know the full extent of the personal challenges that our people were facing, we do know that they were substantial.
And we appreciate our people rising to the occasion and continuing to deliver positive upbeat brand messaging, products and experiences to our customers.
We are extremely grateful for all that our people did and were able to accomplish during the most challenging year that any of us remember.
I'd like to now briefly recap 2020 and some of the key lessons we learned that are informing our plans for 2021 and beyond.
You may recall that we were off to a terrific start in 2020 with outstanding results in February, and the first couple of weeks of March.
Then the pandemic hit.
And on March 17, we temporarily shut down all our stores nationwide.
At that point, we realized wonderful plans that we had for 2020 were simply not going to be achievable, and we pivoted toward our three defensive priorities, people, brands and liquidity.
With respect to people, we worked hard to follow all the applicable guidelines to protect the health and safety of our own people, our customers and the communities in which we work.
This was a significant effort and very difficult, but we were pleased to do our part to help battle the pandemic.
With respect to our brands, we were focused on preserving the integrity of our brands during the pandemic year.
Through an excellent inventory management and outside-the-box merchandising and planning, we were able to keep inventories in good shape.
Without an overhang of excess inventory, we were able to avoid the type of the excessive promotion that can damage brand integrity.
2020 also have reinforced how much our guests love the happy, optimistic messages, products and experiences that we provide.
Put simply, when we deliver happiness to our customers, we succeed.
Finally, on the liquidity front, we finished fiscal 2020 in a strong position with cash increasing to $66 million from $52 million at the end of fiscal 2019, and no borrowings outstanding at the end of either year.
The improvement in our liquidity position was attributable to $84 million of cash flow from operations, which funded capital expenditure investments in data, digital marketing and omni-channel technologies, share repurchases, dividends, and minority investments in smaller branded businesses.
Our strong cash flow and liquidity puts us in a excellent position to invest in our business and execute our strategy going forward.
Given the circumstances of 2020, Lilly Pulitzer once again delivered an outstanding year.
In the several years prior to 2020, we had invested in enhancing and developing Lilly's digital commerce and marketing capabilities.
In particular, we were focused on having a beautiful and easy-to-shop website, as well as being able to assimilate, analyze, and use customer data to better serve existing customers and target new customers.
As a result of these investments and the work the Lilly team has done to capitalize on them, we went into 2020 with a direct-to-consumer business that was balanced in revenue between e-commerce and bricks-and-motor retail.
In addition, we were acquiring new customers through digital means at about twice the rate that we were acquiring them through our bricks-and-mortar retail stores.
This set Lilly up very well when the world shifted to digital commerce during the pandemic.
Our digital prowess, combined with our happy brand message and comfortable casual cheerful products, drove terrific results.
Lilly finished the year with 63% growth in full price e-commerce, which helped drive a 12% operating margin.
As we progress through 2021 and more and more customers are increasingly feeling safe to come back into stores, we are delighted to be able to provide the outstanding Lilly Pulitzer experience.
This experience will be enhanced by many of the innovations that we delivered during 2020 that more tightly integrate the in-store and digital experiences.
In addition, we are continuing to invest in projects that will enhance our ability that integrate first, second and third-party data, providing insights to help us develop segments that better understand and target customers, and track engagement to inform future enhancements.
We are also moving forward with the projects that will enhance our customer service by providing more complete information on an automated basis.
These are just some of the many projects that are under way that will help us better serve our customers.
Tommy Bahama also has an upbeat positive brand message and easy-to-wear easy care products that customers love.
That said, going into 2020, Tommy Bahama was much more dependent on bricks and mortar for both revenue and new customer acquisition.
Tommy's pre-pandemic direct-to-consumer business was split roughly 75% stores outlets and restaurants, and 25% e-commerce.
In addition, it was acquiring customers in bricks and mortar at more than twice the rate that it was through digital.
While Tommy Bahama's e-commerce business grew significantly during 2020, and we believe there is substantial opportunity for additional growth, Tommy Bahama's reliance on bricks-and-mortar retail pre-pandemic for both revenue and customer acquisition meant that the challenges posed by the shut downs and other restrictions were more difficult to overcome in the short term.
As we move into 2021, Tommy is investing in the people, processes and systems that it needs to better compete and win with the consumer and the digital world.
These investments will help enhance our ability to build and better develop customer segments, and create customer journeys tailored to those segments, and to particular use occasions.
During 2020, our Tommy Bahama restaurant business was challenged by shutdowns and multiple operating restrictions implemented by state and local government.
Given these headwinds, we were very pleased with the results that we were able to achieve, particularly with our Marlin Bars, the fast casual concept that we initiated at Coconut Point, Florida, several years ago.
With our emphasis on outdoor dining cocktails and smaller, lighter food items, the Marlin Bar has resonated strongly with guests during the pandemic.
More importantly, leveraging its 25 years of expertise in food and beverage, we believe that the concept delivers our wonderful brand in a way that is highly relevant for today's guests.
To that end, we opened four Marlin Bars during fiscal 2020.
And with our recently opened location at Fashion Valley in San Diego, we now have seven in total.
We believe that the concept provides an excellent avenue for future growth and investment.
Not only can we do business on the food and beverage side, but the Marlin Bars drive outstanding results of the company and retail store.
In particular, the hospitality offered by our Marlin Bars creates an environment that is really helping to grow our women's business.
Amongst our three smaller brands, Southern Tide, The Beaufort Bonnet Company and Duck Head, The Beaufort Bonnet Company was a standout, delivering both top and bottom line growth in fiscal 2020 and operating margin expansion, finishing the year at almost $21 million in sales with two-thirds coming from e-commerce.
All three brands, like their larger siblings, are focused on enhancing their digital e-commerce and marketing skills in 2021 with projects that are similar to those at Tommy Bahama and Lilly Pulitzer, but scaled appropriately for the smaller businesses.
In addition, Southern Tide is continuing to learn from its three recently opened stores and refined its retail concept, while The Beaufort Bonnet Company's third Signature Store recently opened.
We are very excited about what lies ahead in 2021.
Since late February, we have seen a marked improvement in business in our bricks and mortar, particularly in warm weather, off-mall locations and, at the same time, our e-commerce business remains very strong.
Our operating groups did a good job navigating the pandemic and managing significant changes that impacted our business in 2020.
Fiscal 2020 sales decreased 33% to $749 million, with a meaningful shift in the composition of our revenue.
Our e-commerce business grew significantly with double-digit increases in each of our brands.
Some of this growth is certainly attributable to store closures.
But we also believe this growth represents a permanent shift in how our guest shops.
In fiscal 2020, e-commerce sales were $324 million, growing 24% and making up 43% of our total sales, compared to 23% in fiscal 2019.
On the bricks-and-mortar front, our retail stores and restaurant businesses were impacted by temporary closures and continue to operate under restrictions.
We're particularly hard hit in California and Hawaii, where we have a large presence with 34 stores and seven restaurants.
The good news is that as restrictions are being lifted, we are seeing improved traffic and sales.
In fiscal 2020, our adjusted gross margin was 55.1% compared to 57.6% in fiscal 2019.
In 2020, we offered deeper discounts in our off-price channels, took inventory markdown charges, and a higher proportion of our revenue was generated during promotional and clearance events.
At the same time, our gross margin benefited from higher IMUs as we shifted production out of China, and designed products where we can demand a higher retail selling price, such as our performance apparel.
As we move through fiscal 2020, we took actions to reduce SG&A.
In total, adjusted SG&A was $93 million lower than in fiscal 2019 and cost-saving measures included a $63 million reduction in employment costs, a $10 million reduction in occupancy costs, and reductions in variable and other expenses.
As we look to 2021, our business have continued to strengthen.
Our e-commerce business continues to expand, and traffic and conversion rates are improving in our stores, restaurants and Marlin Bars.
We have also seen a recent uptick in our wholesale businesses, and are encouraged by our forward order book.
With higher IMUs and the exit of the lower margin Lanier Apparel business, we expect gross margin expansion in the fiscal 2021.
We expect SG&A to be approximately 5% lower in fiscal 2021 than in fiscal 2019, as reductions in employment and variable expenses are partially offset with increased investments in marketing.
Putting together these dynamics, we expect to deliver a solid top and bottom line improvement in fiscal 2021.
First quarter sales are expected to increase from $160 million in fiscal 2020 to a range of $220 million to $240 million in fiscal 2021.
The full year sales increasing from $749 million in fiscal 2020, to a range of $940 million to $980 million in fiscal 2021.
Our fiscal 2021 effective tax rate for the first quarter is expected to be approximately 15%, and for the full year, is expected to be approximately 20%.
The tax rate for both the quarter and year are expected to benefit from certain discrete items.
On an adjusted basis, we returned to profitability in the fourth quarter of fiscal 2020, and expect adjusted earnings per share in a range of $0.95 to $1.15 in the first quarter of fiscal 2021, and $2.80 to $3.20 in the full fiscal year.
Our business is supported by our strong balance sheet.
Here are some highlights.
We ended fiscal 2020 with inventory in excellent shape.
Inventory decreased 19% to $124 million at the end of the fourth quarter, compared to $152 million in the prior year with double-digit percentage decreases in each operating group.
We achieved this reduction by taking a number of one-time actions in 2020, including reducing and canceling orders, and shifting goods into different selling seasons.
More importantly, our enterprise order management systems will allow us to do more business with lower inventory levels.
Our liquidity position is strong, with no debt and $66 million of cash at the end of fiscal 2020.
Capital expenditures in 2020 were $29 million, and we expect capital expenditures to be approximately $35 million in fiscal 2020.
Our Board of Directors increased our quarterly dividend payout from $0.25 per share to $0.37 per share, returning us to our pre-COVID level. | sees q1 sales $220 million to $240 million.
sees fy 2021 sales $940 million to $980 million. |
As always, I'm available by email or phone for any follow-up questions you may have.
Joining me for today's call are Roger Penske, our Chairman and CEO; Shelley Hulgrave, our Chief Financial Officer; and Tony Facioni, our Vice President and Corporate Controller.
We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA.
I direct you to our SEC filings, including our Form 10-K for additional discussion and factors that could cause results to differ materially.
I'm pleased to report all-time record third quarter results for PAG, in the best quarter in the history of the company.
Our total revenue increased 9% to $6.5 billion and income from continuing operations before taxes increased 53% to $476 million and income from continuing operations increased 44%, the $355 million and related earnings per share increased 45% to $4.46.
Although unit sales were impacted by supply shortages in both our retail automotive and commercial truck dealership operations, earnings growth was driven by a 39% increase in retail automotive, 135% increase in commercial trucks variable gross profit per unit retailed, also 4% increase in retail automotive service and parts gross profit and a 230 basis point reduction in SG&A to gross profit and $15 million in lower interest costs coupled with an increase in commercial truck dealership EBT of 106% and an 83% increase in earnings from Penske Transportation Solutions.
This demonstrated the continued strength of our investment and the benefit provided by our diversified business model.
Looking at our retail automotive operations on a same store basis for Q3 '21 versus Q3 '20, units declined 8%.
However, revenue increased 7%.
Gross profit increased 18% including 180 basis point increase in our gross margin.
Our variable gross profit increased 39%, to $5,769 per unit compared to $4,152 last year.
Looking at CarShop, we now operate 22 locations and expect to open one additional location by the end of the year.
We recently added locations in Leighton Buzzard and Wolverhampton in the UK and our Scottsdale location opened this week.
During the quarter, CarShop unit sales increased approximately 1% to 18,451 units, revenue improved 24% to $438 million and gross profit per unit increased 12% to $2,668.
Our current annualized run rate is approximately 70,000 to 75,000 units representing revenue of $1.6 billion and an EBT between $45 million and $50 million.
Turning to the retail commercial truck dealership businesses, our Premier Truck Group represented 11% of our total revenue in the third quarter.
Retail revenue increased approximately 26%, including a 6% on a same store basis.
On a same store basis, retail gross profit increased 40%, including a 10% increase in service and parts.
Earnings before taxe is increased 106% to $48 million and the return on sales was 6.7%.
The Class 8 commercial truck market remains very strong and during the third quarter, North American Class 8 net orders increased 28% and the backlog increased to 179% to 279,000 units, representing a 13-month supply.
Based on the current industry forecast, retail sales are expected to increase over the next two years and provide tailwinds to our commercial truck and truck leasing businesses.
Turning to Penske Transportation Solutions, we own 28.9% of PTS which provides us with equity income, cash distribution and cash tax savings.
PTS currently operates the fleet to over 350,000 vehicles.
For the nine months ended September 30th, PTS generated $8.2 billion in revenue and $949 million in income or a 12% return on sales.
In Q3, PTS generated $2.9 billion in revenue and income of $409 million or a 14% return on sales.
As a result, our equity earnings in Q3 increased 83% to $118 million.
Our full service leasing and contract sales were up 8%.
Our commercial rental revenue was up 51% and our utilization hit 88% with an additional 14,000 units on rent.
Our consumer rental is up 27% and our logistics revenue increased 27%.
Our gain on sale of used trucks is up 140%, as a strong freight environment and a supply shortage of new trucks is certainly driving a demand for used vehicles.
Looking at the PAG balance sheet and cash flow.
The balance sheet remains in great shape.
At September 30th, we have $119 million in cash and we ended the third quarter with over $2 billion in liquidity.
When looking at our capital allocation, we maintain a disciplined approach that focuses on opportunistic investments across both our retail automotive and commercial truck businesses, capital expenditures to support growth including our first half growth strategy, delivering a strong dividend to our shareholders, reducing that whenever possible and share repurchases.
In fact, year-to-date, we have repurchased 2.5 million shares representing approximately 3% of the total shares outstanding.
Year-to-date we generated $1.3 billion in cash flow from operation.
We invested $157 million in capital expenditures, including $18 million to acquire land for future CarShop expansion.
Net capex was $84 million.
At the end of September, our long-term debt was $1.4 billion.
We have repaid $922 million of long-term debt since the end of 2019.
In addition, we have either repaid or refinanced our senior subordinated debt to lower rates while lengthening the term to take advantage of current market conditions, which has contributed to a $34 million reduction in interest expense so far this year.
These initiatives have lowered our debt to total capitalization to 27%, compared to 37% at December 31st and 45.6% at the end of 2019.
Our leverage ratio fits at 0.9 times, an improvement from 2.9 times at the end of 2019.
At the end of September, our total inventory was $2.6 billion, retail, automotive, inventory is $2 billion, which is down $937 million from December last year.
We have a 19-day supply of new vehicles.
Our day's supply of premium is 22 and volume foreign is 9.
We expect the current supply challenges coupled with strong demand to keep our new vehicle supply at low but manageable levels.
Used vehicle inventory is in good shape with a 40-day supply.
Moving onto our digital initiatives.
We continue to grow, expand and enhance our digital footprint including the introduction of new tools and technologies to offer our customers a hybrid customer-driven shopping model.
Depending on their preferences, customers can purchase either fully online, in-store or any combination of the two.
We will also deliver vehicles directly to a location desired by our customers.
As part of our omnichannel customer experience, we strive to be a leader and online reputation including online customer reviews and star ratings on Google.
Looking at our other digital tools, we retailed 2,550 vehicles or 4.3% of our U.S. unit sales and 14% of our customers use preferred purchase and their buying journey.
Using the Sytner by-on tool in the UK, a customer reserve a car for 99 pounds, apply for financing, receive insta credit approval, obtain a guarantee price and pay online.
During the quarter, we sold 3,700 units using this platform.
When you combine all of our digital tools, including new technology available at CarShop, a customer may perform any part of the transaction online or may use these tools to shorten or visit to the dealership.
Looking at corporate development, in addition to the 220 million of year-to-date share repurchases, we completed acquisitions totaling $600 million in annualized revenue through September 30th.
In October, we acquired the remaining 51% of our Japanese-based joint venture of premium luxury automotive brands, which will add $250 million in consolidated annual revenue and we have another $300 million in annualized revenue of deals in our pipeline that we expect to close either in the fourth quarter or early in 2022.
We also opened up a new Porsche dealership in Washington D.C. earlier this year and we have three other open points under construction.
We increased our CarShop locations by five and expect to open one additional location by the end of the year, bringing our total to 23 locations.
We remain on track with CarShop to retail 150,000 in unit sales and generate $2.5 billion to $3 billion in total revenue and our $100 million of EBT by the end of 2023.
As we look across our diverse portfolio of businesses, we continue to target organic and acquisition growth, as well as further operating efficiencies to continue to grow and expand our businesses.
Before I close, I'd like to congratulate the 35 U.S. dealerships that were named by automotive news to the 100 best dealerships that work for listing.
We had more dealerships on the list than any other automotive retailer, including six of the top 10, 12 of the top 25 in the 2021 ranking.
Our Audi of charge stores ranked number one in the country.
Additionally, seven PAG dealerships were ranked in the top 10 nationally, including the top three places for their efforts to promote diversity, equity and inclusion.
We're honored by these accomplishments and are extremely proud of our team for their commitment to drive the passion and the efforts in working together to be one of the very best.
I'm also pleased to announce the Penske Automotive Group was ranked first in the listing of U.S. public dealerships teams in the 2021 automotive reputation report published by reputation.com.
In closing, our business remains strong and our record performance demonstrates the benefit of our diversification. | penske automotive group q1 earnings per share $4.46.
qtrly total revenue increased 8.8% to $6.5 billion.
qtrly total revenue increased 8.8% to $6.5 billion from $6.0 billion.
q1 earnings per share $4.46. |
Joining me in the call today are Dushyant Sharma, our founder and CEO, and Matt Parson, our CFO.
In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, and adjusted EBITDA, our non-GAAP financial measures.
These non-GAAP financial measures, which we believe are useful on Paymentus' performance and liquidity, should be considered in addition to, not as a substitute for, or an isolation from, GAAP results.
I'm very excited, and it's my pleasure to talk to you for our first earnings call as a public company.
I'm also grateful for our clients and partners who put their faith in us every single day.
We are very proud of you.
I'm very pleased with our second-quarter results.
The progress we have made on IPN, including the signing of definitive agreements to acquire Payveris and Finovera, that puts us at the heart of the bill payment ecosystem for financial institutions of all sizes.
Before covering our second-quarter highlights and talking more about each of these exciting items, I would like to provide a summary of our business for those who aren't familiar with Paymentus.
I founded Paymentus to power the next-generation ecosystem for electronic payments by simplifying them for both consumers and dealers, and with an eye to do the same for financial institutions and consumer platforms.
We took a very deliberate approach through strategy over the years in three different horizons.
During the first horizon, we built an agent platform and targeted the middle market billers with it.
In the second horizon, we moved up market and expanded the functionality of our product.
With the recent introduction of our Instant Payments Network, we entered our third horizon, which allows us to put all the pieces in place to create a modern payment ecosystem.
The IPN leverages our biller network and extends it outside of those billers to financial institutions, retailers, and technology companies that can access Paymentus payments for their customers.
In essence, IPN creates the paradigm shift in the bill payment industry and creates a multi-sided network effect for our business.
Our objective is to be the central modern-age bill payment ecosystem for the entire payments industry, including banks, credit unions, and other financial institutions.
To that effect, we have taken a major step toward the strengthening of our IPN presence in the financial institutions market.
This week, as we are pleased to announce, that we have signed a definitive agreement to acquire Payveris.
Payveris is a modern money movement platform for banks and credit unions.
What that means is that any customer of a bank on Payveris platform can pay any bills from the bank, including the largest billers to smallest businesses like their lawyers, accountants, send money to anyone in the U.S., using their person-to-person transfer capabilities, and move money between their own accounts, bank accounts, across multiple financial institutions using their account-to-account transfer capabilities.
Payveris serves over 265 national institutions.
What this means to Payveris -- this transaction means Payveris that it provides a unique offering for financial institutions when combined with Paymentus' unique Instant Payment Network, and therefore accelerate payment -- Payveris' customer acquisition strategy.
And what that means to Paymentus is that this allows us to accelerate our IPN strategy for banks by having nearly 300 financial institutions join our network.
In addition to that opportunity, there is another equally exciting opportunity where each of these nearly 300 FIs can be direct billers on our platform, which will add to our existing base of direct billers.
In addition to agreeing to acquire Payveris, we have also signed an agreement to acquire Finovera, a technology provider that aggregates consumers' bills, including faster statements in one place.
This is a platform that is already being utilized by Payveris and many of the financial institutions.
We believe the combination of Finovera and Payveris with our IPN, was already favor offering for financial institutions as we provide a robust coverage of billers, whether they are currently utilizing Paymentus platform or not.
This will continue to allow our sales team to prioritize biller outreach for direct onboarding onto our platform based on the bill volumes.
We anticipate that both of these acquisitions will close by end of Q3 and have been considered in the outlook that Matt will share shortly.
On our core horizon one horizon two strategies, we continue to execute very successfully.
Our second-quarter performance was strong.
Revenue grew 30% over the same period in 2020 to $93.5 million.
Q2 contribution profit grew 25% to $37.4 million.
Adjusted gross profit in the quarter was $30.1 million, which was a 24% increase over Q2 of last year.
And the transaction processed grew over 39% year over year.
Matt will provide more color on the financials shortly.
We continue to execute on all three strategic horizons I described earlier.
From the first horizon, small to medium billers continue to be a focus of ours, and we completed a multitude of implementations in the quarter.
As an example, we implemented a midsized public utility in Arizona, resulting in an improved customer experience and access to new payment methods.
The utility was very pleased with our product and implementation process and have offered us to implement other departments in the field.
In the second quarter, we also continue to build on our more than 350 integrations divisions by adding new partners, including completing an integration with a leading provider of software to midsized telecommunication companies.
Going forward, Paymentus will be the preferred provider of payments to their clients.
In the second horizon, which targets larger, more diverse billers, we implemented several new billers, including a large auto finance company.
And we also continue to make progress in our partnership with UPS, adding them to our platform in the U.S. this quarter.
is an addition to other countries around the world already live for UPS on our platform.
We are excited about this partnership and how we look UPS and Paymentus can co-create a leading experience for business clients.
Beyond the implementations, we also have the opportunity to expand at existing clients.
This growth occurs as clients migrate additional divisions to acquire companies and convert them to us, all by adding new payment types and features such as AutoPay.
Beyond new implementations, we also have the opportunity to expand at existing clients.
Two examples of expansion are a large utility with over 2 million customers, which added advanced payment methods like PayPal to provide their customers with more choices.
And a software utility which moved its AutoPay payments to Paymentus to improve its customers' experience by combining one-time and recurring payments under Paymentus' platform.
In addition to new sales and the same-store sales expansion, we completed several key renewals, including extending our relationship with the leading provider of insurance to the jewelry industry.
Through the addition of IPN, we ended our third horizon with a focus of building out our partner network.
IPN expands our reach beyond billers to FIs, technology partners, and retailers who originate transactions that we process.
PayPal, one of our founding IPN partners, continues to focus on introducing enhanced bill payment functionality across its platform.
We are also really excited about IPN across -- other IPN partners, and especially, our extended reach to nearly 300 financial institutions with the Payveris transaction.
In summary, I'm very pleased with the financial results of this quarter and the progress we have made through the acquisition of Payveris and Finovera to move closer to our original long-term vision: to be that ecosystem for consumers, dealers, financial institutions and partners.
You all are the reason for the strong Q2 financial results that I have the privilege of sharing today.
As a quick reminder, today's discussion includes non-GAAP financial measures.
Before I talk about the second quarter's financial results and our outlook for 2021, let me remind you about our business model.
As Dushyant [Audio gap] we get paid when our clients get paid, so the key indicator to measure the performance of the business is the number of transactions processed.
For the vast majority of our clients, transaction fees are the same regardless of the payment amount.
For example, we would receive a $1.50 for a utility payment of $50 and the same $1.50 for a payment of $275.
Interchange fees may vary by bill or industry and type of payment among other things, but in most cases, we have caps on interchange and payment amounts to help us manage the costs.
These transaction fees can be paid by the biller, the consumer, or a combination of both, and we generally do not charge for implementation or customization fees for our platform, so professional services revenue is minimal.
Now turning to the quarter.
We processed $64.2 million transactions, representing a year-over-year increase of approximately 39%.
This transaction growth drove a 30.3% increase in revenue over the same period in 2020, which resulted in revenue of $93.5 million.
As we've explained before, as we see larger -- as we sign larger and larger billers, we anticipate the mix shift of fees will continue.
Contribution profit for Q2 was $37.4 million, a 24% increase over the same period last year.
Adjusted gross profit for the second quarter was $30.1 million and this was an increase of 24% from Q2 of 2020.
Contribution profit growth and adjusted profit growth can vary more than revenue growth due to the change in interchange cost.
As a reminder, there are certain external factors that impact interchange, such as the average payment amount in a particular month or quarter.
For example, hot summers or cold winters may increase utility bills, which increases our interchange cost.
And we also have property tax payments that see large amounts twice per year.
Adjusted EBITDA was $8.3 million, which represents a 22.2% margin on contribution profit.
The 5% decline in adjusted EBITDA from the second quarter of 2020 is due to cost increases related to being a public company, as well as increased investments in R&D and sales and marketing.
The adjusted EBITDA margin for Q2 was higher than anticipated as a result of the higher contribution profit than anticipated for Q2.
And the fact that travel and concerts did not start back as soon as we thought, as well as the ongoing tightness in the U.S. labor market making hiring more challenging than expected.
Operating expenses rose $7.8 million to $24.8 million for Q2 of 2021.
R&D expense increased $1.9 million or 32.4% as we continue to invest in new features and functions in our payments platform and we build out IP with additional partners.
Over half of the operating expense increase, or $4 million, was in G&A and was driven by public company cost, as well as continuing to build out the public company infrastructure.
Sales and marketing increased $1.9 million or 24.5% as we ramped up selling activity relative to the same time last year in the middle of the COVID uncertainty.
Our GAAP net income and earnings per share for Q2 was slightly lower than we anticipated due to one-time discrete tax items that arose as a result of going public.
These two one-time tax items totaled approximately $2 million or about $1 million each.
As a result of these two discreet one-time items that hit GAAP tax expense in our Q2, our effective tax rate for the quarter was approximately 86%.
Excluding these two discreet one-time tax items, our net income for the quarter would have been $2.6 million.
As of June 30, 2021, we had $266.4 million of cash and cash equivalent on our balance sheet.
Now, from our Q2 results, let's turn to our 2021 full-year outlook.
Inclusive of our Payveris and Finovera acquisitions, our revenue outlook for 2021 is in the range of $378 million to $382 million, which represents growth between 25% and 27% year over year.
For contribution profit, our full-year outlook is between $152 million and $154 million, or approximately 26% to 28% growth.
For both revenue and contribution profit, we expect Q4 to see almost all the benefit due a full quarter of Payveris.
As you may recall, we typically see the highest average payment amounts of the year in Q3 as a result of the summer heat, combined with some semi-annual per-year tax payments.
In fact, in Q3 of 2020, we actually saw a slight sequential reduction in contribution profit.
While we do not anticipate a sequential reduction this year, we do anticipate similar factors that will influence our Q3 results.
For full-year 2021, we also see adjust EBITDA in the range of $25 million to $28 million, with an adjusted EBITDA margin of 16.5% to 18.5% on contribution profit.
labor market, making hiring more challenging than in the past several quarters.
With respect to taxes, we do not anticipate any further impacts on the one-time discrete items or any other one-time discrete items this year.
However, as a result of the items mentioned for Q2, we expect that our full-year effective tax rate for 2021 will be approximately 47%.
Federal tax laws or rates.
And this is due to fact that a large majority of our revenue is in the U.S., so it represents the U.S. federal statutory rate combined with various state income taxes.
Look, overall, we are very pleased with the financial and strategic progress we have made this quarter, especially in the expansion of our IPN ecosystem deeper into the financial institutions market.
We continue to execute across our three-horizon strategy and drive organic growth.
With Payveris and Finovera, we'll continue to accelerate the breadth of our IPN offering.
We'll now open the call to questions. | sees fy revenue $378 million to $382 million.
q2 revenue $93.5 million versus refinitiv ibes estimate of $89 million. |
Joining me in the call today are Dushyant Sharma, our founder and CEO; and Matt Parson, our CFO.
In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, adjusted EBITDA and adjusted EBITDA margins our non-GAAP financial measures.
These non-GAAP financial measures, which we believe are useful in measuring Paymentus performance and liquidity, should be considered in addition to, not as a substitute for, or an isolation, from GAAP results.
All great things are happening at Paymentus.
A strong financial performance with strong implementations and strong sales.
Our contribution profit grew 37% year over year to $40.7 million in the quarter.
This is a significant acceleration from Q3 of 2020 and from our last quarter.
And we believe this is just the beginning of the network effect that we have been talking about.
We have signed over 140 billers so far through Q3 and had an exceptionally strong quarter for sales, driven by a large enterprise business deal.
This deal alone could add in excess of 400 basis points to our current revenue run rate when fully implemented.
The strong sales performance is a good example of the halo effect from the IPN ecosystem we have built.
We processed 70.6 million transactions in the quarter, an increase of 45% year over year, giving us an annualized run rate of over 280 million transactions.
This amount remains less than 2% of the overall domestic bill payment market of over 15 billion transactions.
In five of the six verticals that we currently focus on, utilities, insurance, financial services, telecommunications, government, and healthcare, we have less than 2% of the billers as clients, with utilities being the only one over 2%.
Overall, we believe the sales opportunity is significant and the runway is long.
In addition to the runway being long with respect to the ongoing addition of new clients, one of the key strengths of our business is the length of relationships that we enjoy with our existing clients and partners.
They trust us with long-term contracts, generally three to five years, though sometimes longer.
This gives us a significant ability to build and creatively execute on our strategy to grow our business into a big and pervasive platform and to expand our TAM, which also gives us a great deal of confidence regarding our growth prospects for 2022, 2023, and beyond, assuming, of course, that we continue to execute on our service and the payment volumes continue based on the historical patterns in the large market, we recently expanded our relationship with J.P. Morgan Chase.
We'll work closely with the bank on sales of digital payment to J.P. Morgan Chase corporate and commercial clients.
There will also be a revenue stream from some existing build pay clients at J.P. Morgan, which we will recognize as those clients go live on our platform.
This is a very exciting relationship for us, and we have already seen the benefits in our sales and pipeline growth as billers have recognized the power of our combined resources.
Additionally, in the mid-market, we have renewed our relationship with Harris Computer, a key partner for us.
Harris is a leading provider of CIS systems to government and utilities, and we are optimistic about continuing to grow together.
With the help of our partners, our network ecosystem, and our extraordinary sales team, we just had a very strong sales quarter, which continues our momentum from earlier in the year.
We completed some sizable implementations in the third quarter, and fourth quarter looks as strong as well, providing strong growth going into 2022.
For example, we brought one of the largest water utilities in the US live in Q3, serving well over 1 million customers, both residential and commercial.
They chose Paymentus to replace a legacy provider because of our platform's functionality, real-time integration with their ERP system, and our IPN ecosystem.
As anticipated, we closed our acquisitions of Payveris and Finovera in the third quarter and continued to make progress integrating them.
Previously, Paymentus was not capturing financial services initiative transactions, but those payments now become part of our instant payment network following the Payveris acquisition.
Further, a significant percentage of the Payveris transactions are sent to non-payment of billers.
These billers then become targets of our sales team.
We enjoy the same phenomenon across other IP partners as well.
The implication is that we are no longer limited to only processing transactions for our 1,400-plus direct billers.
Our reach through our IPN ecosystem massively extends our distribution and shows the power of IPN to expand our obtainable market.
Just to make this point clear, consumers can pay bills to nonpayment distillers through technology, retail, and banking partners.
We have created a modern platform and an ecosystem that allows any user, any biller and any partner to engage like never before possible and extend the flexibility of the billers ecosystem enjoyed through our platform to all these apps in our ecosystem.
This results in a unique value proposition for all three and the flagyl effect.
We are having a lot of fun leveraging the foundation of the ecosystem we have built by attracting the type of clients and partners we are adding.
As we have built an ecosystem, our four objectives remain: No.
1, find and implement as many billers as possible; No.
2, constantly grow biller payment volume through digital adoption and usage; No.
3, expand the reach of IPN to process every payment from every partner as possible; No.
4, generate a long lead list of all billers that are outside of our biller-direct platform, but processed through our IPN network, and therefore, add them to our sales pipeline.
Finally, some of the seeds we have been planting are bringing to sprout.
Our B2B payment volume is over $1 billion now on a run rate basis.
And similarly, our IPN network payment volume is over $1 billion as well.
The reason I mentioned this is to provide proof points that both products are contributing to our financial performance and growth acceleration.
We are excited about the momentum and expect to continue to expand on it.
It's still early days, but a very positive sign.
With that, I'll pass the call over to Matt.
As a quick reminder, today's discussion includes non-GAAP financial measures.
In the third quarter, we processed 70.6 million transactions, representing a year-over-year increase of 44.9%.
As we add new products such as B2B, account-to-account and person-to-person, our transactions [Inaudible] inclusive of these, so the number now goes beyond pure bill payments to include other money movement transactions.
This transaction growth drove a 30.3% increase in revenue over the same period in 2020, which resulted in revenue of $101.7 million.
I'd just like to take a moment to highlight that this is the first time the company has crossed the $100 million mark for a quarter, which is a great achievement and milestone for us.
We, as a management team of Paymentus, cannot wait for this to become our monthly revenue amount.
Contribution profit for Q3 was $40.7 million, a 37.1% increase over the same period last year.
Note that the combined impact of Payveris and Finovera was less than $1 million on both revenue and contribution profit.
Growth for the quarter was stronger than anticipated due to the higher-than-expected volumes from certain large billers that went live in Q2 and Q3.
The average amount of payment made on our platform was lower in Q3 of 2021 than it was in Q3 of 2020.
Some early tailwinds from the J.P. Morgan partnership and a small amount of revenue from the acquired companies.
Adjusted gross profit for the third quarter was $32.6 million, which is an increase of 38.3% from Q3 of 2020.
Adjusted EBITDA was $5.5 million, which represents a 13.6% adjusted EBITDA margin.
The 8.6% decline in adjusted EBITDA from the second quarter of 2021 is due to the cost increases related to being a public company, increased investments in R&D and sales and marketing and some small dilutive impact from the acquisitions.
Operating expenses rose $10.9 million to $30 million for Q3 of 2021 from the same period last year.
Overall, the increase in operating expenses from last year was driven by a variety of factors, including a corresponding increase in headcount as we continue to innovate with and for our customers, IPN partners and other partners, and we continue to invest in sales and marketing.
We also experienced significant increases in G&A expense due to legal expenses and intangibles amortization related to the acquisitions, multifold increases in the cost of corporate insurance and continuing investment in public company infrastructure.
And then, lastly, travel and marketing events did start to pick back up in Q3.
Specifically, R&D expense increased $2.6 million or 41.7% from the third quarter in 2020 as we continue innovating with and for our customers and partners.
This is a key point of differentiation for Paymentus, and we will continue to invest in it going forward.
Also, a portion of the intangible amortization went into R&D.
Sales and marketing increased $3.3 million or 41.4% as we continue to add headcount to accelerate the acquisition of new customers and partners, given the significant market opportunity and strong market position that we have and also a portion of the intangible amortization winning this sales and marketing as well.
Our GAAP net income was $0.4 million, and GAAP earnings per share for Q3 was 0.
Non-GAAP net income was $1.4 million.
Non-GAAP earnings per share was $0.01 for the quarter.
As expected, we closed the acquisitions of Payveris and Finovera and completed the preliminary purchase accounting for those acquisitions.
As a result of the valuation performed, we recorded $53 million of identifiable intangible assets.
Those intangible assets had useful lives of two to eight years.
And so, the related amortization decreased our GAAP net income by $933,000 and our GAAP earnings per share by $0.01 in Q3, and it will have a meaningful impact on our GAAP net income and earnings per share going forward.
However, because it's amortization, it will not impact our adjusted EBITDA.
As of September 30, 2021, we had $177.5 million of cash and cash equivalents on our balance sheet.
The cash decreased primarily due to the acquisitions and our share count on that date was 119.96 million shares.
Now from our Q3 results, let's turn to our 2021 full year outlook.
We are quite pleased to be able to raise our full year outlook for revenue and contribution profit, as well as reaffirm our full year outlook for adjusted EBITDA to be at the top end of the previously provided range.
Our revenue outlook for 2021 is in the range of $391 million to $393 million, which represents growth between 29.5% and 30.5% year over year.
For contribution profit, our full year outlook is between $156 million and $158 million or approximately 30% to 31%.
It's worth highlighting that our guidance now for revenue and contribution profit growth is at 30% for the full year.
For full year 2021, we also see adjusted EBITDA in the range of $26.5 million to $28 million with an adjusted EBITDA margin of approximately 17% to 18%.
We expect that our full year effective tax rate will be approximately 55%, and this is due to the discrete onetime tax items that were discussed in Q2.
On a normalized basis going forward, we would anticipate that our effective tax rate would be approximately 30%, assuming no changes to current US federal tax laws or rates.
We are performing really well and feel very good about where we are in the final few weeks of 2021 and for 2022 and beyond.
Despite processing nearly $50 billion of processing volume in the past 12 months, I still think of it as a start-up company that truly understands the overall fintech landscape and the opportunities therein.
I believe we already have all of the pieces needed to be successful and continue to deliver growth results now and in the future.
We are very excited about where we are headed because of five fundamental factors.
1, a team of industry leaders.
2, a strong, loyal and growing customer base and therefore, a line of sight to revenues in outer years.
3, a great ecosystem, leading to more biller sales and consumer adoption.
4, multiple vectors of monetization.
5, a multitrillion-dollar addressable market in the US alone.
We'll now open the line to questions. | q3 non-gaap earnings per share $0.01.
sees fy revenue $391 million to $393 million.
q3 revenue rose 30.3 percent to $101.7 million.
compname says expects fy adjusted ebitda to be between $26.5 million and $28 million. |
These are important to review and contemplate.
As everyone on the call today is well aware, business environment uncertainty remains heightened due to COVID-19 and continues to have numerous potential impacts.
This means the results could change at any time, and the forecasted impact of risk considerations is the best estimate based on the information available as of today's date.
Additional information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company 10-K.
I'll now hand it over to our CEO, Ron Lombardi.
Let's begin on slide five.
We are very pleased with our record start to the year.
Our proven business strategy emphasizing brand building paid off meaningfully in Q1, and the strong results we'll discuss in detail are a key factor enabling us to raise our fiscal year guidance.
The fast start to our fiscal '22 was driven by two primary factors.
First, and most importantly, our base business continues to perform well with strong 5% growth across the base portfolio.
This result was driven by solid consumption and share gains across the portfolio, a continuation of the trends we have seen for a while now.
Second, we experienced a dramatic increase in sales for brands benefiting from travel-related activity as consumers shifted habits with increased vaccination rates.
We estimate this accounted for approximately $25 million of the Q1 sales increase over the prior year.
I'll discuss the change in consumer habits in greater detail on the next slide.
Our time-tested brand-building strategy and the reacceleration of certain categories and channels resulted in our highest level of sales ever when excluding our divested Household Cleaning business.
Meanwhile, our financial profile has remained solid throughout the change in consumer purchasing patterns, and we generated record earnings per share of $1.14 and free cash flow of approximately $68 million in Q1.
Our stable and strong cash flow profile continues to enable a disciplined capital allocation strategy.
Throughout fiscal '21, this meant focusing on debt reduction combined with share repurchases.
In Q1, we announced the acquisition of Akorn Consumer Health and its TheraTears brand, which closed on July 1.
We believe this acquisition is a great strategic use of capital, which we'll share more detail on shortly.
So in summary, we delivered excellent Q1 results underpinned by our long-term strategy and further fueled by a rebound in certain COVID-impacted categories and channels.
Let's turn to page six and review some of the changing consumer habits resulting from the pandemic.
Throughout all of fiscal '21, we noted dramatic ways in which consumer habits changed as a result of the COVID-19 pandemic and the resulting effects on our portfolio.
We observed less consumer travel and more focus on hygiene as consumers stayed home and wear masks.
This meant a significant headwind for many of our brands, including Dramamine in motion sickness, Chloraseptic and Luden's in cough/cold, Hydralyte in rehydration and Nix in head lice.
Combined, these brands represent about 20% of our revenues.
Back in May, when we provided fiscal '22 guidance, we anticipated this portion of our portfolio would be largely flat as we expected consumers would take time to move away from the habits formed over the previous year.
While this is still the case in certain categories, this assumption proved conservative in others.
To start, we saw a dramatic rebound in travel-related activity.
This drove a meaningful recovery in Dramamine along with a recovery in our Australian Hydralyte business.
The recovery in travel activity also drove increases in convenience store consumption and the distributor inventory in this channel to support the increased takeaway at shelf.
This benefited brands like Dramamine as well as Clear Eyes with it's Pocket Pal on-the-go offering.
In addition, drug retailer traffic also increased owing to vaccination visits, leading to a strong consumption trends driven by our broad distribution and market share in this channel.
As these changes to consumer habits continue to evolve, our playbook remains the same and our nimble business strategy is a strength.
We will invest opportunistically across our portfolio to drive long-term brand building.
This strategy paid off again in Q1.
On the right, you see Dramamine with Q1 sales compared to prior years.
As consumer travel habits begin to accelerate, we leaned into our leading market position and marketing playbook.
We reactivated time-tested marketing strategies for the brand, resulting in both market share wins and the resumption of sales growth as consumers returned to the category.
While the timing of a full COVID recovery remains difficult to predict, our focus on investing behind our brands leaves us well positioned for future variability and the eventual return to more normalized trends.
As highlighted earlier, we closed on the announced Akorn Consumer Health acquisition on July 1.
As you can see on the left side of the page, the portfolio's revenues are concentrated in the TheraTears brand.
TheraTears, created in the '90s, has a proven history in the eye care category and will further enhance our efforts in this space.
The addition will be complementary to our existing eye care presence by expanding into the growing dry eye segment of eye care.
TheraTears is well positioned with the mild and episodic dry eye consumer with a long track record of steady market share gains and revenue growth above the category.
The portfolio complements Prestige's operating model nicely with outsourced manufacturing and is widely distributed across retail channels in the U.S., similar to our existing business.
Lastly, the Akorn portfolio has a solid financial profile of sales growth and margins consistent with Prestige's long-term targets.
So in summary, these attributes are a great match against our well-defined M&A criteria that evaluates brand opportunity, the business' fit with the Prestige operating model and the financial returns that align with hurdle rates that we measure against.
Strategically, TheraTears fits with our disciplined M&A criteria nicely.
But furthermore, as shown on this slide, it is a great fit alongside our Clear Eyes brand.
The transaction enhances our market-leading scale in eye care.
When combined with our existing eye care business, we now have a $100 million-plus franchise that addresses a range of consumer ailments across the $1 billion category.
Clear Eyes is time-tested and proven as a leader in redness relief and has a long heritage with consumers.
For a consumer, it stands for redness solution.
Clear Eyes remains a leader in the category with long-term sales growth and is a brand that remains as relevant as ever to consumers seeking redness relief.
TheraTears share similar attributes but is focused on a different consumer symptom.
It's established with consumers as a leader in dry eye solutions, particularly for those episodic users in dry eye relief.
For a consumer, it stands for tears and soothing eye relief.
As shown on the right, the two brands in totality represent a wide spectrum of consumer solutions in eye care.
This broad offering will continue to be supported by our brand-building strategy.
And with this comprehensive solution in eye care, we are well positioned for continued success.
Clear Eyes is a great brand success story and one that gives us an advantaged start as experts in the eye care category.
A brand we've owned since our IPO over 15 years ago, Clear Eyes is an example of how we think about long-term brand-building.
Its success has incorporated a number of marketing factors over time.
When we went public, Clear Eyes had about three SKUs with a very narrow focus.
Today, we have over 11 different solutions for consumers solving eye redness.
The most recent example shown here is Clear Eye Sensitive, which is specifically formulated for sensitive eyes.
These are constantly evolving, and most importantly, we emphasize a bottom-up approach to enable effective tactics at a given point in time.
For example, brand messaging evolved during the pandemic to emphasize the concept of at-home usage and used time-tested digital tactics, which helped grow share in the year.
We know from consumer insights that consumers respond to celebrity and influencer marketing in eye care.
As a result, we've had many long-term successful initiatives from spokespersons like Ben Stein and Vanessa Williams to more recent social media influencers.
The result of these efforts is we have broad distribution across retail channels with partners who recognize the value of Clear Eyes brand and the investment efforts we just discussed.
We continue to work with all of our retail partners to optimize their eye care assortment and drive long-term category growth.
The result is clear: our playbook continues to work, and we continue to win share to date in fiscal '22.
We look forward to applying this proven knowledge base to the TheraTears brand and drive continued long-term success across our eye care franchise.
With that, I'll turn it to Chris, who will walk through Q1 financials.
Q1 revenue of $269.2 million increased 17.3% and 15.6% on an organic basis versus the prior year, the latter excluding the effect of foreign currency.
As a reminder, Q1 faced a unique comparison in the year prior, where we experienced lower sales as consumers depleted items previously purchased in March 2020 as a result of COVID-19.
North America revenues were up about 15%.
Nearly all product categories grew with the largest increases in GI and eye and ear care.
As Ron discussed earlier, a return toward more normalized travel trends helped drive a significant lift for certain brands versus a year ago, namely, Dramamine in GI and Clear Eyes in eye and ear care.
International OTC increased approximately 30% in Q1 after excluding the effects of foreign currency.
The increase was attributable to a more favorable comparison in the prior year as well as an overall uptick of Hydralyte sales for more normalized consumer trends around illness and activities in Australia.
EBITDA increased in Q1, approximately 13% while EBITDA margin remained consistent with our long-term expectations in the mid-30s.
Diluted earnings per share for the quarter was a record $1.14 per share, up over 30% versus the prior year driven by both the higher sales discussed and lower interest expense.
Q1 fiscal '22 revenues increased 17% versus the prior year.
Our strong and diverse portfolio experienced approximately 5% baseline growth driven by the favorable year ago comparison and our long-term brand-building efforts.
In addition, we experienced a sharp rebound in certain COVID-impacted categories, adding an estimated $25 million to our Q1 revenue performance.
Of this, we believe roughly half of this relates to timing while the other half resulted from increased consumption in the current quarter.
We also continued to experience year-over-year double-digit consumption growth in the e-commerce channel, further building off the sharply higher online purchasing shift of the prior year.
Total company gross margin of 59.1% in the first quarter increased 70 basis points versus last year's gross margin of 58.4%.
This strength was driven by higher-than-expected sales performance as well as product mix.
We continue to anticipate a gross margin of about 58% for fiscal '22.
Advertising and marketing came in at 14.7% for the first fiscal quarter.
Following the abnormally low rate of spend in Q1 of last year due to COVID-19 shelter-in-place restrictions, A&M returned to normalized levels of spend of approximately 14% to 16%.
For fiscal '22, we still anticipate an approximate 15% A&M rate as a percentage of sales.
And for Q2, we anticipate A&M of closer to 14%.
G&A expenses were just over 8% of sales in Q1.
For the full year fiscal '22, we still anticipate G&A expenses to approximate just over 9% of sales.
G&A dollars are likely to be the highest for the year in Q2, owing to the timing of certain expenses.
Lastly, record diluted earnings per share of $1.14 grew 32.5% over the prior year.
Higher sales and lower interest expense drove this growth.
Looking forward, we now anticipate interest for the full year to approximate $63 million, reflecting the recent financing completed in conjunction with the TheraTears acquisition.
In Q1, we generated $67.8 million in free cash flow, down versus the prior year due entirely to the timing of working capital.
We continue to maintain industry-leading free cash flow and are raising our outlook for the year.
At June 30, our net debt was approximately $1.4 billion, inclusive of the cash we built ahead of the anticipated acquisition closing on July 1.
Following the acquisition of Akorn, our net debt at July one was approximately $1.6 billion.
The acquisition was funded from cash on hand, our ABL revolver and our term loan, which we simultaneously amended and now matures in calendar 2028.
Our covenant-defined leverage ratio was 4.3 times at the closing of the transaction, and we anticipate leverage of approximately four times by year-end fiscal '22.
Over the last year, we faced an unprecedented and dynamic environment.
The many positive attributes of our business and our execution leave us well positioned moving forward.
This is evidenced by our strong Q1 results, where our long-term brand-building efforts paid off in a big way.
For the full year fiscal '22, we now anticipate revenues of $1.045 billion or more, which includes an organic revenue growth expectation of about 6% and the revenue from the acquisition of the Akorn Consumer Health.
For the second quarter, we anticipate revenues of $260 million or more.
This revenue outlook assumes a few key factors: one, that the travel-impacted portion of our business will continue at the recovered levels for the remainder of the year; two, we still anticipate flat sales to prior year in the cough and cold and head lice areas of our business; and three, the acquisition of the Akorn portfolio discussed today should contribute approximately $40 million to the fiscal year net sales.
We anticipate adjusted earnings per share of $3.90 or more for fiscal '22.
For Q2, adjusted earnings per share is expected to be $0.95 or more.
These attributes translate into strong free cash flow as well, where we anticipate adjusted free cash flow of $245 million or more for the year. | q1 earnings per share $1.14.
q1 revenue $269.2 million versus refinitiv ibes estimate of $232.4 million.
raising full-year fiscal 2022 outlook.
sees 2022 adjusted earnings per share $3.90 or more. |
I speak for all of us when I say we hope you and those close to you are safe and healthy.
These are important to review and contemplate.
As everyone on the call today is well aware, the business environment has changed dramatically over the last quarter.
Unfortunately, there's a lot we don't know in the short term about the duration and impact of the COVID-19 pandemic.
These items include an uncertain shutdown time frame for many areas of our economy, ongoing changes to consumer purchasing habits, the potential for a disruptive supply chain, rising unemployment and many other economic factors.
This means results could change at any time and the forecasted impact of COVID-19 on the company's business results now look as a best estimate based on the information available as of today's date.
Additional information concerning risk factors and cautionary statements are available in our most recent SEC filings and most recent company 10-K.
I'll now hand it over to our CEO, Ron Lombardi.
Let's start on slide four.
Without question, the COVID-19 pandemic is at the top of mind for everyone, and as Phil outlined, there are numerous uncertainties.
We have a proven business model that we believe is capable of managing through this extraordinary period and along with our proven 3-pillar strategy that continues to position us well for whatever challenges we find in fiscal 2021.
We are an agile and capable organization, which has allowed us to quickly adjust to the change experienced so far.
On slide four, we have some highlights which are underpinned by our strategy and business attributes.
We are putting the health of our employees, partner employees and communities first.
We've adapted effective work-from-home plans and have enhanced robust safety protocols across our Lynchburg facility, which continues to operate at near-normal output levels.
The comprehensive strategy we've put in place on the first point as well as the benefit of our business model has enabled us to establish strong business continuity plans, which I'll discuss in detail later.
Next, investing for growth.
We are protecting our brands and our marketing plans continue to advance our brand-building playbook.
The environment is unique, but we have the benefit of a leading, diversified and widely distributed brand portfolio that gives us the ability to adapt quickly.
We'll talk about this in more detail later.
Last on the page is a reminder of our disciplined capital strategy.
We continue to benefit from a strong operating model and disciplined capital strategy with an industry-leading financial profile that will enable us to focus on debt reduction and liquidity while continuing to invest in our brands for the long term.
The sum of this is that the proactive approach we are taking positions us well to adapt to marketplace changes in the face of uncertainty.
I'll go over Q4 results, give a brief recap on our full year fiscal 2020 and review our cash flow and liquidity profile.
Flipping to slide six, you can see the highlights of our fourth quarter.
Q4 was a strong finish to the year, including revenue up 4.6% on an organic basis.
This performance was led by continued growth in our international segment and our growing e-commerce business as well as a significant lift from consumer spending in March as we believe consumers stocked up as a result of COVID-19.
During the fourth quarter, we continued to benefit from our ongoing investments and focus on e-commerce.
Our e-comm business grew over 60% in the quarter as we benefited from consumers shifting to online purchasing.
Notably, our consumption growth was about 7%, driven by these factors for the quarter after previously trending at about 2% prior to March, which was consistent with our expectations for the year.
Adjusted gross margin of 59.4% was up 200 basis points versus the prior year, primarily as a result of higher volume and geographic mix.
For Q1, we expect margins similar to prior quarters of about 58% as we expect a more normalized mix.
Adjusted earnings per share of $0.82 per share was also up meaningfully, increasing approximately 14% versus the prior year as we benefited from higher sales growth, gross margin favorability and a reduction in interest expense and share count.
Free cash flow was $52.5 million in the quarter and continued to benefit from our industry-leading EBITDA margins, efficient capital spending and low cash tax rate.
We continue to adhere to a disciplined capital allocation approach from this cash generation, which I'll discuss a bit later.
For the full year fiscal 2020, our organic net revenues increased 1.3% versus the prior year, which excludes the impact of foreign currency and the divestiture of our Household Cleaning segment in the prior year.
Similar to Q4, our full year benefited from strong international segment growth, which was up over 15% versus the prior year when excluding foreign exchange.
E-commerce also grew rapidly, increasing approximately 50% for the full fiscal year and now accounts for approximately 5% of our net sales.
Adjusted EBITDA declined slightly versus the prior year, impacted by the divestiture of Household Cleaning.
As a reminder, we fully lapped the comparison impacts of Household Cleaning beginning in Q2 of fiscal 2020.
Adjusted earnings per share of $2.96 per share increased 6.5%, benefiting from our continued efforts to delever and opportunistically execute share buybacks.
Full year fiscal 2020 net revenues decreased slightly to $963 million but as mentioned on the prior slide, increased 1.3% on an organic basis after excluding foreign currency and the divestiture of Household Cleaning.
For the full year, organic growth was impacted by the effect of retailer inventory reductions, primarily in the drug channel.
Adjusted gross margin, which excludes transition costs associated with our new logistics provider, was 58.3% for the full year, up 130 basis points versus the prior year, primarily driven by mix associated with strong international growth and the divestiture of Household Cleaning.
In terms of A&P, we came in at 16% of revenue in Q4 and 15.3% for the fiscal year.
Consistent with our strategy, we reinvested gross margin gains by opportunistically investing A&P behind our core brand portfolio in Q4.
For Q1, we would expect A&P to be below the fiscal 20% of sales as marketing plans are being adjusted in response to the current situation, resulting in A&P spending moving to future quarters.
Our G&A spending was just over 9% for the year, up slightly in dollars year-over-year.
In Q1, we would expect G&A to be about $22 million.
Finally, we reported adjusted earnings per share in fiscal 2020 of $2.96, representing an increase of 6.5% versus the prior year, primarily driven by the effects of debt paydown and share repurchases.
We expect to continue to reduce debt outstanding, and as a result, we anticipate approximately $22 million of interest expense in Q1.
In Q4, we generated $52.5 million in adjusted free cash flow, which resulted in a full year adjusted free cash flow of $206.8 million.
This represents 2% growth versus the prior year despite the sale of the Household Cleaning business.
We continue to maintain industry-leading free cash flow with fiscal 2020 free cash flow conversion coming in at 136%.
At March 31, we finished the year with approximately $1.6 billion in net debt and a leverage ratio of 4.7 times.
During the year, we continued our focus on debt reduction and reduced net debt by $135 million.
We also repurchased approximately $57 million in shares opportunistically during the year, enabled by our strong cash generation.
Although we continue to have repurchase authorization capacity, we have suspended these efforts in favor of focusing on liquidity in the current environment.
In addition, we proactively built our liquidity position to strengthen our balance sheet, ending the year with approximately $95 million in cash.
Moving forward, given the current operating environment, we intend to maintain a heightened level of cash on hand as a precautionary measure.
As we look forward, we feel good about our capital positioning for a few reasons.
First, we have leading and consistent cash flows and we'll continue to be disciplined around capital deployment with continued priority around debt paydown.
Second, we issued new senior notes in December 2019, and our earliest debt maturity is now January 2024.
And third, we have material cushion to our debt covenants, which are detailed in our 10-K.
Fiscal 2020 was a successful year in many ways, owing in large part to the continued execution of our strategy.
First, we continued to invest behind our core portfolio, which led to growing categories and market share for many of our leading brands.
I'd also like to highlight the success in our International segment, which had a great year as we grew many key brands meaningfully, including Hydralyte.
Second, our cash generation and free cash flow conversion remain best-in-class.
As Chris highlighted, we generated $207 million in free cash flow, driven by strong EBITDA margin and low cash taxes.
Finally, our disciplined capital allocation allowed for multiple areas of investment in fiscal 2020.
Importantly, we continued to focus on debt reduction, reducing our leverage to within our long-term targeted range of 3.5 to five times.
We also used roughly 1/4 of our free cash flow to opportunistically repurchase our stock.
Even in a challenging environment, we delivered excellent results in fiscal 2020, and our strategy leaves us well positioned for future success.
This 3-pillar strategy is highly adaptable and will be our guide as we approach fiscal 2021.
Turning to slide 12, you can see the ways we expect to do this.
We believe our proven 3-pillar strategy and the building blocks shown here position us for success as we navigate this pandemic.
First, our business continuity plan is robust and critical to executing these strategies that tie back to each of our pillars.
We have a diversified leading portfolio that's a key strength in many economic environments, including this one.
Our company is nimble and we are able to adapt quickly and refocus efforts around targeted brands and opportunities.
We'll share some realtime marketing examples of this shortly.
We are also adapting quickly to the changing retail shopping trends and continue our proactive investments in channel opportunities such as e-commerce.
And finally, capital allocation and liquidity will remain critical in this highly volatile environment.
We will remain disciplined capital allocators and true to our company discipline.
Let's dive in on each of these in more detail beginning on slide 13.
As mentioned earlier, we continue to prioritize putting our employees first through various proactive measures.
We have numerous manufacturing partners which are all operating in a similar capacity.
We continue to work with our third-party suppliers around continuity of supply, including prioritizing activities to maintain ample inventory on our leading brands.
These efforts include concentrating SKU manufacturing around critical brands and items, finding alternative suppliers as a precaution and other measures.
Fortunately, even with increased demand experienced in March, our inventory remains well positioned as we were able to benefit from the elevated inventory levels we had maintained during our warehouse transition to a new third-party logistics provider, which was completed at the end of March.
Our number one brands represent over 2/3 of our sales, as you can see on the right-hand side of the slide and is a strength in the current environment.
These brands often hold a long history with consumers, which we believe positions us for continued demand as consumers focus on their health and hygiene more than ever.
With a leading position, they also get to focus on the end goal of driving category growth rather than fighting for share.
This heritage, combined with our long-term brand building and meaningful innovation and new products, continues to differentiate us from other brands and private label.
For example, in fiscal 2020, our leading brands continued to drive category growth and the majority of them outperformed private label meaningfully.
On the left, you can see our diversified portfolio participates across various categories, addressing a broad range of needs.
This reach is a strength.
This diversity ensures our ability to opportunistically allocate resources where consumer insights dictate, drive brand building in both the short term and long term.
This is especially true now as consumer purchase patterns and trends affected by the pandemic are shifting rapidly.
With the market changing, we are seeing consumers change not only what they buy but where they shop due to shelter-in-place orders.
This is a unique attribute of the current pandemic, which makes our current environment different from past recessions.
Our wide-ranging portfolio is impacted in many different ways by this.
On the right end of the opportunity spectrum, consumers are showing increased interest for pain, cough and cold treatments along with feminine care products.
Other products shown in the middle are fairly consistent with the recent trends, and we expect them to be unaffected by current changes in daily living.
On the left, we have brands that are now expected to see lower usage rates as a result of the pandemic as consumers reduce time outdoors and in vacationing.
So how are we capitalizing on these opportunities?
The focus is to allocate greater investments to high-opportunity brands.
Investments will be both by brand and channel as we'll discuss on the next two slides.
While Nix and Dramamine are being affected by the current environment, our investments will strike the balance between the current headwinds being faced by these brands and with long-term brand building effort and potential.
Here, you can see marketing efforts on the left include reaching consumers at home through digital and addressable TV efforts, having the ability to have Monistat shipped to your door rapidly.
A key brand-building strategy is to move share from prescription treatments over time and these marketing efforts are timely to support this objective.
Next in the middle of the slide is Summer's Eve.
With consumers staying at home, we have refocused marketing efforts around home workouts and highlight on our recently launched Summer's Eve active product.
Last, on the right of the slide is Clear Eyes.
We've had several new messages from the brand since the pandemic began.
The most important to us is a digital effort launched in late April, saluting all the hospital workers on the front line fighting COVID-19.
We launched this tribute by donating 100,000 bottles of Clear Eyes to hard-hit hospitals New York City.
Each of these are real-time examples of our nimble marketing approach and ability.
In addition to consumers shifting brand focus as a result of a pandemic, consumers are also changing their preferences on where they are shopping.
Beginning in March, consumer interest in e-commerce ordering and omnichannel click-and-collect shopping accelerated sharply as consumers looked to minimize their person-to-person contact during the pandemic.
As an example, in the month of March alone, we saw an increase of 186% in new visitors browsing Prestige products in certain e-commerce retailers.
This resulted in our impressive fourth quarter commerce sales growth that Chris highlighted earlier.
Moving ahead, we could see this channel representing as much as 8% or more of our total sales in fiscal 2021.
So just like with our brand, we are being nimble with our channel investments.
Our example's shown here, a reminder about quick and easy shipping to a home from Monistat, keyword advertising for BC and combo pack-it to reduce frequency of purchases.
Over the last several years, we've been proactively investing in the emerging e-commerce channel, investing behind digital content and expanding distribution to ensure that our trusted brands are easily available for purchase as customers research and shop for their healthcare needs in new ways.
In summary, we're rapidly adopting retail and brand plans to an evolving environment, and a diversified and leading portfolio of brands gives us a great starting point.
In fiscal 2020, our brand-building efforts continued to deliver strong financial results.
We finished the year with over $205 million in cash flow and a mid-30s EBITDA margin.
As you can see on the chart at the left, we reinvested gross margin gains into A&P, consistent with our long-term strategy.
With this strong strategic positioning, we are then left with options of how to best allocate this capital to enhance shareholder value.
Going into fiscal 2021, this strategy remains consistent and disciplined.
First and foremost, we will continue to invest behind our brands, which are aimed at reinforcing long-term connections with consumers regardless of the economic environment.
Second, we continue to focus on deleveraging.
We continually evaluate the operating environment and how to best manage our leverage profile at any given time.
Currently, we have proactively built cash, as Chris discussed, and also have significant liquidity available due to our capital structure.
Number three and four on the page are other capital considerations, which are always contemplated if the first two priorities are satisfied.
Although admittedly challenging, given the limited economic environment visibility, we will continue to evaluate each of these priorities if they make sense and add long-term value for our shareholders.
Let's wrap up on slide 20 and recap what we've just discussed.
We have a time-tested playbook that is set up to navigate this changing and challenging environment.
Regardless of the landscape, we always focus on ensuring business continuity and will continue brand building for the term.
This is applicable as we think about fiscal 2021 but in a very different way compared to prior years.
We've talked a lot about uncertainty today and we're contemplating a number of factors.
How long shelter-in-place lasts, various economic impacts from the pandemic and many others.
Accordingly, we are not offering our typical full year financial outlook, but we do want to offer some insight to our thinking for Q1.
In Q1, we are anticipating a reversal of the accelerated consumption trends experienced in March.
So far, this quarter, we are seeing consumption declines as shoppers stay home.
Partially offsetting these factors were higher retailer orders in April as retailers replenished their stores following the March spike in consumption.
The net effect of all of this is difficult to predict.
But as of today, we anticipate Q1 revenues of $220 million or more.
We also anticipate earnings per share of $0.70 or more for Q1 as our proactive expense management and cost timing are expected to more than offset the anticipated revenue decline as compared to the prior year.
Meanwhile, we expect to maintain a strong financial profile and continued capital allocation optionality.
We anticipate continuing to leverage our financial profile to drive strong free cash flow conversion.
And we'll use this cash to focus on debt reduction while being mindful of managing liquidity through each quarter.
By executing this strategy, we believe we are set up for continued success. | q4 adjusted non-gaap earnings per share $0.82.
anticipate revenues of approximately $220 million or more in fiscal q1 2021.
for fiscal 2021 anticipate an uncertain environment due to many factors resulting from covid-19.
sees fiscal q1 2021 earnings per share $0.70 or more. |
These are important to review and contemplate.
As everyone on the call today is aware, business environment uncertainty remains heightened due to COVID-19.
These items include shutdown impacts for many areas of our economy, changes to consumer purchasing habits, the potential for disrupted supply chain and various other economic factors.
This means that results could change at any time in the forecasted impact of risk considerations, the best estimate based on the information available as of today's date.
Additional information concerning risk factors and cautionary statements are available on our most recent SEC filings and most recent 10-K.
I will now hand it over to our CEO, Ron Lombardi.
Let's begin on Slide five.
A year ago, we began our fiscal year with a backdrop of tremendous uncertainty stemming from the COVID-19 pandemic.
This uncertainty created widespread volatility across the categories we participate in, with rapid changes in consumer preferences and needs.
To start all of this, we focused on executing a proven long-term business strategy, which resulted in a very successful fiscal '21 that exceeded our guidance.
Several aspects of our business proved to be particularly beneficial during the quickly changing environment of the last year.
A brand building approach of growing categories and connecting with consumers paid off in a big way, especially as consumer shopping habits and needs shifted.
Having a diversified portfolio of leading brands helped us connect with consumers as they turned to their time tested and trusted brands for self-care during the pandemic.
Our widely distributed brands and robust e-commerce presence also paid off as consumers showed up online in greater numbers.
Meanwhile, our company's agility allowed us to reposition our marketing to best connect with consumers in this environment.
The net results of these factors is we continued to win market share in difficult backdrop and generated very strong cash flow due to our consistent operating model.
Let's turn to Page six to review some of the resulting fiscal '21 financial performance metrics.
Even during this unique time, our proven strategy delivered solid results, generating record adjusted earnings and free cash flow.
For fiscal '21, our net sales were approximately $943 million, down about 2% from the prior year.
We were pleased with our consumption trends for the year with impressive performance in the vast majority of our brands.
This included continued market share gains consistent with our long-term objectives.
Our net sales and consumption declined slightly owing entirely to a few categories impacted by COVID, such as cough, cold, which I'll discuss later.
Full year gross margin came in at 58%, essentially flat to last year on an adjusted basis.
Adjusted earnings per share grew nearly 10%, achieving the high end of our long-term expectations as we continued to benefit from our operating model, leading financial profile and ongoing debt reduction.
Adjusted free cash flow of $213 million also grew versus the prior year and continues to fuel our disciplined capital deployment efforts.
In summary, we continue to feel good about our performance within a challenging fiscal '21 COVID backdrop and believe we are set up to continue winning with consumers by executing our long-term strategy.
On the next few slides, we'll review some of the positive effects of our strategy in greater detail.
Let's start on Slide seven.
Here, our major brands and share performance are shown on the left side of the page.
Share performance for a broad portfolio had an outstanding fiscal '21, especially considering rapidly shifting consumer habits due to COVID.
Our breadth allowed us to focus our efforts on near-term brand opportunities like Monistat, Compound W and Clear Eyes, which we'll discuss on the next slide.
This helped offset certain brand pressures stemming from the pandemic, such as Summer's Eve or our share in the on-the-go feminine hygiene products, such as wipes and sprays, pressured our share versus the category.
This performance was underpinned by several factors.
Having leading number one brands is a strength, but just as important is the fact that we lead by a wide margin in many categories.
In fact, many of our brand's market shares are significantly larger than the next category competitor.
This allows us to concentrate our efforts on consumer insights that leverage brand heritage to enable growth with consumers and retailers to expand the overall category.
So in summary, the vast majority of our largest brands grew market share significantly, a continuation of the trends we've seen over the long-term.
This success is a result of our portfolio positioning, brand building strategy and long-term investments, even in the current unique environment.
Here, we have three specific examples of this fiscal '21 market share growth.
Adding onto the underpinnings from the prior page, our company's proven brand building tool kit allows us to focus efforts on targeted brand opportunities, such as these in real time.
Shown on the left is Monistat.
Our marketing efforts, including reaching consumers at home through digital and addressable TV efforts, having the ability to ship Monistat to your door often on the same day.
Shown in the middle is Compound W. As we touched on last quarter, Compound W has been a long-term leader in both innovation and consumer insights and we successfully leveraged this during the rapid shift to e-commerce experienced over the past year.
Finally, shown at right is Clear Eyes.
Brand messaging evolved during the pandemic to emphasize the brand promise of having brighter, whiter and more comfortable eyes.
We focused on the concept of at-home usage and are using time-tested brand building tactics, which helped grow share in the year.
The result is clear that our brand building capabilities, even during COVID continue to pay dividends.
Each brand won significant market share during fiscal '21, outpacing category growth by five, 15 and seven percentage points respectively.
Our fiscal '21 sales performance, driven by the attributes I just discussed, is particularly impressive in light of challenges in a few major categories we faced during the year.
For us, three key categories, cough cold, travel and head lice were materially disrupted by COVID facing declines in incident levels and usage rates as consumers stayed home and wore masks.
This drove double-digit category declines and a 500-plus basis point headwind to our full year sales performance.
Despite this, we were able to grow our overall market share.
As we look ahead, we view this as a positive.
The performance outside of these categories reinforces that our strategy is working while the pressured areas have stabilized and have begun to lap the prior year category declines in Q1.
A final highlight to make that helped drive fiscal '21 results was e-commerce, which now represents about 11% of revenue.
Our multi-year investments around e-commerce are delivering impressive results and we've benefited from growing interest in this channel by consumers.
As a leader in consumer healthcare e-commerce, our market share in this channel are often higher than in brick-and-mortar due to our early and continuing investments.
Also by design, our financial profile has remained consistent through this dramatic channel shift as we maintain a consistent profile across our distribution channels.
In fiscal '21, we continued to make investments behind online content and targeted pandemic-related messaging with the goal of expanding our share with consumers.
We also invested across numerous online retailers during the year.
The result was a doubling of e-commerce sales in fiscal '21, and we are well-positioned to continue to benefit from these investments as we look forward.
Q4 revenue of $237.8 million declined 5.4% and 6.6% on an organic basis versus the prior year, which excludes the effects of foreign currency.
As a reminder, Q4 faced a particularly unique comparison in the year prior, when we experienced a significant lift in March of 2020 as consumers stocked up on items as a result of COVID-19.
By segment, North America revenues were down approximately 4%.
Several segment categories grew with the largest increases in women's health and analgesics.
However, these gains were offset by cough and cold as well as GI category performances, both resulting from changes in consumer behavior due to COVID-19 that Ron discussed earlier.
International OTC declined approximately 24% in Q4 after excluding the effects of foreign currency.
The decline was primarily attributable to lower sales in Australia as a result of the comparison to prior year as consumers stocked up on items as a result of COVID-19 in March of 2020 as well as COVID-19's impact of lowering both general consumer illness and activities such as athletics, impacting Hydralyte.
As expected, adjusted EBITDA declined in Q4 owing to the unusual year ago comparison while EBITDA margin remained consistent with our long-term expectations in the mid-30s.
EPS for the third quarter was $0.79 per share, down $0.03 versus the prior year as lower interest expense from debt pay down and lower share count only partially offset the decline in revenues versus year ago.
For the full year fiscal '21, revenues declined 2.4% versus the prior year in constant currency.
Our diverse portfolio enabled the stable revenue performance, which strengthened many brands in our portfolio, helping to offset COVID-19 impacted categories.
Channel diversity continues to help drive revenue performance as we experienced strong triple digit consumption growth in the e-commerce channel for the full year as consumers continued to shift to online purchasing.
Total company gross margin of 58% was approximately flat to last year's adjusted gross margin of 58.3%.
This was in line with our expectations and we continue to anticipate a gross margin of about 58% for fiscal '22.
Advertising and marketing came in at 14.9% for the fiscal year.
Following an unusual Q1 related to COVID-19, A&M returned to normalized levels of spend of approximately 14% to 16%.
for the upcoming year, we'd anticipate an approximate 15% rate with a higher rate of A&M spend in Q1.
G&A expenses were just over 9% of sales in fiscal '21 versus the prior year, owed largely to disciplined cost management.
For the upcoming year, we anticipate G&A expenses to approximate just over 9% of sales.
Lastly, record adjusted earnings per share of $3.24 grew a strong 9.5% over the prior year.
Lower operating costs, lower interest expense, and lower share count were all factors to the growth.
In Q4, we generated $54.2 million in free cash flow, which resulted in a full year record free cash flow of $213.4 million.
We continue to maintain industry leading free cash flow with fiscal '21 free cash flow conversion coming in at 130%.
As of March 31, we finished the year with approximately $1.5 billion in net debt and a leverage ratio of 4.2 times.
During the year, we reduced debt by $250 million and opportunistically repurchased $12 million in shares during the year, enabled by our strong generation and cash position entering the year.
Our strong cash generation and stable financial profile enables our ability to access debt markets efficiently.
As a result, we were able to issue $600 million of new senior notes during the quarter, which replaced prior notes that were due in 2024.
The transaction both extended a key debt maturity to 2031 and resulted in annual interest savings of over $15 million.
As a result, interest expense for fiscal '22 is expected to be approximately $60 million.
This savings will further enable our three-pillar strategy and our disciplined capital allocation toward investing in our brand, de-leveraging, M&A, and other considerations.
Using our time-tested strategy, we delivered a very strong fiscal '21, including market share wins and record financial returns despite certain category headwinds related to the pandemic.
This approach remains intact and our best business is well-positioned to further these gains in the upcoming year.
For the full year fiscal '22, we anticipate revenues of approximately $957 million to $962 million, including organic revenue growth of 1.5% to 2%.
This revenue outlook assumes our portfolio continues to generate approximately 2.5% long-term organic revenue growth, partially offset by certain categories like cough cold, which we expect to remain flat to fiscal '21.
We anticipate earnings per share of $3.58 or more for fiscal '22.
Disciplined cost management and the benefits of our free cash flow are expected to drive solid double digit earnings growth.
For Q1, earnings per share is expected to be flat to the prior year as a normalized level of advertising and marketing spend is expected to offset revenue growth and interest savings.
These attributes translate into strong free cash flow as well.
We anticipate free cash flow of $225 million or more.
The recently completed debt refinancing further enables our disciplined capital allocation efforts that drives shareholder value.
In summary, we remain confident that our business is well-positioned with momentum heading into fiscal '22 and beyond.
A proven business model continues to deliver results and we look forward to executing our long-term brand building strategy to reward our stakeholders. | q4 adjusted non-gaap earnings per share $0.79.
q4 revenue fell 5.4 percent to $237.8 million.
prestige consumer healthcare - full-year fiscal 2022 outlook for revenue and earnings per share of $957 to $962 million and $3.58 or more, respectively. |
pb.com and by clicking on Investor Relations.
Additionally, we have provided slides that summarize many of the points we will discuss during the call.
These slides can also be found on our Investor Relations' website.
We delivered a solid quarter and first half of the year and continue to make progress against our overall objectives.
Every business grew revenue and improved EBIT from prior year.
Overall, revenue at constant currency grew 6% and EBIT grew 16%.
SendTech and Presort both grew revenue, albeit as expected, given the easier compare, and both businesses grew EBIT.
Presort continues to see a nice recovery in volumes from pandemic levels and EBIT margins remain in the double-digit range, moving back toward the long-term model.
SendTech's revenue growth was led by a strong performance in our SendPro product family in addition to continued double-digit growth in our SaaS-based shipping portfolio.
The business recorded its third consecutive quarter of year-over-year EBIT growth and continues to maintain its EBIT margin above 30%.
Global e-commerce grew revenue this quarter despite a tough prior year comparison, and importantly, also improved quarter-to-quarter.
EBITDA turned positive in the quarter, and both EBIT and EBITDA improved meaningfully over prior year and prior quarter.
The path to profitability for e-commerce is an integrated approach around talent, training, automation and execution.
We've made several important additions to our team and the new management talent, along with the maturation of our existing workforce are clearly yielding results.
We continue to work to optimize our shipping lanes and continue to focus our investments toward more automation.
We continue to make good progress with substantial opportunity still in front of us.
Entering the second half of 2021, I like where we sit.
The revenue comparisons will get more difficult in the second half of the year compared to the first half, but this quarter was a glimpse into what the business can look like when we hit on all cylinders and that improved profitable revenue growth is within our grasp.
Over the course of the last year or so, I have said that Pitney Bowes will come out of this pandemic, a bigger and better company.
And while we are not out of the woods with the pandemic, we're certainly on the trajectory of being a bigger company, and we are working every day at becoming a better company.
Our second quarter results reflect solid momentum across all of our businesses.
We continue to make good progress and are set up well for the second half of the year.
Revenue was $899 million and grew 6% over prior year.
Adjusted earnings per share was $0.11 and included a $0.03 tax benefit in the quarter.
Free cash flow was $87 million, and cash from operations was $79 million, which was a solid performance in the quarter and in line with our expectations.
Although down from prior year, it is important to remember that last year included $66 million contribution from the decline in our finance receivables, which was largely COVID related.
This was an item that we identified as a headwind to our free cash flow comparison earlier this year.
During the quarter, we paid $9 million in dividends and made $5 million in restructuring payments.
We spent $40 million in capex as we continue to invest in our network and productivity initiatives across the business.
We ended the quarter with $814 million in cash and short-term investments.
Total debt was $2.4 billion, which is down $289 million.
When you take our finance receivables and cash into account, our implied operating debt is $567 million.
Let me turn to the P&L.
Starting with revenue versus prior year.
Equipment sales grew 46%.
Supplies grew 14% and business services grew 6%.
We have decline in support services of 1%; rentals of 2%; and financing of 16%.
Gross profit of $301 million improved about $17 million over prior year on growth across all segments.
Gross margin was 33%, which was slightly down from the same period last year, but an improvement from the last two quarters.
SG&A was $236 million and approximately $3 million higher than prior year.
SG&A was 26% of revenue, which was nearly a two point improvement over prior year.
Within SG&A, corporate expenses were $56 million, which was up about $7 million from prior year, largely due to higher employee variable related costs.
R&D was $11 million or 1% of revenue, which was up approximately $4 million from prior year.
During the quarter, we received the remaining insurance proceeds of $3 million for the Ryuk Ransomware attack.
EBITDA was $96 million, an increase of $6 million over prior year, and EBITDA margin was 11%, which was flat to prior year.
EBIT was $56 million, an increase of $8 million over prior year, and EBIT margin was 6%, which was a slight increase over prior year.
Interest expense, including finance interest was $36 million.
Our tax provision was a benefit of about $300,000 and includes a benefit related to a U.K. tax legislation change, which also contributed about $0.03 to earnings per share in the quarter.
Shares outstanding were approximately 179 million.
Let me now turn to each segment's performance.
It is important to note that the year-over-year comparison includes the impact of COVID.
Prior year results saw a positive impact on e-commerce revenue and an adverse impact on SendTech and Presort.
As such, I will also provide growth rates from 2019 to 2021 for the larger transactional parts of our business.
Within e-commerce, revenue grew 3% to $418 million and also grew from first quarter levels.
The revenue growth over prior year was driven by our cross-border services and partially offset by lower domestic parcel and digital services.
Domestic parcel volumes were $44 million in the quarter.
Compared to the second quarter of 2019, e-commerce revenue grew 48%.
Demand for our services continues to be strong as new business signings accelerated from the first quarter as we're getting merchants onboarded for peak season while balancing demand from current clients.
We also continue to have success with bundling our services which now represents close to 50% of all new business.
EBITDA for the quarter was $8 million.
EBIT was a loss of $11 million.
Both EBIT and EBITDA were meaningful improvements from prior year.
We also made significant progress sequentially where second quarter's EBIT margins improved nearly 400 basis points as compared to first quarter, as we were able to improve our productivity and work through some of the residual impact from last year's peak that we saw earlier in the first quarter.
We continue to work to improve service levels and make progress against our productivity initiatives within our domestic parcel services.
While still dealing with industrywide concerns around high transportation costs and a competitive labor market.
We made progress on several unit economics as compared to the first quarter, with the greatest being around labor and transportation cost per piece.
We saw a reduction in our labor cost per piece in part due to the contribution of our new management talent, along with the maturation of our existing workforce.
Parcels processed per hour continued to improve from first quarter levels.
Transportation cost per piece also improved versus prior quarter as we continue to better optimize our shipping lanes.
Our improvement in execution, coupled with better network balancing are certainly yielding results.
We continue to invest in automation, including high-end sorters in our larger facilities and sort-to-light automation in our midsized facilities.
We also announced our partnership with Ambi Robotics last month, which we will be rolling out across our network over the next few years.
These initiatives take time to integrate, train our employees and produce results.
And while we're seeing some early benefits, we expect to yield additional benefits during the upcoming peak season.
Also, as mentioned last quarter, we are in the process of opening two new sites and upgrading another.
We expect to have this completed prior to the peak season, and it will allow us to handle volumes more efficiently.
Ultimately, we expect transportation and labor productivity, along with optimizing our final mile costs to be critical drivers in attaining our long-term e-commerce margins.
And as Marc mentioned, we have made some important additions to our e-commerce management team in order to execute this plan.
It is an exciting time, and our e-commerce business is moving in the right direction with substantial opportunities still in front of us.
Our Presort Services and SendTech businesses both turned in solid performances, which were in line with our expectations.
Within Presort, revenue was $135 million and grew 14% compared to the second quarter of 2019, Presort revenue grew 5%.
Average daily volumes grew 10% over prior year, largely driven by growth in first-class volumes of 4% and Marketing Mail volumes of 39%.
EBITDA was $23 million and EBITDA margin was 17%.
EBIT was $16 million and EBIT margin was 12%.
EBIT and EBITDA dollars improved from prior year due to revenue growth and margin expansion.
We remained focused on our productivity initiatives, having improved pieces fed per labor hour by 3%, resulting in 60,000 less processing hours versus prior year.
Within SendTech, revenue was $346 million and grew 6%.
We continue to differentiate ourselves in the market with a wide range of end-to-end mailing and shipping offerings that are attractive to businesses ranging from large enterprises to small offices.
SendTech's SaaS-based shipping products grew at a low double-digit rate over prior year to $31 million this quarter.
The number of labels printed through our shipping offering grew over 30% and paid subscriptions grew about 70% over prior year.
Additionally, shipping volumes that our U.S. clients finance grew nearly 70% over prior year.
Our end-to-end value proposition continues to resonate with clients as they adopt and use these new offerings, which bring value to their businesses.
Equipment sales grew 46% over prior year.
Compared to the second quarter 2019, equipment sales grew 1%, which is an important metric as this is a key indicator for future streams in the traditional side of the SendTech business.
This also points to how our new sending products are resonating with clients and helping to strengthen our portfolio.
We continue to see strong placement of our SendPro C and mailstation multipurpose devices.
Our international operations also saw strong equipment sales growth, and we continue to roll out new products in these markets.
Through the quarter, we, like many others, experienced some transportation challenges related to our supply chain.
We are proactively managing our inventory and are able to place a significant level of new equipment despite those challenges.
Looking ahead at the second half of the year, we continue to closely monitor the semiconductor industry and potential supply shortage concerns.
While it is still a bit too early to tell, we would expect the impacts, if any, to be more pronounced in the fourth quarter.
We will look to mitigate any potential supply shortages by working closely with our suppliers and repositioning our solutions with our clients as necessary.
EBITDA was $115 million and EBITDA margin was 33%.
EBIT was $107 million and EBIT margin was 31%.
EBIT and EBITDA dollars improved from prior year and was the third consecutive quarter of improvement for both metrics.
Let me now turn to our full year outlook, which is in line with what we have previously communicated.
As we all know, there is still a level of uncertainty in the macro environment, particularly as new COVID variants continue to ramp up and concerns around supply chain remain, and we will continue to monitor any potential impacts closely.
We still expect annual revenue at constant currency to grow over prior year in the low to mid-single-digit range.
We still expect adjusted earnings per share to grow over prior year and more specifically, to be in the $0.35 to $0.42 range.
We still expect free cash flow to be lower than prior year due to items that benefited 2020 and are not expected to continue at the same level this year.
Prior year included a lower level of capex and finance receivables and higher customer deposits.
We also expect our tax rate in the second half to be higher and return to more normal levels.
Looking at the timing, we expect third quarter revenue to be in line with second quarter and the fourth quarter to be larger than the third, given a strong holiday peak season.
Taking the midpoint of our adjusted earnings per share guidance into consideration, we currently expect our third quarter to represent nearly 20% of our full year attainment.
Let me conclude on this.
In the beginning of the year, we said that we expected revenue and adjusted earnings per share to grow, and we remain committed to this outlook.
Each segment has delivered a solid performance through the first half of the year, improving revenue, EBITDA and EBIT from prior year.
We continue to generate good free cash flow and remain focused on maintaining a strong balance sheet.
We also continue to make measurable progress and are confident in our ability to achieve our financial objectives. | q2 adjusted earnings per share $0.11.
q2 revenue $899 million versus refinitiv ibes estimate of $895.5 million.
q2 earnings per share $0.03.
full year 2021 expectations remain in-line with its previous communications.
fy 2021 adjusted earnings per share is expected to be in range of $0.35 to $0.42. |
This is Ned Zachar.
We very much appreciate your participation.
Part of my new duties includes covering the usual and customary safe harbor information for these calls.
So please bear with me for just a few minutes.
pb.com and by clicking on Investor Relations.
Our format today is going to be familiar.
Marc, the floor is yours.
Ned brings a wealth of experience to the role including investing and analyst experience.
Ned has also been an investor in our debt [Phonetic], so he is familiar with our company.
Turning to the quarter.
Given a return to pre-COVID top line seasonality, the distortions in last year results in supply and demand imbalances, there were many different crosscurrents running through the quarter and year-to-year comparisons.
While it's easy to get lost in the numbers, from my perspective, the headline is this.
Demand for our products and services remain strong, and we continue to make progress, repositioning our company for long-term success.
Our Presort business had an excellent quarter from both a top and bottom line perspective.
The Presort team was able to overcome labor and transportation inflation by managing price and productivity and moved back into our long-term profit model.
Importantly, the investments we have made in our network and technology have positioned us well to drive even more productivity and help more clients.
Our SendTech business performed close to the long-term model even though supply constraints hit the top and bottom line.
Equipment sales in our backlog both increased in the quarter, evidencing strong demand.
We will continue to battle through supply demand dynamics, but clearly our new product innovations are making it a very positive difference.
In addition, more of our business is moving to a subscription model.
While this depresses short term revenue, increased subscription revenue is a very positive harbinger for the future.
Within Global Ecommerce, while there are year-to-year aberrations, there are two things that are important to the long-term success of this business.
The first is service to our clients.
We have improved our end to end cycle times by 25% and since the beginning of the year, which is a significant improvement.
And secondly, gross margin.
It is notable that gross margin improved from prior year despite the fact that we had a substantial capacity and without the benefit of peak volumes.
We have foreshadowed that as volumes normalize, thus, margin improvement would happen, and it did.
We have been very disciplined about the kind of volumes we have committed to the fourth quarter, and we like what we have, both in terms of overall volume commitments, the economics and the kind of volume we anticipate receiving.
Like others in the industry, we saw volumes decreased year-to-year in the quarter, but we very much like how we are positioned for the fourth quarter and going forward.
However, to be clear, we expect there to be some challenges this peak season.
Daily headlines talk about the supply chain disruptions, and larger players are already carrying out an impact on the results or outlook.
We are not immune to these supply chain constraints more as it relates to our Ecommerce client supply levels and, to a degree, our SendTech products.
While it remains a level of uncertainty, our team is substantially better positioned this year based on the actions we have taken thus far.
Additionally and similar to the market, we're looking at pricing to help offset some of the higher costs, particularly as it relates to transportation and labor.
For example, within Ecommerce, we have put in place a surcharge for this peak season and recently announced our annual general rate increase effective for 2022.
And we've implemented pricing increases in other parts of our business where it's justified by the new and increased value we are delivering for clients through our new product portfolio.
So lots of moving pieces, but from my perspective, a successful quarter across many dimensions, but most importantly in terms of how the quarter sets us up for our going forward success.
Total revenue for the third quarter was $875 million and declined 2% from prior year.
Recall that the year-over-year comparisons include the impact of COVID on us and many other companies.
Last year's third quarter saw a very positive impact on Ecommerce revenue and an adverse impact on SendTech and Presort.
When we compare this year's third quarter to the third quarter of 2019, in other words, pre-COVID, our 2021 revenue grew over 10%, which illustrates that the bulk of the top line gains we made last year remain intact.
Adjusted earnings per share was $0.08, and GAAP earnings per share was $0.05.
EPS includes a $0.02 net tax benefit offset by a $0.03 charge related to a specific pricing assessment in Global Ecommerce, which I will discuss momentarily.
Free cash flow was $30 million, and cash from operations was $71 million, down from prior year, largely due to higher Capex and changes in working capital, which are in line with our previous commentary on this topic.
During the quarter, we paid $9 million in dividends and made $6 million in restructuring payments.
We spent $57 million in Capex, as we continue to enhance our Ecommerce network and drive productivity initiatives in both our Ecommerce and Presort businesses.
We ended the quarter with $743 million in cash and short-term investments.
During the quarter, we redeemed our 2022 notes for $72 million.
Notably, total debt has declined about $225 million since year-end 2020 to $2.3 billion.
When you take our finance receivables, cash and short-term investments into consideration, our implied operating company debt is $556 million.
Let me turn to the specifics in the P&L, starting with revenue versus prior year.
Equipment Sales grew 4%.
We had declines in Business Services of 1%, Support Services and Supplies of 4%, Rentals of 5% and Financing of 17%.
I would like to point out that as it relates to our Financing revenue, prior year results included investment gains related to the sale of securities, which represent about half of the year-over-year decline.
Gross profit was $286 million and improved across our Ecommerce and Presort segments.
Gross margin of 33% was flat to prior year.
SG&A was $225 million and approximately $14 million lower year-over-year.
SG&A was 26% of revenue, which is a 100 basis point improvement over prior year.
Within SG&A, corporate expenses were $49 million, $4 million lower than prior year largely due to variable employee-related costs.
R&D was $11 million or 1% of revenue.
EBITDA was $92 million, and EBITDA margin was 10.5%, both of which were relatively flat to prior year.
EBIT of $50 million was down about $4 million from prior year, while EBIT margin of 6% was flat to prior year.
Total interest expense was $36 million, down $3 million year-over-year.
Our tax rate of 1% includes net benefits associated with the resolution of tax matters.
And we expect our rate will return to more normalized levels going forward.
Shares outstanding were approximately 179 million.
Let me turn to each segment's performance.
Within Ecommerce, revenue in the quarter declined 4% to $398 million.
However, recall that last year's third quarter saw a surge of new revenues driven by the effects of the pandemic.
If you compare this quarter to third quarter of 2019, revenues for the Ecommerce segment are up over 40%.
Said another way, we kept the vast majority of the revenue gains we experienced post COVID.
Inside of Ecommerce, revenue growth from Cross Border and Digital Services was offset by lower revenues from Domestic Parcel services.
Domestic Parcel volumes were 41 million in the quarter, down from prior year on a tough compare, but up from 2019 levels.
Aside from the tough compare, the decline in volumes can be attributed to the return of a more normal seasonality, where third quarter is typically softer than second.
Additionally, we made a strategic decision to take on volumes that fit our desired partial profiles and drive improved service levels, which also had an impact on volumes.
Demand for our services continues to be strong, as we signed over 130 client deals in the quarter and were able to bundle additional services with 40% of those signings.
Gross margin improved 100 basis points from prior year despite higher labor and transportation cost and inclusive of the previously mentioned pricing assessment.
EBITDA for the quarter was breakeven, which is an improvement of $3 million versus the same period last year.
EBIT was a loss of $21 million.
As I referenced earlier, our results in the quarter include an $8 million charge associated with a pricing assessment, which was mainly caused by lower-than-anticipated volumes that originate outside of the U.S. for our domestic delivery services.
This assessment encompasses the first three quarters of the year.
The impact from this pricing assessment has been factored into our full year guidance.
It is also important to highlight that since the beginning of the year, there has been a 25% improvement in our end-to-end cycle time from induction into our system to the actual delivery of the parcels.
Looking ahead, we have taken numerous steps to be ready for this year's holiday peak season.
We have brought in new leadership with deep industry expertise across virtually every facility in the network.
Additionally, last year's peak called for a change in our approach to hourly labor, and we have made very good progress heading into this year-end.
We have more than doubled the ratio of our permanent hourly workforce from a year ago, and we are seeing promising results from new wage programs, resulting in a more effective recruiting process and improved employee retention, both of which will further improve service quality.
We have increased our PB fleet by 42% over prior year, which reduces our reliance on third-party transportation including use of the spot market.
Lastly, we opened three new facilities and are expanding another to create more effective network footprint with enhanced coverage.
Additionally, all of our new facilities now have some element of induction and/or sortation automation with plenty of opportunity for further automation still in front of us.
The net of all these items is that we believe we are well-positioned to handle peak volumes and deliver appropriate service levels to our clients.
Presort had a terrific quarter.
Revenue was $139 million, 9% better than prior year.
This is the third consecutive quarter of positive revenue growth, illustrating the resilience of a business that has recovered nicely from the impact of COVID.
Revenue growth was driven by several factors including higher revenue per piece, strong sales performance and growth in overall volumes.
In addition, we are realizing clear financial benefits from network investments we made to capture greater work share discounts around five-digit sortation.
While volumes and revenue grew, so did variable cost to support that growth.
On a positive note, the strength of our management systems, as well as the investments we have made in technology, have enabled us to hold productivity levels flat to prior year.
In the end, we are pleased that volumes and revenue growth more than offset the market-driven increases in our Presort costs.
We will continue to invest in automation and productivity in order to help us continue to grow EBIT dollars and expand profit margins.
For the quarter, Presort EBITDA was $27 million, and EBITDA margin was 20%.
EBIT was $21 million, and EBIT margin was 15%.
All of these are significant improvements from prior year and aligned with our long-term targets.
Moving to the SendTech segment.
SendTech revenue was $338 million, which was down 5% from prior year.
As noted earlier, last year's third quarter included investment gains which benefited financing revenue and created a challenging year-over-year comparison.
Last year's investment gains represent about 200 basis points of the year-over-year revenue decline for SendTech in the quarter.
Inside SendTech, I'd like to highlight Equipment Sales, which is a leading indicator for future revenue streams.
For the quarter, Equipment Sales saw 4% growth despite some supply chain challenges in obtaining product.
I'd also highlight our efforts to shift our business mix to the growth areas of the shipping and mailing markets.
Our new SendTech products and offerings have been gaining traction in the marketplace led by the SendPro family, which is an all-in-one system that offers multi-carrier alternatives to find the best rates and delivery options, track parcels, gain postage discounts and manage spend.
In North America, more than 25% of our revenue comes from these new products, and we have begun to launch these products in select international markets.
We are also seeing strong demand for our SendPro mailstation product, which we launched in April 2020 and have shipped over 40,000 of these devices to date.
Our SaaS-based Subscription revenue grew 21%, and paid subscribers for our SendPro online product were up 58% over prior year.
I am also pleased to report that we have been able to satisfy the strong demand for our products, while managing supplier and transportation disruptions that have become prevalent across global supply chains.
SendTech EBITDA was $107 million, and EBITDA margin was 32%.
EBIT was $99 million, and EBIT margin was 29%.
Margins reflect the decrease in high-margin financing results as well as increased freight and shipping costs that have become a theme across the corporate sector.
It's important to note that we have implemented pricing actions where it is justified by the new and increased value we are delivering for clients through our newer product portfolio.
Let me now turn to our outlook.
As Marc discussed, we expect there will be some supply chain disruptions.
We are not immune to the marketwide supply chain challenges, but we believe our outlook takes this into consideration, and we are reaffirming what we have previously communicated.
We still expect annual revenue at constant currency to grow over prior year in the low to mid-single-digit range.
We still expect adjusted earnings per share to be in the range of $0.35 to $0.42.
And we continue to expect Global Ecommerce to be EBITDA positive for the year.
We still expect free cash flow to be lower than prior year driven primarily by a rebound in Capex investments largely as it relates to the expansion of our Ecommerce network and productivity initiatives, along with a slower decline in our finance receivables.
We also expect our tax rate in the fourth quarter to return to a normalized level.
In summary, I feel that Pitney Bowes is in very good shape both operationally and financially.
We have taken important steps throughout the year to strengthen our network capabilities and footprint, our balance sheet and our human capital.
These actions leave us well-positioned to achieve our financial objectives for the year and going forward. | q3 adjusted earnings per share $0.08.
q3 gaap earnings per share $0.05.
sees fy adjusted earnings per share $0.35 to $0.42.
q3 revenue $875 million.
fy 2021 revenue still expected to grow over prior year in low-to-mid single digit range.
fy 2021 adjusted earnings per share still expected to grow over prior year and be in range of $0.35 to $0.42. |
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Additionally, we have provided slides that summarize many of the points we will discuss during the call.
These slides can also be found on our Investor Relations website.
Let me start by saying how delighted I am that Ana is joining the team as our Chief Financial Officer.
Ana held several executive positions at GE Capital; most recently been President and CEO of GE Capital's Global Legacy Solutions and prior to that, the Chief Operating Officer and CFO of that business.
Ana brings with her strong financial and operational experience and will fit into the PB culture very well.
No one could have predicted how the world changed in 2020, but I'm very proud of how our team was prepared and managed through the challenges.
Their efforts and hard work show in the progress we made in our business throughout the year.
If I had to choose one word to sum up our employees in 2020, it will be determined.
That is exactly what our team personifies.
The fourth quarter was a remarkable ending to an extraordinary year.
Revenue at constant currency grew 23%.
To the best of our knowledge, this is the highest modern-day organic growth rate on record for Pitney Bowes.
And our shipping-related revenues comprised 54% of our total revenue.
For the quarter, Global Ecommerce grew 60%, with profit improving from prior year and prior quarters, resulting in positive EBITDA.
Presort turned in flat revenue performance, which is a significant improvement from prior quarters and better than the market.
And SendTech turned in strong performance, growing both revenue and profit over prior year.
This was powered by strong equipment sales, double-digit growth in our SaaS-based shipping offerings and a solid performance in our services business.
SendTech is a business that many considered a melting ice cube.
However, the investments we have made in our digital channel and products, while also expanding our shipping offerings, have given new life to this business.
In all, these accomplishments would have been hard to imagine a few short years ago.
But this is what a determined and focused team can do.
Looking at the year from a broader lens, when the pandemic hit, we had two objectives.
First, we needed to focus on the health and well-being of our employees and ensuring the company remains strong financially during this unpredictable time.
Secondly, we wanted to come out of this terrible moment a stronger company.
It is often true that moments of economic dislocation create opportunities, and our team was determined to leverage the investments we have made over the last several years to capture those opportunities.
We pivoted to change our work protocols and practices.
We provided our employees the necessary PPE to be safe, as they did their essential work.
We also took the important actions to fortify our balance sheet by refinancing our debt, and we made prudent decisions to ensure we had a solid liquidity position.
It was apparent early on that the company's financial position was solid and we turned to coming out of this pandemic stronger, which we are well on our way of achieving.
From an annual perspective, Global Ecommerce turned in $1.6 billion in revenue, growing at a record rate of just over 40%.
This business won new customers and achieved scale much earlier than we had planned.
Simultaneously, we accelerated our planned network build out by several years.
This certainly wasn't always smooth sailing, but the business is in a much better place than it was 12 months ago.
While e-commerce's astonishing growth understandably gets a lot of attention, the transformation of our SendTech business tells an equally remarkable story.
Importantly, the business performed well relative to the mail market.
But even more enduring, business has moved to a natural adjacency in shipping.
This is a new large growth area, which, along with the ongoing transformation of our financial services business and a meaningful contribution from our Global Services group, leverages our core strengths.
Epitomizing the transformation of SendTech is the growth of shipping revenue, which is now a meaningful offset to our decline in mail business.
Also notable, U.S. shipments of our low-end and middle-market devices grew 13% for the year.
These multipurpose devices provide new value to clients as compared to our previous generation single-purpose mailing machines.
I'm also particularly pleased with our cash performance in the fourth quarter in the year.
The increase in our cash is a result of disciplined execution and a great team effort.
It's a fairly remarkable accomplishment to meaningfully increase operating cash flow in the middle of a pandemic and one of the most significant economic associations since the depression.
All that being said, transformations are always messy and never a straight line, and transformations in the middle of a pandemic are particularly complicated.
The unprecedented increase in demand in the e-commerce market created cost inflation, particularly in labor and transportation costs in the fourth quarter, which had a deleterious impact on our profit in e-commerce.
This quarter tested capacity throughout [Technical Issues].
Admittedly, it was a challenge.
In order to optimize our service, we more than doubled our labor and set up three new facilities to help meet the demand.
While these facilities, along with the newer flagship sites we opened late last year, works through typical growing pain, they have also become a critical part of our overall network, handling over one-quarter of our total domestic parcels in 2020.
In addition, our use and reliance of third-party transportation this peak, both in cost and service, was challenged, which was in line with the broader industry trends.
To mitigate this, we proactively upgraded packages at a cost to try to maintain service.
Going forward, we see opportunity to balance our use of third-party transportation and our own PB fleet assets, which performed above expectations this peak.
We will continue to invest to become more efficient across each of these areas.
As I've said in the past, it's now within our four walls to manage the cost structure and generate efficiencies.
I'm often asked about the anatomy of transformations and I think it's worth repeating.
Transformations have a certain arc to them; quick wins, sustained investments, revenue growth and then profitable revenue growth.
The most highly correlated factors for successful transformations are revenue growth and employee engagement.
We have achieved revenue growth the last several years, and our employee engagement in the middle of pandemic reached new highs.
While there continues to be tremendous uncertainty in our economy and how the pandemic will play out, we are poised to enter the last stage of successful transformations, profitable revenue growth.
I am proud of what the team has accomplished.
But we all recognize there is more work to do.
I'm excited about this next chapter of our transformation.
We are on the precipice of accomplishing what very few companies have ever done.
Let me start by providing an overview of our full-year results, followed by the details of our fourth quarter.
For the full year, revenue was $3.6 billion, which was growth of 11% over prior year and is our fourth consecutive year of constant currency revenue growth.
Global Ecommerce grew 41%, Presort Services declined less than 2% and SendTech declined 7%.
Adjusted earnings per share was $0.30 and GAAP earnings per share was a loss of $1.06.
As a reminder, GAAP earnings per share includes a non-cash goodwill impairment charge that we recorded in the first quarter.
GAAP cash from operations was $298 million and free cash flow was $279 million.
Free cash flow increased $91 million over prior year.
Through the year, there were a few noteworthy items that principally benefited free cash flow.
First, our focus on collections resulted in a strong improvement in our DSO.
We also saw a higher level of Presort and PB Bank customer deposits, in part due to initiatives to support our clients.
Second, finance receivables declined at a greater rate, largely in the second quarter as a result of the lower placements of our SendTech equipment due to the pandemic.
You can see the trend starting to improve as our SendTech business built momentum through the second half of 2020 as businesses began to reopen.
Early on when the pandemic surfaced, we made the prudent decision to reprioritize investments and reduce spending, given the level of uncertainty in the market at that time.
There were other puts and takes through the year as we typically experience, but these areas are the key drivers to understanding the strong free cash flow we generated for the year.
Looking at our balance sheet and capital allocation, we ended the year with $940 million in cash and short-term investments.
For the year, we used free cash flow to return $34 million to our shareholders in the form of dividends.
Our capital expenditures totaled $105 million and reflect investments made throughout the year in new and existing facilities, our technology and our products.
As part of our ongoing transformation, we also made $20 million in restructuring payments.
Within our Pitney Bowes Bank, customer deposits grew to $617 million and Wheeler Financial funded $16 million in new deals for the year.
From a debt perspective, we ended the year with $102.6 billion in total debt, which is a reduction of $175 million from prior year.
In terms of our net debt, when you take our cash and short-term investments and finance receivables into consideration, our implied net debt position on an operating company basis was about $550 million at year-end.
Turning to the details of the fourth quarter.
We delivered $1 billion in revenue, which represents growth of 23%.
Global Ecommerce grew 60%, and both Presort and SendTech were flat to prior year.
For the quarter, adjusted earnings per share was $0.13 and GAAP earnings per share was $0.11.
EPS for the quarter reflects a $0.03 tax benefit, primarily related to deferred tax balances in certain international tax jurisdictions.
GAAP cash from operations was $111 million in the quarter and free cash flow was $97 million.
Free cash flow grew $16 million over prior year, predominantly driven by the timing of working capital.
During the quarter, we used free cash flow to reduce debt $31 million, invest $24 million in capital expenditures and pay $9 million in dividends.
Turning to the P&L, starting with revenue performance as compared to prior year.
Business services grew 43% and equipment sales grew 15%.
We had declines in support services of 4% and rentals of 8%, while financing and supplies both declined approximately 10%.
Gross profit was $311 million and gross margin was 30%.
This is a decline of about nine points from prior year, which largely reflects the shifting mix of our portfolio and higher cost of service, driven by the influx of parcel demand in Global Ecommerce.
SG&A was $242 million or just under 24% of revenue, which is a six-point improvement from prior year.
Within SG&A, unallocated corporate expenses were $54 million, which were $2.5 million higher than prior year.
It is important to note that full-year unallocated corporate expenses were $200 million, which were $11 million lower than prior year, primarily due to lower employee-related expenses.
R&D expense was $9.5 million or about 1% of revenue, which was about half-point improvement from prior year.
EBIT was $62 million and EBIT margin was 6%.
Compared to prior year, EBIT declined $3 million and EBIT margin declined about 2%, largely driven by the lower gross profit.
Interest expense, including financing interest expense, was $38 million, which was relatively flat to prior year.
The provision for taxes on adjusted earnings was less than $1 million and our tax rate for the quarter was 1%, bringing our annual tax rate to 13%.
Average diluted weighted shares outstanding at the end of the quarter were about $177 million.
Let me now discuss the performance of each of our business segments this quarter.
Within Global Ecommerce, revenue was $518 million, which was growth of 60% over prior year and the first time we achieved over $500 million in quarterly revenue.
Compared to prior year, volumes grew by 50% or more across each of our lines of business.
Domestic parcel volumes grew 76% to just under 65 million parcels.
Digital volumes grew 50%, and cross-border volumes grew 76%.
Looking at EBIT, we recorded a loss of $15 million.
This was an improvement of $3 million from prior year and $5 million from prior quarter.
EBIT margin also improved three points from prior year and two points from prior quarter.
EBITDA was $3 million, which was an improvement from prior year and prior quarters.
Revenue growth over prior year benefited from the significant demand.
This was offset by higher cost, driven partly by the market dynamics, which we are seeing a significant higher transportation spot market and higher labor costs.
The increase in peak demand also put pressure on our productivity.
We will continue to invest across our network to drive efficiencies, reduce costs and improve service for our clients, which will come in part from automation across our network.
We are addressing our labor structure, shifting more from temporary labor to permanent, which will yield a more productive workforce.
We are also looking at our transportation network and opportunities where it makes sense for us to become less reliant on the spot market, along with becoming more efficient at capturing deeper postal discounts.
Additionally, similar to the market, we will capture a surcharge in 2021, along with our annual general rate increase.
Within Presort Services, revenue was $135 million, which is flat to prior year.
Overall average daily volumes declined 2%.
First Class Mail volumes declined 3%, while Marketing Mail volumes grew 2%.
Marketing Mail Flats and Bound Printed Matter volumes grew 26%.
As we have discussed in the past, this is still a relatively small part of the portfolio, but representing new revenue and profit stream for us.
EBIT was $13 million and EBIT margin was 10%.
EBITDA was $21 million and EBITDA margin was 16%.
EBIT and EBITDA margins were relatively in line with prior quarters and declined from prior year, largely due to higher medical claims and increased labor costs as well as COVID-related direct costs for the health and safety of our facility workers.
Turning to our SendTech segment.
Revenue was $376 million, which was flat to prior year, excluding the impact of currency, and represents growth of 1% on a reported basis.
Marc talked about the investments we have made in our SendTech business around our digital capabilities, including our channel and products.
We are bringing new value to our clients through our multi-purpose devices and we are leveraging our digital channel to attract new clients to our offerings.
In the fourth quarter, SendTech's shipping-related revenues grew nearly 30% to $35 million and our SaaS-based SendPro online offering grew its paid subscriptions by over 70%.
Shipping is a high-margin stream that contributes about 10% to SendTech's overall revenue today, with great opportunity for future growth still in front of us.
The impact of shipping is also resonating in our financing portfolio, as those clients through their shipping volumes by 65% over prior year.
Equipment sales grew 15% over prior year, driven by strong placements of our SendPro C and MailStation multipurpose products.
Our value proposition continues to resonate with our clients.
Our SendPro MailStation is a replacement option for lower-volume mailers and ideal for remote setups or branch offices of larger organizations.
Since launching in April, we have shipped approximately 20,000 MailStation units.
The growth in equipment sales is a significant improvement from prior quarters, particularly against the decline of 32% we saw in the second quarter, at the height of the COVID lock-downs.
Supplies declined 10%, which is an improvement from prior quarters on increased usage and demand.
In the U.S., 70% of our supplies transactions were conducted online in the fourth quarter, which is up nine points from the same period last year.
Support services declined 4%, which is also an improvement from recent quarters.
When combined, rentals and financing revenues declined 9% in the quarter.
We turned in strong EBIT performance of $118 million, which represents growth of $5 million over prior year.
EBIT margin was 31%, which improved one point over prior year and is within the range projected in our long-term model.
EBITDA was $126 million and EBITDA margin was 34%, both improving over prior year.
The quality of our financing portfolio remains healthy, and delinquency rates are trending down from the initial small uptick that we saw earlier in the year as a result of the pandemic.
We continually monitor our delinquency rates and take a very disciplined approach to managing our credit risk.
Let me close with an update on 2021.
Given the ongoing uncertainty in the market around the pandemic and uncertain macroeconomic conditions, we will speak more broadly to our 2021 outlook.
We expect annual revenue to grow over prior year in the low-to-mid single digit range, making 2021 the fifth consecutive year of constant currency growth.
We also expect adjusted earnings per share to grow over prior year.
Within our segments, we expect Global Ecommerce revenue to grow in the low double-digit range and we also expect this business to demonstrate significant profit improvement.
We expect the momentum we saw in the second half of 2020 for SendTech, particularly around our shipping capabilities and new multipurpose devices, to continue through 2021 and help partially offset the decline in recurring related revenues.
We also expect the improvement in volume trends we saw in Presort in the second half of 2020 to continue through 2021.
There are also a few headwinds to be aware of on a year-to-year basis that will partly offset the overall business unit improvements.
In 2020, we recorded RIV insurance proceeds.
In 2021, we expect higher employee-related cost as it relates to variable compensation.
Additionally, we expect our annual tax rate on adjusted earnings to be in the 23% to 27% range, which is higher than where we ended 2020.
We expect lower free cash flow in 2021, primarily due to the specific items I discussed earlier in my comments that benefited 2020 and are not expected to continue at the same level in 2021.
Looking at the timing through the year.
Our portfolio continues to shift to markets that are growing, particularly around shipping.
As a result, the fourth quarter will continue to be our largest quarter for the year.
Specifically in the first quarter, we expect revenue to grow over prior year in the high single-digit to low double-digit range and earnings per share to be relatively in line with prior year. | q4 adjusted earnings per share $0.13.
q4 gaap earnings per share $0.11.
expects 2021 revenue to grow over prior year in low-to-mid single digit range.
expects 2021 adjusted earnings per share to grow over prior year. |
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Eric.
Before we begin, let me make the usual disclaimers.
Our merger with LegacyTexas was completed on November 1, 2019, and our management teams continue to find commonalities and strengths that we expect will benefit our company, our shareholders and associates going forward.
Our planned operational integration remains on schedule for June of this year.
In our efforts to continue to enhance shareholder value, Prosperity repurchased 2,092,000 shares of its common stock at an average weighted price of $52.59 per share during the first quarter of 2020.
The net income was $130 million for the three months ended March 31, 2020, compared with $82 million for the same period in 2019.
Our earnings per diluted common share were $1.39 for the three months ended March 31, 2020, compared with $1.18 for the same period in 2019, a 17.8% increase.
For the first quarter of 2020, on an annualized basis, return on average assets was 1.67%, return on average common equity was 8.86% and return on average tangible common equity was 20.1%.
Prosperity's efficiency ratio, excluding net gains on the sale of assets and taxes, was 42.9% for the three months ended March 31, 2020.
Our loans at March 31, 2020, were $19.1 billion, an increase of $8.7 billion or 83.7% compared with the $10.4 billion at March 31, 2019.
Linked quarter loans increased $281 million, 1.5% or 6% annualized compared with the $18.8 billion at December 31, 2019.
Our deposits at March 31, 2020, were $23.8 billion, an increase of $6.6 billion or 38.5% compared with the $17.1 billion at March 31, 2019.
Our linked quarter deposits decreased $373 million or 1.5% from the $24.2 billion at December 31, 2019.
A portion of this decrease was due to our planned reduction of higher cost and broker deposits assumed in the LegacyTexas merger.
Excluding deposits we assumed in the merger and new deposits we generated at the acquired banking centers since November 1, 2019, deposits at March 31, 2020, grew $1 billion or 6% compared with March 31, 2019, and grew $162 million, nine basis points, or 3.6% compared annualized with December 31, 2019.
Our nonperforming assets totaled $67 million or 25 basis points of quarterly average interest-earning assets at March 31, 2020, compared with $40 million or 21 basis points of quarterly average interest-earning assets at March 31, 2019, and $62 million or 25 basis points of quarterly average interest-earning assets at December 31, 2019.
The increase during the first quarter of 2020 was primarily due to the merger.
During the first quarter of 2020, Prosperity increased its allowance for credit losses to $327 million from $87 million in the fourth quarter of 2019 after adopting accounting standard ASU 2016-13, also known as CECL.
The amount of the allowance is based on our CECL methodology.
We believe these additional reserves should help to insulate the company during these challenging and unprecedented times.
Our allowance for credit losses to total loans excluding the warehouse purchase program loans, now stands at 1.88% compared with 51 basis points at December 31, 2019.
With regard to acquisitions, as one would expect, conversations with other bankers regarding potential acquisition opportunities have subsided.
However, we remain ready to enter into negotiations when it's right for all parties and is appropriately accretive to our existing shareholders.
While today's challenges are certainly extraordinary, Prosperity has a deep management team with experience in navigating and adopting in difficult times.
We enter this economic downturn from a position of strength, with sound credit quality, robust capital and liquidity and solid operating fundamentals.
We believe that our team will see us through, and we remain confident in our long-term future.
Throughout the past several months, while dealing with various personal challenges related to the pandemic, our retail team operated at full capacity enabling us to keep our locations open and serve our customers' daily needs.
Additionally, our operational staff and lending team were crucial in accepting processing and submitting thousands of SBA PPP applications and closing loans working around the clock to assist our customers.
Let me turn over our discussion to Asylbek, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended March 31, 2020, was $256 million compared to $154.9 million for the same period in 2019, an increase of $101.1 million or 65.3%.
The increase was primarily due to the merger with LegacyTexas in November 2019 and $28.5 million in loan discount accretion in the first quarter of 2020.
The net interest margin on a tax equivalent basis was 3.81% for the three months ended March 31, 2020, compared to 3.2% for the same period in 2019 and 3.66% for the quarter ended December 31, 2019.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended March 31, 2020, was 3.36% compared to 3.16% for the same period in 2019 and 3.26% for the quarter ended December 31, 2019.
Noninterest income was $34.4 million for the three months ended March 31, 2020, compared to $28.1 million for the same period in 2019.
The increase in noninterest income was primarily due to the merger with LegacyTexas.
Note, the debit card income from LegacyTexas is now impacted by the Durbin amendment.
Noninterest expense for the three months ended March 31, 2020, was $124.7 million compared to $78.6 million for the same period in 2019.
The increase was primarily due to the merger with LegacyTexas.
For the second quarter 2020, we expect normalized noninterest expense to range around $120 million to $125 million.
In addition to this, we expect $3 million to $5 million in onetime merger expenses related to upcoming June conversion.
Further, we expect to incur expenses related to SBA Paycheck Protection Program in the second quarter, which are not included in the normalized noninterest expense guidance.
As we discussed in prior quarters, we expect to realize most of our cost savings from the LegacyTexas merger beginning in the third quarter of 2020 after the system integration that is planned for June.
To date, we have already realized some cost savings from the merger and eventually expect additional cost savings of approximately $8 million to $9 million per quarter.
Combined, this will be in line with announced 25% cost savings.
The efficiency ratio was 42.9% for the three months ended March 31, 2020, compared to 42.94% for the same period in 2019 and 58.07% for the three months ended December 31, 2019, which included $46.4 million in merger-related expenses.
The bond portfolio metrics at 3/31/2020, showed a weighted average life of 3.08 years and projected annual cash flows of approximately $2.2 billion.
Our nonperforming assets at quarter end March 31, 2020, totaled $67,179,000 or 35 basis points of loans and other real estate.
The March 31, 2020, nonperforming assets total was made up of $61,449,000 in loans, $278,000 in repossessed assets and $5,452,000 in other real estate.
Of the $67,179,000 in nonperforming assets, $13,187,000 or 20% are energy credits, $12,869,000 of which are service company credits and $318,000 are production company credits.
Since March 31, 2020, there have been no material deletions from the nonperforming assets list.
Net charge-offs for the three months ended March 31, 2020, were $801,000.
There was no addition to the allowance for credit losses during the quarter ended March 31, 2020.
The average monthly new loan production for the quarter ended March 31, 2020, was $476 million.
Loans outstanding at March 31, 2020, were $19.127 billion.
The March 31, 2020, loan total is made up of 36% fixed rate loans, 36% floating rate loans and 28% that reset at specific intervals.
Eric, can you please assist us with questions? | prosperity bancshares q1 earnings per share $1.39.
q1 earnings per share $1.39. |
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Gary.
Before we begin, let me make the usual disclaimers.
With the hard work of our entire team, the combination of Prosperity and LegacyTexas continues to bear fruit as reflected in our positive results for the first quarter.
Prosperity Bank has been ranked as the number 2 best bank in America for 2021 and has been in the top 10 of Forbes' America's Best Banks since 2010.
Our net income was $133.3 million for the three months ending March 31, 2021, compared with $130.8 million for the same period in 2020, an increase of $2.5 million or 1.9%.
The net income per diluted common share was $1.44 for the three months ended March 31, 2021, compared with $1.39 for the same period in 2020, an increase of 3.6%.
Our annualized returns on average assets, average common equity and average tangible common equity for the three months ended March 31, 2021, were a 1.54% return on average assets, 8.6% return on average common equity and 18.43% on average tangible common equity.
Our Prosperity's efficiency ratio, excluding net gains and losses on the sale or writedown of assets and taxes, was 41.25% for the three months ended March 31, 2021.
We continue to watch expenses but also expect to make prudent capital expenditures to plan for our future needs and increase shareholder value.
Our loans at March 31, 2021, were $19.6 billion, an increase of $511 million or 2.7% when compared to $19.127 billion at March 31, 2020, primarily due to a $558 million increase in warehouse purchase program loans.
Our linked quarter loans decreased $608 million or 3% from $20.2 billion at December 31, 2020, and that was primarily due to a $570 million decrease in the Warehouse Purchase Program loans, more of a seasonal issue.
At March 31, 2021, the company had $1.1 billion in PPP loans.
At March 31, 2021, our oil and gas loans totaled $503 million, net of the discount and excluding the PPP loans totaling $142 million compared with oil and gas loans of $718 million net of the discount at March 30, 2020.
This represented a decrease of $214 million in oil and gas loans year-over-year, most of which was planned.
Our deposits at March 31, 2021, were $28.7 billion, an increase of $4.9 billion or 20.7% compared with $23.8 billion at March 31, 2020.
Our linked quarter deposits increased $1.4 billion or 5.1%, 20.5% annualized from $27.3 billion at December 31, 2020.
Deposits continue to grow as the government stimulus payments and other assistance continues.
Consumers are now spending more, and we hear from restaurant and other business owners regarding the strength of their business.
The PPP loans also contributed liquidity to businesses, some of which, such as hotels, hospitality services, restaurants were in dire need of the funds.
Our year-over-year nonperforming assets decreased 34.2%.
Our nonperforming assets totaled $44.2 million or 15 basis points of quarterly average interest-earning assets at March 31, 2021, compared with $67.2 million or 25 basis points of quarterly average interest-earning assets at March 31, 2020.
The economy is doing well and should continue to improve as more and more people are vaccinated and more businesses reopen.
Texas and Oklahoma both have bright futures.
According to the Dallas Federal Reserve, Texas now has the fastest-growing population in the nation.
Further, the Dallas Fed Reserve is projecting over 6% job growth, meaning over 700,000 new jobs in Texas for 2021, and Texas is expected to outperform most of the other states for the next three years.
Companies continue to move to Texas with HP and Oracle announcing headquarter moves and other companies such as Tesla and such as Tesla and Samsung announcing a major expansion into Texas.
Oklahoma is also projected to have population growth for 2021 and has seen expansion of many of its large businesses operating in the state, including Boeing, American Airlines, Costco and Amazon.
Consumer spending in Oklahoma is above early 2020 levels and retail job additions and new housing permits are higher than the average U.S. rate.
We are carefully monitoring office building, hospitality and oil and gas loans but continue to participate in these areas with experienced borrowers that can withstand the ups and downs of their industries.
As bank's stock prices have increased, there are more conversations regarding mergers and acquisitions.
I believe you will see more transactions throughout the year unless new tax rates are introduced, which may change the market.
I expect that net interest margins will continue to decline.
Regulatory burden will increase under the current administration, and technology will continue to be ever-changing, expensive and increasingly prevalent, which is a recipe for more consolidations.
We have a strong team and a deep bench of prosperity, and we'll continue to work hard to improve everyone's quality of life and shareholder value.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended March 31, 2021, was $254.6 million compared to $256 million for the same period in 2020, a decrease of $1.4 million or 0.6%.
The current quarter net interest income includes $16.3 million in fair value loan income and $13 million in fee income from PPP loans.
The net interest margin on a tax equivalent basis was 3.41% for the three months ended March 31, 2021, compared to 3.81% for the same period in 2020 and 3.49% for the quarter ended December 31, 2020.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2021, was 3.19% compared to 3.36% for the same period in 2020 and 3.26% for the quarter ended December 31, 2020.
The net interest margin has been impacted by an influx of excess liquidity since the start of the pandemic.
Excess liquidity during the first quarter of 2021 impacted the net interest margin by five basis points compared to the quarter ended December 31, 2020, and by 15 basis points compared to the same period in 2020.
Noninterest income was $34 million for the three months ended March 31, 2021, compared to $34.4 million for the same period in 2020 and $36.5 million for the quarter ended December 31, 2020.
Noninterest expense for the three months ended March 31, 2021, was $119.1 million compared to $124.7 million for the same period in 2020.
On a linked-quarter basis, noninterest expense decreased $1.1 million from $120.2 million for the quarter ended December 31, 2020.
For the second quarter of 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio was 41.3% for the three months ended March 31, 2021, compared to 42.9% for the same period in 2020 and 40.8% for the three months ended December 31, 2020.
During the first quarter of 2021, we recognized $16.3 million in fair value loan income.
This amount includes $6.3 million from anticipated accretion and $10 million from early payoffs.
We estimate fair value loan income for the second quarter of 2021 to be around $4 million to $5 million.
This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs.
Also, during the first quarter 2021, we recognized $13 million in fee income from PPP loans, majority from the forgiveness of the first round PPP loans.
As of March 31, 2021, the first round of PPP loans had a remaining deferred fee balance of $9.4 million, we anticipate more than half of this remaining balance will be recognized in the second quarter 2021 due to loan forgiveness.
Regarding the second round of PPP loans, as of March 31, 2021, we recorded $530.7 million in loans and generated about $24 million in deferred fees, which will be recognized over a five year period or until the PPP loan is forgiven.
The bond portfolio metrics at 3/31/2021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2 billion.
Our nonperforming assets at quarter end March 31, 2021, totaled $44.162 million or 22 basis points of loans and other real estate compared to $59.570 million or 29 basis points at December 31, 2020.
This represents approximately a 26% decline in nonperforming assets.
The March 31, 2021 nonperforming asset total was comprised of $43.338 million in loans, $362,000 in repossessed assets and $462,000 in other real estate.
Of the $44.162 million in nonperforming assets, $9.505 million or 22% are energy credits, all of which are service company credits.
Since March 31, 2021, $844,000 in nonperforming assets have been removed.
Net charge-offs for the three months ended March 31, 2021, were $8.858 million compared to $7.567 million for the quarter ended December 31, 2020.
No dollars were added to the allowance for credit losses during the quarter ended March 31, 2021.
The average monthly new loan production for the quarter ended March 31, 2021, was $645 million.
This includes an average of $177 million in PPP loans per month.
Loans outstanding at March 31, 2021, were approximately $19.6 billion, which includes approximately $1.1 billion in PPP loans.
The March 31, 2021 loan total is made up of 39% fixed rate loans, 36% floating rate loans and 25% that reset at specific intervals.
Gary, can you please assist us with questions? | q1 earnings per share $1.44. |
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Jamie.
Before we begin, let me make the usual disclaimers.
We are pleased with our second quarter 2020 results and with completing the operational integration of Legacy on schedule in early June.
The team members from Legacy, now Prosperity, have been excellent and we could not have achieved such a smooth integration without their commitment and efforts.
We remain excited about the combination and look forward to continuing to build the best bank anywhere.
For the second quarter of 2020, we showed impressive returns on average tangible common equity of 19.98% annualized and on average assets of 1.61%.
Our earnings were $130.9 million in the second quarter of 2020 compared with $82 million for the same period in 2019, an increase of $48.6 million or 59.1%.
Our diluted earnings per share were $1.41 for the second quarter of 2020 compared with the $1.18 for the same period in 2019, an increase of 19.5%.
The second quarter 2020 earnings per share of $1.41 includes a $0.22 income tax benefit, a $0.06 charge for merger related expenses and a $0.03 charge for the writedown of fixed assets related to the merger and some CRA funds.
In summary, it was $0.22 in benefit to earnings and $0.09 in inductions mostly related to the merger.
Loans at June 30, 2020 were $21.025 billion, an increase of $10.4 billion or 98.6% compared with $10.587 billion at June 30, 2019.
Our linked quarter loans increased $1.898 billion or 9.9% from the $19.127 billion at 31, 2020, of which $1.392 billion were SBA Paycheck Protection Program, sometimes referred to as PPP loans.
Mortgage warehouse loans also increased $843 million in the second quarter 2020 compared to the first quarter.
Our core loans, excluding held for sale and the warehouse purchase program and the PPP loans, decreased $311 million.
However, a portion of this decrease resulted from loans that were intentionally removed that were identified in our due diligence of Legacy.
We saw strong loan growth in the first part of the second quarter but that slowed as business shut down or reduced operations in response to various government orders.
Our deposits at June 30, 2020 were $26.153 billion, an increase of $9.265 billion or 54.9% compared with $16.888 billion at June 30, 2019.
Our linked quarter deposits increased $2.326 billion or 9.8% from the $23.826 billion at March 31, 2020.
Historically, our deposits are lower in the second quarter of the year compared with the first quarter and then begin to increase in the third and fourth quarters for us.
But this year, second quarter deposits are higher.
A large portion is from the PPP loans as well as reduction in customer spending and customer saving [Phonetic] right now.
With regard to asset quality, it's always been one of the primary focuses of our bank and always will be.
I have always said you will like us in the good times but love us in the bad times, and this is playing out to be true again during this pandemic and oil price downturn.
Nonperforming assets totaled $77.9 million or 28 basis points of quarterly average interest earning assets at June 30, 2020.
We continue to provide relief to our loan customers through loan extensions and deferrals when possible.
For the second quarter of 2020, net charge-offs were $13 million.
Of these charge-offs, $12.4 million were related to PCD loans with specific reserves of $28.5 million that we acquired in the merger.
So far, $16.1 million in specific reserves were released to the general reserve in addition to the $10 million provision for loan losses for the second quarter.
M&A activity has subsided during this pandemic.
Although there are -- there are some conversations and probably a few deals working, we believe that the M&A activity will start to pick up as businesses reopen and economic activity increases.
Size does seem to matter now, especially with lower net interest margins, the need for increased technology and the potential for additional regulatory burden if there is a change in the administration.
An example is the increased volume at our customer call center, with many older customers wanting to set up online and mobile banking that have previously not been interested in doing so.
The Blue Chip consensus forecast estimates that fourth quarter 2020 GDP will end at a negative 5.6% compared with the fourth quarter of 2019.
However, they're forecasting a positive 4.8% GDP for the fourth quarter of 2021 compared with the fourth quarter of 2020.
They are also forecasting an unemployment rate of 9.4% for the fourth quarter of 2020 compared with unemployment rate of 6.9% for the fourth quarter of 2021.
Based on these estimates, 2021 looks bright.
We are positive about our Company's future.
While our operating environment and economy are changing frequently, we remain focused on addressing whatever comes our way and taking care of our customers and associates.
Prosperity continues to focus on building core relationships, maintaining sound asset quality and operating the bank in efficient manner while investing in ever-changing technology and product distribution channels.
We intend to continue to grow the Company both organically and through mergers and acquisitions.
We want to develop people to be the next generation of leaders, make every customer experience easy and enjoyable and operate in a safe and sound manner.
Let me turn over our discussion to Asylbek, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended June 30, 2020 was $259 million compared to $154.8 million for the same period in 2019, an increase of $104.1 million or 67.2%.
The increase was primarily due to the merger with LegacyTexas in November 2019 and loan discount accretion of $24.3 million in the second quarter 2020.
The net interest margin on a tax equivalent basis was 3.69% for the three months ended June 30, 2020 compared to 3.16% for the same period in 2019 and 3.81% for the quarter ended March 31, 2020.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended June 30, 2020 was 3.33% compared to 3.14% for the same period in 2019 and 3.36% for the quarter ended March 31, 2020.
Non-interest income was $25.7 million for the three months ended June 30, 2020 compared to $30 million for the same period in 2019.
The current quarter non-interest income was affected by $3.9 million in writedown of certain assets and general impacts of COVID-19 pandemic.
Non-interest expense for the three months ended June 30, 2020 was $134.4 million compared to $80.8 million for the same period in 2019.
The increase was primarily due to the merger with LegacyTexas and one-time merger related expenses of $7.5 million due to the core system conversion that occurred in June.
In addition to this merger-related expenses, the second quarter results reflected elevated expenses related to increased mortgage activities.
With the core system conversion and operational integration process behind us, we do not anticipate any significant merger related expenses going forward, and we expect to start realizing the remaining cost savings beginning in the third quarter of 2020.
We expect this additional savings to be about $7 million to $9 million per quarter.
This, combined with the savings realized in the first and second quarter, will be in line with our previously stated 25% cost savings in non-interest expense.
The efficiency ratio was 46.56% for the three months ended June 30, 2020 compared to 43.74% for the same period in 2019 and 42.9% for the three months ended March 31, 2020.
Excluding merger related expenses of $7.5 million, the efficiency ratio was 43.97% for the three months ended June 30, 2020.
The bond portfolio metrics at 6/30/2020 showed a weighted average life of 2.69 years and projected annual cash flows of approximately $2.3 billion.
Our nonperforming assets at quarter-end June 30, 2020 totaled $77,942,000 or 37 basis points of loans and other real estate.
The June 30, 2020 non-performing assets total was made up of $71,595,000 in loans, $187,000 in repossessed assets and $6,160,000 in other real estate.
Of the $77,942,000 in nonperforming assets, $12,173,000 or 16% are energy credits, $12,73,000 of which are service company credits and $100,000 are production company credits.
Since June 30, 2020, $15,786,000 has been removed from the nonperforming assets list through the sale of collateral.
This represents 20% of the nonperforming assets dollars.
Net charge-offs for the three months ended June 30, 2020 were $13,01,000.
$10 million was added to the allowance for credit losses during the quarter ended June 30, 2020.
The average monthly new loan production for the quarter ended June 30, 2020 was $871 million.
This includes a total of $1.430 billion in PPP loans booked during the quarter.
Loans outstanding at June 30, 2020 were $21.025 billion.
The June 30, 2020 loan total is made up of 39% fixed rate loans, 36% floating rate loans and 25% loans resetting at specific intervals.
The fixed rate percentage increased somewhat due to the inclusion of the PPP loans.
Jamie, can you please assist us with questions? | prosperity bancshares, inc q2 earnings per share $1.41.
q2 earnings per share $1.41.
loans increased $1.898 billion or 9.9% during q2 2020.
qtrly net interest income before provision for credit losses was $259.0 million compared with $154.8 million. |
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
Tim Timanus, our Chairman, is unable to join us today.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Randy Hester, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Sean.
Before we begin, let me make the usual disclaimers.
For the second quarter of 2021, Prosperity had strong earnings, core loan growth, deposit growth, continued sound asset quality, impressive cost controls, our return on average tangible common equity of 17.49% and remains well reserved.
Prosperity Bank has been ranked as the number two Best Bank in America for 2021 and has been in the top 10 of Forbes America's Best Banks since 2010.
The unemployment rates continue to increase and GDP growth continues at a high level as forecasted last year with the reopening of the economy.
We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies.
Further, businesses and individuals continue to move to Texas for lower tax rates and a better quality of life.
Our earnings were $130.6 million in the second quarter for 2021 and compared with $130.9 million for the same period in 2020.
The second quarter of 2020 included a tax benefit for net operating losses of $20.1 million or $0.22 per diluted common share as a result of the enactment of the CARES Act.
Diluted earnings per share were $1.41 for the second quarter of 2021 and for the same period in 2020.
Earnings per share for the second quarter of 2020, included the $0.22 tax benefit, partially offset by a $0.06 charge merger-related expense and a $0.03 charge for the write-down of fixed assets related to the merger and some CRA investment funds.
The net effect was a positive $0.13 in earnings per share for the second quarter of 2021, a 10.2% increase after considering the adjustments in the second quarter of 2020.
Loans on June 30, 2021, were $19.2 billion, a decrease of $1.7 billion or 8.4% compared with $21 billion on June 30, 2020.
Our linked quarter loans decreased $387 million or 2% from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans.
On June 30, 2021, the company had $780 million of PPP loans compared with $1.4 billion of the PPP loans on June 30, 2020, and $1.1 billion of PPP loans on March 31, 2021.
The linked quarter loans, excluding the Warehouse Purchase Program and PPP loans increased $148 million or nine basis points, 3.7% annualized from the $16.2 billion on March 31, 2021.
Our deposits on June 30, 2021, were $29.1 billion, an increase of $2.9 billion or 11.3% compared with $26.1 billion on June 30, 2020.
Our linked quarter deposits increased $347 million or 1.2%, 4.8% annualized from the $28.7 billion on March 31, 2021.
We believe that the deposit inflows are starting to normalize as people are spending money again and stimulus payments have been reduced.
However, the child tax credit payments should again add deposits to the banks.
Our asset quality has always been one of the primary focuses of our bank.
Our nonperforming assets totaled $33.7 million or 11 basis points of quarterly average interest-earning assets as of June 30, 2021, compared with $77.9 million or 28 basis points of quarterly average interest earning assets as of June 30, 2020, a 56.8% decrease from last year.
Nonperforming assets were $44.2 million or 15 basis points of quarterly average interest-earning assets as of March 31, 2021.
M&A seems to be regaining momentum.
We've had more conversations with bankers considering opportunities this quarter.
The continued net interest margin pressure, the higher technology costs, the salary increases, loan competition, succession planning concerns, and increased regulatory burden, all point to a continued consolidation.
As mentioned in my opening comments, we believe the U.S. economy is starting to normalize, which has helped reduce unemployment and cause above normal growth rates in GDP.
We are seeing higher prices for gas and groceries, labor shortages, inventory shortages and more.
We believe that Prosperity is well positioned to grow along with the Texas and Oklahoma economies.
We have a deep bench of associates with a passion to help Prosperity and our customers succeed.
Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.
We continue to grow the economy, both -- we intend to continue to grow the company both organically and through mergers and acquisitions.
We're helping to make it the success it has become.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended June 30, 2021, was $245.4 million compared to $259 million for the same period in 2020, a decrease of $13.6 million or 5.2%.
The current quarter net interest income includes $12.2 million in fair value loan income compared to $24.3 million in the second quarter 2020, a decrease of $12.1 million.
Net interest income also continues to be impacted by the Paycheck Protection Program and Warehouse Purchase Program.
The second quarter 2021 net interest income, excluding the impacts of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the first quarter 2021.
The net interest margin on a tax equivalent basis was 3.11% for the three months ended June 30, 2021, compared to 3.69% for the same period in 2020 and 3.41% for the quarter ended March 31, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2021, was 2.96% compared to 3.33% for the same period in 2020, and 3.19% for the quarter ended March 31, 2021.
The decrease was primarily due to a change in the mix of interest-earning assets and excess liquidity.
Noninterest income was $35.6 million for the three months ended June 30, 2021, compared to $25.7 million for the same period in 2020 and $34 million for the quarter ended March 31, 2021.
Noninterest expense for the three months ended June 30, 2021, was $115.2 million compared to $134.4 million for the same period in 2020.
On a linked-quarter basis, noninterest expense decreased $3.9 million from $119.1 million for the quarter ended March 31, 2021.
The current quarter benefited from gains on sale of ORE assets of $1.8 million and a decrease in salary and benefits.
The decrease in salary and benefits is primarily due to lower employment-related taxes for restricted stock vested during the first quarter 2021 and lower discretionary incentives.
For the third quarter 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio was 41% for the three months ended June 30, 2021, compared to 46.6% in for the same period in 2020, which included $7.5 million in merger-related expenses and 41.3% for the three months ended March 31, 2021.
During the second quarter 2021, we recognized $12.2 million in fair value loan income.
This amount includes $4.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $7.9 million from early payoffs.
We estimate fair values -- sorry, we estimate fair value loan income for the third quarter of 2021 to be around $3 million to $4 million.
This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs.
Looking forward, we expect the income from early paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCD loans with large discounts.
The remaining discount balance is $25 million.
Also, during the second quarter 2021, we recognized $10.3 million in fee income from PPP loans.
As of June 30, 2021, PPP loans had a remaining deferred fee balance of $28.3 million.
The bond portfolio metrics at 6/30/2021, showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion.
Our NPAs at quarter end June 30, '21 totaled $33,664,000 or 0.17% of loans and ORE compared to $44,162,000 or 0.22% at March 31, '21.
This represents approximately a 24% decline in NPAs.
The June 30, '21 NPA total was comprised of $33,210,000 in loans, $310,000 in repossessed assets and only $144,000 in ORE.
Of the $33,664,000 in NPAs, $8,378,000 or 25% are energy credits, all of which are service company credits.
Since June 30, '21, 1,448 -- I'm sorry, $1,448,000 in NPAs have been put under contract for sale.
It doesn't necessarily mean they're guaranteed to close, but they are under contract and expected to close.
Net charge-offs for the three months ended June 30, '21 were $4,326,000 compared to $8,858,000 for the quarter ended March 31, '21.
No dollars were added to the allowance for credit losses during the quarter ended June 30, '21, nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended June 30, '21, was $641,000.
This includes a total of $73.8 million in PPP loans booked during the second quarter.
Loans outstanding at June 30, '21 were approximately $19.3 billion, which includes approximately $780 million in PPP loans.
The June 30, '21 loan total is made up of 39% fixed-rate loans, 36% floating and 25% variable resetting at specific intervals.
Sean, can you please assist us with questions? | prosperity bancshares q2 earnings per share $1.41.
q2 earnings per share $1.41.
qtrly net interest income before provision for credit losses $245.4 million versus $259.0 million. |
I'm Charlotte Rasche, General Counsel of Prosperity Bancshares.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Matt.
Before we begin, let me make the usual disclaimers.
I'm pleased to report that because of the confidence in our company, our strong capital position and our continued success, our Board of Directors voted to increase the fourth quarter dividend to $0.52, a 6.1% increase from the third quarter.
Prosperity continues to do well, and we want to share that success with our shareholders.
Additionally, as our stock price experienced declines in the third quarter, Prosperity repurchased 767,134 shares of its common stock at a weighted price of $67.87.
Prosperity Bank was ranked by Forbes as the second best bank in America for 2021 and has been in the top 10 of the Forbes list since 2010.
Prosperity reported net income of $128.6 million for the quarter ended September 30, '21 compared to $130 million for the same period in 2020.
The net income per diluted common share was $1.39 for the quarter ended September 30, 2021 and compared with $1.40 for the same period in 2020.
Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.2% and return on assets of 1.42% for the third quarter of 2021.
Net interest margins have been stressed throughout the low rate environment.
However, we believe this should improve if interest rates rise as projected as the bank is positioned for increased earnings in a higher rate environment.
Our loans on September 30, 2021 were just shy of $19 billion, a decrease of $1.8 billion or 8.8% and compared with $20.8 billion on September 30, 2020.
Our linked quarter loans, excluding Warehouse Purchase Program and PPP loans increased $217 million or 1.3%, 5.3% annualized from $16.4 billion on June 30, 2021.
We saw loan growth throughout the company with the exception of the Dallas-Fort Worth area as we continue to reduce loans that were categorized as PCD loans at the time of the merger as well as loans in the nonrecourse structure commercial real estate category.
Excluding these categories, Dallas/Fort Worth continues to show solid growth and win some marquee deals in their area.
Deposits on September 30, 2021, were $29.5 billion, an increase of $3 billion or 11.3% and compared with $26.5 billion on September 30, 2020.
Our linked quarter deposits increased $341 million or 1.2%, 4.7% annualized from $29.1 billion on June 30, 2021.
Deposits continue to increase, which we believe is due in part to the government benefits and programs implemented during the pandemic and more people saving to have a safety net after the recent events.
Our nonperforming assets totaled $36.5 million or 11 basis points of quarterly average interest-earning assets on September 30, 2021, compared with $69 million or 24 basis points of quarterly average earning assets on September 30, 2020, and $33 million or 11 basis points of quarterly average interest-earning assets on June 30, 2021.
The reduction in nonperforming assets year-over-year is 47.4%.
The allowance for credit losses on loans was $287 million or 1.73% of total loans when excluding Warehouse Purchase Program, and PPP loans on September 30, 2021.
The allowance for unfunded commitments was $29.9 million on September 30, 2021, unchanged from prior periods.
This is a total reserve of $317 million.
Our net charge-offs were $15.7 million for three months ending September 30, 2021.
Net charge-offs included $4.6 million related to resolved PCD loans and $10.8 million related to a partial charge-off of one commercial structure real estate loan that was not a PCD loan and obtained through the acquisition.
The PCD loans have specific reserves of $3.1 million, of which $2.2 million was allocated to the charge-offs and $944,000 was moved to the general reserve.
Further, an additional $14.3 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve.
Overall, in the third quarter 2021, we resolved $54.9 million in acquired loans at $15.7 million in net charge-off and we leased $15.2 million to the general reserve.
We have seen more, but with regard to acquisitions, we've seen more merger and acquisition transactions recently and believe that due to increases in technology and staffing cost, additional government regulations and succession planning concerns, there will be continued activity, especially if current market valuations continue.
We remain ready to enter conversations and negotiations when it's right for all parties and is appropriately accretive to our existing shareholders.
The Texas and Oklahoma economies continue to benefit from companies reloading from states with higher taxes and more regulation.
Texas is projected to increase jobs by 493,000 in 2021.
This increase, combined with people moving to the state requires additional housing and infrastructure, a driver for loans and increased business opportunities.
We are seeing higher prices for most crops and higher oil prices, which should help the local economies.
Inflation continues to be higher than we would like, but we hope that it will moderate next year as the Federal Reserve begins tapering its asset purchases as expected.
We believe there are also signs that inventories are starting to increase and supply chains are improving, although it will take some time to stabilize and return to normal.
Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended September 30, 2021, was $248.6 million compared to $258.1 million for the same period in 2020, a decrease of $9.5 million or 3.7%.
The current quarter net interest income includes $5.4 million in fair value loan income compared to $22.5 million for the same period in 2020, a decrease of $17.2 million.
The third quarter 2021 net interest income, excluding the impact of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the second quarter 2021.
The net interest margin on a tax equivalent basis was 3.10% for the three months ended September 30, 2021, compared to 3.57% for the same period in 2020 and 3.11% for the quarter ended June 30, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended September 30, 2021, was 3.03% compared to 3.25% for the same period in 2020 and 2.96% for the quarter ended June 30, 2021.
Noninterest income was $34.6 million for the three months ended September 30, 2021, compared to $34.9 million for the same period in 2020 and $35.6 million for the quarter ended June 30, 2021.
Noninterest expense for the three months ended September 30, 2021, was $119.8 million compared to $117.9 million for the same period in 2020.
On a linked-quarter basis, noninterest expense increased $4.6 million from $115.2 million for the quarter ended June 30, 2021.
The increase was primarily due to gain on sale of ORE of $1.8 million recorded during the prior quarter and higher current quarter salaries and benefits resulting from higher incentives.
For the fourth quarter 2021, we expect noninterest expense to be in line with the current quarter or in the range of $118 million to $120 million.
The efficiency ratio was 42.3% for the three months ended September 30, 2021, compared to 40.2% for the same period in 2020 and 41% for three months ended June 30, 2021.
During the third quarter 2021, we recognized $5.4 million in fair value loan income.
This amount includes $3.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $2.1 million from early payoffs.
We estimate fair value loan income from anticipated accretion for the fourth quarter of 2021 to be around $2 million to $3 million.
As of September 30, 2021, the remaining discount balance is $18 million.
Also during the third quarter 2021, we recognized $13.4 million in fee income from PPP loans.
As of September 30, 2021, PPP loans had a remaining deferred fee balance of $15.6 million, with the majority of these deferred fees to be earned in the next two quarters.
The bond portfolio metrics at 9/30 2021 showed a weighted average life of 3.5 years and projected annual cash flows of approximately $2.6 billion.
Our nonperforming assets at quarter end, September 30, '21 totaled $36,549,000 or 19 basis points of loans and other real estate, compared to $33,664,000 or 17 basis points at June 30, '21.
This represents approximately a 9% increase in nonperforming assets, which comes from one loan.
The September 30, '21 nonperforming asset total, was made up of $36,73,000 in loans, $326,000 in repossessed assets and $150,000 in other real estate.
Of the $36,549,000 in nonperforming assets, $5,459,000 or 15% are energy credits, all of which are service company credits.
The $5,459,000 as of September 30, '21 is a 35% decline from $8,378,000 as of June 30, '21.
Since September 30, '21, $7,990,000 in nonperforming assets have been put under contracts for sale, but there is no assurance that these contracts will close.
Net charge-offs for the three months ended September 30, '21, were $15,697,000 compared to $4,326,000 for the quarter ended June 30, '21.
The $15,697,000 includes approximately $11 million charged off on one commercial credit secured by an office building.
No dollars were added to the allowance for credit losses during the quarter ended September 30, '21, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended September 30, '21, was $596 million.
Loans outstanding at September 30, '21 were approximately $18,958 billion, which includes approximately $366 million in PPP loans.
The September 30, '21 loan total is made up of 38% fixed-rate loans, 37% floating rate and 25% variable rate.
Matt, can you please assist us with questions? | compname reports q3 earnings per share $1.39.
q3 earnings per share $1.39.
increase in dividend of 6.1% to $0.52 for q4 2021.
qtrly net interest income before provision for credit losses was $248.6 million compared with $258.1 million. |
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
David Zalman will lead you off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Kate.
Before we begin, let me make the usual disclaimers.
The combination of LegacyTexas Bank and Prosperity Bank effective November 1, 2019 has been one of the most exciting times in Prosperity's history.
The commonalities, the enthusiasm and strengths that both companies offer should not only result in asset growth, but should also enhance customer and associate opportunities, and ultimately increase the shareholder value.
We are excited about Prosperity's future opportunities.
We are proud to announce that Prosperity Bank has been rated in the Top 10 of Forbes Best Banks in America for the seventh consecutive year, and we are the highest rated Texas bank -- the highest rated Texas-based banks.
Before we review the highlights for the quarter, I want to remind everyone that there are many moving parts in the results, including the following.
One, there was a one-time charge of $46.4 million related to the merger.
Two, the merger was effective on November 1, 2019, so the fourth quarter results reflect only two months of income contribution.
And three, the net interest margin is elevated somewhat by a higher loan discount accretion income than we expect to have in future quarters.
For the first quarter of 2020, we expect approximately $13 million to $14 million pre-tax in loan discount accretion.
With regard to the financials.
Net income was $86.1 million for the three months ending December 31, 2019, compared with $83.3 million for the same period in 2018.
Our earnings per diluted common share were $1.01 for three months ending December 31, 2019, compared with the $1.19 for the same period in 2018, and were impacted by merger-related expenses of $46.4 million.
Further, net income was also impacted by higher loan discount accretion than we expect to have in future quarters.
It should also be noted that earnings per share is calculated based on average shares outstanding, which were 85,573,000 for the fourth quarter.
We issued approximately 26,228,000 shares in the Merger.
However, those new shares were only outstanding for two months of the quarter.
As of December 31, 2019, we had 94,746,000 shares outstanding.
With regard to loans.
Loans at December 31, 2019, were $18.8 billion, an increase of $8.4 billion or 81.7% compared with $10.3 billion at December 31, 2018.
Linked-quarter loans increased $8.1 billion or 76.6% from the $10.6 billion at September 30, 2019.
Obviously, the majority of the increase was from the Legacy merger.
Excluding loans acquired in the Merger and new production by the acquired lending operations since November 1, 2019, loans at December 31, 2019, grew $218 million or 2.1% compared with December 31, 2018, and decreased $84 million or 80 basis points on a linked-quarter basis.
The Average loans, excluding the impact of the Merger, increased $407 million or 4% during 2019.
Deposits at December 31, 2019 were $24.2 billion, an increase of $6.9 billion or 40.2% compared with $17.257 billion at December 31, 2018.
Our linked-quarter deposits increased $7 billion -- $7.2 billion or 42% from $16.9 billion at September 30, 2019.
Excluding deposits assumed in the Merger and new deposits generated at the acquired banking centers since November 1, 2019, deposits at December 31, 2019 increased $801 million or 4.6% compared with December 31, 2018, and increased $1.1 billion or 6.7% on a linked-quarter basis.
Asset quality or non-performing assets totaled $62.9 million or 25 basis points of quarterly average interest-earning assets at December 31, 2019 compared with $18.9 million or 10 basis points of quarterly average interest-earning assets at December 31, 2018, and $51 million or 26 basis points of quarterly average interest-earning assets at September 30, 2019.
The increase during the fourth quarter 2019 was primarily due to the Merger.
Prosperity continues to exhibit strong credit quality.
With regard to acquisitions, although the Legacy merger was effective in November, we are still working diligently on the operational integration of our two banks.
Many individuals from both banks are involved in the project and it is on track to be completed in June 2020.
As you can tell from the news, bank mergers and acquisitions activity is robust.
We continue to have conversations with other bankers regarding potential acquisition opportunities and are open to exploring a deal, when it is right for all parties and appropriately accretive to our existing shareholders.
I'd like to discuss, we also have a share repurchase program.
We announced today that our Board of Directors has authorized a share repurchase program under which the Company can purchase up to 5% of its outstanding common stock, approximately 4.7 million shares over the next year.
The Board's approval of this program reflects our continued confidence in Prosperity's future and our commitment to enhancing shareholder value.
As has been our approach previously, management intends to repurchase shares only when the market conditions are favorable to do so.
So overall, despite oil and gas prices remaining in the $55 to $60 per barrel range, Texas and Oklahoma continued to experience employment and population growth, with many companies moving to these states because of the favorable tax environments and business-friendly political climates.
Consumer sentiment remains strong and the trend suggests a positive start to 2020.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended December 31, 2019 was $232 million compared to $157.2 million for the same period in 2018, an increase of $74.8 million or 47.6%.
The increase was primarily due to two months of LegacyTexas net interest income and higher loan discount accretion in the fourth quarter 2019.
The net interest margin on a tax equivalent basis was 3.66% for the three months ended December 31, 2019 compared to 3.15% for the same period in 2018, and 3.16% for the quarter-ended September 30, 2019.
Excluding purchase accounting adjustments, the core net interest margin for the quarter-ended December 31, 2019 was 3.26% compared to 3.1% for the same period in 2018, and 3.14% for the quarter-ended September 30, 2019.
The net interest margin for the quarter-ended December 31, 2019 included only two months of LegacyTexas net interest income.
Noninterest income was $35.5 million for the three months ended December 31, 2019 compared to $29.1 million for the same period in 2018.
The increase in noninterest income was primarily due to two months of LegacyTexas noninterest income, partially offset by the sale and writedown of assets.
Noninterest expense for the three months ended December 31, 2019 was $156.5 million compared to $80.8 million for the same period in 2018.
The increase was primarily due to the merger-related expenses of $46.4 million and two months of LegacyTexas expenses.
Until the conversion, sorry, until the system integration and conversion, we expect noninterest expense to range around $120 million to $125 million per quarter, those are excluding any additional merger-related expenses.
We expect to realize portion of the previously announced cost savings related to the Merger, beginning in the third quarter of 2020.
The efficiency ratio was 58.07% for the three months ended December 31, 2019 compared to 43.2% for the same period in 2018 and 43.7% for the three months ended September 30, 2019.
Excluding merger-related expenses, the efficiency ratio was 40.85% for the three months ended December 31, 2019.
The bond portfolio metrics at 12/31/2019 showed a weighted average life of 3.42 years and projected annual cash flows of approximately $2 billion.
Nonperforming assets at quarter-end December 31, 2019 totaled $62.943 million or 33 basis points of loans and other real estate.
The December 31, 2019 nonperforming asset total was comprised of $55.684 million in loans, $324,000 in repossessed assets, and $6.935 million in other real estate.
Of the $62.943 million in nonperforming assets, $15.811 million or 25% are energy credits, $15.487 million of which are service company credits, and $324,000 are production company credits.
Since December 31, 2019, $2.259 million in other real estate has been put under contract to be sold.
Net charge-offs for the three months ended December 31, 2019 were $1.291 million.
$1.700 million was added to the allowance for credit losses during the quarter-ended December 31, 2019.
The average monthly new loan production for the quarter-ended December 31, 2019 was $496 million.
Loans outstanding at December 31, 2019 were $18.845 million -- excuse me, $18.845 billion.
The December 31, 2019 loan total is made up of 38% fixed rate loans, 34% floating rate, and 28% variable rate loans.
Kate, can you please assist us with questions? | q4 earnings per share $1.01. |
All of this information is available on our website under the Investor Relations section.
The definitions and reconciliations of these non-GAAP measures are contained in the supplemental financial information available on the Company's website.
After our prepared comments are made, our senior management team will be available to address any questions that you may have.
At this time, our Chief Executive Officer, Brent Smith, who will provide some opening comments and discuss our first quarter results and accomplishments.
Before I address our quarterly results, I thought I'd begin with the topic that is at the forefront of all our minds, the COVID-19 pandemic and its impact on the economy, our tenants and specifically on Piedmont.
The COVID-19 pandemic has had a profound impact on our daily lives and communities.
Even more difficult to fully comprehend is the suffering that many have endured in our heartfelt sympathies go out to the families, whose lives have been forever changed.
With the outbreak of the pandemic the Piedmont Board and Management Team set three specific priorities; first make sure we're taking all the necessary steps to protect our tenant and our people; second, preserve our other precious resource, which is our capital; and third, that we prepare with [Technical Issues] future to adapt the business to our very best to anticipate the needs of our customers, be creative and engineer new solutions in ways of doing business and not rely on simply what worked in the past.
As when those other businesses, our top priority is protect our customers, contractors and employees, and I want to reassure you that all of us at Piedmont are focusing our efforts to confront this new global issue.
I could not be prouder of how our team is responded to the challenges that were unimaginable just a few months ago.
During the crisis our building that remained opened to essential workers.
As of today, all of our seven core markets are operating under governors orders for shelter-in-place.
In Atlanta, our second largest market and where our headquarters is located, the governor has begun reopening select businesses to start to rebuild the economy.
That said, I think it's going to be challenging and slower than we would like it to be.
Ultimately, the recovery is largely dependent on the duration of the pandemic, an unknown factor.
At Piedmont, I believe, we are taking proper and conservative precautions, we've doubled down, in fact tripled down on sanitation, hygiene and housekeeping, striving to make our building safe and helping our tenant communicate to their employees to ensure they are doing everything they can to social distance.
To remain six feet apart throughout the buildings, lobby's, elevators and other common areas as well as their offices to prevent the spread of infection.
Today, our essential employees and contractors continue to report to work on site, in shifts utilizing appropriate PPE, while there [Technical Issues] employees continue to work from home without disruption.
Across the portfolio of Piedmont, the entire team is working tirelessly to implement new policies and procedures, extensive signage, expansive cleaning protocols, while evaluating new products and measures to ensure our buildings promote a healthy environment.
Finally, we're providing all the support we can to the local communities and businesses we operate with, to help those who need it to get back on their feet.
And as part of those efforts Piedmont and its related foundation has donated over $40,000 to local charities across all our seven markets including Seniors First in Orlando, NYU Langone hospital in New York City; Meals on Wheels in Northern Virginia, and the Emory Hospital COVID-19 impact fund here in Atlanta, among others.
Turning our attention to Piedmont's tenants and the performance of the first quarter of 2020.
Overall the consequences of the COVID-19 virus outbreak had minimal impact on our operations, and financial results for the first three months for the year.
The nature of our tenancy has never been a more powerful, depreciated component of our strategy than it is today.
With the majority of our tenants investment grade quality and an approximately seven year weighted average lease term remaining in the portfolio, we are well positioned to weather this storm.
That said, we are closely monitoring a couple of areas of our tenant base.
To-date, we've had a limited number of tenants whose businesses and financials have been significantly impacted by the pandemic.
We feel fortunate to have limited exposure to some of the industry's most disrupted about 1% of our forecasted 2020 revenues are related to retail tenants and likewise, about 2% of our 2020 budgeted revenues are associated with the co-working sector.
Digging into rent collection specifics in the first quarter rental receipts came in as anticipated, but as April progressed we had a number of select tenants unable to pay their rent.
So far Piedmont has had 96% of it's tenants submit full rent payment, with many of the remaining seeking some form of rent deferral for the month of April.
Most of these deferral are coming from our smaller tenants, largely food, traveling, consulting, retail, co-working related to provide many services at our properties.
Most of them that subsequently begun to avail themselves the various federal and state relief funds, such as CARES Act loans and the Payment Protection Program, which can be utilized partially to meet rental obligation.
All the requests made to us were carefully reviewed and we had accommodate a limited number of the tenants that have requested deferrals of rent for typically up to three months and repayments scheduled for later this year without penalty or we pay back in 2021 with interest.
Regarding Piedmont's second most precious resource, its capital and liquidity.
We firmly believe we have ample financial capacity to confront the effects of the economic slowdown associated with COVID-19.
The Company committed it's financial obligations, including the servicing its debt, as well as be all its debt covenants with significant positive margins.
Piedmont also has a favorable liquidity position with access to our largely unused $500 million line of credit.
Further, bolstering our liquidity, we have entered into a binding contract to sell our only asset in Philadelphia, 1901 Market Street for $360 million.
I would also note that a significant deposit for the transaction went non-refundable on March 31st.
We intend to use the proceeds from the sale to repay the properties $160 million mortgage, as well as eliminate the balance on our line of credit, which will result in only one small mortgage remaining in our portfolio, where the other 56 properties being unencumbered.
While we are seeing signs of the virus outbreak slowing and the infection curve flattening.
We know that this disruption is not over.
The short-term financial impacts caused by the pandemic on 2020 results are still to be fully realized and the longer-term impacts will depend on a great [Technical Issues] upon the duration of the pandemic, it impacts on our tenants and the speed of the recovery.
Certainly, we think activity has slowed, although we continue to execute some leasing, primarily renewals.
We believe the pandemic will likely push out new leasing activity on the whole about a quarter and delayed some expected growth in the portfolio.
Likewise, the few tenant improvements and redevelopment projects we have scheduled will also be delayed.
While we currently believe the impact on Piedmont earnings will be contained and a majority of those impacts will occur primarily in the second quarter of 2020.
To extend the pandemics impact on our economy, on our tenants and on Piedmont will be dependent upon the duration of pandemic and a depth of financial disruption to our tenants.
Bobby will go into more detail in a moment on some of the factors that could impact the second quarter and the back half of the year.
Focusing back to the first quarter, we are pleased with the operational results from a lease transaction perspective.
During the quarter we completed approximately 417,000 square feet of leasing, which as well as first across all our operating markets and included approximately 120,000 square feet of new tenant leasing.
The first quarter execute leases for recently occupied space reflected a 5% roll up in cash rents and a 15.4% increase in accrual rents.
The larger leases for the quarter include the following: In Boston, Advanced Micro Devices renewed to 2028, approximately 107,000 square feet at 90 Central Street.
In Orlando the law firm at Greenberg Traurig renewed approximately 37,000 square feet to the year 2031 at CNL Center I and at 200 South Orange Avenue; Jones Lang LaSalle signed a renewal expansion through 2026 totaling approximately 20,000 square feet.
Finally in Washington, the Association for Unmanned Vehicle Systems signed a new lease through the end of 2030 for approximately 15,000 square feet at 3100 Clarendon Boulevard.
As of quarter end, the portfolio was approximately 90% leased.
The leased percentage at the end of the quarter includes the transfer into service of our previously out of service asset, the recently redeveloped now 41% lease to [Indecipherable] Tower in Chicago.
Regarding upcoming lease expirations we have low lease expiration over the next 18 months with the only sizable lease being the City of New York at 60 Broad Street, where we remain in discussions for a long-term renewal of substantially all the cities existing 313,000 square foot lease that expired this month.
As common with government tenants, the lease entered holdover status on April 15th with the lease specified post exploration increase in cash rents approximating the current market rental rate.
I would note the benefit of increased straight-line rents would not be recognized until a long-term renewal could be executed, which given the tenant, the decision is likely to be further delayed, due to the pandemic.
Therefore for forecasting purposes we have delayed the potential full roll-up in straight-line rent associated with a long-term lease by approximately six months or until the middle to latter part of next year.
Turning to transactional activity, as we previously announced during the first quarter, we completed the depth purchase in Dallas, Texas, of the Galleria Office Towers, comprising 1.4 million square feet and an adjacent two acre development parcel for a total of $396 million or approximately $273 per square foot, which represents a significant discount to replacement cost.
The acquisition allowed us to establish a sizable position in a strong submarket, so that along with our other assets in Dallas, we could present prospective tenants for the spectrum of high-quality office throughout this growing and diverse Sun Belt market.
With the acquisition, we expect that we will be able to realize additional marketing and operational synergies with our existing operations.
The Galleria Office Towers required to reverse exchange and we match for the disposition of 1901 Market Street in Philadelphia that is expected to close in the middle of the summer.
Therefore there is not a need to make a special dividend distribution related to the substantial nine figure gain we anticipate on the sale of our only Philadelphia property.
I'll share with you today how Piedmont has committed to protecting our people and preserving our capital and liquidity.
As one last point, we remain optimistic about the future commercial office real estate.
We're trying to predict the outcome of this event at least to many more questions than answers, one thing is certain, the industry will change and Piedmont will be positioning itself to succeed.
For the first quarter of 2020, we reported $0.47 per diluted share of core FFO, that's a $0.02 increase, compared to the first quarter of 2019.
Even with the loss of earnings contribution due to dispositions up to almost fully leased assets during 2019 that's the One Independence Square building in Washington, DC and our 500 West Monroe property in Chicago, we were more than able to offset these sales with newly acquired Sun Belt properties in Atlanta and Dallas, as well as with new lease commitments and with the continued roll-up of rents across the portfolio.
AFFO was approximately $19 million for the first quarter, which is lower than typical and impacted by one-time payment of lease commissions on a 520,000 square foot 20-year lease to the State of New York at 60 Broad Street in New York City.
With several leases commencing in Atlanta and in Houston late last year, same-store NOI was approximately 2% on a cash basis and 4% on an accrual basis for the first quarter of 2020.
Turning to the balance sheet, our average net debt core EBITDA ratio for the first quarter of 2020 was 5.7 times and our debt to gross asset ratio was approximately 38.7% at the end of the quarter.
Both metrics reflect higher outstanding debt during the quarter as a result of the purchase of the Galleria Office Towers in February.
During the quarter, we entered into a new $300 million unsecured term loan and used the proceeds to pay down our $500 million line of credit, leaving approximately $350 million of availability.
As Brent mentioned earlier, we plan to pay off the remaining balance on the line, as well as our $160 million mortgage [Technical Issues] the proceeds from the sale of 1901 Market Street, which is expected to close this summer.
After doing so, we expect our leverage ratios to decrease and to be similar to our metrics as of the end of the fourth quarter of 2019.
I would add, there are no scheduled debt maturities until late 2021 and our investment grade ratings from Moody's and Standard & Poor's were both recently reaffirmed with stable outlooks.
Given our low leverage, strong liquidity position and quality of our tenants, we do not currently anticipate any changes to our present dividend level.
We are withdrawing our guidance for 2018.
That said we believe our strong diversified tenant base, a majority of which is investment grade quality, and our attractive portfolio of assets located in highly amenitized easily accessible business centers and our prudent balance sheet, which provides us with excellent liquidity all position us well and we'll mitigate the adverse effects of the pandemic on Piedmont.
I do however, want to provide you with a few additional thoughts on trends that we've seen so far in the second quarter that are guiding our assumptions for how the pandemic could impact us during the rest of the quarter and the back half of the year.
While we continue to execute lease renewals, new tenant leasing activity during the second quarter has been slow and we think this trend will continue throughout the quarter, likely pushing all new tenant leasing goals out at least a quarter which will, in all likelihood modestly lower annual operating revenues for 2020 by $1 million to $2 million and lower our originally anticipated year-end leased percentage.
We expect most of our transient parking income for the second quarter will not occur, that would equate to a reduction of approximately $1 million of net operating income.
And with respect to retail tenant income, which is about 1% of our total 2020 revenues, retail NOI is estimated to decline by approximately $1.5 million.
Cash NOI rent receipts will likely be negatively impacted on a same-store basis, when compared to 2019, due primarily to rent deferral amendments I'll discuss in a moment.
The few redevelopment projects within our portfolio will be delayed for a few months, but are not expected to impact 2020 net income materially.
The sale of 1901 Market Street in Philadelphia is expected to close during the summer and while no other deals are under way any other acquisition or disposition during the year will be pricing, property and market dependent.
Now as Brent noted for the month of April to-date, we've received 96% of our regular monthly rents, with all of our 20 largest tenants representing over a third of our cash receipts paying their April rents.
Of the unpaid 4$amount we do have the number of tenants requesting their leases the restructure.
The focus is primarily been on providing appropriate tenants, we've typically up to three months of rent [Technical Issues] that will, in most cases, be paid back later in 2020 or with interest in 2021, although we have accepted some lease extensions and exchange for deferrals.
To date, we've agreed to about $1 million of rent deferrals per month for three months for 27 of our tenants, representing approximately 400,000 square feet of leases.
These lease amendments as you would expect are primarily with retail, hospitality a smaller co-working tenants.
Regarding our seven tenants in the co-working sector all the one are under traditional lease structures with standard credit requirements and combined total about 2% of our originally forecasted revenues.
No one today, knows how long this pandemic will last, nor the impact will have on so many businesses across the broad spectrum of our economy.
However, we do expect to reevaluate guidance when we have a better grasp of the pandemics broader economic impact after current shelter-in-place orders that are in effect for all of our operating markets are lifted and the longer-term consequences of the COVID-19 pandemic on the economy and more specifically on our tenants can be more thoroughly evaluated.
However, we do believe we are in a fortunate position with no major development projects, with a sound balance sheet, with the team of employees dedicated to providing outstanding service and safety to our tenants, and with a client roster position to recover financially.
With that, I'll now ask our operator to provide our listeners with instructions on how they can submit their questions. | qtrly core ffo of $0.47 per diluted share.
entered into a $300 million unsecured term loan and used proceeds to pay down its $500 million line of credit.
withdrawing its 2020 guidance. |
This information is available on our website at piedmontreit.com under the Investor Relations section.
At this time, our president and chief executive officer, Brent Smith will provide some opening comments and discuss our first-quarter results and accomplishments.
First and foremost, I hope that everyone is and continues to be healthy and safe.
This quarter, we reached a dubious milestone having been in the midst of the pandemic for over year now.
While it has been highly disruptive to the office sector in general and Piedmont's leasing pipeline specifically, we are fortunate that the vast majority of our customers are current on rent and building utilization continues to improve, now approaching an average of 25% across the entire portfolio, primarily led by a return to the workplace by our small to medium size tenants.
While overall daily utilization for the portfolio remains far below pre-COVID-19 levels, that percentage is improving and is expected to continue to ramp up in the second half of the year.
But I will note the daily utilization still varies greatly based on tenant characteristics and geography.
With vaccines becoming widely available for all, we continue to see incremental gains in local economic activity week by week, particularly in our Sunbelt markets as I noted on our last earnings call.
However, this quarter, we track an increase in activity for our Northern markets as well, first since the pandemic began.
In addition, we are beginning to see medium-size space request in the 15,000 to 25,000 square foot range and starting to conduct tours with these tenants.
We're encouraged that our leasing pipeline has strengthened and we feel positive about our ability to generate some leasing momentum headed into the rest of the year.
While we saw consistent upticks in tour activity across the portfolio as the first quarter progressed, a 30% increase actually from January to March, we still anticipate it will take two to three more quarters for Piedmont leasing volumes to approach pre-pandemic levels.
With the USD GDP expected to grow 6.2% in 2021, per Bloomberg's April economist survey, U.S. feels like it's getting back to a new normal.
And with this backdrop, we are encouraged for our tenants, our employees and our stockholders as corporations and large businesses begin to plan their return to the office with most targeting the early fall for the workforce to reenter in mass.
Even more tangible evidence of this improving outlook is the fact that we experienced a sizable uptick in the number of executed leases for the first quarter of 2021.
The company completed approximately 678,000 square feet of leasing, with new tenant leasing accounting for approximately one-quarter of that activity.
Had it not been for one large tenant, new leasing would have actually outpaced renewals.
I would also note that the weighted average term of leases introduce during the quarter was approximately seven years.
Comparing the first quarter of this year to the first quarter of last year, both the number of leases and the overall square footage related to new tenants exceeded the first quarter of 2020s pre-pandemic levels.
Through this leasing activity and customer dialogue, we continue to better understand tenant space needs and design requirements.
I would characterize the majority of new leases is having a space plan matching pre-pandemic levels of square feet per employee, but with a greater focus on creating collaboration space and integration of technology to facilitate work from home and in-office employee communication.
That said, we believe a vast number of firms are still trying to understand what work from home truly means for the organization.
We are finding that medium-size enterprises are having the greatest difficulty in reaching a conclusion and as such, these customers typically requiring 15,000 to 25,000 square feet are those most often requesting shorter-term renewals of two to three years.
One positive note is that these customers are requiring very little tenant incentive or capital to transact on these shorter renewals.
As I noted in our last call, we continue to see the smaller user market, defined as those being less than 10,000 square feet remain rather resilient, almost approaching pre-pandemic levels of activity.
And in a large user segment, to find as those needing more than 50,000 square feet, we continue to see the companies who know their business well, use this market disruption as an opportunity to negotiate more favorable terms from their landlords.
While the large user segment has not recovered to the extent of small users, we are still experiencing elevated levels of activity from large tenants in Dallas, Atlanta, Orlando and Boston.
I am pleased to share that one example of this phenomenon has resulted in an early seven-year renewal of Raytheon's approximately 440,000 square foot lease, comprising the entirety of our 225 and 235 Presidential Way assets in Boston.
A more complete lifting of the larger leases executed during the first quarter of 2021 is included in the supplemental information that we published last night and is available on our website.
Looking ahead, our only expiration of any significance over the next 18 months is the City of New York lease of approximately 313,000 square feet, that remains in holdover at 60 Broad Street.
I am also excited to share that Piedmont has executed a five-year interim lease extension and the Department of Citywide Administrative Services has informed us that the public hearing and final approvals are in process.
As a reminder, all government tenant transactions, the landlord's required to execute documentation prior to the tenant.
Assuming things move forward as anticipated, we expect a conclusion to this interim renewal around the end of the quarter, very much in line with the economics in terms we've shared in the past.
Finally, following our playbook, on the State of New York's lease in 2019, we continue to work with DCAS on a potential 20 year extension at the building beyond this extension.
Taking a step back, I would like to share three trends which are benefiting almost all our operating markets.
First, an accelerating population migration to the Sunbelt, along with other secondary cities which offer businesses and employees a lower cost, higher quality experience.
We believe this great affordability migration will constitute a decade-long trend that, in conjunction with the second trend, which is millennial family formation and a movement to the suburbs, will play well amenitized offices in mixed use environments located along a cities primary Ring Road and higher demand.
And finally, as we have dialogue with our tenants and track leasing activity, we're witnessing a third trend, a flight to quality with a focus on amenitize buildings with unique environments, owned and operated by responsive service oriented landlords.
Piedmont's portfolio is well-positioned to be the beneficiary of all three of these themes, a concentration of well amenitized buildings located near strong housing communities and highly regarded education systems, with easy accessibility to major highway thoroughfares and airports and with more than half of our portfolio in the Sunbelt where population growth is expected to surpass national averages.
But today's tenants are not only focused solely on location and neighboring amenities, the physical attributes of a building have never been more important.
The buildings indoor air and light, HVAC, fresher intake, elevator capacity and outdoor collaboration space are all critical.
In addition to a high quality building and a vibrant environment, customers are demanding a higher quality landlord as well and by that we mean a attentive operator, that focuses on ESG initiatives and which has the capital base and scale to provide tenant offerings and engagement.
Office space is no longer just a real estate product.
Our customers view our offering as a service, which excites us and gives us the opportunity to provide a differentiated product, when that we believe will allow us to achieve greater occupancy and real rates in the prevailing submarket.
Touching briefly on transactional activity.
Although we did not complete a capital transaction during the first quarter,, the Raytheon lease extension will likely provide a catalyst.
This is the first time that that tenant has executed renewal that provides a total of 10 years of remaining lease term at the buildings.
As the two assets represented by this renewal are now 100% leased to a single credit-worthy tenant with significant term, we believe that value has been maximizing the properties and we have a unique opportunity to realize that value which has been created.
Therefore, we began marketing our 225 and 235 Presidential Way properties for sale late in the first quarter and we received a good deal of interest.
We are therefore anticipate recycling the proceeds from the sale into high quality amenitized assets would fit strategically into one of our core markets.
Finally, I want to highlight the recent progress that we made on several key ESG initiatives.
ESG have gain more widespread investor and tenant attention here in the U.S. over the past few years and Piedmont's management team has made it a priority to establish a best-in-class ESG platform, getting involved to help to make our communities and planet a better place to live while ensuring our employees, tenants and vendors are treated with respect and given equal opportunities.
I would like to take a moment and point out a few recent achievements.
On the sustainability front, out of 1,000 of participants in the U.S. ENERGY STAR program, Piedmont was recently named one of 70 company's designated the 2021 ENERGY STAR Partner of the Year and Piedmont is the only office REIT headquartered in the Southeast U.S. to receive this designation.
I'm also very pleased with ENERGY STAR's recognition of our ongoing commitment to reducing our portfolio's carbon footprint, including lower energy consumption, in addition to water conservation efforts and reduced landfill waste from our buildings.
Approximately three-quarters of our portfolio is currently ENERGY STAR certified and we continue to make significant progress toward our goal of reducing the overall energy consumption by 20% at our properties over a 10-year period ending in 2026.
Additionally, during the first quarter, our five Atlanta Galleria properties were awarded the WELL Health-Safety Rating by the International WELL Building Institute.
The WELL Health Safety Rating is a new evidence based third-party verified rating for all new and existing buildings.
It focuses on operational policies, maintenance protocols, stakeholder engagement and emergency plans to address the post COVID-19 environment now and into the future.
Our Atlanta Galleria properties representing over 2.1 million square feet of rentable space, were the first properties in our portfolio, as well as the first for all office post the Atlanta to receive this new rating and we're actively working to expand this program across our portfolio.
Additionally, Piedmont recently partnered with Morehouse College, Division of Business and Economics in Atlanta and with Harvard University School of Business in Washington D.C. to introduce the Piedmont Office Realty Trust Scholarship Program.
The program provides scholastic support to rising sophomore students, taking degrees in economics, finance, accounting, engineering or real estate with a renewable scholarship for the Piedmont scholars sophomore, junior and senior years.
Along with access to an executive shadowing program, the scholarship offers each recipient the opportunity to intern with Piedmont and acquire a first-hand experience in commercial real estate and participate in a board-level mentoring program.
It is our hope that this program will provide need based aid to ambitious students and expose the more diverse African pool to a career in the commercial real estate industry.
Our ESG efforts are overseen by our board-level ESG Committee which is chaired by Barbara Lang, the former president of Washington D.C.'s Chamber of Commerce.
Ms. Lang joined our board six years ago and immediately began making a positive impact, helping to lead the company's environmental objectives and social involvement in our communities.
For additional information on our overall ESG program, I encourage you to review our annual ESG report that's available on our website.
For the first-quarter 2021, our reported net income increased to $9.3 million, up 7.3% from the same period a year ago.
We also reported $0.48 per diluted share of core FFO up $0.01 over the first-quarter 2020.
AFFO was almost $39 million for the first quarter, well in excess of our current quarterly dividend level.
Rent roll ups, roll downs on executed leases during the first-quarter 2021 were largely influenced by the significant renewal with Raytheon, that Brent mentioned earlier.
Accrual based rents increased on average approximately 7% while cash rents decreased approximately 2.8%.
However, excluding the strategic Raytheon renewal, cash and accrual rents for the remainder of the leasing activity rolled up 8% and 10.1% respectively.
Same-store net operating income increased almost 4% on a cash basis and was down slightly on an accrual basis.
The increase in cash basis, same-store NOI was primarily attributable to the burn off of significant abatements at 11.55 Perimeter Center West in Atlanta and Arlington Gateway in Washington D.C., along with income associated with WeWork's termination in Orlando.
These increases were partially offset by reductions and transient parking and retail revenues as a result of the lingering effects of the pandemic, and by 0.8% decrease in portfolio occupancy during the first quarter of this year.
We continue to believe that same-store NOI on both the cash and accrual basis will end the year positively between 3% and 5% and economic occupancy is also expected to improve with the burn off of over 400,000 square feet of abatement during the second quarter.
Our overall lease percentage is estimated to end the year around 87% to 88%, but this estimate is before any capital transactions.
Turning to the balance sheet, our average net debt to core EBITDA ratio improved during the first quarter of 2021 to 5.6 times.
And our debt to gross asset ratio at the end of the first quarter remained relatively flat, compared to 2020's year-end at approximately 34.9%.
Our tenant rent collections have returned to near pre-COVID levels at over 99% collections and we now only have approximately $3 million of previously deferred 2020 rents remaining to be paid during 2021.
We currently have approximately 90% of our $500 million line of credit available for strategic capital transactions, along with proceeds expected later this year from the sale of the two Presidential Way assets in Boston.
We plan to repay the only secured debt remaining on our balance sheet, a small $27 million mortgage, once the loan allows for prepayment without yield maintenance later this quarter.
We also plan to go to the public debt markets later this year to refinance a $300 million term loan that matures at the end of November.
At this time, I'd like to reaffirm our 2021 guidance in the range of $1.86 to $1.96 per diluted share for core FFO for the year.
Also as a reminder, this is annual guidance and results vary by a penny or two by quarter due to lease commencements and expirations as a result of seasonal expenses and other such items.
Further, this guidance is before any significant capital transactions.
We'll adjust our guidance range when such transactions occur.
As Brent mentioned earlier, we are cautiously optimistic regarding our leasing pipeline, but please be reminded there is typically a six- to 12-month lag between the time a new tenant lease is executed and when occupancy physically occurs.
With that, I'll now ask our operator provide our listeners with instructions on how they can submit their questions. | qtrly core ffo of $0.48 per share.
sees 2021 nareit ffo and core ffo per diluted share $1.86 to $1.96. |
We appreciate you joining us today for Piedmont's fourth quarter 2021 earnings conference call.
At this time, our president and chief executive officer, Brent Smith, will provide some opening comments and discuss our fourth quarter and annual results and accomplishments.
On the line with me is Eddie Guilbert, our executive vice president of finance and treasurer; George Wells, our chief operating officer; and Bobby Bowers, our chief financial officer; as well as other members of the senior management team.
Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 ENERGY STAR partner of the year and achieving LEED status now on roughly half of the portfolio.
Today, I'm going to cover Piedmont's operational success and leasing momentum along with an update on capital allocation activities across our markets.
Focusing on the fourth quarter of 2021, our FFO per share was $0.51, in line with market consensus.
Portfolio operating metrics were solid with same-store NOI on a cash basis increasing 5.8%.
We leased approximately 400,000 square feet, generated a 3% increase in second-generation cash rents and executed an average lease term of six and a half years, illustrating the longer-term view taken by most of our customers.
Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing.
Overall, leasing activity remained robust and well dispersed across the portfolio with over 40 leases and amendments executed during the fourth quarter.
And while the omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated and we expect the momentum from the second half of 2021 to continue.
Today, our leasing pipeline stands at over 500,000 square feet of negotiations.
And we're trading LOIs on an additional 1 million square feet, which positions Piedmont for space absorption in 2022 and with only about 1 million square feet of existing leases expiring or about 6% of the portfolio.
Boston, Dallas and Atlanta remain our most active leasing markets, albeit for different reasons.
The Boston market continues to exhibit strong fundamentals led by business migration to the suburbs and reduced competitive Class A office stock as the insatiable demand from life science users continues to drive office to lab conversions.
For example, during the past year in our Burlington submarket, three competitive Class A buildings comprising over 400,000 square feet have been repurposed to labs, helping to push net effective rents for office space to pre-pandemic levels.
And in Dallas and Atlanta, our two largest markets, we continue to see an increasing number of corporate relocations, resulting in meaningful job growth.
As an example, during the fourth quarter, we signed a 55,000 square foot lease at our Connection Drive property in Dallas to serve as the new corporate headquarters of an undisclosed Fortune 500 company.
And in that same market during the second quarter, we signed a 44,000 square foot lease to serve as the corporate headquarters for a large national beverage distributor.
In both these markets, rents at our properties are now above pre-pandemic levels.
However, net effective rents are approximately 2% to 5% lower.
I would note a customer flight to quality is well underway, which is driving wider rent disparities between place-making versus commodity office product.
For example, JLL Research noted that 84% of Atlanta leasing activity in the fourth quarter was in Class A or trophy product.
Orlando also continues to perform well with leasing and tour activity across all five of our downtown properties at pre-pandemic levels.
The downtown submarket continues to experience population inflows particularly for the millennial and Gen Z cohorts driven by a highly walkable environment with expanding retail, food and beverage options, along with entertainment amenities surrounding the University of Central Florida's Creative Village campus, Amway Center Arena and Camping World Stadium, along with a uniquely urban Lake Eola.
In Orlando, net effective rents are still trailing pre-pandemic levels by about 5% as a result of increased concessions.
Finally, Minneapolis, the districts in Washington, D.C. and New York City, all experiencing increasing tour activity.
However, leasing velocity and tenant demand still lag our Sunbelt markets.
I would add, we are fortunate to have limited vacancy and near-term lease expirations at our 60 Broad Street property in Lower Manhattan and virtually no expirations at our Washington, D.C. properties for more than two years.
Leasing across all our core markets contributed to the fourth quarter's totals.
And our customer CEO and HR dialogue continues to show our portfolio is positioned to gain market share.
Users of office space are undertaking a flight to quality that focuses on new or newly renovated office buildings with unique environments and a vast set of amenities, owned and operated by responsive, sustainability-minded service-oriented landlords.
And because of these demand drivers, Piedmont's portfolio is well positioned, supported by a concentration of newly renovated, well amenitized buildings located near housing communities and highly regarded education systems with easy accessibility to major highway thoroughfares and airports.
But today's tenants are not only focused solely on location and neighboring amenities.
The physical attributes of a building have never been more important.
The building's indoor air and light, HVAC, fresh air intake, elevator capacity and outdoor collaboration space are all critical.
In addition to high-quality building in a vibrant environment, customers are demanding a higher-quality landlord as well.
And by that, we mean an attentive operator that focuses on sustainability initiatives and which has the capital base and scale to provide tenant offerings and engagement.
Office space is no longer just a real estate product.
Taking a look back at the operational highlights for the 2021 fiscal year.
Piedmont leased almost 2.3 million square feet, which was in line with our average pre-COVID annual leasing levels.
In addition, the increase in second-generation cash rents was seven and a half percent, which helped increase same-store cash NOI for the year by almost 7%.
And finally, our tenant retention ratio was in line with prior years at approximately 70%.
Recovery in leasing activity bolsters our optimism for the rebound of the office sector, and particularly for landlords such as ourselves who offer high-quality, modernized sustainability-focused amenity-rich environments.
Looking ahead, approximately 750,000 square feet of tenant leasing has yet to commence as of this year-end or is in some form of abatement.
This backlog creates organic growth opportunities going into 2022 associated with approximately $26 million in future annualized cash rents.
In addition, approximately 60% of the portfolio's vacancy and 85% of 2022's lease expirations resided in our Sunbelt properties, where we are experiencing the greatest level of leasing velocity.
A schedule of the larger upcoming lease commencements and abatements is included in our supplemental financial information, which was filed last night.
Pivoting now to capital allocation activities.
Despite the disruption from the pandemic and more recently, the omicron variant, the office investment sales market has continued to unthaw.
We are currently in discussions on a pipeline of over $1 billion of high-quality assets primarily for properties in our Sunbelt markets.
Furthermore, we are encouraged to hear of several targeted buildings that will be coming to market in the first half of 2022.
Our principal and broker dialogue suggests insurance companies, pension funds and other private market participants are planning to reduce their office sector exposure in the near term in currently well-leased Sunbelt office with more than seven years of weighted average lease term is among the most liquid type of property in the asset class.
The increase in transactional activity is encouraging, given Piedmont's strategy to recycle capital strategically as an additional driver for our earnings growth.
And finally, I would note that cap rates remain steady for high-quality assets with limited lease rollover and particularly those that are highly amenitized and that can compete with new construction.
While the investment sales market has improved, construction starts have slowed dramatically due to the uncertainty created by the pandemic, a positive for the continued office market recovery.
With supply chain constraints, the construction of new product will now take two and a half to three years to be delivered.
In addition, new construction costs have escalated by 15% to 20% versus pre-pandemic pricing driven by an increase in both raw materials and labor.
In this capital environment, Piedmont continues to focus on our redevelopment opportunities where costs and time lines can be more easily managed.
In 2021, we completed over $50 million of incremental investment in our properties, upgrading assets to remain best-in-class within their respective submarkets.
That said, we continue to have dialogue with a number of clients regarding pre-leasing for ground-up development.
Focusing on Piedmont's investment activities.
During the quarter, we expanded our Atlanta market footprint with the acquisition of 999 Peachtree Street.
And subsequent to quarter end, I'm pleased that we closed on the disposition of a Raytheon asset as well as accelerated our plan to exit from the Chicago market.
As you all know, the 999 acquisition marks our entry into Midtown Atlanta submarket.
The iconic Class A LEED-Platinum 28-story building, a 622,000 square feet with 77% leased at acquisition.
We purchased it for $360 a square foot, which we estimate is over 40% below replacement cost.
We're working with Gensler, a tenant at the building to complete the redesign of 999s arrival experience in public spaces, including a modernized and expanded lobby, energized outdoor space and other enhanced amenities, which will complete over the next 12 to 18 months, and we'll revitalize this asset in a fraction of the time and cost of new construction.
With a 10-foot glass window line across 70% of the facade this asset will effectively compete against new construction at a fraction of the cost with an expected all-in basis in the low $400 per square foot versus new product costing in excess of $650 per square foot, creating substantial pricing leverage for our building when compared to that new development.
The $224 million acquisition of 999 is being funded through multiple dispositions.
Immediately after quarter end, the disposition of 225 and 235 presidential Way in Boston closed in a reverse 1031 exchange for $129 million or a mid-5s cap rate.
Also subsequent to quarter end, we negotiated an agreement to sell and have closed on Two Pierce Place, our last remaining asset in the Chicago area, and we'd anticipate more non-core asset proceeds in the first half of 2022.
The acquisition of 999 Peachtree Street during the fourth quarter as well as the completion of two non-core dispositions just after the quarter end, now makes Atlanta our largest market based on annualized lease revenue.
Adjusting our lease percentage for the disposition transactions our pro forma lease percentage as of December 31 would have been 87%.
Additionally, approximately 63% of our annualized lease revenue is now generated from our Sunbelt properties and our goal is to have 70% to 75% of our ARR generated by our Sunbelt markets before the end of 2023.
We believe a goal that's attainable given the investment in sales market activity we see today.
Myself and the team were extremely grateful to be able to share some of our most recent redevelopment projects.
Looking back on 2021, core FFO for the year was $1.97 per diluted share, a 4% increase over 2020 and in excess of the upper end of our original guidance range for the year.
This growth in core FFO overcame an approximately 1% reduction in our overall lease percentage on a year-over-year basis.
The decrease in occupancy was driven by several factors: Reduced leasing activity during 2020 in the first half of 2021 as a result of the pandemic, a number of sizable lease expirations at recently acquired properties in Atlanta and Dallas that were underwritten as part of their respective acquisitions and the purchase of the 77% leased 999 Peachtree Street property.
After incorporating the just completed disposition activity in January of 2022, our pro forma lease percentage as of December 31 would have been 87%.
We reported $0.51 per diluted share of core FFO for the quarter.
That's an 11% increase over the fourth quarter of 2020.
This increase is primarily due to accretive recycling activity and rising rental rates.
Our core FFO achievement during the fourth quarter also reflects the repurchase of approximately 1 million shares of our common stock at an average price of $17.76 per share during the quarter, leaving approximately $150 million in board authorized capacity under our share repurchase program.
Now, core FFO, as you know, excludes gains, losses, impairments on real estate as well as excluding depreciation and amortization.
And I do want to discuss this real estate activity during the fourth quarter of 2021.
While we had originally intended to lease up Two Pierce Place before disposition, we received an unsolicited offer to purchase the asset during the fourth quarter.
Given the fact that we have no other Chicago holdings, we made the decision to accept the offer if the purchase could be negotiated and closed quickly thereafter.
As is often the case, gap typically just dictates early recognition of potential losses and the decision to shorten the hold period for this asset did result in the recognition of a $41 million impairment charge that is included in our fourth quarter results of operations.
On the flip side, the sale of 225, 235 presidential Way will result in the recognition of an estimated $50 million gain during the first quarter of 2022 when the sell closed.
AFFO generated during the fourth quarter was approximately $39 million, which is well above our current $26 million quarterly dividend level.
Our board has indicated that given our cash NOI growth over the last few years, the fact that we're approaching the conclusion of the large construction restacking project for the State of New York at 60 Broad, and the time since our last dividend increase, they will be reviewing our dividend payout amount during 2022.
Turning to the balance sheet.
I expect more attention will be focused now on corporate financial positions given the rising interest rate environment, including the amount of floating rate debt, upcoming maturities and overall leverage.
Our annual debt -- net debt to core EBITDA ratio as of the end of the fourth quarter of 2021 was 5.7 times and we reported $210 million of unused capacity on our line of credit.
Taking into consideration the completed disposition activity occurring right after year-end, with the net sales proceeds received in January, our current available capacity on our $500 million line of credit is approximately $320 million, with an approximate $120 million more expected later this quarter from the payoff of a note receivable.
Adjusting for the application of proceeds from the two closed January sales, our pro forma debt to gross asset ratio at year-end would have been approximately 35%.
We have no secured debt currently on our books and we have no scheduled debt maturities in 2022 other than our revolver, which we currently intend to renew long term later this year rather than exercise the line's short-term extension options.
Finally, we're introducing 2022 annual financial guidance for core FFO in the range of $1.97 to $2.07 per diluted share.
This guidance assumes a gradual increase in physical utilization of our buildings by our tenants over the course of the year, to a level near pre-COVID utilization by the end of the calendar year.
It also assumes a neutral amount of asset recycling during the year with about $350 million to $450 million each of acquisitions and additional dispositions.
This net neutral activity excludes the recently completed sales of the presidential Way assets and Two Pierce Place property that were used to fund the 999 Peachtree Street acquisition.
We will provide revised guidance as each significant acquisition or disposition is completed this year.
The guidance assumes general and administrative expenses in the range of $29 million to $31 million for the year.
Our same-store cash NOI growth is expected to be flat for the year with a number of abatements occurring during 2022 due to the lease renewals and newly commencing leases such as 160,000 square foot renewal at 1155 Perimeter Center West in Atlanta, and a 56,000 square foot lease at 400 Virginia in Washington, D.C. As well as downtimes between leases associated with new tenant build-outs, such as a 67,000 square-foot lease at 5 and 15 Wayside in Boston and a 44,000 square foot lease at One Lincoln in Dallas.
Accrual-based store NOI is expected to grow from 1% to 3% during the year.
I will remind you that these estimates will ultimately be dependent upon the transactional activity achieved during the year since such properties will be excluded at year-end, from the same-store two-year comparisons.
Likewise, our lease percentage is expected to grow to approximately 88%.
But again, this estimate is subject to the lease percentages of the properties involved was $350 million to $450 million of potential recycling transactions completed during the year.
Our forecast also assumes there will be three to four interest rate hikes during 2022 that will impact interest expense negatively versus recent prior years.
And finally, we are assuming a dividend adjustment around midyear, and it is not expected to impact our overall financial results.
With that, I'll now ask our conference call operator to provide our listeners with instructions on how they can submit their questions. | reported core funds from operations (core ffo) per share of $0.51 for quarter.
introducing 2022 financial guidance of $1.97 to $2.07 per diluted share of core ffo. |
These statements are subject to numerous risks and uncertainties as described in Pebblebrooks' SEC filings, and future results could differ materially from those implied by our comments.
We'll discuss non-GAAP financial measures during today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.
On to the highlights of the second quarter.
Well, we're deep into the summer travel season, and it's clear that the leisure traveler is back and with a vengeance, and that business travel is gaining momentum as well.
Overall demand in the second quarter was robust and much stronger than we expected just 90 days ago.
Same-property revenues of $162.5 million were down 57.8% versus the same period in 2019.
This was a significant improvement from the first quarter when same-property revenues were down 74.7% versus 2019.
Sequentially, same-property revenues grew 95.4% from Q1 to Q2.
More encouraging is the accelerating demand that we experienced throughout the quarter.
June same-property revenues were more than 50% higher than April, and July is expected to be almost 20% higher than June, an encouraging turnaround in such a short time.
These increases are not just at our resorts but also at our urban hotels.
We have seen a resurgence in business travelers as they are clearly getting back on the road, and we expect this trend of improved business demand, both transient and group, to continue during the third quarter.
We anticipate leisure demand to slow down post Labor Day as is typical with the end of summer when kids return to school.
Obviously, the Delta variant and its impact on travel demand for the fall is hard to forecast today, but we have not seen or experienced any notable declines in booking trends or cancellations so far.
Jon will provide insight on our current post-summer booking trends later in the call.
This accelerating strength in hotel demand during the second quarter allowed us to generate $17.1 million of adjusted EBITDA.
This is a dramatic improvement compared with a negative $25 million of adjusted EBITDA for the first quarter of 2021 and demonstrates the rapid turnaround for our portfolio, and the results improved substantially every month throughout the quarter.
This is critical as we live in a sequential recovery world right now.
Adjusted FFO per share was a negative $0.12 per share, better than the negative $0.42 per share from the first quarter.
Most encouraging, we generated positive corporate cash flow in June, and we expect to generate positive adjusted FFO and cash flow in the third quarter.
Drilling down to our hotel operating results for same-property RevPAR versus the comparable period in 2019, April was down 66.3%, May was down 60.1% and June was down 51.6%.
We're forecasting July to be down 38% to 42%, continuing the very positive recovery trend.
For the third quarter, we currently expect RevPAR to also be down between 30% and 42% compared with the comparable period in 2019, which also continues the improving quarterly trend.
Total hotel level expenses of $134.2 million were reduced by 45.1% versus Q2 2019.
Expenses before fixed costs, like property taxes and insurance, were cut by 50.9%.
Our total property-level expense reduction was 78% of the revenue decline and 88% before fixed expenses, pretty incredible, frankly.
Our eight resorts generated a positive $28.4 million of hotel EBITDA in the quarter.
This resulted from an occupancy of 66% at an average daily rate of $386, which is more than $107 and a 38% increase over the comparable 2019 second quarter.
As a result, total revenue per occupied room was 17% higher than Q2 2019.
This allowed our resorts to produce $28.4 million of EBITDA in the second quarter, a 17.5% increase over the comparable period in 2019 and a $13.9 million improvement almost doubling from Q1.
EBITDA margins were up an impressive 622 basis points from Q2 2019.
Urban hotels also made great strides during the second quarter as well.
Occupancy was 33.3%, ADR reached $198 and total revenues were $91.6 million.
Urban hotels were just under the breakeven level in second quarter with a negative EBITDA of just $0.8 million.
Yet in our sequential world, our urban hotels achieved $5.3 million of EBITDA in June with a 43.5% occupancy and a $210 ADR. Impressive results considering the still low occupancy levels in our urban markets and operationally, not something we would have thought possible before the pandemic started.
We had general managers parking cars and cleaning floors, directors of sales moonlighting as front desk agents and many other managers cleaning rooms, serving guests and performing many other jobs that our hourly employees previously did.
This is not anything they signed up to do.
But with a shortage of hourly workers, our dedicated and committed hotel management teams stepped in.
Our company's management team, Board and our shareholders greatly appreciate their leadership and their self-sacrifice.
Shifting to our capital improvement program.
In the second quarter, we completed an $11.7 million redevelopment of L'Auberge in Del Mar in South California.
In early July, we completed -- we commenced the $25 million transformation of Hotel Vitale to 1 Hotel San Francisco and a $15 million comprehensive guest room renovation at the Southernmost Resort in Key West.
We expect the 1 Hotel to be completed by the end of this year and Southernmost early in the fourth quarter.
For 2021, we anticipate reinvesting a total of $70 million to $90 million in the portfolio, which is in line with our prior estimate.
Shifting to our investments program.
You may have noticed that we had a busy quarter taking care of business.
On April 1, we completed the Sir Francis Drake Hotel sale in San Francisco.
And then on June 10, we closed on the sale of our leasehold interest in the Rouge, New York.
And last week, we executed a contract to sell Villa Florence San Francisco on Union Square.
Combined with previous sales we completed since June of last year, this represents approximately $330 million of sales proceeds to reallocate into other assets.
And as we previously announced, we've already had two reinvestment opportunities that we believe would generate substantially better risk-adjusted returns for our shareholders.
In late June, we executed a contract to acquire Margaritaville Hollywood Beach Resort in Hollywood, Florida for $270 million.
This acquisition is anticipated to be funded from existing cash on hand and through the assumption of $161.5 million of favorably priced existing nonrecourse property debt.
We are targeting to complete this acquisition by the end of Q3.
And last week, we completed the acquisition of the iconic Jekyll Island Club Resort for $94 million.
Jon will provide more detail on why we're excited about this investment and the upside opportunities of this unique resort.
As a result of these property sales and acquisitions and assuming Villa Florence is sold and Margaritville is acquired, our 10 resorts will comprise roughly 23% to 24% of our 2019 same-property EBITDA.
Our San Francisco share in 2019 dollars were declined to 19% with 10 properties, and our Southeast focus will increase to 15% with five resorts and one hotel.
Of course, the world moving forward will be different, and we expect these 10 resorts will likely represent a more significant percentage of our EBITDA on a go-forward basis than they did in 2019.
Turning to our balance sheet and liquidity.
We are also taking care of business in this area.
On May 13, we raised $230 million of capital through our 6.375% Series G preferred equity raise.
On July 27, we successfully raised $250 million through our 5.7% Series H preferred equity raise, the largest preferred offering ever in the lodging space and equal to the lowest rate ever.
This raise refinances an equivalent amount of higher price redeemable preferable securities, our 6.5% Series C preferred shares and 6.375% Series D preferred shares.
This effect of $250 million swap will reduce our preferred dividend payments by approximately $1.8 million annually or $0.014 per share.
After completing our Jekyll Island Resort acquisition, we have approximately $875 million of liquidity, which includes roughly $230 million of cash on hand and $644 million available on our unsecured credit facility.
We also have approximately $235 million of reinvestment proceeds available under our current bank arrangements.
We're proud of the tremendous progress we've made strengthening our balance sheet, reducing near-term debt maturities and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity.
This positions us to take advantage of additional new investment opportunities as they become available.
So, I thought I'd focus on what we're currently seeing in our business and how we think the rest of the year is likely to play out.
Though the path continues to be a path with uncertainty given the rise of the Delta variant.
We're certainly very encouraged by the consistent increases in demand we've experienced each month, the robust level of leisure demand that is well outpacing 2019 levels, the continuing acceleration in business travel and forward bookings, our ability to push our average rate closer and closer to 2019 levels and our ability to operate our hotels with new operating models and greater efficiencies.
In Q2, occupancies rose significantly every month on a sequential basis, even as we opened our remaining hotels in softer markets in our portfolio.
Those gains drove RevPAR higher as rates also gradually increased.
April RevPAR was 22.4% higher than March, may was 20.3% higher than April and then June rose even more, up 32.1% to May.
We think July will be up 25% to June.
We estimate that business travel doubled from the first quarter and probably recovered to about 30% to 40% of 2019 levels by the end of the second quarter.
The airlines who certainly have more visibility than our industry have indicated they believe that business travel will improve to 50% to 60% of 2019 levels by the end of the third quarter, with further improvement through the end of the year and into next year.
Their forecast seems reasonable given the bookings we've been seeing and the significant advances each month in urban weekday occupancies, which improved from 24.5% in March to 39% by June, and they look like they'll be up to around 47% or 48% in July.
Overall, urban occupancy rose from 29.5% in March to 43.8% in June, just below our overall portfolio occupancy for June of 46.4% July looks to be over 52%.
Most companies have already changed their travel policies, allowing either vaccinated employees or all employees to travel again.
Our property teams report seeing travel from most of our corporate accounts throughout our portfolio.
Businesses are definitely getting back to travel, both transient and group.
For our portfolio, we saw continuing improvement in all of our markets and at all of our properties.
But outside of our resorts, we saw the most advances in Boston, San Diego, Los Angeles, Seattle and Portland.
Chicago, San Francisco and D.C. are recovering more slowly, primarily a result of their later reopenings.
We believe the recovery is about three to four months behind the faster-recovering urban markets.
In July, looks like occupancies at our properties in San Francisco will average around 30%; L.A., 64%; San Diego, 74%; Portland, 58%; Seattle, 58%; D.C., 34%; and Boston at 66%.
Boston has recovered very strongly in the last two months.
We're also encouraged that we're seeing forward transient bookings pick up as well as the leisure customer feels increasingly confident about booking vacations and leisure trips further out.
The lengthening of the booking window gives us more visibility to schedule our staff and operate our hotels better, and it improves our ability to revenue-manage more confidently and push rate more.
When it comes to room rates, we've seen consistently strong growth in ADRs throughout our portfolio.
All eight of our resorts are achieving significant increases over 2019 levels.
Ray already discussed their combined rates in Q2, so I won't repeat that, but I thought I'd provide some impressive specifics because not only is the rate growth at our resorts a result of leisure compression and a general lack of consumer rate resistance, but it's a result of the repositioned nature of our resorts following large investments we made improving these very unique properties.
For example, ADR year-to-date at LaPlaya in Naples is up $159 or 34% from the first half of 2019.
And ADR for business on the books in both Q3 and Q4 is ahead by a whopping $250 versus same time 2019 or roughly 100% increase in Q3 and 70% in Q4.
Over the year, LaPlaya has consistently climbed higher in the TripAdvisor traveler rankings, reflecting the increasing desires of leisure guessing groups to choose our redeveloped and more luxurious resort.
And consider this, total room revenue currently on the books at LaPlaya is $5.8 million ahead of total room revenue achieved for all of 2019, and we're only in July with five more months to book into this year.
On the other side of the country, at L'Auberge Del Mar in Southern California, where we just completed a highly impactful $11.7 million luxury redevelopment in Bay.
We're booking at dramatically higher rates as we reposition this property to an even higher tier.
In June, we achieved an average rate $258 or 66% higher than for June 2019.
July is running even higher.
Rate currently on the books for July is at $878.
That's $372 or 73% higher than July 2019.
This past weekend, the resort ran 97% at a rate handily over $1,000.
At Paradise Point just down the road in Mission Bay, San Diego, Q3 ADR on the books is currently at $450 versus $269 for Q3 2019.
Transient revenue on the books for 2021 is already $2.8 million ahead of total transit revenue achieved for all of 2019.
Just across the water from Paradise Point at San Diego Mission Bay Resort, which was a Hilton when we acquired LaSalle and where a year ago we completed a $32 million multiphase transportation -- transformation of the property into a luxury independent resort, ADR is climbing as well compared to 2019.
In Q2, we achieved a 23% higher rate than Q2 2019 as we established this new independent resort and gained significant ADR share versus our market competitors.
For Q3, as we gain momentum, ADR is the books is currently ahead by $115 or 46% compared to Q3 2019.
At The Marker in Key West, we've also gained ADR and RevPAR share on our competitors following the $5 million of upgrades we made in 2019 at this small 96-room resort.
In Q2, ADR was up 45% or $143 to $459 compared to $316 in Q2 '19.
The third quarter is running $157 or 65% higher versus Q3 2019.
And I could go on and on about our other resorts as well.
But we've been pushing rates higher at our urban properties as well as leisure and business travel returns to cities.
While in most cases we haven't yet achieved rates higher than 2019, we have grown our city ADR significantly since the pandemic recovery earlier this year, even as we reopened our hotels in the slower-to-recover markets, like Chicago, San Francisco and D.C. Average rate for our urban hotels has grown every month from a low of $155 in January to $158 in February to $160 in March to $175 in April, $196 in May and finally reaching $206 in June.
In July, we look to be up again as ADR achieved at our urban properties has increased another 10% from June at $227 through July 25, and rate on the books for the fall is running even higher.
Some of our better-quality and recently redeveloped urban properties, which also have strong leisure appeal, are closing in on 2019 rates.
At The Nines in Portland, where our luxury collection hotel is the market rate leader and the only luxury property in the city, ADR in the second quarter was down just 7% in Q2 at $250 and our rate on the books is currently running 9% higher than third quarter 2019, the Nines benefits from its number one position in the city and its high-quality suites and event spaces that appeal to high-end leisure and business travelers.
We're also seeing both leisure and business travelers buy up to suites in higher-priced rooms, and that is helping us as our unique lifestyle urban properties recover rate more quickly than more typical commodity hotels in our markets.
At the Mondrian in West Hollywood, where we completed a major comprehensive renovation just two years ago, ADR in Q2 recovered to within 4% of Q2 2019.
Third quarter ADR in the books at Mondrian is currently within 1% of same time 2019 and Q4 rate is up over 10% compared to same time 2019.
Le Parc in L.A., which received an $80,000 per key upgrading and repositioning just a year ago, is also closing in on 2019 rates on its way to even higher rates.
In Q2, ADR was down just 5.5% from Q2 '19.
Q3 is looking to close the gap further and Q4 rates on the books are running ahead of Q4 same time 2019.
In Boston, at The Liberty, which is one of the most unique and popular higher-end properties in Boston, we've achieved a $332 ADR month-to-date through July 25, and it's doing this at an impressive 86% occupancy level.
While we're not yet back to the $375 rate and 97% occupancy we achieved in July 2019, The Liberty, like our other properties in Boston, has certainly come back a long way from January's 30% at $186 and April's 61% at $210.
I could provide more examples of the individual property results that are behind the urban portfolio ADR recovery we're achieving, but we must move on.
As you know, this downturn is unlike any prior cyclical downturn and it would seem that this recovery will be unlike any prior recovery.
With robust macroeconomic fundamentals, the consumer with record amounts of savings, net worth and a pent-up desire to travel and vacation and with business profits at record levels and businesses with a significant pent-up desire and need to travel, we believe it's likely that this recovery will be swift with demand returning much more quickly than we previously thought and rates recovering much more rapidly as well as evidenced by the progress we've already made on rates.
In fact, we're currently forecasting that July's same-property ADR will reach $270 to $275, which will exceed July 2019's ADR by $5 to $10.
We expect to continue to benefit from the quality and uniqueness of our properties, their strong appeal to both leisure and business travelers and the vast repositioning investments we made in the last few years, those we're currently making and those upcoming repositionings we expect to undertake and complete in the near future.
Of course, the benefit of gaining rate back quickly and gaining material rate share at all of our recently repositioned hotels and resorts is gaining an ability to drive profitability and margins much higher than 2019 and do it much more quickly than in a typical cyclical recovery.
Not only have we rebuilt our individual property business models to operate more efficiently, but gains in our rates will naturally flow much more substantially to the bottom line.
We've also achieved efficiencies from creating operating clusters in various markets, which is something we started pre-pandemic.
Because of the turnover that took place following the shutdown of our properties last year and the rebuilding this year, we've been able to cluster even more of the senior positions where we have multiple properties with the same operator in the same market.
These clustered positions often include general management, sales and marketing, revenue management, food and beverage, HR, accounting and even engineering.
Our properties in Santa Monica, San Diego, Portland, San Francisco, Seattle and D.C. have almost all been clustered, yielding significant operating synergies while optimizing performance through the increased quality of the overall clustered personnel.
These savings are permanent and run in the hundreds of thousands of dollars per clustered property.
Ray already talked about the operating cost savings achieved in Q2 versus our revenue shortfalls compared to 2019, so I won't repeat those numbers.
But when we look forward, we expect to continue to close the gap on EBITDA margins to 2019 as revenues and room rates continue to recover.
For example, in June, with total revenues down 50% from 2019, our hotel EBITDA margin was 23.7%.
But for July, with 20% sequential growth in revenues, our hotel EBITDA margin should recover to around 27% to 28%.
While this is still lower than the 35.5% achieved in July 2019, it's a heck of a lot closer in a much shorter time than we were expecting just three months ago.
In addition to transient, group is returning as well, and we've begun to see in the month for the month business group bookings in addition to an increasing volume of business group leads, RFPs, site visits, request for contracts and bookings.
While we're not yet booking at pre-pandemic levels, activity has been progressing toward those prior levels, and bookings each month for this year and next year are increasing monthly.
Yet not surprisingly, group revenue on the books for Q3 and Q4 is down about 64% and 54%, respectively, versus same time in 2019 for the same quarters.
Group on the books for 2022 has been growing.
And as of July, we had about 32% fewer group nights on the books, but it's at a 5% higher ADR as compared to the same time in 2018 for 2019.
The group deficit is not surprising given corporations are just beginning to get back to their offices and refocus on booking group meetings.
This gap should begin to shrink later this year as businesses gain confidence in getting back to normal.
We expect group bookings to be more short term until behavior stabilizes at the new normal.
Citywides are booking rooms throughout our markets in 2022, including in cities like San Francisco, where 2022 kicks off with the JPMorgan Healthcare Conference in early January where groups have been actively booking rooms at our hotels for the conference.
With June achieving positive cash flow and therefore, positive FFO, the recovery has progressed faster than we expected.
And if the Delta or some other variant doesn't drive our economy and mitigation measures backwards, we certainly expect room revenues, total revenues and EBITDA to continue to recover.
In Q3, EBITDA should continue to climb from June as previously discussed.
August is likely to flatten out or decline slightly, including in terms of its percentage recovery to '19 as the prime vacation season winds down in the second half of the month and kids presumably begin to go back to school.
While at the same time, we don't expect business travel gains to accelerate until the post Labor Day period.
September should then pick up the recovery pace, particularly after the Jewish holidays by mid-month, which should continue through the rest of the year as business travel continues its recovery and leisure travel and social groups remain at elevated levels.
When we think about 2022, we're focused strategically on the year being a very strong recovery year overall.
Group should be very healthy as we believe there's a great deal of pent-up demand.
We also think that leisure will continue to be robust with continuing pent-up demand for vacations and getaways, while outbound international travel probably remains more limited.
This means we don't expect rate discounting in 2022.
Again, this is the -- with the obvious caveat that we get to relatively normal behavior by the end of this year and it remains relatively normal next year.
As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on these few remaining projects as soon as the approvals are complete and it's the right time of year to commence them.
All of our redevelopments and transformations, including a large number in the last few years, and all of the current and upcoming projects will provide very significant upside for our portfolio over the next few years as the recovery rolls forward.
Importantly, the vast majority of the dollars for these projects has already been invested.
As we look at the silver lining of potential upside from the crisis, we continue to expect there will be significant opportunities over the next few years to acquire highly desirable properties at the lowest risk time in the cycle at attractive returns with significant upside opportunities for us to use our expertise to improve performance.
In this regard, as previously announced, we've been successful tying up two very unique resort properties that we believe have very significant upside from operational and physical improvements, including numerous opportunities to remerchandise them, add and enhance amenities and better utilize both indoor and outdoor areas to drive higher rates, more revenues and increased EBITDA and NOI.
We believe the Jekyll Island Club Resort we just acquired last Thursday is the quintessential Pebblebrook investment.
That being an extremely unique lifestyle independent property with an almost unlimited list of opportunities that we'll be able to execute on for many years to come.
In this case, very similar to what we've been accomplishing at Skamania Lodge over the last 10 years and with much more to come there as well.
Some of these opportunities include upscaling the rooms throughout the resort, transforming the Ocean Club property into a more exclusive resort as well as dramatically improving each of the three mansion buildings to create a more elevated and more personalized service experience that takes advantage of each building's unique historic architecture and interior finishes.
This would be similar to what we did with the two historic bread and breakfast buildings at Southernmost Resort in Key West where we consistently achieve $100 to $200 or more in rate premiums than the rest of the resort because of the higher personal service and special exclusive club atmosphere that was created and that higher-end guests find very appealing.
Jekyll Island itself has been growing as a desirable drive-to regional vacation and meeting market as the improvements on the island and those currently planned by the Jekyll Island Authority drive the increased desirability of this unique island destination.
We're extremely excited about this acquisition, bringing on Noble House as our operating partner and the vast number of improvements that we'll be planning and executing together.
As a reminder, Noble House operates a long list of independent, unique, high-end resorts and hotels, including LaPlaya Beach Resort & Club, San Diego Mission Bay Resort and L'Auberge Del Mar with us.
As it relates to the upcoming acquisition of Margaritaville Hollywood, we'll be in a position to discuss the opportunities there in more detail once the acquisition is completed.
We continue to be active in our pursuit of additional new investment opportunities, and we'll be sure to update you as and if we are successful.
We believe we have significant competitive advantages pursuing new investments opportunities as they arise.
These include our ability to operate our properties more efficiently than the vast majority of buyers, the additional cost savings from the economies of scale generated by curator, our unique strength in redevelopments, transformations and independent or small brand lifestyle hotels, our vast number of operator relationships and our high-profile and very positive reputation in the industry.
And with that, we'd now like to move to the Q&A portion of our call.
So Donna, you may now proceed. | pebblebrook hotel trust - qtrly adjusted ffo per share negative $0.12.
pebblebrook hotel trust - for q3 2021, sees both same-property room revenues & total revenues to be down between 38% & 42% versus q3 2019. |
These statements are subject to numerous risks and uncertainties as described in our SEC filings.
Future results could differ materially from those implied by our comments.
We'll discuss non-GAAP financial measures during today's call.
We provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.
So on to the highlights of the third quarter.
The third quarter marked another important milestone in our recovery from the pandemic.
We generated $21.4 million of adjusted funds from operations, which was the first quarter since the pandemic that we produced a positive FFO and represents considerable progress from Q2 when we had negative FFO of $15.6 million in Q1 with negative $55.7 million.
Third quarter hotel and adjusted EBITDA climbed robustly from the second quarter as well and were driven by significant increases in same-property RevPAR and same-property total revenues while at the same time, costs were well controlled.
Same-property hotel EBITDA rose by 136% to $66.6 million from Q2's $28.3 million.
The sequential growth was driven by robust leisure travel, improving group and transient business travel and an ability to push pricing higher, particularly at our resort properties.
Same-property room revenues rose a substantial 51% from the second quarter and same-property ADR rose 10% from Q2, and for the first time exceeded the comparable quarter in 2019, in this case, by 3.8%.
Same-property total revenues also rose an impressive 47.2% from the second quarter with healthy food and beverage and other ancillary spend growing faster than occupancy.
Total group room nights ADR and revenues also grew from Q2 to Q3 with room nights and revenues more than doubling, which is a very favorable sign for the return of corporate group demand.
The third quarter started strong to RevPAR improved to down just 31% compared with July 2019, clearly better than June's minus 51.6% comparison to 2019.
Lease demand throughout our portfolio at our resorts and urban hotels increased significantly from June.
It was robust and generally not price sensitive.
The strength in demand continues through mid-August until surge in COVID cases from the Delta variant cause a pause in the recovery.
From mid-August through mid-September, we experienced a rise in cancellations and near-term business travel, primarily group for August, September and October and softer near-term booking demand as well as well as higher attrition when many corporate groups who did hold our meetings over this period.
As a result of the seasonal slowdown in leisure travel and business demand that did not pick up the slack, same-property RevPAR weakened compared to 2019 for August, which was down 39.4% and also then September, which is also down 43.4%.
September was also negatively impacted by Jewish holidays, which both fell in the first half of September.
Fortunately, as the trend of new COVID cases began declining in mid-September and have been falling for six weeks now, booking trends began to reaccelerate in mid-September and this improving trend has continued into October.
Both transient and group business demand have picked up with volumes exceeding levels earlier in the year before the Delta variant and associated restrictions were imposed.
Corporate transient is returning led by small- and medium-sized businesses as well as larger companies, including those in banking, consulting, life sciences, medical, entertainment and music segments, among others.
Big Tech has also begun to travel but remains slower and it's recovered.
For us, the most significant improvements in business demand have been in Boston, Los Angeles, Philadelphia and San Diego.
Slower to recover markets continue to be San Francisco, Washington, D.C. and Chicago, which seems to be three to four months behind the faster recovering cities.
Leisure demand remains healthy heading into the fall and upcoming holiday season, which should be very good, and our positive expectations are consistent with the strong advanced holiday demand the airlines are reporting.
However, we do expect a normal seasonal slowdown in business travel levels in late November and December.
Because of these improving trends and business travel demand, in particular, October is performing better than September.
We're now forecasting RevPAR to be down between 37% and 38% to October 2019, and October occupancy for our portfolio should hit or come very close to the occupancy level achieved in July.
This is not something we would have expected a month ago, which really demonstrates how quickly demand trends can reaccelerate and improve when health concerns related to the pandemic decline or moderate.
Considering how strong October is traditionally for business travel, we find this performance a strong indicator of the reacceleration in the travel recovery, especially for business travel.
For the fourth quarter, we expect same-property RevPAR and total revenue to be down between 38% and 42% compared with the comparable period in 2019.
Now back to our third quarter performance.
Same property revenues of $239.2 million were off 36.3% versus the same period in 2019.
This is a significant improvement from the second quarter when same-property revenues were down 57.8% versus 2019 and continue the progress from the first quarter, which was 74.7% below Q1 2019.
Our strongest performance came from our resorts.
For our original eight resorts and Jaco Island Club Resort for August and September revenues exceeded Q3 '19 by 9.8%, driven by a whopping 57.1% ADR premium to Q3 2019, which was more than offset occupancy that was down just 22.5%.
Our resort occupancies would have been higher but for the rooms renovation at Southernmost Resort and the exterior work on the Gulf Tower building at LaPlaya.
At our urban hotels, same-property revenues were off 50.1% to Q3 2019, driven by same property revenue declines of 50.4%.
This illustrates convincing improvement at our urban hotels in the quarter compared with the second quarter when same-property revenues were down 68.6% from Q2 2019 and same-property RevPAR was down 69.7%.
ADR at our urban hotels also improved quarter-to-quarter from last quarter's minus 26.1% compared to Q3 '19, down just 10.8% in the third quarter of 2019.
Drawing down further on our hotel operating results, our same-property resorts generated $34.6 million of EBITDA, up 45.4% versus 2019.
Our hotel EBITDA margins were 41.5% compared with 31.4% in Q3 '19, over 1,000 basis points better.
While some of this is a result of some continuing unfilled position, much of it is due to the significant benefit of a 57.1% or $156 rate premium in ADR to 2019 as well as higher prices for non-room revenues and our new operating models at all of our properties, including our resorts.
Our urban hotels generated $29.9 million of EBITDA in Q3, down 7.2% versus Q3 '19.
This is substantially better in Q2 when our same-property EBITDA was just $2.7 million.
Operating expenses at the hotel level were well controlled.
And in addition to the room rate improvements versus last year, we took price increases throughout all nonroom revenue items.
Same-property hotel expenses were down in Q3 by 29.5%, representing 81% of the 36% rate of total same-property revenue declines.
Excluding fixed costs, hotel expenses were down by 32.7% or 90% of the rate of decline in same-property revenues.
While we continue to have many unfilled positions at our hotels, we made very significant progress in the quarter filling open positions and the cost savings to 2019 represent a superb effort by our property and asset management teams working together to follow up on our new property operating models that are delivering significant efficiencies and productivity gains.
At the corporate level, after corporate G&A, we generated $55.3 million of adjusted EBITDA in the third quarter.
This is a significant increase from the $17.1 million of adjusted EBITDA in Q2 and a negative $25 million of adjusted EBITDA for Q1.
Shifting to our capital improvement program.
Earlier this week, we completed a $15 million comprehensive guestroom renovation of our Southernmost Beach Resort in Key West.
The last of our resorts will be fully renovated or redeveloped and repositioned.
And we continue to make progress with our $25 million transformation of Hotel Vitality to One hotel in San Francisco.
We've experienced some delays due to the constraints of the supply chain in receiving FF&E items.
So we now expect this renovation to be completed in the first quarter compared to last quarter's expectation at the end of 2021.
For all of 2021, we anticipate investing -- reinvesting a total of $80 million to $90 million in the portfolio, which is in line with our prior annual estimate.
Moving to our investment activities.
We continue to be active reallocating capital in the portfolio.
On September 9, we sold Ville Floor in San Francisco Union Square for $87.5 million.
Since Q1 2020, we have sold seven assets generating $664 million of proceeds.
On September 23, we completed the acquisition of the 369 room Margaritaville Beach Resort for $270 million.
And just last week, we purchased the 19-room Avalon,and the 12 room Gardens in Key West for a combined $20 million.
We will be incorporating these two properties into the overall operations of our Southernmost Beach Resort, and we expect significant operating synergies as a result.
By providing guests of these two guest houses with access to the higher service levels and amenities of the existing B&Bs at Southernmost and our overall resort, we expect to be able to drive rates dramatically higher than the prior owner.
As a result, we anticipate generating an 8% to 12% cash and cash return on this investment after a 4% capital reserve on a forward 12-month basis.
We'll obviously narrow this range down as we get deeper into the operations of these properties as part of Southern most.
As a reminder, year-to-date, we have acquired two resorts as well as two Bed & Breakfast guest houses for a combined $384 million of proceeds.
Turning to our balance sheet and liquidity, we have approximately $807 million of liquidity after completing our recent property transactions including roughly $163 million of cash on hand and $644 million available on our unsecured credit facility.
We also currently have approximately $210 million of reinvestment proceeds available under our current bank arrangements.
We're proud of the tremendous progress we made fortifying our balance sheet, reducing near-term debt maturities and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity.
This positions us to take advantage of additional new investment opportunities as they become available.
So I thought I'd focus on what we're currently seeing in our business, how we think the rest of this year is likely to play out, our current expectations for 2022, will delve a little deeper into the performance of some of our existing properties and markets as well as discuss the capital reallocation decisions we've made in the last 18 months.
As Ray said, we're certainly very encouraged by the reacceleration of the recovery we've seen in the last six weeks, particularly as it relates to business travel and group demand.
While leisure demand recovery started early and has grown to robust levels, we all know that getting back to 2019 levels for us requires further recovery in business travel.
As we stated last quarter, we believe we should get back to 2019 EBITDA levels before we get to 2019 RevPAR, and we expect to consistently hit or exceed 2019 ADR levels before we get back to 2019 RevPAR.
We're very encouraged by the performance of rates in both the industry and our portfolio.
We, of course, are aided by our concentration in drive to resorts.
And as Ray said, we're achieving ADRs at our resorts that are dramatically higher than 2019 levels.
Some of this is due to a lack of competitive alternatives like cruises or traveling abroad or even vacationing in cities.
Some of this premium has to do with repositioning resort ADRs to higher levels and a willingness on the part of the consumer to buy up to suites and view rooms and the like.
And about 1/3 of the premium is due to the transformational redevelopment projects we undertook in the last few years at our resorts, where we substantially repositioned them higher in quality, and as a result, higher ADRs are being achieved, generating attractive returns on our redevelopment investments.
So we believe that a substantial portion of these higher rates at our resorts will be permanent.
Most of these higher rates will last at least for the next two or three years and some portion may turn out to be transitory.
In the third quarter, we estimate we gained over $50 alone just an ADR share versus the competitive market properties with that number accelerating substantially from the second quarter.
Some of the rate premium at our resorts that historically accommodated significant group will likely be reduced as that group returns.
However, that group will come with significant F&B and other profitable revenues that should more than offset any reduction in our rate premiums.
In the third quarter, our resorts achieved 9.8% higher total revenues in Q3 '19, even without that group.
Room revenues were up 21.9%, and EBITDA was higher by 45.4% or $10.8 million.
This rate -- with rate up so substantially 57.1% and occupancy down by 22.5%, EBITDA margin at 41.5% for our original eight resorts and Jekyll Island Club Resort, which was included in August and September.
This is an increase of 1,018 basis points from Q3 '19.
EBITDA per key for our resorts for the third quarter alone grew to $17,000.
On a run rate basis, including Jekyll and Margaritaville Hollywood Beach Resort for the entire quarter, same-property EBITDA for the 10 resorts of $40.5 million was $13.9 million higher than Q3 2019.
For all of 2021, we're now forecasting our eight original resorts to achieve $2.5 million more EBITDA than they earned in 2019 despite being $8 million lower in the first quarter of this year.
Including Jekyll Island and Margaritaville Hollywood, which are both now forecasted to end 2021 above 2019 levels, we're forecasting our run rate resort EBITDA to be $6 million to $7 million higher than 2019 at $115 million to $116 million in total or roughly $46,700 per key.
And that's despite the 10 resort portfolio being $10.8 million lower in Q1 versus 2019.
So that compares to $86.7 million in 2019 for the original eight resorts.
These numbers do not include the two B&Bs we just acquired in Key West.
Both Jekyll and Margaritaville are also running well above our initial underwriting when we price those properties for purchase with Jekyll ahead by over $2 million and Margaritaville ahead by over $5 million.
At these forecasts, Jekyll would be a 7.4% cap rate on 2021 NOI and Margaritaville would be a 6.25% cap rate on 2021 NOI.
And both properties look to be up substantially in Q1 2022 based upon business and rates already on the books.
We also saw a significant improvement in performance in the third quarter at our urban hotels with occupancies, rates and RevPAR all rising substantially as compared to the second quarter.
While some of this improvement can be attributed to meaningful growth in leisure travel, particularly in our urban markets that are drawing significant leisure travel, such as San Diego, Los Angeles and Boston.
Much of the improvement is clearly related to the slow but continuing recovery in business travel, both group and transient.
In the second quarter this year, group room nights achieved amounted to just 13% of comparable 2019 levels in our portfolio.
But that improved substantially to 34% in the third quarter.
And based on business on the books and current cancellation and attrition trends, we expect it to exceed 40% in the fourth quarter.
In the first quarter of 2022, group room nights on the books are currently at 62% of Q1 '19 rooms on the books at the same time in 2018 and ADRs currently ahead by 14%.
For the year, group revenue pace on the books for 2022 is at 69% of the same time in 2018 for 2019 with ADR ahead by 6%.
Of course, what shows up versus what gets canceled will all depend upon what is happening with the virus.
But we're very encouraged about where we are for 2022, especially the significant rate lift that is on the books.
While I mentioned the performances of both Jekyll Island and Margaritaville, I thought I'd provide a little bit more detail.
Both resorts had terrific third quarters.
We were able to influence the performance of Jekyll Island in the quarter due to our acquisition on July 22, but we can't take any credit for Margaritaville's performance in Q3 due to our late September acquisition.
In Q3, Jekyll Island grew RevPAR by 35% over Q3 2019 with ADR increasing by 23% or $58.
At Margaritaville, RevPAR climbed 47% in Q3 versus 2019 with ADR increasing a robust 60% or $136.
Margaritaville's EBITDA in Q3 increased 131% over Q3 '19, up from $2.1 million to $4.8 million, with EBITDA margin up 1,300 basis points.
Jekyll Island's third quarter EBITDA was up 125% over Q3 '19 or $2.5 million versus $1.1 million with EBITDA margin also up 1,300 basis points.
In both cases, these are extraordinary numbers, but ones we expect to substantially exceed as we implement all of our operational changes over the course of the next year, even before any of the capital improvements that we're planning.
We're confident that both of these acquisitions will turn out to be fantastic long-term investments in addition to them being a huge positive uplift to our EBITDA and cash flow in the short to intermediate term.
as we swapped properties in slower recovery markets for properties in faster recovery markets that also have significant upside from both operational improvements and capital investments.
With the third quarter sale of Villa Florence in San Francisco, since the pandemic began, we've sold two older properties in San Francisco and one in New York City, along with some rooftop antennas and the historic Union Station Nashville for a total of $333 million.
And we've acquired two resorts in the Southeast and two small B&Bs in Key West for a total of $384 million.
We're very excited about these swaps and the upside from the new acquisitions.
Not only did these transactions reduce our urban concentration and increase our resort concentration that these trades of San Francisco, New York and Nashville, for Hollywood, Florida, Key West and the Golden isles of Georgia increase our leisure mix and reduce our business customer mix.
While it might look like we're focused on increasing our resort exposure, as discussed many times in the past, we remain opportunistic investors overall, utilizing risk-adjusted return forecasts and underwriting to determine both sales and acquisitions.
And how others value properties and what others are willing to pay definitely impacts where and what we ultimately acquire since value is a key component of our risk-adjusted return investing approach.
In that vein, over the last few months, we spent significant time evaluating the current values of our existing hotels and total portfolio.
As a reminder, the value ranges we determined for each hotel are based upon the transaction market for similar properties in similar condition with similar opportunities and similar locations in the same markets.
They're also based upon whether management and flag are available or if the property is encumbered by those contractual arrangements.
With a more active transaction market in the last three to four months, we feel there's enough real market transaction information to now establish true tradable market values.
And while these values will potentially move significantly and quickly in the next couple of years, we feel comfortable, again, publishing our overall gross and net asset values for our portfolio.
We believe that our current net asset value is in the range of $30 per share at the low end to $35 per share at the high end and $32.50 at the midpoint, and we're happy to discuss this in more detail in the Q&A or in separate conversations over the next few weeks.
I thought I'd also touch on the current labor situation and update you on our current assessment of the ongoing margin opportunity in our portfolio as a result of the implementation of new operating models at all of our properties.
In the last six to eight weeks, we believe the labor situation throughout our portfolio has improved significantly.
As expected, as kids went back to school, more people got vaccinated, child care became more available and enhanced federal unemployment benefits expired, we've seen more of our prior hotel associates coming back to work.
And with lots of hard work, our property teams have also found more qualified candidates interested and willing to fill open positions.
As a result, our properties have made significant progress in filling critical open positions and many of our properties are in good shape now with a more active pipeline for further hiring.
In addition, it seems the H2B visa program is back up and running, and we expect significant numbers of H2B qualified workers to aid our seasonal properties like LaPlaya that have historically utilized this program and Jekyll Island, where we'll be using the program for the first time beginning later this year or early next year.
We also believe those current labor pressures we're still experiencing will lessen over time as more workers come back to the labor force as the spread of the virus and cases decreased over time.
In general, we've not had to increase wages but we have made some adjustments here and there.
This has been mostly at our resorts that are in markets where either we're no longer where we wanted or needed to be in the market competitively or where we've repositioned our properties higher through renovations and redevelopments.
And we want to attract the best of the talent in the market to provide the highest level of service to match our higher rates.
Fortunately, our properties are generally at the higher end of their markets and are in a position to not only pay more as necessary but attract high-quality talent more easily because of the quality of our properties and the ability for associates to earn more money through not just wages and benefits, but higher tips and other gratuities.
As you well know, we've all been experiencing increasing levels of supply chain disruptions, including higher costs for many commodities like food and beverages, but also operating supplies in some of our services.
We've been able to successfully implement some very significant price increases throughout our portfolio for items such as food and beverage offerings, both in our outlets and through banquets and caving as well as charges for parking, event venues, audio visual equipment and services, resort and urban amenity fees, spot treatments, club dues and for other recreational activities.
These increases have ranged from 5% at the low end to as high as 25% at the high end and 15% is about average throughout the portfolio.
We've experienced little to no pushback on pricing increases so far.
It seems both the leisure customer and the business customer are in great financial shape with plenty of discretionary income or high profits.
And with prices increasing for all sorts of goods and services, our customers have been accepting of the increases.
This pricing flexibility and customer acceptance should allow us to continue to be able to grow our pre-pandemic margins by 100 to 200 basis points based upon the restructured operating models developed during the pandemic, which utilize more cross-training, more efficient labor scheduling tools and more technology, among many efforts to continue our never-ending effort to increase productivity and become a more efficient and profitable business.
In addition, curator has now completed over 60 preferred vendor arrangements with a preferred group of individual product and service providers in our industry.
As we continue to implement these arrangements throughout our portfolio, we're further reducing our overall cost of operations as we take advantage of the economies of scale being achieved by curator.
And we expect this number of arrangements to increase over 80 before the end of the year with further opportunities for savings as a result.
And as we get much closer to 2022, we're focused strategically on the year being a very strong recovery year overall.
Group should be very healthy as we believe there's a great deal of pent-up demand.
We also think leisure will continue to be robust with pent-up demand for vacations and getaways, while outbound international travel probably remains more limited.
And we're very encouraged by the decision to reopen our country in the next couple of weeks to international travelers and visitors.
We believe there is significant pent-up inbound demand that will aid both our resorts and our urban markets.
Certainly, the reports from the airlines about ticket sales to international inbound customers are very encouraging.
Taken together, this means we don't expect rate discounting in 2022.
Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year, and it remains relatively normal next year.
As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on the few remaining projects as soon as the approvals are complete, and it's the right time of year to commence them.
All of our redevelopments and transformations, including the large number in the last few years and all of the current and upcoming projects will provide very significant upside for our portfolio over the next few years as the recovery rolls forward.
We're already achieving these returns at our repositioned resorts where demand is, in many cases, already recovered.
Importantly, the vast majority of the dollars for these projects has already been invested, but the benefits have, for the most part, not yet been achieved, but should be as demand recovers.
And finally, as demonstrated by our acquisitions to date, we believe we have significant competitive advantages in pursuing new investment opportunities as they arise.
These include our ability to operate our properties more efficiently than the vast majority of buyers.
The additional cost savings from the economies of scale generated by curator, our unique strength in redevelopments transformations and independent or small brand lifestyle hotels.
Our vast number of operator relationships and our high profile and very positive reputation in the industry, and we look forward to many more opportunities to come.
So with that, we'd now like to move to the Q&A portion of our call.
Hey, Donna, you may now proceed. | pebblebrook hotel trust - unable to provide an outlook for 2021.
pebblebrook hotel trust - for q4 2021, expects both same-property room revenues and total revenues to be down between 38% and 42% versus q4 2019. |
PSEG released first quarter 2021 earnings results earlier today.
We also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with generally accepted accounting principles in the United States.
I'm pleased to report that PSEG has achieved several major milestones on our path to becoming a primarily regulated utility company with a complementary and significantly contracted carbon-free generating fleet.
Our GAAP results for the first quarter were also $1.28 per share versus $0.88 per share in the first quarter of 2020.
Results from ongoing regulated investments at PSE&G and the effect of cold weather on PSEG Power drove favorable comparisons at both businesses.
We are well positioned to execute on our financial and strategic goals for the balance of the year given this eventful quarter.
Beginning was out nearly $2 billion of Clean Energy Future programs, which have moved from approval to execution.
PSE&G is helping to advance the decarbonization of New Jersey in a sizable and equitable way.
Our Clean Energy Future investments are paired with a jobs training program that offers opportunities to low and middle-income New Jersey community.
Last week, the New Jersey Board of Public Utilities voted unanimously to award a continuation of the full $10 per megawatt hour zero-emission certificates, I'll just call them ZECs from now on, for all three New Jersey nuclear units, that would be Hope Creek, Salem number one and Salem number two through May of 2025.
This was the maximum amount that the BPU could have awarded, and we are appreciative of the support received from the many community, labor, business, environmental and employee organizations that participated in this enormously important process.
Each of these groups recognizes the value of the reliable around the clock and carbon-free electricity supply our nuclear plants provide.
Throughout this process, our nuclear team has approached operations at the units with the utmost professionalism and dedication to safety.
I congratulate PSEG Nuclear for being recognized by as an industry leader in operational reliability, one of only two nuclear fleets across the industry with no scrams over the past 365 days.
The BPU's decision to extend the ZEC program will advance climate action in New Jersey by helping to preserve the state's largest carbon-free generating resource and is consistent with the growing interest at the federal level in preserving existing nuclear as an essential part of a clean energy mix.
We applaud the BPU for its decision, which is in the best interest of the state of New Jersey and its ability to achieve its long-term clean energy goals without compromising reliability or going backward on environmental gains made to date.
Looking ahead, we will soon work with stakeholders to obtain alignment of state and federal climate goals in seeking ways to extend the duration of support for carbon-free nuclear power.
During the quarter, the BPU also approved PSEG's 25% equity investment in Orsted's Ocean Wind project.
In addition, Ocean Wind received a notice of intent to prepare an environmental impact statement from the Bureau of Ocean Energy Management, or BOEM, which we will also review -- which will also review the project's construction and operations plan.
In April, PJM, closed cooperation with the BPU, opened a four month solicitation window to seek transmission solutions to support New Jersey's offshore wind generation target.
This process is PGM's first public policy transmission solicitation, and we will participate in this proceeding.
The recent Biden administration proposal focusing on climate action is clearly supportive of offshore wind, existing nuclear generation and electrification of transportation, all of which are aligned with PSEG's business plan and strategy for sustainability.
PSEG eagerly encourages an advocate for a national approach to accelerate economy wide, net zero emissions even sooner than 2050 in a constructive manner that expands green jobs by investing in clean energy infrastructure.
I am more optimistic than ever that the momentum for real climate action is taking hold, PSEG continues to press ahead with our powering, progress, vision, that incorporates energy efficiency and the electrification of transportation to help our customers use energy -- use less energy.
We are pairing that with our move to make the energy our customers use cleaner, which aligns with our efforts to preserve our existing nuclear units and pursue strategic alternatives for our Fossil fleet.
Then we strive to deliver with high reliability and resiliency, which ties to our investments in Energy Infrastructure and the Energy cloud.
Today, we are also announcing progress on our strategic alternatives exploration with an agreement to sell our solar source portfolio to an affiliate of LS Power.
The sale resulted from a robust marketing process, and we're pleased with the outcome of the sale, having determined that the transaction is modestly accretive on the sum of the parts and on an operating earnings basis going forward.
We expect the solar source portfolio deals to close in the second or third quarter of 2021, subject to customary, regulatory and other closing conditions.
PSEG Power is continuing the exploration of strategic alternatives for its Fossil generating fleet and currently anticipate reaching an agreement around midyear.
These expected transactions, along with over a decade of capital allocation directed mainly toward PSE&G to position the remaining company as a primarily regulated electric and gas utility with a complementary carbon-free nuclear fleet and offshore wind investments that will be highly contracted.
The COVID-19 pandemic and its economic impact continued to affect the New Jersey economy.
The large contribution of the transmission and residential electric and gas components to our overall sales mix has had a stabilizing effect on the margins of our utility business as does a supportive regulatory order that authorizes deferral of certain COVID-19-related costs for future recovery.
Governor Murphy recently announced that a significant easing of COVID-19 restrictions on the state's businesses, venues and gatherings would begin on May 19 following progress in vaccinating over half of the state's population and a sustained reduction in positivity and hospitalization rates.
PSE&G has begun implementing the Clean Energy Future Energy Efficiency programs by initiating customer engagement and outreach as well as advancing the clean energy jobs training program I mentioned earlier and related IT system build-out activity.
Following the BPU approval of our $700 million AMI proposal in January, we have begun implementation of the 4-year program.
Our current focus is on planning the AMI communications network, customer outreach and developing the installation schedule of the new meters.
On the regulatory and policy front, there are several upcoming developments at the FERC, the Federal Energy Regulatory Commission, the BPU and PJM that could influence future results.
Last month, FERC promulgated a new proposed rule to limit the 50 basis point RTO return on equity incentive to a 3-year period.
Given the Biden administration's interest in the significant transmission build out to expand the integration of Clean Energy into the nation's power grid, this development was disappointed.
We have long supported the need for higher incentives for transmission investment over distribution returns based on the added complexity and risk of these projects.
Coordination through the RTO has benefits, but -- risks and complications must be considered as well.
Based on the short comment window provided, the proposed rule could be enacted as early as the third quarter.
We will file comments to recognize the merits of continuing the RTO adder, but this looks to be an uphill battle, given the Chair's support for the supplemental rule.
While we await the results of the first PJM capacity auction in three years, which PGM will announce on June 2, PSEG is continuing to advocate for a minimum offer price rule, I'll call it MOPR going forward, that will avoid double payment for resources such as offshore wind and nuclear or other supply need to achieve state goals.
FERC Commissioner Danly has developed a state option to choose resources proposal, or SOCR, intended to achieve the major goals of establishing the rights of states to choose their preferred capacity resources to achieve their energy policy objectives and eliminate double payments by states for the capacity they choose.
This proposal could have the added benefit of keeping much of FERC's capacity market reform rules intact while addressing state objections.
New Jersey is expected to issue its consultants report and recommendation for resource adequacy this month.
This report could determine whether a fixed resource requirement, or FRR, will be chosen to satisfy the state's future capacity obligations beyond the 2022 and 2023 energy year.
We continue to believe that the state could pursue an FRR without legislation and will suggest options to minimize the cost impact of FERC's capacity ruling on New Jersey customers.
Earlier in April, the BPU released its strong proposal to address the design of the solar successor program.
Stakeholder meetings are being conducted to consider a solar financial incentive program that will permanently replace the Solar Renewable Energy Certificate, or SREC program, and the Temporary Transitional Renewable Energy Certificate, or TRAC program, which was instituted in 2020 upon the state attainment of 5.1% of kilowatt hours sold from solar generation fee.
Given the substantial increase in New Jersey solar target, the high cost of solar and the solar cost caps in the Clean Energy Act of 2018, we believe it is critical to develop a cost-effective approach to incent future solar generation.
By far, the most efficient and cost-effective way for New Jersey to optimize what solar can bring to the achievement of its clean energy goals is to maximize grid-connected utility-scale projects by involving the state's electric distribution company.
So to wrap up my remarks, we are reaffirming non-GAAP operating earnings guidance for the full year of 2021 of $3.35 to $3.55 per share.
Our guidance assumes normal weather and plant operations for the remainder of the year and incorporates the conservation incentive programs that begin in June for electric and in October for gas to cover variations in revenue due to energy efficiency and other impacts.
In addition, as we mentioned on our year-end call, our 2021 guidance assumes a prospective settlement of our transmission return on equity at a lower rate and the inclusion of Fossil's results for the full year.
We are on track to execute PSEG's 5-year $14 billion to $16 billion capital program through 2025 and had the financial strength to fund it without the need to issue new equity.
Over 90% of the current capital program is directed to PSE&G, which is expected to produce 6.5% to 8% compound annual growth in rate base over the '21 to '25 period, starting from PSEG's year-end 2020 rate base of $22 billion.
As we've noted previously, PSE&G's considerable cash-generating capabilities are supported by over 90% of its capital spending, continuing to receive either formula rate last based or current rate recovery of and on capital.
From nuclear operations marking a second breaker-to-breaker uninterrupted run at Hope Creek to a cross-functional regulatory, legal, financing, government affairs group that multi cash on Clean Energy Future, ZECs and a host of other regulatory proceedings, to our field crews in New Jersey and Long Island who exemplify a safety conscious mindset, I could not be prouder of our entire PSEG team.
As Ralph mentioned, PSEG reported non-GAAP operating earnings for the first quarter of 2021 of $1.28 per share versus $1.03 per share in last year's first quarter.
We've provided you with information on Slide 12 regarding the contribution to non-GAAP operating earnings by business for the quarter.
And Slide 13 contains a waterfall chart that takes you through the net changes quarter-over-quarter in non-GAAP operating earnings by major business.
I'll now review each company in more detail.
PSE&G, as shown on Slide 15, reported net income for the first quarter 2021 of $0.94 per share compared with $0.87 per share for the first quarter of 2020, up 8% versus last year.
Results improved by $0.07 per share, driven by revenue growth from ongoing capital investment program and favorable pension OPEB results.
Transmission capital spending added $0.02 per share of the first quarter net income compared to the first quarter of 2020.
On the distribution side, gas margin improved by $0.03 per share over last year's first quarter, driven by the scheduled recovery of investments made under the second phase of the Gas System Modernization Program.
Electric margin was $0.01 per share favorable compared to the first quarter of 2020 on a higher weather-normalized residential volume.
O&M expense was $0.02 per share unfavorable compared to the first quarter of 2020, reflecting higher costs from several February snowstorms.
Depreciation expense increased by $0.01 per share, reflecting higher plant in service, and pension expense was $0.02 per share favorable compared to the first quarter of 2020.
Flow through taxes and other were $0.02 per share favorable compared to the first quarter of 2020.
And this tax benefit is due to the use of an annual effective tax rate that will reverse over the remainder of the year and was partly offset by the timing of taxes related to bad debt expense.
Winter weather, as measured by heating degree days, was 4% milder than normal, but was 18% colder than the mild winter experienced in the first quarter of 2020.
For the trailing 12 months ended March 31, total weather-normalized sales reflected the higher expected residential and lower commercial and industrial sales observed in 2020 due to the economic impacts of COVID-19.
Total electric sales declined by 2%, while gas sales increased by approximately 1%.
Residential customer growth for electric and gas remained positive during the period.
PSE&G invested approximately $600 million in the first quarter and is on track to fully execute on its planned 2021 capital investment program of $2.7 billion.
The 2021 capital spending program will include infrastructure upgrades to transmission and distribution facilities as well as the rollout of the Clean Energy Future investments in Energy Efficiency, Energy Cloud, including smart meters and electric vehicle charging infrastructure.
PSE&G is continuing to defer the impact of additional expenses incurred to protect its employees and customers as a result of the COVID-19 pandemic.
PSE&G has experienced significantly higher accounts receivables and bad debts, and lower cash collections from customers due to the moratorium on shut offs for residential customers that began last March and has been extended through June of this year.
We've launched an Expanded Customer Communications Program designed to inform all customers about payment assistance programs and bill management tools.
As a reminder, PSE&G continues to make quarterly filings with the BPU, detailing the COVID-19 pandemic related deferrals.
And as of March 31, PSE&G has recorded a regulatory asset of approximately $60 million for net incremental costs, which includes $35 million for incremental gas bad debt expense.
Electric bad debt expenses recovered through the societal benefits charge and trued up periodically.
With respect to subsidiary guidance for PSE&G, our forecast of net income for 2021 is unchanged at $1.410 billion to $1.470 billion.
Now moving to Power.
In the first quarter of 2021, PSEG Power reported net income of $161 million or $0.32 per share, non-GAAP operating earnings of $163 million or $0.32 per share, and non-GAAP adjusted EBITDA of $321 million.
This compares to first quarter 2020 net income of $13 million, non-GAAP operating earnings of $85 million and non-GAAP adjusted EBITDA of $201 million.
And we have also provided you with more detail on generation for the quarter on Slide 22.
PSEG Power's first quarter results benefited from a scheduled improvement in capacity prices for the first half of 2021, a favorable weather comparison to the mild winter in the first quarter of 2020, and other items, some of which are expected to reverse in subsequent quarters.
The expected increase in PJM's capacity revenue improved non-GAAP operating earnings comparisons by $0.03 per share compared with last year's first quarter.
Higher generation in the 2021 first quarter added $0.01 per share due to the absence of the first quarter 2020 unplanned [on one average.
] And favorable market conditions influenced by February's cold weather benefited results by $0.03 per share compared to last year's first quarter.
We continue to forecast a $2 per megawatt hour average decline in recontracting for the full year recognizing that the shape of the annual average change favors the winter months of the first quarter.
The weather-related improvement in total gas send out to commercial and industrial customers increased results by $0.04 per share.
We expect some of this increase to gas apps will reverse later in 2021, reflecting the absence of a onetime benefit recognized in the third quarter of 2020 related to a pipeline refund.
O&M expense was $0.03 per share favorable in the quarter, benefiting from the absence of first quarter 2020 outages at Bergen two and Salem 1, and lower depreciation and lower interest expense combined to improve by $0.01 per share versus the quarter ago -- or the year ago quarter.
Generation output increased by just under 1% to total 13.3-terawatt hours versus last year's first quarter when Salem Unit one experienced a month-long unplanned outage.
PSEG Power's combined cycle fleet produced 4.7-terawatt hours, down 8%, reflecting lower market demand in the quarter.
The Nuclear fleet produced 8.2-terawatt hours, up 3%, and operated at a capacity factor of 98.8% for the first quarter, representing 62% of total generation.
As Ralph mentioned, Hope Creek posted an uninterrupted run between refueling outages and just began its 23rd refueling outage in April.
PSEG Power is forecasting generation output of 36 to 38 terawatt hours for the remaining three quarters of 2021 and has hedged approximately 95% to 100% of this production at an average price of $30 per megawatt hour.
Gross margin for the first quarter rose to approximately $34 per megawatt hour compared to $30 per megawatt hour in the first quarter of 2020, which contained one of the mildest winters in recent history.
Power prices in the first quarter of 2021 were stronger across PJM New York and New England compared to the year earlier period.
And this winter's temperatures were 12% cooler on average and resulted in better market conditions compared to the first quarter of 2020.
Power's average capacity prices in PJM were higher in the first quarter of 2021 versus the first quarter of 2020 and will remain stable at $168 per megawatt hour -- per megawatt day through May of 2022.
In New England, our average realized capacity price will decline slightly to $192 per megawatt day, beginning June 1.
However, Power's cleared capacity will decline by 383 megawatts with the scheduled retirement of the Bridgeport Harbor Unit 3, achieving our goal of making Power's fleet completely coal free.
Over 75% of PSEG Power's expected gross margin in 2021 is secured by our fully hedged position of energy output, capacity revenue set in previous auctions and the opportunity to earn a full year of ZEC revenues and certain ancillary service payments such as reactive power.
The forecast of PSEG Power's non-GAAP operating earnings and non-GAAP adjusted EBITDA for 2021 remain unchanged at $280 million to $370 million and $850 million to $950 million, respectively.
Now let me briefly address results from PSEG Enterprise and Other.
For the first quarter of 2021, Enterprise and Other reported net income of $10 million or $0.02 per share for the first quarter of 2021 compared to a net loss of $5 million or $0.01 per share for the first quarter of 2020.
The improvement in the quarter reflects higher tax benefits recorded in the first quarter of 2021 due to the use of an annual effective tax rate that will reverse over the remainder of the year as well as interest income associated with a prior IRS audit settlement.
For 2021, the forecast for PSEG Enterprise and Other remains unchanged at a net loss of $15 million.
With respect to financial position, PSG ended the quarter with $803 million of cash on the balance sheet.
During the first quarter, PSE&G issued $450 million of 5-year secured medium-term notes at 95 basis points and $450 million of 30-year secured medium-term notes at 3%.
In addition, we retired a $300 million, 1.9% medium-term note at PSE&G that matured in March.
In March of 2021, PSEG closed on a $500 million, 364-day variable rate term loan agreement, following the January prepayment of a $300 million term loan initiated in March of 2020.
For the balance of the year, we have approximately $950 million of debt at PSEG Power scheduled to mature in June and September.
$300 million of debt scheduled to mature at the parent in November and $134 million of debt at PSE&G scheduled to mature in June.
Our solid balance sheet and credit metrics keep us in a position to fund our 2021 to 2025 capital investment program without the need to issue new equity.
As Ralph mentioned earlier, we are affirming our forecast of non-GAAP operating earnings for the full year of 2021 of $3.35 to $3.55 per share.
That concludes my comments.
And Christi, we are now ready to take questions. | compname announces q1 earnings per share of $1.28.
sees fy non-gaap operating earnings per share $3.35 to $3.55.
qtrly earnings per share $1.28.
qtrly non-gaap operating earnings $1.28 per share.
public service enterprise group - on track to execute five-year, $14 billion to $16 billion capital plan through 2025.
public service enterprise group - on track to execute 5-year capital plan through 2025, have financial strength to fund without need to issue new equity. |
pseg.com, and our 10-Q will be filed shortly.
We will also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income or loss as reported in accordance with generally accepted accounting principles in the United States.
PSEG reported non-GAAP operating earnings of $0.70 per share for the second quarter of 2021 versus $0.79 per share in last year's second quarter.
GAAP results for the second quarter were $0.35 per share net loss related to transition charges at PSEG Power, and that compares with $0.89 per share of net income for the second quarter of 2020.
Also in the quarter, PSEG Power recorded a pre-tax impairment of $519 million at its New England Asset Group, partly offset by a pre-tax gain of $62 million from the sale of the Solar Source portfolio.
We continue to make great progress on a number of fronts to position ourselves for the future.
We had a strong operating quarter that, once again, produced non-GAAP operating earnings in line with our expectations for the year.
Our results for the second quarter bring non-GAAP operating earnings for the first half of 2021 to $1.98 per share.
This 9% increase over non-GAAP results of $1.82 per share for the first half of 2020 reflects the growing contribution from our regulated operations and continued derisking at PSEG Power.
Slides 13 and 15 summarize the results for the quarter and the first half of the year.
It's been a year since we announced our intentions to explore strategic alternatives for our non-nuclear generation assets, and I'm pleased with the progress to date in what I believe is a compelling platform for future regulated growth at PSE&G.
Our utility, a clean energy infrastructure-focused business, will be complemented by a significantly contracted, carbon-free generating portfolio, consisting of our nuclear fleet and investments and opportunities in regional Offshore Wind.
The marketing of the fossil assets has garnered a significant level of interest from numerous qualified buyers in a competitive process, which is advancing as expected.
And we expect to provide you with more information on this process in the very near future.
I'm pleased that we've reached a balanced agreement with the New Jersey Board of Public Utilities and the Division of Rate Counsel on PSE&G's transmission rate, which, if approved by FERC, will resolve a significant regulatory uncertainty for us and provide a timely rate reduction for customers.
PSE&G has agreed to voluntarily reduce its annual transmission revenue requirement, which includes a reduction in its base return on equity to 9.9% from 11.18%.
If approved by the FERC, a typical electric residential customer will save 3% on their monthly bills.
New Jersey continues to experience positive economic activity since Governor Murphy lifted the Public Health Emergency Order in June.
Our largest customer class in terms of sales, the commercial segment, has shown a rebound in electricity demand.
Electric sales overall adjusted for weather were up nearly 4% over the second quarter of 2020, led by an 11% increase in commercial sales, which was partly offset by a 5% decline in residential sales as people gradually returned to work outside the home.
The warmer-than-normal summer has also increased PSE&G's average daily peak load for the quarter to 5,480 megawatts compared to last year's second-quarter average of 5,100 megawatts and the 5,330 megawatts experienced in the pre-COVID second quarter of 2019.
And so far this summer, PSE&G's load has peaked at 10,064 megawatts on June 30, exceeding the 10,000-megawatt mark for the first time since July 19 of the year 2013, eight years ago.
Turning to clean energy developments in New Jersey, the BPU in June awarded a second round of Offshore Wind projects totaling 2,658 megawatts and is now halfway toward the state's goal of procuring 7,500 megawatts of Offshore Wind generation by 2035.
The award was split between the 1,510 megawatt Atlantic Shores project and Orsted's 1,148 megawatt Ocean Wind 2.
The OREC price is set in the second round range from about $86 to $84 for the Atlantic Shores and Ocean Wind projects, respectively.
And last week, the BPU approved a new solar successor incentive framework that consists of two programs: an administratively determined incentive; and a competitive solicitation incentive, which would apply to larger projects defined as five megawatts and above.
Incentive levels for the administratively determined segment range from $90 per megawatt-hour for net-metered residential projects to $70 to $100 per megawatt-hour for the commercial and community solar segments and up to $120 per megawatt-hour for certain public entity projects.
You will recall that the prior program consisting of solar renewable energy credits or as we frequently refer to them as SRECs, average well above $200 per megawatt-hour over the past decade.
And combined with net metering subsidies and federal tax credits provided later incentives topping $300 per megawatt-hour.
So this successor program is a positive step toward balancing the need for clean energy while recognizing the importance of affordability for our customers.
PSEG's existing solar programs are essentially fully subscribed.
We'll continue to work with the state MBP on programs that can help meet the solar goals in the Energy Master Plan.
PSEG continues to make tangible progress on our own decarbonization and ESG goals.
In the second quarter alone, we closed on our 25% equity stake in the 1,100-megawatt Ocean Wind project in New Jersey, that's the Ocean Wind one project, obviously.
We retired our last coal unit at Bridgeport Harbor in Connecticut, making our generating fleet coal-free, and moved up our net-zero vision by 20 years to 2030.
But not only do we accelerate the net-zero vision, we also expanded it to include Scope one direct greenhouse gas emissions, and Scope two indirect greenhouse gas emissions from operations at both PSEG Power and PSE&G.
Expanding the net-zero vision to include both the utility and power operations is a significant move forward in our decarbonization efforts and one that will both inspire and challenge us to do more and do it better.
Coming up, PSEG is preparing to bid into a competitive process to build Offshore Wind transmission infrastructure.
This solicitation is intended to procure transmission solutions to this important New Jersey 7,500-megawatt Offshore Wind target by 2035.
The potential projects can cover onshore upgrades, new onshore transmission connection facilities, new offshore transmission connection facilities, and a network to offshore transmission system.
Proposals may address any or all of these four components.
The decision-making criteria is expected to include, among other things: an evaluation of reliability and economic benefits; cost; constructability; environmental benefits; permitting risks; and other "New Jersey benefits".
This competitive transmission open window will be jointly conducted by PJM and the New Jersey Board of Public Utilities.
PJM will lead the technical analysis of the proposed transmission solutions, and the BP will be the ultimate decision-maker.
We support the state's efforts to procure transmission in a manner that is most reliable, constructible, and cost-effective for our customers.
All of this is great progress on our decarbonization efforts and continues to demonstrate our alignment with the state's Clean Energy agenda and our industry leadership on environmental stewardship.
New Jersey's recent endorsement of the environmental benefits provided by our New Jersey nuclear plants through the second zero-emission certificates, I'll refer to that as ZEC for the rest of this conversation, extends the $10 per megawatt-hour carbon-free attribute recognition through May of 2025.
This extension will allow us, along with stakeholders in New Jersey and at the federal level, the time we need to work on a long-term economic solution to keep our merchant nuclear fleet economically viable and preserve its currently unmatched contribution of reliable, carbon-free baseload generation, the most cost-effective clean generation source available.
During the ZEC deliberations, a growing recognition of these nuclear units were economically at risk, but vitally important to New Jersey's ability to reach its clean energy and carbon goals gain further traction.
The importance of the New Jersey nuclear units to the state's climate goals was also recognized in the BPU Staff's recent resource adequacy report.
The report recommends that New Jersey should continue exploring a regionwide or New Jersey-only integrated clean capacity market, with the fixed resource requirement, often, we refer to that as an FRR.
We expect that the BPU will be closely watching to see whether FERC accepts PJM's just filed modifications to the minimum offer price rule which appears to better align the PJM capacity market with New Jersey's clean energy goals.
The results of the first PJM capacity auction in three years, influenced by a COVID-19 pandemic stifled demand curve, served as further evidence of the market risks faced by our nuclear units.
This sentiment is shared by Biden administration officials, including DOE Secretary Granholm and White House Domestic Climate Advisor Gina McCarthy, who have both spoken publicly on the importance of nuclear energy as a clean energy resource.
We continue to work on promoting a federal nuclear production tax credit proposal where the value of the credit declines as market revenue increases.
This is the primary federal policy that would help prevent premature closing of merchant plants whose market revenues are not currently covering cost and risk.
Other options, such as the federal nuclear grant program administered by the Department of Energy are also being discussed.
However, we and others in the industry share the view that a competitive grant program will not provide timely relief nor the certainty these plants need to remain operational.
Nonetheless, we're encouraged by the attention that at-risk nuclear plants are getting in Washington.
And we especially appreciate the efforts of New Jersey Congressman Bill Pascrell, who's leading this effort in the House of Representatives, and Senators Cardin, Manchin, and Booker in the Senate.
That said, we do expect the federal infrastructure effort to take the better part of the rest of the year to unfold.
On the social side of ESG during the second quarter, we recognized the Juneteenth holiday by giving employees paid time off to commemorate and celebrate this important day in our nation's history and supported our LBGTQ+ community with numerous events for Pride Month.
Also in June, PSEG was named to JUST Capital's Top 100 companies supporting healthy families and communities.
Overall, we had a solid quarter and results for the first half of the year have positioned us to update our full-year guidance somewhat earlier than has been our practice.
We are raising by $0.05 per share at the bottom end of PSEG's non-GAAP operating earnings guidance for full-year 2021 to a range of $3.40 to $3.55 per share, based on favorable results of PSE&G and Power through the first six months of the year.
This update also incorporates an August one effective date to implement the transmission rate settlement and the expectation that the fossil assets will contribute to consolidated results through the end of the year.
We're on track to achieve the Utilities 2021 planned capital spending of $2.7 billion on schedule and on budget.
This spend is part of PSEG's consolidated five-year, $14 billion to $16 billion capital plan, which we still intend to execute without the need to issue new equity, while also continuing to offer the opportunity for consistent and sustainable growth in our dividend.
Before closing, I do want to recognize the contributions of Dave Daly, who will be retiring on January 4, 2022, after 35 years of dedicated service to the company.
Kim Hanemann, who had been named PSE&G's Senior Vice President and Chief Operating Officer, was promoted to succeed Dave as President and COO of PSE&G effective June 30.
In support of a seamless transition of leadership at PSE&G, Dave is serving as an executive advisor through the end of the year.
With her promotion, Kim is the first woman to lead New Jersey's largest electric and gas utility in our 118-year history.
Many of you know Kim is the power behind the transmission buildout over the past 10 years, and I hope all of you will have the opportunity to meet here in the near future.
Speaking of meeting, New Jersey has among the highest rates of fully vaccinated people in the country, but vaccination rates in the state have recently plateaued.
So we're carefully monitoring the impact that highly contagious variants are having on updated health and safety protocols.
So whether in person or virtually, we are looking forward to hosting an investor-owned -- an investor event in the fall when we expect to share with you the many good things that are happening at PSEG regarding our improved business mix, increased financial flexibility, and solid growth opportunities.
As Ralph said, PSEG reported non-GAAP operating earnings for the second quarter of 2021 at $0.70 per share versus $0.79 per share in last year's second quarter.
We've provided you with an information on Slides 13 and 15 regarding the contribution to non-GAAP operating earnings by business for the quarter and the year-to-date periods, and Slides 14 and 16 contain corresponding waterfall charts that take you through the net changes in non-GAAP operating earnings by major business.
I'll now review each company in more detail starting with PSE&G.
PSE&G reported net income of $309 million or $0.61 per share for the second quarter of 2021 compared with net income of $283 million or $0.56 per share for the second quarter of 2020.
PSE&G's second-quarter results reflect revenue growth from ongoing capital investment programs.
Growth in transmission added $0.01 per share to second-quarter net income, reflecting continued infrastructure investment as well as the timing of transmission O&M in the quarter and true-ups from prior year filings.
Electric margin added $0.02 per share to net income compared to the year-earlier quarter, driven by commercial and industrial demand, reflecting higher margins in April and May compared to the COVID-19 restrictions that affected prior year results; and the implementation of the Conservation Incentive Program or CIP mechanism in June.
Gas margin added $0.01 per share, driven by the Gas System Modernization Program rate rollings.
Gas-related bad debt expense and O&M expense were both $0.01 per share favorable compared to the year-earlier quarter, driven by the timing of COVID-related deferrals since the issuance of the BPU's order in the third quarter of last year.
An increase in distribution-related depreciation due to higher rate base lowered net income by $0.01 per share.
Nonoperating pension expense was $0.02 per share favorable compared to the second quarter of 2020, reflecting the continued recognition of strong asset returns experienced last year.
Tax expense was $0.02 unfavorable compared to the second quarter of 2020, driven by the timing of adjustments to reflect PSE&G's estimated annual effective tax rate.
The transmission agreement between PSE&G, the BPU, and Rate Counsel that Ralph mentioned earlier has been filed with FERC for approval with an August one requested effective date.
There's no timetable from when FERC must respond, however, we will begin recording the impacts of the settlement on our financials starting with the August one requested effective date.
The agreement would reset the base ROE for PSE&G's formula rate to 9.9% from 11.18%, which lowers the annual transmission revenue requirement by about $100 million per year on a pre-tax basis.
Other key elements of the settlement lower annual depreciation expense by approximately $42 million, which has a corresponding reduction in revenue that results in no net impact on earnings and an improved cost recovery methodology for our administrative and general costs and investments in materials and supplies.
The agreement also includes an increase of PSE&G's equity ratio from 54% to 55% of total capitalization.
The financial impact of the settlement agreement is expected to lower PSE&G's net income by approximately $50 million to $60 million or $0.10 to $0.12 per share on an annual basis in the first 12 months once implemented.
Weather for the second quarter was significantly warmer than the second quarter of 2020, with the temperature-humidity index that was 34% higher than normal and a significantly higher than normal number of hours at 90 degrees or greater.
The New Jersey economy continued to recover in the second quarter, increased by total weather-normalized electric sales by approximately 4% compared to the second quarter of 2020, which was at the height of the COVID-19 economic restrictions.
On a trailing 12-month basis, weather-normalized electric and gas sales were each higher by approximately 1%, with residential electric and gas usage up by 4% and 2%, respectively.
The Conservation Incentive Program, which started June one for electric sales, removes the variations of weather, economic activity, efficiency, and customer usage from our financial results, resetting margins to a baseline level.
This new mechanism supports PSE&G's ability to maximize customer participation in energy efficiency programs without losing margins from lower sales.
A similar program covering gas sales will commence October one and replace the weather normalization clause.
PSE&G's capital program remains on schedule.
PSE&G invested approximately $700 million in the second quarter and $1.3 billion year-to-date through June.
This capital was part of 2021's $2.7 billion Electric and Gas Infrastructure Program to upgrade transmission and distribution facilities and enhance reliability and increase resiliency.
We continue to forecast over 90% of PSEG's planned capital investment will be directed to the utility over the 2021 to 2025 time frame.
PSE&G's forecast of net income in 2021 has been updated to $1.42 billion to $1.47 billion from $1.41 billion to $1.47 billion.
Now moving on to Power.
PSEG Power reported non-GAAP operating earnings for the second quarter of $0.10 per share and non-GAAP adjusted EBITDA of $159 million.
This compares to non-GAAP operating earnings of $0.24 per share and non-GAAP adjusted EBITDA of $258 million for the second quarter of 2020.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure as well as income tax expense, interest expense, depreciation, and amortization expense.
We also provided you with more detail on generation for the quarter and for the first half of 2021 on Slide 24.
PSEG Power's second-quarter non-GAAP operating earnings were affected by several items that combined lowered results by $0.14 per share below the quarter from a year ago.
Recontracting and market impacts reduced results by $0.09 per share, reflecting seasonal shape of hedging activity and higher cost to serve load versus the year-ago quarter.
Generating volume and zero-emission certificates were each down by $0.01 per share, affected by lower nuclear output related to the spring refueling outage at the 100% owned Hope Creek Nuclear Plant.
PJM capacity revenue added $0.02 per share to the year-ago quarterly comparison.
For the year ended June 30 -- for the year-to-date ended June 30, capacity is $0.05 per share favorable compared to the first half of 2020, reflecting the scheduled higher price of approximately $167 per megawatt day for the majority of the first half of 2021 versus the $116 per megawatt day for the same period in 2020.
Higher O&M expense reduced results by $0.04 per share compared to last year's second quarter, primarily reflecting the planned Hope Creek refueling outage and higher fossil operating expenses.
Lower depreciation expense, reflecting the sale of the solar source portfolio and the early retirement of the Bridgeport Harbor coal-fired generating station, combined with lower interest expense, to add $0.02 per share versus the year-ago quarter.
Taxes and other items were $0.03 per share unfavorable, reflecting the absence of a multi-year tax audit settlement included in the second quarter 2020 results.
Gross margin in the second quarter of 2020 was $28 per megawatt-hour compared with $33 per megawatt-hour for last year's second quarter.
The decline quarter-over-quarter reflects the seasonal price impact of recontracting, that is anticipated to result in a negative $2 per megawatt-hour price decline in the hedge portfolio for the full year.
We expect recontracting results in the third quarter of 2021 to be similarly negative, as we mentioned last quarter, will more than offset the $0.03 per share benefit seen in the first quarter of this year.
Now let's turn to Power's operations.
Total generation output declined by 1% to 12.6 terawatt-hours in the second quarter as the refueling outage at Hope Creek and subsequent forced out its lower nuclear output versus the second quarter of 2020.
The nuclear fleet operated at an average capacity factor of 86% for the quarter, producing 7.2 terawatt-hours, down by 7% versus last year, which represented 57% of total generation.
Power's combined-cycle fleet produced 5.3 terawatt-hours of output, up 8% in response to higher market demand helped by warm weather.
Power is forecasting generation output of 25 to 27 terawatt-hours for the remaining two quarters of 2021 and has hedged 95% to 100% of its production at an average price of $30 per megawatt-hour.
Also during the quarter, we're pleased to remind you that PSEG Power eliminated all coal from its generating mix with the early retirement of Bridgeport Harbor Station three.
Power's quarterly impairment assessments, including consideration of its strategic review of the non-nuclear fleet, determined that the ISO New England asset grouping showed an impairment as of June 30, 2021.
As a result, Power recorded a pre-tax charge of $519 million for this asset group.
PJM and New York ISO asset groupings did not show an impairment as of June 30, 2021.
However, a move of these assets to held for sale, which would be effective upon an anticipated sale agreement, would be expected to prompt an additional material impairment to the fossil portfolio.
Such a move to held for sale would also prop the cessation of depreciation and amortization expense for the held-for-sale units, resulting in a favorable impact to GAAP and non-GAAP operating earnings through the close of the transaction.
In June of 2021, PSEG completed the sale of PSEG's Solar Source, which resulted in a pre-tax gain of approximately $62 million and income tax expense of approximately $63 million, primarily due to the recapture of investment tax credits on units that operated for less than five years.
For the remainder of the year, depreciation expense will also decline by approximately $0.03 per share as a result of the Solar Source sale.
Forecast of PSEG Power's non-GAAP operating earnings for 2021 has been updated to $295 million to $370 million, from $280 million to $370 million, while our estimated non-GAAP adjusted EBITDA remains unchanged at $850 million to $950 million.
Now let me briefly address operating results from Enterprise and Other and provide an update on PSEG Long Island.
For the second quarter of 2021, PSEG Enterprise and Other reported a net loss of $3 million or $0.01 per share for the second quarter of 2021, which was flat compared to a net loss of $2 million or $0.01 per share for the second quarter of 2020.
The net loss for the second quarter of 2021 reflects higher interest expense at the parent initially offset -- partially offset, I should say, by the ongoing contributions from PSEG Long Island.
In June, PSEG Long Island entered into a nonbinding term sheet with the Long Island Power Authority, that would resolve all the authorities claims related to Tropical Storm Isaias.
The terms will be adopted into amendments to our operation service agreement, or OSA, and submitted to New York state authorities for approval later this year.
The OSA contract term will continue through 2025, with a mutual option to extend.
For 2021, the forecast for PSEG Enterprise and Other remains unchanged at a net loss of $15 million.
PSEG's financial position remains strong.
At June 30, we had approximately $4 billion of available liquidity, including cash on hand of about $107 million, and debt represented 52% of our consolidated capital.
During the first half of 2021, PSEG entered into 2,364-day variable rate term loan agreements totaling $1.25 billion.
During the second quarter, PSEG Power retired $950 million of senior notes maturing in June and September 2021 and ended June with debt as a percentage of capital of 20%.
In May, Moody's changed PSE&G's credit rating outlook to negative from stable.
Their first mortgage bond rating remains Aa3.
We still expect to fund PSEG's $14 billion to $16 billion capital investment program over the 2021 to 2025 period without the need to issue new equity, while also continuing to offer consistent and sustainable growth in our dividend payment.
As Ralph mentioned, we've raised the bottom end of our forecast of non-GAAP operating earnings for the full year to $3.40 to $3.55 per share, up by $0.05 per share based on the solid results we have seen in the first half of the year that give us confidence that we can deliver results at the upper end of our original guidance.
That concludes my comments.
And Carol, we are now ready to answer questions. | raises fy non-gaap operating earnings per share view to $3.40 to $3.55.
net loss for q2 of 2021 of $177 million, or $0.35 per share.
non-gaap operating earnings for q2 of 2021 were $356 million, or $0.70 per share.
raises bottom end of full year 2021 non-gaap operating earnings guidance range to $3.40 - $3.55 per share. |
pseg.com, and our 10-Q will be filed shortly.
We will discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with Generally Accepted Accounting Principles in the United States.
At the conclusion of their remarks, there will be time for your question.
PSEG reported non-GAAP operating earnings for the third quarter of 2020 of $0.96 per share versus $0.98 per share in last year's third quarter.
PSEG's GAAP results for the third quarter were $1.14 per share compared with $0.79 per share in the third quarter of 2019.
Our results for the third quarter bring non-GAAP operating earnings for the year-to-date to $2.78 per share, up 5.3% compared to the $2.64 per share in the first months of 2019.
This performance reflects the strong contribution from our regulated operations at PSE&G, cost controls at both the utility and PSEG Power, lower pension expense and the favorable settlement of tax audits I mentioned last quarter.
We delivered a solid quarter at both PSE&G and PSEG Power.
We are updating PSEG's non-GAAP operating earnings guidance for 2020 to a range of $3.35 to $3.50 per share, which removes $0.05 per share from the lower end of our original guidance range.
Last month, The New Jersey Board of Public Utilities -- I'll refer to them as the BPU -- approved the settlement of the energy efficiency component of our Clean Energy Future filed.
As you know, we proposed the comprehensive filing covering energy efficiency, energy cloud and electric vehicles and storage in October 2018, to help deliver on the goals of New Jersey's Clean Energy Act.
The BPU's landmark decision on energy efficiency will enable PSE&G to invest $1 billion over three years to help bring universal access to energy efficiency for all New Jersey customers.
These programs will lower customer bills, shrink their carbon footprint and give them greater control of their energy usage.
PSE&G's Clean Energy Future Energy Efficiency program will also establish a clean energy jobs training program, create over 3,200 direct jobs and enable everyone in New Jersey to benefit from the avoidance of 8 million metric tons of carbon emissions through 2050.
The $1 billion of remaining CEF programs we proposed to implement, which in the energy cloud or otherwise known as advanced metering infrastructure, to expand electric vehicle infrastructure and energy storage, are entering hearing stages later this year and we expect them to conclude in the first quarter of 2021.
Our service area experienced significantly warmer weather during the first half of the summer, which along with the continued reopening of the New Jersey economy, served to moderate the 7% load loss seen earlier in the year caused by the COVID-19 pandemic.
New Jersey has aggressively managed its positivity rates since the spring with some recent resurgence that continues a phased reopening of businesses, schools and activities that will determine the pace of economic recovery going forward.
Recognizing the extraordinary economic stress the pandemic has placed on many of our customers, PSE&G, in partnership with governor Murphy and the BPU, extended a non-safety related shut-off moratorium till March of 2021, for residential, electric and gas service.
The shut-off moratoriums for commercial and industrial customers will continue through November 15th.
PSE&G, as always, will work with customers on alternative payment plans, as needed, to maintain essential services and inform customers about assistance programs that are available, such as LIHEAP.
PSEG continues to provide the latest health and safety information and protocols to all of its employees.
And we recently launched the new mobile app that includes a health questionnaire for employees and contractors who physically report to a PSEG location.
Many of our employees continue to effectively work remotely and our responsible reentry planning is ongoing.
Our cross-functional executive crisis management team continues to monitor business impacts of COVID-19 going into these critical winter months.
In early August, tropical storm, Isaias, wreaked havoc across the New York, New Jersey area with powerful winds and heavy rains; and the fast-moving storm did left approximately 1 million of our customers in New Jersey and Long Island without power.
This was by far the most damaging storm we had experienced since superstorm Sandy in 2012.
And its impact was made worse on several fronts by COVID-19 restrictions.
PSE&G and PSEG Long Island worked around the clock alongside nearly 3,000 mutual aid personnel in New Jersey and over 5,000 on Long Island to restore service.
In New Jersey, we restored 90% of our customers within 72 hours.
The storm was mostly a wind event which caused significant physical damage to poles and wires.
PSE&Gs transmission system did not experience any outages during the storm event, underscoring the reliability and resiliency benefits of our transmission investment programs.
The PSEG Long Island experience was more challenging.
We were able to restore 80% of customers who lost service within 72 hours.
However, our customer communications and restoration time estimates were simply not up to our standards, and we are fixing that.
We have spent the past six years making dramatic improvements to customer service on Long Island.
And JD Power recently recognized PSEG Long Island as the most improved utility nationally in customer service metrics over this period.
Our commitment to continuous improvement remains in place and lessons learned from tropical storm Isaias will be leveraged to further improve customer satisfaction.
On the regulatory front, we are continuing confidential settlement discussions with the BPU and other parties concerning the return on equity related to PSE&Gs Federal Energy Regulatory Commissions formula rate for transmission.
At the state level, the energy efficiency decision authorizing a $1 billion investment over three years represents an annual run rate of about $350 million, which is nearly a tenfold increase from our previous annual energy efficiency spend.
These investments will receive recovery of and on capital through a clause mechanism at the current authorized return-on-equity of 9.6% and be amortized over 10 years with no incentives or penalties applied during the first five years from the start of the program.
The 10-year energy efficiency programs approved by the BPU will help New Jersey achieve its preliminary energy savings target of 2.15% for electricity and 1.1% for gas within five years.
In addition, as part of the energy efficiency settlement, the BPU approved a Conservation Incentive program to provide a lost revenue recovery mechanism for sales variations due to energy efficiency, weather and other variables.
This Conservation Incentive program will begin in June 2021 for electric revenues and in October 2021 for gas revenues.
On the Power side, current market conditions continue to be influenced by lower loads due to COVID-19, low natural gas prices and ample generation.
These persistent conditions kept PJM day ahead around the clock prices in the mid-teens to low $20 per megawatt hour for most days during the third quarter, despite a few weather-driven spikes above $30 per megawatt hour over the summer.
Persistently low PJM day ahead power prices made the economic pressures on our baseload carbon-free nuclear units even more challenging.
PSEG Power recently submitted its application to extend the Zero Emission Certificates program -- I'll refer to that as ZEC -- into 2025, as specified in the 2018 ZEC law.
A BPU final decision is expected in April of 2021.
Our application filed on October 1 demonstrates the financial need for the zero-carbon attribute payment has increased in the last two years, as energy prices has further declined and continue to pressure the economic viability of our New Jersey nuclear units.
The addition of the next jury hearings for the second ZEC proceeding will improve transparency and we believe our application supports the need for more than a $10 per megawatt attribute repayment for the Salem and Hope Creek units.
A new Brattle report estimates that preservation of our New Jersey nuclear units through an extension of the $10 per megawatt hour attribute payment saves customers approximately $175 million per year in lower energy costs over the next 10 years.
The New Jersey Department of Environmental Protection also weighed in through a recently issued report evaluating the states progress in reducing its greenhouse gas emission with a goal of 80% by the year 2050.
One of the recommendations in the DEPs 80/50 report, is to retain existing carbon-free resources, including the Stage 3 nuclear power plant.
And that's a direct quote.
And they called it a key path to reducing emissions from the electric power generation sector.
As our state and region move increasingly toward carbon-free energy, preserving existing nuclear generation, currently the reliability backbone of New Jersey's zero-carbon energy mix, will grow in importance.
On the ESG front, I'm pleased to announce that we have incorporated equity into our diversity and inclusion programs, expanding our commitments for new and ongoing initiatives to ensure that all employees have access to the benefits and opportunities the company offers, and promoting equity in our lower income communities.
And regarding governance, we continue to garner first tier scores for our contributions disclosure and transparency, as cited in the 2020 update of the Corporate Political Disclosure and Accountability Index, also known as the CPA-Zicklin Index, with a score of 85.7, which exceeds both the S&P 500 company average as well as the Utility average score of 77.2.
Turning to earnings guidance.
As I mentioned, we are narrowing PSEG's non-GAAP operating earnings guidance for full year 2020 by removing $0.05 per share off the lower end.
This updates our guidance range to $3.35 to $3.50 per share, based on solid results through the first nine months of the year and our ongoing confidence that we can effectively manage costs at both businesses, continue executing our PSE&Gs investment programs and provide New Jersey with safe, reliable sources of efficient and zero-carbon sources of electricity.
We continue to expect regulated operations to contribute nearly 80% of total non-GAAP operating earnings for the year, reflecting the benefits of PSE&Gs ongoing investments in New Jersey's energy infrastructure.
We also remain on-track to execute on the PSEG five-year $13 billion to $15.7 billion capital plan without the need to issue new equity, and our liquidity position at September 30 stood at nearly $5 billion.
PSEG continues its due diligence and negotiations with Orsted, in preparation of making a final recommendation to our Board of Directors on whether to invest up to a 25% equity stake in the Ocean Wind project.
We expect to announce our decision later this year.
Before moving to the financial review, I'd also like to mention that since our late July announcement that PSEG is exploring strategic alternatives for Power's non-nuclear generating fleet, we have received positive feedback from investors and regulators.
Our intent to accelerate the transformation of PSEG into a primarily regulated electric and gas utility and contract to zero-carbon generation is proceeding as planned.
We are still in the early stages of this process and we expect to begin marketing a potential transaction in one or a series of steps by the end of this year.
If successful, we should be able to complete the process during 2021.
As Ralph said, PSEG reported non-GAAP operating earnings for the third quarter of 2020 of $0.96 per share versus $0.98 per share in last year's third quarter.
We provided you with information on Slide 9 regarding contribution to non-GAAP operating earnings by business for the quarter.
Slide 10 contains a waterfall chart that takes you through the net changes quarter-over-quarter in non-GAAP operating earnings by major business.
And I will now review each company in more detail, starting with PSE&G.
PSE&G reported net income of $0.61 per share for the third quarter of 2020 compared with net income of $0.68 per share for the third quarter of 2019, as shown on Slide 14.
Utilities third quarter results reflected ongoing growth from our investment programs, offset by certain items, largely reflecting tax adjustments that are timing in nature.
For the year-to-date period, PSE&G results are on-track to achieve our full year guidance driven by revenue growth from ongoing capital investment programs, low pension expense and cost control.
Investment in transmission added $0.04 per share third quarter net income.
Electric margin was a $0.01 per share favorable compared to the year-earlier quarter, driven by higher weather normalized residential volumes, mostly offset by lower commercial and industrial demand.
Summer 2020 weather was a $0.01 per share ahead of weather experienced in the third quarter of 2019.
O&M expense was $0.03 unfavorable versus the third quarter of 2019, primarily reflecting our internal labor costs on tropical storm Isaias and timing of certain maintenance activities, partly offset by the reversal of certain COVID-19-related cost recognized in prior quarters.
In July, the BPU authorized PSE&G to defer certain expenses incurred because of the COVID-19 pandemic.
To reflect that order, PSE&G deferred certain COVID-19-related O&M and gas bad debt expense previously recorded and established a corresponding regulatory asset of approximately $0.05 per share for future recovery.
Obviously, offsetting this timing item, PSE&G reversed a $0.04 accrual of revenue under the weather normalization costs for collection of lower gas margins resulting from the warmer-than-normal winter earlier in the year due to recovery limitations under that quarters earnings test.
Distribution-related depreciation lowered net income by a $0.01 per share and non-operating pension expense was a $0.01 per share favorable compared with last year's third quarter.
Flow through taxes and other items lowered net income by $0.07 per share compared to the third quarter of 2019, driven largely by timing of taxes and taxes related to bad debt expense.
The majority of these tax items are expected to reverse about half in the fourth quarter, with taxes related to bad debts reversing in the future based upon the timing of actual write-offs.
Summer weather in the third quarter is measured by the Temperature-Humidity Index, was nearly 18% warmer than normal and 7% warmer than the third quarter of 2019.
Weather normalized electric sales for the quarter declined by approximately 1% versus last year, again reflecting the increases that we've seen in residential volumes, which only partially offsets lower commercial industrial sales.
Residential weather normalized sales were up 7% due to the COVID-19 work-from-home impact.
However, C&I sales declined by approximately 6% with many parts of the New Jersey economy not yet fully reopened.
On a net margin basis, however, residential margins -- which are driven by volumes, are 5% year-to-date, weather normalized -- have offset the margin impact of lower C&I demands.
PSE&Gs capital program remains on schedule.
PSE&G invested approximately $700 million in the third quarter and $1.9 billion through September 30th, as part of its 2020 capital investment program of approximately $2.7 billion in infrastructure upgrades to its transmission and distribution facilities to maintain reliability, increase resiliency and replace aging energy infrastructure.
The Clean Energy Future Energy Efficiency Investment will begin later this year and ramp up to approximately $125 million in 2021 before reaching a full annual run rate of about $350 million in 2022.
We continue to forecast that over 90% of PSEGs planned capital investment will be directed to the utility over the 2020 to 2024 timeframe.
Earlier this month, PSE&G filed its annual transmission formula rate update with FERC to reflect, among other updates, net plant additions.
PJM cost reallocations will more than offset the higher revenue requirements of approximately $119 million and result in a net reduction in costs to PSE&G customers when implemented in January of 2021.
PSE&Gs forecast of net income for the full year has been updated to $1,325 million to $1,355 million from $1,310 million to $1,370 million.
Now, move on to Power.
PSEG Power reported non-GAAP operating earnings for the third quarter of $0.33 per share, and non-GAAP adjusted EBITDA of $349 million.
This compares to non-GAAP operating earnings of $0.29 per share and non-GAAP adjusted EBITDA of $322 million for the third quarter of 2019.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization expenses.
And we've also provided you with more detail on generation for the quarter and for year-to-date 2020 on Slides 21 and 22.
PSEG Power's third quarter non-GAAP operating earnings were positively affected by several items that have improved results by $0.04 per share compared to the year ago quarter.
The scheduled rise in PJM's capacity revenue on June 1, increased non-GAAP operating earnings comparison by $0.03 per share compared with the third quarter of 2019.
Reduced generation volumes lowered results by $0.02 per share versus the third quarter of '19, reflecting the sale of the Keystone and Conemaugh coal units last year, as well as some lower market demand.
Recontracting and market impacts reduced results by $0.02 per share versus the year ago quarter.
And gas operations were $0.02 per share higher.
Lower O&M expense was $0.03 per share favorable compared to last year's third quarter, reflecting lower fossil maintenance costs, including the absence of a major outage at Lindon that occurred in the third quarter of 2019.
Lower interest and depreciation expense combined to add a $0.01 per share versus the year ago quarter.
And also during the quarter, New Jersey enacted an increase in the corporate surtax to 2.5% as part of the fiscal year 2021 budget, which lowered comparisons of $0.01 per share for the third quarter of 2019.
Gross margin for the third quarter was $33 per megawatt hour, an improvement of $2 per megawatt hour over the third quarter of 2019, nearly reflecting the scheduled increase in capacity prices with the new energy year that began June 1st.
Power prices and natural gas prices stayed low through the summer as reduced commercial activity across PJM, New York and Maryland experienced lower loads and countered most of the weather-related demand surge.
Turning to Power's operations.
Total generating output declined 9% to 14.9 terawatt hours for the third quarter, reflecting the sale of Keystone and Conemaugh.
PSE&G Power's combined cycle fleet produced 6.7 terawatt hours of output, down 7%, reflecting lower market demand driven by ongoing COVID-19-related impacts on economic activity in the state.
The nuclear fleet operated at an average capacity factor of 95.9% -- I'm sorry, 95.7% for the quarter, producing 8.2 terawatt hours, up 5% over the third quarter of '19, and represent 55% of total generation.
PSE&G Power continues to forecast total output of 2020 of 50 to 52 terawatt hours.
For the remainder of 2020, Power has hedged approximately 95% to 100% of production at an average price of $36 per megawatt hour.
For 2021, Power has hedged 75% to 80% of forecast production of 48 to 50 terawatt hours, at an average price of $35 per megawatt hours.
And Power is also forecasting output for 2022 of 48 to 50 terawatt hours, and approximately 35% to 40% of Power's output in 2022 is hedged at an average price of $34 per megawatt hour.
We are updating the forecast of both Power's non-GAAP operating earnings for 2020 to a range of $385 million to $430 million from $345 million to $435 million, and estimate of non-GAAP operating EBITDA to a range of $980 million to a $1,045 million from $950 million to $1,050 million.
I'll briefly address operating results from Enterprise and other.
We reported net income of $8 million or $0.02 per share for the third quarter of 2020 compared to net income of $6 million or $0.01 per share in the third quarter of 2019.
Net income for the quarter reflects ongoing contributions from PSEG Long Island and lower taxes that were partially offset by a small loss on the sale of the Powerton and Joliet investments at Energy Holdings.
And the forecast for PSEG Enterprise and other for 2020 has been updated to a net loss of $10 million from a net loss of $5 million.
PSEG ended the third quarter with over $4.9 billion of available liquidity, including cash on hand of about $966 million and debt representing 52% of our consolidated capital.
In August, PSEG issued $550 million five-year senior notes at 80 basis points and $550 million 10-year senior notes at 1.6%, and retired $500 million of the 364-day term loan agreements issued in the spring.
PSEG has also offered $700 million of floating rate term loans that will mature in November 2020.
Also, in August, PSE&G issued $375 million of 30-year secured medium term notes at a coupon rate of 2.05% and retired $250 million of MTN's at maturity.
Following PSEG's announcement that it would explore strategic alternatives for Power's non-nuclear fleet, S&P lowered PSEG Power's credit ratings to BBB with a stable outlook from BBB plus with a stable outlook.
Turning its view that PSEG Power was no longer viewed as core to PSEG.
S&P's rationale reflects family rating methodology that had previously provided a one notch uplift to Power due to that core designation.
And Moody's also published updated issuer comments following the announcement and left Power's credit ratings unchanged at Baa1 with a stable outlook.
Power's debt as a percentage of capital declined to 28% at September 30th, and we still expect to fully fund PSEG's five-year $13 billion to $15.7 billion capital investment program over the 2020 to 2024 period without the need to issue new equity.
And as Ralph mentioned, we've narrowed our non-GAAP operating earnings guidance for the full year by removing $0.05 per share from the lower end of the original guidance, and updated range to $3.35 per share to $3.50 per share.
That concludes my comments.
And Sylvia, we are now ready to answer questions. | compname reports qtrly net income $1.14 per share.
sees fy 2020 non-gaap operating earnings per share $3.35 to $3.50.
qtrly net income $1.14 per share.
qtrly non-gaap operating earnings $0.96 per share. |
pseg.com, and our 10-K will be filed shortly.
We will also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with Generally Accepted Accounting Principles in the United States.
At the conclusion of their remarks, there will be time for your question.
PSE&G reported non-GAAP operating earnings for the fourth quarter of $0.65 per share.
Non-GAAP operating earnings for the full year rose by 4.6% to $3.43 per share, and mark the 16th year in a row that PSE&G delivered results within our original earnings guidance.
PSE&G GAAP results were $0.85 per share for the fourth quarter of 2020 compared with $0.86 per share for the fourth quarter of 2019.
In addition for the full year PSE&G reported 2020 net income of $3.76 per share compared with $3.33 per share in 2019.
Details on the results for the quarter and the full year can be found on slides 12 and 14.
I am pleased to report that the PSE&G's fourth quarter and full year results reflected solid contributions from both PSE&G and PSEG Power.
And I'm particularly proud of the achievements of our employees during this past year as it was one of the most challenging in recent memory.
Their efforts have kept our customers connected to essential energy services to power their homes, businesses, and vitally important institutions.
We have also made steady progress in several key business priorities, the most important of which is our transition to becoming primarily a regulated utility, with contract and generation comprise about zero carbon nuclear fleet and future investments in regional offshore wind.
In the past six months, we've announced the exploration of strategic alternatives for PSEG Power's 7,200 plus megawatts of non Nuclear Generating assets, and received initial indications of interest for both the fossil and solar source assets.
PSE&G successfully initiated its landmark clean energy future program, securing approval to spend nearly $2 billion in energy efficiency, smart meter installations and electric vehicle charging infrastructure, all of which will enhance New Jersey's environmental profile for years to come.
In addition, the New Jersey Board of Public Utilities, I'll refer to them as the BPU recently concluded public hearings regarding PSE&G nuclear application to extend the zero-emission certificate.
I think I'll shorten that to ZEC from now on through May 2025.
Our service area experience milder than the normal weather during the fourth quarter, book ending the week heating season of the first quarter in 2020.
Regarding whether normalized sales for the year, while total electric sales volume declined by 2%.
Gas sales rose by 1%.
In both the electric and gas businesses higher residential usage of approximately 5% largely offset declines in commercial and industrial sales resulting in stable margins overall.
Working with COVID-19 health and safety protocols since last March, PSE&G was able to execute on its plan $2.7 billion capital spending program in 2020.
These capital programs provide a critical investment to support the New Jersey economy, particularly in the early months of the pandemic, and preserve essential jobs while replacing vitally important energy infrastructure, and generating customer benefits of improved reliability and resiliency, as well as methane reduction.
In January of 2021, the BPU approved two settlements with PSE&G and other parties in the clean energy future energy, cloud and electric vehicle proceedings.
The energy cloud investment program is estimated to be approximately $707 million over the next four years, and will result in the replacement of over 2 million electric meters with smart meters.
The electric vehicle program will direct $166 million into EV charging infrastructure over the next six years.
With these recent settlements, the BPU has constructively addressed the vast majority of the clean energy future filings and has approved nearly $2 billion of investment to help realize New Jersey's energy goals.
The Energy Efficiency Program will also be established clean energy job training for over 3,200 direct jobs, while enabling the avoidance of 8 million metric tons of carbon emissions through the year 2015.
Investing in energy efficiency programs is the most cost-effective solution to reducing carbon emissions.
Importantly, the conservation incentive of the settlement encourages the broad adoption of energy efficiency, with certain programs focusing on low- and moderate-income customers that will lower bills for participating customers.
We expect the balance of the clean energy future filing, which includes our request to spend under $200 million on energy storage, and a few remaining EV programs will be addressed following future stakeholder proceeding.
PSE&G continues to engage with the BPU staff and re counsel to advance confidential discussions toward a settlement of the return on equity related to PSE&G formula rate for transmission overseen by the Federal Energy Regulatory Commission.
The annual update under PSE&G existing formula rate filed last October was implemented this past January and together with cost reallocations of our revenue requirements for certain transmission projects, candidly to customers outside of our zone.
This resulted in a net reduction in PSE&G customer costs.
For 2020, PSE&G, once again achieved top quartile OSHA scores.
We also achieve the top quarter of JD Power ranking in the eastern large company category for both residential electric and gas companies.
And PSE&G posted its best ever JD Power scores for electric and gas customer satisfaction outpacing the average industry results on metrics that consider total monthly cost, bill clarity, fairness of pricing and options and ability to manage monthly usage among residential customers.
Also for the 19th year in a row PA consulting recognized PSE&G with its reliability one award as the most reliable electric utility in the Mid-Atlantic region and for the first time with our 2020 outstanding customer engagement award.
New Jersey has recently made solid progress in lowering its COVID-19 positivity rates, and continues to face the reopening of businesses, schools and other activities.
We have a long history of partnering with the state to support the economy.
And we continue to work with them on investment programs that can spur economic development and employment recovery, all while being quite thoughtful about managing customer rate impacts.
Regarding collection activities, the moratorium on shut offs residential electric and gas services currently scheduled to conclude in March, recognizing the economic hardship that many of our customers continue to face PSE&G in partnership with the BPU and community groups is working hard to enroll customers and customer payments support programs, such as light heap and deferred payment rate.
When the moratorium is lifted, we will work closely with the BPU other stakeholders and our customers to ensure a collections process that supports our customer's individual situations.
Turning now PSEG Power, we're continuing all activities related to the exploration of strategic alternatives we announced last July.
In the fourth quarter of last year, we launched the formal sales processes of the 1,467 megawatt solar source, and over 6,750 megawatt thoughtful portfolios.
We are currently evaluating indications of interest, and believe we are on track to announce an outcome in the second half of 2021.
As we launched the strategic alternatives initiative last year, and throughout the process thus far, PSEG Power has continued to deliver on expectations for non-GAAP operating earnings and adjusted EBITDA.
Last year PSEG fossil posted one of its best operational performance records ever, and completed its entire maintenance outage schedule without any OSHA safety violations.
In addition, PSE&G nuclear completed to complex refueling outages in 2020, with new COVID-19 safety protocols, and continue its overall outstanding operating performance.
These achievements speak volumes about the professionalism of our dedicated workforce that exemplifies our focus on safety and operational excellence.
PSE&G nuclear Zero Mission certificate application and the extension of the current ZEC is currently under consideration at the BPU.
Last month, the BPU staff consultant released their preliminary findings.
The consultants found that all three of our New Jersey units were eligible, recognizing that each unit had a financial need for next.
There were other aspects of the preliminary findings that we view as inconsistent with the ZEC law.
And we look forward to upcoming hearings where we will have the opportunity to address those items.
It is clear that New Jersey recognizes the need for nuclear power in order to achieve its short and long-term clean energy goals, as laid out in states on an energy master plan and DEP'S 80 by 60 report.
The recent weather-related power and market values in Texas and California further underscore the importance of maintaining New Jersey's reliable resource mix.
Over the next few weeks, you will hear as mentioned that our confidential filings show that these units are actually in need of more than $10 per megawatt hour, partly due to the fact that PGM forward market prices are lower versus 2018, which was the year that first ZEC application.
As stated in the 2018 ZEC law, nuclear operating risk and market risk must be recognized as a cost in any economic determination and ZEC eligibility.
We have responded to all information requests and share confidential financial information with rate council and PJM independent market monitor.
In order to support transparency around this important proceeding.
And the actions and expansion of the current ZEC, we would not continue to operate the plant.
While the direction of public policy both in New Jersey, Jersey and in the nation is the increased recognition of carbon free energy to mitigate climate change.
That realization in the form of a future price on carbon is highly uncertain at best.
With the final decision on the ZEC application expected on April 27, we are hopeful that the BPU will act to extend the $10 per megawatt hour attribute payment to preserve nuclear units and their 3,400 megawatts of zero carbon base load generation through May of 2025.
The BPU is also moving forward with its investigation of resource adequacy, and the potential for the creation of fixed resource requirements service area within New Jersey, I'm just going to call that FRR in future.
We've maintained a neutral stance on the potential of an alternative capacity procurement paradigm, but remain supportive of accommodations that enable state supported resources to qualify as capacity that can satisfy both the state's capacity obligations, and its clean energy goals.
As we've previously stated, the current minimum offer floor prices are not expected to prevent either our nuclear or gas part of units from clearing in the upcoming PJM capacity auction scheduled for this May.
Now let me turn my attention to 2021 guidance.
We are introducing non-GAAP operating earnings guidance of $3.35 to $3.55 per share with the utility expected to contribute between one $1,410 million and $1,470 million.
PSEG Power between $280 million and $370 million and parent others expected to post a loss of $15 million.
This year we expect PSE&G to contribute just over 80% of consolidated non-GAAP operating earnings at the midpoint of guidance.
Going forward, we expect that the utility earnings will represent 80% to 90% of PSE&G non-GAAP results, with the remaining balance expected to be comprised of long-term agreements for zero carbon offshore wind generation, and as ZEC supported New Jersey nuclear units.
For PSEG Power, over 70% of its 2021 gross margin has been secured by the way of energy hedges, capacity revenues established prior auctions, zero emission certificates, and ancillary service payments.
However, for 2021, recontracting at lower market prices, higher costs tied to a hope Creek refueling outage, and the absence of tax benefits realized in 2020 results in the lower non-GAAP operating earnings guidance for 2021.
Our PSE&G five-year capital spending forecast has been updated to $14 billion to $16 billion for 2021 through 2025 and includes approximately $2 billion of clean energy future investments, as well as the expected extension of the gas system modernization program and Energy Efficiency Program at their average annual run rates for the last two years of the period that being 2024 and 2025.
Consistent with test years approximately 90% or $13 billion to $15 billion this capital program will be directed to grow regulated operations at PSE&G.
This ongoing investment in essential energy infrastructure and clean energy programs is expected to produce 6.5% to 8% compound annual growth and rate base over the five-year period starting from $22 billion at year-end 2020.
On slide 10, we've provided you with an alternate view of our updated capital program for 2021 through 2025.
We've classified it by investments in decarbonization, energy transition, climate adaptation for resilience and reliability and methane reduction.
As a sidebar, any spend for offshore wind will be incremental to these totals and is not included in the $14 billion to $16 billion capital plan.
We also expect that our strong cash flow will enable us to fund our entire five-year capital spending program, as well as our planned offshore wind investments during the 2021 and 2025 period, without the need to issue new equity.
As we continue to plan for the responsible reentry to our offices and facilities currently targeted for this July.
Whether responding to a myriad of COVID-19 challenges, or their excellent injury free response to the nor'easter that we just experienced this past month, employees across our organization has embodied operational excellence, as they provide our New Jersey, New York, Connecticut and Mid-Atlantic customers with reliable essential energy services.
Before moving to Dan's financial review, I will summarize the new initiatives in place of future growth and areas of our continued strategic focus.
These range from the new clean energy future investments behind the meter to infrastructure opportunities supporting electrification of transportation, and a growing mix of renewables in the distribution system to expanding the existing aging infrastructure replacement programs to assist the New Jersey economic recovery.
In addition, we are advancing the strategic alternatives of exploration through a robust bidding process, pursuing near term opportunities to expand offshore wind investments in the Mid-Atlantic and are engaged in ongoing efforts to preserve the New Jersey nuclear fleet, the most cost effective and most reliable source of base load supply to reduce emissions.
Each of these actions serves to further PSE&G's already strong ESG leadership position, which we continuously strive to improve.
In 2020, we move to decarbonize our generating fleet, announced an investment in New Jersey offshore wind, and initiated a landmark energy efficiency investment to bring universal access to a broad range of clean energy opportunities.
In 2021, we joined the company network of the series organization at CERS to advance our climate advocacy.
We will achieve a coal free generating fleet in June.
And we recently published our first ESG Performance Report.
PSEG is getting recognized for our ESG initiatives by Standard and Poor's was included us in their 2021 sustainability yearbook.
And by the Dow Jones Sustainability Index was named PSE&G to the North American index for 13 years in a row.
We're also gratified to be named to the 2021 listing of America's most responsible companies by Newsweek magazine, and the Forbes list of best employees for diversity in 2020.
And best employers and veterans in 2020.
The Board of Directors recent decision to increase the company's common dividend to the indicative annual level of $2.04 per share is the 17th increase in the last 18 years, and reflects our ongoing commitment to returning capital to our shareholders to enhance our total return profile as we also pursue growth.
There is no lack of opportunity for PSE&G.
As we continue the transformation to a primarily regulated electric and gas utility, focused on clean energy infrastructure, complemented with contracted zero carbon generation, we are working toward a sustainable future where customers universally use less energy, the energy they use is cleaner, and its delivery is more reliable and more resilient.
We are confident that pursuing this strategy will enhance our ability to provide our customers with essential energy services, which has been our core mission for the last 118 years.
As Ralph said, PSE&G reported non-GAAP operating earnings for the fourth quarter of 2020 of $0.65 per share.
And we provided you with information on slides 12 and 14 regarding the contribution of non-GAAP operating earnings by business for the fourth quarter, and for the full year of 2020.
Slide 13 and 15 contained waterfall charts that take you through the net changes quarter-over-quarter and year-over-year, and non-GAAP operating earnings by major business.
I'll now review each company in more detail starting with PSE&G.
PSE&G's net income for the fourth quarter of 2020 increased by $0.04 to $0.58 per share, compared with net income of $0.54 per share for the fourth quarter of 2019 as shown on slide 17.
For the full year PSE&G's net income increased by $0.16 per share, or 6.5% compared to 2019 results.
This improvement reflects an 8% increase in rate base at year end 2020 to just over $22 billion, which as we note on slide 22 does not include approximately $1.8 billion of construction work in progress or see what that's mostly a transmission.
The continued growth in utility earnings resulting from investments in transmission added $0.2 per share versus the fourth quarter of 2019.
Gas margin was $0.02 favorable, reflecting GS&NT roll in and higher weather normalized volume.
Electric margin was flat compared to the fourth quarter of 2019.
As higher were the normalized volumes will offset by lower demand?
Mild temperatures during the quarter had a negative $0.03 per share impact, mostly reflecting recovery limitations under the earnings test of the gas weather normalization clause.
O&M expense was flat versus the fourth quarter 2019.
Higher distribution depreciation expense of a $0.01 per share offset lower pension expense of a $0.01 per share in the quarter.
Taxes and other were $0.03 per share favorable, partly reversing the negative $0.07 per share impact that the timing of taxes had on third quarter of 2020.
Recall in the third quarter flow through taxes and other items lower net income by $0.07 per share compared to the third quarter of 2019.
And we indicated at that time that about half of the $0.07 would reverse in the fourth quarter.
The balance is related to bad debts which we anticipate reversing in the future based upon the timing of actual write-offs.
Early winter weather in the fourth quarter as measured by the heating degree days was 9% milder than normal and 14% milder than in the fourth quarter of 2019.
The full year PSE&G weather-normalized residential electric sales increased by 5.6% due to the COVID-19 work from home impact, but a larger decline in commercial sales resulted in total electric sales declining by 2%.
Total weather-normalized gas sales were up 1.2% for 2020 by a 4.9% increase in residential use partially offset by a smaller decline in the commercial and industrial segment.
For both electric and gas sales, higher residential uses largely offset declines in commercial and industrial sales, resulting in stable margins overall.
PSE&G invested $700 million in the fourth quarter as part of its 2020 Capital Investment Program of approximately $2.7 billion directed to infrastructure upgrades of transmission and distribution facilities to maintain reliability, increase resiliency, make lifecycle replacements and clean energy investments.
PSE&G updated five-year capital spending plan includes investing $2.7 billion in 2021.
And as detailed on slide 21, approximately $960 million is allocated to transmission; $700 million to electric distribution, which includes approximately $200 million for Energy Strong Two, $875 million to gas distribution, which includes over $400 million for GSMP2 and $200 million for new clean energy future EV programs and the beginning of the AMI rollout.
The clean energy future EV investment will ramp up to approximately $125 million in 2021 before reaching a full annual run rate of about $350 million in 2023.
As Ralph mentioned the BPU approved two CF settlements in January, totaling approximately $875 million covering energy cloud and electric vehicle investments.
The capital and operating costs of these programs will begin to be recovered in PSE&G next rate proceeding, expected to be filed in the second half of 2023.
From the start of the programs until the commencement of new base rates estimated in late 2024, the return on other non-capital will be included for recovery in these rates as well as operating costs and stranded costs associated with retirement of the existing leaders.
Of these amounts, the vast majority about 90% received contemporaneous or near contemporaneous regulatory treatment either through the first formula rate, or clause recovery mechanisms or recovered and rates as replacement spend or new business.
As Ralph also mentioned, we continue settlement discussions with the BPU staff and recounsel regarding our FERC transmission return on equity.
Although our forecast for 2021 as soon as the resolution effective in the near term, those discussions remain confidential and ongoing.
PSE&G net income for 2021 is forecasted at $1,410 million to $1,470 million which reflects an assumed reduction of our transmission formula rate, as well as incremental investment in EV infrastructure and energy efficiency.
So moving to power, PSEG Power reported non-GAAP operating earnings of $0.10 per share in the fourth quarter unchanged from the non-GAAP results in the fourth quarter of 2019.
Results for the quarter brought Power's full year non-GAAP operating earnings to $430 million or $0.84 per share.
Compared with 2019 non-GAAP results of $09 million or $0.81per share.
Non-GAAP adjusted EBITDA total to $182 million for the quarter and $990 million for the full year of 2020.
And this compares to non-GAAP adjusted EBITDA of $198 million, and $1,035 million for the fourth quarter and full year 2019 respectively.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization expense.
We've also provided you with added detail on generation for the fourth quarter and full year on slide 26.
PSEG Power's fourth quarter non-GAAP operating earnings were aided by the scheduled increase in PSEG Power's average capacity prices in PJM, covering the second half of 2020 and higher gas operations, which resulted in improved non-GAAP operating earnings comparisons of $0.04 and $0.01 per share respectively, compared to the fourth quarter of 2019.
However, lower generation output and recontracting at lower market prices reduced non-GAAP operating earnings by a total of $0.08 per share versus the year ago quarter.
The decline in O&M expenses in the quarter improve results by a $0.01 per share and reflects the absence of the Hope Creek refueling outage that occurred in the fourth quarter of 2019.
The extension of the Peach Bottom Nuclear operating licenses contributed to lower depreciation expense of a $0.01 per share and lower taxes improve non-GAAP operating earnings by a $0.01 over the year ago quarter.
Gross margin for the quarter was $32 a megawatt hour, a $1 per megawatt hour improvement over the fourth quarter of 2019, mainly reflecting the scheduled increase in capacity prices that began June 1, 2020 and remain in place through May of 2021.
For the full year 2020 gross margin was flat at $32 per megawatt hour compared to full year 2019.
Mild fall temperatures and holiday related spikes and COVID-19 positivity rates dampen market demand in New Jersey and kept our prices and natural gas prices lower than the quarter and year ago comparisons.
So let's turn to Power's operations.
Total output from Power's generating facilities declined 9% in the fourth quarter of 2020, compared to the fourth quarter of 2019.
Unplanned outages at fossil and an extended outage at the sale of one nuclear unit reduced fourth quarter generation levels compared to the fourth quarter in 2019.
However, full year 2020 output of 53 terawatt hours came in above our 50 to 52 terawatt hour forecast.
The nuclear fleet operated at an average capacity factor of 78.9% in the quarter, and 90.3% for the full year, producing nearly 31 terawatt hours of zero carbon base load power.
The combined cycle fleet operated an average capacity factor of 46.2% in the quarter, and 48.3% for the full year, generating approximately 22 terawatt hours in 2020.
The three new combined cycle generating units, Keys, Sewaren and Bridgeport Harbor five posted an average capacity factor of over 75% for the full year 2020.
And this coming June PSEG Power will complete the planned early retirement of the 383 megawatt coal fired Bridgeport Harbor three generating station, eliminating the last coal unit in power's fleet.
For 2021, Power has hedged approximately 90% to 95% of its expected output of 48 to 50 terawatt hours, at an average price of $32 per megawatt hour, which represents an approximately $2 per megawatt hour decline from 2012.
In addition 2021 average hedge prices no longer include cost-based transmission charges for New Jersey's basic generation service contracts due to a change in how they are billed and collected.
This change further reduces revenues by approximately $3 per megawatt hour starting on February 1 of 2021.
And is often on the cost side so there's no P&L impact as a result.
We're forecasting 2021 non-GAAP operating earnings and non-GAAP adjusted EBITDA PSEG Power to be $280 million to $370 million and $850 million to $950 million, respectively.
Power segment guidance reflects a full year of fossil and solar operations, lower expected generation volume and lower market prices, as well as the absence of a one-time tax benefit realized in 2020.
Now, let me briefly address operating results from enterprise and other which reported a net loss that increased by $0.03 per share, compared to the fourth quarter of 2019.
And reflects lower tax benefits compared with the fourth quarter of 2019 and lower results from KCG Long Island.
Regarding PSEG Long Island, following several challenges related to our response to tropical storm Isaias.
We've made significant improvements in our outage management to lessening business continuity and other systems and processes.
The Long Island Power Authority filed a complaint against PSE&G Long Island in New York State court last December, alleging multiple breaches of the operating services agreement or OSA in connection with PSE&G Long Island's preparation and response to tropical storm Isaias.
We are in discussions with LIPA to address their concerns, which could include potential amendments to our OSA with LIPA and to resolve all claims.
As a reminder, our 12-year contract is scheduled to run through 2025.
We are committed to addressing the identified performance issues and to continue our strong track record of performance for Long Island customers since taking over operations.
For 2021, PSEG Enterprise and other are forecasted to have a net loss of $15 million as parent financing and other costs exceed earnings from PSEG volume.
PSEG ended 2020 with approximately $3.8 billion of available liquidity, including cash on hand of $543 million, and debt representing 52% of our consolidated capital.
In December PSEG issued $96 million of 8.63% senior notes due April 2031, in exchange for like amount of 8.63% senior notes due April 2031, originally issued at Power, which were cancelled following the completion of the exchange.
PSEG also retired a $700 million term loan at maturity.
Power's debt as a percentage of capital declined to 27% on December 31 from 28%, at September 30.
To summarize non-GAAP results for the quarter was $0.65 per share; full year non-GAAP operating earnings were $3.43 per share.
And as we move into 2021, our guidance for the year is $3.35 to $3.55 per share, with regulated operations expected to contribute over 80% of consolidated results, arranged for 2021 reflects incremental investment in our T&D infrastructure, and a ramp up of a new clean energy future programs, as well as an assumed reduction return on equity of our transmission formula rate during the year at PSE&G.
And a full year of fossil and solar operations at PSEG family.
PSE&G also raised its common dividend by $0.08 per share for the indicative annual level of $2.04, a 4% increase over 2020.
The 2021 indicative rate continues to represent a conservative 59% payout of consolidated earnings at the midpoint of 2021 guidance and utility earnings alone are expected to cover 140% of the dividend at the midpoint of 2021 guidance.
We still expect our strong cash flow will enable us to fully fund PSE&G's five year $14 million to $16 billion capital investment program, as well as our plan to offer when investment during the 2021 to 2025 period without the need to issue new equity.
That concludes my comments.
And Shelby we're now ready to take questions. | compname reports qtrly earnings per share $0.85.
public service enterprise group - qtrly earnings per share $0.85.
non-gaap 2021 operating earnings guidance $3.35 - $3.55 per share.
strategic alternatives review of non-nuclear generation assets on track.
has updated its 5-year capital spending forecast to $14 billion - $16 billion for 2021-2025 period.
public service enterprise group - expect that strong cash flow will enable us to fund entire $14 - $16 billion, 5-year capital spending program. |
Today's presenters are Chairman and Chief Executive Officer, Chris Martin; President and Chief Operating Officer, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
With that, it's my pleasure to introduce Chris Martin, who will offer his perspective on our first quarter.
We appreciate your participation today.
Our first quarter earnings were vastly improved from the same period last year when the pandemic's impact was first being felt.
The economy is rebounding quickly, BMS stimulus by the government, the success of the vaccine rollout, and the tenacity and perseverance of both consumers and business owners to weather this unprecedented event.
Earnings per share were $0.63 for the quarter as compared to $0.23 for the same period in 2020.
And the primary drivers of the improvement included a negative provision due to the prospects of a strong GDP growth combined with the full impact of improved revenue from the SB One acquisition.
Annualized return on average assets was 1.51%, and annualized return on average tangible equity was 16.8%.
Loan growth was constrained as PPP loan forgiveness and prepayments offset meaningful production.
Originations were robust and we continue to support the PPP program in its second phase.
The loan pipeline is consistent with the trailing quarter and the previous year to date.
Yields on new originations are approaching portfolio yields, so stabilization in asset yields is on the horizon.
Unlike most financial institutions, we are awash with liquidity due to the proceeds from stimulus checks and PPP monies augmenting deposit growth.
This added liquidity presented the accompanying challenge of where and how to invest the balances in an accretive manner, while remaining sensitive to potential run off.
And our core deposits are now 91% of total deposits.
The result in increase in deposits alleviated the need for borrowing, which decreased during the quarter.
Our margin improved six basis points during the quarter, and we envision core margin stability in the near term.
Noninterest income improved with the new revenue sources from SB One insurance, increased wealth management income from Beacon Trust, and sadly another bank-owned life insurance claim.
Retail fees also add to these increases along with loan prepayment fees and the net gain on the sale of residential mortgage loans.
Operating expenses were $61.9 million increase from the prior year, largely due to the addition of compensation and occupancy expenses from SB One.
Non-interest expense to average assets was 1.95% versus 2.13% for 2020.
FDIC insurance costs decreased -- increased, excuse me, due to an increase in the assessment rate, an increase in total assets, and the prior year's results having benefited from a small bank assessment credit.
We exceeded the cost saves we projected when we announced the SB One acquisition and are enthusiastic about the combined company's potential to extract more costs and increase revenue.
Our efficiency ratio was 56.19%.
As for asset quality, the numbers continue to improve from the trailing quarter.
Deferrals are down to $132 million, of which $123.5 million are commercial loans.
And of that number, approximately 96% are paying interest.
And Tom will go over this in more detail.
We are optimistic that as the economy opens up further and more people are vaccinated, results will continue to improve.
At this time, I would like to ask Tony to add more color to the success of the combination, along with strategic plans for Provident.
Let me start by noting that we have achieved or exceeded our financial expectations with regard to the merger with SB One Bank.
Our focus has shifted to cultural integration that culminated in the recent company wide rollout of our new core values, which we call our guiding principles.
This successful rollout was celebrated throughout our company, and it has inspired and energized all of us about what we can accomplish together.
Presently, we are all well along in the development of our new strategic plan.
Select tenants of our plan include enhanced focus on one of our core competencies, commercial banking.
This involves building out certain segments of our commercial book and reorganizing our Group to promote better efficiency and credit administration, which will make it easier for us to expand into new markets where we can compete and win.
We also want to build on our exceptional funding base and optimize our branch network.
Of note, during the quarter, we consolidated our branch office in Clifton, New Jersey.
We are also focused on building our non-spread income.
In addition to further expanding our successful wealth management and insurance groups we, will evaluate other sources of revenue with a long-term goal of having non-spread income comprised in excess of 25% of our net income.
To remain relevant, we are concentrating on digital banking and the digital transformation of our business processes to streamline activities, reduce friction, and make our customers' journey through all of our channels simple, fast, and easy.
This will make us more efficient and improve the experience of our customers and employees.
Mergers and acquisitions will continue to be part of our growth strategy for our bank, as well as for Beacon Trust and SB One Insurance.
Scale has become increasingly more important to offset reduced margins and cover the higher cost of investing for our future.
We will remain steadfast in pursuing strategic deals and partnering with companies that have comparable cultures.
Shifting quickly to our markets, we see the light at the end of the COVID tunnel.
Many sectors largely recovered or are quickly improving as the economic shutdown loosens and we approach herd immunity.
Those sectors that continue to exhibit pressure our office space, particularly in Manhattan, and retail centers that don't have a grocery store anchor.
Fortunately, Provident does not have a concentration of note in either of these sectors.
Most banks are presently dealing with the how to best utilize the excess liquidity on their balance sheet?
As a result, we are seeing increased competition which includes more aggressive pricing and elongated interest only periods with higher leverage.
At Provident we remain firmly committed to our credit culture not sacrificing structural [Phonetic] quality for quantity.
Despite the heightened competition, we are seeing good activity within our lending team.
This quarter we originated or funded $526 million of new loans excluding line of credit advances and net PPP loan activity.
This would have been a strong quarter for us if not for the high level of unanticipated loan payoffs that offset the growth.
The payoffs were due in large part to the sale of the underlying properties associated with the loan.
At quarter end, our pipeline remains strong at approximately $1.3 billion, and we are seeing a marginal improvement in the average rate in the pipeline.
If we have a good pull-through rate in our pipeline and see a reduction in prepayments, we should experience solid growth for the remainder of the year.
As noted earlier, our net income was $48.6 million or $0.63 per diluted share compared with $40.6 million or $0.53 per diluted share for the trailing quarter.
Earnings for the current quarter were favorably impacted by $15.9 million of negative provisions for credit losses on loans and off balance sheet credit exposures while the trailing quarter reflected negative provisions of $6.2 million.
Core pre-tax pre-provision earnings, excluding provisions for credit losses on loans and commitments to extend credit were $48.9 million for a pre-tax pre-provision ROA of 1.52%.
This is consistent with $50.1 million or 1.54% in the trailing quarter which also included -- excluded merger related charges and COVID response costs.
Our net interest margin expanded six basis points versus the trailing quarter to 3.10% as benefits from PPP loan forgiveness reduced funding costs and a steeper yield curve were partially offset by lower yielding excess liquidity.
We expect to maintain a core margin of approximately 3% as we continue to deploy excess liquidity into loans and securities, while we're pricing funding downward and continuing to emphasize non-interest bearing deposit growth.
Including non-interest bearing deposits, our total cost of deposits fell to 30 basis points this quarter from 31 basis points in the trailing quarter.
Average non-interest bearing deposits were stable at $2.4 billion or 24% of total average deposits for the quarter.
Average borrowing levels decreased $196 million and the average cost of borrowed funds decreased four basis points versus the trailing quarter to 1.12%.
Average loans increased slightly for the quarter, although quarter end loan totals decreased $19 million versus the trailing quarter.
Loan originations excluding line of credit advances were strong at $539 million for the quarter, including $190 million of PPP2 loans.
Payoffs were elevated however, including $177 million of PPP one loan forgiveness.
The loan pipeline at March 31st increased $73 million from the trailing quarter to $1.3 billion.
In addition, the pipeline rate increased eight basis points since last quarter to 3.65% at March 31st.
Our provision for credit losses on loans was a benefit of $15 million for the current quarter compared with a benefit of $2.3 million in the trailing quarter.
Asset quality metrics including non-performing loan levels, early stage and total delinquencies, criticized and classified loans and the portfolio weighted average risk rating, all improved versus the trailing quarter.
We had annualized net charge-offs as a percentage of average loans of four basis points this quarter compared with ten basis points for the trailing quarter.
Non-performing assets decreased to 65 basis points of total assets from 72 basis points at December 31st.
Excluding PPP loans, the allowance represented 0.92% of loans compared with 1.09% in the trailing quarter.
Loans that have been granted short-term COVID 19 related payment deferrals further declined from their peak of $1.3 billion or 16.8% of loans to $132 million or 1.3% of loans.
This compares with $207 million or 2.1% of loans at December 31st.
This $132 million of loans consist of $300,000 that are still in their initial deferral period, $47 million in a second 90-day deferral period, and $85 million that have received a third deferral.
Included in this total are $41 million of loans secured by hotels, $33 million secured by multifamily properties, including $20 million that are student housing related, $9 million of loans secured by retail properties, $7 million secured by restaurants, and $9 million secured by residential mortgages, with the balance comprised of diverse commercial loans.
Of the $123 million of commercial loans in deferral, 96% are paying interest.
Non-interest income increased $1.2 million versus the trailing quarter to $22 million as growth in insurance agency income, loan and deposit fees, wealth management income, and bank-owned life insurance income was partially offset by reductions in net profits on loan level swaps and gains on loan sales.
Excluding provisions for credit losses on commitments to extend credit and in the trailing quarter merger-related charges and COVID related costs, non-interest expenses were an annualized 1.95% of average assets for the current quarter compared to 1.82% in the trailing quarter.
The increase in the first quarter of 2021 is primarily attributable to seasonal increases in occupancy costs, including snow removal and utilities, an increase in FDIC insurance due to our increased asset size and the change to large institution assessment rates, and the annual reset of the employer share of payroll taxes.
Our effective tax rate increased to 25.1% from 23.3% for the trailing quarter as a result of an increase in the proportion of income derived from taxable sources.
We are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.
We'd be happy to respond to questions. | provident financial services q1 earnings per share $0.63.
q1 earnings per share $0.63. |
Today's presenters are Chris Martin, Chairman and CEO; Tony Labozzetta, President and Chief Operating Officer; and Tom Lyons, Senior Executive Vice President and Chief Financial Officer.
Now I'm pleased to introduce Chris Martin, who will offer his perspective on our third quarter.
Our third quarter earnings improved as the economy recovered in a measured way, with protocols in place allowing businesses to reopen safely and for consumers to return to a semblance of normalcy.
At the end of July, we were able to close on the SB One acquisition, which substantially increased both our balance sheet and earnings potential.
Earnings per share were $0.37, including merger-related expenses of $2 million recorded during the quarter compared with $0.22 in Q2.
Total assets at quarter end rose to $12.9 billion.
The impact of COVID declined substantially during the quarter and related loan deferral levels to 3.2% of loans as of October 16, as we have seen a significant reduction in the number of consumers and businesses requesting part persistence.
The allowance and the related provision reflects the ongoing impact of the COVID-19 pandemic on economic activity, including the hospitality, retail-related CRE and restaurant sectors.
It remains uncertain when and if additional economic stimulus will be provided or when a vaccine will be approved, which may impact the ultimate collectability of certain commercial loans where borrowers have requested multiple deferrals or forbearance.
And we have proactively downgraded our most vulnerable loans, and we continuously review credit quality loan by loan.
We still do not know if and when losses will materialize, but we believe the first half of 2021 will be telling absent government assistance to trouble businesses and consumers.
Now Tom will go over the loan payment deferrals in more detail, but suffice it to say, we have performed a deep dive analysis of full borrower requests for relief and are pleased that so many have recovered and resumed normal payments with approximately 2/3 of those remaining in deferral currently paying interest.
Our credit quality is performing in line with our expectations at this point.
And the key to credit risk management has always been staying consistent with our policies, underwriting discipline and conservative loan structures.
We have been and continue to be proactive at identifying potential credit issues and working problem lines to minimize losses.
And in the end, we believe we're going to continue to have a strong credit quality performance through this cycle.
As a result of our combination with SB One, the loan portfolio increased by $1.77 billion, further augmented by net organic growth for the quarter of $218 million on loan originations of $587 million.
The pipeline improved during the quarter and the volume of loan opportunities has increased.
Regarding the $475 million of PPP loans we held at September 30, like many banks, we anticipated that forgiveness might have started by now.
However, we see a lack of urgency from the SBA, and the program is still being politicized by Congress.
As a result, PPP loans will remain on our balance sheet longer than expected, which will modestly impact our margin.
The yield on PPP loans is approximately 2.75%, and we have about $8 million remaining in related deferred fees.
Deposits increased $2.46 billion, including $1.76 billion added from the SP One transaction.
Included with the SB One deposits were $577 million in CDs, which were adjusted to market rates on acquisition, adding four basis points to our margin this quarter.
Core deposits represent 88% of total deposits, and our total cost of deposits was 33 basis points, among the best in our market.
Overall, our favorable cost of deposits reflects our strong long-standing client relationships.
Borrowings increased with $201 million coming from SB One, while the cost of borrowings declined during the quarter.
Capital levels remain strong and exceed all regulatory requirements.
And with PFS currently trading at 87% of book value, we see the repurchase of our stock as an effective use of capital and a great return for long-term stockholders.
The net interest margin held up well this quarter, and our expected earning asset growth will support total net interest income.
But the effect of historically low long-term rates will continue to challenge our net interest margin.
Funding costs will move marginally lower as borrowings and CDs reprice at maturity, but this may not be sufficient to fully offset declines in asset yields.
And while we have negotiated interest rate floors on the sizable portion of our portfolio and the rates on loans in our portfolio have improved, loan yields on new originations remain lower than portfolio yields.
Additionally, our loan portfolio is approximately 57% adjustable rate and has repriced downward, putting further pressure on the margin.
But our continued disciplined management of deposit pricing has mitigated this impact.
With the SB One merger completed, noninterest income increased as SB One Insurance Agency income was incorporated into the P&L, and we are excited about the prospects for this business line, given our substantial customer base.
Fees on retail banking services rebounded during the quarter, and wealth management fees improved with the market rebound from COVID shutdowns.
Loan level swap income was also up for the quarter.
Reflecting the addition of two months' worth of SB One expenses, the increase was primarily in compensation expense, legal and consulting expenses and severance costs related to the transaction.
Operating expenses to average assets and efficiency ratios remain strong, and we look forward to a decrease in expenses upon converting SB One to our data systems in November.
With that, I'll ask Tom to give some more detail.
As Chris noted, our net income was $27.1 million or $0.37 per diluted share compared with $14.3 million or $0.22 per diluted share for the trailing quarter.
Earnings for the current quarter reflect the $15.5 million acquisition date provision for credit losses on nonpurchased credit deteriorated loans acquired from SB One, partially offset by the favorable impact of an improved economic forecast.
In addition, costs specific to our COVID response fell to $200,000 from $1 million in the trailing quarter.
These improvements were partially offset by merger-related costs that increased to $2 million in the current quarter from $683,000 in the trailing quarter.
Core pre-tax preprovision earnings, excluding provisions for credit losses on loans and commitments to extend credit, merger-related charges and COVID response costs were $44.4 million.
This compares favorably with $35.9 million in the trailing quarter.
Our net interest margin expanded four basis points versus the trailing quarter as we reduced funding costs and grew noninterest-bearing deposits, while earning asset yields stabilized and we deployed average excess liquidity.
To combat margin compression, we continue to reprice deposit accounts downward and emphasize noninterest-bearing deposit growth.
Including noninterest-bearing deposits, our total cost of deposits fell to 33 basis points this quarter from 41 basis points in the trailing quarter.
Noninterest-bearing deposits averaged $2.21 billion or 25% of total average deposits for the quarter, an increase from $1.85 billion in the trailing quarter, reflecting the SB One acquisition and organic growth.
Noninterest-bearing deposits totaled $2.38 billion at September 30, and average borrowing levels increased $43 million and the average cost of borrowed funds decreased 12 basis points versus the trailing quarter to 1.19%.
This rate reduction was partially offset by subordinated debentures acquired from SB One that had an average balance of $16.4 million at an average cost of 4.99% for the quarter.
Quarter end loan totals increased $2 billion versus the trailing quarter, reflecting $1.8 billion from the SB One acquisition and organic growth in CRE, construction, multifamily and C&I loans, partially offset by net reductions in consumer and residential mortgage loans.
Loan originations, excluding line of credit advances totaled $587 million for the quarter.
The pipeline at September 30 increased $71 million from the trailing quarter to $1.4 billion.
The pipeline rate increased 12 basis points since last quarter to 3.55% at September 30.
The increases in pipeline volume and rate reflect the acquisition of the SB One loan pipeline and are requiring higher spreads and floors.
Our provision for credit losses on loans was $6.4 million for the current quarter compared with $10.9 million in the trailing quarter.
This reflects a day one provision of $15.5 million for the acquired non-PCD loans partially offset by the impact of improvements in the economic forecast.
We had annualized net recoveries as a percentage of average loans of less than one basis point this quarter compared with annualized net recoveries of one basis point for the trailing quarter.
Nonperforming assets increased slightly to 42 basis points of total assets from 37 basis points at June 30.
Excluding PPP loans, the allowance represented 1.16% of loans compared with 1.17% in the trailing quarter.
The allowance for credit losses on loans included $13.6 million recorded as part of the amortized cost of PCD loans acquired from SB One.
Loans that have been or expected to be granted COVID-19-related payment deferrals or modifications declined from their peak of $1.31 billion or 16.8% of loans to $311 million or 3.2% of loans.
This $311 million of loans includes $48 million added through the SB One acquisition and consists of $27 million that are still in their initial deferral period, $85 million in the second 90-day deferral period and $199 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $92 million of loans secured by hotels with a pre-COVID weighted average LTV of 56%; $44 million of loans secured by retail properties with a pre-COVID weighted average LTV of 56%; $31 million of loans secured by restaurants with a pre-COVID weighted average LTV of 49%; $15 million secured by suburban office space with a pre-COVID weighted average LTV of 66%; and $43 million secured by residential mortgages, with the balance comprised of diverse commercial loans.
Noninterest income increased $6.3 million versus the trailing quarter to $21 million, as swap fee income increased $3.2 million.
The addition of SB One Insurance Agency contributed $1.7 million for the quarter.
And wealth management income increased $870,000 versus the trailing quarter.
In addition, deposit ATM and debit card income increased $750,000 for the quarter with the addition of SB One's customer base and the easing of pandemic-related consumer restrictions, partially offset by a decrease in bank loan life insurance benefits.
Excluding provisions for credit losses on commitments to extend credit, merger-related charges and COVID-related costs, noninterest expenses were an annualized 1.92% of average assets for the quarter compared with 1.86% in the trailing quarter.
These core expenses increased $9.7 million versus the trailing quarter, primarily due to the addition of SB One personnel, operations and facilities.
Our effective tax rate increased to 25.5% from 20.6% for the trailing quarter as a result of an improved forecasted taxable income in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for the balance of 2020.
We'd be happy to respond to questions. | compname announces third quarter earnings per share $0.37.
q3 earnings per share $0.37. |
Today's presenters are Chris Martin, Chairman, President and CEO and Tom Lyons, Senior Executive Vice President and Chief Financial Officer.
Now I'm pleased to introduce Chris Martin, who will offer his perspective on the fourth quarter.
Providence core earnings of $0.43 per share were impacted by continued margin compression, albeit slight and increased expenses primarily from consulting fees related to CECL modeling and implementation.
Our core return on average assets was 1.13% and core return on average tangible equity was 11.36% for the quarter.
We experienced only 2 basis points of margin compression in Q4 and forecast it being relatively neutral in 2020.
The repricing of deposit relationships that had discretionary rates positively impacted overall deposit flows.
This affords us an opportunity to reduce the rates on our CD book, although not a large portion of our overall deposits.
Key to our success will be our ability to continue to grow our non-interest bearing and core deposits.
We believe we have reached an inflection point in loan pricing and predict lower single-digit growth in the loan portfolio, which continues to be bombarded by payoffs and refinances away from us.
Our loan portfolio is skewed to variable rate products and we continue to swap out longer term fixed-rate loans.
C&I lending has become more competitively of late but we are winning our share of quality loans and relationships.
The middle market space has faced headwinds relating to the origination of loans at levels that meet our ROE hurdles.
We'd take all commercial lending expectations to the level of GDP growth, so low single-digit growth is what we expect to see in 2020.
Residential lending has picked up of late and we continue to be selective in our credit decisioning and leave the aggressive lending to competition, so these had outsized growth targets to bolster their margins.
Further, we are seeing more and more interest-only periods extended and longer fixed rate terms than we have in a long while, emanating from the agencies and life companies.
On the matter of CECL implementation, we expect incremental volatility since reserve levels will be very dependent on the macroeconomic forecasting.
This could affect loan pricing in the future also.
Our credit costs were elevated this quarter versus the same quarter in last year as we continue to conservatively evaluate our classified credits.
We have deemphasized our exposure and concentration in certain industries while also staying away from leverage lending.
We believe the current economic backdrop supports a relatively stable credit outlook and our net charge-offs for the year were slightly higher, but still in line with peers.
Speculation about a potential recession has been on our and other banker's minds over the last couple of years, but it has not happened yet and we try to spot the potholes beforehand.
Fee income continued its improving trend with Wealth Management leading the way along with loan level swap income and loan prepayment fees.
The additional valuation adjustment to the T&L transaction has proved positive as this acquisition is exceeding our initial estimates.
Expenses were higher in the quarter with the majority being in compensation and the non-cash contingent liability for the T&L acquisition.
Consulting and technology expenses continue to increase as we prepare it for CECL.
Regulatory costs were being $10 billion and technology investments to remain relevant in the new digital banking paradigm.
We continue to balance expenses with investments in the customer platform and product set.
Our tech spend is embodied in more consumer-centric, efficient and agile decisioning for our clients to enhance their relationship with us.
Information compiled in our data warehouse and our use of data analytics will be key to understanding our client's needs.
Reliance on AI will likely expand in the years ahead, especially in the payment channels.
We're also investing in the universal banker model, better recruiting processes and on boarding orientation and to constantly evaluating our branch network.
As for M&A, we expended a fair amount of time and energy in 2019 assessing potential acquisitions and continue to have more than enough capital to achieve better returns for our stockholders through whole bank transactions and RIA purchases.
We can fund our organic growth and support a solid and consistently above average cash dividend with only a 54% pay-out ratio and supportive buybacks when they meet our total return criteria.
The consumer segment appears to be in good shape for both the credit and spending perspective and the labor market may be the best that we have seen in a generation.
Fed interest rate policy is expected to be on hold for a while with geopolitical issues, pandemic risk and the presidential election grabbing the headlines, we believe the economy will continue to grow in spite of these distractions.
Our net income was $26 million or $0.40 per diluted share compared with $35.8 million or $0.55 per diluted share for the fourth quarter of 2018 and $31.4 million or $0.49 per diluted share in the trailing quarter.
Current [Phonetic] quarter earnings were adversely impacted by a $2 million or $0.03 per basic and diluted share net of tax expense increase in the estimated fair value of the contingent consideration liability related to the April 1st, 2019 acquisition of New York City-based RAI Tirschwell & Loewy.
As previously disclosed, the earn out of the contingent consideration is based upon T&L achieving certain revenue growth and retention targets over a three-year period from the date of acquisition.
Based upon T&Ls recent positive operating performance and improved projections for the remaining measurement period, an increase to the estimated fair value of contingent consideration was warranted.
At December 31st, 2019, the contingent liability was $9.4 million with maximum potential future payments totaling $11 million.
Excluding this charge, the Company would have reported net income of $27.9 million or $0.43 per basic and diluted share and net income of $114.6 million or $1.77 per basic and diluted share for the quarter and year ended December 31st, 2019 respectively.
Our net interest margin contracted 2 basis points versus the trailing quarter and 23 basis points versus the same period last year.
And that margin compression would continue to reprice downward deposit accounts with negotiated exception rates.
This deposit rate management coupled with an $80 million or 21% annualized increase in average non-interest bearing deposits resulted in a 3 basis point decrease in the total cost of deposits this quarter to 65 basis points.
Noninterest-bearing deposits averaged $1.6 billion or 23% of average total deposits for the quarter.
We will continue to thoughtfully manage liability costs as the rate environment evolves.
Quarter-end loan totals increased $66 million or 3.6% annualized from September 30th as growth in CRE construction and residential mortgage loans was partially offset by net reductions in C&I multifamily and consumer loans.
Loan originations excluding line of credit advances reached their best levels of the year, up $106 million or 30% versus the trailing quarter to $461 million.
But payoffs remained elevated, up $46 million or 18% versus the trailing quarter to $298 million.
The pipeline at December 31st decreased to $905 million from $1.1 billion at the trailing quarter end, reflecting strong year-end closing activity.
The pipeline rate has decreased 14 basis points since last quarter to 3.97% at December 31st.
The lower pipeline rate reflects current market conditions and a decline in interest rates.
Our provision for loan losses was $2.9 million for the current quarter compared with $0.5 million in the trailing quarter.
Our annualized net charge-offs as a percentage of average loans were 26 basis points for the quarter and 18 basis points for the full year.
Overall, credit metrics remained stable this quarter with non-performing assets totalling 55 basis points of total assets at quarter end.
The allowance for loan losses to total loans decreased to 76 basis points from 79 basis points in the trailing quarter largely as a result of improvements in qualitative allowance factors.
Non-interest income decreased slightly versus the trailing quarter to $17.7 million as lower swap fee income offset increased bank-owned life insurance benefits and loan prepayment fees.
Excluding the increase in the fair value of the contingent consideration liability related to the T&L acquisition, non-interest expenses were an annualized 2.05% of average assets for the quarter.
Core expenses increased $1.2 million versus the trailing quarter with consultancy and audit costs related to CECL implementation, additional examination and consulting fees that totaled $1.4 million driving the increase.
We did, once again, benefit this quarter from an FDIC insurance small bank assessment credit of $758,000 and our total remaining FDIC credit potentially realizable in future quarters is $1 million.
Our effective tax rate decreased to 23.6% from 24% for the trailing quarter and we are currently projecting an effective tax rate of approximately 24% for 2020.
We'll be happy to respond to questions. | q4 earnings per share $0.40. |
Today's presenters are Chris Martin, Chairman and CEO; Tony Labozzetta, President and Chief Operating Officer; and Tom Lyons, Senior Executive Vice President and Chief Financial Officer.
Now it's my pleasure to introduce Chris Martin, who will offer his perspective on our fourth quarter.
We sincerely hope that you and your families are healthy.
Our fourth quarter earnings were strong, as we successfully completed our systems integration of SB One and met both our expense savings estimate of over 30% and came in under our projected one-time merger-related charges.
I would be extremely remiss, if I did not recognize the herculean effort by management and the staffs from both companies as they ably met the challenges presented during the pandemic.
And Provident was one of the only a few financial institutions that announced and completed the transaction and converted systems during this tumultuous time in our country.
Fourth quarter earnings were strong at $40.6 million or $0.53 per share, including $3.2 million in merger-related charges.
Net interest income was up 22% quarter-over-quarter.
Total assets at December 31st, 2020 stood at $12.9 billion, which resulted in an annualized return on average assets of 1.25% for the quarter and an annualized return on average tangible equity of 14.1%.
Included in total assets were $473 million in PPP loans, which will continue to be submitted to the SBA for forgiveness throughout Q2 of this year.
With only nominal GDP growth expected in Q2, we anticipate that loan growth will lag and businesses will rebound in the second half of 2021.
Credit line usage is down to 41.6% at December 31st, 2020 versus 55.7% in 2019.
Another issue is the deleveraging of consumer balances, which should begin to pick up once the vaccine is more widely distributed and people get back to more normalized behavior.
With low interest rates, business clients with strong balance sheets and cash flows are able to refinance and/or pay down their loans.
Competition for loan growth remains extreme and our loan pipeline is $1.2 billion, with $295 million approved awaiting closing, and a 47% pull-through rate expected on the remainder.
Deposits for the year increased $2.7 billion, including $1.76 billion acquired from SB One.
Core deposit growth continued throughout the year and represented 88.9% of total deposits at December 31st.
Deposit trends remained favorable during the quarter.
And growth was robust and broad-based, supported by seasonal inflows and pandemic-related customer behavior.
We ended the year with a loan-to-deposit ratio of 99.8%, and we continue to interact with our customers to further solidify deposit relationships.
We also anticipate that with additional government stimulus, deposits will increase or at least remain at these elevated levels and then begin to gradually be drawn down during the second half of 2021.
The bank also promotes the products and services available through SB One Insurance, a new fee business line for us, along with wealth management offerings through Beacon Trust, to further expand our client relationships.
Despite the challenging interest rate environment, our core margin held up well during the quarter.
Non-interest income was up $2.7 million versus same quarter last year, which is primarily the result of $1.8 million contributed by our new fee revenue source from SB One Insurance, accompanied by an increase in the net gain on sale of residential mortgage loans of $757,000 and wealth management income increasing $561,000.
These increases were partially offset by decreases in prepayment fees of $882,000.
Non-operating expenses increased $4.8 million for the quarter, which included $3.2 million of non-recurring costs related to the acquisition of SB One.
Our operating expenses to average assets was 1.82% for the quarter and our efficiency ratio was 54.12%.
We continue to enhance our digital and online mobile banking platforms, as client behavior has demonstrated a clear preference for these channels.
As an example, we have seen an increase in daily usage of 945% versus our previous person-to-person platform.
We will seek to optimize our expanded business model, with the driver being ROI and customer relationship expansion supported by analytics.
And we consolidated three branch locations during the quarter and have another one planned later this quarter.
Our reserve release this quarter primarily reflects Moody's improving macroeconomic outlook.
Although I would note, we did add appropriate qualitative adjustments for economic uncertainty as the pace and shape of the recovery is still evolving.
We're beginning to see the expected rise in non-accrual loans and charge-offs that may already have been reserved under -- for under our CECL methodology.
We are working with all of our clients to provide hardship assistance whenever possible and prudent.
If the vaccination and herd immunity can take hold, we estimate that it would reduce the loss content within our loan portfolio.
And Tom will update the loan payment deferrals in more detail.
But we have seen most of our clients come out of deferrals and returned to full P&I payments.
Our strong capital levels remained above well capitalized, which continue to support growth, a solid cash dividend and an opportunity for stock repurchases that meet our internal return hurdles.
We repurchased 1.3 million shares in 2020 at an average cost of $16.59 per share, which leaves PFS with only 262,000 shares remaining in our existing program.
Yesterday, our Board authorized the adoption of a new 5% repurchase program, which will commence upon the completion of the existing one.
On the M&A front, despite the fact we just completed the SB One systems conversion in November, we remain open to those opportunities that expand our market and deliver solid returns to our stockholders.
We remain disciplined buyers in terms of the financial profile that fits our strategic objectives and culture.
And we will assess fee-based businesses along with whole bank acquisitions.
Though there were improving economic indicators in the fourth quarter, we continue to see an uneven recovery and upticks in COVID cases toward the end of the quarter, negatively impacted the road to recovery.
Overall, our customers continue to be in a much stronger position than we would have anticipated when this crisis began.
However, unemployment levels in the market remained high.
Inventory levels are lower than they were pre-pandemic and the client confidence to invest in their business appears contingent upon the success of the vaccination distribution and the relaxation of government shutdowns.
Despite all this, we believe there is a great potential for expanding economic activity in the second half of the year, especially if there is significant stimulus package.
I'll let Tom go into the further details.
As Chris noted, our net income was $40.6 million or $0.53 per diluted share, compared to $27.1 million or $0.37 per diluted share for the trailing quarter.
Earnings for the current quarter included $6.2 million of negative provisions for credit losses on loans and off-balance sheet credit exposures, while the trailing quarter reflected provisions of $5.8 million.
Q4 represents the first full quarter of combined operations following the July 31st acquisition of SB One Bancorp, with systems integration now complete and the bulk of expected cost saves now achieved.
The remaining non-recurring merger integration costs of $3.2 million were recorded in the fourth quarter, outperforming our expectations as disclosed at the transaction's inception by about $800,000, and helping tangible book value per share to recover and surpass pre-acquisition levels.
Core pre-tax pre-provision earnings, excluding provisions for credit losses on loans and commitments to extend credit, merger-related charges and COVID response costs were $50.1 million for pre-tax pre-provision ROA of 1.54%.
This compares favorably with $44.4 million or 1.48% in the trailing quarter.
Our net interest margin expanded 3 basis points versus the trailing quarter, as we reduced funding costs and grew non-interest bearing deposits, while earning asset yields held steady.
To combat margin compression, we continue to reprice deposit accounts downward and emphasized non-interest bearing deposit growth.
Including non-interest bearing deposits, our total cost of deposits fell to 31 basis points this quarter from 33 basis points in the trailing quarter.
Non-interest bearing deposits averaged $2.38 billion or 24% of total average deposits for the quarter.
This was an increase from $2.21 billion in the trailing quarter, reflecting a full quarter contribution from SB One.
Average borrowing levels decreased $82 million and the average cost of borrowed funds decreased 3 basis points versus the trailing quarter to 1.16%.
Quarter end loan totals increased $66 million versus the trailing quarter or an annualized 2.7%, reflecting growth in C&I, construction and consumer loans, partially offset by net reductions in CRE, multi-family and residential mortgage loans.
Loan originations, excluding line of credit advances totaled $868 million for the quarter.
The pipeline at December 31st decreased $138 million from the trailing quarter to $1.2 billion.
However, the pipeline rate increased 2 basis points since last quarter to 3.57% at December 31st.
Our provision for credit losses on loans was a benefit of $2.3 million for the current quarter, compared with an expense of $6.4 million in the trailing quarter.
We had annualized net charge-offs as a percentage of average loans of 10 basis points this quarter, compared with net recoveries of less than 1 basis point for the trailing quarter.
Non-performing assets increased to 71 basis points of total assets from 42 basis points at September 30th.
Excluding PPP loans, the allowance represented 1.09% of loans, compared with 1.16% in the trailing quarter.
While it may seem counter-intuitive to see the allowance coverage of the loan portfolio declined while non-performing loans increased, this demonstrates our stable expectations of loss content in the loans that have been moved to non-accrual, while life of loan loss expectations for the performing portfolio have improved as a result of advances and the pandemic response and improved economic forecasts.
The expected migration of certain credits to non-performing status is reflective of the protracted economic challenges faced by certain borrowers in a sub-optimal operating environment, constrained by pandemic response restrictions.
Where we could no longer confidently support and more likely than not expectation that all contractually due principal and interest payments would be made, we have classified these credits as non-accrual regardless of whether they are receiving short-term deferrals in accordance with the CARES Act.
Loans that have been or expected to be granted short-term COVID-19-related payment deferrals declined from their peak of $1.31 billion or 16.8% of loans to $207 million or 2.1% of loans.
This compares with $311 million or 3.2% of loans at September 30th.
This $207 million of loans consists of $9 million that are still in their initial deferral period; $51 million in the second 90-day deferral period; $121 million required additional deferrals and $26 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $49 million of loans secured by hotels with a pre-COVID weighted average LTV of 43%; $36 million of loans secured by retail properties with a pre-COVID weighted average LTV of 58%; $30 million of loans secured by multi-family properties, including $21 million that are student housing related with a pre-COVID weighted average LTV of 61%; $5 million of loans secured by restaurants with a pre-COVID weighted average LTV of 50%; and $30 million secured by residential mortgages with the balance comprised of diverse commercial loans.
Non-interest income decreased $268,000 versus the trailing quarter to $20 million as growth in loan and deposit fee income, bank-owned life insurance income and gains on loan sales was more than offset by a decline in net profit on loan level swaps, gains on sale of REO and a small reduction in wealth management income.
Excluding provisions for credit losses on commitments to extend credit, merger-related charges and COVID-related costs, non-interest expenses were an annualized 1.82% of average assets for the quarter, compared with 1.92% in the trailing quarter, as the benefits of greater scale and planned acquisition cost saves were achieved.
Our effective tax rate decreased to 23.3% from 25.5% for the trailing quarter as a result of an increased proportion of income coming from tax exempt sources in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for 2021.
We'd be happy to respond to questions. | q4 earnings per share $0.53. |
Today's presenters are Chairman and CEO, Chris Martin; President and Chief Operating Officer, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
Now, it's my pleasure to introduce Chris Martin, who will offer his perspective on our second quarter.
We hope that you and your families are healthy.
Our second quarter results were solid and the trends remained generally positive.
Operating earnings were strong with net interest income, the highest it has ever been for Provident.
And in spite of strong loan originations, loan portfolio growth was challenged in the quarter, as sales continued to exceed our forecast.
The loan pipeline however is the largest we have ever had.
And we anticipate stronger originations in the second half of the year.
Economic outlook is promising, assuming continued success against COVID-19 and our business clients are optimistic for the future.
Long-term loan growth is highly correlated to economic growth and we believe economic conditions in our markets continue to improve and support an expansionary trajectory.
Also a positive is the consumer and their personal savings position, which will continue to support solid consumer spending in the future.
As businesses see demand increasing, it is anticipated that credit line usage, which is currently on the low side will increase.
However, risk remain as interest rates have been volatile.
And the recent downward shift in rates is putting pressure on net interest income and margin.
Deposit growth continued to be strong with substantial increases in non-interest bearing deposits.
The growth in deposits improves our capacity to fund loan growth in the second half of 2021.
We are executing a disciplined approach to leveraging the excess liquidity on our balance sheet.
Initially, in the investment portfolio to produce better returns and augment our margin.
The net interest margin reflected lower earning asset yields, given the low rate environment and spread pressures from lending competition, although improved funding mix and better deposit pricing are helping to mitigate these factors.
As the quality continued to improve during the quarter and loan payment deferrals are negligible, all of our credit ratios and indicators are positive this quarter.
Our primary non-interest revenue sources namely Beacon Trust and SB One insurance will continue to provide meaningful impact to lessen the pressure being experienced in our spread business.
We expect most fee revenue categories to grow modestly for the remainder of 2021.
And we will continue our methodical approach to managing operating costs.
Our focus will be holding the line on expenses and creating operating efficiencies without sacrificing our commitment to technology enhancements, to improve the customer experience and our competitive position.
We believe we can further improve our returns to stockholders through a combination of balance sheet growth, active management of our margin, continuing to rationalize our branch network and further leveraging operational efficiencies gained with the SB One acquisition accompanied by a continued execution on our regulatory, risk and controlled framework.
With that, I will ask Tony to add some more color.
I would like to take a few moments and share some thoughts with you on market conditions, business line performance and the areas of focus.
Based on the tenor of our conversations with customers, increased activity in our key business lines and improved nonperforming assets and a reduction to an immaterial amount in COVID-related loan deferrals, we believe the economic outlook for the second half of 2021 is promising.
This supports improved growth and continued strong profitability for the remainder of the calendar year.
Excluding PPP loans, our commercial lending group has paced at or better than planned with regard to production.
In the second quarter, we closed over $460 million of new loans, an increase of 57% from the prior quarter.
This solid production in part, it was offset in part by a decline in line of credit utilization of approximately $161 million over the average for fiscal 2020.
In addition, there is significant excess liquidity in the market.
As a result, the competition has been persistently more aggressive on pricing and structure.
We remain committed to maintaining our credit culture and not sacrificing structure of quality for volume, which contributed to an increased level of prepayments.
Consequently, we saw a net decrease in our commercial loan portfolio of about $49 million for the quarter.
Despite the competition, we are seeing good activity within our lending teams.
At quarter end, our pipeline remains strong at approximately $1.7 billion.
However, we are seeing a decline in the average interest rate in the pipeline, which can add pressure to our net interest margin.
We expect a good pull-through rate in our pipeline.
And if our prepayments normalize, we should experience solid growth for the remainder of the year.
Like many banks, we have seen strong growth in our deposits.
Nevertheless, I'd like to point out that the largest percentage of our growth is a non-interest-bearing demand deposits, which grew at an annualized rate of 17% and presently comprised 24% of our deposits.
Our total cost of those deposits is about 26 basis points and is among the best in our peer group.
We continue to grow our fee revenue, largely through Beacon Trust and SB One Insurance.
SB One Insurance had a strong second quarter with new business that resulted in a 60% increase from the same quarter last year.
Beacon Trust also had a very good quarter with assets under management increasing approximately 24% annualized and revenue being up 32% over the same quarter last year.
Both Beacon Trust and SB One Insurance continue to demonstrate value add to our clients and the bank and they integrate well with the other business lines in our organization.
Looking forward, our focus is to responsibly deploy our excess liquidity, predominantly into our commercial lending book, continue to build our fee-based businesses, enhance the experience of our employees and customers and maintain operational efficiency.
This will improve our earnings and total return to our shareholders.
Our net income for the quarter was $44.8 million or $0.58 per diluted share compared with $48.6 million or $0.63 per diluted share for the trailing quarter.
Earnings for the current quarter benefited from $8.7 million of net negative provisions for credit losses on loans and off balance sheet credit exposures, while the trailing quarter reflected negative provisions of $15.9 million.
Pre-tax pre-provision earnings were $51.4 million or an annualized 1.56% of average assets.
This is an improvement from $48.9 million or 1.52% of average assets in the trailing quarter as revenue increased quarterly -- to a quarterly record $112 million and operating expenses declined by $2 million.
Our net interest margin compressed 6 basis points versus the trailing quarter.
Excess liquidity increased despite an increase in average investments as average loans decreased in average deposits group.
Loan repayments remained elevated and included increased PPP loan forgiveness.
We expect to deploy much of this excess liquidity into loans and securities in the near term to improve the earning asset yield and increased interest income.
We were able to reduce the cost of interest-bearing liabilities by 5 basis points versus the trailing quarter through reductions in deposit costs.
Including non-interest bearing deposits, our total cost deposits fell to 26 basis points this quarter from 30 basis points in the trailing quarter.
Average non-interest bearing deposits increased to $100 million or an annualized 17% to $2.48 billion, or 24% of total average deposits for the quarter.
Average borrowing levels decreased $146 million as we shifted funding to lower costing brokered demand deposits.
We expect to maintain a relatively stable net interest margin as we continue to deploy excess liquidity into loans and securities, while managing funding costs and emphasizing non-interest bearing deposit growth.
The pull-through adjusted loan pipeline at June 30th increased $250 million in the trailing quarter to a record $1.1 billion.
However, the pipeline rate decreased 35 basis points since last quarter to 3.28% reflecting the current competitive rate environment.
Our provision for credit losses on loans was a benefit of $10.7 million for the current quarter compared with a benefit of $15 million in the trailing quarter.
The current quarter benefit was attributable to $6 million of net recoveries on previously charged off loans, improved asset quality, a favorable economic forecast and a decrease in loans outstanding.
Asset quality metrics including COVID-19 related deferrals, nonperforming loan levels, early stage and total delinquencies criticized and classified loans and all related ratios improved versus the trailing quarter.
We had annualized net recoveries as a percentage of average loans of 25 basis points this quarter compared with net charge-offs of 4 basis points for the trailing quarter.
Non-performing assets decreased to 62 basis points of total assets from 65 basis points at March 31st.
Excluding PPP loans, the allowance represented 88 basis points of loans compared with 92 basis points in the trailing quarter.
Loans granted short term COVID-19 related payment deferrals have declined from their peak of $1.3 billion to just over $7 million.
This compares with $132 million at December 31st.
All commercial loans in deferral are paying interest.
Non-interest income was stable versus the trailing quarter at $21 million, as increased loan prepayment fees and growth in wealth management insurance agency income were offset by decreased bank-owned life insurance income and reductions in net profits on loan level swaps and gains on loan sales.
Excluding provisions for credit losses and commitments to extend credit, operating expenses were an annualized 1.84% of average assets for the current quarter compared to 1.95% in the trailing quarter and 1.86% for the second quarter of 2020.
The efficiency ratio improved to 54.12% in the second quarter of 2021 from 56.19% in the trailing quarter and 57.35% in the second quarter of 2020.
Our effective tax rate was 25.4% versus 25.1% for the trailing quarter.
And we are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.
We'd be happy to respond to questions. | q2 earnings per share $0.58. |
While it has only been a year, our Q1 2021 earnings call will obviously be very different discussion than we had this time last year.
Before we get started, let me highlight that in addition to reviewing our reported first quarter results, we will also discuss our adjusted results which exclude both a $61 million pre-tax charge associated with a debt tender completed in the quarter, and a $10 million tax insurance benefit recorded in the period.
For purposes of comparison, we will also discuss prior year Q1 earnings adjusted for a $20 million pre-tax goodwill impairment charge.
We encourage you to review these tables to assist in your analysis of our business performance.
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
From double-digit growth in sign ups, revenues and earnings, to enhance liquidity and a $1 billion expansion of our share repurchase authorization we posted a tremendous start to 2021.
Beyond company's specific gains, our first quarter results reflect the ongoing strength of home buying demand throughout all segments of our business.
It is worth highlighting that I believe the strength of the market is due in part to a significant housing shortage in this country, that shortage has been years in the making, and will take years to correct.
I think the first two sentences from a recent Wall Street Journal article aptly summarize the current state of housing supply in the U.S. The U.S. housing market is 3.8 million single family home short of what is needed to meet the country's demand according to a new analysis by mortgage-finance company Freddie Mac.
The estimate represents a 52% rise in the nation's home shortage compared with 2018, the first-time Freddie Mac quantified the shortfall.
Beyond this long-term structural shortage, COVID-19 has also resulted in a growing desire for single family living, and has changed what the homebuyers want and need from their homes.
We believe these new wants and needs are often best met through the floor plans and features available in new construction, these dynamics do supportive demographics, low interest rates and an improving economy, and you get the tremendous demand environment we are experiencing today.
The strength in demand is reflected in our strong order growth for the quarter.
In total, our net new orders were up 31% over last year, while our absorption pace was up 37%.
On a unit basis, this was the highest first quarter sign-ups we've reported in over a decade and at $4.6 billion our highest reported quarterly sales value ever.
I would highlight that the strong demand we experienced in the first quarter of 2021 has continued into the first three plus weeks of April.
We continue to see high traffic volumes in our communities and buyer's anxious to purchase a new home.
Working within the strong demand environment, we continue to improve our operating and financial performance.
Our pricing strategies and disciplined business practices helped us to generate a gross margin of 25.5% and an adjusted operating margin of 14.6% in the quarter.
The resulting cash flows were then available to fund the future growth of our business, and an increase in our ongoing return of excess capital to shareholders.
At a very basic level this is the model that we have been refining for the past decade.
It starts with running a higher performing homebuilding operation, seeking to capture incremental gains in all areas of the business.
It also includes investing in high quality projects and increasing our use of land purchase options to improve cash flows and overall asset efficiency, while delivering consistently strong returns on investment and equity.
Having build a homebuilding operation that we believe can routinely generate strong returns and cash flows, we then allocate capital to support our long-term success and reward our shareholders.
As we have highlighted many times, our highest priority is investing in our business through the acquisition and development of land assets that can generate required risk-adjusted returns.
To that end, since 2016, we have invested $14.6 billion in land acquisition and development, and have done so while building a more efficient land pipeline.
To clearly demonstrate the progress we have made, at the end of 2016, we owned 99,000 lots, while controlling an additional 44,000 lots via option.
Today, we actually own 5,000 fewer lots than five years ago and have more than doubled the lots we hold via option to 100,000.
This significant and continuing change in the composition of our land pipeline has allowed us to increase the returns we generate, while also helping us to reduce land related market risk.
As you know, we have also made the return of funds to our shareholders, an integral part of our capital allocation.
Over the past five years, we've returned approximately $3 billion to shareholders through dividends and share repurchases, including $154 million of stock repurchased in the first quarter.
And finally, as you saw in the first quarter we are also prepared to allocate capital with a view toward further strengthening our balance sheet and reducing our financial leverage.
By paying $726 million of debt in the quarter, including the successful tender for $300 million of our nearest dated outstanding debt, we were able to lower our debt-to-capital ratio on a gross basis to 23.3%.
To be paying down debt and returning significant funds to shareholders, while targeting a 30% increase in our land acquisition and development in 2021, says a lot about our expectations for the earnings power, and the financial strength of this business.
I think it also reflects a more return oriented shareholder-friendly approach toward operating our business.
In fact, I think there is an ongoing maturation of the broader homebuilding industry, in terms of its ability to generate higher returns with reduced risk.
Given changes in the industry's operating and return profile, we believe investors can grow increasingly comfortable about investing in the sector over the entire housing cycle.
With the opportunity for sustained high levels of housing demand, I believe PulteGroup's unique operating strategy has us well positioned to compete, and to continue to grow our business.
Beyond the financial strength that I discussed, I believe that our size and diversity provide important advantages.
For example, a key driver to our order growth in the first quarter was the ongoing recovery in demand among active adult consumers.
A year of being separated from their kids, and grandkids has been more than enough for this buyer group.
With vaccinations now moving into high gear, our active adult buyers are anxious to get on with their lives, including moving into a new Del Webb community.
In conclusion, 2021 has gotten off to an excellent start for our company.
With ongoing strong demand that exceeds available supply, a backlog value of $8.8 billion, and our tremendous financial strength and flexibility, I am excited about what we can accomplish this year.
Jumping right into our operating results.
Home sale revenues in the first quarter increased 17% over last year to $2.6 billion.
The higher revenues for the period reflect the 12% increase in closings to 6,044 homes, coupled with a 4% increase in average sales price to $430,000.
While home closings for the period were up more than 12% over last year, deliveries came in slightly below our guidance with the shortfall resulting primarily from the severe weather in Texas.
4% or $17,000 increase in average sales price realized in the quarter benefited from price increases across all buyer groups, and was led by a 6% increase in ASP for our active adult closings.
The buyer mix of closings in the first quarter was comparable with the prior year, and included 33% from first-time buyers, 43% for move-up buyers, and 24% from active adult buyers.
As Ryan mentioned, our net new orders in the first quarter were up 31% over last year to 9,852 homes.
We experienced strong demand across all geographies and buyer groups, with notable ongoing strength among our active adult buyers.
In the first quarter orders among our first time buyers increased 39% to 3,303 homes, while move-up orders gained 18% to 4,040 homes, and active adult orders increased a robust 49% to 2,509 homes.
49% year-over-year increase in active adult closings reflects the impact of the slowdown in sales in the last two weeks of March last year, but I would highlight that the 2,500 active adult orders this year represent a first quarter high getting back almost 15 years.
I would also point out that buyer demand was consistently stronger during each month of the quarter, even with interest rates increased during the period.
The 31% increase in orders could have been higher, but our divisions continue to actively manage sales in the quarter to match production rates and to help maximize project specific returns.
Along with raising prices in 100% of our community to help cover cost inflation and moderate sales all of our divisions used dropped lot releases to more directly manage sales in some or all of their communities.
For the first quarter, we operated from an average of 837 communities, which is down 4% from last year's average of 873 communities.
The year-over-year decline in community count is consistent with our prior comments and reflects the impact of our decision to slow land spend when the pandemic first hit in March of last year, along with the accelerated close out of communities resulting from the ongoing elevated pace of sales.
Consistent with the overall strength of the market, our cancellation rate in the quarter declined by more than 500 basis points from last year to just 8%.
And we ended the quarter with a backlog of 18,966 homes, which is an increase of 50% over last year.
On a dollar basis, our backlog increased 58% to $8.8 billion.
On a year-over-year basis, we increased the number of homes, we started in the quarter by 25% to 8,364 homes, which helped to raise our total homes under construction by 22% to 14,728 homes.
Of these homes, 1,798 or 12% were spec units, which on a percentage basis is down slightly from the fourth quarter of last year.
Given market conditions, we have continued to work with our trade partners to further increase production and expect to increase overall start to at least 10,000 homes in the second quarter of this year.
This would be an increase of at least 20% over the first quarter of this year.
Based on the stage of construction for the 14,728 homes currently under construction, we expect deliveries in the second quarter to be in the range of 7,400 to 7,700 homes.
At the midpoint, this would be an increase of 27% in deliveries over the second quarter of last year.
Based on the ongoing strength of buyer demand and with almost 19,000 houses in backlog, we are raising our guidance for full year closings to 32,000 homes.
This is an increase of 7% from our prior guide of 30,000 homes and represents a 30% increase in deliveries for the year versus the prior year.
The strong pricing environment has helped to lift the average sales price in our backlog by 5% over last year to $465,000.
Given the backlog ASP and the anticipated mix of deliveries, we expect our average closing price in the second quarter to be in the range of $440,000 to $445,000.
For the full year, we now expect our average closing price to be between $450,000 and $450,000.
Our home sale -- our homebuilding gross margin for the first quarter was 25.5%, which is an increase of 180 basis points over the prior year and a sequential gain of 50 basis points from the fourth quarter of 2020.
The increasing gross margins, which exceeded our prior guidance benefited from the exceptionally strong pricing environment for sold and spec homes and for the mix of homes closed in the period.
In addition to the 4% increase in year-over-year ASP, our gross margins also benefited from lower sales discounts of 2.5% in the quarter, which represents a decrease of 110 basis points for the same period last year.
And a decrease of 50 basis points for the fourth quarter of last year.
As has been well reported material and labor costs continue to move higher being led by lumber prices which now seem to reach new highs every day.
While we now expect our house costs excluding land to be up 6% to 8% for the year, strong demand environment is allowing us to pass through these costs in the form of both higher base sales prices and lower discounts.
Given these cost price dynamics, we expect gross margins to move higher throughout the remainder of 2021.
As a result, we expect to realize sequential gains of approximately 50 basis points in each of the three remaining quarters this year, which would have us in the range of 27% for the fourth quarter of 2021.
In the first quarter, our reported SG&A expense was $272 million or 10.5% of home sale revenues, excluding the $10 million pre-tax insurance benefit recorded in the period, our adjusted SG&A expense was $282 million or 10.9% of home sale revenues.
This compares with prior year SG&A expense for the quarter of $264 million or 11.9% of home sale revenues.
We are adding people to handle our higher construction volumes, but we still expect to realize sequential overhead leverage with the second quarter SG&A expense in the range of 9.9% to 10.3%.
And for the full year, we now expect adjusted SG&A as a percent of homebuilding revenue to be approximately 9.8%.
As Jim noted, we did record a $61 million pre-tax charge in the period related to the cash tender offer for $300 million of our senior notes that we completed in the first quarter.
Turning to Pulte Financial Services, they continue to report outstanding financial results with pre-tax income more than tripling to $66 million, which compares to $20 million in the first quarter of last year.
The large increase in pre-tax income reflects favorable competitive dynamics in the market as well as higher loan production volumes resulting from the growth in our closings and a 150 basis point increase in capture rate to 88%.
Tax expense for the first quarter was $90 million, which represents an effective tax rate of 22.8%.
Our effective tax rate for the quarter was lower than our recent guidance, primarily due to benefits related to equity compensation recorded in the period.
We continue to expect our tax rate to be approximately 23.5% for the balance of the year, including the benefit of energy tax credits we expect to realize this year.
In total for the quarter, we reported net income of $304 million or $1.13 per share.
Our adjusted net income for the period was $343 million or $1.28 per share.
In the first quarter of 2020, the company reported net income of $204 million or $0.74 per share and adjusted net income of $219 million or $0.80 per share.
Turning to the balance sheet, we ended the quarter with $1.6 billion of cash.
On a gross basis, our debt-to-capital ratio at the end of the quarter was 23.3%, down from 29.5% at the end of the year, as we use available cash to pay down $726 million of senior notes in the first quarter.
Our net debt-to-capital ratio was 5.5% at the end of the quarter.
Along with paying down debt during the quarter, we repurchased 3.3 million common shares at a cost of $154 million or an average price of $46.11 per share.
As Ryan mentioned, given the strength of our business and expectations for continued strong cash flows and with our existing repurchase authorization down to approximately $200 million at the end of the quarter, Board of Directors approved an increase of $1 billion to our repurchase authorization.
The return of excess capital to our shareholders remains a priority and as such, we expect to remain a consistent and systematic buyer of our shares.
In the first quarter, we invested $795 million in land acquisition and development, including the lots we've put under control through these investments, we ended the first quarter with approximately 194,000 lots under control, of which 94,000 were owned and 100,000 were controlled through options.
With 51% of our lots now controlled via option, we have surpassed our initial target of 50% owned and 50% optioned and expect that the percentage of option lot can move even higher.
Consistent with our outstanding financial results, I'm pleased to report that earlier this month Standard & Poor's upgraded PulteGroup's debt to investment grade.
This means that our senior notes are now rated investment grade by Standard & Poor's, Moody's, and Fitch.
It's been a long process, but I'm extremely proud of the improvements we've been able to achieve in our credit metrics.
Before opening the call to questions, there are two final topics that I want to quickly review.
First, as one of the nation's largest homebuilding companies, we recognize and accept the important responsibilities we have to continue advancing sound ESG policies.
In today's world, success is judge not just by what we do, but also considers how we do.
As such, along with actively working to improve how we operate, we are advancing our associated environmental, social and governance reporting.
To that end, along with all of our other accomplishments in the first quarter, we launched a new section of our website called Pulte Cares.
In addition to housing information on our efforts to run a sustainable business that supports the communities we serve.
The site also contains our reporting against the Sustainability Accounting Standards Board standards for our industry.
This is the first year reporting against the SASB standards and we look forward to showing our progress in future updates we will be posting to the site.
Finally, I would like to give a big shout out to the entire PulteGroup family for being ranked on the Fortune 100 list of Best Companies to Work For.
Since the founding of our company, we have viewed our culture as a critical and competitive advantage.
The Fortune 100 list is built on an analysis conducted by the Great Place to Work organization, which is based on employee surveys from thousands of companies.
In our case they surveyed 100% of our employees.
To make the Fortune 100 list is an accomplishment, but to make it for the first time when we are operating in a global pandemic is clear and resounding statement about our people, and the culture that they have -- the culture they have built inside of our organization.
I truly cannot be prouder of our company and specifically of our field leaders who do so much to support our people, and help them to be engaged especially during these challenging times. | q1 adjusted earnings per share $1.28.
q1 earnings per share $1.13.
quarterly net new orders increased 31% to 9,852 homes.
quarter-end backlog increased 50% to 18,966 homes with a value of $8.8 billion. |
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings including our annual and quarterly reports.
I look forward to speaking with you today about PulteGroup's third quarter operating and financial results.
In combination, top line growth and margin expansion helped drive higher earnings per share of $1.82.
This is an increase of 36% over the prior year's third quarter adjusted earnings of $1.34 per share.
Inclusive of these strong third quarter numbers through the first 9 months of 2021, our home sale revenues were up 22% to $9.2 billion while our reported earnings per share are up 36% to $4.85.
The resulting strong cash flow being generated by our operations continues to put our company in an enviable position in which we can invest in our business, return funds to shareholders and still maintain outstanding balance sheet strength and overall liquidity.
More specifically, consistent with our constructive view on the housing market, we have invested $2.9 billion in land acquisition and development so far this year.
Our $2.9 billion of land spend is comparable to what we invested for the full year in both 2020 and in the pre-pandemic year of 2019, and we remain fully on track to invest approximately $4 billion in total for the full year of 2021.
I would highlight that while we are investing more into the business, we remain disciplined and focused on building a more efficient and lower-risk land pipeline.
At the end of the third quarter, our lots under option had grown to 54% of our total controlled lot position compared to when I set the initial 50% option target, we have over 65,000 more lots under option and now view 50% as the floor rather than the ceiling in terms of how we control our land assets.
Consistent with our capital allocation priorities, along with investing $948 million more in land acquisition and development through the first 9 months of 2021 compared with last year, we have also returned $726 million to shareholders through share repurchases and dividends and have paid off nearly $800 million in debt this year, leaving us with a net debt-to-capital ratio of only 5.7%.
Finally, consistent with our strategic focus, our operating and financial performance has helped drive a return on equity of 26% for the trailing 12 months.
Just like the broader economy, our operations continue to be impacted by the pandemic.
On one hand, we are managing through the disruptions COVID-19 and the Delta variant have inflicted on our workforce, our trade partners and the global supply chain.
On the other hand, our results have certainly benefited from the remarkable demand and pricing environment the homebuilding industry has experienced over the past 18 months.
Either way, to deliver our third quarter numbers during the global pandemic and with a supply chain that is clearly struggling reflects the commitment and tireless efforts of the entire PulteGroup team.
Since we updated our production guidance in early September, broader industry comments have validated the challenges within the construction supply chain are significant and don't have any quick fixes.
Based on a myriad of calls and questions we have received, I think it's hard for everyone to appreciate the full magnitude of the issues we're facing when you're not dealing with them on a day-to-day basis.
For some products, it's simply the materials aren't available.
Sometimes you can switch to an alternative.
But when you can, you wait.
For others, it's changing lead times where order fulfillment has gone from 6 weeks to 16 weeks, back to 11 weeks and then back to 16 weeks.
And for others, it's seeing allocations being imposed as manufacturers and distributors do their best to keep their major customers, which I would note we are one, at least partially satisfied.
Our local divisions may not get much advanced notice of the shortage resulting allocations so we have to adjust on the fly.
In other cases, it's logistics.
When you're forced to ship materials to solve near-term issues, this might be shipping siding from the Southeast to the Southwest or our trades driving across the state for paint.
In one form or another, these issues impacted our third quarter results and, as Bob will detail, will put additional pressure on our deliveries and margins in the fourth quarter.
As difficult and frustrating as this is, I can say that our suppliers have been outstanding partners and routinely bend over backwards to get us the materials we need to solve our issues.
I can say that we've been clear with our teams that we have to be -- that we have to overcommunicate with customers to keep them informed of any schedule changes.
We also have to be flexible and creative in sourcing materials even if this means spending additional dollars to acquire needed resources.
And finally, we must maintain our standards on the quality and completeness of each home that we deliver.
Given the very problems impacting the supply chain, we would expect a solution that -- we would expect that solutions will be found over different time lines, depending on the suppliers' underlying issue.
In the interim, we will adjust our production estimates for the fourth quarter and work to position the business for more consistent cadence in the year ahead.
We will also continue to work in close partnership with our suppliers to manage through the supply chain issues as quickly and as intelligently as possible.
Our teams have done an outstanding job navigating through the challenging production environment, which can be seen in the exceptional operating and financial results we delivered in the quarter.
Starting with our income statement.
Our home sale revenues for the third quarter increased 18% over last year to $3.3 billion.
The increase in revenues was driven by a 9% increase in closings to 7,007 homes in combination with an 8% or $37,000 increase in average sales price to $474,000.
The higher average sales price realized in the third quarter reflects meaningful price increases we've realized across all buyer groups, with first-time up 8%, move-up up 10% and active adult up 8%.
The mix of homes we delivered in the third quarter included 32% from first-time buyers, 44% from move-up buyers and 24% from active adult buyers.
In last year's third quarter, 30% of homes delivered were first-time, 45% were move-up and 25% were active adult.
Our net new orders for the third quarter were 6,796 homes, which represents a 17% decrease from last year that was driven primarily by a 14% decline in year-over-year community count.
In addition to fewer open communities, orders for the period were impacted by ongoing actions to manage sales paces to better align with current production volumes.
The actions to manage sales pace and outright restrict sales were more frequently targeted toward our first-time buyer communities as we strategically work to build up spec inventory within our Centex branded communities.
Looking at our third quarter orders in a little more detail.
Our orders from first-time buyers decreased 20% compared with last year.
This decrease was driven primarily by our actions to restrict sales as our first-time community count was only down 6% compared with last year.
In contrast, our orders from move-up and active adult buyers decreased 22% and 4%, respectively, which was driven by comparable 22% and 5% decreases in community count, respectively.
In the third quarter, we operated from an average of 768 communities.
Consistent with the guide in our recent market update, this is down 14% from last year's average of 892 communities.
Our Q3 community count should be the low watermark for the year as we expect our fourth quarter community count to increase to approximately 775 active communities.
Further, our existing land pipeline should allow us to realize a meaningful ramp-up in community count as we move through 2022.
As is our practice, we will provide more specifics on 2022 community count as part of our fourth quarter earnings call.
Our unit backlog at the end of the third quarter was up 33% over last year to 19,845 homes.
The dollar value of our backlog increased an even greater 56% to $10.3 billion as we benefited from robust price increases realized over the course of this year.
At the end of the third quarter, we had 18,802 homes under construction, of which 83% were sold and 17% respec.
We have almost 900 more spec homes in production than we did in the second quarter as we have been working to increase spec availability, particularly in our Centex communities.
In many instances, this has meant tightly controlling current period order rates, but we feel this is the appropriate action as we seek to better align our sales with the current pace of production.
Given that 90% of our specs are early in the construction cycle and we have only 109 finished specs, these units are about helping to position the company for 2022, rather than providing closings in 2021.
We faced similar dynamics within our production of sold units as 2/3 of these homes are in the earlier stages of construction, and we can see gaps in the supply of key building products needed to complete these homes.
Given these conditions, we believe it appropriate to update our fourth quarter guide for expected fourth quarter deliveries and currently expect to deliver approximately 8,500 homes in the fourth quarter, which would represent an increase of 24% over the fourth quarter of last year.
It's difficult to say there are positives to be gleaned from the challenging production environment, but one of the outcomes is that the limited supply of homes, coupled with ongoing strong demand, has supported higher prices across the market.
Reflective of these conditions, our average price in backlog increased 18% or $78,000 over last year to $519,000.
Although more than half of our quarter end backlog is expected to deliver in 2022, we will continue to see the benefit of rising prices in our fourth quarter as our average closing price is expected to be $485,000 to $490,000.
At the midpoint, this would represent an increase of approximately 10% over last year.
Our reported homebuilding gross margin in the third quarter increased 200 basis points over last year to 26.5%.
Given that our third quarter closings absorbed the elevated lumber prices from earlier this year, expanding our gross margin by 200 basis points attest to the strong pricing environment the industry experienced over the past year.
It's worth noting that the strong market conditions also contributed to another step down in incentives in the period as discounts fell to 1.3%.
This is down from 3% last year and down 60 basis points from the second quarter of this year.
As our margin increase demonstrates, strong buyer demand has allowed the company to pass through the higher labor and material costs we've experienced.
That said and as Ryan discussed, we are knowingly incurring additional expenses to get houses built within today's challenged operating environment.
In addition to the incremental build costs we are absorbing over the short term to get homes completed, our reported gross margins are being influenced by the mix of homes closed.
As we also highlighted in our recent market update, certain of the homes that we expected to close in Q3 slipped into Q4 and others have been pushed out of the fourth quarter into 2022.
These conditions are impacting our reported gross margins in the third and fourth quarters of 2021 but set us up to realize gross margin expansion as we head into 2022.
That said, with the changing mix of homes we currently expect to close in the fourth quarter, coupled with the added material, labor and logistics costs we're paying to get homes closed, we currently expect our fourth quarter gross margin to be 26.6% or 26.7%.
This would represent an increase of 160 to 170 basis points over last year's fourth quarter and an increase of 10 to 20 basis points over the third quarter of this year.
We see the opportunity to build on this momentum as the strong pricing conditions we've experienced, coupled with the lower lumber costs we expect in next year's closings, should result in further gross margin expansion in 2022.
Our SG&A expense for the third quarter was $321 million or 9.6% of home sale revenues.
Prior year SG&A expense for the period was $271 million for a comparable 9.6% home sale revenues.
Given there's still increase in closings, we expect [Technical Issues] in the upcoming quarter expected to fall to a range of 8.9% to 9.2% of home sale revenues.
Looking at our financial services operations.
Our third quarter pre-tax income was $49 million versus $64 million last year.
As has been the case for much of this year, higher origination volumes have been offset by lower profitability per loan given more competitive market conditions.
The company's reported tax expense in the third quarter was $145 million, for an effective tax rate of 23.3%.
In the comparable prior year period, our effective rate was 14% as we realized a tax benefit of $53 million associated with energy tax credits recognized in the period.
For the third quarter, our reported net income was $476 million or $1.82 per share.
This compares with prior year adjusted net income, excluding the impact of the energy tax credits, of $363 million or $1.34 per share.
Moving over to the balance sheet.
Our business continues to generate strong cash flow, which allowed us to end the quarter with $1.6 billion of cash after significant investment in the business and continued shareholder distributions in the quarter.
In the quarter, we repurchased 5.1 million shares or about 2% of our outstanding common shares for $261 million at an average price of $51.07 per share.
The $261 million in stock repurchase is a sequential increase of $61 million from the second quarter of this year.
As stated previously, we are fully prepared to allocate more capital to shareholders as conditions warrant.
We also invested $1.1 billion in land acquisition and development in the third quarter.
This brings our total land-related spend in 2021 to $2.9 billion and keeps us on track to invest approximately $4 billion of land acquisition and development for the year, which would be an increase of almost 40% over last year.
We ended the third quarter with a debt-to-capital ratio of 22.4%, which is down from 29.5% at the end of last year.
Adjusting for our cash position, our net debt-to-capital ratio at the end of the quarter was 5.7%.
We ended the third quarter with approximately 223,000 lots under control, of which 54% were controlled through options.
Our divisions and particularly our land teams have done an outstanding job building a more efficient land bank while helping to reduce market risk.
We're extremely proud of their efforts and the success that they've realized.
We continue to experience strong demand in the quarter with very consistent traffic and sign-up numbers across the period.
I would also add that strong demand has continued through the first few weeks of October.
While sign-ups in the quarter were lower compared with last year, the primary driver of the decline was the decrease in community count.
Beyond the impact community count had on order rates in the quarter, our divisions continue to manage or outright restrict sales pace to better match sales with our current production.
As Bob indicated, this most recent quarter should be the low point of our community count -- should be the low point of our community count this year as we expect our community count to move higher on a sequential basis as we move through 2022.
Reflecting the strong demand conditions and relatively limited supply of new and existing homes, we were able to raise prices in the quarter across most of our communities.
The most typical increase in the quarter was in the range of 1% to 3%, although some of our divisions were able to push pricing in select communities a little more aggressively.
That being said, we continue to keep a close eye on affordability metrics within our local markets, especially given the recent rise in mortgage rates.
Between an improving economy, a strong jobs market, wage inflation and government stimulus checks, consumers are in a very strong financial position and have proven they are prepared to pay today's higher prices for everything, from food to autos to homes.
We continue to see a very strong financial profile among our homebuyers with the average FICO score remaining above 7 50 and loan-to-value of 83% based on users of our mortgage company.
Looking at demand across the country.
I would tell you that generally where we have product available, we can sell it and at a higher price than earlier in the year.
Although frustrated at times because of limited supply, higher prices and longer build cycles, consumers remain engaged in the home buying process and are anxious to get into a new home.
Just to wrap up, while there are certainly challenges in the business, PulteGroup remains in an excellent position, both operationally and financially.
We have a strong and improving land pipeline that we continue to make more efficient through the use of lot options.
We have an opportunity to further expand margins based on limited supply, strong buyer demand, resulting favorable pricing dynamics and lower lumber costs in 2022.
We have an outstanding homebuilding operation that is generating tremendous cash flow, and we have an exceptional balance sheet strength and liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities. | compname reports q3 earnings per share $1.82.
q3 earnings per share $1.82.
qtrly home sale revenues increased 18% to $3.3 billion.
quarter-end unit backlog of 19,845 homes up 33%.
quarter-end total value of homes in backlog up 56% to $10.3 billion. |
I want to highlight that we will be discussing our reported fourth-quarter numbers as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period.
We encourage you to review these tables to assist in your analysis of our business performance.
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
I appreciate everyone joining today's call.
I hope that your new year has started well and that you are -- and that you remain healthy and safe.
It goes without saying that Covid19 and the resulting challenges made 2020 a year unlike any that we've experienced before.
Let me just say right upfront that I'm extremely proud of how our entire team responded and how our organization remain engaged and focused during some very difficult times.
We also ended the quarter with $2.6 billion of cash and a net debt to capital ratio below 2%.
Reflecting a lot of hard work by an amazing team, PulteGroup realized a 6% increase in full-year closings to 24,624 homes and a corresponding 7% increase in full-year home sale revenues to $10.6 billion.
Benefiting from our ability to expand Homebuilding gross and operating margins along with dramatic gains in our financial services business, we converted the 7% topline growth into a 29% increase in pre-tax income of $1.7 billion.
Our outstanding results extend beyond our income statement as we generated $1.8 billion in operating cash flow in 2020 after investing $2.9 billion in land and development during the year.
Beyond investing in land, we increased our dividend by 17%, effective with the payment we made this month and repurchased a $171 million of our common shares in 2020, despite having suspended the program for six months because of the pandemic.
I am also extraordinarily proud to note that consistent with our focus on generating high returns over the housing cycle, we realized a 23.7% return on equity for the year.
With 2020 complete, we enter 2021 in a strong financial position and with numerous opportunities to drive further business gains.
Obviously, we can't control how the pandemic plays out but we are optimistic that the multiple vaccines getting distributed, mean that we can see a light at the end of this long tunnel.
Bob will provide specific guidance as part of his comments, but let me offer a view of how we are looking at the business and how we plan to operate in the year ahead.
We expect a strong demand environment, which the housing industry experienced for much of 2020 and in reality for many quarters prior to Covid can continue well into 2021.
We said for years that we thought housing starts needed to be around 1.5 million to meet the natural demand created by growth in population and household formations.
We finally reached 1.5 million starts in 2020, but we have under built relative to this number for years.
Given this unmet need and the potential mix shift in demand toward more single-family and away-from-apartment living, we believe demand can remain strong going forward for our business.
Beyond the demographic tailwind, we also believe that the pandemic has caused a permanent increase in the number of people who will be working from home full or at least part-time.
Such a shift has profound implications in terms of what people need from their homes as well as where their homes can be located.
For example, we believe a remote working dynamic expands the buyer pool because it can allow people to purchase more affordable homes in further out locations.
At the same time, working from home has the potential to increase the intent to buy new homes, which offer floor plans and technology features to better meet the needs of today's homebuyers.
With such a strong demand environment, it works to our advantage to be among the nation's largest builders with access to land, labor, and material resources.
We enter 2021 with more than 15,000 houses in backlog, 180,000 lots under control, of which half are controlled via option and long-standing relationships with suppliers and trade partners.
The combination of these factors should allow us to increase 2021 deliveries by more than 20% over the last year.
Labor remains tight, although the change in administration may allow for some relief assuming immigration policies are eased.
At the same time, product manufacturers are battling supply chain issues and the occasional Covid-related disruption within their plants.
Although, I must say, our suppliers have been tremendous partners, going above and beyond in many instances to provide the materials we need.
Given high expectations for the Company's operating performance and our balance sheet strength at year-end, I believe we are exceptionally well-positioned to execute on all of our capital allocation priorities, more specifically, we are targeting land acquisition and development spend of $3.7 billion in 2021.
This is an increase of roughly $800 million over our 2020 investment, but we think appropriate given the growth in our operations.
Beyond our expected land investment, we have made great progress in planning for and selecting the location of our next offsite manufacturing plant.
We still have a few details to work out with the owners of the sites under consideration, but we hope to finalize a plant agreement within the next couple of months and then begin installing the requisite production equipment later this year.
Our ICG operation in Jacksonville has exceeded our expectations, so we are excited to get this new plant up and running sometime during the first quarter of next year.
And finally, we will continue to return excess funds to shareholders through our share repurchase program.
In response to the uncertainties caused by the pandemic, we had suspended share repurchase activities during the second and third quarters of last year.
We have repurchased more than one-third of the Company's share since initiating the program and we expect to remain an active buyer of our shares going forward.
Housing demand was outstanding in the back half of 2020, with strength across all geographies and buyer segments.
And I'm certainly pleased to report that this strength has continued unabated through the first few weeks of January.
The housing industry has been extremely fortunate in being an economic engine, but we do not take this for granted nor would we forget how devastating Covid19 has been for thousands of businesses and millions of people.
It is certainly our hope that we are rapidly approaching the end of this pandemic.
everyone, and let me add my best wishes and express my hope that we can all navigate the coming year in health and safety.
Where appropriate, I'll reference the impact of these items during my review of the quarter.
For our fourth quarter, home sale revenues increased 5% over last year to $3.1 billion.
The increase in revenues for the period was driven primarily by a 4% increase in average sales price to $446,000 as closings were up 1% to 6,860 homes.
The increase in average sales price for the period reflects a strong pricing environment for all buyer groups.
We're pleased to report that on a year-over-year basis.
Our average sales price was higher for our first time move-up and active adult buyer groups.
The demographic mix of our closings grew [Phonetic] slightly in the quarter and reflects changes caused both by the pandemic and by our strategic investment to serve more first-time buyers.
Consistent with these dynamics, our fourth-quarter closings in 2020 consisted of 32% first-time, 46% move-up, and 22% active adult.
In the fourth quarter of 2019, closings were comprised of 31% first-time, 45% move up, and 24% active adult.
Our net new orders for the fourth quarter increased 24% over last year to 7,056 homes, while our average community count for the period was down 2% from last year to 846.
The decrease in community count reflects the slowing of our land activities earlier this year in response to the pandemic as well as the faster close out of communities due to the strong demand environment and related elevated absorption paces.
Demand was strong across the entire period and actually accelerated toward quarter-end as December orders were higher than November and essentially flat with October.
Given the strength of ongoing demand, our divisions are taking specific actions to manage sales pace and production so our backlog does not get over extended.
We are also being thoughtful about adjusting priced to help cover rising house costs, especially the cost of lumber, which moved significantly higher in the quarter.
Consistent with what we experienced during the third quarter, demand was strong across all of our brands, including the ongoing acceleration in demand among active adult buyers.
In the fourth quarter, first-time orders increased 27% to 2,084 homes, move-up orders increased 17% in 2,994 homes, while active adult orders increased 33% to 1,978 homes.
In fact, our Q4 active adult orders were less than 100 units below the all-time quarterly high we reported in the third quarter of this year.
After a pause in the first half of 2020, active adult buyers have clearly gotten off the fence.
Our fourth quarter cancellation rate was 12% which is down from 14% last year.
Based on the strength of our sales, our year-end backlog increased 44% over last year to 15,158 homes.
Backlog value at year-end was $6.8 billion compared with $4.5 billion last year.
We believe our large backlog and continued strong demand for new homes has the company extremely well-positioned to realize significant year-over-year growth in closings in 2021.
At the end of the fourth quarter, we had a total of 12,370 homes under construction, of which 1,949 or 16% were spec.
In the fourth quarter, we focused on closing sold inventory, but we are actively working to increase production of sold and spec homes throughout our markets.
Our large backlog makes this process a little easier, and we're working closely with our trades and product suppliers to ensure the needed capacity to deliver more homes going forward.
With 12,000 -- 12,370 homes under construction at year-end, we expect deliveries in the first quarter of 2021 to be between 6,300 and 6,600 homes.
At the midpoint, this would be a 20% increase in closings over last year.
This growth rate is in line with what we expect for the full year as we are targeting deliveries to increase approximately 22% to 30,000 homes for all of 2021.
Given the strength of our move up and active adult sales along with price increases realized across all buyer groups, our average sales price and backlog was up 4% over last year to $448,000.
Based on the prices in backlog, we expect our average sales price on closings to be in the range of $430,000 to $435,000 both for the first quarter and for the full year 2021.
As we've said in the past, the final mix in deliveries can influence the average sales price we deliver in any given quarter.
Reflecting the benefits of the favorable pricing environment and our ongoing work to run a more efficient Homebuilding operation, our fourth quarter gross margin of 25% was up 220 basis points over last year and 50 basis points from the third quarter of this year.
Driven primarily by increases in lumber and labor, our house costs will be higher in 2021, however, given strong demand conditions, we expect to pass through most of these costs through increased sales prices.
As a result, we expect gross margins to remain high and be approximately 24.5% for both the first quarter and the full year.
Our reported SG&A expense for the fourth quarter was $280 million 9.1% of home sale revenues.
Excluding the $16 million net pre-tax benefit from adjustments to insurance-related reserves recorded in the fourth quarter, our adjusted SG&A expense was $296 million or 9.7% of home sale revenues.
Last year, our reported fourth quarter SG&A expense was $262 million or 8.9% of home sale revenues.
Excluding insurance reserve adjustment of $31 million last year, our adjusted SG&A expense was $293 million or 10% of home sale revenues.
At the outset of the pandemic, we took action to adjust our overheads in anticipation of a more difficult operating environment.
Although nearly all furloughed employees have rejoined the company and we've hired back many of the employees we released, we still expect to realize improved overhead leverage in 2021.
At present, we expect SG&A expense in the first quarter of 2021 to be in the range of 10.5% to 10.9%, which is down from 11.9% last year.
For the full year, we are targeting an SG&A expense of 10% of home sale revenues down from 10.2% on an adjusted basis last year.
Our financial services operations continued to deliver strong results as we reported fourth quarter pre-tax income of $43 million, which is up from $34 million last year.
It's worth noting that our fourth quarter 2020 results include the $22 million pre-tax charge from adjustments to our mortgage origination reserves as we settled claims tied to mortgages issued prior to the housing collapse.
The increase in pre-tax income in the quarter from our financial services business reflects continued favorable rate and competitive market conditions along with higher loan volumes resulting from an increase in mortgage capture rate.
Our mortgage capture rate for the quarter was 86%, up from 84% last year.
Our reported tax expense for the fourth quarter was $86 million, which represents an effective tax rate of 16.4%, and which reflects the tax benefit of $38 million resulting from energy tax credits and deferred tax valuation allowance adjustments recorded in the period.
In 2021, we expect our tax rate to be approximately 23.5%, including the benefit of energy tax credits we expect to realize this year.
Finishing up my review of the income statement, we reported net income for the fourth quarter of $438 million or $1.62 per share.
Our adjusted net income for the period was $404 million or $1.49 per share.
In the comparable prior-year period, the Company reported net income of $336 million or $1.22 per share and adjusted net income of $312 million or $1.14 per share.
Benefiting from the outstanding financial performance and resulting cash flows generated by our Homebuilding and Financial Services operations, we ended the quarter with $2.6 billion of cash.
In addition, at the end of the year, our gross debt to capital ratio was 29.5% which is down from 33.6% last year, and our net-debt-to-capital ratio was 1.8%.
In the fourth quarter, we repurchased 1.7 million common shares at a cost of $75 million or an average price of $43.69 per share.
For the full year, the company returned $171 million to shareholders through the repurchase of 4.5 million common shares at a cost of $37.58 per share.
First, we will exercise the early redemption feature effective February 1, on $426 million of senior notes originally scheduled to mature on March 1 of this year.
Assuming full execution of the tender, the retirement of the $726 million will save the company approximately $34 million in annual interest charges and on a pro forma basis, lower our gross debt-to-capital ratio to 23.7%.
In the fourth quarter, we invested $942 million in land acquisition and development, which brings our full-year 2020 spend to $2.9 billion.
As Ryan mentioned, given our positive view of the market and the expected strong cash flow generation of the business, we currently expect to increase our investment in land acquisition and development to $3.7 billion in 2021.
And finally, we ended the year with slightly more than 180,000 lots under control, of which 91,000 were owned and 89,000 were controlled through auctions.
I want to highlight that based on these numbers, we've effectively reached our stated goals of having 50% of our land pipeline controlled through options, and given our guidance targeting 30,000 closings in '21, we've also reached our goal of having three years of owned lots.
Land acquisition could be lumpy, so the numbers could move around, but we remain disciplined in our investment practices and focused on enhancing returns and reducing risks through the use of options.
When I took over as CEO in 2016, there were several areas where I saw an opportunity to enhance our long-term business performance.
Among the targets we put in place were: to expand first time to be one-third of our business, to lower our lot position to three years of owned lots, to control 50% of our land pipeline via options, and increase our growth rates while continuing to deliver high returns for our shareholders.
Given our 2020 performance and our expectations for 2021, it is gratifying to see that we've achieved these initial goals.
With this foundational work in place, we can now continue developing an even more successful business as we expand our operations, advance innovative customer-centric technologies, and integrate new construction processes.
Our outstanding 2020 results in combination with continued strength in housing demand also has PulteGroup entering '21 with tremendous momentum.
We begin the year with our largest backlog in well over a decade, along with great operating metrics and a strong balance sheet that gives us the flexibility to capitalize on market opportunities.
These opportunities include the expansion of our offsite manufacturing capabilities that I spoke about earlier, as well as the geographic expansion of our Homebuilding operations.
We have our initial land positions in place and we're working quickly to increase our lot pipeline in these new areas.
We are excited about the opportunities we see in both markets, as well as several other cities we are currently evaluating.
With our goal to increase closings by more than 20% this year, along with investing $3.7 billion in land and our expansion into new markets, we believe we are well-positioned to grow our operations while continuing to deliver high returns.
In closing, I'm extremely proud of what our organization accomplished in 2020.
We enter 2021 with high expectations, but I know the pandemic continues to rage and so we will continue to operate our business, thoughtfully and safely.
We ask that you limit yourself to one question and one follow-up. | q4 adjusted earnings per share $1.49.
q4 earnings per share $1.62.
pultegroup - ended q4 with unit backlog of 15,158 homes, which is up 44% over comparable prior year period, valued at $6.8 billion.
qtrly net new orders increased 24% to 7,056 homes; order value increased 33% to $3.3 billion.
qtrly home sale revenues increased 5% to $3.1 billion. |
Today's agenda appears on slide three.
We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter.
Following Tom's comments, I'll provide a more detailed review of our first quarter performance, together with the revised guidance for the full year fiscal 2021.
Tom will then provide a few summary comments and we'll open the call for a question-and-answer session.
We plan to end the call at the top of the hour.
Please refer now to slide four, and Tom will get us started.
I hope that you, your family and your friends are all safe and healthy.
So before I go through the quarter results, I wanted to highlight slide four, which is really our strategic positioning slide on one page.
It's how we create value for our customers, our shareholders and our people.
And I'm going to highlight some of these through the course of my remarks in the opening slides here.
But really, the output of all these differentiators is really that last bullet.
It enables us to be great generators and deployers of cash over the cycle, which is a proven strength of ours that has only gotten better over the years.
This list is what sets us apart.
It is what enables us to be a top-quartile company.
Hopefully, a company that you'll want to be a shareholder of.
If you go to slide five.
This is one of those competitive differentiators, which is the breadth of our technologies.
This is a portfolio of 8-motion control technologies that are all interconnected and complementary to each other.
It's how we bring value to customers.
It's how we solve problems for our customers.
Our customers see the value in it, too.
It has 60% of our revenue comes from customers who buy from four or more of these technologies.
So if you go to slide six, we'll talk about the quarter.
It was an outstanding quarter, great results really in the face of unprecedented times.
So starting with the first bullet, something that we take great pride in.
We are a top-quartile safety performance company.
In addition to that, we continue to reduce recordable injuries and incidents by 31%.
Organic decline was 13% year-over-year, but that showed nice improvement versus the prior quarter, which was a 21% decline.
So we are pleased to see the progress there.
EBITDA margin was 19.5% as reported or 20.1% adjusted.
That makes two quarters in a row that we've been greater than 20% EBITDA margins we're excited about, and it was 100 basis point improvement versus the prior year.
We did a great job on debt reduction.
We paid down debt in the quarter of $557 million.
And our cash flow from operations was just an outstanding level at 22.8%.
So I call your attention to a little table at the bottom of the page.
And go to that last row, the total segment operating margin adjusted row.
See, we came in at 19.9% for the quarter.
That was 110 basis point improvement versus the prior year.
Our decrementals were just terrific.
If you look at our decrementals on an adjusted basis with acquisitions, they were favorable, meaning that we had less sales and we had more income versus the prior year.
On a legacy basis, so Parker without acquisitions, again on an adjusted basis, was a 14% decremental.
Just great results by the operating team.
So if we go to slide seven.
The deleveraging progress has been just dynamite.
You can see we paid down $2 billion worth of debt in the last 11 months.
We've now paid off 37% of the LORD and Exotic transaction debt.
And you can see the multiples, whether it's on a gross basis or on a net basis, we continue to make nice progress reducing those leverage multiples.
So we're very proud of that.
Moving to slide eight.
These outstanding results are really underpinned by a couple of factors versus the prior period restructuring that we've done, The Win Strategy and the performance enhancements that it's driving and the speed and agility of our pandemic response.
And just for clarification, when you look at these numbers, these are cost-out actions that represent the savings that are recognized in the year as a result of our pandemic response.
The incremental amount is footnoted at the bottom of this page.
That was $210 million year-over-year incremental.
But the big thing that I want to make a point on this page is the shift to more permanent reductions.
And while we didn't put it on here -- we didn't put Q4.
But if you go back and look at your Q4 notes, we were 90% discretionary, 10% permanent.
This quarter, Q1, we are now 30% permanent and moving to a full year of 60% permanent.
If you just go to that full year section of the page and looking at FY '21, see $175 million discretionary.
It's a little bit less than what we showed you last quarter, primarily because our volume is better, and we didn't need to and act as many of those discretionary type of actions.
Most of our wage reductions have been restored to normal effective October 1, with some minor exceptions in countries where those government support supplementary income or short work weeks, which we've continued.
Permanent actions stayed the same at $250 million, and we're right on track to deliver that.
And really, I think this bodes well when you look at the shift to more permanent actions for the remainder of FY '21, it sets us up very nicely for FY '22.
So if we go to the next slide, we talk about our transformation.
And clearly, I'm going to show you a couple of numbers here.
Hopefully, you're going to believe the company is definitely transformed.
And we'll talk about how, and we'll talk about more importantly where we're going to go in the future.
Next page is on the how portion of it.
It's been a combination of portfolio of things we've done as well as just sheer performance improvements.
And on the performance side, it all starts with the Parker business system, which is The Win Strategy; and two major updates that we've made that you're familiar with, which is really propelling our performance.
We simplified the organization from a structure standpoint.
And we acquired three outstanding companies that were accretive on growth, margins and cash flow.
And they're performing very well during the pandemic.
And I think the best evidence, which is the slide you've seen before is on slide 11, which is the transformation across the last five manufacturing sessions on how we've been raising the floor operating margin.
We wanted to put this slide in again because we've updated it based on the latest adjustments, where we include deal-related amortization in our adjustments.
And we did that through all the prior periods.
So the reported in change, that's in gray, and gold is the adjusted.
And you can see that the improvement now is even more pronounced, 1,100 basis points over this period of time.
And obviously, we intend to keep moving in this direction.
If you go to slide 12.
We're going to talk more about the future now and where we're going.
And it's going to be all around Win Strategy 3.0, which we just recently changed in our purpose statement, which is in that blue box then at the bottom.
Both of these changes have created excitement within the company and an inspiration from our people on that higher purpose that we're all trying to live up to.
Slide 13, where I'm going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate.
I'm going to make a comment on each one of these.
So start with simplification.
You've seen what we've done on structural things, and organization design work continues.
Simplification is going to expand into more 80/20 and Simple by Design.
And of course, you're all familiar with 80/20.
For us, it's still early days with lots of upside.
The Simple by Design is the realization that 70% of your cost is tied up in how you design the product.
And what we want for our company is design excellence and operating excellence.
We want both of those things.
And the way you get design excellence is through Simple by Design.
It's going to have three major buckets that's going to be a complexity assessment of our existing and new designs.
We're going to use four guiding principles on how we design products.
We're going to design with forward thinking.
We're going to design to reduce how we use material.
We're going to design to reuse things that we use across the company.
We're going to design the flow.
And we're going to enable all this with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and knowledgeable fashion.
Second bullet is innovation.
In our stage gate process, we call internally Winovation.
So that's taking an idea to launch for a new product.
And we're making three changes there.
One is in metrics, and that's called PVI, product vitality index, another new metric for most of you be familiar with this.
It's the percent of revenue that comes from new products and things that we've launched and commercialized over the last five years.
We're holding people accountable to that, and we're seeing nice progress.
We've also included two key process changes.
One is new product blueprinting, which is an outside-in orientation for engineers.
So it's spending more time with customers and end users to understand their pain points and their needs so that we design and develop better products to solve those.
And of course, Simple by Design is embedded into the new Winovation as well.
Third bullet is digital leadership.
Now we put this on there before the pandemic but, of course, with the pandemic, this is even more important.
We've got four big areas that when we say digital leadership, we mean four things: digital customer experience; digital products, which would be IoT; digital operations; and then digital productivity.
And digital productivity is where we would do include our data analytics and artificial intelligence.
Next bullet is growing distribution.
We just want to continue the great progress we've been making, especially growing international distribution.
The next one is kaizen and kaizen -- our brand at kaizen is unique.
And it's really combining kaizen; our high-performance team structure, which is how we build the company; our natural work teams; and that ownership that creates in our plants, warehouses and the offices; and the use of Lean.
And I would just tell you that COVID has not slowed us down one second on the use of kaizen.
We are continuing to have the same activity and the same results.
We're very pleased with that progress.
On the acquisition front, we want to be the consolidator of choice and continue to buy great companies like you've seen us do the last several years.
And then underpinning all this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short.
And we're going to roll this out over the next two years, FY '22 and '23.
We've been piled again over the last two years, '20 and '21.
And it's going to replace return on net assets as our annual incentive.
It's going to have three simple components: earnings, revenue and cash.
So it will be easy to explain, easier for our people to understand.
Those three metrics are highly aligned to total shareholder return.
And this will provide a better linkage to our annual performance.
So we feel very excited to continuing the performance changes we've been making and the performance lift we're going to get with 3.0 that the transformation that you've seen is going to continue in the future.
Moving to slide 14.
You probably saw on Monday, we've made -- Monday this week, we made some important organization announcements.
And the first one, the lady that's sitting right next to me is strategically positioned six feet away from me, though.
Cathy Suever is retiring January 1.
This is part of Cathy's long-term plan.
And she has 33 years with the company and 33 great years.
And that everything she's done, she's excelled in, and she basically helped us a tremendous amount.
Whether it was bad times in recessions or good times with expansions, it's been a big part of the Win Strategy.
And her team -- her and her team did what we did in those acquisitions as a huge led by the finance team and really made a big difference for us.
A great example of values and results, and a great example for the rest of our leadership team.
So this is Cathy's last earnings call.
And I could see she's pretty tore up about that.
But she's going out in style because these are fantastic results to do as your last earnings call.
Now succeeding Cathy on slide 15 is Todd Leombruno, and Todd will be our CFO on January one of next year.
I think a lot of you know Todd.
Todd was Investor Relations and knows the company extremely well, 27 years with the company.
He's been a Division Controller, Group Controller, now Corporate Controller.
And he'll be joining Lee and myself in the office as Chief Executive and CFO.
So Todd, if you want to just make a few introductory comments to everybody?
First of all, I just want to say congratulations to Cathy on a wonderful 33-year career with Parker-Hannifin.
We worked so closely and so well together for so many years.
So we wish you nothing but the best in retirement.
And we look forward to hearing all about your retirement and ventures, and we will stay close.
I couldn't be more humbled and appreciative for this opportunity.
We have a fantastic global team, and we are committed to delivering top-quartile performance and continuing the transformation of the company.
And for the investment community, Tom already mentioned this, but I still remember many of you from my time in Investor Relations.
I look forward to reconnecting and also seeing some new faces very soon.
But Cathy is not retiring yet.
I'd like you to now refer to slide 17, and I'll summarize the first quarter financial results.
This slide presents as reported and adjusted earnings per share for the first quarter.
Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales.
Adjustments from the fiscal 2021 as reported results netted to $0.60, including business realignment expenses of $0.12; integration costs to achieve of $0.03; and acquisition-related amortization of $0.63, offset by the tax effect of these adjustments of $0.18.
Prior year first quarter earnings per share were adjusted by a net $0.45, the details of which are included in the reconciliation tables for non-GAAP financial measures.
On slide 18, you'll find the significant components of the walk from adjusted earnings per share of $3.05 for the first quarter of fiscal 2020 to $3.07 for the first quarter of this year.
Despite organic sales declining 13% and total sales dropping 3%, adjusted segment operating income increased the equivalent of $0.09 per share or $16 million.
Decremental margins on a year-over-year basis were favorable, demonstrating excellent cost containment and productivity by our teams.
In addition, we realized an $0.08 increase from lower corporate G&A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Other income was $0.14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales.
Moving to slide 19, we show total Parker sales and segment operating margin for the first quarter.
Organic sales decreased 13% year-over-year.
This decline was partially offset by favorable acquisition impact of 9.1% and currency impact of 0.8%.
Despite declining sales, total adjusted segment operating margin improved to 19.9% versus 18.8% last year.
This 110 basis point improvement reflects positive impacts from our Win Strategy initiatives and the hard work and dedication to cost containment and productivity improvements by our teams.
Moving to slide 20.
I'll discuss the business segments, starting with Diversified Industrial North America.
For the first quarter, North American organic sales were down 14.1%, and currency negatively impacted sales 0.3%.
These were partially offset by an 8.5% benefit from acquisitions.
Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 21% of sales versus 19.4% last year.
This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our Win Strategy initiatives.
Moving to the Diversified Industrial International segment on slide 21.
Organic sales for the first quarter in the Industrial International segment decreased by 7.3%.
This was offset by contributions from acquisitions of 9.1% and currency of 2.9%.
Operating margin for the first quarter on an adjusted basis increased to 19.2% of sales versus 17% in the prior year, an impressive incremental margin of 66.5%.
The teams continue to work on controlling costs and utilizing the tools of our Win Strategy.
I'll now move to slide 22 to review the Aerospace Systems segment.
Organic sales decreased 20.1% for the first quarter partially offset by acquisitions, contributing 10.8%.
Significant declines in the commercial businesses, both OEM and aftermarket, were partially offset by higher sales in both military OEM and military aftermarket.
The diversity of our aerospace portfolio, which includes business jets, general aviation and helicopters, is providing some additional balance against the current market pressures.
Operating margin for the first quarter was 18.1% of sales versus 20.4% in the prior year for a decremental margin of 43.5%.
Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes.
On slide 23, we report cash flow from operating activities.
Cash flow from operating activities increased 64% to a first quarter record of $737 million and an impressive 22.8% of sales.
Free cash flow for the current quarter was 21.5%.
And with a drop in net income of just $17 million, the free cash flow conversion from net income jumped to 216%.
This compares to a conversion rate of 118% last year.
The teams remain very focused and effective in managing their working capital and consistently generating great cash flow.
Moving to slide 24, we show the details of order rates by segment.
Total orders decreased by 12% as of the quarter ending September.
This year-over-year decline is a consolidation of minus 11% within Diversified Industrial North America, minus 4% within Diversified Industrial International and minus 25% within Aerospace Systems orders.
Just a reminder that we report the Aerospace Systems orders on a 12-month rolling average.
Looking ahead, the updated full year earnings guidance for fiscal year '21 is outlined on slide 25.
Guidance is being provided on both an as-reported and an adjusted basis.
Based on our current indicators, we have revised our outlook for total sales for the year to a year-over-year decline of 3.5% at the midpoint.
This includes an estimated organic decline of 7.3%, offset by increases from acquisitions of 2.8% and currency of 1%.
This calculated the impact of currency to spot rates as of the quarter ended September 30, 2020, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year '21.
Please note our revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing COVID infections.
You can see the forecasted as-reported and adjusted operating margins by segment.
At the midpoint, total Parker adjusted margins are now forecasted to increase 30 basis points from prior year.
For guidance, we are estimating adjusted margins in a range of 19% to 19.4% for the full fiscal year.
For the below-the-line items, please note a significant difference between the as-reported estimate of $400 million versus the adjusted estimate of $500 million.
In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101 million pre-tax or $76 million after tax that will be recognized as other income.
Since this is an unusual onetime item, we plan to remove this gain as an adjustment to our adjusted earnings per share.
The full year effective tax rate is projected to be 23%.
For the full year, the guidance range for earnings per share on an as-reported basis is now $9.93 to $10.53 or $10.23 at the midpoint.
On an adjusted earnings per share basis, the guidance range is now $11.70 to $12.30 or $12 even at the midpoint.
The adjustments to the as-reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the full year fiscal '21.
Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year '21.
Also included in the adjustments to the as-reported forecasts are integration costs to achieve of $18 million.
Synergy savings for LORD are projected to be an additional $40 million, getting to a run rate of $80 million by the end of the year.
And for Exotic, we anticipate a run rate of $2 million savings by the end of the year.
Acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year.
Some additional key assumptions for full year 2021 guidance at the midpoint are sales are now divided 48% first half, 52% second half.
Adjusted segment operating income is split 46% first half and 54% second half.
Adjusted earnings per share first half, second half is divided 45%-55%.
Second quarter fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint.
And this excludes $0.63 or $106 million of projected acquisition-related amortization expense, business realignment expenses and integration costs to achieve, offset in part by the gain on real estate of $0.59 or $101 million.
On slide 26, you'll find a reconciliation of the major components of the revised fiscal year 2021 adjusted earnings per share guidance of $12 even at the midpoint compared to the prior guidance of $10.30.
The teams outperformed our original estimates, beating the first quarter's guidance by $0.92.
With this performance and our continuing efforts to control costs, we are raising our estimated margins, which will in turn generate $0.81 of additional segment operating income over the next three quarters.
This calculates to an estimated decremental margin of 11.4% for the year.
Other minor adjustments to below operating income line items reduces our estimate by a net $0.03.
All in, this leaves $12 even adjusted earnings per share at the midpoint for our current guide for fiscal '21.
So the portfolio, our motion control technologies, gives us a clear competitive advantage versus our competitors.
We continue to transform it with the three acquisitions, and we really feel strongly with the Win Strategy 3.0 in our purpose statement that our best days are ahead of us.
And with that, I'll hand it over to Sonia to start the Q&A. | parker-hannifin q1 adjusted earnings per share $3.07.
q1 adjusted earnings per share $3.07.
sees fy earnings per share $9.93 to $10.53.
sees fy 2021 earnings per share of $11.70 to $12.30 on an adjusted basis. |
Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com.
If you move to Slide 3, you'll see our agenda, we'll begin with Chairman and Chief Executive Officer, Tom Williams, providing some strategic comments and highlights from our second quarter, following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increased to guidance for the remainder of our fiscal year FY '21.
Tom will then provide a few summary comments and will open the call to questions from Tom, we, or myself.
And with that, Tom, I'll hand it off to you.
Now, before I move to Slide 4, I want to make a few opening comments.
Calendar 2020 was an extremely difficult year, to say the least for all of us, both professionally and personally and I hope all of you are staying safe.
Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis.
We've rallied around our purpose, and the one strategy, we've showed that Parker is an exceptional performer, even in the most difficult of environments.
So if you go to Slide 4, one of our key competitive advantages are breadth in motion control technologies.
We're now up to two-thirds of our revenue this -- you heard me talk about this is probably 160% but now the two-thirds of our revenue comes from customers who buy from four more of these technologies.
As these interconnected technologies that enable us to create even more value for our customers and create a distinct competitive advantage versus our competitors.
If you move to Slide 5, we just had outstanding performance in the quarter.
I will run you through some of the highlights.
Top quartile safety performance, we had a 23% reduction in recordable incidents this now makes 75% reduction for the last five years, which has been phenomenal.
Sales decline was 2.5% year-over-year, you can see it was a little over 6% from an organic standpoint this was significantly better than our guidance and about a 50% plus improvement from where we were on Q1.
Q2 was a record net income at $447 million, the EBITDA margin was a little over 23%, as reported or 20.8% adjusted.
You can see the significant improvement versus prior 230 basis points.
Year-to-date cash flow from operations was a record at 20.4% of sales.
And then the table to bottom there has got segment operating margin, both as reported and adjusted basis so I'd call your attention to the adjusted row, 20.4% segment our operating margin adjusted and again a giant increase versus prior plus 230 basis points.
So there's a lot of numbers on this page, we have a lot of companies to track.
So the easy way to remember this is, is the quarter we put up 320's and we happen to highlight them in gold, so greater than 20% EBITDA margin, CFOA margin and segment operating margin, so we're pretty proud of that.
And those are all who create results during the pandemic, so just fantastic job by the whole team.
If you go to Slide 6, we're going to talk about cash flow the cash flow quarter paid down $767 million of debt in a quarter.
If you look at our last 14 months it's $2.8 billion of debt this was a little over half of the acquisition debt, so we took almost organic size, just great progress there.
You see the ratios in the middle of the page there, of significance, if we go back a year ago, we were 4.0 and now we're at 2.7 on a gross debt to EBITDA basis.
And we've now reinstated effective in this quarter Q3 our 10b5-1 share repurchase program.
So I'll move to the next slide, which is our transformation of the company, and hopefully, just the last two slides are indicative of how the company has transformed, but I'd like to give a little more color and context, as to what we're doing.
So if you move to Slide eight, this is our strategy, summary on a page and it's flanked on the left side with why we win, which you've heard me talk about this in the past.
This is a list of our competitive advantages, and I've highlighted those.
So I'm not going to talk about on this really today, but their historical success factors that will continue on into the future.
I want to focus most of the time for my next couple of slides on where we're going and I've got a slide in each one of these bullets, and the output of really this historical success factors on where we're going, is that we want to be a top quartile company, and we want to stand out in the crowd and we think we're doing that.
So we go to Slide 9, the Win Strategy and this is 3.0, this is our business system a pound for pound this has been the most impactful change we've made to-date to the Win Strategy, and it's going to be Win 3.0 and our purpose statement.
There are going to be a powerhouse behind our future performance.
If you go to 10, you've seen our purpose statement enabling engineering breakthroughs that lead to a better tomorrow this is a statement that everybody has really rallied around the foundry inspiration within the company.
It's enabled everyone to connect their efforts to this higher calling, this higher purpose of life and really it helps to answer the question, how can we help through our customers create a better tomorrow.
And I've given what's going on with the coronavirus and the vaccine, Slide 11, is probably a great highlight of our purpose and action and just how essential we are to the vaccine value chain.
The way to read this slide to go left to right, and go in a clockwise fashion, we will start in the upper left hand corner.
So we're in a development and production phase of these vaccines mixing purification filtration and dispensing then you got to get the product moved around, so we are in sterile transfer containers especially designed and then where all of our motion and control technologies are in both air and ground transportation to move the product around the world.
You need to be able to start locally and that requires low temperature refrigeration.
So our refrigeration technologies are at play there.
And then when we administer to the patient, again you need on-premise refrigeration and then stoppers and syringe sales as part of engineered materials offering.
If you move to Slide 12, my last slide from my opening comments, I want to focus on our strategy to grow faster in the market and our proxy for the market is global industrial production growth, which is GIPI, that acronym.
So on the left hand side, it's a series of portfolio things that you've seen us make transforming the portfolio company buying three great companies, $3 billion of acquired revenue we're all accretive on growth, cash margins.
And a matter of fact, as an example, LORD grew mid-single digits last quarter, while the rest of the company, total company grew minus 6%.
On the right hand side, there is a list of organic growth strategies.
And what's interesting about this list with the exception of international distribution, these are all new with Win Strategy 3.0.
So I'm going to make a quick comment on each one.
So strategic positioning is really our effort to focus on stronger divisional strategies, and we have with every division we do three, three a month, and these are extremely productive conversations with our general managers to how they're going to position your division to win versus the competition.
Second, both are an Innovation we made two big changes one is the metric PVI which is product vitality index to measure of new products as a percent of sales looking at a five-year period for new products, and the new product blueprinting, which is that NPB acronym there, is really a change to our ideation process to create better ideas coming into the renovation funnel.
The output of what we're trying to do here is that we want our PBI context the percent of sales to grow by 600 basis points over the next five years and more innovative portfolio, better chances to grow, better margins etc.
And then Simple by Design, I've talked a lot about that.
It's a speed initiative, it's a cost initiative, it's a customer experience initiative, it's a recognition that 70% of your costs are tied up on how you design a product and Simply by Design is all about focusing on design excellence.
So when you put together design excellence with operational excellence, it's a dynamite pairing.
International Distribution is going to continue from the success we've had with 2.0.
Digital Leadership is really a four-pronged attack, digital customer experience, digital products, digital operations and digital productivity and digital productivity is where we have a concerted effort on our official intelligence and debt analytics.
And then lastly, a new incentive plan, our Annual Cash Incentive Plan are acronym ACIP and that's going to focus our divisions and or company on driving growth cash and earnings.
So it's this combination, and it's this combination that's helped us perform better on the top line organically, particular in the current downturn and it will be our catapult to growing fast in the market as we go forward.
So with that, I'm going to hand it back to Todd for more details for the quarter.
I'd like to direct everyone to Slide 14, and I'll just begin summarizing our strong second quarter results.
This slide displays, as reported and adjusted earnings per share for the second quarter, and I'll focus on adjusted earnings per share.
We generated $3.44 this quarter and that compares to $2.98 last year.
If you look at the breakdown of adjustments for the FY '22 or excuse me FY '21, as reported numbers it netted to $0.03 this quarter, and that is made up in the following buckets, business realignment expenses of $0.14, integration cost to achieve of $0.02, acquisition-related amortization expense of $0.62, and as we communicated last quarter, we are adjusting out the gain on the sale of land that amounted to $0.77.
And all-in the net tax impact of all of those adjustments, is $0.02.
Last year, our second quarter earnings per share were adjusted by $1.41, the details of which are included in the reconciliation tables for non-GAAP financial measures.
If you move to Slide 15, this is just a walk from the $2.98 to the $3.44 for the quarter and despite organic sales declining 6% and total sales declining 2.5%, adjusted segment operating income increased by $70 million or $0.11, that equated to $0.42 per share,so very strong operating beat for the quarter.
Detrimental margins on a year-over-basis are favorable, demonstrating the excellent operational execution, robust cost containment by our team members really in every segment and every region.
If you continue on the slide, we had a slight headwind from higher corporate G&A just $0.02, that was a result of market-based adjustments to investment tied to deferred comp.
And as Tom mentioned, our strong cash flow allowed us to pay off a significant portion of debt on a year-over-year basis that reduced our interest expense, that equated to $0.12 for the quarter.
And then if you look at the remaining items, other expense was just $0.01, slightly higher, we had a higher effective tax rate that impacted us by $0.03 and finally slightly higher diluted shares resulted in a $0.02 impact, that's how we get to the $3.44.
If you move to Slide 16.
This is savings from our Cost Out Actions and I know there's been a lot of questions on this, just on, from some of the early reports.
Just a reminder, these represent savings recognized in the year, as a result of our discretionary actions in response to the pandemic and volume declines, plus the savings we realized from our permanent realignment actions taken in FY '20 and also in FY '21.
So if you look at this, our second quarter discretionary savings exceeded our forecast and now amount to $190 million on a year-to-date basis.
We are now forecasting for the full year that discretionary total will increase to $225 million or an increase of $50 million.
The majority of that increase was recognized in the second quarter and roughly amounted to $35 million above our forecast.
Just a reminder, as demand continues to increase and our teams pivot to support growth, we expect these discretionary savings to be lower in the second half.
Permanent actions remain on track.
There is no changes to what we have communicated previously, our full-year forecast will generate savings of $250 million and that will be $210 million incremental.
And we believe, that this will help us generate a strong incremental margins that we have in our guidance for the second half.
If we move to Slide 17, this is just a walk of the total results for the company's our sales and segment operating margin, and as Tom mentioned, organic sales did decline by 6.1% this year.
The decline was partially offset by the contributions from acquisitions, that was 2.6% and currency impact of 1%.
And again, despite these lower sales, total adjusted segment operating margins improved to 20.4% versus 17.9% last year.
This 250 basis point improvement reflects all the positive impacts from our Win Strategy initiatives, the hard work and dedication to cost containment and productivity improvements, as well as savings from those realignment activities, I just spoke off and really performance of the recent acquisition.
So strong execution really across the entire company to get these results.
If we jump into the segments, if you go to Slide 18, looking at Diversified Industrial North America, sales there declined by 5.9%, acquisitions were a plus of 3.1% and currency-only slightly negatively impacted sales.
But again, even with these lower sales our operating margin for the second quarter on an adjusted basis increased sizably to 21.3%, last year it was 18.2%.
So again another impressive 310 basis point improvement, focused on our long-term initiatives around Win Strategy along with the productivity improvements, diligent cost containment actions and really some increased synergies we're seeing out of the LORD acquisitions.
So if we go to the next slide, Slide 19, for Diversified Industrial International, organic sales for the quarter increased by 3.1%, acquisitions added 3.2% and currency accounted for 3.5%, again strong operating performance here, for the quarter, we reached 20.3% of sales versus 16% in the prior year.
And again, same story, Win Strategy initiatives, strong synergy growth and really our teams around the world are rallying together in light of the pandemic.
If we go to Slide 20, and talk about Aerospace Systems' Segment.
And again, what we'll see here is a decline of 20.9% for the quarter, acquisitions helped us by 0.4%, and again, a small currency impact of 0.1% really declines in the commercial business is both in the OEM and aftermarkets and markets were the main impact, these were partially offset by higher sales in both military OEM and military aftermarket sales.
Operating margins for the second quarter was 18% versus last year's 20.2%, this resulted in a detrimental margin of 28.8%, which is in line with our expectations, and really the result of all the previous actions we've taken to realign the Aerospace business to current market conditions, along with strong cost controls and really helping to offset the pandemic imposed to the mix that we're seeing from the commercial and military businesses.
Slide 21, is just some highlights on cash flow.
Tom already mentioned this, but our operating cash flow activities increased 64% year-over-year to a record of $1.35 billion of cash, this is an impressive 20.4% of sales.
Our global teams are really focused on this, very disciplined in managing our working capital across the world, and we're really focused on delivering strong cash flow generation.
If you look at free cash flow, year-to-date, we now move to 19%, that's an increase of 78% versus prior year and our cash flow conversion is now 164% versus 130% last year.
So just strong cash flow performance from the team, very impressive results.
If we want to just focus on orders, real quick moving to Slide 22, our orders came in at flat this year or this quarter I should say and that was really driven by plus 1% and our Industrial North American businesses plus 10% in our Diversified Industrial businesses and minus 18% on a 12 month basis in Aerospace.
So, all-in, we came in flat and that's the first time in seven quarters, I believe that the numbers have been not negative.
If we move to Slide 23, in the guidance, obviously, we have a pretty large guidance increase.
We are now providing this on an as reported and adjusted basis.
And based on the strong performance we just spoke off in the first half, all the current indicators that we see right now we have increased our total outlook for sales to a year-over-year increase of 1.7% at the midpoint,this includes the forecasted organic decline of 3.4%, offset by increases from acquisitions of 2.9% and currency of 2.2%.
And again, just a reminder we've calculated the impact of currency to spot rates based on the quarter ending December 30th and we've held those rates steady as we look through the second half of our fiscal year.
In respect to margins, for adjusted operating margins by segment, at the midpoint we are now forecasting to increase margins 150 basis points year-over-year and that range is expected to be 20.2% to 20.4% for the full year.
And if you note for items below segment operating income, there is a fairly significant difference between the as reported estimate of $388 million and the adjusted forecast of $487 million.
The difference is that land sale that we spoke about that's $101 million pre-tax, $76 million after-tax that was recognized as other income in Q2.
Full-year effective tax rate, no change, we still expect that to be 23%, and for the full year, the guidance range for earnings per share on an as reported basis is now $11.90 to $12.40 or $12.15 at the midpoint and on an adjusted per share basis, the guidance range is now $13.65 to $14.15 or $13.90, at the midpoint.
Adjustments to the as reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the year associated with savings projected from those actions to be $50 million in the current year, and acquisition and integration cost to achieve $50 million of expense.
Synergy savings for the lower acquisition are now projected to reach $100 million, that is an increase of $20 million from our prior stated numbers of $80 million and that is included in our guidance.
Exotic synergies remain are expected to be $2 million for the full year.
Just a reminder, acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year, and some assumptions that we have baked into the guidance here, at the midpoint, our sales are divided 48% first half 52% second half, and both, adjusted segment operating income and adjusted earnings per share is split 47% first half, 53% second half.
For the third quarter of FY '21, we are forecasting adjusted earnings per share to be $3.54 at the midpoint and that excludes $0.57 or $97 million of acquisition-related amortization expense, the business realignment expense and integration cost, we achieved in the quarter.
So if you look at -- move to Slide 24, this is really just the walk from our previous guide to our revised guide.
We had guided at $12 per share last quarter based on the strong second quarter performance, we exceeded our estimates by a $1.6 and we've mentioned this, but the improving demand environment along with the strong operational performance, some additional extended discretionary savings, the permanent restructuring savings, and increased LORD synergies, we feel confident in raising our forecasted margins, which at $0.85 of segment operating income over the next two quarters for the remainder of the fiscal year.
So the majority of this increase is based on operational performance.
This calculated to an estimated incremental margin of 41% for the second half and then some other minor adjustments to the below segment operating income lines are a negative impact of $0.01 and that's a net of interest expense and income tax.
So that's how we get to the $13.90.
That is approximately a 60% increase from our prior guidance.
And just want to wrap things up with these great results don't happen by accident, they're driven by a highly engaged global team.
Our focus on safety, high performance team is lean in Kaizen is driving an ownership culture within the company, hence resulting a top quartile engagement as well as top quartile results.
We talked about the portfolio, it's a big competitive advantage of us at connectivity, the transformation on those three acquisitions is a fact that they're outgrowing and generating more cash and margins on legacy Parker, our performance over the cycle, but we're just reflecting the last 5 years and just use round numbers, our margins are up 500 basis points.
In a five-year period of time that was not just the easiest five-year period of time for industrial companies.
And then our Win Strategy 3.0 in particular in the Purpose Statement are going to be the powerhouse behind accelerating our performance intoo the future.
And Gigi, I'm going to hand it back to you for start the Q&A. | q2 adjusted earnings per share $3.44.
increases fiscal 2021 earnings per share guidance midpoint to $12.15 as reported, or $13.90 adjusted.
qtrly orders were flat for total parker.
during quarter, company made debt repayments of $767 million.
outlook for key end markets continues to be uncertain in current environment.
increased guidance for earnings per share to range of $11.90 to $12.40, or $13.65 to $14.15 on an adjusted basis for fy 2021. |
As Elaine said, this is Todd Leombruno, Chief Financial Officer speaking.
Reconciliations for all non-GAAP measures are included in today's materials.
Tom will then close with key messages and then Tom, Lee and I will take any questions the group may have.
It's really more than just this quarter, it's really been the whole year and the performance to the pandemic and also the transformation of the company into a top quartile diversified industrial company.
These results are all because of your efforts.
So let's look at the quarter on top of slide three.
Starting with safety, as we always do, we had a 33% reduction in record incidents.
We're still in the stop quartile, the combination of safety, lean, our high-performance team structure in Kaizen, were all driving high engagement and high performance, you see that show up in our results.
Sales grew about 1%.
The organic decline was minus 1%, but in particular, if you take out aerospace and look at the industrial only, industrial segment grew organically almost 4%, so that was significant.
We had 5 all-time quarterly records.
You can net income, EPS, and the segment registered for Parker, North America and international.
EBITDA margin was very strong at 21.6% as reported, 21.8% adjusted a huge increase versus prior 250 basis points, year-to-date cash flow was an all-time record of $1.9 billion and 18 -- a little over 18% of sales.
If you go to the very last row of this page, you see segment operating margin on an adjusted basis, 21.4% and again, a significant improvement versus prior, plus 240 basis points.
So a terrific quarter and really tough conditions.
If you go to the next slide.
I want to talk about the transformation of the company.
The old adage that a picture is worth a thousand words, and so I want to take you to slide five, and this is really the picture that speaks to the transformation of the company.
Let me explain the chart here for a minute.
So you've got in gold Bars, the adjusted EPS.
The blue line is global PMI plotted on a quarterly basis.
If you look at the last six years and look at that dotted green line, and compare that to the blue global PMI line, you see they are much less correlated effect there divergent.
And there's been a step change in performance.
The earnings per share over this time period is more than doubled from $7 to our guidance of $14.80, so approaching $15 and was propelled that over that time period as an EBITDA margin that's grown 600 basis points.
So you might ask how, how that happened?
It's really that blue takeaway at the bottom of the page, it's our people.
That focus the alignment, the engagement that comes when you have people think and act like an owner.
The portfolio, which is a combination of our interconnected technologies and the value they bring and the capital deployment we've done buying some great companies that have added to the strength of the company.
Then our performance, which really sits with the strategy of the company, Win Strategy 2.0, at the kind of the beginning of this journey and then The Win Strategy 3.0 most recently in FY 2020.
So this combination is really transformed the company.
You see that as evidenced in this slide, and we're very proud of it.
But if you go to slide six.
So that's what's kind of in the rearview mirror.
But going forward, we're equally excited about where the company is going to go.
And I call this a convergence of positive inflection point.
So on the left-hand side is kind of those external inflection points.
You're familiar with a lot of these, the macro environment industrial momentum, you see that in our positive orders and positive organic growth industrial we showed in this quarter.
Aerospace is going to recover, question is just what the trajectory will be and the timing?
Vaccines are making progress around the world.
There's going to b e a significant amount of climate investment.
And if you put all that on top of, I didn't write all these down, but low interest rates pent-up CapEx demand and fiscal spending, you have a very attractive environment for industrials for the next several years.
On the right-hand side is really the internal things we've been doing, Win Strategy 3.0, in particular, but that last slide that I just went through, spoke to all those internal actions because that's what's been propelling us.
Remember that last period, last six years, really had very little help from a macro standpoint.
So you look at the three major things I highlight here, performance becoming top quartile strategies to grow faster in the market.
You've seen our margin expansion, great cash flow generation consistently over the cycle.
Portfolio, we've added three great companies, all accretive on growth cash and margins.
And with the rapid debt paydown that we've done, we're positioned to do future capital deployment, which is very exciting.
The technology, I'll get into in the next slide, but the interconnected technologies really is distinctive for us.
And then with a climate investment, we are very well positioned with our suite of clean technologies to take advantage of that.
So I would tell you that my view and the team's view this is about as good an environment as we've seen in a number of years.
Go to slide seven.
You've heard me talk about this page.
The power of this interconnectedness technology brings the value accretion for customers what I want to do today in light of the clean technology discussion is give you four examples of how this suite of technologies helps with a more clean environment, clean technology world.
So the first would be electrification.
And we've got a full portfolio of technologies here, hydraulic, electrohydraulic, pneumatic, electromechanical, no competitors got that breadth of technologies.
And we formed about four years ago, the Motion Technology center, which put the best and brightest of engineers to Motion technologies, things that fly as well as things with wheels underneath them.
So we put the -- the motion and the aerospace teams together.
And this team has come up with a great listing of products around motors, inverters and controllers.
But there's also in addition to the typical motion opportunities, there's other challenges around electrification like light weighting, thermal management, shielding, structural adhesives and noise vibration, all these to accomplish what we have a legacy engineered materials and with the LORD acquisition, we're well positioned to take advantage of those.
Secondary is batteries and fuel cells that utilize most of the technologies see on this page, third would be clean power sources and that kind of falls into two buckets: Renewables, which we do a lot -- we've always have done a lot of wind and solar; Then the hydrogen, we just recently joined the Hydrogen Council, and it's going to be both onboard as well as infrastructure opportunities as you go out for the next many years.
And it's really building in our high-pressure and our cryogenic applications that we have today.
And then we've been a more sustainable company for a long time and really the -- a clean technology example for us that started a lot of things is filtration.
And our filtration business protects and purifies assets and equipment for people for a more sustainable environment.
So we feel very good about this portfolio for climate investment in the future.
Going to slide right.
I just want to remind you of our purpose statement enabling engineering brakes that lead into a better tomorrow it's been very inspirational for our team.
And I think it comes more to light when we give you examples of the purpose in action, which is on slide nine.
And again, kind of following with that clean technology discussion, when I'd highlight electrification, I'm going to highlight in particular, electric vehicles.
On the left-hand side, you see applications that are changed because of an HEV or EV versus a combustion engine.
On the right-hand side, you see the various technologies that Parker has that addresses those applications.
I won't read all those under the Bayou see the major category, safety, related technologies, things that say, weight, thermal management and a variety of things we do critical protection.
The big opportunity for us, so we obviously are in the factories helping to make these vehicles and we'll always do that, but the big opportunity for us is the onboard content around Engineered materials.
Our bill of material for an EV or HEV is 10x what it was in a combustion engine.
And it's one of the key reasons why our LORD business has grown so nicely even despite the pandemic we grew 11% organically in Q3 from LORD.
So we're very happy with the progress so far and our purpose and action around electrification as an example.
I'll just orientate everyone to slide 11, and I'll do a quick review of the financial results for the quarter.
Tom mentioned some of these, so I'll try to move quickly.
Sales for the quarter were $3.746 billion.
That is an increase of 1.2% versus prior year.
We are proud of the fact that the Diversified industrial segment did turn positive organically.
Industrial segment organic growth was 3.7%.
Obviously, that was offset by the Aerospace Systems segment, their organic decline was 19.7%.
So all in, that drove total organic sales to minus 1.0.
Currency was a favorable impact this quarter of 2.2%.
And just a note in respect to acquisitions, this is the first full quarter that we report both LORD and exotic in our organic growth numbers.
So therefore, the acquisition impact was zero.
Moving to segment operating margins, you saw the number, 21.4%, that's an improvement of 240 basis points from prior year.
It's also an improvement of 130 basis points sequentially, strong margin performance there.
And that really was a result of just broad-based execution of the Win strategy.
We continue to manage our cost in a disciplined manner.
The portfolio additions in CLARCOR, LORD and Exotic are all performing soundly.
And you've all been familiar with the restructuring activities that we've done in FY 2020 and in FY 2021.
Those are on track and on planned and generating the savings that we expected.
Adjusted EBITDA margins did expand 250 basis points from prior year, finished the quarter at 21.8%.
And net income is $540 million, which is a 14.4% ROS.
That's increased by 22% from prior year.
Adjusted earnings per share is $4.11 that is $0.72 or 21% increase compared to prior year's results of $3.39.
And as Tom said, it's just really outstanding performance.
And I'd also too like to commend our global team members for generating these results.
If you slide to slide 12, this is really a bridge of that $0.72 increase in adjusted earnings per share versus prior year.
And the story here across the board is just strong execution from all of our businesses.
This produced robust incrementals in our Diversified Industrial segment and really commendable decrementals in the Aerospace Systems segment.
Adjusted segment operating income did increase by $98 million or 14% versus prior year, that equates to $0.58 of earnings per share and really is the primary driver of the increase in our adjusted earnings per share number.
Interest expense was favorable to prior by $0.12 as we posted yet another quarter of sizable repayment of our serviceable debt, and that is really benefiting from our strong cash flow generation.
Other expense, income tax and shares netted to a $0.02 favorable impact compared to prior year.
Moving to slide 13.
This is just an update on our discretionary and permanent cost out actions.
And this is just a reminder these represent both savings recognized in the current fiscal year from our discretionary actions in response to the pandemic and our permanent realignment actions that were taken at the end of FY 2020 and throughout FY 2021.
Discretionary statements came in exactly as we guided, at $25 million for Q3, and now total $215 million year-to-date.
There is no change to our discretionary savings forecast for Q4.
That remains $10 million.
And we continue to forecast the total year to be $225 million in full year savings.
Just to note, with the increased demand levels that we're seeing from our positive order entry, our teams have really pivoted to growth and really now these discretionary actions that we knew would diminish across the calendar year have now really been based in reduced travel expenses.
If you move to permanent savings, we realized $65 million in Q3.
Our total year-to-date is $190 million.
The full year forecast, again, here remains, as previously communicated, at $250 million.
One item to note, we did guide that the cost of the FY 2021 restructuring would come in around $60 million.
It's now expected to be $10 million less or $50 million but there is no change to the expected savings that we are forecasting.
Total incremental impact for the year for both permanent and discretionary savings is $260 million.
And just one other thing to note, this will probably be the last quarter that we detail these items as we anniversary the pandemic-induced volume declines and really focus our attention on growth.
So the takeaway is savings are on track, no changes other than the expense will be a little bit less.
If you go to slide 14, this is just highlighting some items from our segment performance for the third quarter.
In our diversified North America business, sales were $1.76 billion.
That is an improvement in organic sales sequentially from Q2.
It still is down 1.2% from prior year, but if you look at the adjusted operating margins, we did increase those operating margins by 190 basis points versus prior year and reached 21.9% for the quarter.
We were able to increase these margins despite that sales decline due to our disciplined cost management, those portfolio improvements we've talked about and really, margins in this segment are at a record level.
If you slide over to order rates, another positive here, they improved significantly from plus one last quarter, and they're now ending the quarter at plus 11.
Looking at the diversified industrial international sales, robust organic growth here of 11.1%.
Total sales came in at $1.39 billion, and another great story here, adjusted operating margins expanded substantially and reached 21.6%, an improvement of 400 basis points versus prior year.
Clearly, the double-digit organic growth, coupled with the cost containment and the effort from our global team really generated this level of record margin performance as well.
And again, another plus here is order rates accelerated in this segment and are now plus 14% for the quarter.
If you look at aerospace systems, they continue to really perform soundly in the current environment sales were $599 million for the quarter.
Organic sales showed a slight sequential improvement from Q2, but are still down basically 20% from prior year.
Commercial end markets are still under pressure.
However, there is strength in our military end markets.
What's nice here is operating margins were 19.4%, 30 basis points better than prior year, despite that 20% decline in volume.
And if you look at our fiscal year, that performance of 19.4% is the highest they've done all year, so we're really proud about that.
Decremental margins are also impressive here in this segment.
This quarter, they're 18% decremental margins.
Order rates appeared to have bottomed and finished at minus 19% for this quarter.
And just a reminder, that is on a rolling 12-month basis.
So overall, we're pleased about a number of things this quarter.
That diversified industrial segment, organic growth of 3.7% as a positive.
Total segment margins improved 240 basis points from prior year and at record levels.
Orders have turned positive and are plus 6% and our teams really continue to leverage the Win Strategy to drive significant improvements in our business and increased productivity and generate strong cash flow.
So with that, I'll ask you to go to slide 15.
This is just some details on our cash flow.
Year-to-date cash flow from operations is now $1.9 billion.
That's 18.1% of sales.
That's up 45% from prior year, and it is a year-to-date record.
Improved net income margin, as we've talked about before, is really a key driver in this.
It's created a step change in our cash flow generation, but I'd also like to commend our team members' intense focus on our working capital metrics.
Each of our working capital metrics is improving and showing positive results, and I'm really proud about that.
Moving to free cash flow at 16.8% of sales.
That's an increase of 630 basis points over prior year, and our free cash flow conversion is now 141%, which compares to 1.22% in the prior year, so great cash flow generation there.
Moving to slide 16, I just want to mention some things we've done on our capital deployment.
We did pay down $426 million of debt this quarter.
That brings our total debt reduction to a little over $3.2 billion in the last 17 months since the LORD acquisition closed.
This reduced our gross debt-to-EBITDA to 2.4%, it was 3.8% in the prior year, and net debt-to-EBITDA is now 2.2%, and that's down from 3.5% in the prior year.
Last week, you saw our Board of Directors approved a quarterly dividend increase of $0.15 or 17%.
This raises our quarterly dividend from $0.88 to $1.03 per share and extends our record of increasing the annual dividends paid per share to 65 consecutive years.
Have positioned us to increase our full year outlook for sales to a year-over-year increase of 4.5% at the midpoint and the breakdown of that sales change is this.
Organic sales are now expected to be flat year-over-year.
Acquisitions will add 3%, and the full year currency impact is expected to be 1.5%.
We've calculated the impact of currency to spot rates as of the quarter ended March 31 and we held those rates constant to estimate the Q4 21 impact.
Moving to segment operating margins.
Our guidance for the full year is raised to 20.8% and that would equate to an increase of 190 basis points versus prior year.
And just some additional color, some things to note.
Corporate G&A, interest and other is expected to be $381 million on an as-reported basis and $479 million on an adjusted basis.
The main difference between those two numbers is that $101 million pre-tax or $76 million after-tax gain on real estate that we recognized and adjusted in the other income line in Q2.
That's the main item.
If you look at our tax rates down just a little bit.
We're now expecting the full year tax rate to be 22.5% and moving to earnings per share on a full year basis.
Our as-reported earnings per share guidance range has increased from $12.96 to $13.26, that's $13.11 at the midpoint.
And on an adjusted basis, we're increasing the range from $14.65 to $14.95, and that's $14.80 at the midpoint.
For Q4, adjusted earnings per share is projected to be $4.18 per share, that excludes $0.54 or $93 million of acquisition-related amortization expense, the finishing of our business realignment expenses and integration cost to achieve.
If you look at slide 18, this is just a bridge of our increase -- our adjust earnings per share guidance, these results that we just reviewed you can see the outperformance that we had in Q3.
That increases our previous guide by $0.57.
The order strength that we just reviewed and really the exceptional operation and execution by our teams have allowed us to increase Q4 guide by an additional $0.33, and that is exclusively based on increased segment operating income.
This raises our full year earnings per share guide by about 6.5% from prior guide.
So we've got a highly engaged team.
You see that is what's driving our results, the ownership culture that we're building.
Record performance in difficult times, these numbers are historical all-time highs for us and not the best of times.
The convergence of positive inflection points, we feel it points to a very bright future.
And the cash generation and deployment is evidenced by the rapid debt pay down, the acquisition performance.
And our dividend increase, which I would just highlight the first time, we've ever been over at $1.03 on a quarterly dividend, which we're very proud of.
So the Win Strategy 3.0 and our purpose statement is well positioned, in addition to those inflection points for a very strong future. | q3 adjusted earnings per share $4.11.
sees fy earnings per share $12.96 to $13.26.
q3 sales $3.75 billion versus $3.7 billion.
sees fy adjusted earnings per share $14.65 to $14.95.
sees 2021 organic sales flat compared with prior year. |
Today's agenda appears on slide three.
We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing an update on Parker's response to COVID-19.
Tom will then discuss highlights from the fourth quarter and full year.
Following Tom's comments, I'll provide a review of our fourth quarter performance together with guidance for fiscal year 2021.
Tom will then provide a few summary comments, and we'll open the call for a question-and-answer session.
We'll do our best to take all the calls we can today.
Please refer now to slide four, and Tom will get us started.
A couple of comments from me before we start slide four.
First, I hope that everybody listening in that you and your families are safe and healthy.
And I'd like to extend our thoughts to those affected by this crisis, and our deepest sympathies go out to those that have lost loved ones as a result of the virus.
First, we delivered outstanding performance during unprecedented times, as you saw by the quarter and by the full year results.
And we're living up to our purpose.
We're providing products and technologies that are helping society through the crisis and helping to do our part to create a better tomorrow for people.
So on slide four, we talk about our response to pandemic.
It starts with safety.
That's the first goal on everyone's strategy.
And really, when we made that change in 2015, it provided a great foundation for us to respond to this pandemic.
We're helping society through the crisis.
Our technologies are essential.
What was interesting with all the government orders that came out, almost every one of those deemed us as an essential manufacturer.
Our purpose and action is more clear than ever, and I'll give you a few examples of that.
And our manufacturing capacity has stayed near-normal levels throughout the pandemic.
The governing principle that's really been the takeaway on this page, which is our two safest places that we want for our people is to be at work and at home.
And we're doing everything we can to live up for that.
So on slide five, the performance during this health and economic crisis and the confidence in the results that you saw in Q4 really come from this list that you see.
I want to just touch on the very last bullet, to engage people.
This was a big change that we made in Win Strategy 2.0 2015, and we recognized the strong correlation between safety, engagement and business performance.
We are now top quartile in safety, top quartile in engagement, and you can see the significant progress we're making toward being top quartile on our financial performance-based on the results that we just turned in.
If you go to the next page, I'm going to talk about the strength of our portfolio and our purpose and action.
And on slide seven is the unmatched breadth of technologies that we have, those 8-motion control technologies.
They are our competitive differentiator.
It's how we bring value to customers.
And our customers see it.
60% of our revenue comes from customers who buy four or more of these technologies.
Go to slide eight.
Our capital deployment strategy has been thoughtful and we've been transforming this already great portfolio through these strategic acquisitions by acquiring CLARCOR, LORD and Exotic.
This is $3 billion of acquired sales.
We bought three great companies, the three largest in our history.
And they've increased our resilience because of their technologies and because of their aftermarket content.
And you've seen in the results they are accretive to growth, margins and cash.
And this was especially evident during a crisis.
And we've been able to equal or beat our synergy goals despite the macro conditions.
Slide nine is our purpose statement, enabling engineering breakthroughs that lead to a better tomorrow, which has really acted as our compass and our guiding light and provide a lot of inspiration to our team.
On slide 10, just some examples of that purpose in action.
On the left-hand side is the food supply, we're basically from the farm all the way to your kitchen table.
Transportation, whether it's truck, air or rail, we're helping the world move products and goods around the various customers.
In the middle section there on life sciences, we're helping patients, whether it's in the hospital or in the ambulance.
And that probably the poster child for us and the one that's really is probably the signature of the purpose in action for the last quarter was the work we did on the ventilator.
So six of those eight technologies that I showed in the prior page or two are ventilators.
And we saw dramatic, you might expect, ramp-up in production needs based on what was happening in the society with existing customers, and we took on a lot of new customers that could not find suppliers that could keep up with this production demand.
And in some cases, we went from zero to full production in weeks, and it was really a remarkable job by the divisions involved.
On the right-hand side in the upper right, we are an essential manufacturer, as I mentioned earlier.
And basically, if you look at any plant in the world, you can probably find a Parker part somewhere in that plant.
So we're an essential manufacturer because we're needed by everybody else.
Then on power generation, whether it's traditional renewables, we're there to help customers with their energy source.
Moving and shifting to really a summary of the quarter and the full year on slide 12, it was outstanding.
It was a difficult time, probably the most difficult in the history as a company.
The organic growth came in at 21% decline.
So we clearly felt that impact we paid down debt by $687 million.
That was on top of what we did in Q3.
And when you look at margin on the two different categories we're going to look at here, it was just terrific performance.
On operating margins, it's better to look at it without acquisitions, given the acquisitions we've got and not and don't have in prior periods.
But if you look at the adjusted growth there, 18.1% versus 17.6%.
So 50 bps increase in Q4 as a 16% decremental, just fantastic.
That's a fantastic job by all the groups and divisions around the company.
And then without acquisitions, EBITDA it's a good way to look at this, apples-to-apples.
If you go down to the last row, 20.4%, 160 basis points improvement, probably the first time, at least in recent memory that we've ellipsed 20% EBITDA margin.
So this is really a combination of the base business performing well, the Win Strategy, the prior period restructuring and bringing on acquisitions that are accretive on margins.
If you go to slide 13, a quick summary of a full year.
We've made continued progress.
I would just remind people that we were already in an industrial session before the pandemic hit.
So these accomplishments really are up against a pretty stiff headwind.
And on safety, 35% reduction in recordable incidents.
This puts us in the top quartile and I would just contrast, five years ago, we were in the fourth quartile on safety and we're not in the first quarter, so remarkable progress there.
Cash flow from operations from a dollar standpoint is an all-time record.
So that's an all-time record in the history of the company, $2.1 billion.
If you got to hit a record, cash is a good place to hit a record on.
You can see the CFOA margins at 15.1%, free cash flow conversion 152%.
And then just some debt metrics, leverage metrics there.
You can see that we improved on our gross debt, down to 3.6 to 3.8 times.
And then on a net debt stand point, is at 3.3 from 3.5.
What we're very proud of is the cumulative debt reduction in FY 2020 was $1.3 billion, approximately 25% of the transaction debt.
So in just a little over eight months of acquisition ownership we, paid off a quarterly of debt that we took on to acquire the company.
It's just a great job by the teams here.
And then moving on 14 to the full year.
Again, just great margin performance for that.
So the full year organic was down about 10%.
and again, same methodology without acquisitions, look at the operating margin that, to us, simply hold out flat at 17.2%, which is very hard to do on a volume drop and came in at a 17% decremental, which is a best-in-class performance.
With acquisitions, looking at EBITDA adjusted, we raised it to 19.3%, again, showing the combination of the Win Strategy and acquiring companies that are accretive on margins to help out the total business.
So if you move to the transition here.
So the Parker transformation, it's happening.
Those numbers that you saw in the prior pages don't happen just by accident or by luck.
So what we've been doing to drive that.
So if you go to page 16, all roads lead to the Win Strategy.
And I would say it's the combination of our decentralized divisional structure with the Win Strategy that drives this unique ownership culture that is really putting up these kinds of results.
If you go to page 2017, just to elaborate a little bit more on what's different.
We started off this time period with a major restructuring activity that's really started in FY '14, and you look at the cumulative restructuring we did for those three years.
It was approximately $270 million of restructuring.
So that really set us on a path of putting the right kind of cost structure in place.
We've built upon that.
We launched simplification in 2015.
Immersed simplification on a broad standpoint is a structure and organization design on 80/20 and on Simple by Design.
But just from a structure standpoint, you can see that we reduced 1/3 of the divisions of the company.
And we made two major updates to the Parker business system, which is the Win Strategy.
Building on the success of the original Win Strategy, we did 2.0 in 2015 and of course, 3.0, just recently and we're very excited about that because we have a ton of potential.
We just launched it and has a lot of runway in front of it.
We talked about the power of the companies that we acquired.
And you see that resilience coming through in the business like.
I'm going to give you two slides coming up that will show you that resilience, objectively, looking at both margins and growth.
But don't underestimate the takeaway of the purpose statement has really provided great create alignment and aspiration.
And there's a big difference between being at work and being inspired by your work and purpose does that for you.
And that's what our people feel about that.
So on slide 18, talk about the margin side.
And I showed you this last quarter.
And this is looking at the last five manufacturing recessions.
And I would argue FY 2020 has actually got two separate recessions in it.
The industrial recession we were already in and the pandemic that came in, in March.
But you can see whether you look at it on an as-reported basis or adjusted, you would see the significant step change in performance over these manufacturing recessions type here.
Something we're very proud of and something that we intend to keep doing.
And if you go to 19, this was a look at top line resilience and go to 19.
So I recognize that the Great Recession and COVID-19 is not the same, but these are two examples of significant shocks to the system.
My view, COVID-19 is worse.
If you look at the GDP reduction across the world in the last quarter, it dwarfs any kind of GDP reduction happened in the Great recession.
But let's just say, for the sake argument that the organic that the environment was the same.
And we took the worst period that happened in the Great recession happened to be Q4 as well, and FY '09 was down 32%, and then what did we do last quarter?
We did minus 21.
Now hopefully, that'll be our worst quarter, time will tell.
But we think it's going to be the worst quarter.
So why is it better?
There's some distinct structural reasons why it's better.
First, the CLARCOR acquisition is now part of our organic performance, and it has 80% aftermarket.
So that's more resilient.
The percent revenue that we get from innovative products and the way we calculate that as a percent of revenue is new to the world, new to the market, divided by our total revenue.
That, over the last five years, that has more than doubled over this period of time.
Innovative production more resilient, they grow faster, better margins.
And then you've heard us talk about how we changed the mix in the international distribution by raising that by 500 bps over this period of time.
And we've had better customer experience.
We have lots more to do on customer experience, but that's been another contributor.
So the top line, we're not immune to the cycle.
We felt it, obviously, but it is better than we were before, and there's distinct reasons why it's better.
And it's only going to get better in the future because LORD and Exotic, not yet in our organic numbers.
And you can see, by the results we've showed so far, they are performing better than legacy Parker We move to slide 2020.
Something we're very proud of, our cash generation history.
I mentioned the CFOA record at $2.1 billion.
And then we've just been very, very consistent.
Good times and bad times, you've seen 19 consecutive years up to double-digit CFOA and greater than 1% free cash flow conversion.
So I want to move to FY 2021 and the outlook, and we decided to reinstate guidance.
And you can make good arguments as to why not to give guidance with the uncertainty.
And we're not trying to pretend that we're any smarter than anybody else because we're not.
However, we're four months smarter than we were the last earnings call, and we've proven that we can operate safely and with strong results.
And while the future is uncertain, we felt we are in the best position to communicate to shareholders and provide them the insight as to where we're going.
And hence, that's why we decided to do guidance.
Of course, it's an opportunity we'll have every quarter, and we will certainly get smarter as order entry comes in.
And we'll update your thoughts as we go through and certainly, we'll go through this in more detail in the Q&A portion of the call.
But I wanted to give you that context as to why we decided to guide before Cathy actually gives you some of the specific numbers.
So then if you go to 22, a big part of our success in Q4 was our actions on costs.
And this is a combination, as I've mentioned, of prior period restructuring, the Win Strategy and all the things we've been doing for years.
And then the speed and agility of our pandemic response.
But what you see here in contrast between what we did in Q4 and what we're going to do in FY 2021 is a strategic shift in the cost to a more permanent cost action basis.
So you can see the little donut chart in Q4 of FY 2020, 12% permanent, and that's going to move to 55% permanent in FY 2021.
If you look underneath the donut for Q4, you see permanent actions.
These are all savings.
It was $25 million.
And that was spot on what we told you last quarter.
And you see the $175 million of savings that was less than what we told you.
We told you a range of $250 million to $300 million.
And it was lower because our volume was better, which was a good thing.
We didn't necessarily give you specific guidance last quarter, but we in our own internal planning, we were projecting a 30% decline in volume.
And hence, that's why we gave you the range in discretionary, came in at minus 21%, which we were grateful for, and we didn't need to do as many discretionary actions.
We needed people to work more hours, which was a good thing.
Then when you move to 2021, you see discretionary of $200 million.
That will be mostly in the first half, and we will gradually wean off of that as we go through the first half.
There will be some in the second half.
There will be more local driven by what the general manager needs based on local conditions and predominantly help balancing plant hours to demand.
But then you see a permanent action rising to $250 million.
And if you look at when COVID hit, and you take the second half of FY 2020 and add all of FY 2021, and look at our restructuring cost.
So we did $65 million we're proposing $65 million of restructuring in FY 2021.
We did $60 million in the second half of FY 2020.
So that's $125 million, of what I would call COVID-related restructuring that's going to generate this $250 million of savings.
So that might seem a little more efficient than normal.
And the reason for that is it's going to be an asset-light restructuring plan.
We will have very few plant closures, as a result, that's why it's a lot more efficient than normal.
So with that, I'm going to hand it back to Cathy for more details on the quarter.
I'd like you to now refer to slide 24, and I'll summarize the fourth quarter financial results.
This slide presents as reported and adjusted earnings per share for the fourth quarter.
Current year adjusted earnings per share of $2.55 compares to $3.31 last year.
Adjustments from the 2020 as reported results netted to $0.28, including business realignment expenses of $0.37 and lowered acquisition integration and transaction expenses of $0.05.
These were offset by the tax effect of these adjustments of $0.09 and the result of a favorable tax settlement of $0.05.
Prior year fourth quarter earnings per share had been adjusted by $0.14.
The details of which are included in the reconciliation tables for non-GAAP financial measures.
Moving to slide 25.
You'll find the significant components of the $0.76 walk from prior year fourth quarter adjusted earnings per share to $2.55 for this year.
With organic sales down 21%, adjusted segment operating income decreased the equivalent of $0.61 per share or $99 million.
Decremental margins on a year-over-year basis were 19%.
Decremental margins without the impact of acquisitions were just 16%, demonstrating excellent cost containment and productivity by the teams.
Offsetting this decline, we gained $0.07 from lower corporate G&A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Interest expense cost an additional $0.15 of earnings per share as debt is currently at a higher level because of the acquisitions.
Income taxes accounted for an additional $0.08 of expense because we had fewer favorable discrete tax credits in the current quarter.
Slide 26 shows total Parker segment sales total Parker sales and segment operating margin for the fourth quarter.
The fourth quarter organic sales decreased year-over-year by 21.1%, and currency had a negative impact of 1.1%.
Acquisition impact of 8.1% partially offset these declines.
Total adjusted segment operating margins were 17.4% compared to 17.6% last year.
This 20 basis point decline is net of the company's ability to absorb approximately 100 basis points or $33 million of incremental amortization expense from the acquisitions.
On slide 27, we're showing the impact LORD and Exotic had on fourth quarter FY 2020 on both an as-reported and adjusted basis.
Sales from the acquisitions were $298 million and operating income on an adjusted basis were $32 million.
The operating income for LORD and Exotic includes $35 million in amortization expense.
I'd like to point out that the improvement of 50 basis points in legacy Parker operating income despite the $818 million drop in sales.
The great work the teams did on controlling costs resulted in a 16% decremental margin for the quarter within the legacy businesses.
Moving to slide 28.
I'll discuss the business segments, starting with diversified industrial North America.
For the fourth quarter, North America organic sales were down 24.7% while acquisitions contributed 7.6%.
Operating margin for the fourth quarter on an adjusted basis was 16.5% of sales versus 18.4% last year.
This 190 basis point decline includes absorbing approximately 60 basis points or $9 million of incremental amortization.
North America's legacy businesses generated an impressive decremental margin of 24%, reflecting the hard work of diligent cost containment and productivity improvements, a favorable sales mix together with the impact of our Win Strategy initiatives.
I'll continue with the Diversified Industrial International segment on slide 29.
Organic sales for the fourth quarter in the industrial international segment decreased by 15.4%.
Acquisitions contributed 5.4%, and currency had a negative impact of 2.9%.
Operating margin for the fourth quarter on an adjusted basis increased to 16.8% of sales versus 16.4% last year.
This 40 basis point improvement is net of the additional burden of approximately 110 basis points or $12 million of incremental amortization expense.
The legacy businesses generated a very good decremental margin of just 9.8%, again, reflecting diligent cost containment, a favorable mix and the impact of the Win Strategy.
I'll now move to slide 30 to review the Aerospace Systems segment.
Organic sales decreased 22.3% for the fourth quarter, partially offset by acquisitions contributing 14.3%.
Declines in commercial OEM and aftermarket volume were partially offset by higher sales in both military OEM and aftermarket.
Operating margins for the current fourth quarter increased to 20.4% of sales versus 17.9% last year.
This is net of the incremental amortization expense impact of approximately 190 basis points or $12 million, a favorable mix, proactive realignment actions, cost containment and lower engineering development costs contributed nicely to the quarter.
Good margin performance from Exotic and hard work by the teams on cost containment and productivity improvements helped contribute to the solid performance in the quarter.
On slide 31, we're showing the impact LORD and Exotic has had during FY 2020 on both an as-reported and adjusted basis.
Sales from the acquisitions for the year totaled $949 million and operating income on an adjusted basis contributed $114 million.
The LORD team was able to pull forward synergy savings, reaching a run rate of $40 million by the end of the year.
These savings plus a great deal of hard work by the teams on integration, productivity and adjusting to lower volume due to the pandemic, helps the acquisitions be $0.04 per share accretive for the year after absorbing $100 million of amortization expense.
Adjusted EBITDA from LORD and Exotic is 26.3%.
With this meaningful contribution from acquisitions, fiscal year 2020 total Parker adjusted EBITDA has increased to 19.3% as compared to 18.2% for fiscal year 2019.
Note that the legacy Parker business was able to improve EBITDA margin 60 basis points to 18.8% despite lower sales of nearly $1.6 billion.
On slide 32, we report cash flow from operating activities.
We had strong cash flow this year, resulting in record cash flow from operating activities of $2.1 billion or 15.1% of sales.
This compares to 13.5% of sales for the same period last year.
After last year's number has adjusted for a $200 million discretionary pension contribution.
Free cash flow for the current year is 13.4% of sales, and the conversion rate to net income is 152%.
Moving to slide 33.
I'd like to discuss our current leverage and liquidity position.
Based on the continued strong free cash flow generation, and effective working capital management, we made a sizable $687 million reduction to our debt during the quarter, which brought our full year debt reduction to $1.3 billion, which is approximately 25% of the debt issued for the LORD and Exotic Metals acquisition.
I apologize for a typo on the slide, the second bullet should be $1.3 billion rather than $1.3 million.
With this reduction, our gross debt EBITDA leverage metric at the end of the quarter was 3.6 times, down from 3.8 times at March 31, despite a drop in EBITDA.
Our net debt-to-EBITDA reduced to 3.3 times from 3.5 times at March 31.
We've continued to suspend our 10b5-1 share repurchase program and we remain committed to paying our shareholders a dividend, and we intend to uphold our record of annually increasing the dividend paid.
Moving to slide 34, we show the details of current order rates by segment.
Total orders decreased by 22% as of the quarter ending June.
This year-over-year decline is a consolidation of minus 29% within Diversified Industrial North America, minus 21% within Diversified Industrial International and minus 5% within Aerospace Systems orders.
Just a reminder that we report the Aerospace Systems orders on a 12-month rolling average.
The full year earnings guidance for fiscal year 2021 is outlined on slide 35.
Guidance is being provided on both an as-reported and an adjusted basis.
Beginning with this fiscal year 2021 guidance, as we've previously announced, we are revising our disclosures for adjusted segment operating earnings and adjusted earnings per share.
With this guidance, we will now start to include acquisition-related intangible asset amortization expense in our adjustments.
In the appendix of today's slides, you can find the impact of the acquisition-related asset amortization expense on fiscal year 2019 and fiscal year 2020.
In today's pandemic environment, total sales for fiscal year 2021 are expected to decrease between 10.7% and 6.7% compared to the prior year.
Anticipated organic decline for the full year is forecasted at a midpoint of 11.3%.
Acquisitions are expected to benefit growth at a midpoint of 2.7% while currency is projected to have a marginal negative 0.1% impact.
We've calculated the impact of currency to spot rates as of the quarter ended June 30, 2020, and we have held those rates steady as we estimate the resulting year-over-year impact for fiscal year 2021.
You can see the forecasted as reported and adjusted operating margins by segment.
At the midpoint, total Parker adjusted margins are forecasted to decrease approximately 80 basis points from prior year.
For guidance, we are estimating adjusted margins in a range of 17.8% to 18.4% for the full fiscal year.
The full year effective tax rate is projected to be 23%.
For the full year, the guidance range on an as-reported earnings per share basis is $7.41 to $8.41 or $7.91 at the midpoint.
On an adjusted earnings per share basis, the guidance range is $9.80 to $10.80 or $10.30 at the midpoint.
The adjustments to the as-reported forecast made in this guidance, at a pre-tax level, include business realignment expenses of approximately $65 million for the full year fiscal 2021 with the associated savings projected to be $120 million in the current year.
We anticipate integration costs to achieve of $19 million.
Synergy savings for LORD are projected to hit a run rate of $80 million and for Exotic, a run rate of $2 million by the end of the year.
And in addition, acquisition-related intangible asset amortization expense of $321 million will be included in our adjustments.
Some additional key assumptions for full year 2021 guidance at the midpoint are: sales will be divided 47% first half, 53% second half; adjusted segment operating income is divided 43% first half, 57% second half; adjusted earnings per share first half/second half is divided 40%, 60%.
First quarter fiscal 2021 adjusted earnings per share is projected to be $2.15 per share at the midpoint, and this excludes to $0.67 per share or $115 million of projected acquisition-related amortization expense, business realignment expenses and integration costs to achieve.
On slide 36, you'll find a reconciliation of the major components of fiscal year 2020 adjusted earnings per share compared to the adjusted fiscal year 2021 guidance of $10.3 at the midpoint.
Fiscal year 2020, adjusted earnings per share was reported at $10.79.
To make it comparable to the fiscal year 2021 guidance, which includes an adjusted for which includes an adjustment for acquisition-related asset amortization expense, we show the adjustment of $1.68 to get to a comparable $12.47.
With organic sales down over 11%, adjusted segment operating income is expected to drop approximately $1.95.
This would result in decremental margins of 27% on a year-over-year basis.
Corporate G&A and other expense is projected to negatively impact earnings per share by $0.36 because of gains achieved in fiscal year 2020 that are not anticipated to repeat.
Offsetting these declines, interest expense is projected to be $0.29 lower in fiscal year 2021.
An income tax rate of 23% will reduce earnings per share by $0.10 year-over-year.
And the assumption of a full year of suspending share buybacks is projected to result in a $0.05 dilution due to an increase in average shares outstanding.
We ask that you continue to publish your estimates using adjusted guidance, which should now include adjusting for acquisition-related amortization expense.
This concludes my prepared comments.
I thought we would close with what is probably an obvious question on most people's minds is, how do you feel about the FY '23 targets that you just outlined in IR Day given the pandemic and what it's done.
And the short answer is, we're still committed to them.
We've made tremendous progress on margins, and our top line is clearly becoming more resilient.
While the top line revenue that Cathy articulated in IR Day was $16.4 billion, that will be very hard to hit.
But we can still grow faster than the market, which is our intention.
So these targets you see in this page, growing faster than global industrial production index.
The margin targets of 21% at the op margin and EBITDA free cash flow conversion and EPS, barring a recession in FY '23 and recognize that we have three full fiscal years left to get here and provided we get some modest growth as we go in FY '22 and '23, we believe we can hit these numbers. | q4 adjusted earnings per share $2.55.
sees fy 2021 earnings per share $7.41 to $8.41. |
Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer; have remarks summarized in the quarter and our revised expectations for the full year, then we'll take questions.
You can refer to our 2020 10-K for additional details regarding these risks and uncertainties.
I continue to be incredibly impressed with the dedication, commitment and execution of the Polaris team as we navigated ongoing supply chain pressures, logistical challenges and increasing input costs to deliver impressive second-quarter results.
Focused execution is our mantra and it once again paid off as the team expertly navigated the challenges to enable us to exceed expectations.
The powersports industry has experienced significant demand, and that trend continued into the second quarter.
Demand, while down from unprecedented levels in the second quarter of last year was up over prepandemic levels of Q2 2019 by 14%.
Overview market share gains continued in the second quarter with gains in both ATVs and side-by-sides.
We did, however, lose a small amount of share in India, particularly in our midsized bikes given the supply chain challenges.
That said, demand remains strong for these models, and we anticipate our share gains will resume as our vehicle supply improves.
Boats also remained strong, growing retail sales and market share during the quarter and we have a healthy and significant backlog.
Although it's off season for snowmobiles with over half our snowmobile build this year being represented by our near-record high snow check preorders, the sales cadence of our snowmobile business will be even more heavily weighted toward our fourth quarter this year given the timing variation in our component deliveries.
Our PG&A and International businesses also performed quite well.
PG&A sales were up 35% during the quarter.
I'd also note that we are experiencing an increase in the attachment rate for PG&A as more consumers look to personalize their vehicles.
Our International business continues to see strength.
We grew sales 64% as the economies outside North America continued to improve in Q2.
Our earnings outperformed expectations, demonstrating the team's ability to overcome challenges with focused execution.
Not surprisingly, production and delivery were and continue to be impacted by global supply chain and logistics challenges.
As a result of this and continued strong consumer demand, our dealer inventories are at the lowest levels in decades.
I'll talk more about this in a moment.
Given our first half results, continued strong consumer demand and our team's hard-fought ability to execute, I am pleased to report that we are again raising our full-year earnings guidance.
Bob will give more details shortly.
On a two-year basis, our retail is up 14%, reflecting continued growth in powersports, driven by strong underlying consumer demand.
As expected, our second quarter North American retail sales were down 28% from the 57% increase reported in the second quarter of 2020.
The gating factor for retail sales today compared to a year ago is low dealer inventory driven by supply chain impacts on delivery.
Retail sales would have likely been significantly higher without these impacts.
Despite the supply impacts to ORV retail sales, market share again grew during the quarter.
Our ORV business gained over 1 percentage point of market share in both ATVs and side-by-sides.
Motorcycle retail sales also continued to grow, increasing 22% during the quarter.
However, Indian lost a modest amount of share during the quarter, driven by low availability of bikes, particularly our very popular scout and chief models.
Strong boat retail also continued and remained ahead of the industry.
Dealer inventory levels ended the quarter down 57% on a year-over-year basis and were also down sequentially.
Our presold order process continues to be an effective lever that our dealers are utilizing to ensure they don't lose a sale.
And I'll go into this in more detail in the next slide.
Looking at the remainder of the year, dealer inventories are expected to remain lean into Q4, which is when we are anticipating the supply chain issues will begin to slowly improve.
Given stronger-than-anticipated demand, coupled with continued supply constraints, our expectations for dealer inventory levels to return to RFM profile levels is now sometime in late 2022 or even into 2023.
As I discussed earlier, the unprecedented demand, coupled with the supply chain constraints, has created significant disruption in our shipping cadence.
With dealer inventory at record lows, the most effective, efficient way for our customers to secure the product they want, and for our dealers to maximize retail and profitability is through our presold order process.
The advantage to consumers is that orders placed in the presold system received priority in our production and shipping schedule.
In addition, dealers and consumers can receive PG&A priority is placed at the time of the vehicle order.
As a result, presold orders have increased significantly since the pandemic began.
Pre-pandemic presold orders accounted for roughly 3% of our retail.
Exiting Q2, ORV presold orders were approximately 80% of retail.
While there have been some reports that the presold order process can be misused, our audits have found that not to be the case.
We regularly audit the system looking for a name change from the presold order at the time of registration.
These audits have found less than 1% where the names changed at registration and where there were changes, the majority had valid reasons for the change.
I'd also point out that the presold order cancellations remain at low single-digit percent, which is similar to pre-pandemic levels.
Lastly, we have analyzed shipping patterns to our dealers by tiers, volumes and regions and were all within 1% of pre-pandemic levels.
The bottom line is that there's high confidence in the presold order process, which is why it continues to be a competitive advantage in this very tight inventory environment.
Our manufacturing plants are operating at peak supply chain constrained capacity.
Our manufacturing, supply chain and logistics teams continue to execute at a very high level, managing the ever-changing production schedules driven by component availability with a singular focus to meet the demand of our consumers and dealers with high-quality vehicles and components.
Despite our efforts, we couldn't meet all the demand during the quarter.
As I indicated earlier, our presold order levels have increased significantly, and it appears those customers are waiting for the high-performing high-quality vehicles we produce.
I'd like to be able to say today that we see the light at the end of the tunnel.
But given the ongoing heightened demand for our vehicles and supplier challenges, it appears we, along with the entire powersports industry will be in a period of tight vehicle supply for the remainder of the year.
Our teams are doing impressive work to keep the flow of products moving, including expediting components, adjusting build schedules, substituting materials were appropriate and buying select materials on the spot market.
Focused execution and teamwork will ensure we win the competitive battle.
As indicated in our last call, we are also adding capacity later this year and into 2022 that will bring on 30% more production capability between ORV boats and motorcycles.
This capacity is needed to meet demand, fill the dealer channel and allow for the addition of some very exciting new products coming next year.
One of the drivers behind the unprecedented demand has been new customers coming into powersports.
New customer growth in the first half of 2021, while down slightly from the robust rates in the first half of 2020 remains comfortably ahead on a comparable two-year pre-COVID basis with approximately 300,000 new customers coming into the Polaris family over the first half of 2021.
The mix of new to existing customers has remained high at over 70% of the total customers for ORV, motorcycles, snowmobiles and boats.
Our existing customers continue to grow at a healthy rate.
And lastly, it's exciting to see the diversity of our customers also grow, led by Hispanic and female riders joining the Polaris family.
Overall customer demand in total remains very strong.
We track repurchase rates for our customers, which are increasing on a year-over-year basis.
This provides us with the confidence that our customers intend to remain with the sport.
The Polaris team is battling each day for the components needed to meet the strong demand of our consumers.
And as our results this quarter indicate, we are winning many of those battles.
Second-quarter sales were up 40% on a GAAP and adjusted basis versus the prior year.
Shipments and sales improved considerably across all segments ORV, motorcycles, adjacent markets, aftermarket and boats.
Second-quarter earnings per share on a GAAP basis was $2.52.
Adjusted earnings per share was $2.70, which was up 108% for the quarter, exceeding our expectations.
This strong performance was driven by a combination of revenue growth, lower promotional costs, increased pricing and operating expense leverage during the quarter partially offset by higher input costs.
Adjusted gross margins were up approximately 310 basis points year over year, primarily due to lower promotional and floor plan financing costs driven by low dealer inventory and strong demand, which requires minimal promotional dollars to drive retail.
This was muted somewhat by higher input costs associated with supply chain constraints, including logistics, commodity and labor cost pressures.
Operating expenses were down considerably due to the goodwill and intangible asset impairments recognized in Q2 2020.
Adjusted operating expenses were up 33% in the quarter relative to Q2 2020, which was heavily impacted by short-term cost actions taken to offset COVID-19 shutdowns.
Q2 2021 operating expenses grew sequentially versus the prior quarter due to the timing of legal, sales and marketing and engineering expenses along with staffing additions.
Operating expenses are expected to be down slightly versus the Q2 run rate in the second half of 2021.
Foreign exchange also had a positive impact on our quarterly results, primarily driven by the Canadian dollar.
From a segment reporting perspective, all segments reported increased sales for the quarter driven by strong demand.
ORV/Snowmobile segment sales were up 38%.
Motorcycles were up 50%, Adjacent markets increased 98%, Aftermarket was up 15% and Boats increased 49% during the second quarter relative to Q2 2020, which was adversely impacted by COVID-19 closures.
Average selling prices for all segments were up, ORV increased about 13%, Motorcycles were up approximately 8%, Adjacent markets increased 10% and Boats were up 14% for the quarter.
All segments benefited from continued lower promotional costs given high demand and the lack of product in the channel.
Pricing actions taken in the quarter and model mix also had a favorable impact.
Our International sales increased 64% during the quarter, with all regions and segments growing sales as the heavily pandemic impacted countries began to open their economies again.
Currency added 15 percentage points to the International growth for the quarter.
And lastly, our parts, garments and accessories sales increased 35% during the quarter, driven by increased demand across all segments and categories of that business.
Moving on to our guidance for 2021.
Given the stronger-than-anticipated performance in the second quarter, we are increasing our full-year adjusted earnings per share guidance for 2021 and now expect earnings to be in the range of $9.35 to $9.60 per diluted share.
The increase is driven by the expectation that the even lower promotional environment we experienced in the second quarter will continue through the second half as demand is expected to remain high and dealer inventory levels low for the remainder of the year.
Additionally, we expect price increases and surcharges for the upcoming model year to provide incremental benefit in the fourth quarter.
These benefits are partially offset by the escalating input costs, particularly component cost increases driven by both the global supply chain shortage and higher commodity prices, along with the increased cost from manufacturing inefficiencies, increased expedites and higher logistics costs.
Overall, for the full year, we are pleased that our product pricing and promotional cost reductions are offsetting the expected annualized incremental cost headwinds on a dollar basis.
We are narrowing our total company sales growth guidance by holding the upper end of our sales guidance range at 21% and raising the lower end of the range to 19% given our sales growth performance to date.
Our dealers have ample presold orders in hand that combined with additional product would typically allow us to increase the top end of our sales guidance range.
However, given the uncertainty around component supply, we are leaving the upper end of our sales guidance unchanged at this time.
Moving down to P&L.
Adjusted gross profit margins are now expected to be down in the range of 40 to 70 basis points.
This is an improvement from our previously issued guidance and primarily due to the higher-than-expected margins in the second quarter which was driven largely by lower current quarter promotional costs and the timing of promotions accrual adjustments as dealer inventory continued to decline.
Adjusted operating expenses are now expected to improve 90 to 120 basis points as a percentage of sales versus last year given the higher sales growth expectations.
Income from financial services is now expected to be down in the mid-20s percent range driven by the historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers as more customers are buying with cash and/or have more time to shop their financing needs with other financing sources given the delays in delivery.
Guidance for the remainder of the P&L items remains materially unchanged from our previously issued guidance.
While our full-year earnings guidance improved as a result of our year-to-date performance, and the pricing actions being implemented at the upcoming model year changeover, our second half performance is expected to be down compared to the second half of 2020 and sequentially from our reported first half results.
Let me give some clarity on the second half cadence for earnings.
Our first half 2021 earnings per share finished at $4.99, a 228% increase over the first half of 2020.
Given our full-year revised guidance, the second half earnings per share equates to a range of $4.36 to $4.61 per diluted share, a decrease of 26 to 30% on a year-over-year basis and an 8 to 13% decline on a sequential basis from the first half of 2021.
This reduction in earnings per share on a sequential basis is driven by a number of positive and negative factors, including increases in input costs in the second half of the year, principally commodities, labor, expedite and rework costs related to supply chain shortages, as well as unprecedented ocean and truck transportation rates and the timing of operating expense spend.
These costs are expected to be partially offset by increased product pricing through both low promotions, higher base prices and surcharges.
On a two-year basis, our second half earnings per share results at the high end of the range are expected to be up over 30% compared to the second half of 2019.
I would also add that the quarterly cadence for earnings per share in the second half of 2021 is more heavily weighted toward the fourth quarter with approximately 60% of our second half earnings per share occurring in Q4.
This is driven by a couple of key factors: First, the majority of our high margins, no Check snowmobiles won't ship until Q4 as compared to a stronger Q3 shipping quarter in 2020.
Second, while we are increasing selling prices and adding surcharges to offset a portion of the cost increases.
These increases do not take effect until late Q3, thus having a larger impact in Q4.
Let me quickly cover our sales expectations by segment.
ORV snowmobile sales guidance remain unchanged at up high teens percent.
The only modification is the timing of shipments, as indicated earlier, with more snowmobiles being shipped in the fourth quarter of 2021 versus prior year, given the supply chain disruptions and the timing of our pricing actions hitting Q4 more heavily than Q3.
Motorcycle sales are anticipated to be up low 30%, down slightly from prior guidance.
While we continue to expect our motorcycle business to grow and take share for the year, supply chain challenges are impacting production enough to possibly shift to some shipments into 2022.
In the remaining segments, Global Adjacent Markets, Aftermarket and Boats, we are increasing our sales expectations given the sales growth realized through the first half of 2021.
Year-to-date second quarter operating cash flow finished at 196 million, down 37% compared to the same period last year, driven by an increase in factory inventory due to the supply chain inefficiencies.
Our expected full-year cash flow performance remains unchanged at down mid-30% compared to last year.
During the second quarter, we spent $111 million on share repurchases.
We will continue to prioritize organic investments in our business, along with share buybacks throughout the remainder of the year, subject to market conditions.
This quarter's results demonstrated the drive and determination of the Polaris team in the face of ongoing challenges.
We will continue to effectively manage a challenging environment to meet consumer demand.
The underlying earnings power of the company remains strong as does our financial health.
Demand for our products remains robust, and we do not see that changing in the medium to long term.
Our supply chain remains the top challenge for the company with component supply not expected to improve until sometime late 2021 or even early 2022.
And as a result, dealer inventories are not expected to return to normalized levels until sometime in late 2022 or even early 2023.
While much of the focus has been on the supply chain, innovation continues to be the lifeblood of Polaris, and we have a number of new products coming, including the all-new electric RANGER, along with exciting model year 2022 launches.
Let me close by reiterating that we're winning in a challenging environment, and we remain focused on navigating through the current supply chain challenges and rising input costs to deliver products our customers are demanding while at the same time, delivering improved results and value to our shareholders. | compname reports qtrly adjusted net income $2.70/shr.
polaris second quarter 2021 earnings results.
q2 earnings per share $2.52.
qtrly adjusted net income was $2.70 per share.
q2 adjusted sales increased 40% to $2,117 million.
polaris increased its full year 2021 earnings guidance and now expects earnings to be in range of $9.35 to $9.60 per diluted share.
full year 2021 adjusted sales guidance was narrowed and is now expected to be up 19% to 21% over prior year.
supply chain-related headwinds and higher input costs will continue into the second half of the year. |
Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer, have remarks summarizing the quarter and our revised expectations for the year, then we'll take some questions.
You can refer to our 2020 10-K and recent 10-Q for additional details regarding these risks and uncertainties.
While demand remained very strong for our products with presold orders at record highs and new customers continue to be a large portion of our sales mix, we were negatively impacted by supply chain challenges for the quarter.
We were able to meet earnings expectations in the quarter, but a combination of logistics challenges and supplier shortages impacted our ability to ship and as a result, sales finished below our expectations.
This is not unique to Polaris.
The entire powersports industry is being deeply impacted by the much reported on supply chain challenges.
The good news is that Polaris continues to outperform as evidenced by our record year-to-date sales and earnings performance, with sales and earnings up 24% and 59%, respectively, versus 2020.
We also continue to drive market share gains in ORV and other segments of the business are in line with or are up yea to date in market share versus last year.
Additionally, our PG&A and International businesses performed well, with PG&A sales growing 8% and our International business delivering strong sales growth of 21% in Q3.
And while I'll cover more details in a few slides, our new product introductions for ORV have generated a lot of excitement and energy for dealers and customers.
We continue to manage through very challenging supply chain constraints, issues stemming from port backups, escalating commodity prices, truck and driver shortages and labor shortages, the list goes on and on.
We are taking aggressive steps to combat these headwinds, but given we are 10 months into the year, the impact of any additional countermeasures may not be realized until sometime next year.
Thus, we're revising our full-year 2021 guidance down slightly.
Bob will give you more details shortly.
While I'm disappointed that we're lowering our full-year guidance as a result of the continued supply chain challenges, I couldn't be more impressed with the Polaris team for their ongoing dedication and exhaustive effort to keep the flow of our products moving to our customers.
I also want to recognize our dealers for their understanding and dedication to Polaris in these challenging times, as well as our suppliers who continue to work with us to improve upon availability of components.
Moving on to retail sales for the quarter.
Our third-quarter North American retail sales were down 24% from the positive 15% reported in the third quarter of 2020.
This resulted in retail being down 13% on a two-year basis.
Our retail results were lower than originally anticipated, driven entirely by supply chain issues.
We continue to gain market share in ORV despite the supply constrained retail sales, getting almost a point and a half of market share with gains in both ATVs and side by sides.
Motorcycles retail sales were also down for the quarter.
Indian market share is now flat year to date, with the midsized bikes being the most supplier-constrained category.
Snowmobiles retail was down 30% in the quarter.
Despite that, our snowmobile business gained share during the quarter as we performed better than the market.
And lastly, Boats market share continues to remain up year to date.
Dealer inventory levels ended the quarter down 46% on a year-over-year basis and down 75% when compared to pre-COVID levels in Q3 of 2019.
We currently have, on average, less than one month of inventory in the channel.
Presold vehicles continue to be a very effective sales lever for our dealers to maintain consumer interest and is a way for consumers to stay engaged with the -- while their vehicle is being built.
Given the competitive advantage we have seen with this process, the team has made some changes, which I'll provide more detail on shortly.
Given the current supply chain issues, we don't expect the dealer inventory situation to improve materially until sometime in 2022.
As I discussed earlier, continued unprecedented demand, coupled with supply chain constraints, have created significant disruptions in our shipping cadence, with dealer inventory at record lows and not expected to return to normal levels in the near term.
The dealer presold order process has become and will continue to be an integral process part of how we take orders and deliver products to dealers and consumers.
Given the acceptance of the process and the escalating supply chain challenges, we've made some modifications to the preorder process to improve the visibility and predictability to dealers and consumers.
Let me share a few of the changes with you.
A few weeks ago, we adjusted delivery dates on a limited number of presold orders to align with our current production schedule.
We are introducing a new industry-first online order tracker that will provide customers with order confirmation data plus the ability to find up-to-date shipping estimates for their presold order.
This will allow for greater transparency of order status for both the dealer and presold customer.
Next, we created a new Polaris off-road reservations program for select premium models, including the RANGER full-size and multi-premium plus models, GENERAL full-size and multi-performance models and the RZR Extreme and multi-performance turbo models.
These premium models are currently the most popular, have the highest demand and are the highest percentage of presold orders in our system today.
We believe this allocation method will provide the necessary prioritization of whole good and PG&A shipments to drive increased retail velocity and dealer profitability while improving the customer experience.
All of the models will remain unchanged within the existing RFM and presold process currently in place today.
In summary, these changes are designed to improve communication to the dealer and consumer while improving our ability to manage product flow in the supply constrained environment and setting clear expectations for shipment timing to better serve the dealer and customer.
Our manufacturing plants continue to operate at peak supply chain constrained capacity.
While our teams are mitigating shortages and delivery delays real time, the supply chain disruptions have become unavoidable for a large number of our models.
The shortages include shocks, plastics, crank cases, doors and, of course, semiconductors, to name just a few.
We continue to aggressively work with suppliers across our business who are behind schedule, with ORV being impacted the most, given its size.
A byproduct of the supply chain shortages is higher input cost.
Each link in the supply chain from shipping lines, port bottlenecks, shortages of trucks and railcars to the increased rework and disruption in production schedules, has created an environment where input costs have increased exponentially.
As an example, since the first of the year, costs attributable to supply chain disruptions has increased fivefold.
That's over $300 million of additional costs that we did not anticipate when the year began.
We've attempted to offset these costs through pricing and surcharges, which Bob will discuss shortly.
Again, I want to reemphasize this is not a manufacturing capacity issue.
It's a supply chain issue.
Bob will give you an update on recent capacity additions, which will clearly demonstrate that we have and will have capacity improvements when the supply chain constraints subside.
New product introductions and innovation remain a key component of our growth strategy going forward.
During the quarter, we introduced 15 new ORV models, product enhancements and limited edition models, including a new midsized RANGER with more comfort, storage and a noticeably quieter ride.
It comes with rider-inspired features, including a larger dump box, more onboard storage, more legroom and new premium contoured seats.
Our Northstar trim is also available with a fully enclosed heated cap to keep riders comfortable into the cold seasons.
Sportsman, the industry-leading ATV brand, just got better with the addition of the exclusive industry-leading seven-inch RIDE COMMAND technology with GPS navigation and communication technology.
And for our younger riders, we introduced a new RZR 200 EFI with industry-leading safety and technology features, including standard hard doors and high visibility front and rear LED lights, digital speed limiting to control top speeds and geo-fencing to allow parents to control where the vehicle is allowed to go.
In addition, we added a number of enhancements and limited edition models to the RANGER, GENERAL, RZR and Sportsman lineup for model year 2022.
We continue to invest aggressively in research and development and a bold slate of industry-first innovations are now entering the introduction phase, with an exciting sequence of launches to play out over the next several years.
One of these introductions, which is sure to throw our extremely passionate recreational riders, is the all-new RZR that will be unveiled on November 9.
If you haven't seen some of the teaser videos, you should check them out.
While the new RZR has been highly anticipated, the social media and video tease last week launched excitement across our rider forms and fan channels.
One little nugget I'm excited to confirm today is that we're not just launching one new RZR, we're getting ready to launch two, the all-new RZR Pro R and the RZR Turbo R are ready to reaffirm our leadership position in the wide open segment with the highest performing recreational vehicle in the industry.
We're incredibly energized to bring these industry-leading products to market.
As I've said, innovation will always be front and center in our growth strategy.
One innovation we have been talking about for some time now is the all-new full-size electric RANGER, which is set to launch in December.
This is a completely redesigned RANGER.
We've been previewing the benefits of this new RANGER in a number of marketing videos throughout the year, including more torque and power, instant acceleration, precise control, regenerative braking, industry-leading ground clearance, highest power-to-weight ratio, lowest cost of ownership and the quietest ride.
You can see each of these videos on our website.
We're incredibly excited to bring the this game-changing RANGER to market as it reflects our commitment to expanding our product offering to meet the needs of our customers.
Mike highlighted the supply chain headwinds we faced in the third quarter and expect to continue to face for the remainder of the year.
We want to make sure our investors understand that we are working diligently to counteract these headwinds and while there is pressure in the near term, we believe we are well-positioned to capitalize on the sustained demand as the supply chain normalizes.
We will have more on the remainder of 2021 later, but let me first start with a summary of the third quarter.
Third-quarter sales were flat on a GAAP and adjusted basis versus the prior year, finishing at $1.96 billion.
Sales improved from Motorcycles, Global Adjacent Markets and Boats.
ORV, snowmobiles and aftermarket sales were down on a year-over-year basis.
While supply chain constraints impacted all of our businesses, we were able to ship more motorcycles in adjacent market vehicles during the quarter compared to the same quarter in 2020.
Both sales were positively impacted by improved product mix as we shipped a stronger mix of premium boats in the quarter.
Third-quarter earnings per share on a GAAP basis was $1.84.
Adjusted earnings per share was $1.98, which was down from the $2.85 we reported in Q3 last year as expected.
Adjusted gross margins were down approximately 360 basis points on a year-over-year basis, mostly due to increased input costs from logistics, commodities, plant inefficiencies and labor.
The input costs were partially offset by increased pricing and ongoing lower promotional and floor plan financing costs.
Adjusted operating expenses were up 4%, primarily due to increased research and development expenditures and, to a lesser degree, increased selling and marketing costs during the quarter.
Income from financial services declined 38% during the quarter, primarily due to lower retail credit income.
Retail financing penetration rates continue to be low due to more customers paying in cash, minimal promotional programs available from Polaris and consumers having additional time to shop around for alternative financing options.
And finally, the tax rate finished at 20.5%, compared to 23.7% in the third quarter last year due to favorable adjustments related to research and development credits taken in the quarter.
From a segment reporting perspective, Motorcycles, Global Adjacent Markets and Boats increased sales for the quarter, driven by volume, pricing, lower promotions and favorable product mix.
Sales for our ORV, Snowmobile and Aftermarket segments reported lower sales for the quarter, driven by the supply chain shortages.
All segments continued to benefit from ongoing low promotional costs, given high demand and the lack of product in the channel.
Pricing actions taken in May also had a favorable impact during the quarter, but were muted, given the large quantity of customer preorder units, which did not benefit from the pricing actions.
Average selling prices for all segments were up, ORV increased about 5%; Motorcycles were up approximately 10%; Adjacent Markets increased about 1%; and Boats was up approximately 30% for the quarter.
Mix had an impact on ASPs in all segments.
I will talk more about pricing actions we have recently taken as they are an important countermeasure to the increasingly inflationary environment we are facing today and going forward.
Our International sales increased 21% during the quarter, with all regions and segments growing sales as many economies continued to gain traction as they recovered from earlier COVID shutdowns.
Currency added 3 percentage points to the International growth for the quarter.
Parts, garments and accessories sales increased 8% during the quarter, with strong demand across all segments and categories in that business, particularly parts and accessories.
Back orders driven by the supply chain bottlenecks remained high, limiting our growth in PG&A for the quarter.
Moving on to our guidance for the remainder of the year.
As Mike indicated, supply chain challenges significantly impacted our ability to ship products in the third quarter, and we anticipate continued pressure in the fourth quarter and into 2022.
When we last updated our expectations in July, we have been expecting the supply chain constraints to ease as we headed into the fourth quarter.
Unfortunately, the supply environment has not improved in the ways we had anticipated.
Therefore, we are lowering our full-year sales and earnings expectations going into the fourth quarter.
Total company sales are now expected to finish at approximately $8.15 billion for the year.
At this projected sales level, full-year adjusted earnings per share guidance for 2021 is expected to finish at approximately $9 per diluted share.
While we are disappointed that we have to update our guidance, keep in mind, this is $0.25 per share higher than the high end of our original 2021 guidance range.
The full-year sales and earnings expectations are driven by our ability to source the needed components for our products.
Our guidance assumes that supply chain performance will not deteriorate further in Q4 and that our suppliers will be able to fulfill our current expectations for component deliveries for the remainder of the year.
While we typically have a solid view of the puts and takes for a given quarter, which gives us confidence in providing a realistic guidance range, in this environment, the timing of component shipments could significantly impact the quantity and mix of products we are able to ship in a given quarter and therefore, our results.
We are doing all we can to deliver vehicles to our dealers and consumers, but have limited ability to quickly countermeasure certain unexpected supply chain disruptions.
As such, we have provided you our balanced projection for 2021, which is reflective of our current viewpoint on the component availability and production run rates.
One thing is certain, we will always do what is in the best interest of our consumers to get their requested vehicles to them as soon as we can.
Moving down the P&L, we have made the following revisions: adjusted gross profit margins are now expected to be down approximately 70 basis points, which is at the lower end of our previous guidance.
The escalating increase in input costs, as Mike indicated earlier, has been significant.
Mike mentioned the $300 million-plus increase in input costs since the beginning of the year, but just in the third quarter alone, our input costs from logistics, ocean and truck rates, commodities, labor rates and plant inefficiencies increased over $100 million or approximately 580 basis points when compared to the prior-year third quarter.
Given the magnitude of the input cost increases and the expectation that they are not transitory, we are quickly adjusting our pricing for model year 2022.
Here in October, we announced price increases that will increase the average sales price on most ORV and motorcycle models in the mid-single-digits percent range.
Similar increases were also announced for associated PG&A.
These increases are in addition to several price increases we have made earlier in the year.
While the cost environment is a headwind that will continue to impact our gross profit margins in the fourth quarter, the benefit of the recent pricing actions taken or announced will not have a significant impact until the first quarter of 2022 as the dealers' current preorders are set at the previous pricing levels.
Adjusted operating expenses are now expected to improve 90 basis points as a percentage of sales versus last year, again, at the lower end of our previous guidance range, driven by the lower sales growth expectations, partially offset by prudent cost management.
We are continuing to invest in the business while controlling our flexible expenses commensurate with our sales volume.
Income from financial services is now expected to be down in the low 30s percent range, driven by the continued historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers, as I explained earlier.
And we're adjusting our income tax provision rate expectations for the full year to be in the range of 22% to 22.5%, an improvement over our previously issued guidance, reflecting the flow-through of favorable tax adjustments related to the R&D credit.
Guidance for the remainder of the P&L items remains materially unchanged from our previous issued guidance.
Our sales expectations for our segments have been lowered given the supply chain challenges with the exception of Global Adjacent Markets, which remains unchanged for the year.
While our adjacent market businesses are feeling the same supply chain challenges with our other businesses, they were in a better position with finished goods and dealer inventory given the B2B market has recovered at a slower rate than the consumer markets.
Our current plant capacity is adequate to meet the current demand.
And when the supply chain constraints ease, we will have the needed capacity in place to ramp quickly and begin to fill the dealer channel with much needed inventory.
We are expanding our Monterrey facility by over 400,000 square feet, adding approximately 35% more capacity for RZR in general over the next year to accommodate the model year '22 vehicles, the new RZRs coming in Q4 and additional ORV models expected to launch over the next couple of years.
For Boats, we added approximately 55,000 square feet of manufacturing capacity in Elkhart, Indiana to meet the demand for Bennington, and we brought the Syracuse, Indiana facility back online to support strong demand for our Hurricane deck boats.
In addition to adding manufacturing space, we have also invested heavily in welding, vending, injection molding and painting capabilities to support higher assembly volumes.
With these capacity adds, we will be ready to meet the anticipated strong demand when the supply chain improves.
Year-to-date third quarter operating cash flow finished at $153 million, down significantly, compared to the same period last year.
The decrease was driven by an increase in factory inventory due to the increase in vehicles waiting for parts and our pre-buying of components to remove as much uncertainty around the component availability as possible.
While share repurchases remains a lever we like to use to return capital to shareholders in the current supply constrained environment, we will concentrate much of our capital toward organic investments until the supply chain improves.
With all the uncertainties surrounding the supply chain, forecasting 2022 is proving to be challenging.
Let me give you some preliminary views on next year, given where we stand today.
First, the supply chain is likely to be an ongoing challenge into 2022.
Supply chain issues have been with us to varying degrees since the pandemic first broke out in March of last year.
But in the past quarter, the supply chain issues have intensified.
Additionally, we're experiencing much higher costs than we anticipated.
We're taking steps to raise prices now that will benefit us next year.
Rest assured that we are working hand-in-hand with our suppliers to improve upon the current situation, and I'm optimistic we can continue to outperform the competition as we have so far this year.
Dealer inventories are expected to remain lean through 2022 until the supply chain improves.
In the meantime, we'll continue to prioritize the majority of our production to preordered units until more supply chain flexibility is obtained.
We expect consumer demand to remain healthy through 2022.
The number of new customers that have entered the market is staggering and repurchase rate data supports that customers are staying with the brand.
As the supply chain starts to recover, we are in a strong position to take full advantage of this, given our substantial investments in capacity expansion.
I've talked at length about the steps we're taking to navigate the current supply crisis.
But behind the scenes, we've also been taking a closer look at our portfolio of businesses.
When I was first appointed to the CEO position almost a year ago, my mantra was focused execution that applies not only to the day-to-day operations, but also strategically and where we want to concentrate our time and capital.
As such, we've made the decision to divest our GEM and Taylor-Dunn businesses, with the expectation that the transaction will be completed by year-end.
And finally, while we received some favorable news out of the Biden administration around the possibility of tariff relief next year, the realities of the process were far less compelling.
The initial exemption reinstatement process appears rather narrow and is likely to have an insignificant impact on our financials in 2022.
2021 has been a year of constant adjustments, but we've been winning by remaining agile and adaptable.
The Polaris team is hands down the best in the industry, couple that with the best brands and product portfolio in the industry, and I believe we have the winning formula for growth and improved profitability for years to come. | compname reports q3 earnings per share $1.84.
polaris third quarter 2021 earnings results.
q3 earnings per share $1.84.
q3 adjusted earnings per share $1.98.
qtrly reported sales of $1,960 million, up $5 million from reported sales of $1,955 million for q3 2020.
full year 2021 sales guidance is now expected to be approximately $8.15 billion.
gem and taylor-dunn expected to be divested by year-end. |
I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business; and Bob Mundy, our Chief Financial Officer.
I'll then wrap things up and then we'll be glad to take questions.
Yesterday, we reported first quarter net income of $167 million or $1.75 per share.
First quarter net income included special items expenses of $0.02 per share related to closure costs for certain corrugated products facilities and specific costs related to discontinuing paper operations associated with the previously announced conversion of the No.
3 machine at our Jackson, Alabama mill to linerboard.
Excluding the special items, first quarter 2021 net income was $169 million or $1.77 per share compared to the first quarter 2020 net income of $143 million or $1.50 per share.
First quarter net sales were $1.8 billion in 2021 and $1.7 billion in 2020.
Total company EBITDA for the first quarter, excluding special items was $342 million in 2021 and $311 million in 2020.
Excluding the special items, the $0.27 per share increase in first quarter 2021 earnings compared to the first quarter of 2020 was driven primarily by higher volumes for $0.45 and prices and mix $0.31 in the Packaging segment and lower annual outage expenses for $0.12.
The items were partially offset by lower volumes, $0.28, and prices and mix of $0.03 in the Paper segment.
Operating costs were $0.15 per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, and fiber costs and energy.
We also had inflation-related increases in our converting costs, which were $0.02 per share higher.
For the last three quarters, freight and logistics costs have risen and were $0.12 per share higher in the first quarter compared to last year.
Significant increases in fuel costs, high truck supply and a higher mix of spot pricing to keep up with box demand are the primary drivers.
And in the first quarter, we had the issues brought on by the winter storms as well.
We also had other expenses of $0.01 per share.
Looking at the packaging business.
EBITDA excluding special items in the first quarter of 2021 of $352 million with sales of $1.6 billion resulted in a margin of 22% versus last year's EBITDA of $290 million and sales of $1.5 billion or a 20% margin.
Demand in the Packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants set or matched all-time quarterly records.
Although we were able to replenish some inventory during the quarter by utilizing the Jackson, Alabama mill for additional containerboard production, we again ended the period with inventory levels lower than planned and at record lows from a weeks-of-supply standpoint due to stronger-than-expected demand.
Our mills and box plants displayed outstanding management of their operations to meet customer commitments in spite of several weather-related events that impacted their operations, created raw material availability issues and presented both inbound and outbound freight and logistics challenges.
In addition, our facilities continued to deliver on numerous cost reduction initiatives, efficiency improvements in capital projects and bringing the benefits of those efforts to the bottom line.
We also recently completed two high return strategic projects that we've mentioned to you before, the OCC project at our Wallula Mill and the boiler project at our Filer mill.
The tremendous effort our employees put into these initiatives and projects helps us minimize some of the cost inflation we see every year and especially now with what we're seeing in the areas I mentioned previously.
As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter, total volume in our corrugated products plants was up 6.6% versus last year and equal the all-time record for total box shipments that we just set in the fourth quarter of 2020.
Shipments per day were up 8.3% over last year, which set a new first quarter record for us.
Strong domestic demand drove outside sales volume of containerboard 13% above last year's first quarter.
Domestic containerboard and corrugated products prices and mix together were $0.26 per share above the first quarter of 2020 and up $0.52 per share compared to the fourth quarter of 2020 as we continued to implement our November 2020 announced price increases during the quarter and we began the implementation of our announced March increase.
Export containerboard prices were up $0.05 per share versus last year's first quarter and up $0.04 per share compared to the fourth quarter of 2020.
Looking at our Paper segment, EBITDA excluding special items in the first quarter was $16 million with sales of $165 million or a 10% margin compared to the first quarter of 2020's EBITDA of $42 million and sales of $217 million or a 19% margin.
As expected, sales volume was about 22% below last year as we ran only one machine at the Jackson, Alabama mill this quarter versus both machines running in the first quarter of 2020.
First quarter paper prices and mix were almost 3% below last year, however, prices began to move higher in the latter part of the quarter, resulting from the announced paper price increases and averaged 1% higher than fourth quarter 2020 average prices.
Industry conditions in the uncoated freesheet market continue to be challenged due to the nationwide responses to help control the spread of the pandemic, however, with the actions we've taken in our Paper segment to match supply with our customers' demand and moving production on the No.
3 machine at our Jackson, Alabama mill from paper to linerboard, we have not only avoided the significant cost issues associated with extended paper market downtime, but we've also enhanced our capabilities, as well as the profitability in our Packaging segment.
Going forward, we will continue to assess our outlook for paper demand and the optimal inventory levels and will run our paper system accordingly.
For the first quarter, we generated cash from operations of $192 million and free cash flow of $107 million.
The primary uses of cash during the quarter included capital expenditures of $85 million and common stock dividends of $95 million.
We ended the quarter with $983 million of cash on hand or $1.1 billion, including marketable securities.
Our liquidity at March 31st was $1.5 billion.
I want to update you on our full year guidance for a couple of items that we provided on last quarter's call.
Current plans and scope of work for the scheduled maintenance outages at our containerboard mills has changed and the new total company estimated cost impact for the year is $0.97 per share.
The actual impact in the first quarter was $0.10 per share and the revised estimated impact by quarter for the remainder of the year is now $0.30 per share in the second quarter, $0.16 in the third and $0.41 per share in the fourth quarter.
Also, our capital spending estimate for the year has changed to a range of $650 million to $675 million as we have now announced our plans for the conversion of the No.
3 paper machine at our Jackson Mill to linerboard.
Regarding the conversion of the No.
3 machine at Jackson, Alabama, our current plans are to continue running the machine on linerboard as demand wards in a manner similar as to how we ran in the first quarter until the scheduled first phase outage is taken in the second quarter of 2022.
The converted machine is expected to operate at an initial production rate of approximately 75% of its new capacity.
The second phase outage work is planned for mid-2023 with the machine reaching its run rate capacity of 2,000 tons per day by the end of 2023.
This phased conversion over the next few years will provide much needed internal linerboard supply.
This gives us a runway for maintaining an optimal integration level and enables us to further optimize and enhance our current mill capacity and box plant operations.
We're committed to being fully integrated and we have a track record of ramping up production from machine conversions according to our customers' demand requirements.
We will continue to serve our paper customers with the No.
1 paper machine at Jackson, Alabama and both machines at our International Falls, Minnesota Mill, which is capable of producing all of Jackson's paper grades.
Looking ahead, as we move from the first and into the second quarter, in our Packaging segment, we expect demand to remain strong and we will continue implementing our previously announced paper price increases.
We also expect export prices to move higher.
In the Paper segment, we expect volumes to be fairly flat with higher average prices and mix as we continue the rollout of our recently announced paper price increase.
The second quarter will be our busiest of the year for planned annual outages in the Packaging segment with work scheduled at four of the mills.
Outage expenses are estimated to be approximately $0.20 per share higher compared in the -- to the first quarter.
We also anticipate continued inflation with freight and logistics expenses as well as most of our operating and conversion costs.
However, energy costs should improve as we move into seasonally milder weather.
With that, we'd be happy to entertain any questions.
The statements were based on current estimates, expectations and projections of the Company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC.
And with that, Regina, I would like to open up the call to questions, please. | q1 earnings per share $1.77 excluding items.
q1 sales $1.8 billion.
q1 earnings per share $1.75.
in q2 packaging segment we expect demand to remain strong.
in q2 packaging segment, expect export prices to move higher.
in q2 paper segment, we expect volumes to be fairly flat with higher average prices and mix.
q2 will be our busiest of year for planned annual outages in our packaging segment. |
I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business; and Bob Mundy, our Chief Financial Officer.
After which, I'll wrap things up, and then we'll be glad to take any questions.
Yesterday, we reported second quarter net income of $57 million or $0.59 per share.
Excluding the special items, second quarter 2020 net income of $132 million or $1.38 per share compared to the second quarter of 2019, net income of $194 million or $2.04 per share.
Second quarter net income was $1.54 billion in 2020 and $1.76 billion in 2019.
Total company EBITDA for the second quarter, excluding special items, was $299 million in 2020 and $376 million in 2019.
Second quarter net income included special items expenses of $0.79 per share related primarily to the impairment of goodwill associated with our paper segment.
Bob will discuss that in more detail in a few minutes.
Special items expenses also included the previously reported closure of our corrugated products facility in San Lorenzo, California and costs and expenses associated with the COVID-19 pandemic.
Excluding the special items that we mentioned, the $0.66 per share decrease in second quarter 2020 earnings compared to the second quarter of 2019 was driven primarily by lower prices and mix in our packaging segment of $0.66 and paper segment $0.05, lower volumes in our paper segment, $0.40 and higher depreciation expense, $0.04.
These items were partially offset by lower operating costs of $0.33, primarily in the areas of labor and fringes, repairs, materials and supplies and several fixed cost areas.
We also had lower annual outage expenses of $0.10, lower converting costs, $0.03, lower freight expenses, $0.02 and other costs, $0.01.
Looking at our packaging business.
EBITDA, excluding special items in the second quarter of 2020 of $313 million with sales of $1.4 billion resulted in a margin of 22% versus last year's EBITDA of $349 million and sales of $1.5 billion or 23% margin.
We ran our containerboard mills to demand, built some much-needed inventory from the historically low levels at the end of the first quarter and maintained the industry-leading integration rate by supplying our box plants with the necessary containerboard to establish a new second quarter record for box shipments per day.
We ended the second quarter with inventory still at the relatively low levels but in adequate position to meet our expected stronger third quarter demand.
Our efficiencies and cost control at the mills and corrugated products facilities throughout the quarter were truly remarkable.
And we continue to see improvements in freight and logistics expenses through the optimization of our trucking operations and geographic footprint of our containerboard supply.
Demand for our corrugated products was very good in the second quarter, especially during the month of June.
As Mark indicated, our corrugated products plants achieved a new second quarter record for shipments per day, which were up 1.2% compared to last year's second quarter.
Total shipments for the quarter were also up 1.2% over last year.
As a comparison for the second quarter, the industry was down 1.4% in total and on a workday basis.
Through the first half of 2020, our box shipment volume is up 2.5% on a per day basis versus the industry being up 0.6%.
Outside sales volume of containerboard was about 10,000 tons below last year's second quarter and 23,000 tons below the first quarter of 2020, and as we ran our containerboard system to demand, supplied the record needs of our box plants and positioned our inventory for even higher demand during an expected stronger third quarter.
Domestic containerboard and corrugated products prices and mix together were $0.61 per share below the second quarter of 2019 and down $0.18 per share compared to the first quarter of 2020.
Export containerboard prices were down about $0.05 per share versus last year's second quarter and flat compared to the first quarter of 2020.
Finally, I'd like to point out that the benefits from our capital spending strategy in the box plants that we've spoken about over the last couple of years are continuing to gain traction.
As we have said many times, this strategy of improving the technology and equipment in various plants as well as the construction of new box plants is based upon our customers' needs and demands and improving our capabilities to grow with them.
We're seeing this in our volume growth with new and existing customers, operating efficiencies and various operating and conversion cost areas.
Looking at the paper segment, EBITDA, excluding special items in the second quarter was $5 million with sales of $123 million or a 4% margin compared to second quarter 2019 EBITDA of $48 million and sales of $238 million for a 20% margin.
Second quarter paper prices and mix were about 5% below last year, and less than 1% below the first quarter of 2020.
As expected, our sales volume was about 45% below last year, and as announced back in April, we had our Jackson mill down for the months of May and June to help manage our supply with our demand outlook.
Unfortunately, our view of demand as we approached the end of June did not improve to the point of allowing us to restart the mill, resulting in us recently announcing that Jackson will also be down for the months of July and August.
We'll continue to assess the market conditions for potential September restart of the mill.
Cash provided by operations for the second quarter was $227 million, with free cash flow of $146 million.
The primary uses of cash during the quarter included capital expenditures of $81 million, common stock dividends of $75 million; net interest payments of $41 million and cash taxes of $39 million.
We ended the quarter with $853 million of cash on hand or $977 million, including marketable securities.
Our liquidity at June 30 was just over $1.3 billion.
During the second quarter, uncoated freesheet market conditions and especially demand for our cut size office paper products, continued to deteriorate rapidly arising from the COVID-19 pandemic.
These conditions, along with the estimated impact on our paper segment and its projected future results of operations, resulted in a triggering event indicating possible impairment of goodwill and the long-lived assets within our paper segment.
Due to this triggering event in a more likely than not assessment that an impairment of goodwill occurred, an interim quantitative impairment analysis as of May 31, 2020, was performed.
Based on this evaluation, we determined that goodwill was fully impaired for the paper segment and recognized a noncash impairment charge totaling $55.2 million.
The impairment charge is not tax deductible.
We also performed a recoverability test on the long-lived assets within our paper segment, including long-lived intangible assets as of May 31, 2020.
The results of this test indicated that these assets were 100% recoverable.
Lastly, we are planning to take or to make a change to the scheduled outages in our containerboard mills for the fourth quarter of this year versus what we discussed during last quarter's call.
Our current plans are to pull forward some recovery boiler work at the DeRidder Mill from next year to eliminate the risk of unscheduled downtime and during this period, perform a high-return capital project on the No.
one paper machine real section.
The fourth quarter estimate for our scheduled outages is now $0.59 per share, and the full year increment is now $1.05 per share.
As in the first quarter, the employees at all of our manufacturing and office locations ran their operations safely and in a very cost effective manner while facing the unprecedented conditions brought on by the COVID-19 pandemic.
All facilities continue to operate in adherence to CDC guidelines and followed a strict protocol for workplace operations as well as notification of and response to potential issues.
Although we did experience some challenges during the second quarter we have not experienced any material disruption in our operations or our supply chain to the pandemic due to the pandemic.
The accomplishments of our employees during this period with the help of our customers and suppliers were truly amazing.
Looking ahead to the third quarter we'll stay focused on preserving our financial and balance sheet strength during these uncertain times.
We remain well positioned to manage whatever lies ahead while ensuring we take care of the needs and expectations of our employees, customers, suppliers and shareholders.
During the unprecedented times corrugated products demand has performed quite well so far this year, and we expect the third quarter to be even stronger.
We began the third quarter with replenished yet still relatively low container board inventories and our expectation is that we'll end the quarter at levels below where we started while managing scheduled outages at two of our mills.
We've already announced the actions being taken in the paper business and we'll continue to evaluate the demand for our paper products throughout the third quarter.
However, shelter in place and lockdown conditions continue to change constantly across the country and such events and actions could adversely impact those expectations in the operations in not only our facilities but also the availability of services and products we rely upon from our suppliers.
As a result, we're not able to quantify our guidance for the third quarter.
These statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties including the direction of the economy and those identified as risk factors in our annual report on Form 10-K which is on file with the SEC. | packaging corp of america q2 earnings per share $1.38 excluding items.
q2 earnings per share $1.38 excluding items.
q2 earnings per share $0.59.
q2 sales $1.54 billion versus refinitiv ibes estimate of $1.63 billion. |
I'm Mark Kowlzan, Chairman and CEO of PCA and with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business and Bob Mundy, our Chief Financial Officer.
I'll then wrap things up and then would be glad to take questions.
Yesterday, we reported second quarter net income of $207 million or $2.17 per share.
Excluding special items, second quarter 2021 net income was also $207 million or $2.17 per share compared to the second quarter of 2020 net income of $132 million or $1.38 per share.
Second quarter net sales were $1.9 billion in 2021 and $1.5 billion in 2020.
Total company EBITDA for the second quarter excluding special items was $397 million in 2021 and $299 million in 2020.
Reported earnings in the second quarter of 2021 included special items expense and income rounding to a negligible impact while last year's second quarter net income included special items expenses of $0.79 per share related primarily to the impairment of goodwill associated with our Paper segment.
Excluding special items, the $0.79 per share increase in second quarter 2021 earnings compared to the second quarter of 2020 was driven primarily by higher prices and mix of $1.01 and volume $0.74 in our Packaging segment, higher volume in our Paper segment of $0.03, and lower non-operating pension expense of $0.03.
These items were partially offset by higher operating costs of $0.57 primarily due to inflation related increases in the areas of labor and fringes, repairs, materials and supplies, recycled fiber cost as well as other indirect and fixed cost areas.
We also had inflation related increases in our converting costs, which were higher by $0.05 per share while annual outage expenses were up $0.19 per share compared to last year.
Freight and logistics expenses were higher by $0.19 per share driven by historically high load to truck ratios, driver shortages, increases in fuel costs, and a higher mix of spot pricing to keep pace with the box demand.
Lastly, depreciation expense was higher by $0.01 per share and Paper segment prices and mix were lower by $0.01 per share.
Looking at our Packaging business, EBITDA excluding special items in the second quarter of 2021 of $409 million with sales of $1.7 billion resulted in a margin of 24% versus last year's EBITDA of $313 million and sales of $1.4 billion or a 22% margin.
Our mills and plants continued to do an outstanding job of meeting our customer needs while managing through certain material and chemical availability issues, a tight labor market, various freight and logistics challenges as well as the planned maintenance outages at four of our mills during the second quarter.
The mills executed the planned outages extremely well and with the help of the No.
3 machine at our Jackson, Alabama mill provided our plants the necessary containerboard to achieve an all-time record for total box shipments.
Although we were able to build some much-needed inventory, due to very high demand, we ended the second quarter below our targeted levels and at a new low for weeks of inventory supply for this time of year and ahead of expected very busy third and fourth quarters.
In the second half of the year, we still anticipate a planned outage at our Jackson, Alabama mill later in the third quarter as well as a significant planned outage at our DeRidder mill in the fourth quarter.
Implementation of the previously announced price increases continues to be executed extremely well by our sales organization while our engineering and technology organization and the employees at all of our mills and corrugated products plants continues to successfully implement numerous initiatives and projects to reduce cost through efficiency, productivity, and optimization improvements.
With inflation driven cost increases across most all areas of our company coupled with truck, rail, and barge challenges for both incoming and outgoing products and materials at our facilities, these efforts are absolutely critical to our success.
In addition, being a primarily virgin fiber based producer of containerboard minimizes the impact of significant increases in recycled fiber costs over the last several quarters.
As Mark indicated, containerboard and corrugated products demand remains very strong across most of all of our end markets.
Our plants achieved a new all-time quarterly record for total box shipments as well as a second quarter record for shipments per day, both of which were up 9.6% compared to last year's second quarter.
Through the first half of 2021, our box shipment volume is up 9% on a per day basis versus the industry being up 6.8%.
Driven by higher domestic demand, outside sales volume of containerboard was about 43,000 tons above the second quarter of 2020, but was down slightly versus the first quarter of this year due to lower export shipments, supplying the record requirements of our box plants and the need to position inventory levels ahead of what appears to be a strong second half of the year.
We are getting good realization from the implementation of our previously announced price increases across all product lines.
Domestic containerboard and corrugated products prices and mix together were $0.92 per share above the second quarter of 2020 and up $0.51 per share compared to the first quarter of 2021.
Export containerboard prices were up $0.09 per share versus last year's second quarter and up $0.04 compared to the first quarter of 2021.
Finally, I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to help offset inflation and improve our margins beyond just price increases.
The benefits from our capital spending strategy in the box plants that we've spoken about over the last few years have been extremely successful and put us in position to serve our customers better than ever before.
Our strategy of improving the technology and equipment in our plants and optimizing our footprint through the construction of new facilities as well as closing certain plants to consolidate business with other locations is based upon our customer's needs and demands and improving our capabilities to grow with them.
We're seeing this in our volume growth with new and existing customers, operating efficiencies and savings, and cost reductions in several conversion areas throughout our plants.
Looking at the Paper segment, EBITDA excluding special items in the second quarter was $12 million with sales of $142 million or an 8% margin compared to second quarter 2020 EBITDA of $5 million and sales of $3 million or a 4% margin.
Although about 1% below second quarter 2020 levels, prices and mix moved higher for the first and into the second quarter of 2021 as we continued to implement our announced price increases.
Volume was 17% above last year when pandemic issues caused us to take both machines at the Jackson, Alabama mill down for two months during the second quarter while this year, we ran the No.
1 machine at Jackson on paper and the No.
3 machine ran linerboard.
Now that we have our finished goods inventory at a new optimal level, sales volume in the second quarter is fairly reflective of what our production capability is as a three machine paper system.
We'll continue to assess our outlook for paper demand and will run our paper system accordingly.
Cash provided by operations for the second quarter was $228 million with free cash flow of $97 million.
The primary uses of cash during the quarter included capital expenditures of $131 million, common stock dividends of $95 million, cash taxes of $87 million, and net interest payments of $40 [Phonetic] million.
We ended the quarter with $972 million of cash on hand or $1.1 billion including marketable securities.
Our liquidity at June 30th was just under $1.5 billion.
As we move from the second to the third quarter in our Packaging segment, we expect continued strong demand for containerboard and corrugated products with one additional day for box shipments.
Paper segment volume should be relatively flat primarily due to the scheduled maintenance outage at the Jackson mill.
We will also continue to implement our previously announced price increases in both our Packaging and Paper segments.
Our annual outage costs will be lower with one outage in the third quarter versus four mill outages in the second quarter.
Inflation associated with most of the operating costs as well as freight and logistics expenses is expected to continue.
Energy costs will also be impacted due to higher seasonal usage and wood costs in our southern mills will be higher due to wet weather, low inventory, and high demand.
Considering these items, we expect third quarter earnings of $2.37 per share.
The statements were based on current estimates, expectations, and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K on file with the SEC. | packaging corp of america sees q3 earnings per share of $2.37.
sees q3 earnings per share $2.37.
q2 earnings per share $2.17 excluding items.
q2 sales $1.9 billion versus refinitiv ibes estimate of $1.78 billion.
do not currently expect special items to have a significant effect on q3 earnings. |
I'm Mark Kowlzan, Chairman and CEO of PCA.
And with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business; and Bob Mundy, our Chief Financial Officer.
And then I'll wrap things up and then we'll be glad to take questions.
Yesterday, we reported fourth quarter 2019 net income of $136 million or $1.43 per share.
Fourth quarter net income included special items of $26 million primarily for certain costs associated with the company's November 2019 debt refinancing, which included redemption premiums, financing fees and write-offs for unamortized debt issuance costs and treasury lock balances.
Excluding the special items, fourth quarter 2019 net income was $163 million or $1.71 per share compared to the fourth quarter 2018 net income of $205 million or $2.17 per share.
Fourth quarter net sales were $1.7 billion in both 2019 and 2018.
Total company EBITDA for the fourth quarter, excluding special items, was $335 million in 2019 and $387 million in 2018.
We also reported full year 2019 earnings excluding special items of $726 million or $7.65 per share compared to 2018 earnings, excluding special items of $760 million or $8.03 per share.
Net sales were $7 billion in both 2019 and 2018.
Excluding the special items, total company EBITDA in 2019 was $1.450 billion compared to $1.500 billion in 2018.
Excluding the special items, the $0.46 per share decrease in fourth quarter 2019 earnings compared to the fourth quarter of 2018 was driven primarily by lower prices and mix in our Packaging business segment of $0.57 and the Paper segment $0.02, higher operating costs $0.05, primarily due to inflation related increases with chemicals, labor and benefits expenses, repair and material costs and other outside service costs.
We also had higher non-operating pension expense of $0.02, higher depreciation expense of $0.01 and other costs including start-up related costs at our new Richland, Washington plant of $0.03.
These items were partially offset by higher volumes in our Packaging segment of $0.16 and Paper segment $0.01, lower annual outage expenses $0.04 and lower freight and logistics expenses of $0.03.
Looking at our Packaging business, EBITDA excluding special items in the fourth quarter 2019 of $303 million with sales of $1.5 billion, resulted in a margin of 21% versus last year's EBITDA of $352 million and sales of $1.5 billion or a 23% margin.
We continue to run our containerboard system to demand in a very cost effective manner.
Our mill production supplied the necessary containerboard to achieve a new all-time quarterly record for box shipments per day and a new fourth quarter record for total box shipments, allowing us to maintain our industry-leading integration rate.
Our new box plant in Richland, Washington had an excellent start up during the quarter, and we're now beginning to take full advantage of the benefits from our machine conversion at the Wallula Mill with its flexibility to produce from the heavier weight high performance linerboard grades, all the way down to the lighter weight high performance grades.
This gives us the capability to further optimize the mix in the inventory levels of the entire containerboard system and provide the type and the quality a board needs for our customers on the West Coast and on the Pacific Northwest and reduce our systemwide freight and logistics costs, which in the fourth quarter alone provided over $2 million of benefit.
For the full year 2019, Packaging segment EBITDA excluding special items was $1.3 billion with sales of $5.3 billion or a 22.1% margin compared to full year 2018 EBITDA of $1.4 billion with sales of $5.9 billion or 23.6% margin.
As Mark indicated, in corrugated products, we had an all-time record quarterly box shipments per day which were up 0.7% compared to last year's fourth quarter as well as a record fourth quarter total shipments, which were up 2.3% over last year.
Outside sales volume of containerboard was 6% below last year's fourth quarter while up 3.7% compared to the third quarter of 2019 due to higher export volume.
For the full year 2019, we established new annual records for total box shipments and box shipments per day, both up 0.9% versus 2018.
Domestic containerboard and corrugated products prices and mix together were $0.43 per share lower than the fourth quarter of 2018 and down $0.14 per share versus the third quarter of 2019 due to a less rich mix.
Export containerboard prices were $0.14 per share, below fourth quarter 2018 levels and down $0.02 per share compared to the third quarter of 2019.
Looking at the Paper segment, EBITDA excluding special items in the fourth quarter was $53 million with sales of $244 million or a 22% margin compared to the fourth quarter of 2018 EBITDA of $52 million and sales of $227 million or 23% margin.
We did a good job managing our inventories during the quarter as we ran the system to demand and reduced our office paper inventories by almost 10% versus the third quarter of 2019.
Volumes during the quarter or volume during the quarter was better than anticipated at levels above last year as well as the third quarter of 2019, and prices and mix were lower as expected, although slightly better than anticipated as well.
Throughout the quarter, the mills had control [Phonetic] over input costs and freight and logistics expenses.
For the full year 2019, Paper segment EBITDA excluding special items was $213 million and sales were $964 million or 22% margin compared to full year 2000 [Phonetic] EBITDA of $165 million with sales of $1 billion or 16% margin.
These results are the best we've ever achieved and reflect the hard work and dedication by all employees in our Paper business as well as the strategic decision to exit the white paper and pressure sensitive business at the Wallula Mill back in 2017.
We had very good cash generation in the fourth quarter with cash provided by operations of $329 million and free cash flow of $194 million.
The primary uses of cash during the quarter included capital expenditures of $136 million, common stock dividends totaled $75 million, $31 million for redemption premiums and fees associated with our debt refinancing, $34 million for federal and state income tax payments, pension payments of $4 million and net interest payments of $35 million.
In addition, in order to generate higher interest income for a portion of our cash, $146 million moved from cash to marketable securities on our balance sheet during the quarter.
We ended the quarter with $679 million of cash on hand or $825 million if you include the marketable securities.
During the quarter we refinanced $900 million of our existing 2.45% notes maturing in 2020 and 3.9% notes maturing in 2022 with new 10-year and-30-year notes.
This resulted in only a marginal increase in the company's average cash interest rate of just over a 0.1% and extended the company's overall debt maturity from 4.1 years to 10.3 years.
Gross debt remain unchanged at $2.5 billion.
For the full year 2019, cash from operations was a record $1.2 billion.
Capital spending was $399 million and free cash flow was a record $808 million.
Our final effective tax rate for 2019 was 24% and our final cash tax rate was 19%.
Regarding full-year estimates of certain key items for the upcoming year, we expect total capital expenditures to be between $400 million to $425 million.
DD&A is expected to be approximately $400 million, pension and post-retirement benefit expense of $22 million, and we expect to make cash pension and post-retirement benefit plan contributions of $85 million.
Our full year interest expense in 2020 is expected to be approximately $81 million and net cash interest payments should be about $84 million.
The estimate for our 2020 combined federal and state cash tax rate is approximately 19% and for our book effective tax rate of approximately 25%.
As we mentioned during the last quarter's earnings call, we have a heavy volume of scheduled mill outages in 2020.
In total, we are planning for nine outages this year versus six in 2019.
Four of these scheduled outages at three of our containerboard mills and one of our paper mills are planned for the first quarter versus only two outages in last year's first quarter.
This will have a negative impact on earnings per share of approximately $0.09 moving from the fourth quarter of 2019 to the first quarter of 2020, and $0.06 per share versus the first quarter of 2019.
The total earnings impact of these outages including lost volume, direct costs and amortized repair costs is expected to be $0.81 per share compared to $0.60 per share for 2019.
The current estimated impact by quarter in 2020 is $0.24 per share in the first quarter, $0.17 in the second, $0.13 in the third quarter and $0.27 per share in the fourth quarter.
Looking ahead as we move into the first quarter of 2020, in our Packaging segment, we expect lower prices as the remaining impact of the published domestic containerboard price decreases from last year work through the system as well as the negative impact from the recent January decreases in the published prices for linerboard medium.
We also expect lower export prices.
Containerboard volumes will be lower due to scheduled outages at our three largest mills during the quarter, but we do expect higher corrugated product shipments.
In our Paper segment, volumes will be lower due to the better than expected levels in the fourth quarter as well as the scheduled outage we have at our Jackson, Alabama mill.
As Bob mentioned earlier scheduled outage costs will be significantly higher than with the fourth scheduled in the first quarter versus just one in the fourth quarter of 2019.
Freight costs will be higher due to rail rate increases in certain areas and scheduled outage related increases.
Labor and benefit costs will be higher with annual wage increases and other timing related expenses.
There will be inflation with purchased electricity and most of our chemical and repair and material costs while seasonally colder weather will increase energy and wood costs.
We also expect our tax rate and depreciation expense to be slightly higher.
Considering these items, we expect first quarter earnings of $1.20 per share.
With that, we would be happy to entertain any questions.
The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K on file with the SEC. | compname posts q4 earnings per share of $1.43.
q4 earnings per share $1.71 excluding items.
q4 earnings per share $1.43.
sees q1 earnings per share $1.20.
q4 sales $1.7 billion versus refinitiv ibes estimate of $1.7 billion.
looking ahead to q1 in our packaging segment we expect lower prices.
expect lower export prices in packaging segment.
containerboard volumes will be lower due to scheduled outages at our three largest mills during quarter. |
The supplemental document is available on our website at prologis.com under Investor Relations.
These statements are based on current expectations, estimates and projections about the market and the industry in which Prologis operates as well as management's beliefs and assumptions.
And Tom, will you please begin?
Positive momentum in the fourth quarter has carried into 2021 as evidenced by our operating results, profitable deployment activities and strong outlook.
Demand driven by the powerful economic recovery, retail revolution and higher inventory levels is unfolding more strongly than we expected.
Headlines in the past 90 days have been a testament to the value of resilient supply chains.
Those who were prepared are now growing and taking market share.
There is great momentum moving through the supply chain that is signaled by retail sales, import volumes and rising inventory levels.
This will continue as inventory to sales ratios have just begun to rise as companies race to keep pace with demand.
Starting with our proprietary metrics with our view of the market, space utilization is 84.5%, up 100 basis points from the last 90 days.
Our customers tell us their activity levels are rising at the fastest pace since 2019.
Lease proposals reached 93 million square feet in the first quarter, a new high watermark and are up 30%[Phonetic] from 2020 adjusted for the size of our portfolio.
Lease signings were 60 million square feet, our second highest quarter on record.
Much of this activity is in new leasing, and as a result, retention was 69% for the quarter as we're optimizing the credit and rents.
Given our high volume of lease signings, our portfolio -- operating portfolio was 96.4% leased at quarter end.
Our leasing mix continues to broaden with strong demand continuing from space sizes above 100,000 square feet and small spaces demand is improving.
E-commerce demand remains elevated, representing 25% of new lease signings in the first quarter.
The balance of leasing is diverse, with outsized growth among companies that provide food and consumer products as well as renewed momentum in the construction segment as housing expands.
In the U.S., we now expect net absorption of 300 million square feet in 2021, which would be the highest in history.
This strong demand is being masked by supply, and we expect 300 million square feet of deliveries this year.
However, supply remains broadly disciplined.
Years of historic low vacancy rates have constrained demand due to the lack of available properties, particularly in the most desirable markets.
Many of our markets faced shortages of land logistics uses.
In addition, obsolescence and conversions to higher and better use have added to this broad-based scarcity.
Vacancies are below 2% in many of our top markets such as Southern California, Toronto, Germany's main markets and Tokyo.
Our supply watchlist continues to include just four markets.
Houston, Madrid, Poland and West China, which taken together account for just over 5% of our NOI.
More recently, we've begun to see a rapid acceleration in replacement costs.
In the U.S., we expect replacement cost to increase 20% to 25% over the two-year period through 2021, the fastest rate ever.
Our procurement team is proactively mitigating these increases by securing favorable pricing and delivery schedules.
For example, the team has procured steel for 5.2 million square feet of starts at pricing roughly 5% below market and providing us with the 10-week to 20-week schedule advantage.
Strengthening demand and ultra-low vacancies are leading customers to increasingly compete for space, which is translating into pricing power.
Rent growth for the quarter, which was up 2.4% in the U.S., outperformed our expectations.
We are raising our 2021 rent forecast to 6.5% in the U.S. and 6% globally.
Our in-place to market rent spread now stands at 13.6%, up 80 basis points sequentially.
This represents future annual incremental organic NOI growth potential of more than $600 million.
Turning to valuations, logistics assets values are up a record 7.5% over the last two quarters.
A way to capital has emerged coming both from rising real estate allocations and investor strategically reassessing their property focus type.
Applying the valuation uplift to our $148 billion owned and managed portfolio, we estimate that the value of our real estate rose by more than $10 billion over the past two quarters.
The work we've done to position the portfolio and optimize the balance sheet is continuing to deliver excellent financial results.
For the quarter, core FFO was $0.97 per share, which includes net promote expense of $0.01.
Net effective rent change on rollover was 27%, led by the U.S. at 32%.
We are prioritizing rents over occupancy in substantially all of our markets.
Occupancy at quarter end was 95.6%, down 60 basis points sequentially, in line with the normal first quarter seasonality.
Rent collections remain very strong.
We effectively had no bad debt expense in the quarter.
Our share of cash same-store NOI growth was 4.5%, driven by the U.S. at 4.8%.
For strategic capital, our team raised $1.4 billion in the first quarter as investor demand remains robust.
Equity cues for our open-ended vehicles are at an all-time high, at more than $3 billion at quarter-end.
This level of interest is another indicator that valuations for high-quality logistics assets should continue to increase.
Looking at the balance sheet, we continue to maintain excellent financial strength with liquidity and combined leverage capacity between Prologis and our open-ended vehicles now totaling $14 billion.
We were able to get in front of the recent increase in interest rates and issued $3.5 billion of debt with a weighted average rate of 96 basis points and a term of 11 years.
This activity included the issuance of a 10-year U.S. dollar bond with the spread of 55 basis points, the lowest 10-year REIT bond spread ever and the completion of our 15th green bond offering.
The assets backing these bonds are the product of two decades of sustainable development.
Our debt maturity stack is in excellent shape with minimal maturities until 2026.
Subsequent to quarter end, we closed on a green revolving credit facility, adding $500 million more capacity to our already exceptionally strong liquidity position.
Moving to guidance for 2021.
Our outlook is more positive across the board.
Here are the updates on our share basis.
We are increasing our cash same-store NOI growth midpoint by 75 basis points and narrowing the range to 4.5% to 5%.
We now expect bad debt expense to be in line with our historical average at approximately 20 basis points in gross revenues, down from our prior guidance midpoint of 30 basis points.
We're increasing our average occupancy midpoint for our operating portfolio by 50 basis points to 96.5%.
Strategic capital revenue, excluding promotes, will now range between $450 million and $460 million, up $12.5 million at the midpoint.
The increase is primarily due to higher asset management fees resulting from increased property values.
Whether you look at public comps or recent transactions, both would indicate that our strategic capital business is significantly undervalued.
We are increasing development starts by $400 million, and now expect a midpoint of $2.9 billion.
Build-to-suits will comprise more than 40% of the volume.
Our land portfolio today comprised of land auctions and covered land place supports approximately $17 billion of future development.
We're increasing the midpoint for dispositions and contributions by $800 million in total.
Consistent with the rise in asset value and higher contributions, we're increasing realized development gains by $200 million with a new midpoint of $750 million.
Net deployment uses are now expected to be $50 million with leverage remaining effectively flat in 2021.
Putting this all together, we're increasing our core FFO midpoint by $0.06 and narrowing the range to $3.96 per share to $4.02 per share.
Core FFO, excluding promotes, will range between $3.98 per share and $4.04 per share, representing year-over-year growth at the midpoint of 12%.
Our efforts over the past 10 years to reposition the portfolio and balance sheet have set us up to outperform in 2021 and beyond.
And you're probably tired of us saying this, but it continues to be true, we believe the best years for the Company are still ahead of us. | q1 core ffo per share $0.97.
sees 2021 core ffo $3.96 to $4.02.
qtrly cash same store noi per prologis share up 4.5%.
sees 2021 cash same store noi - pld share to be up 4.5% to 5.0%. |
The second quarter exceeded our expectations, both in terms of our results and outlook for 2021 and beyond.
With our exceptional portfolio and team, we set high watermarks across several measures this quarter.
Demand for space is robust and diverse and market conditions remain the healthiest in our 38-year history.
In the second quarter, lease signings were 64 million square feet and lease proposals were 84 million square feet, both remained above average and were driven by new and development leasing.
Likewise, at the largest IBI Customer Activity Index reached a new high in the second quarter, and early indicator of strong future demand.
Our leasing mix is broad.
Currently, the greatest demand is for spaces above 100,000 square feet.
For smaller spaces, activity is picking up.
We signed 518 leases totaling 18 million square feet in the quarter, the highest volume in this segment in three years.
For customer segments, e-commerce continues to lead the way, representing 30% of new lease signings in the second quarter.
While Amazon remains steady at 6% of total new leasing, we have seen many mortgage commerce players come to the table.
For example, we signed 168 new e-commerce leases in the first half of 2021 versus 53 in the first half of last year.
Supply chains are racing, beginning to restart.
And as they do, it will create more demand going forward.
Containerized imports are up 33% through May versus pre-pandemic levels as retailers replenish their supply chains.
While inventories have risen 3% from their trough, they have struggled to grow this year as retail sales are up 19% from pre-pandemic levels.
We see the current low level of inventories in our space utilization, which at 84.3% is below the long-term average of 85%.
This is yet another sign that our customers are operating with sub-optimal levels of inventory.
Putting together recent outperformance and ongoing momentum, we are raising our 2021 U.S. forecast for net absorption by 20% to 360 million square feet and deliveries by 8% to 325 million square feet.
Looking forward, we foresee continued supply balanced by demand with historic low vacancy of 4.5% carrying into 2022.
With balanced demand and supply, acute scarcity in our markets is driving the record rent and value growth.
Our operating portfolio lease percentage rose by 80 basis points to 97.2% at quarter end.
Customers continue to compete for space and are making decisions faster with lease gestation in the quarter of just 44 days.
When we look at the factors impacting supply, significant barriers exist in our markets and include a lack of buyable land, increasingly difficult and expensive permitting and entitlement processes and rapidly escalating replacement costs.
Our research team released an excellent paper on this last month, which you can find on our website.
Our supply watchlist remains quite small.
We reviewed Houston in the quarter, leaving just Spain and Poland.
Accelerating demand in the quarter combined with ultra-low vacancies translated to a very strong rent growth of 4.1% in our U.S. markets, exceeding our expectations.
As a result, we are raising our 2021 rent forecast an all time high of 10.3% for the U.S., up approximately 40 basis points from our prior estimate and 8% globally, which is up 300 basis points.
Our in-place to market rent spread is now the widest in our history at 16.9%, up 330 basis points sequentially.
This represents future gas in the tank of nearly $700 million in NOI or $0.90 per share.
Our assets have strongest quarterly uplift in our history, rising 8% in the second quarter alone with the U.S. up more than 10% and Europe up 5.6%.
On the topic of valuation, I want to point out that we enhanced the NAV disclosure in our supplemental related to property management fees.
Given the size and scale of our portfolio, we created substantial value through our operational advantages.
As a result, we know the real estate is worth more in our hands.
Accordingly, we are now including net property management fee income as the bone in the adjusted NOI in our NAV disclosure.
Switching gears to results for the quarter, our team and portfolio continued to deliver excellent financial results.
Core FFO was $1.01 per share with net promote earnings effectively zero, rent change on rollover was 32%.
Occupancy at quarter end was 96.8%, up 110 basis points sequentially.
Cash same-store NOI growth accelerated by 5.8%, up 290 basis points year-over-year.
We tapped into favorable market conditions and disposed off $880 million of non-strategic assets across our portfolio.
In addition, just last week, we completed the sale of a $920 million owned and managed portfolio including all of the non-strategic IPT assets.
It's worth noting that to date we have sold $2 billion of non-strategic assets from our IPT and LPT acquisitions by pricing more than 23% above underwriting.
Turning to strategic capital.
Our team raised almost $600 million in the second quarter.
Equity cues from our open-ended vehicles [Indecipherable] $3.3 billion at quarter end, hitting another all-time high.
Robust investor interest has prompted private equity limited partners to shift away from diversified to more sector specific funds, particularly for the logistics sector.
In light of recent asset management transactions and public comps, the value being ascribed to our strategic capital business is legally understated.
For the balance sheet, we continue to maintain excellent financial strength with liquidity and combined leverage capacity between Prologis and our open-ended vehicles totaling $14 billion.
Moving to guidance for 2021.
Our outlook is further improved given higher rent growth, higher valuations and robust demand.
Here are the key updates on an our share basis.
We're increasing our cash same-store NOI growth midpoint by 75 basis points to now range between 5.25% and 5.75%.
We expect bad debt expense to be approximately 10 basis points of gross revenues, down from our prior guidance midpoint of 20 basis points and well below our historical average.
We are increasing the midpoint for strategic capital revenue, excluding promotes, to $470 million, up $15 million from prior guidance.
This upward revision is due to increased asset management fees resulting from higher property values.
Faster development lease-up and higher asset values are also leading to an increase in promotes.
We now expect net promote income of $0.02 for this year, an increase of $0.04 from our prior guidance.
We're also increasing development starts by $300 million and now expect a midpoint of $3.2 billion.
Build-to-suits will comprise more than 40% of development volume.
Our owned and managed land portfolios compose of land, options and covered land place supports $18 billion of future development over the next several years.
We are also increasing the midpoint for dispositions and contributions by $650 million in total.
This increase will have roughly a $0.02 drag on earnings this year given the timing to redeploy incremental proceeds.
We now expect to generate net deployment sources of $200 million at the midpoint with leverage remaining effectively flat in 2021.
Taking into assumption there is no account, we're increasing our core FFO midpoint by $0.07 and narrowing the range to $4.04 to $4.08 per share.
Core FFO excluding promotes will range between $4.02 and $4.06 per share, representing year-over-year growth at the midpoint of almost 13%.
We continue to maintain exceptional dividend coverage, and our 2021 guidance implies a payout ratio in the low-60% range and free cash flow after dividends of $1.3 billion.
In closing, the first half of the year has been extraordinary and our outlook is equally promising.
Visibility into our strong future organic earnings potential is very clear.
We have a significant embedded in place to market rent spread, the development ready land portfolio, substantial balance sheet capacity and ability to create value for our customers beyond the real estate. | core funds from operations per diluted share was $1.01 for quarter.
sees 2021 core ffo per share of $4.04 to $4.08.
sees 2021 core ffo per share, excluding net promote income, of $4.02 to $4.06.
qtrly cash same store noi per prologis share 5.8%. |
Third quarter results exceeded expectations and were underpinned by record increases in market rents and valuations.
Operating conditions are being shaped by structural forces that continue to drive demand.
At the same time vacancies are at unprecedented lows.
Space in our markets is effectively sold out.
In the last 90 days supply chain dislocations have become even more pronounced, with customers acting with a sense of urgency to secure the space they need.
As demand surges, having the right logistics real estate in the right locations has never been more mission critical to our customers.
During the third quarter, we signed 56 million square feet of leases and issued proposals on 84 million square feet.
Spaces above 100,000 square feet are effectively fully leased.
Our last touch segment continued to gain momentum with new lease signings growing by 44%.
Ecommerce requirements continue to broaden across a range of industries, with this segment representing one quarter of new lease signings.
The activity was down sequentially as anticipated, although remains above trend.
Given the sharp ramp-up in demand, we are raising our 2021 US forecast for net absorption by 14% to a record 375 million square feet against deliveries of 285 million square feet, resulting in year-end vacancy reaching a new low of 4%.
I want to point out that we revised our dataset here, this quarter to reflect only Prologis markets.
Strong demand is being met with historic low vacancy pre-leasing in the US, the Liberty pipeline has reached 70%, its highest level ever as customers continue to compete for space.
Acute scarcity in our global markets is driving record rent and value growth.
In the third quarter alone, rents grew 7.1% in our US markets, far exceeding our expectations.
We are increasing our 2021 market rent forecast significantly to an all-time high of 19% for the US and 70% globally, both up approximately 700 basis points.
Our in-place-to-market rent spread jumped 500 basis points in the quarter and is now approximately 22% with an upward bias.
This current rent spread represents embedded organic NOI growth of more than $925 million or $1.25 per share.
Record rent growth is translating to record valuation increases.
Our logistics portfolio posted the largest quarterly increase in our history, rising 9.5% globally, bringing the year-to-date increased to an impressive 4% -- an impressive 24%, sorry about that.
We expect that the ongoing network reconfiguration and expansion required to meet consumer needs and minimize disruptions will fuel demand tailwinds over the next decade.
Switching gears to results for the quarter.
Core FFO was $1.04 per share, with net promote earnings of $0.01.
Rent change on rollover was strong at 27.9%, slightly lower sequentially due to mix.
Average occupancy was 96.6%, up 60 basis points sequentially and we reached 98% leased at quarter end.
Cash same-store NOI growth accelerated to 6.7%, up 90 basis points sequentially.
We had a very productive quarter on the deployment front.
Margins on development stabilizations remained elevated, coming in at 47%.
Our development starts were $1.4 billion, consisting of 31 projects across 21 markets, with estimated value creation of more than $520 million.
Turning to strategic capital, our team raised almost $500 million in the third quarter and $2.5 billion year-to-date.
Equity cues for our open-ended vehicles were $3.4 billion at quarter end, another all-time high.
Moving to guidance for 2021.
Our outlook has further improved and here are the key updates on our share basis.
We are tightening and increasing our cash same-store NOI growth to now range between 5.75% and 6%.
We're increasing the midpoint for strategic capital revenue, excluding promotes by $12.5 million and now range between $480 million and $485 million.
We expect net promote income of $0.05 per share for the year, an increase of $0.03 from our prior guidance.
In response to strong demand, we are increasing development starts by $450 million to a new midpoint of $3.7 billion.
Our owned and managed land portfolio now supports 180 million square feet and more than $21 billion of future build-out potential, providing a clear runway for significant value creation over the next several years.
We're also increasing the midpoint for acquisitions by $500 million.
The increased pace of acquisitions relates to our focus on covered land plays and urban last touch opportunities.
We now expect net deployment uses of $650 million at the midpoint.
Taking these assumptions into account, we are increasing our core FFO midpoint by $0.06 and narrowing the range to $4.11 to $4.13 per share.
Core FFO excluding promotes will range between $4.06 and $4.08 per share, representing year-over-year growth at the midpoint of almost 14%, while deleveraging by more than 300 basis points.
We expect to generate $1.4 billion in free cash flow after dividends with a very conservative payout ratio below 60% range.
While our year-to-date results have been extraordinary, most of the benefits from the current environment will accrue to the future.
Our 22% in-place-to-market rent spread, the valuation impact on promotes, our leverage capacity, the $21 billion of development, build out, and most importantly the vast opportunity set that our global footprint provides, all pave the way for both significant and durable long-term growth.
As I mentioned at the outset of my remarks, the disruptions within the supply chain won't be solved overnight.
Prologis plays a unique role in the industry and we're committed to helping find long-term solutions, that's why we're working closely with our customers, policymakers and community partners to help address the problems, which range from warehouse space to transport infrastructure to labor scarcity.
In closing, I want to highlight two important upcoming Prologis events.
First, this Monday, we'll be hosting a webinar that we'll dive into our development and strategic capital businesses.
And second, on October 27, we're bringing together supply chain and community thought leaders to focus on some the most pressing issues in logistics today including workforce, energy and transportation.
Please visit our website for more information and the registration links for both events. | sees 2021 core ffo per share of $4.11 to $4.13.
qtrly core ffo per diluted share was $1.04 versus $0.90 for same period in 2020.
q3 cash same store noi per prologis share up 6.7%. |
PMT produced another strong quarter of financial results with net income attributable to common shareholders of $65.4 million or diluted earnings per share of $0.67.
These strong results were driven by strong correspondent production results and the continued improvement in the fair value of its GSE credit risk transfer investments.
Additionally, PMT's CRT investments continued to benefit from the elevated prepayment speeds we are seeing across the industry.
MSR fair value gains were more than offset by fair value declines on Agency MBS and interest rate hedges due to significant prepayment activity and elevated hedge costs driven by market volatility.
PMT paid a common dividend of $0.47 per share.
Book value per share increased 3% to $20.90 from $20.30 at the end of the prior quarter, partially due to strong earnings and partially due to the issuance of senior exchangeable notes.
In the current and evolving market environment, PMT is uniquely positioned as the largest correspondent lender in the country to continue to create organic investments in MSRs sourced from the high-quality conventional production of loans it delivers to the GSEs.
In addition to benefiting from the historically large origination market we are currently in, PMT also benefits from the investments in technology and fulfillment capacity made by its manager and services provider, PennyMac Financial.
Further, PMT's investments in MSR and CRT benefit from PFSI's expertise in managing credit risk utilizing a variety of loss mitigation strategies.
Our high-quality loan production in the quarter resulted in the creation of more than $400 million in new, low‐rate mortgage servicing rights, and PMT ended the quarter with approximately $2.4 billion in fair value of MSRs, which we expect will perform well in a rising rate environment.
Also, this quarter, we further strengthened PMT's balance sheet, issuing senior exchangeable notes and term asset‐backed financing to replace less favorable short‐term securities repurchase agreements.
We issued $659 million of three‐year term notes associated with PMT's sixth CRT transaction and the entirety of PMT's CRT investments is now financed with term notes that do not contain margin call provisions, providing stable financing throughout much of the expected life of the asset.
We also issued $350 million in five-year Fannie Mae MSR term notes to support the growing MSR portfolio.
This term financing also more closely aligns to the expected life of the asset.
And finally, we issued $345 million of five‐year senior exchangeable notes, upsized from an initial $200 million offered with strong support from institutional investors.
This issuance with an initial conversion price of $21.69 represents an attractive premium to PMT's book value per share at issuance.
In addition, the option value of the conversion premium contributed partially to the increase in PMT's book value during the quarter.
I will discuss the mortgage origination landscape and how we believe we have positioned PMT to continue delivering attractive risk‐adjusted returns to our shareholders.
The origination market continues to be historically strong as mortgage rates remain near record lows despite the increases in the 10‐year treasury yield since the start of the year.
Recent economic forecasts for 2021 originations range from $3.3 trillion to $4 trillion, while average forecasts for 2022 originations remain strong at $2.6 trillion.
It is worth noting that in each of 2021 and 2022, purchase originations are expected to total $1.7 trillion, almost 40% higher than 2019 levels.
So, while refinance origination volumes are expected to decline significantly over time as a result of higher interest rates, we believe PMT is well-positioned to continue organically creating investments, especially as we are one of the largest producers of purchase money loans in the U.S.
We believe favorable dynamics continue to drive significant opportunities for PMT in correspondent production.
Additionally, we expect the $1.5 billion annual limit per client on cash window deliveries into each of the GSEs to drive more volume into the correspondent channel.
Finally, we expect limitations placed on the GSEs' ability to guarantee certain types of loans to create a heightened need for private capital over time, providing opportunities for increased investment from companies like PMT that have established expertise in the mortgage capital markets and private label securitizations.
PMT's capital deployment is currently focused on the large opportunity in conventional correspondent production and the related high‐quality mortgage servicing rights.
As David mentioned, PMT's position as an industry‐leading producer of mortgage loans gives us a unique ability to create attractive, high‐quality organic investments in MSRs at low interest rates.
Furthermore, PennyMac Financial's history in successfully executing loss mitigation strategies in its role as the servicer of the loans underlying these investments creates a strong alignment of interests.
On Slide 9, we illustrate the run‐rate return potential from PMT's investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters.
In total, we expect a quarterly run‐rate return for PMT's strategies of $0.50 per share or a 9.5% annualized return on equity.
This run‐rate potential estimate is down slightly from what we showed last quarter.
In our credit-sensitive strategies, a slight reduction in our expected CRT returns reflects credit spreads that have tightened.
In contrast, the return potential for our interest rate-sensitive strategies has improved modestly, driven by expectations for higher carry-on agency MBS.
The change in PMT's run‐rate expected return is also driven by a shift in equity allocation toward the interest rate-sensitive strategies from the correspondent production segment as a result of expectations for lower origination market volumes over the next year.
Let's begin with highlights in our correspondent production segment.
Total correspondent acquisition volume in the quarter was $51.2 billion in UPB, down 10% from the prior quarter and up 72% year over year.
Sixty-six percent of PMT's acquisition volumes were conventional loans, essentially unchanged from the prior quarter.
We maintained our leadership position in the channel as a result of our consistency, competitive pricing, and the operational excellence we continue to provide to our correspondent partners.
PMT ended the quarter with 727 correspondent seller relationships, up from 714 at December 31.
Conventional lock volume in the quarter was $34 billion in UPB, down 14% from the prior quarter and up 78% year over year.
Margins in the channel have normalized and PMT's correspondent production segment pre-tax income as a percentage of interest rate lock commitments was 10 basis points, down from 13 basis points in the prior quarter.
Acquisition volumes remained strong in April, with $18.5 billion in UPB of total acquisitions and $15.6 billion in UPB of total locks.
PMT's interest rate-sensitive strategies consists of our investments in MSR sourced from our correspondent production, and investments in agency MBS, non‐agency senior MBS, and interest rate hedges with offsetting interest rate exposure.
The fair value of PMT's MSR asset at the end of the first quarter was $2.4 billion, up from $1.8 billion at the end of the prior quarter.
The substantial increase in the fair value of our MSR investments reflects both new MSR investments and fair value gains that resulted from higher interest rates.
Notably, during the quarter PMT sold its remaining investment in ESS back to PFSI at fair value.
The capital that resulted from the sale of this investment is expected to be redeployed into attractive MSR investments.
Now, I would like to discuss the drivers of performance in PMT's credit-sensitive strategies, which primarily consist of investments in CRT.
The total UPB of loans underlying our CRT investments as of March 31 was $48 billion, down significantly quarter over quarter as a result of elevated prepayments.
Fair value of our CRT investments at the end of the quarter was $2.58 billion, down slightly from $2.62 billion at December 31 as fair value gains largely offset the decline in asset value that resulted from prepayments.
The 60-day delinquency rate underlying our CRT investments was essentially unchanged quarter over quarter as the overall number of delinquent loans declined roughly in proportion with prepayments.
PFSI's position as the manager and servicer of loans underlying PMT's CRT investments gives PMT a strategic advantage given we can work directly with borrowers who have loans underlying PMT's investments and have experienced hardships related to COVID‐19.
PFSI uses a variety of loss mitigation strategies to assist delinquent borrowers, and because of the scheduled loss transactions, notably PMTT1‐3 and L Street Securities 2017‐PM1, trigger a loss if a borrower becomes 180 days or more delinquent, we have deployed additional loss mitigation resources and continue to assist those borrowers at risk.
With respect to PMTT1‐3, which comprises 6% of the fair value of PMT's overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $34 million.
Through the end of the quarter, losses to date totaled $7 million.
As a reminder, mortgage obligations underlying PMTT1‐3 become credit events at 180 days or more delinquent regardless of any grant of forbearance.
Moving on to L Street Securities 2017‐PM1, which comprises 18% of the total fair value of PMT's CRT investment, such losses will become reversed credit events if the payment status is reported as current after a forbearance period due to COVID‐19.
PMT recorded $14 million in net losses reversed in the first quarter as $43 million of losses reversed more than offset the $29 million in additional realized losses.
We believe the majority of the remaining losses have the potential to reverse if the payment status of the related loan is reported as current after the conclusion of the CARES Act forbearance.
We estimate that an additional $32 million of these losses were eligible for reversal as of March 31 subject to review by Fannie Mae and we expect this amount to increase as additional borrowers exit forbearance and reperform.
We estimate that only $6 million of the losses outstanding had no potential for reversal.
This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017‐PM1 exceeding its face amount by $46 million at the end of the quarter.
The most common method for borrowers to exit forbearance to date has been a COVID‐19 payment deferral.
This allows the borrower to defer the amount owed of the payment deferral to the end of the loan term and the loan is deemed current after the borrower makes a specified number of mortgage payments.
PMT reports results through four segments: credit-sensitive strategies, which contributed $134.3 million in pre-tax income; interest rate sensitive strategies, which contributed $64.6 million in pre-tax loss; correspondent production, which contributed $35.6 million in pre-tax income; and the corporate segment, which had a pre-tax loss of $14.2 million.
The contribution from PMT's CRT investments totaled $135.7 million.
This amount included $98.1 million in market‐driven value gains, reflecting the impact of credit spread tightening and elevated prepayment speeds.
As a reminder, faster prepayment speeds benefit PMT's CRT investments as payoffs of the associated loans reduce potential for realized losses and return principal at par for investments currently held at a discount.
Net gain on CRT investments also included $42.7 million in realized gains and carry, $13.3 million in net losses reversed, primarily related to L Street Securities 2017‐PM1, which Vandy discussed earlier, $200,000 in interest income on cash deposits, $15.9 million of financing expenses, and $2.5 million of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID‐19 pandemic.
PMT's interest rate sensitive strategies contributed a loss of $64.6 million in the quarter.
MSR fair value increased $338 million during the quarter.
$380 million in fair value gains as a result of lower expectations for prepayment activity in the future driven by higher mortgage rates was partially offset by $42 million in other valuation losses, primarily driven by elevated levels of prepayment activity.
Fair value declines on Agency MBS and interest rate hedges totaled $448 million and included $29 million in hedge costs driven by market volatility that also impacted hedge effectiveness in the quarter.
Valuation-related losses in the quarter were somewhat offset by income excluding market‐driven value changes, as servicing fees increased from the prior quarter primarily due to a larger servicing portfolio and as PMT continues to benefit from increasing recapture income from PFSI.
We believe, over time, our results have demonstrated successful hedging of mortgage servicing rights in volatile markets.
PMT's Correspondent Production segment contributed $35.6 million to pre-tax income for the quarter, down from $52.7 million in the prior quarter as gain on sale margins normalized.
PMT's corporate segment includes interest income from cash and short‐term investments, management fees, and corporate expenses.
The segment's contribution for the quarter was a pre-tax loss of $14.2 million.
Finally, we recognized a provision for tax expense of $19.4 million in the first quarter, compared to a tax benefit of $9 million in the prior quarter.
As we look at the evolving mortgage landscape, we believe PMT remains uniquely positioned to capitalize on the current environment characterized by elevated production volumes.
Additionally, we expect changes to the GSE preferred stock purchase agreements limiting cash window deliveries to make the role of well‐capitalized correspondent lenders like PMT increasingly important to a healthy mortgage market.
Finally, we look forward to further discussing our outlook for the business at our upcoming Investor Day for PennyMac Mortgage Investment Trust and PennyMac Financial. | q1 earnings per share $0.67. |
For the third quarter 2021, PMT reported a net loss attributable to common shareholders of $43.9 million or $0.45 per common share, driven by fair value decline in PMT's interest rate sensitive strategies.
As noted in second quarter financial reports FHFA's elimination of the adverse market refinance fee contributed to a significant decline in the fair value of PMT's MSRs in the third quarter, along with continued elevated prepayments.
These impacts were partially offset by strong returns in our credit-sensitive strategies and correspondent production segments.
PMT paid a common dividend of $0.47 per share.
Book value per share decreased to $19.79 from $20.77 at the end of the prior quarter.
We also successfully completed the issuance of $250 million in preferred shares in a public equity offering.
Our high-quality loan production continues to organically generate assets for PMT, and this quarter, $28.6 billion in UPB of conventional correspondent production led to the creation of more than $425 million in new, low-coupon mortgage servicing rights.
From PMT's production volumes we are also creating new credit assets, currently in the form of agency-eligible investor loan securitizations.
During the quarter, we purchased subordinate securities from two securitizations of investor loans totaling $548 million in UPB from PMT's correspondent production, and after the quarter, we retained mortgage securities from PMT's inaugural securitization of investor loans totaling $414 million in UPB.
In aggregate, at the end of October, the fair value of PMT's investments in investor loans was approximately $60 million.
With interest rates rising, the mortgage market is shifting, and we believe PMT is uniquely positioned to capitalize on current and evolving investment opportunities given its scale and leadership position in correspondent production.
Leading economists forecast a smaller origination market in 2022 driven by a decline in refinance originations.
As a result, we expect to see increased levels of competition and continued lower margins across the industry.
However, strong demographic and secular trends are expected to drive growth in purchase activity in 2022, and we believe PMT is well-positioned as a leader in the production of purchase money loans.
For more than 12 years, PMT has successfully navigated various regulatory, interest rate, and origination market environments while delivering strong returns.
This can be attributed to the strong management team at PennyMac and the risk management disciplines we have focused on since our founding.
Organic asset creation remains a competitive advantage for PMT relative to other mortgage REITs.
While the future of lender risk share is uncertain, we remain focused on opportunities in the current market environment, such as MSRs and investor securitizations, with attractive long-term return profiles.
With that, I will now turn over to Andy Chang, PMT's senior managing director and chief operating officer.
I will discuss the mortgage origination landscape, the impact of recently announced changes from FHFA on PMT, and review the run rate return potential from PMT's strategies.
While the origination market is in a period of transition, it continues to be large.
Despite the increase in recent weeks, interest rates continue to be historically low and remain within the projections of leading economists.
Current forecasts for 2022 originations remain strong at $3 trillion.
It is worth noting that purchase originations are expected to grow to a record $2 trillion in 2022, up 9% from this year's levels, while refinance originations are expected to decline to $1.1 trillion.
Given this backdrop, we believe the outlook for PMT remains favorable given its purchase-money focus and flexible investment platform with organic asset-creation capabilities.
That said, the current transition in the market is driving heightened competition, as David discussed earlier, which is expected to affect PMT's near-term results in correspondent production.
Regulatory changes are also impacting the competitive landscape with a new administration and changing focus.
First, FHFA issued a notice of proposed rulemaking to amend the regulatory capital framework for the GSEs, which would introduce more favorable GSE capital treatment for CRT and an incentive for the GSEs to resume CRT issuance.
Notably, Fannie Mae recently completed a new CAS transaction, but the future of lender risk share is still uncertain.
Next, FHFA suspended the GSE's previously imposed 7% limit on the acquisition of investment properties and second homes, resulting in greater liquidity and competition for these loans.
However, PMT has the flexibility to determine the best execution for investor loans, between private-label securitization or delivery to the agencies.
FHFA also suspended the $1.5 billion annual cash window limit for each of the GSEs, increasing competition for loans among correspondent aggregators like PMT. So while correspondents have more flexibility to deliver loans to the GSEs, we expect PMT to remain an attractive option to correspondent sellers looking to sell whole loans servicing-released, particularly as the competitive environment drives tighter origination margins.
On Slide 9, we illustrate the run rate return potential from PMT's investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters.
In total, we expect the quarterly run rate return for PMT strategies to average $0.42 per share or an 8.3% annualized return on equity.
This run-rate potential reflects a moderation of performance expectations for PMT's existing strategies in the near term.
In our credit-sensitive strategies, lower CRT returns reflect credit spreads that have tightened.
The return potential for our interest rate-sensitive strategies has decreased, driven by the expectation that prepayment speeds remain elevated in the near term.
In correspondent production, the expected returns reflect our view that heightened competition to acquire conventional loans is expected to result in a lower income contribution than we have experienced in recent quarters.
This analysis excludes potential contributions from new products under exploration, such as new investments in CRT or the introduction of new products other than investor loans.
It is also important to note, our forecast for PMT's taxable income continues to support the common dividend at its current level of $0.47 per share.
Let's begin with highlights in our correspondent production segment.
Total correspondent acquisition volume in the quarter was $44 billion, down 6% from the prior quarter and down 1% from the third quarter of 2020.
65% of PMT's acquisition volumes were conventional loans, similar to the prior quarter.
We maintained our leadership position in the channel as a result of our consistency, competitive pricing, and the operational excellence we continue to provide to our correspondent partners.
PMT ended the quarter with 755 correspondent seller relationships.
Conventional lock volume in the quarter was $29.4 billion, down 3% from the prior quarter and down 14% year over year.
Importantly, purchase volume was a record for PMT at nearly $29 billion, up from $27.4 billion in the prior quarter and $21.5 billion in the third quarter of 2020.
PMT's correspondent production segment pre-tax income as a percentage of interest rate lock commitments was 9 basis points, up from 6 basis points in the prior quarter.
The weighted average fulfillment fee rate in the third quarter was 15 basis points, down from 18 basis points in the prior quarter, reflecting discretionary reductions made to facilitate successful loan acquisitions by PMT. Acquisition volumes in October were $12.9 billion in UPB, and locks were $11.5 billion in UPB.
PMT's interest rate-sensitive strategies consist of our investments in MSRs sourced from our correspondent production, and investments in agency MBS, nonagency senior MBS and interest rate derivatives with offsetting interest rate exposure.
The fair value of PMT's MSR asset at the end of the third quarter was $2.8 billion, up from $2.6 billion at the end of the prior quarter.
The increase reflects new MSR investments that more than offset fair value losses and prepayments.
Now, I would like to discuss PMT's credit-sensitive strategies, which primarily consist of investments in CRT.
The total UPB of loans underlying our CRT investments as of September 30 was $35.4 billion, down 14% quarter over quarter.
Fair value of our CRT investments at the end of the quarter was $1.9 billion, down from $2.2 billion at June 30, due to the decline in asset value that resulted from prepayments.
The 60-plus-day delinquency rate underlying our CRT investments declined from June 30.
PFSI's position as the manager and servicer of loans underlying PMT's CRT investments gives PMT a strategic advantage since we can work directly with borrowers who have loans underlying PMT's investments that have experienced hardships related to COVID-19.
PFSI uses a variety of loss-mitigation strategies to assist delinquent borrowers, and because the scheduled loss transactions, notably PMTT1-3 and L Street Securities 2017-PM1, trigger a loss if a borrower becomes 180 days or more delinquent.
We have deployed additional loss-mitigation resources and continue to assist those borrowers at risk.
With respect to PMTT1-3, which comprises 6% of the fair value of PMT's overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $18 million.
Through the end of the quarter, losses to date totaled $11 million.
Moving on to L Street Securities 2017-PM1, which comprises 19% of the total fair value of PMT's CRT investment, such losses will become reversed credit events if the payment status is reported as current after a forbearance period due to COVID-19.
PMT recorded $17 million in net losses reversed in the third quarter as $24 million of losses reversed more than offset the $7 million in additional realized losses.
We estimate that an additional $20 million of these losses were eligible for reversal as of September 30, subject to review by Fannie Mae, and we expect this amount to continue to increase as additional borrowers exit forbearance and reperform.
We estimate only $9 million of the $65 million in losses to date had no potential for reversal.
This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017-PM1 exceeding its face amount by $29 million at the end of the quarter.
The most common method for borrowers to exit forbearance to date has been a COVID-19 payment deferral.
This program allows the borrower to defer the amount owed to the end of the loan term, and the loan is deemed current after the borrower makes a specified number of monthly mortgage payments.
During the quarter, we added $27 million in fair value of new investor loan securitization investments, and after the quarter, we added another $21 million in fair value from PMT's inaugural securitization of investor loans.
In total, this year, we have successfully deployed the runoff from elevated prepayments on CRT investments.
And on Slide 8, you can see $925 million of net new investments in long-term mortgage assets more than offset $836 million in runoff from prepayments on CRT assets.
PMT reports results through four segments: credit-sensitive strategies, which contributed $60.7 million in pre-tax income; interest rate-sensitive strategies, which contributed $116.8 million in pre-tax loss; correspondent production, which contributed $27.8 million in pre-tax income; and the corporate segment, which had a pre-tax loss of $12.3 million.
The contribution from PMT's CRT investments totaled $60 million.
This amount included $26.4 million in market-driven value gains, reflecting the impact of credit spread tightening and elevated prepayment speeds.
As a reminder, faster prepayment speeds benefit PMT's CRT investments as payoffs of the associated loans reduce potential for realized losses.
Net gain on CRT investments also included $33.1 million in realized gains and carry; $14.3 million in net losses reversed, primarily related to L Street Securities 2017-PM1, which Vandy discussed earlier; $100,000 in interest income on cash deposits; $13.2 million on financing expenses; and $800,000 of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID-19 pandemic.
PMT's interest rate-sensitive strategies contributed a loss of $116.8 million in the quarter.
MSR fair value decreased a total of $63 million during the quarter and included $64 million in fair value increases due to changes in interest rates, $56 million of valuation decreases due to FHFA's elimination of the adverse market refinance fee, and $70 million in additional valuation declines primarily due to elevated levels of prepayment activity and increases to short-term prepayment projections.
The fair value on agency MBS and interest rate hedges also declined by $95 million and included $80 million of fair value declines due to increases in market interest rates and declines due to hedge costs of $15 million.
PMT's correspondent production segment contributed $27.8 million to pre-tax income for the quarter.
PMT's corporate segment includes interest income from cash and short-term investments, management fees, and corporate expenses.
The segment's contribution for the quarter was a pre-tax loss of $12.3 million.
Finally, we recognized a tax benefit of $4.7 million in the third quarter, driven by fair value declines in MSRs held in PMT's taxable subsidiary.
And with that, I'll turn the discussion back over to David for some closing remarks.
Looking forward, while rising interest rates are driving a competitive environment for aggregators that presents near-term challenges, PMT is well-positioned over the long term with a valuable portfolio of existing investments, alignment to the purchase market in its correspondent production business, and proven ability to organically generate new investments.
We remain tirelessly focused on driving improved execution and capitalizing on the current and evolving investment environment, and are optimistic about PMT's ability to deliver attractive returns as we look ahead.
We encourage investors with any questions to reach out to our investor relations team by email or phone. | compname reports q3 loss per share of $0.45.
q3 loss per share $0.45. |
You may access the release on www.
Unless otherwise stated, all references to IQOS are to our IQOS heat-not-burn products.
All references to smoke-free products are to our RRPs.
Growth rates presented on organic basis reflect currency-neutral underlying results.
Following the acquisitions of Fertin Pharma, OtiTopic and Vectura Group, PMI added the "Other" category in the third quarter of 2021.
Business operations for the Other category are evaluated separately from the geographical operating segments.
It's now my pleasure to introduce Emmanuel Babeau, our Chief Financial Officer.
I hope everyone listening to the call is safe and well.
Our business delivered another strong performance in the third quarter of 2021 coming ahead of our expectation to achieve a record high quarterly adjusted diluted earnings per share of $1.58.
Most notable was the continued excellent growth of IQOS, driving plus 33% Q3 organic growth in RRP net revenue and plus 7.6% for total PMI.
HTU shipment volumes grew plus 24% compared to the same quarter last year to reach 23.5 billion units, with broad-based growth for both our volumes and the category across key geographies.
This was delivered despite ongoing tightness in device supplies due to the global semiconductor shortage, which impacts IQOS user growth rates.
In combustibles, further sequential share gains supported total PMI volume growth of 2.1% in Q3 and we continue to expect total cigarette and HTU volume growth for the year.
We are firmly on track for a strong 2021 organic growth performance, with an expected currency tailwind providing additional growth in dollar terms.
We are also delighted to share outstanding initial results from IQOS ILUMA in Japan and growing traction for IQOS VEEV in early launch markets.
In the quarter, we made three milestone acquisitions, as we build our business for the long term to include products that go beyond tobacco and nicotine.
Our smoke-free transformation is now also reflected in our financing with the launch of an industry-first Business Transformation-Linked Financing Framework, and we continue to prioritize returns to shareholders through a 4.2% increase in the dividend and ongoing share repurchases.
Turning to the headline numbers, our Q3 net revenues grew by plus 7.6% on an organic basis or plus 9.1% in dollar terms.
This reflects the continued strength of IQOS, and the recovery of the combustible business in many markets.
We witnessed good organic growth of plus 5.4% in our net revenue per unit, driven by the increasing weight of IQOS in our sales mix and pricing on both HTUs and combustibles.
Our adjusted operating income margin decreased by 10 basis points on an organic basis.
This reflects the expected initial higher unit costs of IQOS ILUMA and increased commercial spend partly related to its launch, offsetting the continued positive effect from the increasing weight and profitability of IQOS, pricing and productivity savings.
Our resulting adjusted diluted earnings per share of $1.58 represents plus 8.5% organic growth, and plus 11.3% in dollar terms, a very good performance.
Looking at year-to-date performance, our adjusted net revenues grew by almost plus 11% in dollar terms and by plus 7.3% organically.
This reflects the consistent growth of IQOS, where progress throughout the pandemic has been impressive.
We delivered strong organic growth of nearly plus 6% in our net revenue per unit, again reflecting our shifting business mix and pricing, with pricing on combustibles at just over 3% or around 5% excluding Indonesia.
Our year-to-date adjusted operating income margin increased by 280 basis points on an organic basis, an excellent performance driven by our top-line growth engines of IQOS and pricing combined with operating leverage and productivity savings.
Our adjusted diluted earnings per share grew plus 15.8% organically and plus 20.4% in dollar terms, also obviously a very strong result.
This brings me to guidance for 2021.
We are revising our organic growth outlook for net revenues to plus 6.5 to plus 7%, representing the upper half of the previous range, and reaffirming the strong outlook for organic OI margin expansion of around 200 basis points.
We also confirm our currency-neutral adjusted diluted earnings per share growth forecast at the upper end of our previous range, reflecting plus 13% to plus 14% growth, or plus 16% to plus 17% in dollar terms.
This translate into an adjusted diluted earnings per share range of $6.01 to $6.06, including an estimated favorable currency impact of $0.17 at prevailing rates.
Following on from our most recent public comments, as the tightness in device supply persists, we now expect our HTU shipment volumes to be around 95 billion units, as we prioritize devices for user retention.
Given the continued growth of HTUs and the need to maintain inventory duration, we continue to expect our full year shipments to be slightly ahead of IMS volumes.
This guidance does not include any material impact of share repurchases or acquisitions.
Share repurchases through October 15th amount to around $170 million, after some limitations during Q3 from blackout restrictions.
In terms of other assumptions, we are assuming only a limited Q4 recovery in Duty Free following a modest improvement in Q3, with intercontinental and Asian travel still very subdued.
We continue to assume full year combustible pricing of plus 2% to plus 3%, with a softer expected Q4 reflecting continued pandemic-related challenges in certain markets, notably in South & Southeast Asia, as well as tough comparisons in Germany and Australia.
Lastly, in 2021, we continue to expect around $11 billion of operating cash flow at prevailing exchange rates, subject to year-end working capital requirements.
We also update our expectation for full-year capital expenditures to around $0.6 billion, reflecting latest launch plans and pandemic-related timing factors.
Before discussing our results in more depth, I am pleased to report some recent positive regulatory developments, further to those shared in previous quarters.
For example, Switzerland adopted a new Federal Law on Tobacco Products and E-cigarettes, defining dedicated product categories and differentiated health warnings.
In New Zealand, the government has now published new regulations for smoke-free products which allow branded packaging to be reintroduced with a specific text health warning.
In Egypt, earlier this year, smoke-free products were clearly differentiated from combustible cigarettes in both fiscal and regulatory treatment.
There is a growing body of scientific and real-world evidence of the substantial risk reduction potential of non-combustible alternatives compared with smoking.
While fluctuations across different markets are to be expected, we continue to support regulatory and fiscal frameworks that recognize this critical harm reduction opportunity.
Turning back now to our quarterly results, Q3 total shipment volumes increased by plus 2.1%, and by plus 1.5% year-to-date.
This reflects continued strong growth from HTUs of plus 24%, driven by the EU Region, Japan, Russia, Ukraine and encouraging progress from recently launched markets in the Middle East.
HTU shipments were around 1 billion units below IMS volumes for the third quarter, primarily reflecting timing around the August ILUMA launch and the October tax-driven price increase in Japan.
We expect this dynamic to reverse in Q4.
The minus 0.4% decline in our Q3 cigarette volumes reflects the continued sequential recovery of total industry volumes and of our market share.
Due to the impressive performance of IQOS, heated tobacco units comprised 13% of our total shipment volume year-to-date, as compared to 11% in full year 2020, 8% in 2019, and 5% in 2018.
Our sales mix is changing rapidly, putting us on track to achieve our aim of becoming a majority smoke-free company by 2025.
Smoke-free products made up almost 30% of our adjusted net revenue year-to-date, compared to 23% for the same period in 2020.
IQOS devices accounted for over 6% of the $6.7 billion of RRP net revenue, with a step-up in Q3 reflecting the IQOS ILUMA launch, which outweighed the effect of supply constraints on other IQOS versions.
The plus 7.3% organic growth in year-to-date net revenues on shipment volume growth of plus 1.5% reflects the twin engines driving our top line.
The first is pricing on combustibles and, in certain markets, on HTUs.
The second is the increasing mix of HTUs in our business at higher net revenue per unit which continues to deliver substantial growth, an increasingly powerful driver as our transformation accelerates.
Let me now go into the driver of our year-to-date margin expansion, starting with gross margin, which expanded by 240 basis points on an organic basis.
While expansion was lower in Q3 as ILUMA devices were shipped to Japan for the launch, the multiple positive levers discussed in prior quarters continue.
Our significant efforts on manufacturing and supply chain efficiencies are also bearing fruits, with around $450 million of gross productivity savings delivered.
This was accompanied by robust SG&A efficiencies, with our adjusted year-to-date marketing, administration and research costs 40 basis points lower as a percentage of adjusted net revenue on an organic basis.
This reflects the ongoing digitalization and simplification of our business processes, including our IQOS commercial engine and more efficient ways of working, partly offset by increased commercial investments in Q3.
With SG&A saving of more than $200 million, before inflation and reinvestment, this means we have generated over $650 million in overall gross efficiencies year-to-date.
This is strong progress toward the combined target of $2 billion for 2021, 2023.
Moving to market share, sequential gains for both our IQOS and combustible portfolios give us strong momentum going into Q4 and next year despite an approximate 0.3 points year-over-year drag in Q3 from market mix.
Importantly, we expect further improvements in the fourth quarter for HTUs with record shares across key IQOS geographies.
For combustibles, the improving total market volume backdrop includes notable recovery in Indonesia, Turkey and Mexico, and close to stable Q3 industry volumes in the EU Region.
Our share of the combustible category has strongly recovered on a sequential basis, moving us one step closer to our target of stable share, as our portfolio initiatives bear fruit and pandemic-linked restrictions recede in many markets.
In South & Southeast Asia, renewed COVID-linked measures have somewhat dampened the recovery, though industry volumes have nonetheless improved sequentially in Indonesia and in the Philippines where the year-over-year trend is impacted by a challenging prior year comparison.
Our share in the region grew sequentially, albeit less than expected, primarily given pandemic related developments in the Philippines.
Let's now turn to the tightness in device supply due to the global semiconductor shortage.
As we communicated in September, with demand continuing to grow, this has already affected the availability and assortment of IQOS devices in certain markets in Q3, which impacts our ability to run at full commercial and competitive capacity, and fulfil consumer demand.
Device shipments outside Japan were limited to a 7% year-over-year increase, significantly below the growth in HTUs.
This resulted in slower user growth of several hundred thousand in the quarter, notably in Russia given limitations on the IQOS 2.4 Plus device, as flagged in recent communications.
At this stage semiconductor supply forecasting remains volatile, so we assume the tight supply situation will persist into the first half of 2022.
We will continue to carefully prioritize necessary device replacement for existing users, followed by device sales targeted at acquisition.
The successful start of IQOS ILUMA in Japan confirms it will be a significant driver of acquisition and retention.
Nonetheless, at the beginning it triggered significant upgrade from the existing large IQOS user base, many of whom don't really need to replace their devices.
This is a highly desired consumer behavior in normal supply circumstances, but increases constraints in a shortage.
Therefore, we now assume that additional major launches will only take place in the second half of next year.
Given this evolving situation, we have continued important commercial investment in key area.
These include portfolio expansion and product launches such as IQOS ILUMA in Japan and IQOS VEEV, smoke-free category understanding and awareness campaign and a number of commercial development projects.
Including the investments already made in Q3, we anticipate around $300 million of incremental H2 spending compared to the first half.
Overall, this is a temporary phenomenon and with demand remaining strong, we expect user growth to reaccelerate once shortages ease.
We have a pipeline of exciting innovations on devices and consumable, including but not exclusive to ILUMA, and a number of new market entries planned.
However, there are short-term shortage scenarios under which the transitory supply impact on user growth could result in 2022 organic growth below our 2021, 2023 targeted average rates for net revenues, OI margin expansion and adjusted diluted EPS.
Nonetheless, with a strong 2021 as a base and a robust reacceleration post-shortage, we confirm our confidence in our 2021, 2023 growth targets.
Moving now to IQOS performance.
We estimate there were 20.4 million IQOS users as of September 30th, excluding the impact of international sanction in Belarus, this reflects growth of around 0.4 million users in the quarter, with the rate of growth subdued by the tightness of device supply and the time needed to adjust our commercial programs.
As demonstrated again by the ILUMA launch in Japan, the underlying momentum of the IQOS brand remain strong.
Following adjustment of our program and assortment, we expect Q4 user growth to improve by a few hundred thousand compared to the growth seen in Q3.
The reduced user growth for the second half should therefore be broadly consistent with the potential 2 to 3 billion HTU impact flagged in recent communication.
We estimate that 73% of total users or 14.9 million adult smokers have switched to IQOS and stopped smoking, with the balance in various stages of conversion.
The user growth again reflect acquisition across key IQOS geographies despite device constraints.
In the EU Region, third-quarter share for HEETS reached 5.3% of total cigarette and HTU industry volume, plus 1.4 points higher than Q3 last year.
As mentioned last quarter, we expected sequential share for HTUs to be broadly stable due to the effect of seasonality and pandemic-related fluctuation on the combustible market.
Underlying IMS growth trends remain excellent, and as in the prior year, we expect a strong Q4 in both volume and market share terms.
This very good performance include strong growth across the region, with Italy, Germany and Poland as notable contributors.
Robust performance continued in Russia, with our Q3 HTU share up by plus 1.1 points to reach 6.9%.
While lower than Q2, notably due to the seasonality of the combustible market, we expect further sequential growth in IMS to deliver a strong quarterly share increase in Q4, as in the prior year.
We had the largest limitation on lower-priced devices and related commercial programs in Russia and we have seen some increased consumer trial of discounted competitor offering and disposable e-vapor product.
However, we continue to see high interest in the category and with both our existing price-tiered portfolio and future innovations supporting our clear category leadership, we see ample room for further strong growth over time.
There is also broad HTU growth across the Eastern Europe region, with Ukraine, Kazakhstan and South-East Europe contributing.
This slide shows the positive overall regional growth trend in adjusted IMS, albeit somewhat dampened on a sequential basis by the halting of shipments to Belarus due to international sanction, and timing factor in Kazakhstan.
In Japan, the adjusted total tobacco share for our HTU brands increased by plus 2.0 points versus the prior year quarter to 20.8% and adjusted IMS grew sequentially to reach a record high of 8.2 billion units, reflecting the strength of our portfolio and the launch of IQOS ILUMA.
Adjusted sequential share fell by 0.2 points sequentially, reflecting volatility in the total market ahead of the October 1st excise increase in addition to normal seasonality.
While consumer pantry loading effects may weigh on Q4 IMS, we expect further robust underlying growth in volume and a nice sequential improvement in market share.
The overall heated tobacco category continues to grow, making up almost 30% of the adjusted total Japanese tobacco market in Q3, with IQOS maintaining a high share of segment and capturing the majority of the category's growth.
In addition to strong growth in existing markets, we continue to drive the geographic expansion of our smoke-free product as we aim to be in 100 markets by 2025.
During the quarter, we launched IQOS in Egypt, the first market in North Africa, and reached an offtake exit share of 2% in Urban Cairo.
We also now add Norway and Iceland, where our recent acquisition of AG Snus gives us a presence in the snus and nicotine pouch category.
This takes the total number of markets where PMI smoke-free products are available for sale to 70, of which 28 are in low and middle income market, which we are introducing as a more robust measure of making smoke-free products available to adult smokers in emerging countries.
Again, we may have some delays in this market expansion program in the first half of 2022.
Given our smoke-free leadership and global reach, let me pause and share a few words regarding the strength of our intellectual property.
Across all our smoke-free products, we have strong patents and have been the clear leading innovator in the heated tobacco category over recent years, investing billions of dollars in the process.
Despite attempts to disrupt our business through litigation by a competitor who lags behind on R&D and innovation, we have been universally successful in defending our product against IP challenges in all eleven rulings outside of the U.S, including in the U.K. high court and at the European Patent office.
ITC is a federal agency, which among other things, deals with imports claimed to injure a domestic industry or violate U.S. intellectual property rights.
We also note the two patents mentioned in the ITC Final Determination were both drafted after IQOS had been launched.
The FDA fulfilling the exclusive public interest mandate given to it by Congress for tobacco product, has already found that IQOS is appropriate for the promotion of public health and expected to benefit the health of the population as a whole.
We are hopeful in the current Presidential Review Period that the U.S. Trade representative will consider the impact on current American IQOS users, and the many more that would be denied access.
In the scenario, where the ITC determination is upheld, while the financial impact of the scenario is immaterial, given the early stage of the U.S. IQOS roll-out, this would unfortunately mean that U.S. consumer would be unable to buy IQOS for a period of time.
Meanwhile, our contingency plans are underway and include domestic manufacturing.
The U.S. Patent office is also reviewing certain claim of the patents in question with initial ruling expected in 2022, albeit subject to an appeal process.
While the ITC ruling may cause near-term disruption to the U.S. availability of IQOS, we continue to see a large opportunity for IQOS in the United States over the coming years.
The global IQOS innovation story took a historic step forward in August with the launch of two ILUMA devices and a range of TEREA HTUs in Japan.
Building on the success of IQOS 3 DUO, we believe this simple and intuitive device will support easier switching and higher conversion for legal-age smoker, using Smartcore internal induction-heating technology.
While still early days with the national roll-out taking place at the start of September, initial results were outstanding, with device sales well ahead of all comparable past launches at the same stage, despite some limitation on device availability, and the proportion of new users growing to 18%.
TEREA purchases are growing rapidly, exiting the quarter at over 10% of total PMI HTU offtake volume.
Consumer feedback has also been very positive with mid-teens increases in the Net Promoter Score (NPS).
Following this success, we plan to launch in our second market of Switzerland next month and look forward to additional major launches in 2022 when circumstances allow.
We continue to commercialize IQOS VEEV with good progress in the first group of market, where we started in our own channels with a limited range of taste variants and nicotine levels.
IQOS VEEV is a premium product providing a superior experience and the commercial infrastructure of IQOS allows us to deploy efficiently and at scale through a bespoke route-to-market approach.
As we start to expand distribution and the consumable offering, we see sign of increased uptake and clear positive consumer feedback relative to competitive product.
We see encouraging early success in Italy where VEEV reached an estimated 7% national exit volume offtake share of closed system pods, despite not yet being available nationally.
And in the Czech Republic with an estimated 8% national volume offtake exit share.
We also launched in Croatia in Q3, Canada in October, and plan to launch in Ukraine before year-end.
We also continue preparations to apply for a PMTA from the U.S. FDA in the second half of 2022.
Turning now to our strategy to move into new business areas beyond tobacco and nicotine, which focuses on leveraging and complimenting our existing capabilities in the healthcare and wellness space.
We see significant opportunity in adjacent area, with our two focus corridors of selfcare wellness including botanicals and inhaled therapeutics expected to have an addressable market of around $65 billion by 2025.
The acquisitions of Fertin Pharma, Otitopic and Vectura enable us to more rapidly expand our development capabilities with over 250 scientists, infrastructure, technology and expertise in innovative inhaled and oral product formulations, while continuing to grow CDMO activities.
As shown on this slide, this opens up a number of highly complementary opportunities and new focus areas.
This acquisition will fully leverage PMI's existing capability in life sciences, product innovation, and clinical expertise related to inhalation.
We look forward to updating you more in the future on our plans and progress in these exciting new areas.
Moving to sustainability and our ESG priorities, we continue to make good progress toward our purpose through advancing our transformation and addressing our most material impact on society.
We broaden access to our smoke-free product by increasing the availability to adult smoker around the world with new product launches across a growing range of market and smoke-free categories.
In addition, our recent acquisition build our human, intellectual and social capital, adding smoke-free capabilities and laying the foundation for a strong business in areas beyond tobacco and nicotine as we strive to develop commercially successful product that seek to have a net positive impact on society.
I am proud to highlight the recent publication of our Business Transformation Linked Financing Framework and subsequent refinancing of our Revolving Credit Facility.
The Framework, which follows ICMA principle and received a Second-Party Opinion from S&P, links our financing to material sustainability targets in our transformation.
Last, we remain on track to achieve carbon neutrality of our direct operation by 2025, five years ahead of our 2030 target.
In addition, with the United Nations Climate Change conference approaching, we plan to publish a robust Low Carbon Transition Plan and a white paper on climate justice which highlights the connectivity between Environmental and Social issues.
Overall, we are on track for excellent top and bottom line growth performance in 2021, with strong underlying momentum for IQOS and robust cash generation.
We are investing in the broadening of our smoke-free product portfolio and geographic reach.
This is critical as we seek to accelerate the number of adult smokers who switch to better alternative, with a growing positive impact on society.
In addition, we are investing in the capabilities of tomorrow, as illustrated by our three recently announced acquisitions, which provide a comprehensive development platform in selfcare wellness and inhaled therapeutics and strengthen our position in modern oral nicotine.
We have increased cash returns to shareholders in Q3 through a higher dividend and our share repurchase program, in line with our objectives to deliver sustainable value and return to investors as we continue our journey toward becoming a majority smoke-free company.
For 2022, we have a pipeline of exciting innovations for both devices and consumable and we expect IQOS user growth to reaccelerate when device shortages ease.
We continue to see a strong future for our business and remain confident in our 2021, 2023 organic growth targets. | compname reports 2021 third-quarter reported diluted earnings per share of $1.55 and adjusted diluted earnings per share of $1.58, representing currency-neutral growth of 8.5%.
qtrly adjusted diluted earnings per share of $1.58.
sees fy adjusted earnings per share $6.01 to $6.06.
qtrly cigarette and heated tobacco unit shipment volume up by 2.1%. |
These statements speak only as of October 15, 2021, and PNC undertakes no obligation to update them.
I imagine you have seen that earlier this week we completed our conversion of BBVA USA.
And I got to say I'm really proud of the team and our ability to sign, close, and convert a hundred billion dollar banking institution within a year.
The dedication of our employees and our sustained investments in technology allowed us to convert roughly 9,000 employees, 2.6 million customers, and nearly 600 branches across seven states.
BBVA USA is now integrated into PNC and its customers can bank with us from coast to coast.
We're bringing our technology talent and the full suite of best-in-class products and services to 29 of the nation's 30 largest markets with attractive growth opportunities, as you've heard me talk about it for years to come.
Now while we still have some more work to do, which is to be expected for a bank conversion of this size.
We're making solid progress with our staffing levels and the branch operations, and BBVA USA legacy markets.
In addition, we're encouraged to see the teams build pipelines and importantly growing new clients.
Now with BBVA legacy employees now on PNC systems, we believe our momentum is going to continue to accelerate.
As we previously were following the same game plan that we've used in previous acquisitions.
And we know what to do, we just have to execute on it.
With respect to our third-quarter results, we had a solid quarter highlighted by strong revenue growth, which included record fee income in our PNC legacy businesses and continued improvements in credit quality, similar to last quarter.
And pretty much as expected, we had a lot of moving parts in our reported results and, of course, Rob will take you through those in a few minutes.
Loan growth continues to be impacted by supply chain issues and the continued runoff of PPP loans.
And also, the strategic repositioning of the BBVA portfolios, which is consistent with our acquisition projections.
That said, total PNC legacy loans, if we back out that PPP runoff, actually grew almost 5 billion with growth in both commercial and consumer categories and while the environment is still challenging we're actually pretty encouraged by what we're seeing on the corporate side.
With spot utilization rates stabilizing and even rising a little on the back of strong new originations in our secured lending and corporate banking businesses.
And on the consumer side, we're also seeing promising origination activity, particularly in the residential real estate business.
Importantly and as you see our balance sheet remains very strong and we're well-positioned with substantial capital and liquidity to continue to support our expanding customer base while making strategic investments in our technology and businesses.
Another exciting development this quarter was the announcement of our integration with a clear data access network.
This is through an application programming interface.
And the integration is going to allow millions of our customers, if they choose to do so, to safely share their financial information with fintech and data aggregators.
It's an important step in our efforts to help our customers protect their data while also giving them the choice to share their data with third-party applications.
Similar to low cash mode, this integration positions us as a leader in technology and innovation and enables us to best serve our customers.
Our significant collaboration across all divisions is impressive and it gives me great confidence that will capitalize on the enormous opportunities ahead of us.
As Bill just mentioned, and notable during the third quarter we converted the BBVA USA franchise to the PNC platform in less than 11 months, following the announcement of the deal.
PNC's increased scale from this acquisition underscores the opportunity we have with the BBVA USA franchise.
We have a proven track record of acquiring attractive strategic opportunities, identifying and reducing inherent risks, and successfully growing franchises to deliver enhance shareholder value.
And as Bill just mentioned, we're well on our way to accomplishing this with BBVA USA.
Due to the June 1 closing of the acquisition, our average balance sheet growth for the third quarter reflected the full quarter impact of the acquisition.
As loans grew $36 billion, securities increased $12 billion, and deposits grew $53 billion.
For comparative purposes to the second quarter, which you'll recall included just one month of BBVA USA results our balance sheet on Slide 3 is presented on a spot basis.
Total spot loans declined $4.5 billion or 2% linked quarter.
Excluding the impact of PPP forgiveness, loans grew and I'll cover the drivers in more detail over the next few slides.
Investment securities declined approximately $900 million or 1% as we slowed purchase activity throughout much of the quarter during the relatively unattractive rate environment.
Our cash balances at the Federal Reserve continue to grow and enter the third quarter at $75 billion.
On the liability side, deposit balances were $449 billion on September 30th and declined $4 billion reflecting the repositioning of certain BBVA USA portfolios.
We ended the quarter with a tangible book value of $94.82 per share and an estimated CET1 ratio of 10.2%.
Both are substantially above the pro forma levels we anticipated at the time of the deal announcement.
During the quarter, we return capital to shareholders with common dividends of $537 million and share repurchases of $393 million.
Given our strong capital ratios, we continue to be well-positioned with significant capital flexibility going forward.
Slide 4 shows our loans in more detail.
Average loans increased $36 billion linked quarter to $291 billion reflecting the full quarter impact of the acquisition.
Taking a closer look at the linked quarter change in our spot balances total loans declined $4.5 billion.
The PNC legacy portfolio excluding PPP loans grew by $4.7 billion or 2% with growth in both commercial and consumer loans.
PNC legacy commercial loans grew $3.7 billion driven by growth within corporate banking and asset-based lending.
This growth in balances has been aided by a slight uptick in spot utilization.
And while still near historic lows, utilization did reach its highest level since December 2020.
Growth in PNC's legacy consumer loans linked quarter was driven by higher residential real estate balances.
Within the BBVA USA portfolio, loans declined $4.4 billion primarily due to intentional runoff relating to the overlapping exposures and nonstrategic loans.
Looking ahead we have approximately $5 billion of additional BBVA USA loans that we intend to let roll off over the next few years, which is in line with our acquisition assumptions.
Finally, PPP loans declined $4.8 billion due to forgiveness activity and as of September 30th, $6.8 billion of PPP loans remain on our balance sheet.
Moving to Slide 5, average deposits of $454 billion increased $53 billion compared to the second quarter driven by the acquisition.
On the right, you can see total period-end deposits were $449 billion dollars on September 30th, a decline of $4 billion or 1% linked quarter.
Inside of this PNC legacy deposits increased $5.4 billion, as deposits continue to grow reflecting the strong liquidity position of our customers.
BBVA USA deposits declined approximately $9.4 billion during the third quarter, which was anticipated as we rationalize the rate paid on certain acquired commercial deposit portfolios and exited several noncore deposit-related businesses.
Overall, our rate paid on interest-bearing deposits is now four basis points or one basis point decline linked quarter.
Slide 6 details the change in our period and securities and Federal Reserve balance.
And as most of you know we have been disciplined in deploying our excess liquidity with rates at historically low levels.
Back to the beginning of the year as the yield curve steepened, we accelerated our rate of purchasing activity.
However, toward the end of the second quarter, we deliberately slowed our purchases as yields declined.
With the increase in rates at the end of the third quarter, we resumed our increased levels of purchasing including $5.4 billion of forward-settling security, which will be reflected in the fourth quarter.
Average security balances now represent approximately 24% of interest-earning assets and we still expect to be in the range of approximately 25% to 30% by year-end.
As you can see on Slide 7, our third- quarter income statement includes the full quarter impact of the acquisition.
The reported earnings per share with $3.30 which included pre-tax integration costs of $243 million.
Excluding integration, costs adjusted earnings per share with $3.75.
Third-quarter revenue was up 11% compared with the second quarter reflecting the acquisition as well as strong organic feed growth.
Expenses increased $537 million or 18% linked quarter.
Including $235 million of integration expenses and two additional months of BBVA USA operating expense.
Legacy PNC expenses increased $76 million or 2.7%.
Virtually all of which was driven by higher fee business activity.
Pretax pre-provisioned earnings excluding integration costs were $1.9 billion and $25 million, or 7%.
The provision recapture of $203 million was primarily driven by improved credit quality and changes in portfolio composition and our effective tax rate with 17.8%.
For the full year, we expect our effective tax rate to be approximately 17%.
As a result, total net income was $1.5 billion in the third quarter.
Now, let's discuss the key drivers of this performance in more detail.
Turning to Slide 8, these charts illustrate our diversified business.
In total, revenue of $5.2 billion increased $530 million linked quarter.
Net interest income of $2.9 billion was up $275 million or 11%, reflecting the full quarter benefit of the earning asset balances acquired from BBVA USA.
Inside of that interest income on loans increased $277 million or 13% while investment securities income declined $9 million, driven by elevated premium amortization on the acquired BBVA USA portfolio.
Net interest margin of 2.27% was down 2 basis points driven primarily by lower security yield.
Importantly in the fourth quarter, we expect premium amortization to decline meaningfully and on the yield on securities portfolio to increase.
The third-quarter fee income of $1.9 billion increased $274 million or 17% linked quarter.
BBVA USA contributed fee income of $184 million, an increase of $122 million linked quarter driven by two additional months of operating results.
Legacy PNC fees grew by $152 million linked quarter were 10%, driven by higher corporate service fees related to recording M&A advisory activity, as well as growth in residential mortgage revenue.
Other noninterest income of $449 million, decreased $19 million linked quarter as higher private equity revenue was more than offset by the impact of $169 million negative visa derivative adjustments.
This adjustment relates to the extension of the expected timing of litigation resolution.
Turning to Slide 9, our third-quarter expenses were up by $537 million or 18% linked quarter.
The increase was primarily driven by the impact of higher BBVA USA expenses of $327 million and higher integration expenses of $134 million.
PNC legacy expenses increased $76 million or 2.7% due to higher incentive compensation commensurate with a strong performance in our fee businesses including a record quarter in M&A advisory fees.
Our efficiency ratio adjusted for integration costs was 64%.
Obviously, with the acquisition, our expense base is now higher but nevertheless, we remain disciplined around our expense management.
And as we've stated previously we have a goal to reduce PNC stand-alone expenses by $300 million in 2021 through our continuous improvement program, and we're on track to achieve our full-year targets.
Additionally, we're confident we'll realize the full $900 million and net expense savings off of our forecast of BBVA USA 2022 expense base, and expect virtually all of the actions that drive the $900 million of savings to be completed by the end of 2021.
We still expect to incur integration costs of approximately $980 million related to the acquisition.
Since the announcement of the acquisition, we've incurred approximately half of these integration costs.
And as Bill mentioned, we appreciate all the hard work our teammates have done to keep us on track and to achieve these goals.
Our credit metrics are presented on Slide 10 and reflect strong credit performance.
Nonperforming loans of $2.5 billion decreased $251 million or 9% compared to June 30th and continue to represent less than 1% of total loans.
Total delinquencies of $1.4 billion that September 30th increase a $106 million or 8%.
However, this increase includes approximately $75 million of operational delays in early stage delinquencies primarily related to BBVA USA acquired loans.
Subsequent to quarter end all of these operational delinquencies have been or are in the process of being resolved.
Excluding these total delinquencies would have increased $31 million or 2%.
Net charge offs for loans and leases were $81 million a decline of $225 million linked quarter.
The second quarter included $248 million of charge offs related to BBVA USA loans.
Mostly the result of required purchase accounting and treatment for the acquisition.
Our annualized net charge offs loans in the third quarter was 11 basis points.
During the third quarter are allowance for credit losses declined $374 million primarily driven by improvement in credit quality, as well as changes in portfolio composition.
At quarter-end, our reserves were $6 billion representing 2.0 -- 2.07% of loans.
In summary, the PNC reported a strong third quarter and notably earlier this week converted the BBVA USA franchise.
With its debt completed, we expect to add significant value to our shareholders as we continue to realize the potential of the combined company.
In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021 due in part to the delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the fourth quarter.
We also expect the Fed funds rate to remain near zero for the remainder of the year.
Looking at the fourth quarter of 2021, compared to the recent third-quarter results, we expect the average loan balances excluding PPP to be up modestly, we expect NII to be up modestly, on a percentage basis, we expect fee income to be down between 3% and 5%, mostly reflecting the elevated third quarter M&A activity.
We expect other noninterest income to be between $375 and $425 million excluding net securities and fees activities.
On [Audio gap] percent, we expect total noninterest expense to be down between 3% and 5% excluding integration expense, which we approximate to be $450 million during the fourth quarter and we expect fourth-quarter net charge offs to be between $100 and $150 million. | compname reports q3 net income of $1.5 bln.
compname reports third quarter 2021 net income of $1.5 billion, $3.30 diluted earnings per share or $3.75 as adjusted.
q3 adjusted earnings per share $3.75.
qtrly net interest income of $2.9 billion increased $275 million, or 11% versus q2.
qtrly total revenue of $5.2 billion increased $530 million, or 11% q-o-q.
basel iii common equity tier 1 capital ratio was an estimated 10.2% at september 30, 2021. |
We're glad you can join us today.
I'm Jim Lucas, Senior Vice President, Treasurer and Investor Relations.
Actual results could differ materially from anticipated results.
This is certainly a historic time that we are experiencing in the last few months have tried the patients in the entire world and Pentair.
I would like to extend my sincerest sympathies to all that have suffered lost during this horrific global pandemic.
We're taking care of our customers, and we continue to focus on delivering the best financial results possible.
They truly represent the spirit of our culture, and I appreciate their dedication, their courage and their contributions to the first quarter results.
We were very pleased to deliver adjusted earnings per share for the quarter that was above the high end of our prior guidance range.
Inclusive of the challenges from COVID-19 that initially impacted our business in China earlier in the quarter and then globally toward the end of the quarter.
We also recently announced that key hires for CFO and for our previously announced segment structure.
Bob joins Pentair after a long successful career at NCR, where he was essential part of the company's transformation from a hardware and systems manufacturer into a software and services provider.
We also announced the hiring of Mario D'Ovidio to lead our Consumer Solutions segment.
Mario joins us most recently from Electrolux and brings a strong background from several consumer-influenced businesses focused on multiple channels.
Mario will bring a growth mindset and a sense of urgency to our Consumer Solutions businesses.
Jerome Pedretti, who has been with Pentair for nearly 15 years, will lead our Industrial & Flow Technologies segment.
Jerome has held experiences at Pentair and has proven himself as a developer of talent.
He also embraces our PIMS processes and culture and will utilize his experiences to improve the operating capabilities of the Industrial & Flow Technologies businesses.
Finally, we announced the elimination of the COO role, and that Karl Frykman will help oversee an orderly transition with Mario, and will also work with me through the end of the year as a special advisor.
Turning back to market demands.
While we formally withdrew our quarter and annual guidance at the end of March due to a lack of visibility, we are planning for significantly reduced demand throughout the remainder of 2020.
We do not have clarity at this time around the potential impacts to each of our lines of business or when the markets will recover.
Because of lack of clarity, we are taking appropriate actions to adjust our cost structure while still keeping a focus on the longer term as we expect that demand will eventually return for most of our businesses.
Finally, we are focused on maintaining a strong liquidity position.
Pentair has a long track record of being a strong cash flow generator, and our balance sheet is in a solid position.
We understand that the remainder of the year will be a challenge to bring uncertainty.
However, we believe that our strong operating culture and well-positioned businesses will eventually prevail over this pandemic and its impacts on the economy.
Our focus has been and will continue to be on the safety and well-being of our employees while also being mindful of serving customer demand to the best of our abilities.
Our business in China and Southeast Asia saw considerable negative impact in the first quarter, but we did not see much impact in Europe or the U.S. until later in the quarter.
While we have seen our operations in China return to more normalized levels, demand still has not returned to China and Southeast Asia to levels before the pandemic.
Outside of China, we have seen softening demand at start of April, and we took actions to reduce the bottom line impact of expected revenue declines.
In the short term, we are focused on cost reductions in line with lower revenue levels.
We feel good about our balance sheet, cash flow and liquidity and believe that we are well prepared to survive the storm.
We remain focused on our long-term goals and strategy, and we will continue to prepare to take advantage of opportunities when business recovers.
I wanted to spend a few moments on our portfolio exposure and what demand trends we are currently experiencing.
Consumer Solutions is a $1.6 billion segment comprised of our pool and our water solutions businesses.
As you can see on this slide, Consumer Solutions is approximately 75% residential, and approximately 75% of the revenue serves the installed aftermarket base.
Our pool business is a leader in the North American pool equipment business.
There are approximately 5.5 million pools installed in the ground.
Our dealers continue to operate in most geographies.
And we expect the aftermarket business, which represents roughly 80% of our pool business, to see some short term softness, but not to the extent that we might expect will occur in the new pool construction and remodeling parts of the business.
While we had a solid start to the season in March, we have seen some softness to start April.
We believe that inventory levels in the channel are in line with historic levels, but we will be monitoring demand throughout the season.
Our Water Solutions business is made up of components, residential systems and commercial systems.
Within our components business, we have not yet seen many changes within the important wholesale channel.
Residential Systems, which includes the Aquion and Pelican businesses we acquired last year, are somewhat dependent on in-home visits and retail traffic.
While we have not yet seen a material drop-off in demand, there are concerns over consumer behavior in the short term.
Finally, our Commercial Systems business has large exposure to restaurants and hospitality and have seen significant slowing of demand, as expected, with the closures of businesses in these industries.
While we expect some short-term disruptions for our Consumer Solutions segment, we continue to believe that water quality will remain a key focus for consumers and other commercial businesses, and we anticipate this business will be well positioned when markets eventually recover.
Industrial & Flow Technologies, or IFT, is a $1.3 billion segment comprised of our residential and irrigation flow, commercial and infrastructure flow and industrial filtration businesses.
As you can see, IFT is a more diverse segment than Consumer Solutions with approximately half of sales tied to various industrial markets.
IFT does, however, generate approximately 65% of sales from the installed aftermarket base.
Within residential and irrigation flow, we have seen some slowing among our distributors, but this is more in the retail than professional channel.
This business is where we have some exposure to agriculture.
And while the OEM exposed business is down, our aftermarket business is performing better than it did a year ago.
It is important to note that the majority of the residential and irrigation flow portfolio consists of products that are break and fix in nature and tend to be less discretionary purchases.
Our Commercial & Infrastructure Flow business manufactures larger engineered pumps, and it tends to be a backlog-driven business.
Our commercial businesses have seen some slowing of orders, but backlog has not yet been impacted.
Within infrastructure, which is the smaller piece of this business, we are seeing strong backlog, but we'll be watching orders for any signs of slowing, given this is a long-cycle business.
Our Industrial Filtration business is comprised of a number of product lines that serve a wide variety of applications.
For instance, we have a strong niche in beer membrane filtration and other components to the beer industry.
We also have a sustainable gas business that recycles CO2.
We continue to feel comfortable about our overall portfolio given our large installed base and limited industrial manufacturing exposure.
Our products are solutions that help customers solve needs, and we'll be prepared to serve demand when it returns.
It is hard to leave after 12 years with Pentair, but I believe the company is well positioned and will emerge from this current situation stronger as a leading water treatment company.
This chart is to help illustrate our cost structure and the levers available to us as the top line visibility remains challenged.
Materials is our biggest cost at approximately 40% of sales and is the one piece of our structure that is truly variable.
We are engaged in a number of supplier rapid renegotiations to continuously look for opportunities to further reduce input costs.
The rest of the cost structure has variability, but requires actions on our part, and many of the actions come with costs and/or consequences.
In the short term, we will look to drive manufacturing labor reductions in line with volume declines with temporary measures such as furloughs to keep as much of the team intact for the eventual recovery.
Although a significant portion of our overhead is fixed, we are focused on deferring and reducing nonlabor outside spending.
We are targeting overhead reduction at roughly half of the potential volume drop.
On the operating expense side, we have implemented hiring freezes, and we are driving significant savings from delaying, reducing or eliminating purchase services and travel.
There are other costs to go after depending on the extent and level of the volume decline, and we also recognize if the declines expected globally in the second quarter carry over to the remainder of the year, then sales and management incentive plans may not pay out at planned levels.
We are taking necessary actions in the short term to mitigate the expected top line decreases, and we'll watch closely for signs of stabilization before looking to pull additional levers.
Our goal is to manage through this environment to the best of our abilities while doing what we can to prepare for an eventual recovery.
With liquidity in focus, we want to spend a few minutes highlighting why we feel comfortable with our financial position.
As this slide illustrates, we do not have any meaningful debt maturities for the next few years.
We ended the quarter with $169 million in cash and $326 million available under our revolver.
Given the seasonality of our pool business, we tend to use cash in the first quarter, and our second quarter tends to be our strongest cash-generating period given the collection on the pool receivables.
We do not expect that trend to change this year, and, therefore, we anticipate our financial position strengthening even further as the second quarter progresses.
We ended the first quarter with a leverage ratio of 2.1 times, which is well below our 3.7 times covenant.
Given the dramatically changing environment, we have lowered our capital expenditures forecast by over 10% for the year.
During the first quarter, we repurchased $115 million of our shares, but we suspended the buyback during the quarter and are currently choosing to remain on the sidelines as we focus on our strong liquidity.
This is our standard slide we present each quarter.
On the left-hand side of the page, our free cash flow improved rather dramatically from the comparable period last year.
As we highlighted on our fourth quarter earnings call, we did see some timing issues around payables at the start of 2019, but we believe that this year's performance is more reflective of our normal seasonal pattern.
The right-hand side of the page highlights our debt position at the end of the quarter.
While we covered our liquidity position on the previous slide, we would point out that we have a healthy mix between fixed and variable debt.
Our average borrowing rate for the quarter was a very respectable 2.6%, and we ended the quarter with 14.4% ROIC.
Overall, we feel our balance sheet is strong.
And while the outlook for the P&L in the near-term is a bit challenging, given the lack of visibility, we believe that our balance sheet is well positioned to help us navigate through these uncertain times.
For the first quarter, overall sales grew 3%, and core sales also increased 3%.
Segment income grew 13%, return on sales expanded 140 basis points, and adjusted earnings per share increased 21%.
This performance was helped by positive sales mix, price costs and productivity.
Below the line, we saw an adjusted tax rate of 16%, net interest other expense of $7.5 million, and our average shares in the quarter were $168.7 million.
Consumer Solutions saw sales increased 9% with core sales growing 7%.
Pool grew at a low double digit rate against an easy comp and more normal weather patterns.
The pool season appeared to start off more positively this year.
And as John alluded to earlier in the call, it seems anecdotally that pool owners, who are sheltered in place, are opening their pools perhaps a bit earlier than normal.
Our Water Solutions business grew high single digits in the quarter as positive acquisition contribution helped offset sharp declines in China and Southeast Asia that were impacted by the global pandemic.
Within the larger U.S. market, demand had not begun to fall off at the end of the quarter, and we are monitoring trends closely.
The segment had strong segment income performance growing 13% year-over-year, and ROS expanded 80 basis points to 21.8%.
We are pleased with the strong start to the year by Consumer Solutions, but we expect that this will reverse course in the second quarter.
While we plan to manage the cost structure accordingly, we remain focused on the long-term opportunities for the segment.
IFT reported a 3% decline in sales with core growth down 2%.
Residential and irrigation flow saw flat sales performance as positive pricing and a still healthy professional channel was not enough to offset weakness in agriculture and retail.
Commercial and infrastructure flow experienced a mid-single-digit decline in sales as some of the backlog-driven business was negatively impacted by COVID-19 related delays.
In addition, we continue to focus on improving internal delivery rates for this business.
But overall, backlog remains solid, and we are monitoring the order book closely.
Industrial filtration saw sales decline low single digits due primarily to global delays in global projects.
Similar to commercial and infrastructure flow, this is a backlog-driven business, and we will also be closely monitoring the order book for the business.
Segment income was a positive story with a 9% year-over-year increase, and ROS improved 150 basis points to 13.9%.
While mix and price costs were positive contributors, productivity was especially strong.
While its mix of businesses will create some near-term challenges for IFT, there remain a number of self-help opportunities that we remain focused on intently.
While we have suspended our guidance until better visibility returns, we wanted to provide some of our current planning assumptions to help you understand how we are approaching the outlook for the remainder of the year.
First, we are planning for a recessionary environment.
Forecast call for double-digit declines in GDP in the short term, and it is hard to imagine that we would be immune from these external forces.
While we have some businesses that may fare a little better than others, such as our Pool and Water Solutions businesses, other parts of the portfolio might see more significant near-term headwinds.
As a result, as Mark highlighted earlier, we are aligning our costs with the lower expected volumes.
We do have additional cost levers to pull if necessary, but we want to be thoughtful in pulling any of these levers too soon.
We have made a number of significant investments to better position our Consumer Solutions business.
And while we may delay some of those investments, we do not want to cut them off altogether.
Our Pentair employees have been a big part of building our businesses, and I would like to keep our talented teams in place.
And I'm hopeful that we can weather the storm and aggressively pursue opportunities in our segments as the economy recovers.
As Mark highlighted earlier, we feel our liquidity is in a very strong position.
We have historically been a strong cash flow generator, and I believe that we are well positioned financially to weather this uncertain environment.
Finally, our goals remain on protecting our employees, customers and our businesses.
We will continue to optimize our free cash flow and liquidity.
And we expect to deliver the best financial results possible in the near term while focused on our longer-term strategies.
I'm sure when Mark said he would stay to oversee a smooth transition, he never envisioned a quarter like this.
I'm very excited to have Bob on board, and he and Mark are driving a seamless transition.
I am very confident that Bob will be a great replacement for Mark, but I'm still losing and will miss one of my best friends.
I wish you only the best, Mark.
You truly deserve it. | for 2020, pentair has withdrawn its guidance.
remains confident in its liquidity position having ended quarter with $169 million in cash, $1.45 billion of total debt.
has taken measures to enhance liquidity including implementing cost savings initiatives and temporarily suspending share repurchases. |
Jim Hatfield, Chief Administrative Officer; Daniel Froetscher, APS's President and COO; and Barbara Lockwood, Senior Vice President, Public Policy, are also here with us.
First, I need to cover a few details with you.
Note that the slides contain reconciliations of certain non-GAAP financial information.
It will also be available by telephone through May 15.
Before I get started, let me say, I hope everyone is doing well.
This is certainly an unexpected way to start our year, but the last several weeks have only reaffirmed to me that our company and our people are resilient, agile and prepared to handle whatever comes our way.
We recognize the realities of COVID-19 and the challenges that people are facing, and we remain committed, first and foremost, to safely delivering reliable power to Arizona, building shareholder value by ensuring customer value.
In March, we made the decision to deploy as much of our workforce as possible to work from home and to change our work practices for those essential workers needed to keep the lights on for our customers and to prepare for the Arizona summer.
The transition from normal course of business to social distancing and revised safety procedures was seamless from our reliability standpoint and for our customers.
While our processes have changed, our priorities have not.
From a financial perspective, our strengths lie on a strong balance sheet, good credit rating and sufficient liquidity.
We can and will weather the storm.
We recognize that in order to serve both our customers and our shareholders, it is important to maintain our financial health.
Financial stability is a key driver in our decision-making, and it's essential to support our long-term goals.
Operationally, the rigor of our preparation and the strength of our team position us well to navigate the challenges presented by COVID-19.
Our pandemic plan was established, tested, refined and rehearsed before any of the COVID-19 impact began to hit us.
As I mentioned earlier, we've transitioned as many employees as possible to working from home.
I'll note, that includes over 140 call center associates who we moved very quickly to seamlessly continue to provide customer service from their homes, and that includes the oversight folks as well, an incredible job by the IT group there, as well as our field employees who continue to prepare for our peak summer season.
All necessary summer preparedness work, including vegetation management and planned outages at our power plants, have continued.
In an effort to minimize the duration of those outages and the number of people required to be physically present, we prioritized essential work and deferred some discretionary maintenance until later in the year.
I'm pleased to share that we completed the Palo Verde Unit two refueling outage earlier this week, ensuring that this key resource will be available to serve customers this summer.
The refueling outage had a reduced scope to allow the completion of the essential work, with 40% less contractors than normal.
In addition, we've deferred nonessential transmission and distribution work that would require more than a two hour planned outage to our residential customers during this time.
We are grateful for the support we've received from so many who've helped our employees stay safe, including Armored Outdoor Gear, one of our commercial customers in Flagstaff.
We were able to quickly secure 3,000 masks for APS, including an expedited quantity of 300 for Palo Verde employees at a time when masks were harder to come by.
It was really a win-win situation.
We were able to keep our employees safe and, at the same time, support our local economy.
Based on what we've seen so far in energy usage and customer load growth, and Ted will talk more about this, but we know that circumstances will continue to evolve.
Our resource plans for additional generation remain in place.
We expect to announce the results of outstanding wind and solar request for proposal in the near future.
Just as in our pre COVID-19 world, as we learn more about our customer needs and how we are all recovering from the impact of our current situation, we will evaluate our assumptions for future generation resource needs and make any necessary adjustments.
To date, we have not experienced any material supply chain disruptions.
Our team is actively monitoring for potential disruptions and has conducted a contract review to confirm the adequacy of our summer resource needs.
In addition, they've solicited supplier input to identify market risks associated with 800-plus high-volume suppliers, including all of our critical suppliers.
As with many other aspects of our operations, mitigation plans are in place to minimize any potential supply chain disruptions.
On the regulatory front, the Arizona Corporation Commission has been busy addressing COVID-19 concerns and adjusting their work to accommodate social distancing guidelines.
Not surprisingly, as a result, a number of their work streams have been delayed.
As you may recall, the original rate case schedule that staff had was going to file testimony on May 20.
At the request of the commission staff, that date has been extended to August 3, and the hearing is now scheduled to begin on September 30.
On May five and 6, the commission held open meetings discussing our rate comparison tool, how to refund or collect the demand-side management funds and treatment for cost associated with COVID-19.
As a result of the discussion, the commission voted to return $36 million of overcollected demand-side management funds to customers through a onetime bill credit in June.
No votes were taken regarding the other matters.
However, I'll note that Chairman Burns did indicate that he plans to bring the topic of an accounting order for COVID-related cost before the commission again at a later date.
Our clean energy commitment received some positive validation in March after the commission held a workshop to discuss clean energy rules.
Following that workshop, Chairman Burns, Commissioner Kennedy and Commissioner Marquez Peterson all publicly expressed support for a 100% clean by 2050 standard.
And obviously, that's aligned with our clean energy commitment, and I think that's a good sign for the future of clean energy in Arizona.
A good future for clean energy in Arizona means robust economic development in our state and an opportunity for financial growth for Pinnacle West.
We've never experienced anything like COVID-19, but we've been through many challenging times in our 136 years of service to Arizona.
We don't know today what the ultimate disruptions or impacts of this pandemic will be, but I have no doubt we'll navigate both through the near term and continue to deliver on our long-term goals.
I want to add to Jeff's appreciation and recognition of our team's accomplishments under these unusual circumstances.
I have always been proud of the APS workforce, but seeing our teams lead through this pandemic with such tenacity and strength has truly been inspiring.
I would also like to share our appreciation for those in the medical profession and other essential service providers, making very real sacrifices to help our communities navigate the COVID-19 impacts.
Before I discuss some of the unique aspects of our service territory and strengths that will serve us well through this current challenge, I want to briefly touch on our first quarter results.
2020 started out strong, earning $0.27 per share compared to $0.16 per share in the first quarter of 2019.
Lower adjusted O&M and higher pension in OPEB nonservice costs contributed to the increase in earnings.
We also experienced 2.2% customer growth and 0.8% weather-normalized sales growth in the first quarter compared to the same period in 2019.
Excluding the last two weeks of March, weather-normalized sales for the quarter were within our original 2020 annual guidance range of 1% to 2%.
While we started the year strong, we have also begun to experience impacts, including a reduction in load from the COVID-19 social distancing and stay-at-home guidelines.
From March 13, the date when many Arizona schools and businesses closed, through April 30, we have seen an approximate 14% reduction in weather-normalized commercial and industrial load compared to the same period last year, partially offset by an approximate 7% increase in weather-normalized residential load.
The reduction in C&I load equates to an earnings decrease of around $0.14 per share, while the increase in residential usage contributes about $0.04 per share for a net reduction of approximately $0.10 compared to our original expectations for this period.
We cannot predict the ultimate duration or impacts from the social distancing and stay-at-home guidelines resulting from COVID-19 pandemic.
However, we are committed to sharing with you today the information we have, scenario sensitivities and mitigating factors.
On April 30, Governor Ducey extended the stay home, stay healthy, stay connected order through May 15, with some reopenings prior to that date.
On May 4, retail establishments were committed to reopen, while following certain restrictions.
Effective today, hair salons may open.
And on Monday, restaurants are permitted to reopen.
While the process and timing for a full reopening is still uncertain, this is a positive step to restarting the Arizona economy.
Despite the fact that Arizona has already started to reopen, if we assume the trend we experienced from March 13 through April 30 continues through the end of the second quarter, we would anticipate a net weather-normalized sales decrease of approximately 7% compared to the second quarter 2019 and an earnings per share decrease of approximately $0.20 compared to our original second quarter 2020 expectations.
The impacts from COVID-19 are not unique to us, but there are a few differentiating factors I'd like to highlight, most notably weather, cost management and sales growth.
As most of you know, in the hot Southwest desert, our demand is significantly influenced by weather and air conditioning load.
For this reason, our earnings are heavily weighted toward the third quarter.
Historically, approximately 56% of our annual earnings comes from Q3, 28% from Q2 and only 6% from the first quarter.
While we have already experienced a reduction in load from COVID-19, this reduction has occurred in our milder, shoulder season months.
As we saw last year, with the weather impact of negative $0.25 per share, weather alone can play a significant factor in our annual earnings.
This year, Phoenix reached triple-digit temperatures already in April, setting record highs, and we've maintained above 100 degrees every day this week with excessive heat warnings already in effect.
Cost management is another key lever for us to mitigate the potential decrease in sales.
We will continue our focus on cost management using Lean Sigma that we introduced throughout the organization in 2019.
Our commitment to becoming a lean operating company through continuously eliminating unnecessary costs out of the business contributed to our success in meeting earnings expectations in 2019.
The current COVID environment is giving our team another reason to rally in 2020, as we work hard to realize additional efficiencies this year.
We've already experienced a number of successes in this space, in addition to natural O&M reductions from adjustments in our processes and scope of work related to COVID.
For example, by the end of this year, we'll have deployed 28 bots across the enterprise as part of our digital transformation program.
In our fossil fleet, as an example, we're now using robotic process automation to complete all work packages.
The use of technology to automate this process will save employees about 1,800 hours per year.
Just five of the automations planned for the first part of this year are expected to produce an NPV benefit of $1.8 million over the next five years.
These examples and our focus on reducing costs will serve us well, not just through the interim challenges, but also in achieving our long-term goals of providing customers with affordable and reliable service.
While total sales will likely continue to lag during the duration of the stay-at-home period, we remain confident in the long-term growth of our service territory.
According to the Arizona Technology Council's quarterly impact report, Arizona tech sector is growing at a rate 40% faster than the U.S. overall.
Metro Phoenix area showed strong job growth through February of 2020, which has consistently been above the national average.
Through February, employment in Metro Phoenix increased 3.2% compared to 1.5% for the entire U.S. Construction employment in Metro Phoenix increased by 5.4%, and manufacturing employment increased by 2.1%.
This data reflects pre COVID-19 conditions, and we expect to see the 2.2% customer growth rate we experienced in the first quarter to slow in the near term.
However, the qualities and fundamentals that I mentioned that have consistently attracted residents to Arizona, including a low cost of living, attractive weather and robust employment opportunities, remain intact and likely to continue supporting long-term growth after the economy normalizes.
In regard to our future capital investments, we remain committed to the $4.7 billion capex forecast for the 2020 through 2022 time frame, largely driven by clean energy investments.
Information regarding COVID-19 and the potential impact is fluid and changing rapidly.
We will continue to assess our capex plans, load forecast, sales expectations, O&M and other financial data points as more information becomes available.
We recognize there are potential scenarios where COVID-19 impacts could necessitate changes in the timing or scope of our investment plans.
However, as of today, we do not believe the limited load reductions experienced thus far require any alterations to our long-term plans.
Similarly, we continue to believe 2020 Pinnacle West consolidated earnings of $4.75 to $4.95 per share remain achievable, assuming the impacts for COVID-19 dissipate by the end of the second quarter, and customer and sales growth resumes once the economy normalizes.
Additional O&M savings are also being assessed by our management team to mitigate the impact from lost revenue.
A complete list of key factors and assumptions underlying our 2020 guidance can be found on slides three and four.
Another advantage for Pinnacle West is our financial health.
We have a strong balance sheet, A- credit rating, well-funded pensions, sufficient liquidity and no equity needs in 2020.
We currently have $1.2 billion in revolver capacity with an option to increase by another $500 million.
As of May 1, we have drawn down $310 million on our revolvers.
In addition, all remaining Pinnacle West long-term debt maturing in 2020 will occur in November and December, and APS's $200 million term loan matures in August.
With all the long-term maturities falling late in the year, we have ample flexibility to assess the market conditions and evaluate our options.
Further, at year-end 2019, our pension was 97% funded.
With our liability driven investment strategy, our pension was 96.4% funded as of March 31, 2020, highlighting our resilience to the market volatility.
Last week, we proudly celebrated 136 years of service to Arizona customers and communities, and we've been through plenty of challenges before.
As Jeff mentioned, we were well prepared for this current challenge.
We started from a position of financial strength.
The seasonality of our jurisdiction and the exceptional skills and sophistication of our team give us confidence that we will effectively navigate the near term and continue to work toward our long-term commitments. | q1 earnings per share $0.27.
sees fy 2020 earnings per share $4.75 to $4.95.
continues to believe its 2020 consolidated earnings guidance of $4.75 to $4.95 per diluted share is still achievable.
will continue its focus on managing costs and utilizing lean principles to help mitigate any impacts of pandemic.
pinnacle west capital - 2020 outlook assumes impacts from covid-19 dissipate by end of june, customer and sales growth resume once economy normalizes. |
Jim Hatfield, Chief Administrative Officer; Barbara Lockwood, Senior Vice President, Public Policy; and Jacob Tetlow, Executive Vice President Operations are also here with us.
First, I need to cover a few details with you.
It will also be available by telephone through August 12, 2021.
I know that the release is a recommended opinion and order in our pending case is the most significant development for all of you and both Ted and I will discuss that shortly.
But I do want to cover some operational and customer matters before we go there.
So as we progress through the summer season, I'm proud to say our team continues to excel in delivering reliable service to our customers.
Arizona experienced several dozen sizable wildfires in June with only mild damage to our infrastructure and minimal customer outages.
We have strong vegetation management and fire mitigation programs, as well as mandatory line inspection prior to reenergizing in high-risk areas.
And all of these contributed to the protection of our infrastructure and reliable service for our customers.
We also successfully navigated through an early summer heatwave that resulted in six consecutive days of at least 115 degrees and three days approaching our all-time peak demand.
Our resource procurement efforts and reserve margin standards ensured that we are able to meet the needs of our customers through the hot summer last year, through the early heatwave this year and we expect these efforts will continue through the balance of the summer.
Following the heatwave in June, July brought a relentless series of monsoon storms.
so it's good to see the monsoon back, but that does present challenges for us.
In a five-day period during mid-July, our teams restored power to more than 120,000 customers affected by storm-related outages and we effectively communicated with our customers regarding outage status and expected service restoration times.
Our field crews worked in wet, humid, and muddy conditions with no safety events.
I'm extremely proud of their exemplary work and the level of service that they provided.
With the weather we've already experienced this summer, it remains as important as ever to continue assisting our communities through our heat relief support programs.
APS is partnered with St. Vincent de Paul, The Salvation Army and Lyft to ensure that Arizonans have access to an emergency shelter, an eviction protection programs to cooling and hydration stations and have transportation to the nearest cooling shelter as part of heat relief initiatives offered throughout the summer.
This is another example of our effort to collaborate for the benefit of our customers, our communities in our company.
That focus on customer experience remains a top priority as we look to improve our JD Power Customer Satisfaction scores.
We are pleased to see a measurable increase in our year-to-date residential customer satisfaction, but we recognize there is more work to do.
We understand the importance of a high-quality customer experience and I'm grateful and proud of our teams for employing a continuous improvement mindset to drive change for the benefit of our customers.
So now on to the regulatory front.
As you all know, the administrative law judge issued the recommended opinion and order for our rate case on August 2nd.
I will say that we are disappointed and concerned by the recommendation, which would not appropriately allow for the recovery of important investments needed to serve customers reliably.
Ted will speak to our estimates of the potential financial impacts that the ROO are to be adopted by the commission.
However, I do want to note that this is a recommendation from the administrative law judge, it's not yet a final order of the commission.
A summary of the key points from the ROO can be found in our investor deck on slide 23.
From that you can see that the administrative law judge recommended a $3.6 million revenue increase or a non-fuel $29 million revenue decrease at 9.16% return on equity and implied 0.05% return on fair value.
The disallowance of the deferral and investment in the Four Corners SCR project and recovery of the deferral and investment in the Ocotillo Modernization Project.
There is no question that Four Corners has been a critical asset in serving our customers through the record heat the past several years.
Without the EPA mandated installation of SCRs, that plant would not have been allowed to operate and there just is not enough capacity in the West to reliably run the system without Four Corners.
We continue to believe that the commission and other stakeholders recognize the importance of investing in assets such as Four Corners to maintain reliability, given the challenges that we've all seen in the West.
And we've seen that as we work through the California will through order and the concern that the commission has expressed on limitations that reliability challenges in a neighboring state is imposing on Arizona.
So Four Corners is critical for us to continue to serve our customers and our goal is to continue to work with the commission to recover prudent investments and ensure that quality service can be maintained for our customers.
The ROO if approved as it is would put this objective in jeopardy.
So where are we procedurally?
We'll file exceptions to the ROO and that it currently asking for exceptions on August 23rd and then the commission will schedule the case to be voted on at a future open meeting.
We would expect a decision on this rate case to be issued during the third quarter of 2021.
If the outcome of the case does not provide for necessary investments to support customer growth and to maintain the financial health of the company, we have the option to petition the commission for reconsideration of that decision, to challenge the legality of the decision through the court system or to file another rate case.
And we will evaluate all of these options after the conclusion of the case to determine the best path forward to serve our customers and to provide value and predictability to our shareholders.
In the meantime, we'll follow the rate case procedural schedule and we will articulate and advocate the areas in which we disagree with the recommended order.
On the ESG front, in May, the commission voted to preliminarily approve new clean energy rules that would provide for a final standard of 100% clean energy by 2070 with interim standards, the first of which requires a 50% reduction in carbon emissions by December of 2032.
A final commission vote on the clean energy rules package is required for the rules to become effective.
We think we're well-aligned with the commission on the interim goals and expect to continue our current path to achieve 100% clean energy by 2050.
We've executed a contract for an additional 60 megawatts of utility-owned energy storage to be located in our APS solar sites.
This contract with the 2023 in-service date will complete the additional storage on all of our current APS-owned solar facilities.
In addition, we're working through our current all-source RFP for 600 megawatts to 800 megawatts of additional resources with decisions from that RFP expected in the third quarter of this year.
Our MSCI ESG rating improved from A to AA this year with MSCI noting our strong water management performance and decarbonization efforts as key score attributes.
So we made good progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships, and working toward achieving our ESG and clean energy goals.
We need to work through the recommended opinion and order and ensure that our perspective is understood by the commission.
With Jeff having covered our operational and regulatory updates, I'll cover our second quarter 2021 financial results.
I'll also provide additional details around our customer and sales growth and potential impacts from the administrative law judge's recommended opinion and order.
Our performance in the second quarter remains strong earning $1.91 per share compared to $1.71 per share in the second quarter of 2020.
Higher pension and other post-retirement nonservice credits, higher sales and usage and weather, all contributed to the increase in earnings, partially offset by higher operations and maintenance expenses compared to the prior-year period.
We experienced 2.3% customer growth and 5.7% weather normalized sales growth during the second quarter compared to the same period in 2020.
Residential sales increased 1.3% and commercial and industrial sales increased 10.3% compared to the second quarter of 2020.
The increase in C&I reflects the reopening and return to in-person work we are seeing this year compared to the second quarter of last year and COVID business closures that occurred last year and primarily remote work environments.
Given the strong rebound in C&I sales and continued residential strength, we are increasing our 2021 sales estimate to 1% to 2% growth from our previous estimate of 0.5% to 1.5% growth.
The labor market in Arizona is also recovering from the COVID pandemic impacts.
For 2021 through the end of May employment in Metro Phoenix increased 1% compared to 2.2% increase in the entire US.
To be clear, that's 1% Metro Phoenix compared to 0.2% increase in the entire US.
In 2020, Arizona was the third fastest-growing state in the US.
As a result of this continued strong population growth, Arizona reached the highest level of residential housing permits since 2006 last year.
This year, through May, Maricopa County has already reached 21,000 housing permits, which puts housing permits on pace to exceed last year.
We believe the relatively low mortgage rates, low cost of living, desirable place with more space and affordable housing will continue to be a driver and grow Metro Phoenix housing market and benefit the overall local economy.
This continues to be one of our core strengths of our long-term growth thesis.
Turning to our financial health.
While the recommended opinion and order from the administrative law judge is not a final order from the commission, we want to be transparent about the potential estimated financial implications if the commission were to approve the recommended opinion and order as written.
For perspective, the general rule of thumb is that every 50 basis point reduction in ROE equates to approximately $32 million in revenue requirement.
Regarding the potential impact from the recommendation to deny Four Corners of the -- to deny recovery of Four Corners SCR investment and deferral, as of June 30, 2021, the SCR deferral balance was approximately $75 million and the net book value of the asset was approximately $320 million net of accumulated deferred income taxes.
Because this is only a recommendation from the ALJ and not a decision from the commission, we will not be making any changes to the deferral at this time.
If the commission denies recovery of the deferral, it would likely result in a write-off of approximately $75 million, which is net of accumulated deferred income tax.
If the commission also denies recovery of the investment itself, we will consider all regulatory and legal avenues to mitigate any potential write-offs.
In summary, we estimate the ROO, if approved, could decrease annual net income up to about $90 million, which includes the non-fuel decrease as well as the effects of incremental costs we incur once rates become effective.
We're already a top quartile performer for O&M and are employing additional robust cost management improvements throughout the enterprise.
This magnitude of revenue decrease will be significant and detrimental to all of our stakeholders, including customers.
Regarding our financing plans, we expect to issue up to $500 million of long-term debt at APS during the remainder of 2020 to fund capital investments.
We will hold an investor briefing at the rate case concludes at which time we will provide financial guidance, including any forecast at Pinnacle West level funding needs.
As we continue to navigate through the evolving pandemic and the resolution of our current rate case, we will continue to focus on our commitment to our shareholders, customers, communities, and our team.
The fundamentals within our service territory of strong and diverse economic growth and increasing population and the general attractiveness of Arizona, our strong operational performance, our disciplined cost management all bode well for the future.
We will continue to work hard to resolve these current challenges. | compname reports qtrly earnings per share of $1.91.
qtrly earnings per share $1.91.
qtrly operating revenues $1 billion versus $ 929.6 million. |
First, I need to cover a few details with you.
We will be advancing the slides as the speakers present today.
It will also be available by telephone through November 12, 2021.
These are indeed challenging times for us.
But right upfront, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the mid-term prospects post 2022 are positive, and we remain confident in our ability to create renewed growth and deliver strong shareholder returns.
I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that.
But before we cover the rate case, you can see from the four main topics we will discuss today.
I'll cover our third quarter results and our expectations for the remainder of 2021.
Finally, I will wrap up with 2022 guidance and our long-term financial outlook.
Focusing on the third quarter, our performance remains strong, earning $3 per share compared to $3.07 per share in third quarter of 2020.
Mild weather was a significant factor, largely offset by strong sales.
We experienced a mild July and August driven by one of the wettest monsoon seasons in recent history.
Residential cooling degree days in the third quarter decreased 27.5% compared to the same time a year ago, and were 10.6% lower than historical 10-year averages.
As a reminder, third quarter last year was the hottest on record.
Robust sales and usage growth in addition increased transmission sales this quarter mitigated most of the weather impacts.
Looking at full year, I'll provide an update to the 2021 Key Drivers and earnings guidance.
Customer growth and weather normalized sales growth remain important drivers for the remainder of the year.
We are updating weather normalized sales guidance to 3% to 4%, up from 1% to 2%, based on continued robust customer growth and strong residential usage.
Lastly, with the conclusion of the 2019 rate case, we're now able to provide full year guidance.
We expect earnings per share to be within the range of $5.25 to $5.35 per share.
As all of you know, after a series of open meetings and public discussions, the Commission issued a final decision in our 2019 rate case.
This rate case was complex and the issues were numerous.
I'll highlight a few of the main issues that were decided, the revenue requirement SCRs and the ROE.
I'll also discuss our next step and strategy coming out of this case, and then lastly as Ted mentioned, he'll provide the 2022 guidance and our long-term financial outlook.
This outcome was not what we wanted and the process that transpired was not constructive.
Everything we have said on the record with our regulators about what's so damaging and concerning about this decision holds true.
It is a decision that makes everything we're committed to doing more challenging and more costly for a time.
What this decision has not done is change our mission as a company, nor our commitment to delivering value to our customers and you our investors.
It has not changed the commitment of our employees to operational excellence in all that we do.
In fact, we're using the expertise and the track record that we've built in the areas of long-term planning, cost management, innovation and serving as an active voice and advocate for the Arizona business community to emerge from this case with a robust strategy.
We're not apologetic about standing up for what's right for our customers and our communities and for our investors, the owners of this company.
It's your confidence in us and your investment in us that makes it possible to deliver the product and services that power Arizona's economy and way of life.
We don't take that for granted and we'll lay out for you today how we plan to continue to create values at competitive levels, amid the headwinds and the challenges that this case has created.
As a reminder, this case was unique for many reasons.
We are compelled by the Commission to file this case under a question of whether we are over earning.
We are also required to fully litigate this case instead of pursuing settlement opportunities.
This is our first fully litigated rate case in over 15 years.
We still believe that rate case settlements are the standard and this case was definitely an exception.
And finally this case was centered around cost recovery of coal asset.
In contrast, our future investment recovery will be premised on infrastructure supporting Clean Energy and our customer growth.
Let me walk through some of the major decisions of the case.
First, the Commission adopted a total base rate decrease of $119 million inclusive of fuel.
The Commission did reverse its initial vote to move the SCR issue to a separate proceeding and instead provided partial recovery of the SCRs with the disallowance of $216 million.
We disagree with the Commission's decision that the SCR investment was imprudent and don't believe that the record in this case supports that conclusion.
As I've stated before the Four Corners Power Plant is a critically important reliability asset for the entire Southwest region.
It's used in useful currently serving customers and the investment in the SCRs was required to keep the plant running under federal law.
In addition, the Commission voted to lower the ROE from the recommended opinion orders already low ROE of 9.16% to 8.7%.
With this part of the decision, the Commission has adopted an ROE that's meaningfully below the national average of 9.4% for electric utilities and the company disagrees with the Commission's rationale.
We have embraced a culture focused on customer service and don't believe that a penalty was warranted, and the ROE granted ignores the fact that we were one of the fastest growing states in the country and we need to attract capital in order to fund the growth and economic development that we're experiencing in Arizona.
In addition, the Commission moved away from the long-standing practice of providing a risk premium for serving as the operator of the largest clean nuclear generating station in the country.
We'll continue to navigate through these challenges by leveraging our strong growth and seeking judicial review of the decision through the courts.
Although we are disappointed by the Commission's decision, importantly, we now have clarity of the path forward.
And so, let me share our next steps and strategy as we look to the future.
We continue to remain optimistic about our future for many reasons and I'll discuss each of these reasons in more detail.
First, we have a solid track record for performance and have grown earnings and our dividends steadily throughout this time, although we're looking at a reset with this rate case outcome and despite the challenges of our regulatory environment, both for Arizona and our company, we believe that we have the ability to create long-term value and steady growth from here.
And Ted will later share our financial outlook and the actions that we're taking as a management team to get us there.
In addition to our earnings track record, we've delivered on our promise to provide affordable energy to our customers and I'll share I think a great example.
We've seen a 6% weather normalized increase in demand for residential electricity from 2018 to 2020.
During that same period we've lowered the average residential customer bill by more than 7%.
We remain focused on customer affordability and keeping it central to our plans to provide long-term sustainable growth.
That focus, coupled with continued cost management creates headroom for the future.
The second reason that I'm optimistic about our future is our best-in-class service territory.
Arizona remains among the fastest growing states in the country, where other states were experiencing little or negative customer growth, we're projecting 1.5% to 2.5% retail customer growth in 2021 and 3% to 4% weather normalized sales growth.
We expect 43,000 housing permits this year in Maricopa County alone, levels that have not been reached since before the great recession.
We believe the constructive business environment and the ample job growth that it creates a competitive cost of living and a desirable climate will continue to grow the Metro Phoenix housing market and benefit the local economy.
Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever.
In particular, Phoenix is becoming a leader in attracting high tech and data center customers.
As you may remember, Taiwan Semiconductor broke ground on their $12 billion investment earlier this year, cementing Phoenix is one of the top semiconductor hubs in the country.
More recently, KORE Power announced their intention to build a 1 million square foot lithium-ion battery manufacturing facility.
We'll continue to focus our economic development approach on helping to attract and expand businesses and job creators.
The third reason that we're confident is the clear path for our transition to Clean Energy.
We came out with our Clean Energy commitment in early 2020, and I'm proud that we've made significant progress toward that commitment.
As you know, earlier this year, we announced that our Four Corners power plant would begin seasonal operations in 2023.
This will reduce annual carbon emissions from the plant by an estimated 20% to 25% compared to current conditions.
In addition, we remain committed to end the use of coal at our remaining Cholla units by 2025 and to completely exit coal by 2031.
Since our Clean Energy commitments announcement we've procured nearly 1,400 megawatts of additional Clean Energy and storage.
Obviously, Arizona enjoys some of the best solar conditions in the world and we are well positioned to capitalize on this resource as we continue that Clean Energy transition.
Turning to our regulatory environment.
Although, this last case was not constructive, I believe we'll be able to reasonably navigate through the regulatory environment in the future.
I'll underscore that this last case was unique in nearly every aspect.
We plan on filing a new rate case as soon as practicable and be looking to improve the ROE commensurate with rising interest rates and returns.
Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and a diverse range of vested interest in our state's energy future.
We would aim to achieve a settled outcome in our next case, because we believe that the nature of that process itself yields more informed constructive and mutually beneficial results.
We'll work to find alignment with stakeholders and the regulators, so that we can improve things for all interested parties.
Finally, I'm optimistic about the future because we have a well thought out long-term strategy that my entire management team and I are committed to executing.
We've refocused on the customer and have built a customer-centric strategy that will allow us to deliver exceptional customer service results.
We are the most improved large utility in J.D. Power's 2020 residential electric service study and we're focused on making continued improvements.
Near term, our focus and priorities remain on improving our customer experience, customer communications, providing safe and reliable service and continuing to engage with stakeholders to advance our shared priorities of clean, reliable and affordable energy for Arizona residents and businesses.
Now, I'll walk through our 2022 guidance and long-term financial outlook.
As Jeff discussed, this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset.
We're providing a 2022 earnings guidance range of $3.80 to $4 per share given the full effects of the rate case.
We recognize this is a significant reduction compared to 2021, so we've illustrated key factors contributing to the change in earnings.
As you can see on Slide 19, we're starting with the midpoint of our 2021 guidance and walking through the drivers to get us to the midpoint of our 2022 guidance.
No surprise, the most significant driver is the recent rate case decision, with a negative $0.90 impact.
This reflects an additional $13 million downward adjustment beyond the $90 million net income impact estimated for the recommended opinion on order last quarter.
In addition, growth in depreciable plant, higher interest expense related to new financing needs and lower pension OPEB non service credits make up the remaining negative drivers.
We are focused on cost management and expect O&M savings to provide some positive impact to get us to our 2022 guidance range of $3.80 to $4 per share.
Turning to the future, we are prepared to use all levers we have available to help us mitigate the impact of this case, and we remain optimistic of our ability to provide long-term value.
As you can see, investors can expect seven objectives from us and I'll touch upon each one.
Our plan is expected to provide strong long-term earnings growth after 2022 for the next five years.
I want to be transparent and reemphasize that this as projected 5% to 7% earnings growth, builds on our 2022 guidance.
We realize the 2021 base year is a lower growth rate at about 1% to 2%.
However, we believe 2022 is the appropriate place to anchor our long-term outlook given the valuation reset that has already occurred and we're focused on creating shareholder value from this point going forward.
There are a number of factors that could provide upside potential to our growth guidance.
For example, we have the ability to meet -- we have the ability to invest in more Clean Energy if we achieve more constructive cost recovery.
In addition, robust economic development opportunities may drive increased sales and customer growth.
Those along with other factors could provide upside to our guidance.
The second objective shareholders can expect from us, is an optimized capital management plan.
As Jeff discussed, we continued to experience solid growth in our service territory, which is the primary driver behind our capital plan.
Steady population growth is expected to drive average annual customer growth in the range of 1.5% to 2.5% through 2024.
In addition, we expect average annual sales growth to be in the range of 3.5% to 4.5% through 2024 on a weather-normalized basis.
We have updated our capital plan to $4.7 billion from 2022 to 2024.
While this represents a modest increase from prior levels, we believe this is prudent until we're in a better place to secure timely and constructive cost recovery.
We are committed to taking a balanced approach in managing our capital plan to support customer growth, reliability and our clean transition, while limiting our equity needs to minimize dilution as we recover from the outcome of this case.
Third, as you can see from 2019 to 2024, we project that our rate base growth will remain steady at an average annual growth rate of 5% to 6%.
I want to highlight that our FERC jurisdictional transmission investments continue to represent a meaningful portion of that growth, that almost a quarter of the total rate base.
These investments benefit from superior authorized returns in a more favorable cost recovery construct than our ACC jurisdictional investments.
We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission in the future.
Next, I'd like to provide clarity on our financing plans going forward.
We've previously stated that we would issue equity prior to the next rate case.
We understand this case was not constructive and we're committed to doing everything we can to protect shareholders from further dilution.
Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case.
In the meantime, we'll leverage our sales growth and the strength of our balance sheet to support our investment needs.
While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2024, protecting investors from dilution during this period.
We have a solid track record of disciplined cost management and previously announced that we have initiated additional cost savings programs.
We understand the importance of efficiency and instituting lean initiatives.
With that in mind, we're updating our O&M guidance to show one, a reduction of O&M expense from 2021 to 2022.
Two, a goal of keeping total O&M flat during this period.
And three, a goal of declining O&M per kilowatt hour.
Cost management and lean processes will continue to be a strong focus of our management team to mitigate both inflationary pressures and regulatory lag.
We anticipate another important expectation that investors can look forward to as our attractive dividend yield.
Yesterday, our Board of Directors announced an increase in our quarterly shareholder dividend from $0.83 to $0.85 per share.
We have consistently grown our dividend for 10 years straight and we are committed to dividend growth going forward.
Our longer term objective is to grow the dividend, commensurate with earnings growth and target a long-term dividend payout ratio of 65% to 75%.
We understand that we're not there now, but we are confident in our plan and that we will eventually grow back into this payout range.
Turning to the final item, our balance sheet.
We continue to maintain a strong balance sheet, providing us flexibility in our sources of capital over the next few years.
We have an attractive long-term debt maturity profile and no debt maturing at APS until 2024.
Additionally, we maintain robust and durable sources of liquidity with our $1.2 billion of credit facilities recently extended to 2026 and a well-funded and largely derisked pension.
Taking a closer look at our ratings.
We continue to have solid investment grade credit ratings.
Even with the recent downgrade by Fitch and the credit reviews announced by Moody's and S&P, our balance sheet targets include three key components, maintaining credit rating strength, maintaining an APS equity layer greater than 50% and an FFO to debt range of 16% to 18%.
In summary, we're taking action during this reset and have a plan for attractive growth going forward.
Importantly, we plan to defer all equity until 2024, further reduce O&M and optimize the balance sheet and capital program during this reset period.
In return, we have the highest dividend yield among peers, which stands today above 5%.
While certainly a factor of the current valuation, even at a stock price 20% higher than current levels, we offer a dividend yield more competitive than peers.
In addition, we announced long-term earnings per share growth guidance of 5% to 7% from 2022 for the next five years.
With the attractive dividend yield and solid earnings per share CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward.
In the short-term, we are laser focused on doing everything we can to protect investors during this reset period and then transitioning to a renewed era of growth, so that we can provide a competitive return going forward.
We remain optimistic about the future.
Although the final outcome of this rate case was worse than we had expected, we have a path forward that is centered around our long-term track record of constructive rate case outcomes, our robust service territory growth, continued balance sheet strength and a focused management team that is taking action. | sees fy earnings per share $5.25 to $5.35 from continuing operations. |