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I'm pleased that you're able to join us today.
The slides are available on our website at investors.
We caution you that such statements involve inherent risks and uncertainties and actual results may differ materially from our expectations.
Leading our discussion today are Maria Pope, President and CEO; and Jim Ajello, Senior Vice President of Finance, CFO and Treasurer.
Our financial results this quarter were strong.
We reported net income of $96 million or $1.07 per share compared to net income of $81 million or $0.91 per share in the first quarter of last year.
In light of the strong quarter and positive outlook, we are reaffirming our 2021 earnings guidance of $2.55 to $2.70 per share, as well as our long-term earnings and dividend growth rates.
Jim will cover first-quarter results in more detail, provide regulatory and capital updates, as well as discuss the outlook for the rest of the year.
This quarter, again, presented significant weather-driven operational challenges.
And I'm proud of how our teams came together, responding to the most severe, ice, wind and snowstorms in our history, improving our operations and achieving important customer-focused results.
In February, we restored over 750,000 customer outages, as nearly half of our customers were without power, many of whom experienced multiple outages over a more -- more than 2.5-week period.
I want to recognize the hard work of our coworkers, mutual aid crews and assistance from as far away as Southern California, Utah, Montana to Alberta, British Columbia, all of whom in the midst of a pandemic went above and beyond to restore power quickly and most importantly, safely.
Even as we speak, crews continue to repair equipment and clear down trees, as damage is still extensive.
As of March 31, the cost of the February storm were $87 million, which Jim will discuss in detail.
The recent storms and wildfires last fall on top of the pandemic with so many people living, working and learning remotely underscore the importance of our ongoing system hardening and reinvestment programs, combined with the deployment of digital capabilities, AI and smart grid technologies.
Today versus a year ago, customers are experiencing about 16% less planned outages.
Average outage restoration times are about 7% faster and outage text notifications and digital payment options are making a difference in customer satisfaction.
And equally important to note is what did not happen during the February weather events, our generation plants, as well as wind and hydro facilities operated seamlessly.
And power was generated across the region throughout the harsh conditions.
Turning to load growth and the economy.
For the last couple of years, we've discussed the strength of our service territory.
Overall, year-over-year, customer count increased more than 1%, and load growth was up 1.2% on a weather-adjusted basis and 2.3% after accounting for the harsh winter conditions.
Residential usage was up 3% weather-adjusted, offsetting commercial declines of 5%.
Industrial usage grew an impressive 8%, powered by the strength of the tech and digital sectors.
Expansion within our region of several digital companies and the global semiconductor shortage are expected to continue and solidify our positive outlook.
Overall, Oregon's economy is recovering, with nearly two-thirds of the state's pandemic-driven job loss recovered.
Unemployment currently stands at 5.7% across our service territory.
ESG, Portland General has long been an ESG leader.
And this quarter, we join the Amazon Climate Pledge in keeping with our commitment to reduce carbon by 80% by 2030 over 2010 levels and our aspirational goal of net zero by 2040.
We also know that to make real progress on climate, we need to partner in addressing the admissions from transportation and other sectors.
Last week in partnership with Daimler Trucks North America, we celebrated the opening of the first of its kind heavy-duty electric truck charging site.
This site aligns with the West Coast clean transit corridor initiative to electrify along the I-5 Corridor from the borders with British Columbia to Mexico.
And finally, I'd like to address the ongoing social unrest and importance of our diversity, equity and inclusion work.
In these tumultuous times, corporations have an opportunity for change.
At Portland General, our DE&I priorities are focused on recruiting, retaining, training and promoting from our front lines to our Board of Directors.
We are committed to transparency and have published for three years running our workforce and pay equity statistics.
We've made good progress, but we know that there is still much work to do.
As we look to the year ahead, we're excited to lead a clean energy transformation and humbled by the challenges as we work seamlessly to integrate ever-increasing amounts of renewable and distributed energy resources into a growing, reliant and resilient grid, meeting customers' needs for safe, affordable, clean energy.
I too was impressed with the efforts of our teams across the company to restore power safely to customers during the February storms.
As we turn to economic conditions, it's clear that we're beginning to see recovery take hold.
Approximately 40% of Oregonians have had at least one vaccine shot and as of mid-April, K-12 public schools reopened for in-person education, either hybrid or full time.
As of March 2021, the unemployment rate in PGE's service territory was 5.7% compared to a 14% peak in April 2020.
In the first quarter, Oregon saw accelerated job growth and as of March, had recovered over half of the jobs lost last spring.
Harder hit segments such as leisure and hospitality have posted a noteworthy gains after experiencing a second wave of job losses in late 2020.
While there are greenshoots of recovery, we appreciate that many of our customers are still facing challenges, and we embrace our role as an essential service provider and partner to Oregon communities.
Turning to slide 5, I'll cover our financial performance.
As Maria said, we reported $1.07 per share compared to $0.91 per share in the first quarter of 2020.
First, we saw a $0.06 increase in total revenue.
This is composed of $0.04 due to higher loads, which increased 1.2% year-over-year weather-adjusted and a $0.02 positive impact from weather.
Additionally, there was $0.02 from the earnings power associated with the Wheatridge Renewable Energy Facility, which was placed in service in the fourth quarter of 2020.
Next, a $0.03 decrease in net variable power costs driven by lower hydro wind production in 2021.
While our wind production exceeded our expectations, it was still less than the unusually high levels of production experienced in 2020.
A $0.07 decrease was associated with higher operating and maintenance administrative expense, which consists of $0.05 of favorable fixed plant O&M primarily due to lower maintenance expense at our generation facilities.
This was offset by $0.12 of unfavorable administrative expenses, which included $0.03 of higher employee benefit expenses, $0.03 of higher legal and professional expense and $0.03 from the timing of bad debt recognition under our COVID deferral, and $0.03 from other items.
A $0.05 increase was associated with lower depreciation and amortization expense, largely as a result of asset retirements, which were partially offset by capital addition.
There was a $0.04 increase in other income, primarily attributed to market returns on the non-qualified benefit trust.
It was an $0.11 increase from lower tax expense, primarily driven by a one-time recognition of a benefit from a local flow through tax.
Turning to the regulatory update, we are continuing to evaluate our cost structure to ensure that we're providing safe, reliable and affordable service to our customers, while making investments that leverage the use of technology and advance our strategy.
We are still assessing our need and the appropriate timing to file a general rate case with the Oregon Public Service Utilities Commission for a 2022 test year.
This last week, we requested a docket to be open to select an independent evaluator with stakeholders for our upcoming RFP.
This is the first step toward the RFP, the process of which is expected to continue into 2022, before finalizing potential selections.
The RFP will seek both renewable energy and dispatchable resource fits.
PGE has identified a roughly 500-megawatt capacity need that will seek to fill as part of this 2021 all source RFP.
We plan to file a benchmark resource into this competitive process.
Additionally, as it relates to capacity, we are continuing to pursue cost competitive agreements for existing capacity in the region.
If PGE is successful in these negotiations, it might reduce the size of the 2021 RFP, depending on the contracting dates for an existing capacity resource.
Regarding the deferral related to our storm costs, detailed on Slide 6 through March 31, 2021, we've incurred an estimated $87 million in incremental cost due to the February storm, of which $33 million were capital expenditures and $54 million were operating expenditures associated with our transmission and distribution system.
We have a storm deferral mechanism that collects $4 million annually from retail customers to cover incremental expenses related to storm damages, and we defer any amount not utilized in the current year.
In response to the February storms, we exhausted our storm collection balance for 2021 of $9 million to offset operating expenses.
This brings the cumulative incurred cost from the February storm to be estimated at $45 million net as of March 31, 2021.
We have filed an application for authorization to defer emergency restoration costs for the February storms.
We expect a decision from the PUC on this in 2022.
We are confident these costs were incurred prudently in response to this unique and unprecedented storm, although there are comparable storms of similar size and duration in other regions at a similar expense, the OPUC has significant discretion in making the final determination of recovery and their conclusion of the overall prudence.
Turning to Slide 7, which shows our updated capital forecast through 2025, we've increased our 2021 capital expenditures by $45 million this year, the majority of which relates to the capital expenditures from the recent storm restoration.
Our capital plan remains on track, and we continue to invest primarily in projects that enhance the resiliency and reliability of our system for the benefit of customers, while maintaining affordability.
Given our guidance today, we raised our O&M guidance by $20 million.
This is in response to several factors.
$12 million of this increase is associated with the February storm response expense, which is ultimately offsetting revenue and the remaining $8 million is associated with additional initiatives to address wildfire risk, improve our outage restoration estimation and outage response processes.
On to Slide 8, we continue to maintain a solid balance sheet, including strong liquidity and investment-grade ratings, accompanied by a stable outlook.
Based on our strong financial condition, we do not expect to issue additional equity in 2021.
We expect to fund 2021 capital expenditures and long-term debt maturities with cash from operations during 2021, which is expected to range from $600 million to $650 million.
We've also increased a long-term debt issuance later this year up to $350 million, which will refinance the short-term notes closed earlier this year and satisfy our 2022 requirements.
Total liquidity of $780 million, all of which is available.
Earlier this week, our Board approved a dividend increase of $0.09 per share on an annualized basis, which represents a 5.5% increase.
This increase is consistent with our long-term dividend growth guidance of 5% to 7%, while observing a dividend payout ratio of 60% to 70%.
Turning to our 2021 outlook, our first-quarter performance was strong.
We are on track to achieve our guided range and finished within the long-term growth guidance of 46% from the 2019 base year.
We expect continued impacts from the pandemic on the economy and regional power picture through the second quarter.
We anticipate a similar load composition to the trends that we've experienced over the last two quarters.
Our commercial customers face risks associated with economic impact of the pandemic in Oregon, but the strength of our residential and industrial energy deliveries has mitigated this decline.
Right now, we are still under the cap of our decoupling mechanism.
Residential customer usage on a weather-adjusted basis is above the established threshold and is expected to be refunded to customers.
As I settle in, I can see excellent fundamentals of the business, load growth is strong, and we continue to see opportunities to drive efficiency in our operations, mostly through investment in technology and developing a smarter more resilient grid, all of which will result in better outcomes for our customers. | compname reports q1 earnings per share $1.07.
reaffirms fy earnings per share view $2.55 to $2.70.
q1 earnings per share $1.07.
reaffirming 2021 earnings guidance of $2.55 to $2.70 per diluted share. |
I am pleased that you are able to join us today.
The slides are available on our website at investors.
We caution you that such statements involve inherent risks and uncertainties, and actual results may differ materially from our expectations.
Leading our discussion today are Maria Pope, President and CEO; and Jim Ajello, Senior Vice President of Finance, CFO and Treasurer.
I would like to take a moment to formally introduce Jim Ajello, our new CFO, who many of you already know.
As many of you know and many of you may also be experiencing yourself firsthand, millions of Americans have been impacted by severe winter storms this past week.
In Oregon, we have had a historic storm system move through over a 4.5-day period.
It brought punishing wind, ice and snow through three separate storm systems and left hundreds of thousands of PGE customers, over a third of our customer base, without power.
The significant ice late in the storm system was particularly punishing to trees and power lines.
In less than a week, we have restored over 600,000 customers and we still have about 6,000 to 8,000 [Phonetic] customers to go -- excuse me, 68,000 customers to go.
Many customers have experienced multiple outages.
As restoration continues, we appreciate the fatigue and deep frustration of customers who have been without power for extended periods.
Our deepest gratitude to everyone who is working 24/7 to restore power.
In addition to our PGE coworkers, hundreds of line workers from neighboring utilities and contractors are working tirelessly alongside our crews in very challenging conditions.
As we look back over 2020 and into the new year, we are proud of how we have responded to significant challenges that tested us like never before.
From the pandemic, civil unrest, trading losses and historic wildfires, to these recent winter storms, our team has remained focused on delivering for customers, supporting the communities we serve.
We take very seriously our role as an essential service provider.
Given the trading losses, our financial results were disappointing, but we delivered solid operational performance and improved throughout the past year and through the pandemic.
We also have consistent momentum that is in line with our long-term growth strategy.
We took actions beginning early in the pandemic to control customer prices with an appreciation for the economic hardships of many of our customers.
Today, we are more efficient with improved reliability and getting more work done.
We are also seeing the positive impact of investments in our distribution system, including investments in substation upgrades, new wood and steel poles, distribution automation and other resiliency investments.
We improved operational efficiency by leveraging technology, improving overall workflow and operations.
We deployed solutions to better serve customers with innovative and clean energy solutions.
We are enabling our employees to work more efficiently.
2020 was an important year for us in our journey toward a clean energy future.
We announced significant decarbonization goals of net-zero greenhouse gas emissions by 2040, including at least 80% reduction in the power supply to customers by 2030 relative to 2010 levels.
This ambitious Companywide goal will touch every aspect of our business, from the power we serve customers, to the vehicles we drive, to how we operate our buildings and operations.
In the fourth quarter, we closed the Boardman coal plant and opened the Wheatridge Energy Facility, one of the nation's first facilities to integrate solar and wind generation with battery storage at scale in one location.
We are also working to serve many municipal and industrial customers with 100% renewable energy under our green tariff programs, building on our number one decade-long residential clean energy programs.
Partnership and support for our communities and employees is also central to who we are.
To that end, PGE, along with employees, retirees and the PGE Foundation, donated $5.6 million and volunteered over 18,000 hours with more than -- to more than 400 non-profits across Oregon.
Diversity, equity and inclusion have long been a core value, and we measure and publish progress as well as pay equity and other key metrics publicly.
Inclusion in the Bloomberg Gender-Equality Index and a perfect score on the Human Rights Campaign Foundation's Corporate Equality Index reflects our years of focus and work in this area.
However, we know that there is still much work to do.
As we reflect on 2020 and look to the year ahead, the responsibility we have as an essential service provider, a leader within Oregon's economy, and a crucial partner to customers and communities we serve, has never been more important.
Through these historic storms and record outages, many are working 24/7 to restore power.
I am humbled by the strength, dedication and resilience of our teams.
We will not stop working hard until every customer is back online.
I want to start by echoing Maria's comments.
The number of customer power outages and widespread damage to our electric system is unprecedented, and we recognize the hardship these events have created for our customers.
Our entire company is focused on restoring power to our communities and repairing our system, and I'm so impressed with my new teammates at PGE.
Although PGE faced a number of challenging circumstances in 2020, it's clear that this team's hard work and focus on advancing our strategy is paying off.
PGE is in a strong position to build on the momentum we've established and deliver long-term sustainable growth.
I am excited for the opportunities ahead to further reduce carbon emissions, invest across our service territory and continue to reduce cost Companywide to keep customer prices low.
Now I will briefly comment on the economy in our service territory.
While recovery is continuing in the hardest-hit segments of the economy such as lodging and restaurants, other segments of our economy have been less impacted by COVID-19 and performed well from a load growth standpoint, like residential, high-tech manufacturing, and digital services.
In the long run, our 1% average load growth anchors on the strength of these sectors as well as continued in-migration.
Our load growth this year remained consistent with long-term trends, despite the change in composition due to the economy's response to COVID-19.
And our customer base continues to grow.
Despite the COVID-19 pandemic, Oregon continued to rank high among the states, ranking third for inbound moves.
Construction spending on both residential developments and commercial projects throughout our service territory is strong in several major infrastructure projects around the horizon.
Let's cover our financial results on Slide 5.
In 2020, we recorded GAAP net income of $155 million or $1.72 per diluted share compared to GAAP net income of $214 million or $2.39 per diluted share in 2019.
We finished the fourth quarter earning GAAP-based earnings per diluted share of $0.57 compared with GAAP-based earnings per diluted share of $0.68 in the fourth quarter of 2019.
Our 2020 non-GAAP net income was $247 million or $2.75 per diluted share.
This amount is adjusted to reflect the previously disclosed one-time energy trading losses of $1.03 per diluted share.
Looking ahead, we are initiating 2021 full-year earnings guidance of $2.55 to $2.70 per diluted share.
We are also affirming our long-term earnings guidance of 4% to 6% growth off 2019 earnings per share of $2.39.
Turning to Slide 6, allow me to walk through the earnings drivers for 2020.
First, we saw a $0.06 increase in retail revenue as load increased 0.4% year-over-year weather-adjusted.
This increase was partially offset by the impacts of changing load composition on our decoupling mechanism.
We also achieved a $0.12 increase due to lower net variable power cost as a result of low market prices and the effective dispatch of our generating facilities.
As we have been saying to you all along, wind was particularly strong.
In fact, our wind resources produced 23% more energy when compared to 2019.
We drove a $0.33 decrease -- increase, pardon me, in connection with our lower operating and maintenance expenses.
This year served as a catalyst for making long-term sustainable operational improvements Companywide.
I will discuss these in more detail in a moment.
Continuing on Slide 6, we have a $0.26 decrease associated with higher depreciation and amortization, which consisted of $0.09 from higher plant in service in 2020 and $0.17 attributed to a measurement of the company's only non-utility asset retirement obligation on land we own along the Willamette River at our Sullivan plant.
In 2020, we reassessed stakeholder needs in the long-term strategy for the site, which included an updated fourth quarter study.
The site study resulted in a significant increase in our retirement asset liability.
These changes, however, de-risk our ability to respond to long-term strategic opportunities at the property.
Further, there was a $0.10 increase associated with higher production tax credits from favorable wind generation compared to our forecast and then a $0.01 increase for miscellaneous items.
This brings our non-GAAP earnings per share -- diluted share to $2.75.
The third quarter energy trading losses represented a negative impact of $1.03 per diluted share for the year.
And our GAAP earnings per diluted share were $1.72 for 2020.
The corresponding ROEs are 6% and 9.3%, respectively.
As it relates to the regulatory environment, we are keeping our focus on customer price impacts, given the concerns around economic recovery in our service territory.
We continue to evaluate our cost structure to ensure that we are providing safe, affordable, and reliable service for our customers.
Right now, we are evaluating our need to file a General Rate Case with the Oregon Public Utilities Commission for a 2022 test year.
It is important that we continue to operate in a way that is cost efficient to keep prices low for our customers, regardless of our outlook for a new General Rate Case.
With respect to our future resource needs, we filed an update to our 2019 Integrated Resource Plan last month.
We are planning to work with stakeholders to seek approval of our RFP and launch the process later this year, but we are continuing to consider customer and stakeholder interest as it relates to timing.
Given recent updates to federal tax credits, we plan to issue an RFP for both renewables and our remaining capacity.
We will bid a benchmark resource into this competitive process.
On other regulatory proceedings, last October, the OPUC approved our deferral request for wildfire-related expenses.
As of December 31, 2020, we have deferred $15 million related to wildfire response.
We also applied for and received deferral treatment from the OPUC for certain COVID-19 expenses, principally bad debt expense.
As of December 31, 2020, we've deferred $10 million relating to COVID-19.
Earlier this week, we filed a deferral request for restoration cost associated with the severe winter events that Maria discussed and that we've recently experienced.
Because of the magnitude and duration of the event, we are uncertain as to the costs associated with the full restoration service.
We will continue to discuss the impact of this deferral on existing storm recovery mechanism with regulators and stakeholders.
Turning to Slide 8, this shows our updated capital forecast through 2025.
We are providing enhanced recovery here for our capital expenditures forecast.
The majority of our investment in future years are concentrated in low-risk, stable distribution infrastructure upgrades to improve safety and reliability of our system.
Investments here are also intended to make us more efficient and help facilitate savings and improve reliability.
The recent weeks and the wildfire impacts in 2020 demonstrate the importance of maintaining a safe and reliable grid.
We added $200 million to the outer years of the capital plan through 2025, and our capital plan now includes $2.9 billion over the next five years.
As a reminder, these projections do not include any generation billed investment that may arise from a renewable energy RFP.
On Slide 9, we continue to maintain a solid balance sheet, including strong liquidity and investment-grade ratings accompanied by a stable outlook.
Based on our strong financial condition, we do not anticipate to issue equity in 2021.
We expect to fund 2021 capital expenditures and long-term debt maturities with cash from operations during '21, which is expected to range from $600 million to $650 million, the issuance of debt securities of up to $300 million, and the issuance of commercial paper as needed.
After 2021, there are no maturities of long-term debt until 2024.
Turning to Slide 10, we are initiating full-year 2021 earnings guidance of $2.55 to $2.70 per diluted share.
Our assumptions for this guidance range are on the slide.
I'd like to dive deeper and walk through a few key drivers that we're confident will help us grow within the 4% to 6% range in 2021.
Because of continued load trends we are currently seeing with residential customers and commercial customers that are slowly reopening, we expect to refund residential customers under the decoupling mechanism and will again hit the 2% cap on collections for non-residential decoupling.
We continue to recognize the challenges faced by our customers and we'll continue to make sustainable changes to our cost structure throughout the Company.
We've accelerated the use of technology throughout the business.
In our 6% reduction in O&M year-over-year, and about half is from lowering our IT costs and using technology to enable process improvements.
But here are just a few examples.
We have reduced and restructured our software license agreements as PGE continued to move to the cloud.
We rolled out a new mapping software to our line crews and they are now using tablets for better access in the field.
We're using new customer relationship management software to better improve our customer relationships.
We continue to leverage our billing system to drive efficiencies while providing customers with increased functionality.
I am confident we can continue to identify and implement efficiencies in 2021 as we continue to grow.
We are also reaffirming long-term earnings growth guidance of 4% to 6% off a 2019 base year.
The drivers of our long-term guidance are consistent with what we've previously discussed, including load growth from in-migration and industrial customer expansion, operational efficiencies and potential investment opportunities in our system and renewable resources.
With respect to dividends, our Board recently declared a dividend of $0.4075 per share, reflecting an annualized dividend of $1.63 per share.
With this dividend, we completed our 14th consecutive year of dividend growth, with the last five years at a compounded annual growth rate of 5.4%. | q4 gaap earnings per share $0.57.
sees fy 2021 earnings per share $2.55 to $2.70.
reaffirming 4% to 6% long-term diluted earnings per share growth using 2019 base year.
initiating 2021 earnings guidance of $2.55 to $2.70 per diluted share.
sees 2021 cash from operations of $600 to $650 million. |
Once again, this is John Bruno.
Joining me on the call from PPG are: Michael McGarry, Chairman and Chief Executive Officer; and Vincent Morales, Senior Vice President and Chief Financial Officer.
Our comments relate to the financial information released after US equity markets closed on Monday, July 19th, 2021.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Now, let me introduce PPG Chairman and CEO, Michael McGarry.
Most importantly, I hope you and your loved ones are remaining safe and healthy.
Now let me provide some comments to supplement the detailed financial results we released last evening.
For the second quarter, our net sales were a record and nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.94.
Our adjusted earnings per share were significantly higher than the second quarter of 2020, partially due to last year's second quarter, including various pandemic related impacts.
Looking back to pre-pandemic results.
Our adjusted earnings per share was similar to the second quarter of 2019, despite sales volumes being 6% lower than that period and we are dealing with historical high levels of raw material inflation in the current period [Phonetic].
Our strong year-over-year sales reflect a partial recovery from the unfavorable pandemic effects of last year, but also include better than market performance across many of our businesses for this quarter.
We achieved these higher sales levels, despite significant supply and component disruptions; including ones that reduce the overall manufacturing capability of our customers.
Coming in the quarter, we expected these disruptions would have an estimated impact of $70 million to $90 million.
However, the actual impact was much more severe and closer to $200 million.
Our adjusted earnings per share in the second quarter, while near all-time record levels was below our April forecast.
Three main factors impacted the difference: due to supply disruptions we experienced unprecedented levels of raw material and transportation costs that continually elevated as the quarter progressed.
This drove raw material inflation to be up a mid-to-high teen percentage on a year-over-year basis versus our original estimate of a high single-digit percentage increase.
Our automotive OEM business was impacted most significantly from supply disruptions as we estimate that more than 2 million less cars were built than initially expected during the quarter.
This impacted our sales by about $100 million or higher than $40 million more than we expected in April.
Finally, as we expected the supply disruptions led to shortages of certain raw materials with anticipated impact of $30 million to $50 million, but the actual impact was closer to $100 million.
We are highly confident that the sales related to these production disruptions will be deferred to later quarters and this will elongate the global automotive OEM recovery.
As I mentioned in April coming into the year, we are expecting an inflationary environment and had prioritize selling price increases across all our businesses.
This helped us achieve solid price increases year-to-date and our pace of price realization is well ahead of the most recent raw material inflation cycle in 2017 and 2018.
Clearly, this inflation cycle is much higher than anyone anticipated and we are continuing on a business-by-business basis, working to secure further selling price increases.
This includes executing additional pricing actions during the third quarter.
As a reminder, the second quarter of 2021 was our 17th consecutive quarter of higher selling prices.
We're also continuing our strong cost management evidenced by our SG&A as a percentage of sales being 130 basis points lower than the second quarter of 2019.
This is being supported by our ongoing execution on our structural cost savings programs, realized an incremental $40 million of savings in the second quarter.
We have increased our targeted full-year 2021 savings by about 10% to $135 million.
In the second quarter, we finalized three acquisitions: Tikkurila, Worwag and Cetelon.
We funded the acquisition through a combination of cash and external financing, which came in at a very attractive borrowing rate.
We had yet another strong operating cash performance during the quarter and ended the quarter with about $1.3 billion of cash and cash equivalents, given us continued flexibility to do additional accretive cash deployment in the upcoming quarters.
In regards to our other two recently completed acquisitions, our new Traffic Solutions business, which is comprised of the Ennis-Flint acquisition performed to our expectations in the quarter, despite significant challenges with raw material availability and its order book is at historical highs entering the third quarter.
Our VersaFlex acquisition was smaller is performing well and it's already helped us win significant protective coatings project in Central America, due to the advantaged technologies that we acquired.
Another notable accomplishment during the second quarter was the appointment of our company's first ever Vice President of Global Sustainability.
PPG has been a clear ESG leader in the coatings industry for our market-leading sustainable products and we have plans to further improve our overall ESG program.
We will provide updates on these initiatives in subsequent quarters.
Moving to our current outlook most important is that we're continuing to see very robust and broad-based demand globally, including in many industrial and OEM end-used markets and strong architectural coatings trade activity in the US.
Many of our customers have indicated that their order books were at high levels exiting the second quarter.
We anticipate the strong global demand pattern to continue.
In addition, we expect an eventual restocking of inventory to occur in many of our selling channels, either later this year or in 2022.
In the near-term, we expect some of our customers will continue to be challenged with input or component shortages.
So their production capabilities and schedules likely to remain choppy throughout the third quarter.
PPG is also experienced in the continuation of spot outages of direct coatings raw materials.
As a result, we expect some unfavorable sales impacts from both our direct supply chain disruptions and the production curtailment of some of our customers in the third quarter.
Our current best estimate is our sales are expected to be unfavorably impacted by about $150 million in the third quarter, due to these issues.
We expect these sales will be largely deferred to subsequent quarters.
We also expect raw material costs to remain at elevated levels in the third quarter, our current best estimate is that they will be inflated by [Indecipherable] 20%, compared to the third quarter of 2020 with businesses and our industrial coatings segment experiencing the largest increases, due to the raw material mix of those types of coatings.
As a result all our businesses are securing additional selling price increases, due to significant increases we experienced in the second quarter and anticipate in the third quarter, we now fully expect to offset raw material cost inflation in the fourth quarter on 2021 on a run rate basis.
As I've said previously, these current disruptions are temporary and we strongly believe there is sufficient capacity available in our supply chain once operating conditions normalize.
I'm very pleased that we've completed five by recent acquisitions since December 2020.
In the third quarter these acquisitions will add about $500 million of incremental sales to our company.
As we continue to integrate these acquisitions, we will start to realize meaningful synergies that will be a strong earnings catalyst.
We are also witnessing domestic flight activity picking up all over the world.
This will begin to benefit our commercial aftermarket business in aerospace in the second half of 2021.
And the information we posted on our website yesterday evening, we're projecting aggregate sales volumes to be up a low single-digit percentage in the third quarter, compared to the prior year quarter.
With differences by business and region.
Including our acquisitions, we expect overall sales growth to be over 20%, compared to the third quarter of 2020.
In addition, full-year 2021 adjusted earnings, excluding amortization expense and other non-recurring items is expected to be $7.40 to $7.60, which at the midpoint would be about 13% higher than the adjusted earnings per share we realized in 2019, despite the significant raw material inflationary pressures we are dealing with this year.
And the fact that sales volumes are still not fully recovered from the pandemic, when compared to 2019.
Finally, I'm very pleased that our Board recently approved a dividend increase of about 10%.
Our September payment coupled with the anticipated payment of a similar quarterly dividend in December, will mark 50 consecutive years of annual per share increases in the Company's dividend.
This is another testament of our Company's legacy of consistently rewarding our shareholders and the confidence that the Board and I have and our ability to continue to generate and grow our operating cash flow.
In closing, I could not be more proud of our now 50,000 employees around the world, who is [Phonetic] share of our customers, our communities and our many stakeholders.
Their dedication and commitment to doing better today than yesterday, every day helps ensure that PPG continues to protect and beautify the world. | sees fy adjusted earnings per share $7.40 to $7.60.
record q2 net sales of nearly $4.4 billion, about 45% higher than prior year.
qtrly adjusted earnings per share of $1.94.
expect that aggregate input and logistics costs will be sequentially higher in q3, compared to q2.
expect strong sales growth later this year and into next year. |
Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer.
Our comments relate to the financial information released after US equity markets closed on Wednesday, October 20, 2021.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Now let me introduce PPG Chairman and CEO, Michael McGarry.
I will provide some results to supplement the detailed financial results we released last evening.
For the third quarter, we achieved record net sales of nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.69.
As we communicated in early September, our sales and adjusted earnings per share were significantly impacted by worsening supply chain disruptions and increasing raw material cost inflation.
Our raw material costs in the quarter inflated by about 25% year-over-year.
For context, this is about 3 times higher than any previous coatings raw material inflation peak in recent history.
We're also experiencing elevated logistics costs and are incurring increased manufacturing costs due to the sporadic nature of these outages.
Commercially, we have taken significant mitigation efforts due to the high level inflation through rapid implementation of structural selling price increases.
In aggregate, our selling price realization is about 6%, with more than 6% price realization in our Industrial reporting segment.
Our price capture pace is much faster than previous inflationary cycles and we have further pricing initiatives underway.
Coming into the quarter, we expect that the supply chain and customer production disruptions would impact our sales by about $150 million.
However, this actual impact was more than $350 million.
Additionally, this prevented us from completely fulfilling our strong order books and further depleted retail inventory in many of our end-use markets.
We expect much of this demand will be deferred into 2022.
And in particular, these current conditions will elongate the global automotive OEM recovery.
To put the automotive OEM situation in perspective, US dealer inventories had record historic lows in the mid-20-day range.
And in 2021, global production in this industry is expected to be about 20% below prior peak levels.
Despite the current challenges, several of our businesses, including our Automotive Refinish, Protective & Marine, and Packaging Coatings delivered strong above market performance, driven by our strong service capabilities and advantaged technology.
Our PPG-Comex business achieved record third quarter sales with year-over-year organic sales growth of more than 10%.
In addition, our US Architectural Coatings business delivered about 10% same-store sales growth as we continue to expand our customer base with many new wins and increase our digital sales as a percentage of our total sales base.
More generally, we continue to experience improving trade painter demand globally and architectural DIY coatings sales returned closer to 2019 levels after notable growth last year driven by the stay-at-home impacts.
We remain focused on cost management, which is evidenced by our SG&A as a percent of sales being 100 basis points lower than the third quarter 2020.
This is being supported by our ongoing execution on our structural cost savings programs as we delivered an incremental $35 million of savings in the third quarter.
We continue to target and on track for a full year 2021 savings of about $135 million.
In the quarter, we also continued to make good progress integrating our five recent acquisitions contributing to our overall earnings for the quarter.
Our two larger acquisitions, Tikkurila and Ennis-Flint delivered good top line results despite the challenging supply constraints.
We continue to expect them to deliver an aggregate of $25 million of synergies for the full year of 2021.
We once again delivered strong operating cash flow during the quarter and had about $1.3 billion of cash and cash equivalents at the quarter end, including sequential reduction of our net debt by about $400 million.
This was supported by a continuing strong working capital management as we maintain our positive step change improvement achieved last year and are at multiyear lows on a percentage of sales basis.
While we will continue to evaluate accretive deals in our M&A pipeline, we are initiating stock repurchases in the fourth quarter and will continue to focus on debt reduction.
As a reminder, based on the seasonality of our businesses, the fourth quarter is typically our strongest cash generation quarter of the year.
Also during the quarter, in support of further enhancing our ESG program, we were happy to announce an agreement with Constellation Energy to power our Carrollton, Texas manufacturing facility with 100% renewable solar energy.
We are also working on our very first ever diversity report and developing science-based climate targets, both of which we will communicate in 2022.
Equally important is PPG's market-leading sustainable products continue to enable our customers to meet their respective sustainability goals.
We will continue to provide updates on these initiatives on subsequent quarters.
In addition, I'm extremely pleased to announce that yesterday, PPG earned three R&D 100 awards for 2021.
The R&D World Magazine honors the 100 most innovative technologies and services over the past year with the R&D 100 awards.
Even more importantly, two of the three innovations that we were recognized are growth initiatives in electric vehicles, including BFP SC battery fire protection coating, which protects the vehicle occupants from fire and mitigates thermal runaway events plus Envirocron Extreme Protection thermally conductive dielectric powder for battery packs, providing dielectric protection and thermal conductivity.
Our dielectric powder has already been commercialized by a leading EV maker and our battery fire protection product will launch in 2022 by one of the world's largest car makers.
Moving to our outlook.
We are continuing to evidence solid demand in aggregate.
Many of our customers continue to indicate that their order books are at high levels and have lower than normal inventory levels.
In the near term, we anticipate only modest improvements to the supply disruptions that we've been experiencing.
Our estimate is that our sales are expected to be unfavorably impacted by about $250 million to $300 million in the fourth quarter, both for the semiconductor chip shortage issue and chronic supplier operational capabilities.
Recent production curtailments in China may add incremental pressures to availability and inflation, and we expect our inflation to approach 30% compared to the fourth quarter of 2020.
As a result, all our businesses are securing additional selling price increases, and now we expect to fully offset raw material cost inflation in the early part of 2022.
We continue to strongly believe there is sufficient capacity available in our supply chain as operating conditions continue to normalize.
Absent any further disruption, we expect supply chains to operate more normally by year's end, supported by normal seasonality trends.
To provide further assistance and assurance of more consistent supply going forward, we are rapidly qualifying additional regional and global commodity suppliers across a variety of our key raw material procurement groupings.
We expect these increases in product availability, coupled with continued improvement in the existing supply chain, will provide ample supply beginning early in 2022.
While the current environment remains difficult to predict, I remain very optimistic about our specific growth catalysts for 2022.
Specifically, we expect continued recovery in automotive refinish, OEM and aerospace coatings, which collectively account for about 40% of our pre-pandemic sales where we have broad global businesses supported by advantaged technology.
We expect a measurable rebuild of inventories in many of our end-use markets.
Specific to PPG is year-over-year earnings growth in 2022 due to further synergy capture from our recent acquisitions.
Their dedication and commitment to making it happen are reasons why our customers, our communities and our many stakeholders can count on us and protect and beautify the world. | plan to execute share repurchases in q4; continue to evaluate potential bolt-on acquisitions.
increased supply disruptions negatively impacted sales and manufacturing costs.
q3 net sales of nearly $4.4 billion, about 19% higher than prior year.
qtrly adjusted earnings per share $1.69.
compname reports third quarter 2021 financial results (oct. 20).
plan to execute share repurchases in q4.
continue to evaluate potential bolt-on acquisitions.
quarterly adjusted earnings per share $1.69. |
Once again, this is John Bruno.
Joining me on the call from PPG are Michael McGarry, chairman and chief executive officer; and Vince Morales, senior vice president and chief financial officer.
Our comments relate to the financial information released after U.S. markets closed on Thursday, January 20, 2022.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Now, let me introduce PPG chairman and CEO, Michael McGarry.
I hope you and your loved ones are remaining safe and healthy.
I will provide some comments to supplement the detailed financial results we released last evening.
For the fourth quarter, we achieved record net sales of about $4.2 billion and our adjusted earnings per diluted share from continuing operations for $1.26.
To quickly summarize that quarter, we had favorable sales versus our forecast that incurred significant manufacturing challenges due to COVID-related staffing shortages, intermittent customer order patterns, and raw material supply challenges.
Our adjusted earnings were aided by a lower-than-expected tax rate in the fourth quarter, as we recognized more favorable discrete items.
Excluding the favorable impact from the tax rate, our adjusted earnings per share was about 10% below the financial guidance we've provided in October.
Our sales performance for the fourth quarter was solid as we achieved higher than sales in our guidance, primarily due to better-than-expected automotive OEM global production, higher selling price realization, and strong above-market sales volumes and several of our end-use markets.
Overall demand remains robust.
Our PPG-Comex business delivered yet again another excellent quarter and finished with 10% organic sales growth for the full year of 2021.
This business had record sales and earnings growth for 2021 and continued to expand its concessionaire network.
And in January, we will have 5,000 concessionaire locations in our network.
And we recently added our traffic solutions products to its portfolio.
The protective and marine business continued its trend of strong top line results, this time led by improvements in the marine coatings where industry builds are expected to grow for the next several years.
We also continue to grow our share in automotive refinish, where our full suite of advantaged products and services differentiate PPG from our competition.
And in automotive OEM, we were awarded new 2022 business based upon our expanded mobility product offering.
And finally, we realized higher increased selling prices globally.
Lastly, the recently acquired Tikkurila business delivered record sales and earnings for any fourth quarter despite the difficult operating environment.
As I mentioned, overall sales would have been better, but we experienced continuing supply chain disruptions and a significant increase in COVID cases that hampered our ability to fully and consistently operate and prevented us from fully meeting our strong customer order books.
Recently, some of our manufacturing facilities have had up to 40% of their workforce out.
In several businesses, we continue to face certain raw material shortages with the biggest impacts in U.S. architectural coatings and traffic solutions.
Overall, our sales backlog grew, and in total, was about $150 million exiting the quarter, most notably in our aerospace and automotive refinish and general industrial businesses.
Our segment earnings did not meet our expectations.
While we benefited from higher sales and increased selling prices, it was not sufficient to offset significant inflation, supply disruptions, and operational inefficiencies caused by the rapid increase in COVID cases within our employee base, and those of our customers and suppliers.
Raw material cost inflation was up approximately 30% compared to prior year.
And transportation costs spiked due to shortages of available trucks and drivers.
In addition, operating costs were progressively higher during the quarter due to manufacturing interruptions at both our facilities and our customers' operations stemming from COVID.
These increased operating costs impacted the quarter by $0.20 per share, and COVID-related absenteeism has continued in January.
Once we see some normalization, we are confident that we will quickly be able to return our legacy of strong manufacturing performance.
We've been taking actions to further diversify our supplier base and increase our internal resin manufacturing capability.
PPG has in-house large-scale resin manufacturing in each major region.
And we are expanding our capability in 2022 to mitigate future risks.
As one example, PPG-Comex sources a high percentage of its residents internally, which has resulted in minimal disruptions.
In addition to the historically high level of commodity raw material prices, we're also experiencing rising costs in other areas, such as labor and utilities.
We expect to continue to proactively work with our customers to implement additional selling price increases in the first quarter.
In aggregate, our selling price realization in the fourth quarter was about 8%, with a higher price realization in our industrial reporting segment.
Our price capture remains broad, with good traction in all businesses and all regions.
And the pace of price -- excuse me, the pace of price capture is much faster than the pace of prior inflationary cycles.
Reflecting back to 2021, we achieved all-time record sales of $16.8 billion led by strategic acquisitions and strong organic growth of 10% despite the various ongoing supply chain challenges we incurred.
In addition, we delivered record earnings per share growth of more than 10% even with raw material cost inflation of about 20% for the full year, the highest level of coatings industry inflation in recent memory.
We, once again, lowered our SG&A as a percentage of sales, decreasing by about 200 basis points, aided by delivering $135 million in restructuring savings in 2021.
We also advanced our digital capabilities in many businesses, most notably the architectural coatings business or sales transaction on a digital platform increased by 20% compared to 2020, as we see our customers' digital patterns become more ingrained.
In 2021, we had strong accretive cash deployment, including the funding of our acquisitions, share repurchases made in the fourth quarter, and increase in our quarterly dividend for the 50th consecutive year.
We're among a small number of companies that have achieved this milestone, along with even fewer companies paying a dividend for more than 120 consecutive years.
Our working capital as a percent of sales remain at historically low levels and comparable to last year, even though we purchased more raw material than typical in the fourth quarter.
Finally, we have lowered our net debt by about $350 million since funding Tikkurila in June and exited 2021 with a strong balance sheet and optionality for future accretive cash deployment.
Throughout 2021, we took actions to bolster our ESG program.
As an example, in the fourth quarter, we further strengthened our overall ESG corporate governance structure.
We define accountability and oversight for all major elements of our ESG efforts under respective board committees.
We also redefined and renamed our Technology and Environmental Committee to the Sustainability and Innovation Committee, with a key focus on tracking our sustainability progress and defining climate-related risks and opportunities.
Looking ahead, demand continues to be robust in most of our end-use markets.
Tightened supply and COVID-related disruptions evidenced in the fourth quarter are expected to continue into the first quarter of 2022 impacting our ability to manufacture and deliver product.
We expect economic activity to be soft in China during the first quarter as more severe operating restrictions have recently been imposed due to COVID and during the Winter Olympics.
We anticipate more favorable economic conditions in the second quarter.
We plan to implement further selling price increases in all our businesses as raw materials and other cost inflation remain at elevated levels and are increasing further in certain areas.
We will continue to aggressively manage all aspects of our cost structure and are managing to minimize the cost impacts of the current supply challenge.
The first quarter earnings per share guidance that we provided has a wider range than normal.
As is typical, the month of March will be the largest component to our quarterly sales.
Our current visibility to the second half of the quarter is limited due to uncertainties around the supply chain disruptions and the various impacts of omicron globally.
While the current environment remains difficult to predict, I expect that as 2020 progresses, we will start to experience more economic reopenings and an easing of supply chain problems, general inventory rebuilding across many end-use markets, and a healthy consumer willing to spend.
I remain very optimistic about future earnings capability of our company and see many catalysts to return to prior peak operating margins with opportunities to exceed them.
This includes: first, continued recovery in the automotive refinish, OEM, and aerospace coatings businesses, which collectively account for about 40% of our pre-pandemic sales and where we have broad global businesses supported by advantaged technologies.
The volume for these businesses remain about 15% below pre-pandemic levels.
And we are already experiencing improving order flow that is being crimped by supply availability; second, normalization of commodity raw material costs, which should moderate over time as supply dislocations improve; third, higher operating leverage on sales volumes supported by our lower cost structure; fourth, year-over-year earnings growth in 2022 and 2023 due to further synergy capture from our recent acquisitions, including a 15% increase to our original synergy target; and finally, above market organic growth driven by our advantaged and leading brands, technology, and services.
This initiative strongly supports our asset-light strategy by adding more than 2,000 distribution locations.
Together with The Home Depot, we are positioned to outgrow the pro market in the U.S. Considering all of these catalysts, I believe we have a path to at least $9 of earnings per share in 2023.
Every day, their hard work and commitment to delivering on our company's purpose to protect and beautify the world are reasons why we are well-positioned today and in the future. | q4 adjusted earnings per share $1.26.
q4 sales rose 12 percent to $4.2 billion.
raw material cost inflation up 30% year over year in q4.
ended quarter with order backlog of over $150 million.
heightened supply and covid-related disruptions experienced in q4 are expected to continue in q1.
expect raw material costs to remain at an elevated level and we are experiencing additional inflation in other cost areas.
further selling price increases are being implemented in all of our businesses to mitigate incremental inflation.
sees q1 aggregate net sales volumes down a mid-single-digit percentage on a year-over-year basis. |
Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement.
We appreciate you joining us for our first-quarter earnings call.
Moving to the agenda for today's call on Slide 3.
I'll share a few operational highlights as well as an update on the two strategic transactions we announced in March.
Joe will provide a more detailed overview of first-quarter financial results.
Turning to Slide 4.
Today, we announced the first-quarter reported net loss of $2.39 per share.
This reflects special item net losses of $2.67 per share, primarily related to reporting WPD's discontinued operations this quarter.
Adjusting for special items, first-quarter earnings from ongoing operations were $0.28 per share, compared with $0.27 per share a year ago.
These results were in line with our expectations for the quarter.
Compared to last year, improved margins were the most significant driver of the increase, primarily due to more favorable weather compared to the mild winter we experienced in 2020.
Shifting to a few operational highlights.
Now over a year into the pandemic, I'm pleased to report that operationally, all seven of our utilities continue to perform extremely well with no operational issues to report.
We continue to operate in a very similar manner to last year with many of our team members continuing to work from home.
We continue to stress the importance of social distancing and mask wearing within our facilities and at our work site.
With vaccinations in full swing, we are beginning to turn our attention to return-to-office planning and protocols.
However, we are not expecting to deviate from our current mode of operations for at least a few more months and perhaps until the end of summer for some of our locations.
We've been able to operate extremely well during this virtual working environment, as evidenced not only by our strong operational performance, but also our ability to execute two significant strategic transactions simultaneously in a fully virtual manner.
Our number one priority has been and will continue to be the safety of our employees and our customers, so we will be very diligent in our return-to-office planning.
Moving to an update on the Kentucky rate case proceedings.
We reached unanimous settlement agreements subject to Kentucky Public Service Commission approval with all parties in our rate reviews for both LG&E and KU.
The agreements cover all matters in the review except for net metering.
We have a long track record of working constructively with the parties to our rate reviews to achieve positive outcomes that balance the interest of all our stakeholders, and this time was no exception.
The settlement agreements were filed with the KPSC on April 19, and hearings were held last week.
We expect KPSC orders on all settled matters by June 30 with new rates effective July 1.
I'll review the terms of the settlement agreements in a bit more detail on the next slide.
Moving to Pennsylvania, PPL Electric Utilities recently received the 2021 Energy Star Partner of the Year award from the EPA and Department of Energy.
This award recognizes outstanding corporate energy management programs and is the EPA's highest level of recognition.
It reflects PPL's commitment to protecting the environment and helping customers save energy and money.
In April, we also made a number of leadership changes to help further position the company for long-term success, especially as we plan for the integration of Narragansett Electric into the PPL family of regulated utilities.
Greg Dudkin was promoted to chief operating officer of PPL from his prior role as president of PPL Electric Utilities.
Under Greg's leadership over the past decade, PPL Electric Utilities has been focused squarely on creating the utility of the future.
The business has developed one of the nation's most advanced electricity networks, has consistently delivered award-winning customer satisfaction, and has firmly established itself as an industry leader in reliability.
This advanced grid that we've built at PPL Electric Utilities uniquely positions us to partner with the state of Rhode Island in support of their ambitious decarbonization goals of net zero by 2050, and potentially driving toward 100% renewable energy by 2030.
We continue to be very excited about the opportunity to bring our experience and expertise to an already very strong utility in Narragansett Electric.
Greg will also focus on driving continuous improvement and best practices across our already strong regulated utility operations.
Stephanie Raymond is succeeding Greg as the President of PPL Electric Utilities.
Stephanie has been a key member of PPL Electric Utilities leadership team for nearly a decade and has led both the transmission and distribution functions.
Our Pennsylvania customers are in very good hands with Stephanie now at the helm of PPL Electric Utilities.
We also hired Wendy Stark as our new senior vice president and general counsel.
Wendy replaces Joanne Raphael, who announced her retirement from the company effective June 1 after an impressive and distinguished 35-year career with our company.
Wendy joins PPL from Pepco Holdings, where she served as senior vice president, legal and regulatory strategy, and general counsel.
Wendy is an excellent addition to our team, and she's already making her presence known as we prepare for the regulatory approval process for the Narragansett acquisition.
She brings to PPL significant experience in leading legal teams and extensive background in regulatory matters and a deep knowledge of our industry.
I'm very excited about the strong leadership team that we've assembled here at PPL.
I believe it's the right team at the right time as we strategically reposition PPL for long-term growth and success.
Finally, I'll note that we continue to make good progress on the regulatory approval processes related to both the WPD sale and the Narragansett acquisition.
In the U.K., we remain on track to close the WPD sale by the end of July.
On April 22, National Grid shareowners voted overwhelmingly to approve the transaction.
And on May 4, we received the Guernsey approval, leaving just the Financial Conduct Authority approval outstanding in the U.K. While we have no assurance as to the timing of this final approval, the WPD sale could close as early as this month.
In the U.S., we've made all the required regulatory filings to secure approval for the Narragansett Electric acquisition.
We've requested the Rhode Island Division of Public Utilities and Carriers to decide on our petition by November 1, 2021.
While we cannot be assured the division will decide on our petition in that time frame, we remain confident in our ability to close on the acquisition by March of next year.
The transition teams for both PPL and National Grid have been formed and have actively begun planning to ensure a seamless transition for both employees and Rhode Island customers upon the approval and closing of the transaction.
The PPL transition team is being led by Greg Dudkin, with strong executive presence and experienced leaders on the team, who will oversee the eventual integration of Narragansett Electric into PPL.
I'll also note that we've had very constructive discussions with public officials in Rhode Island since our announcement.
These interactions have only strengthened my belief that PPL is well-positioned to drive real value for Rhode Island customers in their communities and to play a key role in helping the state achieve its ambitious decarbonization goals.
Turning to Slide 5 in a bit more detail on the settlement agreements in Kentucky.
We believe the agreements, which again require approval of the KPSC, represent constructive outcomes for all stakeholders and that they minimize the near-term rate impact on customers while still providing LG&E and KU the opportunity to recover their costs while providing safe and reliable service.
The settlements proposed a combined revenue increase of $217 million for LG&E and KU with an allowed base ROE of 9.55%.
These revenue increases enable LG&E and KU to continue modernizing the grid, strengthening grid resilience, and upgrading LG&E's natural gas system to enhance safety and reliability.
They include LG&E and KU'S proposed $53 million economic release store credit to help mitigate the impact of the rate adjustments until mid-2022.
The stipulation reflects the continuation of the currently approved depreciation rates for Mill Creek Units one and two and Brown Unit three for rate-making purposes, rather than using the depreciation rates proposed in our original applications.
We had initially requested the depreciation rates for these units to be updated with their expected retirement over the next decade as they reach the end of their economic useful lives.
This adjustment reduces the requested revenue increases by approximately $70 million.
In a related provision, the settlement agreements also proposed the establishment of a retired asset recovery rider to provide recovery of and on the remaining net book values of retired generation assets as well as associated inventory and decommissioning costs.
The rider would provide recovery over a 10-year period upon retirement as well as a return on those investments at the utilities than weighted average cost of capital.
As we announced in January, Mill Creek Unit 1 is expected to retire in 2024.
And Mill Creek Unit two and E.W. Brown Unit three are expected to be retired in 2028 as they reach the end of their economic useful lives.
These units represent a combined 1,000 megawatts of coal-fired generating capacity.
The settlements also proposed full deployment of advanced metering infrastructure.
I'll note that the capital cost of the proposed AMI investment is not included in the revenue requirements in these rate cases.
We'll record our investment in the AMI project as CWIP and accrue AFUDC during the AMI implementation period.
And finally, the settlement agreements include commitments that LG&E and KU will not increase base rates for at least four years, subject to certain exceptions.
I'll cover our first-quarter segment results on Slide 6.
regulated segment from our quarterly earnings walk.
First, we have adjusted the 2020 corporate and other amount to reflect certain costs previously reflected in the U.K. regulated segment, which was primarily interest expense.
The total amount of these costs was about $0.01 per share for the quarter.
In addition, beginning with our 2021 results, corporate-level financing costs will no longer be allocated for segment reporting purposes.
Those costs were primarily related to the acquisition financing of the Kentucky regulated segment and will also be reflected in corporate and other moving forward.
Now turning to the domestic segment drivers.
Our Pennsylvania regulated segment results were flat compared to a year ago.
During the first quarter, we experienced higher distribution, adjusted gross margins resulting primarily from higher sales volumes due to favorable weather compared to the prior year, a year in which we experienced a mild winter.
Weather in Pennsylvania was essentially flat to our forecast for Q1 2021, with quarterly heating degree days slightly below normal conditions.
Adjusted gross margins related to transmission were slightly lower for the first quarter.
Returns on additional capital investments were offset by lower peak transmission demand and a reserve recorded as a result of a challenge to the transmission formula rate return on equity.
Settlement negotiations related to the challenge are currently proceeding, but there can be no assurance that they will result in a final settlement.
Finally, we experienced lower O&M expense of about $0.01 per share in Pennsylvania during the first quarter compared to 2020.
Turning to our Kentucky regulated segment.
Results were $0.02 per share higher than our comparable results in Q1 2020.
The increase was primarily driven by higher sales volumes, primarily due to favorable weather.
And similar to Pennsylvania, weather was flat compared to our forecast.
Partially offsetting the increase from higher sales was higher operation and maintenance expense, primarily at our generation plants.
Results at corporate and other were $0.01 lower compared to a year ago, driven primarily by higher interest expense from the additional debt we issued at the start of the pandemic to ensure we had adequate liquidity to navigate the uncertainty.
We expect our interest expense to be reduced significantly after we complete the liability management following the closing of the WPD sale.
In summary, we continue to deliver electricity and natural gas safely and reliably for our customers during the pandemic.
We're on pace to close our strategic transactions within the expected time frames while making good progress on the integration and transition planning for Narragansett Electric.
And we remain very excited about the opportunity we have in front of us to reposition PPL for future growth and success.
With that, operator, let's open the call for Q&A. | compname reports qtrly loss per share $2.39.
qtrly loss per share $2.39.
adjusting for special items, q1 2021 earnings from ongoing operations (non-gaap) were $0.28 per share.
continues to advance strategic repositioning of company; transactions remain on track to close. |
During the call, we will also refer to earnings from ongoing operations, a non-GAAP measure.
So turning to Slide 4.
Today, we announced after completing a comprehensive strategic review with our board of directors, that we are going to initiate a process to sell our U.K. business, WPD.
We've engaged JP Morgan to lead that process for us.
utility holding company, sharpening our focus on rate-regulated assets in the U.S., and improving our ability to invest in sustainable energy solutions.
We expect the proceeds from the sale would be used to strengthen our balance sheet and enhance our long-term earnings growth, which could include supporting U.S. asset acquisitions and returning capital to shareowners.
We believe there are multiple ways in which this transaction will create shareowner value.
First, we strongly believe the sale price net of any tax, will be higher than the sum of the parts value currently embedded in PPL stock price.
Second, we believe we will have a much stronger balance sheet post sale.
Targeting mid- teens FFO to debt metric.
And finally, assuming we acquire another U.S. utility, we believe we can leverage our operational excellence and efficient business model to create even more value for both customers and shareowners.
We've been very transparent with investors that while we constantly analyze strategic alternatives, we would not engage in M&A unless we could do it in a way that would create shareholder value.
We firmly believe that the sale of WPD at this time will unlock value for our shareowners.
As we've been saying for a number of years, we believe WPD represents the premier asset group with an extremely high-performing management team in the best energy subsector in the U.K., i.e. electric distribution.
will flow through electric distribution.
And significant investment will be required in that sector, if the U.K. is going to achieve its net-zero goals, which Ofgem reaffirmed over a week ago in the electric distribution subsector consultation.
I expect that WPD will have the opportunity to earn reasonable return and invest significant amounts of capital during RIIO-ED2 and well beyond that.
As such, the decision to sell WPD is in no way a negative reflection on our WPD team or the WPD business.
In fact, it's quite the opposite.
We are extremely proud of the financial and operational results that WPD has achieved over the past two decades and we are confident they will continue to deliver in the future.
And while we believe the public market continues to discount the value of WPD and our share price, we firmly expect that a wide range of strategic and financial buyers will demonstrate significant interest in this highly attractive asset.
There are several recent precedent transactions of regulated networks in the U.K. and across broader Europe that support our position.
Given the relative attractiveness of electric distribution and the superior quality of the WPD business, we would expect WPD to attract a premium valuation.
Regarding timing, we would intend to announce a transaction within the first half of next year.
Let me just end by saying the plan to sell WPD as part of a broader strategic repositioning of the company, which we believe will result in a new PPL with a stronger balance sheet, a more focused growth strategy in the U.S., and an improved position to reduce its carbon footprint.
We believe this will lead to a stronger outlook for the company with a competitive TSR and compelling growth prospects.
The dividend has been and will remain an important part of total shareowner return for PPL investors.
The board will assess the dividend at the appropriate time in connection with the resulting transaction.
Now let me make some high-level comments on the quarterly results before turning it over to Joe for the more detailed quarterly review.
Turning to Slide 5.
Today, we announced second-quarter reported earnings of $0.45 per share.
Adjusting for special items, second-quarter earnings from ongoing operations were $0.55 per share, compared with $0.58 per share a year ago.
Turning to a brief update on the impacts of COVID-19.
I'm pleased to report that we continue to deliver electricity and natural gas safely and reliably as our customers navigate the challenges of this pandemic.
As we highlighted on our first-quarter call, we acted swiftly and aggressively to implement social distancing and minimize the spread of the virus within our company.
This included shifting about 35% to 40% of our workforce or more than 4,500 employees to work from home, and creating additional separation for those who must still report to a PPL facility due to the nature of their jobs.
With health and safety, our top priority, these steps remain in place today, even as restrictions have begun to ease in the regions in which we operate.
And while we continue to plan for what reentry to the workplace will look like for those now at home, we plan to move very cautiously and continue to follow guidance from the CDC and state and local health department.
As a result of the measures we've taken, we've been very effective in minimizing the impact of COVID-19 on our workforce and our operation.
While the most recent tropical storm Isaias, impacted about 70,000 of our customers in Pennsylvania, we were able to restore power to most of them within 24 hours and all of them within 48 hours, reinforcing again, little to no impact from COVID-19 on our ability to serve our customers even in the worst of conditions.
Finally, from a financial perspective, we've maintained a strong liquidity position of over $4 billion.
Our cash receipts have remained steady and minimal impact on our allowance for bad debt.
Turning to a U.K. regulatory update.
We've seen some recent developments pertaining to the next price control period, RIIO-2.
First, we were not surprised at all by the recent outcomes of the draft determinations for gas and transmission published in early July.
Ofgem has been very clear about three things in their RIIO-2 messaging.
They are going to incentivize investment that supports the U.K.'s net-zero carbon ambitions, they will ensure customer bills remain affordable, and there will be significant investment required in electric distribution over at least the next decade.
We've said all along that Ofgem was going to deemphasize the gas and transmission sectors in favor of electric distribution, not because they are picking winners and losers, but because they fundamentally know the electric distribution networks will require significant investment going forward.
In order for customers to afford that level of investment, they need to build headroom into customer bills, with lower returns and lower investment levels in gas and transmission.
We believe that is why Ofgem has been so critical of the investment plans of both the gas and transmission subsectors.
On average, Ofgem cut the gas investment plans by about 20% and cut the transmission plans by about 45%.
While Ofgem indicated there would be potential opportunity for some of that investment to be approved in the final determinations, which will come out later this year, I don't believe Ofgem is going to make it easy on these sectors.
WPD is in the fortunate position, however, to be able to follow the gas and transmission process through to the end, prior to us having to submit our business plans mid next year.
Therefore, we are expecting that the RIIO-ED2 process for WPD will be much smoother and more successful.
The sector-specific methodology consultation on electric distribution that was released just over a week ago was also largely in line with our expectations.
Ofgem made it clear that the DNOs were going to be critical to supporting the decarbonization efforts in the U.K. to deliver a net-zero economy.
And we continue to agree that we are best positioned to deliver on those objectives.
While we are still in the early stages of this process, WPD is very focused and engaged with our stakeholders and Ofgem to ensure we deliver a plan that will achieve these goals.
We've led the way in RIIO-1 in terms of stakeholder engagement and we'll continue to lead in this area as we begin our business planning process toward the end of this year.
While many of the parameters are still being developed, let me talk a little bit about our expectations for the electric distribution incentive package.
Based on our recent discussions with Ofgem, we expect the incentive scheme for ED2 to continue to play a significant role in the overall returns for the electric distribution sector, much more significant compared to gas and transmission.
In addition to the reliability and customer incentives we're accustomed to, I would expect to see significant output measures for low-carbon initiatives, promoting flexibility of the network, and other net-zero-related outputs.
So while incentives are not a significant component of the gas and transmission subsector reviews, we absolutely continue to expect it to be meaningful for ED2.
And finally, regarding our 2020 earnings forecast, while COVID-19 has had an impact on our year-to-date financial results and we expect it to negatively impact the remainder of the year as well, we continue to believe the full-year impact will be manageable.
Therefore, we reiterated our earnings guidance range for 2020 of $2.40 to $2.60 per share, with results expected to track toward the lower end of our forecast range given COVID and unfavorable weather in the first half of the year.
In a positive sign, we began to see a gradual easing of restrictions later in the quarter that dampened some of the impact we were seeing in April from strict lockdown measures.
Residential load continues to be stronger than planned as a result of the continued work-from-home measures.
And while C&I is still below plan in all three business units, it is not as bad as we were originally expecting it to be.
Regarding 2021, we are withdrawing our prior 2021 forecast as a result of today's announcement regarding the potential sale of the U.K. business, and we will provide an updated 2021 forecast at the conclusion of the process, which we expect to occur in the first half of 2021.
I'll cover our second-quarter segment results on Slide 6.
First, I'd like to highlight that the estimated impact from COVID on our second-quarter results was about $0.06 per share, which was primarily due to lower sales volumes in the U.K. and lower demand revenue in Kentucky.
As we outlined in our projections on the first-quarter call, about two-thirds of the impact or $0.04 per share is recoverable through the U.K. decoupling mechanism on a two-year lag.
I'll discuss further the impacts of COVID on the quarterly sales volumes in more detail in a few moments.
Turning to the quarterly walk and starting with Q2 2019 ongoing results on the left, we first reflect adjustments for weather and dilution for comparability purposes of the underlying businesses.
During the second quarter, we experienced a $0.01 favorable variance due to weather, compared to the second quarter of 2019, primarily in Pennsylvania.
Compared to our forecast, weather in the second quarter was about $0.01 unfavorable variance with stronger load in Pennsylvania being offset by more mild weather in the U.K. and Kentucky versus normal conditions.
In terms of dilution, we saw a $0.03 impact in the quarter primarily driven by the November 2019 draw on our equity forward contracts.
Moving to the segment drivers, excluding these items, our U.K. regulated segment earned $0.33 per share in the second-quarter 2020.
This represents a $0.01 decrease compared to a year ago.
The decline was primarily due to lower sales volumes, primarily due to the impact of COVID-19 and lower other income due to lower pension income.
These decreases were partially offset by higher realized foreign currency exchange rates compared to the prior period, with Q2 2020 average rates of $1.63 per pound, compared to $1.36 per pound in Q2 2019.
I'll note that we layered on additional hedges since our last quarterly call and are now hedged at 95% for the balance of 2020 at an average hedge rate of $1.47 per pound.
And in light of today's announcement, we do not plan to add additional earnings hedges to 2021.
Moving to Pennsylvania, we earned $0.15 per share, which was $0.02 higher than our comparable results in Q2 2019.
The increase was primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in transmission.
This increase was partially offset by higher operation and maintenance expense.
I'll note that our customer mix mitigated the impact on sales from COVID-19, as our positive impact from our significant residential base in Pennsylvania and fixed charges more than offset lower demand in the C&I sectors.
Turning to our Kentucky regulated segment.
We earned $0.10 per share, a $0.03 decrease from our results one year ago.
The decline was primarily due to lower commercial and industrial demand due to the impact of COVID-19 and higher income taxes due to a tax credit recognized in the second quarter of 2019.
These decreases were partially offset by higher retail rates that were effective May 1, 2019.
Results at corporate and other were $0.01 higher compared with a year ago, driven by several factors, none of which were individually significant.
Turning to Slide 7.
We outline the changes in weather-normalized sales for each segment by customer class.
As expected and reflected in the financial results, we saw lower demand in the C&I sectors, partially offset by higher demand in the residential space in each of our service territories.
In addition, as Vince pointed out, the reopenings that we observed, primarily in June substantially reduced the impact on load.
For example, in Kentucky and Pennsylvania, we went from 15% to 20% C&I load declines at the peak of the lockdowns in April to more modest declines of 8% and 2%, respectively, for the month of June.
In the U.K., we saw some positive momentum as the U.K. government downgraded its alert level midmonth, although the recovery was more modest with June demand down about 11% versus the prior year.
Looking forward, we are encouraged by the recovery we've seen in June, which gives us more comfort in reaffirming the 2020 forecast today, albeit, at the lower end of the range.
We expect the annualized load sensitivities by segment that we provided last quarter will remain as good guide as we move through the balance of the year.
Let me conclude today's remarks with an outline of some of my key areas of focus for the company and my excitement for PPL's bright future.
As I've mentioned to many of you over the past few months, I'm extremely proud of our operational excellence at PPL, which is core to our mission of delivering safe and reliable service at an affordable price.
This has been and will continue to be a priority for the company as it has led to continuous innovation and operational improvements that are driving our premier customer service and satisfaction levels.
One of my goals is to take this culture of operational excellence and find ways to leverage it to drive additional value for our customers and shareowners.
I'm sure our decision to launch a sale process for WPD doesn't come as a surprise to investors, given PPL's stock performance over the past few years.
We believe today's announcement creates the best path forward to improve our TSR by simplifying the business mix, reducing our leverage, improving our earnings growth rate, and enhancing our ability to invest in sustainable energy solutions.
Another key area of focus will be to reduce the carbon footprint of the company.
We've already communicated our targets of reducing CO2 emissions by at least 70% by 2040 and at least 80% by 2050.
With the declining cost of renewable energy, we believe there will be a real opportunity to accelerate decarbonization of our Kentucky fleet under regulatory oversight and with economic benefit for our customers.
In closing, I'm very excited for the future of PPL.
I firmly believe that the company's organic growth opportunities and strengthened financial flexibility expected from today's announced strategic repositioning, best position PPL to deliver long-term value to both our shareowners and our customers.
We look forward to providing further updates at the conclusion of the process or as appropriate. | reaffirms fy 2020 earnings per share view $2.40 to $2.60 from continuing operations.
reaffirms 2020 earnings from ongoing operations forecast range of $2.40 to $2.60 per share.
withdraws guidance for 2021.
qtrly gaap earnings per share $0.45.
qtrly non-gaap earnings per share $0.55.
expects full-year impacts of pandemic to be manageable. |
Before we get started, I'll draw your attention to Slide 2 in a brief cautionary statement.
We appreciate you joining us for our second-quarter investor update.
Moving to Slide 3 and the agenda for today's call.
Joe will then provide a detailed review of second-quarter financial results and walk through some recent actions we've taken to strengthen PPL's balance sheet.
Turning to Slide 4.
The second quarter has been a busy one as we continue to advance the strategic repositioning of the company.
First, we completed the sale of our U.K. utility, achieving exceptional value for the business and once again demonstrating our ability to deliver on our strategic priorities to maximize shareowner value.
The sale resulted in net cash proceeds of $10.4 billion, which will support the repositioning of PPL as a high-growth U.S.-regulated utility company.
As a reminder, we've earmarked $3.8 billion of those proceeds to acquire Narragansett Electric from National Grid.
We also deployed some of the proceeds to achieve our previously stated objective of strengthening our balance sheet, utilizing $3.9 billion to retire $3.5 billion of outstanding holding company debt which will provide the company with substantial financial flexibility.
Regarding the remaining proceeds, we continue to review various options as previously discussed, including investing incremental capital at our utilities or in renewable energy, as well as the repurchase of PPL shares.
On the topic of share repurchases, our board recently authorized the company to repurchase up to $3 billion in PPL common stock.
We currently expect to repurchase about $500 million by year-end, while we continue to assess other opportunities to deploy proceeds to maximize shareowner value.
The actual amount we apply to share repurchases will depend on various factors, including the determination of other uses for the proceeds.
We believe our current plan provides a balance of an efficient use of proceeds while still maintaining financial flexibility.
I'll note that we are in the process of reevaluating our capital plans for incremental investment opportunities for the benefit of our customers.
We'll provide further updates to our capital and rate base plans after we complete this review.
The U.K. sale represented an important first step in our strategic repositioning.
rate-regulated utilities and strengthening our balance sheet while providing much greater flexibility to support future growth.
We're also making great progress in the acquisition of Narragansett Electric in Rhode Island.
To date, we've satisfied our HSR and FCC requirements.
And on July 16, the Massachusetts Department of Public Utilities granted a waiver of jurisdiction over the sale, streamlining the overall path to regulatory approval for the acquisition.
We continue to make progress on securing approvals from FERC and the Rhode Island division of public utilities and carriers, which are the two remaining approvals required for the transaction.
Looking ahead, we remain confident in our ability to close the transaction by March of next year with hopes of closing before year-end.
As we pursue the final regulatory approvals, we are working closely with National Grid on transition planning to ensure a seamless transition for Rhode Island customers and Narragansett employees upon closing.
We've also announced our planned leadership team for the Rhode Island Utility, Dave Bonenberger, who has nearly four decades of energy industry experience, including leading both the transmission and distribution businesses at PPL Electric Utilities will serve as the Rhode Island President upon completion of the transaction.
Dave is well-positioned to lead the execution of our operational strategy in Rhode Island as we seek to drive significant value for Rhode Island customers and to support the state's decarbonization goals.
Dave will be joined in Rhode Island by former National Grid employees in creating a strong, experienced, and local leadership team with a deep commitment to delivering energy safely and reliably to Rhode Island customers.
Moving to Slide 5.
This goal encompasses greenhouse gas emissions from our Kentucky generation, as well as other aspects of our business as outlined in the footnote on the slide.
PPL is fully committed to driving innovation to enable net-zero carbon emissions by 2050.
And to ensure a balanced, responsible, and just transition for our employees, communities, and customers as we advance toward our clean energy goals.
Our new goal reflects our continuous evaluation of our progress and opportunities through ongoing business and resource planning efforts.
Based on our latest reviews, we believe we are on a path to achieve 80% emissions reduction by 2040, a full decade ahead of our prior goal.
As a result, in addition to today's announced net-zero emissions goal, we've also accelerated our previous interim goals, now targeting an 80% reduction by 2040 and a 70% reduction by 2035.
In addition, we are undertaking an enterprisewide effort to enhance our clean energy strategy and develop additional programs, metrics, and goals that will guide our path to net-zero emissions.
We've hired an industry-leading global consulting firm to assist us in this endeavor.
In addition to the strategic initiative, we are completing an updated scenario-based climate assessment to evaluate the potential impacts to PPL from climate change and potential future requirements.
Our last climate assessment report was published in 2017.
Our updated assessment, which we intend to publish later this year, will analyze multiple scenarios, including a scenario tied to limiting the global temperature increase to no more than one and a half degrees Celsius.
As we conduct our climate assessment, our efforts will be informed by our ongoing integrated resource planning activities in Kentucky.
LG&E and KU submit an IRP once every three years to the Kentucky Public Service Commission.
And the next IRP will be filed in October of this year.
Both the Climate Assessment and the IRP will serve as key inputs as we further define the pathway to achieving our emissions goals.
Wrapping up this slide, we recognize that achieving these emissions reductions while maintaining reliability and affordability will require significant advances in clean energy technology and solutions, that can be scaled economically to meet the country's energy needs.
This is especially true as we support greater electrification of other sectors.
With that in mind, investing in research and development is a key pillar of our clean energy strategy.
And we continue to look for opportunities to engage in this area to drive the innovation and solutions necessary to achieve net-zero.
PPL, for example, is an anchor sponsor of the low carbon resources initiative, being led by EPRI in the Gas Technology Institute and I chair EPRI's LCRI Board Working Group.
We also recently joined Energy Impact Partners global investment platform, which brings together leading companies and entrepreneurs worldwide to foster innovation toward a sustainable energy future.
Through our participation in the EIP platform, PPL will support up to $50 million in investments aimed at accelerating shift to a low carbon future and driving commercial-scale solutions needed to deliver deep economywide decarbonization.
Apart from LCRI and EIP's investment platform, we also continue to engage in a number of other R&D efforts related to clean energy technologies and enhancing the power grid.
These collaborative efforts provide PPL greater visibility into emerging technologies that can be leveraged to advance the clean energy transition, and we will continue to look for opportunity to expand our work and support in this area.
Moving to Slide 6.
We've outlined our updated path to net-zero carbon emissions on this slide, along with our current expectations on coal-fired generation capacity in Kentucky, which is consistent with the generation planning and analysis study included in our recently approved rate case filings.
It's clear that we'll need to advance technology to achieve net-zero emissions by 2050 as we balance the need for affordable, reliable, and sustainable energy for our customers.
Based on these current factors and consistent with our most recent rate case filings in Kentucky, we currently expect to achieve a reduction in our coal-fired capacity of 70% by 2035, 90% by 2040, and 95% by 2050 from our baseline in 2010.
We anticipate having about 550 megawatts of remaining coal-fired generation in 2050 due to our highly efficient and relatively new Trimble County Unit 2 that started commercial operation in 2011.
Therefore, our objective is to continue to explore innovative ways through our R&D efforts to economically drive these reductions further while supporting our customers and local communities.
We have also assessed the implications of advancing these goals even further.
Our internal view of what it could take to achieve 100% carbon-free generation by 2035 as proposed by the Biden administration using current technologies would create significant affordability issues for our customers.
our new commitment to achieve net-zero carbon emissions by 2050 is backed by the actions that we are and will continue to take to support a low-carbon energy system that is affordable and reliable and provides the time needed for technology to advance.
Next, on Slide 7, I'll cover the details of the Kentucky rate cases.
On June 30, the KPSC approved the settlements that LG&E and KU had reached with parties to their rate reviews with certain modifications.
At a high level, the orders support continued investment to modernize our energy infrastructure, strength, and grid resilience and upgrade LG&E's natural gas system to enhance safety and reliability for those we serve.
Effective July 1, the KPSC authorized a combined $199 million increase in annual revenue for LG&E and KU with an allowed base ROE of 9.425% and a 9.35% ROE for the environmental cost recovery and gas line tracker mechanisms.
In addition, the KPSC approved a $53 million economic release or credit that was proposed by LG&E and KU to help mitigate the impact of rate adjustments until mid-2022.
Importantly, the commission's order authorized full deployment of advanced metering infrastructure, which will empower customers with detailed energy usage information, enable LG&E and KU to respond more quickly to power outages, and improve operational efficiency.
We continue to believe the resulting O&M savings from installing advanced meters will exceed the cost of this investment for the benefit of our customers.
The $350 million capital cost of the proposed AMI investment is not included in the new rates that took effect July 1.
Instead, we will record our investment in the AMI project as CWIP and accrue AFUDC during the project's implementation period.
The KPSC also approved a very constructive retired asset recovery rider to provide recovery of and a return on the remaining net book values of retired generation assets, as well as associated inventory and decommissioning costs.
The rider will provide cost recovery over a 10-year period upon retirement of such assets, as well as return on those investments at the utilities then weighted average cost of capital.
As we announced in January, Mill Creek Unit 1 is expected to retire in 2024.
Mill Creek Unit 2 and EW Brown Unit 3 are expected to be retired in 2028 as they reach the end of their economic useful lives.
These units represent a combined 1,000 megawatts of coal-fired generating capacity.
The retired asset recovery rider balances the interest of all stakeholders and provide certainty of recovery for the prudent investments made in these coal plants.
Pursuant to the settlement agreements approved by the KPSC, LG&E and KU have committed that they will not increase the new base rates for at least four years, subject to certain exceptions.
And before leaving this slide, I would note that in approving the settlement agreements, the commission adjusted the proposed base ROE downward from 9.55% to 9.425% and disallowed the recovery of certain legal costs.
These modifications reduced the annual revenue requirements proposed in the settlements by approximately $20 million.
We have filed a request for a limited rehearing on these matters.
And finally, turning to Slide 8.
In other highlights across PPL, we continue to achieve recognition for our strong commitment to diversity equity inclusion, innovation, and safety.
During the second quarter, PPL was recognized by Diversity Inc. in two distinct areas.
First, as one of the top utilities in the nation for workforce diversity, and second, as one of the top 50 companies for ESG, determined by several factors, including our programs and practices surrounding talent in the workforce, corporate social responsibility and philanthropy, supplier diversity programs and overall leadership in governance.
PPL was also named the Best Place to Work for Disability Inclusion for the fourth consecutive year, earning a perfect score on the 2021 disability equality index.
And finally, PPL Electric Utilities received the Southeastern Electric Exchange's Chairman's Award for its groundbreaking technology that safely and automatically cuts power to down power line.
These awards reflect the corporate strategy focused on creating value for all stakeholders as grounded in our five strategic priorities.
These include achieving industry-leading performance and safety, reliability, customer satisfaction, and optional efficiency, advancing a clean energy transition while maintaining affordability and reliability, maintaining a strong financial foundation, and creating a long-term value for our shareowners, fostering a diverse and exceptional workplace, and building strong communities in the areas we serve.
Turning to Slide 10.
Today, we announced second-quarter reported earnings of $0.03 per share.
tax rate change and a loss on the early extinguishment of debt, partially offset by earnings from the U.K. utility business that have been recorded as discontinued operations.
I'll note that the tax-related item was a noncash adjustment prior to the completion of the sale of WPD in June.
Adjusting for these special items, second-quarter earnings from ongoing operations were $0.19 per share compared with $0.20 per share a year ago.
We remain encouraged by the economic recovery from the pandemic in both our Pennsylvania and Kentucky jurisdictions, which has resulted in continuously improving commercial and industrial sales.
These higher sales were offset by several factors, which I will cover on the next slide.
So let's move to Slide 11 for a more detailed look at our second-quarter segment results.
As a reminder, we've adjusted the 2020 corporate and other amount to reflect certain costs previously reflected in the U.K.-regulated segment, which was primarily interest expense.
Total amount of these costs was about $0.02 per share for the quarter.
Turning to the ongoing segment results.
Our Pennsylvania-regulated segment results were $0.02 per share lower compared to a year ago.
The decrease was primarily due to lower adjusted gross margins, driven by lower transmission demand as discussed in Q1 and consistent with our expectations and an increase in the reserve recorded as a result of a challenge to the transmission-based return on equity, partially offsetting these negative variances were increased returns on additional capital investments.
We also experienced an additional $0.01 decline due to favorable tax-related items recorded in the second quarter of 2020.
Turning to our Kentucky-regulated segment.
Results were $0.01 per share higher than our comparable results in Q2 2020.
The increase was primarily driven by higher commercial and industrial demand revenue as we experienced a strong recovery in 2021 in these sectors from the significant impacts of COVID-19 and lower interest expense primarily due to the interest costs previously allocated to the Kentucky-regulated segment in 2020 that are now reflected in corporate and other.
Partly offsetting these items was higher operation and maintenance expense, primarily at our generation plants.
Results at corporate and other were flat compared with a year ago.
Higher interest costs of $0.01 a share related to the corporate debt previously allocated to the Kentucky segment were offset by several factors that were not individually significant.
Turning to Slide 12.
I'll cover some notable financing-related updates.
First, following the sale of the U.K. utility business, we successfully completed a series of financing activities in June and July that led to a significant reduction in holding company debt.
The result was a total reduction of PPL capital funding debt by about $3.5 billion, which was in line with our previously discussed targets.
Through these actions, we've reduced total holding company debt to about 20% of PPL's total outstanding debt, while effectively clearing all near-term maturities at PPL capital funding through 2025.
In addition to the activity of PPL capital funding, we redeemed at par $250 million at LG&E and KU Energy in July, which was part of our original financing plan for the year in order to simplify the capital structure of the company by eliminating intermediate holding company debt.
That was the final remaining outstanding debt security at the LKE entity.
Therefore, we have deregistered LKE as we no longer expect to issue debt out of this entity.
We expect PPL capital funding will be the financing entity at the holding company level to provide support to all of our operating subsidiaries.
The successful execution of liability management leaves PPL well positioned and on track to achieve our targeted credit metrics post closing of the Narragansett Electric acquisition.
In addition to these notable financing updates, we also reduced outstanding short-term debt as an efficient use of available cash until we fully deploy the remaining proceeds from the sale of WPD.
In summary, as we continue to execute our strategic priorities, I am incredibly excited about PPL's future.
We continue to deliver electricity and natural gas safely, reliably, and affordably for our customers.
We continue to evolve our clean energy strategy and to drive innovation across our company.
We completed the sale of our U.K. utility business, achieving outstanding value for our shareowners.
We're on track to close on our Narragansett acquisition within the expected time frames.
And the new PPL will emerge from our strategic repositioning as a much stronger company, one poised for long-term growth and success. | compname announces plan to repurchase approximately $500 million in ppl shares in 2021.
sets new 2050 net-zero carbon emissions goal, targeting 80% reduction by 2040 and 70% reduction by 2035.
q2 gaap earnings per share $0.03.
q2 adjusted earnings per share $0.19. |
We appreciate you joining us for our third-quarter earnings call.
Moving to Slide 3.
I'll share a few updates on regulatory and ESG-related matters.
And Joe will then provide a more detailed overview of the third-quarter financial results.
Turning to Slide 4.
Today, we announced third-quarter reported earnings of $0.37 per share.
based on the 2020 Finance Act and unrealized losses on foreign currency economic hedges.
Third-quarter earnings from ongoing operations were $0.58 per share compared with $0.61 per share a year ago.
At a high level, results for the quarter were in line with our expectations.
I'll note that the lower earnings, compared to last year include $0.02 of lower volumes in the U.K., which will recover in future periods.
And $0.01 due to the timing of our estimated federal income tax computation, which will reverse in Q4.
Joe will cover the financial results in more detail in his section.
Regarding a COVID update, throughout the quarter, we continued to deliver strong operational performance, providing outstanding customer service and reliability.
At the same time, we've remained focused on innovation and building for the future.
In September, we launched the new digitalization strategy in the U.K. The strategy focuses on transforming the way we develop and operate the network to empower customers drive greater efficiency and deliver faster decarbonization.
And in Pennsylvania, during Q3, we reached the $1 million mark for customer outages avoided as a result of our investments in automated power restoration technology.
Regarding customer sales during the quarter, residential load continued to be strong than our weather-normalized forecast, driven by sustained work-from-home measures in all of our service territories.
Conversely, C&I demand remained lower in all three business units albeit less pronounced in Q3 than it had been earlier in the pandemic.
From a financial perspective, we are well-positioned to weather the continued economic downturn.
We've maintained a strong liquidity position of over $4 billion.
Our cash receipts remain steady and our capital plans remain largely intact.
And as the moratoria are starting to lift across our U.S. service territories, we will comply with all state utility commission requirements and continue to work with our customers to maintain uninterrupted electricity and gas service.
This means offering flexible payment plans, connecting our customers with agencies and programs that can provide assistance and working with them to address overdue balances before they become unmanageable.
Service terminations are always a last resort.
Overall, we continue to believe the full-year impact of COVID-19 will be manageable as we close out the year.
As a result, we've narrowed our forecast range to $2.40 to $2.50 per share from the prior range of $2.40 to $2.60 per share.
We continue to expect to track toward the lower end of this guidance range due to the impacts of COVID-19 and warmer than normal weather during the first quarter.
sale process remains on track, and we continue to expect to announce a transaction in the first half of 2021.
Moving to Slide 5, and starting with key regulatory developments.
On October 1, WPD responded to Ofgem's RIIO-ED2 sector-specific methodology consultation, advocating for the continuation of a strong incentive-based regulatory regime that supports the best outcomes for our customers in terms of low prices and high-quality service.
We believe RIIO-ED1 largely achieved this balance and that the basic structure of the RIIO-ED1 regime should broadly remain intact under ED2.
WPD's response to the consultation focused on several areas, where we believe Ofgem should reconsider its position and the robustness of its supporting evidence before making its methodology decision.
In the end, we continue to believe that Ofgem has made it clear that DNOs will be critical to supporting decarbonization efforts in the U.K. to deliver a net-zero economy.
Based on our discussions with Ofgem, we expect the incentive scheme for ED2 to continue to play a significant role in the overall returns for electric distribution companies.
And we expect that WPD will have the opportunity to earn reasonable returns and invest significant amounts of capital during RIIO-ED2 and beyond.
Moving forward, WPD will remain very focused and engaged with its stakeholders and Ofgem to ensure it delivers a plan that will achieve the U.K.'s ambitious carbon reduction goals.
Ofgem is expected to issue its RIIO-ED2 sector-specific methodology decision in December.
developments, the Competition and Markets Authority or CMA issued a recent provisional ruling that supports more stable returns for regulated utilities in the U.K. to incentivize appropriate levels of investment.
The CMA ruling concluded that the water sector regulator, Ofwat, went too far in its efforts to sharply reduce returns for water utilities.
We expect the provisional ruling will be one that Ofgem studies closely as it nears its decision on the RIIO-2 final determinations for the gas and electric transmission sectors and ultimately for the electric distribution sector.
Turning to the U.S. The FERC on October 15 issued an order in a complaint filed by a third-party challenging PPL Electric Utilities based return on equity for transmission.
The FERC order sent the complaint to settlement procedures.
If no settlement can be reached, the case will go to public hearing.
We continue to believe that PPL Electric Utilities' current transmission return on equity is just and reasonable, and that complaint is without merit and based on flawed assumptions and calculations.
Also in the U.S. on October 23, LG&E and KU notified the KPSC of the company's intent to file a rate request later this month.
As part of the rate case, we will be applying for approval to deploy advanced metering to further enhance grid automation and reliability in the state.
Assuming the maximum suspension period for such a proceeding, the resulting base rate changes would be effective July 1, 2021.
Shifting gears to a few notable highlights related to our sustainability efforts and governance updates, in August, we announced that we joined an exciting new initiative to accelerate the development of low-carbon technology.
The low carbon resources initiative led by the Electric Power Research Institute and the Gas Technology Institute, focuses on identifying, developing and demonstrating affordable pathways to economywide decarbonization.
BPL is an anchor sponsor for the five-year program, which supports our clean energy strategy.
At a high level, that strategy is focused on decarbonizing PPL's own generation, decarbonizing our non-generation operations, enabling third-party decarbonization and advancing research and development into clean energy technologies.
As we've shared previously, PPL has set a goal to reduce its carbon emissions by at least 80% by 2050.
We're confident this goal is achievable with today's technology.
At the same time, we recognize that going further and faster, we'll require new ideas, new technology and new systems that can be delivered at scale safely, reliably and affordably for those we serve.
We also remain squarely focused on diversity, equity and inclusion as part of our long-term corporate strategy.
I'm pleased to share that PPL has been named a best place to work for people with disabilities.
In July, the company earned a top score of 100% on the 2020 Disability Equality Index, the nation's most comprehensive annual benchmarking tool for disability inclusion.
PPL's top score is the result of policies and practices that we've put in place to promote the success of those with disability.
And it's just the latest recognition of PPL policies focused on ensuring all employees have the opportunity to succeed.
Earlier this year, for example, PPL was named the best place to work for LGBTQ equality by The Human Rights Campaign after achieving a perfect score on their corporate equality index.
Moving forward, we will continue to work with employee-led affinity groups to better enable all employees to reach their full potential.
We believe it's important to be transparent on these matters, highlighting one of our core values of integrity and openness and our overall compliance and ethics commitment that is supported by robust internal controls.
Lastly, PPL's Board of Directors appointed Ar Beattie as a new director effective October 1.
Ar brings to the board a wealth of knowledge and experience with regulated utilities and the energy industry and we're certainly glad to have him onboard as we strategically reposition PPL for the future.
I'll cover our third-quarter segment results on Slide 6.
First, I would like to highlight that the estimated impact of COVID on our third-quarter results was about $0.04 per share, which was primarily due to lower sales volumes in the U.K. and lower demand revenue in Kentucky.
This is less than the $0.06 impact we experienced during the second quarter, primarily due to the improving electricity demand that Vince mentioned earlier in his remarks.
As a reminder, the majority of this impact is recoverable via the U.K. decoupling mechanism, which adjusts revenues on a two-year lag.
Turning to the quarterly walk, starting with the Q3 2019 ongoing results on the left.
We first separate the impact of weather and dilution for comparability purposes of the underlying businesses.
During the third quarter, we experienced a $0.02 unfavorable variance due to weather compared to the third quarter of 2019, primarily in Kentucky.
We experienced substantially higher degree days in Kentucky during the third quarter of 2019 that led to a favorable variance last year.
Weather in the third quarter of 2020 was about $0.01 favorable overall compared to plan, primarily due to stronger load in Pennsylvania versus normal due to the warmer conditions in July.
In terms of dilution, during the third quarter, we continued to recognize the impact of the November 2019 draw on our equity forward contracts, which resulted in dilution of about $0.03 per share for the quarter.
Moving to the segment drivers.
Excluding these items, our U.K.-regulated segment earnings increased by $0.01 per share compared to a year ago.
earnings results include higher foreign currency exchange rates, compared to the prior period, with Q3 2020 average rates of $1.54 per pound, compared to $1.26 per pound in Q3 2019, and lower interest expense, primarily due to lower interest on index-linked debt.
These increases were partially offset by lower sales volumes, primarily due to the impact of COVID-19, lower other income due to lower pension income and higher income taxes.
Segment earnings were $0.02 per share higher than our comparable results in Q3 2019.
The increase was primarily driven by higher adjusted gross margins, primarily resulting from returns on additional capital investments in transmission.
And as we saw in Q2, our customer mix mitigated the impact on sales from COVID-19 as our positive impact from our significant residential base in Pennsylvania and fixed charges more than offset lower demand in the C&I sectors.
Turning to our Kentucky-regulated segment.
Results were flat to the comparable results one year ago.
Factors impacting the results include lower commercial and industrial demand due to the impact of COVID-19 offset by factors that were individually not significant.
Results at corporate and other were $0.01 per share lower compared to a year ago, driven primarily by higher income taxes due to timing, which is expected to reverse in the fourth quarter.
Turning to Slide 7.
We again outlined the changes in weather-normalized sales for each segment by customer class as we did last quarter.
And like Q2, we saw lower demand in the C&I sectors, partially offset by higher residential load in each of our service territories.
Demand in the C&I sector, while still lower than last year, has been steadily recovering as certain COVID restrictions have been lifted.
In Pennsylvania, demand improved from about an 11% decline in C&I load in the second quarter to a 4% decline during Q3 compared to a year ago.
C&I declines in Pennsylvania continue to be primarily in retail trade and services industry and manufacturing, respectively.
Our large industrial customers have generally returned to pre-COVID operations and are not expecting future reductions at this time.
Our Kentucky segment reported about a 7% C&I load decline during Q3, compared to the greater than 14% decline we saw last quarter versus the prior year.
And like Pennsylvania, the services industry, such as restaurants, retail and hotels continue to be negatively impacted in our commercial sector in Kentucky.
Much of the improvement we experienced during Q3 was on the industrial side as many manufacturing companies were able to reopen after temporarily being forced to shut down in Q2.
Specifically, industrial volumes were driven in part by auto manufacturing volumes returning to pre-COVID levels.
Coal mining and non-auto manufacturing continue to be more negatively affected.
Finally, in the U.K., C&I load improved to about a 14% decline in the third quarter, compared to a 20% decline that we experienced last quarter versus a year ago as government restrictions put in place in late March were further eased throughout the month of July.
The primary driver of the increase was seen in the large industrial and manufacturing sectors that have largely closed during the full lockdown phase and have since opened, albeit not quite the pre-COVID levels.
It's clear on this slide that the U.K. demand has not recovered as sharply as our U.S. service territories which underscores the value of the effective decoupling mechanism there.
We remain encouraged by the recovery we have observed in each of our service territories during the third quarter, but we'll continue to monitor load impacts as we move into the winter months, including the impact of additional temporary lockdowns should they arise, such as the lockdowns we are currently experiencing in England and Wales.
At this time, the current lockdown is not as stringent as what we experienced early in the year as workers that are not able to work from home can still go to work and many retail establishments can still provide takeout options.
In addition, strong residential demand is expected to continue to act as a hedge to lower C&I demand.
Now I know I just stated a lot of percentages.
So let me take a moment to summarize the impact of COVID-19 on our ongoing results in 2020.
We experienced a $0.10 per share impact to the end of the third quarter.
The remaining $0.03 is primarily from lower demand in Kentucky, and we have been able to offset the majority of that through effective cost management.
Overall, we believe our strong regulatory constructs, balanced rate structures and customer mix, positions PPL well to continue to operate at a high level in this challenging environment.
In closing, I remain very proud of how our teams across PPL have risen to the challenge of COVID-19.
We continue to deliver electricity and gas safely and reliably to our customers.
At the same time, we remain as focused as ever on innovation and continuous improvement as we position the company for future success.
With that, operator, let's open the call for Q&A. | compname reports q3 earnings per share $0.37.
sees fy 2020 earnings per share $2.40 to $2.50 from continuing operations.
q3 reported earnings of $0.37 per share.
qtrly earnings from ongoing operations of $0.58 per share. |
Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement.
We appreciate you joining us for our 2021 year-end earnings call.
Moving to Slide 3 and the agenda for today's call.
I'll highlight key achievements we made throughout the year, including our progress in strategically repositioning PPL for future growth and success.
Turning to Slide 4.
I'm incredibly proud of how our team performed and what was truly a remarkable year for PPL.
As we began a new century in our company's history, we took bold steps to strategically reposition PPL as a US-focused energy company committed to sustainable growth and well-positioned to lead the clean energy transition while maintaining affordability and reliability for our customers.
We completed the sale of our UK utility business in June.
Achieving exceptional value at almost $11 billion while eliminating risks associated with foreign operations.
We then took steps to strengthen PPL's balance sheets by reducing $3.5 billion of our holding company debt, which provides us with significant financial flexibility going forward.
We advanced our planned acquisition of Narragansett Electric, which will expand and diversify our US presence, add another high-quality regulated utility to our portfolio, and create additional opportunities to leverage our proven operating model to drive value for customers and shareowners.
We anticipate receiving a final order from the Rhode Island division of public utilities and carriers with respect to the acquisition by March of 2022.
While strategic repositioning was a key priority in 2021 to set PPL up for long-term success, we also remain focused on achieving our near-term objectives.
In 2021, we continued our track record of earning equity returns that were in line with those allowed by our regulators.
We also achieved constructive regulatory outcomes in 2021 with the settlements on the Pennsylvania FERC ROE challenge and the rate case in Kentucky, which will provide added stability and predictability to our plan over the next several years.
We also returned over $2 billion to share owners through dividends as well as share repurchases, which included the completion of our targeted $1 billion in share buybacks through December 31.
And true to our mission, we delivered energy safely, reliably, and affordably for our 2.5 million customers in the United States.
And as the pandemic refused to yield, we stayed resilient acted responsibly to protect our employees, and remain focused on continuous improvement.
From Kentucky to Pennsylvania, we delivered exceptional service throughout 2021.
We maintain transmission and distribution reliability as well as generation availability that was among the best in the industry.
Despite PPL electric utilities experiencing significant storms during 2021, it maintained top quartile performance for safety, which measures the average number of outages our customers experienced.
Meanwhile, our Kentucky operations posted their second-best year on record for the state.
When severe weather struck either in Pennsylvania or Kentucky, we responded quickly and effectively.
For example, after December tornadoes tore through portions of our service territory in Kentucky damaging or destroying more than 500 transmission and distribution poles.
We restored power to most customers within 48 hours.
Similarly, when the remnants of Hurricane Ida swept through our Pennsylvania service territory, knocking out power to tens of thousands of customers, we mobilized quickly and effectively to get the lights back on as soon as possible.
Our restoration performance in the wake of Hurricane Ida was recognized with an EEI Emergency Response Award.
This performance is the result of the investments we've made in our grid and our dedicated employees who pride themselves on delivering a superior level of service each day.
And that service was once again reflected in our customer satisfaction scores.
We were honored to receive four new JD Power awards in 2021 for electric utility residential and business customer satisfaction with PPL Electric Utilities and Kentucky Utilities both ranking highest among similarly sized utilities in their respective regions.
And following an independent survey of customers at 140 of the largest utilities in the US, PPL Electric and Kentucky Utilities were recognized by Escalent as two of the most trusted utility brands in the nation.
Across PPL, we also continue to foster a culture of innovation, investing in advanced technology and data analytics to deliver industry-leading reliability and enterprisewide cost efficiencies.
This resulted in multiple industry awards in 2021, including the use of dynamic line rating, technology, and the use of data analytics to better target vegetation management.
With an eye toward keeping reliability strong and empowering our customers, we also continue to invest in the future.
This included executing more than $2 billion in infrastructure improvements to further strengthen grid resilience, modernize our networks, incorporate advanced technology, and pave the way for increased electrification and renewable energy in our service territories.
Turning to Slide 5.
Over the past year, we also delivered on our commitments to deliver a sustainable PPL for our shareowners, employees, and the communities we serve.
We made significant progress in advancing our clean energy strategy.
We adopted a net-zero carbon emissions goal, accelerated our interim emissions reduction target to 70% from 2010 levels by 2035 and 80% by 2040.
And we also accelerated our coal plant retirements scheduled.
Separately we announced the commitment of over $50 million in new investment to fund research and development in the clean energy space with our planned investment in EIP and EPRI's low carbon resources initiative.
We also launched a new partnership to study carbon capture at a natural gas combined cycle power plant and reached new agreements to provide an additional 125 megawatts of solar power to major Kentucky customers.
In November, we published our latest comprehensive climate assessment report, which highlights the risks associated with climate change and the opportunities in responding to it and evaluating potential future emissions under multiple scenarios.
This included a scenario consistent with limiting global warming to 1.5 degrees Celsius.
Our climate assessment outlines our clean energy strategy and goals to enable a responsible transition that balances our commitments to the environment, our customers, our employees, and our communities.
LG and KU also submitted their triannual joint Integrated Resource Plan, which reflected a significant increase in projected renewable additions in the 15-year planning horizon compared to our prior plan.
We expect the trend of more rapid decarbonization of our generation fleet in Kentucky to continue with further improvement in cost and technology for renewables, as well as other clean energy technologies.
In addition to our focus on advancing our clean energy transition, we also remain very engaged in the communities we serve and with our employees throughout 2021.
We continue to move PPL forward by creating a more diverse and inclusive workplace.
We implemented an enterprisewide diversity equity inclusion strategy, adopted DEI commitment, increased diversity within our leadership ranks, overall workforce in the board, and we expanded our support for social justice and equity initiatives in the communities we serve.
In addition, we continue to create new opportunities for business resource groups for employees of all backgrounds and experiences to collaborate, share perspectives, and contribute to PPL's success.
Our strong commitment to diversity and inclusion received recognition from multiple organizations in 2021, with PPL being named the best place to work for LGBTQ equality and disability inclusion, as well as a top company for ESG.
And this January, PPL once again was named the best place to work for LGBTQ equality, marking the sixth straight year PPL has received this recognition.
During our fall giving campaign, PPL employees, and retirees collectively raised more money than ever before.
More than $7 million in individual pledges and corporate matching contributions will help lift individuals, families, and the community.
And in the aftermath of the Kentucky tornadoes, we responded quickly providing financial support to assist Kentucky families and businesses.
In other highlights, we continue to build an exceptional management team that we believe will lead PPL to its best years to come.
We promoted Greg Dudkin to the chief operating officer and our leveraging his experience in building one of the most advanced utilities in the nation and PPL Electric Utilities to drive further value for stakeholders across all the PPL operating companies.
We're extremely excited to have Wendy Stark on our team as our new general counsel.
Wendy's extensive experience in regulatory matters and her deep knowledge of our industry have made her a great addition to PPL.
We named two new utility precedents in Pennsylvania and Kentucky, with Stephanie Raymond in Pennsylvania, and John Crockett in Kentucky.
Stephanie is the first female utility president in our company's 100-year history.
We also named a highly qualified and experienced leadership team in Rhode Island led by Dave Bonenberger from PPL and numerous talented employees from National Grid to lead our electric and gas operations pending the completion of the acquisition.
We also took steps to strengthen our corporate governance during the year.
Our board of directors appointed an outstanding leader and experienced board member as independent Board Chair in Craig Rogerson, reflecting PPL's continued commitment to strong corporate governance and independent oversight by a diverse, engaged board.
In summary, across our business, we made tremendous progress in 2021 as we pursued our strategy to deliver sustainable value for all stakeholders and position PPL for future growth and success.
Today, we announced fourth quarter reported earnings of $0.18 per share.
Special items in the fourth quarter were $0.04 per share, primarily due to integration expenses associated with the planned acquisition of Narragansett Electric and discontinued operations associated with the UK utility business.
Adjusting for special items, fourth quarter earnings from ongoing operations were $0.22 per share.
Our fourth quarter results bring our total 2021 results to a net loss of $1.93 per share.
Special items for 2021 were $2.98 per share, primarily due to discontinued operations associated with the UK utility business, a UK tax rate change prior to the sale, and a loss on the early extinguishment of debt.
Adjusting for special items, 2021 earnings from ongoing operations for $1.05 per share.
Before turning to the 2021 earnings walk, I'll highlight a few other financial updates.
As we indicated on our third quarter earnings call, we plan to update the dividend following the January 3 payment as we continue to progress on PPL's strategic repositioning.
Recall that we had maintained the dividend at the prior rate despite the sale of WPD, providing $350 million of dividends to reward long-term shareowners as we work to close the transactions and deploy the cash proceeds from the WPD sale in a value-accretive manner.
Today, we've announced the first quarter 2022 dividend of $0.20 per share payable on April 1.
The updated quarterly dividend aligns with our earnings projections for PPL's current businesses and a targeted payout ratio of 60% to 65%.
We plan to provide an updated annualized dividend rate and growth projections to align with earnings growth during an Investor Day following the completion of the Narraganset regulatory review process.
We recognize that it would have been optimal to declare the April 1 dividend when we provide our annualized earnings forecast.
However, since we haven't completed the Narragansett regulatory review process, we wanted to be transparent today by providing clarity on the dividend reset following the sale of WPD.
We plan to reflect any increase in the dividend due to the inclusion of Narragansett in our forecasts when we provide a comprehensive financial update at Investor Day.
As Vince noted, one of the key financial highlights for 2021 was a reduction in our holding company debt as we allocated a significant amount of the WPD sales proceeds to strengthen PPL's balance sheets.
We had a unique opportunity to establish one of the leading credit profiles in the sector, an attribute we see as increasingly important with a growing capital needs to fund the clean energy transition and now amid the backdrop of rising interest rates.
In other financial updates, we amended and extended our credit facilities during the fourth quarter to better align our liquidity needs.
Post the strategic repositioning.
In short, we slightly reduced the capacity of PPL capital funding to $1.25 billion from $1.45 billion, as we no longer need the same level of liquidity without the foreign currency risk associated with the UK.
We've also included an option to add Narragansett as a co-borrower to the PPLcapital funding credit facility pending the closing of the acquisition.
And we continue to target 16% to 18% CFO and FFO to debt metrics, including the Narragansett Electric acquisition.
We believe these actions provide a very strong financial foundation and place PPL among the best credit profiles in our industry.
Let's move to our full-year 2021 earnings results on Slide 8.
I would note that while I will compare 2021 earnings to our 2020 results, the periods are not truly comparable given the sale of the UK businesses, the reallocation of certain costs, the balance sheet recapitalization along with the outcome of the transmission ROE challenge.
Similar to prior quarters, we have adjusted the 2020 corporate other amounts to reflect certain costs previously allocated to the UK regulated segment, primarily interest expense and other support costs.
These costs totaled about $0.07 per share for the year.
Turning to the ongoing segment drivers.
Our Pennsylvania Regulated segment earned $0.61 per share, a $0.04 year-over-year decrease.
Earnings results in Pennsylvania were primarily driven by a reduction in the transmission formula rate return on equity, lower peak transmission demand, and higher operation and maintenance expense.
These decreases were partially offset by returns on additional capital investments in transmission.
Turning to our Kentucky segment, we earned $0.61 per share in 2021, a $0.6 increase over comparable results one year ago.
The increase was primarily due to higher base retail rates effective July 1.
Lower interest expense, primarily due to lower interest costs that were previously allocated to the Kentucky regulated segment and lower interest rates.
Partially offsetting these items were higher operation and maintenance expenses related to several factors including support costs, generation plant costs, T&D costs, and higher depreciation due to the additions to PP&E.
Results at corporate and others were $0.03 higher compared to the prior year.
Factors driving earnings results at corporate and other, primarily included lower interest expense primarily due to less outstanding long-term holding company debt, partially offset by interest costs previously allocated to the Kentucky segment, partially offsetting this increase were several factors that were not individually significant.
Moving to Slide 9.
The capital investments made in Pennsylvania and Kentucky during 2021, support grid modernization, grid resiliency and reliability, and improved service for our customers.
Of the $2 billion of capex that Vince noted, we invested about $1 billion in each of the segments.
In Pennsylvania, investments in distribution were made to maintain top quartile industry reliability and performance and investments in more advanced IT systems.
Meanwhile, on the transmission side, investments were primarily related to asset health reliability with a focus on smart relays, equipment monitoring, and automation to support of more advanced grid.
Our Kentucky investments were primarily related to replacing the aging transmission, infrastructure, maintaining and enhancing our electric distribution network, generation outages, environmental compliance, and grid modernization.
This resulted in total rate base growth of nearly 6%.
Even as a rate based related to our coal-fired generation facilities decline.
As I mentioned at the outset of my remarks, 2021 was very much a transition year for PPL.
It was about reimagining PPL and laying a firm foundation for the company's future growth.
And I believe we achieved just that.
Looking forward, our focus is on completing the acquisition of Narragansett Electric and introducing a new PPL to shareholders.
The PPL that is committed to delivering sustainable value for shareowners backed by one of the strongest balance sheets in the US utility sector, distinguished by best-in-class customer service, committed to net-zero carbon emissions, and well-positioned to lead the clean energy transition while maintaining affordable reliable service for our customers.
We look forward to sharing further details on our strategy and the exciting growth prospects for the new PPL at our Investor Day.
With that operator, let's open the call for Q&A. | q4 earnings per share $0.18.
q4 adjusted earnings per share $0.22 from continuing operations.
strategic repositioning remains on track. |
As a precautionary measure, and as a part of our ongoing pandemic plan, the participants in our call today are joining us remotely from their respective offices.
We have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property & Casualty lines; and Kevin Shook, President of our Workers' Compensation Insurance Operations.
Ned, will you lead us off?
It's hard to believe it's been a full quarter since we started meeting this way with each of us on our own offices and harder still to believe that it might not be the last time we do so.
While the COVID-19 pandemic continues to shape everything from how we interact with each other on a daily basis to the global economy, it absolutely does not impair our mission to protect others.
If anything, the pandemic reinforces our resolve to protect our customers, there's [Phonetic] truly brave individuals who work tirelessly to protect us all in turn.
The results in the second quarter were affected by a few significant items that we will discuss shortly.
However, as this conference call marks the first anniversary of my tenure as CEO and installation of the executive leadership team that we formed, I want to recognize the accomplishments the team has spearheaded in the past year.
When Mike Boguski moved over from Eastern to lead the Specialty Property & Casualty, I asked him to employ his exceptional operational skills to foster a results-oriented culture of accountability.
He has delivered as expected instituting a comprehensive review of the Specialty Property & Casualty segment and undertaking a full reunderwriting of our Specialty healthcare book of business.
At Eastern, Kevin Shook and his team have led the company constantly and profitably through one of the most challenging periods in Workers' Compensation Insurance history, facing intense competition, and with the onset of the COVID-19 virus and subsequent shuttering of the national workforce, unprecedented uncertainty.
Our rural underwriting strategy and efficient claims handling have brought success in the market that constantly tests its participating writers.
Dana Hendricks led the treasury, accounting and IT teams through the implementation of a new general ledger and accounts payable solution, which reduced reliance on manual processes, implemented a common chartered accounts across the Company's four accounting locations, and improved overall system performance.
This was an important step in furthering our goal of becoming a more efficient and effective organization, further unifying the ProAssurance family of companies.
Our human resource team, led by Noreen Dishart, worked tirelessly to shape and execute the remote work plan that allowed 95% of our employees to work from home.
Almost immediately, she then turned around and began putting together the Return to Office plan.
The key considerations of both plans were ensuring we are flexible to accommodate the varying working needs of our employees while remaining cohesive to serve our customers, all the while making sure ProAssurance continues to be a great place to work.
Amid all of these efforts, The NORCAL transaction was being finalized during the last half of 2019, announced in Q1 of 2020, and today continues to proceed through the required state and federal regulatory approvals.
Perhaps more than any other initiative, this acquisition represents the combined efforts of the executive leadership team and those of the whole Company.
Even though segments or departments without a direct hand in the transaction assist in the effort through their contributions to the capital position of the Company or their support of critical functions, without which there could be no deal at all.
We look forward to working with the exceptional people at NORCAL, adding profitable business in attractive territories and achieving strategic gains in scope and scale that are ever more important as the healthcare professional liability market continues to evolve.
All that to say, it has been a very busy year in which the executive team and each member of the Company has much to be proud of.
I am tremendously grateful for the opportunity and experience of serving them, and I look forward with excitement and enthusiasm to the next year and those that follow.
For the second quarter, we reported a net loss of $18.1 million or a loss of $0.34 per share and an operating loss of $32.4 million or $0.60 per share.
As Ned mentioned and as we described in yesterday's release, there are two items of particular note that affected our second quarter results.
Those will be discussed in the segment's discussions momentarily.
Similar to last quarter, the COVID-19 pandemic and its influence on our investments featured prominently in the quarter's results.
So I'd like to provide some expanded detail for each component.
The biggest impact came from higher losses from our unconsolidated subsidiaries.
We invest in various LPs and LLCs and the results of those investments are typically reported on a one quarter lag.
Accordingly, the $18.6 million loss in the current quarter from our LPs and LLCs is a result of the impact of the disruption in global financial markets during the first quarter due to COVID-19.
We expect a recovery in value of those investments in the third quarter, comparable to the recovery in the broader market this past quarter, which leads us to a brighter note.
We've recorded consolidated net realized investment gains of $20 million in the second quarter.
This was driven by increases in the fair value of our equity portfolio and convertible securities as financial markets began to stabilize following the initial shock of the pandemic, representing a recovery in fair value of approximately 40% since the first quarter.
Lastly, consolidated net investment income decreased quarter-over-quarter, primarily attributable to a lower allocation to equity securities and partial reinvestment in fixed maturities, coupled with lower yields on our short-term investments due to the recent aggressive action taken by the Federal Reserve to reduce interest rates.
Given the uncertainty presented by the pandemic, we allowed cash to build to ensure support of business operations and our customers accordingly.
We're being patient and evaluating investment opportunities and the economy in general to determine how best to allocate capital.
Excluding the impacts of these items, the consolidated current accident year net loss ratio decreased 1.5 percentage points, driven by our Specialty Property & Casualty and Lloyd's Syndicates segment, partially offset by higher current accident year net loss ratio in our Workers' Compensation Insurance segment.
We've recognized $17.1 million in net favorable prior accident year development, stemming from all of our segments other than the Lloyd's segment.
Mike and Kevin will address this more specifically in their remarks later as a part of the segment discussion.
Our consolidated underwriting expense ratio was 28.3% in the second quarter, a decrease of 1.7 percentage points from the year ago period, driven by the effect of the tail premium earned associated with the large national healthcare account.
Excluding that earned tail premium, our expense ratio was relatively flat quarter-over-quarter as the incremental improvements we have made in becoming a more efficient and effective organization over the past year, along with the expense savings related to COVID-19, have mitigated the upward pressure on our expense ratio due to the lower earned premium, as we continued to reunderwrite our Specialty book.
This leads us to a combined ratio of 130.1% for the second quarter.
In all, the financial market fluctuations associated with the pandemic and the effects of the large national healthcare account make it difficult to see the incremental improvements we are achieving in our underlying businesses.
But rest assured, we are making progress.
The Specialty Property & Casualty segment recorded a second quarter loss of $56.6 million, primarily due to a tail policy issued to a large national healthcare account.
We recognized what we assume will be a full limits loss for this tail policy, which resulted in a $45.7 million net underwriting loss in the quarter.
The establishment of a $10 million reserve related to COVID-19 also contributed to the operating loss, which I'll expand upon shortly.
Gross premiums written were $107.1 million, a decrease of 16.3% quarter-over-quarter.
The lower topline revenue reflects our strategy to strengthen rate levels in our Standard Physician business, execution on state strategy initiatives, recognition of pandemic-related premium credits, and continued reunderwriting efforts in our Specialty business, which includes national accounts, excess and surplus lines, hospitals, and healthcare facilities.
The Specialty reunderwriting efforts began in the third quarter of 2019 followed by the new executive hires in our Healthcare Professional Liability underwriting operation during the previous quarter.
We are pleased with our progress to date.
The first year reunderwriting in our Specialty business will be completed by the end of the third quarter of 2020.
We expect to see the benefits of this effort continue in future quarters.
We continue to focus on underwriting discipline and achievement of our long-term profit objectives, shrinking our topline, if necessary, to improve our bottom line.
In relation to these strategic underwriting efforts, premium retention in the segment was 71% for the quarter, primarily driven by a 29% retention in our Specialty lines.
The lower Specialty retention was driven by the loss of two large accounts, representing premium writings of $11.8 million, which includes the aforementioned large national account.
In addition, the non-renewal of certain risk profiles within the senior care business had a significant impact on specialty premium retention in the quarter.
Notably, the premium level for this book of business has been reduced by 75% in the past year.
While this reduction lower premium retention in the segment, it also reduced our exposure to the claim activity associated with the pandemic in the senior care space.
In our Standard Physicians line, retention was 82%, primarily impacted by our state strategy pricing adjustments in challenging venues and competitive market conditions.
The lower premium retention was offset by renewal premium increases of 20% in Specialty and 12% in Physicians.
In addition to the rate increases in Specialty, we also significantly strengthened rate adequacy through improvement of product structure, terms and conditions.
We are pleased to report strong premium retention results in our Medical Technology Liability business and Small Business Unit, which were 88% and 91% respectively.
New business writings in the Specialty Property & Casualty segment were $4.6 million in the quarter compared to $8.1 million in the second quarter of 2019.
This result reflects careful risk selection, disciplined underwriting evaluation, competitive market conditions, and the impact of slower submission activity due to market disruptions from COVID-19.
New business writings in our Medical Technology business increased to $2 million compared to $1.3 million in the second quarter of 2019.
This was driven by increased demand for pandemic-related products in the medical technology space.
We are proud to support our long-term and new Medical Technology clients that are working to turn the tide against this pandemic.
The current accident year net loss ratio was 137.7% in the second quarter, a 43.7 percent point [Phonetic] increase from the year ago period, primarily attributable to the large national account tail policy written in the quarter.
To a lesser extent, the increase also reflects the $10 million reserve related to COVID-19.
Overall, the accident year net loss ratio reflects recognition of higher claim severity trends and loss volatility in certain states and a higher loss pick within our Specialty business.
Excluding the COVID reserve and the impact of the national health account, the current accident year net loss ratio was 93%.
In the second quarter, we observed significant reductions in our claim frequency as compared to the same quarter in 2019.
This reduction is likely associated with COVID-19.
However, we have remained cautious in recognizing these favorable frequency trends in our current accident year reserves due to the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.
We've recognized net favorable prior year development of $15.4 million compared to $12.4 million in the prior year quarter.
The net favorable development was equally distributed across our Healthcare Professional, podiatric, and Medical Technology Liability businesses.
The Specialty Property & Casualty segment reported an expense ratio of 19.9% in the second quarter, a 3.8-percentage point decrease from the same quarter in 2019.
The decrease was primarily related to the one-time impact of the fully earned large national account tail premium, and to a lesser extent, the decrease in travel expenses and cost savings associated with remote work related to COVID-19.
We anticipate these pandemic-related expense reductions will continue for the remainder of the year.
The reduction in the expense ratio also reflects the incremental improvements during the past year due to organizational structure enhancements, improved operating efficiency, and expense reductions, offset by 0.4 percentage points of one-time charges related to restructuring costs.
We continue to build an operating model that will position us well to be successful throughout the various insurance and economic cycles.
Just a quick update on the NORCAL transaction.
We continue to proceed through the regulatory and integration planning process.
We remain excited about the combination of the companies and continue to work together with the NORCAL team to complete this transaction.
We still aim to close the deal by year-end 2020.
So what details can you give us about the virus' effects to our premiums or our claims?
The pandemic continues to impact our business, including premium and exposure reductions, new business disruption, jury trial delays, and cash flow implications from deferred premiums.
To be more specific, we processed approximately $3.7 million of premium reductions and $5.3 million of premium deferrals during the quarter.
We have collected the vast majority of the outstanding deferrals early in the third quarter.
The revenue reduction related to premium credits was partially offset by the aforementioned increase in new business writings in our Medical Technology business.
There are only three reported COVID-19 claims with limited exposure during the quarter in our Healthcare Professional Liability business.
As previously mentioned, we established a $10 million COVID loss reserve.
This was related to reported incidents in our Senior Care business, primarily from non-renewed accounts.
This reserve represents our best estimate on ultimate claims-related expenses based on current information and reported incidents.
The vast majority of the states in which we write Senior Care business have enacted immunity legislation.
We continue to monitor such legislation on a state-by-state basis and other regulatory trends.
Now, let's turn to Kevin Shook for comments about the results of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments.
The Workers' Compensation Insurance segment produced operating income of $1 million and a combined ratio of 98.7% for the second quarter of 2020.
During the quarter, the segment booked $57.2 million of gross premiums written, a decrease of 10.9% quarter-over-quarter.
Renewal price decreases were 4% for the quarter and are representative of the continued competitive pressures in our underwriting territories despite COVID-19 and the associated economic conditions.
Premium renewal retention was 87% for the 2020 quarter compared to 81% in 2019, as we continue to see stronger premium retention each month during the pandemic.
New business writings were relatively flat quarter-over-quarter at $6.5 million in 2020 compared to $6.6 million in 2019.
Audit premium for the second quarter of 2020 was approximately $200,000 compared to $1.2 million for 2019.
The calendar year loss ratio was consistent quarter-over-quarter, reflecting an increase in the current accident year loss ratio from 68.2% in 2019 to 70.6% in 2020, offset by higher prior-year net favorable development of $1.5 million in 2020 compared to $1.1 million in 2019.
The increase in the current accident year loss ratio primarily reflects the impact of renewal rate decreases.
Despite a 39% decrease in reported claim frequency during the pandemic, we concluded that it was prudent to continue recording a higher accident year loss ratio, given the many uncertainties surrounding COVID-19.
As part of our normal actuarial process, we will reevaluate the current accident year loss ratio in the third and fourth quarters of 2020, as more information becomes available regarding the pandemic and its potential impacts on our claim results.
Our claims operation closed almost 35% of 2019 and prior claims during 2020, which is consistent with historical claim closing rates.
Our claims professionals remain highly effective while working remotely during the pandemic.
Our short-tailed claim-closing business model results in fewer open claims, which will assist us through the pandemic with a manageable prior year's open claims inventory.
The underwriting expense ratio in the quarter was 31.7%, an increase of slightly less than 1 percentage point from the same quarter in 2019, primarily due to the decrease in net premiums earned, partially offset by a decrease in general expenses.
We continue to carefully monitor all general expenses in anticipation of a decline in premium from reduced payrolls associated with the pandemic.
Moving to the Segregated Portfolio Cell Reinsurance segment, operating income was approximately $1.6 million for the quarter, which represents our share of the net underwriting profit and investment results of the segregated portfolio cell captive programs in which we participate to varying degrees.
Gross written premium and the SPC reinsurance segment decreased to $15 million for 2020 from $17 million in 2019.
This reflects premium renewal retention in 2020 of 87%, new business writings of $741,000, and renewal rate decreases of 5%.
Excluding the effect of the 2019 E&O policy discussed on previous calls, the SPC reinsurance 2020 calendar year loss ratio decreased from 52% in 2019 to 45.9% in 2020, the result of a decrease in the current accident year loss ratio, offset by slightly lower net favorable reserve development of $1.9 million in the quarter.
The decrease in the current accident year loss ratio in 2020 is primarily due to a decrease in large claim activity.
Now, I'm going to provide you with some additional color on the COVID-19 pandemic and its current impact on our Workers' Compensation business.
With respect to premiums, despite proactive communications to do so, we continue to observe minimal activity on the part of policyholders to submit updated payroll information and endorse their premium mid-term.
For mid-March to the end of July, we have endorsed 992 policies mid-term for a total premium reduction of $2.6 million.
We have processed 224 policy cancellations, resulting from business closures, which reduced our premiums by less than $1 million through the end of July.
We continue to offer policy cancellation suspensions and to defer premium payments for customers on a case-by-case basis as substantially all policyholders use installment plans.
To date, we have received less than 250 requests to defer premium installment payments on a policyholder base of more than 13,700.
We believe our rural underwriting strategy and diverse book of business has assisted us in managing the pandemic to date.
We continue to monitor closely COVID demographics in our 19 core states that represent 99% of our in-force book of business.
According to data from the Center for Disease Control, as of the end of July, the combined number of cases reported from the largest county in each of our 19 core states represents approximately 17% of total COVID cases reported, while the number of cases reported from our largest county in these same 19 states is less than 8% of the total.
We believe this is attributable to our rural underwriting focus, whereby the counties in which we primarily operate currently report on average fewer cases than larger metro areas despite our higher premium allocation to the healthcare sector.
The current length and severity of the pandemic and its ultimate impact on premium is difficult to predict.
We continue to expect downward pressure in future quarters on direct and net written premium resulting from changes in payroll estimates.
Regarding claims, since around mid-March through the end of July, we continue to observe a decline in reported claim activity as I previously mentioned.
As businesses reopen and employees return to work, we expect reported claim activity to increase.
In our Workers' Compensation Insurance segment, we have 271 COVID cases reported as of July 31, with an undeveloped gross incurred value of approximately $1.3 million.
Sadly, we had a claim reported to us where the injured worker passed away from COVID.
The total incurred on this claim represents approximately $550,000 of the $1.3 million.
In our Segregated Portfolio Cell Reinsurance segment, which contains more than half of our long-term care exposure, there are 236 COVID cases reported through July, with an undeveloped gross incurred of $400,000.
Of the four Senior Care programs in this segment, we have an ownership interest in just one, and that ownership is 25%.
Similar to the premium side, there was much uncertainty with respect to COVID claims and the ultimate outcome will depend on the length and severity of the pandemic and the result of legislative attempts to broaden coverage for workers' compensation claims.
While legislative attempts to expand compensability and reduce burden of proof related to acquiring the virus at work seem to have lost traction in certain states as they attempt to reopen, we can only conjecture that a second wave or the continuation of increased reported cases may revive efforts in this regard.
So Ned, how are things developing at Lloyd's with the virus?
Ken, they're developing about how we would expect.
Because we typically report our Lloyd's results on a one quarter lag, we're seeing most of the initial response to the pandemic showing up in our Lloyd's Syndicates results this quarter.
The projections we disclosed in our Q1 release have held and we booked approximately $1.5 million related to the virus in the second quarter, net of reinsurance.
We estimate we will recognize an additional $1.4 million, net of reinsurance, in the third quarter of this year.
We will continue to be as forthcoming and transparent as we can, given the multitude of evolving variables.
A few remarks on Lloyd's outside of the pandemic.
This was the first quarter in which our reduced participation in Syndicate 1729 came through our results, a change that brought down gross premiums written in the segment, but also one we expect will bring down volatility going forward.
Because of this reduced participation, we expect to receive a return of approximately $33 million of our funds at Lloyd's during the third quarter of 2020.
Meanwhile, we are seeing encouraging signs of hardening in every line of business in which we participate, particularly in the reinsurance segment, where rate increases and withdrawing capacity have created opportunity for those that continue to write in the space.
Any final comments for us?
Just to reiterate what I said in the beginning.
The previous four quarters have been unquestionably challenging but I am proud of the work we've accomplished in that time.
Our goal of becoming a more efficient and effective organization is one of continuous improvement, one that we'll never call finished, but one toward, which I think great progress has been made. | compname reports q2 loss per share $0.34.
q2 operating loss per share $0.60.
q2 loss per share $0.34. |
On our call today, we have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property and Casualty lines; and Kevin Shook, President of our Workers' Compensation Insurance operations.
Ned, the floor is yours.
We closed the NORCAL transaction on May five, roughly halfway through the reporting period, and the financial teams of our newly combined organization did a great job getting everything ready to report our results.
We've made excellent early progress on our integration plan and already NORCAL is proving its value as we expand our operating model to a truly national platform.
As I said in the release yesterday, closing the NORCAL transaction was a transformative event for ProAssurance and the combined companies are off to a strong beginning.
As you will hear from both Mike and Kevin, the strategic changes we've made over the past two years are beginning to show through, and I'm very encouraged by the results of the second quarter.
We remain in an uncertain environment due to the continuing effects that pandemic has had on our healthcare and civil court systems and as workplaces navigate the return to work to an office environment.
In spite of these uncertainties, I am confident we have the right team in place, especially as we add in our colleagues from NORCAL to succeed as we move forward.
The NORCAL acquisition was, of course, the most impactful item in the quarter, and we'll get to that in a moment.
But first, I think it's important to answer the question of, excluding the noise from the transaction, how did we do this quarter?
In short, it was a good quarter.
We expected significant improvement year-over-year just by nature of the adverse events booked in the year ago period, and we saw that improvement and then some.
Our Specialty P&C business continues to show improvement with strong rate gains, solid retention and top line growth.
Lloyd's turned in an excellent result at a little over $4 million.
Our Workers' Compensation Insurance and Segregated Portfolio Sale Reinsurance businesses both produced underwriting income in a very challenging marketplace, with their expense ratios benefiting from the restructuring completed last year.
Finally, we saw excellent returns from our investments in LPs and LLCs, driven by the market increase in the first quarter.
Recall, those investments are typically reported on a quarter lag.
All told, a solid result as we continue to execute strategies that drive steady incremental improvement.
Now for the results for the quarter.
We will be filing our 10-Q on or before Monday, which will provide a great look into exactly how NORCAL contributed to the quarter and the effects of transaction accounting.
I'll address certain of those impacts throughout my remarks today.
At the consolidated level, we reported net income of $92.1 million in the second quarter or $1.70 per diluted share, driven by a gain on bargain purchase of $74.4 million related to the NORCAL acquisition, partially offset by $20.3 million of pre-tax transaction-related costs.
Because these one-time items are unique and unusual in nature and non-indicative of regular operations, they are excluded from operating earnings and segment reporting.
We reported non-GAAP operating income of $26.6 million or $0.49 per share, again, driven by strong performance from our LP and LLC investment portfolio and meaningful year-over-year improvement in our underwriting results.
All segments contributed to our profitability this quarter.
Consolidated gross premiums written increased nearly 13% year-over-year, driven primarily by the addition of NORCAL's premium to our Specialty P&C results, as well as $14 million of new business written in the quarter from our core operating segments.
Our consolidated current accident year net loss ratio was 81.9%, a year-over-year improvement of 28.1 points, primarily attributable to the adverse effect of losses associated with significant events in the second quarter of last year in Specialty P&C.
More importantly, that improvement also reflects the continued benefits of our reunderwriting efforts.
We recognized net favorable development of $13.8 million in the current quarter, driven largely by the Specialty P&C segment, which included $2.1 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed reserve.
Our consolidated underwriting expense ratio increased in the quarter to 32.3%, driven by the pre-tax transaction costs associated with our acquisition of NORCAL.
Excluding those transaction costs, the expense ratio in the quarter was 23.8%, reflecting the continued impact of restructuring efforts, but also included the impact of certain purchase accounting adjustments.
As a part of purchase accounting, we wrote off NORCAL's capitalized DPAC asset on the acquisition date.
As a result, DPAC amortization expense for NORCAL in the second quarter was only $900,000 and represented expenses capitalized and subsequently amortized since the acquisition.
This amount is approximately $6.3 million lower than would be considered normal.
In our Form 10-Q, we will provide a detailed breakout of the various items affecting our expense ratio in the quarter to help our readers arrive at a run rate.
From an investment perspective, our consolidated net investment result increased year-over-year to $29.3 million, driven by $11.9 million of income from our unconsolidated subsidiaries, which were driven by the results of our investments in LPs and LLCs, as previously discussed.
Consolidated net investment income was $17.4 million in the quarter, down slightly from the year ago period, primarily due to lower yields from our short-term investments in corporate debt securities, due to the current low interest rate environment.
This decrease was partially offset by $2.7 million of net investment income from additional invested assets that came over from the NORCAL acquisition.
They've done a great job.
Mike, congratulations on a significant improvement in Specialty P&C this quarter.
What can you tell us about the results?
I want to start by extending congratulations to the Specialty P&C team for the continuing turnaround of our operating results, over the past two years to achieve an operating profit, the close of the transaction with NORCAL and the great start to integration of the companies.
We are proud of all that has been accomplished and look forward to a bright future with our new team members and business partners at NORCAL.
The significant year-over-year improvement in the segment's results was driven by several components.
Primarily, the comprehensive business strategy executed since 2019 to address our operating and underwriting results and the resulting reunderwriting and rate strengthening efforts in our legacy HCPL business.
We recorded improvement in operating metrics for all lines of business in the segment, including higher premium retention, continued rate gains, a reduced expense ratio and a lower current accident year loss ratio.
Most material to the improved results for the quarter was the impact of certain adverse events recorded in the second quarter of 2020.
However, we recorded improvement in the current accident year net loss ratio, even excluding those adverse events, a direct result of the continued benefits of our HCPL reunderwriting efforts.
Also contributing to profitability in the quarter was $10.5 million of net favorable reserve development spread relatively evenly across lines of business within the segment.
Just a brief aside before we move on from the loss ratio.
The reduction in HCPL claims frequency observed in 2020 has continued into 2021 thus far, as courts and jury trials in most places have yet to return to normal schedules.
We remain cautious in recognizing these favorable frequency trends in our current accident year loss pick due to the long-tailed nature of our lines of business and the high degree of continuing uncertainty that COVID-19 has introduced into operating conditions.
We continue to carefully monitor pandemic related claim activity and no adjustments have been made to the COVID-19 IBNR reserves booked in the second quarter of 2020.
Moving on to our top line.
Gross premiums written during the second quarter increased by over 30% or approximately $35 million.
We benefited from $22.4 million delivered by the NORCAL team and growth in our legacy business of 6.9%.
We achieved this growth with focus on underwriting discipline and we will continue to manage the segment's top line as necessary to achieve our long-term profit objectives.
Premium retention for the segment was 86% in the quarter, driven by retention rates that either improved or remained flat in all lines of business.
Furthermore, we achieved average renewal price increases of 10% in the segment this quarter, driven by 11% in Standard Physicians and 10% in Specialty Healthcare.
Although not reflected directly in our rates or pricing, we continue to strengthen rate adequacy through adjustments to product structure, terms and conditions.
Our small business unit and medical technology liability business also achieved increased rate gains of 6% and 8%, respectively.
New business written in the quarter totaled $7.2 million, an increase of $2.6 million from the year ago quarter and primarily driven by $3.7 million written in our HCPL specialty business.
The Specialty Property and Casualty segment reported an expense ratio of 17.1% for the first quarter -- for the second quarter, an improvement of 2.8 points from the year ago quarter, driven by significantly higher earned premiums, the impact of transaction accounting and benefits from prior organizational restructuring efforts.
This was partially offset by a slight increase in technology costs.
To conclude, we are pleased with the results of our reunderwriting, restructuring, expense management and operational improvements in our legacy Specialty P&C business over the past two years.
We are extremely excited about the strategic value of the NORCAL transaction and the bright future ahead.
We have made excellent progress on our integration plan during the quarter, and we are well on our way to building our future business model on a national basis with the goal of enhanced and sustainable performance through all economic and insurance cycles.
And congratulations again to you and the team.
Kevin, Workers' Compensation Insurance and the Segregated Portfolio Cell Reinsurance segments had solid results to report as well.
Can you walk us through those?
The Workers' Compensation Insurance segment produced income of $1.1 million and a combined ratio of 99.6% in the second quarter of 2021 compared to 98.7% in 2020.
The increase in the combined ratio year-over-year reflects a higher accident year loss ratio in 2021, partially offset by an improvement in the underwriting expense ratio.
During the quarter, the segment booked $57.8 million of gross premiums written, an increase of 1.1% year-over-year despite negative audit premium.
Renewal price decreases in our traditional book of business were 3% in the second quarter of 2021 and premium renewal retention was 85%.
Traditional new business writings increased by $300,000 to $6.1 million in the quarter.
Audit premium in our traditional book of business decreased $1.3 million year-over-year reflecting the economic conditions associated with the COVID-19 pandemic and its impact on final audits of policyholder payrolls.
The increase in the calendar year loss ratio to 68.3% in 2021 reflects an increase in the current accident year loss ratio, partially offset by prior year favorable development of $1.9 million in 2021 compared to $1.5 million in 2020.
The increase in the full year 2021 accident year loss ratio during the quarter reflects our response to observed higher claim activity as workers return to full employment with the easing of pandemic related restrictions in our operating territories.
The trend in higher claim activity was concentrated in our historically profitable small business unit, most notably in restaurant, hospitality and small construction market segments and was from accounts within our renewal policyholder base.
We booked a current accident year loss ratio of 73% for the second quarter of 2021, which brings the ratio for the six months ended June 30th to 72%.
Despite the increase in claim activity in our small business unit, overall frequency continues to be below pre-pandemic levels, albeit higher than 2020.
The claims operation closed 15.4% of 2020 and prior claims during the 2021 quarter consistent with second quarter historical trends.
Reported COVID claims continued to decrease during the second quarter of 2021.
Of note is the fact that there are no currently reported COVID claims with accident dates in the month of June.
However, there was a slight increase in reported COVID claims during July.
We continue to monitor legislative attempts to broaden workers' compensation coverage in our underwriting territories but observed minimal movement during the second quarter.
The 2021 underwriting expense ratio decreased to 31.3%, primarily due to the restructuring initiatives implemented in August of 2020, partially offset by a decrease in net premiums earned.
Other underwriting and operating expenses were $8.3 million in the quarter, a decrease of 7% or approximately $700,000.
The Segregated Portfolio Cell Reinsurance segment produced income of $955,000 and a combined ratio of 84.4% for the second quarter of 2021.
Premium trends in the SPC Re segment were largely consistent with those in the Workers' Compensation Insurance segment.
We renewed all of the captive programs that were available for renewal during the current quarter.
The SPC Re calendar year loss ratio increased from 45.9% in 2020 to 51.9% in 2021.
The 2021 accident year loss ratio was 62.9%, up from 57% in 2020 and reflects both the continuation of intense price competition in the workers' compensation business and the impact of higher claim activity as workers return to employment.
Favorable loss reserve development was $1.8 million in the second quarter of 2021 compared to $1.9 million in 2020.
In all, another solid quarter in a very competitive marketplace.
Ned, can you give us just a quick look at the Lloyd's results before closing comments?
Happy to do so, Ken.
As you know, for the 2021 underwriting year, we reduced our participation in Syndicate 1729 from 29% to 5% and our participation in Syndicate 6131 from 100% to 50%.
The gross premiums written in the segment this quarter reflect that change.
As a result of these reductions, we received a return of capital of $24.5 million.
Despite the reduced participation, results improved meaningly meaningfully from the year ago period to $4.3 million.
Before we get to questions, I want to reiterate how pleased we are to deliver improved results after an exceptionally challenging year.
While we still have much to do in pursuit of our long-term profit objectives, I believe our progress from a year ago speaks for itself.
I look forward to seeing what we can accomplish in the second half of the year. | proassurance q2 earnings per share $1.70.
q2 earnings per share $1.70.
q2 operating earnings per share $0.49. |
In the third quarter, we continued to see improvement in our underlying operations, as the beneficial results from our reunderwriting and restructuring efforts begin to manifest this lower recurring operating expenses and improved loss experience in each of our operating segments.
As onetime incurred charges related to these efforts are put behind us, we anticipate a continued favorable trajectory into the fourth quarter and into 2021.
Aside from our regular operating results, we continue to learn more about the COVID-19 virus as each day passes, and we gain insight into the impact it has on our business and those of our customers.
There is still much to learn about the disease.
While we have seen some favorable claims trends that are likely the result of the pandemic, we've remained cautious in recognizing these trends in our results, given the uncertainty surrounding the length and severity of the pandemics.
Unfortunately, the continued market volatility caused by COVID-19 and sustained depression of our stock price has overshadowed the improvements we've made this year.
I'll let Dana expand on the goodwill impairment charge we announced in yesterday's release, but I want to note that the charge has no effect on our liquidity or our statutory entities and is strictly an accounting transaction.
As I mentioned in yesterday's release, I remain confident that our solid foundation and the strategic initiatives we have undertaken in the past 16 months will reward our customers, shareholders and employees in the quarters and years to come.
I'll start with the goodwill impairment charge recognized in the quarter as it had the largest impact to our net results.
We routinely review our goodwill for potential impairment annually on October 1.
Because of continued market volatility caused by COVID-19 and the sustained depression of our stock price, we performed interim quantitative impairment tests in the third quarter.
More detail is available in our filed Form 10-Q.
But to summarize, we determined that while no impairment was necessary for our workers' compensation or segregated portfolio sale reinsurance reporting units, a full impairment of goodwill was indicated for the specialty P&C reporting unit.
Consequently, we recorded a noncash pre-tax goodwill impairment charge of $161.1 million, which drove a net loss in the third quarter of approximately $150 million, or $2.78 per share.
Importantly, we reported non-GAAP operating income of $2.6 million in the third quarter, or $0.05 per share.
This excludes the effects of certain items, primarily the goodwill impairment and realized investment gains.
This result reflects lower consolidated net premium earned, largely offset by lower current accident year net losses and loss adjustment expenses and lower operating expenses.
Each of these components will be discussed in more detail in the segment-specific portions of our call, but I think it's important to note here that they are all primarily related to the intentional restructuring and reunderwriting efforts completed over the past year.
Consolidated net investment income decreased quarter-over-quarter to $16.9 million.
This was primarily attributable to our lower allocation to equity securities, coupled with lower yields on our short-term investments and corporate debt securities, given actions taken by the Federal Reserve to reduce interest rates in response to COVID-19.
However, we reported $4.9 million in income from our unconsolidated subsidiaries.
We invest in various LPs and LLCs, and the results of those investments are typically reported on a one quarter lag.
Accordingly, the earnings from unconsolidated subsidiaries in the current quarter represents the recovery and value of our LPs and LLCs in the second quarter of 2020.
For the third quarter, our consolidated current accident year net loss ratio was 80.7%, a decrease of 1.6 percentage points quarter-over-quarter as the early results of our strategic underwriting efforts of the past year are beginning to manifest in our specialty P&C business.
The decrease was also driven by continued favorable loss trends in our workers' compensation business.
Each of our segments contributed to the $11.5 million of net favorable development we recognized in the third quarter.
While lower than the year ago period, we want to emphasize that we continue to exercise caution, given the current loss environment.
Our consolidated underwriting expense ratio was 30.5% in the quarter, an increase of 1.8 percentage points from the year-ago period.
The increase is attributable in part to lower earned premiums, but what is most important to know is that expenses in the current quarter included $3.2 million in onetime charges associated with the restructuring that resulted in 78 position elimination through a combination of early retirement, job eliminations, reassignments and promotions that spanned our entire organization.
This restructuring is expected to result in annual savings of approximately $7.4 million in addition to other expense saving initiatives earlier this year.
The takeaway is that we have taken specific and permanent action to improve our underlying expense structure without sacrificing excellence in service.
More details about the restructuring will be provided in Mike's and Kevin's remarks later.
This leads us to a consolidated combined ratio of 105.3% for the third quarter.
In summary, we continue to see incremental improvements in our operating results as the strategic initiatives of the past 16 months gained traction.
We also anticipate expenses will normalize for the remainder of the year, furthering the gains we've seen to date.
Now, I'd like to ask Mike to start our segment-specific portion of the call with the specialty P&C segment.
The specialty P&C segment recorded a third quarter loss of $12.5 million.
Now, while we're not satisfied with the result, it does reflect an improvement from the first and second quarters of 2020.
And there are a number of encouraging aspects of the quarter, which I'll expand upon throughout my comments.
Gross premiums written were $158.3 million, a decrease of 4.1% percent quarter-over-quarter, reflecting our reunderwriting efforts in healthcare professional liability and timing differences in the regular renewal cycle of 24-month policies.
Notably, within our specialty book, we have reduced gross premiums written in our Senior care line by almost 82% quarter-over-quarter.
Further, the timing differences related to the 24-month policies in our standard physician line contributed $3.9 million to the reduction.
We have begun the process of converting all 24-month policies to 12-month policies, which we anticipate will be completed early in the second quarter of 2021.
As we've discussed in recent quarters, the reunderwriting efforts began in the third quarter last year following the new executive hires in our healthcare professional liability underwriting operation during the previous quarter.
As of the end of the third quarter 2020, these targeted reunderwriting efforts in our HCPL business are substantially complete.
We expect to benefit from the reunderwriting efforts in future quarters.
We continue to focus on underwriting discipline and achievement of our long-term profit objectives, shrinking the segment's top line, if necessary, to improve our bottom line.
In relation to these strategic underwriting efforts, premium retention in the segment was 81% for the quarter, driven largely by a 55% retention in our specialty lines primarily related to the Senior care line of business and includes a nonrenewal of a $5.6 million policy in that line during the quarter.
In our Standard Physician line, retention was 85%, lower by two percentage points quarter-over-quarter, reflecting our state-specific pricing adjustments in challenging venues and competitive market conditions.
However, we continue to deliver strong premium retention results in our medical technology liability business and small business units, which were 85% and 92%, respectively.
The segment's lower premium retention was largely offset by renewal premium increases of 14% in specialty and 10% in Standard Physician.
In addition to the rate increases in specialty, we have also significantly strengthened rate adequacy through our improvement of product structure, terms and conditions.
New business writings in the segment were $8.7 million in the quarter compared to $9 million a year ago.
This result reflects careful risk selection, disciplined underwriting evaluation; and, to a lesser degree, the impact of slower submission activity due to market disruptions from COVID-19.
New business writings in our medical technology liability business increased to $2 million compared to $1.3 million in the third quarter last year as demand for pandemic-related products in the medical technology space continues to rise.
The current accident year net loss ratio was 89.8% in the quarter, a 4.7 percentage point improvement from the year-ago period, attributable to underwriting efforts and price strengthening.
Furthermore, the current accident year net loss ratio for the first nine months of 2020, excluding the large national healthcare account tail policy and the $10 million COVID reserve, is approximately 6.5 percentage points lower than the full-year ratio for 2019.
In the quarter, we continued to observe a significant reduction in our claims frequency as compared to the same quarter in 2019, likely associated with COVID-19.
However, we remain cautious in recognizing these favorable frequency trends in our current accident year reserves due to the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.
We have not booked any additional IBNR reserves related to the pandemic during the quarter after carefully reviewing virus-related claim activity.
Despite the current loss environment, we recognized net favorable prior-year development of $2.9 million, of which $2.5 million is attributable to our medical technology liability line.
As previously stated, we remain conservative in our views of prior-year loss development as a result of the current loss environment.
The specialty P&C segment reported an expense ratio of 23.8% in the quarter, essentially flat from the same quarter last year.
The expense ratio reflects improvements in our expense model made during the past year, offset by related onetime restructuring expenses of $1.8 million and lower net earned premium.
This restructuring is expected to result in annual savings of $3.6 million in addition to other expense savings measures we've disclosed previously.
As a result of our prior organizational structure enhancements, restructuring field offices and staff reductions, we anticipate quarterly run rate expense savings of $3 million in the segment, or $12 million annually.
We continue to build an operating model that positions us well to be successful throughout the various insurance and economic cycles.
I'll conclude with a brief update on the NORCAL transaction.
We continue to proceed through the regulatory and integration planning process.
However, once we receive preliminary regulatory approval of NORCAL's proposed plan of conversion, there will be a 60- to 90-day solicitation period before the deal can close, and we anticipate the deal will close in the first quarter of 2021.
The NORCAL group, its employees, agents and customers represent an exciting expansion in the standard physician marketplace.
Upon completion of the transaction, approximately 75% of our healthcare professional liability business will be written in the Standard Physician's line, a marketplace in which we have deep expertise and a successful history of profitability.
We remain excited about the combination of the companies and our future together, and we'll continue to work together with the NORCAL team to complete this transaction.
The workers' compensation insurance segment produced income of $1.5 million and a combined ratio of 97.4% for the third quarter of 2020.
During the quarter, the segment booked $63 million of gross premiums written, a decrease of 10% quarter-over-quarter.
Renewal price decreases were 3% for the quarter, representative of the continued competitive pressures in our underwriting territories despite COVID-19 and the associated economic conditions.
Premium renewal retention was 86% for the 2020 quarter compared to 84% in 2019 as we continued to see stronger premium retention each month during the pandemic.
New business writings decreased quarter-over-quarter to $7.4 million in 2020 compared to $11.3 million in 2019.
Audit premium for the third quarter of 2020 resulted in return premium to policyholders of $1.6 million compared to additional premium to the company of $1.8 million for 2019, a quarter-over-quarter decrease attributable to the economic impact of COVID-19 on policyholder payrolls.
We continue to expect downward pressure in future quarters on direct and net written premium resulting from changes in payroll estimates.
The calendar year net loss ratio decreased 3.2 percentage points to 62.2% in the third quarter due to a decrease in the current accident year loss ratio and higher prior-year net favorable reserve development of $2 million in 2020 compared to $1.4 million in 2019.
The reduction in the 2020 accident year loss ratio from 70.4% at June 30, 2020 to 69.2% at September 30, 2020 was driven by our recognition of favorable claim trends in the 2020 accident year, which I'll describe in more detail momentarily.
As this reduction was fully recognized in the current quarter, the result is a third quarter current accident year loss ratio of 66.9%.
The 2020 accident year loss ratio of 69.2% at September compares to 68.2% for the same period in 2019 and reflects the impact of renewal rate decreases and negative audit premium, partially offset by the favorable claim trends in 2020.
We've seen a 36.5% decrease in reported claim frequency during the pandemic with only $1.3 million of gross undeveloped incurred losses from the currently reported 447 COVID claims.
However, management remains cautious in its evaluation of the 2020 accident year loss ratio, considering the many uncertainties surrounding the pandemic.
Our claims professionals remain highly effective while working remotely, closing 47% of 2019 and prior claims during 2020, consistent with historical claim closing rates.
Legislative attempts to broaden coverage for workers' compensation claims seem to have lost traction in certain states as their economies attempt to remain open and legislators focused on elections recently.
We can only conjecture that a second wave, or the continuation of increased reported cases, may revive efforts in this regard.
Turning now to expenses.
The underwriting expense ratio in the quarter was 35.2% compared to 30.1% in 2019, reflecting the decrease in net premiums earned and a onetime severance charge of $923,000 related to our restructuring, which I will describe in more detail shortly.
Underwriting and operating expenses were $15 million for the third quarter of 2020, essentially flat from 2019 despite the included severance charge.
Turning to the Segregated Portfolio Cell Reinsurance segment, income was approximately $1.2 million for the quarter, which represents our share of the net underwriting profit and investment results of the captive programs in which we participate.
Premium and loss trends in the SPC Reinsurance segment were consistent with those in workers' compensation.
We renewed all the alternative market programs available for renewal during the current quarter and year-to-date.
I will wrap up by discussing recent restructuring initiatives in our workers' compensation business.
COVID-19 continues to present challenges for all in the insurance marketplace.
Policyholders, agency partners and insurance carriers are conducting business in ways previously unimaginable, and in some cases representing a new normal.
Given these challenges, we have used the past seven months to thoroughly review the impacts of COVID and the external environment on our business, agency partners' operations, and valued customer base, with the ultimate goal of enhancing our service platform to meet the ever-changing needs of the marketplace and those presented most recently.
Our detailed strategic review led us to make permanent organizational adjustments to our business model.
We believe these structural enhancements will allow us to grow our business profitably while strengthening our industry-leading products and services.
These changes include repositioning from five regions to three for more effective and efficient management of the underwriting, risk management and claims processes, improving the consistent application of our business model while maintaining our local service teams.
We integrated small business and underwriting support functions into one unit for each with dedicated leadership, which will allow us better turnaround time on policy submissions while continuing our individual account underwriting philosophy that has been a resounding part of our success in workers' compensation.
Lastly, we realigned our previously stand-alone captive team into our regional structure to improve accountability, and we streamlined our marketing operations to extend more agency management responsibilities to the decision-makers in the underwriting process.
These changes resulted in some early retirements, job eliminations, reassignment and promotions.
Striving for continuous improvement and proactive enhancements to business models are imperative as circumstances, economic trends and changing insurance markets present themselves; and importantly, before the full operational and financial impacts are realized.
Consistent with our history of evolving to meet the demands of the changing environments in which we operate, these structural enhancements will strengthen our workers' compensation business further and were applauded by our agency partners and customers.
The restructuring implementation commenced September one and is expected to result in an annual savings of approximately $3 million in addition to other expense management measures.
Ned, before we get to your closing comments, I'd like to turn to the Lloyd's Syndicate segment for a moment.
Is there anything you want to tell us about the results from London?
And yes, there were several notable changes to our results at Lloyd's from the prior year quarter.
First, our results in the quarter were income of $3.7 million, one of the best quarters we've had since we invested in the syndicates.
Our combined ratio improved 10.5 percentage points to 89.6%, as both net losses and underwriting expenses were reduced by over 20%.
In addition, as a result of our reduced participation, in the third quarter we received a return of approximately $32 million from our funds at Lloyd's.
Lastly, Syndicate 6131 entered into a quota share reinsurance arrangement with an unaffiliated insurer, effectively reducing our net participation in the syndicate by half.
The agreement is effective July 1, 2020, so it will not be reflected in our results until the fourth quarter of 2020 due to the quarter lag.
We continue to work closely with Dale Underwriting Partners to monitor the global legislative situation pertaining to COVID.
Speaking of loss estimates, given the number of natural catastrophes that occurred during the quarter, I want to note that, to date, our exposure to these events has been within our cat expectations for the fourth quarter.
Before we open the call to questions, I want to reiterate that the changes we've implemented in the quarter and over the past 16 months have been important.
The changes are focused on both achieving our long-term profitability goals and enhancing the excellent products and services we provide to our customers.
As a company, we have always operated with the understanding that the long cycles inherent in our industry will challenge us in troughs and reward us in peaks.
Our role as a specialist is to be the absolute best possible choice for our customers regardless of the stage of the cycle in which we find ourselves.
To that end, I want to quantify our actions taken to date.
You heard in Dana's remarks and throughout the call about our initiatives in each of our segments and related onetime charges, but I think it would be helpful to consolidate that information for the big picture.
As a result of our strategic initiatives in 2020, we anticipate $17 million in annual expense savings.
This is on top of initiatives taken in 2019 that reduced annual costs by $5 million.
This brings us to estimated cumulative annual cost reductions of approximately $22 million since this leadership team was put in place over 16 months ago, which includes an overall reduction in our workforce of approximately 13%.
Thus far in 2020, we've recognized a little over $5 million in onetime charges primarily related to early retirements and job eliminations.
These changes, though painful, are necessary as we create the next iteration of ProAssurance and position the company for success.
As we head into the final quarter of 2020, I look forward to an exciting 2021. | q3 non-gaap operating earnings per share $0.05.
q3 loss per share $2.78. |
On our call today, we have Ned Rand, President and CEO; Dana Hendricks, Chief Financial Officer; Mike Boguski, President of our Specialty Property and Casualty Lines; and Kevin Shook, President of our Workers' Compensation Insurance Operations.
Ned, will you please start us off?
It was our first full quarter with NORCAL and we remain very pleased with the progress we are making on the integration of our two companies.
Even outside of daily underwriting, claims and risk management operations, our investment results alone begin to show the earnings power of this combined enterprise, and I'm excited to complete the integration plan in 2022.
Meanwhile, results in our legacy ProAssurance Healthcare Professional Liability business continued to show improvement as we make incremental progress toward underwriting profitability and expand the regional operating structure to maximize service quality for our customers.
On the Workers' Compensation side, we are reacting to what we perceive as a tough loss environment as the impact of labor shortages, time away from work and the mental wear and tear of the continuing pandemic weigh on employers and their workforces.
However, this segment remains profitable through 9/30, and we remain confident in our ability to succeed across economic and insurance cycles.
Kevin will highlight some of the positives during his remarks later in the call.
In all, it was a quarter where we executed on a plan and that's the continuing national challenges presented by the pandemic, and I'm proud of the work that we've completed to date.
Now I'll ask Dana to share results for the quarter.
It was another solid quarter, and we reported net income of $12.2 million or $0.23 per share and operating income of $13.8 million or $0.25 per share.
While this result was driven primarily by our investments, particularly our equity and earnings from unconsolidated subsidiaries, we also improved results in our Specialty P&C segment through continued rate gains, strong retention and top line growth, both including and excluding the effect of the added NORCAL premium.
Further, we reduced expense ratios in all segments as the structural changes implemented in 2020 continue to pay returns.
These improvements were partially offset by unfavorable development in our Lloyd's Syndicate segment, lower income from our Segregated Portfolio Cell Reinsurance segment and a loss in our Workers' Compensation Insurance segment.
Consolidated gross premiums written increased nearly 26% year-over-year, driven primarily by the addition of NORCAL's premium to our Specialty P&C results as well as $15.5 million of new business written in the quarter from our core operating segments.
Our consolidated current accident year net loss ratio was 85.2%, a year-over-year increase of 4.5 points as improvements in our legacy Specialty P&C business were offset by higher average loss ratios in the NORCAL book of business and a higher net loss ratio in our Workers' Compensation business.
We recognized net favorable development of $8.6 million in the current quarter, driven largely by the Specialty P&C segment at $6.8 million, which includes $2.3 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed reserve.
We also recorded $1.5 million and $1.6 million of favorable development in the workers' compensation insurance and segregated portfolio sale reinsurance segments, respectively.
The Lloyd's segment recorded unfavorable development of $1.3 million, primarily related to natural catastrophe losses.
Excluding onetime transaction-related costs, our consolidated underwriting expense ratio decreased approximately seven points in the quarter to 23.3%.
That's driven by the effect of significantly higher earned premium acquired through NORCAL and lower related expenses.
Year-over-year improvement is also attributable to restructuring in the third quarter of 2020 and related onetime costs.
N our Form 10-Q, we provide a detailed breakout of the items affecting our expense ratio in the quarter to help readers arrive at a run rate.
From an investment perspective, our consolidated net investment result increased nearly 60% year-over-year to $34.5 million.
This includes $15.2 million of equity in earnings from our unconsolidated subsidiaries due to the results of our investments in LPs and LLCs.
Consolidated net investment income was $19.3 million in the quarter, up significantly from the year ago period and primarily due to higher investment balances following the NORCAL transaction.
Higher investment balances were offset slightly by lower yields from our short-term investments in corporate debt securities due to the low current interest rate environment.
We're going to pivot to Mike Boguski for commentary on the Specialty Property & Casualty segment.
Before we get into the results of the quarter, I'd like to provide a brief overview of where things stand with both legacy ProAssurance and NORCAL business.
First, we continue to achieve incremental improvements and results from our legacy business, including higher gross premiums written, rate and retention gains, decreased operating expenses and improved the loss experience.
On the NORCAL front, we are extremely pleased with progress to date and the overall execution of our integration plan.
During the quarter, we announced and implemented our Healthcare Professional Liability organizational structure and regional service model on a national basis.
We successfully integrated reinsurance programs, financial and investment operations and retained 87% NORCAL's business, while achieving average rate increases of approximately 11% on the book since the close of the transaction.
This is a great start to the reunderwriting efforts on the NORCAL book.
We are ahead of plan on targeted expense synergies, achieving $17.2 million through the end of the third quarter on an overall plan of $18 million.
Information Systems Consolidation is proceeding as planned, and the cultures are merging together the combination of exceptional talent from both organizations.
Now for the results of the third quarter.
Gross premiums written during the quarter increased by over 48% or approximately $77 million.
NORCAL contributed just over $72 million of that increase.
Premium retention for the segment was 84% in the quarter, driven by retention rates that have either improved or remained consistent in all lines of business.
Furthermore, we achieved average renewal pricing increases of 9% in the segment this quarter, driven by 9% in standard physicians and 13% in specialty healthcare.
Although not reflected directly in our rates or pricing improvement, we continue to strengthen rate adequacy through adjustments to product structure, terms and conditions.
Both our small business unit and medical technology liability business achieved average rate gains of 8%.
New business written in the quarter totaled $11.2 million, an increase of $2.5 million from the year ago quarter and primarily driven by $6.4 million written in our HCPL specialty business.
The current accident year net loss ratio was essentially flat from the year ago quarter as improvements, in our legacy HCPL business were offset by higher average loss ratios associated with NORCAL business.
As previously stated, we are off to a great start in the reunderwriting of the NORCAL business.
We are confident the HCPL loss ratio in the segment will continue to benefit from the previous reunderwriting work in our legacy ProAssurance business, execution of the NORCAL plan and lower claims frequency experienced for several quarters.
The segment net loss ratio decreased to 86.6% due to a higher net favorable reserve development, which was $6.8 million in the quarter.
His includes $2.9 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's reserves.
The reduction in HCPL claims frequency observed in 2020 has continued into 2021 thus far, some of which is driven by the impacts of the COVID-19 pandemic and our reunderwriting efforts.
Given these favorable trends, we began to recognize some of the benefits in our healthcare professional liability current accident year loss ratio during the third quarter of 2021.
The segment reported an expense ratio of 17.7% for the first -- third quarter, a year-over-year improvement of 6.1 points driven by significantly higher earned premiums, the impact of transaction accounting and benefits from prior organizational restructuring and expense management efforts.
Exclusive of the NORCAL impact, the expense ratio decreased approximately one point.
Overall, we continue to be pleased with the improvement in our operating results and the NORCAL integration process.
Kevin, will you please bring us up to date on the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments?
The Workers' Compensation Insurance segment recorded an underwriting loss of $2.2 million and a combined ratio of 106.3% in the third quarter of 2021.
The increase in the combined ratio quarter-over-quarter reflects a higher accident year loss ratio in 2021, partially offset by an improvement in the underwriting expense ratio.
Of note is the fact that the reported combined ratio includes intangible asset amortization and a corporate management fee.
The combined ratio, excluding these items for 2021 was 103% for the quarter and 97.4% year-to-date, an indicator of the results of our ongoing business performance.
During the quarter, the segment booked $64.6 million of gross premiums written, an increase of 2.5% quarter-over-quarter.
Renewal pricing increased 1% in our traditional book of business in 2021 compared to a decrease of 3% in 2020 and premium renewal retention was 87% for the third quarter of 2021 compared to 84% in 2020.
Traditional new business writings for 2021 were $3.5 million compared to $6.2 million in 2020.
We continue to see higher premium retention and lower new business, a trend that began at the beginning of the pandemic.
Audit premium in our traditional book of business improved $700,000 quarter-over-quarter to an audit premium return to customers of $100,000, a significant improvement over recent quarters.
The increase in the calendar year loss ratio from 62.2% in 2020 to 74.3% in 2021 reflects an increase in the current accident year loss ratio.
Favorable prior year reserve development was $1.5 million in 2021 compared to $2 million in 2020.
The increase in the full year 2021 accident year loss ratio during the quarter reflects higher claim activity as workers return to full employment with the easing of pandemic-related restrictions in our operating territories and the labor shortage, resulting in increased overtime hours by existing employees, a reduction in skilled job training and increases in alternative work arrangement risks.
The trend in higher claim activity continues to be concentrated in our historically profitable small book of business, most notably in restaurant hospitality and small construction market segments and was from accounts within our renewal policyholder base.
We recorded a current accident year loss ratio of 77.8% for the third quarter of 2021, which brings the ratio for the nine months ended September 30 to 74%.
Our detailed actuarial process each quarter is consistent in scope and scale with that at year-end, and this, coupled with our short-tailed claim strategies, enables us to react and record these trends real time.
Despite the increase in claim activity in our small book of business, overall frequency continues to be below pre-pandemic levels and the lowest in 10 years with the exception of accident year 2020.
The claims operation closed 12.2% of 2020 and prior claims during the 2021 quarter consistent with third quarter historical trends.
There were 160 reported COVID claims with accident dates in the third quarter of 2021 with a total recorded incurred loss expense of $127,000, which management relates to the spread of the Delta variant.
We continue to monitor legislative attempts to broaden workers' compensation coverage in our underwriting territories but observed minimal movement during the third quarter.
The 2021 underwriting expense ratio decreased to 32% from 35.2% in 2020 and primarily due to the realization of the restructuring initiatives implemented in August of 2020 and the recording of $900,000 in employee severance costs in the third quarter of 2020.
Other underwriting and operating expenses were $8.6 million in the third quarter of 2021, a decrease of 13.7%.
The Segregated Portfolio Cell Reinsurance segment produced income of $539,000 and a combined ratio of 87.7% for the third quarter of 2021.
Premium trends in the SPC Re segment were largely consistent with those in the Workers' Compensation Insurance segment.
We renewed all of the captive programs that were available for renewal during the current quarter.
The SPC Re segment calendar year loss ratio increased from 42.7% in 2020 to 56.7% in 2021, driven largely by a decrease in prior year favorable development quarter-over-quarter.
The 2021 accident year loss ratio was 67.2% compared to 67.3% in 2020.
The 2021 accident year loss ratio reflects the continuation of intense price competition and the resulting renewal rate decreases in the Workers' Compensation business and the impact of higher claim activity as workers return to employment, offset by favorable trends in prior accident year claim results and its impact on our analysis of the current accident year loss estimate.
Favorable loss reserve development was $1.6 million in the third quarter of 2021 compared to $4 million in 2020.
Despite the increase in loss activity in the Workers' Compensation Insurance segment, I want to emphasize that there were several positive indications for the quarter, including a decreased expense ratio, gross written premium growth of 2.5%, strong premium renewal retention, improved audit premium and rate increases of 1%, the first rate increase in many years.
Though the Lloyd's segment reported a profit in the third quarter, it was a smaller one than the year ago quarter due to the expected top line reduction and some adverse catastrophe development.
As you know, for the 2021 underwriting year, we reduced our participation in Syndicate 1729 from 29% to 5%.
And our participation in Syndicate 6131 from 100% to 50%.
The gross premiums written in the segment this quarter reflect that change.
Meanwhile, adverse development, primarily driven by certain large catastrophe-related losses further thinned the margin this quarter.
Change is hard, particularly during a period of national uncertainty and upheaval.
You've done a remarkable job, and we're on the right track. | compname posts quarterly earnings per share of $0.23.
q3 non-gaap operating earnings per share $0.25.
qtrly net income of $12.2 million, or $0.23 per diluted share. |
On our call today are President and CEO, Ned Rand, Dana Hendricks, our Chief Financial Officer, Mike Boguski, President of our Specialty P&C line, and Kevin Shook, President of our Workers' Compensation and Operations.
Ned, floor is yours.
In the history of the company, I don't think we've ever had so much to talk about on an earnings call.
For over 40 years, ProAssurance and its predecessors have navigated the peaks and valleys of the long-cycle characteristics of our businesses.
The two announcements we made yesterday, our fourth quarter and full-year 2019 results and the NORCAL transaction serve as an example of what we have always believed, it is during the most challenging stages of the long cycle that the greatest opportunities arise.
With that, we'll jump right in.
As we pre-announced on January 22, we had adverse development that came out of our regular year-end review of updated loss data with internal and external actuaries.
This adverse development was largely attributable to increased reserve estimates for a large national healthcare account and to a lesser extent in our broader excess and surplus book of business.
Given this reserve strengthening, we reported a net loss of $59.4 million for the quarter or a loss of $1.10 per share, and net income of $1 million for the year or net income of $0.02 per share.
Our consolidated operating loss was $68.3 million for the quarter or a loss of $1.27 per share.
For the year, we reported a consolidated operating loss of $43.8 million or a loss of $0.81 per share.
For the quarter, our consolidated current accident year net loss ratio increased by 20.4 percentage points to 109% and the full-year ratio was 90.3%, an increase of 6.6 percentage points.
Excluding the reserve adjustments related to the large national healthcare account, these ratios were 93.5% and 86.4% respectively.
We experienced unfavorable development in our prior accident year reserves of $30.4 million for the quarter, which drove the calendar year net loss ratio to 123.2%.
However, for the full year, we recorded favorable development of $11.8 million and our calendar year net loss ratio was 89%.
Our underwriting expense ratio was 31.5% for the fourth quarter and 29.9% for the year.
This brings us to a combined ratio of 154.7% for the quarter and 118.9% for the year.
In our Corporate segment, we reported net investment income of $21.6 million in the quarter and $87.1 million for the full year.
Due to the reserve adjustments recorded in the fourth quarter, we recognized a consolidated pre-tax loss for the year, which resulted in the recognition of $21.9 million tax benefit from tax credits, which was the primary driver of the total tax benefit of $29.8 million for both the full year, as well as the current quarter.
The Specialty P&C segment recorded year-end 2019 operating loss of $147.9 million.
This result was driven by a reserve strengthening in the fourth quarter of 2019 as referenced by Dana in her comments related to the large national account, and excess and surplus lines business.
I want to be clear that the Specialty P&C segment has favorable loss reserve development of $45.8 million exclusive of the large national account during 2019.
In 2019, the new leadership team executed a comprehensive business strategy in response to emerging emerging loss trends and changing conditions in healthcare professional liability.
This includes organizational structure enhancements, consolidation of operations, recruitment of additional talent in healthcare professional liability specialty underwriting, tightening of underwriting criteria terms and conditions, as well as price strengthening.
In early 2020, we introduced the field organization of the future for our healthcare professional liability business.
We established four operating regions with regional hubs and reduced the number of offices from 20 to 10 across our operating territories.
We believe the strategic business decisions that have been made to date will improve the operating efficiency, pro forma expense structure, and value-added service to distribution partners and customers.
We expect to see the benefits of these actions in late 2020 and beyond.
We are encouraged by our early progress, and we'll continue to execute the strategy throughout 2020 to position us well for the future.
I will now update you on year-end 2019 results starting with the top line trends.
Gross premiums written were essentially unchanged as compared to 2018, finishing 2019 at $577.7 million.
The increase to gross premiums written in our physicians business is driven by solid production results and renewal rate increases.
This is offset to some degree by the reunderwriting efforts in our healthcare, facilities and certain sectors of the excess and surplus lines business.
Gross premiums written for the other lines in Specialty P&C were relatively flat year-over-year.
Overall, we observed firming of the market in healthcare professional liability.
However, this was offset by the excess capital in the space and pockets of intense competition, particularly in the physicians business.
Premium retention for the segment was 86% for the year, 3 percentage points lower than the prior year, reflecting our focus on underwriting discipline and our willingness to walk away from business that does not fit our risk appetite or longer-term profit objectives.
We were aggressive in reunderwriting our healthcare facilities in excess and surplus lines business.
As a result, premium retention in our healthcare facilities business was 62% for the year and 47% for the quarter.
Exclusive of the facilities, business premium retention was 88% in each of our physicians, medical technology and legal liability businesses for the year.
A strong result in a market that remains competitive.
We are also encouraged by renewal rate increases of 14% in our healthcare facilities and 6% in physicians, our largest portfolio business.
In our large account business, we achieved significant improvement in terms, conditions and product structure, improving overall rate adequacy in that segment.
We wrote $42.6 million of new business in 2019 compared to $47.9 million in 2018, reflecting our disciplined underwriting evaluation of the business presented to us.
Our physician new business was a driver at $25.1 million of writings during 2019.
The increase in the current accident year loss ratio to 105.5% was due to the previously mentioned underwriting loss for a large national account, and to a lesser degree, adverse loss trends in our excess and surplus lines of business.
For 2019, the prior-year adverse loss development related to the large national account was $51.5 million, which was entirely responsible for the $5.7 million of adverse development recorded in the segment for 2019.
As previously stated in my opening comments, excluding the impact of the large national account, loss reserves developed favorably by $45.8 million.
On a very bright note, we're extremely pleased with the exceptional underwriting results in our life science business during 2019.
We are excited to announce the NORCAL Group acquisition and look forward to the combination of the companies.
This is a transformative strategic transaction for both organizations and provides us with geographic diversification, a true national platform, significant penetration in the physician market, best-in-class talent and high quality distribution partners.
We look forward to working with the exceptional employees, distribution and strategic business partners of both companies to create a premier organization to serve the healthcare market, ultimately creating long-term value for our shareholders.
Please keep in mind, the transaction is subject to regulatory approvals and other required closing conditions.
Kevin, will you please lead us through the results of our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments?
The Workers' Compensation Insurance segment produced operating income of $12.5 million and a combined ratio of 94.7% for the 2019 year in a highly competitive marketplace.
During 2019, gross premiums written, which includes traditional and alternative market business ceded to the SPC Reinsurance segment, decreased 5% to $278.4 million, compared to $293.2 million for 2018.
The consistent application of our individual account underwriting strategy, which carefully assesses the underlying risks of each policy, resulted in this production decrease in 2019.
Correspondingly, new business writings for 2019 were $30.8 million, compared to $51.5 million in 2018.
However, it's important to note that 2018 includes $11.7 million of new business related to the Great Falls renewal rights transaction.
Audit premium was $5.7 million in 2019, compared to $5.9 million in 2018.
Renewal price decreases were 4% and premium renewal retention was 83% for the 2019 year.
We continue to monitor closely historical loss ratio results on the business we renewed, versus lost or non-renewed to determine we are retaining profitable accounts that value the Eastern service model.
The increase in the calendar year loss ratio reflected an increase in the current accident year loss ratio from 68% in 2018 to 68.4% in 2019.
Net favorable reserve development was $7.8 million for the year.
The 2019 net favorable loss reserve development reflected better-than-expected claim results, primarily related to accident years 2015 and 2016.
The claims operation enclosed 65.7% of 2018 and prior claims during 2019, the best claim closing result in Eastern's history and indicative of the short-tail strategy embedded in our Workers' Compensation business model.
The increase in the current accident year loss ratio reflects the impact of renewal rate decreases and the effect of updated contract terms to our reinsurance treaty renewed in the second quarter of 2019, which included the addition of an annual aggregate deductible, substantially offset by the previously mentioned favorable claim trends in 2019.
The full-year 2019 underwriting expense ratio increased to 30.4%, compared to 29.9% in 2018, primarily due to an increase in policy acquisition and employee benefit-related costs.
The Segregated Portfolio Cell Reinsurance segment operating result was $3.5 million for the 2019 year, which represents our share of the net operating profit of the Segregated Portfolio Cell captive programs, in which we participate to varying degrees.
Gross written premium in the SPC Reinsurance segment increased to $87.1 million for 2019, from $85.1 million in 2018.
This includes premium renewal retention in 2019 of 91%, new business writings of $3.8 million, and audit premium of $2 million, offset slightly by renewal rate decreases of 5%.
The 2019 calendar and accident year loss ratios were impacted by $10 million reserve recorded in the second quarter of 2019 for an errors and omissions liability policy assumed by one of Eastern Re's Segregated Portfolio Cells.
As a reminder, the recording of this reserve increased net loss and loss adjustment expenses, but had no effect on our operating results as we have no participation or ownership interest in this particular cell.
Year-over-year, the SPC Reinsurance 2019 calendar year loss ratio increased to 54.4% excluding the impact of the $10 million E&O reserve driven by an increase in the current accident year loss ratio, partially offset by net favorable loss reserve development of $10.1 million in 2019, compared to $9.0 million in 2018.
The favorable development reflects better than expected claim results, primarily related to accident years 2015 through 2018.
The increase in the current accident year loss ratio in 2019 is due to an increase in severity-related claim activity.
Underwriting expenses in the SPC Reinsurance segment represents the ceding commission paid to the Workers' Compensation Insurance and Specialty P&C segments for the services they provide to the segregated portfolio cells.
Ned, will you please give us a quick update on Lloyd's before we get to the NORCAL transaction?
As you know, for the past year, we've been looking at ways to reduce our exposure at Lloyd's.
And as a result, we have decreased our participation in Syndicate 1729's operating results for the 2020 underwriting year from 61% to 29%.
Due to the one quarter lag, we'll begin to see the effect of this change come through during our second quarter 2020 results.
Duncan Dale and his team have build an excellent operation at Lloyd's as evidenced by the fact that he was able to secure additional capital providers for the Syndicate at a time when others are struggling to do so.
We look forward to continuing our relationship with Dale Underwriting Partners under the new arrangement, which we believe is more in line with our operating goals for the 2020-year.
I'm going to turn to talk a little bit about the NORCAL transaction, but before I do, I'm going to get Dana to give us a little additional financial information.
Although in NORCAL will not follow its year-end 2019 annual statutory statements for its group of companies with the California Department of Insurance until March 1, it maybe helpful for you to know that when they do, we expect it will show consolidated statutory surplus of approximately $575 million as of December 31, 2019.
That will reflect reserve strengthening for both current and prior accident years.
Back to you, Ned.
We've always been selective in our approach to M&A activity, growing where and more importantly when it makes sense to do so.
The increasing complexity of modern medicine, a shifting healthcare professional liability loss environment, and the growing competitive importance of scope and scale in our industry make it an ideal time for two companies with decades of specialized experience to align their futures.
We expect this transaction to deliver multiple strategic and financial benefits, including enhancements to our scale and capabilities, expanded access to the high quality California physician market, and an expected $18 million in pre-tax synergies.
These synergies will consist of corporate and back-office expenses, staffing, and other cost areas such as technology and real estate, along with consolidation of reinsurance and investments.
We anticipate the transaction will be accretive to earnings in the second year of ownership, and over the long term, generate highly attractive returns for shareholders.
As Mike said, bringing the NORCAL Group into the ProAssurance family of companies represents a transformational strategic opportunity.
I know there is more to do, but the work that's been done to get us to this point is truly outstanding.
With this transaction, ProAssurance gains a truly national platform in healthcare professional liability with operations in all 50 states.
It doubles the size of our physician book of business, opening the door to the California market and simultaneously makes ProAssurance the third largest writer of healthcare professional liability insurance in the country.
As always, our due diligence process on NORCAL's loss reserves, in particular, has been very thorough with both internal and external experts contributing to the project for well over a year.
We believe the transaction valuation at this level is attractive.
We expect the transaction to close by the end of 2020, but we have a lot of work ahead of us to ensure a smooth transition.
It was during the last true hardening of the market under conditions similar to those we perceive today, that the merger between for ProNational and Medical Assurance created ProAssurance.
I said before that this cycle feels different, and we should not expect the markets to harden as quickly, nor perhaps as dramatically, as in the early 2000s.
While we continue to navigate the challenges of an evolving market, we are confident that our strategy is the right one, and we're excited for the next stage of ProAssurance's journey. | compname reports qtrly loss per share $1.10.
qtrly loss per share $1.10.
qtrly adjusted loss per share $1.27.
results for 2019 were not acceptable. |
There have been countless attempts to summarize all that was 2020 and I won't add to those efforts here.
Suffice it to say, 2020 was a year we are all glad to put behind us.
However, it was not one we should hurry to forget.
For all the challenges 2020 brought, it ought to be defined instead by our response to those challenges and our determination in taking the steps needed to accomplish our objectives.
The organizational and strategic changes we have made, beginning in 2019 and throughout 2020, we've had a meaningful impact on our operations, and-or having a positive effect on our performance.
You'll hear some of the details of those improvements momentarily.
And one obvious impact of those efforts has been to our top line.
Our topline contracted in 2020 as we took a hard look at some of the businesses we'd written in recent years.
However, this does not mean we don't intend to grow.
We do intend to grow.
We just want to make sure we're doing it profitably.
The recent dip in our top line is a result of that strategy.
Though the loss environment is challenging at this stage of the cycle, we're not hunkering down to weather the storm, rather we are taking a moment to consult the map before moving through it.
For the fourth quarter, we reported non-GAAP operating income of $3.3 million or $0.06 per share.
This reflects higher equity in earnings of unconsolidated subsidiaries and the meaningful quarter-over-quarter improvement in our underwriting results.
While we have more to do before we say we're satisfied with our results, this quarter served as evidence that the changes we've made over the past year and a half are having a strong beneficial impact to our operating performance.
For the full year, we reported a non-GAAP operating loss of $27.7 million, attributable to the pre-tax net underwriting loss of $45.7 million, associated with the tail policy issued to a large national healthcare account and a pre-tax $10 million IBNR reserve related to the pandemic, both of which were recorded in the second quarter.
For the fourth quarter, our consolidated net loss ratio was 74.9%, a significant quarter over quarter decrease primarily due to the effects of the large national healthcare account in the year ago quarter.
But most importantly, also reflected our reunderwriting and rate strengthening efforts over the last 12 months.
For the year, the net loss ratio was 83.4%, a 5.6 percentage point decrease primarily due to favorable reserve development and a reduction to the current accident year net loss ratio, driven by improvements made in our Specialty P&C segment.
However, this improvement was largely masked by the second quarter tail policy and pandemic IBNR reserve.
Our consolidated underwriting expense ratios for the quarter and for the year of 30.9% and 30% respectively were relatively unaffected by our contracting topline revenue from our reunderwriting efforts, which demonstrates that the strategic initiatives to improve our underlying expense structure have taken hold.
For the year, the expense ratio, also reflected one-time expenses related to restructuring, as well as transaction related costs associated with our planned acquisition of NORCAL, partially offset by reduced travel related expenses due to the pandemic.
From an investment perspective, our consolidated net investment result increased quarter-over-quarter to $26.3 million, driven by $10.1 million of income from our unconsolidated subsidiaries.
We invest in various LPs and LLCs and the results of those investments are typically reported to us on a 1/4 lag, accordingly, the earnings from unconsolidated subsidiaries in the current quarter represent the recovery in value of our LPs and LLCs in the third quarter.
Consolidated net investment income was $16.1 million in the quarter, down from the year ago period primarily due to a decrease in our allocation to equities and lower yields from our short-term investments and corporate debt securities, given the actions taken by the Federal Reserve to reduce interest rates in response to COVID-19.
Net investment income was also lower for the year due to these same factors.
The Specialty Property & Casualty segment continues to execute a comprehensive business strategy to address our operating and underwriting results.
Although we recorded an underwriting loss in the quarter and year, we continue to be encouraged with the improvement in both the expense and net loss ratios, exclusive of the underwriting loss associated with the large national healthcare account in both 2019 and 2020.
As a result of the aggressive restructuring reunderwriting and expense reductions executed throughout 2019 and 2020, we are confident that we have established a strong foundation for the future and positive momentum.
As expected, gross premiums written contracted in the quarter and full-year, reflecting our reunderwriting and rate strengthening efforts in the competitive environment across our operating territories.
However, our gross premiums written were relatively consistent year-over-year in our Medical Technology Liability business.
In addition, gross premiums written in the quarter reflected renewal timing differences of $4.6 million dollars in our Specialty business, and the non-renewal of a $2.8 million dollar policy in our Standard Physicians business.
We will continue to focus on underwriting discipline and achievement of our long-term profit objectives, managing the segment's topline is necessary to improve our bottom line.
Premium retention improved to percent quarter-over-quarter, driven largely by improvement in our specialty business.
Retention for the full year was 79% and reflects the reunderwriting in specialty and rate strengthening efforts and standard positions over the past 12 months.
Premium retention results in our Small Business Unit and Medical Technology Liability business were relatively consistent with historical trends.
In addition to higher premium retention in the quarter, we achieved renewal price increases of 8% in the segment, driven by price increases in both our Standard Physician and Specialty business of 10%.
For the full year, we achieved renewal price increases of 9% attributable to increases in the Specialty and Standard Physicians business of 15% and 11% respectively.
In addition to the pricing increases in specialty, we also significantly strengthened rate adequacy through our improvement of product structure terms and conditions.
New business writings were $5.3 million in the quarter compared to 4.6 million in the fourth quarter of 2019, driven by our Medical Technology Liability business.
Year-end new business writings were $23 million, compared to $43 million in 2019 which reflects careful risk selection, disciplined underwriting evaluation, and the impact of slower submission activity due to market disruptions from the pandemic.
The current accident year net loss ratio decreased 6.3 percentage points year-over-year, exclusive of the impact of the large national healthcare account in 2019 and 2020 and posting of the COVID IBNR reserve in the second quarter.
This decrease primarily reflects the improvement from our reunderwriting efforts that began in the third quarter of 2019.
Both in the quarter and full year, we continued to observe a significant reduction in our claims frequency as compared to the same periods of 2019, some of which is likely associated with the pandemic.
We have remained cautious in recognizing these favorable frequency trends in our current accident year loss pick due to the long tail nature of our lines of business and the uncertainty brought on by COVID-19.
Just a brief update on COVID-19 business impact during the year.
We established a pre-tax $10 million IBNR reserve in the second quarter related to reported incidents.
As of year-end 2020, we have not seen the emergence of additional suits from the incidents reported.
Five suits have been filed as of year-end 2020.
Therefore, after careful review of the pandemic related claim activity, no additional IBNR reserves been booked since the second quarter.
There have been minimal changes in premium deferrals or discounts since the third quarter.
Despite the challenges of the current loss environment, we recognized net favorable development of $6.8 million and $27.5 million in the fourth quarter and full year respectively.
This result is a significant improvement from the comparable periods of 2019.
The Specialty Property & Casualty segment reported expense ratios of 23.8% and 23% in the fourth quarter and full year respectively.
Incremental improvements of 1.4 and 1.1 percentage points as compared to the same periods of 2019.
This result was achieved despite lower net earned premiums and $4 million of one-time charges during the year related to restructuring.
As a result of organizational structure enhancements, office consolidations and reductions in staff, we achieved expense savings of approximately $12 million in 2020.
The current reinsurance market continues to firm as a result of social inflation and severity claim trends, via successful October renewal of our reinsurance treaty and mitigated potential significant cost increases by increasing our retention from $1 million to $2 million for -- [Technical Issues] liability and Medical Technology Liability businesses.
I'll conclude with a brief update on the NORCAL transaction.
As disclosed in our release, last week the California Department of Insurance completed its review of NORCAL conversion documents.
And NORCAL will now begin soliciting policyholders to vote on the plan to convert from a mutual company to a stock company.
As part of their process, policyholders will have the option to take their ownership share of the company in the form of NORCAL stock which ProAssurance will offer to buy through our tender offer.
We expect materials to be mailed to eligible policyholders by the end of February.
This is an important step toward closing the transaction, which remains subject to a number of prerequisites as detailed in our prior disclosures.
Assuming all of these prerequisites are met, we now expect to close the transaction in the second quarter of 2021.
We remain excited about the combination of the companies and the strategic value presented by this transaction and are excited to work with NORCAL toward the next phase of this process.
We look forward to continued progress on our business plan in 2021.
Congratulations to you and your team for getting us this far in the process.
Now, I'd like to pivot to the results from the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments.
Kevin, what can you tell us about the quarter and year?
The Workers' Compensation Insurance segment produced income of $6 million and a combined ratio of 97.8% for 2020, including income of $2.1 million and a combined ratio of 96.3% for the fourth quarter.
During the quarter and full year, the segment booked $47 million and $247 million of gross premiums written respectively, representing decreases of 13.6% and 11.4% compared to the same periods in 2019.
Renewal pricing in 2020 decreased 4% for both the quarter and full-year, reflecting the continued competitive pressures in our underwriting territories despite COVID-19 and the associated economic conditions.
Premium renewal retention was 82% for the 2020 quarter and 84% for the year, both improvements compared to 76% and 83% for the same periods in 2019.
As we continue to see stronger premium retention and lower new business during the pandemic.
New business writings decreased quarter over quarter to point $4.4 million dollars in 2020, compared to $5.5 million in 2019.
And for the full year were $27.4 million in 2020 compared to $30.8 million in 2019.
Audit premium for the fourth quarter of 2020 resulted in additional premium to the company of approximately $700,000 compared to $2.2 million for 2019, and for the year, was additional premium of $700,000 compared to $5.7 million in 2019.
The decreases in audit premium reflects the economic impact of COVID-19 on policyholder payrolls.
We continue to expect downward pressure in future quarters on premium resulting from changes in payroll estimates.
The calendar year net loss ratio increased in both the fourth quarter and for the year, reflecting the continuation of soft market conditions and workers' compensation and resulting renewal rate decreases, and additionally, the reduction in audit premium and lower net favorable reserve development, partially offset by favorable 2020 accident year claim results.
The 2020 accident year loss ratio was 69% for the year, compared to 68.4% in 2019.
Net favorable loss reserve development for the quarter was $2 million in 2020 compared to $4.4 million dollars in 2019, and for the full year was $7 million versus $7.8 million in 2019.
We continue to reserve for all claims as if injured workers were receiving medical treatment as they would have prior to the pandemic.
Reported claim frequency for non-COVID claims decreased 35% during the pandemic, with only $2.2 million of gross undeveloped incurred losses at the end of 2020 from the currently reported 1,375 COVID claims.
Further, through the end of January 2021, we closed 87% of the 2020 reported COVID claims received to date, indicative of the shorter tailed nature of workers' compensation insurance compared to healthcare professional liability.
However, management remains cautious in it's evaluation of the 2020 accident year loss ratio considering the many uncertainties surrounding the pandemic.
Our claims professionals' continue to function effectively while working remotely, closing 61% of 2019 and prior claims during 2020, consistent with historical claim closing rates.
Many legislative enactment or proposals to broaden coverage for workers' compensation claims, expired at December 31.
However, new legislative sessions that commenced in January may revive efforts in this regard.
Turning to expenses, the underwriting expense ratio in the quarter was 32.7% compared to 29.8% in 2019 reflecting the decrease in net premiums earned.
The underwriting expense ratio decreased 2.5 percentage points from the third quarter of 2020 due to our restructuring efforts discussed on our November earnings call, and to a lesser extent, the associated one-time expense of $900,000 included in the third quarter.
For the 2020 year, the expense ratio was 32.9% compared to 30.4% in 2019.
Turning now to the Segregated Portfolio Cell Reinsurance segment, we reported income of $1.6 million for the quarter and$4.4 million dollars for all of 2020.
Premium trends in the SPC Reinsurance segment were largely consistent with those in the Workers' Compensation Insurance segment.
We renewed all of the alternative market programs that were available for renewal during the current quarter and for the year and wrote one new program in 2020.
The SPC resegment recorded favorable development of $9 million in the fourth quarter of 2020 compared to $2.3 million in 2019, and for the full year was $16.6 million dollars versus $10.1 million in 2019.
As of December 31, 2020, we had 1,090 reported COVID claims for this segment with $1 million of gross undeveloped incurred losses.
Turning to our Lloyd's Syndicates segment now, I would like to ask Ned to take us through the results from the Syndicates and some of the developments in the quarter.
As expected, we saw a natural catastrophe losses in the fourth quarter related to hurricanes Laura and Sally and the wind storms that swept through the Midwest in August.
Our participation in the results of Syndicate 1729 and 6131 let us to record a loss of just under $1 million in the quarter.
The fourth quarter loss, combined with our reduce participation in Syndicate 1729 for the 2020 underwriting year, contributed to overall lower income of approximately $2.1 million for the year.
Losses on these storms and other natural catastrophes in the last three months of 2020 lead us to expect the segment loss in our first quarter of approximately $2.5 million.
Regarding the developments Ken mentioned, It's been a year of change for us at Lloyd's and the fourth quarter proved to be no exception.
For the 2021 underwriting year, we have further reduced our participation in Syndicate 1729 from 29% to 5%.
Additionally, we reduced our participation in Syndicate 6131 from 100% to 50% for the 2021 underwriting year.
Due to the quarter lag, these changes will be reflected in our results beginning in the second quarter of 2021.
Our decision to further reduce our participation in the syndicates is driven by our desire to support and grow our core insurance operations, and to reduce volatility in our underlying performance.
Duncan Dale, and his team at Dale Underwriting Partners have been and will continue to be valued partners to ProAssurance.
And it is a testament to the quality of their work that the syndicates were able to secure participating capital to replace our own without difficulty.
Before we open the call to questions, I'll note that the meaningful improvements we've made in the past 12 months go a long way toward our goals of operational excellence and sustainable profitability. | q4 non-gaap operating earnings per share $0.06. |
As always, we hope you and your families remain safe and healthy.
Prudential delivered solid financial results for the third quarter, reflecting our strong investment performance and high demand for the products we've introduced to support our customers as they solve their financial challenges in a changing world.
We also made significant progress executing on our transformation strategy to become a higher-growth, less market-sensitive, and more nimble company.
First, we reached agreements to divest our full-service recordkeeping business and to sell a portion of our traditional variable annuities, advancing our pivot toward less market-sensitive, and higher-growth businesses.
Second, we continue to advance our cost-savings program and remain on track to achieve $750 million of savings by the end of 2023.
And third, with the support of our rock-solid balance sheet, we are maintaining a disciplined and balanced approach to redeploying capital.
I'll provide an update on each of these transformation initiatives before turning it over to Rob and Ken.
Turning to Slide 3.
In September, we reached an agreement to sell a block of our traditional variable annuities to Fortitude Re.
This divestiture, which is expected to close in the first half of 2022, represents approximately 20% of our traditional individual annuities account values and significantly advances our goal of cutting in half the earnings contribution of legacy variable annuities products through a mix of strategic transactions and natural runoff.
This transaction expands upon our prior divestiture activity, including the agreement we announced in July to sell our full-service recordkeeping business and the successful completion of the sales of our Taiwan and Korea insurance businesses.
As a result of these divestitures to date, we expect to generate net proceeds of approximately $6 billion by the first half of 2022.
And we continue to explore additional opportunities to derisk in-force blocks of business.
With the pending sale of our full-service recordkeeping business and our annuities block transaction, we have combined our individual annuities and retirement businesses to better serve the retirement needs of both individuals and institutions and support our growth strategy.
Turning next to our cost-savings program on Slide 4.
We are progressing well and remain on track to achieve our $750 million cost-savings targets by the end of 2023 as we look to reduce expenses while improving both the customer and employee experience.
To date, we have achieved $590 million in run-rate cost savings, exceeding our $500 million targets for the full year.
These savings include 145 million achieved in the third quarter for a total of $385 million this year.
Turning to Slide 5.
We continue to demonstrate a disciplined and balanced approach to capital deployment by enhancing returns to shareholders, reducing leverage, and investing in the growth of our businesses, all supported by our rock-solid balance sheet.
Year to date, we returned $3.5 billion to shareholders, including 2.1 billion of share buybacks and 1.4 billion in dividend payments, reflecting a 5% increase in our quarterly dividend compared to last year.
And we're targeting to return $11 billion of capital to shareholders by the end of 2023.
During the third quarter, we also took steps to enhance our financial flexibility by redeeming $900 million of outstanding debt.
This reduced financial leverage and generated 30 million in annual interest savings going forward.
We also continued to deploy capital in our businesses to drive long-term growth.
For example, this quarter, we completed a $5 billion funded pension risk transfer transaction, which is the fourth largest transaction in the history of the PRT market and demonstrates our expertise, ability to execute at scale, and commitment to this market.
We also deployed capital to support our ongoing pivot to less interest rate-sensitive and higher-growth products, including our FlexGuard and variable life products.
Our capital deployment is supported by our balance sheet strength, including highly liquid assets of $3.8 billion at the end of the third quarter and a capital position that continues to support a AA financial strength rating.
Turning to Slide 6.
I'm pleased to report a meaningful expansion of our environmental, social, and governance commitments.
Earlier this week, we announced our commitment to achieve net-zero emissions across our primary global home office operations by 2050, with an interim goal of becoming carbon-neutral by 2040.
We're also carefully assessing the emissions impact of our investment portfolio.
As an immediate action, we will restrict new direct investments in companies that derive a material portion of their revenues from thermal coal.
Separately, on the social front, the Prudential Foundation achieved an important milestone during the quarter, reaching $1 billion in funding to partners aimed at eliminating barriers to financial and social mobility around the world since making its first grant in 1978.
These investments include funding aligned with our racial equity commitments to support organizations, such as those supporting minority-owned small businesses and historically black colleges and universities that foster black economic empowerment and address the racial wealth gap.
This milestone by the foundation follows the $1 billion investment mark achieved in our impact investing portfolio in 2020.
We are confident these actions taken alongside of our strategic transformation will help us build a more sustainable company on behalf of all our stakeholders.
I'll provide an overview of our financial results and business performance for our PGIM, U.S., and international businesses.
I'll begin on Slide 7 with our financial results for the third quarter.
Our pre-tax adjusted operating income was $1.8 billion or $2.78 per share on an after-tax basis and reflected the benefit of strong markets and business growth, which exceeded the net mortality impacts from COVID-19.
PGIM, our global asset manager, had record-high asset management fees driven by record account values of over $1.5 trillion that were offset by lower other related revenues relative to the elevated level in the year-ago quarter as well as higher expenses supporting business growth.
Results of our U.S. businesses increased approximately 29% from the year-ago quarter and reflected higher net investment spread, driven by higher variable investment income, and higher fee income primarily driven by equity market appreciation, partially offset by less favorable underwriting experience driven by COVID-19-related mortality.
Earnings in our international businesses increased 14%, reflecting continued business growth, higher net investment spread, lower expenses, and higher earnings from joint venture investments.
This increase was partially offset by less favorable underwriting results, primarily driven by higher COVID-19 claims.
Turning to Slide 8.
PGIM continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate, and equities as a top 10 global active investment manager.
PGIM's investment performance remains attractive with more than 94% of assets under management outperforming their benchmarks over the last three-, five- and 10-year periods.
Third-party net flows were 300 million in the quarter, including institutional net flows of 700 million, primarily driven by public fixed income flows.
Modest retail net outflows of 400 million were due to equity outflows from sub-advised mandates and client reallocations due to rising rates and inflation concerns.
As the investment engine of Prudential, PGIM benefits from a mutually beneficial relationship with our U.S. and International Insurance businesses.
PGIM's asset origination capabilities and investment management expertise provide a competitive advantage by helping our businesses to bring enhanced solutions and more value to our customers.
And our businesses, in turn, provide a source of growth for PGIM through affiliated flows that complement its successful third-party track record of growth.
PGIM's asset management fees reached another record, up 13% compared to the year-ago quarter as a result of strong flows driven by investment performance and market depreciation.
PGIM's alternatives business, which has assets in excess of 250 billion, continues to demonstrate momentum across private credit and real estate equity and debt, benefiting by our global scale and market-leading positions.
As an example, PGIM's private businesses deployed almost $12 billion of capital this quarter, 28% more than the year-ago quarter.
This strategic focus on expanding higher-yielding products has resulted in stable fee rates over time despite industrywide fee pressures.
Now turning to Slide 9.
businesses produced diversified earnings from fees, net investment spread, and underwriting income and benefit from our complimentary mix of longevity and mortality businesses.
We continue to shift our business mix away from low-growth, capital-intensive, and interest rate-sensitive products and businesses, transform our capabilities and cost structure and expand our addressable markets.
In addition to the agreement that we announced in July to sell our full-service retirement business, this quarter, we also announced the sale of a portion of our legacy in-force annuities block to reduce the overall contribution of traditional variable annuities.
These transactions are significant steps forward in shifting our business mix and product portfolio to reduce market sensitivity and accelerate long-term growth.
In addition, our product pivots have worked well, demonstrated by continued strong sales of our buffered annuity products, which were $1.3 billion in the third quarter, representing 88% of total individual annuity sales.
Since the launch of FlexGuard in 2020, sales have exceeded $6 billion.
These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.
We have also exercised discipline through frequent pricing actions, and our sales continue to benefit from having a strong and trusted brand and highly effective distribution team.
Also, our Individual Life sales continue to be strong and reflect our product pivot strategy, with higher variable life sales compared to the year-ago quarter.
Our retirement business reflected strong sales in the quarter, including a 5.2 billion funded pension risk transfer transaction and 1.6 billion of international reinsurance transactions, demonstrating our market-leading capabilities.
With respect to Assurance, our digitally enabled distribution platform, total revenues, our primary financial metric as we concentrate on scaling the business, were up 47% over the prior-year quarter.
During the third quarter, we increased the number of agents to prepare for the seasonally higher expected demand of the Medicare annual enrollment period that occurs in the fourth quarter.
Turning to Slide 10.
Our international businesses include our Japanese life insurance operation, where we have a differentiated multichannel distribution model, as well as other operations, focused on high-growth emerging markets.
Sales across both Life Planner and Gibraltar operations were higher than last quarter amid the state of emergency in Japan that ended on September 30th.
dollar-denominated product repricing in Japan that we implemented in the third quarter of last year.
We also continue to see sales momentum in Brazil, particularly within the third-party distribution channel.
We remain encouraged by the resiliency of our unique distribution capabilities, which have supported the continued growth of our in-force business.
And with that, I'll hand it over to Ken.
I'll begin on Slide 11, which provides insight into earnings for the fourth quarter of 2021 relative to our third quarter results.
Pretax adjusted operating income in the third quarter was $1.8 billion and resulted in earnings per share of $3.78 on an after-tax basis.
To get a sense for how our fourth quarter results might develop, we suggest adjustments for the following items.
First, variable investment income outperformed expectations in the third quarter by 570 million.
Next, we included a placeholder for COVID-19 claims experience in the fourth quarter that is a similar level to our experience in the third quarter.
While we have provided this placeholder for COVID-19-related claims experience, the actual impact will depend on a variety of factors, such as infection and fatality rates, geographic and demographic mix, and the continued acceptance and effectiveness of vaccines.
Third, we expect seasonal expenses and other items will be higher in the fourth quarter by 140 million.
Fourth, we anticipate net investment income will be reduced by about 10 million, reflecting the difference between new money rates and disposition yields of our investment portfolio.
And last, we expect the fourth quarter effective tax rate to normalize.
These items combined get us to a baseline of $2.27 per share in the fourth quarter.
I'll note that if you exclude items specific to the fourth quarter, earnings per share would be $3.05.
The key takeaway is that our underlying earnings power has increased from last quarter, driven by the benefits of business growth, our cost-savings program, and market appreciation.
While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the fourth quarter.
Turning to Slide 12.
We continue to maintain a robust capital position and adequate sources of funding.
Our capital position continues to support a AA financial strength rating and have substantial sources of funding.
Our cash and liquid assets were $3.8 billion, which is greater than three times annual fixed charges, and other sources of funds include free cash flow from our businesses and contingent capital facilities.
Turning to Slide 13 and in summary.
We are executing on divestitures.
We are on track to achieve our targeted cost-saving initiatives.
And with the support of our rock-solid balance sheet, we are thoughtfully redeploying capital. | q3 adjusted operating earnings per share $3.78. |
It is possible that actual results may differ materially from the predictions we make today.
Prudential delivered strong financial results for the fourth quarter and the full year, reflecting favorable investment performance and continued high demand for the products we introduced during the pandemic to address our customers' evolving needs.
2021 was also a pivotal year for Prudential and our efforts to become a higher growth, less market-sensitive and more nimble company.
First, we are repositioning our business mix to generate sustainable long-term growth with reduced market sensitivity.
Second, we continue to advance our cost savings program.
And third, we maintained our disciplined and thoughtful approach to deploying capital.
I'll provide an update on each of these areas before turning it over to Rob and Ken.
Moving to Slide 3.
We are making significant progress repositioning our business for sustainable long-term growth with reduced market sensitivity through a mix of divestitures and strategic programmatic acquisitions.
Following the successful completion of the sales of our Korea and Taiwan insurance businesses, which produced $1.8 billion in proceeds, we reached agreements to divest our full-service business and a portion of our traditional variable annuities.
We are on track to close both of these transactions in the first half of 2022 and generate additional proceeds of over $4 billion.
We are redeploying capital in part through highly targeted acquisitions and investments in asset management and emerging markets.
Last year, PGIM acquired Montana Capital Partners, a European-based private equity secondaries asset manager; and Green Harvest, a separately managed account platform that provides customized solutions for high net worth investors.
Meanwhile, on the emerging markets front, we closed on an investment in ICEA LION Holdings, a highly respected financial services market leader in Kenya with operations in Tanzania and Uganda.
Turning to Slide 4.
We continue to advance our cost savings program and are on track to achieve $750 million in savings by the end of 2023.
To date, we have already achieved $635 million in run-rate cost savings, exceeding our $500 million target for 2021.
We have also taken steps to improve experiences around the world for our customers and employees through innovation.
This includes using automation, artificial intelligence, and other technology to expedite underwriting, reduce and simplify processes, provide faster, more convenient service options, and deliver meaningful financial advice in the ways our customers want it.
I'll touch more upon how we're using the technology in a moment.
Turning to Slide 5.
We have maintained a disciplined and balanced approach to deploying capital by enhancing returns to shareholders, reducing financial leverage, and by investing in the growth of our businesses.
We currently plan to return a total of $11 billion of capital to shareholders between 2021 and the end of 2023.
This includes $4.3 billion returned during 2021 through share repurchases and dividends.
As part of this plan, the board has authorized $1.5 billion of share repurchases and a 4% increase in our quarterly dividend beginning in the first quarter.
This represents our 14th consecutive annual dividend increase.
We also reduced debt by $1.3 billion in 2021.
In addition to the acquisitions I previously mentioned, we also made investments in our businesses to drive long-term growth and to meet the evolving needs of our customers.
In PGIM, for example, we have significantly strengthened our suite of environmental, social, and governance bond funds to better serve sustainability-focused investors.
Meanwhile, in our insurance businesses, we market-sensitive and have higher growth potential, such as our FlexGuard and variable life products, with a focus on improved customer experience and driving greater operational efficiency.
One example, as I mentioned earlier, is our use of artificial intelligence.
We use AI to quickly and accurately assess risk in our life insurance businesses and to expedite the application and underwriting process.
The application of innovative technology generated significant efficiencies for our global businesses during 2021, while delivering a dramatically better experience for our customers.
We will continue to expand the use of AI and other emerging technologies across the firm.
Our capital deployment strategy is supported by a rock-solid balance sheet which includes $3.6 billion in highly liquid assets at the end of the fourth quarter and a capital position that continues to support our AA financial strength rating.
Turning to Slide 6.
Our ongoing efforts to transform the company in 2021 go hand-in-hand with Prudential's long-standing commitment to sustainability.
This commitment is reflected in several significant enhancements to our environmental, social, and governance framework last year.
We committed to achieve net-zero emissions by 2050 across our primary global home office operations, with an interim goal of becoming carbon-neutral in these facilities by 2040.
We are also reviewing our general account investment holdings and have restricted new direct investments in companies that derive 25% or more of their revenues from thermal coal.
On the social front, the Prudential Foundation surpassed $1 billion in grants to partners primarily focused on eliminating barriers to financial and social mobility around the world.
This achievement follows another milestone that we reached in 2020 when our impact investment portfolio exceeded $1 billion.
We also continue to advance our nine commitments to racial equity through investments in funding for organizations committed to diversity, equity, and inclusion, and through internal measures, including diversity training and our commitment to equitable compensation for our employees.
Our governance actions reflected a shared commitment to diversity and inclusion, beginning at the top with over 80% of our independent board directors being diverse.
In 2021, we enhanced our diversity disclosures by publishing EEO-1 data and the results of our pay equity analysis for our U.S. employees.
We also expanded our policy of tying compensation plans for senior executives to the achievement of workforce diversity goals.
As I noted earlier, we believe our sustainability commitments and transformation to become a higher growth, less market-sensitive, and more nimble business are closely connected.
Together, they help us fulfill our purpose of making lives better by solving the financial challenges of our changing world by expanding access to investing insurance and retirement security for customers and clients around the globe.
I am proud of the progress we made and the momentum we built in 2021 and look forward to making an even more meaningful difference in the lives of all our stakeholders in 2022 and beyond.
I'll provide an overview of our financial results and business performance for our PGIM, U.S., and international businesses.
I'll begin on Slide 7 with our financial results.
For 2021, pre-tax adjusted operating income was $7.3 billion or $14.58 a share on an after-tax basis.
Results for the year included a benefit from the outperformance of variable investment income that exceeded target returns by about $1.6 billion, reflecting market performance, strategy, and manager selection.
In the fourth quarter, pre-tax adjusted operating income was $1.6 billion or $3.18 a share on an after-tax basis, while GAAP net income was $3.13 per share.
Of note, our GAAP net income includes realized investment gains and favorable market experience updates that were offset by a goodwill impairment that resulted in a charge of $837 million net of tax.
This charge reflects two main drivers of a reduction in the estimated fair value of Assurance.
First, we acquired capabilities to increase access to more customers, and we have experienced good revenue growth.
However, this growth has been slower than expected and we are now assuming it will take longer to monetize into earnings and cash flow.
And second, we have seen a significant decline in publicly traded peer valuations, which is a key input in our assessment of fair value.
Turning to the operating results of our businesses.
PGIM, our global asset manager, had record asset management fees driven by record account values of over $1.5 trillion.
Relative to the year-ago quarter, earnings reflected the elevated level of other related revenues last year as well as higher expenses supporting business growth in the current period.
Results of our U.S. Businesses increased 13% from the year-ago quarter and reflected higher net investment spread, including a greater benefit from variable investment income, higher fee income, primarily driven by equity market appreciation, partially offset by higher expenses driven by a legal reserve and less favorable underwriting experience due to COVID-19-related mortality.
Earnings in our international businesses increased 5%, reflecting continued business growth, lower expenses, and higher net investment spread.
Turning to Slide 8.
PGIM continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate, and equities as a top 10 global investment manager.
PGIM's investment performance remains attractive with more than 95% of assets under management outperforming their benchmarks over the last three, five- and 10-year periods.
This performance has contributed to third-party net flows of $11 billion for the year, with positive flows across U.S. and non-U.S.-based clients in both public and private strategies.
As the investment engine of Prudential, success, and growth of PGIM and of our U.S. and international insurance businesses are mutually enhancing.
PGIM's asset origination capabilities, investment management expertise, and access to institutional and other sources of private capital provide a competitive advantage by helping our businesses to bring enhanced solutions, innovation, and more value to our customers.
And our businesses, in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its successful third-party track record of growth.
PGIM's sixth consecutive quarter of record asset management fees reflect strong business fundamentals and record assets under management.
We continue to expand our global equity franchise to grow our alternatives and private credit business, which has assets in excess of $240 billion across private credit and real estate equity and debt and benefits from our global scale and market-leading positions.
Notably, PGIM's private businesses deployed nearly $50 billion of gross capital, up 33% from last year.
Now turning to Slide 9.
Our U.S. Businesses produced diversified earnings from fees, net investment spread, and underwriting income and also benefit from our complementary mix of longevity and mortality businesses.
We continue to shift our business mix toward higher growth and less interest rate-sensitive products and businesses to transform our capabilities and cost structure and to expand our addressable markets.
Our product pivots have worked well, demonstrated by continued strong sales of our buffered annuities, which were nearly $6 billion for the year, representing 87% of total individual annuity sales.
These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.
We have also exercised discipline through frequent pricing actions and our sales benefit from having a strong and trusted brand and a highly effective distribution team.
Our individual life sales also reflect our earlier product pivot strategy with variable products representing 71% of sales for the year.
Our retirement business has market-leading capabilities, which drove robust international reinsurance and funded pension risk transfer sales, including a $5 billion transaction, which was the fourth largest in the history of the market during 2021.
And reflected strong persistency and revenue growth in 2021 across all segments.
With respect to Assurance, our digitally enabled distribution platform, total revenues for the year were up 43% from last year.
Turning to Slide 10.
Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses focused on high-growth emerging markets.
We remain encouraged by the resiliency of our unique distribution capabilities, which have maintained the stability of our sales and our in-force business despite the pandemic.
In Japan, we are focused on providing high-quality service, growing our world-class sales force and expanding our geographic coverage and product offerings.
Our needs-based approach and mortality protection focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs.
In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions where customers' needs are growing where there are compelling opportunities to build market-leading businesses and partnerships and where Prudential -- the Prudential enterprise can add value.
As we look ahead, we're well-positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security.
We plan to continue to invest in growth businesses and markets to deliver industry-leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers.
And with that, I will now hand it over to Ken.
I'll begin on Slide 11, which provides insight into earnings for the first quarter of 2022 relative to our fourth quarter results.
Pre-tax adjusted operating income in the fourth quarter was $1.6 billion and resulted in earnings per share of $3.18 on an after-tax basis.
To get a sense for all our first quarter results might develop, we suggest adjustments for the following items: first, variable investment income outperformed expectations in the fourth quarter by $440 million.
Next, we adjust underwriting experience by a net $90 million.
This adjustment includes a placeholder for COVID-19's claims experience in the first quarter of $195 million, assuming 75,000 COVID-19-related fatalities in the U.S. While we have provided this placeholder for COVID-related claims experience, the actual impact will depend on a variety of factors such as infection and fatality rates, geographic and demographic mix and the effectiveness of vaccines.
Third, we expect seasonal expenses and other items will be lower in the first quarter by $105 million.
Fourth, we anticipate net investment income will be reduced by about $10 million, reflecting the difference between new money rates and disposition yields of our investment portfolio.
And last, we expect the first quarter effective tax rate to normalize.
These items combined get us to a baseline of $2.73 per share for the first quarter.
I'll note that if you exclude items specific to the first quarter, earnings per share would be $3.17.
The key takeaway is that the underlying earnings power per share continues to improve and has increased 9% over the last year, driven by business growth, the benefits of our cost savings program, capital management and market appreciation.
While we have provided these items to consider, please note there may be other factors that affect earnings per share in the first quarter.
As we look forward, we have also included seasonal and other considerations for 2022 in the appendix.
Turning to Slide 12.
We continue to maintain a robust capital position and adequate sources of funding.
Our capital position continues to support a AA financial strength rating and we have substantial sources of funding.
Our cash and liquid assets were $3.6 billion and within our $3 billion to $5 billion liquidity target range and other sources of funds include free cash flow from our businesses and contingent capital facilities.
Turning to Slide 13 and in summary, we are executing on our plans to reposition our businesses and we are on track to achieve our targeted cost savings.
And with the support of our rock-solid balance sheet, we are thoughtfully deploying capital. | prudential financial q4 adjusted operating earnings per share $3.18.
q4 adjusted operating earnings per share $3.18.
q4 earnings per share $3.13. |
I'm here with Joe Russell and Tom Boyle.
We do ask that you initially limit yourselves to two questions.
Of course, if you have more beyond that, please feel free to jump back in the queue.
Before we begin, we continue to wish everyone good health as we all face the many impacts from the pandemic.
As you know, on May 3, we are hosting an Investor Day virtually and hope you can join us.
We will share our key strategies and introduce you to the executive leadership team that will drive our growth in the coming years.
Looking at Q1, a number of historic metrics played through.
Customer demand for self-storage has remained elevated.
We continue to see consistent customer behavior across all markets with increased move-in rates, extended customer length of stay and more latitude to resume traditional rate increases to existing customers.
The band has been tied to both historic drivers coupled with a longer lasting impacts from more consumers needing storage.
This includes work from home, study from home, elevated home sales and remodeling and the migration in and out of metropolitan markets.
With the economy improving and additional government stimulus, consumer balance sheets are healthy and our customers' payment patterns remained strong.
Both same-store and non-same-store assets are performing well, with lease-ups particularly in non-same-store assets outpacing our projections as NOI grew by 46%.
To investments, 2021 is shaping up to be a robust year of acquisition activity.
With the addition of the recently announced ezStorage portfolio, our year-to-date 2020 acquisition activity either closed or under contract is $2.5 billion.
Of note, since 2019, we have acquired, developed and redeveloped approximately 22 million square feet and have expanded our portfolio by 13% having invested $4.3 billion.
In regard to the ezStorage acquisition, I would like to mention a few highlights of this significant transaction and how it matched four specific areas tied to our unique capabilities.
First, the integration of the assets into the Public Storage brand and operating platform will be seamless as we already had a broad presence in these markets with 115 assets.
We now enjoy even stronger presence with now 163 assets with unmatched brand presence across the Mid-Atlantic region.
Second, eight of the ezStorage assets are poised for expansion along with one that has begun ground-up development.
The Public Storage development team has taken lead on these opportunities and is ready to execute on each one of them, allowing us to expand the portfolio by approximately 10% over the next 24 months.
As you know, Public Storage has the only development team among the self-storage REITs and is well poised to unlock more value from this portfolio by virtue of our unique development capabilities.
Third, our ability to fund a large acquisition and close in a very short timeline, in this case six weeks from selection to close, was due to our efficient and prime capital structure.
This transaction is immediately accretive to FFO and NOI.
And fourth, our well-earned reputation of being a buyer of choice in the investment community.
Looking to fall 2021, we are encouraged by core customer demand, our well located portfolio, the strength of our balance sheet and the quality and dedication of the 5,000 plus team members at Public Storage, all of whom are committed to enhancing the leading brand in the self-storage industry.
With that, let me hand the call over to Tom.
I'll start with financial performance.
Our financial performance has improved steadily through the second half of 2020 into the first quarter of 2021.
In the same-store, our revenue increased 3.4% compared to the first quarter of 2020, which represents a sequential improvement in growth of 2.6% from the fourth quarter.
There were two primary factors contributing to that improvement.
First and foremost, move-in rates were up double-digits, while move-out rates were roughly flat year-over-year leading to improving in-place rents.
Secondly, occupancy also increased through the quarter with move-in volume down, but move-out volume also lower.
Now on to expenses.
The team did a great job driving same-store cost of operations down in the first quarter.
Lower expenses were driven by property payroll, utilities, marketing and a timing benefit on property taxes.
Of property tax, specifically, we will expense our estimate ratably through the year leading to a benefit in the first three quarters and reversing to a headwind in the fourth quarter.
This will lead to more stable quarter-over-quarter property tax in the future.
The benefit this quarter was worth $0.05 of FFO.
Some of the technology and operating model evolution we'll discuss on Monday at our Investor Day showed up in our first quarter numbers with property payroll down 13% in the quarter given efficiency improvements.
We look forward to sharing more on Monday.
In conjunction with the line by line commentary in our supplemental, it's a guide to our outlook and the key drivers of our business.
And as we started 2021, we've seen continued strength, as Joe mentioned, in customer demand with occupancy is up 260 basis points and in-place contract rent per occupied square foot turning into positive year-over-year territory in January.
We anticipate same-store revenue to grow from 4% to 5.5% in 2021.
That outlook is supported by good customer demand and moderating supply.
That said, we do see risk to move-outs going higher as we move through the year comping against what was really extraordinary existing tenant performance in 2020.
Our current expectations are for occupancy to be down 100 basis points plus in the fourth quarter compared to 2020.
We expect continued strong expense control in the same-store in 2021.
Our expectations are for 1% to 2% same-store expense growth.
Property tax expense growth will pick up this year with our expectations around a 5% increase for the year, again recognized ratably through the year.
Our guidance includes the acceleration of our external growth initiatives with ezStorage and will add to FFO growth through our non-same-store portfolio this year and next.
In total, our outlook is for core FFO per share of $11.35 to $11.75 for 2021.
I'll now shift gears to the balance sheet.
As Joe mentioned, we used our growth-oriented balance sheet to fund the purchase of ezStorage, entering the bond market the day after announcement and having fully funded the transaction within two days.
The offering comprised of three, seven and 10 year tranches with the weighted average cost of about 1.6%.
After effect of the transaction, we have the longest duration balance sheet in the REIT industry with one of the lowest cost profiles.
And we remain in a great position to continue to use the balance sheet to fund our growth initiatives, and we'll share more at our Investor Day on Monday. | sees 2021 core ffo per share $11.35 - $11.75. |
Slide two contains our Safe Harbor statement.
In the third quarter, we had adjusted earnings of $1.4 billion.
We generated operating cash flow of $2.2 billion, which meaningfully exceeded our capital spending and dividends during the quarter.
We returned $394 million to shareholders through dividends, and in October, we increased the quarterly dividend to $0.92 per share.
We believe in a secure, competitive and growing dividend.
Since we formed as a company, we've returned approximately $29 billion to shareholders and we remain committed to disciplined capital allocation.
We're seeing signs of sustainable cash generation improvement.
We've made good progress on debt repayment, reducing our debt balance by $1 billion so far this year.
We're on a path to pre-pandemic level debt, strengthening our balance sheet and supporting our strong investment-grade credit ratings.
Earlier this week, we announced an agreement to acquire all of the publicly held units of Phillips 66 Partners.
The all-equity transaction simplifies our corporate structure and positions us to drive greater value for both Phillips 66 shareholders and Phillips 66 Partners unitholders.
We continue to advance the companywide transformation efforts that we began in 2019.
We believe that strengthening our cost position is necessary for long-term competitiveness.
We recently initiated an effort to identify opportunities to significantly reduce cost across our portfolio.
We're in the process of scoping these reductions and look forward to updating you early next year on our progress.
Recently, we announced greenhouse gas targets to reduce the carbon emissions intensity from our operations by 2030.
Our targets demonstrate our commitment to sustainability and to meeting the world's energy needs today and in the future.
In the third quarter, we saw a significant improvement in earnings and cash generation.
In Refining, we captured a meaningful improvement in realized margins.
Midstream had strong earnings in the quarter.
In Chemicals, the Olefins and Polyolefins business reported record quarterly earnings, and Marketing and Specialties had its second best quarter ever.
In Midstream, we continued to advance frac forward the Sweeny Hub with construction approximately one-third complete and about 70% of the capital already spent.
Additionally, we recently completed construction of Phillips 66 Partners' C2G pipeline.
CPChem continues to pursue development of two world-scale petrochemical facilities on the US Gulf Coast and in Ras Laffan, Qatar.
In addition, CPChem is expanding its alpha-olefins business with a world-scale unit to produce on 1-hexene.
The Alliance Refinery sustained significant impacts from Hurricane Ida and will remain shut down through the end of this year.
We continue to assess future strategic options for the refinery.
We continue to progress Rodeo Renewed, which is expected to be completed in early 2024, subject to permitting and approvals.
Upon completion, Rodeo will have over 50,000 barrels per day of renewable fuel production capacity.
The conversion will reduce emissions from the facility and produce lower carbon transportation fuels.
In Marketing, we're converting 600 branded retail sites in California to sell renewable diesel produced by the Rodeo facility.
Our Emerging Energy Group is advancing opportunities in renewable fuels, batteries, carbon capture and hydrogen.
With our recent investment in NOVONIX, we're expanding our presence in the battery value chain.
Additionally, we recently announced a collaboration with Plug Power to identify and advance green hydrogen opportunities.
We'll continue to focus on lower carbon initiatives that generate strong returns.
We're excited about our participation in this dynamic energy transition, and combined with our commitment to disciplined capital allocation and strong returns, we're well positioned for the future.
Starting with an overview on slide four, we summarize our third quarter results.
We reported earnings of $402 million.
Special items during the quarter amounted to an after-tax loss of $1 billion, which was largely comprised of an impairment of the Alliance Refinery.
Excluding special items, we had adjusted earnings of $1.4 billion or $3.18 per share.
We generated operating cash flow of $2.2 billion, including a working capital benefit of $776 million and cash distributions from equity affiliates of $905 million.
Capital spending for the quarter was $552 million.
$311 million was for growth projects, including a $150 million investment in NOVONIX.
We paid $394 million in dividends.
Moving to slide five, this slide shows the change in adjusted results from the second quarter to the third quarter, an increase of $1.1 billion with a substantial improvement in Refining and continued strong contributions from Midstream, Chemicals, and Marketing and Specialties.
Our adjusted effective income tax rate was 16%.
Slide six shows our Midstream results.
Third quarter adjusted pre-tax income was $642 million, an increase of $326 million from the previous quarter.
Transportation contributed adjusted pre-tax income of $254 million, up $30 million from the prior quarter.
The increase was driven by higher equity earnings from the Bakken and Gray Oak Pipelines.
NGL and Other adjusted pre-tax income was $357 million compared with $83 million in the second quarter.
The increase was primarily due to a $224 million unrealized investment gain related to NOVONIX, as well as inventory impacts.
In September, we acquired a 16% interest in NOVONIX.
Our investment will be mark-to-market at the end of each reporting period.
The Sweeny fractionation complex averaged a record 383,000 barrels per day, and the Freeport LPG export facility loaded 41 cargoes in the third quarter.
DCP Midstream adjusted pre-tax income of $31 million was up $22 million from the previous quarter, mainly due to improved margins and hedging impacts.
Turning to Chemicals on Slide seven, we delivered another strong quarter in Chemicals with adjusted pre-tax income of $634 million, down $23 million from the second quarter.
Olefins & Polyolefins had record adjusted pre-tax income of $613 million.
The $20 million increase from the previous quarter was primarily due to higher polyethylene sales volumes, driven by continued strong demand, partially offset by higher utility costs.
Global O&P utilization was 102% for the quarter.
Adjusted pre-tax income for SA&S decreased $45 million compared to the second quarter, driven by lower margins, which began to normalize following tight market conditions.
During the third quarter, we received $632 million in cash distributions from CPChem.
Turning to refining on slide eight.
Refining third quarter adjusted pre-tax income was $184 million, an improvement of $890 million from the second quarter, driven by higher realized margins across all regions.
Realized margins for the quarter increased by 119% to $8.57 per barrel, primarily due to higher market crack spreads, lower RIN costs and improved product differentials.
Pre-tax turnaround costs were $81 million, down from $118 million in the prior quarter.
Crude utilization was 86% compared with 88% in the second quarter.
Lower utilization reflects downtime at the Alliance Refinery, which was safely shut down on August 28 in advance of Hurricane Ida.
The third quarter clean product yield was 84%, up 2% from last quarter, supported by improved FCC operations.
Slide nine covers market capture.
The 3:2:1 market crack for the third quarter was $19.44 per barrel compared to $17.76 per barrel in the second quarter.
Realized margin was $8.57 per barrel and resulted in an overall market capture of 44%.
Market capture in the previous quarter was 22%.
Market capture was impacted by the configuration of our refineries.
Our refineries are more heavily weighted toward distillate production than the market indicator.
During the quarter, the distillate crack increased $1.55 per barrel and the gasoline crack improved $1.92 per barrel.
Losses from secondary products of $1.98 per barrel improved $0.40 per barrel from the previous quarter as NGL prices strengthened.
Our feedstock advantage of $0.01 per barrel declined, by $0.26 per barrel from the prior quarter.
The Other category reduced realized margins by $5.01 per barrel.
This category includes RINs, freight costs, clean product realizations and inventory impacts.
Moving to Marketing and Specialties on slide 10.
Adjusted third quarter pre-tax income was $547 million compared with $479 million in the prior quarter.
Our Marketing business realized continued strong margins and saw increasing demand for products.
Marketing & Other increased $62 million from the prior quarter.
This was primarily due to higher international margins and volumes, driven by the easing of COVID-19 restrictions.
Refined product exports in the third quarter were 209,000 barrels per day.
Specialties generated third quarter adjusted pre-tax income of $93 million, up from $87 million in the prior quarter, largely due to improved oil margins.
On slide 11, the Corporate and Other segment had adjusted pre-tax costs of $230 million, an improvement of $40 million from the prior quarter.
This was primarily due to lower costs related to the timing of environmental and employee-related expenses, partially offset by higher net interest expense.
Slide 12 shows the change in cash for the quarter.
We started the quarter with a $2.2 billion cash balance.
Cash from operations was $2.2 billion.
Excluding a working capital benefit of $776 million, our cash from operations was $1.4 billion, which covered $552 million of capital spend, $394 million for the dividend and $500 million of early debt repayment.
Our ending cash balance was $2.9 billion.
This concludes my review of the financial and operating results.
Next, I'll cover a few outlook items.
In Chemicals, we expect the fourth quarter global O&P utilization rate to be in the mid 90s.
In refining, we expect the fourth quarter worldwide crude utilization rate to be in the low 80s.
We expect the Alliance Refinery to remain shut down for the full quarter.
We expect fourth quarter pre-tax turnaround expenses to be between $110 million and $140 million.
We anticipate fourth quarter Corporate and Other costs to come in between $240 million and $250 million pre-tax. | compname reports q3 adjusted earnings per share $3.18.
q3 adjusted earnings per share $3.18. |
These include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance that do not rely -- solely relate to historical or current facts.
Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA and free cash flow.
Lastly if you would like to be notified when Quanta publishes news releases and other information, please sign up for email alerts through the Investor Relations section of quantaservices.com.
We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.
Backlog at the end of the quarter was a record $15.8 billion, which we believe reflects the continued advancement of our long-term growth strategies.
We continue to see opportunities for multi-year growth across our service lines, driven by our solutions-based approach and the growth of programmatic spending with existing and new customers.
The recognition that the country's infrastructure needs to be modernized to support economic growth improved safety and reliability and for a cleaner environment is evidenced by the Biden administration's recently proposed $2 trillion infrastructure plan.
The proposal will evolve and take time to move through the political process.
But as proposed, the plan includes funding and policies to encourage new infrastructure development and modernization in several of our core markets including, high-voltage electric transmission and power grid modernization and resiliency, renewable energy, electric vehicle charging station infrastructure and other electrification initiatives, and broadband infrastructure expansion.
While this infrastructure proposal could accelerate activity in these areas and provide incremental opportunity for Quanta over several years, I want to stress that our positive multiyear outlook and strategic plan are not reliant on this infrastructure proposal.
We have been collaborating with our customers for many years to support their significant multiyear investment programs already in place to modernize the existing power grid, ensure reliable power delivery and to integrate higher levels of renewable generation.
Our Electric Power Solutions operations performed well during the quarter, reflecting broad-based business strength, driven by ongoing grid modernization, system hardening, renewable energy interconnections and solid and safe execution.
During the quarter, we signed a significant multiyear master services agreement with a utility in the Western United States, which made a substantial incremental contribution to our record first quarter backlog.
We believe our record backlog and these initiatives will continue to drive multiyear growth opportunities for Quanta.
Though COVID-19 has created some near-term challenges in Canada, we see opportunities to pursue additional large projects there for the coming years.
Additionally, our discussions with high-voltage electric transmission project sponsors in the United States have increased as the need for large-scale electric transmission infrastructure to support growing renewable generation and achieve carbon-neutrality goals become evident.
LUMA Energy and its employees, as supported by Quanta and its joint venture partner ATCO, are all working diligently toward transitioning the operations and maintenance of the Puerto Rico electric power grid to LUMA in early June.
LUMA's efforts under the agreement are intended to deliver long-term social and economic benefits to the people of Puerto Rico.
As stated previously, we believe this opportunity is transformative for all the parties involved, including the people of Puerto Rico, and the work to be performed by LUMA under the 15-year contract aligns with Quanta's strategy of providing sophisticated and valuable solutions to the utility, industry that benefits consumers.
The majority of our communications operations are off to a solid start this year, driven by strong demand for fiber densification to reach homes and businesses and the early stages of 5G network deployments.
However, during the quarter, we experienced short-term challenges really associated with efficient subcontractor work in a specific geographic area, which required rework.
We have addressed our quality assessment protocol shortcomings on this issue and are pursuing compensation from the subcontractor.
This was an isolated issue, and we believe we are on track to generate high-single or double-digit operating income margins for the remainder of this year.
Additionally, we continue to believe, we can achieve at least $1 billion in annual revenue with double-digit operating income margins in the medium term.
As service providers continue to push fiber closer to the customer, fiber backhaul densification continues, 5G wireless infrastructure development increases, and meaningful federal funding is provided for broadband network expansion initiatives in underserved markets.
On prior calls, we have shared our belief that Quanta is uniquely positioned between the communications and utility industries to provide solutions for broadband and 5G technology deployments leveraging existing infrastructure.
We have made significant progress working with our customers and a broadband technology partner and during the first quarter made a minority financial investment in this partner.
We also entered into a strategic alliance with them where Quanta will serve as a program manager for large-scale deployments of their fixed wireless broadband technology which we utilized our customers' facilities where appropriate.
We believe this relationship advances our solutions with customers to accelerate and improve access to affordable and reliable broadband in rural and underserved markets.
We believe our proactive strategy and the unique solutions Quanta provides the marketplace enhances our opportunity to expand our telecom infrastructure solutions with other utility and communication customers.
Our Underground Utility and Infrastructure Solutions segment performed well in the quarter with better than expected profitability despite seasonality and continued challenges caused by COVID-19.
We are confident in our full year expectations for the segment driven by solid demand for our gas utility and pipeline integrity service.
Additionally, there are encouraging signs supporting our expectations of improved demand for our industrial services beginning in the second half of this year.
We believe deferred maintenance and capital spending due to the effects of COVID on the downstream market is creating pent-up demand for our services which should prove beneficial as market conditions normalize for our customers.
However, we would like to see how the summer travel season develops which could influence activity levels of our downstream customers before making adjustments to our full year expectations for this segment.
The solutions Quanta provides support our customers' efforts to increase reliability, safety, efficiency, and connectivity all of which have favorable, environmental, and social impact.
Our end markets and multiyear visibility are solid and we have built a strong platform that positions us well to capitalize on favorable long-term trends particularly grid modernization and hardening, the transition toward a carbon-neutral economy, and the adoption of new technologies such as 5G, battery storage, and hydrogen.
Previously, we have discussed our strategic focus on enhancing our front-end capabilities such as engineering and permitting.
To complement our world-class construction expertise, our strategy is designed to provide differentiated comprehensive and industry-leading solutions to our customers which we have achieved through organic investment and select acquisitions.
This strategy is contributing to our backlog growth increasing our total addressable market and providing meaningful growth opportunities for the future.
We believe this demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends, our ability to safely execute, and our strong competitive position in the marketplace.
We continue to believe we are in a multiyear up cycle with continued opportunity for further record backlog and results in 2021.
We are focused on operating the business for the long-term and expect to continue to distinguish ourselves through safe execution and best-in-class build leadership.
We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers.
We believe Quanta's diversity unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for all our stakeholders.
Today we announced first quarter 2021 revenues of $2.7 billion.
Net income attributable to common stock was $90 million or $0.62 per diluted share and adjusted diluted earnings per share a non-GAAP measure was $0.83.
The first quarter was another strong quarter for Quanta led by continued strength from electric power and better-than-expected profitability from our Underground Utility and Infrastructure segment.
Our electric power revenues were $2.1 billion a record for the first quarter and a 17% increase when compared to the first quarter of 2020.
This increase was driven by continued growth in base business activities as well as contributions from larger transmission projects under way in Canada and revenues from acquired businesses of approximately $70 million.
Also revenues associated with emergency restoration services attributable to winter storm response efforts were approximately $80 million a first quarter record.
Electric segment margins in 1Q 2021 were 9.7% versus 7.3% in 1Q 2020.
The improved operating margins were driven by double-digit performance from our electric operations within the segment including the benefit associated with increased profit contributions from emergency restoration efforts, which typically present opportunities for higher margins than our normal base business activities due to higher utilization.
Operating margins also benefited from approximately $5 million of income associated with our LUMA joint venture.
Negatively impacting first quarter margins were recorded reserves for the identified issues Duke discussed, which when combined with normal seasonality exacerbated by severe weather challenges from winter Storm Uri created an operating loss within our US telecom operations for the quarter.
Again we believe we have addressed the issues and expect margins at or near double-digits going forward.
Underground Utility and Infrastructure segment revenues were $643 million for the quarter, 35% lower than 1Q 2020 due primarily due to reduced revenues from our industrial operations and a reduction in contributions from larger pipeline projects.
Operations within this segment in last year's first quarter results had yet to be impacted by COVID-19 headwinds.
And in fact our industrial operations had record results in the period.
In 1Q 2021, the segment continues to be negatively impacted by COVID-19 with first quarter revenues from our Canadian operations and our industrial operations both meaningfully below pre-pandemic levels.
Despite the COVID-related headwinds, the segment delivered margins of 1.4%.
And although 170 basis points lower than 1Q 2020 primarily due to the reduced revenues, the results exceeded our original expectations for 1Q led by execution across much of our base business activity including our gas distribution and industrial services.
Our total backlog was a record $15.8 billion at the end of the first quarter with 12-month backlog of $8.9 billion representing solid increases when compared to year end as well as the first quarter of 2020.
This marks the third consecutive quarter where we posted record backlog, a trend driven primarily by continued growth in multiyear MSA programs with North American utilities which we believe continues to validate the repeatable sustainable nature of the largest portion of our revenues and earnings.
For the first quarter of 2021, we generated free cash flow, a non-GAAP measure of $49 million, $115 million lower than 1Q 2020, however 1Q 2020 included the collection of $82 million of insurance proceeds associated with the settlement of two pipeline project claims.
Day sales outstanding or DSO measured 89 days for the first quarter, an increase of four days compared to the first quarter of 2020 and an increase of six days compared to December 31, 2020.
These increases are primarily due to the expected ramp in work on two larger electric transmission projects in Canada in the first quarter and the timing of billing.
The Canadian response to COVID has significantly hampered production for which we will seek recovery and delayed this in meeting certain billing milestones.
We had approximately $200 million of cash at the end of the quarter with total liquidity of approximately $2.1 billion and a debt-to-EBITDA ratio as calculated under our credit agreement of approximately 1.3 times.
Integration activities associated with acquisitions closed in the back half of 2020 are ongoing and we closed another small acquisition during the first quarter of 2021.
We continue to take an opportunistic view toward acquisitions and maintain the balance sheet strength to support strategic capital outlays in this area.
We remain committed to delivering shareholder value through prudent capital deployment.
Based on the Electric segment's strong first quarter and continued confidence in our ability to execute on the opportunities across the segment, we've increased the low end of our full year expectations for segment revenues resulting in a range between $8.4 billion and $8.5 billion for 2021.
Similarly, we are increasing the low end of our full year margin range for the segment with 2021 operating margins now expected to range between 10.2% and 10.9%.
Regarding the Underground Utility and Infrastructure Solutions segment, while we had a nice start to the year, we are not yet in a position to change our full year expectations.
Accordingly, we are reiterating our original full year guidance for the segment with revenues expected to range between $3.65 billion and $3.85 billion and segment margins ranging between 5.5% and 6%.
These segment operating ranges support our increased expectations for 2021 annual revenues of between $12.05 billion to $12.35 billion and adjusted EBITDA, a non-GAAP measure of between $1.1 billion and $1.2 billion.
The midpoint of the range represents 10% growth when compared to 2020's record adjusted EBITDA.
In addition to these improved operating expectations, our full year expectations for net income and adjusted net income, a non-GAAP measure are expected to benefit from a reduced annual tax rate, driven by higher benefits realized in the first quarter associated with the fair value of vested stock compensation awards.
We now expect our full year tax rate to range between 25.25% and 25.75%.
As a result, our increased expectation for full year diluted earnings per share attributable to common stock is now between $3.25 and $3.69, and our increased expectation for adjusted diluted earnings per share attributable to common stock a non-GAAP measure is now between $4.12 and $4.57.
We are maintaining our free cash flow guidance for the year, expecting it to range between $400 million and $600 million.
And we'll reiterate that quarterly free cash flow is subject to sizable movements due to various customer and project dynamics that can occur in the normal course of operations.
Overall, we are pleased with the start to the year and remain confident in the strength of our operations and prospects for profitable growth.
As our backlog continues to grow and our visibility into the duration of this infrastructure cycle continues to improve, we have increasing conviction in our ability to capitalize on the opportunities across our end markets.
We firmly believe the repeatable nature of our base business solutions coupled with opportunistic larger project deployments, disciplined capital allocation and continued balance sheet strength will be the key to delivering long-term shareholder value. | compname reports q1 gaap earnings per share $0.62.
q1 adjusted non-gaap earnings per share $0.83.
q1 gaap earnings per share $0.62.
q1 revenue $2.7 billion versus $2.76 billion.
long-term outlook for quanta's business is positive.
expects 2021 revenues to be between $12.05 billion and $12.35 billion.
sees fy diluted earnings per share attributable to common stock $3.25 and $3.69.
sees fy adjusted diluted earnings per share attributable to common stock $4.12 and $4.57. |
These include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance, but that do not solely relate to historical or current facts.
Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA and free cash flow.
Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for email alerts through the Investor Relations section of quantaservices.com.
We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.
We will provide a review of our third quarter results and full year 2021 financial expectations.
Additionally, total backlog of $17 billion at the end of the quarter was also a record, which we believe reflects the benefits of our collaborative approach with the customers, favorable end market dynamics and continued advancement of our long-term growth strategies.
As many of you are aware, several weeks ago, we completed the previously announced acquisition of Blattner, which is a premier utility scale renewable energy infrastructure solutions provider in North America with decades of experience and a strong safety culture.
We believe the energy transition in North America is on the cusp of a significant acceleration, and at moving to a carbon-neutral economy will require sizable and decades-long investment in renewable generation and related infrastructure.
We believe this transaction puts Quanta in a unique position to enable the energy infrastructure for North America's energy transition.
Since announcing our intention to acquire Blattner in early September, customer reactions and conversations across our customer base have been overwhelmingly positive and supportive.
Further, we previously commented about how remarkably similar Quanta and Blattner are operationally and culturally, which has become increasingly apparent to working with the Blattner management team on integration.
We were all excited about our combined growth opportunities when we first announced the transaction.
And I can tell you that today, we are even more excited and increasingly confident in the value proposition, innovative solutions and growth synergy opportunities at Quanta and Blattner are positioned to provide existing and new customers.
Now turning the call to our operating results.
Our Electric Power Solutions operations continued to perform well with record revenues and strong margins driven by robust demand for our services, solid and safe execution, high utilization of our resources and operational excellence.
We are proud of our execution and confident that our strong market position will allow us to capitalize on future opportunities created by a favorable long-term trends driving utility investment and demand for our comprehensive solutions.
Demand for grid modernization, system hardening and renewable energy interconnection services remain active, and discussions around opportunities for our electric vehicle infrastructure installation and program management capabilities continue to advance.
Our electric power backlog remains strong, driven primarily by significant multiyear master service agreements with utilities, which adds to the substantial MSA backlog growth we generated in the first half of this year.
During the quarter, Hurricane Ida made landfall over Louisiana, which ultimately left 1.2 million customers across eight states without power, including one million outages in Louisiana alone.
Quanta deployed significant resources to support utility customers through electric power infrastructure who was damaged or destroyed by the hurricane, including more than 2,500 line workers and front-end support services and engineering staff.
Our comprehensive response resulted in record emergency restoration revenue and highlights our ability to quickly mobilize substantial resources to support our customers in times of need.
Our customers continue to advance their efforts to achieve carbon neutrality over the coming decades, which is planned to be achieved in large part through increasing renewable generation investment.
We believe public policy and a positive general sentiment supporting a greener environment will drive North America's power generation mix increasingly toward renewables over the near and longer term.
Blattner's utility scale renewable generation solutions, coupled with Quanta's complementary and holistic grid solutions, creates a unique value proposition and opportunity to collaborate with our customers to shape their energy transition initiatives.
For example, Blattner is currently constructing more than 30 utility-scale renewable energy projects across the country, and another Quanta company is currently working on the largest solar-powered battery storage projects in North America.
Additionally, we are seeing accelerated demand for our services that enable renewal generation, including transmission interconnections and substations.
We continue to scale our communication operations and progress to our strategy.
For example, we have developed our wireless capabilities and are expanding our wireless services into certain markets.
Communications revenues grew significantly in the third quarter as compared to last year.
And though we incurred higher costs on certain jobs due to descoping of certain contracts and project closeouts, which impacted profitability for these operations, these issues were not meaningful to the overall electric power segment or Quanta as a whole.
Nevertheless, demand for our communication services remains high and the majority of our communication operations are performing at or near our double-digit margin targets.
Our underground utility in Infrastructure Solutions segment generally performed well in the quarter despite being impacted by work disruptions along the Gulf Coast due to Hurricane Ida and work inefficiencies associated with the recent surge of the COVID-19 Delta variant in certain areas.
We continue to experience solid demand for our gas utility and pipeline integrity services, which are driven by regulated spend to modernize systems, reduce methane emissions, ensure environmental compliance and improve safety and reliability.
We expect our industrial services to strengthen through next year, along with the continued recovery of the global economy and demand for refined products as well as the return of our customer maintenance and capital spending that was previously deferred due to the effects of COVID-19 on the downstream market.
Looking to the coming years, we believe the opportunity Quanta has with customers in this segment as they increasingly pursue strategies to reduce their carbon footprint and diversify their operations and assets toward greener business opportunities may be underestimated.
Here are several examples of such initiatives and project opportunities.
Gas utilities are implementing system modernization initiatives that position them to blend hydrogen into their natural gas flow.
To that end, Quanta is working with several gas utility customers on hydrogen pilot programs.
Certain refiners are building renewable and biofuel processing facilities, which could create opportunities for our industrial services.
Natural gas power plants are also exploring blending hydrogen with natural gas as a fuel source to power their turbines, which could create opportunities for our pipeline infrastructure services.
Lastly, we are actively pursuing carbon sequestration projects in the United States, which could utilize our engineering and pipeline construction services.
In Canada, Pembina Pipeline and TC Energy have proposed a plan to jointly develop a carbon transportation and sequestration system called the Alberta Carbon Grid, which is envisioned to serve as the backbone of Alberta's carbon capture utilization and storage industry and could include participation by other pipeline companies.
The initiative would leverage existing pipelines, requires a new pipeline and facility investment, which when fully constructed would be capable of transporting more than 20 million tons of carbon dioxide annually.
The North American energy transition is just that a transition process.
We roll our electric power infrastructure solutions play, and the energy transition is clear.
However, we believe Quanta's underground utility and infrastructure solutions operations could play in an evolving and increasing role in this transition in support of our customers' carbon reduction initiatives.
Progress continues in Washington, D.C. toward enacting the bipartisan infrastructure bill and the Build Back Better plan.
As commented on prior calls, our positive multiyear outlook and strategic plan are not reliant on either of these packages.
But if either or both enacted, they could provide incremental opportunity for Quanta over both the near and longer term.
These packages include funding and policies to encourage new infrastructure development and modernization in several of our core markets.
In particular, the Build Back Better plan currently contains policy and incentives representing the largest clean energy legislative package in American history.
While additional political steps are still required, we are encouraged by what we've seen recently.
We have profitably grown the company and executed well this year and expect to continue to do so.
We are confident in the strategic initiatives we are executing on, the competitive position we have in the marketplace and our positive multiyear outlook.
We also believe that our business and opportunities for profitable growth in 2022 are gaining momentum, driven by our solution-based approach, the growth of programmatic spending with existing and new customers, opportunities for larger electric transmission projects, the addition of Blattner's renewable generation solutions and the opportunity for recovery of certain portions of our business that have been affected by the global pandemic.
Looking to the medium and longer term, as energy transition and carbon reduction initiatives are increasingly implemented in addition to the primary drivers of our business currently, we believe our visibility could increase and our growth opportunities could expand and accelerate.
We believe the infrastructure investment and renewable generation necessary to support these initiatives are still in the early stages of deployment, and that this is arguably the most exciting time in Quanta's history.
We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best-in-class field leadership.
We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers.
We believe Quanta's diversity, unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for our stakeholders.
Today, we announced record third quarter 2021 revenues to $3.4 billion.
Net income attributable to common stock was $174 million or $1.21 per diluted share.
And adjusted diluted earnings per share, a non-GAAP measure, was $1.48.
Our electric power revenues were $2.3 billion, a quarterly record and a 10% increase when compared to the third quarter of 2020.
This increase was driven by continued favorable dynamics across our core utility and communications market and associated demand for our services.
Also contributing to the increase were revenues from acquired businesses of approximately $55 million.
Electric segment operating income margins in 3Q '21 were 12.4%, slightly lower than 12.7% in 3Q '20 but better than our initial expectations.
Operating margins benefited from record emergency restoration revenues of approximately $230 million, which typically present opportunities for higher margins than our normal base business activities due to higher utilization as well as overall solid execution across our electric operations.
Additionally, segment margins benefited from approximately $10 million of income associated with our LUMA joint venture.
Otherwise, the slight reduction in operating margin versus prior year was attributable to normal job variability and mix of work and our communications operations, which delivered mid-single-digit margins during the quarter.
As a reminder, last year's third quarter electric power results also included what was at the time a record level of emergency restoration revenues.
Underground Utility and Infrastructure segment revenues were $1.02 billion for the quarter, 12% higher than 3Q '20 due primarily to increased revenue from gas distribution and industrial services.
Though our operations experienced increased activity year-over-year, current quarter revenues and margins in our industrial operations were negatively impacted by disruptions along the Gulf Coast attributable to Hurricane Ida in both our industrial and non-U.S. markets within this segment remain pressured by COVID-19 dynamics.
Third quarter operating income margins for the segment were 6.7%, 170 basis points lower than 3Q '20, but generally in line with our expectations.
Margins for the year -- margins for the third quarter of 2020 benefited from favorable adjustments on certain larger pipeline projects with both scope changes and favorable closeout in the quarter.
Our total backlog was $17 billion at the end of the third quarter, the fifth consecutive quarter we've posted record total backlog.
Additionally, 12-month backlog of $9.8 billion also represents a quarterly record.
Our backlog growth continues to be driven primarily by multiyear MSA programs with North American utilities, which we believe reinforces the repeatable and sustainable nature of the largest portion of our revenues and earnings.
The Blattner acquisition occurred after September 30.
And accordingly, their backlog is not included in our current reported levels.
However, the total backlog from Blattner and the other 4Q acquisitions is approximately $1.8 billion.
For the third quarter of 2021, we generated negative free cash flow, a non-GAAP measure, of $40 million compared to $70 million of positive free cash flow in 3Q '20.
Net cash provided by operating activities during the third quarter of 2021, although largely in line with our expectations, was down due to higher revenues and corresponding increases in working capital demands compared to prior year, which benefited from lower revenues and a corresponding lower use of working capital.
Also, 3Q '20 benefited from the deferral of $41 million of payroll taxes in accordance with the CARES Act, 50% of which are due by December 31, 2021, with the remainder due by December 31, 2022.
Partially offsetting these dynamics was a favorable impact of increased earnings as compared to 3Q '20.
Days sales outstanding, or DSO, measured 89 days for the third quarter of 2021, an increase of seven days compared to the third quarter of 2020 and an increase of six days compared to December 31, 2020.
The increase was primarily due to elevated working capital requirements associated with two large Canadian transmission projects driving an increase in contract assets.
Specific to the Canadian projects, both continue to encounter work stoppage protocols in Canada associated with COVID mitigation as well as delays attributable to, among other things, wildfires impacting access to work sites.
These dynamics created substantial inefficiencies and production delays resulting in increased project costs.
We are in active discussions with both customers regarding change orders associated with these increased costs, some of which have already been approved with the remaining amounts being pursued in the normal course.
In addition, normal variability in work production and associated payment cycles across our operations contributed to slightly higher DSO in the quarter.
As Duke discussed and as we previously announced, we closed on the acquisition of Blattner on October 13.
Prior to the closing, in September 2021, we issued $1.5 billion aggregate principal amount of senior notes with a weighted average interest rate of 2.12%, receiving net proceeds of $1.48 billion.
Accordingly, as at quarter end, we had approximately $1.7 billion of cash.
Subsequent to the quarter, we amended our credit agreement to, among other things, provide a term loan facility of $750 million, which was fully drawn and combined with the net proceeds from the senior notes offering to fund a substantial majority of the cash consideration payable to the Blattner shareholders at closing.
I'll highlight that our financial strategy and consistent performance have allowed us to maintain investment-grade ratings subsequent to these financing transactions.
From a capital allocation perspective, Blattner represents the largest acquisition in Quanta's history and a strategic opportunity to expand the solutions we deliver to support North America's transition to carbon neutral energy infrastructure.
Capital deployment for strategic acquisitions has always been a key part of our strategy.
But as we've discussed in the past, our first priority for capital allocation remains supporting the working capital and equipment needs of our existing operations.
While the debt issued to support the Blattner acquisition moved our leverage profile above our target range, it remains well below the financial covenant requirements in our credit facility, and we believe we can efficiently delever while continuing to create shareholder value through our dividend and repurchase programs as well as strategic acquisitions.
These incremental transactions further enhance our ability to deliver comprehensive infrastructure solutions to our North American utility and communications customers.
Turning to our guidance.
Our outlook for the remainder of the year reflects the strength of our core utility-backed operation, which continued to deliver solid results with robust year-over-year growth.
However, the results of companies acquired during and subsequent to the third quarter, including Blattner's operations, will be included in our consolidated financial statements, which makes comparability to our previous expectations' challenge.
It should be noted that we are in very early stages of establishing Blattner-specific opening balance sheet, which includes assessing the positions of ongoing projects as of the closing and valuing the tangible and intangible assets acquired.
The result of those ongoing efforts will have a meaningful impact on Blattner's fourth quarter contribution, which we've attempted to address in the range of our fourth quarter expectations for the acquired businesses.
That said, excluding the expected contributions from the recently acquired companies, we now expect full year revenues from our legacy operations to range between $12.15 billion and $12.35 billion.
Due to the strength of our consolidated performance for the first nine months of the year, we are increasing our expectations for the contribution of our legacy operations to adjusted EBITDA to range between $1.17 billion and $1.2 billion, with the midpoint of the range representing an increase over our previous guidance and 13% growth when compared to 2020's record adjusted EBITDA.
As it relates to our current reportable segments, while we continue to evaluate how these changes may change with the addition of Blattner, I wanted to provide some color on our current expectations compared to our previous commentary, again, excluding contributions from the recently acquired businesses.
We continue to expect full year revenues to range between $8.7 billion and $8.8 billion for our legacy electric segment operations.
However, based on the strong performance through the first nine months of the year and continued confidence in our ability to execute on the opportunities across the segment, we've increased our full year margin range for the segment with 2021 operating margins expected to come in slightly above 11%.
Our full year expectations for the Underground Utility and Infrastructure Solutions segment, however, have slightly moderated due primarily to lower third quarter revenue levels than previously expected.
Accordingly, we are reducing our full year expectations for the segment with revenues now expected to range between $3.45 billion and $3.55 billion while segment margins are now expected to range between 4.5% and 5%, which includes a $23.6 million provision for credit loss recognized in the second quarter, a nearly 70-basis-point negative impact on a full year basis.
With regard to the recently acquired companies operations I spoke of earlier, including Blattner, we expect post-closing revenue contributions for the year to range between $400 million and $500 million and adjusted EBITDA, a non-GAAP measure, ranging between $40 million and $60 million.
Accordingly, including the expected contributions from the recently acquired companies, we now expect our consolidated full year revenues to range between $12.55 billion and $12.85 billion and adjusted EBITDA, a non-GAAP measure, of between and $1.21 billion and $1.26 billion.
Corporate and unallocated costs will increase significantly, primarily due to the acquired companies.
We currently estimate amortization expense for the full year will be between $149 million and $159 million, with $60 million to $70 million attributable to the recently acquired companies.
Stock compensation expense for the full year is now expected to be approximately $89 million, with approximately $2 million attributable to restricted stock units issued to employees of the acquired company.
Acquisition and integration costs are expected to be approximately $26 million for the fourth quarter, resulting in approximately $36 million for the year.
This includes approximately $10.5 million of expenses associated with change of control payments awarded to certain employees of Blattner by the selling shareholders, which require expense accounting as they have a one-year service period requirement.
We expect a comparable dollar amount will be accrued each quarter post closing until the one-year anniversary of the transaction, at which time the payments will be made to the employee.
We intend to include this amount as an adjustment to arrive at our adjusted earnings per share and adjusted EBITDA, both non-GAAP measures.
Below the line, we expect interest expense for the year to be around $67 million, which includes approximately $16 million of incremental interest expense associated with debt financing used to fund the cash portion of the Blattner acquisition.
Additionally, we now expect our full year tax rate to be around 24%, reflecting a slight reduction from our prior expectations due primarily to a favorable shift in the mix of earnings between various taxing jurisdictions.
As a result, our expectation for full year diluted earnings per share attributable to common stock is now between $3.20 and $3.40.
And our increased expectation for adjusted diluted earnings per share attributable to common stock, a non-GAAP measure, is now between $4.62 and $4.87.
On a consolidated basis, we now expect free cash flow for the year to range between $350 million and $500 million.
This slight decrease is primarily due to potential timing of payments associated with emergency restoration efforts as well as the likelihood that the dynamics impacting the larger Canadian projects continue to pressure DSO in the fourth quarter.
Additionally, while we expect Blattner will be meaningfully accretive to our cash flow profile on an annual basis, we expect certain favorable billing positions at the time of acquisition could unwind as Blattner incurs costs in the fourth quarter to finish projects for which they've already received payments.
This dynamic could minimize Blattner's cash contribution during the quarter, which we factored into our range of expectations.
As we stated in prior quarters, our quarterly free cash flow is subject to sizable movements due to various customer and project dynamics that can occur in the normal course of operations.
Overall, we continue to believe we are in the early stages of a significant infrastructure investment cycle, and the acquisition of Blattner further differentiates us in the markets we serve and expand our ability to deliver solutions to support North America's transition to carbon neutral energy infrastructure.
We remain confident in our ability to execute against the opportunities in front of us while maintaining the financial flexibility to opportunistically deploy capital to deliver long-term shareholder value. | q3 revenue $3.4 billion.
sees fy adjusted non-gaap earnings per share $4.62 to $4.87 including items.
q3 adjusted non-gaap earnings per share $1.48.
qtrly earnings per share $1.21.
long-term outlook for quanta's business is positive.
now expects revenues to be between $12.55 billion and $12.85 billion for full year of 2021. |
These include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts.
Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA and free cash flow.
Lastly, if you'd like to be notified when Quanta publishes news releases and other information, please sign up for email alerts through the Investor Relations section of quantaservices.com.
We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.
Additionally, we renamed our Pipeline and Industrial segment to Underground Utility and Infrastructure Solutions, which we believe is more reflective of the strategic changes we have made over the past five years to reposition the segment toward a greater level of resilient business services to our gas utility, pipeline integrity and industrial customers.
These services tend to be more visible and recurring in nature and are driven by safety, reliability and environmental regulations.
We continue to expand our capabilities in both segments to provide comprehensive end-to-end solutions with craft skill labor at the core.
We are proud of our successful focus on base business activity over the last five years, which now accounts for more than 90% of our revenues.
We continue to view large projects as upside opportunities and are well positioned to safely execute them when they occur.
Quanta performed well and delivered a solid year in 2020, which includes numerous accomplishments.
This was due to the performance of our field leadership and the people of this organization who continue to be exceptional.
Here are some of the accomplishments in 2020: Electric Power segment revenues achieved record levels, and we earned our best operating margin performance in six years, driven by strong execution across our operations.
Included in these results were record storm response revenues from supporting our customers' efforts to restore power to millions of people adversely impacted by numerous severe weather events during the year.
Our ability to quickly mobilize this level of resources to support our customers in times of need, even during a pandemic is unmatched in our industry.
After an 18-month competitive process, LUMA Energy, our joint venture with ATCO, was selected for a 15-year operation and maintenance agreement to operate, maintain and modernize PREPA's more than 18,000 mile electric transmission and distribution system in Puerto Rico.
LUMA and PREPA are making good progress toward transitioning operations of the system this year, and we continue to believe this opportunity is transformative for Quanta.
We grew our communication services revenue by more than 40%, meaningfully improved profit margins and ended the year with a total backlog of approximately $900 million.
We substantially completed the exit of our Latin American operations, despite the significant challenges and impacts to these wind down activities from the effects of COVID-19.
We continue to lead the industry in safety, which we believe starts with training.
We continue to incrementally invest in our training efforts through our Northwest Line College and Quanta Advanced Training Center.
Additionally, last year, we began site preparation for a new line worker training campus in Puerto Rico that will be operated by Northwest Line college.
The facility will provide world-class training to LUMA's employees and develop Puerto Rico's future craft skill workforce.
Our industry-leading training and recruiting initiatives are driving improved productivity in the field and ensures that we have the very best craft skill labor.
This enhances our ability to collaborate with customers and labor affiliations on future workforce needs and further differentiate us in the marketplace as a strategic solutions provider.
We invested approximately $400 million in strategic acquisition of seven high-quality companies with great management teams that expand or enhance our ability to provide solutions to our customers, are additive to our base business and advance our strategic initiatives.
These companies add to our self-perform capabilities, which typically accounts for approximately 85% of our work and are key to providing cost certainty to our customers.
We believe our approach to acquisitions and our operating model helps derisk our work portfolio through improved execution and results in more consistent earnings.
We strengthened our financial position with the closing of our $1 billion investment-grade senior notes offering, which we believe points to the resiliency and sustainability of our business model and positive multiyear outlook.
We demonstrated our commitment to stockholder value and confidence in Quanta's financial strength and continued growth opportunities through the acquisition of approximately $250 million of common stock and a 25% increase in our dividend.
And finally, the diversity of our services, proactive cost management and execution through significant uncertainty caused by the pandemic and challenged energy markets, allowed our Underground Utility and Infrastructure Solutions operations to perform well under the circumstances.
We are optimistic that the most challenging market conditions are behind us, and we see opportunity for revenue and margin improvement in 2021 and continue to believe the segment can achieve upper single-digit operating income margin as operating conditions further normalize over time.
We believe our strategic position in the marketplace remains strong, and we are well positioned for continued profitable growth over the near and longer term.
Despite unprecedented operating conditions and uncertainties caused by the global pandemic proportions of our business, the strong performance of our Electric Power and Communications Operations resulted in record adjusted EPS, adjusted EBITDA, cash flow and backlog in 2020.
While we are proud of the achievements last year, we remain focused on getting better to ensure that Quanta continues to evolve to effectively collaborate with our customers and business partners and helping them achieve their goals and to capitalize on the opportunities ahead of us.
The recent severe weather conditions that impacted living conditions in Texas and other parts of the country shows how a critical infrastructure that we design, build and maintain is to our everyday well being.
The solutions Quanta provides supports our customers' efforts to increase reliability, safety, efficiency and connectivity, all of which have a favorable environmental and social impact on both the markets that we serve and society.
Additionally, our solutions facilitate policies and goals aimed at the adoption of new technologies and transitioning toward a carbon-neutral economy.
As a result, we believe our business is levered to favorable and sustainable long-term goals.
Our utility customers, who account for more than 70% of our 2020 revenues, are leaders in the effort to reduce carbon emissions with aggressive efforts to modernize and harden their systems, expand their renewable generation portfolios and implement new technologies for current and future needs.
A number of utilities have committed to providing 100% of their power by clean energy or achieving net-zero carbon emissions by 2050.
Achieving these goals will require substantial incremental investment in transmission, substation and distribution infrastructure to interconnect new renewable generation facilities to the power grid and to ensure grid reliability due to the significant increase of intermittent power added to the system.
Further, developed economies are expected to be increasingly driven by electricity to meet carbon reduction goals over time.
Vehicle electrification offers a large carbon reduction opportunity, in addition to residential and commercial space and water heating and industrial and agricultural electrification.
According to a report from the WIRES Group, increased electrification and electric vehicle adoption in the United States could require 70 to 200 gigawatts of new power generation by 2030.
The majority of which is expected to be renewables and could require incremental transmission investment of $30 billion to $90 billion by 2030.
We believe these investment requirements associated with electrification are in addition to the significant multiyear investment programs already in place for the coming years to modernize the existing power grid, to ensure reliable power delivery under current market conditions.
The outlook for our communications operations, which is within the Electric Power segment, remains bright.
We expect to generate approximately $700 million in revenue this year, which would represent approximately 30% growth over 2020.
Our communications services support the technology we use every day for work, education, entertainment, connecting with friends and family, all of which are critically important.
To that end, the effects of COVID-19 have caused communication providers to increase investment in the fiber networks to ensure adequate speed, capacity and reliability to meet these needs.
Additionally, we believe Quanta is well positioned to leverage our Electric Power and communication Solutions capabilities to assist many of our rural and municipal electric customers, who are expected to participate in the rural digital opportunity fund.
This fund provides more than $20 billion to bridge the digital divide that exist for millions of people living in rural America without access to adequate broadband connectivity.
Further, we expect 5G deployments to accelerate in 2021, which we remain well positioned to continue to participate in.
Our Underground Utility and Infrastructure Solutions segment experienced meaningful challenges during the year to the effects of COVID-19, such as shutdowns in certain cities that had short-term impacts on our gas utility services and a significant reduction in demand for refined products that materially impacted our industrial service customers.
As discussed previously, we believe the greatest impact from these dynamics are behind us.
Going forward, we expect to continue our focus on our gas utility, pipeline integrity and industrial services businesses, consistent with our strategy over the last five years due to the favorable long-term trends, driven by safety, reliability and environmental regulations.
Our gas utility services supported with regulated programs that will replace and modernize aging infrastructure, which can be leak prone and post potential safety concerns.
They also support customer efforts to reduce methane emissions and position their gas distribution systems to potentially deliver hydrogen to users in the future.
Our pipeline integrity services seek to ensure that existing pipelines operate safely and in an environmentally friendly manner.
And many of our industrial services support customers compliance with regulations aimed at minimizing environmental impacts caused by methane gas release and increased operational efficiency and safety.
We believe these favorable, safety, reliability and environmental initiatives and long-term industry trends, such as electrifications and technology implementations, will continue to drive growth opportunities for Quanta for the foreseeable future.
Quanta is actively engaged in collaborative conversations with many of our customers about their multiyear, multibillion-dollar programs extending as far as 10 years, regarding how Quanta can provide solutions throughout our customers' value chain to meet their strategic infrastructure investment goals and support of these initiatives.
We believe -- which we believe demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends, our ability to safely execute in our strong competitive position in the marketplace.
Our expectations call for growth in revenues, adjusted EBITDA and earnings per share and improved profit margins.
Additionally, we see opportunity to achieve new record levels of backlog in 2021.
In summary, we generated solid results in 2020 that we believe will reflect the resiliency and sustainability of our business, the benefit of our strong financial position, the successful execution of our strategic initiatives and the excellence of our people.
The challenges we faced and the way we continue to support and collaborate with our customers last year, particularly as it relates to the pandemic, brought out the best of this organization, and I believe, make Quanta stronger.
Overall, our end markets and multiyear visibility are solid, and we have built a strong platform that positions us well to capitalize on favorable long-term trends, particularly the transition toward a carbon-neutral economy and the adoption of new technologies.
Considering our organic growth opportunities and the levers available to us to allocate future cash flow generation into creating opportunities such as stock repurchases, acquisitions, strategic investments and dividends, we believe Quanta will continue to generate meaningful stockholder value going forward.
Quanta is a portfolio of exceptional businesses with geographic and service line diversity.
We are anchored by our commitment to craft skilled labor and our self-perform capabilities.
We are focused on operating the business for the long-term and expect to continue to distinguish ourselves through safe execution and best-in-class build leadership.
We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers.
We believe Quanta's diversity, unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for all our stakeholders.
Today, we announced fourth quarter 2020 revenues of $2.9 billion.
Net income attributable to common stock was $170.1 million or $1.17 per diluted share and adjusted diluted earnings per share, a non-GAAP measure, was $1.22.
Overall, the fourth quarter closed out another exceptional year of operational performance for Quanta, a year in which we delivered record results across multiple metrics despite headwinds faced related to the pandemic.
Our Electric Power revenues, excluding Latin America, were $2.11 billion, a 15.7% increase when compared to the fourth quarter of 2019.
This increase was driven by mid single-digit growth in our base business, increased contributions from the timing of certain larger projects and $75 million in revenues from acquired businesses.
Contributing to the base business growth was approximately 13% growth from our communications operations and record fourth quarter demand for our emergency restoration services of approximately $150 million, primarily associated with efforts to restore infrastructure in the Southeastern and Midwestern United States, although it came at the expense of certain other work in progress.
Partially offsetting these increases was the expected reduction in fire hardening work in the Western United States during 4Q '20 as compared to 4Q '19.
Electric segment margins in 4Q '20 were 11.6%.
And excluding our Latin American operations, segment margins were 12.9% versus 9% in 4Q '19.
The robust operating margins were driven by increased profit contributions from the elevated emergency restoration services, which typically present opportunities for higher margins due to higher equipment utilization and fixed cost absorption as well as improved margins in our Canadian operations, primarily associated with certain larger transmission projects.
However, although difficult to calculate the direct incremental effects, excluding revenues and profit from storm response efforts, our margins were still comfortably in double digits, reflecting continued strong execution across all of our Electric Power operations.
Of note, our communications margins continue to improve against the prior year with a margin of 9% during the quarter.
Regarding our Latin American operations, included within the Electric segment, we have substantially completed the wind down activities required to exit those markets.
Our year-long effort to shut down our operations across the region was significantly impacted by COVID-19 dynamics as well as political and regulatory uncertainties and customer challenges, all of which contributed meaningfully higher losses than anticipated.
In the fourth quarter, we took the additional step of reserving remaining property, equipment and inventory assets as the uncertain market conditions minimize likely recoveries upon disposition.
As a reminder, we currently receive no tax benefit for losses in Latin America, so the $27 million in losses impacted the quarter by approximately $0.19.
With minimal contractual obligations remaining, we feel comfortable that other than arbitration updates on the terminated Peruvian Communications Network Project, we will no longer provide commentary on Latin America.
Revenues from our underground utility and infrastructure Solutions segment were $806 million, 36% lower than 4Q '19.
Similar to prior quarters, expected reduced contributions from larger diameter pipeline projects contributed to the decline.
The variability attributable to larger pipeline projects is why we've taken strategic steps to reposition our service offerings around more predictable utility-backed revenue streams.
While we remain well positioned to opportunistically deploy resources for larger pipeline projects, we expect most future work will consist of smaller pipeline transmission and integrity-oriented projects.
Additionally, the lingering negative impacts of COVID-19 have reduced some level of demand for broader services across the segment with the reduction in demand for refined products substantially contributing to reduced quarter-over-quarter revenues from our industrial operations.
Operating margins for the segment were 5.1%.
these margins were 190 basis points lower than 4Q '19, primarily due to reduced revenues as well as some degree of execution challenges during the quarter and costs associated with the exit of certain ancillary pipeline operations.
These negative impacts were partially offset by net positive project closeouts, primarily driven by the recognition of previously deferred suspension and milestone payments and the reduction of remaining contingency balances associated with the Atlantic Coast pipeline project, which was officially terminated on December 31, 2020.
Our total backlog was $15.1 billion at the end of the fourth quarter, slightly higher than 4Q '19 and comparable to the third quarter of 2020, yet remains at record levels.
12-month backlog of $8.3 billion is an increase from both the fourth quarter of 2019 and the third quarter of 2020.
As a reminder, the LUMA joint venture is accounted for as an equity method investment, and therefore, does not contribute to revenue and is not included in backlog.
However, assuming an operating margin profile consistent with our Electric Power operations, LUMA's contribution over the 15-year operation and maintenance agreement would imply a backlog equivalent of more than $6 billion for Quanta.
For the fourth quarter of 2020, we generated free cash flow, a non-GAAP measure of $200 million.
And although $381 million lower than 4Q '19, it was higher than we anticipated, driven by stronger profits in the quarter and a cash cycle consistent with our third quarter results.
For the year, we generated record free cash flow of $892 million.
Days sales outstanding, or DSO, measured 83 days for the quarter, which was comparable to the third quarter of 2020 and fourth quarter of 2019.
Cash flows in the fourth quarter and full year 2020 did partially benefit from the deferral of $37 million and $109 million of employer payroll tax payments permitted by the CARES Act with the payments due in equal installment at the end of 2021 and 2022.
We had $185 million of cash at the end of the year with total liquidity of $2.2 billion and a debt-to-EBITDA ratio, as calculated under our credit agreement, of approximately 1.2 times.
We continue to deal with some level of COVID-19 uncertainty as we assess the near-term prospects of our operations, primarily in our underground utility and Infrastructure Solutions segment, and we remain prudent with our expectations for 2021.
However, as we look ahead to 2021 and beyond, we see the base business propelling multiyear growth opportunities for both segments.
Electric segment revenues grew to $7.8 billion at the end of 2020, and we continue to see our base business providing mid-single to double-digit growth opportunities, coupled with some degree of increased contributions from larger projects, primarily associated with previously announced projects in Canada.
In the aggregate, we expect Electric Power revenues to range between $8.3 billion and $8.5 billion, which includes expected revenues from our communications operations of around $700 million.
As it relates to Electric Power segment revenue seasonality, we expect revenue growth in each quarter of '21 compared to 2020, with quarter-over-quarter growth in the first and second quarters, potentially exceeding 10%.
We expect first quarter revenues to be the lowest of the year due to normal seasonal weather dynamics impacting certain construction activities.
We expect the high end of our revenue range to represent greater revenue growth opportunities in the third and fourth quarters relative to 2020.
We expect 2021 operating margins for the Electric Power segment to range between 10.1% and 10.9%, which includes contributions of approximately $29 million or $0.20 per share from the LUMA joint venture and earnings from other integral unconsolidated affiliates.
LUMA is expected to contribute around $9 million in the first half of the year and then increasing in the back half of the year as we exit the front-end transition services period.
Although we are proud of our overall Electric Power performance in 2020, our 11.6% margins, excluding Latin America, are above historical averages and are the highest since 2013, due in part to record annual emergency restoration service revenues of $450 million.
As outlined in our accompanying slides, our 2021 expectation for margins for this segment are consistent with historical averages and are also based on expectations for more normalized emergency restoration service revenues of approximately $200 million, also in line with historical averages.
As is typically the case, we expect that first quarter operating margins will be the lowest for the year, possibly slightly below 10%.
However, we expect margin to increase into the second and third quarters and then slightly decline in the fourth quarter.
We believe communications operating income margins, which have been dilutive to segment margins in prior periods, could be at parity with electric operations on a full year basis.
The underground utility and Infrastructure Solutions segment continues to be impacted by COVID-19 and the challenging energy market conditions.
However, we are anticipating upper single-digit to double-digit revenue growth off of 2020 with full year revenues expected to range between $3.65 billion to $3.85 billion.
Over 90% of our revenue expectations for 2021 represent base business with larger projects representing their lowest level of contributions in the last seven years.
From a seasonality perspective, we see first quarter revenues being our lowest for the year, likely more than 20% lower than the first quarter of 2020.
This decline is primarily due to significantly reduced industrial service revenues compared to the record results in 1Q '20, as industrial customers are still dealing with lower demand stemming from decreased global travel activity associated with the pandemic as well as reduced contributions from larger pipeline projects.
Revenue should then increase sequentially into the third quarter than seasonally decline in the fourth quarter.
Quarterly revenues for the second through the fourth quarters are expected to be higher on a quarter-over-quarter basis as compared to 2020 with double-digit growth expected for each quarter.
Operating margin improvement for the segment continues to be a focus for us.
We see segment margins ranging between 5.5% and 6%, led primarily by continued execution within our gas LDC operations.
Our full year margin expectations include a breakeven contribution from our industrial services operations in 2021 due to the continued challenging environment.
However, to put our current segment margin guidance in context, if our industrial operations contributed at historical pre-COVID margin levels, our segment margin guidance would increase by over 100 basis points.
Consistent with years past and similar to Electric Power, our first quarter traditionally has lower activity in the segment due to weather seasonality, which impacts our revenues and pressures margins.
With current inclement weather across much of the U.S., further pressuring those operations, we expect first quarter margins between breakeven and a small loss.
However, we expect solid improvement into the second and third quarters with a seasonal decline in the fourth quarter.
These segment operating ranges support our expectation for 2021 annual revenues of $11.95 billion to $12.35 billion, and adjusted EBITDA, a non-GAAP measure, of between $1.09 billion and $1.19 billion.
This represents 8% growth at the midpoint of the range when compared to 2020's record adjusted EBITDA.
With these operating results, we estimate our range of GAAP diluted earnings per share attributable to common stock for the year to be between $3.16 and $3.66, and anticipate non-GAAP adjusted diluted earnings per share to be between $4.02 and $4.52.
Turning to cash flow.
We expect free cash flow for 2021 to range between $400 million and $600 million with the standard disclaimer that quarterly free cash flow is subject to sizable movements due to various customer and project dynamics that occur in the normal course of operations.
Included in our free cash flow expectation is the anticipated payment of $54 million in the fourth quarter related to payroll taxes that were deferred in 2020.
As we have discussed during prior investor events, our cash flow generation moves counter to our revenue growth rate.
For instance, a large driver of our significant free cash flow in 2020 was reduced revenues of approximately $900 million compared to 2019, decreasing working capital needs.
However, higher revenue growth, like we're guiding for 2021, will like to require a meaningful investment in working capital to support the growth.
While our 2021 free cash flow may be negatively impacted by increased working capital required to support our return to 2019 revenue levels, we believe the consistent, sustainable growth profile and solid margins of our base business provides for repeatable levels of free cash flow generation in line with our 2021 guidance in future periods.
Looking back on our 2020 performance, although there were headwinds to the year, we ended the year with $11.2 billion in revenues, which represents an 8.1% revenue CAGR since 2015.
More importantly, we ended the year with slightly over $1 billion of adjusted EBITDA, a record for Quanta and equal to our goal established five years ago, which represents a nearly 15% CAGR since 2015.
Lastly, our record adjusted earnings per share of $3.82 represents a 28% CAGR since 2015, with our adjusted earnings per share growing faster than profits, which are growing faster than revenues.
Over the last five years, we have deployed approximately $1.4 billion in cash for M&A and strategic investments and $760 million for stock repurchases.
While we acquired $250 million of common stock in 2020 and $7 million of common stock through February 24, 2021, we have approximately $530 million of availability remaining on our current stock repurchase program.
Our first capital priority remains supporting the growth of our business through working capital and capital expenditures, however, we remain committed to the deployment of remaining available capital to stockholders through our stock repurchase and dividend programs, and we continue to expect opportunistic acquisitions.
Our $1 billion bond offering in 2020 established a fixed level of debt that nicely complements our current EBITDA profile, which we believe is a repeatable, sustainable baseline of earnings.
Simultaneously, we secured an expanded credit facility, further enhancing our ability to meet incremental capital needs.
Overall, we remain confident in the strength of our operations, our prospects for profitable growth and the repeatable and sustainable nature of our core markets.
We've developed a platform for Quanta to capitalize on the trends driving the spend in our markets, and we firmly believe delivering base business solutions through world-class craft skill labor, opportunistic larger project deployments and continued balance sheet strength will be the key to delivering long-term shareholder value. | q4 earnings per share $1.17.
q4 adjusted non-gaap earnings per share $1.22.
expects 2021 revenues to range between $11.95 billion and $12.35 billion.
expects 2021 earnings per share to range between $3.16 and $3.66 and adjusted earnings per share to range between $4.02 and $4.52. |
Today, we will be discussing our strong first quarter results and the highly accretive acquisition of DoublePoint Energy that leads to a stronger outlook with significant free cash flow generation.
We will also detail the high level of execution our teams continue to deliver and the top-tier ESG standards to which we adhere.
Pioneer delivered a very strong first quarter, generating free cash flow of approximately $370 million when adjusted for partially acquisition cost.
You can see that we increased our 2021 estimated free cash flow up to about $2.7 billion.
That's at strip pricing, which includes the contribution for the very accretive acquisition at DoublePoint and obviously, higher commodity prices as the strip continues to move up.
You can see the magnitude of the synergies, $525 million, which will improve our free cash flow generation, which will be highlighted on a subsequent slide.
And again, we'll remain focused on environmental stewardship and minimize flaring through our operations.
Lastly, you can see now with DoublePoint, we're the largest producer in the Permian.
That brings lower cost of capital, economies of scale, shared facilities and infrastructure.
And going into 2022, the company will be over 700,000 barrels of oil equivalent per day just in the Permian Basin in 2022.
Going to slide number four.
I think the key point here, solid execution from all levels of operation and our field drive strong first quarter results.
Again, the outperformance have exceeded the top end of guidance, oil production, was due to our field staff, bringing our production back online sooner, in the wake of the winter storm and also the outperformance of new wells.
Going to slide number five.
As Neal mentioned, we closed yesterday on our DoublePoint acquisition, approximately 100,000 acres right in the heart -- core of the core of the Midland Basin.
This will take our Midland Basin on up to over 900,000 net acres.
This transaction generates double-digit free cash flow on accretion per share, enabling increased variable dividends over the next several years.
Now with the contiguous acreage and the operational synergies, just to give you an idea how dominant we are in the Midland Basin, we'll have 25% of the basin rig count and 25% of the basin frac fleet rig count.
Again, allow us for continued synergies, drilling longer laterals on which Rich will talk about later.
Going to slide number six, long-term investment thesis.
When you look at the strip, last year -- I mean, of the strip over the next several years as it continues to move up and look at our model of growing oil production 5% per year over the next several years, our reinvestment rate will actually be below, we say 50 to 60% here.
It'll actually be below 50%.
We generate strong corporate returns, double-digit returns.
We'll continue to reduce our leverage.
It's at one today.
We'll continue to reduce it below 0.75 next year and continue to drive it down to a very, very low level.
We remain committed to our -- really, our key thesis and returning most of our capital back to the shareholders.
So we're targeting a 10% total return.
We'll talk more about that later.
Going to slide seven, compelling free cash flow generation.
We're showing now, with DoublePoint Energy on top in the brighter -- darker blue color, adding about $5 billion of free cash flow over the next several years to 2026, increasing our total free cash flow at the company.
With the strip, and this is a strip a few days ago.
So the number continues to move up with the strip moving up, generating $23 billion of free cash flow.
As we have already stated, approximately -- this actually represents 50% of our current enterprise value, that 20 -- total enterprise value, including market cap plus debt.
The addition of DoublePoint is a 25% increase on top of our free cash flow.
That's taken the $5 billion over the $23 billion -- $5 billion over $23 billion.
I think what's key is that when you look at the current stock price, our dividend yield will move up from 1.5% to over 4% in 2022 and over 8% in the following years to 2026.
That's at the current stock price.
I do have to have a call out for Devon and Rig's great slide, comparing their dividend to peers, I think we're in there around 1.5% toward the bottom quartile.
They're showing them leading this year at 7%.
Pioneer will move to second place next year, moving over 4, and then moving up to the top spot above Devon.
And the primary driver is really just our low -- our margins in the high 20s, our low-cost basis in addition to the fact that we're paying out 75% of our cash flow versus Devon's 50%.
Going to slide number eight.
Again, just emphasizing the variable dividend long-term shareholder return model.
Last quarter, we initiated the mechanics of it.
Mechanics will be paying out long term, roughly 75% of the remaining annual free cash flow after the base dividend is paid.
When you look at -- including the base dividend, approximately 80% of the company's free cash flow is expected to be returned to shareholders.
Between the base and the variable dividend, shareholders next year will -- should expect eight separate dividend checks per year.
Obviously, this is all subject to our Board approval, like we do on the base dividend and the variable dividend.
I'm going to start on slide number nine.
And with the closing of the DoublePoint transaction yesterday, we wanted to provide an updated outlook for our 2021 production and capital.
As Scott mentioned, DoublePoint is currently producing at 92,000 BOEs per day, and we expect to ramp them up to about 100,000 BOEs per day by the end of the quarter and with an additional 20 to 25 POPs planned between now and quarter end.
We plan to maintain that production, 100,000 BOEs a day for the second half of the year.
And so that's embedded in our updated guidance.
And we also have adjusted our guidance to reflect the actual results for Q1 where we were able to recover production from the winter storm quicker-than-anticipated and along with the Q1 strength of our well performance and execution by our operating teams.
So overall, we are forecasting 2021 production of 351,000 barrels of oil per day to 366,000 barrels of oil per day.
And on a BOE basis, 605,000 to 631,000.
Looking at capital, we are adding $530 million to $570 million of incremental capital related to the DoublePoint transaction over the course of the remainder of the year.
This is up from the bottom of our previous announcement since we were able to close the transaction earlier than originally anticipated.
Total capex is now projected at $2.95 billion to $3.25 billion on cash flow of about $5.9 billion based on strip prices, which is leading to what Scott talked about, $2.7 billion of free cash flow for the year.
Turning to slide 10.
You can see our -- for a full year, that we plan to average 22 to 24 rigs and deliver 470 to 510 POPs.
If you take that just for the remainder of the year, we plan to run with the addition of DoublePoint, 24 to 26 rigs and seven to nine frac fleets.
Currently, we're at 26 rigs and nine frac fleets.
This does reflect the fact that we do plan on reducing DoublePoint rig count from seven to five by year-end.
And longer term, as we think about reducing our growth rate from 30% down to 5%, we can drive that down to three to four rigs as we are consistent with our 5% growth plan over the long term.
You can see on the map there over one million acres, predominantly in the Midland Basin, 920,000 and 100,000 acres in the Delaware.
In terms of Delaware plans, we will start drilling our first well later this year.
The team is looking forward to bringing that same efficiency gains that we've achieved in the Midland Basin to the Delaware and see how we can further improve our wealth returns, especially given the higher oil cut that we see in Delaware and the lower royalty burden.
And just for a point of reference, first quarter production was 74% oil in the Delaware.
Turning to slide 11.
I want to provide an update on our planned synergies related to the Parsley and DoublePoint transactions.
On G&A, we've accomplished $100 million of Parsley savings.
So that's -- we checked that box.
As it relates to DoublePoint, they're running about $25 million annually in G&A.
We expect to bring that under $10 million on an annual basis, and we think we'll be there beginning of the third quarter of 2021.
On interest, we refinanced Parsley's bonds in January.
If you recall, those were over 5% coupon.
We refinanced those on a weighted average base well under 2%.
And we plan on refinancing the DoublePoint volumes later this month.
So along with paying off DoublePoint's credit facility that happened yesterday, we're going to accomplish our interest savings sooner than we originally anticipated, and we'll have that fully done by the end of this month.
On operational synergies, we are making great progress on those.
We've been able to leverage our supplier relationships and are seeing significant savings on things of like pressure pumping, wireline, cement, casing and tubulars to name a few examples.
We've also, and Joey will talk more about this, successfully tested simulfrac on our acreage during the first quarter, and we're seeing significant savings like the industry -- other industry participants in that $200,000 to $300,000 per well.
So this is something that we'll be able to not only execute across Pioneer's acreage, but we'll also be able to execute that, I guess, across Parsley's and DoublePoint's acreage.
The team has also continuing to optimize our development plans to take advantage of existing facilities.
So looking at tank batteries, water disposal, salt water disposal gathering system, reuse facilities and really optimizing those as we move into the 2021 -- 2022 program, sorry, to really take advantage of those savings.
And then as Scott mentioned, one of the other significant benefits of combining Parsley and DoublePoint is really adding to our contiguous acreage position.
And what this allows us to do, is we've successfully drilled longer laterals out to 15,000 feet, really up from the 9,000 to 10,000 feet that we've been drilling at, really allow for a lot of locations that we can drill longer laterals on, which is much more capital efficient and really adding essentially the same production by drilling fewer wells.
So it's still early, but it should add significant long-term value across our portfolio and just demonstrates the benefit of having contiguous blocking acreage to be able to drill that type of laterals.
Turning to slide 12.
Really, this just reflects our trend of what we've accomplished on G&A over the past three years, including the synergies from the acquisitions.
We are forecasting G&A per BOE to be around $1.15 to $1.20 by year-end.
And so, I think this is just an example of, really -- and highlights the focus of the company's had on improving returns and improving our return of capital to shareholders.
So it's really lowering our overall cost structure.
So you've seen us drive down well costs, lower LOE, lower G&A per BOE, lower interest per BOE, all with the idea of improving our free cash flow profile.
With that, I'll turn it to Neal to talk about breakevens.
On slide 13, you can see how Pioneer's high-quality asset base positions us as the only E&P to realize a corporate breakeven below $30 a barrel WTI within our peer group.
As Scott stated earlier, it's this attractive peer-leading breakeven oil price that enables Pioneer's low investment rate and drive significant free cash flow generation and return of capital to our shareholders.
This low breakeven price reflects the quality and the resilience of Pioneer's portfolio, underpinning our operational and financial strength and flexibility.
I'm going to be starting on slide 14.
Our drilling and completions teams continued their streak of resetting the bar with another great quarter of efficiency gains.
Our simulfrac operations contributed to these gains with the successful execution of four pads in Q1, where we were able to achieve approximately 3,000 feet of completed lateral per day.
This is greater than a 50% improvement when compared to our program average.
It's still early days, but we estimate savings to be in the range of $200,000 to $300,000 per well.
We will continue to refine our simulfrac operations and conduct more trials throughout the second quarter.
You will note that our wells per pad projection for 2021 is down slightly from last quarter, and this is due to the integration of DoublePoint pads into our schedule.
Still, our wells per pad continues to increase, which further contributes to our efficiency gains.
I know this slide only illustrates improvements in drilling and completions, so I want to emphasize that we are also seeing tremendous performance in our production operations, facilities, construction and water management teams, and none of this would be possible with those that support development planning, our robust supply chain and our expanding use of technology.
We remain focused on delivering peer leading performance, keeping our people safe and reducing our environmental footprint.
And so congratulations to all the teams for their contributions to our safe and efficient execution in Q1.
I'm now going to go to slide 15.
I know that Scott covered this in some detail last quarter, so I'll be brief.
So this chart represents more than 64 million barrels of hydrocarbon liquids per day, including the largest national oil companies, majors and independents.
Pioneer's operations produced barrels with one of the lowest associated CO2 emissions intensities globally.
Our low-cost, low-emissions barrels will continue to be desired around the world.
On slide number 16, the strong focus on ESG.
Pioneer continues to hold all pillars of ESG of great importance.
We've talked about our new sustainability report released late last year, which reflects our significant strides in reducing both Scope one and Scope two greenhouse gas and methane emissions, and incorporates emissions intensity reduction goals on both.
Pioneer inclusive of Parsley is a very low flaring intensity of 0.4% compared to peers of 1.3%.
We will also work to bring DoublePoint's assets in line with Pioneer's high standards of environmental stewardship.
We also continue to promote a diverse workforce, all the way up to the Board level, which reflects the community in which we live and work.
Again, on slide 17, we're really committed to driving value for our shareholders and returning cash flow back to the shareholders over the next several years.
We'll stop there and open it up for Q&A. | for 2022, company expects to distribute up to 50% of 2021 free cash flow, after payment of base dividends.
expects its 2021 drilling, completions and facilities capital budget to range between $2.95 billion to $3.25 billion.
during 2021, company plans to operate an average of 22 to 24 horizontal drilling rigs in permian basin. |
I am Jessica Doran, Chief Financial Officer.
If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.
Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.
In addition, please be advised that due to prohibitions on selective disclosures we do not as a matter of policy disclose material that is not public information on our conference call.
Last quarter, my remarks centered on the extreme volatility on the market during March that has only happened once before during the Great Depression.
Here we are three months later and volatility has moderated and optimism has returned.
During the second quarter, the S&P 500 continued to rise on the growing dominance of the FANG stocks which now represent almost 13% of the index's market cap and 4.3% of the 500 companies earnings.
Well we have generally outperformed the markets from the bottom, we still lag behind the indices over longer periods of time raising age old questions.
Is value investing broken?
If value was supposed to protect on the downside, why does it appear to be so much more volatile?
Given these questions, we wrote a white paper this quarter with these two hypotheses.
First, while recent extreme volatility has made value investing look bad today, long-term investors should match their investment horizon which -- with the period over which they measure volatility.
It just seems illogical to us to compare long-term returns with monthly volatility, which is what most every investor does.
And the second, value investing looks bad today, because the endpoint is so distorted.
The idea, that's something has changed that makes value investing different than in the past is not defensible.
The practice of value investing is simply to take advantage of undervaluation created by investors emotional overreaction to recent events.
We believe there are opportunities to exploit these valuation anomalies without taking excessive risk.
Our study showed that while value strategies tend to have higher short-term volatility than the market, our long-term returns are actually less volatile than the markets.
Further, while strategies long-term track record is commonly used to measure manager skills, it has notable flawless.
In particular, return data are highly influenced by their starting and ending points.
Once a manager has run a consistent investment process for many years, we can look at the average experience over time periods and remove the vagaries of starting and ending points.
15 months ago our focus value strategy posted the best absolute 10 year performance record in its history.
While our most recent 10 year history is more representative of our long-term average.
Meanwhile, the S&P 500s most recent 10 year record is substantially above it's average and appears to be anomalously high.
When we calculate a sharp ratio using our recent performance record and our higher short-term volatility, our investment skill appears questionable versus the S&P 500.
However, when we do the same calculation using average 10 year returns and the volatility of those 10 year returns, we see a completely different picture which one actually represents our true investment skill after 25 years of deep value investing.
Just a word about our business.
We finished the quarter with approximately $400 million in net outflows.
Those two for us are notoriously bumpy.
For the previous 12 months, we had net positive flows of approximately $300 million.
And for the last three calendar years we had positive net flows.
We attribute this milestone win to our new clients acknowledgment that we will not deviate from our value discipline, and that such commitment is necessary to achieve long-term investment success.
We reported diluted earnings of $0.13 per share for the second quarter compared to zero last quarter and $0.18 per share for the second quarter of last year.
Revenues were $30.1 million for the quarter and operating income was $11 million.
Our operating margin was 36.4% this quarter, increasing from 32.1% last quarter and decreasing from 46.4% in the second quarter of last year.
Taking a closer look at our assets under management.
We ended the quarter at $31.5 billion, up 17.5% from last quarter, which ended at $26.8 billion and down 15.5% from the second quarter of last year which ended at $37.3 billion.
The increase in assets under management from last quarter, was driven by market appreciation including the impact of foreign exchange of $5.1 billion, partially offset by net outflows of $0.4 billion.
The decrease from the second quarter of last year reflects $6.1 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows of $0.3 billion.
At June 30, 2020, our assets under management consisted of $13 billion in separately managed accounts.
$16.4 billion in sub-advised accounts and $2.1 million in our Pzena Funds.
Compared to last quarter, assets under management across all channels increased with separately managed account assets reflecting $2 billion in market appreciation and foreign exchange impact and $0.2 billion in net inflows.
Sub-advised account assets reflecting $2.8 billion in market appreciation and foreign exchange impact, partially offset by $0.7 billion in net outflows.
And assets in Pzena Funds being $0.3 billion in market appreciation and $0.1 billion in net inflows.
Average assets under management for the second quarter of 2020 were $29.8 billion, a decrease of 15.8% from last quarter and a decrease of 19.7% from the second quarter of last year.
Revenues decreased 13.1% from last quarter and 20.4% from the second quarter of last year.
The decreases from last quarter and the second quarter of last year primarily reflects the decrease in average assets under management.
During the quarter, we did not recognize any performance fees, similar to last quarter and compared to $0.3 million recognized in the second quarter of last year.
Our weighted average fee rate was 40.4 basis points for the quarter, compared to 39.1 basis points last quarter and 40.8 basis points for the second quarter of last year.
Asset mix and the impact of swings in performance fees and fulcrum fees are all contributors to changes in our overall weighted average fee rate.
Our weighted average fee rate for separately managed accounts was 55.2 basis points for the quarter, compared to 52.6 basis points last quarter and 54.5 basis points for the second quarter of last year.
The increase from the first quarter of 2020 reflects the addition of assets to strategies that typically carry higher fee rates.
Our weighted average fee rate for sub-advised accounts was 26 basis points for the quarter, compared to 26.6 basis points for last quarter and 28.7 basis points for the second quarter of last year.
The weighted average fee rate for the quarter reflects the reduction in the base fees of certain accounts related to the fulcrum fee arrangements of one client relationship.
These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allows for a performance fee if the strategy outperforms that benchmark.
During each of the second and first quarters of 2020, we recognized $1 million reduction in base fees related to these accounts, compared to a $0.5 million reduction in base fees during the second quarter of last year.
These fees are calculated quarterly and compare relative performance over a three-year measurement period.
To the extent the three-year performance record of this account fluctuates relative to its relevant benchmark, the amount of base fees recognized may vary.
Our weighted average fee rate for Pzena Funds was 65.9 basis points for the quarter, increasing from 62.5 basis points last quarter and decreasing from 69.4 basis points for the second quarter of last year.
The increase from the first quarter of 2020 reflects inflows into funds that generally carry higher fee rates.
The decrease from the second quarter of 2019 reflects an increase in fund expense cap reimbursements which are presented net against revenue.
Looking at operating expenses, our compensation and benefits expense was $15.6 million for the quarter, decreasing from $19.1 million last quarter and from $16 million for the second quarter of last year.
The decrease from the first quarter reflects the absence of the cost of employee departures and expenses associated with tax payments and the company's employee profit sharing and savings plan, which generally do not recur during the year.
The decrease from the second quarter of 2019 reflects the decrease in the bonus accrual.
G&A expenses were $3.6 million for the second quarter of 2020, compared to $4.4 million last quarter and $4.3 million for the second quarter of last year.
The decrease from last quarter and the second quarter of last year primarily reflects the reduction in travel costs and professional fees.
Other income was $3.2 million for the quarter, driven primarily by the performance of our investments.
The effective rate for our unincorporated and other business taxes was 4.1% this quarter compared to 29.9% last quarter and 4.3% in the second quarter of last year.
We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3% and 5% on an ongoing basis.
Our effective tax rate for our corporate income taxes ex-UBT and other business taxes was 26.6% this quarter, compared to our effective tax rate of 100% last quarter and 23.8% for the second quarter of last year.
We expect this rate to be between 23% and 25% on an ongoing basis.
The allocation to the nonpublic members of our operating company was approximately 77.7% of the operating company's net income for the second quarter of 2020, compared to 74.5% both last quarter and in the second quarter of last year.
The variance in these percentages is the result of changes in our ownership interest in the operating company.
During the quarter, through our stock buyback program, we repurchased and retired approximately 266,000 shares of Class A common stock for $1.4 million.
At June 30, there was approximately $11.2 million remaining in the repurchase program.
At quarter end, our financial position remains strong with $33.1 million in cash and cash equivalents as well as $7.3 million in short-term investments.
We declared a $0.03 per share quarterly dividend last night.
We'd now be happy to take any questions. | q2 gaap earnings per share $0.13.
q2 revenue fell 20 percent to $30.1 million. |
If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.
Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.
In addition, please be advised that due to prohibitions on selective disclosures, we do not, as a matter of policy, disclose material that is not public information on our conference calls.
That's always been obvious investment strategy favored at the end of every cycle.
These are really just select the few dominant technology masters of the universe that everyone loves, sit back and enjoy the multiple expansion.
Meantime, valuation spreads between cheap and expensive have reached all-time highs all over the world.
Further, the volume of questions about whether value will ever work again or whether there is a new definition of value have been -- have become commonplace.
This is reminiscent of the late 1990s Internet bubble, when Michael Lewis' 1999 book, The New New Thing, described it all you needed to know.
Investors then like investors today, were mesmerized.
But values day is coming, paying less than the present value of future cash flows remains a winning strategy for long-term investment success, and the environment today makes this path even more attractive than normal.
We would argue that the seeds for unwinding today's extremes are right in front of us, especially as our COVID dominated world has led us into a recession, that history shows it's the key marker for the shift.
Considering the following four possible catalysts that could already be signaling that a shift is upon us.
First, the recession is in place and the path toward economic recovery is becoming clear.
We examined recessions in the U.S. over the last 100 years and in Japan over the last 45 years, and the evidence is compelling.
The U.S. experienced 14 recessions during the past century.
I'm looking at the five year returns, measuring from the beginning of the recession, the value outperformed the broad market by an average of 5% per year.
Second, interest rates stop falling, bringing multiple expansion from growth stocks to an end.
Interest rates have been in structural decline for the past 40 years.
The trend has led us to a world where you can buy value stocks at PEs of 10 just like at any time in the past 70 years, while average growth stock multiples have doubled from 30 times to 60 times earnings.
Even if rates don't rise, the tailwind enjoyed by growth stocks should dissipate.
Exuberant growth expectations for the technology masters of the universe revert to normal.
Consider the math using Microsoft as an example.
Microsoft's stock price is up ten-fold during the past 10 years.
That's 25% per year, helped by strong growth in cloud technology replacing on-premises hardware demand.
This has led to 8% annual growth in operating income.
To get an 8% annual stock price appreciation going forward given Microsoft's high multiple would now require 20 years of 10% operating income growth.
But considering that, market analysts estimate that public cloud penetration of data needs has reached 30% to 35%, and that the possible maximum penetration for the public cloud would be approximately 70%.
We're about halfway to saturation.
So where will 20 years of growth come from?
We have yet to see.
And finally, the conventional wisdom that technological change comes entirely at the detriment of the existing franchises proves to be mistaken.
Let's consider the case of electric cars and Tesla versus VW.
Conventional wisdom and stock price suggest that the answer is obvious, Tesla will win.
But even if Tesla grows, does it make sense that VW has to shrink?
Tesla's stock is one of the darlings rising over ten-fold during the past five years.
VW's stock on the other hand has barely changed in the same period.
But there are ultimately only two ways to win an auto manufacturing.
One, charge higher prices.
In other words, maintain a brand premium or two, manufacture at lower costs.
It seems inevitable, but these truths will apply to electric vehicles and that VW will succeed importing their brands strengths, think Porsche and Audi and scale advantages into the electric vehicle competition.
In fact, VW leads all competitors in the number of new electric vehicles that will be introduced over the next several years.
Turning to the business front, we finished the quarter with approximately $1.1 billion in net inflows.
For the previous 12 months, we had net positive flows of approximately $2.1 billion.
In fact, we have had positive net flows for each of the last three calendar years and six of the last eight years.
No small feat in a world questioning the efficacy of value investing.
We reported diluted earnings of $0.16 per share for the third quarter compared to $0.13 last quarter and $0.19 per share for the third quarter of last year.
Revenues were $33.9 million for the quarter and operating income of $15 million.
Our operating margin was 44.1% this quarter, increasing from 36.4% last quarter and decreasing from 46.3% in the third quarter of last year.
Taking a closer look at our assets under management, we ended the quarter at $33.3 billion, up 5.7% from last quarter, which ended at $31.5 billion and down 7% from the third quarter of last year, which ended at $35.8 billion.
The increase in assets under management from last quarter was driven by net inflows of $1.1 billion, as I've just mentioned, and market appreciation including the impact of foreign exchange of $0.7 billion.
A decrease from the third quarter of last year reflects $4.8 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows of $2.1 billion.
September 30, 2020, our assets under management consisted of $13.3 billion and separately managed accounts, $18 billion in sub-advised accounts and $2 billion in our Pzena funds.
Compared to last quarter, separately managed account assets increased, reflecting $0.4 billion in market appreciation and foreign exchange impact, partially offset by $0.1 billion in net outflows.
Sub-advised account assets increased, reflecting $1.3 billion in net inflows and $0.3 billion in market appreciation and foreign exchange impact, and assets in Pzena funds decreased slightly to $0.1 billion in net outflows.
Average assets under management for the third quarter of 2020 were $33.1 billion, an increase of 11.1% from last quarter and a decrease of 8.1% from the third quarter of last year.
Revenues increased 12.7% from the last quarter and decreased 8.4% from the third quarter of last year.
The fluctuation in revenues primarily reflects severance [Phonetic] and average assets under management over the period as well as the impact to performance fees and fulcrum fees recognized.
During the quarter we did not recognize any performance fees similar to last quarter when compared to $0.3 million recognized in the third quarter of last year.
The third quarter also reflects a reduction in the base fees of certain accounts related to the fulcrum fee arrangements of one client relationship.
These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allows our performance fee if the strategy outperforms its benchmark.
During the third and second quarters of 2020, we recognized $1 million reductions in base fees related to these accounts compared to $0.5 million reduction in base fees during the third quarter of 2019.
These fees are calculated quarterly and compare relative performance over a three year measurement period.
To the extent that three year performance record at this account fluctuate relative to its relevant benchmark, the amount of base fees recognized may vary.
Our weighted average fee rate was 41 basis points for the quarter compared to 40.4 basis points last quarter and 41.2 basis points for the third quarter of last year.
Asset mix and the impact of swings in performance fees and fulcrum fees are all contributors to changes in our overall weighted average fee rate.
Looking at operating expenses, our compensation and benefits expense was $15.8 million for the quarter compared to $15.6 million last quarter and $16 million for the third quarter of last year.
G&A expenses were $3.2 million for the third quarter of 2020 compared to $3.6 million last quarter and $3.9 million for the third quarter of last year.
The decrease from last quarter and the third quarter of last year, primarily reflects a reduction in travel costs and professional fees.
Other income was $0.5 million for the quarter, driven primarily by the performance of our investments.
Looking at taxes, the effective tax rate for our unincorporated and other business taxes was negative 6.8% this quarter compared to a positive 4.1% last quarter and negative 5.1% in the third quarter of last year.
The negative effective tax rate this quarter and in the third quarter of last year reflects the benefit associated with the reversal of uncertain tax position liabilities and interests due to the expiration of the statute of limitations.
We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3% and 5% on an ongoing basis.
Our effective tax rate for our corporate income taxes, ex-UBT and other business taxes, was 26.5% this quarter compared to our effective tax rate of 26.6% last quarter and 24.4% for the third quarter of last year.
The fluctuation in these effective rates reflects certain permanently non-deductible expenses.
We expect this rate excluding these items to be between 23% and 25% on an ongoing basis.
The allocation to the non-public members of our operating company was approximately 78% of the operating company's net income for the third quarter of 2020 compared to 77.7% in the last quarter and 74.5% in the third quarter of last year.
The variance in these percentages is a result of changes in our ownership interest in the operating company.
During the quarter through our stock buyback program, we repurchased and retired approximately 102,000 shares of Class A common stock for $0.5 million.
At September 30, there was approximately $10.7 million remaining in the repurchase program.
At quarter end, our financial position remained strong with $49.2 million in cash and cash equivalents as well as $70.3 million in short-term investments.
We declared a $0.03 per share quarterly dividend last night.
We'd now be happy to take any questions. | compname reports q3 earnings per share of $0.16.
q3 gaap earnings per share $0.16.
q3 revenue fell 8 percent to $33.9 million. |
Joining me are Richard Fain, our chairman and executive officer; Michael Bayley, president and CEO of Royal Caribbean International; and Michael McCarthy, our vice president of investor relations.
These statements do not guarantee future performance and do involve risks and uncertainties.
Examples are described in our SEC filings and other disclosures.
Please note that we do not undertake to update the information in our filings as circumstances change.
Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP historical items can be found on our website.
Richard will begin the call by providing a strategic overview and update on the business.
I will follow with a recap of our second-quarter results, and I will provide an update on our latest actions and on the current booking environment.
You all know it's been almost a year and a half since the onset of the pandemic, and it's certainly been a difficult time.
We've been in a virtual standstill in this long period.
And there's no business school that has a course in how to succeed in business with zero revenue.
Fortunately, our people are responding well to these unprecedented challenges, and I'm very proud of the progress that they have produced.
Today, we are reporting another painful set of financial results, but we're also reporting on the dramatic progress on the restarting of our operations and the continued strength in the demand environment for our leading brands.
Most importantly, we have already restarted almost half of our capacity, and we're bringing more online as we speak.
Our protocols appear to be working very well, which gives us and our guests comfort about their safety on board.
Lastly, bookings are remarkably strong, especially for 2022.
I would like to address these three issues in order.
First, I want to talk about the process of restarting; second, our operational protocols and their impact; and then lastly, come back to our booking outlook.
Now starting with the process of resuming operations.
It seems like only yesterday that people were asking me if I thought cruising would restart by December.
Suddenly, we have half of our ship sailing on revenue cruises.
We know that it's going to take us a while to return to full normalcy.
But while people are emerging from isolation, it's clearly going to take them a while to feel totally comfortable.
We believe that the best way to get them comfortable is to demonstrate just how well the process works.
We call that the flywheel effect.
Once we get the vast majority of our fleet back online and thousands of people sailing safely, it will make even more people feel comfortable doing the same thing.
Once the flywheel starts spinning, it keeps spinning and the machinery keeps getting more powerful.
Now some of you have asked why we were the first to restart in the States and how we've gotten our ships operating so quickly.
The answer is simply that we started earlier, and we have the very best people in the business who have been very aggressive in implementing the new protocols.
We started preparing before we had official word that we would be allowed to sail but at the point where we thought the approval was inevitable.
And our people have worked hard and diligently to make sure that our ships could be back in the water quickly.
In this accelerated return to service, the health and safety of our passengers and crew remain a top priority.
For every ship that we restart, we have committed to three pillars: first, ensuring our ship experiences are as safe or safer than their shoreside equivalents; second, meeting and exceeding our exacting pre-pandemic expectations, especially in regard to guest experience; and three, doing so in a financially prudent manner.
Now turning to the second item on my list.
I think it's important to talk about the safety protocols related to COVID.
As you all know, our goal from the beginning of the pandemic has been to make cruising not just as safe as comparable to land vacations but safer.
We believe that the unique attributes of a cruise ship could allow us to control the environment to an unusual extent.
We can ensure a level of vaccinations and testing that would be impossible for most other places to even contemplate.
Specifically, we require 100% of the crew to be fully vaccinated.
And we require the bulk of our guests to be fully vaccinated as well.
The only exceptions are children under 12 and, in Florida, a minor number of people who choose not to get vaccinated.
Excluding Singapore, which is a special case, an average of 92% of the people onboard our ships in July were fully vaccinated.
And this number is likely to rise going forward.
The idea is to limit the spread of COVID-19 aboard our ships.
We all know it's impossible to eliminate cases on board a ship totally, just as it's impossible to eliminate cases on land.
But the steps that we are taking are designed to prevent the isolated cases from becoming an outbreak and it seems to be working.
We have had people test positive.
But because almost everyone around them is vaccinated, they've remained isolated cases.
That's the goal, rare individual cases, and no significant spread.
Repeat this with a few hundred thousand or million cruisers, and that creates the trust that will drive our resurgence.
Now the Delta variant is problematic for everyone, but even this looks manageable by our extensive protocols.
It's too early to draw definitive conclusions, but the vaccines are the ultimate weapon, and they work.
Our experience shows that while there are breakthrough cases aboard, the vaccines help keep them contained.
In fact, and I thought this was quite unusual, in most of our positive cases, even the cabin mate of the infected individual has tested negative.
But in light of the Delta variant and other variants, we have recently strengthened our protocols further, even more testing and even more people required to be vaccinated than we had in June and July.
We have gone from cruises being a source of concern to cruises being an exemplar for how to deal with COVID-19.
I'm thrilled that we're making this dream a reality.
And that brings us to how our customers are responding.
And fortunately, that outlook is good.
Our guests are eager to cruise again.
We had hoped that there would be pent-up demand for cruises, but even we were surprised by the level that we're seeing.
We are also encouraged by the improvements we're seeing more broadly across the travel industry.
Cruise consideration remains high among active cruisers and is steadily increasing among noncruisers.
It is clear people are eager to travel to take a vacation, and we are ready to make their vacation dreams come true.
Jason is going to speak more about our booking trends in a moment.
Now we all know it's going to take some time for the situation to settle.
There's still a lot of confusion in the marketplace, and that definitely hurts the next few months or so.
In addition, people usually book their cruise vacations well in advance.
It will take some time for us to catch up with the bookings that we didn't arrange or we didn't get up until now.
But if we only obsess about the present, we will fail to prepare for the future.
We must keep our eye firmly on that future that we can see is coming.
We need to prepare ourselves for it, so we are focusing our thoughts, our efforts, and our plans on that future.
While the third and fourth quarter of this year will continue to be painful, it's booking generally in line with our return to service and occupancy ramp-up expectations.
Due mainly to the timing of the ramp-up in service and the abnormal booking window, we don't expect 2022 to be a normal year.
However, we are seeing rapid and steady progress toward normalcy starting in the spring and summer of next year.
One important additional point is that we are not only in the business of delivering the best vacations possible but also doing it sustainably.
The company's commitment to corporate stewardship remains a priority even during our return to service.
Despite pandemic headwinds, the company has made tremendous progress across environmental, social, and governmental governance focus areas.
Some of the key achievements include a 35% reduction in our greenhouse gas emissions from our 2005 baseline.
We removed 60% of single-use plastics from our supply chain.
60% of our ships are equipped with emissions purification systems that remove 98% of sulfur oxides.
And our newer ships are equipped with Selective Catalytic Reduction, which reduces NOx emissions.
We've reduced waste to landfill by 85% from our 2007 baseline.
And we've also completed the introduction of over 2,000 certified tours in three assessments by the Global Sustainability Tourism Council.
One interesting point is that our wind farm that spans 20,000 acres in Northern Kansas has 62 turbines with a total power generation capability of 200 megawatts.
It's now been operational for more than a year.
It will annually generate 760,000 megawatt-hours of carbon-free energy.
That's saving some 500,000 tons in carbon.
And to put it in perspective, it's the equivalent to the energy use of about 60,000 homes.
These are just a few of the many initiatives underway at the company, and I've only focused here on the area of the environment.
The last 16 months have caused much pain and much suffering, but the tide is clearly turning.
Their dedication to seeing us see through this black swan event in the best way possible is nothing short of extraordinary.
So I look forward to sunnier days ahead.
This has been accomplished through impressive interdepartmental collaboration and many, many sleepless nights.
And for that, we are really forever grateful.
I will now turn to discuss our performance for the second quarter.
While these losses are incredibly painful, the second quarter was a turning point for the company on multiple fronts.
Second, we took financing actions to reduce our negative carry and began our journey back to an unencumbered and pre-COVID balance sheet.
And third, we saw a significant increase in booking activities that resulted in a large increase in our customer deposits.
And as of today, our customer deposit balance is $2.5 billion.
At this point, a little over 35% of our customer deposit balance is associated with FCCs, compared to about 45% at the time of our last call, signaling continued strong demand.
On the liquidity front, we closed the second quarter with $5 billion in liquidity.
As you all know, we pride ourselves on having industry-leading brands with a world-class and highly innovative fleet and a history of strong financial discipline and performance.
These assets and attributes have been instrumental in helping us raise more than $13 billion of new capital since March of last year.
During the second quarter, we continued our efforts to manage and improve our balance sheet.
And to that end, we successfully issued $650 million of senior unsecured notes at 4.25% and used those proceeds to redeem 7.25% senior secured notes in full.
This will generate approximately $17 million of cash savings annually beginning in 2022.
We are delighted with the current momentum and the restart of our operations in the United States and around the globe.
The environment remains fluid, and for this reason, we are not providing a cash burn estimate or the related offsets generated by revenue and new customer deposits.
I will highlight that the burn rate for the ships that are kept at layoff is expected to be consistent with our previous expectations.
Now as it pertains to our debt maturities, our scheduled debt maturities for the remainder of this year and 2022 are $21 million and $2.2 billion.
I will now update you on capacity and the booking environment.
After more than a full year of painful financial losses, a never-ending roller coaster of ups and downs regarding the timing of our return to service, multiple liquidity actions, and very little cruise capacity, we are now finally bringing our fleet back into service and are already welcoming thousands of guests back on board each week.
The pace with which our teams have been able to bring ships out of layup and ready them for guests is nothing short of incredible.
It is amazing to think that at the end of April, we only had four ships delivering incredible vacations across our five brands.
But as we sit today, there are guests sailing on 29 of our 60 ships in the Caribbean, Europe, Asia, Alaska, Iceland, and the Galapagos.
We are also in the process of ramping up seven more ships to be welcoming guests this month.
As a result, we anticipate having about 65% of our fleet in service at the end of the third quarter and approximately 80% of the fleet back in operation by the end of the year.
When considering our plans to ramp up capacity, the one area we continue to watch is the Asia Pacific region.
And for purposes of our return-to-service planning, we have been cautious.
Now I'll give you an update on bookings.
Bookings are still below 2019 levels due in part to our reduced capacity for 2021 and the fact that many sailings were announced very close in with little time to build business.
However, the gap narrowed further during the second quarter.
And we received about 50% more bookings in Q2 than during the previous three months, with trends improving one month to the next.
By June, we were receiving about 90% more bookings each week when compared to Q1, with bookings for 2022 practically back to 2019 levels.
As it relates to Delta variant, we have mainly seen small variations with closer-in bookings in markets with high case counts.
However, July was our second highest booking month of the year, and bookings for 2022 are strong.
We are particularly encouraged by the continued strong demand for the important spring and summer months.
The health and safety of our guests and crew is our No.
And as such, our start-up strategy incorporates low initial occupancies to give the crew the opportunity to seamlessly implement the new protocols and facilitate amazing vacations in this new and constantly changing environment.
After each ship gets a few voyages under their belt, our plan is for our load factors to steadily increase from one month to the next.
This is evident in our fleet where several of our ships are now sailing with more than 50% load factors.
Overall, the booking activity for 2021 sailings is consistent with our expected capacity and occupancy ramp-up at prices that are higher than 2019.
We are also seeing record Net Promoter Scores, as well as record onboard revenue for the ships that have resumed service.
This is very encouraging as we are not only seeing pent-up demand for cruises, but we are also seeing pent-up demand for our onboard revenue experiences.
Guests are really enjoying our shore excursions, casinos, spas, and restaurants after spending a year in isolation.
We are also seeing an increased demand for our WiFi services as more and more consumers have flexibility to take vacations and work remotely.
Looking further forward, we continue to be impressed by the demand and pricing we are seeing for 2022 sales.
It is still a bit early in the booking window to provide too much color for next year, but I will share that our booked load factors continue to be well within historical ranges at prices that are up nicely versus 2019, including the dilutive impact of FCCs.
While we were still in the early stages of the planning cycle for 2022, we do expect lower-than-average load factors for the first quarter as several ships will still be in ramp-up mode after having recently returned to service.
That being said, the first quarter is booked within historical ranges.
In addition, load factors are at the higher end of historical ranges for the back half of the year, with Q3 currently in a particularly strong position.
Underpinning this is a strong customer deposit profile for 2022.
Customer deposits for 2022 are significantly higher than the same time in 2019.
This demand and booking profile is quite encouraging, considering that we have only been spending about a quarter of our typical sales and marketing spend.
We are also optimistic that a number of larger macro indicators will provide further tailwinds to our future demand, increased vaccination rates around the globe, sharp increases in consumer confidence, and significant increases in personal saving rate versus the same time two years ago.
I will close by saying that we are thrilled for the flywheel to be spinning at such an accelerating pace.
We have been dreaming of this moment for more than 16 months, and it's finally here.
We feel very optimistic about our future and are thrilled to see more and more guests in the United States and around the globe enjoy incredible vacations onboard our ships.
And with that, I will ask Shelby to open up the call for a question-and-answer session. | royal caribbean group - anticipate 80% of our fleet to be back in service by year-end.
royal caribbean group - expects to incur a net loss on both u.s. gaap and adjusted basis for its q3 and 2021 fiscal year.
royal caribbean group - booking activity for 2021 sailings consistent with co's expected capacity, occupancy ramp up, at prices higher than 2019.
royal caribbean - while it's too early to make definitive conclusions of impact of delta variant on bookings, seen modest impact on closer-in bookings.
royal caribbean group - by end of this month, group expects to be operating 36 ships, representing over 60% of its capacity.
royal caribbean group - booked load factor for 2022 is within historical ranges. |
In addition, specifically for our Homegenius segment, other non-GAAP measures that will be discussed today include adjusted gross profit, adjusted pre-tax operating income or loss before allocated corporate operating expenses, and the related Homegenius profit margins.
Also, on hand, for the Q&A portion of the call is Derek Brummer, President of Radian Mortgage.
These are also available on our website.
I am pleased to say that we continue to see strong growth in the housing and real estate markets driven by historically low interest rates and robust demand.
And while we continue to closely monitor the pandemic and the economic environment, we are encouraged by the favorable credit trends within our insured portfolio that increasingly reflect a return to a more certain operating environment.
Frank will discuss the details of our financial position shortly, but let me first share a few highlights and insights from the third quarter.
We reported net income of $126 million or $0.67 per share for the third quarter and adjusted diluted net operating income per share was also $0.67.
We grew our book value per share by 9% year-over-year.
We achieved this growth even after accounting for more than $100 million of dividends that we returned to stockholders over the past year.
For our mortgage segment, we remain focused on writing new business at attractive returns that we believe will generate long-term economic value and future earnings for Radian and its stockholders.
During the third quarter, we wrote $26.6 billion of high-quality new mortgage insurance business and our primary insurance in-force grew by $4.3 billion from the second quarter to $241.6 billion at September 30.
As we noted last quarter, we believe the industry has transitioned to a more stable, competitive environment, where we would expect to maintain a pro rata share of the market over the long-term with some expected quarter-to-quarter market share shifts across the industry.
We have seen continued improvement in the credit performance of our portfolio, with a 46% year-over-year decline in our total number of defaulted loans.
We saw 60% decline year-over-year in the number of new notices of default received in the quarter.
In fact, the number of new notices of default during the second and third quarters were at or below pre-COVID levels.
Strong cure activity has continued with cures outpacing new defaults for each month since June 2020.
The cure-to-new default ratio in the third quarter of 2021 was 178%.
As I have mentioned since the onset of the pandemic, the outstanding support by the government, GSEs, and industry in the form of forbearance programs for homeowners struggling to meet their mortgage payments has proven to be very beneficial to all stakeholders, as these forbearance programs began to expire at September 30 and beyond.
We are working closely with servicers and the GSEs as they seek to successfully migrate these borrowers to a current status, including through the use of payment deferral programs or the appropriate workout solution.
We expect that we will have greater visibility over the next few quarters into the ultimate resolution of the loans exiting forbearance programs.
In terms of the overall housing market, we saw positive trends continuing in the third quarter.
Based on September data from our own Radian Home Price Index continued strong housing demand and relatively limited supply in the market led to an annualized 17.6% increase in home prices across the country.
We continue to expect the rate of home price appreciation to moderate over time and we believe the combination of an improving economy, strong housing dynamics in terms of demand, supply, home values and mortgage underwriting, relatively low mortgage interest rates as well as strong income growth are well aligned for a healthy and sustainable housing market.
Our new mortgage insurance business was 90% purchase volume in the third quarter versus only 71% a year ago.
Based on updated market projections for our 2021 mortgage originations, we now expect the private mortgage insurance market to be approximately $575 million to $600 billion, which would be slightly lower than the record volume in 2020, but still represent the second highest MI volume year in history.
Looking ahead, total mortgage originations for 2022 are estimated to be approximately $3 trillion, reflecting a 10% increase in purchase originations and a 55% decrease in refinance activity.
While the overall market is projected to be smaller in 2022 than 2021, the growth in the purchase market is positive for the mortgage insurance industry and is expected to fuel another strong market for private MI, given the higher likelihood that purchase loans will utilize private mortgage insurance as compared to refinance loans.
It is expected to be among the largest private MI markets in history.
It is also important to highlight that the expected decline in refinance originations in 2022 is likely to result in improved persistency in our mortgage insurance in-force portfolio.
Overall, we believe the improving macroeconomic conditions and strong home purchase market, fueled by first-time homebuyers, provides strong tailwinds for long-term growth in the economic value of projected future earnings of our mortgage insurance portfolio.
Turning to our Homegenius segment, total revenues for the third quarter were $45.1 million, representing a 35% increase from the second quarter of 2021 and a 51% increase year-over-year.
This was primarily driven by an increase in our title revenue, which grew 106% year-over-year as well as growth in our valuation business.
As we discussed during our Homegenius Investor Day in June, we believe Homegenius has the potential for significant value creation and financial contribution going forward, and Frank will discuss our progress against our financial projections.
In terms of capital strength, at September 30, Radian Group maintained a strong capital position with $1 billion of total holding company liquidity.
Additionally, at September 30, Radian Guaranty's PMIERs excess available assets, was $1.7 billion or a cushion of 49%.
Frank will provide additional details on our capital actions and position in a moment.
Turning to the regulatory and legislative landscape, since assuming the role of acting Director of FHFA in June, Sandra Thompson has taken meaningful steps to prioritize access and affordability of mortgage credit.
Notably, the recent lifting of the preferred stock purchase agreement caps on layered risk, the newly proposed amendment to the Enterprise capital framework to reduce GSE-required capital levels and the various direct market actions such as eliminating the 50 basis point adverse market fee for refinance loans and expanding eligibility for the refi now and refi hospital programs represent a notable shift in focus.
We expect the FHFA's efforts to expand access to home ownership to continue.
As the only source of private capital currently dedicated to first loss mortgage credit protection, we look forward to working with the FHFA and the GSEs to identify and pursue thoughtful and meaningful opportunities to increase sustainable homeownership among low and moderate income borrowers.
Ultimately, this is good for the economy and for homeownership and given our strong alignment with first-time homebuyers for the mortgage insurance industry as well.
At Radian, it aligns perfectly with our values and overall mission to ensure the American dream of home ownership.
To recap our financial results issued last evening, we reported GAAP net income of $164.1 million or $0.67 per diluted share for the third quarter of 2021 as compared to $0.80 per diluted share in the second quarter of 2021 and $0.70 per diluted share in the third quarter of 2020.
Adjusted diluted net operating income was $0.67 per share in the third quarter of 2021 compared to $0.75 in the second quarter of 2021 and $0.59 in the third quarter of 2020.
I'll now turn to the key drivers of our revenue.
As Rick mentioned earlier, our new insurance written was $26.6 billion during the quarter compared to $21.7 billion in the second quarter of 2021 and $33.3 billion in the third quarter of 2020.
New insurance written for purchase transactions was $23.9 billion, an increase of 2% year-over-year and 43% compared to the second quarter of 2021.
Purchase volume accounted for 90% of our total new insurance written for the third quarter, an increase from 77% of volume in the prior quarter and 70.5% in the third quarter of 2020.
Primary insurance in-force increased $4.3 billion during the quarter to $241.6 billion.
On a year-over-year basis, primary insurance in-force has declined approximately 2%, primarily driven by sustained low persistency resulting from policy cancellations during a low interest rate, high refinance period.
It is important to note, however, the mix shift of our in-force portfolio during this past year, monthly premium insurance in-force, which drives the majority of our earned premiums, has grown 6% year-over-year compared to a 25% decline in single-premium insurance in-force.
It should also be noted that prepayments in single-premium insurance in-force enhances our realized returns as the life over which the single premium is recognized is shortened.
Our quarterly annualized persistency rate was 67.5% this quarter, an increase from 66.3% in the second quarter of 2021 and 60% in the third quarter of 2020.
The year-over-year increase in quarterly annualized persistency is primarily driven by lower refinance activity in the third quarter of 2021 as compared to the same quarter last year.
While persistency is expected to improve during the remainder of 2021, we also expect persistency to remain below our historic long-term levels for the foreseeable future given the current pace of refinance activity.
Moving now to our earned premiums and other revenues, total net premiums earned were $249.1 million in the third quarter of 2021 compared to $254.8 million in the second quarter of 2021 and $286.5 million in the third quarter of 2020.
The decrease on both a linked quarter and year-over-year basis are primarily driven by lower accelerated premium recognition due to single-premium policy cancellations as well as a continued decline in our in-force premium yield.
Title premiums increased to $12.3 million in the third quarter of 2021 compared to $7.7 million in the second quarter of 2021.
Slide 10 shows the mortgage insurance premium yields trend over the past five quarters.
Our direct in-force premium yield was 40.3 basis points this quarter compared to 41.1 basis points last quarter and 43.2 basis points in the third quarter of 2020.
With regard to pricing on new business, we remain focused on maximizing projected economic value and generating attractive risk-adjusted returns.
And while we expect to generate a pro rata volume overall, we target the volume with the highest economic value.
Our Homegenius segment revenues were $45.1 million for the third quarter of 2021, representing a 35% increase compared to the second quarter of 2021 and a 51% increase compared to the third quarter of 2020.
Our reported home genius pre-tax operating loss before allocated corporate operating expenses was $600,000 for the third quarter of 2021 compared to a loss of $4.5 million for the second quarter of 2021.
Our reported Homegenius adjusted gross profit for the third quarter of 2021 was $17.9 million compared to $11.7 million for the second quarter of 2021.
As noted on Slide 22, we continue to make progress against our targets as communicated earlier this year, with Homegenius revenues still tracking toward our goal of $150 million for 2021.
Our target for pre-tax operating income before allocations was updated primarily to reflect adjustments made this quarter to recognize the impact of companywide incentive expense approvals.
Our investment income this quarter of $36 million was relatively flat compared to the prior quarter and same quarter prior year due to the lower investment yields, which were partially offset by additional investment balances from underwriting cash flow.
At quarter end, the investment portfolio duration was approximately 4.5 years, unchanged from the prior quarter.
Moving now to our loss provision and credit quality, as noted on Slide 13, the mortgage provision for losses for the third quarter of 2021 was $16.8 million, an increase compared to $3.3 million in the second quarter of 2021 and a decrease compared to $87.8 million in the third quarter of 2020.
As shown on Slide 14, we had approximately 8,100 new defaults in both the third and second quarters of 2021 compared to approximately 21,000 in the third quarter of 2020.
Also, as noted on Slide 13, the provision for losses for the third quarter 2021 includes a positive development on prior defaults of $16.5 million.
This positive development was primarily driven by more favorable trends in cures than originally estimated, which resulted in a reduction in certain default-to-claim rate assumptions, related to defaults first reported prior to the onset of the COVID-19 pandemic.
We maintained our prior quarter assumptions for defaults reported since the start of the pandemic, including the default to claim rate assumption on new defaults at 8% for the third quarter of 2021.
We continue to closely monitor the trends and cures and claims for that portion of our default inventory, including the resolution of COVID-19 related forbearance programs.
As shown on Slide 16, 67% of all defaults were reported to be in a forbearance program as of September 30, 2021.
Based on information provided by servicers, we currently expect that substantially all defaults as of September 30, 2021, under a forbearance plan will reach the scheduled expiration of their forbearance term by the end of the third quarter 2022 and that approximately half of this population will reach that expiration before year-end 2021.
These estimates are based on the date each loan was reported as entering forbearance and the maximum forbearance term available to the borrowers at that time.
As a reminder, forbearance programs are positive for our industry and for homeowners as they are intended to keep people in their homes through what is expected to be a temporary economic disruption.
It should also be noted that approximately 89% of new defaults from the second quarter of 2020 and 85% of new defaults from the third quarter 2020 have cured as of the end of October.
Now turning to expenses; other operating expenses were $86.5 million in the third quarter of 2021, flat to the second quarter of 2021 and increased compared to $69.4 million in the third quarter of 2020.
The increase in other operating expenses as compared to the prior year is primarily related to an increase in incentive compensation expense, including long-term share-based incentive compensation as well as a $6.7 million decrease in ceding commissions associated with lower single premium acceleration.
It should also be noted that as Homegenius revenues and earnings continue to grow, our total expenses will grow as well.
Over the next year, we expect consolidated normalized quarterly operating expenses to grow from approximately $72 million to approximately $85 million which will depend largely on the timing and the execution of our Homegenius segment revenue growth strategy.
Our mortgage segment, however, should have relatively flat quarterly expenses at just under $60 million.
Moving now to taxes; our overall effective tax rate for the third quarter of 2021 was 21.8%.
Our annualized effective tax rate for 2021 and before discrete items remains generally consistent with the statutory rate of 21%.
Now moving to capital and available liquidity; Radian Guaranty's excess available assets over minimum required assets was $1.7 billion as of the end of the third quarter, which represents a 49% PMIERs cushion.
In connection with this transaction, Radian Guaranty will receive $484.1 million of fully collateralized aggregate excess of loss reinsurance coverage from Eagle Re at closing.
The excess of loss reinsurance will cover mortgage insurance losses on new defaults on an existing portfolio of eligible policies with risk in force of $10.8 billion that were issued predominantly between January 1, 2021 and July 31, 2021.
For Radian Group, as of September 30, 2021, we maintained $768 million of available liquidity compared to $923 million as of June 30, 2021.
The primary driver of this decline was share repurchase activity, which I will discuss in more detail in a moment.
Along with our recurring shareholder dividend payment, partially offset by a $36 million ordinary dividend paid by our Radian Reinsurance subsidiary.
Total liquidity, which includes the company's $267.5 million credit facility, was $1 billion as of September 30, 2021.
It is important to reiterate that most of the cash flows of the parent company are funded by long-established, regulator-approved expense, interest and tax sharing agreements with its subsidiaries and not through dividends from subsidiaries.
This provides us with an enhanced level of certainty and predictability in parent company cash flows.
During the third quarter of 2021, we repurchased 7.1 million shares and year-to-date through October 31, we have purchased 13.3 million shares or approximately 7% of our outstanding shares at an average share price of $22.78 or an approximate 3% discount to our current book value.
As of October 31, we have approximately $95 million of remaining repurchase authorization which expires on August 31 of next year.
We have also continued to pay a dividend to common shareholders throughout the pandemic, including during the third quarter of 2021, as we returned approximately $27 million to shareholders through dividends during the quarter.
As a reminder, and as previously announced, we increased our quarterly dividend by 12% to $0.14 per share during the second quarter of this year.
The combination of dividend payments and share repurchase represent a return of capital of approximately 82% of our after-tax operating income for this year.
Given the capital strength at Radian Guaranty, and the financial flexibility provided by our available liquidity at Radian Group, we believe that we are well positioned to support our businesses and deliver value to our shareholders.
We've seen continued improvement in the credit performance of our portfolio that reflects a return to a more certain operating environment.
We wrote $26.6 billion of high-quality new mortgage insurance business, which helped grow our primary mortgage insurance in force to $241.6 billion, Homegenius revenues increased by 51% year-over-year.
Finally, I wanted to mention how proud I am of our team's continued dedication to our customers, our communities and each other.
During the quarter, we were recognized as a champion of Board Diversity by the Forum of Executive Women and raised a total of $165,000 for the NBA Open Store Foundation, an organization that shares our mission of enabling and protecting homeownership.
I know many of you are familiar with our annual fundraiser for the foundation which helps families with critically ill or injured children to remain in their homes while their children are in treatment.
Now operator, we would be happy to take questions. | q3 adjusted operating earnings per share $0.67.
q3 gaap earnings per share $0.67.
q3 revenue rose 51 percent to $45.1 million. |
Sorry for that break.
Before we begin our call today, I need to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts.
These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to nonrecurring items.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility.
Please review these disclosures if you're interested in seeing how they're calculated.
2020 was a very challenging year on many levels.
Fortunately, the world is coming to terms with the COVID-19 pandemic and hydrocarbon demand is slowly but surely recovering.
This has led to a reduction in oil inventory to near its five year average, aided by supportive OPEC+ actions to date.
As a result, the outlook for the oil and gas prices is encouraging, which should support modest growth in industry activities.
The first quarter played out largely as we expected, except for the unusually severe cold weather during February.
Our estimate is that this event negatively impacted our EBITDA by approximately $5 million.
Notwithstanding that event, we see encouraging trends in most of our service lines, which gives us confidence in our 2021 outlook.
Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will provide some closing comments.
For the first quarter of 2021, revenues decreased to $182.6 million compared to $243.8 million in the first quarter of the prior year.
Revenues decreased due primarily to significantly lower activity levels, including the February adverse weather conditions, and lower pricing compared to the first quarter of the prior year.
Operating loss for the first quarter was $10.5 million compared to an adjusted operating loss of $13.2 million in the first quarter of the prior year.
EBITDA for the first quarter was $7.8 million compared to adjusted EBITDA of $25.8 million in the same period of the prior year.
Loss per share was $0.05 in the first quarter of this year compared to adjusted loss per share of $0.04 in the first quarter of 2020.
Cost of revenues during the first quarter of 2021 was $146.2 million or 80.1% of revenues compared to $181.9 million or 74.6% of revenues during the first quarter of 2020.
Cost of revenues declined primarily due to decreases in expenses consistent with lower activity levels and RPC's cost reduction initiatives.
Cost of revenues as a percentage of revenues increased primarily due to lower pricing for our services, increased maintenance and repair and fuel costs as well as labor and other cost inefficiencies resulting from several challenges during the quarter.
These challenges included lower activity levels, COVID compliance costs and adverse weather events in the first quarter as compared to the same period in the prior year.
Selling, general and administrative expenses decreased to $30.6 million in the first quarter of 2021 compared to $36.5 million in the first quarter of the prior year.
These expenses decreased due to lower employment costs, primarily the result of cost reduction initiatives during previous quarters.
Depreciation and amortization decreased to $17.8 million in the first quarter of 2021 compared to $39.3 million in the first quarter of the prior year.
Depreciation and amortization decreased significantly primarily due to asset impairment charges recorded in previous quarters, which decreased RPC's depreciable property, plant and equipment as well as lower capital expenditures.
Our Technical Services segment revenues for the quarter decreased 24.2% compared to the same quarter in the prior year.
This was due to significantly lower activity and pricing.
Significant operating -- segment operating loss in the first quarter of 2021 was $5.8 million compared to a $12.2 million operating loss in the first quarter of the prior year.
Our Support Services segment revenues for the quarter decreased 38% compared to the same quarter in the prior year.
Segment operating loss in the first quarter of 2021 was $2.9 million compared to an operating profit of $1.5 million in the first quarter of the prior year.
On a sequential basis, RPC's first quarter revenues increased 22.9% to $182.6 million from $148.6 million in the prior quarter.
And this was due to activity increases in most of our service lines.
Cost of revenues during the first quarter of '21 -- 2021 increased by $28.3 million or 24% to $146.2 million due to expenses, which increased with higher activity levels, such as materials and supplies and employment expenses.
As a percentage of revenues, cost of revenues increased slightly from 79.3% in the fourth quarter of 2020 to 80.1% in the first quarter of 2021.
This was due to increases in M&R expenses and fuel costs, coupled with labor and other cost inefficiencies due to the adverse weather event.
Selling, general and administrative expenses during the first quarter of 2021 increased 17.6% to $30.6 million and $26 million in the prior quarter.
This was primarily due to a beneficial forfeiture rate adjustment to stock compensation that we recorded in the prior quarter.
RPC incurred an operating loss of $10.5 million during the first quarter of 2021 compared to an adjusted operating loss of $11.3 million in the prior quarter.
RPC's EBITDA was $7.8 million in the first quarter of 2021, which was the same as adjusted EBITDA of $7.8 million in the fourth quarter of 2020.
Our Technical Services segment revenues increased by $33.7 million or 24.2% to $172.6 million in the first quarter due to increased activity levels in most of the segment service lines.
The Technical Services segment incurred a $5.8 million operating loss in the current quarter compared to an operating loss of $11.3 million in the prior quarter.
Our Support Services segment revenues increased by $310,000 or 3.2% to $10 million in the first quarter.
Operating loss was $2.9 million in the current quarter compared to an operating loss of $2.6 million in the prior quarter.
During the first quarter of 2021, RPC operated five horizontal pressure pumping fleets, the same as in the fourth quarter, but with improved utilization.
Due to high utilization of these existing fleets, we recently added one additional horizontal fleet to meet expected incremental demand.
First quarter 2021 capital expenditures were $11.8 million, and we currently estimate full year 2021 capital expenditures to be approximately $55 million, comprised primarily of capitalized maintenance of our existing equipment and selected growth opportunities.
We are encouraged by how 2021 has started.
Activity levels and pricing have largely tracked our expectations coming into the year, and all signs point to a continued modest recovery as the year progresses.
We remain committed to capital discipline and do not plan to add incremental capacity until we have greater confidence that economic returns will justify the investment.
ESG has continued to grow as a topic of interest among many of our customers.
RPC aspires to be an environmentally friendly company.
We are adapting our operations to reduce emissions wherever possible.
We are in the final stages of upgrading another of our fleets to dual-fuel capability, after which 2/3 of our deployed frac capacity will be ESG-friendly.
However, for RPC and most of our competitors, the easy conversions are largely done.
Further ESP adaptation requires economics to improve before additional capital investments make financial sense.
While economics are not currently supportive of adding net capacity, the continued transition to ESG-friendly equipment is more likely to come from the replacement of older equipment than growth of capital expenditures.
At the end of the first quarter, RPC's cash balance was $85.4 million, and we remain debt-free. | q1 revenue fell 25.1 percent to $182.6 million.
q1 adjusted loss per share $0.04.
q1 loss per share $0.05. |
Before we begin our call today, I want to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts.
These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to nonrecurring items.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility.
Please review these disclosures if you're interested in seeing how they're calculated.
As we anticipated, the twin impacts of the COVID-19 pandemic and global oil glut have caused a swift, steep decline in oilfield activity over the past few months.
The rig count fell to historic lows, and RPC's quarterly revenues fell to their lowest level since 2004.
We addressed this rapid disruption by reducing costs and managing working capital, which resulted in more than doubling our cash during the quarter.
Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will offer some additional thoughts about the near term.
For the second quarter of 2020, revenues decreased to $89.3 million compared to $358.5 million in the prior year.
Revenues decreased due to lower activity levels and pricing compared to the second quarter of the prior year.
Adjusted operating loss for the second quarter was $35.9 million compared to an operating income of $8.4 million in the second quarter of the prior year.
Adjusted EBITDA for the second quarter was negative $17.8 million compared to EBITDA of $51.2 million in the same period of the prior year.
For the second quarter of 2020, RPC reported a $0.10 adjusted loss per share compared to $0.03 diluted earnings per share in the prior year.
Cost of revenues during the second quarter was $80 million or 89.6% of revenues compared to $265.1 million or 73.9% of revenues during the second quarter of 2019.
Cost of revenues declined primarily due to decreases in expenses consistent with lower activity levels and RPC's cost reduction initiatives.
Cost of revenues as a percentage of revenues increased because of the negative leverage of these expenses over significantly lower revenues.
This percentage increase was slightly offset by lower materials and supplies expenses as a percentage of revenues caused by a shift in pressure pumping job mix.
Selling, general and administrative expenses decreased to $28.8 million in the second quarter compared to $43.3 million in the second quarter of the prior year.
These expenses decreased due to lower employment costs, primarily the result of RPC's cost reduction initiatives during the previous several quarters.
Depreciation and amortization decreased to $19.6 million in the second quarter of 2020 compared to $42.9 million in the second quarter of prior year.
Depreciation and amortization decreased significantly because of asset impairment charges recorded during the past several quarters.
Our Technical Services segment revenues for the quarter decreased 76.2% compared to the same quarter in the prior year.
Operating loss in the second quarter was $34.1 million compared to a $6.9 million operating profit in the second quarter of the prior year.
This loss was due to lower activity and pricing.
Our Sports Services segment revenues for the quarter decreased 57.2% compared to the same quarter in the prior year.
Operating loss in the second quarter of 2020 was $1.9 million compared to a $4 million operating profit in the second quarter of the prior year.
On a sequential basis, RPC's second quarter revenues decreased 63.4% to $89.3 million from $243.8 million in the prior quarter.
This was due to the significant decline in industry activity that began in March.
Cost of revenues during the second quarter of 2020 decreased by $101.9 million or 56%, due to lower materials and supplies and fuel expenses caused by decreased activity and lower employment costs resulting primarily from headcount reductions.
As a percentage of revenues, cost of revenues increased significantly from 74.6% in the first quarter to 89.6% in the second quarter.
Selling, general and administrative expenses during the second quarter decreased 21.2% to $28.8 million from $36.5 million in the prior quarter.
RPC incurred an adjusted operating loss of $35.9 million during the second quarter compared to an adjusted operating loss of $13.2 million in the prior quarter.
RPC's adjusted EBITDA was negative $17.8 million in the second quarter compared to adjusted EBITDA of $25.8 million in the prior quarter.
Despite the rapid decline in activity, our decremental EBITDA margin was only 28% due to our cost reduction efforts.
Technical Services segment revenues decreased $147.2 million or 64.6% to $80.5 million in the second quarter.
This was due to significantly lower activity levels and pricing.
RPC's Technical Services segment incurred a $34.1 million operating loss compared to an operating loss of $12.2 million in the prior quarter.
Our Support Services segment revenues decreased by $7.3 million or 45.5% to $8.8 million in the second quarter.
Operating loss was $1.8 million compared to $1.5 million operating profit in the prior quarter.
During the second quarter, RPC operated up to four horizontal pressure pumping fleets.
And is currently operating three horizontal frac fleets in the Permian Basin.
At the end of second quarter of 2020, RPC's pressure pumping capacity remained at approximately 728,000 hydraulic horsepower.
Second quarter 2020 capital expenditures were $14 million, and we currently estimate full year capital expenditures to be $50 million to $60 million.
Though the rig count declined once again last week, we believe domestic completion activity passed the trough during the second quarter.
We anticipate oilfield activity in RPC's revenues will improve modestly during the third quarter.
However, I want to emphasize that we are unsure whether this is the beginning of a sustained cyclical recovery because of this cautious outlook, which is shared by many in our industry, we will continue to focus on cost management and capital expenditure controls.
Our focus will remain on maintaining our financial strength, which will include rigorous pricing discipline.
During the coming quarters, this may hinder our revenue growth but will preserve the condition of our equipment until we are able to secure opportunities to generate sufficient returns.
In fact, our $145 million in cash at the end of the second quarter was the highest in decades. | q2 revenue $89.3 million versus refinitiv ibes estimate of $102.1 million.
q2 adjusted loss per share $0.10. |
Before we begin our call today, I want to remind you that in order to talk about our company, we're going to mention a few things that are not historical facts.
These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to nonrecurring items.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility.
Please review these disclosures if you're interested in seeing how they're calculated.
The second quarter represented a transition quarter for RPC.
We saw numerous signs of increased demand for our services and have a full frac calendar for most of the third quarter.
This is the most visibility we have had since pre-COVID.
Nevertheless, we did experience an air pocket in June customer activity due to some jobs being pushed and heavier rains in the Permian.
July is shaping up to be substantially better than our second quarter run rate and the remainder of the third quarter appears consistent with July at this point.
Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will provide some closing comments.
Second quarter of 2021, revenues increased to $188.8 million compared to $89.3 million in the second quarter of the prior year.
Revenues increased due primarily to higher activity levels and improved pricing compared to the second quarter of the prior year.
Revenues also increased in the second quarter of 2021 because the second quarter of the prior year was severely impacted by COVID-19.
This impact affected all of our year-over-year comparisons.
Operating loss for the second quarter was $1.2 million compared to an adjusted operating loss of $35.9 million in the second quarter of the prior year.
EBITDA for the second quarter of this year was $17.3 million compared to adjusted EBITDA of negative $17.8 million in the same period of the prior year.
We approached breakeven per share results in the second quarter of 2021 compared to an adjusted loss per share of $0.10 in the second quarter of 2020.
Cost of revenues during the second quarter of 2021 was $145.8 million or 77.2% of revenues compared to $80 million or 89.6% of revenues during the second quarter of the prior year.
Cost of revenues increased primarily due to increases in expenses consistent with higher activity levels.
Cost of revenues as a percentage of revenues decreased due to the leverage of higher revenues over certain direct costs, fixed direct costs.
Selling, general and administrative expenses increased to $29.4 million in the second quarter of this year compared to $28.8 million in the second quarter of the prior year.
These expenses included higher bad debt expense and expenses consistent with higher activity levels, primarily offset by lower [Indecipherable].
Depreciation and amortization decreased slightly to $17.9 million in the second quarter of 2021 compared to $19.6 million in the second quarter of the prior year as capex has remained relatively low.
Our Technical Services segment revenues for the quarter increased to 118.7% compared to the same quarter in the prior year due to significantly higher activity and some pricing improvement.
Segment operating profit in the second quarter of 2021 was $1.4 million compared to $34.1 million operating loss in the second quarter of the prior year.
Our Support Services segment revenues for the quarter increased 44.1% compared to the same quarter in the prior year.
Segment operating loss this year was $2.4 million compared to an operating loss of $1.9 million in the second quarter of the prior year.
On a sequential basis, our second quarter revenues increased 3.4% from $182.6 million in the prior quarter due to activity increases in most of our service lines.
The improvement was negatively impacted by multiple frac jobs pushing into July.
Cost of revenues during the second quarter of 2021 was $145.8 million, relatively unchanged from the prior quarter.
As a percentage of revenues, cost of revenues decreased from 80.1% in the first quarter of this year to 77.2% to the second quarter due to a favorable job mix in several service lines as well as the impact of the CARES Act employee retention credit that we recognized during the quarter.
Selling, general and administrative expenses during the second quarter of 2021 decreased 3.9% to $29.4 million from $30.6 million in the prior quarter, and this was also due to the impact of the retention tax credit.
RPC incurred an operating loss of $1.2 million during the second quarter of 2021 compared to an operating loss of $10.5 million in the prior quarter.
RPC's EBITDA was $17.3 million during the quarter compared to EBITDA of $7.8 million in the first quarter.
Our Technical Services segment revenues increased by $3.5 million or 2% to $176.1 million in the second quarter due to increased activity levels in most of the segment's service lines.
RPC's Technical Services segment generated a $1.4 million operating profit in the current quarter compared to an operating loss of $5.8 million in the prior quarter.
Support Services segment revenues increased by $2.7 million or 26.8% to $12.6 million during the second quarter.
Operating loss was $2.4 million compared to an operating loss of $2.9 million in the previous quarter.
During the second quarter, RPC operated up to six horizontal pressure pumping fleets.
And early in the third quarter, we reactivated, at minimal cost, a seventh fleet to meet incremental demand.
Second quarter 2021 capital expenditures were $14.1 million, and we currently estimate full year 2021 capital expenditures to be approximately $65 million, comprised primarily of capitalized maintenance of our existing equipment and selected growth opportunities.
Second quarter revenues improved sequentially as drilling and completion activities continued to increase due to improving oil prices and a strengthening economy.
We are pleased with the increased activity levels and our ability to pass through cost increase to our customers.
We have not been able -- we have not yet been able to consistently achieve net pricing improvements but are optimistic that, that will change soon.
Our ESG-friendly Tier four and dual-fuel frac equipment is in very high demand, and we expect to see pricing power here first.
We began the third quarter with indications that our customer base is responding to higher commodity prices with increased drilling and completion plans during the remainder of the year and into 2022.
At the end of the second quarter, RPC's cash balance was $121 million, and we remain debt-free. | compname posts q2 adjusted loss per share $0.10.
q2 revenue $188.8 million versus refinitiv ibes estimate of $202 million.
q2 adjusted loss per share $0.10. |
Before we begin our call today, I want to remind you that in order to talk about our Company, we're going to mention a few things that are not historical facts.
These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to non-recurring items or changes in capital structure.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our revolving credit facility.
Please review these disclosures if you're interested in seeing how they are calculated.
Before we begin discussing RPC's results, I would like to take a moment to recognize R. Randall Rollins, our Chairman, who passed away during the third quarter.
For nearly half a century, Randall guided our company with a steady hand.
He instilled a culture of capital discipline that has allowed RPC to successfully navigate the severe volatility experienced in our industry.
He will be missed.
RPC's third quarter progressed much as we had expected.
U.S. oilfield activity improved from the historic lows recorded in the second quarter and RPC capitalized on this with equipment and crews that were in place and prepared to work.
Our results improved due to higher revenue, increased utilization and continued expense management.
Our CFO, Ben Palmer, will discuss this and other financial results in more detail, after which I will provide some closing comments.
The third quarter of 2020 revenues decreased to $116.6 million compared to $293.2 million in the third quarter of the prior year.
Revenues decreased due to lower activity levels and pricing compared to the third quarter of the prior year.
Operating loss for the third quarter was $31.8 million compared to an adjusted operating loss of $21 million in the third quarter of the prior year.
EBITDA for the third quarter was negative $12.3 million compared to adjusted EBITDA of $22.8 million in the same period of the prior year.
For the third quarter of 2020, RPC reported a $0.09 adjusted loss per share compared to an $0.08 adjusted loss per share in the third quarter of the prior year.
Cost of revenues during the third quarter was $100.9 million or 86.5% of revenues compared to $225.2 million or 76.8% of revenues during the third quarter of 2019.
Cost of revenues declined primarily due to decreases in expenses consistent with lower activity levels and RPC's[Phonetic] cost reduction initiatives.
Cost of revenues as a percentage of revenues increased due primarily to lower pricing for our services.
Selling, general and administrative expenses decreased to $32.4 million in the third quarter of 2020 compared to $42.6 million in the third quarter of the prior year.
These expenses decreased due to lower employment costs, primarily the result of cost reduction initiatives during previous quarters, partially offset by $3.3 million of accelerated amortization of restricted stock related to the passing of our Chairman.
Depreciation and amortization decreased to $18.7 million in the third quarter of 2020 compared to $44.7 million in the third quarter of the prior year.
Depreciation and amortization decreased significantly primarily due to asset impairment charges recorded in previous quarters, which reduced the net book value of RPC's property, plant and equipment as well as lower capital expenditures.
Our Technical Services segment revenues for the quarter decreased 60.2% compared to the same quarter in the prior year.
Segment operating loss in the third quarter of 2020 was $24.9 million compared to $18.2 million in the third quarter of the prior year.
This increased loss was due to significantly lower activity and pricing, partially offset by lower depreciation and amortization expenses.
Support Services segment revenues for the quarter decreased 61% compared to the same quarter in the prior year.
Segment operating loss in the third quarter of 2020 was $3.8 million compared to an operating profit of $1.6 million in the third quarter of the prior year.
On a sequential basis, RPC's third quarter revenues increased 30.6% to $116.6 million from $89.3 million in the prior quarter.
This was due to activity increases in several of our larger completion-related service lines.
Cost of revenues during the third quarter of 2020 increased by $20.8 million or 26% due to expenses, which increased with higher activity levels such as materials and supplies, and maintenance expenses.
As a percentage of revenues, cost of revenues decreased from 89.6% in the second quarter of 2020 to 86.5% in the third quarter due to more efficient labor utilization and the leverage of higher revenues over direct costs, which are relatively fixed during the short term.
Selling, general and administrative expenses during the third quarter of 2020 increased 12.5% to $32.4 million from $28.8 million in the prior quarter, primarily due to the $3.3 million accelerated vesting of restricted stock.
RPC incurred an operating loss of $31.8 million during the third quarter of 2020 compared to an adjusted operating loss of $35.9 million in the prior quarter.
RPC's EBITDA was negative $12.3 million in the third quarter of 2020, compared to adjusted EBITDA of negative $17.8 million in the prior quarter.
Our Technical Services segment revenues increased by $28.7 million or 35.7% to $109.3 million in the third quarter due to increased activity levels in several service lines.
RPC's Technical Services segment incurred a $24.9 million operating loss in the current quarter compared to an operating loss of $34.1 million in the prior quarter.
Our Support Services segment revenues decreased by $1.5 million or 16.6% to $7.3 million in the third quarter.
Operating loss was $3.8 million compared to an operating loss of $1.8 million in the prior quarter.
During the third quarter, RPC operated as many as five horizontal pressure pumping fleets.
At the end of the third quarter of 2020, RPC's pressure pumping capacity remained at approximately 728,000 hydraulic horsepower.
Third quarter 2020 capital expenditures were $13.7 million and we currently estimate the full-year capital expenditures to be approximately $60 million to $70 million and comprised primarily of capitalized maintenance of our existing equipment as well as upgrades of selected pressure pumping equipment for dual fuel capability.
As we indicated on the last quarter's conference call, we believe domestic oilfield activity bottomed out during the second quarter.
The downturn in our industry experience was perhaps the steepest and most severe ever encountered.
The fact RPC is weathering it as well as we are is a testament to the dedication and hard work of our employees.
Despite the uptick in activity, the modest industry improvements experienced during the third quarter are insignificant -- insufficient to generate sustainable financial returns.
Much of the recent increase in our industrywide activity has been driven by operators completing previously drilled wells.
For our service industry to remain healthy, we need to see sustained growth in the rig count followed by higher pricing -- higher service pricing.
The recent consolidations among the exploration and production companies likely represent a headwind in that regard.
Therefore, until we see the signs that demand for our services is likely to grow substantially, we will continue to focus on expense management and limit our capital investments.
At the end of third quarter, RPC's cash balance was $145.6 million and we remain debt free.
This financial strength allows us to continue operating in this difficult environment, make selective investments and respond appropriately as the industry evolves.
Our goal is to be cash -- free cash flow positive in 2021.
At this time, we will open up the lines for you[Phonetic]. | compname reports q3 adjusted loss per share $0.09.
q3 adjusted loss per share $0.09.
q3 loss per share $0.08.
q3 revenue $116.6 million versus refinitiv ibes estimate of $96.1 million. |
Before we begin our call today, I want to remind you that in order to talk about our company we're going to mention a few things that are not historical facts.
These non-GAAP measures are adjusted net loss, adjusted loss per share, adjusted operating loss, EBITDA and adjusted EBITDA.
We're using these non-GAAP measures today because they allow us to compare performance consistently over various periods without regard to non-recurring items.
In addition, RPC is required to use EBITDA to report compliance with financial covenants under our credit facility.
Please review these disclosures if you're interested in seeing how they are calculated.
rpc.net for a copy.
We will discuss the quarter in a moment.
Through their efforts, our company is positioned to benefit from improving business conditions.
We appreciate your dedication.
Proportionately, several COVID vaccines have been approved and are now in the early stages of distribution.
This development paves the way for a worldwide recovery in hydrocarbon demand.
On the supply side, we have experienced a lack of investment in drilling the past several years, a declining production base in "OPEC plus" discipline.
This would appear supply and demand are heading in opposite directions.
This confluence of events could potentially lead to an up cycle in our industry.
RPC's fourth quarter activity levels improved sequentially for the first time since 2016, consistent with several oilfield key metrics.
Our CFO Ben Palmer will discuss this and other financial results in more detail, after which I will provide some closing comments.
For the fourth quarter of 2020, revenues decreased to $148.6 million compared to $236 million in the fourth quarter of the prior year.
Revenues decreased due to lower activity levels and pricing compared to the fourth quarter of the prior year.
Adjusted loss for the fourth quarter was $11.3 million compared to an adjusted operating loss of $17.3 million in the fourth quarter of the prior year.
Adjusted EBITDA for the fourth quarter was $7.8 million compared to adjusted EBITDA of $23.2 million in the same period of the prior year.
For the fourth quarter of 2020, RPC reported a $0.03 adjusted loss per share compared to a $0.07 adjusted loss per share in the fourth quarter of the prior year.
Cost of revenues during the fourth quarter of 2020 was $117.9 million or 79.3% of revenues compared to $176.9 million or 75% of revenues during the fourth quarter of 2019.
Cost of revenues declined primarily due to decreases in expenses consistent with lower activity levels and RPC's cost reduction initiatives.
Cost of revenues as a percentage of revenues increased primarily due to lower pricing for our services and labor inefficiencies resulting from lower activity levels in the fourth quarter as compared to the prior year.
Selling, general and administrative expenses decreased to $26 million in the fourth quarter of 2020 compared to $36.8 million in the fourth quarter of the prior year.
These expenses decreased due to lower employment costs, primarily the result of cost reduction initiatives during previous quarters.
Depreciation and amortization decreased to $18 million in the fourth quarter of 2020 compared to $40.3 million in the fourth quarter of the prior year.
Depreciation and amortization decreased significantly, primarily due to asset impairment charges recorded in previous quarters, which reduced RPC's depreciable property, plant and equipment coupled with lower capital expenditures.
Technical Services segment revenues for the quarter decreased 36.5% compared to the same quarter in the prior year.
Segment operating loss in the fourth quarter of this year was $11.3 million compared to $17.2 million operating loss in the fourth quarter of the prior year.
Our Support Services segment revenues for the quarter decreased 43.6% compared to the same quarter in the prior year.
Segment operating loss in the fourth quarter of 2020 was $2.6 million compared to an operating profit of $1.2 million in the fourth quarter of the prior year.
And on a sequential basis, RPC's fourth quarter revenues increased 27.5%, again to $148.6 million from $116.6 million in the prior quarter, and this was due to activity increases in most of the segment service lines as a result of higher completion activity.
Cost of revenues during the fourth quarter of 2020 increased by $17 million or 16.9% to $117.9 million due to expenses, which increased with higher activity levels such as materials and supplies and maintenance expenses.
As a percentage of revenues, cost of revenues decreased from 86.5% in the third quarter of 2020 to 79.3% in the fourth quarter due to the leverage of higher revenues over certain costs including more efficient labor utilization.
Selling, general and administrative expenses during the fourth quarter of 2020 decreased 19.6% to $26 million from $32.4 million in the prior quarter.
This was primarily due to the accelerated vesting of stock recorded in the prior quarter related to the death of RPC's Chairman.
RPC recorded impairment and other charges of $10.3 million during the quarter.
These charges included a non-cash pension settlement loss of $4.6 million and the cost to finalize the disposal of our former sand facility.
RPC incurred an operating loss of $11.3 million during the fourth quarter of 2020 compared to an adjusted operating loss of $31.8 million in the prior quarter.
RPC's adjusted EBITDA was $7.8 million in the current quarter compared to adjusted EBITDA of negative $12.3 million in the prior quarter.
Technical Services segment revenues increased by $29.7 million or 27.2% to $139 million in the fourth quarter due to increased activity levels in several service lines.
RPC's Technical Service segment incurred an $11.3 million operating loss in the current quarter compared to an operating loss of $24.9 million in the prior quarter.
Support Services segment revenues increased by $2.3 million or 32.1% to $9.7 million in the fourth quarter.
Operating loss narrowed slightly from $3.8 million in the prior quarter to $2.6 million in the current quarter.
So during the fourth quarter, RPC operated five horizontal pressure pumping fleets, the same as the third quarter but with improved utilization.
At the end of the fourth quarter, RPC's pressure pumping capacity remained at approximately 728,000 hydraulic horsepower.
Fourth quarter 2020 capital expenditures were $12.8 million.
We currently estimate 2021 capital expenditures to be approximately $55 million.
This will be comprised primarily of capitalized maintenance of our existing equipment and selected growth opportunities.
As 2021 begins, we have greater visibility into the near-term activity levels than in the recent past.
Commodity prices have improved and our customers have a more constructive outlook.
However, while we expect activity levels to continue to improve as the year progresses, we remain committed to capital discipline.
We will remain disciplined and will not increase our equipment fleet until we have clarity into economic returns justifying investment.
Currently, our operating plans for 2021 include low capital spending, continued expense management and scrutiny of customer relationships for acceptable profitability.
At the end of the fourth quarter, RPC's cash balance was $84.5 million and we remain debt free. | q4 adjusted loss per share $0.03.
q4 revenue $148.6 million versus refinitiv ibes estimate of $120.8 million.
as 2021 begins, expect activity levels to continue to improve as year progresses. |
But first, I'll review the safe harbor disclosure.
I have Joining me on the call today Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer.
Sales for the quarter declined 30% primarily due to reduced ethanol gallons sold offset by an $0.11 increase in per-gallon ethanol pricing.
Sales for the quarter were based upon 47.6 million gallons this year versus 71.4 million last year.
The reduced production also resulted in lower unit sales for the ethanol by-products.
The lower ethanol production was primarily at the NuGeN South Dakota plant, as we experienced reduced availability of affordable corn, largely in response to the wet spring conditions, which has led to uncertainty on current year corn production in that area.
We also experienced a lower distiller grain pricing on a year-over-year basis.
Our consolidated corn cost per bushel rose 25% compared to the prior year, again, largely reflecting the concern for corn availability.
Combining these factors led to gross profit for the ethanol and by-product segment decreasing from $11.3 million in the prior year to $25,000 for the current year.
The refined coal segment had a gross loss of $1.8 million for the third quarter of fiscal 2019 versus $3.5 million for the prior year, reflecting lower production levels in the current year.
These losses are offset by tax benefits recorded under Section 45 credits.
SG&A decreased for the third quarter from $5.4 million to $4.1 million, primarily due to reduced incentive compensation associated with corporate profitability and reduced commission fees associated with the lower refined coal production.
Equity and income of unconsolidated ethanol affiliates decreased from $611,000 [Phonetic] to a small loss of $15,000 for the quarter.
Interest and other income increased from $809,000 to $1 million, primarily reflecting higher interest rates in the current year.
We booked a tax benefit of $3.2 million for the third quarter of this year versus a benefit of $10 million in the prior year.
The benefit is primarily as a result of the Section 45 credits from our refined coal operation, and again reflects lower refined coal production in the current year.
The above factors led to a net loss attributable to REX shareholders for the third quarter of $2.1 million this year compared to income of $11.9 million, and a loss per share of $0.32 this year versus income of $1.86 in the prior year.
Going forward, our corn supply has improved over the last quarter and the crush spreads we have also improved.
We have -- there is less production going on currently in the industry as many plants have -- or number of plants have closed or slowed down.
Demand next year should be up, if the government sticks to the announced rain products.
We're currently running at a profitable rate in ethanol and we're running at a rate that's above last year's corresponding quarter, and certainly, above the quarter we just reported.
In refined coal, we currently continue to run at a rate that -- or we continue to expect a rate less than last year, but we expect it to still be profitable in the current quarter on an after-tax basis.
Our cash balance was approximately $196 million.
We have -- still, have our authorized share repurchase program, 350,000 shares are still open to be bought.
We generally bought our shares on dips.
[Phonetic] We have -- we still have that availability, should we choose.
And we also continue to look for opportunities in the ethanol field.
At the moment, there is nothing imminent, but we are looking.
We have -- also looking at opportunities outside the ethanol field where we can use our management abilities to make profits for our shareholders.
In terms of our cash, we're currently investing it in short-term securities.
As I mentioned in our previous two calls, a challenging environment has continued throughout the year.
The Company faced a number of issues due to weather-related problems, which delayed the planting of corn, uncertainty regarding the expected corn yields and expected delays in the harvest.
We struggled to obtain an adequate supply of corn at our NuGeN facility in South Dakota, where production has fallen off of a historical level.
Our production at this point -- at this plant continue to be interrupted due to corn availability, including no operation in October.
That's largely we experienced the loss in the ethanol segment in the third quarter of 2019.
The only other time it happened was in the fourth quarter of fiscal 2012 because of drought, and that was almost seven years ago.
On top of that, we are experiencing continued uncertainty because of the trade disputes and the small refinery exemption.
Recently the EPA approved 31 small refineries exemptions for 2018, effectively reducing by 1.4 billion gallons obligation required under the renewable fuel standard.
The EPA has granted a waiver of 2016 and 2017 totally, 2.6 billion gallons.
The EPA has already received 10 petitions for small refinery exemption for -- from the 2019 renewable fuel standard compliance year.
These petitions have doubled since the EPA updated its online dashboard in September.
These waivers are contrary to President Trump's promise to deliver a huge package to the ethanol industry during the trade disputes.
As you all know, the ethanol industry did not receive any payments or subsidy from USDA or any other federal agencies.
As far as concerned about ethanol export, during the first nine-month of 2019, export fell to 1.1 billion gallons compared to 1.25 billion gallons during the same period last year.
Brazil, Canada, and India were the top three importers.
Last year, ethanol export were very healthy 1.7 billion gallon.
We expect ethanol export will drop to 1.5 billion gallon this year due to the continued trade uncertainty.
If or when trade disputes are resolved, export of ethanol are expected to increase as more countries will begin to blend ethanol into their fuel supply because of their growing concern about air quality.
The ethanol stock last week drew 237,000 barrels and the stock ended 22.277 million barrels.
That's almost -- that's now of almost 1.6 million barrels over just the last three weeks, according to a EIA data release on November 27, for the week ending in November 22nd.
Ethanol stock is down 11.6% compared to the same week, last year.
We are pleased that New York becomes the latest state to allow the sale of E15, opening up the fourth-largest fuel market in the USA.
But we are still waiting on California to approve the blend all year around.
As far as concern about the distiller grain, in the first nine months of 2019, export felt to approximately 8.3 million metric tons compared to 8.9 million metric tons in the first nine months of 2018, according to the USDA.
That's a reduction of 6% U.S. export of distiller grain in the September dropped approximately 72,000 metric tons to 1,046,000 metric tons, about 6.4% reduction in August.
However, that was 2% above the 1,020,000 metric tons exported in September 2018.
Mexico was the top buyer.
The country bought approximately 137,000 metric tons, down about 23% from the 180,000 metric tons it bought in August.
The top five importance of DDG in September were Mexico, Vietnam, Turkey, South Korea, and Japan.
DDG is currently trading at approximately 100 -- 210% [Phonetic] of the corn value.
We believe that DDG market will remain the same in the near future unless China tariff gets reduced or eliminated.
Farmers planted 19 million acres of corn and estimated corn yield is about 167 bushels per acre.
Corn use for ethanol field were down 25 million bushels each and export and domestic consumption was down about 50 million bushels each.
Due to heavy rain and floods, the planting season was delayed and many acres were planted very late or not at all.
Because of the delayed planting season, it is estimated approximately 1 billion or more bushels of corn are left to be harvested.
The carryout for 2019 and 2020 is expected to be 1.91 [Phonetic] billion bushels according to USDA.
As I mentioned previously, we have struggled to obtain an adequate supply of corn in South Dakota.
We have not seen this kind of situation during the last 10 years, including the drought year of 2012.
We have seen some improvements in the supply of corn during the harvest and the gross margin also has increased as Stuart mentioned earlier, but I stress cautions into the harvest, until the harvest is completed.
As far as concern about the capital expenses, during the last nine months, we made total capital expenses up approximately $2.6 million at our consolidated ethanol plant.
We estimate $5 million to $6 million of capital expenses during the fourth quarter, excluding any maintenance expenses.
In summary, it was a very challenging operating environment throughout the year.
We faced floods, logistic problems, production interruption because of lack of corn at the NuGeN plant, small refinery exemption and trade disputes.
But we have seen recent improvements in the gross margin, as Stuart mentioned earlier, and we currently expect to be profitable for the fourth quarter at this time.
But why did [Phonetic] this trend continues and we face no more corn shortage?
Now, I will give it back to -- floor to Stuart Rose for any additional comments.
In conclusion, as Zafar just mentioned, crush spreads and corn supplies have improved quarter-to-date versus last quarter, and we are again running at a profitable rate, and should -- and currently project if we can continue this to do better than the fourth quarter of last year.
We continue to outperform the industry even in difficult times.
We attribute this to good plants, good rail, and most importantly, we really believe we have the best people in the industry, and that's really what separates us from the industry.
I'll now turn the conference call over to questions. | compname reports q3 loss per share of $0.32.
compname reports third quarter diluted earnings per share loss of $0.32.
q3 loss per share $0.32.
rex american resources - lower q3 '19 ethanol production and lower distiller grain pricing resulted in year-over-year decline in net sales and revenue. |
But first, I'll review the safe harbor disclosure.
As such, actual results may vary materially from expectations.
I have joining me on the call today, Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer.
Sales for the quarter increased 43% primarily due to increased production levels.
Ethanol sales for the quarter were based upon 74.6 million gallons this year versus 47.6 million gallons last year.
We ran our consolidated plants at full capacity in the current year third quarter while last year we had reduced the run rate at the NuGen plant based upon tight corn supply in that region.
Ethanol price per gallon did decline from $1.39 in the prior year to $1.31 in the current year.
We reported a large increase in gross profit to $18.9 million in the third quarter for the ethanol and by-products segment versus a gross profit of $28,000 in the prior year.
Our crush spread between ethanol and corn was approximately $0.19 in the current year versus approximately a negative $0.04 in the prior year, primarily reflecting year over year lower corn pricing of 21%.
Our refined coal segment had a gross loss of $1.3 million for the third quarter of fiscal 2020 versus $1.6 million in the prior year based upon lower volumes.
These losses are offset by tax benefits of $1 million and $2.2 million for the third quarters of fiscal 2020 and 2019 respectively recorded from the Section 45 credits and the tax benefit from operating losses.
SG&A was similar for the third quarter at $4.3 million versus $4.1 million in the prior year.
We recorded income of $1.2 million from our unconsolidated equity investment in this year's third quarter versus a small loss of $15,000 in the prior year.
Interest and other income declined year-over-year from $1 million to $537,000, primarily due to lower interest rates on a cash and short-term investments as interest rates fell sharply during the current year.
We recorded a tax provision of $4.1 million for the third quarter of this year versus a benefit of $3.2 million in the prior year.
We had a tax expense in the current quarter based upon returning to profitable operations, reversing in the third quarter previously recorded federal benefit of losses at 35% for the current year as well as having lower run rates at the refined coal facility.
The above factors led to net income attributable to REX shareholders of $8.8 million or $1.44 per share in this year's third quarter versus the net loss of $2.1 million or a loss of $0.32 per share in the prior year.
The quarter -- on the quarter to date going forward, we so far are profitable, but crush spreads have deteriorated rapidly in the last 30 days, Zafar Rizvi, our CEO will discuss that further.
We have hoped for a possible better EPA and Agriculture Secretary related to ethanol in the Biden administration that should be a positive -- we hope to be a positive for our Company.
Currently there is less driving which is related to COVID hitting people hard.
And I expect it to hit people even harder right before the vaccine -- hit us even harder right before the vaccine as people are more cautious as they see a vaccine coming soon.
And we believe more people will be staying home.
In terms of refined coal, we have approximately one year left where we receive tax credits, or expect to receive tax credits on that business.
The fourth quarter did well.
We expect it to improve over the third quarter on an after-tax basis.
When cold weather hits, the utilities usually run more which gives us a chance to make more refined coal from the utility, where it usually runs more which gives us a chance to make more refined coal.
In terms of short-term cash on the balance sheet, we have approximately $202 million in short-term cash and short-term investment, -- excuse me, short-term investments and cash on the balance sheet, we have approximately $202 million.
We repurchased 316,349 shares.
And so far in fiscal 2020, we have authorization for another 33,512.
We current -- under our current authorization and we tend to or try to buy or use our buyback to buy the stock on debts.
We're also looking for opportunities in the ethanol field, where we're only really looking at plants that we consider among the very, very best.
In terms of carbon capture, we're working hard on that.
Zafar Rizvi, our CEO will discuss that.
I'll now turn the conference call over to our CEO, Zafar Rizvi.
As I mentioned during calls -- about the last two quarters, this year started in a challenging environment including: a decline in the crude and ethanol demand and price; COVID-19 pandemic shutdown of businesses and; stay at home orders.
And we struggled to find corn for NuGen facility.
We saw a decrease in the fuel demand and the negative impact to the ethanol industry.
We experienced improvement in late May when the COVID-19 shutdown order were relaxed, creating a greater demand for the gasoline and ethanol.
During the third quarter, condition further improved, most importantly, we received a steady flow of corn at both of our majority owned as well as minority owned locations.
This resulted in an improved crush margin and a very profitable third quarter.
These improved conditions continued until recently, now we are seeing a decline in the crush margin.
Due to higher corn price, the price of ethanol failed to keep up with the increase in corn prices in the wake of the threat of another wave of COVID-19.
Also, direct payment to farmers under the CARES Act resulted in a lack of interest from farmers in selling corn.
When China stepped up its corn purchase, that led to a higher corn price.
In addition, we are experiencing continued uncertainty because of the trade dispute.
And the EPA continued to consider and grant small refinery exemption from RFS compliance year.
Unless economic condition and the availability of the corn continue to improve, trade disputes as a result, and COVID-19 threat diminishes, we expect the crush margin may continue to decline due to less demand for ethanol and the higher cost of corn.
On the other hand, USDA corn report shows corn condition at the South Dakota are 79% excellent to good.
We had difficulty in sourcing corn at our NuGen plant during the last crops year.
But this year the crops around our plants' draw in South Dakota and Illinois is strong and encouraging.
The corn crops for 2021 year is projected to yield approximately 14.5 billion bushels and expected to carry 1.7 billion bushels.
DDG export dropped approximately 111,000 [Phonetic] metric tons in the first nine month of 2020 compared to last year.
Export of dry distal grains through September 2020 totaled approximately 8.24 million metric tons compared to 8.3 million metric tons for the first nine month of 2019.
Ethanol export during this timeframe totaled 983 million gallons, 89% of last year's volume of 1.1 billion gallons during the same period.
Let me give you a little bit about our carbon sequestration project.
As I mentioned during our last call, we are working with the University of Illinois to drill a carbon sequestration well at our One Earth Energy facility.
The University of Illinois is in the process of evaluating a permit application to drill a test well.
Their teams will perform 2D seismic surveys to select the location and conduct a front-end engineering and design feed study of the CO2 capture system.
The University expect to receive a well drilling permit in the first quarter of 2021 and plan to drill the test well within the first half of 2021.
This project -- this project is still a very preliminary stage and we cannot predict yet that we will be successful with this project.
In summary, we are pleased to announce a very profitable quarter in spite of a very difficult environment for the industry.
We are pleased with the production of the corn crops in our draw area this year over last year.
It helped and led to a very profitable third quarter.
They contributed to profitable third quarter earnings in spite of the uncertainty and the difficult overall environment.
I will give back -- floor back to Stuart Rose for additional comments.
As Zafar said, we had a good quarter, we regained profitability, but hard times have hit us again as the crush spread have gone negative.
All things considered, a profitable quarter during these times is something to be proud of.
And, our plants are among the -- and continue to be among the best locations and best plants in the industry.
And as Zafar said most importantly and the best part of our Company is, during these COVID times, our employees have shown how great they are, they've been heroes, they've come to work and we're very proud that we have the best -- the best employees in the industry.
And that's allowed us to produce among the best numbers in the industry.
I'll now leave the forum open to questions. | compname posts q3 earnings per share $1.44.
compname reports fiscal 2020 third quarter earnings per share of $1.44.
q3 earnings per share $1.44. |
But first, I'll review the Safe Harbor disclosure.
I have joining me on the call today Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer.
REX is very pleased to report on our strong third quarter results.
We now have just one reportable segment of ethanol and by-products.
Sales for the quarter increased by 63% as we experienced higher pricing for ethanol, distiller grains and corn oil.
Ethanol sales for the quarter were based upon 69 million gallons this year versus 74.6 million last year.
The reduced gallons were primarily due to limited corn supply at the beginning of the quarter which abated once the current year corn harvest began.
We reported gross profit of $25.2 million from continuing operations versus a gross profit of $18.9 million in the prior year.
For the current year quarter improved selling prices were offset somewhat by higher corn and natural gas pricing.
Ethanol pricing improved by 76%, dried distiller grain improved by 43% and corn oil pricing improved by 146% for this year's quarter over the prior year quarter.
Corn cost increased by 97% and natural gas pricing increased by 119% for this year's quarter compared to the prior year.
SG&A increased for the third quarter to $6.3 million from $4.3 million in the prior year.
This primarily represents increased incentive compensation based upon higher earnings in the current year and increased railcar lease costs.
We had income of $349,000 from our unconsolidated equity investment in this year's third quarter versus income of $1.2 million in the prior year.
Interest and other income decreased to approximately $35,000 versus $537,000 in the prior year, primarily reflecting the lower interest rate environment.
As mentioned above, since refined coal operation is now classified as discontinued operations, its results and historical results now reflected on one line on the income statement including the tax benefits from this business.
We reported $2 million of net income reportable to REX shareholders from discontinued operations for the third quarter.
This also resulted in us reporting a tax provision of $4.3 million for the third quarter of this year versus a provision of $5 million in the prior year from our continuing operations.
These factors led to net income attributable to REX shareholders from continuing operations of $13.3 million for this year's third quarter versus $9 million in the prior year, a 47% improvement.
Our net income per share from continuing operations attributable to REX shareholders was $2.23 for this year versus a $1.47 in the prior year.
Total net income per share, attributable to REX shareholders, including the discontinued operations was $2.56 for the quarter versus a $1.44 in the prior year.
Doug, is Stuart there still?
Zafar, why don't you go ahead?
Sorry, I'm on, I'm on.
Going forward, we are currently running in a significantly higher rate of earnings per share in the quarter that we currently reported.
Crush spreads have risen greatly even with higher input prices of corn and natural gas.
Zafar Rizvi will discuss this later in his section.
Refined coal operations as Doug ended in the middle of November.
After tax, it was profitable all the way up to the end.
Tax credits that -- we have not used that yet, we'll carry forward for up to 20 years, will help our cash flow significantly over in the next few years, assuming we continue to make good earnings.
The sequestration project is moving forward.
Carbon sequestration, Zafar Rizvi again will discuss that in his section.
Cash balance right now has risen to $219 million, up significantly from year-end of $108.7 million.
We currently, based on current operations, we again expect that to rise over the next -- over the next couple of -- over this quarter.
We bought back almost 67,000 shares in the quarter, we're working on our carbon capture project which Zafar again will talk about.
We continue to look for top quality ethanol plants, we tried, but we've not been as imminent at this time, we know nothing that's top quality that is up for sale at a price, we would consider buying it for.
We are open to considering other alternative energy projects and carbon capture opportunities.
So we'll see what happens in those areas.
Again, our cash balance as you can see on the balance sheet, $219 million.
Zafar will now discuss the operations.
As I mentioned in our previous quarterly call, the operating environment in 2021 improved in the first and second quarter.
We saw a decline in the crush margin in the beginning of the third quarter due to several factors.
But then the operating environment has begun to change.
An early harvest resulted in an increase in the availability of the corn -- favorable ethanol and corn oil prices helped to increase the crush margin due to the availability of corn.
We were able to increase the production at our plants, which is resulted in a very profitable quarter as Doug and Stuart mentioned earlier.
We continue to see favorable trend as Stuart just mentioned in crush margin, which could result into another profitable quarter.
Both of our majority-owned plants currently are producing at near capacity, are the logistic problems continue to be very challenging and are beginning to get worse due to the slowdown of the railroad and the availability of DDG containers and trucks.
We expect this trend may continue into the first quarter of next year or maybe longer which could adversely affect production and net income.
Let me give you a little bit of progress of our carbon sequestration project.
As you know, we are working with the University of Illinois to drill carbon sequestration well.
We have received a permit from the Illinois Department of Natural Resources to drill a test well, the site for the drilling has been prepared.
Rigs and other materials and equipment have arrived at the site.
We expect drilling will start today.
We hope to convert the test well into Class VI in the monitoring well.
The first stage of preparing the Class VI permit application has been using.
Existing information and US EPA has been notified.
The completion of the application process will continue -- will continue as we began to receive more information after the test well is completed in January 2022.
It will require another several weeks of testing, extensive modeling and computer stimulation to predict the behavior of the CO2, when it is injected, it is a very slow process.
This stimulation model will determine how much CO2 can be injected at the location, at what rate and it is eventual distribution in the subsurface area.
2D seismic processing has just finished and currently, preliminary [Phonetic] reports looks good at the proposed site.
The process [Indecipherable] testing has started, permitting fertility [Phonetic] usually takes more time than 2Ds as there is more land involved.
The fertility require us to enter in the fields and run linear grids across the property after receiving permission from the landlord -- landowners.
Our FEED study of the capture of CO2 and the design of the facilities are underway.
The design of the capture CO2 facility is expected to be completed soon.
As I have mentioned in the previous calls, this project is still at a very preliminary stage, and we cannot predict yet that we will be successful.
In summary, we are pleased to announce once again a very profitable quarter and progress with our carbon sequestration project.
I'll get back -- I'll give the floor back to Stuart Rose for additional comments.
In conclusion, we had a very, very good quarter as we both mentioned.
We're in the midst of an even better quarter, a significantly better quarter as crush spreads have risen.
We have continued to outperform the industry.
Significantly, we have good plants, good locations and as Zafar mentioned, we believe we have the best people in the industry and much capable people in the industry.
That's really what sets us apart from what the average plan is currently doing.
I'll now leave the floor open to questions. | compname reports q3 earnings per share of $2.56.
compname reports fiscal 2021 third quarter net income per share attributable to rex common shareholders increase of 78% to $2.56.
q3 earnings per share $2.56. |
The Everest executives leading today's call are Juan Andrade, President and Chief Executive Officer; Mark Kociancic, Executive Vice President and Chief Financial Officer.
We are also joined by other members of the Everest management team.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings.
Management may also refer to certain non-GAAP financial measures.
Everest delivered an outstanding second quarter with strong growth and excellent underwriting and investment performance.
We set multiple records for our company on both the top and bottom lines.
These results serve as the foundation for our exceptional net income result of over $1 billion through the first half of 2021, and another important step to achieving our three-year strategic plan objectives and the delivery of superior results to our shareholders.
Everest achieved an annualized total shareholder return of 22.5% through the first half of 2021, while exceeding our three-year strategic planned target of 13%.
We capitalized on market opportunities to expand our franchises in both reinsurance and insurance, driven by relentless execution and the strength of our value proposition to our clients and brokers.
Disciplined underwriting drove strong profitability in both reinsurance and insurance, and our investment return was a quarterly record for the company.
The standout performance this quarter demonstrate the progress we have made in executing our strategy and the quality of Everest's diversified earnings.
As I discussed at our Investor Day in June, our strategy has three building blocks.
First is building our underwriting franchises.
We are growing our specialty P&C insurance platform while expanding its margins.
We are solidifying our leadership position in global P&C reinsurance, while we are growing and diversifying this business.
Our investment portfolio is a core tool to generate solid returns, and we're optimizing the portfolio while sharpening our strategy.
Second, we continuously pursue operational excellence.
This starts with underwriting discipline, supported by a system of management oversight and checks and balances.
Beyond underwriting, we are transforming the operating model of the company to achieve greater scalability over time.
We are also optimizing capital within our underwriting and investment portfolios.
Capital is valued and respected.
We are using the most efficient sources of underwriting capital from the capital markets, including ILS investors.
In our industry, those who execute best, win.
We're leveraging our flat, agile organization to deliver best-in-class service and risk solutions to our brokers and customers.
They routinely site our responsiveness and capabilities as a key reason why they choose to do more business with Everest.
Finally, ESG principles are core to Everest.
This includes focusing on the culture our company.
Culture is one of our key differentiators, and it is one of the reasons we can attract and keep top talent.
Our culture fuels our success by helping our team be the best it can possibly be.
We're investing in the talent of the organization as well as the diversity of our team.
At Everest, we have three drivers of earnings.
The first driver is about building a high-quality specialty commercial P&C insurer, the underwriting excellence and a compelling value proposition.
We are embedding data and analytics across the organization, enabling more effective pricing and decision-making.
This means we make better underwriting decisions at improved loss ratios.
We are improving our claims outcomes while delivering excellent service to our clients, and we're focusing our distribution efforts to be more sales and results oriented.
Our second driver of earnings is Everest leading global P&C reinsurance platform.
We enjoy the leading market position of a fully scaled platform, and we are focused on continuing to grow and optimize our reinsurance business.
We're executing an underwriting transformation by improving operational oversight, governance and controls.
Our reinsurance division is entrepreneurial and nimble.
We will maintain it within a framework of pricing, reserving and process discipline.
We're further diversifying into higher-margin opportunities.
And finally, we're expanding our risk financing by further partnering with capital markets and ILS investors.
The third core driver of earnings is the investment portfolio.
We have a high-quality portfolio, and we're focused on the efficient use of capital.
The successful execution of our strategies in all three drivers of earnings is clearly evident in our results.
I will now discuss our group reinsurance and insurance first quarter 2021 results.
Starting with the group results.
We grew gross written premiums by 35% and net written premiums by 39%.
Our growth was broad and diversified, stemming from: one, increased exposures and new business opportunities as the U.S. economy recovers; two, continued double-digit rate increases; three, expanded shares on attractive renewals; and four, strong renewal retention.
The combined ratio was 89.3%, an 8-point improvement year-over-year.
The attritional combined ratio was 87.6%, almost a four point better than prior year, with both segments expanding margins.
We generated $274 million in underwriting profit compared to $51 million in the second quarter last year.
Underwriting profitability remains at the core of everything we do.
Net investment income was simply outstanding at $407 million, compared to $38 million in the prior year second quarter.
These strong operating results led to a net income for the quarter of $680 million, resulting in an annualized return on equity of over 28%.
Gross written premiums in reinsurance were up 40% over the second quarter of 2020.
We are pleased with the ongoing execution of our 2021 plan.
This growth was broad-based in the areas we discussed during Investor Day as attractive.
We achieved this growth while also coming off or reducing shares on less attractive business.
We drove continued targeted growth in property cap, which we achieved while lowering our PMLs in peak zones, thus reducing expected volatility and improving risk-adjusted economics.
Much of our growth came from our core trading partners that are looking to grow with Everest because of our strong ratings and balance sheet, significant capacity and the ability to ride across all lines.
The attritional combined ratio, ex COVID-19 pandemic impact was 86.1% for the quarter, a 60 basis point improvement year-over-year, resulting from our continued focus on loss and expense management.
We see risk-adjusted returns expanding in almost all treaties and classes of business globally.
We're also benefiting from investments in data and analytics.
As you can see in our results, our focused actions improved the quality and profitability of the book.
We are writing a more balanced portfolio with improved economics at an appropriate level of risk.
We have achieved improved portfolio economics across all of our 2021 property renewal dates.
We improved in every dimension.
We increased top line, increased margin and achieved higher ROEs.
In casualty and professional lines, primary rate increases continued to outpace expected loss trends.
Jim Williamson is available to provide additional details during the Q&A.
Our insurance division continued its strong performance with excellent growth in underwriting results.
We continue to expand margins as we execute our strategy.
We wrote over $1 billion in gross written premiums for the first time in a quarter.
This represents 25% growth year-over-year or 30% growth, excluding workers' compensation.
This growth is driven by disciplined cycle management, new business opportunities, continued double-digit rate increases and strong renewal retention on existing business.
We're also starting to see a steady improvement in overall economic activity.
The growth was well diversified in target classes of business, where market conditions are prime for profitable growth, including specialty casualty, professional liability, property, transactional liability and trade credit and political risk.
We are pleased with this diversification as it is a core tenet of our strategy.
We also delivered strong underwriting results with a 93.5% combined ratio, a 10-point improvement over the same period last year, which was impacted by COVID.
The underlying performance was also excellent with a 92.1% attritional combined ratio, a 1.6% improvement over last year and almost four points better than the second quarter of 2019.
Renewal rate increases continued to exceed our expectations for loss trend, up 14% in the quarter, excluding workers' compensation, and up 11%, including workers' compensation.
Rate increases were led by excess casualty, up 22%; property, up 16%; financial lines, up 14% and general liability, up 9%.
We are building a diversified portfolio, steering our mix toward product lines with better rate adequacy and higher long-term margins.
We also continued to manage average limits deployed to mitigate volatility.
We are pleased with the progress we have made.
And this strategic direction and granular portfolio management should continue to possibly impact our results going forward.
We continue to thoughtfully manage the workers' compensation line, which now represents 10% of our second quarter premiums, down from 14% year-over-year.
While this line remains profitable, we have pared back monoline guaranteed cost writings and shifted to more loss sensitive loss ratable business, where we share more risk with our customers with more focus on risk mitigation.
Workers' compensation is an area of expertise at Everest, and we're monitoring market conditions closely for potential opportunities, but these efforts illustrate our disciplined cycle management.
Lastly, our strong position in both the E&S and retail channels continues to give us access to a wide set of opportunities.
Mike Karmilowicz is available to provide additional details during the Q&A.
In summary, Everest had an outstanding second quarter with strong growth and exceptional underwriting and investment performance.
We have vibrant and well-diversified reinsurance and insurance businesses with experienced leadership and underwriting teams providing industry-leading solutions to our customers.
We have significant momentum as we continue to execute our strategic plan.
The company has excellent financial strength, top talent and a prudent capital management philosophy.
We are focused on sustained profitable growth, a more diversified, targeted and deliberate mix of business and superior risk-adjusted returns.
We believe the relentless and disciplined execution of our strategy will result in maximizing shareholder returns.
I am confident in Everest's future and our ability to deliver on our commitments to customers and shareholders.
Everest reported excellent results for the second quarter of 2021, with robust premium growth, excellent underwriting results and truly outstanding investment returns.
I'll provide more detail on these points over the next few minutes.
For the second quarter of 2021, Everest reported gross written premium of $3.2 billion, representing 35% growth over the same quarter a year ago.
By segment, reinsurance grew 40% to $2.1 billion and insurance reported its first-ever $1 billion top line quarter, representing 25% growth year-over-year.
Turning to net income.
For the second quarter, Everest reported net income of $680 million, resulting in an annualized return on equity of 28%.
We also reported net operating income of $587 million, equal to operating earnings of $14.63 per share and an annualized operating return on equity of 24.5%.
All three of our earnings engines provided meaningful contributions with significant underwriting income from both our reinsurance and insurance franchises, capped off by net investment income of $407 million, a record quarterly net investment income result.
The underwriting income during the quarter of $274 million reflects Everest's disciplined execution of our strategy to grow and expand margins.
The combined ratio was 89.3% for the quarter, compared to 97.5% last year.
Catastrophe losses during the quarter of $45 million are pre-tax and net of reinsurance and reinstatement premiums, with $35 million in the reinsurance segment and $10 million in the insurance segment, representing additional IBNR provisions for Winter Storm Uri.
Reinsurance segment cat loss includes a provision for minor events and preliminary IBNR for the European convective storms of late June.
Finally, I note we have not added to our COVID-19 incurred loss provision, which remains at $511 million, with the vast majority remaining as IBNR.
Second quarter results continue to reflect the impact of our underwriting and portfolio management initiatives.
Our underlying attritional profitability remained strong during the second quarter.
Excluding the catastrophe losses, reinstatement premiums, prior year development and COVID-19 pandemic impact, the attritional loss ratio for the group was 60.3% in the second quarter of 2021, compared to 60% in the second quarter of 2020.
The year-to-date attritional loss ratio for the group was 60.5% compared with 60.7% a year ago.
The attritional combined ratio for the group was 87.6% for the second quarter compared to 88.5% for the second quarter of 2020, representing a 0.9 point improvement.
Year-to-date, attritional combined ratio for the group was 87.4% compared with 89.1% a year ago, representing a 1.7 point improvement.
For insurance, the attritional loss ratio improved to 64.2% in the second quarter of 2021 compared with 65.1% year-over-year.
The attritional combined ratio for insurance improved to 92.1% as compared to 93.7% over the same period of time.
Our U.S. insurance business, which makes up the majority of our insurance business overall continues to run very well with an attritional combined ratio in the high 80s.
For reinsurance, the second quarter 2021 attritional loss ratio was 59.1% compared with 58.2% a year ago.
The increase was due to a mix of business shift and more prudent initial loss picks.
The attritional combined ratio was 86.1% for the second quarter, down from 86.7% for the second quarter of 2020.
The group commission ratio of 21.8% for the second quarter of 2021 was down 100 basis points from 22.8% reported in Q2 2020, largely due to changes in the composition of our business mix.
The expense ratio remained low at 5.5% for the quarter as compared with 5.8% reported a year ago, and the expense ratio continues to benefit with our continued focus on expense management and the increased scale and efficiency of our operating model.
For the second quarter, investment income had an exceptional result of $407 million as compared to $38 million for Q2 2020.
Alternative investments accounted for $266 million of income during the second quarter, largely due to increases in the reported net asset values of our diversified limited partnership investments.
And as a reminder, we report our LP income one quarter in arrears.
And in 2020, the market and the world were starting to experience the impact of COVID-19, while so far, in 2021, results continue to benefit from economic and financial markets recovery.
Invested assets at the end of the second quarter totaled $27.1 billion compared to $21.6 billion at the end of Q2 2020 and $25.5 billion at year-end 2020.
Approximately 80% of our invested assets are comprised of a well-diversified high credit quality bond portfolio with a duration of 3.6 years.
The remaining investments are allocated to equities and other investment assets, which include private equity investments, cash and short-term investments.
Our effective tax rate on operating income for the second quarter of 2021 was 9.3% and 10.6% on net income.
This was a favorable variance versus our estimated tax rate of approximately 11% based on the geographic distribution of income.
For the first six months of 2021, Everest generated a record $1.6 billion of operating cash flow, compared to $1.1 billion for the first half of 2020, reflecting the strength of our premium growth year-over-year.
Our balance sheet remains very strong with a capital structure that allows for the efficient deployment of capital and ample capacity to continue to execute on market opportunities.
Shareholders' equity was $10.4 billion at the end of the second quarter 2021, compared with $9.7 billion at year-end 2020.
We repurchased $16.8 million of shares in the quarter.
Our debt leverage ratio is 13.3% or approximately 15.5% inclusive of our $310 million short-term loans from the Federal Home Loan Bank.
Book value per share was $260.32 at the end of the second quarter compared with $241.57 at the end of Q1 2021, reflecting dividend adjusted growth of 8.4%.
And I'll close with one final number.
The total shareholder return or TSR target that we detailed in our Investor Day a few weeks ago, recall that TSR is defined as the annual growth in book value per share, excluding unrealized gains and losses on fixed maturity investments plus dividends per share.
And for the year-to-date, the TSR number is 22.5% annualized. | q2 operating earnings per share $14.63.
qtrly gross written premium growth of 35% and net written premium growth of 39%. |
The Everest executives leading today's call are Dom Addesso, President and Chief Executive Officer; Juan Andrade, Chief Operating Officer; Craig Howie, EVP and Chief Financial Officer; John Doucette, EVP and President and CEO of the Reinsurance Division; and Jonathan Zaffino, EVP and President and CEO of the Everest Insurance Division.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these SEC filings.
Management may also refer to certain non-GAAP financial measures.
In the third quarter, Everest produced operating earnings of $3.39 per share, despite experiencing $280 million of cat losses.
Our underlying performance continue to be excellent, as our attritional underwriting gain of $250 million nearly offset the cat loss.
On a year-to-date basis, our underwriting profit was $365 million and $700 million, excluding cats.
This is a solid outcome and demonstrates our ability to absorb cat volatility due to a large and well diversified book of business.
When combined with another solid quarter of investment income the year-to-date operating income is at $742 million.
These outcomes are being driven by an organization that has evolve dramatically over the last several years due to an intentional strategic focus and supported by market conditions.
What you see, for example, is a continued effort to reduce cat volatility as a result of growth, diversification and exposure reductions.
In reinsurance, the growth has been focused largely on mortgage risk and casualty lines, where rates, terms and conditions have been improving.
Keep in mind that our push into these lines, especially casualty, was more recent vintage.
For many years, we de-emphasized casualty only recently, as the market has been improving and we've been growing premium.
The greatest diversify, however, has been our successful push into the specialty insurance space.
By year-end, we will be closing in on $3 billion of annual gross premium, and as you have seen, the profit picture there remains solid.
Our timing on these initiatives has been good.
Rates are improving in many sectors.
And yes, while there have been pockets of frequency and severity trends to take note of, these are managed through conservative loss picks through the cycle.
We are in a long-term business, and at times cost of goods sold may seem uncertain.
But we are less worried about that and what we see on trend versus rate, given our book of business and where we have impact.
The market is poised to continue higher as it grapples with trend, increasing weather events and anemic investment returns on new money, but now is not the time to retreat.
With that, let me pass it over to my colleagues to give you some of the details around this story.
First Juan Andrade, who as you know is my successor, effective January 1.
It's a privilege to be here as a member of the Everest team.
After 8 weeks on the job, I've had the opportunity to start getting deeper into our businesses and to meet our employees, major customers and our key distribution partners in the US and around the world.
I'm very appreciative for Dom's support and that of the entire leadership team.
As we transition responsibilities at the end of the year.
Dom has built a great business that we will continue to advance.
Everest is well positioned for the current market environment.
We have a highly diversified franchise with a strong team of smart and experienced leaders, a rock-solid balance sheet and enduring customer relationships.
I've been very pleased with the talent, division, the energy, the focus and the pride in Everest that everyone I have met has shown.
The feedback that I have received from our customers has been universally passed.
They value the longevity of our trading relationship, our financial strength and sizable capacity, our knowledgeable underwriters and the access to products in the right locations, along with our responsiveness and innovation.
We have two very strong and complementary businesses.
We are a top 10 global reinsurer with a 47-year history.
We have a seasoned and strong underwriting team around the globe, broad product capabilities, a dynamic strategy that is responsive to market conditions, best-in-class data-driven management systems and a competitive expense advantage.
We also have an entrepreneurial and growing primary specialty insurance business with a 'client first' culture of providing solutions with more than 150 products and services.
This team is led by highly skilled industry professionals who are focused on sustainable profitability and growth and who have the underwriting discipline and built the tools and processes required to ensure continued success.
While being very cognizant to the challenges facing our industry, we also see opportunity.
These industry challenges are resulting in improving pricing and terms and conditions in both insurance and reinsurance.
In some classes of business, we are seeing the strongest rate movement than many years.
This change in the market is long overdue, and we remain committed to being selective to where we dedicate resources and capacity.
At Everest, we will continue to focus on underwriting profitability and sustainable growth with a relentless focus on execution, diversifying our, business always strengthening our enduring relationships, managing our cat exposure and maintaining our strong balance sheet that provides the foundation for the security that we provide to our customers.
I am optimistic about the future of Everest.
We have a strong franchise that is positioned to succeed, regardless of market conditions.
For the third quarter of 2019, Everest reported net income of $104 million.
This compares to net income of $198 million for the third quarter of 2018.
On a year-to-date basis, Everest had net income of $792 million compared to net income of $474 million for the first nine months of 2018.
The 2019 result represents an annualized net income return on equity of 13%.
These results were driven by a strong underwriting performance across the Group, our highest quarterly investment income in the last nine years and lower catastrophe losses compared to the first nine months of 2018.
In the third quarter of 2019, the group incurred $280 million of net pre-tax catastrophe losses compared to $230 million in the third quarter of 2018, the catastrophe losses related to Hurricane Dorian at $160 million and Typhoon Faxai at $120 million.
On a year-to-date basis, the results reflected net pre-tax estimated catastrophe losses of $335 million in 2019 compared to $795 million in 2018.
Average reported $52 million of favorable prior year reserve development in the quarter.
This primarily related to a one-time commutation of a multi-year contract that reduced prior year carried loss reserves by $44 million, which was offset by $44 million of commission paid.
Effectively, no material impact to the underwriting result in the quarter.
Another $4 million of the favorable development was identified through reserve studies completed in the third quarter of 2019.
Excluding the catastrophe events and favorable prior year development, the underlying book continues to perform well with an overall current year attritional combined ratio of 87.7% through the first nine months compared to 87% for the full year of 2018.
This increase was primarily due to the business mix in the Reinsurance segment, which as we have noted has been writing more casualty business over the past several quarters.
Pre-tax investment income was $181 million for the quarter and $501 million year-to-date on our $20 billion investment portfolio.
Investment income was up $60 million or 14% from one year ago.
This result is primarily driven by the growth in invested assets coming from our record cash flow, which was $1.5 billion during the first nine months.
Some of the strong cash flow comes from the increase in overall premium volume, including an increase in the casualty writings, which has a longer tail and allows us to invest the money longer.
Before moving into taxes, I'd like to point out that we included for the first time on Page 15 in the financial supplement a split of our net investment income between the Insurance segment and total Reinsurance.
This shows an indication of the contribution provided by each segment to pre-tax operating income and reflects $361 million allocated to reinsurance and $140 million of net investment income allocated to the insurance segment.
The split is based on gross carried loss reserves, excluding catastrophe reserves.
We are including this information to better demonstrate the total contribution by business segment and illustrate the unrecognized embedded value of the growing insurance franchise.
This is consistent with previous comments encouraging investors to look at Everest on a 'sum of the parts' basis.
On income taxes, the tax benefit we recorded in the quarter was the result of the amount and geography of the losses associated with the catastrophes and the favorable prior year reserve development associated with the one-time commutation of a multi-year contract that I previously mentioned.
The year-to-date effective tax rate of 9% is an annualized speculation that includes planned catastrophe losses for the remainder of the year.
Higher-than-expected catastrophe losses would cause the tax rate to trend lower than the current 9%.
Shareholders' equity for the Group ended the quarter at $9 billion, up over $1 billion or 14% compared to year-end 2018.
The increase in shareholders' equity is primarily attributable to $792 million of net income and the recovery in the fair value of the investment portfolio.
Our balance sheet and overall financial position remained strong.
We maintain industry-low debt leverage, a high quality investment portfolio and continue to generate positive cash flow.
You will notice some minor revisions related to foreign exchange in our financial supplement, none of these revisions impact operating income.
And now John Doucette will provide a review of the reinsurance operations.
The magnitude of industry losses over the past three years has been extraordinary for the reinsurance market.
Although the insurance industry would have hoped for a quieter 2019 to regroup, this has not been the case.
The losses have shaken up the primary reinsurance and retro markets, creating dislocation and in turn opportunity.
Though not an across-the-board traditional hard market, we see a foundationally more sustainable environment for the near and medium term in many lines.
Multiple factors are pushing the market, including 2017, '18 and '19 cat losses, with corresponding trapped capital and negative sentiment for ILS; emerging industry loss trends in casualty; improving primary market and underwriting actions taken by major participants; and continued low investment income yields.
Given the above, we are increasingly optimistic on the treaty and facultative global reinsurance markets heading into renewal and our improving opportunity to deploy capital profitably in n 2020 and beyond.
We continue to see increased demand for reinsurance globally, driven by our clients' desire to reduce volatility, manage regulatory capital constraints and decrease net capacity deployed.
That increase in demand, in conjunction with improved insurance and reinsurance pricing terms and conditions, will result in more opportunities hitting our underwriting requirements and pricing targets.
At the same time, the supply of reinsurance capital is relatively flat or down considering trapped capital, given that over 50% of the retro capacity is supported by unrated alternative capital.
And there will be more collateral trapped by the recent events, in addition to the remaining collateral still trapped from the 2017 and '18 events.
Not all rated reinsurers are position to right multiple classes of business across all territories to clients, large and small, but we are.
With our solid financial strength in ratings, multi-decades long trading relationships, we are one of a few global reinsurers writing in all P&C lines in most developed territories, making us well positioned to take advantage of these positive trends to drive differentiated results.
Year-to-date reinsurance premium is $4.7 billion, up 3% from last year.
Growth in our business is being driven by increased casualty writings, more proportional business.
, mortgage, more treaties with our global clients and increased back opportunities.
This growth was muted by the reunderwriting of some portions of our property book, as we pushed pricing and reduced lines or came-off programs that did not meet our required pricing targets.
Year-to-date reinsurance underwriting profits are $310 million, impacted this quarter by the Dorian and Faxai losses mentioned by Craig.
Year-to-date reinsurance attritional losses are 57.5% compared to 57% for the full year 2018, due predominantly to shift in mix, increased casualty business as well as overall more proportional business to capture the primary rate movements.
This is offset by increased mortgage writings, which have a lower combined ratio.
Heading into the renewal season, we are optimistic about the market conditions in casualty, fac, mortgage and certain property markets, including retro and loss affected areas.
In US casualty, reinsurance terms are improving.
Primary rates are increasing on loss-affected programs, along with some tightening of terms and conditions.
Some market participants have signaled reducing capacity.
Combined, this results in some interesting opportunities.
Since 2018, we have been increasing our casualty reinsurance writings based on these improving conditions.
And this trend will likely continue heading into January 1 renewals.
Facultative is seeing meaningful increased submission activity globally, improved rates and terms in both property and casualty, resulting in an increased business at much improved economics.
As mentioned last quarter, our global fac book is well over $400 million gross written premium in force, and we see continued growth opportunities there, given favorable market conditions.
Fac is typically a leading indicator of client risk appetite and therefore shows increased future demand for our treaty capacity.
The global impact of Lloyd's and other major insurers reunderwriting is meaningful.
Significant premium is coming to market, which is then subject increased rate and improved terms and conditions.
This is in addition to some large primary insurers' tightening capacity and pushing rate in both property and casualty lines.
The mortgage market remains favorable as the large GSEs, Fannie and Freddie continue to privatize risk.
Our well-seasoned mortgage portfolio continues to produce strong earnings with growth potential.
Currently, our annualized mortgage book is about $200 million of gross written premium, including many multi-year deals with future premium that has not yet been recognized.
We continue to proactively scrutinize relevant economic trends and underwriting standards, which remain attractive, and we'll continue to look for more opportunities there.
Given these multiple areas to deploy profitably our capital, our pricing targets for cat-exposed property reinsurance and retro continue to rise.
We remain committed to manage volatility through our long-standing disciplined underwriting, robust portfolio construction and through increased property hedging in both traditional and alternative hedges.
The current property momentum is generally favorable and likely will last well into 2020.
But additional improvement in rates terms and conditions are required in global property reinsurance and retro markets, given the elevated risk factors and increased exposures in certain territories, as well as the recent substantial industry losses.
More rate is required to get back to adequate levels to achieve a long-term, appropriate and sustainable return on capital.
Concentrating property underwriting on our core clients has created a better risk-adjusted portfolio with significantly more dollars of profit per unit of risk.
And we do have the capacity to increase our participation in improvement markets when returns increase enough to warrant.
We expect January 1 property rates generally be up in most regions and more recently loss-affected territories will see greater impact.
In retro, we anticipate double-digit rate increases.
With Hagabis causing further losses in trapped capital late in the year and uncertainty of ultimate loss, rates may improve more.
Improvement in retro is necessary, given those rates have been under the most pressured by non-traditional capital, but also because retro bore a disproportionate share of losses since 2017.
Everest has the capital and capability to effectively right in this market.
We believe there will be select opportunities to deploy additional capital, depending on market conditions.
Overall, we are in a reinsurance market where favorable trends exists for those able to capture and maximize the best opportunities.
With our financial strength, nimble culture, global capabilities and diversified capital sources, we are prepared to meet our clients' needs, while delivering superior results to our shareholders.
Everest Insurance has just completed another quarter of solid execution, resulting in excellent top line growth and more importantly continued profitability.
We continue to advance our strategy to build a world-class diversified specialty insurance group fueled by talent, partnerships and a deep set of specialty products that are well positioned within this changing market.
Our solid result this quarter build on the first two quarters of this year and mark the 19th consecutive quarter of growth for the insurance operations.
Our gross written premium growth of 29% quarter-over-quarter has once again balanced across all major business segments.
Our growth accelerated this quarter beyond our year-to-date trend line of plus 21%, in part reflecting the changing nature of the market, which is impacting nearly all major product lines.
This is particularly the case for business originated within the excess and surplus lines market, which accounted for over 1/3 of our premium written in the quarter.
Our new business this quarter provide some additional context on our balanced growth.
It was driven by a multitude of areas reflecting the specialty nature of our portfolio, including specialty casualty, which once again experienced meaningful rate increases in the quarter; our property and short-tailed businesses, led by both our retail and excess and surplus property division, both of which also achieve meaningful rate increases; and our various other specialty product lines, including transactional risk, credit and political risk and surety.
Each of these businesses continues to see meaningful increases in opportunity.
The segments I just referenced to make up approximately 75% of our business growth in the quarter and represent the balanced portfolio we seek to build.
The combined ratio for the quarter is 96.4%, 3.2 points better than the third quarter of 2018, and year-to-date is 96% or 2.1 points better year-over-year.
This is due to both lower catastrophe losses impacting our repositioned property portfolio and to an improved attritional loss ratio.
The expense ratio remained stable, despite our continued commitment toward investments in people, technology, new business unit and a new facility.
New underwriting capabilities established in Bermuda and a regulatory approval of the London branch of our Irish Insurance company are good examples of these new facilities and represent our continued commitment to international expansion.
Further, new and expanded office locations in the US are bringing us closer to the customers and trading partners we serve.
Turning to the rate environment, we are encouraged by the results we see here.
In the quarter, we experienced pure rate increases, which excludes the impact of exposure, of 7.6%, excluding workers' compensation, and a positive 6.7% year-to-date.
The quarterly ex work comp rate increase is the largest increase seen since the second quarter of 2012 and continues to be led by double-digit rate increases within our property and commercial auto portfolios.
Financial line and Umbrella & Excess are also showing improvement in the mid to high single digits, while general liability rate lift continues to build momentum with rate increases in the mid-single-digit range.
So London wholesale market is also improving, showing double-digit improvement this quarter, driven by professional indemnity, management liability, and property.
Year-to-date, international is showing a 7% improvement.
We are very well positioned to take advantage of this improved pricing environment in terms of our people, product sets and our ability to offer compelling solutions to the market.
This, coupled with strong retention rates within both our wholesale and retail books, is an encouraging sign.
In other words, the strategic plan we have been executing over the last several years has positioned us well in this current rate environment.
Most importantly, this growth in top line, coupled with improved business metrics, has resulted in Everest Insurance continuing to post an underwriting profit, over two times greater for the year-to-date period and now standing 10 of the past 11 quarters.
As Craig mentioned in the new investment disclosure, the pre-tax net investment income per insurance is $140 million year-to-date, plus our pre-tax operating income year-to-date now stands at $195 million.
In conclusion, we remain pleased with the continued progress we are making in the establishment of a world-class specialty insurer.
The over 90,000 new business submissions we have received year-to-date in our direct broker operations speak to our relevance and positioning in this market.
Further, the underlying performance of our diverse books of business remain solid, and hence, we are well positioned to create value for all of our constituents in the evolving market ahead.
We look forward to reporting back to you on our progress next quarter. | qtrly after-tax operating income $3.39 per diluted common share.
gross written premiums for quarter were $2.4 billion, up 9%. |
The Everest Executives leading today's call are Juan Andrade, President and Chief Executive Officer; Mark Kociancic, Executive Vice President and Chief Financial Officer.
We are also joined by other members of the Everest management team.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings.
Management may also refer to certain non-GAAP financial measures.
2020 had its share of global challenges, that COVID-19 leads any discussion of the year.
The pandemic affected all our communities, our way of life, and resulted in an unimaginable death toll.
It affected all aspects of the world economies, including the insurance and reinsurance industry.
Despite unprecedented challenges and through the resilience and dedication of our team, Everest delivered solid 2020 results with excellent growth and improved underlying profitability.
Key steps we took last year include adding to our deep and talented management team, strengthening our balance sheet, enhancing our enterprise risk management and operational discipline, and further diversifying our business.
Most importantly, we have been a valued partner to our distributors and customers during a very perilous time.
With a strong foundation in place, we remain confident in continued operational and financial success across our business.
We are bullish about 2021.
We will continue to profitably grow the insurance segment, while continuing to grow and strengthen our position as a global and leading P&C reinsurer.
As we think about our positioning in the market, among our clients, partners and investors, we are guided by the following principles, by whichever's will seize opportunities and increase the value of our company.
First, we will deliver superior growth in book value per share over the cycle.
Second, we are an underwriting company.
One of our core competencies is the identification, underwriting, pricing and management of risk.
The ratification by line of business and geography is critical.
We have clearly defined and quantified risk appetites and we maintain strong enterprise risk management and performance monitoring.
Third, investment returns are a critical value driver and investment management is also a core competency.
We are further optimizing our invested assets via portfolio management strategy that is complementary to underwriting risk.
With a sizable invested asset base and significant cash flow, we seek to add value and diversify the sources of income to the company.
Fourth, we manage our capital to fuel long-term profitable growth, while continuing to expand our third-party capital capabilities.
And fifth, we will maintain our industry-leading financial strength.
We complement our core strengths with a low cost expense base in a flat entrepreneurial and responsive organization.
Our diversified reinsurance and insurance franchise, financial strength, deep distribution relationships, and leading customer solutions enable our continued performance in today's market.
We have robust momentum coming into 2021, and we are well positioned to continue diversifying our business for sustained profitable growth.
I will now discuss our group reinsurance and insurance results starting with the fourth quarter followed by our full-year 2020, and how these results position us well for 2021.
Starting with group results.
In the fourth quarter, we grew gross written premiums by 13% and net written premiums by 16%, with strong growth across both segments.
Our growth stems from a combination of new business opportunities, improved terms and conditions and rate levels, expanded shares on attractive renewals, and high retention rates on our existing book.
Our underlying combined ratio was 86.3%, a 4 point improvement over the fourth quarter of 2019, with both segments showing significant improvement in loss and expense ratios.
Net investment income was very strong at $222 million compared to $146 million in the prior-year quarter.
For 2020, Everest grew gross written premiums of 15% and net written premiums 17% year-over-year.
We delivered $514 million in net income and $300 million in operating income despite the COVID-19 loss provision, the prior year reserve strengthening, and an active Cat year.
Our dividend adjusted book value per share grew over 11%.
We are focused on delivering superior growth in book value per share over the market cycle.
The underlying combined ratio improved almost a point to 87.5% year-over-year, with our insurance segment improving 2.3 points to 94.2%.
Net investment income was in line with prior year despite the market volatility.
These results demonstrate the earnings power of Everest and our ability to thrive in any market.
We continue to diligently manage our portfolios to improve returns with a broad array of underwriting actions, including managing attachment points, limits, terms and conditions, targeted non-renewals, and many other actions.
This is the hard work of building and sustaining a profitable book.
Underwriting profitability remains at the core of everything that we do As previously announced, in the fourth quarter, we strengthened prior accident year reserves in our Reinsurance segment by $400 million.
The reserve strengthening does not change our view of current accident year loss picks, as we had already selected more conservative loss picks in response to general loss trends.
We are confident in the prior year reserving actions we took in the quarter and the quality of the in-force portfolio.
These decisive actions will serve us well.
In the fourth quarter, we also added $76 million primarily for third-party lines to our COVID-19 loss provision.
Despite a high frequency of storms in the fourth quarter, our manageable catastrophe losses of $70 million resulted from disciplined underwriting and the purposeful reduction of volatility over the last two years in our reinsurance portfolio.
For our Reinsurance Division, the fourth quarter continued our strong growth.
Gross written premiums grew 12% in the quarter and 15% in 2020.
The attritional combined ratio ex-COVID was 83.9%, an improvement from 87.4% in the prior fourth quarter.
January 1 is our largest renewal date, and this one was one of the strongest in many years.
The rate environment improved across most territories and lines of business, with loss impacted business seeing material increases.
Capacity is abundant, but reinsurers remain disciplined on pricing in terms and conditions.
There is a flight to quality, where Everest's strong balance sheet and highly rated financial strength set us apart.
Customer and broker demand for Everest capacity is strong, as highlighted by our increased shares and preferential signings on treaties, counterparties actively want to do more business with Everest.
Our responsiveness, ability to deploy significant capital and reputation as problem solvers in the market were critical to a successful renewal season.
We saw outstanding results in Latin America, in the U.S. and Canada, as well as meaningful growth in Continental Europe.
We had notable wins on large deals and increased our share with core customers and in territories and classes we found the most attractive, including facultative business.
We continue to expand and diversify the portfolio as we execute to achieve a stronger, more diversified and more profitable book.
Specific to our January 1 property book, total limit outstanding increased with an increase in rate online and significant improvements in the combined ratio, ROE,risk adjusted return and increased dollars of expected margin.
We have a stronger and more profitable portfolio.
John Doucette is available to provide additional details during the Q&A.
Our insurance division continued its solid execution as evidenced by our results in both the fourth quarter and the full-year of 2020.
Gross written premiums grew 15% or 18%, excluding terminated programs, with gross written premium of $872 million in the quarter and over $3.2 billion for 2020.
Both fourth quarter and full-year 2020 revenues are milestones for the Insurance Division.
Everest Insurance delivered an improved attritional combined ratio of 93.8% for the fourth quarter, a 4.3 point improvement over the fourth quarter of 2019 and 94.2% for the full year 2020, a 2.3 point improvement over 2019.
These results were driven by portfolio and expense management and are consistent with expanding insurance margin.
We achieved record renewal rate increases of 21% in the fourth quarter, excluding workers' compensation, and up 14% including workers' compensation, where we are seeing rates flatten.
Rate is outpacing our expected loss trend and renewal retention across the entire portfolio was strong.
The rate we achieved is a function of market conditions and disciplined, proactive underwriting actions across our businesses.
After years of soft pricing and rising loss costs, pricing adjustments are necessary, and we expect they will continue throughout 2021.
Consistent with prior quarters, these increases are led by property, up 21%; excess casualty, up 50%; D&O, up 35%; and commercial auto, up 17%.
We are also seeing widespread increases in other lines of business, which had been slower to turn, most notably, general liability, now up 9%.
We are managing the insurance portfolio to build a diversified business and see our mixed or product lines that are in higher long-term margins.
Our position in both the E&S and retail channels give us access to a wide set of opportunities.
Mike Karmilowicz is available to provide additional details during the Q&A.
We have a vibrant and well diversified reinsurance and insurance business, with experienced teams providing industry-leading solutions to our customers.
Building on the achievements of 2020, we will continue diversifying our business for profitable growth and sustained momentum throughout 2021.
The company is on solid ground, with excellent financial strength ratings, top talent, and a prudent capital management philosophy.
We are focused on sustained profitable growth, a more diversified mix of business and superior risk-adjusted returns.
The relentless execution of our strategies result in maximizing shareholder returns.
I am confident in Everest's future and on our ability to deliver the commitments to our customers, shareholders and the marketplace.
2020 showed us all just how resilient we truly are now.
As Juan discussed, in our pre-release outlined, Everest had strong underlying results for the quarter and the year with positive net income in Q4, improving underlying margin, continued growth and an excellent capital position.
I'll touch on these over the next few minutes.
The positive quarterly net income result was achieved despite a prior year reserve strengthening charge of $400 million, a COVID provision of $76 million, and catastrophe losses of $70 million.
This clearly demonstrates the diversification and earnings power of Everest.
Everest reported net income of $64 million for the quarter and $514 million for the year, resulting in a return on equity of 5.8% for 2020.
We had a $44 million operating loss for Q4, given the charges, and generated an operating income of $300 million for the year.
Our net income in the quarter reflect strong investment income performance and improved attritional loss and combined ratios, offset by Cat, COVID and reserve charges, the catastrophe losses of $70 million are pre-tax and net of reinsurance, with $60 million from reinsurance and $10 million from insurance, driven by hurricane Delta, Zeta, and the Australian Queensland hailstorm.
The estimate implied market share of industry losses, is just over 60 basis points for Everest.
This is an excellent result, reflecting the underwriting and risk management initiatives of the past two years.
There was also no development from prior Cats in the Q4 charge.
Year-to-date, the results include catastrophe losses of $425 million compared to $576 million during 2019.
All amounts are pre-tax and net of reinstatement premiums.
In the fourth quarter, we added $76 million to our COVID loss provision, reflecting the ongoing nature of this event and our consistent reserving philosophy.
This additional provision is predominantly IBNR for third-party lines.
This amount includes $56 million in the Reinsurance segment and $20 million in the insurance segment, and is in addition to the $435 million of pandemic losses estimated in the first nine months of 2020.
Our fourth quarter estimates were not impacted by the recent UK Supreme Court ruling, as we had taken a prudent approach to loss assessment, leading up to that ruling.
For the full year 2020, the total pandemic loss provision is $511 million, of which more than 80% is classified as IBNR.
Everest had an underwriting loss in Q4 of $219 million due to the prior year reserve adjustment charge as compared to an underwriting loss of $29 million for Q4 2019.
As Juan mentioned, we booked $400 million prior year reserve strengthening in the fourth quarter exclusively for the Reinsurance Division, primarily within long tail casualty segments, such as GL, auto liability, and professional lines for accident years 2015 through 2018.
The reserve charge also includes actions on non-Cat property lines primarily for the 2017 through 2019 accident years, and driven by a few large losses to aggregate programs.
Our reserve studies indicate that the Insurance Division overall has strong an adequate reserve levels.
At a granular level, we address some redundancies and deficiencies with no overall financial impact.
The lines we strengthened included professional liability in the 2015 through 2018 accident years.
This was offset by releases and other lines.
Turning to Everest's market position and growth on a year-to-date basis, gross written premium was $10.
5 billion, up $1.3 billion or 15% compared to 2019.
This reflects strong and diversified growth in both segments with reinsurance up 15% and insurance up 15% compared to 2019.
Our underlying attritional loss and combined ratios are strong and improving, excluding the catastrophe losses and impact from the COVID-19 pandemic, the attritional combined ratio was 87.5% for 2020 compared to 88.4% for 2019.
Excluding the pandemic loss estimate, the group attritional loss ratio for 2020 was 60.1%, down from 60.2% for 2019, with insurance improving from 66% the 64.8%.
For reinsurance, the 2020 attritional combined ratio, excluding the pandemic loss estimate and prior year reserve charge was 85.2%, down from 85.5% in 2019.
For insurance, the 2020 attritional combined ratio, excluding the pandemic loss estimate was 94.2% compared to 96.5% in 2019.
Our U.S. franchise, which makes up the majority of our insurance business continues to run at an attritional combined ratio in the low '90s, excluding the pandemic loss estimate.
The group commission ratio of 21.6% year-to-date was down from 23% in 2019, largely due to business mix, a one-time significant contingent commission in the Reinsurance segment during 2019, and higher ceding commission in the Insurance segment.
The group expense ratio remains low at 5.8% for 2020 versus 6% for 2019, as we benefited from premium growth and continued focus on expense management.
Q4 investment income had a strong performance of $222 million compared to $146 million for Q4 2019.
For the full year, pre-tax investment income was $642 million versus $647 million for 2019.
The fixed income portfolio generated $542 million of investment income year-to-date compared to $520 million for the same period last year.
Limited partnerships recorded $91 million of income quarter-to-date, largely due to fair market value adjustments.
The limited partnership result was due to the continued improvement of the economy and financial markets.
As a reminder, we report our limited partnership income one quarter in arrears.
Invested assets grew 23% to $25.4 billion versus $20.7 billion last year end.
This strong invested asset growth was due to $2.9 billion of operating cash flow and the proceeds of our debt issue.
The pre-tax yield to maturity on the investment portfolio was just under 3%, down from 3.4% one year ago.
Approximately 80% of our invested assets are comprised of a well diversified, high credit quality bond portfolio with duration of 3.6 years.
The remaining portfolio is allocated to equities and other invested assets, which are largely private equity investments, with the residual amount in short-term investments and cash.
Our effective tax rate on operating income for 2020 was 7.7% and 12.1% on net income.
For 2021, we expect our tax rate to be approximately 12%, which reflects an annual Cat load of about 6 points of loss ratio.
Everest generated record operating cash flows of $2.9 billion compared to $1.9 billion in 2019, reflecting the strength of our growing premiums in 2020 year-over-year and a more modest level of claims paid.
Everest enjoys very strong financial strength with ample capacity to execute on market opportunities.
Shareholders' equity was $9.7 billion at year-end 2020, up from $9.1 billion at year-end 2019.
Net book value per share stood at $243.25, up 11% versus year-end 2019, adjusted for dividends.
Everest's strong balance sheet was further strengthened by the 30-year $1 billion senior notes offering completed in early October 2020.
This is long-term capital for Everest and enhances the efficiency of our capital structure, with our debt leverage now standing at 16.4%. | q4 net profit 64 million usd.
qtrly gross written premium growth of 13%. |
John and David will provide high-level commentary regarding the quarter.
We appreciate you joining our call today.
We're very pleased with our fourth quarter and full-year results.
We achieved a great deal despite a challenging interest rate and operating environment.
Despite continued economic uncertainty, we remain focused on what we can control, and our efforts are paying off.
We grew consumer checking accounts by 3% and small business accounts by 5%.
Notably, our 2021 net retail account growth exceeds the previous three years combined and represents an annual growth rate that is three times higher than pre-pandemic levels.
We increased new corporate banking group loan production by approximately 30% and generated record capital markets revenue.
Through our enhanced risk management framework, we delivered our lowest annual net charge-off ratio since 2006.
We made investments in key talent and revenue-facing associates to support strategic growth initiatives.
We continue to grow and diversify revenue through our acquisitions of EnerBank, Sabal Capital Partners, and Clearsight Advisors.
We successfully executed our LIBOR transition program to ensure our clients are ready to move to alternative reference rates.
We continue to focus on making banking easier through investments in target markets, technology, and digital capabilities.
We surpassed our two-year $12 million commitment to advance programs and initiatives that promote racial equity and economic empowerment for communities of color.
Before closing, we're extremely proud of our achievements in 2021 but none of these would have been possible without the hard work and dedication of our nearly 20,000 associates.
The past year posed unique challenges as we continue to transition to our new normal, both on a personal and professional level.
Despite continued uncertainty, our associates remain steadfast.
They continue to bring their best to work every day, providing best-in-class customer service, successfully executing our strategic plan, and maintaining strong risk management practices, all of which contributed to our success.
In 2022 and beyond, we'll continue to focus on growing our business by making investments in areas that allow us to make banking easier for our customers, all while continuing to provide our associates with the tools they need to be successful.
We will make incremental adjustments to our business by leaning into our strengths and investing in areas where we believe we can consistently win over time.
These changes represent a natural extension of our commitment to making banking easier for our customers and complement the enhanced alerts, time order posting process, as well as our Bank On certified checking product we launched last year.
It's important to note that the financial impact of these enhancements have been fully incorporated in our total revenue expectation for 2022.
Again, we're pleased with our results and have great momentum as we head into 2022.
Now Dave will provide you with some select highlights regarding the quarter.
Let's start with the balance sheet.
Including the impact of acquired loans from the EnerBank transaction, adjusted average and ending loans grew 6% and 7%, respectively, during the quarter.
Although business loans continue to be impacted by excess liquidity, pipelines have surpassed pre-pandemic levels.
And encouragingly, we experienced a 240-basis-point increase in line utilization rates during the fourth quarter.
In addition, production remained strong with line of credit commitments increasing $4.7 billion year over year.
Consumer loans reflected the addition of $3 billion of acquired EnerBank loans, as well as another strong quarter of mortgage production accompanied by modest growth in credit card.
Looking forward, we expect full-year 2022 reported average loan balances to grow 4% to 5% compared to 2021.
Let's turn to deposits.
Although the pace of deposit growth has slowed, balances continued to increase this quarter to new record levels.
The increase includes the impact of EnerBank deposits acquired during the fourth quarter, as well as continued growth in new accounts and account balances.
We are continuing to analyze our deposit base and pandemic-related deposit inflow characteristics in order to predict future deposit behavior.
Based on this analysis, we currently believe approximately 35% or $12 billion to $14 billion of deposit increases can be used to support longer-term asset growth through the rate cycle.
Additional portions of the deposit increases could persist on the balance sheet but are likely to be more rate sensitive, especially later in the Fed cycle.
While we expect a portion of the surge deposits to be rate sensitive, you will recall that the granular nature and generally rate insensitive construct of our overall deposit base represents significant upside for us when rates do begin to increase.
Let's shift to net interest income and margin.
Net interest income increased 6% versus the prior quarter, driven primarily from our EnerBank acquisition, favorable PPP income, and organic balance sheet growth.
Net interest income from PPP loans increased $8 million from the prior quarter but will be less of a contributor going forward.
Approximately 89% of estimated PPP fees have been recognized.
Cash averaged $26 billion during the quarter.
And when combined with PPP reduced fourth quarter's reported margin by 51 basis points, our adjusted margin was 3.34%, modestly higher versus the third quarter.
Excluding the impact of a large third-quarter loan interest recovery, core net interest income was mostly stable as loan growth offset impacts from the low interest rate environment.
Similar to prior quarters, net interest income was reduced by lower reinvestment yields on fixed-rate loans and securities.
These impacts are expected to be more neutral to positive going forward.
The hedging program contributed meaningfully to net interest income in the fourth quarter.
The cumulative value created from our hedging program is approximately $1.5 billion.
Roughly 90% of that amount has either been recognized or is locked into future earnings from hedge terminations.
Excluding, PPP Net interest income is expected to grow modestly in the first quarter, aided by strong fourth-quarter ending loan growth, as well as continued loan growth in the first quarter, partially offset by day count.
Regions balance sheet is positioned to benefit meaningfully from higher interest rates.
Over the first 100 basis points of rate tightening, each 25-basis-point increase in the federal funds rate is projected to add between $60 million and $80 million over a full 12-month period.
This includes recent hedging changes and is supported by a large proportion of stable deposit funding and a significant amount of earning assets held in cash when compared to the industry.
Importantly, we continue to shorten the maturity profile of our hedges in the fourth quarter.
Hedging changes to date support increasing net interest income exposure to rising rates, positioning us well for higher rates in 2022 and beyond.
In summary, net interest income is poised for growth in 2022 through balance sheet growth and a higher yield curve in an expanding economy.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 5% from the prior quarter, primarily due to elevated other noninterest income in the third quarter but did not repeat in the fourth quarter.
Organic growth and the integration of Sabal Capital Partners and Clearsight Advisors will drive growth in capital markets revenue in 2022.
Going forward, we expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA.
Mortgage income remained relatively stable during the quarter.
And while we don't anticipate replicating this year's performance in 2022, mortgage is expected to remain a key contributor to fee revenue, particularly as the purchase market and our footprint remains very strong.
Wealth management income increased 5%, driven by stronger sales and market value impacts, and is expected to grow incrementally in 2022.
Seasonality drove an increase in service charges compared to the prior quarter.
Looking ahead, as announced yesterday, we are making changes to our NSF and overdraft practices, which along with previously implemented changes will further reduce these fees.
NSF and overdraft fees make up approximately 50% of our service charge line item.
These changes will be implemented throughout 2022.
But once fully rolled out, together with our previous changes implemented last year, we expect the annual impact to result in 20% to 30% lower service charges revenue versus 2019.
Based on our expectations around the implementation timeline, we estimate $50 million to $70 million will be reflected in 2022 results.
NSF and overdraft revenue has declined substantially over the last decade.
And once fully implemented, we expect the annual contribution from these fees will be approximately 50% lower than 2011 levels.
Since 2011, NSF and overdraft revenue has decreased approximately $175 million and debit interchange legislation reduced card and ATM fees another $180 million.
We have successfully offset these declines through expanded and diversified fee-based services.
And as a result, total noninterest income increased approximately $400 million over this same time period.
Through our ongoing investment in capabilities and services, we will continue to grow and diversify revenue to overcome the impact of these new policy changes.
We expect 2022 adjusted total revenue to be up 3.5% to 4.5% compared to the prior year, driven primarily by growth in net interest income.
This growth includes the impact of lower PPP-related revenue and the anticipated impact of NSF and overdraft changes.
Let's move on to noninterest expense.
Adjusted noninterest expenses increased 5% in the quarter.
Salaries and benefits increased 4%, primarily due to higher incentive compensation.
Base salaries also increased as we added approximately 660 new associates, primarily as a result of acquisitions that closed this quarter.
The increased headcount also reflects key hires to support strategic initiatives within other revenue-producing businesses.
We have experienced some inflationary pressures already and expect certain of those to persist in 2022.
If you exclude variable-based and incentive compensation associated with better-than-expected fee income and credit performance, as well as expenses related to our fourth quarter acquisitions, our 2021 adjusted core expenses remained relatively stable compared to the prior year.
We will continue to prudently manage expenses while investing in technology, products, and people to grow our business.
As a result, our core expense base will grow.
We expect 2022 adjusted noninterest expenses to be up 3% to 4% compared to 2021.
Importantly, this includes the full-year impact of recent acquisitions, as well as anticipated inflationary impacts.
Despite these impacts, we remain committed to generating positive adjusted operating leverage in 2022.
Overall credit performance remained strong.
Annualized net charge-offs increased 6 basis points from the third quarter's record low to 20 basis points driven in part by the addition of EnerBank in the fourth quarter.
Full-year net charge-offs totaled 24 basis points, the lowest level on record since 2006.
Nonperforming loans continued to improve during the quarter and are now below pre-pandemic levels at just 51 basis points of total loans.
Our allowance for credit losses remained relatively stable at 1.79% of total loans, while the allowance as a percentage of nonperforming loans increased 66 percentage points to 349%.
We expect credit losses to slowly begin to normalize in the back half of 2022 and currently expect full-year net charge-offs to be in the 25 to 35 basis point range.
With respect to capital, our common equity Tier 1 ratio decreased approximately 130 basis points to an estimated 9.5% this quarter.
During the fourth quarter, we closed on three acquisitions, which combined absorbed approximately $1.3 billion of capital.
Additionally, we repurchased $300 million of common stock during the quarter.
We expect to maintain our common equity Tier 1 ratio near the midpoint of our 9.25% to 9.75% operating range.
So, wrapping up on the next slide are our 2022 expectations, which we've already addressed.
In closing, the momentum we experienced in the fourth quarter positions us well for growth in 2022 as the economic recovery continues.
Pretax pre-provision income remains strong.
Expenses are well controlled.
Credit risk is relatively benign.
Capital and liquidity are solid, and we're optimistic about the pace of the economic recovery in our markets. | record performance, accelerating growth.
qtrly average loans and leases increased 4 percent compared to prior quarter. |
Actual results could differ materially from expected results.
Last night we reported a loss of $1.11 in adjusted operating earnings per share which included pre-tax $500 million in COVID 19 impacts, or $5.59 per share.
Our 12 month trailing ROE was 2.1%, which included 9.8% in COVID 19 impacts.
Premium growth was strong at 9.5% and we ended the quarter with excess capital of $1 billion.
This quarter saw elevated COVID 19 claims in the US, India and South Africa, consistent with the levels of general population mortality.
In the US individual mortality business, COVID 19 claims were $235 million in the quarter, slightly above the high end of our rules of thumb range.
We also had a level of excess non COVID 19 claims reflecting the elevated levels of excess mortality reported in the general population by the CDC.
COVID 19 claims in India and South Africa were $161 million and $64 million respectively as those countries also experienced a material delta wave, and Jonathan will provide further insights on our claims shortly.
The performance this quarter ex COVID 19 was strong and featured many highlights again demonstrating the value of our diversified global business and the strength of our new business franchise.
The highlights this quarter include strong earnings across all lines and regions from our GFS business, deployment of $140 million of capital into in-force transactions, including our largest to date longevity transaction in the Netherlands.
This brings the year-to-date capital deployment into in-force transactions to a total of $440 million putting us on track for a very strong year as our pipelines remain very good with opportunities in all regions.
I am particularly pleased with the recent success in our GFS business in Asia.
That business has grown from a relatively small base a few years ago, the one that has produced $66 million of adjusted operating income through the first nine months of this year.
Our success is in large part the result of our high-caliber local teams working together with our global product and risk experts to bring new solutions that best fit the needs of the local markets and clients.
We are actively managing our capital position, balancing deployments into organic business and attractive in-force block opportunities with shareholder dividends, and in this quarter the resumption of share buybacks.
And we generated additional capital with the completion of a financially attractive asset intensive retrocession transaction, I believe clear evidence of an efficient and effective capital management approach.
Investment results were favorable in the quarter despite the continued challenges of below market yields, impairments were minimal, and we realized some nice gains in our limited partnerships in real estate joint ventures.
Both our US Group and US individual Health business performed above our expectations, continuing a recent trend.
As I think about this quarter and the last six quarters on the pandemic, I remain encouraged by the resilience of our global business and by the positive momentum in our new business opportunities and growth prospects.
Looking forward, we expect some continuing impact from COVID 19 claims but believe these will be manageable endpoint to increasing vaccination rates globally as a reason for optimism.
We operate from a position of strength with an outstanding workforce, valued client relationships, and healthy business fundamentals.
We have a strong balance sheet and a track record of successful execution against our strategy.
All this gives me confidence in our business and in our opportunities for growth.
Even though a lot of the focus this quarter is on COVID 19 claims, we are accomplishing a lot in terms of adding substantial new long-term value.
I'm proud of this team and all that we've achieved and I am excited about the future, and look forward to sharing more thoughts at our Investor Day on December 9.
RGA reported a pre-tax adjusted operating loss of $89 million for the quarter and adjusted operating earnings per share loss of $1.11 per share which includes a negative COVID 19 impact of $5.59 per share.
Our trailing 12 months adjusted ROE was 2.1% which is net of COVID impacts of 9.8%.
While we did experience a significant level of COVID 19 impacts, our underlying non-COVID 19 results were strong as demonstrated by the year-to-date growth in our book value per share excluding AOCI of 4% to $137.60.
I would highlight this growth in book value per share is after absorbing approximately $1 billion pre-tax of COVID 19 claim costs.
Consolidated reported premiums increased 9.5% in the quarter, or 7.7% on a constant currency basis.
Reported premiums did reflect a couple of one-off items where organic growth was very good and new business activity is encouraging across all regions.
The effective tax rate for the quarter was 15.2% on pre-tax adjusted operating loss below our expected range of 23% to 24% primarily due to adjusted operating income and higher tax jurisdictions and losses in tax jurisdictions, for which we did not receive a tax benefit.
This was partially offset by favorable adjustments from tax returns filed in the quarter.
We saw non COVID 19 excess claims of approximately $75 million, which is consistent with higher non-COVID 19 population mortality as per CDC reporting.
The US Group and individual Health business both performed better than our expectations due to favorable experience overall, even after reflecting $15 million of COVID 19 claims in our US Group lines of business.
Variable investment income was strong in the quarter as both limited partnership performance and real estate joint venture realizations were favorable.
The US Asset Intensive business reported very strong results.
The segment had favorable overall experience and higher variable investment income.
We continue to be pleased with the results in this segment.
The Canada Traditional segment results reflected favorable experience in the group and creditor lines of business, slightly offset by COVID 19 claim costs in individual life -- line of approximately $5 million.
The Canada Financial Solutions segment results reflected modestly unfavorable experience.
In the Europe, Middle East and Africa segment, the Traditional business results reflected COVID 19 claim cost of $80 million in total, of which $64 million was in South Africa, and $13 million in the U.K.
We also saw some excess mortality claims believed to be directly or indirectly COVID 19 related.
EMEA's Financial Solutions had a good quarter as business results reflected favorable longevity experience, $4 million attributable to COVID 19.
Turning to our Asia Pacific Traditional business, Asia results reflect COVID 19 claim cost of $169 million of which $161 million was in India.
This impact was higher than our expectation and Jonathan will provide further information in a few minutes.
Australia reported a small loss for the quarter.
We continue to take necessary actions to manage the business back to consistent profitability.
The Asia Financial Solutions business had a good quarter reflecting favorable experience and strong growth in new business.
As Anna mentioned, we continue to be pleased with the growth and contributions from this segment.
The Corporate and Other segment reported pre-tax adjusted operating loss of $27 million, which is in line with our quarterly average run rate.
Moving on to investments, the non-spread portfolio yield for the quarter was 4.95%, reflecting both our well-diversified portfolio allocation and strong variable investment income primarily due to realizations from limited partnerships and real estate joint ventures.
While hard to predict from a timing perspective, variable investment income is a core part of our investment earnings.
The investment portfolio average rating was unchanged in the quarter and investment credit impairments were again nominal.
Our new money rate increased to 3.7% with the majority of purchases in public investment grade assets and contributions from strong private asset production.
Regarding capital management, our excess capital position at the end of the quarter was approximately $1 billion.
Our capital position remains strong and we have ample liquidity.
We deployed $140 million into in-force transactions and repurchased $46 million of shares.
Additionally, we entered into an asset intensive retrocession transaction that generated $94 million of capital and enhanced our returns.
This quarter highlights our balanced approach to capital management and our ability to absorb the impacts of COVID 19, fund organic growth, deploy capital into transactions, and return capital through share repurchases and dividends.
I'm going to review our Q3 claims experience and then provide some views on our COVID claim cost expectations for Q4.
The global emergence of the delta variant has been a key driver of higher general population mortality in the quarter.
We were optimistic in our last earnings call that trends in the US would lead to an improvement in mortality over the remainder of the year.
However, Q3 saw increases in both COVID 19 and non-COVID 19 general population mortality.
There are three key takeaways.
COVID 19 reported deaths increased substantially in the quarter.
COVID 19 deaths under the age of 65, ages where there is more life insurance exposure were at their highest points over the past six quarters.
Non-COVID 19 excess deaths were at their highest relative and absolute level since the start of the pandemic.
Our individual mortality claims results --sorry, US individual mortality claims results are consistent with what was happening in the general population.
COVID 19 claim costs were $235 million in the quarter, slightly above the higher end of our rule of thumb.
Q3 results reflect higher mortality in ages under 65 and larger average claim sizes.
On a year-to-date basis, COVID 19 claims are at the midpoint of our range.
Our excess non-COVID 19 experience was also driven by higher claims frequency consistent with the elevated deaths in the general population.
Turning to markets other than US individual mortality COVID 19 claim costs of $161 million in India were higher than our prior estimates, reflecting the more adverse impact of the Q2 delta wave.
Similar to what we are observing in the US, the Delta Verint has resulted in higher general population deaths, a shift of deaths to younger more insured ages and a larger average claim size.
$30 million of this impact in the quarter relates to an increase in IBNR, resulting in a COVID specific IBNR balance for India of $75 million at the end of the quarter.
COVID 19 claim costs in South Africa are estimated at $64 million in the quarter, reflecting a change in the distribution of general population deaths by province, as well as some large claims volatility.
Q3 general population data indicates that provinces with higher socioeconomic levels and therefore more insurance penetration and larger sized policies were more adversely impacted this quarter.
Other markets including Canada and the U.K. accounted for $30 million of estimated COVID 19 claim costs.
As expected, our longevity offset was modest in the quarter given relatively low levels of general population deaths in the U.K. where our longevity business is concentrated.
Looking ahead to Q4, elevated levels of excess general population mortality are continuing in the US through October, although currently running at lower levels and experienced at their peak in September and trending downward.
We are maintaining our claim cost rule of thumb of $10 million to $20 million for every 10,000 general population deaths.
We are also maintaining our rule of thumb for the U.K. and Canada at this time.
General population COVID 19 deaths in India and South Africa have been relatively modest through October.
Predicting COVID 19 claim costs continues to be challenging in particular in India where comprehensive data is not available about.
Although India and South Africa vaccination levels are still below our other key markets, they have increased materially in both countries since the beginning of Q3, which will reduce the scenario of future COVID 19 impacts.
We remain confident that the impacts will be manageable.
Let me now hand it back to Todd.
We hope you can join us for our discussion. | q3 adjusted operating loss per share $1.11. |
Actual results could differ materially from expected results.
I hope you are all remaining safe and staying healthy.
The loss and anxiety caused by the pandemic is extraordinary.
And on behalf of everyone at RGA, I would like to express profound depreciation for those on the front lines in the fight against the pandemic and offer our deepest sympathies to those who have lost loved ones.
Through these tough times, I remained incredibly proud of the role that RGA has played in an industry that helps to safeguard the financial futures of millions of families from the unforeseen tragedies of life.
Our purpose has never been made clear during this past year.
Let me now move to our results.
Last night we reported adjusted operating earnings per share of $1.19, which we consider another solid quarter in the context of the pandemic.
In this quarter, we were able to absorb estimated total COVID-19 related claim costs of $300 million globally and delivered profitable earnings due to the underlying strength in many of our businesses.
These include our Asia business, our US group and individual health operations and our US asset-intensive business.
Additionally, excluding the impact of claims attributed to COVID-19.
Our US individual mortality experience was again favorable this quarter.
Reported premium growth was strong, driven by results in EMEA and Asia.
We completed a number of transactions in the quarter and deployed approximately $100 million of capital.
The transaction pipeline is very good overall and includes opportunities in all our regions.
Our investment portfolio held up well, and we ended the year with a strong balance sheet, an excess capital of $1.3 billion.
Our approach to capital deployment during this crisis remains prudent, disciplined and balanced.
As I step back and consider our full year results, we reported adjusted operating earnings per share of $7.54.
This includes absorbing estimated total COVID-19 related claim costs of $720 million globally.
And when adjusted for COVID-19 related offsets, including longevity and reduced expenses, we estimate the full year impact of COVID-19 to be roughly $6.80 on adjusted operating EPS.
I'm encouraged by the fact that our underlying fundamental performance and client relationships remained strong.
This speaks to the resilience of our global franchise, the benefits of our diversified business and to the success of our client-focused strategy.
As we look forward, it is clear that COVID-19 remains both the global health and economic challenge.
And we expect to see a meaningful level claims in the first half of 2021.
But we believe that the impact will be manageable, given our strong balance sheet and our underlying earnings engine.
We are optimistic that we will begin to see the benefits from the global vaccination programs as we move into the rest of the year, after which we expect to see some normalization of results.
In the meantime, we will continue to remain focused on protecting our employees, serving our clients and supporting the industry and our communities.
The quality, strength and resilience of our business give us confidence that we will emerge from the pandemic, position to take advantage of the opportunities ahead and continue to build on our long track record of value creation.
And I hope you all continue to remain safe and well.
Beginning with consolidated premiums.
For the quarter, we reported premium growth of approximately 9%, somewhat higher than recent quarters as we saw good business growth in some areas in addition to some client catch-ups have benefited the reported premiums.
The effective tax rate on pre-tax adjusted operating income was 18.3% for the quarter.
Below the expected range of 23% to 24%, as a result of utilizing foreign tax credits and tax benefits associated with differences in bases and foreign jurisdictions.
The US and Latin America Traditional segment reported pre-tax adjusted operating loss of $89 million in the quarter.
Our individual mortality experience for the quarter, excluding the estimated COVID-19 claim cost were favorable.
Let me provide a little more detail.
Approximately $230 million of claims are attributed to COVID-19, including $100 million of IBNR claims.
The approach is to attribute COVID-19 claims is consistent with that used in the second and third quarter, which continues to track quite well.
We also continue to see excess mortality in the quarter consistent with CDC, reporting a significant levels in the general population.
Although, we believe a portion of this is likely related to COVID-19, we have chosen not to include it in our estimated COVID-19 claim costs.
Overall, when we simply adjust for 2019 specific death, our experience this quarter would have been favorable, primarily due to lower large claims.
I would also note that our 1999 to 2004 business, excluding COVID-19 continues to perform in line with our mortality expectations as we set back in 2015.
Also our Group and Individual Health business performed well in the quarter.
Our Asset-Intensive business reported a good result for the fourth quarter, benefiting from higher variable investment income and strong equity markets.
US Capital Solutions reported fourth quarter pre-tax adjusted operating results that were better than our expectations, albeit the decrease against the strong prior-year period.
The Traditional segment fourth quarter results were in line with our expectations and reflected modestly unfavorable individual mortality experience, primarily due to the impact from COVID-19, offset by favorable underwriting experience in other lines of business.
Our Financial Solutions segment performed well in the quarter, reflecting favorable longevity experience.
In the Europe, Middle East and Africa segment our Traditional business fourth quarter results reflected unfavorable mortality experience, partially explained by COVID-19.
The COVID-19 claims are concentrated in South Africa and the UK.
Additionally, as we've seen in the US, there's significant level of excess mortality experience in the population in South Africa, over and above reported COVID-19.
EMEA Financial Solutions business fourth quarter results reflected modestly unfavorable longevity experience.
Turning to our Asia Pacific Traditional business.
In the fourth quarter, Asia had a favorable underwriting experience across most of the region.
While we did see some COVID-19 related impacts, these were offset by favorable non-COVID experience as well as some data catch-ups on client reporting.
Australia experienced a loss of approximately $26 million.
This reflects a number of one-off, including an increase in reserves to reflect our recently updated industry table and in IBNR for estimated COVID-19 claims.
Without these one-off, we would have been near breakeven for the quarter.
For the year, we saw a much improved result over 2019 and when excluding the Q4 one-offs, would have reported a small profit this year.
While there remains some uncertainty in the Australian market, we saw progress in 2020 and we continue to be prudent about new business and focused on actions to improve results.
Our Asia Pacific Financial Solutions business continued to produce good results in the fourth quarter, benefiting from the growth of business in Asia.
The Corporate and Other segment reported a pre-tax adjusted operating loss of $24 million, relatively in line with the average run rate.
The nonspread portfolio yield for the quarter was 4.2%, a significant improvement relative to that in the third quarter, primarily due to above average run rate for variable investment income as we experienced a high level of commercial mortgage prepayments and some realizations in our various private partnerships.
We believe our portfolio will defensively positioned coming into the crisis, credit performance continues to benefit from diligent security selection as well as economic reopening and policy responses.
Our portfolio average quality of A was maintained and credit impairments were minimal in the quarter.
RGA's leverage ratios remained stable at the end of the year, following the second quarter senior debt issuance and our liquidity remains strong with cash and cash equivalents of $3.4 billion.
Looking forward, we expect to see some level of ongoing COVID-19 impacts that will negatively affect our earnings until this crisis is resolved.
However, we continue to view this as manageable and believe that our strong balance sheet, the power of our earnings engine and the benefits of our global franchise positions us to emerge from the pandemic in good shape to continue to produce attractive returns to our shareholders over time.
I'd also like to comment on Slide 13 of the earnings materials.
As you know, we are very proud of our track record of book value per share growth over the years.
And while 2020 was a difficult year as a result of the pandemic, we have every confidence that we will continue creating value for our shareholders.
I also want to comment on the topic of financial guidance.
We have historically provided intermediate-term financial guidance in conjunction with our fourth quarter results.
However, given the near-term uncertainty surrounding the COVID-19 pandemic, we have decided not to provide guidance at this time.
COVID-19 mortality claim costs for Q4 continue to be toward the lower end of our model expectations relative to general population reported COVID-19 deaths and we continue to see lower insured mortality relative to the general population.
The US still accounts for the majority of our estimated COVID-19 claim costs.
Our ongoing mortality model updates did not result any material changes in the quarter.
So we are reiterating our mortality rules of thumb for our major markets as shown on Slide 14.
Overall longevity experience was modestly favorable in the quarter, but less than the prior quarter run rate.
This lower offset was expected due to lower longevity -- sorry, due to longer longevity reporting lives and differences in country specific mortality rates over the period.
We expect elevated claim cost to continue in the first half of 2021 based on the level of ongoing COVID-19 death in the general population.
Although, uncertainty exists and the ultimate impact of new COVID-19 variance, it is good to see some recent positive signs as well.
Many countries are experiencing decreases in new case counts and deaths from the peak of the holiday season waves and the preliminary data from the global rollout of vaccines looks promising.
We expect the vaccines will have a material beneficial impact on general population mortality in particular as those that are most vulnerable to severe outcomes are vaccinated.
We continue to closely monitor all of these developments, and we'd expect to update our views if needed, as new data emerges.
Let me now hand it back to Todd. | q4 adjusted operating earnings per share $1.19.
global estimated covid-19 claim costs of approximately $300 million for q4.
q4 and full-year results were negatively impacted by a significant level of covid-19 mortality claim costs. |
Then Tom Dineen, our Chief Financial Officer, will give an overview of the fourth quarter and 2020 financial results.
And then, I will discuss our operations and the state of the market.
Copies of these documents may be obtained by contacting the company or the SEC or are available on the company website at Ruger.com/corporate, or of course, at the SEC website at sec.gov.
We do reference non-GAAP EBITDA.
Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2020, and our Forms 10-Q for the first three quarters of 2020, which also are posted on our website.
Now, Tom will discuss the Company's 2020 results.
For 2020, net sales were $568.9 million and diluted earnings were $5.09 per share.
For 2019, net sales were $410.5 million and diluted earnings were $1.82 per share.
For the fourth quarter of 2020, net sales were $169.3 million and diluted earnings were $1.78 per share.
For the corresponding period in 2019, net sales were $105.1 million and diluted earnings were $0.46 per share.
The substantial increase in profitability for the fourth quarter and the full year is attributable to the significant increase in sales, 61% for the fourth quarter and 39% for the full year.
And the reduction in the promotional and rebate activity in 2020, particularly in the latter half of the year.
At December 31, 2020, our cash and short-term investments, which are invested in US T-bills, totaled $141.2 million.
Our current ratio is 2.9 to 1 and we have no debt.
At December 31, 2020, stockholders' equity was $264.7 million, which equates to a book value of $15.13 per share, of which $8.07 per share was cash and short-term investments.
In 2020, we generated $144 million of cash from operations.
We reinvested $24 million of that back into the Company in the form of capital expenditures, primarily related to new products.
In addition, the Company acquired substantially all of the Marlin Firearms assets for $28 million in November of 2020, which included machinery and equipment, tooling, fixtures, and inventory.
We estimate that 2021 capital expenditures will be approximately $20 million, predominantly related to new product development.
Our ability to shift manufacturing equipment between cells and between facilities improves overall utilization and allows for a reduced capital investment.
Cash returned to shareholders.
In 2020, we returned $114 million to our shareholders through the payment of dividends, reflecting our customary quarterly dividends and a special dividend of $5 per share that was paid in August.
Our Board of Directors declared a $0.71 per share quarterly dividend for shareholders of record as of March 12, 2021, payable on March 26, 2021.
As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter.
These dividends add up.
Since 2015, the company has paid $225 million in dividends to its shareholders, just less than $13 per share.
Additionally, during that time, we repurchased more than 1.7 million shares of our stock for $84 million, at an average price of $48.36 per share.
That's the financial update for 2020.
The tremendous sales growth and profitability in 2020 was driven by the historic surge in consumer demand that began late in the first quarter and continued throughout the year.
The estimated sell-through of the Company's products from the independent distributors to retailers, in 2020, increased 44% from 2019.
For the same period, the National Instant Criminal Background Check System or NICS background checks, as adjusted by the National Shooting Sports Foundation, increased 60%.
These substantial increases have likely been constrained due to the limited available inventory in the distribution channel.
In 2020, new product sales represented $111 million or 22% of firearm sales, compared to $102 million or 26% of firearm sales in 2019.
We remain committed to new product development as evidenced by our strong roster of our new products in 2020, which included the extremely popular Ruger-57 pistol, which is awarded the 2020 Caliber Award for best overall new product by the Professional Outdoor Media Association in conjunction with the NASGW.
The LCP II in.
22 Long Rifle, which is based on the venerable LCP platforms and utilizes our Lite Rack system for easier slide manipulation and reduced recoil.
The Wrangler revolver, our latest take on the classic single-action revolver, which has surpassed our wildest expectations and shows no signs of slowing down.
And the PC Charger and AR-556 pistol, two pistol configurations based on established rifle platforms that have found widespread popularity.
As a reminder, derivatives and product line extensions of mature product families are not included in our new product sales calculation, but they provide great value to our distributors, retailers, and our loyal Ruger consumers.
Despite the ferocious pace of business, our engineering teams continue to develop exciting new platforms in a -- for a variety of new products.
I look forward to providing updates when we get closer to launching these innovative new products in the future.
The incredible surge in demand outstripped our production for most of 2020.
As a result, the combined inventories in our warehouses and at our distributors, decreased 290,000 units during 2020.
And the available information suggests that retailer inventory of Ruger as well as most other firearms brands also remains largely depleted.
We are working hard to replenish inventories throughout the distribution channel as quickly as possible so consumers can purchase the Ruger firearms that they desire.
With the onset of the Covid19 pandemic, we suspended hiring from March until June.
Once hiring resumed, we remained cautious and limited the rate at which we were bringing new folks on board.
By mid-summer, we began to accelerate our hiring process, and as a result, since the middle of 2020, our workforce has been strengthened by 250 folks.
This allowed us to realize a 30% increase in production during the latter half of the year.
As many of you are aware, in November, we purchased substantially all of the Marlin assets for $28.3 million.
Since that time, we moved all the inventory, manufacturing equipment, tooling, fixtures, and gauges to our facilities, which is no small task.
We are still in the process of evaluating these assets, reviewing the product designs, and determining the best manufacturing process for each component part.
We have started to establish a manufacturing cells that will produce the Marlin rifles and plan on shipping the first Ruger-made Marlin lever-action rifles from our Mayodan facility in late 2021.
Like many of you, I've been a fan of Marlin products for as long as I can remember.
We have heard from hundreds of the Marlin-faithful and countless firearms consumers who are excited, as excited as we are, to have this legendary brand as part of Ruger.
As we are all too well aware, the Covid19 pandemic continues to cast its wall shadow.
Since its onset in March, we have remained proactive in maintaining the health and safety of our employees and mitigating its impact on our business by providing all hourly employees with an additional two weeks of paid time-off in 2020 and providing an additional week in 2021, encouraging employees to continue to work remotely wherever possible and maintaining social distancing throughout each manufacturing facility, including in every manufacturing cell.
Confidentially communicating with and assisting employees with potential health issues through our dedicated facility nurses.
Restricting visitor access to minimize the introduction of new people to the factory environment, implementing additional cleaning, sanitizing, and other health and safety [Technical Issue] processes, including improved ventilation to maintain a clean and safe workplace.
Providing all employees with multiple face mask coverings and other personal protective equipment and manning their use at all times in our facilities.
Issuing periodic guidance and reminders to all associates, directly to their phones where possible, to encourage them to engage in safe and responsible behaviors, and manufacturing and donating personal protective equipment to local hospitals, healthcare facilities, and police and fire departments in our local communities.
These actions which cost approximately $3.6 million, in 2020, mitigated the adverse financial impact on our business, resulting from Covid19.
We also experienced expense reductions and deferrals in certain areas of our business, including reductions or delays in sponsorships and advertising, reduced conference and trade show participation costs, and reduced travel expenditures.
These expense reductions and deferrals approximated $2.9 million in 2020.
The future impact of Covid19 remains unknown.
We estimate that Covid-related costs will total between $1.5 million and $3 million in 2021.
Included in this estimate is a $200 bonus for every employee who receives a Covid vaccination.
Our financial strength, evidenced by our debt-free balance sheet provides financial security and flexibility as we continue to manage through Covid and focus on our long-term goals and creation of shareholder value.
I would be remiss if I did not mention the extraordinary work of our Covid19 task force and the leadership teams at all of our facilities.
They have risen to the daily challenges posed by the pandemic and have worked tirelessly, keeping our folks healthy and our facilities clean.
I could not be prouder of everyone's performance.
It truly was a team effort.
I'm excited as we head into 2021.
We look forward to launching new products that are sure to create excitement among shooters.
And as I mentioned a few moments ago, we're excited to start shipping Marlin lever-action rifles in late 2021.
And the low inventory levels in the channel provide further opportunity for us.
Those were the highlights of 2020.
Operator, may we have the first question? | compname reports q4 earnings per share $1.78.
compname reports 2020 diluted earnings of $5.09 per share and declares dividend of 71¢ per share.
q4 earnings per share $1.78.
q4 sales $169.3 million. |
Then Tom Dineen, our chief financial officer, will give an overview of the fourth quarter and 2021 financial results, and then I will discuss our operations and the state of the market.
Copies of these documents may be obtained by contacting the company or the SEC or on the company website at ruger.com/corporate or, of course, at the SEC website at sec.gov.
We do reference non-GAAP EBITDA.
Now Tom will discuss the company's 2021 results.
For 2021, net sales were $730.7 million and diluted earnings were $8.78 per share.
For 2020, net sales were $568.9 million and diluted earnings were $5.09 per share.
The substantial increase in profitability in 2021 compared to 2020 is attributable to the increase in sales and production, the resulting favorable leveraging of fixed costs, including depreciation, engineering, and other indirect labor expenses, reduced sales promotional activities, and increased labor, and other manufacturing efficiencies.
For the fourth quarter of 2021, net sales are $168.0 million and diluted earnings were $2.14 per share.
For the corresponding period in 2020, net sales were $169.3 million and diluted earnings per $1.78 per share.
Diluted earnings per share in the fourth quarter of 2021 were increased by $0.18 due to a reduction in the effective tax rate for the year, which was recognized in the quarter.
T-bills, total $221 million.
Our current ratio was 4.3 to one, and we had no debt.
Our cash laden, debt-free balance sheet will allow us to pursue acquisitions and other capital opportunities that may emerge.
At December 31, 2021, stockholders equity was $363.7 million, which equates to a book value of $20.67 per share, of which $12.56 per share was cash and short-term investments.
In 2021, we generated $172 million dollars of cash from operations.
We reinvested $29 million of that back into the company in the form of capital expenditures, primarily related to new products.
We estimate that 2022 capital expenditures will be approximately $20 million, predominantly related to new product development.
Our ability to shift manufacturing equipment between cells and between facilities improves overall utilization and allows for reduced capital investment.
In 2021, we returned $59 million to our shareholders through the payment of dividends.
Our board of directors declared an $0.86 per share quarterly dividend for shareholders of record as of March 11, 2022, payable on March 25, 2022.
As a reminder, our quarterly dividend is approximately 40% of net income and therefore, varies quarter to quarter.
That's the financial update for 2021.
2021 was a great year for Ruger.
We ended the year with virtually no finished goods inventory, so all the firearms sold in 2021 had to be manufactured in 2021.
Our 28% increase in sales would not have been possible without the 30% increase in production at our factories.
And this 30% increase was achieved with a manpower increase of less than 10%.
The manufacturing efficiency gains drove a 109% return on net operating assets for the year, which is a remarkable feat.
Our dedicated workforce accomplish this despite the highly publicized challenges of tight labor markets, transportation, and supply chain issues, and COVID-19 obstacles that we experienced throughout the year.
Following a 44% increase in 2020, the sell-through of our products from distributors to retailers increased again in 2021, this time by 4% despite the 12% reduction in the National Instant Criminal Background Check System background checks as suggested by the National Shooting Sports Foundation.
The increase in the sell-through of our products compared favorably to the decrease in adjusted NICS background checks in 2021 and may be attributable to strong consumer demand for our products, increased availability of our products at the distributors and at retail as a result of our increased production, and the introduction of popular new products.
Led by the award-winning Ruger-5.7 pistol, the MAX-9, and the LCP MAX pistol, our new product sales in 2021 represented $155 million, or 22% of firearm sales, an increase of $45 million from $111 million, or 22% of firearm sales in 2020.
As a reminder, derivatives in product line extensions of mature product families are not included in our new products sales calculations.
We ended 2021 on a high note as we shipped the first Ruger-made Marlin lever action rifles.
The model 1895 SBL, chambered in 45-70 government in December.
During the past year, our team completed a thorough design and production review of the 1895 focused on ensuring the highest quality, accuracy, and performance standards.
Being a longtime Marlin fan, I knew that we needed to take our time and make sure that our reintroduction was nothing short of perfect.
From the quality of the firearm to clear ways for consumers to differentiate Ruger-made Marlins, we focused on getting every detail right.
I look forward to reintroducing many more Marlins in 2022 and in the years to come.
Long live the lever gun.
Our finished goods inventory remains significantly below pre-COVID-19 pandemic levels.
Distributor inventories of our products increased 125,000 units in 2021, but remained below the level needed to support rapid fulfillment of retailer demand for most products.
We have an expansive product line, which ranges from our versatile pistols to bolt-action hunting rifles, to our classic revolvers to Marlin lever action rifles.
This provides some stability in the volatile firearms market as we can reallocate our labor and machinery to prioritize the manufacture of products that are in strong demand while we replenish our inventories of models that appear to be in adequate supply in the distribution channel.
Our ability to reallocate resources and our willingness to maintain appropriate levels of inventory strengthen us as demand ebbs and flows within the various diverse sectors of the industry.
I'm excited as we enter 2022.
We will remain disciplined and committed to our strategy of pursuing manufacturing excellence and vigorously developing innovative and exciting new products.
We look forward to watching some of these new products under both the Ruger and Marlin brands in 2022.
Those are the highlights of 2021.
Operator, may we have the first question? | compname reports 2021 diluted earnings of $8.78 per share.
compname reports 2021 diluted earnings of $8.78 per share and declares dividend of 86¢ per share.
q4 earnings per share $2.14. |
These documents can be found on our website, www.
My name is Felipe Athayde, and I'm the newly appointed president and CEO of Regis Corporation.
I could not be more excited to be joining this amazing company.
And even though these are obviously uncertain times, I believe times like these always open new opportunities.
But before I talk about some of the opportunities I see, let me start by sharing my background with you.
I spent almost a decade at Restaurant Brands International, a portfolio company of 3G Capital, in parent company of the Burger King, Tim Hortons and Popeyes creams.
I joined Burger King shortly after the 3G acquisition, and held positions in marketing, operations and development across all three RBI grades.
I served as president of Tim Hortons U.S., president of Burger King Latin America, and most recently as president of the Americas for Popeyes Louisiana Kitchen, where I led the launch of the Popeyes chicken sandwich and a successful revitalization of the brand resulting in some of the largest same-store sales increases in the history of quick service restaurants.
I also lend the recovery of Popeyes following the COVID-19 pandemic.
Many have asked why I'm excited to have made the transition to Regis.
And the answer is simple.
Regis' brands are in the business of making people look and feel their best.
Hair carries the weight of people's identities and because we cater to such an important human need, I believe core demand for hair salon services is and always will be inherently strong.
Regis has already built the foundation that positions us well for growth even in the current environment.
And the opportunities around us today are very real.
The way I see Regis today is exactly how I saw Burger king back in 2011.
In terms of the magnitude of the value creation potential for our shareholders, and of the wealth creation that can be achieved by our franchisees when we focus on franchise profitability.
Existing Regis franchisees who are good partners of our brands and have the right infrastructure, competencies and resources will have a tremendous opportunity to multiply their footprints, both by driving new unit growth in their territories as well as by acting as consolidators where applicable.
New hospitality-focused franchisees from different franchises systems will be recruited into our many brands, helping us elevate the level of our customer experience.
We are well on our way to becoming a fully franchised business, and my main priority at this moment is to finish the refranchising process started by Hugh which I plan to do at an accelerated speed.
We have seeing consistent high interest in the remaining salons left in the portfolio, and have been approached by a few potential private equity players who see the current environment as a great opportunity to build a portfolio of hair salons which can then serve as a platform for future consolidation and aggressive new unit growth.
It is an avenue we're exploring to bring in new franchise owners.
The hair salon industry in North America is incredibly fragmented, and it's mostly in the hands of independent players.
There's a tremendous opportunity for salon chains to earn market share through brand differentiation, differentiation through technology, through marketing or through advancement opportunities for our stylists.
We are the largest hair salon network in the world.
We own some of the most iconic brands in North America.
We have a strong network of franchisees and a world-class in-house technology group that is not only developing innovative customer-facing technology, but also that will allow us to have a sophisticated business analytics platform based on transactional data from our salons via our OpenSalon Pro POS system.
This will make us into a much smarter company and allow us to use data analytics to design traffic-driving initiatives, drive product attachment in our salons and create loyalty programs that will keep our customers coming back.
My goal is to make Regis into a brand-led company that is in the business of supporting franchisees with a strong focus on their unit economics.
In the franchisee world, unsurprisingly, the brands which have grown the fastest are those that have been the most profitable.
I consider this to be my most important learning for my 10 years in the restaurant industry.
So Regis' obsession has to be and will be the profitability of our franchisees.
I have engaged an outside consultant who I have known for many years and worked closely with in my restaurant days and who's already working with us on the implementation of a zero-based budgeting process at Regis, a process which I have been intimately familiar with in the past decade.
Zero-based budgeting will create better visibility and control over our expenses, increase accountability over budgets and ensure expenses are aligned with our company's new business model and its respective priorities.
Regis will run as one fully franchised company and no longer as corporate opco and franchise.
I appreciate you being on the call.
Today, we reported, on a consolidated basis, first-quarter revenues of $111 million which represented a 55% decrease from the prior year.
The decrease is the natural result of the transition to an asset-light franchise model, coupled with the negative continued impact of COVID-19.
We estimate that we lost roughly $44 million of revenue in the first quarter due to the reduced traffic in-store closures associated with COVID-19.
As of today, approximately 95% of our solon systemwide are open, and management is evaluating the future of unopened corporate salons which may include keeping some salons permanently closed.
We reported an operating loss of $31 million during the quarter.
The economic disruption caused by the pandemic was the key driver of this loss as it has been in the last quarter of our prior fiscal year.
First-quarter consolidated adjusted EBITDA loss of $19 million was $48 million unfavorable to the same period last year.
And was driven primarily by the decrease in the gain associated with the sale of company-owned salon of $27 million and the planned elimination of the EBITDA that had been generated in the prior period from the net 1,056 company-owned salons that has since been sold and converted to the franchise portfolio over the past 12 months.
The COVID-19 pandemic also significantly contributed to the decline in the first-quarter adjusted EBITDA.
Looking at the segment-specific performance and starting with our franchise segment, first-quarter franchise royalties and fees of $18 million decreased $10 million or 36% versus the same quarter last year.
A substantial part of the year-over-year decline was due to a $6 million reduction in cooperative advertising funds which we would have typically charged to and collected from franchisees, but which the company temporarily reduced as part of the COVID-19 pandemic relief effort to help ease the financial burden, the pandemic placed on our franchisees.
This decline is offset in-site operating expense, and it has no impact on operating income.
Royalties also declined approximately $7 million primarily due to COVID-19, certain state mandatory salon closures, state-mandated operating restrictions and pandemic-related customer behavior changes which we believe to be temporary.
Offsetting these declines with the growth in our franchise fees which now represents 80% of our portfolio.
Product sales to franchisees increased $1 million year over year to $14 million driven by the increase in the franchise fees.
As Felipe mentioned, we plan to use our technology capabilities to make better data-driven business decisions, leading to higher franchise profitability.
We believe product attachment strategies can be created through better use of transactional data from our salon.
First-quarter franchise adjusted EBITDA of $7 million declined approximately $5 million year over year driven primarily by reduced royalties as a result of the COVID-19 pandemic and the associated activities, as previously noted partially offset by a decline in G&A.
Looking now at the company-owned salon segment.
First-quarter revenue was $47 million, a decrease of $127 million or 73% versus the prior year.
The multifaceted reach and the impact of COVID-19 including increased governmental regulations, along with the year-over-year decrease of 1,243 company-owned salons over the past 12 months were the drivers of the decline.
The decrease in the company-owned salons can be bucketed into three main categories: First, the successful conversion of 1,067 company-owned salons to our asset-light franchise platform over the course of the past 12 months, of which 137 were sold during the first quarter; second, the holder of approximately 400 company-owned salons over the course of the last 12 months, most of which were underperforming salons at lease expiration and not essential to our future strategy nor did we believe would be well suited within the current franchisee portfolio; and third, these net company-owned salon reductions were partially offset by 218 salons that were taken back from franchisees over the last year and six new company-owned organic salon openings during the last 12 months which we expect to transition to our franchise portfolio in the months ahead.
First-quarter company-owned salon segment adjusted EBITDA decreased $22 million year-over-year to a loss of $11 million.
Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by the elimination of the adjusted EBITDA that had been generated in the prior-year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months.
As it relates to corporate overhead, first-quarter adjusted EBITDA decreased $21 million to a loss of $15 million and is driven primarily by the $27 million decline in net gains excluding noncash goodwill derecognition in the prior year from the sale and conversion of company-owned salon partially offset by the net impact of management initiatives to eliminate non-core, non-essential G&A expense.
There is still work to be done in taking out non-core, non-essential G&A expense.
And as Felipe mentioned, we have recently initiated a zero-based budgeting and organization process which will ensure expenses are aligned with our new franchise business model.
Turning now to the cash flow and balance sheet.
As you heard from Felipe, our top priority is to finish the refranchising process at an accelerated pace.
In addition, cash proceeds during the first quarter were $3.7 million or approximately $27,000 per salon.
We continue to maintain our strong overall liquidity position.
As of September 30, we have liquidity of $184 million.
This includes $99 million of availability under our revolver and $85 million of cash.
In the first quarter, we used $29 million of cash, operating the business.
As you may recall, at the end of the third quarter and during fourth quarter, we utilized cash management strategies, such as modifying payment terms on vendor payables and renegotiating rent payments which actions have now impacted cash used in the first quarter and will also impact second-quarter cash use as some of these actions delayed payments into the second quarter.
Additionally, we used $2.5 million in the first quarter to buy out of underperforming salons early at a discount that will improve future cash flows.
We expect additional cash to be utilized in the second quarter as bonus payments that are typically paid in first quarter will be paid in the second quarter in addition to certain CEO-transition and onboarding expenses.
We believe our largest uses of cash will occur in the first half of this year with cash utilization improving in the back half of the fiscal year.
We've had a number of investors ask about the lease liability on our balance sheet.
So I thought it would be worth mentioning that these lease liabilities on our balance sheet represent liabilities for both our corporate and franchise locations, of which approximately 80% of our liability is service and personally guaranteed by our franchisees.
Additionally, the liability on our balance sheet includes the lease payments for the current term of the leases, plus one option period for all leases we expect to renew at our discretion which overstates the rent payments that Regis has committed to.
Excluding the option period, the lease liability would be approximately $460 million which is $300 million, less than the $760 million on our balance sheet.
So to take that one step further, only 20% of the $460 million or $92 million is release exposure on the company-owned salon.
Before wrapping up, I thought I would spend a few minutes on what we are seeing with the business and related traffic trends.
As a reminder, government-mandated closures started impacting the business in March, and we fully started reopening with a few locations in late April, with more opening in May and June.
Even with these reopenings, most states impose onerous operating limitations including reduced salon capacity.
We sign an initial reopening surge lasting about a week post reopen and the normalized traffic patterns reported this quarter.
We saw our lowest traffic levels in August which was further impacted by significantly reduced back-to-school traffic.
The business was also impacted by states and provinces that were mandated to reclose again.
The West Coast, specifically California, where we have over 500 locations was largely impacted by reclosures mandated in mid-July, lasting through most of August.
The island of Oahu also reclosed in September and El Paso, Texas recently announced another two reclosure.
We have seen some improvement in traffic across the brands in September and October.
The best performance has come out of the middle of the country where there has been relatively less disruption post reopening.
We are seeing better performance in the South and Southeast as well, likely as these areas have been less restrictive.
The Northeast states in Canada primarily Ontario as well as the West Coast, post reclosure disruption continue to struggle with building traffic back up. | estimates it lost approximately $44 million in revenue due to reduced traffic and store closures associated with covid-19 pandemic. |
Before turning the call over to Hugh, there are a few housekeeping items I'd like to address.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to or the substitute for our GAAP financial measures and should be read in conjunction with GAAP financial measures for the period.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in yesterday's release, which is available on our website at www.
Our guiding principle at Regis is to generate long-term value for our shareholders and key stakeholders.
In that regard, I was honored to be asked to chair our company's Board of Directors, in addition to my continuing role as President and Chief Executive Officer.
I believe that assuming the Chairman's role will help ensure continuity of leadership in our multiphase transformational strategy, during a period of ongoing change.
The second quarter does represent an important milestone where we gained greater clarity into the end date of our portfolio transformation.
Based on our year-to-date results and a robust pipeline of potential transactions, we now believe that our transition to a fully franchised business will be substantially complete by the end of this calendar year.
This improved visibility into the cadence of our portfolio transfer transition enabled us to begin meaningful reductions in our cost structure and to initiate other plans we have for the business including reengineering our capital structure, so that so that it will be appropriate for a fully franchised capital like growth platform.
We are pleased to report this quarter that we continue to make meaningful progress in our ongoing strategic transformation to capital light high growth franchise company in August 2019 we estimated that it would take us 18 to 24 months to complete our conversion to a fully franchise portfolio.
However, due to the success we've had in the first half of fiscal year 2020 are, we expect that we will substantially complete this conversion at a somewhat earlier date than we originally anticipated.
In the first half of fiscal 2020, we have converted 988 salons to franchise owners, with line of sight to the sale of approximately 900 additional salons.
This means that net of closing roughly 350 to 500 underperforming salons, which typically occurs at lease expiration.
We have approximately 50% of the remaining company-owned salon portfolio in the pipeline at various stages of transition.
As of December 31, nearly 70% of our portfolio is now franchised.
And you may recall that when I began my tenure as CEO in April of 2017, our salon portfolio was roughly 28% franchised and 72% company-owned.
So by any measure, very significant progress in our portfolio transformation.
As I mentioned, our transition to a fully franchised model has been occurring at a rapid pace.
And as a result, we have been thoughtful and intentional in our plans to begin more aggressive expense reductions.
In January, we announced actions that will reduce G&A by approximately $19 million on an annualized basis.
As we consider the magnitude of these planned G&A reductions, we decided to schedule our actions at the beginning of the third quarter, as we recognized by scheduling the execution of these G&A reductions in January would dilute our second quarter results, given the increased pace of our venditions.
However, we wanted to ensure that our actions to reduce expense did not create an unacceptable level of risk to the stability of our company-owned salons and corporate operations.
We expect to consider further G&A reductions as we draw closer to the end date of our transition and gain additional visibility into our path to sustainable growth.
Further, we believe it is the right time to redesign our capital structure so that our debt facility is better suited for a company that is now 70% franchised.
We recently engaged Guggenheim Securities to help us design the optimal capital structure for what is now a franchise business.
Guggenheim has an outstanding track record of success in working with large franchisors and assuming continued favorable market conditions, we anticipate that this process will be successful and that we will complete our replacement financing no later than the fourth quarter.
Once we have completed our financing, we anticipate that we will continue to make investments to prepare the company for the growth phase of our multi-phase transformation.
This could include additional investments in the following franchisor capabilities: frictionless customer-facing technology; the company's new internally developed back office salon management system, which is now in beta; disruptive marketing and advertising; print driven merchandise, including investments we have made in a new private label brand, we've named Blossom, and the relaunch of our historically successful DESIGNLINE brand.
Ongoing investments in stylists' recruiting and education and then stylists and franchise partner education will also be considered.
We may also utilize our cash in the next 18 months to complete any remaining elements of our multiyear restructuring, including closing nonperforming company-owned salons, when it's justified by the economics, although our operational bias is typically to manage these salons to lease expiration; paying down some debt, we determined that it's wise to do so; supporting our ongoing G&A reductions through severance programs and if needed, capital investments in salon refurbishments and remodels as we consolidated our various brands into what we have called the Fab 5.
And as you all know, we have utilized cash to repurchase our shares in circumstances where we believe that would be in the best interest of our shareholders.
We decided to push the pause button on share repurchases during the second quarter in order to reduce our debt levels and continue investments in other growth initiatives.
Upon completion of our refinancing, management and the board will continue to assess our capital allocation strategies on a periodic basis as we have done historically.
Despite the inherent variability and near-term risks associated with our transformational strategy, we remain convinced that a fully franchised business has the potential to generate a higher return on its capital and will prove to be in the best long-term interest of our shareholders and franchise constituents.
We do have a significant amount of work ahead of us in order to substantially complete the portfolio transformational phase of our strategy by calendar year-end.
However, we are determined to bring this phase to a conclusion so that we can continue to shift our time and energy in our talent toward the organic growth phase of our strategy.
Although conditions could change, we have growing confidence in our plan and our ability to successfully execute our multiphase transformation.
Our restructuring and portfolio transformational phases are each moving rapidly toward their end dates.
And we intend for Regis to be well positioned for its growth phase, a period we expect to generate sustainable revenue and earnings in the years ahead.
With that, I'll ask Kersten Zupfer, our Chief Financial Officer, to take us through the numbers.
As you mentioned, we are pleased to share significant progress in our transition to a fully franchised model.
Yesterday, we reported on a consolidated basis, second quarter revenues of $208.8 million, which represented a decrease of $65.9 million or 24% versus the prior year.
The year-over-year revenue decline was driven primarily by the conversion of a net 1,447 company-owned salons to the company's franchise portfolio over the past 12 months and the closure of 172 salons, of which the majority were cash-flow negative and not essential to our future plans.
When targeting salons for closure, our bias is to exit the location at lease expiration, unless the economics justify a course of action to buy out of the lease early.
The headwinds in the quarter were partially offset by a $5.8 million increase in franchise revenues and $33.6 million of rent revenue recorded in connection with the new lease accounting guidance adopted in the first quarter of fiscal 2020.
Second quarter consolidated adjusted EBITDA of $17 million was $3.6 million or 17.5% unfavorable to the same period last year, and was driven primarily by the elimination of the EBITDA that had been generated in the prior period from the net 1447 company on salon that have been sold and converted to the franchise portfolio over the past 12 months.
Second quarter adjusted Eva dial was also impacted by lower comp, minimum wage increases and strategic investments in technology.
The decline in adjusted EBITDA was partially offset by a $5.6 million increase in the gain associated with the sale of company-owned salons.
Excluding discrete items and the income from discontinued operations the company reported decreased second quarter 2020 adjusted net income of $4.6 million or $0.13 earnings per diluted share as compared to adjusted net income of $8 million or $0.18 earnings per diluted share for the same period last year.
The year-over-year decrease in adjusted net income was driven primarily by the elimination of adjusted net income that had been generated in the prior year from salons that were sold and converted to the company's asset-light franchise portfolio over the past 12 months.
On a year-to-date basis, consolidated adjusted EBITDA of $46.8 million was $1.1 million or 2.3% favorable versus the same period last year.
The year-over-year favorability was driven primarily by a $24.7 million increase in the gain, excluding noncash goodwill derecognition related to the year-to-date sale and conversion of 988 company-owned salons to the franchise portfolio.
Excluding the impact of the gains second quarter year-to-date adjusted EBITDA totaled $5.6 million, which was $23.7 million unfavorable year-over-year and like the second quarter results, this unfavorable variance is also driven largely by the elimination of EBITDA related to the sold and transferred salons over the past 12 months.
As you noted, we disclosed at the close of fiscal year 2019 that our transition to a capital-light franchise model would initially have a dilutive impact on the company's adjusted EBITDA.
So this decline in our reported adjusted EBITDA was not unexpected.
Nevertheless, please note that as we continue our transition, we are certainly paying attention to cash from operations.
As you know, we do not provide guidance.
However, assuming no unexpected changes in market conditions and after adjusting for unusual and transition-related items.
Our objective is for our run rate trajectory to be cash flow positive in the fourth quarter as we accelerate into the end state of our transition.
Looking at the segment-specific performance and starting with our franchise segment second quarter franchise royalties and fees of $29.3 million increased $6.7 million or 29.8% versus the same quarter last year, driven primarily by increased franchise salon counts.
Product sales to franchisees decreased to $1 million year-over-year, to $16.9 million, driven primarily by a $6.5 million decrease in products sold to TBG, partially offset by increased franchise salon counts.
As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate our same-store sales in our company-owned salon portfolio and represents the total change in sales for salons that have been a franchise location for more than 12 months.
As we are in this transition phase, salons are leading company-owned comps but not entering franchise comps for 12 months, which adds temporary noise to same-store sales comparisons.
Second quarter franchise adjusted EBITDA of $13.1 million grew approximately $4.6 million year-over-year, driven by growth in the franchise salon portfolio and better leverage of our cost structure, partially offset by lower margins on franchise product sales.
We believe that the franchise portfolio may have been temporarily challenged by the operational complexity of onboarding new owners and transitioning salons to a more -- to our more experienced owners, among other factors.
With the revenue recognition and the lease accounting guidance we have adopted over the last two years as well as sales of merchandise to TBG at cost, our EBITDA margin percentage is not comparable year-over-year.
After adjusting for the noncontributory revenue associated with ad fund revenue, franchisee rent revenue and TBG product sales EBITDA margin was approximately 37.5%, which is approximately 4.2% favorable year-over-year and is in line with where we would expect it to be.
Year-to-date, franchise adjusted EBITDA of $24.9 million grew approximately $6.6 million or 36% year-over-year.
Now looking at the company-owned salon segment, second quarter revenue decreased $105.3 million or 45% versus the prior year to $128.9 million.
This year-over-year decline is driven and consistent with the decrease of approximately 1,598 company-owned salons over the past 12 months, which can be bucketed into two main categories.
First, the conversion of 1,498 company-owned salons to our asset-light franchise platform over the course of the past 12 months.
These net company-owned salon reductions were partially offset by 51 salons that were brought -- bought back from franchisees over the last year and 21 new company-owned organic salon openings during the last 12 months, which we expect to transition to our portfolio in the month's end.
Second quarter company-owned salon segment adjusted EBITDA decreased $17 million year-over-year to $4.2 million.
Consistent with the total company consolidated results, the year-over-year variance was driven primarily by the elimination of the adjusted EBITDA that had been generated in the prior year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months.
The quarter was also impacted year-over-year by increases in stylist minimum wage and styles commissions and a decline in same-store sales in our company-owned salon.
As you might expect, we are carefully monitoring our company-owned salons as we continue through our transition.
Our objective is to maintain focus and stability in those salons until they are venditioned.
On a year-to-date basis, company-owned salon consolidated adjusted EBITDA of $15.7 million was $33.2 million unfavorable versus the same period last year.
The unfavorable year-over-year variance is driven by the elimination of the adjusted EBITDA related to the sold and transferred salons over the past 12 months, partially offset by management initiatives to rightsize the source structure in the field.
Of course, it's important to note that our company-owned salon performance will continue to become less critical to the future trajectory of our business as we accelerate our conversion to franchise.
Turning now to corporate overhead.
Second quarter adjusted EBITDA of $0.3 million increased $8.8 million and is driven primarily by the $15 million of net gains excluding noncash goodwill derecognition from the sale and conversion of company owned salons, the net impact of management initiatives to eliminate noncore, nonessential G&A expense and lower year-over-year incentive and equity compensation.
In January, based on the improved visibility into the speed of our transition, we began meaningful reductions in our expenses.
By eliminating approximately 290 positions, including 15 contractors across the U.S. and Canada, which is expected to result in approximately $19 million of annualized G&A savings as the company accelerates into its multiyear transformation.
We expect the removal of these G&A costs will also positively impact the company's cash from operations in the back half of fiscal 2020 and in future periods.
Lastly, I wanted to point out that vendition cash proceeds during the second quarter were approximately $71,000 per salon compared to approximately $69,000 per salon in the first quarter of our fiscal 2020, which is consistent quarter-over-quarter.
However, as we vendition more Signature Style salons this fiscal year, we may have lower net proceeds per salon due to the cost of converting some of these salons as part of our brand consolidation efforts, along with more SmartStyle venditions.
Looking now at the balance sheet.
At the end of the quarter, we made a decision to pay $30 million toward our outstanding debt, which decreased our cash balance to $49.8 million as of December 31, 2019.
We paid down the debt to remain in compliance with the net leverage covenants that are part of our existing credit facility.
Given our successful vendition process, we have known for some time that our existing credit facility would not be appropriate for our end state franchise business and that we would need to reengineer our credit facility to meet the opportunities inherent in our new business model.
We believe we now have the visibility and facts that we need to move forward with our refinancing efforts.
After careful consideration, we retained Guggenheim because they have a strong track record of establishing capital structures for growth-oriented franchise companies.
We expect a successful outcome in our refinancing efforts and to complete the process, no later than the fourth quarter of this fiscal year.
Turning now to cash flow.
I thought it might be helpful to provide a high-level reconciliation of how we see adjusted EBITDA flow-through to cash from operations and our free cash flow.
When looking at the cash flow statement, the single largest use of cash is approximately $17 million use of working capital.
As we noted in the prior quarter, this net use of cash is significantly impacted by cash outlays associated with the wind down of company-owned salons as we convert to a fully franchised platform, including transaction-related payments and severance payments related to restructuring our field teams to better align with our future state.
As you noted, we also invested in our new Blossom brand of our private label merchandise, which was received in December and will be in the salons in the spring.
We have also invested in the repackaging and reformulation of our historically successful DESIGNLINE private label brands.
In addition to change in working capital, when reconciling the adjusted EBITDA to operating capital, you will need to take into account the fact that the $41.2 million net gain from the conversion of our company-owned salons to the franchise platform are included in our net income and adjusted EBITDA but not included in cash from operations as the proceeds are reported as inflows in the investing section of the cash flow statement.
I also wanted to provide a brief update on TBG.
At the end of December, TBG transferred back to Regis 207 of its North American mall-based salons, a roughly 10% of the company's portfolio.
When TBG approached Regis about their financial situation in late 2019, we just determined that acquiring the salons, where we just had continuing obligations under real estate leases, would provide greater control over the outcome and maximum optionality for these locations.
This was always a previously considered strategy for these salons.
The remaining lease liability associated with the TBG salons is approximately $30 million and Regis will operate the salons until lease end date or until a new franchise owner is identified.
Essentially, we are now managing these salons in the normal course and will treat the former TBG salons as we would any other location in our company-owned salons portfolio.
We continue to believe the overall transaction, which was always intended to mitigate the company's lease obligation on these salons, was a financial and strategic success.
As a reminder, when we executed the original transaction with TBG back in October of 2017, the lease liability for the mall-based portfolio was approximately $140 million, and as noted, is less than $30 million today. | q2 revenue fell 24 percent to $208.8 million.
q2 earnings per share $0.13 excluding items.
dave williams to remain board's lead independent director.
board elects hugh sawyer, president and chief executive officer, as chairman.
company begins meaningful g&a reductions.
about 900 co-owned salons,available for sale are in various stages of negotiations to be purchased. |
Before turning the call over to Hugh, there are a few housekeeping items I'd like to address.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons which should not be considered superior to or as a substitute for our GAAP financial measures and should be read in conjunction with GAAP financial measures for the period.
I am grateful to each one of you for your many contributions to our business while confronted with these extraordinary unprecedented conditions.
There's little doubt that the most important event of the quarter was the company's successful amendment of its revolving credit facility in the month of May, an amendment that expires in March of 2023.
Among other things, these negotiations removed all prior financial covenants including the net leverage ratio and fixed charge coverage ratio and added a minimum liquidity covenant while providing the lenders security in the company's assets.
This covenant-light facility is expected to provide the long-term flexibility we need to see our transformational strategy through to completion and at the same time, enable us to successfully navigate the uncertainties caused by the pandemic.
We were pleased with this outcome, particularly given all of the uncertainty related to the pandemic and the state of the economy in North America.
Broadly speaking, we expect the -- I mean, the credit facility will enable us to move forward.
We move forward to embrace the full potential of our growth strategy which includes, among other elements, completing our conversion to a capital-light franchise platform, transforming our company with technology, focusing on the value salon sector and our core brands, eliminating costs while continuing to invest in capabilities needed for a better future, and upgrading our marketing and ongoing digital education efforts.
As to the current state of our salon operations, with the exception of our salons in California which opened and then were closed again due to a state mandate and several company-owned salons we elected not to open, our salons have substantially reopened.
As I understand it, Governor Newsom announced on Friday that salons in California can reestablish indoor operations, subject to county approval.
We believe this is late-breaking good news for us given our significant populations of salons in California.
But as of today at month end, roughly 82% of our total salon portfolio was open for business including both franchise and company-owned salons.
Of course, we expect the number of open salons will begin to increase as California and its individual counties begin to reopen.
Excluding the salons in California that are temporarily closed due to state mandate, 90% of our franchise salons and about 88% of our company-owned salons, representing approximately 90% of the company's portfolio, have reopened.
So normalizing for California folks, we are substantially reopened, and we just got a little bit of good news on late last week out of Governor Newsom.
I think you would be interested to know that we've been working very closely with our franchisees, our franchise councils, and our company's operating teams to identify ideas, new ideas to adjust our operations to a post-COVID reality, while keeping the safety of our stylists and customers as our top priority.
As we previously shared with you, we worked with infectious disease specialists at the University of Minnesota to assure that the health and safety of our customers and stylists will be at the forefront of our salon operating procedures.
As I mentioned earlier, while adjusting to the impact of this pandemic, we are trying creative new ideas to help build traffic, while maintaining social distancing and our safety protocols.
For example, collaborating with one of our leading Supercuts franchisees, we recently introduced an outdoor salon concept in Southern California in a format somewhat similar to a sidewalk cafe.
While it's still early days, we really like the new concept and believe it may ultimately prove to have a longer-term application in other locations and perhaps brands.
While our post-COVID volumes are down, our scale confers significant benefit that's not shared by most of the salon sector.
And we certainly believe that consumer interest and good grooming is something that has long-term sustainability.
It's important to consider that despite constantly changing external conditions, Regis has been around for almost 100 years now.
We have survived in spite of multiple recessions, a great depression in the Second World War.
And I believe that with advances in the treatment of COVID-19, better testing and the potential introduction of new vaccines in the months ahead, our customers and their families will return to a more normal lifestyle that will include visits to our salons.
Although much has changed since we embarked on our multiyear strategy, we remain committed to our transformation to a capital-light growth platform.
We originally believed we would complete our refranchising process by the end of this calendar year, and that was the trajectory.
However, no one expected this pandemic and the timing of our transition will likely be delayed a few months by the disease.
Given the impact of the pandemic, we now expect to be substantially complete with the refranchising effort on or before the end of fiscal year 2021.
In other words, we think we'll finish the process no later than next summer.
At this point, the transition, we also anticipate that the onetime cash proceeds generated by this last phase of our refranchising process will be lower due to the uncertainty in traffic erosion created by the pandemic.
However, as you may expect, these assumptions could change depending on the length or severity of the pandemic and the potential impact of advances in treatment, better testing and the introduction of new vaccines.
Although we have more work to do and must find effective ways to adapt to this new reality, we believe the core elements of our strategy and our continuing evolution to a technology-enabled growth platform will, in the long run, enhance shareholder value.
In order to support our growth strategy and provide enhanced capabilities to our franchisees and to establish frictionless customer relationships, we kept our promise and made a long-term commitment to strategic technology investments which we shared with you today.
In August, the company launched its proprietary cloud-based salon management and point-of-commerce solution, OpenSalon Pro.
OpenSalon technology now powers customer-facing booking and information delivery on branded platforms.
This follows a wider initiative launch in 2019 to enable booking directly from Google, Facebook Messenger and Amazon Alexa.
We overhauled and launched the Supercuts mobile app which improved same-day check-in and the ability to book services for the following day.
This update represents an alternative to the traditional walk-in model that consumers and even some states are demanding, particularly in the face of COVID-19 restrictions and wider consumer preference.
And finally, during the quarter, we also launched the new Cost Cutters mobile app in iOS and Android, and a new Cost Cutters website.
With the ability to book an appointment up to three days out, the new mobile app will also be at the center of brandwide loyalty and rewards programs at Cost Cutters.
When downloading the app, customers will be able to earn points in our salons for discounts on future services or toward purchase of Regis's exclusive private label retail products.
And we've also kept our promises regarding expense rationalization.
In June, we took further action to eliminate administrative costs and personnel, with an expected annualized savings of $6 million.
During the year, we made a number of frankly painful decisions to eliminate nonessential G&A cost as we continued our transition to a fully franchised portfolio.
On a full-year basis, our G&A expense was approximately $45.3 million lower than last year primarily due to the transition of company-operated salons to franchise, salon closures and furloughs resulting from the COVID-19 pandemic among other factors.
Please note that our company rejects racism, inequality, cruelty and hatred of any kind.
My thoughts and prayers are also with our healthcare workers and first responders, who are helping fight this pandemic, the victims of Hurricane Laura and our firefighters in California.
May god bless them all.
I'm also grateful to each one of you for your continued interest in Regis.
As Hugh mentioned, the last few months have been unprecedented, but we are committed more than ever to our strategy.
And despite the unfortunate consequences of this pandemic, we continue to be pleased with the progress of our transformation.
At one point in the fourth quarter, virtually all of our salons were closed.
franchisees began opening their salons in April and more than half were opened in May and June.
Company-owned salons began reopening in June.
As additional insight, we estimate we lost roughly $105 million of revenue in the fourth quarter due to the COVID pandemic.
We are pleased that as of today, approximately 82% of our salons are open across the entire portfolio.
Excluding California salons, nearly 90% of our salons are opened.
As Hugh mentioned, with California reopening, that number should increase in the next few weeks.
We also reported that our operating loss was $69 million during the quarter.
The economic disruption caused by the pandemic was the key driver of this loss.
Our management was quick to react to the store closures and furlough the majority of our workforce in April and into May and June to partially offset the lost revenue.
Further, we implemented aggressive wage reductions for the small number of essential employees who continued to work.
Additionally, the company recognized a $23 million noncash long-lived asset impairment primarily related to its lease assets during the quarter.
The impairment was also driven by the impact of the pandemic.
Fourth-quarter consolidated adjusted EBITDA loss of $34 million was $73 million or 186% unfavorable to the same period last year and was driven primarily by the decrease in the gain associated with the sale of company-owned salons of $27 million and the planned elimination of the EBITDA that had been generated in the prior-year period from the net 1,448 company-owned salons that have been sold and converted to the franchise portfolio over the past 12 months.
As we promised, management has taken steps to align the company's cost structure to materially offset the decline in adjusted EBITDA from our company-owned salons.
We executed workforce reductions in January and June resulting in nearly $25 million of annualized savings.
We have also significantly reduced our marketing spend.
As I've already noted, the COVID-19 pandemic also contributed to the decline in the fourth-quarter adjusted EBITDA.
On a year-to-date basis, consolidated adjusted EBITDA of $20 million was $103 million or 84% unfavorable versus the same period last year.
The change includes a $20 million decrease in the gain excluding noncash goodwill derecognition related to the year-to-date sale and conversion of 1,475 company-owned salons to the franchise portfolio.
Excluding the impact of the gain, fourth-quarter year-to-date adjusted EBITDA was a loss of $30 million which was $82 million unfavorable year over year.
And like the fourth-quarter results, this unfavorable variance was also largely driven by the elimination of the EBITDA related to the sold and transferred company-owned salons over the past 12 months and the COVID-19 pandemic.
Of course, as you know, the elimination of EBITDA associated with the sold and transferred company-owned salons was a key element of our strategy and a planned event.
Turning now to segment-specific performance and starting with our franchise segment.
Fourth-quarter franchise royalties and fees of $7 million decreased $19 million or 72% versus the same quarter last year.
Product sales to franchisees decreased $5 million year over year to $7 million.
Both decreases were driven primarily by the COVID-19 pandemic.
Franchise same-store sales were unfavorable 20% due to a decline in traffic as customers learned to navigate the pandemic.
As a reminder, same-store sales represents the total change in sales for salons that were open on the same day each year.
Salon closures are not included in the same-store sales.
So as we've previously discussed with you, it'll take some time for the dust to settle and for same-store sales to be an entire reliable metric for our performance.
Let's hope that by this time next year, we can all rely on these year-over-year comp comparisons as a key indicator of traffic and performance.
Fourth-quarter franchise EBITDA of $1 million declined approximately $9 million year over year driven by reduced royalties and product sales due to the government-mandated salon closures in response to the COVID-19 pandemic partially offset by a decline in G&A.
Year-to-date franchise adjusted EBITDA of $38 million was flat, decreasing by less than $1 million or 2% year over year.
Adjusted EBITDA was favorable year over year until the impact of COVID-19 pandemic hit.
Looking now at the company-owned salon segment.
Fourth-quarter revenue decreased $195 million or 93% versus prior year to $15 million.
COVID-19 was the primary driver along with the year-over-year decrease of approximately 1,476 company-owned salons over the past 12 months which can be bucketed into three main categories.
First, the conversion of 1,475 company-owned salons to our asset-light franchise platform over the course of the past 12 months, of which 112 were sold during the fourth quarter.
Second, the closure of approximately 250 company-owned salons over the course of the last 12 months, most of which were underperforming salons that we closed at lease expiration and are not essential to our future strategy.
And third, these net company-owned salon reductions were partially offset by 234 salons that were bought back from franchisees over the last year and 15 new company-owned organic salon openings during the last 12 months which we expect to transition to our franchise portfolio in the months ahead.
While historically the company has waited until we signed the close underperforming salons, in the current environment, we may utilize our balance sheet to terminate some leases early where the economics justify the decision which will lead to early termination fees.
However, we believe closing certain salons sooner is in our best interest as we get close to a fully franchise model.
Fourth-quarter company-owned salon segment adjusted EBITDA decreased $44 million year over year to a loss of $22 million.
Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by COVID-19 and the elimination of the adjusted EBITDA that had been generated in the prior-year periods from the company-owned salons that were sold and converted into the franchise platform over the past 12 months.
On a year-to-date basis, company-owned salon consolidated adjusted EBITDA loss of $7 million was $95 million unfavorable versus the same period last year.
The unfavorable year-over-year variance is driven by the elimination of the adjusted EBITDA related to the sold and transferred salons over the past 12 months and COVID-19.
As I mentioned earlier, management has taken significant steps to reduce costs associated with this segment.
It is important to remember that our company-owned salon performance will continue to be less critical to the future trajectory of our business as we continue our conversion to a capital-light franchise model.
Turning now to corporate overhead.
Fourth-quarter adjusted EBITDA loss of $14 million increased $20 million and is driven primarily by the $27 million decline in net gain excluding noncash goodwill derecognition in the prior year from the sale of and conversion of company-owned salons partially offset by the net impact of management initiatives to eliminate non-core non-essential G&A expense.
Vendition cash proceeds during the fourth quarter declined approximately $36 million or approximately $33,000 per salon compared to $49,000 per salon in the third quarter of fiscal '20.
The company is still committed to its conversion to an asset-light franchise business model and expects to substantially complete with the transition no later than the end of fiscal '21, a few months later than we had originally expected.
We do believe the economic uncertainty created by the pandemic has and may impact the number of salons to be sold, the pace of sales to franchises, and we expect proceeds per salon to continue to decline.
However, given the lack of visibility related to the length or severity of the pandemic, it is not possible for us to predict the outcome of our refranchising.
We do remain confident that we'll get it done.
However, the timing and cash proceeds are still uncertain.
We have tried to be conservative in our estimates, and we'll keep you posted as we gain more knowledge regarding the impact of the pandemic to refranchising in the months ahead.
Please remember salon proceeds are included in cash from investing activities so they are not included in the reconciliation of operating cash flows to adjusted EBITDA.
As Hugh mentioned, in May, we amended our revolving credit facility that expires in March of 2023.
The amendment provided relief for the maximum consolidated net leverage covenant and minimum fixed charge coverage ratio.
Our liquidity position as of June 3 was $210 million.
This includes $96.5 million of available revolver capacity and $114 million of cash.
This compares to a liquidity position of $241.5 million as of March 31, a reduction of $31 million or approximately $10 million per month.
We continue to believe that the successful amendment of our credit facility will provide the long-term flexibility we need to see our strategy through to completion and enable us to successfully navigate the uncertainties caused by this pandemic.
I agree with you.
This is the pivotal event of fiscal '20.
And in my view, greatly increase the probability of our long-term success in this uncertain environment.
Please be aware that refinancing our credit facility was very challenging, but your management team and the credibility of our strategy both proved equal to the task.
Since the onset of the pandemic, I can report that we have greatly increased our internal focus on all liquidity matters.
It has not always been easy, but we are being aggressive on all fronts to preserve cash until visibility improves.
This includes, but is not limited to, an intense review of all company payables on a weekly basis.
No dollar leaves the company without my personal approval.
Formalizing a company policy for collection of any past due amounts from our franchise partners.
Historically, Regis has had very few problems with unpaid rent or royalties from our franchisees.
However, we recognize that this risk exists in the new normal, and we intend to take appropriate steps to protect the interest of our shareholders.
Ongoing negotiations with our landlords to seek rent abatements, deferrals or permanent rent reductions, this aspect of cash management will not be a short-term project, but will continue into the foreseeable future including proactive negotiations at lease renewal.
For example, we have recently been successful in securing various accommodations from Walmart in order to better support our SmartStyle and Cost Cutter Salons in Walmart locations.
We are fortunate to have a collaborative long-term relationship with Walmart and greatly appreciate their partnership in this circumstance.
Finally, we are proactively managing cash payments to our suppliers wherever is possible to do so.
So in summary, when it comes down to liquidity at Regis, you can be confident that cash is queen.
Although the second half of fiscal '20 has proven to be unprecedented period in Regis's history, we remain excited about the investments we've made in technology.
In particular, we're pleased with the August launch of OpenSalon Pro, proprietary back office salon management system designed to help our franchisees run their business in a more effective manner.
When combined with the launch of our upgraded customer-facing mobile apps and the launch of our private label merchandise lines, my confidence in our strategy and the company's future continues to grow.
As I said earlier, I believe it was the long-term potential and viability of our strategy that enabled the successful outcome of our refinancing efforts.
We are committed to the completion of our transformation and believe we remain well positioned to generate long-term shareholder value as we transition the company to its growth phase in the coming calendar year.
And if our nation receives a new vaccine and improved treatments for this terrible virus, I also believe our customers will ultimately return to our salons with their families.
In closing, our thoughts are with all of you and your families for safety and well-being in the months ahead.
These are certainly unusual times, but all of us at Regis remain focused on long-term value creation for our shareholders, our franchise partners and our employees. | expects to complete its transition to a fully-franchised model no later than end of fiscal year 2021. |
We appreciate your time today.
Before we review our first quarter financial results, I'd like to take a moment to talk about Robert Half's response to the COVID-19 pandemic.
We've been working for many weeks now to ensure the health and welfare of our employees, while also maintaining our service commitments to customers.
The safety of our employees remains our first priority.
Early on, we gave all staff the unconditional right to work from home, and this will remain so.
We also agreed that time taken off due to illness or the care of loved ones who are sick would not be charged to employees.
As we navigate through this crisis, preserving the long-term intrinsic value of Robert half is our guiding principle.
The key focus is retaining our best people, who've proven time and again their ability to grow and sustain the organization.
They are critical to maintaining the culture that's been an essential part of our success.
Given the magnitude of the COVID-19 impact on our business, we fully understand that we must also adjust our cost structure in all other areas.
To reinforce that we're all in this together, I've cut my base pay by 100% until the end of the year and the other executive officers across the enterprise have also taken substantial pay cuts.
Our previous cloud and other infrastructure investments positioned us extremely well to seamlessly transition our employees to work-from-home status with access to all essential technology tools and communication options.
Virtually all employees across the globe are currently working remotely.
We've weathered many downturns over Robert Half's 70-plus year history, owing to our strong balance sheet and cash flow, unparalleled brands, professionally focused business model and what we believe is the most driven and tenured workforce in the industry.
We are confident that we will emerge from this too with the ability to compete effectively and win in the post-COVID-19 world, maintaining and enhancing our industry-leading brand.
Now let's take a look at first quarter 2020 financial results.
Companywide revenues were $1.507 billion, up 3% from last year's first quarter on a reported basis, and up 2% on an as-adjusted basis.
Net income per share for the quarter was $0.79 compared to $0.93 in the first quarter one year ago.
Cash flow from operations during the quarter was $125 million and capital expenditures were $14 million.
In February, we raised our quarterly cash dividend to shareholders from $0.31 to $0.34 per share.
We paid the dividend in March for a total cash outlay of $40 million.
We also repurchased approximately one million Robert Half shares during the quarter for $51 million.
We have 1.5 million shares available for repurchase under our Board-approved stock repurchase plan.
While results through the first half of March were strong and above plan, the second half of March began to reflect the COVID-19 impact on our business, particularly our staffing operations.
Our Robert Half Technology and Robert Half Management Resources divisions turned in solid results, notwithstanding this.
Protiviti had another very strong quarter, posting double-digit, year-on-year revenue gains for the eighth consecutive quarter.
It saw broad strength across its diversified service offerings, including internal audit, technology consulting and regulatory compliance consulting as well as services provided jointly with staffing.
Return on invested capital for the company was 32% in the first quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.507 billion in the first quarter.
This is an increase of 3% from the first quarter one year ago on a reported basis and an increase of 2% on an as-adjusted basis.
Also on an as-adjusted basis, first quarter staffing revenues were down 1% year-over-year.
U.S. staffing revenues were $944 million, down 0.2% from the prior year.
Non-U.S. staffing revenues were $269 million, down 4% year-over-year on an as-adjusted basis.
We have 327 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the first quarter, there were 63.1 billing days compared to 62.2 billing days in the same quarter one year ago.
The current second quarter has 63.4 billing days, unchanged from the second quarter one year ago.
Currency exchange rate movements during the first quarter had the effect of decreasing reported year-over-year staffing revenues by $9 million.
This decreased our year-over-year reported staffing revenue growth rate by 0.7 percentage points.
Now let's take a closer look at results for Protiviti.
Global revenues in the first quarter were $294 million, $233 million of that is from business within the United States and $61 million is from operations outside the United States.
On an as-adjusted basis, global first quarter Protiviti revenues were up 15% versus the year ago period.
The U.S. with U.S. Protiviti revenues up 20%.
Non-U.S. revenues were up 2% on an as-adjusted basis.
Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $2 million and decreasing its year-over-year reported growth rate by 0.6 percentage points.
Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 27 countries.
Turning now to gross margin.
In our temporary and consulting staffing operations, first quarter gross margin was 37.8% of applicable revenues compared to 38% of applicable revenues in the first quarter one year ago.
Our permanent placement revenues in the first quarter were 9.9% of consolidated staffing revenues versus 10.8% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consulting gross margin, overall staffing gross margin decreased 70 basis points compared to the year ago first quarter, to 44%.
For Protiviti, gross margin was $78 million in the first quarter or 26.3% of Protiviti revenues.
One year ago, gross margin for Protiviti was $64 million or 25.3% of Protiviti revenues.
Companywide SG&A costs were 31.8% of global revenues in the first quarter compared to 31.4% in the same quarter one year ago.
Staffing SG&A costs were 35.3% of staffing revenues in the first quarter versus 34.2% in the first quarter of 2019.
The increase in staffing SG&A as a percentage of revenue was significantly impacted by negative leverage as revenues decreased in response to the pandemic.
First quarter SG&A costs for Protiviti were 17.3% of Protiviti revenues compared to 17.9% of revenues in the year ago period.
Moving on to operating income.
Companywide operating income was $131 million in the first quarter.
Operating margin was 8.7%.
First quarter operating income for our staffing divisions was $105 million with an operating margin of 8.6%.
Operating income for Protiviti in the first quarter was $26 million, with an operating margin of 9%.
Our first quarter tax rate was very high at 32% compared to 26% a year ago.
The primary driver was the lower-than-expected tax deduction for the annual vesting of stock compensation, which was valued after recent stock price declines.
At the end of the first quarter, accounts receivable was $854 million, and implied day sales outstanding, DSO, was 51 days.
Given the uncertainty caused by the COVID-19 pandemic and its impact on global economies, we are not offering overall guidance this quarter.
We will, however, review with you some of the monthly revenue trends we saw in the first quarter and so far in April, all adjusted for currency and billing days.
Our temporary and consulting staffing divisions exited the first quarter with March revenues down 6% versus the prior year compared to being flat for the full quarter.
Revenues for the first three weeks of April were down 25% compared to the same period one year ago.
Permanent placement revenues in March were down 33.3% versus March of 2019.
This compares to a 9% decrease for the full quarter.
For the first three weeks of April, permanent placement revenues were down 63% compared to the same period in 2019.
Protiviti's pipeline remains strong, particularly for technology and regulatory compliance engagements.
Protiviti expects second quarter revenues to be in the range of flat to down 10% versus the prior year.
As a result of these staffing trends and the continuing social distancing lockdowns across the globe, we took actions in March and early April to reduce our operating costs by approximately 20% compared to the first quarter of 2020.
Also, we are currently taking further action to reduce SG&A costs by an additional 10%.
These actions have been focused on eliminating all nonessential costs, such as travel and events, as well as laying off our less-experienced and lower-performing staff.
Impacted corporate staff were furloughed with paid benefits, awaiting a return to higher activity levels.
Given the timing of these reductions and certain severance costs, reported results in the second quarter will only reflect savings of approximately 25% versus the first quarter of 2020.
We entered this period with a very strong balance sheet.
At the end of the quarter, we had $250 million in cash and $854 million in receivables, both of which will be a significant source of ongoing liquidity and financial resilience.
As noted earlier, the COVID-19 pandemic is having a significant impact on global economies as a result of stay-at-home orders and business closures to stop the spread of the virus.
Our staffing clients, most of which are small and midsized businesses, are feeling the crisis most acutely, and the downstream effect is a much tougher business climate for Robert Half.
I'm extremely proud of how our teams have been responding to this pandemic.
Even in the current environment, we see opportunity.
We're aggressively pursuing significant opportunities in financial services, government and public education and outsourced reshoring many times jointly with Protiviti.
We're already seeing many successes in these areas.
Protiviti has also successfully transitioned its existing and new client work to a remote delivery model, which makes it even more possible to bring the most relevant deep-subject-matter experts to the table for its client.
We believe the factors that drive typical recovery patterns are still very much in place.
Companies get lean and defer projects during downturns, particularly nimble, small and midsized businesses, Because they start lean, employers need help as business picks up and they resume projects that were put on hold.
Variable cost labor models are ideal in the early stages of a recovery until the business stabilizes.
As the recovery accelerates, there is typically pent-up demand, especially for specialized skills.
The quality of the available labor pool is never better than in the early part of a recovery.
Many people who lost their jobs during the downturn did so because of business conditions, not performance.
Some companies will tap into this talent pool by hiring full-time as their business picks up.
Others will upgrade existing staff, and some will tap into the high-quality temporary and contractor pool because they're reluctant to hire full-time.
Either way, Robert Half gets a lift in permanent placement and temporary and contact revenues.
What's particularly good news this time is that employers have seen that remote work can be effective.
With fewer geographical constraints, we can find an even better fit on the candidate side, which effectively raises the quality of the candidate pool that much further.
We're already seeing examples of this.
In short, as business picks up, demand for our services also picks up because clients start with lean staffs.
Likewise, the quality of the candidate supply benefits from high unemployment and fewer geographic limitations, which provides further incentive for our clients.
During early periods of recovery, clients particularly need our help to avoid becoming overwhelmed with the massive volume of candidate responses to their open positions.
They're ill equipped to handle the interviewing, vetting, follow-up and consummation of their employment requirements.
They also need our help persuading fully employed candidates to make a job change at a time when they value the security of their existing jobs and to get access to candidates who are only known to us confidentially.
In the past two downturns, once the trough was reached, our revenue growth was very robust for the next three to five years, with permanent placement outpacing temporary and consulting.
Much of the current unprecedented monetary and physical policy response to this crisis, including this week's $484 billion extension, is targeted at our client base.
This gives us cause for optimism.
We're confident that Robert Half will participate fully in any recovery as business conditions improve.
[Operator Instructions] If there's time, we'll come back to you for additional questions. | compname reports q1 earnings per share of $0.79.
q1 earnings per share $0.79.
q1 revenue $1.507 billion versus refinitiv ibes estimate of $1.45 billion. |
We appreciate your time today.
This is how we measure and manage these divisions internally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
The supplemental schedules just mentioned also include a revenue schedule showing this information for 2018 through 2021.
We are extremely pleased that our first quarter results exceeded the high end of our guidance and reflect a broad-based recovery that's well under way.
Protiviti's revenues grew 35% year-on-year reflecting continuing momentum across its wide array of service offerings, including very strong managed solutions with staffing.
This is Protiviti's 14th consecutive quarter of year-on-year revenue gains.
Our staffing operations significantly outperformed their historical sequential trends, led by small and medium-sized businesses and permanent placement, which grew 22% sequentially.
I continue to be impressed with the adaptability of our teams in navigating the new hybrid and remote work models with our clients and candidates, helping them grow and find meaningful work.
Companywide revenues were $1.398 billion in the first quarter of 2021, down 7% from last year's first quarter on a reported basis, and down 8% on an as adjusted basis.
Net income per share in the first quarter was $0.98, increasing 24% compared to $0.79 in the first quarter a year ago.
Cash flow from operations during the quarter was $68 million.
In March, we distributed a $0.38 per share cash dividend to our shareholders of record, for a total cash outlay of $44 million.
We also acquired approximately 797,000 Robert Half shares during the quarter for $61 million.
We have 9.2 million shares available for repurchase under our Board approved stock repurchase plan.
Our return on invested capital for the company was 37% in the first quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.398 billion in the first quarter.
On an as adjusted basis, first quarter staffing revenues were down 18% year-over-year.
U.S. staffing revenues were $759 million, down 19% from the prior year.
Non-U.S. staffing revenues were $242 million, down 15% year-over-year on an as adjusted basis.
We have 322 staffing locations worldwide, including 86 locations in 17 countries outside the United States.
In the first quarter, there were 62.3 billing days compared to 63.1 billing days in the first quarter one year ago.
The current second quarter has 63.4 billing days equivalent to the second quarter one year ago.
Currency exchange rate movements during the first quarter had the effect of increasing reported year-over-year staffing revenues by $17 million.
This impacted our year-over-year reported staffing revenue growth rate by 1.4 percentage points.
Now, let's take a closer look at results for Protiviti.
Global revenues in the first quarter were $397 million.
$316 million of that is from business within the United States, and $81 million is from operations outside the United States.
On an as adjusted basis, global first quarter Protiviti revenues were up 35% versus the year-ago period, with U.S. Protiviti revenues up 37%.
Non-U.S. revenues were up 26% on an as adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $6 million and increasing its year-over-year reported growth rate by 2 percentage points.
Protiviti and its independently owned member firms serve clients through a network of 86 locations in 28 countries.
We remind you that changes to the company's deferred compensation obligations are classified as SG&A or, in the case of Protiviti, cost of services with completely offsetting changes in the related trust investment assets classified separately below SG&A.
Previously, they were both classified as SG&A.
Our historical discussion of consolidated operating income has been replaced with the non-GAAP measures of combined segment income.
This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets.
This is a non-GAAP disclosure, so we also show a reconciliation to GAAP.
Turning now to gross margin.
In our temporary and consultant staffing operations, first quarter gross margin was 38.8% of applicable revenues compared to 37.8% of applicable revenues in the first quarter one year ago.
Our permanent placement revenues in the first quarter were 11.2% of consolidated staffing revenues versus 9.9% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin increased 160 basis points compared to the year-ago first quarter to 45.6%.
For Protiviti, gross margin was 26.5% of Protiviti revenues compared to 27.6% of Protiviti revenues one year ago.
Adjusted for the effect of deferred compensation expense related to changes in the underlying trust investment assets as previously mentioned, gross margin for Protiviti was 26.9% for the quarter just ended compared to 26.3% one year ago.
Companywide SG&A costs were 30.3% of global revenues in the first quarter compared to 29.4% in the same quarter one year ago.
Changes in deferred compensation obligations related to increases in underlying trust investments had the impact of increasing SG&A as a percent of revenue by 0.8% in the first quarter and decreasing SG&A by 2.4% in the same quarter one year ago.
When adjusted for these changes, companywide SG&A costs were 29.5% for the quarter just ended compared to 31.8% one year ago.
Staffing SG&A costs were 37.3% of staffing revenues in the first quarter versus 32.3% in the Q1 -- in Q1 2020.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 1% in the first quarter compared to income of 3% related to decreases in the underlying trust investment assets in the same quarter one year ago.
When adjusted for these changes, staffing SG&A costs were 36.3% for the quarter just ended compared to 35.3% one year ago.
First-quarter SG&A costs for Protiviti were 12.5% of Protiviti revenues compared to 17.3% of revenues in the year-ago period.
Operating income for the quarter was $139 million.
This includes $12 million of deferred compensation expense related to increases in the underlying trust investment assets.
Combined segment income was therefore, $151 million in the first quarter.
Combined segment margin was 10.8%.
First quarter segment income from our staffing divisions was $93 million with a segment margin of 9.3%.
Segment income for Protiviti in the first quarter was $57 million with a segment margin of 14.4%.
Our first quarter tax rate was 26% compared to 32% a year ago.
The 2020 rate was elevated based upon the estimated lower coverage of non-deductible tax items due to lower pandemic-impacted revenues.
Moving on to accounts receivable.
At the end of the first quarter, accounts receivable was $800 million, and implied days sales outstanding or DSO was 51.4 days.
Before we move to second quarter guidance, let's review some of the monthly revenue trends we saw in the first quarter and so far in April, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the first quarter with March revenues down 12.5% versus the prior year, compared to an 18.9% decrease for the full quarter.
Revenues for the first two weeks of April were up 9% compared to the same period one year ago.
Permanent placement revenues in March were up 24.2% versus March of 2020.
This compares to an 8.1% decrease for the full quarter.
For the first three weeks of April permanent placement revenues were up 154% compared to the same period in 2020.
We provide this information so that you have insight into some of the trends we've seen during the first quarter and into April.
But as you know, these are very brief time periods and we caution against reading too much into them.
With that in mind, we offer the following second quarter guidance.
Revenues $1.435 billion to $1.515 billion.
Income per share $1 to $1.10.
The midpoint of our guidance implies a year-over-year revenue increase of 31% on an as adjusted basis including Protiviti.
Midpoint earnings per share of $1.05 would represent an all-time high for the company.
The major financial assumptions underlying the midpoint of these estimates are as follows.
Revenue growth on a year-over-year basis, staffing up 23% to 26%, Protiviti up 47% to 49%, overall up 30% to 32%.
On the gross margin percentages, temporary and consultant staffing 38% to 39%, Protiviti 27% to 29% and overall 40% to 41%.
SG&A as percent of revenues, excluding deferred compensation investment impacts, staffing 35% to 37%, Protiviti 12% to 14%, overall 29% to 30%.
And segment income, staffing 9% to 10%, Protiviti 14% to 15%, and overall 10% to 11%.
Full year capital expenditures and capitalized cloud computing costs, $85 million to $95 million with $15 million to $20 million in the second quarter.
Our tax rate, 26% to 27% and shares at 112 million.
We limit our guidance to one quarter.
Our staffing results accelerated during the quarter, indicating a faster early cycle pace of recovery than we've experienced in the past.
This was very broad based and seen across geographies, lines of business, client size, and skill levels.
As I mentioned earlier, small and medium-size businesses led the way after being more negatively impacted during the peak of the pandemic.
The NFIB recently reported that 42% of small businesses had job openings they could not fill, which was a record level.
This bodes well for us.
Our investments in advanced AI technologies have allowed us to adapt quickly to a new marketplace, where remote and hybrid work has become commonplace.
Together with our people, these technologies enable us to find solutions to meet the critical talent and consulting needs of our clients across broader resource pools.
Protiviti continues to thrive with multi-year double-digit growth and a pipeline that is highly diversified across both solution offerings and client segments.
Our blended solutions, complementing Protiviti's offerings with contract talent, allows us to be extremely nimble and cost effective in response to client needs, and we expect this offering to be an increasing part of our business going forward.
We're excited about our current momentum and our prospects for the balance of 2021 and beyond, buoyed by the strength of our brands, our people, our technology, and our professional business model.
These are Fortune's 100 Best Companies to Work for in 2021 and Forbes' Best Employers for Diversity 2021.
Please ask just one question and a single follow up as needed.
If there's time, we'll come back to you for additional questions. | compname posts qtrly net income was $111 mln, or $0.98 per share.
qtrly net income was $111 million, or $0.98 per share, on revenues of $1.398 billion. |
We appreciate your time today.
I'd like to begin by acknowledging that these past few months have been unlike anything most of us have experienced in our lifetimes, with both the global economic disruption caused by the COVID-19 pandemic and the social unrest over racial injustice.
I am so proud of how Robert Half has responded to these circumstances, our employees and tenured management teams have worked together to effectively manage our cost and aggressively pursue revenue generation opportunities.
We remain committed to serving our clients, candidates and partners.
Since the start of the pandemic, we have prioritized the health and safety of our employees and virtually all our global staffing and Protiviti employees have been working remotely.
We have successfully maintained full operations even where our physical locations have remained closed.
Robert Half's second quarter results were clearly affected by the economic crisis, resulting from the COVID-19, pandemic most acutely in our staffing business.
Protiviti had an outstanding quarter and continues to benefit from strong solutions offerings and pipeline.
We are encouraged by recent signs of week-on-week sequential growth in our staffing operations and although significant uncertainty continues, we have approached the third quarter with optimism.
Now let's take a look at Robert Half's second quarter 2020 financial results.
Companywide revenues were $1.1 billion, down 27% from last year's second quarter on a reported basis and down 26% on an as adjusted basis.
Net income per share in the second quarter was $0.41 compared to $0.98 in the second quarter, one year ago.
As announced in our last earnings call, we've implemented actions to reduce our overall cost structure by approximately 30% as compared to Q1 2020.
The timing of those actions which occurred over the course of the quarter as well as certain employee compensation-related items, such as severance and salary continuation, reduced the savings actually reported in the second quarter to 24%.
Cash flow from operations during the quarter was $301 million and capital expenditures were $8 million.
In June, we distributed a $0.34 per share cash dividend to our shareholders of record for a total cash outlay of $38 million.
There were no repurchases during the second quarter, we anticipate repurchase activity to commence again in Q3 and at a reduced rate.
Let's start with revenues.
As Keith noted global revenues were $1.108 billion in the second quarter.
This is a decrease of 27% from the second quarter one year ago on a reported basis and a decrease of 26% on an as adjusted basis.
On an as adjusted basis, second quarter staffing revenues were down 33% year-over-year.
U.S. staffing revenues were $640 million, down 34% from the prior year.
Non-U.S. staffing revenues were $184 million, down 31% year-over-year on an as adjusted basis.
We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the second quarter, there were 63.4 billing days, unchanged from the same quarter one year ago.
The current third quarter has 64.3 billing days compared to 64.1 billing days in the third quarter one year ago.
Currency exchange rate movements during the second quarter had the effect of decreasing reported year-over-year staffing revenues by $8 million.
This decreased our year-over-year reported staffing revenue growth rates by 0.6 percentage points.
Now let's take a closer look at results for Protiviti.
Global revenues in the second quarter were $284 million, $225 million of that is from business within the United States and $59 million is from operations outside the United States.
On an as adjusted basis, global second quarter Protiviti revenues were up 4% versus the year ago period, with U.S. Protiviti revenues up 6%.
Non-U.S. revenues were down 2% on an as adjusted basis.
Exchange rates had the effect of decreasing year-over-year Protiviti revenue by $1 million and decreasing its year-over-year reported growth rate by 0.5 percentage points.
Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries.
Turning now to gross margin.
In our temporary and consulting staffing operations, second quarter gross margin was 37.1% of applicable revenues compared to 38.2% of applicable revenues in the second quarter one year ago.
The year-over-year decline in gross margin percentage is primarily due to lower conversion revenues.
Our permanent placement revenues in the second quarter were 8.6% of consolidated staffing revenues versus 11.3% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consulting gross margin, overall staffing gross margin decreased 260 basis points compared to the year-ago second quarter to 42.5%.
For Protiviti, gross margin was $73 million in the second quarter or 25.7% of Protiviti revenues.
One year ago, gross margin for Protiviti was $76 million or 27.9% of Protiviti revenues.
Companywide selling, general and administrative costs were 32.9% of global revenues in the second quarter compared to 31.5% in the second quarter one year ago.
Staffing SG&A costs were 39.1% of staffing revenues in the second quarter versus 34.6% in the second quarter of 2019.
The increase in staffing SG&A as a percentage of revenue was significantly impacted by negative leverage as revenue -- as revenues decreased.
In addition, as Keith noted earlier, the timing of our cost reduction actions, including compensation related costs associated with employee terminations impacted total SG&A expense for the quarter.
Second quarter SG&A costs for Protiviti were 15% of Protiviti revenues compared to 17.3% of revenues in the year ago period.
Companywide operating income was $58 million in the second quarter, operating margin was 5.3%, second quarter operating income from our staffing divisions was $28 million, and -- with an operating margin of 3.4%.
Operating income for Protiviti in the second quarter was $30 million, with an operating margin of 10.6%.
Our second quarter tax rate was 20% compared to 28% a year ago.
The relatively low second quarter tax rate is a consequence of a lower anticipated full-year tax rate compared to our full-year estimate in the first quarter.
Our six month year-to-date rate of 28% is in line with what we expect for the full year.
Accounts receivable at the end of the second quarter, accounts receivable was $665 million and implied day sales outstanding or DSO was 54 days.
Before we move to third quarter guidance, let's review some of the monthly revenue trends we saw in the second quarter in so far in July, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the quarter with June revenues down 33.7% versus the prior year compared to a 31.2% decrease for the full quarter.
Revenues for the first two weeks of July were down 33% compared to the same period one year ago.
On a sequential week-over-week basis, we saw revenue growth for the last three weeks of June and this has continued into July.
Permanent placement revenues in June were 46.1% versus June of 2019.
This compares to a 49.1% decrease for the full quarter.
For the first three weeks of July, permanent placement revenues were down 35% compared to the same period in 2019.
We provide this information so that you have insight into some of the trends we saw during the second quarter and into July.
But as you know, these are very brief periods of time and we caution reading too much into them.
With that in mind, we offer the following third quarter guidance.
Revenue $1.09 billion to $1.20 billion, income per share $0.49 to $0.68.
The midpoint of our guidance implies a year-over-year revenue decline of 26% on an as adjusted basis, inclusive of Protiviti.
We limit our guidance to one quarter.
Only a few short months ago, we discussed our operations in an unprecedented candidate-constrained labor market.
In one quarter's time, we are now operating in a labor market with unprecedented unemployment levels.
The experience of our tenured management team has driven a swift shift and strategic focus to embrace this new operating environment.
Our employees have found innovative ways to maintain connections with candidates, clients and each other in a remote environment.
We've seen opportunities for new success with virtual client visits and by connecting clients to deep expertise from Protiviti on a virtual basis.
We've seen new opportunities arise across all of our lines of business in supporting a wide range of companies and entities, financial institutions, state and local governments, large school districts, just to name a few.
The widespread, global stay-at-home orders have accelerated trends in remote work, with many companies indicating a permanent shift in their staffing strategies.
We see increased demand as companies upgrade their talent pools without regard to physical location of the candidate.
Likewise, as remote work takes a more prominent position, we see new demand for changing skill sets.
Larger companies that have temporarily furloughed employees are also seeking opportunities to upgrade or refine remote talent from lower cost areas.
And we see demand when furloughed employees are not able or ready to return to work.
We've managed through this crisis and have a solid foundation for thriving in the new normal.
I'm proud of the resilience our employees demonstrated in arguably the most unique period in the company's history.
We aggressively cut costs in the quarter, achieving our targeted reductions.
These reductions coupled with the talent and driven team, that is backed by industry-leading technology, position us to fully participate in any economic recovery. | q2 earnings per share $0.41.
q2 revenue $1.108 billion versus refinitiv ibes estimate of $1.13 billion. |
We appreciate your time today.
This is how we measure and manage these divisions internally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
The supplemental schedules just mentioned also include a revenue schedule showing this information for 2019 through 2021.
We achieved record levels of revenues and earnings in the second quarter due to a broad-based, global acceleration in demand for our staffing and business consulting services.
We were particularly pleased with the strength of our permanent placement and Protiviti operations, which grew year-over-year by 102% and 62%, respectively.
Protiviti reached its 15th consecutive quarter of revenue gains with very strong growth in each of its solution areas.
I am extremely proud of our staffing, Protiviti and corporate services professionals who are the key to our success.
Companywide revenues were $1.581 billion in the second quarter of 2021, up 43% from last year's second quarter on a reported basis, and up 40% on an as adjusted basis.
Net income per share in the second quarter was $1.33, increasing 227% compared to $0.41 in the second quarter a year ago.
Cash flow from operations during the quarter was $165 million.
In June, we distributed a $0.38 per share cash dividend to our shareholders of record, for a total cash outlay of $42 million.
We also acquired approximately 717,000 Robert Half shares during the quarter, for $63 million.
We have 8.4 million shares available for repurchase under our Board-approved stock repurchase plan.
Return on invested capital for the company was 49% in the second quarter.
As Keith noted, global revenues were $1.581 billion in the second quarter.
On an as adjusted basis, second quarter staffing revenues were up 33% year-over-year.
U.S. staffing revenues were $855 million, up 34% from the prior year.
Non-U.S. staffing revenues were $267 million, up 31% on a year-over-year basis as adjusted.
We have 322 staffing locations worldwide, including 86 locations in 17 countries outside the United States.
In the second quarter, there were 63.4 billing days, unchanged from the same quarter one year ago.
The current third quarter has 64.4 billing days, compared to 64.3 billing days in the third quarter one year ago.
Currency exchange rate movements during the second quarter had the effect of increasing reported year-over-year staffing revenues by $24 million.
This impacted our year-over-year reported staffing revenue growth rate by 2.9 percentage points.
Temporary and consultant bill rates for the quarter increased 3.7% compared to one year ago, adjusted for changes in the mix of revenues by line of business, currency and country.
This rate for Q1 2021 was 3.4%.
Now, let's take a closer look at results for Protiviti.
Global revenues in the second quarter were $459 million.
$366 million of that is from business within the United States, and $93 million is from operations outside the United States.
On an as adjusted basis, global second quarter Protiviti revenues were up 59% versus the year ago period, with U.S. Protiviti revenues up 63%.
Non-U.S. revenues were up 43% on an as adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $8 million and increasing its year-over-year reported growth rate by 2.8 percentage points.
Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries.
We remind you that changes in the company's deferred compensation obligations are classified as SG&A or, in the case of Protiviti, costs of services, with completely offsetting changes in the related trust investment assets classified separately below SG&A.
Previously they were both classified as SG&A.
Our historical discussion of consolidated operating income has been replaced with the non-GAAP measure of combined segment income.
This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets.
This is a non-GAAP disclosure, so we also show a reconciliation to GAAP.
Turning now to gross margin.
In our temporary and consultant staffing operations, second quarter gross margin was 39.7% of applicable revenues, compared to 37.1% of applicable revenues in the second quarter one year ago.
Our permanent placement revenues in the second quarter were 12.8% of consolidated staffing revenues, versus 8.6% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin increased 490 basis points compared to the year-ago second quarter, to 47.4%.
For Protiviti, gross margin was 29.1% of Protiviti revenues, compared to 23.4% of Protiviti revenues one year ago.
Adjusted for the effect of deferred compensation expense related to changes in the underlying trust investment assets as previously mentioned, adjusted gross margin for Protiviti was 30% for the quarter just ended versus 25.7% one year ago.
Transitioning to Selling, General and Administrative Costs, company SG&A costs were 30.9% of global revenues in the second quarter, compared to 36.7% in the same quarter one year ago.
Changes in deferred compensation obligations related to increases in underlying trust investments had the impact of increasing SG&A as a percent of revenue by 1.5% in the current second quarter and increasing SG&A by 3.8% in the same quarter one year ago.
When adjusted for these changes, companywide SG&A costs were 29.4% for the quarter just ended, compared to 32.9% one year ago.
Staffing SG&A costs were 38.4% of staffing revenues in the second quarter, versus 44.2% in the second quarter of 2020.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.1% in the second quarter, compared to an expense of 5.1% related to increases in the underlying trust investment assets in the same quarter one year ago.
When adjusted for these changes, staffing SG&A costs were 36.3% percent for the quarter just ended, compared to 39.1% one year ago.
Second quarter SG&A costs for Protiviti were 12.5% of Protiviti revenues, compared to 15.1% of revenues in the year-ago period.
Operating income for the quarter was $177 million.
This includes $28 million of deferred compensation expense related to increases in the underlying trust investment assets.
Combined segment income was therefore $205 million in the second quarter.
Combined segment margin was 12.9%.
Second quarter segment income from our staffing divisions was $125 million, with a segment margin of 11.1%.
Segment income for Protiviti in the second quarter was $80 million, with a segment margin of 17.4%.
Our second quarter tax rate was 27%, compared to 20% one year ago.
The comparative rate in 2020 was lower than normal due to adjustments made to the estimates of the pandemic impact on the 2020 tax rate.
Outstanding or DSO was 51.6 days.
Before we move to third quarter guidance, let's review some of the monthly revenue trends we saw in the second quarter and so far in July, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the second quarter with June revenues up 34% versus the prior year, compared to a 27% increase for the full quarter.
Revenues for the first two weeks of July were up 35% compared to the same period one year ago.
Permanent placement revenues in June were up 83% versus June of 2020.
This compares to a 97% increase for the full quarter.
For the first three weeks in July, permanent placement revenues were up 83% compared to the same period in 2020.
We provide this information so that you have insight into some of the trends we saw during the second quarter and into July.
As you know, these are very brief time periods of time.
We caution against reading too much into them.
With that in mind, we offer the following third quarter guidance.
Revenue $1.61 billion to $1.69 billion.
Income per share $1.35 to $1.45.
The midpoint of our guidance implies new all-time high revenue and earnings per share levels for the Company.
Midpoint revenues of $1.65 billion are 37% higher than 2020 and 5% higher than 2019 levels on an as adjusted basis.
Midpoint earnings per share of $1.40 is 110% higher than 2020 and 39% higher than 2019.
The major financial assumptions underlying the midpoint of these estimates are as follows; revenue growth on a year-over-year basis; staffing up 33% to 35%; Protiviti up 46% to 48%; overall up 36% to 38%.
Gross margin percentage, temporary and consultant staffing, 39% to 40%.
Protiviti, 29% to 31%.
Overall, 41% to 43%.
SG&A as percent of revenues, excluding deferred compensation investment impacts: staffing, 35% to 36%; Protiviti, 12% to 13%; overall, 29% to 30%.
Segment income for staffing, 10% to 11%; Protiviti, 17% to 18%; overall, 12% to 13%.
A tax rate up 26% to 27% and shares outstanding 111.5 million.
2021 capital expenditures and capitalized cloud computing costs, $65 to $75 million, with $15 million to $20 million incurred during the third quarter.
We limit our guidance to one quarter.
Our staffing results continue to reflect a faster pace of recovery than we've experienced in the past.
Clients have lean staff levels as they begin to expand, which is exacerbated by generally higher levels of attrition.
Also, as they look remotely to fill their needs, clients are elevating the experience requirements for their job openings, which further adds to the demand for our services.
The recovery is also very broad-based and spans across industries, client size, skill levels, geographies, and lines of business.
The National Federation of Independent Business, NFIB, recently reported that 56% of small businesses had few or no qualified applicants for open positions, and 46% had job openings that could not be filled.
This speaks well of the ongoing demand environment.
Protiviti's multiyear record of consecutive growth continues to benefit from a highly diversified suite of solution offerings and client base.
Blended solutions with staffing pair Protiviti's world-class consulting talent with staffing's deep operational resources to provide a cost-effective solution to clients' skills and scalability needs.
Protiviti has also benefited from project work in the public sector resulting from various federal and state stimulus programs.
Approximately $100 million in revenue this quarter resulted from work related to these programs, or approximately $0.07 of our earnings per share.
Growth in this public sector business contributed 32 points to Protiviti's year-on-year growth rate of 62%, while the core business accelerated to a growth rate of 30%.
Core growth was strong across internal audit, technology consulting, risk and compliance consulting, and business process improvement with internal audit showing the most acceleration.
A year ago, the world faced an uncertain future with extraordinary challenges ahead.
Along the way we have continued to invest in our tenured, high performing workforce.
We also strengthened our investments in advanced AI technologies, enabling our professionals to help clients with critical talent and consulting needs and find solutions across broad resource pools.
As a result, we closed the quarter with an employee base that is more engaged and productive than ever, with all-time high revenues, and strong momentum leading into the second half.
Bolstered by the strengths of our brands, our people, our technology and our professional business model, we are excited about the continued ability to find meaningful and exciting employment for the people we place and provide clients access to the specialized talent they need to grow and the deep subject matter expertise they need to confidently compete in a dynamic world.
Please ask just one question and a single follow-up, as needed.
If there's time, we'll come back to you for additional questions. | compname reports q2 earnings per share $1.33.
q2 earnings per share $1.33.
q2 revenue $1.581 billion versus refinitiv ibes estimate of $1.48 billion. |
We appreciate your time today.
This is how we measure and manage these divisions internally and from now on, it's how we will report them externally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
We are very pleased that third quarter and early October results reflect consistent weekly and monthly sequential gains across our divisions.
Protiviti had another outstanding quarter reporting its 12th consecutive quarter of year-on-year revenue gains, leveraging a strong pipeline of diversified service offerings, including particularly robust growth with the blended solutions with our staffing operations.
We're also pleased with the quarter-on-quarter growth in our staffing divisions, led by our permanent placement and OfficeTeam divisions.
2020 continues to be an unprecedented year.
I'm extremely proud of the resourcefulness and commitment exhibited by all of our employees as we maintain high levels of service to our clients and candidates.
Companywide revenues were $1.19 billion in the third quarter of 2020, down 23% from last year's third quarter on a reported basis and down 24% on an as-adjusted basis.
Net income per share in the third quarter was $0.67 compared to $1.01 in the third quarter a year ago.
Cash flow from operations during the quarter was $139 million and capital expenditures were $7 million.
In September, we distributed a $0.34 per share cash dividend to our shareholders of record, for a total cash outlay of $38 million.
We also acquired approximately 450,000 shares during the quarter for $24 million.
We have 1 million shares available for repurchase under our Board-approved stock repurchase plan.
Return on invested capital for the company was 25.8% in the third quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.190 billion in the third quarter.
This is a decrease of 23% from the third quarter one year ago on a reported basis and a decrease of 24% on an as-adjusted basis.
Also on an as-adjusted basis, third quarter staffing revenues were down 31% year-over-year.
U.S. Staffing revenues were $666 million, down 32% from the prior year.
Non-U.S. Staffing revenues were $203 million, down 29% year-over-year on an as-adjusted basis.
We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the third quarter, there were 64.3 billing days compared to 64.1 billing days in the third quarter one year ago.
The current fourth quarter has 61.7 billing days equivalent to the fourth quarter of one year ago.
Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year staffing revenues by $4 million.
This increased our year-over-year reported staffing revenue growth rate by 0.3 percentage points.
Now, let's take a closer look at the results for Protiviti.
Global revenues in the third quarter were $321 million.
$260 million of that is from business within the United States, and $61 million is from operations outside the United States.
On an as-adjusted basis, global third quarter Protiviti revenues were up 6% versus the year-ago period, with U.S. Protiviti revenues up 10%.
Non-U.S. revenues were down 8% on an as-adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $2 million and increasing its year-over-year reported growth rate by 0.7 percentage points.
Protiviti and its independently owned member firms serve clients through a network of 86 locations in 28 countries.
Under these plans, employees direct the investments of their account balances, and the company makes cash deposits into an investment trust consistent with these directions.
As realized and unrealized investment gains and losses occur, the company's deferred compensation obligation to employees changes accordingly.
However, the value of the related investment trust assets also changes by an equal and offsetting amount, leaving no net cost to the company.
Going forward, changes in the company's deferred compensation obligations noted above will continue to be included in SG&A or, in the case of Protiviti, direct cost.
However, the offsetting changes in the investment trust assets will be presented separately, below SG&A and outside of operating income.
This does not change the reported level of pre-tax or after-tax income or cash flows provided -- previously provided.
Going forward, we will replace the discussion of consolidated operating income with the non-GAAP measure of combined segment income.
This will be calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets.
Turning now to gross margin.
In our temporary and consultant staffing operations, third quarter gross margin was 37.5% of applicable revenues compared to 37.9% of applicable revenues in the third quarter one year ago.
The year-over-year decline in gross margin percentage is primarily due to lower conversion revenues.
Our permanent placement revenues in the third quarter were 10% of consolidated staffing revenues versus 10.7% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin decreased 80 basis points compared to the year-ago third period to 43.8%.
For Protiviti, gross margin was $87 million in the third quarter or 27.1% of Protiviti revenues.
This includes $3.4 million or 1.1% of Protiviti revenues of deferred compensation expense related to increases in the underlying trust investment accounts.
One year ago, gross margin for Protiviti was $88 million or 29.4% of Protiviti revenues, including $200,000 of deferred compensation expense related to investment trust activities.
Companywide SG&A costs were 32.8% of global revenues in the third quarter compared to 31.2% in the same quarter one year ago.
Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percentage of revenue by 1.9% in the current third quarter and 0.1% in the same quarter one year ago.
Staffing SG&A costs were 40.2% of staffing revenues in the third quarter versus 34.8% in third quarter of 2019.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.6% and 0.1% respectively.
The increase in staffing SG&A as a percentage of revenues is primarily the result of continued negative leverage resulting from the decline in revenues.
Third quarter SG&A costs for Protiviti were 13% of Protiviti revenues compared to 16.2% of revenues in the year-ago period.
Operating income for the quarter was $77 million.
This includes $26 million of deferred compensation expense related to increases in the underlying investment trust assets.
Combined segment income was therefore $103 million in the third quarter.
Combined segment margin was 8.6%.
Third quarter segment income from our staffing divisions was $54 million, with a segment margin of 6.2%.
Segment income for Protiviti in the third quarter was $49 million with a segment margin of 15.2%.
Our third quarter tax rate was 26% compared to 28% a year ago.
The lower third quarter tax rate is primarily due to annual adjustments made to reconcile our tax accounts to prior year's tax returns as actually filed.
Our nine-month year-over-year tax rate of 28% is in line with what we expect for the full year.
Moving on to accounts receivable, at the end of the third quarter, accounts receivable were $690 million and implied days sales outstanding or DSO was 52.3 days.
Before we move to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the third quarter with September revenues down 29.3% versus the prior year compared to a 30.7% decrease for the full quarter.
Revenues in the first two weeks of October were down 27% compared to the same period one year ago.
Permanent placement revenues in September were down 30.1% versus September of 2019.
This compares to a 35.7% decrease for the full quarter.
For the first three weeks in October, permanent placement revenues were down 31% compared to the same period in 2019.
We provide this information so that you have insight into some of the trends we saw during the third quarter and into October.
But, as you know, these are very brief time periods.
We caution against reading too much into them.
With that in mind, we offer the following fourth quarter guidance.
Revenues of $1.155 billion to $1.255 billion; income per share $0.55 to $0.75.
The midpoint of our guidance implies a year-over-year revenue decline of 22% on an as-adjusted basis inclusive of Protiviti.
The major financial assumptions underlying the midpoint of these estimates are as follows.
Revenue growth on a year on year basis, staffing down 27% to 30%; Protiviti up 5% to 7%; overall down 21% to 23%.
On the gross margin percentages, Temporary and Consultant Staffing 37% to 38%; Protiviti 27% to 29%; overall 39% to 40%.
SG&A as percentage of revenues, excluding deferred compensation investment impacts, staffing 36% to 38%; Protiviti 14% to 16%; overall 30% to 32%.
Segment income, Staffing 6% to 8%; Protiviti 12% to 15%; overall 8% to 10%.
We expect our tax rate to be between 27% and 29% and shares to be 113 million.
We limit our guidance to one quarter.
As is evidenced in the growth of our newly reported inter-segment revenues.
The partnership between Protiviti and our staffing operations continues to be an accelerating source of growth for our enterprise.
We have also seen particular strength in our services to the public sector and financial services clients.
In addition, we've experienced increased demand for services and solutions in cloud technology, online security, data privacy and digital transformation as enterprise client companies have continued to strategically invest in these areas.
The significant reductions we made to our cost structure in the second quarter have also benefited the third quarter and will continue to benefit future quarters.
Remote and hybrid working models will continue long after the pandemic ceases to require them.
Access to talent is no longer limited to time zones or geographies.
With our global network of talent and world-class technology tools, we can provide the right match for clients and candidates regardless of location.
While uncertainty remains in the overall economic environment as the pandemic continues, there is much to be optimistic about.
As the fourth quarter progresses, the nature, timing and amount of any additional fiscal stimulus should be known.
Medical solutions to the COVID-19 virus move ever closer to reality, and the NFIB continues to report improving trends in the small business community.
A recent study showed that more than half of small businesses are hiring or trying to hire, with the vast majority reporting few or no qualified applicants.
We continue to believe in our positioning for future growth with the unique strengths of our brands, people, technology and professional business model.
Please ask just one question and a single follow-up, as needed.
If there's time, we'll come back to you. | compname reports quarterly earnings per share $0.67.
quarterly earnings per share $0.67.
quarterly revenue $1.19 billion.
return on invested capital for co was 25.8 percent in q3. |
We appreciate your time today.
This is how we measure and manage these divisions internally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
The supplemental schedule just mentioned also include our revenue schedule showing this information back for 2018, 2019, as well as 2020.
Fourth-quarter results for both our Protiviti and staffing operations were very strong and exceeded the top end of our guidance range.
Protiviti reported its 13th consecutive quarter of year-on-year revenue gains, with particular strength in its technology consulting practice and managed solutions with staffing.
Our staffing operations reported broad-based, double-digit, quarter-on-quarter sequential revenue growth on an as-adjusted basis.
I could not be more proud of how our teams have managed through this extraordinary year.
Over the last several months, they have made significant impacts helping our clients succeed and job candidates find meaningful work.
Companywide revenues were $1.304 billion in the fourth quarter of 2020, down 15% from last year's fourth quarter on a reported basis, and down 16% on an as-adjusted basis.
Net income per share in the fourth quarter was $0.84, compared to $0.98 in the fourth quarter one year ago.
Cash flow before financing activities during the quarter was $85 million.
In December, we distributed a $0.34 per share cash dividend to our shareholders of record, for a total cash outlay of $39 million.
We also acquired 1.1 million Robert Half shares during the quarter for $63 million.
We have 9.9 million shares available for repurchase under our Board-approved stock repurchase plan.
Return on invested capital for the Company was 31% in the fourth quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.304 billion in the fourth quarter.
This is a decrease of 15% from the fourth quarter one year ago on a reported basis and a decrease of 16% on an as-adjusted basis.
On an as-adjusted basis, fourth quarter staffing revenues were down 24% year-over-year.
US staffing revenues were $723 million, down 25% from the prior year.
Non-US staffing revenues were $219 million, down 23% year-over-year on an as-adjusted basis.
We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the fourth quarter, there were 61.7 billing days, equal to the number of billing days in the fourth quarter one year ago.
The current first quarter has 62.3 billing days, compared to 63.1 billing days in the first quarter one year ago.
The billing days for 2021 by quarter, are 62.3 days, 63.4 days, 64.4 days and 61.7 days for a total of 251.8 days, which is approximately one day less than 2020 due to it being a leap year.
Currency exchange rate movements during the fourth quarter had the effect of increasing reported year-over-year staffing revenues by $8 million.
This increased our year-over-year reported staffing revenue growth rate by 0.7 percentage points.
Temporary and consultant bill rates for the quarter increased 2% compared to a year ago, adjusted for changes in the mix of revenues by line of business.
This rate for Q3 2020 was 3.1%.
Now, let's take a closer look at results for Protiviti.
Global revenues in the fourth quarter were $362 million; $294 million of that is from business within the United States, and $68 million is from operations outside the United States.
On an as-adjusted basis, global fourth quarter Protiviti revenues were up 18% versus the year-ago period, with US Protiviti revenues up 23%.
Non-US revenues were down 2% on an as-adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $3 million and increasing its year-over-year reported growth rate by 1 percentage point.
Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries.
As first noted last quarter, changes in the Company's deferred compensation obligations are now included in SG&A or in the case of Protiviti, direct cost, with offsetting changes in the investment trust assets presented separately below SG&A.
As a reminder, our historical discussion of consolidated operating income has been replaced with the non-GAAP measure of combined segment income.
This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets.
This is a non-GAAP disclosure, so we also show a reconciliation to GAAP.
Turning now to gross margin.
In our temporary and consultant staffing operations, fourth quarter gross margin was 38.5% of applicable revenues, compared to 38% of applicable revenues in the fourth quarter one year ago.
The year-over-year increase in gross margin percentage is primarily due to lower payroll taxes, insurance and other fringe costs.
Our permanent placement revenues in the fourth quarter were 9.7% of consolidated staffing revenues versus 10.3% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin increased 10 basis points compared to the year-ago fourth quarter, to 44.4%.
For Protiviti, gross margin was $96 million in the fourth quarter or 26.5% of Protiviti revenues.
This includes $5 million, or 1.5% of Protiviti revenues, of deferred compensation expense related to increases in the underlying trust investment assets.
One year ago, gross margin for Protiviti was $90 million or 29.7% of Protiviti revenues, including $2 million of deferred compensation expense or 0.7% of Protiviti revenues, related to investment trust activities.
Companywide selling, general and administrative costs were 32.6% of global revenues in the fourth quarter compared to 32.8% in the same quarter one year ago.
Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percent of revenue by 2.7% in the current third quarter and 1.2% in the same quarter one year ago.
Staffing SG&A costs were 39.7% of staffing revenues in the fourth quarter versus 36.7% in the fourth quarter of 2019.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 3.7% and 1.5%, respectively.
We ended 2020 with 7,800 full-time internal staff in our staffing divisions, down 32% from the prior year.
Fourth-quarter SG&A costs for Protiviti were 14.1% of Protiviti revenues, compared to 17.1% of revenues in the year-ago period.
We ended 2020 with 7,300 full-time Protiviti employees and contractors, up 34% from the prior year.
Operating income for the quarter was $89 million.
This includes $41 million of deferred compensation expense related to increases in the underlying investment trust assets.
Combined segment income was therefore $130 million in the fourth quarter.
Combined segment margin was 9.9%.
Fourth quarter segment income from our staffing divisions was $79 million with a segment margin of 8.4%.
Segment income for Protiviti in the fourth quarter was $51 million with a segment margin of 13.9%.
Our fourth-quarter tax rate was 27% for both the current and prior period years.
Accounts Receivable at the end of the fourth quarter, accounts receivable was $714 million, and implied days sales outstanding or DSO was 49.4 days.
Before we move to first-quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter of 2020 and so far in January 2021, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the fourth quarter with December revenues down 20.8% versus the prior year, compared to a 23.8% decrease for the full quarter.
Revenues for the first three weeks of January were down 23% compared to the same period one year ago.
Permanent placement revenues in December were down 25.4% versus December of 2019.
This compares to a 28.5% decrease for the full quarter.
For the first three weeks of January, permanent placement revenues were down 20% compared to the same period in 2020.
We provide this information so that you have an insight into some of the trends we saw during the fourth quarter and into January.
But, as you know, these are very brief time periods.
We caution against reading too much into them.
With that in mind, we offer the following first-quarter guidance.
Revenues; $1.29 billion to $1.37 billion, income per share; $0.74 to $0.84.
The midpoint of our guidance implies a year-over-year revenue decline of 11.7% on an as-adjusted basis, including Protiviti and earnings per share returning to prior-year levels.
The major financial assumptions underlying the midpoint of these assumptions are as follows.
Revenue growth on a year-over-year basis, staffing down 19% to 21%, Protiviti, up 23% to 25%, overall, down 11% to 13%.
Gross margin percentages; temporary and consultant staffing, 37% to 38%, Protiviti; 25% to 26%, overall; 38% to 39%.
SG&A as percent of revenues, excluding deferred compensation investment impacts: staffing: 35% to 36%, Protiviti: 14% to 15%, overall: 29% to 30%.
Segment income, staffing: 8% to 9%, Protiviti: 10% to 12%, overall: 8% to 10%.
2021 capital expenditures and capitalized cloud computing costs for the year: $85 million to $95 million, with $15 million to $20 million in the first quarter.
Tax rate: 27% to 28%, shares: 113 million.
We limit our guidance to one quarter.
We enter 2021 with renewed optimism about Robert Half's positioning for future growth.
We have retained our key staff, and they are committed to driving our success as the backbone of the enterprise.
Our aggressive go-to-market strategy during the pandemic with clients in the public sector and financial institutions of all sizes has yielded meaningful wins and new relationships.
Our technology investments have facilitated remote working models internally and with our advanced AI- driven capabilities are providing clients with real-time choices of candidates from outside their local market area.
Owing to its diversified solution offerings, Protiviti continues its record of multiyear double-digit revenue growth and very positive pipeline.
The collaboration between Protiviti and staffing is at an all-time high as evidenced by the 82% year-on-year growth rate this quarter from the unique blend of consulting and staffing solutions.
Staffing services provided to our mid-cap clients now approaches one-third of our revenues and growing and this is incremental to our traditional focus on SMB clients and prospects.
With multiple vaccines now rolling out throughout the world and fiscal and monetary policy support expected to continue globally, economists are increasingly expecting GDP growth to follow.
GDP driven early cycle growth is traditionally particularly robust for SMB clients that are lean and nimble from the downturn and have pent-up demand to restore and upskill their workforce as they return to growth.
More than ever, we believe the strength of our brands, our people, our technology and our professional business model position us for future success in 2021 and beyond.
Please ask just one question and a single follow-up, as needed.
If there's time, we'll come back to you for additional questions. | compname reports q4 earnings per share $0.84.
q4 earnings per share $0.84.
q4 revenue $1.304 billion versus refinitiv ibes estimate of $1.22 billion. |
I ll begin with consolidated revenues on slide nine.
Record quarterly net revenues of $2.47 billion, grew 35% year-over-year and 4% sequentially.
Record asset management fees grew 8% sequentially, commensurate with a sequential increase of fee-based assets in the preceding quarter.
Private Client Group assets and fee-based accounts were up 9% during the fiscal third quarter, providing a tailwind for this line item for the fourth quarter.
Consolidated brokerage revenue is $552 million, grew 14% over the prior year, but declined 7% from the record set and the preceding quarter.
Institutional fixed income brokerage revenues remain solid, albeit down from the record set in the preceding quarter.
Brokerage revenues and PCG were up 22% on a year-over-year basis, but down 6% sequentially due to lower trading volumes, as well as the large placement fee in the preceding quarter.
Account and service fees of $161 million increased 20% year-over-year and 1% sequentially, largely due to higher average mutual fund balances.
Record consolidated investment banking revenues of $276 million, grew 99% year-over-year and 14% sequentially, driven by record M&A revenues, and strong debt and equity underwriting results.
Our investment banking pipelines remain strong.
So we would be pleased if fourth quarter revenues came in around the average of the quarterly revenues generated over the first three quarters of the fiscal year, that would have been about $260 million on average.
But of course, this line item is inherently difficult to predict.
Other revenues of $55 million were up 25% sequentially, primarily due to $24 million of private equity valuation gains during the quarter, of which approximately $10 million were attributable to non-controlling interest, which are reflected in the other expenses.
Moving to slide 10.
Clients domestic cash sweep balances ended the quarter at $62.9 billion, essentially flat compared to the preceding quarter and representing 6.1% of domestic PCG client assets.
As we continue to experience growing cash balances and less demand from third-party banks during fiscal 2021, $8.6 billion of the client cash is being held in the client interest program at the broker dealer.
Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries.
On slide 11, the top chart displays our firmwide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term interest rates.
The combined net interest income and BDPs from third-party banks of $183 million were up slightly compared to the preceding quarter, as modest NIM compression was offset by growth in client cash balances and higher asset balances in Raymond James Bank.
However, it s still down significantly from the peak of $329 million in the second quarter of fiscal 2019, really highlighting the remarkable results we have been able to generate despite near zero short-term interest rates.
In the lower left portion of the slide, we show net interest margin or NIM for both RJ Bank and the firm overall.
We continue to expect the bank s NIM to decline to just around or just below 1.9% over the next quarter or two.
The average yield on RJBDP balances with third-party banks declined 1 basis point to 29 basis points in the quarter.
We believe this average yield will remain around this level for the rest of the fiscal year, but there will likely be downward pressure in this yield in fiscal 2022, especially in the back half of the fiscal year if banks demand for deposits, don t improve from current levels.
Moving to consolidated expenses on slide 12.
First, our largest expense compensation; the compensation ratio decreased sequentially from 69.5% to 67.2% largely due to record revenues in the capital markets segment, which had a 57% comp ratio during the quarter.
And the benefit from the private equity valuation gains, which do not have direct compensation associated with them.
Given our current revenue mix and disciplined manage of expenses, we remain confident, we can maintain a compensation ratio lower than 70% in this near zero short-term interest rate environment.
And as I ve said over the past few quarters, we could outperform that just as we did in the fiscal third quarter with capital markets revenues at or near these levels.
Non-compensation expenses of $425 million, increased 18% compared to last year s third quarter and 53% sequentially, primarily driven by the $98 million loss on extinguishment of debt, acquisition-related expenses, the non-controlling interest of $10 million and other expenses related to our private equity valuation gains and higher business development expenses.
As we discussed last quarter, we successfully executed a debt offering in the fiscal third quarter to take advantage of the low rate environment and significantly extend the maturities of our existing balances.
We raised $750 million of 30-year senior note at 3.75% and utilize the proceeds and cash on hand to early redeem our next two senior notes that we re maturing in 2024 and 2026, effectively, resulting in the same amount of senior notes outstanding.
This resulted in $98 million in losses associated with the early extinguishment of those nodes, but in doing so locked in very low rates for 30 years, while significantly extending the duration and stability of our funding profile.
Overall, our results show, we have remained focused on managing controllable expenses, while still investing in growth across all of our businesses and ensuring high service levels for advisors and their clients.
Excluding the debt extinguishment expense, we do expect non-compensation expense to continue picking up over the next few quarters as hopefully, travel, recognition trips and conferences continue to resume, and we continue to increase our investments in technology and high quality service levels for our growing business.
We would eventually expect loan loss provisions associated with net loan growth as well.
Slide 13 shows the pre-tax margin trend over the past five quarters.
Pretax margin was 15.6% in fiscal third quarter of 2021 and adjusted pre-tax margin was 19.8%, which was boosted by record revenues, the loan loss reserve release and still relatively subdued business development expenses.
At our Analyst and Investor Day in June, we outlined a pre-tax margin target of 15% to 16% in this near zero interest rate environment.
But as we experienced during the first nine months of the fiscal year, there s meaningful upside to our margins, when capital markets results are strong and improving macroeconomic trends lead to releases of our allowances for credit losses.
On slide 14, at the end of the quarter, total assets were approximately $57.2 billion, a 2% sequential increasing increase, reflecting solid growth of securities-based loans at Raymond James Bank.
Liquidity and capital levels are very strong, with cash at the parent of approximately $1.56 billion, a total capital ratio of 25.5% and a Tier 1 leverage ratio of 12.6%.
We have substantial amount of flexibility to be both defensive and opportunistic.
The third quarter effective tax rate of 20.3% benefited from non-taxable gains in the corporate life insurance portfolio, we would expect that tax rate to be around 21% in the fiscal fourth quarter, assuming a flat equity market.
Slide 15 provides a summary of our capital actions over the past five quarters.
In the third quarter, we repurchased 375,000 shares for $48 million.
As of July 28, $632 million remains available under the current share repurchase authorization.
But as Paul Reilly will discuss our priority continues to be deploying capital to grow our businesses.
Lastly, on slide 16, we provide key credit metrics for Raymond James Bank.
The credit quality of the bank s loan portfolio remains healthy with most trends continuing to improve.
Non-performing assets remained low at just 12 basis points of total assets and criticized loans declined sequentially.
The bank loan loss benefit of $19 million reflects an improved outlook for economic conditions and higher credit ratings on average within the corporate loan portfolio.
Due to reserve releases and loan growth during the quarter, the bank loan allowance for credit losses as a percent of total loans declined from 1.5% to 1.34% of the quarter end.
For the corporate portfolio, these allowances are higher at around 2.4%.
We believe, we re adequately reserved, but that could change if economic conditions deteriorate.
So overall I m very pleased with our strong results for this quarter, which top many records, and did so in spite of the persistent challenges of the global health pandemic and near zero short-term rates.
As for the outlook, we remain well positioned entering the fourth fiscal quarter with records of many of our key business metrics, strong pipelines for financial advisor recruiting and investment banking.
In the Private Client Group results will benefit by starting the fourth quarter with 9% increase of assets and fee-based accounts.
With the strong recruiting pipeline, we are on track for record fiscal year recruiting as prospective advisors across all of the affiliation options have continued to be attracted to our platform, including the leading technology solution, our advisor and client centric culture.
These recruiting results are primarily strong given the very competitive market for experienced advisors.
In Capital Markets segment, the investment banking pipeline remains strong and we expect solid fixed income brokerage results, driven by demand from depository client segment.
However, keep in mind, these there is still an economic uncertainty due to the ongoing pandemic that could impact these results.
In the Asset Management segment, if equity markets remain resilient, we expect results to be positively impacted by higher financial assets under management.
Active asset managers continue to face structural headwinds.
However, we are pleased to see positive net flows on a fiscal year to date basis for Carillon Tower Associates.
We hope that the one benefit of increased market volatility is that it reinforces the value of our high quality asset active managers.
And Raymond James bank should continue to grow as we have ample funding and capital to grow the balance sheet.
We ll continue to focus on lending to PCG clients through securities-based loans and mortgages.
And we will continue to be selective and deliberate in growing our corporate loan and agency backed securities portfolio.
As we look further ahead, we remain focused on the long-term growth.
And as we ve outlined at our recent Analyst and Investor Day, those key growth initiatives, include driving organic growth across all of our core businesses, continue to expand our investments in technology and sharpening our focus on strategic M&A.
Today s announcement of our firm s intention to make an offer for Charles Stanley Group demonstrates our focus on these initiatives in our commitment to deploy excess capital over time.
We believe this acquisition stays true to our long-standing criteria for acquisitions.
So first, being a good cultural fit, a good strategic fit, it makes financial sense for shareholders and something we can integrate.
They ve been amazing at being able to provide excellent service to their clients, to these difficult times.
I m very proud to be a part of this special Raymond James family. | raymond james financial inc - quarterly net revenue $2.47 billion, up 35% over prior year’s q3.
quarterly net revenue $2.47 billion, up 35% over prior year’s q3. |
We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties.
We undertake no obligation to update these statements as a result of new information or further events, except as required by law.
A recording of the call will be available later today.
Our commentary today will also include non-GAAP financial measures.
And with that, I'll turn that over to Jay Farner to get to start.
We had a strong second quarter as we continue to execute on our growth strategy and leverage our platform across real estate, auto, and financial services.
In real estate, revenue was driven in part by record purchase volume.
Putting us on track to reach our goal of becoming the largest retail home purchase lender in the nation by the end of 2023.
Many of the accomplishments that we've achieved are results of our technology and, of course, our people, who bring their best to work each and every day.
This tremendous combination was recently rewarded with Rocket Mortgage, again, being named the No.
The accolade marks the eighth consecutive time our company has earned this honor, and it's our 19th J.D. Power award overall, when you include the 11 straight No.
1 rankings we've received for mortgage origination.
Our servicing team put our clients first, helping them through the difficult and uncertain times during the pandemic.
While clients and other lenders experienced several hour wait times at the onset of pandemic, Rocket Mortgage clients were able to navigate a digital solution complete with educational resources and easily apply for forbearance plans online.
This approach resulted in Rocket's forbearance rate being 41% lower than the industry.
Innovative technology-driven client-first solutions such as these are a testament of our ability to scale and to quickly pivot to meet the demands of unpredictable markets without the need to add headcount and ultimately deliver unmatched client experiences.
As we turn back to the second-quarter results, 2020 accelerated the shift to an all-digital experience, an opportunity that Rocket was primed to capture.
The demand for digital experiences has only expanded, providing true momentum for Rocket Companies across all our core markets, real estate, auto, and financial services.
When we look back at 2019, we have now more than doubled the size of our business from pre-COVID levels.
Rocket Companies generated $84 billion in closed loan volume and $2.8 billion of revenue in the second quarter of 2021.
Both more than double the second quarter of 2019 and more volume than we did the entire year of 2018.
Our Q2 EBITDA of $1.3 billion was more than triple the same period two years ago, demonstrating the sheer power and scalability of the Rocket platform.
As we've shared with you in past calls, the Rocket platform is built to win.
Our mission is to provide certainty in life's most complex moments.
We removed the friction and pain points from major events like buying a home, getting a personal loan, or purchasing a car, all from a scalable centralized platform.
This flexibility allows us to stay nimble and go after the areas of greatest opportunity, optimizing revenue for our companies, and driving value for our investors.
In today's environment, consumer demand is incredibly strong in each of our markets.
In fact, the markets are so hot that there are significant inventory challenges in both real estate and automotive sectors.
Even under these conditions, we achieved records for home purchase volume as well as Rocket Auto gross merchandise value and unit sales.
Based on the strength of demand at the top of our funnel, we believe both record purchase volume and record auto results would have been even higher if not for inventory challenges.
As today's mortgage market shifts toward home purchase in 2021, Rocket is geared to capture more purchase volume, driven by our superior technology-driven client experience, product innovation, and our integrated end-to-end home buying ecosystem.
We mentioned last quarter that our company has set a goal to become the largest retail home purchase lender in the country by 2023.
Continuing to transform the home buying experience is the single biggest opportunity for Rocket Companies today.
We spent years creating a complete end-to-end experience that puts the power of choice back into the hands of the consumer.
From credit monitoring to home search, connections with betted local agents, centralized services, a comprehensive for sale by owner process, and our recently announced iBuying services to provide a backup offer to sellers.
We have the suite of services that allow consumers to create a bespoke process tailored to their individual needs while driving extremely strong conversion rates.
When paired with the power of America's largest mortgage lender in Rocket Mortgage and one of the largest title providers in Amrock, no other company can provide the same level of integrated one-stop services that Rocket delivers.
Our iBuying program facilitated through third-party partner companies will be released over the next several quarters.
Just last month, Rocket Homes announced an important milestone, hosting home listings in all 50 states.
Rocket Companies is now the only residential real estate ecosystem that has mortgage licenses, real estate broker licenses, home search listings, real estate agents, and real estate agent partners spanning all 50 states.
With nationwide coverage, Rocket Homes is performing at scale with traffic growing sixfold year over year to reach nearly 2 million unique monthly visitors in the second quarter.
In addition, Rocket Homes drove a record $2 billion in second-quarter real estate transaction value, representing the value of homes purchased and sold through our real estate agent network.
Rocket Homes is still in the early innings and has a very long runway for growth.
Rocket Homes also drives purchase volume for Rocket Mortgage, and we expect our momentum in purchase to continue.
Rocket Homes draws in-process clients into the Rocket ecosystem even earlier in the funnel and regularly engages with our pool of nearly 2.4 million servicing clients, representing $0.5 trillion in servicing value.
This significantly increases our lifetime value and recurring revenue with potential and existing clients.
From the beginning of the year, roughly 70% of Rocket Homes' transactions involve both an agent and the Rocket Homes real estate agent network and in Rocket Mortgage, representing an attach rate among the highest in the industry.
We also have a high attach rate between Rocket Mortgage and Amrock.
In fact, Amrock serves as the appraisal management company for approximately 65% of appraisals ordered for our direct-to-consumer mortgages, illustrating the power of our ecosystem.
We are also extending our value proposition of creating simple seamless experiences to now include residential solar.
Solar energy adoption is at a growth inflection point.
According to third-party research, the current solar energy market is expected to quadruple by 2030, with roughly one in eight homes adopting solar power.
Our dedicated, highly trained group of team members from the Rocket Cloud force will serve as rocket solar advisors to our clients.
The team will help plans determine its solar panels are the best for their home and connect homeowners to our simple digital financing application.
Once financing is complete, the Rocket Cloud force will facilitate the installation of a new solar solution.
We will also be well-positioned to help consumers who may not have started with Rocket Solar, consolidate their solar loan and mortgage for significant cost savings.
We launched Rocket Solar with a rate interim finance product in late July and expect to be operating at scale in 2022.
Looking at Rocket Auto, the company drove record performance in the second quarter with both auto unit sales growth of 140% and in gross merchandise value more than tripling year over year.
When considering the auto inventory shortages facing the industry, we are particularly proud of these results.
Rocket Auto continues to add new partners who are interested in connecting their inventory with our new prospective buyers.
During the quarter, one of the largest online sellers of used cars joined Rocket Auto's partnership network, giving Rocket Auto access to tens of thousands of additional used cars to sell through its constantly expanding platform and providing significant more fuel to Rocket Auto's growth story.
Technology and data are the cornerstones of our platform from the use of data science to optimize every aspect of our client marketing funnel, the use of ethical AI to aid in client service, to sophisticated pricing models, just to name a few.
Technology and data fundamentally drive our business by enhancing client experience through speed and personalization, increasing efficiency through streamlined workflows and decisioning and improving our pull-through and lead conversion.
During 2021, intelligent client targeting models were deployed to more than 80% of our client contacts, ensuring that our Rocket Cloud force is reaching out to clients at the exact moment they're most ready to engage with us.
By tailoring the experience to the client, we have lifted conversion resulting in approximately $4 billion in incremental application volumes so far this year.
The beauty of our platform is its flexibility to meet clients where they are and scale across multiple products and verticals, regardless of the market environment.
While our company started as the direct consumer mortgage lender, Rocket Companies is increasingly a multiproduct, multichannel platform.
In addition to consumers, the Rocket platform works closely with three important B2B constituents: Real estate agents; mortgage brokers; and premier enterprise partners.
Each of these audiences play a crucial role as trusted advisors, leveraging the tailored products and tools that Rocket has developed to help deliver additional value to empower their clients and to reach their goals.
Real estate agents, they play a critical role in the home buying process, and we are empowering agents in our network with new leads, products, and tools to win in today's competitive environment through innovative tools like our verified approval process, which fully underwrite fires and allows them to make offers that compete with cash buyers to our overnight underwrite, which ensures purchase loans are underwritten in near hours, we arm real estate professionals and our clients with the tools to ensure that they win.
Another Rocket Mortgage innovation that's proven popular with realtors is Rocket Pro Insight, which we unveiled last year to help real estate agents create pre-approval letters for our offers, track the status of their clients' mortgage and receive real-time updates.
The number of real estate agents leveraging Rocket Pro insights more than tripled to 50,000, up from just 14,000 two quarters ago.
For the thousands of mortgage brokers and our Rocket Pro TPO network, we arm them with the industry knowledge and tools to work smarter and grow their business.
In the second quarter, we began our revamp of our broker partner portal, starting with our newly enhanced pricing calculation, providing greater ease of use for our partners to run different scenarios for their clients.
Over the past month, more than 20,000 unique mortgage professionals relied on our interactive broker tools to move mortgage applications to the finish line and their clients to the closing table.
Our Pathfinder tool that we created in partnership with Google, provide simple answers to even the most complicated mortgage qualification and underwriting questions and has become one of the top resources for mortgage brokers.
We continue to add new premier enterprise partners to our network and we deepened our integration with our existing partners.
We recently launched our new integration with Credit Karma, allowing their 110 million users to apply for our Rocket Mortgage directly inside their app.
We also continue to grow and expand our relationship with partners, including MIT, Charles Schwab, and realtor.com, just to name a few.
We are excited to serve a broader range of clients through deep integrations with our partners and deliver the trusted high-quality experiences their customers expect.
It's also my pleasure to announce a new relationship with MassMutual.
This new relationship will allow the company's 9,000-plus agents to originate home loans through Rocket Mortgage.
Turning to our community.
From the beginning, we have operated with a more than profit philosophy.
Along with Rocket Community Fund, our philanthropic partner company, we have executed numerous data-driven investments and initiatives to serve and support Detroiters and revitalize Detroit, our hometown, and where we are the largest employer.
At the end of June, we sponsored our flagship with the Rocket Mortgage Classic PGA tournament event Health in Detroit.
Rocket Morgage Classic showcases the best talent in golf while raising funds to help bridge the digital divide and bring broadband connectivity to all Detroiters.
As we continue to grow Detroit, it's critical that Detroiters have an equitable opportunity to grow with us.
In closing, we are entering the third quarter with tremendous momentum across our entire platform, and we are poised to have a record year across our platform from Rocket Mortgage to Amrock, Rocket Homes, and Rocket Auto.
I'd like to think about this.
Over the past several years, Rocket Mortgage has grown volume and taken market share consistently.
In 2018, we originated $83 billion in mortgage volume.
In 2019, that grew to $145 billion, and we ended 2020 with $320 billion in mortgage value.
While industry forecasters expect a smaller market in 2021, we expect to grow volume from our 2020 record levels.
We're going to gain market share and achieve record origination volume this year.
In addition, we expect our servicing local grow more than 30% this year to over $600 billion, driving a recurring cash revenue stream of more than $1 billion.
Rocket portfolio companies reinforce our ecosystem and contribute to our intended business retention rate, expanding client lifetime value.
This year, we are building on momentum from 2020.
I'm beyond proud of what our team has accomplished, and I'm even more excited about what's ahead.
With that, I will turn things over to Julie to go deeper into the numbers.
I'm pleased to report another quarter of strong financial results for Rocket Companies.
This continued success demonstrates our ability to leverage our flexible platform.
I will be sharing some detail around the investments we're making to drive growth and provide insights into trends we are seeing heading into the third quarter.
2020 was an unusual year for the economy, with the combination of historically low interest rates, and constrained mortgage industry capacity.
Under these market conditions, Rocket exhibited the scalability of our platform, with our loan origination volume growing 121% in 2020 year over year, while our expenses grew only 47%.
Given the unusual year 2020 represented, it is important to look at our growth and profitability relative to pre-COVID results.
We were successful in gaining market share in last year's environment, and we continue to grow our business as we head into 2021.
During the second quarter of 2021, Rocket Companies generated $2.8 billion of adjusted revenue, which represents a 110% increase from Q2 2019 and $1.3 billion of adjusted EBITDA, up more than 220% compared to Q2 2019, representing a 46% adjusted EBITDA margin.
We generated net income of $1 billion, which exceeded full-year 2019 net income, and we generated adjusted net income of $920 million in Q2 '21, which was more than triple Q2 of 2019 levels, representing a 33% adjusted net income margin.
Our adjusted earnings per share was $0.46 for the quarter.
Rocket Mortgage generated $84 billion of closed loan origination volume during the quarter, up more than 160% from $32 billion in Q2 2019 and in line with the midpoint of our Q2 guidance.
Less interest rate-sensitive products, which include home purchases, term reductions, and cash-out refinances represented more than half our closed loan volume in the second quarter.
Turning to home purchase, in particular, purchase volume nearly doubled year over year, and we set a new company record in the second quarter.
We estimate that the largest retail purchase lender did $60 billion of purchase origination volume in 2020, excluding correspondent volume.
With the success we have had during the first half of 2021 and the momentum we have going into the third quarter, we expect that our full-year 2021 purchase volume will exceed $60 billion.
This growth, in combination with the recently announced Rocket Homes initiatives are bringing us closer to our goal of becoming the No.
1 retail purchase lender by 2023.
For the quarter, our rate lot gain on sale margin was 278 basis points, which is in line with our expectations at the midpoint of our guidance and substantially higher than most multi-channel mortgage originators.
Our strong results extend across the Rocket Companies' platform.
Despite a relatively low level of auto inventory impacting the industry, Rocket Auto continued to accelerate its growth.
Generating $484 million of gross merchandise value during the second quarter, up nearly 35% as compared to Q1 2021.
Through the first half of 2021, we have generated $844 million of GMV, and are on track to more than double 2020 levels.
With onboarding of new inventory partnerships, including just recently, one of the largest online sellers of used cars, we expect to further accelerate growth in the second half of 2021.
Rocket Homes faced similar inventory constraints.
However, we're successful in generating record real estate transaction value of $2 billion, which represents the value of homes purchased and sold through our real estate agent network during the second quarter.
We also saw record traffic to rockethomes.com during the second quarter or nearly 2 million monthly unique visitors, expanding an important top-of-the-marketing funnel.
The Rocket Company's flywheel is based on leveraging our profitability advantages to constantly reinvest in our business, further strengthen our competitive position, expand into new areas of growth, and client lifetime value.
With the opportunities we see ahead and to fully realize the potential of our platform and unique real estate ecosystem, we will continue to invest for the long term, particularly in technology, marketing, and our most valuable resource, our team members.
We plan to grow our technology, product strategy, and data intelligence teams.
Within Rocket, we have more than 3,000 team members dedicated to building proprietary technology.
Key priorities for investment are continuing to deliver break line experiences, driving operational efficiency, and extending our platform to partners.
Increasing the lifetime value of our clients is another core component of our growth strategy.
Our business is profitable on the first transaction with the client.
We then maintain ongoing loan servicing relationships with 2.4 million clients, representing over $500 billion in outstanding loan principal.
Mortgage servicing drives a recurring cash revenue stream for Rocket Companies that now exceeds $1 billion on an annual basis with service unpaid principal balance of 34% in the last 12 months, and net retention north of 90%.
Based on our strong relationships with clients, we continue to expand our platform to address more of the important transactions in their lives.
Whether that's real estate, auto, personal loans, or new products like residential solar, incremental products on our platform position us to increase the lifetime value of our client relationships.
Looking ahead to Q3, we are seeing strong fundamental tailwinds for our business.
The housing market remains active, homeowners are sitting on the highest levels of home equity in more than a decade, and the investments we have been making are gaining traction across the platform.
Our pipeline for both purchase and refinance remains robust.
As Jay mentioned, we expect to set a new company record with full-year 2021 closed loan origination volume on pace to exceed the previous record achieved in 2020.
While the Mortgage Bankers Association and other public industry forecasts, predicted overall mortgage volumes will decrease as compared to last year, we expect to drive growth and market share gains in 2021.
For the third quarter, we currently expect closed loan volume in the range of $82 billion to $87 billion and rate lock volume between 83 billion and $90 billion.
We expect third-quarter gain on sale margin to be in the range of 270 to 300 basis points.
At this time, we believe the run rate of operating expenses for the first and second quarters of 2021 is a good reference for the third quarter with expenses roughly flat even as we are growing mortgage origination.
We exited the second quarter with $2 billion of cash on the balance sheet, and an additional $2.4 billion of corporate cash used to self-fund loan originations for a total available cash of $4.4 billion.
Total liquidity stood at $7.8 billion as of June 30th, including available cash plus undrawn lines of credit and undrawn MSR lines.
Our business is capital light and our balance sheet is extremely strong.
This year, we expect to generate more than $320 billion in closed loan volume, exceeding last year's record.
Keep in mind, even at these origination levels, we need less than $1 billion of cash on hand to properly operate our business.
With $7.8 billion in available liquidity, the $4.4 billion in total cash is largely held for investments, dividends, and share buybacks.
As we've said before, our capital priorities always start with proper capitalization and reinvesting in the business.
We continue to look for acquisitions that would be additive to our platform by bringing new clients into our ecosystem, enhancing operational efficiencies, or enhancing our product offerings.
Beyond that, we look to return capital to shareholders.
At current price levels, we believe our stock is undervalued.
Over the past 24 months, we have generated $16.3 billion in adjusted EBITDA.
Our MSR portfolio has a fair value of $4.6 billion, and our balance sheet has total equity of $8.2 billion.
With our current levels of capital, we have the opportunity to repurchase shares and return capital to shareholders via dividends as we've done in the past, while still being able to invest in the business and consider acquisition opportunities.
We will deploy our capital in a strategic and disciplined manner to generate long-term shareholder value. | qtrly adjusted diluted earnings per share $0.46. |
Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.
As usual, Todd, will start off with financial details on the quarter.
Craig will follow with some color on the product portfolio and market conditions.
We can then open the call to questions, and Jon will close with some final thoughts.
Yesterday, we reported first quarter operating earnings of $0.87 per share.
The quarter's result reflects elevated winter storm losses which were more than offset by favorable benefits on prior year's loss reserves as well as improved current year casualty results.
We achieved percent top line growth or 10% growth when adjusting the comparable quarter last year for premium returned to transportation insurers.
As a reminder, at the onset of the pandemic, we helped our public auto insurers by adjusting or returning premium, which resulted in a $23 million decrease in our transportation business.
We believe adding the premium back when comparing to last year, provides a more accurate view on premium growth in the quarter.
In total, we posted a 86.9 combined ratio.
Investment income was down 7.6%, reflective of the decline in reinvestment rates during 2020.
Unrealized gains on the equity portfolio are in stark contrast to unrealized losses experienced during the same period last year and serve the bolster net earnings this quarter.
Additionally investee earnings advanced nicely to start the year which accrued to net earnings.
Craig will talk more about market conditions in a minute, but from a high level, all three segments experienced growth.
Property led the way, up 31% as rates and market disruption continue to support growth.
Reported casualty growth was plus 19% compared to last year.
But as previously mentioned, we want to call out the comparative benefit from the $23 million public auto premium adjustment in the first quarter of last year.
Adjusting last year's result for this amount casualty growth was fairly modest as was securities.
From an underwriting perspective, this quarter's combined ratio of 86.9 compared to 92.0 a year ago.
Our loss ratio declined 5.6 points to 45.9 points despite a 7 point impact from winter storm, Uri, one of our largest winter or spring storm events experienced.
Of the $16 million in net storm loss, $15 million was in the property segment and $1 million was in the casualty segment related to the property exposure in certain packaged coverages.
Favorable reserve development was up notably compared to last year and was widespread across most products.
As a reminder, in the first quarter of last year uncertainty around COVID influenced our approach the indications, we were seeing in prior year's reserves as well as specific COVID reserves we established on the current accident year.
In the first quarter of 2020, we recorded $5 million in COVID specific reserves, $2 million of property, and $3 million in casualty.
On an underlying basis, if you exclude prior year reserve benefits, catastrophes and the aforementioned reserves established for COVID, our loss ratio is down in 2021.
The casualty segment is influenced in this result and its underlying loss ratio was down about 3 points from the same period last year.
An improving mix and modest reductions in loss booking ratios similar to what we discussed on our fourth quarter call have driven the improvement.
From an overall COVID perspective, total reserves are largely unchanged from year end.
Our quarterly expense ratio increased 0.5 point to 41 [Phonetic].
In addition, general corporate expense was up $1.6 million.
These increases are driven by amounts accrued for performance related incentive plans.
The combination of significantly higher operating and net earnings given the relative equity portfolio performance, plus an improved combined ratio drove these metrics higher.
Excluding incentive amounts, other operating expenses were flat.
Risk assets continue to lead with positive returns in the quarter from both public equities and high yield credit.
Additional investment grade bonds couldn't overcome higher yields and price declines offset the positive return from other assets.
All in, our portfolio posted a 0.2% return for the first quarter and we are more than happy to trade a modest price decline in bonds for the opportunity to put operating cash flow to work at higher rates.
Outside of the core portfolio, investee earnings were also a contributor in the quarter with Maui Jim and Prime each adding $3.7 million to the quarter's results.
Prime continues to benefit from profitable growth and Maui Jim has rebounded nicely from a more difficult period in mid 2020.
All in a very good quarter and solid start to the year.
As Todd mentioned, we're off to a running start to the year, reporting 87 combined ratio and 10% underlying growth in gross written premium.
Very solid underwriting results despite the impact of winter storm Uri.
The sub-90 combined ratio we achieved is a testament to our well-diversified portfolio of specialty products and the consistency of our disciplined underwriting approach.
Top line growth was realized across all segments and in most of our products.
Our rate achievement this quarter carried in lower beta, the highest were not quite as high, but the lows were not as low.
I would say it's a little too early to say whether the rates are plateauing in the most markets, but we continue to achieve rate increases at or above long-term loss costs across the majority of our portfolio.
Our underwriting diet is well balanced in our palate remains refined as the competition is broadly moving toward acceptable rate levels in our chosen market.
The most disrupted spaces for us remain catastrophe exposed property, excess casualty, executive products, commercial auto liability and marine.
Now onto some segment specific comments.
In casualty, we report an outstanding 83 combined ratio and grew gross premiums 19%, 4% adjusted for transportation.
As you may recall, the comparable quarter last year required a significant premium adjustment for inactive vehicles in our transportation product line.
Also of note, our casualty segment as a significantly -- significant exposure to the construction industry and although this industry never completely shut down, we have observed some slowdown due to uncertainty related to both pandemic and resulting supply chain issues.
We were still able to achieve 8% rate increase in this segment overall, while account retentions are holding well.
The casualty segment was led on the top line by our personal excess liability, executive products and transportation businesses which rebounded nicely.
Underwriting profitability was led by our primary liability, personal excess liability, transportation, professional services liability and small package businesses.
As mentioned earlier, we did see some moderating of rate increases for our public directors and officers product, but the rate increases were more widespread across the dozen or so products within our executive products portfolio.
This business along with transportation and commercial excess liability, we're still able to achieve double-digit rate increases for the quarter.
Property segments top line grew 31% on a small underwriting loss as a result of the widespread winter storm, Uri.
We achieved 10% rate for the segment overall.
We continue to observe opportunities across all products in this segment.
Our catastrophe businesses grew premium and rate at a double-digit pace.
The size of the rate increases was a little off its peak in the last couple of quarters, but still above acceptable levels to assume the risk.
Earthquake still seems a little more competitive than win mainly the result of demand versus excess supply, since significant earthquakes occur frequently and coverages sell them required for financing prices above a certain threshold or decline and property owners elect to self-insure.
We have room to grow our catastrophe exposures if the market continues to cooperate.
Our marine business also continues to see profitable opportunities to grow because of the disruption at Lloyds and elsewhere.
Emissions continue to increase significantly and we experienced top line growth of more than 25% on a very good underwriting results.
I don't want to move on without giving a big mahalo to our Hawaii homeowners business which continues to grow at a double-digit pace and produces great results for our Company.
In surety, we grew top line 5% and achieved a 79 combined ratio.
Another great underwriting results and hopefully some signs that the market is finally starting to come back to us.
Larger losses have hit the industry causing competitors retrenchment and reinsurance capacity seems to be tightening for the first time in many years.
We will continue to capitalize on the disruption, we are starting to observe.
Most of our growth this quarter came from our commercial account driven business, which saw both new business opportunities as well as expansion with existing accounts.
All products in this segment were profitable.
We will continue to focus on building relationships, consistent underwriting servicing our distribution partners and customers and investing in technology to make it easier for our customers to work with us.
Overall, the solid start to 2021, we remain well positioned for the future and we'll focus on what we do well, adapt to our environment, stay true to what makes us different and execute.
We create our own opportunities with our investment in people, service, and technology and we will take advantage of new opportunities when our competitors retrench and market disruption occurs.
We are constantly looking for ways to provide profitable solutions to meet the needs of our customers and distribution partners.
This is what we do.
It is what owners do.
Our success can be attributed directly to the quality of the associate owners we hire and the service they provide and the relationships they build with our customers.
Our differentiated approach delivered again this quarter. | qtrly book value per share of $25.55, an increase of 2% (inclusive of dividends) from year-end 2020.
rli achieved $29.9 million of underwriting income in q1 of 2021 on an 86.9 combined ratio. |
Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.
Pretty standard structure for today's call, with Todd running down the financial results for the quarter ended June 30th; Craig will add some commentary on current market conditions and our product portfolio; we will then open the call to questions, and Jon will close with some final thoughts.
Yesterday, we reported second quarter operating earnings of $1.09 per share.
Results reflect positive current year underwriting profit, supplemented by favorable benefits from prior year's loss reserves.
All in, we experienced 25% top-line growth and posted an 84.8 combined ratio.
Additionally, our core business was complemented by a strong quarter from Maui Jim and Prime.
While investment income was down modestly in the quarter, year-to-date operating cash flow of $165 million has supported growth in our invested asset base.
Realized gains for the quarter were elevated as we rebalanced our equity position, leaving a modest $4 million change in unrealized gains on equity securities.
As you know, large movements in equity prices in comparable periods can have a significant impact on net earnings, which you can see in both the quarterly and year-to-date comparisons to 2020.
Aggregate underwriting and investment results push book value per share to $27.46, up 11% from year end, inclusive of dividends.
Craig will talk more about market conditions in a minute, but from a high level, all three segments experienced growth.
Property led the way, up 33% as rates and market disruption continue to support growth.
Casualty gross writings improved 24%, with all major product lines contributing.
For Surety, premium was up 11% as our contract and transactional business grew nicely in the quarter.
From an underwriting income perspective, the quarter's combined ratio was 84.8 compared to 88.4 a year ago.
Our loss ratio declined 4.1 points to 44.4.
Storm losses booked in the quarter totaled $8 million, with $7 million impacting the Property segment and $1 million the Casualty segment.
On an overall basis, prior year's reserves continue to develop favorably, enhancing both the Casualty and Property loss ratios.
Surety, however, experienced adverse loss development in the quarter, as we further strengthen incurred, but not reported reserves, on the 2020 accident year for the energy portion of our commercial surety business.
Lastly, on the loss front, our current accident year loss ratio for Casualty continued to improve.
On an underlying basis, if you exclude prior year's reserve benefits and catastrophes, our Casualty loss ratio was down 7 points.
COVID-related impacts in 2020 account for about 4 points of that decline.
Excluding that, however, the loss ratio was still down 3 points.
An improving mix and modest reductions in loss booking ratios, similar to what we discussed on the last few calls, have driven the positive results.
With respect to COVID-specific reserves, amounts are largely unchanged from year end.
Our quarterly expense ratio increased 0.5 point to 40.4.
Similar to last quarter, the increase and the increase in general corporate expenses are largely driven by amounts accrued for performance-related incentive plans.
The combination of significantly higher operating earnings and improved combined ratio and growth in book value drove these metrics higher.
Apart from elevated incentive amounts and continued technology-related investments, other operating expenses were relatively flat.
On the asset side of the balance sheet, our investment portfolio had the major components pulling the same direction, with positive results from equities and fixed income.
Higher bond returns have come alongside lower reinvestment rates, as treasury yields have declined from the highs we saw earlier in the year.
Despite the return of lower yields, strong operating cash flow is accruing to the benefit of total invested assets.
A growing portfolio helped to flatten the curve of investment income, which was down just over 1% in the quarter.
Total return was 2.8% for the quarter, and we continue to put money to work in nearly all environments to stay fully invested.
Apart from the capital markets exposure, investee earnings were significant compared to 2020.
Maui Jim and Prime contributed $10.6 million and $3.6 million, respectively, both benefiting from robust markets and an improving macro economic environment.
All in all, a very good quarter and a strong first half of the year.
A very good quarter, as Todd mentioned, with 25% top-line growth and an outstanding 85 combined ratio.
We are very pleased with our results and our position in the marketplace.
We're seeing widespread growth across almost every product in our portfolio as a result of an improving economy, higher retention rates on renewal business, increased submission flow on new business and rising rate levels.
Although frequency of claims slowed during the pandemic, they have begun climbing back to previous levels, and we remain watchful of the long-term impact of social inflation.
We also continue to keep an eye on loss cost inflation associated with rising building, material and labor costs.
This could prove challenging as we enter the hurricane season, which will likely increase the cost of rebuilding, but also lengthen related business interruption claims.
We think there is more opportunity to get rate as the industry is still underperforming overall.
The industry much more broadly recognize the rising risk levels associated with inflation, the uncertain impact of the pandemic, the possibility of a rising number of severe weather catastrophes, and more unique exposures like the recent building collapse.
We anticipate that these factors will drive and sustain current rate levels and momentum.
We have the benefit of underwriting discipline and product diversification.
This permits us to navigate all market conditions, pushing for rate adequacy where needed, shrinking our position if necessary to maintain underwriting margins while growing shareholder value.
Now for some more detail by segment.
In Casualty, we grew top line 24% and reported an 83 combined ratio, as we benefited from significant favorable reserve development.
Rates, overall, are at or above loss cost, as we achieved 6% for the quarter and 7% year-to-date.
Rates are still up significantly in excess liability products and select auto markets where we compete.
Rates remained relatively flat in primary liability, small package business, and even in several auto niches where competition remains fierce.
We achieved growth in underwriting profit across all major products in our Casualty portfolio.
We have benefited from a quicker recovery in the public auto space as buses are coming back online faster, and we are also realizing goodwill earned with our customers and our producers last year when we reduced premium in recognition of exposure changes during the pandemic.
Casualty growth excluding our transportation unit was still up 18% for the quarter and 12% year-to-date.
In Property, we achieved top-line growth of 33% while reporting an 84 combined ratio.
All of our major products in this segment grew top line and reported underwriting profits.
The pace of rate changes flattening, but still positive across the board.
Overall, rates were up in Property 8% for the quarter and 9% year-to-date, with catastrophe win continuing to lead the way at plus 17% for the quarter and plus 21% year-to-date.
PMLs for wind are up about 15% for the year, but are still well contained at the 250-year level with reinsurance protection.
I don't want to move on from this segment without commenting on the recent collapse of the Champlain Tower in Surfside, Florida.
It was a very tragic event and our thoughts continue to be with the families of all those impacted.
We do write contractors, architects and engineers and properties in the area, but we do not target multi-unit high rises or condo associations in any of our businesses.
Although our loss exposures appear minimal at this time, we will continue to do our part by tightening our underwriting guidelines, and as a result, improve the risk management posture of contractors and those responsible for building maintenance in our chosen markets.
In Surety, we reported 11% top-line growth and a 96 combined ratio.
We were able to achieve an underwriting profit in this segment despite an elevated risk environment related to the number of bankruptcy filings in the energy sector of our commercial surety business.
We maintained significant reinsurance protection against large losses.
We also have strong partners who value our underwriting discipline and have mutually benefited from our relationship for over two decades.
Our underwriting team remains disciplined and continues to underwrite more profit in this space.
We have further tightened our restrictive standards, targeting the highest credit quality principles, insisted on more structured protection in collateral, raised rate levels and lowered tolerances for any delayed commissioning work by the principle.
Our commercial, contract and miscellaneous surety markets are growing and remain profitable year-to-date with an 87 combined ratio.
Overall, an excellent quarter and a very nice first half of the year.
Our disciplined underwriting, diversified portfolio of niche products, talent -- and talented team have delivered once again.
They enable us to provide a consistent underwriting appetite to our customers and producers and strong stable returns to our shareholders. | operating earnings for q2 of 2021 were $49.9 million ($1.09 per share).
qtrly book value per share of $27.46, an increase of 11% (inclusive of dividends) from year-end 2020. |
Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.
As in prior quarters, Todd will kick things off with financial details on the three and nine-month periods ending September 30th.
Hopefully that information will answer some of your common questions.
Craig will follow with some detail on the product portfolio.
We can then open the call to questions.
And Jon will close with some final thoughts.
Last night we reported third quarter operating earnings of $0.42 per share.
In a quarter that was impacted by a number of severe hurricanes, we achieved 9% top line growth and posted a 99.5 combined ratio.
Investment income declined modestly while investee earnings and unrealized returns on the investment portfolio reversed adverse trends experienced earlier in the year.
Positive net earnings drove book value per share up 13% for the year inclusive of dividends to end the quarter at $24.40.
Pricing momentum continued in a number of our products and the pandemic's influence was modest this quarter with casualty posting 11% top line growth, where property and surety were up 8% and 1% respectively.
Craig will talk more about individual products and market conditions in a minute, but overall growth in gross premiums written was driven largely by rate increases and expanded distribution.
From an underwriting perspective, the quarter's numerous hurricanes resulted in one of our larger cat-impacted periods.
Recorded losses from hurricanes Hanna, Isaias, Laura and Sally are within our pre-announced range and stand at $39 million net of reinsurance.
$35 million of that is from our property segment and $4 million impacted casualty where a number of our package policies are reported.
Net of bonus related impacts, these losses totaled $33.2 million or $0.58 per share net of tax and added 15 points to the quarter's combined ratio.
Overall, the quarter's loss ratio was 58.9.
In addition to catastrophe losses, we maintained the elevated current-year loss booking ratios mentioned last quarter on certain financial-related products where heightened exposure to pandemic-related losses exist.
This resulted in recording $4 million in COVID-19-related losses, $3 million in casualty and $1 million in surety.
Year-to-date reserves established for COVID-19 totaled $15 million.
By segment amounts recorded totaled $2 million for property, $3 million for surety and $10 million for casualty.
To date we have not paid any COVID-related indemnity amounts.
A majority of claims received have been closed, but we continue to investigate and review all claims submitted.
Offsetting reserve additions in the quarter were approximately $25 million in net benefits from prior year's reserve releases.
By segment, casualty totaled $19 million with the majority of products posting favorable experience.
Surety posted $3 million of benefits and property was $3 million, inclusive of some reductions in prior year's storm losses.
Our quarterly expense ratio remained below last year, down 1.3 points to 40.6.
Book value growth improved during the quarter, but continues to lag than [Phonetic] prior year as does our combined ratio resulting in lower amounts earned under incentive compensation.
The decline in amounts under incentive plans accounts for the majority of the decrease in our expense ratio as well as the bulk of the decrease in general corporate expense.
Having said that, while revenue has exceeded our early estimates at the onset of the pandemic, targeted actions set in motion to eliminate or defer expenses have persisted.
We are continuing to evaluate areas of opportunity for efficiency gains and expense savings, while increasing our investment in technology, particularly those related to customer experience and ease of doing business.
Turning to investments, we are pleased to see a continued recovery in most sectors during the quarter.
Despite some September volatility for equities the portfolio again produced positive results and a 2.2% total return.
Although invested assets contributed to sustained book -- growth in book value, the current interest rate environment weighed on investment income during the quarter.
Operating cash flow was strong this quarter and drove a continued preference for purchase activity and high-quality investment grade securities.
While capital market's volatility may resurface in the near term, 2020 has confirmed that our sound balance sheet can weather most storms.
Outside of the core portfolio, our share of investee earnings increased nicely in the quarter.
For Maui Jim net sales improved from the second quarter's trend as the retail sector opened up further.
While sales remain down significantly on a year-to-date comparative basis, efforts to rightsize related operating expenses have proven effective.
For Prime investee earnings continued to advance reflective of growth in revenue and earnings they are experiencing.
As mentioned previously, results for both investees may be influenced by any economic headwinds, particularly in the retail sector as it relates to Maui Jim.
As Todd mentioned, we were able to grow top line 9% and still deliver a small underwriting profit for the quarter despite significant headwinds.
2020 has been an unprecedented year to say the least, with 10 named storms making landfall in the Continental US, wildfires across a large portion of the West, a derecho in the Midwest, civil unrest in many cities and an ongoing global pandemic.
The market was hardening prior to these events as a result of prolonged competition and rising loss costs.
We're seeing some acceleration of discipline into the market with a greater focus on limit and attachment point management, tighter terms and conditions, increased rates and more refined appetites where the pain is greatest.
The market continues to improve more broadly, but still not everywhere.
Improving conditions and increased submission flow are most pronounced in low frequency, high severity products where we often find the less regimented underwriting occurs.
Despite all the tragedies associated with this year, RLI continues to be steadfast in helping and supporting our customers while also delivering underwriting profit and double-digit book value growth to our shareholders.
Our financial strength, diversified portfolio of products and relentless focus on disciplined underwriting and customer service have served us well.
Our underwriters have narrow and deep knowledge in their space and know when we are being appropriately compensated for the risk we take.
We will continue to take advantage of opportunities where we have expertise and where we choose to compete.
I'll provide a little more color by operating segment.
In casualty, we were able to grow 11% while reporting a 90 combined ratio.
Rates are up 10% across the segment driven by excess liability coverages and automobile exposures.
On commercial and executive product excess liability, we are seeing shorter limits being deployed, higher attachments and tighter terms required and significantly higher rates.
Our commercial excess liability rates were up about 11% for the quarter, while our executive product rates were up more than 35%.
We continue to see double-digit revenue growth out of these products which has largely been driven by rate.
Our personal umbrella business also continues to grow with more than a 50% increase for the quarter and year-to-date from investments made in technology, new and existing distribution partners as well as market disruption.
Our transportation business continues to be challenged on the top line shrinking 8% for the quarter and off more than 40% year-to-date, largely driven by the negative impact that COVID-19 has had on the chartered transit and school bus sector.
On a brighter note, rates continue to exceed loss cost, the business remains profitable for us and we are starting to see signs of resiliency in the public auto business.
Casualty market dynamics do appear bifurcated in that primary casualty products with limits of $1 million or less, many construction risks and workers' compensation still remain very competitive.
For RLI this includes about 35% of our casualty portfolio represented by products like small professional liability, admitted and non-admitted general liability and package policies.
In property, we achieved 8% growth but reported a sizable underwriting loss as a result of the four named storms we experienced during the quarter.
We have very few reported losses from the derecho and wildfires.
The most significant storm for us was Hurricane Laura that hit southwest Louisiana in late August.
Given the frequency and severity of these events, the losses have fallen within our expectations.
The time is now to deliver on our promise and differentiate ourselves and we are doing just that.
We had claim representatives on the ground shortly after each event assessing damage and writing checks to our policyholders for covered property and time element exposures.
These catastrophes, along with a tighter reinsurance market will continue to drive further hardening of rates.
For the entire property segment, rates are up about 14% for the quarter and 12% year to date.
Wind-only rates are up over 40% in the quarter, which is the fifth consecutive quarter we have achieved increasing price momentum.
There have also been spillover effects in other property perils including earthquake, which achieved its third consecutive quarter of double-digit rate increases.
Despite the rate increases, we continue to see steady competition from MGAs offering capacity in the catastrophe space.
Our overall exposures have remained relatively flat while growing our property premium about 10% year to date.
Other products in the property worth noting include our Hawaii homeowners business which continues to grow at a double-digit pace and deliver underwriting profits, despite the challenges to the island's economy.
Marine also continues to be a disrupted market as a result of fallout from Lloyds.
We have achieved more moderate growth here but rate continues to outpace loss trends.
All in all, we are pleased with the underlying positioning of this segment.
The surety segment was able to grow 1% reported, an impressive 75 combined ratio for the quarter.
All of the major segments within this business remain profitable.
Our focus on the most financially secured and well-run companies has typically mitigated the fallout associated with economic downturns.
We suspect there are some carriers wrestling with the stressed accounts and underlying profitability as a result of less disciplined underwriting that occurred pre-pandemic.
We will continue to focus on making investments in our sales teams, technology and smaller transactional businesses, which will serve us well in the long term.
Overall, a pretty good quarter in light of events that occurred and the challenges we continue to tackle.
Rates are continuing to move in the right direction and more broadly and top line growth is better than expected.
We continue to remain connected to our customers and producers through technology, phone and video calls and even in person whenever possible.
We believe that online connectivity can supplement but never replace experiences, trust, problem solving and relationships that are only forged in person.
People are the difference.
Our talented associates provide the personal service and consistent appetite that have always been differentiators and continue to serve us well through the times of both turmoil and tranquility.
Although many can't wait to move on to 2021, we believe the events of 2020 have helped highlight why RLI is different.
That difference has served all of our stakeholders well and distinguishes us.
Being different still works. | compname reports q3 operating earnings per share of $0.42.
q3 operating earnings per share $0.42.
losses from hurricanes hanna, isaias, laura and sally, resulting in a $33.2 million net decrease in underwriting income in quarter. |
As usual, we have Jon Michael, Chairman and CEO; Craig Kliethermes, President and COO; and Todd Bryant, CFO.
Jon is going to begin with some opening comments.
In many respects, we're ready to move on to 2021.
But I would be remiss if I didn't mention that RLI overcame many challenges during the last 12 months and delivered strong results.
There is much to be proud of for 2020.
Our gross premiums were up 7%.
GAAP equity grew to $1.1 billion after returning more than $87 million to shareholders during the year.
And we achieved a 92 combined ratio.
That 92 combined marks the 25th consecutive year of underwriting profit for RLI.
These results could not have been possible without the hard work of our talented associates who persevered through tremendous uncertainty and change to keep our business and, more importantly, our customers' business moving forward.
I'm proud of our entire team for their outstanding efforts.
And before we move on, I want to take a moment to congratulate Craig.
In December, I announced my plan to retire at the end of this year and that Craig will be assuming the CEO role at the end of -- or at the beginning of 2022.
Craig is a proven executive and I have complete confidence in his ability to continue leading RLI to achieve success.
Congratulations to Craig as well.
Last night, we reported fourth quarter operating earnings of $0.75 per share.
The quarter's result reflects elevated catastrophe losses, which were offset by favorable benefits on prior year's loss reserves as well as improving current year casualty results.
We achieved 10% top line growth and posted an 88 combined ratio.
Investment income declined modestly, while unrealized returns on the investment portfolio continued to rebound from adverse trends earlier in the year.
Overall, strong net and comprehensive earnings drove book value per share up 22% for the year, inclusive of dividends, to end the year at $25.16.
Pricing momentum continued in a number of our products and the pandemic's influence was muted in the quarter, with casualty posting 9% top line growth, while property and surety were up 15% and 2%, respectively.
Craig will talk more about individual products and market conditions in a minute, but overall, growth in gross premiums written was driven largely by rate increases and expanded distribution.
From an underwriting perspective, we posted a fourth quarter combined ratio of 88.0 compared to 92.4 a year ago.
Our loss ratio declined 3.5 points to 45.8 as reserve benefits offset 6.5 points of hurricane losses posted in the quarter.
In addition to catastrophe losses, we maintained the elevated current year loss booking ratios discussed the last few quarters on certain financial-related products where heightened exposure to pandemic-related losses exist.
This resulted in recording another $3.5 million in COVID-19-related pre-tax losses, $2.5 million in casualty and $1 million in surety.
Year-to-date, reserves established for COVID-19 totaled $18 million.
By segment, amounts recorded totaled $2 million for property, $3 million for surety and $13 million for casualty.
To date, we have paid less than $10,000 in actual indemnity losses on what we deem as COVID-related.
Over 90% of claims received have been closed without payment, but we continue to investigate and review all claims submitted.
Offsetting reserve additions in the quarter were approximately $25 million in net benefits from prior year's reserve releases, largely within the casualty segment, where the majority of products posted favorable experience.
Our quarterly expense ratio remained below last year, down 0.9 points to 42.2.
Relative to last quarter, however, this ratio moved higher as metrics that drive various incentive plans, combined ratio, operating return on equity and book value growth, all improved significantly during the fourth quarter.
I would note, however, on a year-to-date basis, our expense ratio was 40.8, down 1.8 points compared to last year.
The decline was aided by growth in revenue, modestly lower amounts earned under incentive plans as well as targeted expense reduction and deferral initiatives that began at the onset of the pandemic.
As mentioned last quarter, we continue to evaluate areas of opportunity for efficiency gains and expense savings, while increasing our investment in technology, particularly those related to customer experience and ease of doing business.
Capital markets made up lost ground in the quarter with robust returns in the last two months of the year.
Public equities were responsible for most of the quarter's 3.2% return.
However, bonds put in a positive result even with higher risk-free rates.
While total return was a significant contributor to the increase in shareholders' equity, investment income remains under some pressure from the current rate environment.
It is not our preference to reach for risk to make up for lower rates, but to keep putting money to work, letting portfolio growth stem the tide.
The majority of operating cash flow is being invested in high-quality fixed income securities.
Outside of the core portfolio, our share in investee earnings was down in the quarter.
Maui Jim results were influenced by normal seasonality as well as certain mark-to-market adjustments on loan to live assets.
For Prime, the investee earnings continued to advance, reflective of growth in revenue and earnings they are experiencing.
All in all, a very good quarter and solid year.
We ended the year with $1.1 billion in shareholders' equity, our combined ratio was 92.0 for 2020, which, as Jon mentioned, represents our 25th consecutive year of reporting an underwriting profit.
Once again, operating income and solid investment performance resulted in capital generation in excess of current needs, which was returned to shareholders in the form of $1 special dividend in December.
In 2020, we marked our 45th consecutive year of paying or increasing our quarterly dividend.
With special dividends, we have returned over $1.1 billion in dividends to our shareholders over the last decade.
Given all the challenges faced in 2020, we are proud of our success.
We reported our 25th consecutive year of underwriting profit and grew top line by 7%.
A great quarter overall, with an 88 combined ratio on 10% top line growth.
Large parts of the market appeared to be shifting in our favor with retrenchment of some competitors, rates increasing and terms tightening.
We still see some uneven fees ahead but are confident that with our diverse portfolio of products and underwriting discipline, we are well positioned to take advantage of opportunities presented.
Now I'd like to go into a little more detail by segment.
In our casualty segment, we saw 9% top line growth for the quarter and ended the year up 6%.
We were able to achieve a very good underwriting result for the quarter and the year with an 85 and 92 combined ratio, respectively.
Growth has been fairly widespread across the segment with our excess liability businesses leading the way.
We continue to see opportunities in both our personal and commercial umbrella businesses where we focus on the first excess layer.
Our executive products group is also growing at a relatively good clip but mostly from needed rate increases.
Our transportation insureds are still struggling.
And as a result, we realized a 25% revenue decline for the quarter and 40% for the year.
Overall, in the casualty segment, rates were up 11% for the quarter and 10% year-to-date, which is outpacing our expectations for loss cost inflation.
We believe double-digit rate increases are still achievable in auto liability, excess liability and the directors and officers product lines, which, for us, make up about half of the net premium in this segment.
The market remains very competitive in primary limit liability and package businesses where we target small and medium-sized professionals and contractors.
In property, we grew 15% in the quarter and 11% year-to-date.
We achieved an underwriting profit in the quarter but did end up in a loss position in this segment for the year.
Obviously, a tough year with a dozen name storms making landfall in the U.S. Property business is where the market is hardening most broadly, with rates up 11% across the segment for the quarter and the year.
Our catastrophe-focused wind and quake businesses led the way and year-to-date rates were up 35% and 18%, respectively.
Our Marine business continues to find opportunities from disruption at Lloyd's, with rates up 9% for the quarter and year-to-date.
Our Hawaii Homeowners book also continues to grow profitably.
Surety remains the most competitive segment for us.
We were able to grow the top line 2% this quarter but did end up the year down 1%.
The combined ratio continues to outperform at an 85 for the quarter and 75 year-to-date.
Given some of the headwinds this segment has faced, both from the fallout of the pandemic and intense competition in the surety markets we serve, our underwriters have done a great job staying disciplined and working with our producers to manage risk and produce great results.
Our focus on customers with strong balance sheets and good management has been beneficial during the financial stress and economic uncertainty resulting from the pandemic.
We believe that keeping the powder dry will serve us well as we are optimistic this market will eventually swing in our favor.
Overall, a great quarter and a very good year.
When I think about everything that has happened over 2020, it reminds me of stories my grandmother used to tell me when I was young.
I remember she would tell anecdotes about growing up poor in rural Missouri.
During her first 25 years on earth, she grew up with the Spanish flu, the first World War, the spread of polio and The Great Depression.
It was unimaginable to me at the time, but it now seems like we have all lived a quarter century in the past year.
Like my grandmother who lived to the age of 92, we have also been resilient and will persevere.
Our company has overcome many extraordinary challenges over the last 25 years of its existence but still delivered underwriting profit every year.
To get where we are today, we have adapted, adding many diverse products, building out our surety business and sizing our catastrophe business based on market conditions.
What has not changed is our focus on hiring narrow and deep talent who are champions of our ownership culture, empowering them to serve our customers and reinforcing disciplined underwriting through a compensation structure that rewards underwriting profit and is paid out on real results over time.
We feel good about where we are and where we are going.
We will focus on our customers, look outward, adapt to the change around us and continue to deliver value to our shareholders.
We are comfortable being different because being different has worked for RLI and all its stakeholders.
Our company has a rich history of success because of the quality of people who work here. | q4 operating earnings per share $0.75. |
Our expectations contain many risks and uncertainties.
Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic.
They have demonstrated their resilience, agility and ongoing passion for our brand and our consumers in a year unlike any other.
Their commitment and execution shined through in our better-than-expected fourth quarter results.
Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company than when we came into it.
This includes: first, across all three regions, we accelerated our work to elevate our brands while also strengthening and simplifying our brand portfolio.
We're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs.
Second, we repositioned each of our channels and reduced our exposure to secularly challenged areas of distribution, particularly in North America.
Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration.
Within direct-to-consumer, we accelerated our shift to digital, step-changing profitability by over 1,000 basis points as we added new connected retail capabilities and drove quality of sales.
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Our expectations contain many risks and uncertainties.
Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
Hey, if there's one thing we've learned over the past 18 months, it's agility and the importance of agility.
So apologies for the false start.
Our teams delivered exceptional first quarter performance on both our top and bottom line results and across every geography.
Our brand is resonating with consumers around the world as we lean into the breadth of our offering to deliver the products they are craving in this new normal.
And all of our regions are in a healthier, more profitable growth trajectory.
Even as we continue to execute through COVID-related challenges, it is clear that Ralph Lauren is back on offense.
A few highlights to note.
First, building on our consistent brand elevation work in direct-to-consumer business, we are now seeing accelerated demand and increased AUR in our wholesale channel.
Second, our digital growth is accelerating, following our pricing and promotional reset work last year, and our digital margins continue to be accretive across every region.
And third, we continue to make strong progress toward our long-term target of mid-teens operating margins.
We delivered the highest Q1 company operating margin since fiscal '14, even as we more than doubled our marketing investment and continued to reinvest in key areas of growth like digital, key city ecosystem expansion and our consumer targeting and personalization.
Our performance demonstrates consistent execution against the five strategic pillars that we outlined at the start of our Next Great Chapter plan.
Let me share a few highlights from the quarter.
First, on our efforts to win over a new generation.
As we continue to invest in marketing, we are focused on new consumer acquisition and retention and both global and localized campaigns that capture consumers' optimism and desire to come together as we progressively emerge from the challenges of the past year.
Some of our key campaigns in the first quarter included our Summer of Sports, which we kicked off with our Olympics campaign in North America as the official outfitter of Team USA.
In June, we amplified our Wimbledon campaign with the diverse group of athletes, celebrities and influencers, such as South Korean superstar and Tottenham forward, Son Heung-Min; British pro surfer, Lucy Campbell; and G2 Esports League of Legends superstar, Rekkles.
In the world of golf, we celebrated our brand ambassador, Yuka Saso's first major win at the U.S. Women's Open Championship.
Combined, these Summer of Sports campaigns generated more than eight billion total impressions globally in the quarter.
And there's still more to come in August and September with the 2021 Ryder Cup and the U.S. Open Tennis Championships right here in New York.
We also announced our launch this quarter as the official outfitter of G2 Esports, one of the world's premier professional esports organizations.
We are proud of this first-of-its-kind partnership in fashion and gaming as we continue to drive new ways of reaching next-generation consumers in key channels where they engage.
In all, we added more than one million new consumers to our direct-to-consumer channels alone this quarter.
And our total social media followers continue to grow, exceeding 46 million globally led by Instagram.
This takes me to our second key initiative, energize core products and accelerate high-potential underdeveloped categories.
As markets reopen around the world, consumers are shifting back to many of the key categories that drove our business prior to the pandemic while we also continue to develop new and high-potential categories.
While casual styles are still resonating, we're also seeing a progressive return to sophisticated casual.
Given the breadth of our assortment, we have the unique ability to respond to consumer shifting appetite, reintegrating more elevated styles into our assortments as we scale back on stay-at-home categories.
On the men's side, we're seeing a resurgence in polo shirts, sports coats and trousers, denim, footwear and accessories for our core brands.
In women's, we're seeing improvements across dresses, elevated sweaters, novelty fleece, jackets and handbags.
And we're also driving better performance in bottoms, including new fashion silhouettes like wide leg as well as new fabrications like silk and linen.
We are rebuilding the penetration of these categories into fall '21 and beyond as consumers make the transition back to the office and social activities.
Our Spring performance gives us increased confidence that we will have the right assortments to meet consumers' needs moving forward.
Other product highlights from the quarter included our first of several special collections with Major League Baseball.
These limited capsules celebrate the heritage of America's favorite past time and evoke Ralph's lifelong love of the sport.
Launched in May, across all of our channels, including social, digital, our stores and wholesale, the initial capsule generated over five billion media impressions along with significantly higher spend compared to our average total consumer.
Our Spring Polo shirt campaign included the launch of our Polo Color Shop, fully made-to-order customized Polos and our updated Earth Polo in expanded colors.
And we launched Polo Cologne Intense, an updated fragrance for a new generation and our new stir of eyewear collection as we continue to elevate and innovate across our licensed categories as well.
Moving on to our third key initiative, drive targeted expansion in our regions and channels.
With most of our key markets now fully reopened, we are back on offense this year with the build-out of our brand-elevating key city ecosystems around the world.
This ecosystem approach ensures a consistently elevated experience across our digital, social and physical channels both in our direct-to-consumer and wholesale networks.
As part of this, in the first quarter, we opened 18 new stores and concessions in priority locations globally, mostly in Asia, and closed 11 locations.
China continues to be a significant long-term growth opportunity, and our ecosystem approach delivered strong growth again this quarter with Mainland sales up more than 50%.
We are opening two new emblematic store experiences this year in Beijing and Shanghai.
With a smaller footprint than our existing flagships around the world, this new format offers consumers an elevated, immersive brand experience at a significantly lower investment than our traditional flagships.
Our Beijing store opened at the end of April in Sanlitun Mall, one of the top shopping locations in the country.
In addition to featuring our Ralph's Coffee, Sanlitun integrates innovative, smart retail and digital activations throughout the store in partnership with Tencent.
This includes endless aisle technology, virtual try ons and in-store treasure hunt using QR codes and customization stations where consumers use our WeChat Mini Program to order customized products from their mobile phones.
Though still early, the store has significantly outperformed our initial expectations, and we're excited to build on our presence in China with the opening of our emblematic Shanghai location in just a few weeks.
Both stores will immerse consumers in the world of Ralph Lauren and will help further develop our ecosystems in these key markets, which already include our smaller format Polo boutiques, concessions and digital presence across our own site and key partners such as Tmall.
And as foreign tourism continues to be a headwind compared to fiscal '20 levels, we have shifted more of our marketing, clienteling and merchandising to capture local shoppers and regional tourists along with driving digital commerce.
This takes me to our priority of leading with digital.
Our global digital ecosystem, including our directly operated sites, department store dot-com, pure players and social commerce, accelerated to more than 80% growth in the first quarter in constant currency, up from about 60% in Q4.
While traffic is returning -- is starting to return to physical stores, the strength in digital is exceeding our expectations, driving a benefit to our overall operating margin mix.
North America drove the biggest improvement this quarter, increasing more than 50% across both owned and wholesale digital channels.
Meanwhile, Europe and Asia momentum continued with growth of more than 100% in each region in Q1, led by our wholesale digital and pure-play channels.
Our investments in digital continue to focus on content creation for all of our platforms, enhanced digital capabilities to improve the user experience and continuing to leverage AI and data to serve our consumers even more effectively.
Touching on our work to operate with discipline to fuel growth.
We continue to drive expense discipline in the first quarter in order to fund our long-term strategic investments in global expansion, digital and brand building while also working toward our target of mid-teens operating margins.
We also successfully completed the sale of Club Monaco at the end of the first quarter as planned.
And as previously announced, Chaps will transition from our North America wholesale business to a licensed model in Q2.
These actions will enable us to further focus our resources on our core namesake brands and elevated positioning in the marketplace.
I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do.
In June, we published our Annual Design the Change report, outlining our updated commitments and actions to drive our impact and champion the lives touched by our business.
We committed to comprising our global leadership team of at least 20% underrepresented race and ethnic groups by 2023.
As part of our comprehensive circularity strategy, we set a target to use 100% recycled cotton in our products by 2025 and to launch additional resale and recycle opportunities for our consumers by 2022.
We also announced a goal to achieve net-zero greenhouse gas emissions across our operations and supply chain by 2040 as we continue to work on reducing our carbon footprint throughout our value chain.
And beginning this fiscal year, we will incorporate key ESG metrics into our executive compensation plans.
In closing, Ralph and I are very encouraged by the strong start to the fiscal year.
Our teams are executing with passion and continue to embrace the agility they demonstrated throughout the challenging and unpredictable last 18 months.
While we will continue to monitor key macro challenges closely for the balance of the year, notably around inflation, supply chain disruptions, COVID resurgences and the pace of traffic recovery, the actions we took to strengthen the foundations of our brand and our business last year are enabling us to deliver results even earlier than we expected.
Looking beyond this period of unusual COVID compares, we are increasingly confident in our ability to drive sustainable growth.
More than ever, led by Ralph's iconic vision, our teams are intensely focused on executing on our strategic plan to continue to protect and elevate our brand while realizing the significant growth opportunities that exist for our business in every market.
With their passion, talent and careful execution, Ralph and I are confident in our ability to deliver attractive, long-term growth and value creation for all of our stakeholders.
Our first quarter performance exceeded our expectations as our teams navigated challenges with agility, our brands connected with consumers and our strategy drove high-quality growth.
Upside performance this quarter was driven by faster recovery in both North America and Europe led by our wholesale channel.
Strong performance across Asia despite extended COVID headwinds in Japan accelerated digital growth with further digital margin expansion and continued brand elevation with high-teens AUR growth.
And we continue to drive expense discipline across our business while investing in high-ROI initiatives to drive operating margins significantly above our expectations.
First quarter revenues increased 182% to last year on a reported basis and 176% in constant currency.
Growth was positive in every region led by North America.
Compared to first quarter fiscal '20 or LLY, revenues declined 4%.
However, this includes approximately seven points of negative impact from last year's strategic reset to our distribution and to our Chaps business, which transitions to a licensed model this month.
Total digital ecosystem sales accelerated to more than 80% growth in constant currency both to last year and LLY, including 50% growth in our own digital business.
Our performance improved sequentially in every region, reflecting our strong assortments, expanded connected retail capabilities and high-impact marketing.
North America delivered the strongest sequential improvement with digital ecosystem sales increasing more than 50%, up from low double digits last year.
Digital margins also continue to strengthen and were strongly accretive to every region's profitability.
Total company adjusted gross margin was 69.8% in the first quarter, down 200 basis points to last year on a reported basis and down 260 basis points in constant currency.
This was significantly better than expected as we lapped last year's unusual COVID mix benefits driven by better pricing and promotion, along with favorable product mix and the benefit of supply chain organization streamlining.
Adjusted gross margins increased 30 basis points to LLY.
First quarter AUR growth grew 17%, marking our 17th consecutive quarter of AUR gains as we continue on our brand elevation journey.
This came on top of 25% growth last year while stores were closed.
Adjusted operating expenses increased 39% driven by higher compensation and rent as we lapped last year's furloughs and store closures during COVID shutdowns.
Adjusted expenses declined 2% compared to LLY.
We more than doubled our first quarter marketing investments over the last year's substantially reduced levels at the start of the pandemic.
Compared to first quarter fiscal '20, marketing increased 39% as we focused on digital initiatives and reactivating key brand moments as markets reopened around the world.
We expect to maintain an elevated level of marketing this year at around 6% of sales to support consumer engagement, acquisition and our long-term brand-building initiatives.
Adjusted operating margin for the first quarter was 16.8% compared to a margin loss of negative 35.7% last year and 460 basis points ahead of LLY operating margin.
This was well above our guidance of 7% to 7.5% due to stronger-than-expected replenishment in our wholesale and digital channels, which generate highly accretive margins versus our total company rate.
Moving on to segment performance, starting with North America.
First quarter revenue increased 300% to last year driven by strong Spring assortments, improving consumer sentiment and expanded store reopenings as we lapped the peak of store lockdowns last spring.
Compared to LLY, North America revenues declined 8%, but included an 18% headwind from our strategic distribution resets and Chaps.
In North America retail, revenues grew 189% to last year.
Comps increased 176% on improved traffic and nearly 40% AUR growth, reflecting our continued elevation around product marketing and more targeted pricing and promotions.
Brick-and-mortar comps increased 278% driven by stronger AUR, basket sizes and traffic as most stores reopened.
Although foreign tourist sales improved significantly to last year, they were still nearly 70% below LLY due to continued softness in international traffic and travel.
Comps in our own digital commerce business grew 51% this quarter, accelerating from 25% in Q4 as we continued to focus on new consumer acquisition, product elevation and enhancing the user experience.
While we expect continued momentum in this channel, we note the prior year compares build sequentially after Q1.
In North America wholesale, revenues increased to $250 million compared to $23 million last year as we carefully restocked into the channel and lapped last year's minimal shipment to customers during the shutdown.
Sales meaningfully outperformed our expectations, driving the biggest upside to our guidance this quarter.
The foundational work we completed through COVID to reset and elevate our inventories, exit lower-tier wholesale doors and significantly reduce our off-price penetration is starting to deliver strong early results across every key metric.
In North America wholesale, full-price sellout is exceeding our sell-in.
Total sellout was up high teens to LLY in Q1, led by market share gains in men's, kids, home and women's footwear.
And we are also encouraged by early sequential improvements in women's ready-to-wear.
Wholesale AUR growth continues to accelerate, up more than 20% to LLY.
This represents our strongest wholesale pricing gains in the last six years.
And our focus on Wholesale Dot Com is working with digital sellout up more than 50% in Q1 and more than 75% to LLY.
Coming out of the pandemic, our wholesale partnerships are stronger, healthier and more collaborative with a focus on marketing, improved digital capabilities and the right product assortment and an appropriate level of inventories as we build back into demand.
And we see more to come as we are still in the early stages of driving our brand elevation strategy in this channel.
Moving on to Europe.
First quarter revenue increased 194% on a reported basis and 179% in constant currency, above our expectations.
First quarter comps increased at 98% with a 154% increase in brick-and-mortar as stores reopened and a 23% increase in digital commerce.
The strong early pent-up demand that started in the U.K. this April was followed by better-than-expected reopening trends across France, Germany and Italy despite extended lockdowns in the quarter.
Approximately 20% of our stores were fully closed in Q1 with additional stores operating under partial closures or other restrictions.
All of our major markets reopened by the end of June.
Digital commerce outperformed despite a challenging 44% comparison last year when COVID-related closures shifted more business online.
While our digital comps partially benefited from extended lockdowns across Europe this quarter, the results also reflected stronger Spring assortments, growth in connected retail and our targeted marketing efforts.
Europe wholesale exceeded our expectations again this quarter driven by stronger sellout and reorders in both digital wholesale as well as traditional wholesale accounts.
Revenues increased 68% on a reported basis and 61% in constant currency.
Our Asia retail comps increased 43% driven by similar performance across our brick-and-mortar stores and digital commerce.
Our digital ecosystem continued to accelerate in Asia.
In Q1, this was supported by our successful 5/20 gift day campaign, 6/18 shopping event live streamed from our newly opened Sanlitun store and momentum in our newest digital flagships in China, Japan and Hong Kong.
Japan, our largest market in Asia, was negatively impacted by an extended state of emergency for the majority of the quarter.
These restrictions drove a roughly six-point headwind to the region's overall growth in Q1.
Despite this, our teams were able to successfully mitigate these headwinds with stronger performance across the rest of the region.
This was led by the Chinese Mainland, which was up more than 50% to last year and 70% to LLY in constant currency driven by a strong product assortment, localized marketing initiatives and new store openings.
Korea was also up more than 30% to last year and 40% to LLY.
Japan returned to normal operations in late June and started to ramp up vaccinations.
However, the government declared another state of emergency in July ahead of the Olympic Games, and we expect a slower recovery in Japan this year.
Moving on to the balance sheet.
We ended the year with $3 billion in cash and investments and $1.6 billion in total debt, which compares to $2.7 billion in cash and investments and $1.9 billion in total debt last year.
We are confident in our ability to meet our debt leverage requirements, ratio requirements in Q2 and eliminate capital allocation restrictions in our bank waiver.
Net inventory increased 4% to support increasing demand.
This compared to a 22% decline last year when we limited shipments to brick-and-mortar channels at the height of COVID shutdowns last spring.
Supply chain challenges are increasing the variability of inventory flows quarter-to-quarter.
Looking ahead, our outlook is based on our best assessment of the current macro environment, which includes ongoing COVID-related disruptions, the global supply chain challenge -- and the global supply chain challenges.
We expect the quarter cadence this year to be volatile given dynamic conditions across our markets.
This includes potentially uneven pace of recovery by region and channel as well as the timing of investments as markets reopen.
For fiscal '22, we now expect constant currency revenues to increase approximately 25% to 30% to last year on a 53-week basis.
Excluding approximately $700 million in annualized revenues, we deliberately reduced during the pandemic, including department store exits, off-price and daigou reductions, Chaps and Club Monaco, this implies revenues up slightly to fiscal '20.
Foreign currency is expected to contribute about 30 basis points to full year revenue growth.
We now expect gross margin to expand 50 to 70 basis points even as we lap meaningful geographic and channel mix benefits due to last year's COVID closures.
This implies roughly 440 basis point increase to fiscal '20.
Our outlook includes slightly higher freight headwinds of approximately 100 to 120 basis points versus our previous expectation of about 100 basis points.
However, this is more than offset by our expectation of stronger AUR growth of mid to high single digits above our long-term guidance of low to mid-single digits annually as we continue our long-term elevation work.
We now expect operating margin of 12% to 12.5%, up from our 11% outlook previously.
This compares to a 4.8% operating margin last year and 10.3% in fiscal '20.
We expect operating margin for the remaining three quarters to moderate from Q1 levels based on increased marketing investments as planned to get to our target of 6% of sales this year, increased freight pressure in the back half of the year and our assumption that the higher-margin wholesale replenishments that we saw in the first quarter does not continue as demand start to normalize.
For the full year, we expect operating profit dollars to increase meaningfully compared to fiscal '20 pre-COVID levels.
For the second quarter, which no longer includes Club Monaco, we expect constant currency revenues to increase approximately 20% to 22%.
Foreign currency is expected to contribute about 50 basis points to revenue growth.
We expect operating margin of about 13% to 14% in the second quarter.
This includes gross margin of flat to up 20 basis points as we continue to drive AUR and product mix, largely offset by higher freight as we lap last year's COVID mix benefits.
We also expect modest operating expense leverage and restructuring savings, partially offset by higher marketing and new stores.
We expect full year tax rate to be about 24% with the second quarter tax rate about 24% to 25%.
In closing, we are proud of our team's agility and execution around the world this quarter.
As Patrice mentioned, we are still managing through a highly dynamic environment.
We are firmly back on offense with this strong start to the year, and this is only the beginning.
Guided by Ralph's original vision and our purpose of inspiring the dream of a better life through authenticity and timeless style, we are connecting with consumers in more exciting and innovative ways than ever before.
Over the coming quarters and beyond, you'll continue to see us driving our targeted strategic investments in key growth opportunities in order to deliver value for all our stakeholders. | global digital ecosystem revenues accelerated to more than 80% growth in q1.
ralph lauren - full year fiscal 2022 outlook raised with constant currency revenues now expected to grow 25% to 30% on a 53-week basis.
full year fiscal 2022 adjusted operating margin expected in range of 12.0% to 12.5%.
continued momentum in chinese mainland, with q1 sales increasing more than 50% to last year.
q2 fiscal 2022 revenues are expected to increase approximately 20% to 22% in constant currency to last year.
inventory at end of q1 of fiscal 2022 was $803 million, up 4% compared to prior year period.
foreign currency is expected to positively impact q2 2022 revenue growth by approximately 50 basis points.
europe revenue in q1 increased 194% to $355 million on a reported basis and increased 179% in constant currency.
asia revenue in q1 increased 68% to $288 million on a reported basis and 61% in constant currency.
q2 gross margin is expected to be flat to up 20 basis points to last year. |
Our expectations contain many risks and uncertainties.
Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
We are delivering strong progress on our fiscal '22 plan, with second quarter performance exceeding our expectations across all key financial and consumer engagement metrics.
Our brand elevation strategy, which cuts across our product, marketing and distribution channels, is resonating with consumers in every region.
We're driving these results despite greater-than-expected disruptions in the global supply chain and extended COVID restrictions in key markets like Japan.
And while we continue to face a volatile environment, the work we have done to build a resilient supply chain over the last several years as well as our significant AUR elevation will continue to be competitive advantages as we navigate emerging challenges and mitigate risk.
To give you some context and color, our supply chain is intentionally diversified across multiple markets, a key initiative we started over four years ago.
This allows us to quickly shift production when certain markets are affected by COVID or other issues.
We've created a strategic supplier program whereby we prioritize our partners with a presence across multiple markets, enabling these shifts to happen even more seamlessly.
And we have proven pricing power, elevating our AUR across every channel and geography over the last 4.5 years so that we have room to absorb near-term pressures we've seen in our business, such as tariffs or current inflationary headwinds.
This built-in agility gives us confidence as we continue to navigate a volatile global operating environment ahead.
But I want to be clear that this is not just about our ability to play defense.
Even as macro challenges arise or subside, Ralph Lauren is firmly driving offense to position the company for long-term sustainable growth.
We are leveraging our strong momentum to further accelerate investments across brand building, personalization and new customer recruiting, digital and key markets and categories in the months ahead.
Reflecting on the last quarter, a few key highlights.
First, our overall recovery is outpacing our expectations.
This was led by outperformance in Europe and North America, with Asia in line with our plan and positive to fiscal '20 or LLY despite extended COVID measures as our product assortments resonated strongly with consumers globally.
Second, our digital momentum continues, following our reset work across product, pricing and promotions last year, and our digital operating margins continue to be strongly accretive to our overall company margin rate.
And third, our elevation strategy is translating across all channels, including positive trends in wholesale across regions.
On top of all of this, we made further progress toward our long-term target of mid-teens operating margins, with second quarter margins of 17%, representing the highest Q2 rate since fiscal '13.
And we achieved this even as we continue to reinvest for future growth and plan to increase returns to shareholders over the next several quarters.
Our performance demonstrates our team's strong execution against the five strategic pillars that we outlined at the start of our Next Great Chapter plan.
Let me share a few highlights from the quarter across each one.
First, on our efforts to win over a new generation.
We continue to invest in our brand building initiatives to drive both new customer acquisition and retention in order to fuel long-term growth.
In the second quarter, we further strengthened our brand consideration, purchase intent and Net Promoter Scores globally, while Ralph Lauren brand sentiment also improved across every region.
Some of our key campaigns underpinning these results included: the continuation of our summer sports program with the U.S. Open Tennis Championships here in New York as well as Team USA's victory at the 2021 Ryder Cup in golf.
These came on the heels of our sponsorship of the U.S. Olympic Team in Tokyo earlier in the quarter.
Together, these campaigns generated over 71 billion media impressions in the second quarter as we continue to inspire new generations of athletes and dreamers.
In September, we celebrated the return of fashion's biggest line, the Met Gala.
And what better opportunity to showcase this year's theme of American fashion than with one of the most iconic American brands, Ralph Lauren.
Celebrities and influencers from Jennifer Lopez and Ben Affleck to Chance the Rapper and Lily Aldridge were featured in our designs, driving strong engagement and traffic to our channels.
Ralph's designed of Lilly Collins' wedding dress, some of you will know her as Emily in Paris, garnered worldwide media attention.
And we were excited to announce a new collaboration this quarter with Zepeto, a metaverse or virtual world, where user's avatars can socialize and create content.
This partnership represents the latest frontier in digital engagement in which users can purchase exclusive digital and apparel for their 3D avatars for the first time ever.
Early engagement has outpaced our expectations with 100,000 items already sold in just a few weeks.
In all, we added 1.4 million new consumers to our direct-to-consumer channels alone this quarter, a 19% increase to last year.
And our total social media followers continue to grow, reaching 46.9 million globally led by Instagram.
Moving to our second key initiative, energize core products and accelerate high potential underdeveloped categories.
Ralph and our design teams continue to inspire consumers around the world as they begin to incorporate sophisticated casual styles back into their closets, while still seeking elevated comfort with categories like loungewear.
We are uniquely positioned to capture this evolving hybrid way of dressing given the breadth of our portfolio.
And we're also making strong progress on our high potential categories like outerwear and denim.
During the second quarter, we drove our core sportswear categories along with seasonal styles such as transitional sweaters and fleece as we headed into early fall selling.
On the men's side, we saw strength across bottoms, including denim, active styles and shorts, as well as sweaters and performance fleece.
Though a small part of our business prior to COVID, tailored clothing and dress shirts continued to show sequential improvement.
In women's, we drove outsized performance in sweaters, sweatshirts, mid-layer knits and bottoms.
Outerwear, including transitional quilted jackets, updated blazers and denim jackets, also grew double digits to LLY.
This should bode well for the key outerwear selling period of fall and holiday.
We also launched our new Ralph's Club fragrance globally with a digital-first campaign featuring Luka Sabbat and Gigi Hadid.
This marked our first major fragrance launch in China.
And in its first month, it ranked among the top three men's fragrances in key markets around the globe, including in the U.S. and more than 75% of purchases on ralphlauren.com were made by consumers who are new to the brand.
This takes me to our third key initiative, drive targeted expansion in our regions and channels.
We continued the build-out of our brand-elevating key city ecosystems around the world in the second quarter, with 35 new stores and concessions opening in top cities globally and 13 locations closed.
The majority of these store openings were in Asia and particularly the Chinese Mainland, which continues to represent a significant long-term growth opportunity for our brand.
Despite COVID-related shutdowns in July and August, our Mainland sales were still up more than 25% to last year and more than 70% to LLY in constant currency.
And comp trends rebounded quickly in September once restrictions were lifted.
We opened our second emblematic store experience in China at Shanghai's Kerry Centre this quarter, following our first opening in Beijing this spring.
The emblematic concept provides an example of how we are transforming the retail experience, with digital integration throughout, exciting in-store activations and hospitality features like Ralph's Coffee that are fueling new consumers acquisition.
Early performance is well ahead of our expectations, and these stores are also lifting overall growth trends in their respective omnichannel ecosystems.
Moving to our priority of leading with digital.
Our global digital ecosystem, including our directly operated sites, departmentstore.com, pure players and social commerce, grew approximately 45% in the quarter in constant currency and 50% to LLY.
Our digital momentum continues even as traffic returns to physical stores, driving a benefit to our overall operating margin mix.
This is the result of our continued digital investments focused on content creation, data analytics and AI to serve our consumers through an elevated connected retail experience.
Now touching on our work to operate with discipline to fuel growth.
As I mentioned, our teams continue to operate with agility and focus to mitigate supply chain headwinds, delivering better-than-expected gross and operating margins in the second quarter.
At the same time, we continue to drive expense discipline as we accelerate both near-term and multiyear investments in the back half of the year to fuel long-term growth.
And lastly, on our brand portfolio, we successfully transitioned Chaps from our North America wholesale business to a license model in the second quarter, as previously announced.
This completes our exit from moderate-priced U.S. department stores, enabling our teams to focus on our core namesake brands and elevated positioning in the marketplace.
I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do.
We recently announced the launch of the U.S. Regenerative Cotton Fund in partnership with the Soil Health Institute.
Funded by the Ralph Lauren Corporate Foundation, this program works directly with farmers to transition one million acres of American cotton crop land to regenerative production.
In all, it is set to eliminate one million metric tons of carbon dioxide equivalent from the atmosphere by 2026, both increasing sustainable cotton supply and making important progress in the urgent call to action on climate.
We are proud to share today that this program is being recognized at the COP26 International Meeting on Climate as an innovation spread partner by the Agriculture Innovation Mission for Climate.
In addition, this quarter, we joined the Global Fashion Agenda's Strategic Partner Group to prioritize sustainability and fashion as well as the Ellen MacArthur Foundation as a partner in its mission to create a circular economy for apparel.
And we were also honored to be recognized as one of the 2021 Best Places to Work for People with Disabilities by the Disability Equality Index and as one of the world's best employers of 2021 by Forbes.
In closing, Ralph and I are strongly encouraged by the company's progress through the first half of the fiscal year.
All channels and geographies are showing strong momentum as we build on the healthier foundation we set over the past 18 months.
Our performance, along with the resilience of our supply chain and pricing power in the market give us confidence as we accelerate our investments in the back half to support long-term growth.
Our second quarter results outperformed our expectations with progress across each of our key strategic initiatives, even in the midst of continued COVID and supply chain headwinds around the world.
Performance this quarter was driven by strong top line growth led by our full-price wholesale channels globally and broad-based outperformance in Europe, continued digital momentum across owned and third-party channels, further gross margin expansion on top of last year's COVID mix benefits with double-digit AUR growth and elevated product mix more than offsetting higher freight.
And higher-than-expected operating margins, including cost-savings benefits, improved wholesale margins and favorable channel mix shifts from wholesale and digital.
Second quarter revenues increased 26% to last year with positive growth in every region, led by Europe and North America.
Compared to second quarter fiscal '20 or LLY, revenues declined 12%.
However, this included approximately eight points of negative impact from last year's strategic reset of our distribution and our Chaps business, which moved to a licensed model.
Total digital ecosystem sales grew approximately 45% in constant currency to last year and 50% to LLY, including 35% growth in our own digital business.
Momentum continued across every region, reflecting our strong assortments, expanded connected retail capabilities and high-impact marketing.
Digital margins were also strongly accretive to our second quarter profitability, consistent with last year and about 1,300 basis points higher than LLY.
Total company adjusted gross margin was 67.3% in the second quarter, up 80 basis points to last year on a reported basis and 50 basis points in constant currency despite increased freight headwinds of approximately 150 basis points.
Gross margins were better than expected despite lapping last year's unusual COVID mix benefits, driven by better pricing and promotion, along with favorable product mix and last year's supply chain organization streamlining.
Adjusted gross margins increased 580 basis points to LLY.
Second quarter AUR grew 14% on top of 26% growth last year, with increases across every region.
This represents our 18th consecutive quarter of AUR gains as we continue on our brand elevation journey, and it gives us strong confidence in our sustained pricing power as we mitigate mid to high single-digit product cost inflation starting in the second half of the year.
Adjusted operating expenses increased 17% to last year to $755 million and declined 5% compared to LLY, reflecting our restructuring savings.
The increase to last year was driven by higher marketing and compensation as we lapped last year's furloughs and store closures due to COVID.
Marketing increased 83% to 6.1% of sales in the quarter with a focus on new customer acquisition and long-term brand-building initiatives.
Operating expenses were below our initial plan as we shifted about $25 million of investment into the second half of the year based on COVID disruptions.
In the second half, we will increase marketing and talent investments to support growth this holiday and in customer acquisition to drive longer-term growth.
Adjusted operating margin for the second quarter was 17.1%, up 450 basis points to last year and 220 basis points to LLY.
This was above our guidance of 13% to 14% margin, largely driven by improvements in Europe and North America wholesale.
Excluding the timing shift, operating margin was still well ahead of our plan, above 15%.
Moving to segment performance, starting with North America.
Second quarter revenue increased 30% to last year, supported by strong product assortments, new customer acquisition and market share gains.
Compared to LLY, North America revenues declined 20%, but included a 15-point headwind from our strategic distribution reset and Chaps similar to Q1.
In North America retail, revenues grew 34% to last year.
Comps increased on improved traffic and 23% AUR growth, reflecting our continued elevation around product, marketing and more targeted pricing and promotions.
Brick-and-mortar comps increased 31%, driven by double-digit growth in AUR, basket sizes and traffic.
Although foreign tourist sales improved significantly to last year, they were still down more than 80% to LLY due to continued softness in international travel.
Comps in our owned digital commerce business grew 32% this quarter.
This was driven by a strong product offering, along with high-quality new consumer acquisition and retention of last year's new consumers, resulting in higher full-priced sales.
New consumers increased 12% to last year and more than 50% to LLY.
And retention of the new consumers acquired last year improved meaningfully as we become increasingly effective at targeting and personalization.
In North America wholesale, revenues increased to 23% to last year.
This was ahead of our expectations as the foundational work we completed through COVID to reset our inventories, elevate our product mix, exit lower-tier wholesale doors and significantly reduced off-price penetration is delivering improved top line growth and quality of sales.
Total sellout was up low double digits in the second quarter to LLY led by continued market share gains in men's, kids and home.
Lauren women's continued to stabilize sequentially, including share gains in women's ready-to-wear.
Overall, wholesale AUR growth continues to accelerate, up 30% to LLY as we elevated our assortments and pulled back on seasonal promotions in the channel.
And our momentum on Wholesale Dot Com drove digital sellout growth of more than 45% to both last year and LLY.
All of this is enabled by our healthier brand positioning in wholesale, and we see more to come as we are still in the early stages of driving our brand elevation strategy in this channel.
Moving on to Europe.
Second quarter revenue increased 38% on a reported basis and 36% in constant currency, above our expectations.
Revenue inflected to positive growth on a LLY basis this quarter, with all key markets performing better than planned, led by Germany and France.
The U.K., our largest market in the region and earliest to reopen this spring, also continued to perform better than planned on strong demand.
Europe comps increased 27% in the quarter.
Bricks-and-mortar comps were up 28%, driven by improved traffic, AUR and basket sizes.
Digital commerce comps increased 24% on top of a 26% comp last year when COVID-related closures shifted more business online.
Europe wholesale exceeded our expectations again this quarter, driven by stronger sellout and reorders at both digital wholesale as well as traditional wholesale accounts.
Revenue increased 14% on a reported basis and 13% in constant currency.
Our Asia retail comps increased 7% with 69% growth in digital commerce and 4% growth in bricks-and-mortar stores.
Continued strong momentum in China and Korea this quarter more than offset extended COVID restrictions in Japan, our largest market in the region as well as Australia, Malaysia and Singapore.
In total, COVID-related closures and operating restrictions negatively impacted Asia sales by about 3.5% in the quarter.
And while the Chinese Mainland still grew more than 25% this quarter, our performance was also tempered by COVID lockdowns from late July through August.
On a positive note, Mainland comps rebounded quickly in September once stores reopened.
Japan comps also started to improve toward the end of the quarter with the government lifting all states of emergency following the end of our fiscal Q2.
Our digital ecosystem continued to accelerate in Asia.
Moving on to the balance sheet.
We ended the quarter with $3.1 billion in cash and investments and $1.6 billion in total debt, which compares to $2.4 billion in cash and investments and $1.6 billion in total debt last year.
Net inventory increased 5%, modestly below our plan due to global supply chain delays.
While we expect continued variability of inventory flows, from quarter-to-quarter, we believe our inventories are well positioned across key categories and channels to meet demand for the upcoming holiday and spring '22 seasons.
Overall, we expect to improve our inventory positions as supply chain headwinds subside and plan to end the year with inventories better aligned to sales growth.
As we move into the second half of this fiscal year, we are recommitting to our long-term capital allocation priorities outlined prior to COVID.
This includes, first, reinvesting in our strategic growth priorities, including brand marketing and elevation, digital and expansion of our key city ecosystems to drive long-term sustainable growth.
Second, with peak pandemic closures likely behind us, we are focused on returning 100% of our free cash flow to shareholders in the form of dividends and share repurchases.
We reinstated our dividend in the first quarter, and we expect this to grow in line with durable net income growth.
And we expect to resume our share repurchase program starting in the second half of this fiscal year, with about $580 million remaining under our current share authorization.
Looking ahead, our outlook is based on our best assessment of the current macro environment, including global supply chain challenges and COVID-related disruptions.
We expect the quarterly cadence this year to remain volatile given dynamic conditions across our markets.
For fiscal '22, we are raising our revenue growth to 34% to 36% growth to last year in constant currency on a 53-week basis, excluding approximately $700 million in annualized revenue we reset during the pandemic.
This includes department store exits, off-price and daigou reductions and the licensing and sale of Chaps and Club Monaco.
This implies revenues up high single digits to fiscal '20.
Foreign currency is expected to negatively impact full year revenues by about 20 basis points.
We expect gross margins to expand at the high end of our prior range of 50 to 70 basis points or roughly 450 basis point increase to LLY.
Our outlook improved on more favorable pricing and product mix this year despite increased freight costs, which we now expect to be in the range of 130 to 150 basis points due to our plans to use more air freight to fulfill strong demand in the back half.
As a reminder, we renegotiated our ocean freight rates for the year in Q1.
Raw materials, notably cotton, were purchased roughly a year in advance, resulting in slightly favorable product costs through the first half of fiscal '22.
This is followed by mid to high single-digit estimated cost increases in our second half ending March and through calendar 2022, which we expect to more than offset with continued AUR growth and productivity improvements.
We raised our AUR outlook to high single-digit growth this year, above our long-term annual guidance of low to mid-single digits as we continue our elevation work.
We still expect operating margins of 12% to 12.5%, which compares to 4.8% operating margin last year and 10.3% in fiscal '20.
We continue to expect operating margin rates for the back half of the year to moderate from first half levels based on increased second half marketing investments of approximately 7% to 8% of sales reaching our full year target of at least 6% of sales this year, increased air freight expense in the back half of the year and our assumption of more normalized channel mix compared to last year's COVID disruptions.
For the full year, our increased revenue outlook implies high-teens operating profit dollar growth compared to LLY pre-COVID levels.
For the third quarter, we expect constant currency revenues to increase approximately 14% to 16%.
Foreign currency is expected to negatively impact revenues by about 140 basis points.
While our teams are still actively focused on managing through global supply chain disruptions, we remain confident in our ability to deliver the right product at appropriate levels to meet consumer demand over the holiday selling period.
We expect operating margins of about 13% to 13.5% in the third quarter, roughly in line with last year.
This has seen modest gross margin expansion, largely offset by the timing shift in strategic investments, input cost inflation and mixed headwinds I noted a moment ago.
We now expect the full year tax rate to be about 21% to 22% with a third quarter tax rate of around 22% to 23%.
In closing, our strong first half performance underscores the timelessness of Ralph's creative vision, the power of our brand and our strengthening consumer base.
With these as our foundation, we will leverage our momentum and invest in the key strategic initiatives that will support our long-term growth.
And within a highly dynamic global environment, our teams around the world are executing with agility and playing offense to deliver long-term value creation for all our stakeholders. | qtrly global digital ecosystem revenue increased approximately 45% including owned digital commerce growth of 35%.
q2 average unit retail increased 14%.
for fiscal 2022, company now expects constant currency revenues to increase approximately 34% to 36%.
north america revenue in q2 increased 30% to $703 million.
europe revenue in q2 increased 38% to $496 million on a reported basis and increased 36% in constant currency.
asia revenue in q2 increased 14% to $270 million on a reported basis and 13% in constant currency.
2022 gross margin is now expected to increase at high end of previous guidance of 50 to 70 basis points to last year.
inventory at end of q2 of fiscal 2022 was $928 million, up 5% compared to prior year period.
company expects to resume its share repurchase program starting in second half of fiscal 2022.
for q3 fiscal 2022, revenues are expected to increase approximately 14% to 16% in constant currency to last year.
operating margin for q3 is expected in range of 13.0% to 13.5%.
expects to resume its share repurchase program starting in second half of fiscal 2022. |
Our expectations contain many risks and uncertainties.
Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
Our third quarter performance reflected strong underlying progress on our path to quality, sustainable long-term growth.
Overall revenues improved sequentially and were in-line with our expectations.
Stronger than expected recovery in Asia was offset by the impact of continued COVID-19 resurgences across Europe.
While North America was roughly in line with our expectations, even with additional COVID pressures.
Meanwhile, our focus on brand elevation, improved quality of sales and cost discipline drove better than expected gross and operating margin expansion in the quarter.
With double-digit AUR growth and digital profitability exceeding our expectations.
And while COVID, is likely to remain a near-term headwind, there is reason to be hopeful as we start the new year and vaccines begin to rollout.
Ralph and I are incredibly proud of the dedication, resilience and agility; our teams have shown in not only managing through the pandemic; but also positioning the company to emerge stronger than we came into it.
As part of this, we balanced reset activities with an acceleration of our core strategies, including strengthening our brand and bolstering our marketing and new customer acquisition, expanding key categories and international markets, scaling our Connected retail offerings globally, continuing to prune non-elevating distribution and further realigning our cost structure.
These actions are consistent with the five strategic priorities that we laid out as part of our long-term plan prior to COVID.
These include first, win over a new generation of consumers, second, energize core products and accelerate high potential under-developed categories, third, drive targeted expansion in our regions and channels, fourth, lead with digital across all activities and fifth, operate with discipline to fuel growth.
I will touch on a few of these in a moment.
But first let me provide, some updates specific to this quarter's performance.
As we anticipated at the start of the holiday season, the global retail environment remain volatile, due to the pandemic and other macro factors.
Led notably by Asia and our digital channels globally.
Asia, which we view in many ways as a blueprint for our progress in other markets grew 14% to last year.
This was driven by continued momentum in the Chinese Mainland, with more than 40% reported growth.
Japan, we turned to positive growth in the quarte, while Korea was up double-digits.
In North America, performance continue to improve sequentially and was in-line with our expectations, despite rising COVID cases in many of our key markets.
Our strategy of elevating our brand across digital, department stores and off-price is well under way.
And we're still on track to complete the significant portion of this work in fiscal '21.
Europe was the most challenging segment this quarter, with the majority of our stores closed for a full month of the key holiday period.
In addition to the government-mandated shutdowns, there were also significant operating and travel restrictions throughout the quarter, which have continued into our forth quarter to-date.
In many ways, this second and third wave restrictions, have been more disruptive than the first wave of shutdowns we experienced last spring.
As they vary greatly by market and by day.
Third quarter traffic headwinds were partly mitigated by a strong acceleration across our owned and wholesale digital channels in Europe.
This was driven by our expanded Connected retail programs, exclusive capsules with partners like Mytheresa and ASOS, holiday campaigns and influencer activations.
We also leveraged this period of disruption to continue our long-term brand elevation in the region.
Acquiring new high value consumers and driving increased AUR despite a highly promotional competitive environment.
These actions should help position our brands for healthier recovery and ecosystem expansion once we emerge from COVID.
By channel, digital continues to be a key driver of our performance with digital sales accelerating in all three regions this quarter.
We continue to scale up our Connected Retail offerings and emphasize gifting in key product categories for holiday.
These included our iconic sweaters, holiday bear programs, Home and loungewear that are resonating with consumers today.
In our brick-and-mortar stores, as I mentioned, traffic was challenged due to COVID, particularly in Europe and North America.
But we were strongly encouraged that our teams were able to deliver higher conversion in these channels with double-digit AUR growth and reduced discounting while also starting to leverage our new Connected Retail offerings this holiday.
We also continue to invest in targeted new store expansion in key growth markets with 23 new stores this quarter, primarily in Asia.
Within our wholesale business, we were encouraged by continued sequential progress across regions, particularly on wholesale.com.
We still expect pressure on our reported selling trends in the near term, as we deliberately exited department store doors early in the pandemic and prioritize inventory management in this environment.
As a reminder this near-term discipline is integral to building price harmonization across our ecosystem and to protecting the elevation in long-term equity of our brands.
Turning to our efforts to win over a new generation.
In the third quarter, we continue to ramp up our personalization initiatives, shift our brand building efforts increasingly toward digital and leverage the authentic values that have been central to our brand since Ralph started this company more than 50 years ago.
Let me touch on some of the highlights from this quarter.
First we launched, a fully integrated and diverse Family is Who You Love Holiday campaign across social media, our own stores and digital sites and wholesale environments.
We also focus more than ever on creating innovative digital experiences that emerge the consumer in the world of Ralph Lauren.
These included our groundbreaking virtual flagship store experiences in Beverly Hills, New York and Paris, where consumers around the world can experience our brands and the full breadth of our assortment, in a way that was previously only possible by walking into one of our beautiful stores, amplifying and reach of our flagships to a global audience, digital traffic in these virtual stores was 8 times greater than the foot traffic in these physical stores over the same period.
We were also the first apparel brand to launch Snapchat's logos scan this holiday.
This allows consumers to scan our iconic Polo Pony logo from any surface, including clothing items, adds, shopping bags and more, to trigger an Augmented Reality experience that brings them into the world of Ralph Lauren and ultimately transact on our own site.
And in Asia, we were excited to launch our live stream selling event with 360 degree activation for Singles' Day.
Delivering more than 120 million impressions.
We are investing in these new forms of selling, including social commerce, which we expect to become a greater part of the digital shopping experience long term.
Looking ahead, we will continue to partner with celebrities and influencers who embody our core values, along with being a part of key moments around the world.
More recently, Ralph and I were particularly proud of our brands participation in the U.S. Presidential inauguration.
Overall we are encouraged by the momentum we are seeing in consumer engagement across generations.
Notably, our brand awareness and purchase intent has accelerated since the start of the pandemic and we are seeing particularly strong growth from consumers under 35 and women.
We added more than one million new consumers through our direct to consumer platforms alone in Q3.
In our total social media followers, reached 45 million in the quarter.
This was led by continued momentum across key platforms like Instagram, Tik-Tok, YouTube and Snapshot, where our Ralph Lauren x Bitmoji Collection is connecting strongly with Gen Z consumers.
Since the launch last August, over 20 million users has addressed our Bitmoji and Ralph Lauren and tried on the collection over 550 million times.
This takes me to our long-term priorities of leading with digital.
Fiscal' 21 continues to be a transformational year, as we digitize our consumer platform and experiences and how we work as a company.
On the consumer-facing side, the continued acceleration of Connected Retail is essential to creating the best possible experience for our consumers and to our long-term growth.
Building on our accelerated Connected retail launches in the first half of the year, in the third quarter we added mobile point of sales across our North American, retail fleet, appointment scheduling and curated personal collections online, all while continuing to expand our digital clienteling programs globally.
We also launched our Hong Kong digital flagship in time for holiday, which is an important part of our broader ecosystem strategy as consumer shop and travel in new ways.
In addition to strengthening our digital commerce capabilities, we continue to build our social commerce presence and expand our partnerships with influential digital retailers around the world.
Our teams executed a successful global launch campaign this holiday with Farfetch.
We delivered lifestyle content tailored to next generation consumers, reaching over 15 million impressions globally, including the first ever editorial experience, within the Farfetch app.
We were encouraged by engagement rates that were three times higher than our competitive benchmarking on this platform.
And as we continue to digitize how we work as a Company, we launched our integrated vendor management system in the third quarter with the majority of our suppliers.
This new digitally centralized portal enables us to communicate seamlessly with our suppliers, on everything from digital product creation to real-time tracking on our production status and factory capacity.
It also enables us to track and support areas like gender diversity at the supplier level.
This is all part of our broader goal of elevating our product, streamlining how we bring them to market and making it easier for our teams to stay connected and agile.
All while driving our sustainability and citizenship initiatives across everything we do.
Touching on our work to operate with discipline to fuel growth.
Our ongoing focus on balancing growth with productivity continues to be an important element of our long-term plan.
And this discipline is even more critical, as we make hard choices to realign our cost structure, so we can position the company to emerge from COVID stronger than we came into it and pivot back to growth.
In the second quarter, we announced the first major actions related to our fiscal 2021 Strategic Realignment Plan.
These included, first, the simplification of our organization, enabling our teams to move with greater agility, and second, an assessment of our brand portfolio resulting in the decision to move Chaps to a fully license business.
Today, we announced the next stage of our plan, which is focused on realigning and driving increased efficiencies across our global real estate footprint.
While Jane will discuss these actions in more detail in a moment.
I am pleased that we are making good progress on this multi-pronged plan.
This gives us increased confidence in our ability to start fiscal '22 strong and with the right foundations in place.
Importantly, I also want to take a moment to touch on our ongoing work to integrate citizenship and sustainability into everything we do.
In the third quarter, we were proud to score 100% on the Human Rights Campaign foundations Corporate Equality Index and earn the designation as a best place to work for LGBTQ Equality.
On the supply chain and sustainability front, we have leverage this period of change to continue diversifying across geographies and strengthening our relationships with suppliers.
From improved capacity planning to implementing diversity and inclusion training and driving best practices in sustainability.
In the third quarter, we reaffirmed our commitment to achieving our science based greenhouse gas emissions targets and joined hundreds of other organizations in calling on the U.S. federal government to reenter the Paris climate agreement, which the new administration recommitted to just a few weeks ago.
We look forward to sharing further progress including our greenhouse gas reduction roadmap in our 2021 report update this June.
In closing, Ralph and I are optimistic about the future of our business and encouraged by the work our teams are doing to emerge from COVID stronger than we came into it.
We are spending this time doing the important work of elevating our brand, investing in key strategic areas, streamlining our business and realigning our cost structure.
We have made meaningful progress in delivering digital experiences for all of our consumers around the world and driving our direct-to-consumer channels all while pursuing our goal of becoming a more equitable, diverse and sustainable company.
Our third quarter results demonstrate solid execution of our strategy through this holiday season in the midst of a still challenging operating environment.
We continue to focus on what we can control in this dynamic context and on positioning the Company to accelerate value creation as we emerge from the pandemic.
This includes investing in our powerful lifestyle brands, our digital transformation and maintaining a strong balance sheet, while also realigning and streamlining our operational and expense structure.
As Patrice mentioned today, we announced the second round of actions related to our fiscal '21 Strategic Realignment Plan.
This stage focuses on realigning our real-estate footprint to our future strategic priorities.
This includes first reducing our North America corporate office footprint up to 30%, along with selected reductions in Europe and Asia.
As our teams embrace new ways of working and we pivot resources to our key strategic priorities.
Second closing up to 10 retail locations globally.
Pending ongoing landlord negotiations, combined with the successful lease renegotiations completed year-to-date.
We expect these savings to drive improved profitability in our existing fleet, while we continue to expand our brand elevating ecosystems, and third, completing the consolidation of our North American distribution center operations to drive greater efficiencies, improve sustainability and deliver a better consumer experience, with faster average delivery times and an increased focus on Connected Retail.
Combined, these actions are expected to result in growth annualized pre-tax expense savings of approximately $200 million to $240 million.
Inclusive of our previously announced organization savings.
While we still expect the majority of the original $180 million to $200 million in organizational savings to flow through to the bottom line, we expect to reinvest the majority of our savings related to today's actions in our future growth.
We will provide any additional updates to the plan as the actions are finalized.
Moving on to the third quarter performance.
Third quarter revenues declined18% following a 30% decline in the second quarter, Asia and North America both improved sequentially, while Europe was more significantly impacted by COVID and mandated closures and restrictions in the quarter.
Global Wholesale revenue declined 19% and direct to consumer revenues were down 16%.
Our digital business outperformed with sales up more than 20% to last year, including double-digit growth in all regions and even more importantly, our digital operating margins continued to expand, with Q3 digital margins up 900 basis points to last year and accretive to our total company rates to a combination of higher quality of sales and operating expense leverage.
Driving profitability in this business remains key, not only to our long-term margin accretion and shift to D2C, but also to our strategy of repositioning Ralph Lauren.com as our digital flagship or the best expression of our brand online.
Total company adjusted gross margin was 65.4% in the third quarter, up 320 basis points to last year.
Gross margin expansion was primarily driven by strong AUR growth along with favorable geographic and channel mix shifts.
Around 60 basis points of this quarter's gross margin expansion was driven by unusual mix shifts due to COVID.
With the remainder driven primarily by our continued global improvement in pricing and promotions.
Third quarter AUR growth of 19% was above our expectations with North America and Europe up double-digits and Asia up high-single digits.
We continued to elevate our brands across every touch point, significantly reduce promotions and take targeted pricing increases.
Our confidence in the strategy is reinforced by our continued improvement in full price penetration, larger baskets and better than expected conversion even as AUR growth has exceeded our expectations.
Operating expenses declined 11% to last year, driven by reductions in compensation, rent and other expenses, as we continue to work in new ways.
Adjusted operating margin for the third quarter was 13.3%, down 70 basis points to last year.
Marketing in the third quarter decreased 3%.
We shifted some investments into the fourth quarter of this year as store closures and in-store shopping restrictions increased due to rising COVID cases.
However, we accelerated select strategic marketing investments this holiday, focusing on higher margin, new customer acquisition in North American digital and reactivation of in-person events in Asia.
We expect fourth quarter marketing to increase about 50% to support our long-term brand-building activities and key events like Lunar New Year and the Australian Open.
This elevated growth rate reflects both the timing shift from Q3 and lapping of last year's depressed marketing spend as COVID hit Asia followed by Europe and North America.
Moving on to segment performance, starting with North America.
Revenue decreased 21% to last year.
Retail comps declined 21% driven by a 30% decline in bricks-and-mortar comps.
While our own digital comps improve sequentially to 9%.
Brick-and-mortar comps continued to be impacted by COVID related traffic declines with third quarter traffic down 45% and foreign tourists sales down about 85%.
However, we continued to drive our strategy of improving quality of sales with our third quarter discount rate down nearly 400 basis points.
AUR mid-teens and conversion up more than 200 basis points in our brick-and-mortar channel.
Our digital commerce comps were up 9% with total digital sales up 10% in the quarter.
Underlying sales to domestic consumers grew high teens, while sales to international consumers declined double-digits to last year, as planned.
We reduced our site wide promotions by 52 days compared to the prior year as we continue to elevate our digital experience driving AURs up 22% and gross margins up more than 800 basis points to last year in the channel.
While these deliberate reductions in promotional activity are a headwind to our digital comps in fiscal 2001.
We continue to invest more aggressively on new consumer acquisition during this transition period.
Our accelerated investment in digital marketing generated a 27% increase in new customers during this competitive holiday quarter, exceeding our expectations.
Year-to-date, these new consumers are transacting at a higher gross margin rates and larger basket sizes and represent a higher penetration of consumers under 35.
Looking ahead, we are focused on retaining these new consumers and are encouraged thus far by repeat purchase rates.
Stronger sales to domestic consumers this quarter were driven by our ongoing investments in connected retailing like buy online pickup in-store, new functionality like online exchanges and Card payment instalments and expanded personalization and targeted marketing efforts.
All of these initiatives helped deliver a significant increase in our full price sales this quarter, which grew more than a 130% to last year.
In North America wholesale, third quarter revenue declined 22% as we continue to manage our shipments carefully and realigned inventories to demand.
Full price sales declined at a more moderate rate, driven by stronger trends in core replenishment, Polo men's, kids and home.
While Lauren Women's remain challenged consistent with the broader category.
Our inventories in the marketplace were clean and well positioned at the end of the third quarter, declining more than 30% at North America wholesale.
Our sales to off-price were down meaningfully as planned as we continue to significantly reduce our penetration in this channel.
Moving on to Europe.
Third quarter revenue declined 28% on a reported basis and 30% in constant currency.
Europe retail comps were down 38% with a 51% decline in our bricks-and-mortar store comps, partly offset by an acceleration in our own digital commerce up 68%.
Across Europe, our bricks-and-mortar businesses were significantly impacted by traffic headwinds with some form of store closures or restrictions across 16 of our 17 markets in the region, ranging from curfews and closures to full lockdown.
Despite these pressures our conversion improved and AUR increased 12% to last year, driven by our ongoing strategy to elevate our factory channel strong momentum in our own digital commerce comp was driven by our new consumer acquisition, up 112% along with its banded Connected Retail initiatives gifting programs and improved digital content.
Europe wholesale revenues declined 22% in constant currency as we continue to limit shipments to reset our inventories to demand.
COVID related challenges in bricks-and-mortar wholesale were partially offset by stronger performance at our wholesale digital accounts where sell-in and sell-out rates were both positive for the quarter.
Revenue increased 14% on a reported basis and 9% in constant currency, our Asian retail comps increased 3% with bricks-and-mortar stores up 1% and digital comps up 54%.
We are encouraged that growth in the Chinese Mainland is not only back to pre-COVID levels of more than 40% on a reported basis, but growing versus double LY.
Japan also returned to positive growth in the third quarter, with sales increasing high single digits on a reported basis, following the second COVID wave in Q2.
However, we continue to watch Japan closely as key areas like Tokyo and Osaka entered a state of emergency in January.
Overall momentum in our Asian digital businesses continued through the quarter, driven by strong performance across all key markets and channels, including our own sites in digital pure plays, where we added four new partners in the quarter.
Moving on to the balance sheet.
We ended the third quarter with $2.8 billion in cash and investments and $1.6 billion total debt, which compares to $1.9 billion in cash and investments and $694 million in total debt at the end of last year's third quarter.
While we have managed our balance sheet carefully, since the start of the pandemic to preserve liquidity, `we are monitoring COVID conditions closely and based on our current outlook, we are planning to reinstate our dividend in the first half of fiscal ' 22 Net inventory declined 4% to last year, including a 2% decline in North America, 15% decline in Europe and a 7% increase in Asia, to support growth.
While we have taken a highly cautious approach to managing inventory through the pandemic.
Overall, we are encouraged by our team's ability to both move inventories across regions and to merchandise around our core and iconic styles as well as key COVID categories like home, loungewear and casualties.
Our increased agility is also enabling us to drive core product replenishment and shift back into pre-COVID categories, as consumers start returning to more normalized trends.
Looking ahead, our outlook is based on our best assessment of current COVID lockdowns and trends and is subject to change, given the dynamic nature of COVID developments around the world.
We currently expect fourth quarter revenues to decline approximately mid-to-high single-digits, representing a meaningful sequential improvement from the first three quarters of the year.
This includes the impact of third wave COVID lockdowns in the UK and Germany, from the start of the quarter to approximately mid-February as well as partial closures in France, Spain and Italy.
Third wave lockdowns in Japan through early March and a slow recovery in North America, where we have also seen increased cases and COVID related traffic headwinds.
If government mandated lockdowns or restrictions are extended from these periods or more severe restrictions are applied, this could negatively impact our current outlook.
These COVID related headwinds should be partially mitigated by continued momentum in China and our global digital businesses.
We expect gross margins to continue expanding, albeit at a more moderate rate than the first three quarters of the year.
As we strategically we purpose full price product from last year's COVID shutdowns to our factory channels.
Improved pricing and promotions, including targeted consumer messaging should continue to be the most durable driver followed by geographic and channel mix.
We expect operating expenses to increase low single digits as we reaccelerate our brand-building investments to support growth coming out of the pandemic, largely offset by our ongoing expense discipline.
Excluding marketing operating expenses are expected to decline low-single digits.
We expect inventories to increase in the fourth quarter as we start building back into demand and lap last year's double-digit decline in response to COVID.
In closing, we are encouraged by the progress our teams have made over the first three quarters of the year.
As we close out this fiscal year, we are focused on Offense as we leverage all of the critical work our teams have done prior to and through the pandemic to position the company for quality long-term growth.
Led by Ralph's enduring vision to guide us through a still highly dynamic global environment, we are accelerating our core strategies, including first and foremost, elevating our brand, driving our companywide digital transformation and targeting expansion in key geographies.
All while adopting new ways of working and executing with discipline around our cost structures. | qtrly global digital commerce sales increased more than 20%.
north america revenue in q3 decreased 21% to $715 million.
announcing additional realignment actions related to its real estate footprint.
q3 average unit retail increased 19% to last year.
plans to further right-size and consolidate its global corporate offices.
europe revenue in q3 decreased 28% to $316 million on a reported basis and decreased 32% in constant currency.
identified up to 10 stores subject to potential closure through fiscal 2022, pending ongoing negotiations.
plans to complete consolidation of its existing north america distribution centers.
asia revenue in q3 increased 14% to $330 million on a reported basis and 9% in constant currency.
combined actions are expected to result in gross annualized pre-tax expense savings of approximately $200 million to $240 million.
qtrly north america wholesale revenue decreased 22%.
ralph lauren - expect financial results for both q4 and full year 2021 to continue to be adversely impacted by pandemic and prolonged demand recovery.
for q4, we expect revenues to decline approximately mid-to-high single digits to last year. |
Our expectations contain many risks and uncertainties.
Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic.
They have demonstrated their resilience, agility and ongoing passion for our brand and our consumers in a year unlike any other.
Their commitment and execution shine through in our better-than-expected fourth quarter results.
Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company, than when we came into it.
This includes, first, across all three regions, we accelerated our work to elevate our brands, while also strengthening and simplifying our brand portfolio.
We're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs.
Second, we repositioned each of our channels and reduced our exposure to secularly challenge areas of distribution, particularly in North America.
Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration.
Within direct-to-consumer, we accelerated our shift to digital step changing profitability by over 1,000 basis points, as we added new connected retail capabilities and drove quality of sales.
Third, we established a stronger, digital infrastructure globally, while also ramping up our investments in consumer analytics, personalization, and high-value new customer acquisition.
Fourth, within our supply chain, we further diversified across geographies and meaningfully shortened lead times.
With approximately two-thirds of our products now in lead times of six months or less, two years ahead of our goal to reach 50% and compared to just 20% five years ago.
And lastly, we created a leaner more agile cost structure.
This operating discipline is enabling us to accelerate growth investments across areas like marketing, digital and our key city ecosystems, with further expansion in select under-penetrated markets this year.
Overall, these actions position our business for healthier, more sustainable growth as we emerge from COVID.
And beyond the foundational work we delivered this year, we strongly believe our brand is uniquely positioned to capture share, both during this transitional post-pandemic period and longer term.
Ralph has created a lifestyle brand, that is inclusive and marked by spirit of togetherness, optimism and love.
And we believe this is the kind of luxury that people are creating in this moment.
The breadth of our lifestyle portfolio means, we have the ability to continue meeting consumers desires through comfort and timeless elegance [Phonetic], while also delivering on their increasing appetite to reintegrate elevated Dress Your Styles back into their wardrobes.
Over the coming quarters, you will see us progressively evolve our assortments accordingly.
Before I speak to our growth drivers, I want to share a few of the highlights from our five strategic pillars this quarter and year.
First, on our efforts to win over a new generation.
Some of our key campaigns this year included our Ralph Lauren Bitmoji Collection on Snapchat, with over 1 billion try-ons to date.
Our first-of-its-kind Virtual Store Experiences, which now includes five of our iconic flagships globally.
Our Spring '21 Collection featuring a live performance from Janelle Monae, with over 36 million video views and more than 8 billion total impressions.
Our limited edition Polo collaboration with Edison Chen's CLOT brand, ahead of the Lunar New Year, which sold out in less than two minutes on our WeChat mini-program in China, and with over 6 billion total impressions.
And our debut sponsorship of the Australian Open, which resonated particularly well across Asia, and more still to come with our summer sports program, including the Tokyo Olympics starting in just over two months.
In all, we added approximately 4 million new consumers through our direct-to-consumer platforms alone this past fiscal year.
And our total social media followers exceeded 45 million led by Instagram, TikTok, Kakao and Snapchat.
This takes me to our priority of leading with digital.
Fiscal '21 was a transformational year in digitizing our consumer platforms and experiences, as well as how we work as a company.
And we were proud to deliver significant acceleration in digital performance across each of our regions, with total digital ecosystem growth of more than 60% this quarter.
We accelerated the roll-out of connected retail programs to enable our consumers to interact with our brands in new and more personal venues.
Among the many new capabilities we added this year, highlights included digital catalogs, Buy Online-Pick Up in Store, and curbside pickup, mobile checkout, contactless payments and Klarna payment installments.
Connected retail options now represent a high-single-digit percentage of our retail revenues in North America, and a high-teens percentage in Europe, up from low-single-digits in both regions prior to COVID.
We also continued to roll-out digital flagships in Japan and Hong Kong, while adding new partnerships with influential digital partners around the world like Farfetch.
In the fourth quarter, we also rolled out digital ID tagging to 50% of our total products, and are on track to reach a 100% by end of fiscal '22.
These not only enabled product authentication and support future circularity, but also provide consumers access to detailed product information.
In addition to our consumer-facing enhancements, we made significant stride this year in digitizing how we work as a company.
This includes the adoption of virtual showrooms and continuing to expand our 3D digital product creation.
Touching on our work to operate with discipline to fuel growth, we accelerated key actions this year to realign our cost structure, many of which I outlined at the outset of our call.
The third and final stage of our fiscal '21 strategic realignment plan was our announcement last week to sell Club Monaco, expected to close in Q1.
This sale, combined with our previously announced action on shifting Chaps to a licensed model, will enable us to further focus our resources on our core namesake brands.
Club Monaco has been an important parts of Ralph Lauren for over two decades now.
We believe that this is the right step forward for the brand, and we are confident in the brand's strong future under Regent's stewardship.
With this step, and the actions we've taken as part of our strategic realignment plan, we continue to progress on our brand elevation journey as we deliver Ralph's vision in today's dynamic environment, creating values for all of our stakeholders in fiscal '22 and beyond.
Importantly, I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do.
Navigating a highly dynamic global retail environment in the midst of COVID-19, our first priority was to ensure the safety and well-being of our employees, partners and communities.
This year, we donated hundreds of thousands of PPE to frontline workers, 3 million products to frontline workers and families in need, doubling our initial commitment, and $10 million in COVID-19 relief from the Ralph Lauren Corporate Foundation to support our employees, communities and charitable partners.
We were also proud to be named, once again, one of Forbes 2021 America's Best Employers for Diversity, capping off an important and defining year of employee engagement, round tables and learning opportunities for our organization.
Within sustainability, we launched our circularity strategy, as well as Color on Demand, the revolutionary platform aimed at delivering the world's first scalable zero waste water cotton dyeing system.
We are open sourcing the first phase of the platform to the fashion industry.
Our hope is that we will see broad industry adoption, so that together we can make progress in addressing one of our sectors' biggest area of impact.
We look forward to sharing our comprehensive progress on our citizenship and sustainability journey in our 2021 Design the Change report this June.
Looking to fiscal year '22, though still volatile given ongoing COVID closures and global supply chain disruptions, we are optimistic on a more favorable operating environment ahead.
Consistent with the five pillars of our Next Great Chapter plan, we expect top line growth over the next year to be driven by a combination of continuing to scale digital, which now represents more than 25% of our total sales, expanding our key city ecosystems led by fast-growing markets like China, in addition to our under-penetrated areas in North America and Europe, accelerating marketing investments, including new consumer acquisition, targeting and personalization, and continuing on our brand elevation journey more broadly across our distribution and product assortments, driving further AUR growth, coupled with unit growth.
Furthermore, we have confidence in a new post-pandemic fashion cycle based on the strong full-price performance of our Spring '21 collections.
Our consumers are starting to gravitate back to newness, color and the styles we are best known for, such as our Iconic mesh polos, blazers and denim.
This strength comes on top of the continued momentum we are seeing in fleece, tees, novelty sweaters and other casual styles that have resonated over the past year.
With our brand's unique ability to assort compelling products across sportswear, loungewear and dressier styles, we will meet consumers growing demand across these categories in the coming season.
In closing, Ralph and I want to reiterate how proud we are of the dedication, resilience and agility our teams have demonstrated as we worked through a challenging year on many levels.
We enter fiscal year '22 stronger than we came into the crisis.
With a stronger go-to market models and more streamlined cost structure, more resilient supply chain and an iconic brand well positioned to capitalize on the relax with sophisticated style consumers are craving.
As we look ahead, we have significant opportunity, and a world-class team focused on becoming an even more elevated, more direct-to-consumer, more digital, more global and more diverse equitable and sustainable company.
And before I pass it to Jane, a couple of updates regarding our Board.
Hubert Joly, will step into the role of Lead Independent Director, previously held by Frank Bennack, while Frank will continue to serve our Board.
With the extraordinary efforts of our teams around the world, we closed out the year significantly stronger than we came into it, in terms of both our financial performance as well as our key strategic initiatives.
Our fourth quarter and full year results reflected increased agility across our organization as macro conditions and consumer behaviors evolved, a significant leap forward on our elevation journey as we repositioned our distribution and accelerated our pricing gains, our digital transformation from how we serve our consumers to the way we work and driving digital margin accretion, and a better aligned operational and expense structure overall.
This year, we delivered the highest gross margin in the Company's history.
Even excluding the one-time mix benefits of COVID, our underlying gross margin for fiscal '21 was about 64.2%.
We also strengthened our balance sheet through this year of uncertainty, and are pleased to announce the reinstatement of our dividend in the first quarter of fiscal '22.
And as Patrice mentioned, we announced the final stage of our strategic realignment plan with the sale of Club Monaco, contributing about 40 basis points to 50 basis points to operating margins this year.
These actions set the right foundation and strategic focus for our teams as we enter fiscal '22.
Moving on to our fourth quarter performance.
Our business returned to growth in the fourth quarter.
Total revenues increased 1% compared to an 18% decline in the third quarter.
All regions improved sequentially with positive growth in Asia and Europe on a reported basis, despite continued COVID-related disruptions.
North America also returned to positive comps this quarter, driven by significant digital acceleration.
Global wholesale revenues increased 1% and direct-to-consumer revenues were up 4%.
Total digital ecosystem sales accelerated to more than 60% with double-digit growth in every region, up from mid-single-digits in the first nine months of the year.
And we delivered digital margins that were accretive within every region, and to our total Company rate, expanding more than a 1,000 basis points in the fourth quarter and full year.
We achieved this outstanding result through a combination of higher quality of sales and operating expense leverage.
This was an important step as we work toward our mid-teens Company operating margin target, and continue to drive digital expansion in the years to come.
Total Company adjusted gross margin was 62.9% in the fourth quarter, up 380 basis points to last year.
Gross margin expansion was primarily driven by strong AUR growth, along with favorable geographic and channel mix shifts.
Product costs were also lower as we lapped last year's tariff impacts in North America, partially offset by higher freight costs this year.
Around 80 basis points of fourth quarter and 150 basis points of full year gross margin expansion was driven by unusual mix shifts due to COVID.
Fourth quarter AUR growth of 30% represented our 16th consecutive quarter of AUR gains, as we continue on our brand elevation journey.
Underlying AUR growth of about 20% was driven by a combination of reduced promotional activity, improved full-price selling on our new Spring collections and strategic price increases.
Looking ahead, we remain confident in our long-term target of low-to-mid single-digit AUR growth, supported by the same multi-pronged strategy of product elevation, acquisition of new full-priced consumers and favorable channel and geographic mix, while also ramping up our targeting and personalization efforts.
Operating expenses declined 4% to last year, driven by reductions in compensation, rent and other expenses as we started to realize the early benefits of our fiscal '21 restructuring.
Adjusted operating margins for the fourth quarter was 3.4%, up 680 basis points to last year.
Marketing in the fourth quarter accelerated to 44% growth as we reactivated in-person activities, continue to drive high-impact digital campaigns and personalization, and shifted certain investments from the first three quarters of the year due to COVID lockdowns.
For the full year, marketing increased to 6% of sales, up from 4.5% the prior year.
With sales growth expected to accelerate in fiscal '22, we expect marketing to remain at an elevated level to support our long-term brand building, digital activations and key events like the Olympics, US Open and Wimbledon.
Moving on to segment performance, starting with North America.
Fourth quarter revenue decreased 10% to last year, but continued to improve on a sequential basis, including an earlier-than-expected return to positive retail comps, up 3%.
Comps in our owned digital commerce business were up 25% this quarter, accelerating from 9% in Q3.
Underlying sales to domestic consumers accelerated to over 50% up, from high-teens in Q3, while the sales to international daigou consumers declined double digits to last year, as planned.
We reduced our sitewide promotions by 50 days, compared to the prior year, as we continue to elevate our digital experience driving AUR up more than 40% and gross margins up more than 700 basis points to last year in the channel.
At the same time, we continue to invest in new consumer acquisition, up 78% in the fourth quarter and 45% for the full year.
These new consumers are transacting at higher gross margin rates and larger basket sizes, and represent a higher penetration of consumers under 35.
Stronger sales of new Spring '21 product offering, along with continued investments in connected retailing helped deliver a significant increase in our full-price sales this quarter, which grew more than a 150% to last year.
Brick-and-mortar comps improved sequentially to down 2% in the quarter, with meaningful improvements in AUR, basket size and conversion.
Traffic was down 23%, but inflected to positive growth in the last three weeks of March as we started to lap COVID shutdowns, while foreign tourist sales were down about 75%.
In North America wholesale, fourth quarter revenue declined 22%, as we continue to manage our sell-in carefully through the Spring season.
However, we were encouraged by positive sell-out performance, along with double-digit AUR increases to both last year and LLY.
Our inventories in the marketplace were clean and well positioned at year-end, declining nearly 30% at North America wholesale.
And we expect a meaningful turnaround in our sell-in trends as we enter Q1.
Our sales to off-price were down double-digits as planned, reducing our penetration to the channel by about 450 basis points for the full year.
Overall, we completed our distribution reset plans in North America this year across digital, department stores and off-price, enabling us to enter fiscal '22 with a healthier, more elevated brand positioning.
We ended fiscal 2021 with North America brick-and-mortar full price wholesale penetration at about 10% of total Company revenues, down from mid-teens last year, as we continue to accelerate our wholesale.com, direct-to-consumer and international expansion.
Looking ahead, we are encouraged by the positive momentum in our direct-to-consumer comps, including digital acceleration and quality wholesale improvement.
Moving on to Europe.
Fourth quarter revenue increased 5% on a reported basis, and was down 4% in constant currency.
Europe retail comps were down 45%, with 65% decline in brick-and-mortar stores, partially offset by continued acceleration in our own digital commerce, up 79%.
More than half our stores were fully closed in the quarter, similar to last spring.
Nevertheless, we were able to drive significantly better performance compared to our Q1 lockdown, as strong momentum across digital help to offset brick-and-mortar headwinds.
About 80% of our stores in the region are now fully open versus a little over 50% at the end of Q4.
Strong momentum in our own digital commerce comps was driven by new consumer acquisition and personalization, up 75%.
Europe wholesale revenue increased 29% in constant currency.
COVID-related challenges and brick-and-mortar wholesale were more than offset by stronger performance in our wholesale digital accounts.
This quarter's wholesale performance significantly exceeded our expectations, despite ongoing COVID headwinds, underscoring both the strength of our partnerships as well as our successful pivot to digital in the market.
And while COVID restrictions continue to pressure many of our key European markets into fiscal '22, we are encouraged that the UK, our largest market in the region emerge from lockdowns in mid-April and is showing early signs of pent-up demand.
Underlying macro indicators are also encouraging with an improving pace of vaccination roll-out, high levels of consumer savings, and consumer purchases shifting back toward our pre-COVID categories, this spring.
Revenue increased 35% on a reported basis, and 28% in constant currency in the fourth quarter.
Our Asian retail comps increased 23% with brick-and-mortar stores up 21%, and digital up, 59%.
All of our key markets reported positive growth, led by the Chinese mainland, which was up 145% in constant currency and more than 70% to LLY.
Korea also accelerated to 50% growth.
Japan, our largest market in the region, grew mid-single digits despite COVID restrictions in the first half of the quarter.
We are encouraged that our digital businesses continue to accelerate even as brick-and-mortar trends have strengthened.
This was supported by a successful Lunar New Year campaign with sales up 75% to LLY.
Strong momentum in our new digital flagships in China, Japan and Hong Kong, and powerful partnerships like Kakao and Tmall's Luxury Pavilion, where we became the Number 1 menswear brand this quarter.
Looking ahead, we are watching Japan carefully, due to a new state of emergency imposed in April, which is included in our Q1 guidance.
Nevertheless, we are encouraged that the rest of our key markets in Asia have returned to a more normalized growth trajectory.
And we still see significant long-term growth opportunities in the region, and particularly in China, which now represents about 6% of total Company revenues, nearly double the penetration from a year ago.
Moving on to the balance sheet.
We ended the year with $2.8 billion in cash and investments, and $1.6 billion in total debt, which compares to $2.1 billion in cash and investments and $1.2 billion in total debt last year.
Net inventory increased 3% to support future growth, compared to depressed levels of down 10% at the end of last year as COVID hit.
Looking ahead, our outlook is based on our best assessment of the current macro environment, which includes ongoing COVID-related disruptions to the global supply chain, as well as key markets still operating under government restrictions, primarily in Europe and Japan.
For fiscal '22, we expect constant currency revenues to increase approximately 20% to 25% to last year on a 52-week comparable basis.
We expect double-digit growth in each region, led by Europe and North America, due to the significant COVID-related closures in the prior year.
We estimate the 53rd week will contribute an additional 140 basis points to this year's revenue growth.
We expect gross margins to contract 40 basis points to 60 basis points as we lap last year's unusual geographic and channel mix benefits due to COVID closures.
This implies about a 100 basis point expansion to last year's underlying gross margin ex-COVID.
Gross margins should benefit from product mix, reduced costs following organization reshaping, as well as further improvements in pricing.
We expect these drivers to be offset by duties, significantly higher freight costs, and global supply chain pressures, notably in the first quarter and consistent with the broader industry.
Overall, we are watching a highly volatile and inflationary input cost environment into fiscal '22.
SG&A should grow at a more moderate rate than revenues.
Inflation, along with continued investments in marketing, new stores and digital will be mitigated by continued expense discipline and restructuring savings.
As a result, we expect operating margins of about 11%, expanding approximately 620 basis points to last year, and exceeding our pre-pandemic levels.
As previously discussed, we deliberately exited or reduced several areas of our business in fiscal '21 to accelerate our brand elevation strategy.
These include, transitioning Chaps from an owned to a fully licensed model, exiting more than 200 US department store doors, significantly reducing our off-price business, and shrinking our exposure to international daigou sales on our ralphlauren.com site in North America.
Combined with the sale of Club Monaco, expected to close in the first quarter, these strategic actions represent a little more than $700 million in revenues compared to fiscal '20.
This implies expected fiscal '22 revenues that are roughly flat to pre-pandemic levels on an underlying basis.
For the first quarter, which still includes the operational results of Club Monaco, we expect revenues to increase approximately 140% to 150% in constant currency.
We expect gross margins to decline approximately 575 basis points, as we lap last year's one-time COVID mix benefits due to store closures and from higher freight headwinds in the quarter.
We expect operating margin of 7% to 7.5% with gross margin contraction more than offset by significant operating expense leverage.
We expect to end fiscal '22 with inventories up 12% with higher growth in the first half of the year, as we continue to build back into demand.
We expect capital expenditures of approximately $250 million to $275 million, in line with our pre-pandemic targets, as we continue to focus on building out our key city ecosystems and digital infrastructure.
In closing, in the midst of an unprecedented year, our teams showed tremendous dedication and agility as we fundamentally strengthened our business.
Led by Ralph's enduring vision, we are leveraging the timelessness and authenticity of our core brands, while taking on learnings to evolve with the changing needs of the consumer across our product, platforms and new ways of working.
And while we are still navigating a highly dynamic environment, we are confident we have the right foundation to drive sustainable growth over the coming year and beyond. | north america revenue in q4 decreased 10% to $569 million.
for fiscal 2022, expects constant currency revenues to increase approximately 20% to 25% to last year on a 52-week comparable basis.
europe revenue in q4 increased 5% to $370 million.
asia revenue in q4 increased 35% to $289 million on a reported basis.
for q1, revenues are expected to increase approximately 140% to 150% in constant currency to last year.
planning capital expenditures for fiscal 2022 of approximately $250 million to $275 million.
inventory at end of fiscal 2021 was $759 million, up 3%.
for the first quarter, revenues are expected to increase approximately 140% to 150% in constant currency to last year.
qtrly owned digital sales increasing 52% to last year, total digital ecosystem sales up more than 60%.
joel fleishman will not stand for reelection for his term set to expire at end of july at 2021 annual meeting.
ralph lauren - hubert joly appointed to serve as board’s new lead independent director replacing frank bennack. |
On the call today to discuss our quarterly results are our CEO, Mick Farrell; and CFO, Brett Sandercock.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions; however, our actual results may differ.
Since this COVID-19 pandemic began in January, ResMed has produced hundreds of thousands of ventilators, providing the gift of breath to people in need in 140 countries worldwide.
We continue to support frontline respiratory medical professionals, healthcare providers, patients and our teammates, ResMedians, so they are all safe and healthy.
We also continue to provide ventilators as local state and national healthcare providers are facing second and third waves of COVID-19 cases and associated hospitalizations.
In our core markets, the patient diagnosis trends in sleep apnea, COPD, asthma and beyond are steadily increasing as well as prescription therapy flow from those diagnoses.
Growing numbers of people are returning to healthcare systems, including primary care as well as specialist care.
We are seeing more healthcare systems come back online through telehealth and in-person visits.
Overall treatment capacity as well as capacity utilization rates of those systems are both increasing.
We have seen a steady sequential, what we would call U-shape recovery of patient flow to primary care physicians as well as then to specialist physicians across the 140 countries that we serve.
This is just as we forecast 90 days ago on our Q4 earnings call.
We expect this same patient flow growth trend to continue throughout fiscal year 2021.
In my remarks today, I'll provide a high-level overview of our Q1 business results, and then I'll hand over to Brett to walk us through further detail.
I will also review progress toward our ResMed 2025 strategic goals, including execution of highlights against our quarterly as well as our annual operating priorities.
Today, we have reported high single-digit growth in top-line revenue and strong double-digit growth in both net operating profit as well as earnings per share.
These results speak to our team's ability to nimbly pivot to meet short-term needs for emergency ventilators while also investing for the long-term growth in our core markets of sleep apnea, COPD, asthma, and out-of-hospital medical software.
Our investments in research and development for digital health technology have accelerated these last nine months as we see increasing demand from patients, physicians, providers as well as healthcare systems as they embrace digital health through remote patient engagement as well as population health management technology.
During the first quarter of fiscal year 2021, we generated over $144 million of cash, allowing us to return $57 million of cash as dividends to our shareholders.
At the same time, though, we have increased our research and development investments at double-digit rates, including investments in digital health clinical research as well as hardware and software innovation across both our med tech and our Software as a Service businesses.
We have a very full pipeline of innovative solutions that will generate both medium and long-term value for customers with an industry-leading intellectual property portfolio of over 6,000 patents and designs.
Our digital health ecosystem is an important competitive advantage for ResMed that offers integrated care to drive superior clinical outcomes, to drive better patient experiences and to drive lower total healthcare system costs.
We now have over 7 billion nights of respiratory medical data in our cloud-based Air Solutions platform.
We've provided over 12.5 million 100% cloud-connectable medical devices to customers.
And we have over 14 million patients enrolled in our AirView software solution.
During our last earnings call, I discussed how COVID-19 has accelerated the rapid adoption of digital health technology around the world, including a recognition of the value of remote patient monitoring, virtual diagnosis, and the rapid evolution of digital reimbursement models.
We have seen much greater collaboration between the med tech industry and governments globally, not just in ventilators, but well beyond.
An encouraging example of this was just a few days ago when the U.S. Centers for Medicare & Medicaid Services, or CMS, announced that it will be maintaining current reimbursement rates in our product categories in January 2021.
This is great news.
And in part, it is due to industry feedback that it was inappropriate to make unnecessary changes, particularly during an ongoing COVID-19 public health emergency, and really importantly, that current rates were appropriate for the services being provided.
We've also seen governments in Germany, France, Japan, and across the U.S. adopt models to facilitate digital health and remote care that will be important, not only during this pandemic but well beyond.
This is better healthcare at lower costs, leveraging technology.
These trends support ResMed's 2025 strategy, and we believe that the accelerated adoption of digital health solutions represents a significant medium and long-term tailwind for our business.
These three trends: one, the increased importance of respiratory medicine; two, the increased importance of digital health; and three, the increased importance of out-of-hospital healthcare, will all help ResMed meet and beat our goal of growing volume at double digits from 2020 through 2025 and improving over 250 million lives by 2025.
Let me now highlight a few examples of innovation and execution in support of our strategic priorities.
Just a recap of our strategy priorities: a, to grow and differentiate our sleep apnea, COPD and asthma businesses; b, to design, develop, and deliver world-leading medical devices and digital health solutions; and c, to innovate and grow the world's-best software solutions for care delivered away from the hospital.
In our core market of sleep apnea, we introduced our latest mask innovation in September.
It's called the AirTouch N20.
This innovation is the first nasal mask with a memory foam cushion.
As a patient myself, I'm happy to say that this is ResMed's softest nasal mask ever.
The memory foam technology of the AirTouch N20 adapts to the curves and contours of the person's face, creating a personalized fit that is designed to increase comfort and to make it easier for the patient to adhere to sleep apnea therapy.
The adherence rates for ResMed solutions are the best in the industry.
And it is innovation and technology like this new AirTouch N20 that helps get us there.
Our mask portfolio is crafted to offer physicians market-leading options for prescribing for each patient.
To enable home care providers to successfully fit the patient the first time every time and to satisfy the desires of the ultimate customer.
That's the person who suffocates each night with sleep apnea.
Our focus on innovation to meet customer needs will never end.
We are innovating with smaller, quieter, more comfortable, more connected and more intelligent solutions every day.
We have an exciting pipeline ahead.
Let me now turn to a discussion of our respiratory care business, focusing on our strategy to deliver better care for COPD and asthma patients worldwide.
During the June quarter, we launched, in Europe, an upgraded version of our AirView cloud-based remote monitoring software, specifically designed for our ventilation solutions.
This solution called AirView for ventilation provides remote monitoring capability, allowing clinicians to quickly access clinical data from ResMed ventilation devices wherever they are, and to allow them to more easily triage and prioritize both chronic needs and acute needs for ventilated patients.
This completely reimagined platform transforms the management of ventilated patients, allowing doctors, nurses and all clinicians and care providers to ascertain powerful patient insights from huge respiratory medical data sets.
Adoption of the AirView for ventilation solution has been rapid and strong.
Our team was really thrilled to deliver for our customers during the COVID emergency with this solution, but the value that is being provided by AirView for ventilation is ongoing for physicians and healthcare systems.
We are making digital health part of the standard of care.
During the quarter, we expanded the reach of our market-leading Propeller Health technology, specifically through our partnership with pharmaceutical company, Novartis.
During the quarter, Novartis announced the launch of two new once-daily medications to treat uncontrolled asthma in Japan.
These products are called Enerzair and Atectura Breezhaler.
In this market, patients using either the Enerzair or the Breezhaler manage their uncontrolled asthma will be able to acquire a Propeller technology sensor from physicians and then enroll in our Propeller digital health platform.
The benefits of the platform are tremendous.
The offering is a simple and convenient way to better live with sleep apnea with a fully integrated digital experience, with no incremental cost to the patient.
It's great to see our Novartis partnership expanding to include now both Europe and Japan, leveraging our world-leading Propeller technology.
Let me now briefly review our out-of-hospital Software as a Service business.
During the quarter, our SaaS business grew in the mid-single digits year on year, driven by continued strong uptake of our HME resupply solutions.
The COVID-19 market dynamics continue to impact the patient census volumes, particularly at skilled nursing facilities, and new patient admissions have remained under pressure.
We are maintaining our forecast that the SaaS market growth rate will be in the mid-single-digit range for the portfolio of verticals that we serve for fiscal 2021.
We expect the portfolio to return to high single-digit growth as hospital and other outpatient surgery center discharge rates return to normal.
We continue to invest in research and development for our SaaS businesses so that we continuously improve on our market-leading solutions in home medical equipment, skilled nursing facilities, home health, hospice as well as private duty home care and life plan communities.
As this portfolio of SaaS verticals returns to high single-digit growth, ResMed will continue to be there with our R&D resulting in leading Brightree and MatrixCare branded technology solutions, allowing us to better serve customers and, therefore, to not just meet but to beat that market growth rate.
A year ago, we announced that ResMed would begin collaborating with Cerner Corporation to help clinicians make more informed treatment decisions to control costs and to deliver seamless care across healthcare systems, from the hospital to the home.
We have now integrated our MatrixCare branded home health and hospice platform with the electronic health record or EHR system from Cerner.
I'm excited to let you know that we've expanded our relationship with Cerner to new offerings and have now entered into a new value-added reseller arrangement with Cerner.
This establishes our Brightree technology as the preferred solution for Cerner's home medical equipment, pharmacy, and home infusion customers.
This development is the next step in the ResMed-Cerner relationship and will lead to better interoperability, it will lead to enhanced provider capabilities, and it will lead to an improved patient experience.
Overall, this partnership is performing above expectations for both ResMed and Cerner.
We anticipate opportunities to deepen and expand this collaboration to involve our core markets of sleep apnea, COPD, and asthma disease management over time.
In summary, the SaaS portfolio is performing well and remains an important driver of our digital transformation of healthcare in settings outside the hospital.
2020 has been an unprecedented year for companies across every industry.
The fundamentals of our ResMed business, however, remains strong, and we've maintained growth through this crisis through breakthrough innovation, through investments in recurring revenue businesses and effective execution in our operating excellence programs.
COVID-19 has accelerated digital health adoption as well as awareness of respiratory hygiene and respiratory health.
The importance of respiratory medicine, the importance of digital health and the importance of healthcare delivered away from a hospital.
These trends are present during COVID, but they're here to stay.
You have allowed hundreds of thousands of people around the world to get emergency ventilators and to have the gift of breath, while also keeping focus on making sure we have the best technology and solutions now and in the future for sleep apnea, COPD, asthma, and all those who need world-class care outside the hospital and preferably in their own home.
With that, I'll hand the call now over to Brett in Sydney, and then we'll go to Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2021 and some remarks on our FY '21 outlook.
As Mick noted, we had a strong quarter.
Group revenue for the September quarter was $752 million, an increase of 10% over the prior-year quarter.
In constant currency terms, revenue increased by 9% compared to the prior year quarter.
Revenues for the first quarter were favorably impacted by continued demand for ventilator devices and accessories.
We estimate that the incremental revenue benefit from ventilator devices and related accessories derived from COVID-19 demand was approximately $40 million in the first quarter.
Additionally, we experienced strong mask revenue growth in both our domestic and international markets.
However, we did observe continuing headwinds in the sleep device market.
Taking a closer look at our geographic distribution, and excluding revenue from our Software as a Service business, our sales in U.S., Canada, and Latin America countries were $403 million, an increase of 9% over the prior-year quarter.
Sales in Europe, Asia and other markets totaled $257 million, an increase of 15% over the prior-year quarter or an increase of 10% in constant currency terms.
By product segment, U.S., Canada, and Latin America device sales were $197 million, an increase of 6% over the prior-year quarter.
Masks and other sales were $206 million, an increase of 12% over the prior-year quarter.
In Europe, Asia and other markets, device sales totaled $176 million, an increase of 16% over the prior-year quarter or in constant currency terms, an 11% increase.
Masks and other sales in Europe, Asia, and other markets were $81 million, an increase of 12% over the prior-year quarter or in constant currency terms, an increase of 8%.
Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 11% over the prior-year quarter.
Software as a Service revenue for the first quarter was $92 million, an increase of 6% over the prior-year quarter.
On a non-GAAP basis, SaaS revenue increased by 4%.
During my commentary today, I will be referring to non-GAAP numbers.
The non-GAAP measures adjust for the impact of amortization of acquired intangibles, the purchase accounting fair value adjustment to MatrixCare deferred revenue and the fair value adjustment of equity investments.
Our non-GAAP gross margin improved by 30 basis points to 59.9% in the September quarter compared to 59.6% in the same quarter last year.
The increase is predominantly attributable to favorable product mix and foreign exchange rate movements, partially offset by increased costs associated with logistics and procurement costs, together with typical declines in average selling prices.
The cost increases largely reflect the impact of COVID-19 and our rapid ramp-up of ventilator production.
We saw elevated airfreight costs relative to the prior year, but these are tracking sequentially lower, particularly as we rebalance from air freight to sea freight.
Moving on to operating expenses.
Our SG&A expenses for the first quarter were $159 million, a decrease of 5% over the prior-year quarter, or in constant currency terms, SG&A expenses decreased by 7% compared to the prior year period.
SG&A expenses as a percentage of revenue improved to 21.1% compared to 24.6% we reported in the prior-year quarter, benefiting from cost management and reduced travel as we work through the uncertain COVID-19 environment.
Looking forward, we expect SG&A expenses in Q2 to be broadly consistent with the prior year period and then in the second half of FY '21 to increase in the low single digits relative to the prior-year period.
R&D expenses for the quarter were $55 million, an increase of 14% over the prior-year quarter, or on a constant currency basis, an increase of 12%.
R&D expenses as a percentage of revenue was 7.3% compared to 7.1% in the prior year.
We continue to prioritize our investments in innovation because we believe our long-term commitment to technology and product development will deliver a sustained competitive advantage.
Looking forward, we expect R&D expenses to continue to grow year over year in the high single digits to low double digits, reflecting our commitment to innovation through the economic cycles.
Total amortization of acquired intangibles was $20 million for the quarter, and stock-based compensation expense for the quarter was $16 million.
Non-GAAP operating profit for the quarter was $237 million, an increase of 24% over the prior-year quarter, reflecting strong top-line growth, expansion of gross margin, and well-managed operating expenses.
On a GAAP basis, our effective tax rate for the September quarter was 17.4%, while on a non-GAAP basis, our effective tax rate for the quarter was 18.5%.
Looking forward, we estimate our effective tax rate for the full fiscal year 2021 will be in the range of 17% to 19%.
Non-GAAP net income for the quarter was $185 million, an increase of 37% over the prior-year quarter.
Non-GAAP diluted earnings per share for the quarter were $1.27, an increase of 37% over the prior-year quarter.
Our GAAP diluted earnings per share for the quarter were $1.22.
Cash flow from operations for the quarter was $144 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $14 million.
Depreciation and amortization for the September quarter totaled $39 million.
During the quarter, we paid dividends of $57 million.
We recorded equity losses of $2.3 million in our income statement in the September quarter associated with the Verily joint venture.
We expect to record equity losses of approximately $3 million in Q2 and approximately $5 million per quarter in the second half of FY '21 associated with the joint venture operation.
We ended the first quarter with a cash balance of $421 million.
At September 30, we had $1.1 billion in gross debt and $635 million in net debt.
Our debt levels remained modest.
And at September 30, we had a further $1.2 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
However, I also want to highlight that in these times of uncertainty, we are maintaining a disciplined approach, and we are tightly managing expenses, cash flow, and liquidity.
Today, our board of directors declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance.
Turning now to our FY '21 outlook.
At a high level, we are now seeing a minimal COVID-19-generated demand for our ventilators and do not expect any incremental benefit in Q2 and beyond.
Additionally, we expect to see a continued year-on-year headwind for sleep devices in Q2 in response to temporary reduction in the diagnosis of new patients.
However, at this time, we continue to forecast a sequential improvement in sleep devices through the course of FY '21.
Masks and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base.
We expect to see continued year-on-year growth of our mask portfolio in FY '21.
Of course, like many other companies, we continue to experience significant uncertainty in the current environment.
And as a result, our forecast and possible future revenue outcomes remain dynamic.
And with that, I will hand the call back to Amy.
Let's now turn to the Q&A portion of the call.
[Operator instructions] Cheryl, let's go ahead and start the Q&A. | q1 non-gaap earnings per share $1.27.
q1 gaap earnings per share $1.22. |
With me on the call today are ResMed's chief executive officer, Mick Farrell; and chief financial officer, Brett Sandercock.
During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, our president and chief operating officer; Jim Hollingshead, the president of our sleep & respiratory care business; and David Pendarvis, chief administrative officer and global general counsel.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions, however, our actual results may differ.
Our first quarter results demonstrate strong performance across our business, void by extremely high demand for our sleep and respiratory care devices as well as continuing recovery of many markets from COVID-19.
We achieved double-digit growth at both the top and bottom line metrics of our business.
I want to be clear that achieving these results has not been that easy in this quarter.
We are dealing with an unprecedented, what I would call, perfect storm of elements, including the COVID recovery but also including a competitor recall that's ten-fold higher than any in the industry to date, and supply chain constraints that are impacting not only our industry but multiple industries worldwide.
I'm incredibly proud of ResMedians across our global teams, many of whom are working 24/7 to get our products and solutions into the hands of patients who need them most.
Despite these extraordinary efforts, we know that we have not been able to meet all of the demand.
As such, the market leader, our competitor, that is in the not No.
2 market share position, announced a recall mid-June that has created unprecedented dislocations in the market.
In effect, we are facing the challenge of providing the volume for our own No.
1 market share position and also trying to meet as much of the No.
2 market share position as possible around the world.
Given the supply chain crisis, our suppliers have been allocating components to us on the inbound side.
We have, in turn, been forced to allocate our products on the outbound side to our customers.
We have been clear on the guiding principles for that allocation of our products.
Namely that we are giving priority for production and delivery of these devices to meet the needs of the highest acuity patients first.
The allocation conversations that I have with our customers are the same ones that I am having with my suppliers and their suppliers and so on up the supply chain.
As an example, during the quarter, I was on a Zoom call with one of our suppliers, suppliers, suppliers, suppliers, suppliers, suppliers, and I'm not kidding.
We have achieved the goal with that manufacturer and we received increased allocation from that manufacturer.
But then we face the challenge, and are still facing it, of working with the five customers of theirs.
All the way down that chain to get to us to ensure that the agreed upon increased allocation of that component actually gets to ResMed, gets manufactured into ResMed products, and then sent to ResMed customers and ultimately to patients.
That's just one example of a high degree of difficulty dive for our supply chain team.
The supply chain analyses and negotiations are ongoing, and the situation is very, very fluid, and changing day by day, week by week and month by month.
We have an incredible Six Sigma Black Belt laden team of supply chain specialists working on these issues 24/7.
In short, supply bottlenecks continue to restrict our access to critical electronic components, especially semiconductor chips, that ultimately limit our net production output.
In addition to component supply issues, the ongoing challenges of seafreight and airfreight from manufacturing facilities to the distribution warehouses, and ultimately, the customers are increasing our costs and further impacting our ability to respond as rapidly as we want to the huge demand for ResMed products.
The combination of component shortages and transportation bottlenecks makes providing steady and smooth flow of products to the market very difficult.
We are working incredibly closely with our global supply chain partners, doing everything we can to gain access to additional supply of the critical components that we need further increase production of our medical devices.
We will continue to coordinate with all stakeholders as the situation develops.
We understand that this is a difficult situation for all of our customer groups, including physicians, home medical equipment providers, payers, and the most important customer, the patient.
1 priority will always be patients, doing our best to help those who need treatment for sleep apnea, for COPD, for the asthma and for other chronic respiratory diseases as well as critical out-of-hospital care.
Our goal is to ensure that patients get the therapy that they need, where they need it and when they need it.
Let's now discuss the overall market conditions in our industry.
We are also seeing a steady ongoing recovery of demand in the countries that we operate in.
They remain at various stages of the post-COVID peak recovery process in terms of patient flow.
We are still seeing a divergence in total patient flow and sleep lab capacity from 75% to 95% of pre-COVID levels in some countries, up to 100% plus of pre-COVID levels in others.
These metrics will now continue to ebb and flow as vaccines and boosters roll out globally and as new variants of the coronavirus arise and cause temporary perturbations.
Our global ResMed team remains committed to working with national, state, and city governments, as well as the local health systems, hospitals and healthcare providers to supply the ventilators, the masks and the training for acute care and the transition home for affected patients.
Let me now update you on our three strategic priorities as we pivot back to grow our core business.
These three are, one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop, and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and three, to innovate and then grow in the world's best software solutions for care delivered outside the hospital and especially in the home.
In August, we launched our next-generation device platform that we call AirSense 11 into the United States market.
In short, that launch has been very successful.
We will be introducing the AirSense 11 into additional countries very soon.
Our market-leading R&D team accelerated the launch of this amazing innovation.
So, first, by expanding the controlled product launch to additional customers and then accelerating to an earlier full product launch date to bring this product to market faster.
Globally, we continue to sell our market-leading legacy platform, the AirSense 10, to be able to maximize the total volume of CPAP, APAP, and bi-levels available for customers.
Clearly, the ongoing adoption of both the AirSense 10 and the AirSense 11 platforms remains very, very strong.
It's still early into the SirSense 11 launch but initial customer feedback, combined with the detailed responses to our controlled product launch, tells me that the AirSense 11 is also another success for ResMed.
Physician, provider, and patient feedback are all very positive.
I was able to attend the California Sleep Society meeting in person actually during the quarter, and I was able to observe this firsthand the responses to the latest innovations on the AirSense 11, such as personal therapy assistant, care check-in, and the incredible rate of uptake of the patient-centric app called myAir, which has been upgraded for AirSense 11.
And the uptake on that is almost double what it was for the myAir app than AirSense 10.
What's clear to me is that this platform, the AirSense 11, benefits not only patients and their bed partners.
In addition, the device and software combination benefits physicians, it benefits providers, and it benefits payers as well as entire healthcare systems with more data, more insights, and better outcomes.
As a two-way digital health comms platform with many technical features of -- that represent significant therapeutic advances, AirSense 11 is not only easy to set up and use, it also offers a very rich patient-centric experience.
All AirSense 11 devices are 100% cloud connectable with upgraded digital health technology that is able to increase patient adherence to improve clinical outcomes and to deliver proven cost reductions within healthcare providers and physician's own health systems.
We are engaging with patients in their therapy digitally like never before in the industry.
This is a critical part of the ResMed 2025 strategy as presented at Investor Day, which we held virtually during this last quarter.
Another key aspect of our long-term growth is linked to the awareness and the increasing flow of sleep apnea patients.
With 936 million sleep apnea sufferers worldwide, this work is critical to our mission.
COVID-19 has advanced awareness, adoption, and your acceptance of digital health and remote care, including home-based sleep apnea tests.
We want to support seamless and cost-effective approaches to sleep diagnostics.
We want to scale technology that in our consumer markets enables an easy-to-use device experience and technology that in our reimbursed markets, can be a low-cost, clinically reliable, screening tool for sleep apnea.
In this vein, on October 1st, we then closed a transaction to acquire Ectosense, a leader in cloud connected home sleep apnea testing technology from Belgium.
We believe Ectosense's digital and easy-to-use solutions in the hands of both physicians and sleep lab technicians, as well as consumers, can help significantly increase sleep apnea diagnosis rates, as well as general sleep awareness.
Ectosense will operate within our sleep and respiratory care business unit, we're excited to bring this innovative technology to more global markets as we move forward.
Let me now turn to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD patients and the 330 million asthma patients worldwide.
Our long-term goal is to reach hundreds of millions of patients with our respiratory care solutions, such as noninvasive ventilation and life support ventilation as well as newer therapeutic areas such as cloud-connected pharmaceutical delivery solutions and high-flow therapy offerings.
Demand for our core noninvasive ventilation and life support ventilation solutions for COPD and the -- beyond was strong throughout the quarter, especially in markets outside the United States, where physicians and providers shifted focus to support the most severe, highest acuity patients.
This demand is aligned with our strategy to ensure priority for manufacturing and delivery of the devices that meets the needs for patients, specifically those that need life support ventilation or noninvasive ventilation, including bi-level support, first.
We are balancing the growth in the respiratory care demand with the supply of ventilators that made it to market throughout the coronavirus pandemic as well as customers as they balance their inventory with ongoing acute and chronic ventilation patient needs.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago, and then we continue to really expand this technology to regions around the world.
The value being provided through AirView for ventilation has been very helpful to physicians not only during COVID, but it is increasingly valuable on an ongoing basis for them and the healthcare systems that they operate in.
In the not-too-distant future, I can see that AirView becoming standard of care for patients on home-based ventilation protocols in many healthcare systems.
Let me now review our Software-as-a-Service business for out-of-hospital care.
During the quarter, our SaaS business grew in the mid-single digits year-on-year across our portfolio of markets, including home medical equipment, as well as facility-based and home-based care settings.
The continued growth of home-based care is providing tailwinds for our home medical equipment and our home health products, and we continue to grow with customers as they utilize our software and data solutions, including Brightree and Snap ReSupply to improve and optimize business efficiencies and patient care.
The COVID-19 pandemic has also been challenging for some verticals in our SaaS business, particularly skilled nursing facilities.
However, we are seeing positive trends as census rates of patients improve across SNFs and other facility-based care settings.
We will continue to watch this closely as COVID cases ebb and flow at a really slower and slower rates around the country.
We expect there to be pent-up demand for technology investments in these SaaS verticals, which provides opportunities for us to increase our new customer pipeline that the COVID restrictions continue to ease.
As we look at our portfolio of software solutions, we expect SaaS revenue to accelerate, increasing from mid single-digit growth to high single-digit growth by the back end of this fiscal year.
As always, our goal is to meet or beat these market growth rates as we continue to innovate and take market share.
We are the leading strategic provider of SaaS solutions for out-of-hospital care, and we provide mission-critical software across a broad set of very attractive markets.
We are uniquely positioned, and we have created this differentiated value for ResMed with our SaaS portfolio.
We are set up for sustainable growth through ongoing innovation investments, commercial excellence partnerships and future acceleration through strategic M&A as well as selective tuck-in M&A opportunities.
Looking at the portfolio of ResMed's business across sleep and respiratory care as well as our SaaS solutions, and we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our patient-centric, physician-centric, and provider-centric approach, combined with our unique ResMed culture means that we are well positioned to continue winning in the vastly underserved respiratory medical markets of sleep apnea, COPD, asthma, and other chronic diseases.
We are transforming the out-of-hospital care at scale.
We are leading the market in digital health technology.
With over 10 billion nights now, 10 billion nights of medical data in the cloud and over 15.5 million, 100% cloud connectable medical devices on bedside tables in 140 countries worldwide, we are unlocking value from these data to help patients, providers, physicians, payers, and entire healthcare systems.
Our mission and goal to improve 250 million lives through better healthcare in 2025, drives and motivates me and ResMedians every day.
We again made excellent progress toward that goal this quarter.
You, our ResMed team, have helped save the lives of many hundreds if not thousands of people around the world with COVID-19 with those emergency needs these last 18 months.
And you are now, and you have now already, pivoted back to provide ongoing support for all our customers during some of the most challenging industry dynamics that we've seen in the industry.
With that, I'll hand the call over to Brett in Sydney, and then we'll open the call up for Q&A.
In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2022.
As noted, all comparisons are to the prior year quarter.
Group revenue for the September quarter was $904 million, an increase of 20%.
In constant currency terms, revenue increased by 19%.
Revenue growth reflected increased demand for our sleep and respiratory care devices, driven by both sleep patient flow recovering from COVID-19 impacted reduced levels experienced in the prior year quarter and by increased demand in response to the recent product recall by one of our competitors.
In the September quarter, we estimate the incremental revenue from COVID-19-related demand was approximately $4 million, compared to $40 million estimated incremental revenue from the COVID-19-related demand in the prior year quarter.
And excluding the impact of COVID-19-related revenue in both the September 2021 and September 2020 quarters, our global revenue increased by 25% on a constant currency basis.
Looking forward, we expect negligible revenue from COVID-19-related demand.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $80 million to $90 million in the September quarter.
So, taking a look at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada and Latin America countries were $491 million, an increase of 22%.
Sales in Europe, Asia, and other markets totaled $315 million, an increase of 23% and or an increase of 21% in constant currency terms.
By product segment, U.S., Canada and Latin America device sales were $276 million, an increase of 40%.
Masks and then other sales were $215 million, an increase of 5%.
In Europe, Asia and other markets, device sales totaled $218 million, an increase of 24% or in constant currency terms, a 22% increase.
Masks and other sales in Europe, Asia, and other markets were $97 million, an increase of 21%, or in constant currency terms, an 18% increase.
Globally, in constant currency terms, device sales increased by 31% while masks and other sales increased by 8%.
Excluding the impact of COVID-19-related sales in both the current quarter and the prior year quarter, global device sales increased by 44% in constant currency terms while masks and other sales increased by 10% in constant currency terms.
Software-as-a-Service revenue for the September quarter was $98 million, an increase of 6% over the prior year quarter.
For the balance of fiscal year '22, we expect several factors will drive demand, including the general recovery of the global sleep market from COVID-19 impacts, the ongoing launch of our next-generation AirSense 11 platform into markets and geographies, and share gains during our competitors' recall.
However, as reported last quarter, while we are working hard to increase manufacturing output, we will not be able to meet the expected demand resulting from our competitors' recall, primarily because of significant and ongoing supply constraints for electronic components.
And so as Mick discussed earlier, we're operating a very dynamic supply chain environment.
Based on the latest information available, we continue to expect component supply constraints will limit the incremental device revenue resulting from competitor's recall to somewhere between $300 million and $350 million for fiscal year 2022.
This includes the device revenue we were able to generate in Q1.
In particular, we now do not see any improvement in our component supply position until our fourth quarter of FY '22.
During my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin decreased by 270 basis points to 57.2% in the September quarter, compared to 59.9% here in the same quarter last year.
The decrease is predominantly attributable to higher manufacturing and freight costs, ASP declines, and unfavorable currency movements, which has been partially offset by a positive product mix, particularly in relation to this strong growth of our higher acuity devices.
Moving on to operating expenses.
Our SG&A expenses for the first quarter were $177 million, an increase of 11%, or in constant currency terms, SG&A expenses increased by 10% compared to the prior year period.
The increase was predominantly attributable to an increase in employee-related expenses.
SG&A expenses as a percentage of revenue have improved to 19.5%, compared to the 21.1% we reported in the prior year quarter.
Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 20% to 22% for this balance of the fiscal year '22.
R&D expenses for the quarter were $60 million, an increase of 10%, or on a constant currency basis, an increase of 9%.
R&D expenses as a percentage of revenue was 6.6%, compared to 7.3% in the prior year quarter.
We continue to make significant investments in innovation because we believe our long-term commitment to technology, product, and solutions development will deliver a sustained competitive advantage.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the balance of fiscal year '22.
Total amortization of acquired intangibles was $19 million for the quarter, and stock-based compensation expense for the quarter was around $17 million.
Our non-GAAP operating profit for the quarter was $281 million, an increase of 18%, underpinned by strong revenue growth.
During the quarter, we finalized the deed of settlement with the Australian Taxation Office, or ATO, covering transit pricing audits for the years 2009 through 2018, and also agreed on transfer pricing principles for the future.
And in anticipation of this settlement, we had previously estimated and recorded an accounting tax reserve of $249 million, net of credits and deductions in our FY '21 financial results.
In relation to the conclusion of the settlement in the current quarter, we recorded an additional GAAP tax expense of $4 million associated with lower tax credits, which were driven by foreign currency movements.
So, on a GAAP basis, our effective tax rate for the September quarter was 21.3% while on a non-GAAP basis, our effective tax rate for the quarter was 20%.
Looking forward, we estimate our non-GAAP effective tax rate for the fiscal year '22 will be in the range of 19% to 20%.
Non-GAAP net income for the quarter was $222 million, and an increase of 20%.
Non-GAAP diluted earnings per share for the quarter were $1.51, an increase of 19%.
Our GAAP net income for the quarter was $204 million, and our GAAP diluted earnings per share for the quarter was $1.39.
We had negative cash flow from operations for the quarter of $66 million due to the payment of about $285 million to the Australian Taxation Office associated with the deed of settlement.
After adjusting for this payment, our operating cash flow for the quarter was $219 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $27 million.
Depreciation and amortization for the quarter September totaled $39 million.
During the quarter, we paid dividends of $61.2 million.
We recorded equity losses of $1.4 million in our income statement in the September quarter associated with the Primasun joint venture with Verily.
We expect to then report equity losses of approximately $2 million per quarter through the balance of fiscal year '22 associated with the joint venture operations.
We ended the first quarter with a cash balance of $276 million.
At September 30, we had $806 million of gross debt and $530 million in net debt.
Our debt levels remained modest, and at September 30, we had almost $1.5 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declare our quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provides flexibility in how we allocate capital.
And going forward, we plan to continue to reinvest for growth through R&D.
We will also likely continue to deploy capital for tuck-in acquisitions such as Citus Health and Ectosense, an acquisition we made on October 1.
And with that, I will hand the call back to Amy. | q1 earnings per share $1.39.
q1 revenue rose 20 percent to $904 million.
qtrly non-gaap diluted earnings per share $1.51. |
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions.
However, our actual results may differ.
On this, our first call for calendar year 2021, we are happy to see the steady growth of production, distribution, and availability of vaccines around the world.
Clearly, we all want to see faster production and wider distribution so that people can be safe from COVID-19 and free to open up their communities, and free to get back to their lives.
We continue our work here at ResMed to support frontline respiratory therapists and pulmonary physicians, critical care physicians, as well as providers, patients, and ResMedians around the 140-plus countries that we operate in.
In our core markets, the patient diagnosis trends in sleep apnea, COPD, and asthma are steadily increasing, modestly improving on the trends we saw in the September 2020 quarter.
We're seeing this improvement of patient flow even as second and third waves come through Northern Winter Hemisphere nations because physicians and providers are adopting digital health, which enables patient engagement, even when people cannot or do not want to meet live and in person.
In my remarks today, I will provide a high-level overview of our December Q2 FY '21 business results and then hand the call over to Brett for further detail on the financials.
I will also review progress toward our ResMed 2025 strategic goals, including execution highlights against our quarterly and annual operating priorities.
Today, we have published and reported solid high single-digit growth in top-line revenue and strong double-digit growth in both net operating profit, as well as earnings per share.
These results once again speak to our ResMed team's ability to work innovatively and deliver results even when facing lower patient activity and little to no incremental benefit from ventilator sales.
During the second quarter of fiscal-year 2021, we generated over $170 million of cash, allowing us to return over $57 million in dividends to shareholders.
We have also grown research and development investments in digital health technology, as well as hardware, software, and clinical research.
We forecast increasing digital health demand from patients, from physicians, from providers, and from healthcare systems as they embrace remote patient monitoring, and they adopt data-driven population health management systems.
We have an exciting pipeline of innovative solutions that will generate both medium and long-term value for our customers, with an industry-leading IP portfolio, including over the 6,000 patents and designs.
Our digital health ecosystem is an important competitive advantage for ResMed that offers integrated care to drive superior clinical outcomes, to drive better patient experiences, and to drive lower healthcare system costs.
We now have over 8 billion nights of respiratory medical data in our cloud-based Air Solutions Platform.
We have sold over 13.5 million 100% cloud connectable medical devices into the market from ResMed, and we have over 15 million patients enrolled in our AirView Solutions in the cloud.
With these data liberated to the cloud, we can unlock value for all of our customer groups.
We can unlock value for patients through myAir, we can unlock value for physicians through AirView and we can unlock value for IDNs, payer providers, as well as private and government insurers for data-driven population health management.
That's the future of healthcare.
The goals we share with all of our customers are these three: one, to improve patient outcomes, patient quality of life, patient chronic disease outcomes; two, to lower overall healthcare system costs; and three, to bend the curve of chronic disease progression.
To be clear, the spectrum of chronic diseases that we look out here at ResMed are, of course, including our core focus areas of sleep apnea, COPD, and asthma, but it also includes biological systems interaction with cardiovascular disease, with cancer, with type 2 diabetes, with neuromuscular disease, Alzheimer's and beyond.
During our last earnings call, I discussed how COVID has continued to accelerate the rapid adoption of digital health technology around the world.
We are seeing the recognition of the value of remote patient screening, virtual diagnosis, remote patient management, and a rapid evolution of digital reimbursement models in many of the nations that we serve patients.
As an example of just one of these, Germany, during the quarter, approved reimbursement for mandibular repositioning device, including our digital 3D printed dental sleep apnea, product called Narval.
This is the first time Germany has approved such a product type to treat sleep apnea.
In addition, several German states are looking at and experimenting with digital health reimbursement models.
These are exciting developments, and we expect this will benefit our German business over time.
We have also seen other national governments, including France, Japan, and the United States where they've adopted models and taken action to accelerate digital health adoption.
Remote healthcare is of incredible importance during this COVID-19 pandemic, but digital health is also valuable well beyond the impact of COVID because it provides better availability of healthcare, it provides excellent quality care for patients, and it provides significantly lower costs for healthcare systems worldwide.
These trends are key to ResMed's 2025 strategy.
We believe the accelerated adoption of digital health solutions represents a significant and permanent shift of the adoption curve for ResMed's market-leading digital health solutions.
Let me now briefly update you on our top three strategic priorities.
These three priorities are, one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop and deliver world-leading medical devices, as well as globally scalable digital health solutions; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in the home.
In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends, as well as very strong resupply activity, both of which have supported another quarter of solid revenue growth that you can see in the numbers we just released.
We're seeing 70% to 90% of the pre-COVID patient flow coming through our biggest market in the United States, and to take an example of a European country, in Germany, we're already back to 85% to 90-plus percent in some states of Germany of pre-COVID patient flow.
Even in countries like China, in our large Asia region, where we saw the sharpest declines at the start of this crisis with very severe lockdowns in Asia and particularly in China, we're now back to already seeing around 70-plus percent, 70% to 75% of pre-COVID patient flow coming through the mainly hospital clinics in our China market.
Obviously, the recovery rates of new patients starting sleep apnea therapy may be impacted by the typical seasonality we see in our largest market here in the United States in the March quarter as a result of insurance deductibles resetting at the start of the calendar year.
This is as per normal.
This seasonal impact affects devices more than it affects mask systems given the relative price points of the two categories and the fact that the vast majority of mask revenue is returning customers on resupply programs.
The resiliency of our mask and accessory resupply has been strong throughout the COVID-19 pandemic, and we see it as remaining strong through the rotary and strong in a post-COVID peak world.
We continue to produce clinical research showing that diagnosing and treating sleep apnea saves money and improves quality of life for patients.
This quarter, we are now showing data that treating sleep apnea is actually a life and death decision.
The latest data from the European Respiratory Journal, which published during the quarter results from a 30-year study.
The high-level summary of these results were that treating sleep apnea increases patient quality of life and extends quantity of life.
It also showed the converse side in that not treating sleep apnea leads to a significantly higher incidence of heart attack, type 2 diabetes, and ischemic heart disease, leading to significantly higher healthcare costs treating those diseases and ultimately leading to earlier death.
Let me now turn from sleep apnea to a discussion of our respiratory care business, focusing on our strategy to better serve COPD and asthma patients worldwide.
Our goal is to reach more patients in our core respiratory care markets, including non-invasive ventilation, as well as life support ventilation, as well as newer areas, including pharmaceutical drug delivery and high flow therapy.
We make the smallest, quietest, and most comfortable devices on the market and they are all 100% cloud connectable.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe in the midst of the peak of the COVID-19 crisis there about nine months ago.
We accelerated the time-to-market to meet the needs of physicians and patients during the COVID peak and it's proved to be very useful during the peak and beyond the peak.
The value being provided through this platform has helped healthcare systems in the markets they're operating in.
In short, we are making digital health part of the standard of care for respiratory care, not just in Europe but worldwide.
During the quarter, we decided to exit the portable oxygen market and shut down our concentrator business in that category.
We entered the POC market in 2016 as a way to engage with Stage 2 and Stage 3 COPD patients.
Since then, in these last five years, we have acquired Propeller, giving us access to COPD patients even earlier in their COPD disease progression, including Stage 1 and Stage 2 COPD patients.
Additionally and especially during COVID, we've seen more rapid adoption of high flow therapy that can support some COPD patients.
And of course, we have our core noninvasive ventilation and life support ventilation solutions for more severe COPD patients in markets globally already.
In short, we don't need POCs to help in our end-to-end digital health pathway for COPD.
government and the economics of our customer acquisition cost versus lifetime value, the POC market itself is not as attractive as it was five years ago.
The bottom line is this.
We have pharmaceutical drug delivery management through Propeller to support COPD patients in Stage 1 and Stage 2 COPD, we have the emergence of high flow therapy for Stage 2 and Stage 3 COPD and we have growing use of noninvasive ventilation and life support ventilation to support patients in Stage 3 and Stage 4 COPD.
So in summary, we are very well-positioned to help patients, physicians, providers, and payers with an end-to-end digital health management pathway for COPD.
Let me now review our Software as a Service business.
During the quarter, our SaaS business grew in the mid-single digits year on year, driven by a continued strong uptake of our Brightree HME resupply solutions.
The impact of COVID on surgical procedures and other in-hospital and out-of-hospital visits has impacted discharge rates that particularly affect the census at skilled nursing facilities and hospice.
On the other hand, the flow of patients in home medical equipment and home health has been recovering well, even stronger.
So as we look across our portfolio of out-of-hospital care settings, including home medical equipment, skilled nursing facilities, home health and hospice, life plan communities, private duty home care, and senior living, we expect that the weighted average market growth rate of these verticals will be in the low to mid-single-digit range for fiscal 2021.
We expect this weighted average market growth rate portfolio to return to mid-single digits and then to high single digits as hospital discharge and ambulatory surgery center discharge rates return.
Our offerings are very well received in each of the verticals that we serve.
So we will not just accept these market growth rates, we will look to meet and beat that group market growth rate as we did this quarter, getting a return from our significant investments in R&D within Brightree and MatrixCare.
And through expansion of our partnerships with hospital-based electronic health record providers.
Brightree continues to innovate to drive resupply growth.
Of particular note, the integration and scaling of the Snap technology is going very well.
This has allowed our home medical equipment customers to expand their resupply programs and support more patients with better engagement at a time during the COVID pandemic when they desperately need new innovation, both the providers and the patients.
MatrixCare has also introduced new technology.
We introduced new voice to text technology at the point of care, which helps address caregiver shortages, which are right during COVID by enabling better and more efficient workflows for the customer, while also delivering a better experience for the ultimate customer who's the patient.
Our expanded relationship with Cerner is progressing very well.
We are now Cerner's preferred solution across home health and hospice, as well as home medical equipment and their pharmacy and infusion businesses.
Our increasingly important relationship with Cerner is leading to better interoperability for providers, our mutual customers, and an improved experience for patients.
We anticipate opportunities to deepen and expand this collaboration to sleep apnea and COPD disease management with these partners over time.
Clearly, 2020 was an unprecedented year for companies across every industry, and there was much suffering around the world.
However, we see some blessings during all that suffering.
Importantly, we here at ResMed, we were able to be there during the emergency.
We were able to pivot our whole team and our HOT business to provide over 150,000 ventilators during the peak needs of the pandemic and get them to where they needed based upon a humanitarian epidemiology model.
Additionally, COVID has highlighted the importance of respiratory health.
COVID generally kills people through acute respiratory distress syndrome.
And it's awful, but that has raised the awareness of respiratory hygiene, respiratory health, and the field of respiratory medicine.
The crisis also showed us the importance of digital health and has accelerated the awareness and adoption of technologies that can be used for remote patient screening, remote patient diagnosis, remote patients set up, as well as remote patient monitoring and management.
We have seen this crisis drive the importance of healthcare delivered outside the hospital.
And that's where ResMed competes for more than 90% of our business.
And it's where we add value to customers and where we win.
We have seen an ability to bring digital technology that we've been inventing and developing for over a decade, digital screening, digital diagnostics, digital therapeutics, and digital health management of patients.
With over 1.5 billion people worldwide suffering from sleep apnea, COPD, and asthma combined, we see incredible opportunities for greater and greater adoption of these scalable technologies.
We are poised to continue relentless innovation and development, as well as to provide the global scale that's needed to drive this technology to the 140 countries that we operate in and beyond.
Before I hand the call over to Brett for his remarks, and then we get to the Q&A, I want to once again express my sincere genuine gratitude to the more than 7,500 ResMedians, whose perseverance, hard work, and dedication during the incredibly challenging circumstances of 2020 allowed our partners in healthcare to save the lives of many hundreds of thousands of people around the world with emergency need for ventilation, literally given the gift of breath and the gift of life to many during COVID.
With that, I will hand the call over to Brett in Sydney, and then we'll move to Q&A.
My remarks today, I will provide an overview of our results for the second quarter of fiscal-year 2021 and some remarks on our FY '21 second-half outlook.
Unless noted, all comparisons are to the prior-year quarter.
As Mick noted, we had a strong quarter.
Group revenue for the December quarter was $800 million, an increase of 9% over the prior-year quarter.
In constant-currency terms, revenue increased by 7%.
Consistent with our prediction during the Q1 earnings call, we derived minimal incremental revenue from COVID-19 related demand in the December quarter.
Taking a closer look at our geographic distribution and excluding revenue from our Software as a Service business, our sales in U.S., Canada, and Latin America countries were $427 million, an increase of 5%.
Sales in Europe, Asia, and other markets totaled $281 million, an increase of 17%, growing constant-currency terms an increase of 10%.
By product segment, U.S., Canada, and Latin America device sales were $205 million, an increase of 1%.
Masks and other sales were $222 million, an increase of 8%.
In Europe, Asia, and other markets, device sales totaled $188 million, an increase of 16% or in constant-currency terms, a 10% increase.
Masks and other sales in Europe, Asia, and other markets were $93 million, an increase of 18% or in constant-currency terms, an increase of 12%.
Globally, in constant-currency terms, device sales increased by 5%, while masks and other sales increased by 9%.
Software as a Service revenue for the second quarter was $92 million, an increase of 6%.
On a non-GAAP basis, SaaS revenue increased by 5%.
During my commentary today, I will be referring to non-GAAP numbers.
The non-GAAP measures adjust for the impact of amortization of acquired intangibles, restructuring expenses, the purchase accounting fair value adjustment to MatrixCare deferred revenue, litigation settlement expenses, and the fair value adjustment of equity investments.
Our non-GAAP gross margin improved by 20 basis points to 59.9% in the December quarter compared to 59.7% in the same quarter last year.
The increase is predominantly attributable to manufacturing efficiencies, favorable product mix changes, and foreign exchange rates, partially offset by declines in average selling prices.
Moving on to operating expenses.
Our SG&A expenses for the second quarter were $169 million, a decrease of 1% or in constant-currency terms, SG&A expenses decreased by 3%.
SG&A expenses as a percentage of revenue improved to 21.2% compared to the 23.3% we reported in the prior-year quarter.
Benefiting from cost management and reduced travel as a result of COVID-19 restrictions.
Looking forward, we expect SG&A expenses in the second half of FY '21 to increase in the low single digits relative to the prior-year period.
R&D expenses for the quarter were $55 million, an increase of 10% or on a constant-currency basis, an increase of 7%.
R&D expenses as a percentage of revenue was 6.9% compared to 6.8% in the prior year.
We continue to prioritize our investments in innovation because we believe our long-term commitment to technology, product, and solution development will deliver sustained competitive advantage.
Looking forward, we expect R&D expenses to continue to grow year over year in the high single digits, reflecting this commitment to innovation.
Total amortization of acquired intangibles was $19 million for the quarter and stock-based compensation expense for the quarter was $15 million.
Non-GAAP operating profit for the quarter was $254 million, an increase of 16%, reflecting strong top-line growth, expansion of gross margins, and well-contained operating expenses.
On a GAAP basis, our effective tax rate for the December quarter was 14.8%, while on a non-GAAP basis, our effective tax rate for the quarter was 15.2%.
We continue to expect our effective tax rate for the full fiscal-year 2021 will be in the range of 17% to 19%.
Non-GAAP net income for the quarter was $206 million, an increase of 17%.
Non-GAAP diluted earnings per share for the quarter were $1.41, also a 17% increase.
Our GAAP diluted earnings per share for the quarter were $1.23.
During the December quarter, we closed our portable oxygen concentrator business.
We recognized that restructuring expenses of $13.9 million associated with the closure.
Going forward, the cessation of our POC business will have an immaterial impact on both group revenue and earnings per share.
We do not expect to incur additional expenses in connection with this activity in the future, and we have adjusted for this one-time expense within our non-GAAP results for the quarter.
Cash flow from operations for the quarter was $170 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $35 million.
Depreciation and amortization for the December quarter totaled $41 million.
During the quarter, we paid dividend of $57 million.
We recorded equity losses of $2.6 million in our income statement in the December quarter associated with the Verily joint venture.
We expect to record equity losses of approximately $5 million per quarter in the second half of FY '21 associated with the joint venture operations.
We ended the second quarter with a cash balance of $256 million.
At December 31, we had $826 million in gross debt and $570 million in net debt.
Our debt levels remain modest.
At December 31, we had a further $1.4 billion available for drawdown under our existing revolver facility.
Our board of directors today declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance.
Our solid cash flow and liquidity provide flexibility in how we allocate capital.
We have focused on paying down debt, as well as ensuring we have cash reserves to support the company through the uncertainty caused by the ongoing pandemic.
Going forward, we plan to continue to reinvest for growth through R&D.
We will also likely deploy capital for tuck-in acquisitions, such as Snap, which was completed during the third quarter of fiscal-year 2020.
We intend to continue returning cash to shareholders through our dividend program, and we may also resume our share buyback program sometime during the calendar year.
This program having been on par since our acquisitions of MatrixCare and Propeller Health in fiscal-year 2019.
Turning now to our FY '21 outlook.
At a high level, we are seeing negligible COVID-19 generated demand for our ventilators and do not expect any incremental benefit in the second half of FY '21.
Note, as a reminder, we recorded $35 million in COVID-generated ventilator revenue in our March quarter last year and $125 million in COVID-generated ventilator revenue in our June quarter last year.
Mask and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base and the success of our resupply service offerings.
We expect to see continued year-on-year growth of our mask sales in the second half of FY '21.
Notwithstanding continued COVID-19 challenges, we continue to expect a sequential increase in new sleep patients, which should support our device sales as we move through the second half of FY '21.
However, we typically experience a small seasonal sequential decline in revenue from Q2 to Q3, largely attributable to the reset of deductibles in health insurance plans in our U.S. market.
We expect this trend will also be apparent in FY '21.
Of course, like many other companies, we continue to experience significant uncertainty in the current environment, including the potential disruptive impacts of ongoing restrictions imposed in many of the countries we operate in.
As a result, our forecast and possible future revenue outcomes remain dynamic.
And with that, I will hand the call back to Amy.
Chantel, let's now go ahead and turn to the Q&A portion of the call. | compname posts q2 non-gaap earnings per share $1.41.
q2 non-gaap earnings per share $1.41.
q2 gaap earnings per share $1.23.
q2 revenue $800 million versus refinitiv ibes estimate of $783.2 million. |
With me on the call today are chief executive officer, Mick Farrell; and chief financial officer, Brett Sandercock.
During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, our president and chief operating officer; Jim Hollingshead, our president, sleep and respiratory care; and David Pendarvis, our chief administrative officer and global general counsel.
We believe these statements are based on reasonable assumptions.
However, our actual results may differ.
Our second quarter results continue to demonstrate the strong performance across our business, benefiting from the ongoing extremely high demand for our sleep and respiratory care devices as well as the steady recovery of markets from the peaks of COVID-19 impacts.
We achieved double-digit growth in our business as we navigate three major externalities: one, the recovery of patient flow post the COVID maximum peaks; two, global supply chain constraints, particularly in electronic components; and three, the almost unlimited demand associated with the competitor recall, that has actually extended further in terms of volumes of their devices that were impacted and the duration of their repair and replace process.
The bottom line is we have at least 12 more months of this incredible demand for ResMed products.
I'm very proud of 8,000 ResMedians serving patients in 140 countries worldwide.
Our global teams are finding ways to deliver products and solutions to home care providers, physicians and healthcare systems and ultimately into the hands of patients who need them most.
Clearly, the global supply chain environment remains very challenging across multiple industries, and we are not immune to its impact.
During the quarter, despite growing double digits year-on-year, we were not able to meet all the demand available in the market.
We have being allocated components from our suppliers, particularly electronic components and even more specifically, semiconductor chips, and we are thus being forced to allocate our outbound products to our customers.
We have established an allocation process with clear guiding principles that give priority to the production and delivery of devices to meet the needs of the highest acuity patients first.
In addition to component supply issues, the ongoing challenges of sea freight and air freight are impacting our ability to respond as rapidly as we would like to the demand for ResMed products.
Freight costs are increasing across the board on inbound components from suppliers and on outbound products to our distribution centers and for ultimate delivery to our customers.
As a result of these increased costs, we implemented a surcharge on our products starting in January to share some of the burden of these increased costs with customers.
Given all the increase in prices from commodities to specialty products across multiple industries around the world, the necessity of this surcharge has been understood and accepted by our customers.
We are working closely with our global supply chain partners doing everything that we can to gain access to additional supply of the critical components that we need to further increase production of our medical devices.
We are also reengineering designs validating new parts, pieces, supplies and accelerating new product launch and development to further catch up with the demand.
We understand that this is a difficult situation for all of our customers, including physicians, for medical equipment providers, payers, healthcare systems and the most important customer, the patient.
1 priority will always be patients, doing our best to help those who suffer from sleep apnea, COPD, asthma and other respiratory chronic diseases, as well as those who benefit from our out-of-hospital healthcare software solutions.
To grow and differentiate our Sleep and Respiratory Care business, we will develop, design and deliver world-leading therapy solutions that can be scaled globally, and we're going to deliver the world's leading out-of-hospital software solutions to empower each person's healthcare wherever they are.
Our goal is to ensure that every person gets the care that they need, where they need it and when they need it.
Let me step back to discuss the broad market conditions in our industry.
We're seeing steady ongoing recovery of demand across the countries that we operate in.
We are still seeing a divergence in the total patient flow from 85% to 100% of pre-COVID levels in most countries and above 100% of pre-COVID levels in a few locations.
These metrics will continue to steadily increase toward pre-COVID levels and beyond as vaccines and boosters roll out globally.
Each new COVID variant has an impact, but with the adoption of digital health solutions for screening, diagnosis and remote patients set up and remote patient monitoring as well as established and well-established processes for COVID cleaning protocols at sleep labs, we expect the impact of new variants to diminish in absolute impact each time.
Our global ResMed team remains committed to working with national, state and city governments as well as local healthcare systems, hospitals and healthcare providers to supply ventilators, masks and training for acute care and the important transition home as needed.
Given the steadily decreasing severity of each impact on the hospitalizations and severe disease from COVID, the demand for ventilators is now consistent with pre-COVID levels.
Let me now update you on our top three strategic priorities: No.
1 is to grow and differentiate our core sleep apnea, COPD and asthma businesses; No.
2 is to design, develop and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and No.
3 is to innovate and grow the world's best software solutions for care delivered outside the hospital and especially in the home.
launch of our next-generation device platform called AirSense 11 continues to go very well.
This new platform has provided much needed additional product supply as we face all-time high demand for ResMed devices.
We expect to introduce the AirSense 11 platform into additional countries throughout calendar year 2022.
In parallel, we will continue to sell our globally available market-leading platform, the AirSense 10, to maximize the total volume of CPAP, APAP and bilevels available for sale.
In fact, the only product that the AirSense 10 is inferior to is the AirSense 11.
As you saw in our results with double-digit growth this quarter, the ongoing adoption of both the AirSense 10 and AirSense 11 platforms remains very, very strong.
With the AirSense 11 platform and our digital health technology ecosystem, we are engaging patients in their therapy digitally like never before in the industry.
We are also making it easier and more efficient for our customers to manage their patient populations using our full suite of software solutions, including myAir for patients, AirView for physicians and Brightree for home medical equipment providers.
When customers use these digital health technology solutions, they have increased efficiencies, lower costs and we achieved improved outcomes for patients and their physicians.
We have peer-reviewed published evidence showing that combining AirSense platform with myAir software and AirView software, we see over 87% adherence to positive airway pressure therapy.
This was in the study with over 85,000 patients.
On our latest and greatest platform, the AirSense 11, we are driving even higher adoption rates of the myAir app than ever before.
In fact, we are seeing more than double the uptake of patients signing up to myAir and fully engaging with ResMed software technology.
The net result is that this delivers a better patient experience, better efficiency for the home care providers and more importantly, greater long-term adherence to therapy.
We saw this demonstrated in the Alaska study in partnership with the French healthcare systems, where we showed in a study with over 176,000 patients that those patients who had adhered to CPAP therapy had a 39% relative reduction in mortality rates versus control.
Demonstrating these types of better patient outcomes and lower costs for the healthcare system at a scale not seen before in the industry are critical components of the ResMed 2025 strategy.
Another key aspect of our long-term growth strategy is driving awareness and increasing the flow of patients through the top of the sleep apnea diagnosis funnel.
COVID-19 has advanced awareness, adoption and acceptance of respiratory health and respiratory hygiene but also adoption and acceptance of digital health and telehealth tools, including home-based sleep apnea tests.
Although increasing demand is not as important in the immediate short term, given the ongoing competitor recall, we have a long-term focus, and we're always focused on that long-term demand gen opportunity.
We are innovating with partners and our customers to create an even more efficient and effective approach to sleep apnea patient identification, screening, diagnostics, treatment and management.
We will continue to invest in technology that enables an end-to-end seamless digital experience for patients.
As we mentioned in our October call, during the second quarter, we acquired Ectosense, a leading provider of cloud connected home sleep apnea testing technology worldwide.
We believe Ectosense's digital and easy-to-use solutions in the hands of physicians, sleep lab technicians as well as consumers can help significantly increase both diagnostic and screening rates as well as general sleep apnea awareness.
Let me now turn to a discussion of our Respiratory Care business, focusing on our strategy to better serve the 380 million patients with chronic obstructive pulmonary disease or COPD worldwide, and the 330 million patients that suffer from asthma worldwide.
Our goal is to reach hundreds of millions of patients with our respiratory care solutions, including noninvasive ventilation and life support ventilation, as well as newer therapeutic areas such as cloud-connected pharmaceutical delivery solutions from our Propeller technology and high-flow therapy offerings such as our product platform called Lumus HFT.
Demand for our core noninvasive ventilation and life support ventilation solutions was strong throughout the quarter, especially in markets outside the U.S., where provide a shifted focus to support the most severe highest acuity patients.
This demand is aligned with the guiding principles of our allocation process, namely to give the highest priority to manufacturing life support ventilation and noninvasive ventilation devices, including buy levels that meet the needs of these highest acuity patients first.
Adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago, remains solid, and we continue to expand this technology to regions around the world.
AirView for ventilation has provided valued by helping physicians and the healthcare systems they operate in to manage high-risk patients during the COVID-19 pandemic.
But it is also increasingly being used on an ongoing basis to enhance quality of care through early and proactive intervention at the first sign of respiratory medical issues to help reduce the risk of hospitalization.
We see a world where AirView for ventilation is standard of care for COPD treatment.
The way that our core sleep apnea AirView platform is now standard of care for sleep apnea treatment.
Let me now review our Software as a Service business for out-of-hospital care.
During the quarter, our SaaS business showed improved sequential growth.
We achieved high single-digit growth year-on-year across our portfolio of SaaS markets, including home medical equipment, as well as facilities-based and home-based care settings.
The continued growth of home-based care is providing tailwinds for our home medical equipment as well as our home health and hospice products, and we continue to grow with customers as they increase their utilization of our software and data solutions to improve and optimize business efficiencies and patient care, including Brightree and Snap resupply.
The COVID-19 pandemic has been and remains challenging for some of the verticals in our SaaS business, particularly skilled nursing facilities as the effects of the highly contagious Omicron variant remains a headwind for patient volumes in these settings.
We will continue to watch this closely as COVID rates peak and then decline with this latest variant as has happened in many regions around the country and around the world.
As COVID restrictions continue to ease and our customers improve their line of sight to better conditions, we expect to see pent-up demand for technology investments, which provides opportunities for us to sell more and more services and solutions to existing customers, as well as to increase our new customer pipeline.
As we look at our portfolio of solutions across care settings, we expect our SaaS group revenue growth to accelerate, achieving sustainable high single-digit growth as we exit this fiscal year.
As always, our goal is to meet or beat that market growth rate as we continue to innovate and continue to take market share from competitors.
We are the leading strategic provider of SaaS solutions for out-of-hospital care, and we provide mission-critical software across a broad set of very attractive markets.
Our latest and greater SaaS solutions addressed the No.
1 issue reported across our customer base, which is staffing challenges.
Our SaaS customers expect this problem to persist and they recognize the need for technology solutions to help solve their challenges with efficiency and scale.
And our software services and solutions help them achieve both of these outcomes.
We are well positioned, and we have created differentiated value for our customers and for ResMed within our SaaS business.
Looking at the broader portfolio of ResMed's businesses across sleep and respiratory care as well as our SaaS solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our sleep and respiratory care solutions treat the most prevalent and highest cost chronic conditions, and our SaaS solutions support the care settings where people face these and other chronic conditions.
With this combination, we can fundamentally transform out-of-hospital healthcare at a scale that no other company can match.
And we are set up for sustainable growth through ongoing investments in R&D to the tune of 7% of our revenues, commercial excellence in partnerships with CVS, Verily and beyond, as well as future acceleration through strategic M&A, as well as tuck-in M&A as we move forward.
Our patient-centric physician-centric and provider-centric approach, combined with our unique ResMed culture, means that we are positioned to continue winning in the vastly underserved medical markets of sleep apnea, chronic obstructive pulmonary disease, asthma and beyond.
We are transforming out-of-hospital healthcare at scale, leading the market in digital health technology with over 10.5 billion nights of medical data in the cloud and over 16 million 100% cloud connectable medical devices on bedside tables in 140 countries worldwide, we are unlocking value by using de-identified data to help patients, providers, physicians, payers and in entire healthcare systems.
We have invested in the privacy cloud operations and AI and ML-driven data analytics capabilities to do this at a scale that is unmatched by competitors, and we are increasing our lead every day.
Our mission to improve 250 million lives through better healthcare in 2025, drives and motivates ResMedians every day.
We again made excellent progress toward that inspiring goal during this last quarter.
Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude to more than 8,000 ResMedians for their perseverance, hard work and dedication during these ongoing unprecedented times.
With that, I'll hand the call over to Brett in Sydney and move to the group for Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2022.
Unless noted, all comparisons are to the prior year quarter.
We're pleased with our financial performance in Q2 despite the headwinds we faced as a result of significant ongoing supply chain constraints in a challenging freight environment.
Group revenue for the December quarter was $895 million, an increase of 12%.
In constant currency terms, revenue increased by 13%.
Revenue growth reflects increased demand for our sleep and respiratory care products across our portfolio, driven by recovering market conditions and by increased device demand in response to the ongoing product recall by one of our competitors.
In the December quarter, we recorded immaterial incremental revenue from our COVID-19 related demand consistent with the prior year quarter.
Looking forward, we expect negligible revenue from COVID-19 related demand.
However, we will continue to estimate it for you as appropriate.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $45 million to $55 million in the December quarter.
For the first half of FY '22, this reflects incremental revenue in the range of $125 million to $145 million.
We continue to expect component supply constraints will limit the total incremental device revenue opportunity to somewhere between $300 million and $350 million for the full fiscal year 2022.
As we shared last quarter, we expect our fiscal third quarter to remain supply constrained similar to our fiscal second quarter, therefore, limiting incremental revenue during the third quarter.
We see supply challenges to some extent easing in our fiscal fourth quarter and into fiscal year 2023.
Looking at our geographic revenue distribution and excluding revenue from our Software as a Service business, sales in U.S., Canada and Latin America countries increased by 14%.
Sales in Europe, Asia and other markets increased by 12% in constant currency terms.
By product segment, Globally, in constant currency terms, device sales increased by 16%, while masks and other sales increased by 10%.
Breaking it down by regional areas, device sales in the U.S., Canada and Latin America increased by 19%, as we benefited from incremental revenue due to a competitor's recall and favorable product mix as we sold an increased proportion of higher acuity devices.
This is consistent with our guiding principles for product allocation, namely that we are giving priority to the production and delivery of our devices to meet the needs of the high security patients first.
Masks and other sales increased by 9%, reflecting solid resupply revenue and achieved despite the challenging device supply environment, which continues to limit new patient setups.
In Europe, Asia and other markets, device sales increased by 13% in constant currency terms, again reflecting the benefit from incremental revenue due to a competitor's recall.
Masks and other sales in Europe, Asia and other markets benefited from improved patient flow relative to the prior year and increased by 11% in constant currency terms.
Overall, our Asian operations, in particular, delivered a strong quarter.
Software as a Service revenue increased by 8% in the December quarter.
We saw strong performance out of the HME segment as customers continue to utilize our SaaS solutions to streamline and more efficiently run their businesses, and we are seeing some stability in the skilled nursing care segment as it continues to emerge from the challenges of the COVID-19 pandemic.
For the second half of fiscal year '22, we expect to continue to benefit from our competitors' inability to supply new patients and from the global fleet markets general recovery from COVID-19 impact.
However, as we have said for the last few quarters, while we are working hard to increase device output, we will not be able to meet all the expected demand resulting from our competitors' recall, primarily because of significant and ongoing supply constraints for electronic components.
We are operating in a very dynamic supply chain environment.
As I stated earlier, we continue to expect component supply constraints will limit the incremental device revenue resulting from our competitors' recall to somewhere between $300 million and $350 million for fiscal year '22.
This includes the device revenue we were able to generate in the first half of fiscal year '22.
We expect Q3 to remain challenging but Q4 to be better.
During the rest of my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin declined by 230 basis points to 57.6% in the December quarter.
The decrease is predominantly attributable to higher freight component and manufacturing costs and unfavorable currency movements, partially offset by positive product mix, particularly in relation to strong growth of our higher acuity devices.
Moving on to operating expenses.
During Q2, we maintained a disciplined approach in our ongoing spend to support our operations.
But we are seeing a more normalized expenditure profile as COVID-19 impacts subside.
G&A expenses for the second quarter increased by 9% or in constant currency terms increased by 10%.
The increase was predominantly attributable to an increase in employee-related expenses.
Importantly, SG&A expense as a percentage of revenue improved to 20.7% compared to 21.2% in the prior year period.
Looking forward and subject to currency movements, we expect SG&A expense as a percentage of revenue to be in the range of 20% to 22% for the second half of FY '22.
R&D expenses for the quarter increased 14% on both a headline and a constant currency basis.
R&D expenses as a percentage of revenue was 7% compared to 6.9% in the prior year quarter.
We continue to make significant investments in innovation because we believe our long-term commitment to technology, product and solutions development will deliver a sustained competitive advantage.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the second half of FY '22.
Our non-GAAP operating profit for the quarter increased by 5%, underpinned by strong revenue growth, partially offset by the contraction of our gross margin.
On a GAAP basis, our effective tax rate for the December quarter was 15%, while on a non-GAAP basis, our effective tax rate for the quarter was 15.6% compared to the prior year quarter of 15.2%.
The relatively low tax rate in Q2 in both the current quarter and prior year quarter reflects a favorable tax benefit associated with employee equity investing that typically occurs in the second quarter.
Looking forward, we estimate our non-GAAP effective tax rate for the full fiscal year '22 will be in the range of 19% to 20%.
Our non-GAAP net income for the quarter increased by 5% and our non-GAAP diluted earnings per share for the quarter increased by 4%.
Our cash flow from operations for the quarter was $220 million, reflecting robust underlying earnings, partially offset by higher working capital.
Capital expenditure for the quarter was $30 million.
Depreciation and amortization for the quarter totaled $41 million.
During the quarter, we paid dividends to shareholders totaling $61 million.
We recorded equity losses of $1.9 million in our income statement in the December quarter associated with the Primasun joint venture with Verily.
We expect to record equity losses of approximately $2 million per quarter through the balance of fiscal year '22 associated with the joint venture operation.
We ended the second quarter with a cash balance of $194 million.
At December 31, we had $680 million in gross debt and $486 million in net debt.
Our debt levels remained modest.
And at December 31, we had approximately $1.6 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declared a quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provide flexibility in how we allocate capital.
Going forward, we plan to continue to reinvest for growth through R&D.
We also expect to continue to deploy capital for tuck-in acquisitions such as [inaudible] Health, [inaudible], an acquisition we completed on October 1.
And with that, I will hand the call back to Amy. | q2 revenue rose 12 percent to $894.9 million. |
We appreciate you joining us.
With me on the call today are CEO Mick Farrell and CFO Brett Sandercock.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions.
However, our actual results may differ.
I will review progress toward ResMed's 2025 strategic goals, including execution highlights against our quarterly and our annual operating priorities.
A year ago today, when we discussed our March 2020 results, we were only just beginning to understand the scope of the COVID-19 pandemic.
Much of our business, particularly in the United States, had not yet been significantly impacted.
However, outside the U.S., countries including China and Italy were already in the midst of emergency needs.
We quickly mobilized our supply chain and global operations to address and support ventilation needs worldwide, producing over 150,000 ventilators.
We accelerated the production and distribution of noninvasive and life support ventilators and mass systems to those in need, resulting in an incremental $35 million of COVID-related revenue during the March 2020 quarter.
I'm incredibly proud of how we quickly pivoted our business to meet that need, providing life-saving solutions around the world so that healthcare systems were prepared with the resources needed to treat patients who are fighting COVID-19.
Today, one year later, the countries we operate in are at various different stages of the post-COVID peak recovery process in terms of getting to normal patient flow.
We see a range of -- from 70% of pre-COVID patient flow in some countries, up to 90% of pre-COVID patient flow in other countries.
Vaccines are steadily rolling out in the United States, the U.K., and many other countries worldwide.
We still see significant impact from ongoing second, third and fourth waves of infection in some countries in Europe, as well as in South America and Asia, and especially right now in the country of Brazil and particularly India.
Our team is working with hospitals and healthcare providers in those two countries and beyond for preservation of life, making sure that they have ventilators, masks, and the training that they need to use them.
We continue to support the frontline respiratory therapists and the physicians who are there on the ground, as well as providers, patients, and ResMedians throughout the 140-plus countries that we operate in.
We're pleased with the steady progress that we are seeing in getting new sleep apnea, COPD, and asthma patients diagnosed.
Excluding the $35 million of COVID-related ventilator sales in the March 2020 quarter, our team delivered positive sales growth across our core sleep apnea and respiratory care business this quarter on both the headline and constant-currency basis.
We forecast a steady improvement trend of patient flow for sleep apnea and COPD and asthma continuing as we move through 2021 and into 2022.
We expect this progress to accelerate as global vaccination rates continue.
We are encouraged to see that patients, physicians, and providers around the world are adopting digital health tools for remote patient screening, home-based testing, remote patient monitoring, and ongoing patient management.
I'd like to be clear that the ventilation sales that we made in 2020 will be part of our comparables for the next two quarters.
In the June 2020 quarter, we recognized $125 million in COVID-related ventilator sales.
And in September 2020 quarter, we recognized $40 million in such revenue.
Over the coming quarters, we expect to continue to show strong positive year-over-year revenue growth excluding these one-time sales from 2020.
As we look further forward, we see a clear path to double-digit revenue growth in the back half of our fiscal-year 2022 across our full business, powered by opening economies and our pipeline of new technology and innovation.
Our headline results were impacted this quarter by an accounting reserve we took in connection with discussions with the Australian Tax Office, or ATO, regarding their ongoing audit dating back to fiscal-year 2009.
Brett has been leading those discussions and will speak to the details in his remarks.
I will make this statement: ResMed pays significant taxes in countries around the world, and we operate in over 140 countries, helping people sleep better, breathe better and live better lives well away from the hospital.
Brett and his team are working toward a final resolution of these transfer pricing discussions dating back over 12 years with the ATO.
So we have taken this $255 million reserve.
We believe that resolving these discussions is the pragmatic thing to do for all of our stakeholders so that we can put this behind us and focus all of our efforts on our core mission of improving lives in respiratory medicine around the world.
During the third quarter of fiscal-year 2021, we generated over $196 million in operating cash, allowing us to return $57 million in cash dividends to shareholders.
We also increased our R&D investments in the period in digital health technology, as well as R&D for hardware, embedded software, and clinical research while maintaining financial discipline with reduced SG&A and other operating costs.
We have seen increased demand for our digital health solutions from patients, physicians, providers, and healthcare systems around the world as they embrace remote patient engagement and adopt population health management.
We are the clear leader in this field with over 14 million cloud-connectable medical devices in the market.
And our ongoing and increasing investments in digital health innovation will ensure we provide superior value to patients, physicians, and providers to be their partner of choice.
We don't take our leading market share position for granted.
We fight for it every day through innovation.
Our digital technologies are a growth catalyst for our business.
We have an exciting pipeline of innovative solutions that will generate both medium and long-term value, with an industry-leading IP portfolio, including over 8,000 patents and designs.
We now have over 8.5 billion nights of respiratory medical data in our cloud-based platform called Air Solutions.
We have over 15.5 million patients enrolled in our cloud-based AirView software solution.
And we also have over 105 million patients managed within our Software-as-a-Service network for out-of-hospital healthcare.
These incredible data assets allow us to unlock value for all of our customers, patients, physicians, providers, as well as private and government payers.
Let me take a few minutes to share some recent clinical highlights that show how we are working with researchers to advance the field of sleep and respiratory medicine with these data and beyond.
During 2020, an important 30-year duration study was published in the European Respiratory Journal, following over 4,500 diagnosed OSA patients to better understand the long-term impacts of untreated sleep apnea.
The study showed that untreated sleep apnea leads to high incidence of myocardial infarction or heart attack, high incidence and prevalence of Type 2 diabetes, and high incidence of ischemic heart disease.
This real-world clinical analysis is showing that what we've known for over three decades: sleep apnea is a public health epidemic that simply can't be ignored.
In terms of clinical quality of life improvement from CPAP therapy, the data are also clear.
In late 2019, the multicenter, randomized controlled trial called MERGE was published in the journal Lancet Respiratory Medicine.
The results were that patients randomized to CPAP demonstrated clear improvement in quality of life for CPAP patients versus standard of care with symptomatic benefits, including reductions in sleepiness, as well as improvements in fatigue and importantly, depression, a key part of mental health.
Importantly, these results were evident in both mild, as well as moderate and severe, sleep apnea.
In terms of economic data and a dose-response relationship from CPAP therapy, the data are also unequivocal.
In 2019, a study was published in the Journal of Clinical Sleep Medicine showing a quantified dose-response relationship from CPAP therapy.
So for every additional hour of positive airway pressure use, there was an 8% decrease in hospital inpatient visits and a 4% decrease in overall physician visits.
In other words, treating sleep apnea with our CPAP therapy not only improves lives, it also saves money for the healthcare system by lowering total healthcare utilization costs.
During the quarter, we saw the publication of a draft technology assessment from the Agency for Healthcare Research and Quality, or AHRQ, here in the U.S. market.
AHRQ sort input and ResMed-filed public comments, along with comments from many physician groups, sleep apnea patient advocates, provider groups, and beyond.
I won't repeat all the details of those public comments, but I will say this, we presented peer-reviewed and published data showing that CPAP therapy improves quality of life, reduces healthcare costs, and even reduces mortality.
In short, these data prove that in partnership with our physician and provider colleagues in the market, we are saving lives and saving money for the healthcare system through our medical technology.
We have peer-reviewed and published data showing that a reduction in incidence of heart attack, a reduction in hypertension, as well as a reduction in the incidence of solid cell cancer tumors.
All of these are logical sequelae of the elimination of hypoxia that is associated with CPAP therapy in treated sleep apnea patients.
Just last month, NICE made public their 2021 draft guidelines that recommend that CPAP therapy, along with telemonitoring, is the frontline treatment option for patients with mild OSA.
That would be an expansion of coverage in the U.K. and also an expansion of the use of digital health technology in that market.
Similarly, the Ministries of Health in France, Germany, and Japan have seen the value of digital health in sleep apnea therapy and have begun investing reimbursement funds in this space.
It's great to see this expansion of coverage for sleep apnea therapy and digital health around the world as governments see improvement in outcomes and reductions in total healthcare system costs with this technology.
While we respect the work of AHRQ, we, along with many other academic research-focused institutes and practicing physician groups, believe that they bypassed a generation of data in real-world evidence that needs to be taken into account, along with their own select group of RCTs in the draft report.
We are optimistic that the final report when issued will reflect the preponderance of real-world evidence and broader RCTs, showing both the clinical and economic benefits of treating sleep apnea with positive airway pressure.
Let me now update you on our top-three ResMed strategic priorities.
These are, one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop and deliver world-leading medical devices, as well as globally scalable digital health solutions; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital and preferably, in a person's home.
In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends as we seek to provide solutions for the 936 million people worldwide who suffocate every night.
was impacted by the typical seasonality that we see in the March quarter, primarily as a result of insurance deductibles resetting at the start of each calendar year.
This seasonal impact affects devices more than mass systems, given the incremental cost of diagnosis and the relative price points of the two categories.
We expect sequential growth in sleep and respiratory care as we move past this typical seasonality.
New patient flow during the quarter was impacted by the recent COVID-related case surges in select countries in Asia and Europe, including two large markets, France and Germany.
We see that impact the number of patients going for clinic-based diagnosis pathways in these affected countries.
We expect to see these markets reopen, along with hospitals, as vaccines continue to roll out and as we see further scaling of the remote home-based diagnostic capacity.
Clearly, the kinetics of opening of these economies and the rate of vaccination rollout are beyond our control.
However, we can control our investments in digital solutions for our physician and provider partners, which we are doing at increasing velocity and with scalable systems and processes.
More broadly, we are seeing growth in total sleep -- total new sleep apnea, COPD, and asthma patient flow.
And we expect to see this improve over time in our portfolio of 140 country markets each quarter.
Importantly, our market-leading share position has remained stable across both masks and devices, and we're excited about our future pipeline.
We rarely talk about our future pipeline as those who followed us for a period of time know.
But today, I would like to open up the curtain just a little bit on our next-generation sleep apnea platform.
regulatory filings that we made for our next-generation flow generator platform called the AirSense 11.
Clearly, there are multiple steps in the process to bring this new platform to global markets and these public regulatory filings are simply one important step, but we are making good progress.
Earlier this month, we started a limited controlled product launch of the AirSense 11 in certain parts of the United States.
and then to country markets worldwide in sequence after that.
For now, I can say that as a personal user of our CPAP therapy, I have firsthand knowledge that the AirSense 11 device will benefit patients and their bed partners.
And our early data show that the device and software platform combination will benefit physicians, providers, payers, and beyond, and ultimately continue to catalyze ResMed's global leadership in digital health solutions for sleep apnea and then also accelerate our success in digital health solutions for COPD, asthma, and other key chronic diseases.
We make the smallest, quietest, smartest, and the most comfortable devices on the market.
Importantly, they are all cloud connectable with the latest and greatest digital health technology to increase adherence, improve clinical outcomes, and deliver proven cost reductions within our customers' own healthcare systems.
Let me turn now to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD, or chronic constructive pulmonary disease, patients and the 340 million asthma patients worldwide.
Our goal is to reach more patients with our core respiratory care solutions, including both noninvasive ventilation and life support ventilation, as well as newer therapeutic areas, such as cloud-connected pharmaceutical drug delivery devices and high-flow therapy devices.
Our respiratory care business benefited in the March 2020 quarter as we sold incremental ventilated devices and ventilation mask solutions to meet growing demand worldwide as a result of the pandemic.
During the March 2021 quarter, COVID-related ventilator sales were not material to the global business.
However, we are seeing some demand in select countries affected by these latest COVID surges, such as just this month with the surge in India.
We're getting many thousands of devices to those in need.
The demand is there in that country.
But as in Q3, we do not expect the revenue to be material to our global business, even though the broader impact, particularly with preservation in life in these countries is clearly priceless and incredibly important to not only our local team in India but to all of us here at ResMed worldwide.
Demand for our core noninvasive ventilator and life support ventilator solutions for COPD and other respiratory insufficiency are experiencing the same steady recovery in new patient flow as in sleep apnea.
We are balancing the growth in patient demand there with the supply of ventilators that we made to the market throughout 2020 as customers balance their inventory and their core ongoing patient needs.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe in the midst of the pandemic this time a year ago.
We are now seeing that this technology has expanded to regions around the world.
The value being provided through this cloud-based software solution has been fruitful not only during the COVID pandemic and the peak part of the crisis, but it's also valuable on an ongoing-value basis for physicians, as well as the healthcare systems they operate in.
We are hoping to ensure that digital health is now the new standard of care for respiratory care.
Let me now review our Software-as-a-Service business for out-of-hospital care.
During the quarter, our SaaS business grew in the mid-single digits year on year across our portfolio of markets.
The verticals include home medical equipment, or HME, skilled nursing facilities, home health, hospice, private duty home care, home infusion, senior living, and life plan communities.
Our HME customers are leveraging our advanced resupply solutions, including snap technology and Brightree resupply for our existing portfolio of patients.
And they are contributing to ongoing growth as the flow of new patients in HME continues to recover steadily period by period.
Over the past 12 months, COVID-19 has had a dampening effect on elective and emergent procedures at hospitals, as we all know, and that has slowed hospital discharge rates affecting patient flow and ultimately, the census rates at skilled nursing facilities, home health, hospice and beyond.
As the rate of vaccinations accelerate across the U.S. and the number of COVID-19 cases continues to trend downward in this country, we're seeing improvements in the census rates across skilled nursing facilities, home health, hospice, and across all post-acute care settings.
In addition to the solid organic growth that we are seeing in our SaaS business, we closed an exciting acquisition just this month.
The company is called Citus Health.
Citus is a digital health leader specializing in patient engagement solutions for home infusion and specialty pharmacy, as well as for home health and hospice markets.
Citus enhances the patient experience, and it also improves provider efficiency and reduces the workload for frontline clinicians and caregivers.
We are excited to have the Citus team as part of the ResMed family of solutions and to leverage their digital collaboration and patient support platform in our mission to improve patients' lives outside the hospital.
I'm very impressed by the breadth and depth of talent at Citus and their passion for patient care.
This goes from their CEO and co-founder all the way to the frontline.
We're very excited to have them join our team, and we will be better together.
As we look across our portfolio of solutions from Brightree to MatrixCare to now Citus including HME, specialty pharmacy, home infusion, skilled nursing facilities, home health, hospice, senior living, life plan communities, and private duty home care, we expect this portfolio, this SaaS portfolio of revenue growth to accelerate, increasing from mid-single-digit growth that we saw in this quarter to high single-digit growth as we move forward.
As always, our goal is to meet or beat the sort of market average growth rates, and we continue to take share across the verticals that we're in.
We also see opportunity to drive growth through further acquisitions that will augment and add to our existing portfolio of solutions.
Our offerings are very well received in each of these verticals, and we continue to see and leverage analytics and the technology that we have across our core business and the SaaS business to help people age in place and minimize or eliminate acute care episodes.
Looking at the broader ResMed portfolio of business across sleep and respiratory care, as well as our Software-as-a-Service solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our mission to improve lives, strives, and motivates ResMedians across the world every day.
COVID has highlighted and continues to highlight the importance of respiratory health and respiratory hygiene.
It has highlighted also the importance of digital health and remote care, and it has also accelerated awareness and adoption of technologies that can be used for remote patient screening, diagnosis, setup, as well as remote patient management and monitoring.
We have continued to invest aggressively in R&D and innovation to ensure our solutions are best in class and are a catalyst for future growth.
With over 1.5 billion people around the world suffering from sleep apnea, COPD, and asthma combined, we see incredible opportunities for greater identification, enrollment, and engagement of people with our digital health pathways.
We are relentlessly driving innovation and development to provide the scale needed to expand the impact of this technology across the 140 countries that we operate in.
Before I hand the call over to Brett for his remarks, I want to, once again, express my sincere gratitude for the more than 7,500 ResMedians for their perseverance, hard work, and dedication during these most unusual circumstances these last 15 months.
This team has helped save the lives literally of many hundreds of thousands of people around the world with ventilators with these emergency needs.
The team is now rapidly pivoted back to our core markets and our core purpose of helping people with sleep apnea, COPD, and asthma.
And for all those who need world-class care delivered well away from the hospital and preferably in their own home.
With that, I will now hand the call over to Brett in Sydney, and then we will move to Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the third quarter of fiscal-year 2021 and comment on our FY '22 outlook.
Unless noted, all comparisons are to the prior-year quarter.
Group revenue for the March quarter was $769 million, which is consistent with the prior-year quarter.
In constant-currency terms, revenue decreased by 3% compared to the prior-year quarter.
Consistent with our prediction during the Q2 earnings call, we derived negligible incremental revenue from COVID-19-related demand in the March quarter, whereas our prior-year Q3 revenue included an incremental benefit from COVID-19-related sales of approximately $35 million.
Excluding these impacts, our Q3 FY '21 revenue increased by 1% in constant-currency terms.
Taking a close look at our geographic distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada, and Latin America countries were $403 million, an increase of 2%.
Sales in Europe, Asia, and other markets totaled $272 million, a decrease of 5% or a decrease of 13% in constant-currency terms.
By product segment, U.S., Canada, and Latin America device sales were $193 million, a decrease of 2%.
Masks and other sales were $210 million, an increase of 7%.
In Europe, Asia, and other markets, device sales totaled $173 million, a decrease of 11% or in constant-currency terms, an 18% decrease.
Masks and other sales in Europe, Asia, and other markets were $99 million, an increase of 9% or flat year over year in constant-currency terms.
Globally, in constant-currency terms, device sales decreased by 10%, while masks and other sales increased by 4%.
Excluding the impact of COVID-19-related sales in the prior-year quarter, global device sales declined by 3% in constant-currency terms, while masks and other sales increased by 6% in constant-currency terms.
Software-as-a-Service revenue for the third quarter was $94 million, an increase of 5% over the prior-year quarter.
During my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin decreased by 40 basis points to 59.6% in the March quarter, compared to 60% in the same quarter last year.
The decrease is predominantly attributable to higher freight costs, additional manufacturing costs associated with the transition to our new Singapore site with commenced operations during the quarter, and geographic mix changes.
Moving on to operating expenses.
Our SG&A expenses for the third quarter were $160 million, a decrease of 7%, or in constant-currency terms, SG&A expenses decreased by 11% compared to the prior-year period.
SG&A expenses, as a percentage of revenue, improved to 20.9%, compared to the 22.4% we reported in the prior-year quarter, benefiting from cost management and reduced travel as a result of COVID-19 restrictions.
Looking forward, we expect SG&A expenses in Q4 FY '21 to increase in the low single digits relative to the prior-year period.
R&D expenses for the quarter were $56 million, an increase of 9%, on a constant-currency basis, an increase of 3%.
R&D expenses as a percentage of revenue was 7.3%, compared to 6.7% in the prior year.
Looking forward, we expect R&D expenses in Q4 to increase year over year in the high single digits, reflecting our long-term commitment to innovation.
Total amortization of acquired intangibles was $18 million for the quarter and stock-based compensation expense for the quarter was $16 million.
Our non-GAAP operating profit for the quarter was $242 million, an increase of 2%, reflecting well-contained operating expenses.
For the March quarter, we estimated and recorded an accounting tax reserve of $255 million, which is net of credits and deductions for a proposed settlement of transfer pricing audits by the Australian Taxation Office, or ATO.
The audit covered tax years 2009 to 2018.
As previously disclosed, for 2009 to 2013, the ATO issued assessment of $266 million, inclusive of penalties and interest.
The 2014 to 2018 year audits remain open, ongoing and assessments have not been issued.
We have tentatively agreed on a number with the ATO to result in the entire matter for all audit years.
We expect any adjustments to the reserve we have taken this quarter would be immaterial.
Next steps include getting to a written agreement and final board approval.
If the deal falls apart, we will litigate.
We continue to believe we are more likely than not to succeed in litigation.
However, transfer pricing litigation is complex, costly, and uncertain.
So we are looking forward to putting this behind us.
As a result of recording the reserve, on a GAAP basis, our effective tax rate for the March quarter was 136%.
While on a non-GAAP basis, which excludes the reserve, our effective tax rate for the quarter was 19.4%.
Looking forward, we estimate our underlying non-GAAP FY '21 effective tax rate will be in the range of 17% to 19%.
Our non-GAAP net income for the quarter was $190 million, an increase of 1%.
Non-GAAP diluted earnings per share for the quarter were $1.30, an increase of 1%.
As a result of the tax reserve recorded this quarter, our GAAP net loss for the quarter was $78 million and our GAAP diluted loss per share for the quarter was $0.54.
Cash flow from operations for the quarter was $196 million, reflecting solid underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $26 million.
Depreciation and amortization for the March quarter totaled $40 million.
During the quarter, we paid dividends of $57 million.
We recorded equity losses of $5 million in our income statement in the March quarter associated with the Verily joint venture.
And going forward, we expect to record equity losses in the range of $3 million to $5 million per quarter associated with the Verily joint venture.
We ended the third quarter with a cash balance of $231 million.
At March 31, we had $734 million in gross debt and $503 million in net debt.
Our debt levels remain modest.
And at March 31, we had a further $1.5 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
During the third quarter, we completed the acquisition of Citus Health.
Citus Health is a digital health leader specializing in patient engagement solutions that enable real-time secure collaboration between patients and those involved in their care.
We also acquired certain business assets of [Inaudible] medical company based in Korea, which primarily represented [Inaudible] sleep and respiratory distribution business.
Both these acquisitions will not be material to our group results.
Our board of directors today declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance.
Our solid cash flow and liquidity provides flexibility in how we allocate capital.
During the pandemic, we have focused on paying down debt.
Going forward, we plan to continue to reinvest the growth through R&D.
We will also likely continue to deploy capital for tuck-in acquisitions like Citus Health.
We intend to continue to return cash to shareholders through our dividend program.
We may also resume our share buyback program sometime during the calendar year.
This program has been on hold since our acquisitions of MatrixCare and Propeller Health in fiscal-year 2019.
Turning now to our expectations on the outlook for Q4 FY '21 and FY '22 outlook.
There remains uncertainty in the short term, particularly in predicting the timing of recovery of new patient flow from COVID-19-related impacts across the many countries that we operate in.
Consequently, we expect Q4 FY '21 revenue to reflect low single-digit sequential growth over Q3 FY '21.
As we move through FY '22, we expect to see continued improvement in new patient flow and a return to more normalized underlying revenue growth trends.
Additionally, we are seeing minimal COVID-19 generating demand for our ventilators and do not expect any material benefit going forward.
As a reminder, we recorded $35 million COVID-19 generated revenue in our March quarter last year, $125 million in our June quarter last year, and $40 million in our first quarter of FY '21.
Mask and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base and the success of our resupply service offerings.
We expect to see continued year-on-year growth of our mask sales in FY '22.
Finally, like many other companies, we continue to experience significant uncertainty in the current environment, particularly in relation to the timing of the reopening of economies with the vaccination programs roll out.
As a result, our forecast and possible future revenue outcomes remain dynamic.
And with that, I will hand the call back to Amy.
Celine, are you there?
Ready to run the Q&A portion of the call? | compname reports q3 non-gaap earnings per share of $1.30.
q3 gaap loss per share $0.54.
q3 non-gaap earnings per share $1.30.
qtrly revenue was comparable at $768.8 million; down 3% on a constant currency basis. |
These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them.
Also, our discussion today may include references to certain non-GAAP measures.
I'm joined today by Harp Rana, our chief financial officer.
Our business continued to fire on all cylinders in the second quarter.
We posted an impressive $20.2 million of net income or $1.87 of diluted EPS, with strong returns of 7.1% ROA and 28.7% ROE.
We experienced a return to double-digit year-over-year growth in our ending net receivables and quarterly revenue, which were up 15.7% and 10.9%, respectively.
Record high sequential portfolio growth of $78 million in the quarter drove our ending and average net receivables to all-time highs, which in turn generated record quarterly revenue.
We continue to capture market share as our growth once again outpaced the broader near-prime market.
At the same time, our quarter end 30-plus day delinquency rate fell to a historical low of 3.6%, and our net credit loss rate during the quarter dropped to 7.4%, a 320 basis-point improvement from the prior-year period.
These results validate the efficacy of our long-term strategy and the strength of our team's execution.
Our recent strategic investments in growth, including digital initiatives, geographic expansion, and product and channel development continue to bear considerable fruit.
Our core portfolio grew $80 million or 7% sequentially in the second quarter, with more than half of the growth occurring in June.
We originated a record $373 million of loans, of which $87 million was derived from our new growth initiatives.
The second-quarter volume was more than double last year's pandemic impacted quarter and up 7%, compared to the second quarter of 2019.
We continued to roll out our improved digital prequalification experience last quarter, and it's already driving increased digital booking rates.
We had record digitally sourced originations of $35 million in the second quarter, more than double first quarter levels and up dramatically from last year.
New digital volumes represented 28.5% of our total new borrower volume.
The average FICO on our digital volumes originated last quarter with 613, with 65% originated as large loans.
We will complete the deployment of the new prequalification experience to all of our states this quarter, and we will continue to integrate the new functionality with our existing and new digital affiliates and lead generators in the months ahead.
In addition, we have begun testing our new guaranteed loan offer product, which is an alternative to our convenience check loan product and offers online fulfillment with ACH funding into a customer's bank account.
Later this year, we will begin testing our end-to-end digital origination product for new and existing customers, and we remain on pace to roll out an improved online customer portal and a mobile app in the early part of 2022.
Our new larger auto secured loan product has also begun to gain traction as we've now rolled out the product to all of our states as of yesterday.
In addition, in late July, we expanded our retail point-of-sale lending relationship with a large Ashley Homestore franchisee.
With this expansion, we are tripling the number of locations we serve for this franchisee to 73 stores across five states, allowing us to better fulfill their need for near-prime and sub-prime installment financing options, all while fully underwriting borrowers via automation and maintaining industry-best service levels.
We believe there is a substantial opportunity and a renewed focus on our retail loan product, including cross-sell opportunities to our other loan products.
Beyond our digital product and channel investments, we continue to make important strides in expanding and optimizing our geographic footprint.
During the quarter, we entered Illinois and in just three months, our first branch has surpassed $1.5 million in receivables, which is impressive when you consider that our historical average time to reach $1.5 million in receivables in a new branch is 22 months.
The next two branches exceeded $500,000 in receivables after an average of only four and a half weeks.
These results demonstrate the tremendous opportunities that await us as we rapidly expand to new states and grab market share.
As a reminder, we plan to open roughly 20 new branches in 2021 across our network.
We also expect to enter one to two additional states by the end of the year and an additional four to six new states in 2022.
With the best first half in our company's history behind us, we entered the third quarter with considerable momentum.
We began the second half with nearly $1.2 billion of net finance receivables.
Loan demand has remained strong throughout July, even as child tax credit payments began to hit bank accounts.
We expect that demand for our loan products will increase in the coming months as the economy continues to recover, driving strong portfolio and top-line growth for the balance of the year and in 2022.
We are well-positioned to continue to gain market share as our strategic investments yield strong returns.
During this time of robust growth in our business, we remain focused on protecting our balance sheet and maintaining the credit quality of our loan portfolio.
In July, we further strengthened our liquidity position by closing on another securitization transaction.
This latest ABS deal is our first with a five-year term and has a weighted average coupon of 2.3%.
As of the end of July, we had over $813 million of unused capacity and available liquidity of over $229 million.
Of our $887 million in outstanding debt at the end of July, $759 million carries a fixed interest rate with a weighted average coupons ranging from 2.1% to 3.2%.
We also maintained $350 million of interest rate caps with strike rates of 25 to 50 basis points, covering $127 million in variable rate debt.
In sum, we're well-positioned to fund our future growth, and we're well protected should interest rates rise.
We also continue to maintain a superior credit profile, though we had expected a modest uptick in second-quarter delinquencies, we ended the quarter with another historically low 30-plus day delinquency rate.
This, in turn, contributed to a further improvement in our net credit loss rate and enabled us to reduce our allowance for credit losses by $200,000 in the quarter despite record portfolio growth.
As a result, our allowance for credit losses reserve rate at the end of the quarter was 11.8%, down from 12.6% last quarter.
Our $139 million allowance for credit losses as of June 30 continues to compare quite favorably to our 30-plus day contractual delinquency of $43 million and includes an $18 million reserve for additional credit losses associated with COVID-19.
As of June 30, approximately 80% of our total portfolio had been originated since April 2020, the vast majority of which was subject to enhanced credit standards that we deployed following the onset of the pandemic.
Looking ahead, credit performance should remain strong throughout 2021 and into 2022.
In light of our current historically low delinquencies, we now expect our full-year 2021 NCL rate to be roughly 7%.
We anticipate that our delinquency rate will gradually normalize over the next 12 months and that our NCL rate in 2022 will be between 8% and 8.5%, absent any significant changes to the macroeconomic environment.
As we progress throughout the year, we expect that our allowance for credit losses will increase as the portfolio continues to grow, though we anticipate that the reserve rate will normalize to pre-pandemic levels of around 10.8% by the end of the year.
In light of the unique circumstances presented by the pandemic and credit loss provisioning under the new CECL accounting standard, we have elected for this year only to provide a full-year 2021 net income outlook.
Having earned $46 million in the first half of the year, we expect to generate full-year 2021 net income of between 75 and $80 million, assuming no material change to current economic conditions.
This outlook reflects an expectation that we will build our allowance for credit losses in the second half of the year due to robust receivable growth, even as our reserve rate normalizes to pre-pandemic levels of roughly 10.8%.
We also expect to increase our SG&A expenses in the second half as we continue to invest in our growth initiatives, including increased marketing expenses as we continue to expand our digital lending.
Based on our confidence in the earnings power and value of our business, our board has approved a $20 million increase in the amount authorized under our current stock repurchase program from $30 million to $50 million.
As we move forward, we remain firmly on the strategic course we've charted.
We'll continue to invest in our omnichannel growth initiatives, digital innovation, geographic expansion, and new products and channels.
We will continue to grow our portfolio and market share by providing a best-in-class experience to our customers and will maintain a sharp focus on credit quality and a healthy balance sheet, which will allow us to fund our growth and return excess capital to our shareholders.
We remain fully committed to our customers and our path forward.
And we continue to be in a prime position to create sustainable long-term value for our shareholders.
I couldn't be prouder of the team and the results they've produced.
Let me take you through our second-quarter results in more detail.
We generated net income of $20.2 million and diluted earnings per share of $1.87 resulting from our growth initiatives, stable operating expenses, lower funding costs, and strong credit.
To highlight the underlying momentum of our business, consider that last quarter, we generated $25.5 million in net income, inclusive of a $10.4 million decrease in our allowance for credit losses.
This quarter, we generated $20.2 million of net income, inclusive of only a $200,000 decrease in our allowance.
The business produced strong returns, with 7.1% ROA and 28.7% ROE this quarter and 8.2% ROA and 32.7% ROE through midyear.
While our returns were aided by a benign credit environment, our ability to drive revenue to our bottom line and generate strong returns continues to pick up spin.
As illustrated on Page 4, branch originations were well above the prior year, due in part to the pandemic as we ended the second quarter, originating $263 million of loans in our branches.
Meanwhile, we more than tripled direct mail and digital originations year over year to $110 million.
Our total originations were a record $373 million, more than doubling the prior-year period and 7% higher than the second quarter of 2019.
Notably, our new growth initiatives drove $87 million of second quarter originations.
Page 5 displays our portfolio growth and mix trends through June 30.
We closed the quarter with net finance receivables of $1.2 billion, up $78 million from the prior quarter and $161 million from the prior-year period as we continue to successfully execute on our new growth initiatives and marketing efforts.
Our core loan portfolio grew $80 million or 7% from the prior quarter and $172 million or 17% from the prior year as we continue to expand our market share.
Large loans grew 10% versus the first quarter of 2021, while small loans increased 3% quarter over quarter.
For the third quarter, we expect demand to remain solid with some potential headwinds from the child tax credit payment.
Overall, we expect to see healthy quarter-over-quarter growth in our finance receivables portfolio in the third quarter.
On Page 6, we show digital resourced originations, which were 28.5% of our new for all volume in second quarter, another high watermark for us, and a further testament to our ability to meet the needs of our customers and serve them through our omnichannel strategy.
During the second quarter, large loans were 65% of our digitally sourced originations.
Turning to Page 7.
Total revenue grew 11% to $99.7 million.
Interest and fee yield increased 110 basis points year over year, primarily due to improved credit performance across the portfolio as a result of government stimulus, tightened underwriting during the pandemic, and our overall mix shift toward higher credit quality customers, resulting in fewer loans and non-accrual status and fewer interest accrual reversals.
Sequentially, interest and fee yield and total revenue yield increased 50 and 70 basis points, respectively, due to credit performance and seasonality.
As of June 30, 67% of our portfolio were large loans and 82% of our portfolio had an APR at or below 36%.
In the third quarter, we expect total revenue yield to be approximately 60 basis points lower than the second quarter, and our interest in fee yield to be approximately 30 basis points lower due to our continued mix shift toward larger loans.
Moving to Page 8.
Our net credit loss rate was 7.4% for the quarter, a 320 basis-point improvement year over year, while delinquencies remained at historically low levels.
Net credit losses were also down 30 basis points from the first quarter due to the impact of government stimulus, improving economic conditions, and our lower delinquency levels.
We expect that our full-year net credit loss rate will be approximately 7%.
Flipping to Page 9.
Our 30-plus day delinquency level as of June 30 was 3.6%, 120 basis-point improvement from the prior year, and notably, 70 basis points lower than March 31.
Moving forward, we expect 30-plus day delinquencies to rise gradually off of the June loan toward more normalized levels over the next 12 months.
Turning to Page 10.
We ended the first quarter with an allowance for credit losses of $139.6 million or 12.6% of net finance receivables.
During the second quarter of 2021, the allowance decreased by $200,000 to 11.8% of net-net receivables.
This decrease included a base reserve build of $6.1 million to support our strong portfolio growth and a COVID-19 reserve release of $6.3 million due to improving economic conditions.
As a reminder, as our portfolio grows, we will continue to build additional reserves to support this new growth.
With the improving economy, we've reduced the severity and the duration of our macro assumptions, including an assumption that the unemployment rate will be under 8% at the end of 2021.
We will continue to review these assumptions every quarter to reflect changing macro conditions as the economy continues to revamp.
Our $139.4 million allowance for credit losses as of June 30 continues to compare very favorably to our 30-plus day contractual delinquency of $42.8 million.
We are confident that we remain appropriately reserved.
Flipping to Page 11.
G&A expenses for the second quarter of 2021 were $46.4 million, up $4.9 million or 11.7% from the prior-year period, driven in part by normalized marketing from pandemic impacted second quarter 2020 levels, as well as increased investment in our new growth initiatives and omnichannel strategy.
On a sequential basis, our G&A expense rose $0.5 million, driven by our marketing activities.
Overall, we expect G&A expenses for the third quarter to be approximately $52 million as we continue to invest in our digital capabilities, our geographic expansion into new states, and new products and channels to drive additional sustainable growth and improved operating leverage over the longer term.
Turning to Page 12.
Interest expense was $7.8 million in the second quarter of 2021 and 2.8% of our average net finance receivables.
This was a 60 basis-point improvement year over year and $1.3 million lower than in the prior-year period.
The improved cost of funds was driven by the lower interest rate environment and improved funding costs from our recent securitization transaction.
We currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of the second quarter totaled $293.8 million.
We have purchased a total of $350 million of interest rate caps over the past year at a one-month LIBOR strike price range of 25 to 50 basis points, including a $50 million interest rate cap in the second quarter at a strike price of 25 basis points.
In the last six months, these caps have appreciated in value by $775,000.
As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly.
Looking ahead, we expect interest rate expense in the third quarter to be approximately $10 million.
Page 13 is a reminder of our strong funding profile.
Our second quarter funded debt-to-equity ratio remained at a conservative 3.1-1.
We continue to maintain a very strong balance sheet with low leverage and $139 million in loan loss reserves.
As of June 30, we had $647 million of unused capacity on our credit facilities and $202 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
As a reminder, during the quarter, we enhanced our warehouse facility capacity to $300 million, closing on three new warehouse facilities with our current lenders, Wells Fargo and Credit Suisse, and adding JP Morgan to our roster of lenders.
In July, we also closed our six securitization, our first five-year transaction of approximately $200 million at a weighted average coupon of 2.30%.
The new securitization will be used to further reduce our cost of capital and fund our growing business.
Our effective tax rate during the second quarter was 19%, compared to 36% in the prior-year period, better-than-expected from tax benefits on share-based compensation.
For the second half of 2021, we expect an effective tax rate of approximately 25%.
The company's board of directors has declared a dividend of $0.25 per common share for the third quarter of 2021.
The dividend will be paid on September 15, 2021, to shareholders of record as of the close of business on August 25, 2021.
In addition, during the second quarter, we repurchased 344,429 shares of our common stock at a weighted average price of $46.45 per share under our $30 million stock repurchase program announced in May 2021.
We also repurchased an additional 68,437 shares at a weighted average price of $50.49 per share in July, bringing total repurchases under the program to 412,866 shares at a weighted average price of $47.12 per share through July.
As Rob mentioned earlier, we are pleased to announce that our board has approved a $20 million increase in the amount authorized under our current buyback program from $30 million to $50 million.
We continue to be extremely pleased with our outstanding performance, our robust balance sheet, and our prospects for growth.
In summary, we are performing extremely well thus far in 2021.
Our omnichannel operating model, new growth initiatives, and superior credit profile led to another excellent quarter and a record-breaking first six months of the year, and we don't plan to let up.
We will continue to execute on our key strategic initiatives, positioning us to sustainably grow our business for years to come.
We have many exciting things on the horizon for Regional as we remain well-positioned to expand our market share and create additional value for our shareholders.
Operator, could you please open the line? | compname reports q2 earnings per share $1.87.
q2 earnings per share $1.87.
q2 revenue $99.7 million versus refinitiv ibes estimate of $95.3 million.
for full year 2021, company expects net income to be between $75 million and $80 million. |
These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them.
Also, our discussion today may include references to certain non-GAAP measures.
I'm joined today by Harp Prana, our chief financial officer.
In the third quarter, our strategic initiatives continued to fuel record growth and drive strong results.
We posted $22.2 million of net income or $2.11 of diluted EPS, with very attractive returns of 7.1% ROA and 31.6% ROE.
We continue to grow our market share and once again experienced double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 24% and 23%, respectively.
We generated record sequential portfolio growth of $131 million in the quarter, leading to another all-time high in net finance receivables and quarterly revenue.
The successes of our long-term strategic initiatives are evident.
We built a growth company with a focused omnichannel strategy and proven consistent execution.
At the same time, we've derisked the business by investing heavily in our custom underwriting models and shifting more than 82% of our portfolio to higher-quality loans at or below 36% APR, enabling us to maintain a stable credit profile as we grow and deliver predictable superior results for our shareholders.
In the third quarter, delinquency increased in line with expectations as government stimulus waned, but it's 4.7%, our 30-plus day delinquency rate is on par with the prior year and 180 basis points below third quarter 2019 levels.
Our net credit loss rate during the quarter was 5%, the lowest in our history as a public company, a 280 basis point improvement from the prior-year period and a 310 basis point improvement from the third quarter of 2019.
Our strategic investments in digital initiatives, geographic expansion and product and channel development, along with our proven omnichannel marketing engine, continue to drive substantial growth.
We originated a record $421 million of loans in the third quarter, which was up 35% over last year and 19% above 2019 pre-pandemic levels.
This includes $129 million derived from our new growth initiatives.
The loans originated through these growth initiatives are performing as expected with solid credit experience and strong net credit margins.
New digital volumes represented 28% of our total new borrower volume, with 57% originated as large loans.
Our digital prequalification engine will continue to be integrated with new states as they roll out and with our existing and new digital affiliates and lead generators in the months ahead.
Aside from our improved digital pre-qualification experience, we continue to test our new guaranteed loan offer product, which is an alternative to our convenience check loan product and provides online fulfillment with ACH funding into a customer's bank account.
Within the next few months, we will also begin testing our end-to-end digital origination product, and we remain on pace to deliver an improved online customer portal and a mobile app in the early part of 2022.
As we continue to build on our omnichannel model and expand our digital initiatives, we made significant strides to further strengthen our team during the quarter with the addition of Chris Peterson as our first chief data and analytics officer.
A strong data and analytics function can transform an organization, and we believe that it will be a key enabler in delivering our long-term strategies.
We are confident that our investment in data and analytics will ultimately drive a step change in customer insight and engagement, transform products and services, enable better business decisions and risk management, and improve our core operations.
In the third quarter, we also continued to grow our geographic footprint.
Near the end of the quarter, we entered Utah as we expanded our operations to the western U.S. As a reminder, we entered Illinois in the second quarter and as of the end of October, our first branch has reached $2.8 million in receivables in six months, and the four branches in the state have exceeded $9 million in receivables.
We're confident in our ability to quickly gain a strong foothold in new geographies as we expand.
In the coming months, we expect to enter a new state and open 10 new branches across our network, and we have plans to enter an additional five to seven new states by the end of 2022.
This will result in higher average receivables per branch and the need for fewer branches, which we expect will drive greater operating leverage.
In the third quarter, we assessed our legacy branch network and decided to lean further into our omnichannel approach by optimizing our footprint.
To that end, we closed 31 branches in the fourth quarter, where there were clear opportunities to consolidate operations into a larger branch in close proximity, while still providing our customers with the best-in-class service they've come to expect.
These branch optimization actions will generate approximately $2.2 million in annual savings, which we'll reinvest in our expansion into new states.
Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit quality.
In October, we closed a five-year $125 million private securitization transaction at a fixed coupon of 3.875%, which enables us to fund loans above and below 36% APR.
The transaction increases our percentage of fixed rate funding further diversifies our funding sources and strengthens our overall liquidity position.
Following the October securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and an average revolving duration of nearly three years.
Following the transaction, we also maintained $350 million of interest rate caps with strike rates of 25 to 50 basis points, covering $133 million in variable rate debt and future portfolio funding.
In sum, we remain well positioned to fund our future growth and we're well protected against the risk of rising interest rates.
As I noted earlier, our credit profile remains very strong.
We have achieved controlled growth with stable credit through prudent underwriting to our rigorous pre-pandemic standards and our ongoing investment in our custom scorecard.
We have further protected our portfolio with the addition of enhanced verification processes implemented at the outset of the pandemic and the use of alternative data in our risk and response models to adjust for the impact of stimulus and forbearance programs.
Across all product lines, FICO scores have increased since early 2020, and our highest growing customers make up a larger portion of our overall portfolio.
As of September 30, approximately 87% of our portfolio had been originated since April 2020.
The vast majority of which was subject to enhanced credit standards that we deployed following the outset of the pandemic.
Consistent with our loan portfolio growth, we built our allowance for credit losses by $10.7 million in the third quarter.
And as a result, our allowance for credit losses reserve rate at the end of the quarter was 11.4%.
Our $150.1 million of allowance for credit losses as of September 30 continues to compare quite favorably to our 30-plus day contractual delinquency of $61.3 million and includes a $15.5 million reserve for additional credit losses associated with COVID-19.
We released only $2 million of our COVID-related reserves in the third quarter as we continue to maintain a conservative stance as we monitor the impact of the delta variant, the pace of the economic recovery and the health of the consumer as the benefits of government assistance continue to dissipate.
Looking ahead, absent any significant changes to the macroeconomic environment, we expect that our fourth quarter and full year 2021 NCL rates will be below 7%.
Our allowance for credit losses will increase in the fourth quarter as the portfolio continues to grow, and we now anticipate that the reserve rate will return to pre-pandemic levels of around 10.8% by roughly mid-2022.
Assuming the economic recovery remains on track, we believe that credit performance should remain strong into next year and that our 2022 NCL rate will be at or below 8.5% even as delinquencies continue to normalize off the recent historically low levels.
As we near the end of 2021, we remain in the strongest position in our history.
Our net finance receivables are at record highs and loan demand remains robust as the economy recovers.
We look forward to strong portfolio and top line growth as our strategic investments yield solid returns, and we continue to take market share.
Based on our third quarter results, we're raising our expectations for full year 2021 net income to between 85 and $87 million, up from our prior range of $75 million to $80 million.
Our revised outlook reflects our strong third quarter core portfolio growth of 25.4% over the prior-year period, which outpaced the broader market.
Our outlook also assumes the year-end net finance receivables will be approximately $1.4 billion, providing a strong jump-off point as we enter 2022 and further demonstrating the power of our omnichannel model.
As a reminder, we're only providing a full year net income outlook for 2021 due to the unique circumstances we've encountered this year.
We're having a record year and we're extremely excited for our long-term future.
Our omnichannel initiatives are working quite well for us, and we continue to invest broadly in our growth plans and digital capabilities.
We'll bring our financial solutions to even in more states in the months ahead, while ensuring that our customers continue to receive outstanding service.
And we'll continue to prioritize our credit quality, our balance sheet strength, and driving operating efficiencies, which will lead to more profitable growth, the return of excess capital to our shareholders, and sustainable long-term value creation.
Let me take you through our third quarter results in more detail.
We generated net income of $22.2 million and diluted earnings per share of $2.11, driven by significant portfolio and revenue growth, stable operating expenses, low funding costs, and a healthy credit profile.
The business continued to produce attractive returns with 7.1% ROA and 31.6% ROE this quarter and 7.8% ROA and 32.4% ROE year to date.
We continue to demonstrate our ability to drive revenue to our bottom line and generate strong returns.
As illustrated on Page 4, branch originations were well above the prior year as we originated $268 million of branch loans in the third quarter, 18% higher than the prior-year period and 3% higher than 2019.
Meanwhile, direct mail and digital originations also increased nicely year over year to $152 million, 80% higher than the prior year and 66% higher than 2019.
Our total originations were a record $421 million, up 35% from the prior-year period and 19% higher than 2019.
Notably, our new growth initiatives drove $129 million of third quarter originations and have become a significant factor in our accelerating expansion.
Page 5 displays our portfolio growth and mix trends through September 30.
We closed the quarter with net finance receivables of $1.3 billion, up $131 million from the prior quarter and $255 million from the prior-year period as we continue to successfully execute on our omnichannel strategy, new growth initiatives, and marketing efforts.
Our core loan portfolio grew $132 million or 11% from the prior quarter and $263 million or 25% from the prior-year period as we continue to take market share.
Large loans and small loans grew 12% and 10% on a sequential basis.
For the fourth quarter, we expect demand to remain strong and to generate healthy quarter-over-quarter growth in our finance receivables portfolio, resulting in year-end net finance receivables of approximately $1.4 billion.
On Page 6, we show our digitally sourced originations which were 28% of our new borrower volume in the third quarter as we continue to meet the needs of our customers through our omnichannel strategy.
During the third quarter large loans were 57% of our new digitally sourced originations.
Turning to Page 7.
Total revenue grew 23% to a record $111.5 million.
Interest and fee yield increased 50 basis points year over year, primarily due to improved credit performance across the portfolio, resulting in fewer loans and nonaccrual status and fewer interest accrual reversals.
Sequentially, interest and fee yield and total revenue yield each increased 40 basis points due to credit performance and the growth in our small loan portfolio in the third quarter.
As of September 30, 67% of our portfolio was comprised of large loans and 82% of our portfolio had an APR at or below 36%.
In the fourth quarter, we expect total revenue yield to be approximately 70 basis points lower than the third quarter and our interest and fee yield to be approximately 50 basis points lower due to the continued mix shift toward larger loans and the impact of nonaccrual loans as credit continues to normalize.
Moving to Page 8.
Our net credit loss rate was 5% for the third quarter, a 280 basis point improvement year over year.
Net credit losses were also down 240 basis points from the second quarter due to improving economic conditions and our lower delinquency levels.
We continue to expect that our full year net credit loss rate will be below 7%.
Flipping to Page 9.
30-plus day delinquencies have begun to normalize as expected.
Our 30-plus day delinquency level as of September 30 was 4.7%, an increase of 110 basis points versus June 30, but comparable to the prior year and 180 basis points below 2019 levels.
Our 90-plus day delinquency level increased only 40 basis points sequentially and remains below third quarter 2020 and 2019 levels.
Moving forward, we expect delinquencies to continue to rise gradually toward more normalized levels.
Absent any significant change to the macroeconomic environment, we expect strong credit performance into 2022.
And we anticipate that our 2022 NCL rate will be at or below 8.5%, even as the historically low delinquencies continue to normalize.
Turning to Page 10.
We ended the second quarter with an allowance for credit losses of $139.4 million or 11.8% of net finance receivables.
During the third quarter of 2021, the allowance increased by $10.7 million to $150.1 million to support our strong portfolio growth, but the allowance as a percentage of net finance receivables decreased to 11.4%.
The allowance increase in the quarter consisted of a base reserve build of $12.7 million to support our portfolio growth and a COVID-related reserve release of $2 million due to improving economic condition.
We continue to maintain a reserve of $15.5 million related to the expected economic impact of the COVID-19 pandemic.
As a reminder, as our portfolio grows, we will build additional reserves to support new growth.
We continue to reduce the severity and the duration of our macroeconomic assumptions given the stronger economy.
We expect that the reserve rate at year-end will be comparable to current levels and will normalize to pre-pandemic levels of approximately 10.8% by around mid-2022.
Our $150.1 million allowance for credit losses as of September 30 continues to compare very favorably to our 30-plus day contractual delinquency of $61.3 million.
We are confident that we remain appropriately reserved.
Flipping to Page 11.
G&A expenses for the third quarter of 2021 were $47.8 million, up $4 million or 9% from the prior-year period, driven by increased investment in our new growth initiatives, personnel, and omnichannel strategy.
G&A expenses for the third quarter also included $0.7 million of expenses related to the consolidation of 31 branches as a part of the company's branch optimization plan and the $3 million benefit related to the deferral of digital loan origination costs, of which $1.5 million was incremental to the quarter.
On a sequential basis, our G&A expenses rose $1.4 million.
Overall, we expect G&A expenses for the fourth quarter to be approximately $54 million as we continue to invest in our digital capabilities, our geographic expansion into new states and personnel to drive additional sustainable growth and improved operating leverage over the longer term.
Fourth quarter G&A expenses will include an estimated $0.9 million of branch optimization expenses.
Turning to Page 12.
Interest expense was $8.8 million in the third quarter or 2.8% of our average net finance receivables on an annualized basis.
This was a $0.5 million or 70 basis point improvement year over year.
The improved cost of funds was driven by the lower interest rate environment and improved costs from our recent securitization transactions.
We currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of third quarter totaled $219 million.
$350 million of the interest rate caps at a one-month LIBOR strike price between 25 and 50 basis points and a weighted average duration of 2.3 years.
As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly.
Looking ahead, we expect interest rate expense in the fourth quarter to be approximately $10 million, excluding mark-to-market impact on interest rate caps, with the increase in expense attributable to the growth in our loan portfolio.
Page 13 is a reminder of our strong funding profile.
Our third quarter funded debt-to-equity ratio remains at a conservative 3.5 to one.
We continue to maintain a very strong balance sheet with low leverage and $150 million in loan loss reserves.
As of September 30, we had $722 million of unused capacity on our credit facilities and $194 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
As a reminder, in October, we closed our seventh securitization, a private $125 million transaction that has a five-year revolving period and a fixed coupon of 3.875%.
The new securitization enables us to pay down higher cost variable rate debt, provides us with additional fixed interest rate certainty, and allows us to fund multiple product types, both above and below 36% APR.
Following the securitization, our fixed rate debt as a percentage of total debt increased from 78% to 87%, with a weighted average coupon of 2.7% and average revolving duration of nearly three years.
Our effective tax rate during the third quarter was 23% compared to 27% in the prior-year period.
For the fourth quarter, we expect an effective tax rate of approximately 25%, excluding discrete items, such as tax impacts associated with equity compensation.
The company's board of directors has declared a dividend of $0.25 per common share for the fourth quarter of 2021.
The dividend will be paid on December 15, 2021 to shareholders of record as of the close of business on November 24, 2021.
In addition, during the quarter, we repurchased 390,112 shares of our common stock at a weighted average price of $56.32 per share under our $50 million stock repurchase program.
We continue to be extremely pleased with our outstanding performance throughout the year, a robust balance sheet, and our near and long-term prospects for growth.
That concludes my remarks.
In summary, it was another outstanding quarter for Regional.
Our omnichannel operating model, new growth initiatives, and superior credit profile continue to set us apart from our competition.
We're a growth company at a value price, and we hope that you're as excited as we are about our future and the focused omnichannel strategy that we've developed.
We'll continue to execute on our key strategic initiatives, positioning us to sustainably grow our business, expand our market share, and create additional value for our shareholders.
We look forward to continuing to provide our shareholders with predictable, consistent, and high-quality returns.
Operator, could you please open the line? | compname reports q3 earnings per share $2.11.
q3 earnings per share $2.11.
q3 revenue rose 23 percent to $111.5 million. |
These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them.
Also, our discussion today may include references to certain non-GAAP measures.
I'm joined today by Harp Rana, our chief financial officer.
We continue to deliver consistent, predictable and superior results in the fourth quarter.
We generated $20.8 million of net income or $2.04 of diluted EPS, along with attractive returns of 6% ROA and 29.5% ROE due to quality growth in our loan portfolio, a strong credit profile, disciplined expense management and low funding costs.
For the third straight quarter, we logged double-digit year-over-year growth in our net finance receivables and quarterly revenue, which were up 26% and 23%, respectively.
These annual growth rates far exceeded our 2019 prepandemic portfolio and revenue growth rates of 19% and 16%, respectively.
We originated a record $434 million of loans in the fourth quarter, up 19% over both the prior year and 2019 levels.
Over the past two years, we've taken market share, as evidenced by our growth compared to the broader industry and, at the same time, maintained our robust credit underwriting.
In the fourth quarter, our portfolio also grew sequentially by $112 million, exceeding our guidance and driving our ending net receivables to an all-time high of more than $1.4 billion, which in turn produced record quarterly revenue of $119 million.
While delinquencies continue to normalize in line with our expectations, our credit profile at the end of the year remains stronger than prepandemic levels.
Our 30-plus day delinquency rate ended just below 6%, which was 70 basis points above the prior year end but still 100 basis points below December 31, 2019.
Our net credit loss rate during the quarter was 6.4%, a 50 basis point improvement from the prior year period and 260 basis points better than the fourth quarter of 2019.
Our net credit loss rate for the full year 2021 was 6.6% or 230 basis points lower than 2020 and 290 basis points lower than 2019.
Our operations have proven durable and resilient throughout the pandemic, including during the most recent Omicron variant surge, and we continue to be encouraged by the strength of the economy, positive macroeconomic outlook, and the low unemployment rate.
As I reflect on 2021, I'm proud of our team's relentless execution on our strategic growth initiatives and our company's delivery of strong results that benefit all stakeholders, most importantly our customers, team members, communities and shareholders.
We once again demonstrated our ability to produce exceptional outcomes despite a challenging macroeconomic environment.
For our customers, we continue to execute our vision of delivering a best-in-class experience and a basket of useful, accessible, easily understood financial solutions that serve their evolving needs and support their long-term financial well-being.
We enhanced the digital prequalification experience, launched a guaranteed loan offer program with online fulfillment, expanded our auto secured and retail loan products, and introduced our valuable credit solutions to millions of new customers in two new states.
We also made the investments necessary to deliver end-to-end digital lending and improved customer portal and a mobile app to our customers in 2022.
At the same time, we improved the financial well-being of our customers, including through our graduation programs.
In 2021, we refinanced approximately 41,000 of our customers' small loans into large loans, representing $237 million in finance receivables at origination and reducing these customers' average APR from 42.8% to 30.7%.
For our team members, we established a $15 per hour minimum wage, rolled out additional compensation increases for hourly employees in amounts well ahead of the current inflationary environment, provided an additional week of paid time off and access to bereavement leave, held health and welfare insurance premiums flat, improved our overall benefit offerings and introduced new training and development programs.
For our communities, we continue to make a positive impact through Regional Reach, an employee-led program dedicated to creating social change and goodwill through community service, charitable giving, and diversity, equity and inclusion initiatives.
In the spring, we again partnered with the American Heart Association, leading all upstate South Carolina companies in fundraising for the Heart Walk for the second year in a row and emerged as a top partner for American Heart nationwide.
Throughout the year, we also provided support to other organizations, such as Harvest Hope Food Bank and Asian Americans Advancing Justice.
For our shareholders, we grew our loan portfolio, gained market share, maintained a strong credit profile, appropriately managed our operating expenses, diversified our funding sources, decreased our funding costs, hedged our interest rate risk, and posted a number of annual and quarterly records on both our income statement and balance sheet.
We finished 2021 with a record $88.7 million of net income, $8.33 of diluted EPS, 7.2% ROA, 31.6% ROE.
These results are far and away the best in our company's history, with net income exceeding the high end of our most recent guidance by nearly $2 million.
We also invested heavily throughout the pandemic, enabling us to dramatically improve our capabilities relative to 2019 and positioning us well for 2022 and beyond.
These investments led to a strong portfolio and revenue growth, up 26% and 20%, respectively, in 2021 compared to prepandemic results in 2019.
In addition to growing our portfolio and investing in our future, we returned capital to our shareholders in the form of dividends totaling $10 million and share repurchases totaling $67 million in 2021.
Since the outset of the pandemic in 2020, we have returned a total of $92 million of capital, comprised of $80 million of share repurchases or 17.2% of shares outstanding at the beginning of 2020 and $12 million of dividends.
In recognition of our exceptional results, our strong capital position and the long-term earnings power and resiliency of our business, I am pleased to announce that our board of directors has approved a 20% increase in our quarterly dividend to $0.30 per share and has authorized a new $20 million stock repurchase program.
Pivoting to the new year.
We entered 2022 in a position of considerable strength.
Our loan portfolio at the outset of the year was at an all-time high, providing a solid jump-off point for 2022, and we expect that loan demand will continue to be robust.
We remain well-situated to execute on our long-term strategies, including our ambitious growth plans throughout the year and beyond.
We will continue to invest heavily in technology as we innovate and evolve our business.
Our improved digital prequalification experience produced another period of record digitally sourced originations.
We originated $49 million of digitally sourced loans in the fourth quarter, up 135% from the prior year period and 226% from the fourth quarter of 2019.
New digital volumes represented 28.2% of our total new borrower volume in the quarter, with 59.8% originated as large loans.
Total digitally sourced originations in 2021 were $149 million, up 239% from 2020 and 199% from 2019.
With the combination of our digital prequalification engine and our new end-to-end digital lending capabilities, which we'll begin testing this quarter, we expect to be in a position to deliver another year of record digitally sourced originations in 2022.
Earlier this week, we continued to grow our geographic footprint with the expansion of operations to Mississippi, our 14th state.
We also plan to enter at least five additional new states and open approximately 25 de novo branches later this year as we continue our national expansion.
Our digital investments and support from our centralized sales and service team will allow our branches in new states to maintain a broader geographic reach.
This will result in higher average receivables per branch and the need for fewer branches, creating greater operating leverage.
We remain confident in our ability to quickly gain a strong foothold in new geographies as we expand.
Along with our rapid growth, we continue to keep a firm handle on our balance sheet and credit profile.
As of the end of 2021, we had more than $550 million of unused borrowing capacity and available liquidity of $210 million to fund our growth.
We are positioned well for rising interest rates with 78% of our $1.1 billion in outstanding debt carrying a fixed rate interest rate with a weighted average coupon of 2.7% and an average revolving duration of 3.1 years.
In the fourth quarter, we added two forward interest rate caps totaling $100 million at strike rates of 50 basis points, a timely purchase in light of increasing rates at the outset of 2022.
The new caps are effective in 2023 and 2024, provide protection into early 2026 and extend our weighted average interest rate cap duration to nearly two years.
As of December 31, inclusive of the new caps, we had a total of $450 million of interest rate caps with strike rates at 25 to 50 basis points, covering $244 million in existing variable debt and creating protection for future growth.
By midyear 2022, we also plan to begin implementing our next-generation scorecard with a full rollout by year-end.
The new proprietary model will provide significant advancements in underwriting capabilities by utilizing sophisticated modeling algorithms that leverage new alternative data sources to drive more predictable outcomes.
Also, in support of our end-to-end digital growth strategy, we will integrate industry-leading APIs for fraud, income, cash flow and employment verification into the underwriting and origination process.
These efforts will contribute to stable credit performance in the coming years.
We also began 2022 with healthy reserves against future credit losses.
Consistent with our strong portfolio growth in the fourth quarter, we built our allowance for credit losses by $9.2 million, resulting in an allowance for credit losses reserve rate at the end of the year of 11.2%.
Our allowance includes a $14.4 million reserve related to the expected economic impact of the COVID-19 pandemic.
We released only $1.1 million of these COVID-related reserves in the fourth quarter as we continue to maintain a conservative stance while monitoring the impact of the Omicron variant, the pace of the economic recovery and the financial health of the consumer.
In summary, our strategic investments in digital initiatives, geographic expansion, and product and channel development, along with our proven multichannel marketing engine, continue to drive substantial profitable growth.
We've also derisked our business by investing heavily in our custom underwriting models and shifting 83% of our portfolio to higher quality loans at or below 36% APR, enabling us to maintain stable credit profile as we grow.
We also continue to prioritize our operating efficiency and balance sheet strength.
Together, these efforts have yielded consistent, predictable and superior results and will drive profitable growth with sustainable long-term value creation and capital return in the future.
I'll take you through our fourth-quarter results in more detail.
We generated net income of $20.8 million and diluted earnings per share of $2.04, up 45% and 59%, respectively, over the prior-year period.
These results were driven once again by significant portfolio and revenue growth, low funding costs and a healthy credit profile.
The business produced strong returns with 6% ROA and 29.5% ROE this quarter, and 7.2% ROA and 31.6% ROE for the full year 2021.
We continue to demonstrate our ability to drive revenue to our bottom line and generate robust returns.
As illustrated on Page 4, branch originations increased year over year as we originated $287 million of branch loans in the fourth quarter, 7% higher than the prior year period.
Meanwhile, direct mail and digital originations were 55% above the prior year period, rising to $148 million of originations.
Our total originations were a record $434 million, up 19% from the prior year period.
Notably, our new growth initiatives drove $128 million of fourth-quarter originations and continue to be a significant factor in our accelerating expansion.
Page 5 displays our portfolio growth and mix trends through the end of 2021.
Our core loan portfolio grew $112 million or 8.6% sequentially in the quarter and $296 million or 26.5% from the prior year period as we continued to capture market share.
Large loans and small loans grew 10% and 6% on a sequential basis.
As a reminder, for the first quarter of 2022, we expect to see some degree of normal seasonal runoff in the portfolio as customers have historically paid down their loans in the first quarter with tax refunds and bonuses.
However, in light of strong demand in the market this year, we anticipate that our finance receivables portfolio will liquidate only slightly in the quarter.
Our first quarter ending net receivables should be approximately $1.4 billion, and consistent with prior years, the portfolio will return to growth in the second quarter.
On Page 6, we show our digitally sourced originations, which were 28% of our new borrower volume in the fourth quarter as we continue to meet the needs of our customers through our omnichannel strategy.
During the fourth quarter, large loans were nearly 60% of our new digitally sourced origination.
Turning to Page 7.
Total revenue grew by 23% to a record $119.5 million.
Interest and fee yield declined 50 basis points year over year as expected primarily due to the continued mix shift toward larger loans and the impact of nonaccrual loans as credit continues to normalize.
Sequentially, interest and fee yield was lower by 60 basis points and total revenue yield was lower by 80 basis points, reflecting normal seasonal increases in 90-plus day delinquencies.
In the first quarter, we expect total revenue yield to be approximately 110 basis points lower than the fourth quarter and our interest in fee yield to be approximately 120 basis points lower due to the continued mix shift to large loans, seasonally higher net credit losses and credit normalization.
Moving to Page 8.
Our net credit loss rate was 6.4% for the fourth quarter, a 50 basis point improvement year over year and 260 basis points better than the fourth quarter of 2019.
We typically experience a seasonal increase in our net credit loss rate in the first quarter of each year, and we also expect that the credit profile of our portfolio will continue to normalize in the first quarter of this year.
Despite the combination of typical first quarter seasonality and this year's credit normalization, we anticipate that our net credit loss rate will remain 130 basis points better than first quarter 2020 prepandemic level.
For the full year 2022, we expect that our loss rate will be approximately 8.5% or 100 basis points below full year 2019 levels.
30-plus day delinquencies continue to normalize as expected.
Our 30-plus day delinquency level as of December 31 was 6%, an increase of 130 basis points versus September 30, and up 70 basis points versus the prior year-end.
However, we remain 100 basis points below year-end 2019 level.
On a product basis, our mix shift to higher quality large loans has served us well.
As of December 31, 68% of our portfolio was comprised of large loans, and 83% of our portfolio had an APR at or below 36%.
As expected, our 30-plus day delinquency on our small loan portfolio is normalizing more quickly than on our large loan portfolio, with our small loan delinquency rate up 200 basis points year over year compared to only 20 basis points on the large loan portfolio.
However, our small loan portfolio has higher yields and wider net credit margins to accommodate the faster normalization of credit as we manage our overall portfolio to achieve attractive risk-adjusted returns.
Both our large and small loans, 30-plus day delinquency rates remain below 2019 levels.
Moving forward, we expect delinquencies to continue to rise toward more normalized levels.
Turning to Page 9.
We ended the third quarter with an allowance for credit losses of $150.1 million or 11.4% of net finance receivables.
During the fourth quarter, the allowance increased by $9.2 million sequentially to $159.3 million to support our strong portfolio growth, but the allowance as a percentage of net finance receivables decreased to 11.2%.
The allowance increase in the quarter consisted of a base reserve build of $10.3 million to support our portfolio growth and a COVID-related reserve release of $1.1 million due to improving economic conditions.
We continue to maintain a reserve of $14.4 million related to the expected economic impact of the ongoing COVID-19 pandemic.
As a reminder, as our portfolio grows, we will build additional reserves to support new growth, but we continue to expect that the reserve rate will normalize over the course of 2022.
We estimate that our reserve rate will remain at approximately 11.2% at the end of the first quarter and gradually decline to prepandemic levels of approximately 10.8% by the middle to the end of the year, depending upon the continued impact of COVID-19 and how quickly cases subside.
Our $159.3 million allowance for credit losses as of December 31 continues to compare very favorably to our 30-plus-day contractual delinquencies of $84.9 million.
We are confident that we remain appropriately reserved.
Flipping to Page 10.
G&A expenses for the fourth quarter were $55.5 million, up $11 million or 24% from the prior year period, a bit higher than we previously guided.
The increase was driven by increased investment in our new growth initiatives, personnel and omnichannel strategy.
G&A expenses for the fourth quarter also included $0.9 million of expenses related to the consolidation of 31 branches as a part of the company's branch optimization plan.
Looking ahead, 2022 will be a year of heavy investment.
Overall, we expect G&A expenses for the first quarter to be approximately $55 million or $0.5 million lower than the fourth quarter as we continue to invest in our digital capabilities, geographic expansion and personnel to drive additional sustainable growth and improved operating leverage over the longer term.
These investments include centralized sales and service staff to support our digital initiatives as well as additional centralized collectors to mitigate the impact of credit normalization.
Turning to Page 11.
Interest expense was $7.6 million in the fourth quarter or 2.3% of our average net finance receivables on an annualized basis.
This was a $1.7 million or 100 basis point improvement year over year.
The improved cost of funds was driven by the lower interest rate environment, improved costs from our recent securitization transactions and a mark-to-market adjustment of $2.2 million on our interest rate cap.
We currently have $550 million of interest rate caps to protect us against rising rates on our variable rate debt, which as of the end of fourth quarter totaled $244 million.
$450 million of the interest rate caps have a one-month LIBOR strike price between 25 and 50 basis points and a weighted average duration of two years.
As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly.
Looking ahead, we expect interest expense in the first quarter to be approximately $10.5 million, excluding any mark-to-market impact on interest rate caps with the sequential increase in expense attributable to the growth in our average net receivables.
Page 12 is the reminder of our strong funding profile.
Our fourth-quarter funded debt-to-equity ratio remained at a conservative 3.9:1.
We continue to maintain a very strong balance sheet with low leverage and $159 million in loan loss reserves.
As of December 31, we had $557 million of unused capacity on our credit facilities and $210 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
Our fixed rate debt as a percentage of total debt was 78% with a weighted average coupon of 2.7% and an average revolving duration of 3.1 years.
Our effective tax rate during the fourth quarter was 18% compared to 23% in the prior year period, primarily due to tax benefits from share-based awards.
For the first quarter, we expect an effective tax rate of approximately 25%, excluding discrete items such as tax impacts associated with equity compensation.
During the fourth quarter, we repurchased nearly 200,000 shares of our common stock at a weighted average price of $57.38 per share under our $50 million stock repurchase program.
We completed the stock repurchase program in January of 2022, having repurchased in total 945,089 shares at a weighted average price of $52.91 per share.
As Rob noted earlier, our board of directors has declared a dividend of $0.30 per common share for the first quarter of 2022, a 20% increase over the prior quarter's dividend.
The dividend will be paid on March 16, 2022, to shareholders of record as of the close of business on February 23, 2022.
In addition, as Rob mentioned earlier, we are also pleased to announce that our board of directors has authorized a new $20 million stock repurchase program.
We are proud of our outstanding performance throughout the year, and we remain extremely pleased with our strong balance sheet and our near- and long-term prospects for growth.
That concludes my remarks.
The successes of our long-term strategic initiatives are evident.
We built a growth company with a focused omnichannel strategy and proven consistent execution.
Our investments throughout the pandemic in technology, the digital experience and credit underwriting have transformed the company and driven substantial quality growth in customer accounts, our loan portfolio and the top and bottom lines.
Looking ahead, we'll continue to invest in our future, including in geographic expansion and the development of digital capabilities on par with any fintech lender.
These investments and our key strategic initiatives will position us to sustainably grow our business, expand our market share and create additional value for our shareholders.
Operator, could you please open the line? | q4 earnings per share $2.04.
q4 revenue rose 22.6 percent to $119.5 million. |
Yesterday, after the market close, we issued our quarterly release.
The pass code you will need for both numbers is 5371939.
Today's call is also available through the Investor Information section of www.
renre.com and will be archived on RenaissanceRe's website through midnight on August 31, 2021.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings, to which we direct you.
With us to discuss today's results are: Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.
This resulted in annualized return on average common equity of 27.6% and annualized operating return on average common equity of 16.8%.
Now that many of our locations are tentatively reopening, we are excited to begin reestablishing our normal cadence of business.
In many ways, last year was a trying one, but it was also a year of great opportunity.
I'm especially proud of our team's ability to continue to thrive and execute in a time of great uncertainty.
While for many, 2020 was a year of challenges; for us, it was also a time of opportunity and growth.
I am pleased with all that we accomplished and we'd like to take a few minutes to talk about the journey we have been on and how that affects who we are and what we do.
Back in 2013, the market was evolving rapidly.
We anticipated that investors would increasingly seek yield, which would result in capital becoming more interested in reinsurance risk.
At that time, we made the strategic decision to focus on our vision, which is to be the best underwriter.
For us, this meant leveraging our skills into remaining the leading reinsurer, while diversifying both geographically and into traditional casualty lines.
It meant remaining focused on reinsurance business and not pursuing an insurance strategy.
It also meant committing to grow our hybrid business model by expanding our Capital Partners franchise.
We knew that achieving this strategic imperative would require us to become more efficient.
We set specific goals to increase our capital leverage, investment leverage and operating leverage with particular focus on managing expenses.
This was because we expected the market to become more efficient and we wanted to insulate our investors as best we could from the effects of the soft market.
Lowering our expense ratio help to mitigate the effect of the falling rates and offset its impact on our ROE.
In short, we transformed the profile of the company to ensure we continue to benefit our shareholders over the long-term.
We knowingly began building our casualty business during a challenging phase of the market with the intent that by doing so we could construct a portfolio with embedded options for growth when pricing improved.
This is not a strategy for the faint of heart.
You must believe that you understand the risk you are taking because there is little room for error.
You need conviction in your beliefs on how, when and why the market will change.
And you must be positioned as a respected market participant so you can grow quickly when opportunity arises.
I am pleased to report that we have succeeded in executing this strategy in our casualty book.
Of course, we continue to monitor the impact of social inflation and other trends.
What I am confident of, however, is that the successful execution of our strategy to grow casualty in a clearly improving market will serve us well and the favorable balance of profitable business will ultimately benefit our shareholders.
As we have said many times, we evaluate our casualty business over rolling 10-year periods.
For the last few years, we've been writing well-rated risk that we believe will serve as the foundation for a strong portfolio with superior returns.
While we believe that we are already beginning to see this profitability, we are in no rush to make changes today.
Our long-term shareholders support us and they will be rewarded.
Shifting gears briefly to capital management, which Bob will address in greater detail.
We have always been thoughtful and careful stewards of our capital and have methodically grown our capital base at a pace consistent with scaling our business while maintaining strong ratings.
Since the second quarter -- we have -- of 2020, we have raised $1.1 billion in equity capital, raised over $1 billion of partner capital, grown gross written premiums in our in-force portfolio by $1.8 billion, earned $1 billion in net income and returned over $700 million to our shareholders through share repurchases and dividends.
As a result, we now find ourselves in the enviable position of having what we believe to be the most -- to be more than ample financial flexibility to support our existing risk, take advantage of potential opportunities and continue repurchasing our shares on what we believe are attractive valuations.
I cannot emphasize too strongly, however, that last year's common equity raise was the cornerstone of all these capital management and underwriting successes.
Having the right capital at the right time provided us the fortress balance sheet necessary to accomplish all that we have.
That concludes my opening comments.
I'll provide more detailed update on our segments performance at the end of the call.
My comments today will focus on our accomplishments during the quarter and items that drove our results, including our three drivers of profit.
Starting with our consolidated results where we reported net income of $457 million and operating income of $278 million for the quarter.
These results were driven by strong performances in each of our three drivers of profit: excellent underwriting results, increased fee income and high-quality net investment income, as well as robust mark-to-market gains in our strategic investment and fixed income portfolios.
This produced annualized return on average common equity of 27.6% and annualized operating return on average common equity of 16.8%.
I'll now shift to our three drivers of profit starting with underwriting income.
Our top-line grew significantly in the quarter.
Gross premiums written were up $392 million or 23% with the Property segment growing $141 million and the Casualty segment growing $251 million.
Year-to-date, we have grown net premiums written by $886 million or 36% and remain on track to grow well over $1 billion.
We reported underwriting profit of $329 million in the quarter and a combined ratio of 72%.
For our Property segment specifically, gross premiums written grew $141 million over the comparable quarter or 14% and we reported a combined ratio of 44%, driven by a lack of cat losses and strong performance in our other property business and $51 million in prior year favorable loss development.
Growth in gross premiums written was $50 million or 7% in property cat and $91 million or 28% in other property.
Most of the growth in our property catastrophe business took place in our joint ventures.
As a result, we currently only retain about 28% of the gross premiums written in our property catastrophe business.
Attritional losses in other property book ran at about 46%.
This is somewhat favorable to our expectations for this business.
As a reminder, in addition to attritional risk, we also take catastrophe risk in our other property business.
Moving on to our Casualty results.
Our Casualty segment reported gross premiums written of $911 million, growing $251 million or 38% versus the comparable quarter.
Kevin will elaborate on the drivers of this growth in his discussion of underwriting performance.
We experienced a small amount of favorable development and the combined ratio was 97.8%.
Underlying this was a 67% current accident year loss ratio, which is a 1.4 percentage point improvement from the same quarter last year and consistent with our expectations.
This quarter, there were no significant changes to our COVID-19 loss estimates.
That said, this is a developing situation and we will continue to receive information over time.
We continue to monitor COVID-19 development across both segments and our current reserves represent our best estimate of potential losses.
Now moving on to our second driver of profit, fee income.
Total fee income was $46 million, which is up from the second quarter of last year.
Management fees increased and we expect that they will continue to serve as a strong, stable source of recurring revenues going forward.
Overall, we shared $114 million of income with the partners in our joint ventures as reflected in our redeemable non-controlling interest, driven by profitable performance and a low cat quarter and prior year favorable loss development.
Our Medici and Epsilon funds raised in aggregate over $200 million in new quarter capital this year, which we deployed it to June 1 renewal.
We made a small addition to our financial supplement this quarter.
You will see that on the bottom of Page 11, we have broken out our fee income to show its contribution to underwriting results.
The goal was to provide additional disclosure on the geography of our fee income in the income statement.
Turning now to our third driver of profit, investment income.
We recorded strong investment returns this quarter due to falling interest rates as well as gains in our equity portfolio.
Net investment income was $81 million and we had $191 million of mark-to-market gain.
This resulted in total investment returns of $272 million.
The decrease in interest rates has lowered the yield on our retained fixed maturity and short-term investment portfolio to 1.3%.
The duration on a retained portfolio remained roughly flat at 3.8 years.
You'll note that we reduced our exposure to corporate credit this quarter, shifting the portfolio to US Treasuries.
We did this as credit spreads approach multi-year lows.
And turning now to our expenses and starting with the acquisition expense ratio, which was up slightly to 24%.
This was driven by casualty acquisition ratio, which increased by 1 percentage point to 28%.
The current expected run rate of our casualty acquisition expense ratio is in the upper-20%s.
So this quarter is consistent with expectations.
Meanwhile, the property acquisition ratio -- expense ratio -- acquisition expense ratio was flat.
Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned, was flat from the prior quarter at 6%.
On an absolute basis, operational expenses were up in the quarter but remain below 5% as the ratio to net premiums earned.
Going forward, as we grow our top-line, we will also continue to invest in the business to support our growth.
We expect our direct expense ratio to remain generally consistent with this quarter, absent one-time items.
I'd like to now shift to our discussion on our capital management during the quarter.
Earlier this month, we issued $500 million of our Series G Perpetual Preference Shares with a fixed for life dividend of 4.20%.
We plan to use $275 million of the proceeds to refinance our 5.375% Series E preference shares, which we have already been called and the remainder of the proceeds for general corporate purposes.
As a reminder, last year, we redeemed the outstanding $125 million of our 6.08% Series C Preference Shares and retired $250 million of our 5.75% senior debt.
So in total, we have replaced $650 million of capital at an average cost of 5.67% with $500 million of capital at a cost of 4.20% [Phonetic].
This is part of our long-term strategy to minimize the cost of capital.
Even with the incremental $225 million raised this month, we are comfortable with our various capital ratios which are stronger than two years ago.
Also in the quarter, we participated in the issuance of additional $250 million tranche of our Mona Lisa cat bond.
Consistent with our strategy, this adds additional efficient underwriting capital to our fortress balance sheet.
As Kevin noted, since June -- since last June, we have earned $1 billion.
In the second quarter of 2021, we continued returning these earnings to shareholders repurchasing 1.9 million common shares for $309 million.
This works out to an average price per share of about $159 and an average price to book value of 1.1 times our current book value.
Subsequent to the quarter-end, we continued to repurchase shares and, as of July 19, had repurchased an additional 920,000 shares for $138 million at an average price of just over $149 a share.
In total this year, we have purchased 3.9 million shares for $618 million at an average price of $157 per share.
This has reduced our share count by about 7.8% from the year-end 2020 total.
Despite substantial quarterly share repurchases, we ended the quarter with more capital than we began, which reflects our excess earnings, net of share buybacks and dividend.
Our common equity now stands at $6.7 billion.
To be clear about the use of the $1.1 billion of common equity we raised last year, that money has been fully downstreamed into our operating entities to support the attractive opportunities we took advantage of to substantially grow our book this year and position us well for the future.
Now before turning the call back over to Kevin, I'd like to finish with a brief discussion on tax.
We have been closely following recent G7 and G20 announcements on setting a global minimum corporate tax, the OECDs work on Pillar 1 and 2 and President Biden's proposals for US tax changes.
When it comes to tax reform, the details matter and they are not yet clear.
Over the years, however, the flexibility of our global operating platform has proven resilient and we anticipate this resilience will persist.
That said, we will continue to monitor this issue closely.
So, in closing, we are pleased with our solid financial performance this quarter across our three drivers of profit and believe we have demonstrated proactive capital management, which should continue to contribute to shareholder value.
As usual, I'll divide my comments between our Property and Casualty segments.
Starting with Property, while we always maintain our leadership and property cat underwriting, to be clear we are increasingly doing it differently.
We currently take more of our cat exposed risk through our other property portfolio because that is where we are seeing better returns for taking cat risk.
Our existing other property book has access to some of the most dislocated property lines in the US E&S market.
We have the platforms, capital and expertise to focus across classes to target and obtain the best risk due to the long-term relationship that we've cultivated with customers for over 25 years.
This is evident in the 28% year-on-year growth, which our other property book has delivered and we now have an in-force portfolio of over $1 billion.
We also grew our property cat portfolio this quarter but by a smaller percentage.
The June 1 renewals proceeded as anticipated and, overall, we believe that we have constructed one of our best cat books in years.
The Florida renewal saw rate increases averaging 5% to 20% with abundant capacity for upper layers, while many lower layers struggled to get placed, especially if they were loss impacted.
As we anticipated on last quarter's call, we reduced the number of Florida programs that we wrote from 18 to 13, which is a continuation of last year's trend when we reduced from 25 programs.
Since 2019, we have reduced our bottom line exposure to Florida domestic companies by almost half.
The Florida market remains highly challenged due to social inflation and, as anticipated, proposed reforms do not appear likely to materially change the landscape.
I reiterate that the Florida domestic market now represents less than 3% of our gross written premiums.
That said, decreased exposure to Florida domestics is not the same thing as decreased exposure to Florida hurricanes.
Southeast wind remains the peak risk in our portfolio.
What has changed is that we have moved away from Florida domestic companies to more regional and nationwide programs and over the last year have increasingly taken southeast wind risk through our other property portfolio.
I should note that as we have grown, so has our tail risk on an absolute basis.
On a percentage of equity basis, however, it is similar to where we were prior to last year's capital raise.
It is easy to grow in this business by simply going risk on, but we created a larger and more efficient portfolio than we had prior to the capital raise and we did this while holding our relative risk levels consistent with prior years.
Inflation has been in the news recently with headline CPA in May exceeding 5%.
Most relevant to our property book, however, is inflation in the commodity and labor markets as that is more likely to impact rebuilding cost after an event.
Lumber and other commodity prices have been elevated this year although recently they appear to be moderating.
We price for inflation in our models.
Given the elevated risk in the current environment, we have stress tested our portfolio and remain comfortable with its exposure to inflation.
From our perspective as a reinsurer, it was a quiet quarter for tax.
Claudette made landfall in Louisiana as a disorganized weak tropical storm.
In the beginning of July, Elsa made landfall in Florida as a strong tropical storm and was the earliest east storm on record.
While these storms may result in some losses, we currently do not anticipate these to be material.
We are closely monitoring meteorological conditions as we head into the third and fourth quarters.
You've probably read news reports about wildfires and record droughts already in the US, particularly in California.
We are expecting an active hurricane season having already having three US landfalling storms.
Europe recently experienced a significant flooding event, which we are closely evaluating although it's too early to estimate potential losses.
As always, RenaissanceRe Risk Sciences is proving invaluable in helping us understand the climate dynamics likely to influence the remainder of the year.
I am often asked if we vary the amount of business that we write based on weather forecasts.
I strongly believe that due to our superior tools and better understanding of climate change, we play a critical role in managing our customers' natural catastrophe risk.
Behaving like a partner by providing long-term stable capacity is part of our value proposition for which I expect we will be rewarded.
Moving now to our Casualty and Specialty segment.
Our Casualty portfolio is performing well.
Original insurance rates continuing to increase although the magnitude appears to be moderating in those classes which have experienced the greatest uplift such as D&O.
We have grown our Casualty business by more than 300% since 2015 on an in-force basis.
This includes adding over $1 billion of new business in the last 12 months, also on an in-force basis, which should position as well as the market has clearly improved.
Reflecting over my career, I believe that many underwriters do not go large enough when opportunity knocks or small enough when it recedes.
I am proud of how our team has performed and believe that we have executed into this market opportunity with great skill and dexterity.
Our competitive advantages, including our long-term relationships and first mover status, have served us well this year.
We anticipated this market well in advance and adopted a strategy of confident provision of consistent capacity.
While other reinsurers haggled over terms and conditions, we were discussing new structures and coverages.
We believe that this was the appropriate approach and it explains our ability to grow proactively into an improving market, which should benefit from building our largest and what we believe to be our best Casualty and Specialty portfolio as the market hits a multi-year high.
Cyber insurance has been getting a lot of attention lately.
Rate changes have been greater than 40% year-on-year and the market has been growing by about 25% each year for the previous five years.
Recently, this is being driven by multiple large cyberattacks and increasing instances of ransomware.
As a result, the cyber market is currently experiencing increasing demand and limited supply.
We have been reinsuring cyber liability for almost a decade and believe there are good opportunities to grow this book.
Casualty and Specialty losses, including those related to COVID-19, continue to develop within our expectations.
In our credit book, mortgage forbearance rates also continue to improve and the US housing market continues to be very healthy.
As I mentioned on our previous calls, in the Casualty business, our actuaries are being patient in recognizing positive rate movements.
We are optimistic that over time we will benefit from the improved underwriting terms and pricing that we believe we are enjoying.
Closing now with our Capital Partners business.
The big news for this quarter was that our Medici capital and fund surpassed $1 billion in capital under management.
This quarter experienced near-record cat bond issuances.
And we continue to see strong demand for our Medici fund.
Our strategic approach to asset management is not as an asset accumulator, but rather as an underwriter looking to match the most efficient capital with desirable risk.
To achieve this and provide the best solutions to our customers, we need multiple capital structures and capital sources.
It is for this reason that we manage several vehicles both rated and unrated to provide additional capacity to our customers from third-party capital.
Since 2015, we have grown our Capital Partners business from four vehicles and $6 billion in capital to six vehicles with more than $11 billion in capital.
This is a critical component of our strategy, provides our customers efficient capital with our owned rated balance sheets are less efficient.
It allows our third-party investors to partner with the best underwriter and benefit from our unparalleled understanding and modeling of the catastrophe risk that they desire.
And it is good for our shareholders that it results in a stable growing source of fee income.
In conclusion, we delivered a solid quarter with strong premium growth, improving profitability and proactive capital management.
We maintained a fortressed balance sheet while heading into the winter season, continuing to build the foundations for long-term shareholder value. | net claims and claim expenses incurred associated with covid-19 pandemic were not significant in q2 of 2021. |
Yesterday, after the market closed, we issued our quarterly release.
The passcode you will need for both numbers is 2968847.
Today's call is also available through the Investor Information section of www.
renre.com and will be archived on RenaissanceRe's website through midnight on November 28, 2020.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you.
With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.
Once again, we find ourselves at the end of a very active third quarter, which saw numerous name storms making landfall in the U.S., record-breaking wildfires across the West Coast and multiple typhoons in Asia.
We extend our sympathies to all those impacted by these catastrophes.
An important part of our purpose is to support rebuilding and recovery efforts after disaster strike, which we do by providing solutions and protection, sharing our expertise and paying valid claims promptly.
So while our results for the third quarter reflect an elevated level of activity, these are risks that we fully understand and are paid to take.
And I am proud of the role we play helping people when they need it most.
The Q3 2020 large loss events were driven in particular by hurricanes Laura and Sally in the Gulf of Mexico and the wildfires in California, Oregon and Washington.
The fourth quarter has also been active so far with Hurricane Delta making landfall as a category two in nearly the same location as Hurricane Laura and continued wildfire activity.
Last year, during our third quarter call, I discussed our belief that climate change contributes to making extreme events more frequent and more severe.
This year, it is already clear that we are experiencing an especially active season for both wildfire and wind.
On the West Coast, California wildfires have already consumed more than four million acres in 2020, which is more than double either 2017 or 2018, and has resulted in over 90 million metric tons of carbon dioxide being released into the atmosphere.
For perspective, this is 1.5 times more carbon dioxide than is released in powering the entire state for a year.
We continue to believe that there is strong evidence that climate change is increasing wildfire risk in California for two primary reasons.
First, California's climate is hotter and drier now than at any time in the past 120 years.
Higher temperatures and longer dry seasons accelerate the desiccation and death of vegetation creating fuel for larger, more intense wildfires.
Second, climate change extends the length of the dry season into the late autumn, causing it to overlap with the Diablo and Santa Ana winds.
This combination of high and strong winds results in the dramatic spread of damaging fires as we have experienced in 2017 and '18.
Climate change is also influencing hurricane risk.
Due to a globally warmed world, we anticipate a future, where a greater proportion of tropical cyclones reach category four or category five status.
Climate change also drives sea-level rise, which increases the impacts from storm search.
While there have always been natural cycles of variability in sea surface temperatures, we believe recent increases are primarily a product of climate change.
Consequently, sea surface temperatures and associated hurricane activity will not revert to lower levels of prior periods, rather the heightened activity levels of the last two decades are likely the new normal for Atlantic hurricane.
Vendor cat models, however, rely on the long-term historical record to estimate risk.
Unfortunately, due to climate change, this long-term record of past experience may no longer be a reliable guide for what we can expect in the future.
Making the problem worse, human behavior can interact in complex ways with climate change to amplify risk of loss.
For example, we have seen a long-term trend to build on coastlines or in the wildland-urban interface, often with building codes and materials that fail to provide resilience in the face of natural perils.
Recognizing the fact that climate change is increasing the risk of natural disasters is only the first step, however.
To gain a true competitive advantage, this insight must be accurately reflected in the cat models used to price risk.
Our scientists, meteorologists and engineers at RenaissanceRe Sciences have been studying the impact of climate change on natural hazards for decades.
They believe that a physical model, informed by historical observations but calibrated to our best understanding of how the climate has and will continue to change, creates the best basis for categorizing the full distribution of outcomes that should be a new written against.
Applying these insights, RenaissanceRe Risk Sciences works closely with our underwriters and risk managers to build proprietary cat models that capture the physics and future impact of climate change.
Our approach sets us apart from many other underwriters or ILS managers, who often rely on a single vendor model that fails to capture the true impact of a changed climate.
This has obvious implications for ILS investors.
But building proprietary climate change-informed cat models goes beyond investments in cat risk and benefits all of our stakeholders.
Our ILS partners rely on us to accurately model the risks inherent to their investment.
Our clients appreciate the superior customer service that we can provide through deeper insight into the full distribution of their risk profile, which often leads to increased demand for our products.
And our shareholders benefit from the more efficient portfolios of risk we can construct as well as our enhanced sustainability.
Contrary to some perspectives, accurately pricing for climate risk does not put us at a competitive disadvantage to our peers, rather an industry-leading understanding of the influence of climate on risk is a key component of superior risk selection allowing us to shape our portfolios but growing on the best business and shrinking on the worst.
Moving on from climate change.
I want to take a minute to discuss capital deployment opportunities.
As we enter the important January one renewal period, I believe we will have one of the best opportunities in many years to profitably deploy material additional capital.
Our focus on superior risk selection should prove increasingly valuable as the combination of historically low interest rates, the Q3 2020 large loss events and material trapped capital put additional upward pressure on reinsurance rates.
We have legacy positions on the best programs, first call status to capture opportunistic and off-cycle business and significant capital to support growth on new and existing profitable opportunities.
I'll provide more detailed update on the renewal in our segments at the end of the call.
As Kevin discussed, and as you saw in our pre release, our third quarter results were impacted by active wind and wildfire season.
Despite this elevated activity, we reported positive net income and remain in a very strong capital position going into renewals.
Today, I will discuss our consolidated performance and then provide more detail on our three drivers of profit: underwriting income, fee income and investment income.
Starting with our consolidated results, where we reported an annualized return on average common equity of 2.8%, benefiting from mark-to-market gains in our strategic investment portfolio.
Annualized operating return on average common equity was negative 7.7%, with the loss primarily driven by the Q3 2020 large loss events.
We grew our book value per common share by $0.86 or 0.6% and our tangible book value per common share plus accumulated dividends by $1.24 or 1%.
Year-to-date, we have grown tangible book value per common share plus change in accumulated dividends by 14.6%.
Net income for the quarter was $48 million or $0.94 per diluted common share.
We reported an operating loss of $132 million or $2.64 per diluted common share.
This excludes net realized and unrealized gains on investments, the sale of RenaissanceRe (U.K.) Limited, net foreign exchange gains and expenses related to the integration of TMR. Included in this operating loss is $322 million of net negative impact resulting from Q3 2020 large loss events.
Now to clarify, net negative impact is the bottom line impact of events to us after taking into account our best estimate of net incurred losses along with related adjustments for earned and ceded reinstatement premiums, lost profit commissions and redeemable noncontrolling interest.
I will now discuss our three drivers of profit, starting with underwriting income.
On a consolidated basis, we reported underwriting loss of $206 million for the quarter and a combined ratio of 121%.
Our results were driven predominantly by natural catastrophe losses with little impact from COVID-19 losses in the quarter.
Gross premiums written for the quarter were $1.1 billion, up $282 million or 33% from the comparable quarter of last year.
Approximately 60% of this growth came from our Casualty segment and 40% came from Property.
We are pleased with our growth so far this year.
As I've mentioned last year, we anticipate that we will have many opportunities to deploy additional capital in 2021 and beyond.
Moving now to our Property segment, where gross written premiums increased by $113 million or 36% from the comparable quarter.
This was driven by an increase in reinstatement premiums related to the Q3 2020 large loss events, a negative premium adjustment in 2019 and continued expansion of our Lloyd delegated authority insurance book.
The overall combined ratio for the Property segment was 140%, with property catastrophe and other property reporting combined ratios of 159% and 113%, respectively.
We reported a current accident year loss ratio for the Property segment of 122%.
And as we've indicated in the past, our other property class of business is exposed to catastrophe risks with the Q3 2020 large loss events, adding 30 percentage points to its loss ratio.
Favorable development for the Property segment during the quarter was 8%, with property catastrophe experiencing favorable development of 11% and other property experiencing favorable development, up 3%.
The underwriting expense ratio for Property was 26%, which is flat to the comparable quarter.
However, within the underwriting expense ratio, the acquisition expense ratio was up approximately one percentage point due to the unwinding and previously earned profit commissions given the large cat events for the quarter.
This was offset by a one percentage point decline in the operating expense ratio due to improved leverage and slightly lower operating expenses.
Now moving on to our casualty segment, where our gross premiums grew $169 million or 31%.
This growth was a combination of expansion of existing deal share and premium as well as new business opportunities.
Overall, our casualty combined ratio was 99.9%.
The current accident loss year ratio was 76%, which is seven percentage points higher than the comparable quarter.
This increase is driven by three factors, each of which contributed about two percentage points to the loss ratio.
First, $10 million of IBNR related to Hurricane Laura in our marine and energy book; second, increased reserves from our private mortgage insurer book, which did not impact the combined ratio; and third, $15 million in ceded premium for our new Lloyd's adverse development cover.
Now let me walk you through the last two items in more detail.
Starting with our private mortgage insurance book, where we increased our reserves to reflect delinquency notifications.
The primary mortgage insurers are required to report loans as delinquent net 60 days without payment even if the loans are in forbearance or payment holiday and otherwise expected to perform long term.
We reserve for these delinquencies as they are reported to us.
That said, we do not anticipate that all of the notifications will crystallize as paid losses.
While these mortgage delinquencies increased our casualty loss ratio by two points.
Due to the structure of the transaction, these losses were offset by a decrease in profit commissions paid to our cedents.
As a result, there's no impact to the combined ratio.
Now moving to the Lloyd's adverse development cover.
We closed this transaction in August to reinsure the casualty reserves for our Lloyd's syndicate for the 2009 through 2017 underwriting years.
The premium cost of this cover is reflected in the current accident year loss ratio for our casualty segment, contributing about two points.
This transaction is an innovative example of our gross-to-net strategy in action.
It provides capital relief to our syndicate, over time, creating additional capacity to underwrite into an improving market.
This protection is a retroactive reinsurance transaction.
This means that we are protected economically, but given the accounting treatment, you may continue to see reserve volatility in the short to medium-term from an accounting standpoint.
During the third quarter, the casualty segment also experienced favorable development of 3%, driven by a variety of specialty lines.
Now moving to our second driver of profit fee income, where total fee income for the third quarter was $18 million.
Management fees were $30 million, up 23% from the comparable quarter, driven by increases in assets under management at DaVinci, premier and Upsilon.
This was offset by negative $12 million in performance fees due to the impact of catastrophe events on DaVinci and Upsilon.
Year-over-year, total fees are up 8%.
The net noncontrolling interest charge attributable to DaVinci, Medici and Vermeer for the quarter was $19 million.
This reflected an overall loss for DaVinci that was more than offset by income in Medici and Vermeer.
The $19 million is passed on to our partner capital, reducing our operating earnings accordingly.
Now turning to our third driver of profit, investment income.
We reported total investment results for the third quarter of $308 million with realized and unrealized gains of $224 million.
These mark-to-market gains were predominantly in our fixed maturity and equity investment portfolio with equity gains driven by our strategic investment portfolio.
We take a prudent and reasonably conservative approach to our investment portfolio and have not materially increased our allocation to high yield or equities in attempt to stretch for yield.
As I discussed on our previous call, we increased our allocation to investment-grade corporate credit in the second quarter.
In the third quarter, we made more marginal allocations, increasing in higher quality credit sectors such as AAA-rated collateralized loan obligations and commercial mortgage-backed securities.
Our fixed maturity and short-term investment income for the quarter was $70 million, and overall net investment income for the quarter was $84 million, of which we retained $65 million and shared the remainder with partner capital.
Our managed investment portfolio reported yield to maturity of 1% and duration of 2.9 years on assets of $18.6 billion while our retained investment portfolio reported yield to maturity of 1.3% and duration of 3.7 years on assets of $13 billion.
Now before handing over to Kevin, I'd like to provide more information on our expenses and foreign exchange gains for the quarter.
Direct expenses, which are the sum of our operational and corporate expenses, totaled $97 million for the quarter, which is an increase of $30 million from the third quarter of 2019.
This increase is predominantly driven by the sale of RenRe (U.K.) Limited, which I'll discuss momentarily.
The ratio of direct expense to net premiums earned was 10%, an increase of more than two percentage points from the comparable period last year.
This increase was driven by corporate expenses, which increased by $34 million or three percentage points on the corporate expense ratio.
Included in corporate expenses were $32 million related to the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction-related expenses and $5 million of one-off items, including expense related to senior management departures.
RenaissanceRe (U.K.) Limited was acquired as part of the TMR transaction and primarily wrote long-tail commercial auto business.
It was placed into run-up by Tokio Millennium Re in 2015, and our stated intent has always been to divest this entity.
This allows us to focus on our core strategy, simplify our operations and decreased underwriting and foreign exchange volatility.
As a reminder, the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction costs are excluded from the operating loss in the quarter.
Excluding the impact of RenaissanceRe (U.K.) Limited and the one-off items I just described, the ratio of direct expense to net premium earned was 6%.
This is a decrease of one percentage point from the comparable period last year, demonstrating the operating leverage embedded in our business model.
And the operational expense ratio also declined by 1% point due to the reduction in office travel expense related to COVID-19 restrictions.
Finally, we reported a $17 million foreign exchange gain.
Approximately half of this gain is an accounting adjustment for the prior quarter related to the Tokio Millennium Re integration.
The majority of the remaining gain relates to Medici and has no impact on our bottom line as it's backed out through noncontrolling interest.
As usual, I will divide my comments between our Property and Casualty segments.
Overall, I am very optimistic regarding opportunities across our business as we head into the January one renewal.
We anticipate that there will be a supply/demand imbalance in certain areas of our portfolio, particularly for capital-intensive risks driven by continued uncertainty related to COVID-19 and further accelerated by another active year for natural catastrophes.
RenRe is positioned to deploy additional capital and grow, given our market leadership and long-term relationships with brokers and customers.
Beginning with Property cat.
The third quarter was very active for natural catastrophes in the U.S. So it categorize as high-frequency and low-to-medium severity.
The largest and most impactful events for us for Hurricanes Laura and Sally in the Gulf of Mexico, Hurricane Isaias in the Northeast and wildfires on the West Coast.
Because the U.S. had already experienced above-average frequency of events prior to the third quarter, aggregate covers also increasingly came into play.
These events will add additional pressure to the already hardening rate environment from Property cat and should lead to increased demand for Property cat reinsurance throughout 2021.
At the same time, ILS capital is becoming fatigued as investors contemplate a fourth consecutive year of elevated cat losses and additional trapped collateral caused by COVID-19 BI claim uncertainty.
While we are encouraged by the market, we must remember that we are still in a pandemic that is likely to result in losses across the insurance industry.
In the U.S., so far, we have received generally favorable news regarding the court's interpretations of the availability of business interruption protections from the COVID-19-related shutdown.
It's important to recognize, however, that for the most part, these processes remain at an early stage.
I remain concerned that the plaintiffs bar will continue to test new theories for recovery in multiple venues in the hopes of obtaining judgments more favorable to insurers.
Such challenges will result in continued uncertainty regarding BI coverage that could extend for years.
And it's irrational to believe that these processes will not result in material liabilities to the insurance industry.
As with any time there is uncertainty with coverage, insurers will submit claims to protect their rights under their insurance policies.
Ultimately, some of those claims may be presented to reinsurers.
I think we are a long way from understanding the impact of the virus and the shutdowns.
But I expect that we will see an increase in submitted claims, particularly as information is shared during the renewal process.
Internationally, business interruption is a more fluid issue as more affirmative coverage was sold outside the U.S. Additionally, various jurisdictions are approaching the issue of coverage differently, so we are watching this space carefully.
In the fourth quarter, we expect that our renewal conversations will provide us with greater clarity regarding potential customer claims for business interruption-related losses, and we will react appropriately as we assess the validity of such claims.
Turning to other property.
It was also an active quarter.
As I explained to you earlier this year, we have increased the other property books catastrophe exposure as we believe we are being paid sufficiently for it.
Consequently, other property experienced losses from the Q3 2020 large loss events, primarily from hurricanes Laura and Sally and the Midwest derecho.
That said, attritional losses were within our expectations.
Prior year development was favorable this quarter.
And overall, I am satisfied with the performance of the other property book.
Similar to Property cat, we are seeing increased opportunities to profitably deploy material capital in other property.
Rates are up, particularly in the U.S. E&S business.
And the Q3 2020 large loss events will only accelerate the velocity and persistence of these rate increases.
Of course excessive losses and increasing uncertainties aggravating an already dislocated retro market, we are experienced and comfortable managing the level of uncertainty in this market, both as a buyer and seller of retrocessional coverage.
Focusing on selling more in 2021 is yet another opportunity to profitably deploy significant amounts of capital.
Moving now to our Casualty and Specialty business.
As Bob explained, this segment largely performed within our expectations during the third quarter.
We experienced rate increases across all major risk classes, along with acquisition and profit commission ratio improvements, and executed on several key transactions at economics that exemplify both our strategic position with core clients and a continuing hardening of casualty markets.
Our ability to increase lines on targeted deals that were oversubscribed substantiates our strategy to build options with core trading partners.
We have been closely monitoring economic impact of COVID-19-related shutdowns and the development of forbearance measures on our mortgage book.
While the homeowners market has seen significant price appreciation in recent months, it comes on the back of a challenging unemployment picture that could put pressure on homeowners' ability to repay their outstanding mortgages.
Despite this challenging economic backdrop, we believe that the portfolio we have constructed will remain resilient.
The fundamentals of the U.S. housing market were strong heading into the pandemic, supported by tight underwriting standards and banking regulations, high loan quality and growth of homeowner equity.
And although we did not expect it to be pandemic-driven, we have been underwriting and constructing the portfolio in anticipation of an economic downturn and have actively avoided risk from lower credit borrowers for several years.
Forbearance trends are showing improvement as well.
With GCE forbearance speaking at around 6.4% in May, and have been consistently reduced since that time.
Looking forward to the January renewal, we expect ample opportunities to deploy significant additional capital in both of our segments and across our platforms.
Many markets are exhibiting supply/demand imbalances.
And overall, we are seeing strong rate momentum across all lines with stable or improving terms and conditions.
We have focused for many years building strong positions on high-quality programs.
As the market hardens, we believe we are preferentially poised to expand our share on existing programs while being the first call for new opportunities, both at improved economics.
I'm pleased to report debentures team continues to operate effectively.
And overall, our joint venture balance sheets continue to perform well.
With the level of catastrophe losses in the quarter, DaVinci also experienced losses, but year-to-date remains profitable.
Top Layer Re, Upsilon and Vermeer, all had positive quarters.
And Medici, our cat bond fund, had one of its best performances in its history, and we expect it to continue to benefit from the flight to simplicity that cap on market is currently experiencing.
The ILS industry will likely suffer significant amounts of trapped capital yet again in 2020 due to the impact of COVID-19, catastrophe loss events to date and an already-active fourth quarter.
The potential for trapped collateral highlights an important difference between collateralized coverage and traditional reinsurance in a collateralized deal, as cedents enjoy protection for as long as collateral is available.
Consequently, in a year like 2020, cedents would prefer to maintain protection against the heightened uncertainty of losses while providers will want to roll their capital into new deals and new premium.
Business interruption-related COVID-19 claims only intensify this inherent tension.
The industry remains in the early stages of assessing the myriad of factors affecting potential BI losses of process that will play out over years.
Given this, going into 2021, we expect that cedents will increasingly prefer the certainty of rated balance sheets, provide over collateralized vehicles.
If this occurs, we have the flexibility to transact with our customers through their preferred means of risk transfer.
This is likely to result in us deploying more rated paper and shrinking Upsilon.
In conclusion, we find ourselves in a very enviable position heading into the January one renewal cycle.
Market conditions continued to improve as the natural catastrophe activity of the quarter further restricts supply in an already unbalanced market.
As the industry grapples with the uncertainties from climate change and COVID-19, our independent view of risk provides us with an enduring competitive advantage.
I am confident that we can profitably deploy material amounts of capital in this environment and continue creating long-term shareholder value in 2021 and beyond. | compname reports third quarter 2020 net income available to common shareholders of $47.8 million, or $0.94 per diluted common share.
operating loss attributable to common shareholders of $131.7 million, or $2.64 per diluted common share.
q3 operating loss per share $2.64. |
Yesterday after the market closed, we issued our quarterly release.
The passcode you will need for both numbers is 4277895.
Today's call is also available through the Investor Information section of www.
renre.com and will be archived on RenaissanceRe's website through midnight on February 27, 2021.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you.
With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer and Bob Qutub, Executive Vice President and Chief Financial Officer.
I wanted to begin today by giving you a quick summary of what we accomplished at January 1 and how 2021 is shaping up.
I made several promises then, which I can now definitively say were kept.
This January 1, was one of the most important renewals in our history, and I'm very pleased with the performance and the outcome we achieved.
At January 1, we saw opportunities for profitable growth in both of our segments and across our platforms, resulting in the full deployment into our underwriting portfolio of the $1.1 billion raised last June.
We also raised and deployed additional capital in our joint venture business.
As a result, in 2021, we expect to grow our net premiums written by approximately $1 billion and believe that we've materially increased the profitability of our underwriting book.
Importantly, we expect to achieve these outcomes while keeping our tail risk consistent with last year's on a percentage of equity basis, and due to the efficiency and diversity of our portfolio continuing to have ample dry powder to deploy into new opportunities.
Looking back at 2020, at the beginning of the year, I told you that with the TMR integration behind us, we were a more resilient company and a broader, deeper partner to our customers.
In our business, you learn to expect the unexpected, but I don't think any of us envisioned the year would unfold in quite the way it did or just how critical, how resilience would prove to be.
As the year progressed, we encountered a variety of challenges.
I am proud of how our employees responded rapidly and effectively to each of these, enabling us to grow our business, substantially and profitably.
At the end of each year, I like to review our performance by responding to two questions.
The first is, how did we do financially, and the second is, have we executed our strategy effectively.
Starting with the first question, how did we do financially.
In a year, impacted by the global COVID-19 pandemic and multiple weather-related catastrophic losses, we grew book value per share by 15% and tangible book value per share plus change in accumulated dividends by 18%.
For the year, our return on equity was 11.7% and our operating return on equity was 0.2%.
Bob will walk you through our financial results in greater detail, but I believe, we have done the hard work to recognize our losses early, build a fortress balance sheet and enter 2021 financially and operationally stronger as a company than we have ever been.
Moving to the second question, have we executed our strategy effectively.
While our strategy continues to evolve, it remains focused on serving our customers.
At its core, this strategy is in into -- is to employ our integrated system to match desirable risk with efficient capital.
While this may appear simple or even common sense, the difficulty lies in its long-term, consistent applications in all market cycles.
You have witnessed this consistency in our execution over the years.
As we have grown, we have broadened our access to risk, we're adding more lines of business on more platforms.
We have also diversified our sources of capital through various owned and joint venture balance sheets as well as equity, debt and ILS markets.
This has afforded us significant flexibility to react when the world changes, which it did quite drastically in March.
As COVID-19 started developing, our confidence in understanding our potential exposure across all aspects of our business enabled us to pivot our focus on the needs of our customers and brokers.
We were one of the first to raise capital with a highly successful common equity offering.
To be clear, this capital raise was exclusively offensive and as I mentioned, has now been fully deployed into our underwriting portfolio.
Consistent with our message during the capital raise, we have deployed the capital through a combination of two main activities, growing into an improving market and retaining more risk.
Starting with organic growth, we began planning for the January renewal early in the year with focused and coordinated approach across the company.
This allowed us to expand our value proposition to our customers and brokers and in an evolving market providing a clear message around appetite and tolerance.
Our fortress balance sheet permitted us to engage our customers early in the renewal cycle, understand their needs and have productive conversations about how we could help solve their biggest problems.
Heading into the renewal, we expected retro and U.S. property cat markets to provide us with the greatest opportunities.
While this was the case up until mid-December, ultimately the market dynamics in retro and property cat reinsurance were not as strong as the market initially expected.
In part, I think this was because investment portfolios were disconnected from the financial reality of COVID-19 and the economic recession.
The resulting boost to book values decreased relative reinsurance demand by giving many companies the confidence to retain more risk.
Supply was also elevated as new capital enter the retro and property cat markets and increasing amounts of collateral were released and available for underwriting.
Throughout the renewal, however, both casualty and specialty lines as well as property and has continue to experience extremely favorable pricing dynamics.
In general, both outperformed our expectations with increased rates as well as improved terms and conditions.
Because of our broad access to risk, we were able to emphasize growth into these areas.
Several years ago, we began initiating small positions on desirable programs which we used to build strong customer relationships over time.
This year, as rates improved, we've positioned to grow on these programs, add more profitable expected returns.
So while the January 1 renewal may have been disappointing to those who approached it in a transactional manner, our focus on superior customer relationships and building efficient portfolios through risk allocation and sharing meant that we were once again able to select the best business at the strongest returns.
The second opportunity for deploying capital was by retaining more risk.
At January 1, we reduced the ceded protection that we purchased as a percentage of our gross premium by several percentage points.
In line with retaining more risk, we increased our ownership in DaVinci and Medici, and now have $1 billion co-invested in various joint ventures consistent with our strategy of strong alignment with our partners.
As I mentioned already, the result of this diligent planning and strong execution is that we now believe that we will grow net written premiums in 2021 by about $1 billion with an increase in expected profit.
I should caution you however that these estimates were derived from model predictions of future outcomes based on reasonable assumptions and actual premiums may differ materially from those discussed.
So when I look back on 2020, I think we had a number of accomplishments, each of these would have been impressive under normal conditions.
They were even more so in the context of working from home.
In conclusion, I'm very pleased with the steps that we took to advance our strategy during the year.
Shannon joined us in Bermuda at the beginning of January and is a strong addition to our leadership team.
I'll provide more detailed update on the renewal and our segments at the end of the call, but first, Bob will discuss our financial performance for the quarter.
As Kevin discussed, both our fourth quarter and year-end results were impacted by large weather events and COVID-19.
Despite this above-normal activity, we reported positive net income for the quarter and positive net and operating income for the year.
Today I'll divide my remarks between our fourth quarter and year-end 2020 results.
I'll first cover our consolidated performance and then provide more detail on our three drivers of profit, underwriting income, fee income and investment income.
Starting with our consolidated results and beginning with the fourth quarter where we reported an annualized return on average common equity of 10.9%, benefiting from mark-to-market gains in our strategic investment and fixed-income portfolios.
Annualized operating return on average common equity was negative 4.4%, primarily driven by weather-related losses in the COVID-19 pandemic.
We grew our book value per common share by $3.33 or 2.5% and tangible book value per common share plus change in accumulated dividends by $3.84 or 3%.
Net income for the quarter was a $190 million or $3.74 per diluted common share.
Reported an operating loss of $77 million or $1.59 per diluted common share.
This excludes $268 million of net realized and unrealized gains on investments and $23 million of net foreign exchange gains.
This includes an operating result with a net negative impact of $166 million from weather-related losses and $173 million from the COVID-19 pandemic.
As a reminder, net negative impact is the impact on net income available to common shareholders after taking into account our best estimate of net incurred losses along with related adjustments for assumed and ceded reinstatement premiums, profit commissions and redeemable non-controlling interests.
Now moving on to the full year 2020, where we grew our book value per share by 14.9% and tangible book value per share plus change in accumulated dividends by 17.9%.
We reported a return on average common equity of 11.7% and an operating return on average common equity of 0.2%.
Net income for the year was $732 million or $15.31 per diluted common share and operating income was $15 million or $0.12 per diluted common share.
Included in this operating income was a net negative impact of $494 million from weather-related losses and $287 million from the COVID-19 pandemic.
I'm now going to shift to our three drivers of profit.
Starting with underwriting income and will focus my comments on key points impacting our results.
While we reported underwriting losses of $152 million in the quarter driven predominantly by weather-related losses and COVID-19.
I would like to spend some time walking you through both of these estimates.
As I mentioned, weather-related losses had a $166 million net negative impact on our results for the quarter.
Of this, $100 million relates to events in the quarter as well as aggregate contracts.
The remaining $66 million was from continuing development on the Q3 2020 were the related catastrophe events.
The costliest storms for us in the fourth quarter were Hurricane Zeta and Delta, both of which made landfall in Louisiana as category 2 hurricanes and Hurricane Ada which made landfall in Florida as a tropical storm.
The increase in our third quarter estimates was primarily from Hurricane Laura.
Not surprisingly, COVID-19 restrictions coupled with damaged infrastructure made it more difficult for insurers to access impacted areas to adjust losses.
Additionally, Hurricanes Delta and Zeta chartered a similar path to Hurricane Laura with Delta making landfall within about 10 miles.
This combination of temporal and geographic proximity complicated the loss adjustment process.
Now moving on to the $173 million net negative impact from COVID-19.
As you know because of the uncertainty related to the pandemic, we have approached our COVID exposures in three categories.
While we have not received a significant number of formal claim advisories to-date, the information that we obtained during the renewal process provided us with a reasonable basis to update our estimate of potential losses in category 3, which we refer to as the known-unknowns and includes business interruptions.
The majority of the COVID losses in the quarter related to category 3.
We took a rigorous process involving either a top-down or a bottom-up review depending on client and geography.
The recent U.K. Supreme Court decision on the FCA case did not have a material impact on our estimate.
The net negative impact of COVID-19 for the year stands at $287 million and represents our best estimate based on information available of the aggregate impact of the pandemic on our business as a whole.
Moving now to our Property segment, where we grew gross written premiums by 26% in the fourth quarter and 23% in the year.
As a reminder, we do not typically write much property cat premium in the fourth quarter.
About half of the property cat growth in the quarter stemmed from an increase in reinstatement premiums from our weather-related losses.
The continued growth in our other property book, both in the quarter and the year comes predominantly from our successful efforts to expand our access to primary property E&S business.
We reported a property combined ratio of 126% for the quarter and 99% for the year with COVID-19 and weather-related losses being significant drivers of our results.
Specifically, weather-related losses at 47 points to the property-combined ratio for the quarter and 35 points for the year.
COVID-19 added 46 points to the combined ratio for the quarter and 12 points for the year.
These losses occurred across both property catastrophe and other property.
Our losses in the Property segment during the quarter were partially offset by 25 points of favorable development.
Now moving onto our casualty results, where the fourth quarter gross premiums written decreased by 5% in the quarter and grew by 18% in the year.
The decrease in the quarter is primarily related to selected non-renewals of business acquired from TMR, premium adjustments and the relatively minor premium impact from COVID-19 on a few lines of business.
We continue to meaningfully grow our casualty business and our full-year growth rate of 18% is more indicative of our plans for this business going forward.
The combined ratio for casualty was 104% for both the quarter and the year.
These results were driven impart by the impact of COVID-19, which increased the combined ratio by 1.7 points in the quarter primarily in accident and health and 6 points for the year.
During the quarter, we also experienced 1.4 points of weather-related losses related primarily in the specialty lines.
For the year, weather-related losses had 8.8 impact on the casualty combined ratio.
Now moving onto our second driver of profit, fee income.
Total fee income was $36 million for the quarter and $145 million for the year.
This reflects an increase of both management and performance fees that represents growth in our third-party capital and improved performance.
As we grow our joint ventures, management fees should be steadily increasing over time.
Performance fees will fluctuate year-over-year based on the results of our joint ventures.
We are pleased with our results in 2020 especially given the elevated level of catastrophe activity.
For the year, the net redeemable noncontrolling interest attributable to DaVinci, Medici and Vermeer was $231 million.
This represents a portion of our underwriting and investment income that we share with our joint venture partners, which is up 14% from 2019.
Now turning to our third driver of profit, investment income.
We reported strong investment results in the quarter and finished the year with total investment results of $1.2 billion.
This is comprised of $354 million in net investment income and mark-to-market gains of $821 million.
Mark-to-market gains were predominantly in our fixed maturity and equity investment portfolios with equity gains driven by our strategic investment portfolio.
After adding materially to investment grade credit in the second quarter, we reduced this exposure by about 13% in the fourth quarter with an emphasis on shorter-dated maturities as credit spreads approach relatively tight levels.
The average duration of our managed portfolio was unchanged at 2.9 years, while the duration of the retained portfolio moved modestly lower in the fourth quarter to 3.6% of years.
At this point, I will provide additional information on our expenses in foreign exchange gains, and starting with the acquisition expense ratio was 23% for both the quarter and the year.
This is within our current expectations.
However, you will notice that there were some noise across the segments in the quarter, where the acquisition expense ratio declined 5 points in the Property segment against the comparable quarter.
This was from an increase in the profit commissions we earned in our third-party capital business and came primarily related to favorable development.
For casualty, the acquisition expense ratio increased by 8 points against the comparable quarter.
This was driven primarily by two items, about a third was associated with a purchase accounting adjustment in last year's results and another third comes from changes in estimated profit commissions in our mortgage book, and to be clear, this is unrelated to the impact of forbearance we discussed last quarter.
The current expected run rate of our casualty acquisition expense ratio is in the upper 20s.
Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned has continued to decline and was 6% for the quarter and 8% for the year.
The decline in the direct expense ratio primarily relates to reduced operational expenses and continued leverage of our platform.
In the fourth quarter, reduced performance-based compensation expense specifically contributed to the decline in operational expense.
At 2%, the corporate expense ratio was largely flat relative to the comparable quarter and year.
Corporate expenses did increase $3 million in the quarter.
However, this increase was driven by $7 million charge from the impairment of certain U.S. insurance licenses related to the restructuring of the TMR operating subsidiaries as well as non-recurring severance-related expense.
These expenses were partially offset by a reduction in transition expenses related to the acquisition and integration of TMR that occurred in 2019.
We also reported a $23 million foreign exchange gain in the quarter, approximately one-third of this gain relates to Medici and has no impact on our bottom-line, as it is backed out through noncontrolling interest.
The remainder relates to our underwriting activities and operations denominated non-U.S. dollar currencies.
Finally, let me conclude with some comments on our capital management activities.
As Kevin mentioned, we have had a very successful joint venture capital raise in preparation for the January renewal, raising over $700 million across DaVinci, Upsilon and Medici for 2021, and this includes $131 million of our own capital.
This is an addition to the $1 billion in capital that we raised across our various joint ventures in 2020, which also included $138 million of our own capital.
On top of these investments, we also purchased $117 million of DaVinci shares from third-party investors.
In aggregate, we have increased our stake in both DaVinci and Medici to 28.7% and 15.4% respectively.
Having the ventures capital in place early, along with our capital -- equity capital, put our underwriting team in a strong position to negotiate with clients at the renewal, and as Kevin noted, we deployed significant capital at January 1st.
Even after adjusting for the substantial capital we deployed at January 1 and allowances for additional deployment opportunities during the course of 2021, we remained in a strong capital position.
Our fortress balance sheet has served us well and we typically hold excess capital.
That said, our preference is always to deploy capital into the business and we envision many opportunities in 2021 to do so profitably.
As usual, I will divide my comments between our Property and Casualty segment.
Before I get into segment-specific information, I would like to provide my perspective on the ongoing impact of COVID-19 on our industry.
As Bob explained, we undertook a very rigorous process in estimating our potential COVID-19 losses this quarter.
In the first quarter of 2020, I first defined our three category approach to evaluating our COVID-19 exposure.
As you recall, we initially recorded $104 million reserve primarily for category 1.
We also adjusted loss picks for category 2 exposures to reflect the likelihood of increased claim activity due to the pandemic and the resulting economic slowdowns.
We've now received enough information to update our COVID estimate, and this resulted in $173 million net negative impact for the quarter, primarily rated two property exposure in category 3.
Even as COVID-19 continues to spread, there has been some speculation that it will not prove as impactful to the insurance industry as originally foreseen.
I do not believe this to be the case.
In many instances, our industry is yet to recognize the losses that will inevitably arise from the pandemic particularly, with respect to business interruption.
Like -- likely this lack of recognition occurred because it made renewals smoother at January 1.
I believe, that we still have a long way to go before the true scale of COVID-19 industry losses are fully apparent.
In the U.S., the risk of widespread court leakage where courts imply coverage when it is not expressly provided currently appears low, but is something we continue to monitor.
While individual court rulings have been relatively favorable to the insurance industry, cases will take years to work through the system and some recent decisions have been adverse.
In the U.K., Europe and Australia, we've seen a trend of more affirmative contractual cover and in situations of uncertainty, court's ruling in favor of the policyholder.
Now moving to our Property segments and starting with property.
Following an active third quarter, natural catastrophe persisted into the fourth.
As Bob mentioned, the most impactful events for us in the quarter were Hurricane's Zeta, Delta and Eta.
2020 was an extraordinary year in many ways.
We experienced a record 30 name storms, 12 of these made landfall in the U.S., six is hurricanes, including one major.
The previous record was in 1916 with nine land-falling storms.
We also saw record wildfire.
In terms of acreage burned, five of the six largest fires in California's history occurred in 2020.
It is safe to say that 2020 was anything but a normal year.
As I discussed on the call last quarter, we expect that the warming climate will make extreme events more frequent and more severe.
However, this does not mean that we expect every year going forward to be like 2020.
Of course, the world will continue to experience variability in weather events, what has increased, however, is the likelihood of extreme events relative to the long-term record.
The insurance industry has always used the past to predict the future, but now the future no longer resembles the past.
Our ability to understand this shift in future risk provides us a competitive advantage, allowing us to position ourselves favorably for a changing climate.
About 50% of our property business renews at January 1st, and as I discussed, we had a very successful renewal.
By almost any measure, our property portfolio has gotten better and is indicative of a materially improving market.
A significant amount of this growth was in our other property business.
As I discussed on the call this time last year, we have been growing our other property portfolio and targeting risks that are more cat-exposed particularly, in the U.S. E&S market.
We've bill -- been building our reputation in this market for many years and have attained first call status on several accounts.
In part, this is because we have the platforms, capabilities and relationships to move quickly and add scale into much -- the much improved market for E&S.
With rates up 20% to 25%, we found many attractive opportunities to grow, both existing and new customers at January 1 renewal and believe that the market will continue to harden through 2021.
Our growth in traditional property cat was relatively muted, demand was flat with rate increases across the book averaging about 10%, with loss impacted U.S. business enjoying larger increases and non-loss impacted European business up single-digits.
We saw better opportunities in other areas and are pleased with the increase we achieved in our property portfolio overall, as we believe we constructed very attractive portfolios for us and our partners.
Shifting now to the retro market.
Heading into the renewal, our goals were to push for further rate increases, improve contractual terms and grow, if possible.
While rates in the retro market were up 5% to 15%, as I discussed earlier, additional supply against suppressing rate increases as the renewal progressed.
We demonstrated discipline by choosing to write a slightly smaller retro book.
That said, the retro market has experienced four consecutive years of rate enhancement, resulting in cumulative average rate increases approaching 50%, so while a little smaller, our retro book is attractive.
Moving now to our Casualty Specialty business.
The Casualty and Specialty renewal proceeded particularly well exceeding our already high expectations.
A significant portion of our Casualty and Specialty business renews at January 1st.
We saw opportunities in various classes across this segment with several experiencing dislocation that should provide further opportunities in 2021.
As a result, we will grow our gross written premiums in Casualty and Specialty for the year by approximately $500 million with lines like general liability and D&O being particularly attractive.
At this renewal, we continue to leverage years of relationship, building with key customers into preferred access to desirable business.
Our conviction in consistent and independent view of risk was an advantage in this changing market and we're able to provide customers and brokers with early and material solutions, which resulted in our successful growth.
We're also a market leader and largely successful in implementing communicable disease exclusions when necessary, and demonstrated our resolve by non-renewing several deals that did not incorporate a necessary exclusion.
In our casualty book, about half of the growth came from existing programs, with the other half coming from new programs with existing customers.
We continue to be the first call on several private deals, which typically garner better than market terms.
In addition to premium growth, we realized significant improvement in expected underwriting margins, which are principally driven by strong underlying insurance rate increases.
The specialty in credit book renewals were also successful and we found that our stability, underwriting expertise and strong relationships were an advantage in securing additional business this year.
Reinsurance terms and conditions adjusted where appropriate to account for increasing view of risk in areas such as mortgage and surety and strong underlying insurance rates added to growth and increased underwriting margin in classes such as marine and energy.
This quarter, we once again demonstrated the strength of our ventures group.
As Bob mentioned, including our own participation, we raised over $700 million across our joint venture vehicles.
While each of our vehicles enjoyed strong renewals, we particularly demonstrated both disciplined and superior capital management in our Upsilon joint venture.
We're able to materially improve its portfolio, consistent with our track record so as to return unused capital to investors rather than deploy it at on attractive rates of return.
As we predicted, when we raised our equity capital last June, Upsilon wrote a slightly smaller portfolio but with higher expected profit.
We are leaders in ILS management and believe we acted accordingly, upholding the highest underwriting standards while putting the interests of our partners first.
Finally, another milestone for the year was our public announcement of an environmental, social and governance strategy.
Our strategy focuses on promoting climate resilience, closing the protection gap and inducing positive societal change.
We chose these three priorities because we believe they lie at the intersection of our risk acumen and ability to make a meaningful impact on society.
As part of this strategy, we will be tracking and offsetting our operational carbon footprint, more information about our broader ESG strategies available on our newly launched webpage, found on renre.com under ESG/Sustainability.
In conclusion, for most perspective's, 2020 was a difficult year.
Across our industry, COVID-19 strained normal business practices and stressed employees.
Climate change fueled record-breaking hurricanes and wildfires.
Decreasing interest rates impacted future returns on investment portfolios.
There were others receive only problems.
The best underwriter recognized outsized opportunities.
We raised a material amounts of expensive capital in anticipation of these opportunities and executed strongly in one of the best January 1 renewals in many years, growing expected profit across our business lines and geographies.
As we head into 2021, I believe we will continue to find outsize opportunities to create shareholder value. | compname reports q4 2020 net income available to common shareholders of $189.8 mln, or $3.74 per diluted share.
compname reports fourth quarter 2020 net income available to common shareholders of $189.8 million, or $3.74 per diluted common share.
operating loss attributable to common shareholders of $77.1 million, or $1.59 per diluted common share.
q4 operating loss per share $1.59.
q4 earnings per share $3.74.
qtrly total revenue $1.4 billion versus $1.11 billion. |
The slides for today's call can be found on the Investors section of our website, along with the news release that was issued today.
These uncertainties include economic conditions, market demands and competitive factors.
Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the Investors section of our website.
Turning to slide three.
As expected, the COVID-19 pandemic led to challenging market conditions in Q2.
Despite these circumstances, strong execution during the quarter enabled Rogers to deliver solid financial results.
Before discussing our results in more detail, I'll provide an update on our ongoing response to the COVID-19 pandemic.
As I highlighted during our last earnings call, our priorities are to manage through the current macroeconomic environment, while building upon our strategic positions and strengths for Rogers' future success.
From an operations standpoint, all of our manufacturing facilities continue to operate in Q2 as essential businesses and did not experience any significant disruptions related to COVID-19.
Our factory teams continue to do an excellent job of managing the current situation and adapting to robust health and safety protocols.
Our nonmanufacturing employees have transitioned seamlessly to remote work arrangements.
They are maintaining effective collaboration with their colleagues and with our customers, where we continue to secure design wins and support customer needs.
For example, an OEM customer was at risk of missing a critical milestone in the development of their new EV technology after returning from a forced shutdown.
Rogers' employees acted with a sense of urgency, engaging on design support and delivering the critical components needed to keep the customer on schedule.
This dedication, in addition to our balance sheet, market positions and product portfolio gives Rogers a strong foundation to overcome current market dynamics.
Turning to slide five.
I'll next discuss our financial results in more detail.
Q2 net sales of $191 million were down 4% from the prior quarter and were within our guidance range.
Second quarter gross margin of 36.6% and adjusted earnings per share of $1.13 per share exceeded our guidance.
Gross margin gains were driven by strong operational execution and favorable product mix.
As Mike will discuss in more detail, we are very encouraged by the progress we are making on our cost improvement road map.
We have built considerable momentum, and we will continue to drive this initiative forward as a top priority.
The 23% increase in adjusted earnings per share from the prior quarter was due to the gross margin performance and our timely actions to manage operating expenses.
As the current market challenges are expected to extend into the third quarter, we will continue to carefully manage manufacturing costs and operating expenses.
We generated robust free cash flow of $39 million in the second quarter, and our balance sheet remains strong, enabling us to navigate the current macro environment, while also investing in our future growth.
From a market perspective, the quarter finished largely as anticipated.
Sales in our ACS business increased from stronger defense demand and higher wireless infrastructure sales, which were driven by 5G deployments in China.
The strength in these markets was offset by the significant impacts of COVID-19 pandemic on most other markets, especially general, industrial and automotive.
One market we typically don't highlight, but it is certainly a strength is aerospace and defense, where recent defense design wins drove sequential sales growth of more than 25%.
I'll discuss more about the longer-term opportunity in this market later.
Also, as highlighted, advanced mobility and advanced connectivity continue to comprise nearly 50% of total revenue.
Both focus areas continue to be important to Rogers, but we are seeing an evolution in the relative opportunity within each of these areas, which we'll look at in greater detail on the next two slides.
Turning to slide six.
All three of our business units are focused on opportunities in advanced mobility, which includes EV/HEV and ADAS markets.
It has become increasingly clear that the momentum behind vehicle electrification is accelerating despite the near-term challenges brought on by COVID-19.
Recent statements from a number of European, Asian and U.S. automakers point to the rapid progression toward fleet electrification.
On a broader scale, recently enacted government stimulus programs in Europe are providing an additional catalyst for electric vehicle growth.
Given this outlook, we are intensifying our focus to prioritize capital investments and dedicate resources to the expanding opportunities in advanced mobility.
First, in the PES segment, we are well-positioned to take advantage of the 35% plus CAGR expected in this market over the next five years.
Rogers' leading substrate technology for power semiconductor packaging is used across the spectrum of mild hybrids, plug-in hybrids and full electric vehicles.
We have a strong product portfolio to address the entire market, including our new silicon nitride substrates, which enable us to participate in the growth of silicon carbide power modules for EVs.
As a general reference point, although our content opportunity per vehicle can vary based on vehicle type and power levels, our substrate content ranges from $5 in a 48-volt mild hybrid to around $40 in a full electric vehicle.
Power interconnects provide an additional content opportunity for this market.
And like our substrate solutions, the dollar content can range broadly.
We have secured design wins with a number of promising entrants to the EV market and see this as another avenue of growth.
In our EMS business, we continue to be encouraged by our strong pipeline of design activity and wins with leading automakers and battery suppliers.
Our content opportunity spans most electric vehicle types and battery technologies with an especially strong opportunity in battery pressure pads, vibration dampening pads and battery pack sealing solutions provide additional content opportunities.
Similar to our PES business, our content opportunity can vary based on battery size, battery type and other factors.
However, as an example, Rogers' content opportunity in battery pressure pads for plug-in HEVs and EVs can be greater than $30 per vehicle.
In ACS, we have a leading position in the ADAS market where there is significant long-term growth opportunity.
Although the near-term outlook for auto sales is challenging, only around 35% of vehicles manufactured today contain ADAS features.
As these safety features increasingly become more standard in new vehicles, the market is expected to grow at an 18% CAGR over the next several years.
Longer-term trends toward autonomous driving are also expected to increase the average number of sensors per vehicle.
We see these markets in advanced mobility as opportunities that are extremely well-suited to Rogers' strengths, which are developing solutions for applications that demand high-performance and high reliability and providing expert engineering support.
We are well-positioned across each of these markets, and we'll continue to invest in our capabilities to take advantage of the growth opportunities ahead in advanced mobility.
Our advanced connectivity focus includes the wireless infrastructure and portable electronics markets, along with other emerging opportunities.
In wireless infrastructure, trade restrictions and political tensions as well as an ongoing decline in 4G deployments are creating challenges and limiting visibility.
While this creates uncertainty, industry experts continue to point to the potential for global 5G deployments in excess of one million base stations per year for the next few years beginning in 2021.
Although the longer-term 5G market outlook is positive, trade and competitive factors continue to moderate this opportunity for us.
We expect that we will have minimal share with Huawei.
Also, we are seeing some other OEMs adopt lower content antenna designs that are less technically demanding.
5G content of high-frequency circuit materials varies based on OEM design and ranges from approximately $100 to $200 per base station for the combined antenna and power amp systems.
The weighted average content opportunity is closer to the low end of that range, as Chinese OEM customers have adopted lower content designs.
Turning to portable electronics.
The overall market has been impacted by the effects of COVID-19 in 2020.
However, we see a good growth opportunity in 5G handsets, which utilize our elastomeric solutions.
Sales of 5G phones are expected to grow to around 15% of total units this year and then increase to roughly 30% of the market in 2021.
Design changes incorporated in 5G handsets are creating greater content opportunity for Rogers' advanced materials in the range of 10% to 15% versus 4G phones.
High-performance tablets, which contain our circuit materials, are a relatively smaller opportunity, but recent demand has been strong, driven by remote working and education.
In addition to the other opportunities discussed, we also continue to pursue growth opportunities for high-frequency circuit materials used in low earth orbit Internet service, next-generation advanced antenna materials and high-speed data applications.
ACS net sales for the second quarter were $71 million, an increase of 10% sequentially.
Strong growth from the defense market and higher 5G wireless deployments in China were partially offset by an expected decline in ADAS demand due to automotive factory shutdowns.
Looking ahead to Q3, we expect sales in the defense market to remain strong due to the previously mentioned design wins.
In the ADAS market, current expectations point to a potential rebound in demand late in Q3, but it remains uncertain when auto sales may return to pre-pandemic levels.
In wireless infrastructure, we anticipate a decline in Q3 sales from expected lower base station builds and decontenting.
Recent data from Chinese officials indicates that more than half of the planned 2020 5G installations were completed by the end of June.
The effects of trade tensions, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure.
As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward.
In defense, we have seen a number of significant design wins for multiyear projects.
This is supporting the outlook for a double-digit growth rate in 2020 and a high single-digit rate going forward.
In ADAS, although there are near-term challenges, as discussed earlier, the medium to long-term growth projections for this market remain robust with a 5-year CAGR of 16%.
PES net sales in the second quarter were $45 million, a decrease of 3% as compared to Q1.
The decline was due to lower sales in the traditional automotive market where demand was significantly reduced by COVID-19.
Market demand for electric vehicles continues to be strong, but we did see a decline in Q2 sales from EV factory shutdowns.
We saw moderate increases in industrial power and mass transit market sales, primarily related to customer inventory management rather than stronger end market demand.
Looking ahead to Q3, we anticipate an improvement in EV/HEV market demand as manufacturing disruptions have now subsided.
Recent sales of electric vehicles in Europe have also been increasing as COVID-19 restrictions continue to be lifted.
Offsetting the expected growth in EV sales is a lower outlook for mass transit demand due to ongoing effects from COVID-19.
Improvements in PES operations contributed significantly to our Q2 gross margin performance.
Continuing the trend from prior quarters, we again saw improvements in yields and reductions in material usage.
We are pleased with the improvements, but remain focused on additional opportunities identified in our ongoing cost improvement road map.
Q2 EMS net sales were $72 million, a sequential decrease of 14%, primarily due to the economic impact of COVID-19.
The largest decline was in our general industrial and consumer markets, including portable electronics.
Sales of battery pads and battery pack sealing solutions for the EV/HEV market was a bright spot in the quarter and was driven by stronger demand from Europe.
For Q3, we expect demand for portable electronics and EV/HEV battery applications to increase.
Portable electronics is expected to grow in Q3 from both normal seasonal patterns and increased sales of 5G handsets.
Sales in the general industrial market are anticipated to be similar to Q2 levels.
While we are seeing some signs of recovery, current visibility remains limited.
Our sales in this market are correlated with capital spending levels, and given the current economic uncertainty, many companies are delaying investments.
Lastly, I'll summarize the key messages before passing the call over to Mike.
First, we took actions to protect our employees' health and well-being, while also continuing to meet our customer needs.
Second, we managed through a dynamic quarter to deliver solid Q2 results.
As evidenced by our gross margin and earnings improvement, we maintained focus on our cost improvement road map and took timely actions in response to the current environment.
We generated strong free cash flow, and our balance sheet remains healthy.
Lastly, even as near-term visibility is limited, we have maintained a long-term view of the market opportunities.
We are focused on accelerating our plans to take advantage of the significant opportunities in advanced mobility and pursuing opportunities in 5G technologies in advanced connectivity.
By leveraging our strong product portfolio and investing in innovation and growth markets, we are positioning the company for the long term.
In the slides ahead, I'll review our second quarter results, followed by our third quarter guidance.
Turning to slide 13.
Second quarter revenues, as previously noted, were $191.2 million, 4% lower than Q1, but within our guidance range of $190 million to $205 million.
Weak demand in most automotive applications, consumer applications, including portable electronics and general industrial applications were responsible for the lower revenues in Q2.
Strong demand in the second quarter for materials serving the defense market as well as the anticipated increase in materials for 5G base station deployments, mainly in China, mitigated the revenue decline in the quarter.
Our gross margin for the second quarter was 36.6%, an increase of 360 basis points compared to the Q1 margin and well above the top end of our guidance range of 32.5% to 33.5%.
In the quarter, we experienced a more favorable product mix as the higher-margin ACS revenues represented a higher percentage of total revenues.
In addition, our focus on operational excellence, including improved manufacturing yields, material cost savings and matching our revenues with our demand profile is reflected in the higher gross margin.
Lastly, we benefited from a China trade legislation decision in the second quarter, which will reimburse Rogers for increased tariffs paid in past quarters.
This tariff refund of $3.3 million, which we did not anticipate, more than offsets the $3 million for COVID-19-related expenses incurred in the second quarter.
GAAP operating income for Q2 of $21.1 million included $3.9 million of accelerated amortization for certain intangible assets acquired in the DSP acquisition in 2017.
As the DSP demand has significantly decreased, we determined that certain of the acquired intangible assets have an economic life that will expire at the end of 2020.
Accelerated amortization for these intangibles will be $11.7 million in both Q3 and Q4.
The incremental amortization of $27.4 million through December 31, 2020, will be excluded from our adjusted results, consistent with all amortization for intangible assets acquired in acquisitions.
Adjusted operating income for Q2 2020 was $29.5 million or 15.4% of revenues, a meaningful increase from Q1 of $22.6 million and 11.3% of revenues.
The increase in the second quarter was driven by the improved gross margin, as discussed earlier, as well as significantly lower operating expenses, driven both by cost saving activities to mitigate the decrease in revenues and lower travel related expenses resulting from the pandemic.
GAAP net income for the second quarter of $14.5 million is $1.2 million higher compared to Q1.
The effective tax rate for the second quarter of 30.6% was significantly higher than the first quarter effective tax rate of 20.6% due primarily to an increase in the reserve for uncertain tax positions in the quarter, resulting from routine audits in foreign jurisdictions.
GAAP earnings per share for the second quarter was $0.78 per fully diluted share at the top end of our guidance range of $0.58 to $0.78.
On an adjusted basis, the company delivered earnings per share of $1.13 per fully diluted share in the second quarter, above the top end of our guidance range of $0.80 to $1 per share.
Turning to slide 14.
Our Q2 revenues of $191.2 million decreased $7.6 million compared to the first quarter of 2020.
As Bruce mentioned, EMS revenues decreased 14%, PES revenues decreased 3%, while ACS revenues increased 10% sequentially.
Currency exchange rates unfavorably impacted second quarter revenues by $1.1 million compared to the first quarter.
The sequential ACS revenue increase resulted primarily from a 28% increase in wireless infrastructure revenues and a 27% increase in aerospace and defense revenues.
The increase in 5G was anticipated as China resumed its 5G rollout late in Q1 and continued into the second quarter.
The 5G demand increase peaked mid-quarter and slowed at the end of the quarter, consistent with the end of the first wave of deployments in 2020.
The increase in aerospace and defense application revenues came mostly from defense, as we continue to deliver on existing program and capture new programs.
As expected, ADAS revenues were down significantly compared to Q1 as our customers built inventory in the first quarter and automakers shutdown lasted well into the second quarter.
We expect demand for ADAS applications to remain weak in the third quarter, even as the auto industry starts to recover as our customers need to work off inventory purchased in the first half.
Revenues in our EMS segment decreased in Q2 compared to Q1 in all applications with a lone bright spot being EV/HEV battery pad applications, which grew 38%.
We continue to be encouraged by our engagement in the development and design process and adoption of our materials into new design wins with battery makers for significant OEMs. Revenues for portable electronics, which comprise approximately 25% of the segment revenues, declined 7% in the quarter due to consumer demand softness for handheld devices, exacerbated by the coronavirus pandemic.
As we exited Q2, we started to see some budding demand for handhelds driven by 5G handsets and increased content in certain 5G phones.
Revenues for general industrial applications, covering many diverse markets, comprise over 45% of the segment revenues.
These revenues declined 16% sequentially due to lower demand in areas such as oil and gas and general manufacturing and industrial applications.
PES revenues decreased in the second quarter compared to Q1 due to weak demand in our automotive applications, both vehicle electrification and EV/HEV applications, including power semiconductor substrates as well as laminated busbars for power distribution.
Vehicle electrification applications decreased 35% in Q2 due to soft consumer demand for and automaker shutdowns, as discussed earlier.
The semiconductor substrate revenues for EV/HEV, which account for approximately 25% of the segment revenues, decreased 12% compared to the first quarter; and the laminated busbar revenues for EV/HEVs, which account for less than 10% of the segment revenues, decreased 65% sequentially.
Both of these sequential declines were primarily due to the production shutdown of a significant EV OEM in the quarter, resulting from the coronavirus threat.
Revenues for power semiconductor substrates for general industrial applications, which comprise over 30% of the segment revenues, were up close to 6% compared to Q1.
Spot orders of laser coolers and certain customers for industrial power applications drove the increase.
But in general, these applications remain relatively weak in the quarter.
Turning to slide 15.
Our gross margin for the second quarter was $70 million or 36.6% of revenues.
The increase in gross margin percentage was due to a favorable product mix and improved manufacturing execution efforts, as mentioned earlier.
In the quarter, the company spent approximately $3 million associated with the coronavirus pandemic and accrued a benefit of $3.3 million for a refund of increased tariff costs in China.
The tariff benefit is not expected to repeat in Q3, and the coronavirus pandemic costs are expected to be minimal in the third quarter.
Gross margins increased significantly for ACS in the second quarter as product mix, cost reduction efforts and the accrual of the tariff refund benefited the margin.
The higher wireless product revenues, specifically for power amp applications resulted in the more favorable product mix.
The EMS gross margin was down compared to the first quarter due to lower volumes, resulting in lower absorption of fixed overhead and an increase in inventory reserves for slow-moving products resulting from the lower demand levels.
In the second quarter, we continued to execute on the PES recovery plan and saw the good results in the improved gross margin.
We remain encouraged by continued signs of progress made in the quarter for manufacturing yield, continued material cost reduction and optimizing the resources for the demand levels.
The second quarter progress resulted in a 400 basis point improvement in gross margin for PES in the second quarter.
Over the past three quarters, through focus on operational execution, we have improved the PES gross margin by over 800 basis points.
We are encouraged and confident we will capture an incremental 200 to 400 basis points of improvements in the business, subject, however, to increased volumes.
We continue to focus on operational execution as a key component of gross margin expansion.
As evidence of the improvement the company has made over the past year, in the second quarter of 2019, the company generated a gross margin of 35.3% on revenues of $243 million.
In the second quarter of 2020, we generated a gross margin that is 130 basis points higher on $52 million less revenue.
The improvement is equivalent to approximately 450 basis points of gross margin conversion on equivalent product mix.
slide 16 details the changes to adjusted net income for Q2 of $21.1 million compared to adjusted net income for Q1 of $17.2 million.
As discussed earlier, the adjusted operating income for Q2 of $29.5 million and 15.4% of revenues was meaningfully higher than Q1's adjusted operating income.
Adjusted operating expenses for Q2 of $40.4 million or 21.2% of revenues were $2.7 million lower than Q1 operating expenses of $43.1 million.
The lower expenses resulted from disciplined cost management to adjust for reduced revenues as well as reduced travel-related expenses resulting from the coronavirus pandemic threat.
As previously mentioned, Rogers' effective tax rate for the second quarter increased to 30.6%, as a result of recording significantly higher reserves for uncertain tax positions accrued to address certain routine audit findings in foreign jurisdictions.
We now expect our effective tax rate for 2020 will be 26% higher than our previously communicated expected tax rate of 24% to 25%.
Turning to slide 17.
In the second quarter, the company generated strong free cash flow of $39.3 million and ended the second quarter with a cash position of $298.7 million.
In the quarter, we generated $46.3 million from operating activities, including a $22.3 million reduction in working capital and repaid $50 million on our revolving credit facility.
We ended the second quarter with a net cash position defined as cash and equivalent balances in excess of the amounts owed under our revolving credit facility of $75.7 million.
In Q2, the company spent $7 million on capital expenditures.
We spent $18.2 million year-to-date through June.
We communicated a capex spending range of $40 million to $45 million for 2020 and expect to come in at the lower end of the range, while continuing to invest to fund growth opportunities in EV/HEV applications.
We paid down an additional $125 million on our revolving credit facility on July 29.
The paydown resulted in an outstanding balance on our revolver of $98 million.
The company ended the second quarter with a strong balance sheet, is well-positioned to withstand the current economic challenges and will look to invest in opportunities to accelerate growth out of the downturn.
Taking a look at our Q3 2020 guidance on slide 18, we see both opportunities and challenges.
The opportunities include continued strength in defense for ACS, the portable electronics market preparing to launch 5G handsets benefiting EMS, renewed strength in power semiconductors and laminated busbars for EV and HEV applications in PES with the resumption of manufacturing at a significant OEM and continued progress in the EV/HEV battery pad applications in EMS. The challenges in Q3 included a demand slowdown in wireless infrastructure revenues, as Bruce discussed in his remarks.
In addition, we anticipate applications selling into the traditional automotive market will be down sequentially in the third quarter, even as signs of a broader automotive recovery become evident as many of our customers will work down inventory levels.
Lastly, we have not seen many signs of a general industrial recovery early in the third quarter and expect revenues from these applications to be flat compared to the second quarter.
Our revenue guidance is provided with the assumption that our supply chain will continue to supply critical materials, and we will continue to produce and deliver products for our customers with minimal disruptions from the coronavirus pandemic.
Therefore, revenues for Q3 are estimated to be in the range of $175 million to $190 million.
We continue to monitor and flex our spending for manufacturing infrastructure, SG&A and capital expenditures to address the anticipated demand levels.
Likewise, we continue our pursuit of operational excellence and efficiency.
Even with these actions, an unfavorable product mix and lower volumes will negatively impact our gross margins in Q3.
As a result, we are guiding gross margin in the range of 35% to 36%.
We guide GAAP Q3 earnings in the range of $0.19 to $0.39 per fully diluted share.
On an adjusted basis, we guide fully diluted earnings in the range of $0.90 to $1.10 per share for the third quarter. | rogers sees q3 adj. earnings per share in range of $0.90 to $1.10.
rogers corp qtrly earnings per share $0.78.
rogers corp qtrly adjusted earnings per share $1.13.
rogers corp qtrly net sales of $191.2 million decreased 3.8% versus prior quarter.
rogers corp sees q3 net sales of $175 million to $190 million.
rogers corp sees q3 earnings per share in range of $0.19 to $0.39.
rogers corp sees q3 adjusted earnings per share in range of $0.90 to $1.10.
rogers corp sees 2020 capital expenditures in range of $40 million to $45 million. |
The slides for today's call can be found on the investor section of our website along with the news release that was issued today.
Before we begin I would like to note that statements in this conference call that are not strictly historical or forward looking statements within the meaning of the private securities litigation Reform Act of 1995 and should be considered as subject Too many uncertainties that exists in Rogers operations and environment.
These uncertainties include economic conditions market demand and competitive factors.
Also the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non GAAP financial measures the most directly comparable gap financial measures can be found in the slide deck for today's call which is posted on the investor section of our website.
Before discussing Rogers' third quarter results I would like provide some context around the business environment in which we are operating and its effect on both our Q3 results and the outlook for the remainder of the year.
Similar to what many other companies have reported in recent weeks macroeconomic conditions are creating softness in the global economy.
In addition ongoing trade tensions are generating headwinds and in some cases limiting near-term demand visibility from a market perspective industrial and conventional automotive demand which had begun to slow in late Q2 weakened further in the third quarter.
These challenges are continuing into Q4 with recent economic data pointing to declining factory activity lower industrial output and falling auto sales.
In addition the geopolitical tensions between China and the U.S. which have resulted in trade restrictions on sales to Huawei are impacting 5G demand.
While Rogers is able to continue sales to our direct fabricator customers there is uncertainty regarding waterways ability to maintain 5g deployments.
Without certain us components and whether the performance of its alternative base station design will be acceptable.
It is also not clear what impact these factors will have on Huawei share of the market.
A byproduct of these trade restrictions has led Huawei to consider local sources of supply for high frequency circuit materials.
Even though these alternative materials have performance limitations as compared to Rogers products.
Although these challenges are impacting our near term results we continue to see very compelling market opportunities.
And we remain focused on the key pillars of our strategy to enable our success.
With this context in mind I'll now turn to our results for the quarter.
Rogers achieved q3 net sales of 220 $2 million and adjusted earnings of $1 51 per share.
Despite the market headwinds I mentioned which tempered our top line performance our adjusted earnings exceeded the high end of our guidance as a result of favorable product mix progress on gross margin improvement efforts efficient management of operating expenses and a lower effective tax rate.
Demand for Rogers products remained strong in certain sectors.
For example portable electronics demand was reasonably favorable in q3 and we achieve sequential revenue growth of approximately 5%.
Year to date growth has been particularly robust.
Due to our leading product portfolio.
Our results have meaningful meaningfully outperformed the overall handset market.
Also demand for ADAS applications remained solid year-to-date despite weakness in global auto sales.
The uniqueness of our material solutions combined with the increased market penetration of ADAS is a key enabler of our success.
Growth in the ADAS market is expected to continue driven by an increasing number of new vehicles adopting auto radar systems and as the average number of sensors per vehicle increases with higher levels of autonomy.
Finally aerospace and defense sales were robust in Q3 and year-to-date revenue is up significantly relative to 2018.
Turning to areas where we were impacted by the previously mentioned challenges Q3 wireless infrastructure sales declined versus Q2 due to lower 4G demand and the collateral effects of ongoing trade tensions already discussed.
Based upon customer and industry analyst inputs we expect the recent pause in the 5G rollout to continue through the end of the year and believe that China 5G deployments will rebound in the first half of 2020.
We anticipate continued weakness in 4G deployments as a result of the Chinese telecoms prioritizing capex investments in 5G.
And soft demand for power semiconductor substrates used in industrial power and vehicle electrification applications for conventional automotive also impacted revenue for the quarter.
In summary we saw solid Q3 results in certain market segments tempered by a number of headwinds that we anticipate will continue into Q4.
We are optimistic about the opportunities we have in areas of advanced connectivity and advanced mobility.
And as I'll discuss next we are encouraged by a number of recent developments which point toward significant opportunities for future growth.
Within Advanced Connectivity we see 5G as a multiyear growth opportunity for Rogers where market indications continue to point toward increased deployments in 2020.
At a recent forum China Mobile increased their target for 5G coverage to 340 cities by the end of next year underscoring their expansion plans.
This followed recent news from Chinese telecoms that advanced subscriptions for 5G service which is not yet available have already reached approximately 9 million.
Third-party experts expect 2020 5G deployments to be in the range of 600000 base stations which at that scale would provide an opportunity for substantial growth in our 5G wireless infrastructure business next year.
Low earth orbit or LEO is a significant emerging growth opportunity within Advanced Connectivity.
Several companies are competing to deploy large constellations of satellites that would provide high-speed internet to underserved areas.
Rogers is well-positioned to capitalize on this opportunity given our tremendous strength in the materials technologies needed to enable the complex antenna solutions that will be part of the receiver systems located on Earth.
We are also encouraged by the progress of some companies in this sector to launch commercial services.
For example in recent months one leading company announced plans for broadband internet coverage in targeted areas in 2020 with full global coverage by the end of 2021.
Looking to advanced mobility we remain optimistic about the strong opportunities in EV and HEVs.
A recent IHS market report projects that through 2025 sales of EVs and HEVs will increase at a compounded annual growth rate of approximately 30%.
These expectations for ambitious growth are underpinned by the plans of leading automakers and reinforce that this is a growing sustainable market for Rogers' Power Electronics Solutions.
One example is VW which recently unveiled the first model in its new all-electric brand that will be delivered to customers early next year.
This is the first step in VW's plan to sell up to 3 million EVs and HEVs annually by 2025.
Additionally, Daimler recently announced that they will discontinue all future development of internal combustion engines further signaling the shift in focus to electric vehicles.
By 2022 Daimler is scheduled to bring 10 all-electric vehicles to market and plans to eventually electrify the entire Mercedes Benz portfolio.
Rogers is also targeting EV charging infrastructure which is a related emerging growth opportunity for our Power Electronics Solutions.
ACS third quarter net sales were $79 million a decrease of 15% from the prior quarter and an increase of 10% versus the prior year.
As discussed earlier this decline is primarily attributed to lower 4G and 5G sales.
ADAS demand remained strong in Q3 and year-to-date sales have grown 8% compared to 2018.
Aerospace and defense sales increased 17% versus Q2 and year-to-date results are up over 20% versus the prior year.
This market segment is highly program-dependent and while we don't anticipate demand for these applications to grow at the same rate into the future we do expect stable and consistent high single-digit growth over time.
As we look ahead we anticipate that 4G and 5G demand will continue to be soft through the end of the year.
However we expect 5G demand to rebound in the first half of 2020 with the next wave of deployments.
Turning to Slide 7 in Q3 EMS net sales were $95 million a slight increase compared to Q2.
Seasonally strong portable electronics sales drove the sequential increase in revenue.
A decline in demand for general industrial and EV/HEV battery applications partially offset the growth in portable electronics.
Year-to-date sales of applications for EV/HEV battery pads and battery pack sealing systems have increased 29% versus the prior year highlighting the excellent growth opportunity in this area.
The lower Q3 revenue is the result of the recent decline in the China EV market.
We are very pleased with the progress we are making toward the new design wins with a number of European and other automakers for EV battery pad solutions.
We expect this to continue to be a driver of growth over the next several years.
Looking ahead to the fourth quarter we anticipate total EMS segment sales to decline sequentially in line with normal seasonal patterns.
Turning to Slide 8 PES third quarter net sales were $43 million a decrease of 17% from Q2.
As we anticipated at the outset of the quarter sales of power semiconductor substrates in industrial power and vehicle electrification applications for conventional automobiles declined due to weak market demand in Q3.
Sales of power substrates used in EVs and HEVs also declined largely due to the previously mentioned soft China EV market which primarily uses lower-end solutions.
The outlook continues to be strong for our new generation wide band gap semiconductor silicon nitride substrates which are used in high-end EVs and where Rogers has a leading position.
Operational improvements in PES remain a top priority with new leadership in place.
We are executing on our performance recovery plan including yield improvements.
As we look to Q4 we expect industrial and automotive market demand to be stable as compared to Q3.
Looking ahead in PES the EV/HEV market opportunity is extremely compelling and we firmly believe that we are well-positioned to fully take advantage of this opportunity.
As I indicated earlier we like other global companies are facing macro headwinds in both the industrial and conventional automotive markets and feeling the impact of trade tensions.
These challenges are having a near-term impact as is the pause in 5G deployments in China.
The achievement of our 2020 vision has always been closely tied to growth in the advanced mobility and advanced connectivity markets supported by modest growth in the industrial and conventional automotive markets.
As I explained we remain confident in this growth and our ability to succeed in these areas.
However given the challenging market and global economic conditions there is an increased uncertainty that we will attain these targets as a run rate as we exit 2020.
Having said that I want to stress that we continue to believe that there is tremendous opportunity in the advanced connectivity and advanced mobility markets supported by our broader portfolio.
We are optimistic about the 5G opportunity with the recovery expected in the first half of 2020 and a further multiyear growth horizon.
The growth opportunity in EV/HEV is equally exciting with opportunities both in power semiconductor substrates and solutions for batteries.
All of this gives us confidence in our ability to grow our business and achieve these targets.
In the slides ahead I'll review our third quarter 2019 results followed by our fourth quarter guidance.
Turning to Slide 11 we will review the financial results for Q3 2019.
Third quarter revenues as previously noted were $221.8 million below our Q3 guidance range of $225 million to $235 million.
Q3 revenues decreased 9% on a sequential basis and 2% compared to the third quarter 2018.
As Bruce noted in his comments weak demand for products serving the wireless infrastructure market for both 4G and 5G applications as well as soft demand for power semiconductor substrate used in industrial power and conventional automotive applications are responsible for the lower sequential revenues.
We achieved a gross margin of 35.6% for the third quarter 30 basis points higher than Q2 and within our guidance range of 35% to 36% due primarily to a favorable product mix and reduced spending in all of our business segments to react to the softer market demand in Q3 and expected to continue through Q4.
Our gross margin was negatively impacted by lower production volumes and the ongoing pressure from tariffs resulting from the continued trade tensions between the U.S. and China.
Adjusted operating income for Q3 2019 was $36.2 million or 16.3% of revenues compared to $41.7 million or 17.2% of revenues for Q2.
Adjusted operating expenses decreased by $1.4 million in the third quarter compared to the second quarter.
GAAP earnings per share of $1.25 per fully diluted share and adjusted earnings per share of $1.51 per fully diluted share for Q3 2019 were above the upper end of our guidance range for Q3 but below Q2 levels.
The good earnings performance both on a GAAP and an adjusted basis resulted primarily from spending control and a lower-than-forecasted effective tax rate for the third quarter.
The company generated $33.4 million of free cash flow in the third quarter and $76.8 million year-to-date.
The company has paid down $98 million of debt year-to-date and ended the third quarter in a net cash position of $10.3 million.
Turning to Slide 12 our Q3 2019 revenues of $221.8 million decreased $21.1 million or 9% compared to the second quarter of 2019.
The sequential decrease was experienced in our ACS business segment down 15%; and our PES segment down 17%.
The EMS business segment saw its revenues increase slightly over the second quarter.
Currency exchange rate negatively impacted 2019 third quarter revenues by $1.6 million compared to Q2.
The decrease at ACS revenues resulted primarily from a slowing 4G demand and a near-term delay in the 5G rollout in China.
As a result our wireless infrastructure revenues declined 35% sequentially.
4G revenues which were basically flat year-to-date through June compared to the same period in 2018 are now 10% lower year-to-date through September compared to 2018 and are expected to remain soft through Q4.
Revenues from aerospace and defense programs were strong in Q3 growing 19% sequentially and are up 17% year-to-date compared to 2018.
ADAS revenues were down 7% sequentially from a strong second quarter but are up 8% year-to-date compared to 2018 in the face of a weak auto market.
Revenues in our EMS segment increased sequentially due to strong demand for portable electronic applications.
The third quarter is typically the strongest quarter for portable electronics revenues which grew 5% sequentially and 10% compared to Q3 2018 due to our customers' commercialization of new handset and tablet designs.
General industrial application revenues which comprise close to 40% of the business segment's revenues were down slightly compared to the second quarter and down 5% compared to the third quarter 2018.
As noted in Bruce's remarks PES experienced weaker demand and lower revenue in Q3 primarily from power semiconductor substrates for general industrial and conventional vehicle electrification applications.
Revenues for these applications decreased sequentially by 20% and 13% respectively and decreased 27% and 26% respectively compared to Q3 2018.
For power semiconductor substrate for EV/HEV applications demand weakened in the third quarter consistent with lower demand for low-end EVs particularly in China.
As a result revenues per EV/HEV applications declined 35% sequentially.
However revenues were up 16% year-to-date.
Turning to Slide 13 our gross margin for Q3 2019 was $78.9 million or 35.6% of revenues 30 basis points higher than our second quarter gross margin of 35.3%.
The increase in gross margin percentage was due to a favorable product mix and reduced spending to adjust for the significantly reduced volume.
These benefits were mostly offset by the effects of lower manufacturing volume and the continued impact of tariffs resulting from the ongoing trade tensions between the U.S. and China.
As we expect to see increased demand for the next wave of the 5G rollout we are intentionally carrying additional manufacturing cost to efficiently address the opportunity reflected as strategic investments.
We were pleased with the increased gross margin percentage from the EMS business in Q3 resulting from a favorable product mix and reduced manufacturing spending to offset lower volumes.
We continue to see progress on EMS performance issues related to consolidation and optimization efforts reflected in the company gross margin.
ACS gross margins declined in the third quarter due to significantly lower volumes mitigated by a favorable product mix compared to Q2.
While we reduced our manufacturing cost in the third quarter to reflect lower demand we did not flex our cost proportionately with the lower manufacturing volumes in the quarter.
We carried additional resources in order to enable our factories to respond to the anticipated increase in 5G demand in the first half of 2020.
In the third quarter the PES gross margin continued to be negatively impacted by the significantly reduced demand for our power semiconductor substrate across all applications.
We continue to execute on our recovery plan and we are encouraged by signs of progress on yield in the third quarter.
As we have discussed previously the recovery plan will require multiple quarters to execute with contributions to overall gross margin beginning in Q4 and accelerating in the first half of 2020.
We continue to address our cost structure in PES to compensate for the lower volume while still maintaining our ability to support the increasing demand in the wide band gap semiconductor power applications.
Tariffs continued to be a headwind to gross margin in the third quarter impacting gross margin by approximately $2.3 million or 106 basis points an increase of 26 basis points compared to Q2.
We are working aggressively to leverage our factory footprint and to optimize our supply chain to mitigate the effect of tariffs.
We expect to see the benefits of the actions in the form of lower tariffs as a percent of revenues beginning in the first half of 2020.
Relative to our third quarter gross margin the path to the higher gross margin is through improved operational execution in PES and EMS contributing 200 to 250 basis points mitigating the impact of tariffs contributing 50 to 100 basis points and increased volume in all our businesses particularly 5G revenues contributing 100 to 200 basis points.
Slide 14 details the changes to adjusted net income for Q3 2019 of $28.2 million compared to adjusted net income for Q2 of $30.7 million.
As discussed earlier the adjusted operating income for Q3 2019 was lower than Q2's adjusted operating income both on a dollar and a percent of revenue basis.
Adjusted operating expenses for Q3 of $42.7 million or 19.2% of revenues or $1.4 million lower than Q2 adjusted operating expenses of $44.1 million or 18.2% of revenues.
The lower expenses resulted from reduced SG&A cost from spending control measures.
Our effective tax rate for Q3 2019 was 18.6% compared to our Q2 effective tax rate of 22.9%.
The lower effective rate for Q3 was primarily due to a geographic profit mix and the reversal of reserves associated with uncertain tax submission.
The company expects the 2019 effective tax rate to be 20% to 22% with the fourth quarter effective tax rate of 22% to 24%.
Turning to Slide 15 we ended the third quarter 2019 with a cash position of $140.7 million a decrease of $32.4 million from June 30 and a decrease of $27 million from December 31.
In Q3 the company spent $14.8 million on capital expenditures.
We have spent $38.8 million year-to-date and we guide capital spending for the year in the range of $50 million to $55 million.
The company paid down $65 million of debt in the quarter and has paid down $98 million of debt in 2019.
As of September 30 we are in a net cash position of $10.3 million.
The company generated $48.2 million from operating activities in Q3 including a decrease in working capital of $9.9 million.
Through September the company generated $115.7 million from operating activities net of an increase in working capital of $4 million primarily from the increase in inventory with long lead times.
Taking a look at our Q4 guidance on slide 16 we are facing near-term macroeconomic headwinds as well as softness in certain of our markets from ongoing trade tensions that we expect to continue through Q4.
In addition Q4 is a seasonably low quarter for portable electronics.
Therefore revenues for Q4 are estimated to be in the range of $200 million to $210 million.
In response to the market weakness we will continue to adjust our spending for manufacturing infrastructure SG&A and capital expenditures.
We will also continue our progress addressing yields at PES and optimization at EMS as discussed earlier.
Even with these actions an unfavorable product mix a meaningful reduction in volume and continued tariff headwinds will negatively impact our gross margins in Q4.
As a result we are guiding gross margin in the range of 33% to 34% for Q4.
The pension plan was adequately funded therefore the company was not required to make additional cash contributions to fund the plan.
The company will however take a $52 million to $56 million non-cash charge to income for other accumulated losses for the plan that were recorded as part of our equity.
As a result we guided GAAP Q4 loss in the range of $1.43 to $1.28 per share.
On an adjusted basis we guide the fully diluted earnings in the range of $1.00 to $1.15 per share for the fourth quarter. | compname reports q3 earnings per share $1.25.
rogers corp - q3 net sales of $221.8 million, down 2.2%.
rogers corp qtrly earnings per share $1.25.
rogers corp - for remainder of year anticipate continued weakness in industrial and automotive markets.
rogers corp - for remainder of year anticipate pause in china 5g deployments before expected next wave of deployments in first half of 2020.
rogers corp sees 2019 q4 net sales to a range of $200 to $210 million.
rogers corp sees q4 loss $1.28 - $1.43 per share.
rogers corp - q4 adjusted earnings is expected to be in range of $1.00 to $1.15 per diluted share. |
The slides for today's call can be found on the Investors section of our website-along with the news release that was issued today.
These uncertainties include economic conditions, market demands and competitive factors.
Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures-to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the Investors section of our website.
Turning to slide three.
Rogers delivered solid third quarter results led by growth in key strategic markets and strong operational execution.
Q3 net sales were $202 million.
Gross margin was 37.4%, earnings were $0.37 per share and adjusted earnings were $1.45 per share.
Next sales, gross margin and adjusted earnings per share all improved sequentially and exceeded our previously announced guidance ranges.
Strong demand in the EV/HEV ADAS portable electronics and defense markets drove the higher-than-expected sales.
EV/HEV sales grew double digits sequentially driven by strong demand for battery pad and ceramic substrate applications.
ADAS sales experienced a sharp recovery in Q3, but the broader automotive market remains below pre-pandemic levels.
The substantial growth in sales for the portable electronics market resulted from improved seasonal demand bolstered by a fast ramp in 5G smartphones.
Defense market sales increased at a rapid pace in Q3, adding to the impressive year-to-date performance.
We have a long history of success in this market and recent design wins and new product introductions are adding to our growth.
Sales in the wireless infrastructure market were lower in Q3 as supply chain challenges resulting from trade restrictions slowed the 5G rollout in China.
We have yet to see broad recovery in the general industrial and mass transit markets.
Visibility to the timing of a recovery in these markets remains less clear.
Rogers continued to achieve strong results with our operational excellence initiatives, which helped drive our improved gross margin performance.
The higher gross margin and effective management of expenditures and working capital resulted in strong free cash flow of $48 million.
We are pleased with our Q3 results and our year-to-date performance in the face of challenging market conditions.
Our strong results highlight the benefits of both our diversified market and operational excellence strategies.
Turning to slide five.
I'll next discuss the outlook for some of our key markets.
Beginning with advanced mobility, Rogers' differentiated materials technology is a key performance enabler for this market.
The long-term outlook for the EV/HEV market continues to be robust with industry experts projecting a compound annual growth rate of approximately 35% over the next five years.
The trends driving this outlook include continued investment by automakers in EV and HEV technologies, regulatory measures and increasing consumer demand.
Recent strong sales in Europe highlight the continued resiliency in this emerging segment of the automotive market.
Year-to-date European sales are at record levels and third parties expect that full year 2020 sales will be three times higher than 2019.
As I'll discuss, Rogers is well positioned to capitalize on growth across the full spectrum of EVs and HEVs.
We also have a leading position in the ADAS market, where our high-frequency circuit materials are distinguished by our performance and reliability.
Over the next five years, this market is expected to grow at a CAGR of between 15% and 20%.
Driving this growth is higher penetration rates of ADAS units which are increasingly becoming standard safety features on new vehicle models.
Also, as vehicle autonomy gradually increases over time, the average number of RADAR sensors per vehicle is expected to grow.
In advanced connectivity, we are optimistic about the growth prospects in the portable electronics market led by 5G smartphone sales.
Third-party estimates point to modest growth in the total smartphone market over the next five years with a CAGR of about 4%.
However, the 5G portion of that market is expected to grow at a much faster 35% CAGR.
This is significant for Rogers as advanced features incorporated in 5G handsets have created a greater content opportunity.
The higher content ranges from 10% to 15% in mid-range devices up to 30% more content for certain premium products.
With our high-performing materials and reputation for reliability, we are well positioned to capitalize on this growth.
We are encouraged by the positive long-term outlook for growth in Advanced Defense Systems.
Defense spending is increasingly shifting to technology programs such as missile defense and radar systems, which drive increasing demand for Rogers' advanced circuit materials.
Our long history of providing high reliability solutions for demanding applications and our differentiated engineering capabilities puts us in a strong position to continue our success in this market.
We also continue to leverage our innovation to develop new technologies that support advanced communications, radar and guidance systems.
As mentioned, we are gaining traction with recent product introductions and we remain focused on developing future advanced materials solutions.
All three of our business units are focused on the significant growth opportunities we see ahead in advanced mobility, which includes the EV, HEV and ADAS markets.
Today, I'll focus on our advanced mobility solutions specific to EV/HEV, beginning with EMS. EV/HEV battery performance, reliability and safety are of great importance to automakers and their customers.
Leveraging our expertise in polyurethane materials, we have developed high-performance solutions that enable improved battery reliability for full electric and hybrid electric vehicles.
Battery compression pads for plug-in HEVs and EVs are the largest opportunity in this market, where content can be greater than $30 per vehicle.
We have numerous design wins and a strong pipeline of additional opportunities with leading OEMs and battery manufacturers.
We have a strong market position in high-performance ceramic substrates, which are used across the full spectrum of EVs and HEVs.
As a reference point, the contact opportunity for our substrates ranges from $5 in a 48-volt mild hybrid to around $40 in a full electric vehicle.
Increasingly, EV and HEV designs are incorporating wide band gap semiconductors, which require high-performance packaging.
This advanced technology provides substantial efficiency improvements which results in increased vehicle range and lower-cost batteries while reducing the size of the inverters.
Rogers is well positioned to capitalize on this growing trend.
Our new generation of silicon nitride-substrates helps to maximize the performance of silicon carbide devices in demanding EV applications.
Power interconnects provide an additional content opportunity in EV/HEV and like our substrate solutions, the dollar content can range broadly.
Power interconnects are critical components in EVs and they ensure the safety and reliability of the vehicle.
We are encouraged by design wins we have secured with several leading entrants to the EV market.
Rogers' growth strategy is built on four pillars, which include being a market-driven organization, delivering innovation leadership, utilizing synergistic M&A and driving operational excellence.
I'd like to highlight our operational excellence strategy, which we apply to our manufacturing activities and all parts of our business.
Beginning with our manufacturing operations, we have gained significant traction in recent quarters, which has resulted in sustainable improvements to our gross margin.
At the core of our success is our standardized and scalable operating system that leverages lean manufacturing to drive performance improvements in the areas of safety, quality, cost and flexibility across all our global site and supply chain.
Some of the guiding principles of our system include establishing a proactive safety culture with 100% employee engagement, driving operational excellence through a lean manufacturing culture that embraces continuous improvement, and optimizing our global manufacturing footprint to maximize capital utilization while best serving our global customer base.
Each of these elements has a strategy behind it to drive scalable, systematic and measurable improvements while delivering increased value to our customers.
Here are some examples of the results that we are seeing from applying this standardized system.
First, we have seen substantial improvements in yields, scrap rate and on-time deliveries in all three of our business units compared to the prior year.
This has benefited our financial performance and improved customer satisfaction.
Second, our system has provided a structure to make decisions about optimizing our global factory footprint.
As announced, we are making adjustments to certain manufacturing facilities in Europe and Asia.
These actions will significantly benefit the company by better aligning capacity with end market demand, improving factory utilization and increasing our cost competitiveness.
Third, in addition to our manufacturing improvement efforts, we are engaged in an enterprisewide continuous improvement initiative focused on optimizing all business processes.
This will drive further operating expense efficiency, as we leverage our commercial and administrative infrastructure and complement our manufacturing improvement efforts.
Recapping the key messages from today's call.
We are pleased with the solid results for the quarter resulting from our diversified market strength and the consistent execution of our operational improvement initiatives.
We are encouraged by the strength in many of our key strategic markets even as a recovery is not yet evident in other areas.
In the slides ahead, I'll review our third quarter results, followed by our fourth quarter guidance.
Turning to slide nine.
As Bruce mentioned, Rogers delivered solid results in the third quarter that exceeded our guidance for revenues, gross margin and adjusted EPS.
We delivered GAAP earnings per share of $0.37 per fully diluted share which was above the midpoint of our guidance range.
In the third quarter, we recorded restructuring and impairment charges of $9.4 million related to manufacturing footprint optimization plans involving certain Europe and Asia locations mentioned earlier.
Additional restructuring charges of between $2.5 million and $4.5 million are expected in the fourth quarter.
Many of the restructuring actions will not commence until late in Q4 and into the first half of 2021, at which point, we will have a comprehensive view of the annual benefits from the planned actions.
In addition, consistent with our communication last quarter, we incurred $11.7 million of expense in Q3 from the acceleration of our amortization of intangible assets from the DSP acquisition.
Neither the restructuring charges nor the accelerated amortization were included in our adjusted fully diluted earnings per share for Q3 of $1.45.
Turning to slide 10.
Our Q3 revenues of $201.9 million increased $10.7 million or 6% compared to the second quarter of 2020.
EMS revenues increased 21% to $86.4 million.
PES revenues increased 6% to $47.9 million while ACS revenues decreased 10% to $63.7 million sequentially.
Currency exchange rates favorably impacted third quarter revenues by approximately 1% compared to the second quarter.
The sequential EMS revenue increase resulted primarily from significantly higher portable electronic application revenues which grew 72% sequentially and accounted for over 35% of the segment revenues.
The revenue increase was spread across many of the large OEMs as the early momentum we witnessed at the end of the second quarter gained significant traction in Q3, bolstered by 5G handsets-and increased content in certain 5G phones.
In addition, revenues from EV, HEV battery pad applications grew 77% sequentially as the adoption of our materials into new design wins with battery makers for significant OEMs continue to demonstrate the application advantage of our PORON product.
We expect the demand for both portable electronics and EV/HEV applications to remain robust in Q4.
Revenues for general industrial applications, which comprise over 35% of the segment revenues, declined 2% sequentially.
The rate of decline in Q3 lessened significantly from the second quarter's sequential decline.
We are a bit cautious regarding q4 demand for general industrial applications as the increase in COVID-19 cases could slow the momentum of the economic recovery.
The increase in the PES revenues compared to Q2 was driven by a 20% increase in EV/HEV application revenues, which account for just under 30% of the segment revenues.
The sequential increase reflects the continued momentum in the market.
In addition, traditional automotive revenues for x-by-wire applications grew 60% sequentially and-resulting from the automotive recovery that commenced in Q2.
The industrial variable frequency drive business, which accounts for close to 25% of the segment revenues, declined 6% compared to Q2, an indication of the continued weakness in the general industrial market.
ACS revenues decreased sequentially, primarily due to a 42% decline in our wireless infrastructure revenues-which comprise approximately 23% of the segment revenues.
The decline was felt in both 4G and 5G revenues as the supply chain challenges from trade restrictions felt by Huawei have negatively impacted the pace of the China 5G installations.
We believe these challenges will continue to impact 5G revenues into the fourth quarter.
Aerospace and defense revenues, which now account for over 40% of the segment total, grew 11% sequentially from existing and new programs in the defense market.
We expect these defense revenues to be flat to slightly down in the fourth quarter due to the timing of orders for certain programs while we maintain our bullish outlook on our long-term prospects in this market due to the alignment of the advanced defense system requirements with the technical capabilities of our products.
ADAS revenues grew 42% sequentially as the automotive market commenced the recovery in the second quarter and our customers worked through their inventories early in the third quarter.
We expect to see continued strength for ADAS applications in the fourth quarter.
Turning to slide 11.
Our gross margin for the third quarter was $75.5 million or 37.4% of revenues, an increase of 80 basis points over the second quarter.
The increase in gross margin percentage was primarily due to increased volume, a favorable product mix and improved manufacturing execution.
Gross margins increased significantly for EMS in the third quarter due to increased volumes, a favorable mix with higher portable electronic revenues and less expense for excess inventory reserves.
ACS gross margin declined in the quarter due to lower volumes and not having the benefit of the tariff refund accrued in the second quarter.
The unfavorable impacts were partially offset by increased yields.
CES gross margin declined in the quarter, primarily due to an unfavorable product mix.
The impact of the unfavorable mix was partially offset by increased volume and the continued improvement in manufacturing performance.
We continue to be encouraged by the results generated from our increased focus on operational execution.
The gross margin for Q3 2020 was 180 basis points higher than Q3 2019 gross margin of 35.6% on approximately $20 million less revenues.
At the same revenue level and the same product profile as Q3 2019, our Q3 2020 gross margin would have approximated 39%.
Also on slide 11, we detail the changes to adjusted net income for Q3 of $27.1 million compared to adjusted net income for Q2 of $21.1 million.
The adjusted operating income for Q3 of $35 million and 17.3% of revenues was 190 basis points higher than Q2's adjusted operating income.
Adjusted operating expenses for Q3 of $40.5 million or 20.1% of revenues were approximately flat compared to Q2's expenses demonstrating good spending discipline on increasing revenues.
We terminated our interest rate swap agreement late in the third quarter, which resulted in recording additional interest expense of $2.4 million in Q3.
Rogers effective tax rate for the third quarter decreased to 8.1% as a result of reducing evaluation allowance on R&D credits in the quarter.
-We now expect our effective tax rate for 2020 will be approximately 23% to 24% with our long-term rate projected to be in the range of 20% to 22%.
Turning to slide 12.
In the third quarter, the company generated strong free cash flow of $47.9 million and ended the quarter with a cash position of $186.1 million.
In the quarter, we generated $58.7 million from operating activities, including a $22.2 million reduction in working capital and repaid $163 million on our credit facility.
We ended the third quarter with an outstanding balance on our credit facility of $60 millionand a net cash position defined as cash and equivalents in excess of the amount owed under our credit facility of $126.1 million.
In Q3, the company spent $10.8 million on capital expenditures.
We spent $28.9 million year-to-date through September.
And for 2020, expect to be at the low end of our communicated $40 million to $45 million range.
On October 16, the company entered into the fourth amended and restated credit agreement, which effectively extends the maturity of our revolving credit facility from February 2022 to March 2024.
Turning to our fourth quarter guidance on slide 13.
We expect to see strength in portable electronics driven by 5G handsets, strength in EV/HEV driven by the continued marketplace momentum and strength in traditional automotive markets resulting from the recovery in the end market.
We expect the timing of defense orders to weigh on revenues in Q4 and the supply chain challenges caused by trade restrictions to continue to negatively impact the wireless infrastructure market in Q4.
While we see some positive signs pointing toward the beginning of a recovery in general industrial markets, we are cautious in our forecast due to the influence of current developments of COVID-19 containment and outbreaks in different geographies.
As a result, Q4 revenues are estimated to be in the range of $195 million to $210 million.
We expect the Q4 volume and revenue mix profile to approximate our Q3 profile.
Therefore, we guide gross margin in the range of 37% to 38%.
We guide GAAP Q4 earnings in the range of $0.50 to $0.70 per fully diluted share.
On an adjusted basis, we guide fully diluted earnings in the range of $1.30 to $1.50 per share for the fourth quarter. | rogers q3 gaap earnings per share $0.37.
q3 gaap earnings per share $0.37.
q3 adjusted earnings per share $1.45.
qtrly gaap net sales $201.9 million versus $221.8 million.
sees q4 net sales $195 million to $210 million.
sees q4 earnings per share$0.50 to $0.70.
sees q4 non-gaap earnings per share $1.30 to $1.50. |
The slides for today's call can be found on the Investors section of our website, along with the news release that was issued today.
These uncertainties include economic conditions, market demands and competitive factors.
Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the Investors section of our website.
2019 was in many ways a tale of two halves for Rogers.
In the first half of the year, our strategic positioning enabled us to take advantage of strong market growth and achieve consecutive quarters of record sales.
In the second half of the year, changing macroeconomic conditions, trade tensions and a pause in the wireless infrastructure market combined to temper full year results.
Even with these headwinds, we have reported modest growth in revenue and earnings in 2019.
Net sales for the year were $898 million and adjusted earnings per share was $6.14.
In addition, we delivered record cash from operations of $161 million and strong free cash flow of $110 million for the year.
As mentioned, challenging market condition impacted the second half of 2019 and specifically Q4.
For the fourth quarter, net sales were $194 million and below our guidance range, primarily due to a greater than anticipated pause in the 5G build out and lower 4G demand.
This decline was partially offset by stronger sales of power semiconductor substrates for the EV/HEV market and aerospace and defense demand.
Q4 adjusted earnings per share was $1.14, which was near the high-end of our guidance range.
I will take a moment here to briefly discuss the coronavirus outbreak.
Similar to other multinationals with sales and operations in China, we are closely following the situation.
While Rogers is well positioned in a variety of growth areas, the still unfolding situation is expected to have a near-term impact on market demand, which is affecting our Q1 outlook.
Mike will discuss this in more detail during his comments.
One of the key pillars of Rogers' strategy is a commitment to a market driven innovation, which has enabled us to advance our position in a number of high growth global markets.
Our diverse portfolio and market strategy enabled us to mitigate the impact of the challenging business environment in late 2019.
Relative strength in areas such as aerospace and defense, portable electronics, ADAS and EV/HEV partially offset headwinds in industrial and traditional automotive markets and slower wireless infrastructure demand from China.
We believe our market driven innovation strategy creates a competitive advantage for Rogers and will enable us to continue to drive growth in a diverse set of markets.
Turning to slide six.
I'll next provide our latest outlook for the advanced connectivity and advanced mobility markets.
Beginning with advanced connectivity, the expectations for 5G deployment over the next several years continues to be very strong.
Recent estimates from third party experts project that nearly 4 million 5G base stations will be installed globally by 2023 with around 880,000 deployed in 2020.
However, these 2020 deployments do not take into account the potential impact of the coronavirus that it could have on the China deployment timeline.
In the U.S., there are encouraging signs for the 5G market as the FCC continues to take steps to free up additional mid-band spectrum that is needed to facilitate a large scale rollout of 5G in coming years.
Overall, there are some challenges and uncertainties that we face in the wireless infrastructure market.
These include: first, the ongoing trade tensions that continued to push Chinese OEMs to diversify their supply chains, thereby putting pressure on the market share of U.S. suppliers.
Second, a substantial capital required for 5G infrastructure is reducing 4G deployments and putting pressure on OEMs to reduce base station costs leading to some reductions in content.
With these changes, we expect that our opportunity for 5G content will be around three times that of 4G or approximately $175 to $225 per base station.
Third, uncertainty around the impact of the coronavirus is adding timing risk to 2020 deployments in China.
In summary with forecasts for strong multi-year 5G deployments, we see the wireless market as a promising growth opportunity for Rogers.
While we have imperfect visibility to market share and timing of the near-term 5G rollout given the challenges and uncertainties discussed, we expect to retain a substantial share of this growing market.
The advanced connectivity sector also includes portable electronics and we saw a strong growth in this market in 2019.
Despite the decline in the global smartphone market last year, we expanded our market share based on our broad portfolio of sealing and protection technologies, which continues to be a leading choice in this market for major smartphone manufacturers.
Turning to advanced mobility.
The growth outlook for sales of EVs and HEVs continues to be robust.
Industry experts project that through 2024 sales of EVs and HEVs will continue at a compounded annual growth rate of approximately 30%.
In response to this trend, automakers worldwide continue to make multi-billion dollar commitments to electrify their fleets and invest in electric vehicle battery technologies.
For a number of years, Rogers has targeted investments toward innovative technologies that have put us in a strong position to take advantage of these significant opportunities.
For example, in our PES business, we have a leading market position based on the strength of our new generation wide band gap semiconductor silicon nitride substrates for the EV/HEV market.
We are encouraged by our progress here based on multiple active programs and recent design wins.
In our EMS business, battery pads and battery pack sealing solutions for electric vehicles is another exciting opportunity where we saw a solid growth in 2019 and which also provides significant growth potential for 2020 and beyond.
The superior performance of our products developed for this market has firmly established Rogers as a leading provider to a large number of EV battery manufacturers and automakers.
Additionally, the outlook for ADAS continues to be very positive based on trends and adoption of automotive safety systems and the push by automakers to higher levels of autonomy.
Our leadership position has been reinforced by positive customer responses to our new products for the next generation auto radar and we continue to maintain high share with leading global auto suppliers for existing and new designs.
In 2019, ACS net sales were $317 million, an increase of 8% compared to 2018, or 10% on a constant currency basis.
The higher sales were driven by demand in Wireless Infrastructure, Aerospace and Defense and ADAS.
Wireless Infrastructure as highlighted on slide five, accounted for about 14% of total Rogers revenue in 2019.
Sales increased for the full year but as noted we saw a slowdown in demand in the second half of the year and the coronavirus may impact timing of the next wave of 5Q deployments.
With that said, the multi-year growth outlook for 5G deployments remain very strong.
With four million base station deployment expected over the next four years at three times the content of 4G.
Aerospace and Defence grew at double digit rates in 2019 and has delivered consistent growth over the past three years, with a compounded annual growth rate of about 10%.
The outlook for Aerospace and Defence remains positive as the U.S. government increases its defence budget and as we continue to secure design wins.
ADAS grew at a solid rate in 2019 and has also demonstrated a strong multi-year growth profile with a three year compounded annual growth rate of more than 15%.
We expect growth for the full year as new vehicles increasingly adopt auto radar systems and as the average number of sensors per vehicle increases with higher level of autonomy.
In addition to the significant ACS opportunities discussed, we continue to pursue growth opportunities for high frequency circuit materials used in consumer receivers or low earth orbit internet service as well as next generation advance antenna material and components.
Turning to slide eight.
EMS net sales were $362 million, an increase of 6% versus 2018 or 8% on a constant currency basis.
The higher EMS sales resulted from strong growth in applications for portable electronics, mass transit and EV/HEV as well as contributions from our recent acquisitions.
This growth was partially offset by weakness in general industrial and traditional automotive markets.
As mentioned, we believe there is a substantial growth opportunity for the company in battery pads and battery pack sealing solutions for the EV/HEV market.
The application of our innovative technologies add value by enhancing the life of lithium-ion batteries.
We are encouraged by our growing sales in this market and a significant design progress in a number of battery suppliers.
2019 PES net sales were $199 million, a decrease of 11% as compared to 2018 or 7% on a constant currency basis, double-digit growth in mass transit, power interconnects and power semiconductor substrates for EV/HEV were areas of strength.
However weakness in the industrial power and traditional automotive markets in the second half of 2019 more than offset these increases.
We made significant improvements in PES operations in the fourth quarter.
As we indicated in the middle of last year, PES operational improvements were a top priority for company and we established a detailed recovery plan.
In Q4, we continued to successfully execute on that plan as we achieved yield improvements and other efficiencies which contributed to meaningful gains in gross margin and segment operating margin, even as volume remained low from softer demand in non-EV/HEV markets.
There is still a great deal of improvement that needs to be made and we are making good progress.
With the substantial growth outlook for silicon nitride ceramic substrates, we significantly increased capacity in 2019 and additional capacity is planned to come online in 2020.
This investment positions us well to take advantage of the rapidly growing EV/HEV market opportunity.
Lastly, turning to slide 10, I'll discuss our vision for the future.
As indicated on our last earnings call, there was increased uncertainty that we would attain these targets as a run rate in 2020 due to the challenging market conditions and effects of the trade tensions.
With the business environment remaining challenging and near term uncertainty related to the impact of the coronavirus, we see the timing of attaining these financial targets as being extended beyond this year.
However, as a company we remain committed to achieving annual revenue growth of 15% driven by both organic and synergistic M&A opportunities.
We also remain committed to achieving a greater than 20% adjusted operating margin as we drive top line growth and continue to execute on operational improvements.
We believe that our investments in innovation and growth markets in our broad portfolio are positioning the company well to achieve these future targets.
In the slides ahead, I'll review our fourth quarter and full year 2019 results followed by our first quarter guidance.
Turning to slide 12, fourth quarter revenues as previously noted, were $193.8 million, below our Q4 guidance range of $200 million to $210 million.
A slowdown in demand for products serving the Wireless Infrastructure market for both 4G and 5G applications and seasonal weakness in the portable electronics market were the primary drivers of the lower revenues in Q4.
In addition, continued soft demand for products serving the general industrial and conventional automotive end markets also contributed to lower sequential revenues.
Gross margin for the fourth quarter was 33.1%.
The gross margin was within our guidance range of 33% to 34% despite the lower revenues, as we took steps to reduce our manufacturing spending in all business segments to compensate for the adverse impact of significantly lower volumes.
Adjusted operating income for Q4 2019 was $22.5 million or 11.6% of revenues, down sequentially due to the lower revenues in the quarter.
The company had a GAAP loss in the fourth quarter of $28.8 million or $1.55 per share, that included a $43.9 million or $2.35 per share non-cash after tax charge, which resulted from terminating a pension plan in the fourth quarter.
This decision continues our strategy to improve cost competitiveness and de-risk the balance sheet.
On an adjusted basis, the company delivered earnings per share of $1.14 per fully diluted share within our guidance range of $1 to $1.15.
The good earnings performance on an adjusted basis resulted from a lower than forecasted income taxes for the fourth quarter.
The company generated $32.9 million of free cash flow in the fourth quarter and $109.7 million for all of 2019 compared to $19.7 million in 2018.
Turning to slide 13, revenues for calendar year 2019 of $898.3 million were 2% higher than 2018 due to organic growth of just under 3% on a constant currency basis.
Acquisitions added approximately 2% and currency had a negative impact of just over 2%.
Organic growth resulted primarily from advanced connectivity related applications, both in Wireless Infrastructure and ACS, primarily in the first half of 2019 as well as portable electronics and EMS. Growth in advanced mobility and advanced connectivity was tempered by weak general industrial and conventional automotive demand.
Adjusted operating income for 2019 of $141.4 million or 15.7% of revenues was 10 basis points lower than 2018, the lower adjusted operating margin resulted from a 40 basis point decline in 2019 gross margin versus 2018 due primarily to operational challenges to add capacity and wrap new products in our PES business throughout the year and incremental costs for integration of EMS acquisitions in the first half of 2019.
In addition, trade tensions between U.S. and China resulted in tariffs that decreased gross margin by 66 basis points in 2019.
Despite the challenges outlined above, both ACS and EMS increased our gross margins compared to 2018.
EPS for 2019 was $2.43 per fully diluted share compared to $4.70 per fully diluted share in 2018.
As discussed in our Q4 results, 2019 results include a significant charge to terminate a pension plan.
Adjusted earnings per share per fully diluted share of 2019 of $6.14 was $0.37 higher than 2018, due primarily to a decrease in the effective tax rate to 14.2% in 2019 from 20.7% in 2018.
Adjusted EBITDA of $188.2 million or 21% of revenues in 2019 was slightly higher than the $184.8 million or 21% of revenues in 2018.
Returning to the fourth quarter on slide 14, our Q4 2019 revenues of $193.8 million decreased 13% compared to the third quarter of 2019.
The sequential decrease was experienced in our ACS business segment down 18% and our EMS business segment down 16% while the PES business segment saw its revenues increase 2% over the third quarter.
Currency exchange rates negatively impacted fourth quarter revenues by $1.1 million compared to Q3.
The decrease in ACS revenues resulted primarily from a further slowdown in 4G demand and a continued delay in the 5G rollout in China.
As a result, our Wireless Infrastructure revenues declined 34% sequentially.
4G revenues ended the year 23% below 2018 revenues.
The 5G revenues for the year 2019 resulted in Wireless Infrastructure revenues growing 10% over 2018 levels.
Fourth quarter revenues from Aerospace and Defense programs grew 4% sequentially over a strong third quarter and increased 16% for the year.
ADAS revenues were down 8% sequentially but are up 7% annually compared to 2018 in the face of a weak auto market.
Revenues in our EMS segment decreased sequentially due to weakness in our end user applications in all markets led by an expected seasonal softness in portable electronics, which declined 19% in the fourth quarter.
Despite the fourth quarter demand decline revenues for portable electronics, which comprised greater than 27% of the segment revenues grew 16% in 2019 compared to 2018 due to our strong product portfolio, which led to share gains in new handset and tablet designs.
General industrial application revenues, which comprise approximately 40% of the business segment's revenues were down 9% compared to the third quarter and down 5% annually compared to 2018 reflecting ongoing weakness in certain industrial markets.
PES revenues increased in the fourth quarter due to a strong increase in our power semiconductor substrates for EV/HEV applications.
These revenues which represent close to 20% of the segment revenues increased 42% compared to the third quarter and grew 14% annually.
Power semiconductor substrates, for general industrial applications, which comprise over 30% of the segment revenues grew 2% in the fourth quarter, principally from the completion of inventory corrections in the quarter.
For the year revenues from general industrial applications were down 16% as demand for factory automation capital was weak, particularly in the second half of 2019.
Revenues from conventional vehicle electrification applications showed continued weakness in the fourth quarter, declining 11% sequentially and 21% for the year as a result of weak auto sales, particularly in Europe.
In our power interconnect business revenues for mass transit applications grew nicely in 2019 due to strong first half demand from a couple of key customers increasing 35% for the year.
Turning to slide 15, our gross margin for Q4 2019 was $64.2 million or 33.1% of revenues, significantly lower than our third quarter gross margin.
The decrease in the gross margin percentage was due to lower volumes resulting in less factory absorption and manufacturing expenses, particularly fixed costs.
We were able to reduce manufacturing spending at all business segments, thereby mitigating a portion of the negative impact from the reduced volumes.
Tariffs were $1.6 million lower in the quarter due primarily to reduced Wireless Infrastructure production.
Gross margins declined significantly for both ACS and EMS in the fourth quarter due primarily to the meaningful volume declines experienced in the quarter.
In addition, EMS had a negative impact from product mix as the higher profit portable electronics revenues experienced a seasonal decline compared to Q3.
In the fourth quarter, we continued to execute on the PES recovery plan as Bruce mentioned and we are encouraged by signs of progress made in the quarter for manufacturing yield and cost structure.
The improvements led to a significant progress on the business segment profitability, increasing PES gross margins by over 600 basis points resulting in over 100 basis point improvement to the company gross margin.
While encouraged, we still have significant work to realize the additional expected improvement and incremental 600 basis points improvement at PES driven primarily from increased yields and continue to believe it will take us through the first half of 2020 to realize the majority of the remaining improvements.
These efforts are critical to maintaining our ability to support the increasing demand in the wide band gap semiconductor power applications.
Tariffs resulting from trade tensions continued to be headwind to gross margins in the fourth quarter, although less so compared to Q3.
The impact to gross margins was approximately $0.8 million or 41 basis points, a decrease of 65 basis points sequentially.
The decrease was due primarily to lower shipments subject to tariffs, specifically less Wireless Infrastructure materials.
We are working aggressively to leverage our factory footprint and to optimize our supply chain to mitigate the effects of tariffs and expect to see the benefits of these actions throughout 2020.
As we have discussed previously, the path to higher gross margins continues to be through improved operational execution, primarily in PES mitigating the impacts of tariffs and increased volumes in all businesses.
Slide 16 details the changes to adjusted net income for Q4 2019 of $21.3 million compared to adjusted net income for Q3 of $28.2 million.
As discussed earlier, the adjusted operating income for Q4 2019 was lower than Q3 adjusted operating income both on a dollar and a percent of revenue basis.
Adjusted operating expenses for Q4 of $41.7 million or 21.5% of revenues were $1 million lower than Q3 adjusted operating expenses, 19.2% of revenues.
The lower dollar expenses resulted from reduced performance-based expenses.
The company had lower interest expense in the fourth quarter as a result of paying down $65 million of debt in the third quarter.
Rogers effective tax rate for 2019 was 14.2% compared to 20.7% in 2018.
The 2019 rate decreased primarily due to the increased utilization of research and development credits and excess tax deductions on stock based compensation, partially offset by the tax effect of the pension settlement charge and an increase in reserves for uncertain tax positions.
Turning to slide 17, we ended 2019 with a cash position of $166.8 million, an increase of $26.1 million from September 30 and a decrease of $0.9 million from December 31, 2018.
In Q4 the company spent $12.8 million on capital expenditures, we spent $51.6 million in 2019 with significant expenditures to increase capacity at both ACS and PES.
The company paid down $7.5 million if debt in the quarter and paid down $105.5 million of debt in 2019 and ended the year in a net cash position of $43.8 million.
The company generated $45.7 million from operating activities in Q4, including a decrease in working capital of $17.4 million.
For 2019, the company generated a record $161.3 million from operating activities including $13.4 million from a decrease in working capital.
Cash generation in 2019 compares favorably to the cash generation in 2018 of $66.8 million from operating activities, net of the $46.2 million used for increases in working capital and $25 million to fund a pension plan.
The company ended 2019 with a healthy balance sheet and is well positioned to fund growth in 2020 and beyond, whether it be organically or through M&A activities Taking a look at our Q1 2020 guidance on slide 18, several of the headwinds Bruce described in his Q4 comments will continue into the first quarter and are expected to be exacerbated by the near term impacts and uncertainties from the coronavirus.
While we have been able to restart our factory near Shanghai, we expect the outbreak will have near-term negative impacts on global supply chains in our China business, which accounts for approximately one third of our revenues.
The impacts will be felt by all three of our business segments, but it will have the most severe impact on our ACS business segment, specifically the continued push out of 5G deployments.
As a result, we believe the coronavirus will reduce our revenues in the first quarter by approximately 7% to 10%.
We are however projecting to see a continued uptick in advanced mobility business both in EV/HEV and ADAS applications.
Therefore, revenues for Q1 are estimated to be in the range of $185 million to $200 million.
The range is wider than historically provided due to the increased level of uncertainty from the potential impact of the coronavirus.
We will continue to flex our spending for manufacturing infrastructure, SG&A and capital expenditures to address the anticipated lower demand levels.
We will also continue our progress improving yields at PES as discussed earlier.
Even with these actions, the lower volumes will continue to negatively impact our gross margins in Q1 and we will continue to carry some incremental costs in our ACS business to address our customer needs when 5G rollout resumes.
As a result, we are guiding gross margin in the range of 32.5% to 33.5% for Q1.
We guide a GAAP Q1 earnings in the range of $0.50 to $0.70 per fully diluted share.
On an adjusted basis we guide fully diluted earnings in the range of $0.75 to $0.95 per share for the first quarter.
In 2020, we expect the effective tax rate to be 20% to 21% excluding the impact of discrete items, which have historically lowered the effective rate.
Lastly, we expect to spend $40 million to $45 million on capital expenditures in 2020. | compname posts q4 loss per share of $1.55.
q4 adjusted earnings per share $1.14.
q4 loss per share $1.55.
market uncertainty tempering q1 outlook.
q4 sales fell 13.1 percent to $193.8 million.
sees q1 earnings per share $0.50 to $0.70.
sees q1 adjusted earnings per share $0.75 to $0.95.
sees q1 2020 sales $185 million to $200 million.
for full year 2020, rogers expects capital expenditures to be in a range of $40 to $45 million.
q4 revenues were impacted by expected weakness in industrial and automotive markets.
q4 revenues were impacted by greater than anticipated slowdown in wireless infrastructure demand.
looking ahead to q1, we have limited visibility across multiple segments due to still unfolding impact of coronavirus outbreak.
looking ahead to q1, believe that revenue will be impacted in range of 7% to 10% by coronavirus outbreak. |
So with that, I'll hand the call over to Blake.
On the leadership front we have two exciting announcements today.
First, we've hired Scott Genereux as our new Chief Revenue Officer.
Scott built strong executive-level customer relationships and has spent most of his career leading global sales forces and major enterprise software and hardware companies.
These include Oracle and most recently Veritas, and we are thrilled to bring him on board in this newly created role.
Scott will be responsible for all our worldwide sales and marketing efforts, leading our global go-to-market strategies and accelerating Rockwell's growth, including software sales and annual recurring revenue.
The second important announcement is that Brian Shepherd has been hired as the new leader of our Software and Control business segment.
Brian has extensive experience in the industrial software space and joins Scott in bringing proven knowledge about ways to drive faster recurring revenue growth in our business.
Prior to joining us, Brian was President of Production Software and Smart Factory solutions for Hexagon AB and before that was a longtime executive at PTC where he led strategy and operations for their enterprise software segments.
He has strong technical expertise across the design, operate and maintain phases of the customer journey and how industrial software can maximize customer value.
We are excited to have him on board.
Both Scott and Brian begin on February 1st.
Finally, I'm happy to report we are well along in our CFO search and expect to make that announcement shortly.
It's been a busy few months but I'm very pleased with the new talent and fresh perspectives we are adding to our leadership team.
In other news this quarter, we had a very important win on the legal front.
In Q1 Radwell International was found liable for trademark infringement and false advertising relating to its resale of Rockwell products.
This latest legal victory underscores our commitment to protecting our intellectual property as well as our authorized distribution network.
We're using a portion of the gain that resulted from this ruling to make additional investments this year.
This includes investments to pull forward software product launches that will increase recurring revenue in fiscal '22 and beyond as well sustainability-related investments to drive our ESG goals.
With that, let me now turn to our Q1 results on Slide 3.
In Q1, total reported sales declined 7%.
Organic sales were down 10% versus prior year.
Total sales included a two-point positive contribution from our ASEM and Kalypso acquisitions.
Note that Sensia is now included in our organic results.
During the quarter we saw a sharp acceleration in order intake, especially for our products.
Total orders were back above pre-pandemic levels.
The increased demand was broad-based and well above our expectations and the higher order rates will benefit sales for the balance of the year.
More on that in a moment.
I'll now comment on our new business segments.
Intelligent devices organic sales declined 8%.
In the quarter we saw positive year-over-year growth in motion, where we believe we are gaining market share.
Orders in this segment returned to positive growth a quarter ahead of our expectations.
Software and Control organic sales declined 6%.
In the quarter we saw year-over-year growth in Network and security infrastructure.
Lifecycle services' organic sales decline of 16% was led by continued weakness in oil & gas.
We did see a 25% sequential uptick in Lifecycle services orders in the quarter, which will drive sequential sales improvement through the balance of the year.
In Information solutions and connected services, organic sales were down slightly in the quarter primarily due to COVID-related project delays.
However, we saw double-digit organic orders growth in IS as well as strong demand in the cyber security portion of connected services.
IS/CS built backlog by about 30% versus prior year and we expect IS/CS to have a great year overall, growing double-digits in fiscal '21 with organic sales exceeding $500 million.
Total backlog grew strong double-digits on an organic basis both year-over-year and sequentially.
Lifecycle services book-to-bill reached a record of 1.18 reflecting a significant improvement both sequentially and year-over-year.
Segment operating margin performance of 20% in the quarter was roughly flat with last year on lower sales, a testament to our increasing business resilience.
Adjusted earnings per share grew 11% versus prior year, including the legal settlement gain.
Excluding the gain adjusted earnings per share came in above our expectations for the quarter.
Figures are for organic sales.
Our Discrete Market segment sales declined by approximately 5% however, we saw strong broad order momentum in the quarter particularly in North America that should benefit sales performance for the remainder of the year.
Automotive sales declined approximately 10% versus prior year with mid-single digits growth in EMEA offset by tough comparisons in other regions.
Our EV business significantly outperformed the rest of automotive and include key wins from a major auto brand owner in Europe that is building a new line for EV battery manufacturing.
We also won at a European Tier 1 OEM, which shows our independent cart technology for the precision motion control necessary to build new electric vehicles.
These were both hard fought wins where our strong customer support and technology differentiation were important factors in our success.
Semiconductor grew low-single digits in the quarter and is expected to improve significantly over the balance of the year.
Strong secular tailwinds in this vertical are prompting some of our largest semiconductor customers to increase their capex spend this year.
As a result we are raising our semiconductor outlook to high-single digit growth for the year, up from our original guidance of mid-single digit growth.
Another highlight within discrete was our performance in e-commerce, with sales growing approximately 40% versus prior year.
This is obviously another industry with secular tailwinds and we're well positioned to provide value that will continue to support its tremendous future growth.
Our independent cart technology is a long-term differentiator here as it is in battery assembly and the packaging of consumer products.
Turning now to our Hybrid Market segment.
This segment grew by low-single digits and accounted for 45% of revenue this quarter.
Food & Beverage grew low-single digits.
In addition, packaging OEMs delivered another quarter of double-digit growth versus the prior year.
Life sciences grew about 10% in Q1 well above our expectation for the quarter led by strong broad-based demand in North America.
Thermo Fisher is an important part of the vaccine ecosystem and we were very proud this quarter to be awarded a significant multi-year enterprise software order to supply software and professional services to enable their Pharma 4.0 initiative and drive their COVID readiness and response.
That shows Rockwell's FactoryTalk innovation suite, which uniquely integrates MES, IIoT, analytics and augmented reality in a single software solution to drive productivity.
FTIS in combination with strong pharma industry expertise, full lifecycle services and best-in-breed digital partner ecosystem were key factors in why Thermo Fisher selected Rockwell.
While there is a lot of focus on our role in vaccine formulation, we're also working with the broader vaccine ecosystem to support packaging and distribution requirements.
For every one pallet of vaccines being shipped, 20 to 30 additional pallets of vaccine accessories are required.
Based on the broad-based increase in life sciences' demand, we're are now expecting life sciences to grow mid-teens in fiscal '21.
Process markets were down approximately 25% and weaker than we expected led by larger declines in oil & gas.
Process verticals typically lag our discrete business by about half-a-year.
Turning now to Slide 5, and our organic regional sales performance in the quarter.
North America organic sales declined by 11% versus the prior year primarily due to sales declines in oil & gas and automotive.
Business conditions improved significantly through the quarter and were reflected in strong product orders.
EMEA sales declined 8% led by oil & gas.
Sales from food & beverage and water customers were strong in the quarter.
Sales in the Asia Pacific region declined 7% largely due to declines in process industries that were partially offset by growth in mass transit and semiconductor.
Asia Pacific backlog reached a record high in the quarter and we do expect strong sales growth in the region for both the upcoming quarter and full year.
In China, we saw growth in auto with some important greenfield EV battery wins.
Sequential orders growth in Q1 and double-digit year-over-year growth in backlog support our full-year sales growth outlook in China to be above the company average.
Latin America declines were led by oil & gas and mining.
In the region we saw good growth in food & beverage and tire.
Orders momentum in the first quarter is expected to drive strong growth in the balance of the year.
The higher top-line guidance is primarily related to improvements in the outlook for life sciences and e-commerce in North America as well as in our global outlook for semiconductor growth.
Our new reported sales outlook assumes 10% year-over-year growth at the midpoint including 6% organic growth.
We expect our new software offerings and expanded services will drive double-digit ARR growth in fiscal '21, our new hires will be focused on this objective.
Our new adjusted earnings per share target of $8.90 at the midpoint of the range represents 13% growth over the prior year.
A more detailed view into our outlook by end market is found on Slide 7.
I won't go into the details on this slide but as you can see we expect positive organic sales growth in all of our key end markets this year with the exception of oil & gas.
Our market uptick in orders for Sensia in the latter part of Q1 sets the stage for improving sales later in the fiscal year.
I'll start on Slide 8, first quarter key financial information.
First quarter reported sales were down 7.1% year-over-year.
Organic sales were down 9.7%.
Acquisitions contributed 1.8 points of growth and currency translation increased sales by 0.8 points.
Segment operating margin was 19.8%, slightly below Q1 of last year.
This is the second quarter in a row that segment margin was about flat year-over-year despite lower sales, so a good result.
Corporate and other expense of $28 million was down about $5 million compared to last year.
Last year's amount included transaction fees related to the formation of the Sensia joint venture.
Note that previously, we referred to this line item as general corporate net.
The adjusted effective tax rate for the first quarter was 15.4% compared to 8.3% last year.
The increase in the tax rate is primarily due to a large discrete tax benefit recorded in Q1 last year related to the formation of Sensia and other discrete items.
As a reminder, beginning with this quarter, we changed the definition of adjusted earnings per share to also exclude the impact of purchase accounting, depreciation and amortization expense.
First quarter adjusted earnings per share was $2.38.
As Blake mentioned earlier, this result includes $0.45 related to a favorable legal settlement.
Adjusted earnings per share excluding the legal settlement was $1.93 identical to last quarter and better than we expected.
We're pleased with this result since compared to last quarter we were unable to overcome a $0.30 headwind from the reinstatement of incentive compensation and the reversal of temporary cost actions as of the end of November.
I'll cover year-over-year adjusted earnings per share bridge for Q1 on a later slide.
Free cash flow was $319 million in the quarter including the $70 million legal settlement.
Free cash flow conversion was 115% of adjusted income.
One additional item not shown on the slide.
We repurchased 356,000 shares in the quarter at a cost of about $88 million.
This is in line with our full-year placeholder of about $350 million.
At December 31, $766 million remained available under our repurchase authorization.
Slide 9 provides the sales and margin performance overview of our operating segments.
As a reminder, this is the first quarter we're reporting under our three segment structure, the new three segment structure.
The Intelligent Devices segment had an organic sales decline of 7.9% in the quarter.
Segment margin was 19.4%, 130 basis points lower than last year, mainly due to lower sales partially offset by temporary and structural cost savings.
As Blake highlighted earlier, we had a strong order performance in the quarter particularly in our product businesses.
Intelligent devices' orders grew low-single digits year-over-year and high-single digit sequentially.
Software and Control segment organic sales declined 6.2% in the quarter.
Acquisitions contributed 2.7% to growth and segment margin was 30.2%, which was 80 basis points lower than last year's strong margin performance mainly due to lower sales, partially offset by temporary and structural cost savings.
Software and control orders also grew low-single digits year-over-year and high-single digits sequentially.
Organic sales of the Lifecycle Services segment declined 16.3% year-over-year as the recovery in this segment's offerings tends to lag our products businesses.
Acquisitions contributed 3.9% to growth and operating margin for this segment increased 50 basis points to 8.9% versus 8.4% a year ago despite lower sales.
Contributing to the lower year-over-year margin improvement -- I'm sorry, contributing to the year-over-year margin improvement were temporary and structural cost savings and the absence of Sensia one-time items recognized in the first quarter of fiscal 2020.
First quarter book-to-bill performance for the Lifecycle Services segment was 1.18, a strong start to the year.
The next Slide 10 provides the adjusted earnings per share walk from Q1 fiscal 2020 to Q1 fiscal 2021.
Starting on the left, core performance had a negative impact of about $0.25 driven by lower organic sales.
Temporary cost actions partially offset the sales impact by $0.20.
These were the salary reductions and 401(k) match suspension that we implemented in Q3 of fiscal 2020, which remained in effect through the end of November 2020.
Incentive compensation was a year-over-year headwind of about $0.10.
Tax was a headwind of about $0.10 primarily due to the Sensia-related tax benefit recorded last year and other discrete items.
Acquisitions contributed about $0.05.
This represents the positive contribution from acquisitions that we completed in 2020 and so far in 2021.
As a reminder Sensia is now reported in core.
Finally, as mentioned earlier, the legal settlement contributed $0.45 to adjusted EPS.
Moving to Slide 11, monthly product order trends.
This slide shows our order -- daily order trends for our Software and Control and Intelligent Devices segments excluding the longer lead time configured to order offerings.
The trend shown here accounted for about two-thirds of our overall sales.
Order intake for products improved again this quarter as the recovery continue.
As you can see there was a sharp acceleration in demand in November and December.
Orders for the Lifecycle Services segment also improved in the quarter but are recovering slower than product orders.
A strong order performance resulted in record total company backlog growing over 20% year-over-year and double-digits sequentially.
Our quarterly product order trends are shown on Slide 12.
This is the same data as the prior slide summarized by quarter.
Our order levels in the first quarter are now clearly above pre-pandemic levels, both for products and the total company.
This takes us to Slide 13, updated guidance.
We are increasing our organic sales growth outlook by 1 point.
The new range is 4.5% to 7.5% with a midpoint of 6%.
Given the weaker U.S. dollar we now expect currency translation to contribute about 2.5% to growth.
We expect acquisitions to contribute about 1.5%.
In total, the midpoint of our reported sales guidance range is 10%.
We have also updated the adjusted earnings per share guidance range to $8.70 to $9.10.
I'll review the bridge from the prior guidance midpoint and the new $8.90 midpoint on the next slide.
Segment operating margin is now expected to be about 19.5%.
The lower margin compared to prior guidance reflects the software investments that Blake mentioned earlier and the impact of the Fiix acquisition.
These will primarily affect the Software and Control segment and will be weighted toward the third and fourth quarters.
Our adjusted effective tax rate is expected to be about 14%, the same as prior guidance.
As mentioned last quarter, this includes a 300 basis point benefit related to discrete items, which we expect to realize late in the fiscal year.
We continue to project free cash flow conversion of about 100% of adjusted income.
A few additional comments on the fiscal 2021 guidance.
Corporate and other expense is expected to be between $105 million and $110 million.
Purchase accounting amortization expense for the full year is expected to be about $50 million.
Net interest expense for fiscal 2021 is still expected to be between $90 million and $95 million.
Finally, we're still assuming average diluted shares outstanding of about 117 million shares.
This takes us to Slide 14.
This slide bridges the midpoint of our November adjusted earnings per share guidance range to the midpoint of our new guidance.
Starting on the left, there is a higher contribution from core operating performance, primarily due to the higher organic sales guidance.
Currency is projected to add about $0.05 compared to prior guidance.
Next, given the increase in guidance, there is about a $0.10 impact from higher bonus expense.
Finally, there is the $0.45 contribution from the Q1 legal settlement, partially offset by about $0.35 for the incremental investments and the impact of the Fiix acquisition.
The new midpoint of the guidance range is $8.90.
Finally, a couple of quick comments regarding fiscal Q2.
Given our strong order performance in Q1, we expect Q2 sales to grow sequentially and to be about flat year-over-year.
We expect second half year-over-year organic sales growth in the mid-to-high teens.
As a reminder, as we mentioned on the last earnings call, Q2 will have the largest year-over-year headwind from the reinstatement of the bonus in the range of $50 million.
With that, I'll hand it back to Blake for some additional comments.
Historically, the pace of recovering demand for our products after a recession has come faster than we predicted when we were still in the downturn.
This recovery is looking similar so far and we will see Q2 sales and earnings begin to reflect the torn of orders we received in November and December, with significant double-digit year-over-year growth expected in the second half of the year.
The rate of infections in each region around the world has had a direct impact on the timing and rate of their respective economic recoveries.
The Americas were last in and seem to be the last to recover, with our sales most highly correlated to this geography given our revenue there.
We are working over time to meet this demand and staying close to our component suppliers around the world.
We are actively hiring an additional capacity for Logix, it's coming online this month.
The new Milwaukee manufacturing center is working two shifts a day to keep pace with this increased level of orders activity.
Turning to Slide 15.
We're also investing in software development to drive our future growth.
Last November at our Investor Day, we talked about how we will be releasing Software as a Service within our FactoryTalk portfolio to add value in the design, operate and maintenance phases of the customers' investment lifecycle.
The recent legal settlement gain will allow us to advance these deliverables.
Recent acquisitions are playing an important role in these offerings as well with fixed software central to FactoryTalk Maintenance Hub within the Software and Control business segment.
Fiix is already showing great momentum and just booked their first million dollar annual recurring revenue contract.
Their leadership is already a part of the larger plans for accelerating our SaaS offerings.
It all begins with great people and I continue to be immensely proud of our employees in all parts of the organization and around the world.
We continue to hire top talent and the two new members of the team we announced today will add to an already great leadership team.
With that, let me pass the baton back to Jessica to begin the Q&A session.
Michelle, let's take our first question. | q1 adjusted earnings per share $2.38.
rockwell automation - fiscal 2021 first quarter sales were $1,565.3 million, down 7.1 percent from $1,684.5 million in the first quarter of fiscal 2020.
updating fiscal 2021 diluted earnings per share guidance to $11.07 - $11.47 and adjusted earnings per share guidance to $8.70 - $9.10.
sees fy 2021 organic sales growth of 4.5% to 7.5%. |
In addition, we filed an 8-K and have posted supplemental information on our website related to our new business segments and adjusted earnings definition.
So with that, I'll hand the call over to Blake.
I first want to address Patrick's recent announcement that he will be leaving Rockwell to start a new chapter in his career.
In his 14-years with us, the Company has continued its long legacy of financial discipline and delivering superior shareowner returns, and we wish him well in his next pursuit.
Many of you know Steve Etzel, who will be stepping in as CFO on an interim basis.
Steve has been with us for over 30-years and over these years has run Investor Relations, Treasury, and Corporate FP&A.
The Board and I have full confidence he will reinforce our strong financial framework and continued commitment to superior shareowner returns.
Patrick and Steve are ensuring a very smooth transition, while we consider internal and external candidates for a permanent successor.
These cost actions enabled us to protect our company's financial strength and allowed us to continue making important, targeted investments to drive our future growth.
Now, with business conditions gradually improving, we will reverse the temporary pay reductions by the end of November, one month earlier than expected.
In addition, our guidance for next year assumes a return to a fully funded bonus plan.
Because of our employees' hard work and dedication, we have never been so well positioned for what lies ahead.
This is another testament to the type of culture we have at Rockwell and I couldn't be prouder.
Turning now to our Q4 results on Slide three.
While business conditions remain difficult relative to a year ago, we are pleased with the steady improvement we're seeing.
In Q4, total reported sales declined by 9% versus the prior year.
Organic sales were down about 12% versus prior year, but grew 10% sequentially.
Product sales outperformed our expectations and were driven by better-than-expected results in Drives and Motion.
Motion performance was led by our Independent Cart Technology, where we received the largest single order in Rockwell Automation's history.
We won this multi-year project from the US Navy based on a need for precise, highly responsive motion control not available with traditional systems, and on Rockwell's long track record as a dependable US supplier.
Independent Cart provides a new way for us to add value and drive growth.
You'll be hearing more about it, and other innovative technologies, at our upcoming Investor Day on November 17th.
Turning to Information Solutions and Connected Services.
Organic sales were up low single-digits versus prior year.
IS/CS orders grew double-digits over the prior year in both software and connected services.
IS/CS sales reached approximately $400 million in fiscal '20 on an organic basis and were well in excess of that when including all of our recent inorganic investments.
Demand for software sold as a result of our PTC partnership is also increasing rapidly as we enter the new fiscal year, and we're very happy with the recent extension and expansion of this relationship.
Together with PTC, we added over 200 new customer logos in fiscal 2020, and deal sizes in our Information Solutions software business continue to grow.
The synergies of our combined offering are very evident to customers.
In Connected Services, our recent Kalypso acquisition is doing particularly well and is helping us further differentiate.
Kalypso is already contributing to some large competitive wins, and they just had the best orders quarter in their history.
Total sales include a 3 point positive contribution from inorganic investments, led by our Sensia joint venture, along with the Kalypso and ASEM acquisitions.
Total backlog in the quarter grew double-digits versus the prior year and grew high single-digits on an organic basis.
Our Q4 Solutions and Services book-to-bill was 0.87, and full-year book-to-bill was over 1.
This Solutions and Services book-to-bill does not include the large Independent Cart order we received from the US Navy.
Turning to profitability, strong segment operating margin performance of over 20% in the quarter was flat with last year on lower sales, underscoring our increasing business resilience.
Free cash flow was also very strong, reinforcing our solid balance sheet and liquidity position.
Our Discrete market segment declined approximately 10%, with Automotive performing better than we expected, driven by stronger MRO and projects sales.
Among the more notable projects in the quarter was a significant OT cybersecurity win in Europe with one of the major German car companies.
And in Electric Vehicles, we saw momentum continue in the industry with battery manufacturers and brand owners.
We are excited by recent announcements from both new and established automakers as they focus on production of compelling new EV offerings.
In Semiconductor, we had another very strong quarter and grew high single-digits versus the prior year.
This vertical is benefiting from a variety of secular tailwinds such as the rise of smart devices and the resulting Internet of Things, along with the need for faster data centers and the adoption of 5G wireless technology.
In addition to facilities management, which has been a strong foundation for us, we see an opportunity for our material handling technology as well as our software.
In e-commerce, we had a significant expansion win at Cloostermans, one of the largest and most important suppliers to the global e-commerce industry.
This is another industry with long-term secular tailwinds that will continue to invest in automation and industrial software to support its tremendous future growth.
Turning now to our Hybrid market segment.
This segment declined a little less than 5% and outperformed the discrete and process industry segments.
Food & Beverage and Life Sciences each declined low single-digits for both the quarter and for the year.
Packaging OEMs had another strong quarter and delivered double-digit growth versus the prior year.
We believe these markets will outperform in fiscal '21.
Eco-Industrial outperformed other industries in the quarter, driven by growth in Water, where we continue to benefit from a differentiated offering that integrates control, power, and industrial software.
Tire & Rubber was down double-digits, but performed in line with our expectations.
In the quarter, we had key wins at important strategic accounts, including Cooper Tire, which continues to strengthen its global track and trace capabilities to support the company's long-term growth plans.
They chose FactoryTalk software, because of our strong MES and analytics capabilities, and our differentiated ability to connect to both Rockwell and non-Rockwell control platforms.
Once again, our strong software portfolio, our ecosystem of best-of-breed partners, and our expertise in connecting diverse manufacturing environments were all important reasons Rockwell won this very competitive project with Cooper Tire.
Process markets were down approximately 20%.
Oil & Gas was a little weaker than we expected, but that was partially offset by better-than-expected performance in most other process markets like Mining and Pulp & Paper.
Sensia held up fairly well during the quarter and continues to demonstrate their competitive differentiation.
Turning now to Slide five and our organic regional sales performance in the quarter.
North America organic sales declined by 12% versus the prior year.
Business conditions improved through the quarter, particularly in products, where orders significantly exceeded our expectations.
While our large Independent Cart win was part of that result, we also saw great software orders within Information Solutions that more than doubled versus the prior year, creating strong momentum entering the new fiscal year.
In EMEA, sales declined 12% largely, due to capex delays.
These were partially offset by strong growth in Water.
We also saw growth in Life Sciences and PPE-related machine builder business.
Sales in the Asia Pacific region declined 9% largely, due to declines in end user business within Automotive and Mass Transit.
Double-digit growth in Mining and Life Sciences partially offset those declines.
China sales declined, but orders grew mid single-digits year-over-year in the quarter.
Latin America declines were led by Mining and Oil & Gas.
It's an understatement to say that fiscal '20 turned out very different than the plans we discussed together at a great Investor Day during an incredible Automation Fair in Chicago last November.
The shadow of the pandemic soon created unique challenges, but I'm proud of our ability to respond, while taking big steps forward in the execution of our strategic vision.
We kept the safety of our employees at the top of our list and continued to provide dedicated service to our customers, many of whom are producing the food, water, protective gear, and medicine that keep us going.
The pandemic has focused us all on what's truly important.
We took thoughtful actions to manage costs through this pandemic, while at the same time protect strategic investments, including some very big internal development projects.
And you can see those investments drive the performance of our software business, which reached over $500 million in revenue in fiscal '20 and was one of the best performing areas of our business in both orders and sales this year.
We deployed over $500 million for inorganic investments that contributed almost 4 points to our top line growth; and we deployed over $700 million in cash toward dividends and repurchases enabled by our strong free cash flow.
I am tremendously proud of what we've accomplished in fiscal '20, and I'm excited about the resulting momentum as we enter fiscal '21.
Turning now to our outlook on Slide seven.
As I said earlier, we saw strong sequential momentum exiting the year.
Industrial Production is projected to grow in the second half of our fiscal year.
So it may take a couple of quarters for us to climb back to year-over-year sales growth from the Q3 trough in fiscal '20.
We expect double-digit year-over-year growth during our third and fourth quarters.
Of course, we are all closely monitoring global infection levels related to this pandemic, but we are not assuming a widespread shutdown of customer manufacturing operations.
We expect reported sales to grow about 7.5% at the midpoint of the guidance range, including 5% of organic growth and over a point of growth from our fiscal '20 and fiscal '21 acquisitions to-date.
In addition, we are adopting Annual Recurring Revenue as an important metric for the company and have added ARR as a performance metric in our incentive compensation framework beginning this year.
ARR is expected to grow double digits in fiscal '21, after showing over 6% growth in fiscal 20.
This is further evidence of our ability to build an even more resilient business model.
Adjusted earnings per share is expected to reach $8.65 at the midpoint, which is up 10% from last year's fiscal '20 results.
We are targeting Free Cash Flow conversion of 100%.
A more detailed view into our outlook by end market is found on Slide eight.
I won't go into the details on this slide, but as you can see, we expect positive organic sales growth in all of our key end markets next year with the exception of Oil & Gas.
We'll then have Steve discuss our fiscal 2021 outlook in his remarks.
I'll start on Slide nine, fourth quarter key financial information.
Sales, segment margin, Adjusted earnings per share and free cash flow were all better-than-expected in the fourth quarter, mainly as a result of better organic sales growth and productivity.
Organic sales improved as the quarter progressed and were up 10% sequentially versus Q3.
Compared to last year, Q4 organic sales were down 12% and acquisitions contributed just over 3% to total growth.
Currency translation was a smaller headwind than expected, and decreased sales by 0.3 points.
Overall company backlog increased year-over-year in the quarter.
Backlog for our short-cycle products was up double-digits from a year-over-year and sequential perspective, even excluding the very large Independent Cart order Blake referred to earlier.
Segment operating margin was 20.2%, the same as last year.
The negative impact of lower sales was partially offset by a combination of temporary and structural cost actions.
Fourth quarter results included about $10 million of restructuring charges, which are expected to yield over $15 million in additional annualized structural cost savings.
Most of these savings will be realized in fiscal 2021.
General Corporate -- net expense was $22 million, pretty much in line with what we expected.
As I mentioned earlier, Adjusted earnings per share of $1.87 was better-than-expected, mainly as a result of better organic sales, productivity, and a slightly lower tax rate.
I'll cover a year-over-year adjusted earnings per share bridge on a later slide.
The adjusted effective tax rate for the fourth quarter was 15%.
A bit lower than we expected, due to a slightly different geographic mix of our pre-tax income.
Free cash flow performance remained strong.
We generated over $300 million of free cash flow in the quarter, well over 100% conversion on adjusted income.
Note that this result includes a voluntary $50 million pre-tax contribution made to the US pension plan.
This voluntary pension contribution was not reflected in our prior guidance.
Slide 10 provides the sales and margin performance overview of our operating segments.
Organic sales of both segments improved significantly, compared to last quarter.
Both segments were up about 10% on an organic basis, compared to Q3, though organic sales remained lower, compared to last year.
Segment margin of both segments increased over 300 basis points, compared to Q3, mainly due to higher organic sales, but also as a result of cost control including a full quarter benefit of our cost reduction actions and generally improving operating efficiencies.
Compared to last year, Architecture & Software margins were up 100 basis points, despite the impact of lower sales, mainly as a result of our cost actions, including lower incentive compensation.
Segment margins for the Control Products & Solutions segment declined 60 basis points, compared to last year, with cost actions offsetting most of the impact of lower organic sales.
The next Slide, 11, provides the adjusted earnings per share walk from Q4 fiscal '19 to Q4 fiscal '20.
As you can see, core performance was down about $0.15 on a 12% organic sales decline.
This implies core earnings conversion, that is, excluding the effects of acquisitions and currency, of a little below 20%, which is a bit better than the outlook I shared with you in July.
A positive Adjusted earnings per share contribution from acquisitions is offset by unfavorable currency impacts.
Slide 12 provides key financial information for full-year fiscal '20.
After a good start to the fiscal year, we experienced significant year-over-year sales declines in the second half as a result of the COVID-19 pandemic.
Organic sales declined 8% for the fiscal year.
Our cost reduction actions protected key investments and helped to partially mitigate the impact of lower sales.
We selectively increased investments in some of our highest priority areas.
R&D expense was about flat, compared to fiscal '19, and R&D as a percent of sales increased further to 5.9% of sales in fiscal 2020.
Full-year segment margin remained at about 20%, compared to record 22% segment margins last year, and Adjusted earnings per share was down 11%.
Free cash flow performance remained strong, and excluding the $50 million voluntary pension contribution in fiscal '20, was flat, compared to last year.
Free cash flow conversion was over 110% of Adjusted Income.
And finally, return on invested capital remained well above our target of over 20%.
Our capital structure and liquidity remain very strong.
At September 30, our fiscal year end, cash on the balance sheet was over $700 million, and our total debt was about $2 billion.
During the fourth quarter, we paid off the $400 million term loan that we executed earlier in the year, and our net debt to EBITDA ratio at September 30 was 1.0.
Moving to Slide 13, product order trends.
This slide shows our daily order trends for our products, which account for about two-thirds of our overall sales and represent our shorter-cycle businesses.
As we expected, order intake for products continued to improve during the quarter.
Our guidance for fiscal 2021 assumes this trend will continue.
Daily product order performance through October continued to improve on a year-over-year basis, down low single-digits.
Solutions orders are recovering slower than product orders.
Let's move on to the next Slide 14, guidance for fiscal 2021.
As Blake mentioned, we are expecting sales of about $6.8 billion in fiscal 2021, up about 7.5% at the midpoint of the range.
We expect organic sales growth to be in the range of 3.5% to 6.5% and about 5% at the mid-point of our range.
From a calendarization viewpoint, we expect first half organic sales to be down, compared to fiscal 2020, followed by a stronger second half with organic sales up mid-to-high teens.
As a reminder, first half fiscal 2020 organic sales were about flat, followed by double-digit declines in the second half.
We therefore expect easier comps starting in Q3 of fiscal 2021.
We expect segment operating margin to be between 20% and 20.5% probably at the higher end of that range.
At the midpoint, our guidance assumes full-year core earnings conversion, which excludes the impacts of currency and acquisitions of between 30% and 35%.
As we mentioned last quarter, we expect to offset a $150 million year-over-year headwind related to fully funding our incentive compensation and reversing fiscal 2020 temporary cost reduction actions with additional productivity.
We expect the full-year Adjusted Effective Tax Rate will be about 14%.
This includes a 300 basis point benefit related to discrete items which we expect to realize late in the fiscal year.
Our underlying adjusted effective tax rate is expected to be 17% to 18%.
Under the new definition, we are now also excluding purchase accounting depreciation and amortization expense from adjusted EPS.
This has the effect of increasing adjusted earnings per share by approximately $0.20 on a full-year basis.
Our adjusted earnings per share guidance range on the new basis is $8.45 to $8.85.
This compares to fiscal 2020 adjusted earnings per share of $7.87 on the new basis.
On an apples-to-apples basis, at the midpoint of the range, this represents 10% adjusted earnings per share growth on about 5% higher organic sales.
We expect adjusted earnings per share to improve throughout the year and anticipate first quarter fiscal 2021 adjusted earnings per share to be lower than our fiscal 2020 fourth quarter performance, primarily as a result of a $0.30 sequential headwind related to increased incentive compensation expense and the reversal of our temporary cost actions as of the end of November.
Finally, we expect full-year 2021 free cash flow conversion of about 100% of adjusted Income.
This assumes $150 million of capital expenditures and a $50 million voluntary pre-tax US pension contribution.
A few additional comments on fiscal 2021 guidance.
Corporate and Other expense, which we previously referred to as general corporate net expense, is expected to be around $105 million.
Net interest expense for fiscal 2021 is expected to be between $90 million and $95 million, a little lower than fiscal 2020.
Finally, we're assuming average diluted shares outstanding of about 117 million shares.
The next Slide, 15, provides the adjusted earnings per share walk from fiscal 2020 to the fiscal 2021 guidance midpoint.
Moving from left to right, fiscal 2020 adjusted earnings per share was $7.68 on the old definition.
Next you see the $0.19 impact of the new definition of adjusted EPS.
So, fiscal 2020 adjusted earnings per share on the new basis was $7.87.
Core performance is expected to contribute about $1.90.
This includes the benefit of higher organic sales, as well as the benefit of our cost reduction actions.
Reinstatement of the bonus and reversal of the temporary cost actions, together, will be a headwind of about $1.15.
As mentioned last quarter, we expect these headwinds to be offset by productivity, which is in Core.
Currency forecasts project a weaker US dollar, compared to fiscal 2020, which should contribute about $0.10 to EPS.
The higher tax rate is expected to be about a $0.15 headwind.
Acquisitions made during fiscal 2020, and so far this year, are expected to add about $0.10.
Note that Sensia is now in Core, as October 1 was the one-year anniversary of the formation of the joint venture.
As mentioned, at the midpoint of our guidance range, adjusted earnings per share is $8.65.
Moving on to the next Slide 16, I'll make a few comments on our Capital Deployment Framework.
You may recognize this slide from our last investor day.
Our capital deployment priorities remain the same.
Our first priority is organic growth.
After that, we focus capital deployment on inorganic activities.
Then we focus on capital returns to shareowners, through our dividend, and then repurchases.
Our capital deployment plans for fiscal 2021 include dividends of about $500 million.
As a reminder, we announced a 5% dividend increase last week.
Consistent with our past track record, we expect our remaining capital deployment to include a balance of inorganic investments and share repurchases.
We resumed share repurchases on October 1, the beginning of our fiscal year.
In summary, our guidance assumes a continued sequential improvement in organic sales performance.
Cost actions are expected to offset the significant headwind of reinstating incentive compensation and reversing temporary cost actions, and we expect about 10% adjusted earnings per share growth and continued strong free cash flow conversion.
Turning to slide 17, I'll finish with a comment about our new segment structure which is effective for fiscal 2021.
As a reminder, our first quarter fiscal 2021 results will be reported in the new, three-segment format as shown here.
We continue to see our customers take steps to increase their resilience, agility, and sustainability.
Resilience includes investments to reduce single points of failure, with a growing list of companies announcing plans to build or expand North American operations.
Our strong market share in the US, Mexico, and Canada make us a natural beneficiary of these plans.
Other measures to increase resilience include increased automation, traceability, and remote monitoring, which are all Rockwell strengths.
We're making investments in our own operations, which we'll showcase during next week's Investor Day.
Our contribution to operations agility is demonstrated by our great results in consumer and life sciences packaging equipment and the growth of our software to manage the increasingly dynamic SKU's offered by our customers.
The pandemic has prompted new food and beverage packaging formats, along with quantities of testing kits, therapeutic drugs, and hopefully very soon, doses of vaccines.
Quite simply, these cannot be manufactured at the necessary scale, safety, and quality without automation.
We're proud of the role our innovation is playing at Pfizer, Roche, and many other companies as we help the world recover.
The need to increase the sustainability of industrial processes is only increasing.
Clean drinking water is one of the reasons our Eco Industrial focus is so important for the future, along with electric vehicles and the everyday ways our products reduce energy consumption in every industry.
This expanded value gives us optimism for the coming years.
In fiscal '21, we are guiding to high single-digit reported growth, paced by our highest-margin segment.
This results in guidance that also includes double-digit earnings per share growth.
I'm looking forward to telling you more about our plans next week, with the help of great customers, partners, and a very talented Rockwell leadership team.
With that, let me pass the baton back to Jessica to begin the Q&A session.
Before we start the Q&A, I just want to say that we would like to get to as many of you as possible.
So please limit yourself to one question and a quick follow-up.
Ami, let's take our first question. | q4 adjusted earnings per share $1.87.
2021 earnings per share guidance diluted earnings per share $8.07 - $8.47.2021 earnings per share guidance for adjusted earnings per share $8.45 - $8.85.
sees 2021 reported sales growth 6% - 9%.
sees 2021 organic sales growth 3.5% - 6.5%.
sees 2021 inorganic sales growth 1.0% - 1.5%. |
Additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handle @investorsrok that's at Investors ROK.
So with that, I'll hand the call over to Blake.
Let's turn to our quarterly results on Slide 3.
We saw another quarter of exceptional demand across all three business segments.
Total order surpassed $2.2 billion and grew 40% over the prior year, reflecting a very strong demand pipeline across our portfolio of core automation and digital transformation solutions.
Total revenue of over $1.8 billion grew 15% with additional sales that shifted in the fiscal '22 due to supply chain headwinds.
Organic sales grew 13% versus prior year.
We had very strong growth in core automation and the Information Solutions, and Connected Services grew double digits in both orders and revenue.
This performance was led by strong demand for software and cyber security services.
Turning to ARR, we continue to make significant progress to drive recurring revenue.
Our ARR grew organically by over 18% and including our recent acquisition of Plex now accounts for over 8% of total sales.
Segment margin of 18% came in line with our expectations with the execution of planned investments in Q4.
I'll now comment on our topline performance by business segment.
Intelligent devices organic sales increased 15% versus prior year, even with significant headwinds from supply chain.
From an orders perspective, this is the fourth consecutive quarter of record order intake in this segment with orders 30% above fiscal 2019 levels.
We continue to see significant strength across the automation portfolio and share gains particularly evident in motion led by our Independent Cart Technology.
Software and control organic sales grew 14% led by strong demand across the segment including double-digit growth in Logix.
Orders grew approximately 50% year-over-year, once again showing great momentum across the software, control, visualization and network portfolios.
In Lifecycle Services, organic sales increased 7% versus the prior year and increased 2% sequentially even with some projects delayed as a result of component availability.
Lifecycle Services book to bill of $1.09 was well above seasonal Q4 levels.
Total company backlog of $2.9 billion grew by over 80% year-over-year.
Over 40% of backlog is related to our Lifecycle Services business.
Turning to Information Solutions and Connected Services, which represent many of Rockwell's numerous digital revenue streams.
We had another great quarter.
Recent orders included a number of meaningful software and infrastructure as a service wins.
One of the more notable wins in the quarter which Ardagh Group, one of the world's largest sustainable packaging companies.
The company had placed million dollar order for fixed software in Q3 to reduce unplanned downtime.
Ardagh like a lot of manufacturers is trying to respond to a sharp increase in demand.
By Q4 as a relationship develop we pulled through an additional $4 million purchase of core automation products showcasing the tremendous synergy resulting from our new software capabilities and intelligent devices.
With their ARR going 45% and over 470 new fixed customers added in just the last nine months.
I'm very happy with the contributions Fiix has been able to make to our overall business.
We also had a great win with one of the world's largest Food and Beverage companies in two key application areas.
The first one is in the area of predictive analytics.
Where are our Kalypso digital consulting business will combine our FactoryTalk innovation suite with our automation technology to provide real time monitoring and analytics for their manufacturing environment.
The second application is in the area of sustainability for our software and automation technology will be used to help monitor water, air, gas, electricity and steam usage to develop real time KPIs that further reduce their carbon footprint and drive quantifiable production outcomes.
Kalypso continues to play a very important role within Rockwell and spearheading some of the most exciting digital transformation projects in all of manufacturing.
Our customers are recognizing Rockwell's expanding capabilities to converge IT and OT and be a strong partner throughout the digital transformation journey.
In fact, we now yesterday that we are adding to Kalypso's capabilities with our acquisition of Avata which will strengthen and expand our supply chain solutions domain expertise.
This expertise, combined with our operations management software and that of our partners drives great outcomes for our customers.
We are very excited to be expanding our presence in the connected supply chain, since it is such a critical high growth area.
We also accelerated our FactoryTalk SaaS offering with the acquisition of Plex in September.
The integration is going well and we look forward to showcasing the entire FactoryTalk software offering including Plex at our upcoming Investor Day on November, 10th in Houston.
We hope to see you there.
I'd also like to highlight the increasing traction we're seeing with our PTC partnership.
Our sales force seeing the number and size of engagement is growing.
The capabilities and versatility of the combined solution is a great way to win with both existing customers and new ones all over the world.
Not only the wins we saw this quarter we're in diverse industries around the world.
We're happy with this partnership, I think it's a great part of our software portfolio.
We had great performance in our discrete industry segment with roughly 15% sales growth.
Within this industry segment, automotive sales grew about 15% led by an increase in EV capital project activity including a strategic win at Magna.
One of the top Tier 1 auto manufacturers delivering EV content for GM and forward.
Semiconductor was strong from 20% off of a very good quarter last year.
E-commerce performance was also exceptional the sales growing approximately 30% versus a strong prior-year.
Turning now to our hybrid industry segment, the verticals in this segment also had a terrific quarter.
Food and beverage grew about 15% led by strong greenfield and brownfield project opportunities in North America and EMEA, as well as strong double-digit OEM demand.
Life Sciences grew over 15% in Q4 and remains one of our top growth verticals.
We see continued growth in the overall Life Sciences market and evidence that we are taking market share.
Once again, our fastest growing vertical in the hybrid segment was Tire, which is up about 35% in the quarter.
Process markets grew over 10% with strong sequential and year-over-year growth in oil and gas, especially in our Sensia JV.
In summary, we are clearly seeing very strong growth across discrete and hybrid segments as well as improving oil and gas trends.
Turning now to Slide 5 in our Q4 organic regional sales performance.
North America organic sales grew by 16% versus the prior year with strong double-digit growth across all three industry segments.
EMEA sales increased 7% driven by strength in Food and Beverage, Tire and Metals.
Sales in the Asia Pacific region grew 12% with broad-based growth led by EV, semiconductor, and mining.
In China, we saw double-digit growth driven by strength in mining, Life Sciences, Tire and the EV.
Record orders of $8.2 billion in 26%.
Reported sales grew 11% even with supply chain constraints.
Organic sales grew almost 7%.
ICS revenue exceeded $500 million at year-end and grew double-digits organically.
Adjusted earnings per share grew 20% and we once again generated significant cash flow due to our very profitable financial framework, strong focus on productivity and financial discipline.
At the same time, we made significant investments in our future to accelerate profitable growth.
That included organic investments as well as inorganic investments.
In fiscal '21, we accelerated funding of software development projects and deployed approximately $2.5 billion toward inorganic investments.
At the same time we returned $800 million back to share owners in the form of dividends and buybacks.
Turning to Slide 7.
You can see how these investments in our strong order momentum in backlog are helping to accelerate our top line performance heading into fiscal '22.
Our new fiscal '22 outlook expects total reported sales growth of 17.5% including 15.5% organic growth versus the prior year.
These projections take into account our latest view of supply chain constraints.
We have the people, supplier commitments and plant capacity to support this growth, but we will know now need to continue to manage new challenges as they emerge in this highly dynamic environment.
We expect global-digit growth in both core automation as well as information solutions, and connected services.
Acquisitions are expected to contribute two points of profitable growth.
We are increasing our margin expectations to 21.5% at 150 basis points over the prior year.
Our new Adjusted earnings per share target of $10.80 at the midpoint of the range represents about 15% growth compared to the prior year.
I should add that we expect another year of double-digit annual recurring revenue growth, including our recent Plex acquisition which adds approximately $170 million to our ARR totals in fiscal '22.
A more detailed view into our outlook by end market is found on Slide 8.
I won't go into the details on this slide.
But as you can see, we continue to expect broad based organic sales growth in fiscal '22.
I'll start on Slide 9, Fourth Quarter Key Financial Information.
Fourth quarter reported sales were up 15% over last year.
Q4, organic sales were up 12.6% and acquisitions contributed one point to total growth.
Currency translation increased sales by 1.5% points.
Segment operating margin was 17.9% in line with our expectations.
The 230 basis point decline was primarily related to higher planned investment spend, the reversal of temporary pay actions and the restoration of incentive compensation, partially offset by the impact of higher sales.
Corporate and other expense was $33 million.
The year-over-year increase was from deal costs associated with Plex acquisition.
Adjusted earnings per share of $2.33 was better than expected and grew 21% versus the prior year.
I'll cover a year-over-year adjusted earnings per share bridge on a later slide.
The adjusted effective tax rate for the fourth quarter was negative 3%, much lower than expected, compared to 15% in the prior year.
The lower than expected rate was related to the cumulative impact of several one-time discrete items recognized in the current quarter.
Free Cash Flow performance was in line with our expectations.
We generated $160 million of Free Cash Flow in the quarter.
The Free Cash Flow generation includes higher levels of working capital in the current year to support our increasing revenue and build inventory in anticipation of the accelerated revenue levels in fiscal year '22.
One additional item not shown on the slide, we repurchased 200,000 shares in the quarter at a cost of $61 million.
For the full year, our share repurchases totaled $301 million in line with our July guidance.
On September 30th, $152 million remained available under our repurchase authorization.
Slide 10 provides the sales and margin performance of our three operating segments.
Organic sales of both Intelligent Devices and Software & Control were up double digits.
Lifecycle Services' organic sales were up sequentially and up 7% year-over-year, led by oil and gas, Life Sciences including beverage.
All segments saw strong double-digit growth in orders.
Compared to last year, Intelligent Devices margins were up 100 basis points on higher sales.
This segment did see higher input costs both year-over-year and sequentially, however these costs were largely offset by price.
Segment margins for the Software & Control segment declined 330 basis points compared to last year.
With higher planned investment spend, partially offset by higher organic sales this segment benefited from positive price cost in the quarter.
Lifecycle Services segment margin was 8.1% and declined 820 basis points driven by the reversal of temporary pay actions, the reinstatement of incentive compensation, as well as unfavorable mix partially offset by higher sales.
The next Slide 11 provides the adjusted earnings per share walk from Q4 fiscal '20 to Q4 fiscal '21.
As you can see core performance was up about $0.70 on a 12.6% organic sales increase.
Approximately $0.10 was related to non-recurring accelerated investments that we announced earlier this year.
These investments are mostly in our Software & Control segment.
The reversal of temporary pay actions and restoration of incentive compensation contributed negative $0.45.
Acquisitions were a $0.15 headwind due to the deal costs associated with the acquisition.
As previously noted, our lower adjusted effective tax rate contributed $0.40.
Slide 12 provides a walk from our Q4 midpoint in our July guidance to our actual Q4 adjusted earnings per share results.
We usually don't provide this information, but I wanted to show how the quarter played out relative to the midpoint of what we had guided back in July.
The unforeseen impacts of the Delta variant in Southeast Asia added incremental pressure to the supply chain.
But the impact of the volume mix of $0.40 was mitigated to lower incentive compensation, further productivity and a favorable mix, all of which contributed $0.35.
As previously noted, a more favorable tax rate benefited our earnings per share versus guidance by $0.25.
Moving to Slide 13, product order trends.
This slide shows our average daily order trends for our products, which includes our software portfolio.
As a reminder, the trends shown here account for about two-third of our overall sales.
Order intake was broad based and improved sequentially for the fifth consecutive quarter.
Q4 product order levels grew at about 40% versus the prior year and are well above pre-pandemic levels as customers are increasingly interested in investing in our core automation and software.
Both of which are essential to drive the outcomes that come from digital transformation.
Slide 14 provides key financial information for the full year fiscal '21.
Reported sales grew 10.5% including over one point coming from acquisitions.
Organic sales were up 6.7% led by double-digit growth in our hybrid and discrete end markets and improving process verticals.
Full year segment margins remained at about 20% including close to $30 million of onetime accelerated investments mostly in our Software & Control segment.
R&D expense was up 14% compared to fiscal '20 and R&D as a percent of sales increased further to 6% of sales in fiscal '21.
Our core automation, which excludes the impacts-- Excuse me, our core conversion, which excludes the impact of acquisitions currency and our accelerated one-time investments was 34%.
Corporate and others was at just over $20 million.
Mostly related to acquisition costs associated with the Plex acquisition.
Adjusted earnings per share was up 20%, a detailed year over year adjusted earnings per share walk can be found in the appendix for your reference.
Free Cash Flow performance remained strong and was in line with our July expectations.
Free Cash Flow conversion was 103% of adjusted income.
Finally,ROIC remained well above our target of over 20%.
For the year we deployed about $3.3 billion of capital toward acquisitions, dividends and share repurchases in fiscal '21.
Our capital structure and liquidity remained strong.
Let's move on to the next Slide 15.
Guidance for fiscal '22.
As Blake mentioned, we are expecting sales of about $8.2 billion dollars in fiscal '22 up 17.5% at the midpoint of the range.
We expect organic sales growth to be in the range of 14% to 17% and about 15.5% at the midpoint of our range.
This outlook includes our latest assumptions on supply chain constraints.
We expect full year segment operating margins to be about 21.5%.
We expect positive price cost for the full year from the additional price increase we implemented this month.
At the midpoint of our guidance assumes full year core earnings, conversion of between 30% and 35%.
We believe we are in the early stages of a cycle of sustained growth and are making investments to fuel this growth in '22 and beyond.
Our fiscal '22 segment margin and core conversion outlook includes our plans to increase R&D and other growth-related investments by double-digit.
We expect the full year adjusted effective tax rate to be around 17%, we do not anticipate any material discrete items to impact tax in fiscal '22.
This rate is under current tax law, should tax laws change, we would provide an updated outlook with the impacts from these changes.
Our adjusted earnings per share guidance is $10.50 to $11.10.
This compares to fiscal '21 adjusted earnings per share of $9.43.
At the midpoint of the range, this represents a 15% adjusted earnings per share growth.
I will cover a year over year adjusted earnings per share walk on the next page.
From a calendarization viewpoint based on our current supply chain availability, we expect our first quarter sales to be relatively flat compared to our Q4 and fiscal '21.
Following the first quarter we expect sequential sales to improve over the balance of the year.
We expect segment margins and the adjusted earnings per share to decline sequentially in Q1 and then improve throughout the year in line with our sales volume and the timing of price increases.
We anticipate recent price increases to having more substantial benefit and subsequent quarter given the timing of when customer agreements are renewed throughout the year.
Also as a reminder, fiscal '21 Q1 included a non-recurring $0.45 gain related to the settlement of a legal matter.
Finally, we expect full year fiscal '22 Free Cash Flow conversion of about 90% of adjusted income.
This reflects $155 million bonus payout for the fiscal '21 performance.
$165 million of capital expenditures and funding higher levels of working capital to support higher sales.
Our working capital is targeted to be aligned with our historic amount of about 12% of sale.
A few comments, additional comments on fiscal '22 guidance.
Corporate and other expense is expected to be around $125 million.
Net interest expense for fiscal '22 is expected to be about $115 million.
And finally, we're assuming average diluted shares outstanding of about $117.5 million shares.
The next Slide 16 provides the adjusted earnings per share walk from fiscal '21 to fiscal '22 guidance at the midpoint.
Moving from left to right, core performance is expected to contribute $2.15 this includes the benefit of higher organic sales, we anticipate price realization will exceed input cost inflation by about $0.10.
Our pricing philosophy is built on the high value that we bring our customers.
In light of increasing input costs, we have taken several price adjustments this year to mitigate and we are prepared to take additional price actions as needed.
The removal of the onetime accelerated investments made in fiscal year '21 will be about $0.20 benefit the one-time gain from a legal matter that was settled in the prior year is $0.45 headwind.
Plex will be a $0.15 tailwind in fiscal '22 including the impact of incremental interest.
We have included further information showing the impact of Plex in both fiscal '21 and fiscal '22 in our appendix.
No real significant changes to what we showed in July.
We expect about a $0.05 impact coming from share dilution and the higher tax rate is expected to be about a $0.75 headwind.
Moving on to the next Slide 17, I'll make a few comments on our capital deployment framework.
Our long-term capital deployment priorities remain the same.
Our first priority is organic growth.
After that, we focus capital deployment on inorganic activities.
And then, we focus on capital returns to shareholders through our dividend and then share repurchases.
In addition to our organic and inorganic investments, our capital deployment plans for fiscal '22 include a focus on delevering.
Dividend of about $520 million and share repurchases of $100 million.
In summary, our guidance assumes a combination of order and backlog growth to drive this team and 0.5% organic sales at the midpoint and reaches the total sales of over $8 billion.
We continue to offset inflationary pressures through additional price actions yielding segment margins of 21.5%.
We expect adjusted earnings per share growth of 15% and continued strong Free Cash Flow.
As we look forward to fiscal '22, strong order trends and record backlog underpin a robust top-line outlook.
We are making investments in our capacity, technology and people to support our future growth.
Our people delivered great results this year, and I want to take a moment to recognize the tremendous work during this especially challenging times.
As the world recovers, investments in automation and digital transformation never been more top of mind.
Nobody is better positioned to help industrial customers be more resilient, agile and sustainable.
As many of you will see at our upcoming Investor Day, we're taking manufacturing to a whole new level and look forward to a great year ahead.
Let me now pass the baton back to Jessica to begin the Q&A session.
Before we start the Q&A, I just want to say that we would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up.
Press, we'll take our first question. | q4 adjusted earnings per share $2.33.
q4 sales were $1,807.8 million, up 15.1%.
sees 2022 reported sales growth 16% - 19%.
sees 2022 organic sales growth 14% - 17%.
sees 2022 adjusted earnings per share $10.50 - $11.10. |
Before talking about our results, I want to express how concerned and focused we are regarding the spread of COVID-19.
We know many of you are experiencing the expansion of the virus in your communities and we hope you and your family are doing well and remain safe.
Now back to our second quarter.
Revenues for the quarter grew 5.6% to $553.3 million compared to $524 million for the same quarter in 2019.
Net income rose approximately 16.5% [Phonetic] to $74.9 million [Phonetic] or $0.23 per diluted shares, compared to $64 million or $0.20 per diluted shares for the second quarter of last year.
Revenues for the first six months of the year were $1.04 billion, an increase of 9.3% compared to $953 million for the same period last year.
Net income for the first six months increased 8.9% to $118.1 million [Phonetic] or $0.36 per diluted share compared to $0.33 per diluted share for the comparable period last year, a 9% increase.
Turning to our business lines results in the quarter.
Residential pest control grew an outstanding 14.8%.
Commercial, however, excluding fumigation, was down 5.2%.
We have offset some of those commercial revenue shortfalls with termite and ancillary service, which was up 7.3%.
Eddie will provide greater detail around these numbers.
During what we consider the most challenging time in our Company's history, our employees' efforts and contributions have been exceptional in every regard.
We couldn't be more grateful and proud of them in what they've done.
They truly are our most valuable asset.
We continue to be aware and involved to ensure their safety and good health.
They are provided with personal protection as needed as they go about servicing our customers.
Most of our technicians are working remotely and avoiding spacing issues that would exist their coming into our branch offices.
The majority of our home office and call center employees are also working remotely.
Our commitment to safe practices involves our valued customers as well.
On the plus side, most of our residential customers have been at home 24/7 and they are becoming even more conscious of their home and, in some cases, the need to protect their family and property from unwanted pests.
Additionally as families self quarantine, many are spending more time in their yards, recognizing the need for mosquito control.
We are benefiting from the high regard, trust and confidence that our customers have in our brands, which is in part responsible for our fast-growing pest control revenue and our gain in new customers, all at record setting rates.
Before turning the call over to John, I want to note while we were pleased with the results for the quarter, we continue to face the challenges of the pandemic and the unknowns that go with it.
As a result, we review and adjust our activities and policies routinely to help us better address the impact of COVID-19.
As I mentioned, commercial pest control unfortunately has been more impacted by the virus and its related economic circumstances.
However, we've been narrowing the revenue shortfall gap each month since March.
Anecdotally, we are seeing a growing realization at many businesses that they can't shut down pest control services for an extended period of time without having infestation consequences.
A worthwhile offset to these commercial pest control challenges has been our other brands and introduction of our disinfectant service, VitalClean.
As a result of this new service development prior to the pandemic, we have the ability to roll out our related sales and service protocols quickly.
VitalClean is gaining traction and we would expect it to be more significant contributor to our commercial revenue going forward.
I would like to echo the commentary Gary made earlier about our team members.
A common theme worldwide was their unbelievable response to this pandemic and their commitment to their customers throughout this event.
As the pandemic started, we saw firsthand the trust that our customers have in our highly reputable brands and service professionals.
Additionally, we quickly moved to outfit our field teams with personal protective gear that help keep them safe as well as give our customers confidence in our ability to service their pest needs responsibly.
Without the response we received from our outstanding team members, our customers would have been left unprotected from many insect and rodent caused health threats.
As we noted last quarter, Orkin and many of our other brands are now offering a disinfection service which quickly and thoroughly eliminates a wide variety of serious pathogens.
Comprehensive disinfection is imperative to keeping an establishment as sterile as possible and disease-free.
During the second quarter, we were very delighted to see the positive reception this service is receiving from our commercial customers.
I was especially pleased at a wide-ranging movement from our field teams to provide this service [Indecipherable] to hundreds of first responder locations, police stations, fire houses and hospitals.
As the economy slowly opens and more commercial businesses begin welcoming back their patrons for indoor dining, shopping or as guests in their hotels and as their employees go back to the various workplaces, we expect the demand for VitalClean services to continue to grow.
We are pleased with the progress thus far and very excited about the potential for this opportunity.
Our call centers were very busy during the second quarter as reflected in our increased residential sales.
The record book for performance was completely rewritten as our inbound telephone sales effort replaced seven of the top 10 sales days in our history.
From what we are currently experiencing, we are optimistic that these results will continue into the third quarter as July performance certainly reflects that as the remaining three top 10 sales days have been replaced.
Last, we continue to expand our Company's presence both in the US and globally, having made second quarter acquisitions in Australia and the UK.
On July 1, we announced one of our Australian subsidiaries had acquired the largest independent pest control company in Australia, Adams Pest Control.
This acquisition solidifies Rollins' national coverage in Australia.
Adams Pest founded by John Adams and established in 1944 has expertise in all aspects of general pests and wildlife control and is the market leader in the Greater Melbourne and Adelaide areas.
In the United Kingdom we also acquired two environmentally friendly companies, Albany Environmental Services based in Central London and Van Vynck Environmental Services in Essex.
These latest acquisitions bring our presence to seven companies covering all the UK.
Today, I'll share some details on our Q2 actual results and some additional insight to what we know today that will impact the future.
During the entirety of the second quarter, our operations have remarkably navigated all that we as a society have dealt with related to the economic and health impacts of the virus.
Additionally, our non-field operation groups successfully switched to a remote work model and did not miss a beat with their support.
As you can see from the outcome, their collective results and efforts have been outstanding.
From a reporting perspective, please also keep in mind that we lapped our initial Clark acquisition on May 1st and we will see much more normalized financial results for the quarter and the foreseeable future.
For the quarter, our residential pest control and termite services lines showed growth and key to the quarter included higher material and supplies costs, which included the purchase of personal protective equipment, successful cost containment implemented to drive margin improvements year-over-year and provision set up for potential commercial customer bad debts.
Looking at the numbers, the second quarter revenue of $553.3 million was an increase of 5.6% over the prior year's second quarter revenue of $524 million.
Income before income taxes was $103.5 million or 19% above 2019.
Net income was $75.4 million, up 17.2% compared to last year.
Our GAAP earnings per share were $0.23 per diluted share.
EBITDA was $126.9 million and rose 16.4% compared to 2019.
Our Q2 numbers have begun to normalize again as we lapped the initial Clark acquisition in the quarter.
The first six months revenue of $1.041 billion was an increase of 9.3% over the prior year's first six months revenue of $953 million.
Income before income taxes was $158.9 million or 11.1% above last year.
Net income was $118.6 million, up 9.3% compared to 2019.
Our GAAP earnings per share were $0.36 per diluted share.
EBITDA was $206.1 million and rose 13.6% compared to 2019.
As we stated on our Q1 call, we began aggressively purchasing PP&E [Phonetic] in March and in April.
This along with the transition to new, more diversified vendors impacted our materials and supplies costs between $2 million and $3 million in Q2 and will impact the business in a similar manner for the remainder of the year.
Let's take a look through the Rollins revenue by service lines for the second quarter.
As Gary reviewed, our total revenue increase of 5.6% included 3.1% from Clark and other acquisitions and the remaining 2.5% was from pricing and organic growth.
In total residential pest control, which made up 47% of our revenue, was up 14.8%, commercial pest control, ex fumigation, which made up 33% of our revenue was down 5.2% and termite and ancillary services, which made up approximately 20% of our revenue, was up 7.3%.
Also of note, our wildlife services were up strong double digits yet again this quarter.
Again, total revenue less acquisitions was up 2.5% and from that residential was up 10.3%, commercial, ex fumigation, decreased 7.8% and termite and ancillary grew by 5.5%.
As John mentioned in his remarks, but I also want to recognize our call centers that made the transition to working remotely and then went on to set numerous revenue and sales records, which helped drive our residential growth.
Both Gary and John discussed the trust of our customers during the quarter.
Our investment in PP&E also helped our customers to show trust in our well-known brands.
Seeing their technicians or salesperson in full PP&E gave a comfort that we also had the customer safety top of mind.
Our feedback from customers shared on our NPS score for our residential product showed 2.4 percentage points higher than last year, which included a new COVID-19 category.
This data was further supported by significantly better Google reviews and Facebook recommendations.
Marketing has supported our ops very well to gain these insights.
In total, gross margin increased to 53.8% from 51.7% in the prior year's quarter.
The quarter was positively impacted by our lower salary expense in the areas of company furloughs, layoffs and salary reductions as well as lower fuel expense and continued improvements from our routing and scheduling initiatives.
Additionally materials and supplies were up, as discussed earlier.
Depreciation and amortization expenses for the quarter increased $1.8 million to $21.9 million, an increase of 8.9%.
Depreciation increased $1 million due to acquisitions, vehicles acquired and equipment purchases, while amortization of intangible assets increased $754,000 due to the amortization of customer contracts from several acquisitions, including Clark.
Sales, general and administrative expenses for the second quarter increased $9.4 million, or 5.8%, to $171.3 million, or 30.9% of revenues, which was flat to last year.
The quarter produced savings in salaries and benefits, lower fuel, discretionary savings but was offset with a higher reserve set for our anticipated bad debt primarily from our commercial customers due to COVID-19.
Our commercial business is a mirror to the general economy around the world.
While many of our commercial pest control customers are paying at a slower rate than normal, they are still paying.
Based on what we know at this time, we feel that we have adequately reserved for those customers that may not be in business on the other side of the pandemic.
Our cash flow continues to be strong and at this time we have no changes to our capital allocation plans.
As our top priority, we've continued with our M&A activity around the globe.
As John mentioned, we completed several acquisitions in the quarter and have plans for more in the future.
During the quarter, we more aggressively paid down our debt and are now on track to have this retired in late 2021.
As for our cash position for the period ended June 30th, 2020, we spent $56 million on acquisitions, compared to $410.1 million in the same period last year, which included Clark.
We paid $65.5 million on dividends and had $12.4 million of capex, which was slightly lower compared to 2019.
We ended the period with $134.8 million in cash of which $73.2 million is held by our foreign subsidiaries.
Before I close, I want to share that we have released our first ever sustainability report for 2019.
We've taken the opportunity to highlight some of the things that we have going on in the areas of the environment, social and governance.
The report has been posted on our website and we look forward to building on these areas as a company as we move through 2020 and beyond.
Yesterday, the Board of Directors approved a temporary reduction of the regular cash dividend to $0.08 per share that will be paid on September 10th, 2020 to stockholders of record at the close of business on August 10th, 2020. | compname posts q2 earnings per share of $0.23.
q2 earnings per share $0.23.
q2 revenue $553.3 million versus refinitiv ibes estimate of $541.3 million. |
Yesterday, our Board of Directors appointed Julie Bimmerman, who many of you know, as our interim Chief Financial Officer and Treasurer.
Eddie Northern has been moved into an operational role as Senior Vice President focused on sustainability.
She has been with us since 2004, having most recently been Vice President of Finance and Investor Relations.
Prior to joining Rollins, Julie worked in corporate accounting, internal audit and corporate tax audit role.
She's known to many of you already and she will be available to analysts and institutional investors after the call as per usual.
Now to the exciting news.
I'm very pleased to report that Rollins delivered a strong financial performance in the second quarter, and we remain well positioned for 2021.
John will share with you our recent additions to our Board of Directors, while Jerry and Julie will give you details of our financial results shortly.
These results were made possible by the continued dedication and contribution of our incredible field and corporate teams.
We truly appreciate their customer focus that has generated a significantly higher than normal growth and profitability so far in 2021.
Over the past year, we have enhanced and diversified Rollins' Board of Directors with several new additions.
I'd like to spend a moment today welcoming our two newest Board members, Gregory Morrison and Donald Carson.
Don, having worked for many years in investment in commercial banking, including Wachovia Bank, brings a high level of knowledge and strategic financial transactions to the company.
We're thrilled to add these individuals to the outstanding group of leaders on our Board, and we look forward to their counsel and contributions to our company.
As Orkin begins their 120th year of service, we thought it was an opportune time to spend a few minutes highlighting some of the recent successes of the brand.
For those who have followed us over the years, you may recall that Orkin was acquired by Rollins in 1964 and as the original company, that first started our venture into pest control.
Today, Orkin remains our largest brand, employing over 8,000 team members and completing millions of services annually worldwide.
Orkin is very involved in the communities they serve, maintaining a strong commitment to education, public health and environmental responsibility.
From collaborations with the centers for disease control and prevention and major universities to their work with the National Science Teachers Association, Orkin fosters a deeper understanding and appreciation of the natural world around us.
As we have previously shared with you over the past few years, Orkin has adopted new technologies, which has improved communications with customers, optimized routing and scheduling and increased technician efficiencies to name a few.
Through the years, Orkin has grown adding both new customers and new customer service offerings like bed bug, flea and tick, mosquito and most recently, VitalClean, our service designed to fight COVID-19.
Overall, Orkin has significantly contributed to the long-term success of Rollins.
As Gary mentioned earlier, we're very pleased with our results for the second quarter.
Revenue increased 15.3% to $63.2 million compared to $553.3 million for the second quarter of last year.
Net income grew to $98.9 million, or $0.20 per diluted share, compared to $75.4 million, or $0.15 per diluted share, for the same period in 2020.
Julie will review the GAAP and non-GAAP results shortly.
For the quarter, we experienced solid growth in all our business lines with residential increasing 13.6% and termite, 16.3% over second quarter 2020.
Additionally, commercial, excluding fumigation, delivered an impressive 17.4% growth over second quarter last year.
This is also an improvement of 11.3% growth over two years ago when we weren't experiencing COVID-related shutdowns.
As you may recall, last year, we thought it was prudent to forgo our annual price increase during the pandemic.
Now encouraged by the economic recovery that's underway, we have rolled out our 2021 annual price increases at all our brands.
Implemented at the end of the second quarter, we expect that we will see the benefits of these increases as we move throughout the remainder of the year.
Additionally, we're especially pleased with our commercial pest control growth, which has not only benefited from the economy reopening, but also from our InSite commercial technology.
Through the use of InSite, Orkin's web reporting tool, our commercial customers have the ability to monitor pest activity and treatments within their facilities, reduce service tickets and receive specific pest alert notifications.
This allows for quality assurance checks to be easily completed at the customer level.
It also gives the customer the ability to produce timely reporting as necessary for regulatory or third-party audits.
We get great feedback from customers on InSite and are confident that this feature will strengthen our relationships with commercial clients.
Overall, we've made strong progress during the first six months of 2021.
And as we look ahead, we are confident in our ability to continue driving growth and profitability in our business.
At Rollins, we are constantly looking for ways to improve in all areas of our business.
As many of you know, continuous improvement is an important part of our culture.
We have a lot of opportunity for the remainder of 2021.
But I would like to recognize that the significant financial gains from this quarter are on top of the strong gains that we experienced during 2020.
Even as we were all entering a different economic time back in Q2 of last year, our revenue grew at a steady 5.6%.
That was converted into net income growth of 17.2%.
Both of these 2020 numbers were at or above our historic averages.
So for the second quarter 2021, as Jerry noted, all business lines presented strong revenue growth.
Keys to the quarter included pricing strength, positively impacting revenue growth, continued mosquito service revenue improvement over 30% and commercial pest control revenue improving significantly.
Additionally, for the first time, our mosquito service revenue has surpassed our bedbug revenue in this quarter was over 3% of our total revenue.
Looking at the numbers.
The second quarter revenues of $638.2 million was an increase of 15.3% over the prior year's second quarter revenue of $553.3 million.
Our income before income taxes was $133.9 million, or 29.4% above 2020.
Our net income was $98.9 million, up 31.2% compared to 2020.
Our earnings per share were $0.20 per diluted share compared to $0.15 in 2020, or a 33.3% increase.
As a reminder, we reported both GAAP and non-GAAP financials for the first quarter of 2021.
The non-GAAP results were positively impacted by our gain on sales of several of our properties.
For the first six months of 2021, revenues were $1.174 billion, which was an increase of 12.7% over the prior year's first six months revenue of $1.014 billion.
Our GAAP income before income taxes was $253.8 million, or 59.7% above 2020.
Our GAAP net income was $191.5 million, or 61.4%, compared to 2020.
Our GAAP earnings per share or earnings per were $0.39 per diluted share compared to $0.24 per diluted share in 2020.
Overall, like some companies that were negatively impacted by the pandemic, demand in most areas of our business in both 2020 and 2021 was strong.
We maintained consistent revenue growth of 5.6% in 2020, followed by a healthy increase of 15.3% in 2021.
It does not seem that pent-up demand or stimulus checks have impacted our residential revenue growth, but rather a new awareness of pest needs based on more time spent at the home.
It would be difficult to predict what these new demand levels will look like in the future, but we remain optimistic.
Our total revenue increased for the quarter, up 15.3% and included 1.7% from significant acquisitions with the remaining 13.6% from pricing and new customer growth.
Residential pest control made up 40% of our revenue; commercial pest control, 33%; and termite and other services made up approximately 21% of our revenue.
In addition, our wildlife service continued to see strong double-digit growth.
Again, total revenue less significant acquisitions, was up 13.6%.
From that, residential was up 12.3%; commercial, excluding fumigation, increased 14.8%; and termite and ancillary grew by 14.9%.
In total, our gross margin decreased to 53.3% from 53.8% in the prior year's quarter.
Improvements were made in total payroll but were negatively offset by higher overall fleet costs and a write-down of inventory of $2.7 million related to our PPE, or personal protective equipment.
We will continue to assess our fluctuating future needs and market value for our PPE in the coming quarters.
In addition to our continued Orkin U.S. mileage savings, our Orkin Canada and Western Pest brands are making progress regarding their BOSS and routing and scheduling implementation.
Each company has improved their on-day and on-time delivery since the project started.
These savings will help support improvements in our overall fleet cost in the future quarters.
Depreciation and amortization expenses for the quarter increased $1.4 million to $23.3 million, an increase of 6.3%.
Amortization of intangible assets increased $1.3 million due to several acquisitions, including McCall Service in December 2020 and Adams Pest in Australia in July of last year.
Sales, general and administrative expenses presented a 7.1% improvement for the quarter over 2020, decreasing from 30.9% of revenues to 28.7% of revenues in 2021.
The quarter produced savings in administrative and sales salaries and benefits as well as telephone savings from better negotiated contracts.
As for our cash position, for the six months ending 6/30/2021, we spent $28.4 million on acquisitions compared to $56 million in the same period last year.
We paid $79.7 million on dividends and had $13.2 million of capex compared to $12.4 million in 2020.
We ended the period with $128.5 million in cash, of which $73.6 million is held by our foreign subsidiaries.
As part of our continuous improvement that I mentioned in my opening, we have lots of opportunity in the future in this area, but we are proud of this recognition by the industry.
Yesterday, the Board of Directors approved a regular cash dividend of $0.08 per share that will be paid on September 10, 2021, to stockholders of record at the close of business August 10, 2021. | compname reports q2 earnings per share of $0.20.
q2 revenue $638.2 million versus refinitiv ibes estimate of $613.9 million.
q2 earnings per share $0.20. |
Looking at our third quarter performance, we are pleased to report another solid result, and we remain proud of our planned execution across all of our business service lines.
Revenue grew 4.9% to $583.7 million compared to $556.5 million for the same quarter in 2019.
Net income rose to $79.6 million or $0.24 per diluted share compared to $44.1 million or $0.13 per diluted share for the third quarter of last year.
Eddie will review the GAAP and non-GAAP results shortly as there were meaningful adjustments impacting our financials.
Revenues for the first nine months of the year were $1.62 billion, an increase of 7.6% compared to $1.51 billion for the same period last year.
Net income for the first nine months increased to $198.2 million or $0.60 per diluted share compared to $152.6 million or $0.47 per diluted share for the comparable period last year.
Again, Eddie will review these and our 9-month non-GAAP results in a few minutes.
Turning to our business lines results.
Residential pest control grew 10.5% during the quarter, reflecting the resiliency of this service and its strong demand.
As anticipated, our commercial operation revenue was down year-over-year as commercial pest control continues to be negatively impacted by the COVID-19 virus and its related economic toll.
However, some businesses reopened during the quarter.
And for some of these customers, their economic conditions improved.
We've continued to narrow the revenue shortfall gap each month since April.
Overall, we were pleased with the steady progress we've achieved under those circumstances.
John will provide greater detail on these and our other operational results shortly.
Overall, our people and business continues to perform well in what remains a complex environment.
We have an unwavering commitment to keep our employees and customers safe.
Our team's continued dedication in serving our customers has been outstanding.
They are truly our greatest asset, and we're grateful for their efforts.
Further, our commitment to safe practices involved our employees and customers as well.
We continue to benefit from the high regard, trust and confidence that our customers have in us.
John Wilson, who many of you know through his involvement on our earnings conference calls and investor meetings, was promoted to the company's Vice Chairman.
John joined the company in 1996 and has been an integral part in developing and executing Rollins strategic initiatives over the years.
This promotion is truly a testament to his leadership, work ethic and talent.
Additionally, Jerry Gahlhoff was promoted to Rollins' President and COO.
Since many of you may not be too familiar with Jerry's background, I'd like to take a minute and highlight a few of his many accomplishments.
Jerry started his career in the pets control industry in 1991 and came to Rollins in the HomeTeam acquisition in 2008.
He has successfully managed several areas of the company and has been instrumental in guiding meaningful growth and profitability in these businesses.
He most recently led what we refer to as the Rollins specialty brands team, which includes HomeTeam Pest Defense, Clark Pest control, Northwest Exterminating, Western Pest, Waltham Pest and OPC Services as well as our very important Rollins human resources department and training department.
A seasoned executive and well-respected industry leader, Jerry has a comprehensive understanding of our organization, business and is extremely well suited for the COO position.
Another little-known fact is that Jerry came from an Orkin household as his dad was a 26-year employee.
We're fortunate to have John and Jerry assume a greater role in our company, its direction in its future.
We look forward to their continued contributions.
I am excited and grateful for the opportunity to be here.
I wanted to start by providing some context to the current environment.
While the coronavirus remains prevalent in many areas, we feel positive about our financial performance this quarter and how we are executing as a company to meet the needs of our residential and commercial customers, both in the U.S. and abroad.
Our residential business remains solid.
Our call centers are busy, and we are pleased with our results from this service line.
We are also encouraged yet, at the same time, cautiously optimistic about the positive trends we have been seeing on the commercial side of our business.
As Gary noted, our third quarter commercial results were down year-over-year.
However, the operating environment steadily improved as the third quarter progressed, and we continue to see month-to-month improvements as more businesses reopened and the trust that our brands have built over time have enabled our technicians to provide service when and where needed.
Still, we are, by no way, thinking that this pandemic is over.
We remain diligent considering the current operating environment.
And with many experts projecting that another wave is possible, there remain many uncertainties.
We are executing against our plan and continue to proactively navigate the best path forward.
For example, out of concern for the health of our employees as well as our customers, stringent safety practices are ongoing and remain a top priority.
To keep our technicians safe, we continue to adhere to the advanced health and safety protocols as recommended by the CDC.
By providing a full complement of personal protective equipment for our customer-facing employees, we are continuing to build trust with our customers, while also demonstrating it is safe to do business with us.
We are also working with our customers to create a safer environment for where they live and work.
As we have discussed, Orkin and many of our other brands are now offering a commercial and residential disinfection service, which is effective in quickly and thoroughly eliminating a wide variety of serious pathogens.
While it is still early, we are pleased with the very positive reception this new service line has been receiving from existing as well as new customers.
During the third quarter, we steadily grew this new offering.
Additionally, investors have asked us about the business impact of the devastating wildfires out West as well as the recent tropical storms and hurricanes that have made landfall in the U.S. While our hearts go out to those that have been adversely affected by these natural disasters, up to now, we have not had any significant business disruption.
I would also like to take a minute to provide an update on our wildlife brands, who have experienced strong double-digit growth year-to-date.
For those of you who aren't too familiar with this business segment, the services we provide include live trapping and removal of wildlife, exclusion of wildlife from residences and other buildings and the repair and remediation of damages caused by wildlife.
There is not a more urgent call for help than that customer who has a wild animal loose in their home or business.
Although a small part of our total business, we have firmly established our position as the leading wildlife control provider in North America, and looking ahead, we believe that this is real opportunity to continue to grow this business.
Lastly, I wanted to circle back to the promotion of Jerry to President and Chief Operating Officer.
Not only does he have a strong foundation in the pest business, he does have a degree in entomology after all, he is that rarest of individuals who knows both bugs and the bug business inside out.
He works very hard at improving himself each day.
And I've watched him over the last 13 years improve every operation he has touched.
I am excited to have Jerry in this new role.
I believe that every reference that could be made regarding how long the last quarter has been has already been used, so I'm going to spare my attempt.
Your words of reflection and support were truly appreciated.
In 2016, we had our first-ever Investor Day in New York City, and our team had a chance to get to know many of you on that day.
The primary reason for holding that event was to share the depth and breadth of our management -- of our senior management team.
I've had discussions with many of you over the years about the eventual passing of the baton, and the elevation of Gary, John and Jerry show this in action.
Each of them have been well prepared for years to take their perspective and vision to lead Rollins for years to come.
We're fortunate as an organization.
And as investors, I believe that you will be pleased with what the future holds.
The obstacles that impacted Q2 began to subside, and our operations and nonoperations groups have made tremendous adjustments to the new life that we are all leading.
Today, I'll share some details on our Q3 actual results and some additional insight to what we know today that will impact the future.
For the quarter, our residential pest control and termite service lines showed growth and key to the quarter included: improvements in commercial revenue growth rates compared to the second quarter; impairment charges related to our personal protective equipment, also known as PP&E and the successful continued cost management implemented to drive margin improvements year-over-year.
As Gary referenced, I will be reporting both GAAP and non-GAAP financials that were impacted by vesting of shares this year and the impact of the pension plan moving off of our Rollins books in Q3 of 2019.
Looking at the numbers, the third quarter revenues of $583.7 million was an increase of 4.9% over the prior year's third quarter revenue of $556.5 million.
Our GAAP income before income taxes was $108.9 million or 136% above 2019.
Net income was $79.6 million, up 80.6% compared to 2019.
Our GAAP earnings per share were $0.24 per diluted share.
On a non-GAAP basis, our income before taxes was $115.6 million this year compared to $96 million last year, a 20.4% increase.
Our 2020 income before taxes was impacted by $6.7 million for the vesting of our late Chairman's Rollins shares.
Additionally, 2019 was reduced by $49.9 million for our divesting of the pension plan off of our Rollins books.
Both the vesting of shares and pension divesting were noncash items.
Our non-GAAP net income was $86.3 million this year compared to $70.6 million in Q3 of 2019, a 22.1% increase.
Looking at the first nine months revenue of $1.625 billion, that was an increase of 7.6% over the prior year's third quarter revenue of $1.509 billion.
Our GAAP income before income taxes was $267.8 million or 41.6% above 2019.
Net income was $198.2 million, up 29.9% compared to 2019.
Our GAAP earnings per share were $0.60 per diluted share.
Our non-GAAP financials, taking the share vesting and pension plan into consideration, were income before taxes of $274.5 million, up 14.8% and net income was $204.9 million this year compared to $179.2 million in 2019, a 14.4% increase.
Our non-GAAP earnings per share for the nine months were $0.63 compared to $0.55, which is a 14.5% increase.
As we stated on our Q1 and Q2 calls, we began aggressively purchasing personal protective equipment in March and April.
While these were costly, they were critical to keeping our operations running safely.
As the cost of these materials have moved lower from the peak, we took a $2 million onetime charge to revalue our inventory.
With pricing moving lower, we anticipate spending $1 million per quarter, down from the $2 million that we shared on previous calls.
At this time, we would anticipate having this additional expense through Q2 of 2021.
Let's take a look through the Rollins revenue by service lines for the third quarter.
Our total revenue increased 4.9%.
That included 1.4% from acquisitions and the remaining 3.5% was from pricing, which was a small portion of that, but mostly from organic and new customer growth.
In total, residential pest control, which made up 47% of our revenue, was up 10.5%; commercial, ex-fumigation pest control, which made up 34% of our revenue, was down 1.9%; and termite and ancillary services, which made up approximately 18% of our revenue, was up 6.2%.
Again, total revenue less acquisitions was up 3.5% and from that, residential was up 9%; commercial, ex-fumigation, decreased 3.7%; and termite and ancillary grew by 5.9%.
Our residential business continues to perform well.
And the business on the commercial side has seen steady improvement each month since April.
While we continue to manage our costs appropriately, it's difficult to know how the revenue levels will look as we move through the pandemic with restrictions continuing to change throughout the world.
In total, gross margin increased to 52.8% from 51.7% in the prior year's quarter.
The quarter was positively impacted by lower service and administrative salary expenses as well as lower fuel expense and continued improvements from our routing and scheduling efficiencies.
Additionally, materials and supplies were up, as I referenced, related to the inventory revaluation of our personal protective equipment.
Depreciation and amortization expenses for the quarter increased $714,000 to $22.4 million, an increase of 3.3%.
Depreciation increased $1 million due to acquisitions, vehicles acquired and equipment purchases, while amortization of intangible assets decreased $286,000 due to the full amortization of customer contracts from several acquisitions, including HomeTeam and tuck-ins related to Orkin.
Sales, general and administrative expenses for the third quarter increased $838,000 or 0.5% to $168 million or 28.8% of revenues, down from 30% last year.
The quarter produced savings in salaries and benefits, lower fuel and bad debt through better collection efforts.
As for our cash position for the 9-month period ended September 30, 2020, we spent $79.9 million on acquisitions compared to $431.2 million in the same period last year, which included the acquisition of Clark Pest Control.
We paid $91.7 million on dividends and had $17.7 million of capital expenditures, which was slightly lower compared to 2019.
We ended the period with $95.4 million in cash, of which $62.9 million is held by our foreign subsidiaries.
Before I close, I would like to give an update on one of our sustainability initiatives, particularly as it relates to our local communities.
Through corporate and brand initiatives, such as our Rollins United and Northwest Good Deeds Teams, Rollins employees across all brands are strongly encouraged to volunteer within our local communities.
In 2021, our employee volunteer goals include: community cleanup efforts, trafficking education awareness, literacy programs and support of the united way, to name a few.
Rollins is committed to giving back to our communities through a strong philanthropic vision.
Please go to rollins.com under the Investor Relations tab to view the full 2020 sustainability report.
Yesterday, the Board of Directors approved a large regular cash dividend of $0.08 per share plus a special dividend of $0.13 that will be paid on December 20, 2020, to stockholders of record at the close of business November 10, 2020.
In addition, they also announced a 3-for-2 stock split that will take effect December 10, 2020, for stockholders of record at the close of business on November 10, 2020. | q3 earnings per share $0.24.
q3 revenue $583.7 million versus refinitiv ibes estimate of $577.6 million. |
Before we begin, I am sure you have noticed that Gary is not on today's conference call.
He is actively rehabbing from a knee replacement operation, and while he is recovering quickly he is doing very well.
He's just not a position to physically join us today.
We wish Gary well with this physical therapy and look forward to having him rejoin us on future calls.
During the third quarter we achieved some very strong business results, and Jerry will go over those with you shortly.
In the interim, I wanted to share news of the latest addition to our Rollins' Board of Directors.
As you already know over the previous year we have enhanced and diversified that group with several new members.
I am very pleased to announce our latest addition is Rollins' President and Chief Operating Officer, Jerry Gahlhoff.
This is in recognition of his strong leadership and his deep commitment to the company's long-term success.
We are proud to have Jerry serving on our Board moving forward.
Jerry hit -- is an important part of the Rollins leadership team and his in-depth knowledge of our business and experience gained from working in our industry since 1991 adds perspective.
We're fortunate to have him assume a greater role in the direction and future of our company.
Before turning the call over to Jerry I have two items to first update you on.
The first, we'll represent a recent development in Rollins Environmental, Social and Governance commitment.
We take very seriously the responsibility that we have to the communities in which we work and live.
As a recent example, we're pleased to share that Rollins made an in-kind donation originally costing $4.6 million dollars worth of personal protective equipment or PPE items during the third quarter.
Working with the Federal Emergency Management Agency and several philanthropic organizations including the Friends of Disabled Adults and Children, the Foundation of HOPE Food Bank, as well as COPE Preparedness in Los Angeles, we donated 27 pallets or 6.8 million pieces of masks, gloves and other items.
In addition to achieving a successful execution of our strategies as well as solid business results, we also have a responsibility to the communities in which we work and live.
ESG is a -- facet of our business is becoming more important to us.
We are proud to support these initiatives.
Last, as we have previously disclosed, the company has been responding to an investigation by the US Securities and Exchange Commission.
In accordance with accounting standard ASC 450, we have established a reserve related to this matter which we consider immaterial.
Given that the investigation is ongoing, we cannot answer any questions during our Q&A, but we remain focused on resolving this inquiry.
With that, I will turn our call over to Jerry.
We're very pleased with our third quarter results.
Revenue increased 11.4% to $650.2 million compared to $583.7 million for the third quarter of last year.
Our net income totaled $93.9 million or $0.19 per diluted share compared to $79.6 million or $0.16 per diluted share for the same period in 2020.
Julie will review the GAAP and non-GAAP results shortly.
Revenues for the first nine months of 2021 were $1.824 billion, an increase of 12.2% compared to $1.625 billion for the same period last year.
Net income for the first nine months increased 44% to $285.3 million or $0.58 per diluted share compared to $198.2 million or $0.40 per diluted share for the comparable period last year.
For the quarter, we experienced solid growth in all our business lines with residential increasing 11.7% and termite presenting percent growth over the third quarter 2020.
Additionally, commercial excluding fumigation delivered an impressive 10.1% growth over the third quarter last year.
This is also an improvement of 7.9% growth over two years ago when we were not experiencing COVID related shutdowns.
Overall, we are pleased with our performance.
Rollins remains well positioned for the remainder of the year and into 2022.
Looking deeper at our operating results, we're attracting customers to all our services and brands.
And one area I'd like to focus on today is our continued strong growth in our wildlife service offerings.
Trutech wildlife joined the Rollins family in 2010 followed by Critter Control in 2015.
Since 2010, the business has grown 800%.
Day-to-day operations of operating a wildlife control business is quite different than running a typical pest and termite business, and we are proud to have a dedicated team focused on this much needed service.
Originally concentrated in the Southeastern United States, the business has expanded across the nation as well as into Canada.
And with and with Critter Control expansion into Canada, it's Rollins' first brand to enter an international country without acquiring another business as a platform.
The wildlife division also operates a thriving franchise system.
There are currently 84 franchises with the most recent franchise launching in Mansfield Ohio.
We anticipate finishing the year with 12 new franchises, one of our strongest years in adding franchisees.
We have also been fortunate to add nine former corporate employees as franchisees.
Employees who have an entrepreneurial drive and a passion for nuisance wildlife and customer service have multiple career path opportunities, be it ownership of the franchise or growth within our company.
We believe there is meaningful opportunity for continued growth in our wildlife business and look forward to updating you in the quarters ahead.
I'd now like to discuss Hurricane Ida.
Our hearts go out to our Gulf Coast region and those that were affected by the hurricane.
But I must admit we are inspired by our team in that area.
They implemented an amazing plan that helped our team members, and alleviate the negative impact of the storm.
Ida shut down several of our branches for days but two locations were shut down for about two weeks.
The impact to our employees in the days following the storm was far worse than the impact to our business in the quarter.
Through the Rollins Employee Relief Fund, we granted 137 emergency grants to impacted employees within the first week following the hurricane to enable employees to address their personal essential needs.
Since then, another seven employees who endured greater hardships received full grants to address their more significant needs.
Additionally, our Orkin South Central division led by Leland Morris quickly initiated a preparedness and mitigation plan to assist our team members.
This included immediate procurement of much needed supplies for our employees and their families such as generators, dual, portable air conditioners, fans, water, and other essential emergency provisions that were not readily accessible to them locally.
Our team members in adjacent areas that were fortunate to avoid the brunt of Ida's force volunteered their time and energy often after work hours to load these suppliers into box trucks and drive them to those most in need.
For weeks they continued to shuttle fuel to these employees to keep their generators up and running.
This was a total team effort and we are tremendously proud of their care, compassion and commitment to one another.
In fact, we're so pleased with our effort that we plan to expand and formalize this program in other areas of the country so that we can rapidly respond in case of a natural disaster or emergency.
As we measure our performance and think about how to best articulate Rollins' business in the future along with what routine questions we've received from the investment community, we will now be presenting three additional measurements quarterly moving forward.
The first is a measure we have referred to periodically and that is EBITDA or earnings before interest, taxes, depreciation and amortization.
Due to our consistent high volume of acquisitions and hence high amortization expense related to these acquisitions, presenting EBITDA regularly will provide a clear picture of our operations ongoing financial performance.
Think about this, over the last three years we have averaged 30 acquisitions per year.
Next we will begin presenting our revenue growth through both constant exchange rate and actual exchange rate.
By utilizing historical baseline revenues for acquisitions [Indecipherable] through the due diligence process, we were able to include all acquisitions within the calculations, both stand-alone and tuck-in.
This will bring clarity and consistency to both our acquisition and our organic revenue growth measurements.
Third, we will be providing you with our free cash flow.
We believe that this will properly illustrate Rollins' strong ability to generate cash.
We have taken a simple approach to defining free cash flow, which is calculated as net cash provided by operating activities less purchase of equipment and property.
Our hope is that these measurements will enable investors to better assess our operating performance in the future and provide a deeper view of our business.
So onto the numbers.
Our third quarter revenues of $650.2 million was an increase of 11.4% over last year.
Of the 11.4% actual exchange rate revenue growth, acquisition growth was 2.2%, and organic equated to 9.2%.
For the constant exchange rate, the growth percentage is calculated within the hundreds of the actual exchange growth rate therefore presented the same.
For the nine months ended September 2021, revenue of $1.824 billion was an increase of 12.12 percentage over year-to-date 2020.
Of this actual exchange rate total revenue growth of 2.
-- or excuse me, of 12.2%, 2.7% was related to acquisitions, and 9.5% organic growth.
The constant year-to-date exchange rate total revenue growth for 2021 equaled 11.6%; 2.7% represented acquisitions and 8.9% organic revenue growth.
As Jerry pointed out, residential, commercial and termite all grew double-digits this quarter over the same quarter last year.
So, in determining my focus for today, I decided to take Jerry's lead and discuss wildlife, yet I'm discussing specifically company owned wildlife operations.
For the third quarter in 2021, wildlife revenues grew 24.1% over last year, and year-to-date wildlife has presented an overall revenue growth of 27.6%.
What makes us particularly impressive at this is that this is after their strong growth of 20.4% last year.
So similar to our residential pest control, wildlife did not feel a negative impact to revenue growth during the pandemic.
The way to go to the wildlife team.
Now onto our income.
For the third quarter and year-to-date, we are presenting adjusted EBITDA for comparison purposes due to the one-time super vesting of our late Chairman stock grants in the third quarter of 2020 and the impact of our gain on sale of several of our core properties in the first six months of 2021.
So, third quarter 2021 EBITDA was $150.9 million or 8.7% over 2020 third quarter adjusted EBITDA of $138.9 million.
Third quarter 2021 earnings per share was $0.19 per diluted share or 5.6% improvement over the 2020 third quarter adjusted EPS.
For the nine months ended September 2021, our adjusted EBITDA was $422 million or 22.1% over last year's adjusted EBITDA of $344.9 million.
Year-to-date 2021 adjusted earnings per share was $0.53 per diluted share or 26.2% over last year.
For the third quarter 2021, gross margin increased to 53% or 0.4% over last year.
Strong improvements in our materials and supplies were negatively offset by high overall fleet costs primarily from an increase in fuel of approximately $4 million over third quarter 2020, and lower vehicle gains of $900,000 compared to last year.
Sales, general and administrative third quarter margin increase over last year was strongly impacted by the PPE donations and the SEC accrual previously mentioned by John.
Travel expenses have also increased $1.3 million in the third quarter as we have begun to lift our company travel restrictions.
Amortization expenses for the third quarter 2021 increased $1.4 million due to the amortization of customer contracts from multiple acquisitions.
This was offset by a decrease in depreciation of $201,000 due to the sale of owned vehicles and centralizing of IT function.
Overall, this equated to a 5.1% increase in depreciation and amortization over the third quarter 2020.
Our dividends paid year-to-date 2021 was $119.7 million or an increase of 30.4% over last year.
We ended the current period with $117.7 million in cash, of which $73.6 million was held by our foreign subsidiaries.
So, this brings us to the final of our new three measurements, free cash flow.
For the third quarter of 2021, our free cash flow is $72.9 million or a decrease of 27.5% over the same quarter last year.
For the nine months ended 2021, our free cash flow equal $278.9 million or 13.6% decrease over year-to-date 2020.
This fluctuation occurred due to the deferral of $30.3 million in FICA taxes payable in 2020 as allowed under the CARES Act.
These associated taxes were then remitted in September of 2021.
We hope that with he discussion of these new measurements you will receive a greater clarity while reviewing our financial performance.
Lastly, I want to discuss that yesterday we were extremely pleased to announce that our Board has approved a 25% increase to our dividends.
The quarterly dividend increased to $0.10 per share from $0.08 per share and will be paid on December 10, 2021 to stockholders of record at the close of business on November 10, 2021.
Additionally, the Board also approved a special dividend of $0.08 to be paid on December 10, 2021 as well.
The dividend increase reflects our strong performance in the first nine months of the year and underscores our financial strength, our solid capital position, and the Board's confidence in our outlook for continued growth. | q3 revenue rose 11.4 percent to $650.2 million.
q3 earnings per share $0.19. |
While we faced unprecedented obstacles this past year, I'm pleased to report that Rollins' performance in 2020 is marked by continued growth and solid financials.
Rollins' results are a testament to the strength of our business, our exceptional focus on customer service and the commitment to program execution by our people.
We're especially proud of our employees' dedication and adaptability through this difficult year.
They've continued to provide vital services to our customers through very challenging situations, enabling the continuation of our long-term success.
Our people are truly our most important asset as they protect our customers' property, health and peace of mind.
We're extremely appreciative of their efforts during this unprecedented time.
At Rollins, we also have a unwavering commitment to keeping our employees safe.
This has never been more important than this past year, while we faced the threat of the COVID-19 virus.
New stringent safety protocols were promptly created and even today remain a priority, while we continue to have employee health risk from the virus.
As a result of working safely through the pandemic, we've also benefited from the trust we have built with our customers.
This was confirmed by the strong performance that we had in our residential services segment.
Looking ahead, we remain confident in our business and the importance of the service we provided.
Their insightful guidance and service to the Company has been invaluable and we wish them well in their retirement.
Turning to our performance.
We are pleased with our fourth quarter results, which capped off a great year in 2020.
Revenue for the quarter grew 6% to $536.3 million compared to $506 million for the same quarter in 2019.
Net income rose to 5 -- to $62.6 million or $0.13 per diluted share compared to $50.8 million or $0.10 per diluted share for the fourth quarter last year.
Revenue for the full year totaled $2.161 billion, an increase of 7.2% compared to $2.015 billion for 2019.
Net income for the full year increased to $260.8 million or $0.53 per diluted share compared to $203.3 million or $0.41 per diluted share for the same period last year.
Eddie will review the GAAP and non-GAAP results shortly as there are two adjustments impacting our financials.
Overall, our team members in the various businesses continue to perform well.
We experienced strong growth in residential pest control during the fourth quarter, increasing 11%, while termite and ancillary services grew 8.7%.
Year-over-year, commercial revenue was down as commercial pest control was negatively impacted by the COVID virus due to varying levels of government-driven shutdowns.
However, we have continued to narrow the revenue shortfall gap each month since April with fourth quarter commercial growth only 0.6% below last year.
We are pleased with the steady progress we have achieved under these circumstances.
I am very proud of our team and the commitment they show each day to take care of our customers.
Their dedication and determination were very evident this year as they added many thousands of customers during a challenging time.
We believe our fourth quarter and 2020 full year results reflect both the resilience of our company and our people.
I would now like to take a moment to talk about Rollins' ESG or Environmental, Social and Governance commitment.
We hold ourselves accountable to a high standard of sustainability, social responsibility and good corporate governance.
ESG is not just an important part of our business, it's become part of our culture.
We also have launched a new Diversity, Equity and Inclusion or DEI initiative, internally focused on advancing a culture of inclusion where all employees feel respected and treated fairly with an equitable opportunity to excel.
This effort is sponsored by Freeman Elliott, our Orkin U.S. President.
Freeman is working in close partnership with the newly formed Advisory Council made up of employees from across all brands to drive DEI improvements.
The council is actively reviewing all policies, conducting campaign awareness, creating listening forums and providing training with much more to come.
We are committed to this vision in the journey we will all take together.
I am also pleased to note that we have further strengthened our Board of Directors, adding to an already experienced and strong Board with the additions of Susan Bell, Patrick Gunning and Jerry Nix.
As background, both Susan Bell and Patrick Gunning have recently retired from distinguished careers in public accounting, 36 and 39 years respectively.
Both are qualified as financial experts for U.S. Securities and Exchange Commission public companies.
Jerry Nix comes to our Board as the Former Vice Chairman and Chief Financial Officer of Genuine Parts Company.
They are all seasoned executives and accomplished leaders and their diverse experience will be invaluable to help shape Rollins' future.
I do so with a strong sense of responsibility to our company, our employees, our customers and our shareholders.
I'm excited to be here.
During the fourth quarter, we continued to expand the company's presence, not only in the U.S., but yet globally as well.
We added 10 strategic acquisitions within the United States, Canada, Australia, United Kingdom and Singapore.
This past week, we completed our first virtual companywide leadership meeting with all our top leaders across all our global business units.
While we missed being in the same room together, we still found an opportunity to gather on Zoom for productive discussions on items that will be critical for our success in 2021.
As an example, one focus area we discussed that has been significant to our growth is mosquito service.
This continues to be an excellent add-on service for many customers and has increased greater than 30% over the prior year.
We know this will continue to be a great opportunity in 2021.
As we have discussed in the past, mosquito-borne diseases continue to be an increasing threat around the world and as family self quarantine, many are spending more time in their yards, recognizing the need for mosquito control.
The overall emphasis of our leadership meeting was about executing our plans in 2021, and I have great confidence in our leadership team to make this happen.
The obstacles that impacted Q2 and Q3 continue to decrease throughout the quarter and our operations and non-operations groups continue to make tremendous adjustments to the new lives that we are all leading.
We are utilizing mostly remote workforces, which has forced us to continue to evaluate processes and become more efficient.
These changes have made us a better company.
Dealing with the increased demand on the residential side of our business and the disruption aroused on the commercial side of our business would have been an extreme challenge to handle without these tools in place.
For the quarter, our residential pest control and termite service lines showed growth and keys to the quarter included a fourth year in a row of metric improvement through our routing and scheduling initiatives, safety improvement that translated to expense reductions and successful continued cost containment implemented to drive margin improvement year-over-year.
As John referenced, I will be reporting both GAAP financials for the quarter and GAAP and non-GAAP financials for the full year that were impacted by accelerated investing of shares in the third quarter of this year, and the impact of the pension plan moving off of our Rollins' books in 2019.
Looking at the numbers, the fourth quarter revenues of $536.3 million was an increase of 6% over the prior year's fourth quarter revenue of $506 million.
Our income before income taxes was $86.9 million or 28.7% above 2019.
Net income was $62.6 million, up 23.4% compared to 2019.
Our earnings per share were $0.13 per diluted share.
Looking at the full year, revenue of $2.161 billion was an increase of 7.2% over the prior year's revenue of $2.015 billion.
Our GAAP income before taxes was $354.7 million or 35.8% above 2019.
Our net income was $260.8 million, up 28.3% compared to 2019.
Our GAAP earnings per share were $0.53 per diluted share.
For the full year, looking at our non-GAAP financials, taking into account the accelerated stock vesting that occurred in the third quarter of this year and the pension plan moving off of our books in 2019, income before taxes was $361.4 million and was up 16.2% and net income was $267.5 million this year compared to $229.9 million in 2019, a 16.3% increase, and our non-GAAP earnings per share were $0.54 compared to $0.47, which is a 14.9% improvement.
Jerry mentioned our 2021 leadership meeting, and while our gathering online instead of in-person looked different than the previous years, our focus on messaging and alignment for the year to come continue to be the same.
One of the sessions over the three days was entitled, items to make you successful in 2021.
During this segment, we discussed several different topics that will impact our journey of sustainability through Environmental, Social and Governance or ESG.
The topics were all focused on actionable items that each and every operation can impact as we move forward in the new year.
In depth, we discussed our routing and scheduling and how it saves miles, improves margin and helps to reduce our carbon footprint.
Next, we discussed our launch of the Diversity, Equity and Inclusion or DEI initiative that John mentioned earlier.
Freeman did an excellent job sharing how a more diverse group will help lead our decision-making in the future.
And then, Jerry spent time and discussed our safety journey and how this positively impacts our workforce and our financial performance.
The advantage to hosting these sessions online, and yes, I am looking for silver linings here, is that we get a chance to read comments in real-time as the speaker is leading the session.
There was a very positive energy around all of these topics and others that will support our sustainability for years to come.
Let's take a look through the Rollins revenue by service line for the fourth quarter.
Our total revenue increase of 6% included 1.5% from acquisitions and the remaining 4.5% was from pricing and new customer growth.
In total, residential pest control, which made up 45% of our revenue, was up 11%, commercial, excluding fumigation, commercial pest control, which made up 34% of our revenue was down five-tenth of a percent and termite and ancillary services, which made up approximately 19% of our revenue, was up 8.7%.
One item of note is that our wildlife service grew at their fastest rate since Q1 of 2018.
Again, total revenue less acquisition was up 4.5%, and from that residential was up 9.3%, commercial ex-fumigation decreased 2.4%, and termite and ancillary grew by 8.4%.
Our residential business continues to perform well and our commercial pest control business has seen steady improvement each month since April.
While we continue to manage our cost appropriately, it's difficult to know how the revenue levels will look as we move through the pandemic with restrictions continuing to change throughout the world.
In total, gross margin increased to 50.3% from 49.7% in the prior year's quarter.
The quarter was positively impacted by lower service salary expense as well as lower fleet expense through continued improvements from our routing and scheduling efficiencies.
These gains were offset by higher materials and supplies cost related to our personal protective equipment inventory.
Depreciation and amortization expenses for the quarter decreased $203,000 to $22.4 million, a decrease of nine-tenth of a percent.
Depreciation decreased $57,000 and amortization of intangible assets decreased $148,000 as intangibles from previous acquisitions such as HomeTeam and Western became fully amortized.
Sales, general and administrative expenses for the fourth quarter increased $4.3 million or 2.8% to $159.1 million or 29.7% of revenue.
This was down 2.9% compared to 2019 and the quarter produced savings in salaries and benefits and lower bad debt through better collection efforts.
As for our cash position for the period-ended December 31, 2020, we spent $147.4 million on acquisitions compared to $430.6 million the same period last year, which included our initial Clark Pest Control acquisition.
We paid $160.5 million on dividend and had $23.2 million of capital expenditures, which was slightly lower compared to 2019.
We ended the period with $98.5 million in cash, of which $71.3 million is held by our foreign subsidiaries.
These numbers all include our reduction in debt of $88.5 million for the year.
As you may remember, we kicked off the reporting of our ESG activities at the beginning of the year in 2020 with our first-ever 2019 Sustainability Report.
In March of 2021, we will produce our second addition, which will include more updates and goals in the areas that will impact our company over the next five years.
Yesterday, the Board of Directors approved a regular cash dividend of $0.08 per share, which was a 50% increase in the pre-split numbers from last year that will be paid on March 10, 2021 to stockholders of record at the close of business February 10, 2021. | q4 revenue $536.3 million versus refinitiv ibes estimate of $530.2 million.
q4 earnings per share $0.13. |
I'm pleased to report that we experienced a very successful year, both financially and operationally, especially with our revenue and earnings per share growth.
As we begin 2022, we believe that Rollins is poised to deliver on our short-term and long-term objectives.
We look forward to sharing our progress with you as the new year unfolds.
As we previously disclosed, the company is in discussion with the staff at the U.S. Securities and Exchange Commission to resolve our SEC investigation.
During the fourth quarter, we increased the accrual related to this matter to $8 million for a potential settlement.
Given that the investigation is ongoing and out of respect for the process, we cannot answer any questions during our Q&A, but we are focused on resolving this inquiry in the very near future.
As Gary mentioned, we are extremely pleased with our 2021 performance and very proud of the hard-working men and women of our company that propelled us to achieve record levels of revenue growth across each of our brands.
I'm also pleased to note that we again realized a very strong performance in our termite service line, posting year-over-year double-digit growth of 14.3%.
While our termite business has been growing by double digits for several years in a row now, termite damage claims, as well as any related to litigation have declined year by year reaching our lowest level in recent history during 2021.
To be more specific, termite damage claims received have declined from a high of 9,349 to the low of 380 new claims received this past year while, at the same time, revenue from termite has tripled.
The genesis of this great story started with a serious commitment to address a problem that had been building for several years.
Obviously, resolve alone wouldn't clean up a problem that large.
Success came from a series of changes initiated by our leadership team to our culture, our training, our treatment protocols, and our quality assurance processes.
We significantly improved and expanded training of our field service and sales team members, and our managers made that training mandatory before you could be allowed to service our customers.
We held hundreds of regional training meetings and a multitude of termite-specific training modules were developed.
We revised our treatment protocols to solve situations we were experiencing, due in part to evolving new construction practices in various markets.
These revised treatment protocols, in many cases, exceeded state treating requirements.
Additionally, we created a nationwide quality assurance team that took control of the claims process, requiring our branch offices to report each claim immediately.
This ensured a quick response to our customers when most needed.
This QA group also went to the field and inspected our team's work and verified that things were being done according to our new treating requirements.
Finally, and maybe most important, the most difficult change was to our culture.
As an example, any location failing quality assurance team inspections had to make a trip to the Division President of the company.
Those that failed to adjust and adhere to the new practices by the time a follow-up QA visit occurred didn't receive a return trip.
Change came quickly due to those practices.
Fast forward to today and all our newly acquired companies are brought under these standards as quickly as possible.
We believe these service level commitments are important to meet our -- or exceed the expectations our customers have for us.
Operationally, our service offering is led by a very strong and dedicated termite services group and a very experienced technical service team.
I'm proud to work for a company that has made these commitments to protect our customers, our brands, and our reputation.
2021 was a strong and productive year for Rollins' family of pest control brands.
Q4 revenues increased 11.9% to $600.3 million, compared to $536.3 million the previous year.
Net income rose to $65.3 million or $0.13 per diluted share, compared to $62.6 million or $0.13 per diluted share for the same period in 2020.
Our revenues for the full year were $2.424 billion, an increase of 12%, compared to $2.161 billion for the same period last year.
Net income for the full year increased 34.5% to $350.7 million or $0.71 per diluted share, compared to $260.8 million or $0.53 per diluted share for the comparable period last year.
Again, Julie will review our full-year GAAP and non-GAAP results shortly.
All our business lines experienced solid growth, with residential pest control up 11.9% and termite realizing growth of 13.6%.
Additionally, commercial pest control delivered an impressive 11.4% growth over the fourth quarter of last year.
Julie will give you a more detailed breakdown on organic revenue growth by service line in a few moments.
Before I move on from revenue and address expenses, I want to emphasize how proud we are of the growth rates we achieved in the fourth quarter and for the year.
During the year, coincidentally, Orkin reached their 120th anniversary and celebrated by putting up one of their best performances in years.
All our brands grew and contributed greatly to our operating results.
On the expense side, payroll, materials and supplies, and fleet are our three largest expense areas, and I'll give you some additional color on how each of these items impacted margin in Q4.
Let's start with labor.
Remarkably, we've been able to achieve above-average revenue growth rates, while keeping our service payroll expense margins below last year in Q4.
On a year-to-date basis, that expense margin is flat to 2020.
Our administrative payroll margins also improved over 2020 as we continue to improve productivity.
However, we did experience a slight increase in our sales payroll margin.
The sales payroll expense trend is reflective of the planned investment we made in up-staffing our residential and commercial sales teams over the last 12 months.
This investment yielded the high levels of growth I mentioned a few minutes ago.
If there's an area I do not mind giving up margin to, its sales payroll so long as we are growing revenue faster than the sales payroll expense.
I'm proud of our team's ability to manage payroll expense despite recruiting challenges caused by labor shortages.
Last week, we held our virtual Rollins leadership meeting with over 175 of our top leaders.
Most of our topics were about best practices in recruiting and retaining our people.
This is a huge focus item for us in 2022.
Let's move to materials and supplies costs or M&S.
Our M&S costs were a slight headwind in the quarter, particularly for our termite and ancillary service offerings, where we've had more supply chain issues in the latter part of the year.
Our procurement team is working hard in this area by seeking alternate products, while our operations team has analyzed the impact of these increases and adjusting our rate card pricing upward where needed to counteract the rise in material costs.
Probably most impactful to us in Q4 is fleet expense, particularly fuel.
Compared to Q4 of 2020, our fuel costs were up 56.5% in Q4 of 2021.
That equated to over $4.5 million in increased fuel costs for the quarter.
In addition, increases in fleet repair costs for items like tires and basic maintenance also rose double digits.
As we've discussed in the past, we're making significant progress with our BOSS operating systems' routing and scheduling technologies, which help us mitigate some of these fuel cost increases.
Since reducing miles driven between services saves not only fuel but also time, this technology contributed in an even bigger way to helping us manage our service payroll expense by enabling us to reach our customers in a more efficient and productive manner.
We began to feel the first significant impacts of the fuel increases in Q2 of 2021.
So, we anticipate that fleet costs will continue to be a significant headwind for us in the first quarter of this year.
Related to expenses, there's one other item I'd like to mention.
Most are familiar with the cybersecurity attacks experienced by SolarWinds and Colonial Pipeline and others that recently put a spotlight on cybersecurity threats.
Due to concerns about these types of cybersecurity issues, in Q4, we fast-tracked our multiyear strategy to enhance our protection against cybersecurity threats by accelerating a $3 million expenditure.
We have a dedicated cyber team implementing enhanced cybersecurity controls for our domestic and international operations to protect our employees, our customers, and our brands.
Shifting briefly to the acquisition landscape, we continue to successfully execute our acquisition strategy of identifying and acquiring high-quality companies with shared culture and values.
Last year ended strong with over 70% of our trailing 12 months revenue acquired occurring in the fourth quarter.
And looking ahead, we expect that strategic acquisitions will continue to be an important component in our initiatives to further grow our business.
We delivered an outstanding fourth quarter, highlighted by significant growth across many key financial metrics.
As we previously discussed in our third-quarter conference call, we assess the performance metrics we report to ensure they best articulate Rollins' business.
To that end, we discussed several additional measurements we would present each quarter, including EBITDA, free cash flow, and total organic revenue growth.
In addition, we're now including organic revenue growth by revenue type, specifically residential, commercial, and termite.
We believe this will bring further transparency to our revenue growth measurements.
We realize we are going over a lot of information today and believe this will give you a resource to review everything that we have covered.
So, now on to the numbers.
Our fourth-quarter revenues of $600 million was an increase of 11.9% actual exchange rate growth, 8.9% organic.
For the constant exchange rate, the total revenue growth percentages calculated to 11% with an 8.1% organic.
For the full year 2021, revenues of $2.4 billion was an increase of 12.2% over full year 2020, 9.5% organic.
The constant exchange rate, total revenue growth for 2021 equaled 11.4%, 8.7% organic.
As mentioned previously, residential, commercial, and termite all grew double digits this quarter over the same quarter last year.
What Jerry did not tell you was that all three also grew double digits for the full year 2021 over 2020.
For the fourth quarter growth over last year, residential grew 11.9%, 8.4% organic; commercial grew 11.4%, 9.3% organic; lastly, we have termite, which grew 13.6% with 10.1% organic.
For the full year 2021 over 2020, residential grew 12.9%, 10% organic; commercial grew 10.2%, 7.4% organic; and we closed out with termite at a 14.3% growth, 11.9% organic.
Now, to our income.
For the fourth quarter and year to date, we are presenting adjusted EBITDA for comparison purposes due to the one-time super vesting of our late chairman stock grants in the third quarter of 2020, the impact of our gain on sale of several of our Clark properties in the first six months of 2021 and our recorded accruals related to the potential settlement of the SEC matter in the third and fourth quarters of 2021.
Fourth-quarter adjusted 2021 EBITDA was $122.2 million or 11.2% over 2020.
Fourth quarter 2021 adjusted earnings per share was $0.14 per diluted share or 7.7% improvement over 2020.
For the full year 2021, our adjusted EBITDA was $546.4 million or 20.1% over last year.
Year to date, 2021 adjusted earnings per share was $0.68 per diluted share or 25.9% over 2020.
For fourth quarter 2021, gross margin increased 50.4% or 0.10 point over last year.
That was after overcoming our strong headwinds of fleet expenses, specifically fuel in the amount of $4.5 million and termite M&F for $2.7 million.
Sales, general and administrative fourth quarter 2021 margin increased 1.6% over last year.
This was driven by the increase in sales salaries mentioned by Jerry along with the increased SEC accrual.
Without these two items, our SG&A fourth-quarter margin presented an improvement over fourth quarter 2020.
Related to the SEC potential settlement, we recorded an accrual of $5 million in Q4.
This was in addition to the $3 million we previously accrued in the third quarter.
These amounts are not tax-deductible for state or federal taxes.
The company continues to cooperate with the SEC and working toward a final resolution.
During the year, we completed significant remediation efforts, including the addition of a Chief Accounting Officer, SEC Attorney, and SEC External Reporting Director.
Also, we reevaluated and strengthened our internal controls over financial reporting, while improving processes, procedures, and related supporting documentation, including those related to management's judgments and estimates.
Now, for a few notes regarding our cash flow.
Our dividends full year 2021 were $208.7 million or an increase of 30% over 2020, while cash used for acquisitions declined 5.8% to $139 million for 2021.
We ended the current period with $105.3 million in cash, of which $78.1 million was held by our foreign subsidiaries.
As you've probably noted over time, our foreign cash held has increased with the exception of use for acquisitions.
We are in the process of restructuring our foreign entities to make cash from foreign operations more readily available.
This should be completed later in 2022.
Now, to free cash flow.
For the fourth quarter of 2021, our free cash flow was $88.9 million, or a decrease of 0.8% over last year.
The decline was due to a capital expenditure increase from upgrading our data center facility as part of our cybersecurity initiatives.
Full-year free cash flow was $395 million or a decrease of $41 million.
This decline was primarily due to the $30 million 2020 carry back taxes paid in 2021 and a $32 million gain from the sale of the Clark properties, the latter of which is an operating cash reconciling item.
Last, I'm happy to share that yesterday our board of directors approved a regular cash dividend of $0.10 per share that will be paid on March 10, 2022, to shareholders of record at the close of business, February 10, 2022.
This represents a 25% increase over the March 2021 regular cash dividend paid out.
The dividend increase reflects our strong performance in 2021 and that accentuates our financial strength, our solid capital position, and the board's confidence in our outlook for continued growth. | compname says q4 revenue rose 11.9% to $600.3 mln.
q4 revenue rose 11.9 percent to $600.3 million.
q4 adjusted earnings per share $0.14.
q4 earnings per share $0.13. |
We begin with our Safe Harbor statement.
You should listen to today's call in the context of that information.
Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis.
For the first quarter, the difference between our GAAP results and our adjusted results consists of the following items; amortization of acquisition-related intangible assets, purchase accounting adjustments to acquired deferred revenue and related commission expense, and lastly, a gain on sale related to a minority investment in Sedaru.
I'll hand the call over to Neil.
Rob will then highlight our P&L performance and balance sheet metrics.
I'll then walk through our segment details, our increased outlook for the year and our concluding comments.
As we turn to Page 5, we got off to a better start than we expected.
Business execution was strong across the portfolio and it was also broad based.
We are encouraged by seeing nice improvements across the vast majority of our software and product-based end markets.
In addition, we continue to see accelerating software recurring revenue growth, growing approximately 6% on an organic basis.
Importantly, our 2020 cohort of acquisitions, led by Vertafore, continue to perform very well versus our expectations.
When we put this all together, we experienced double-digit growth across virtually all financial metrics; revenue, EBITDA, DEPS and cash flow.
The growth in cash flow performance in the quarter allowed us to continue our rapid deleveraging with about $500 million in debt pay-down during the quarter.
Based on this encouraging start, we're increasing our outlook and guidance for the full year.
Turning to Page 6 and covering the Q1 financial highlights.
Total revenue increased 13% to $1.53 billion, which was an all-time record for any Roper quarter.
Organic revenue for the enterprise declined 1% versus last year's plus 4% pre-pandemic comp.
EBITDA grew 20% to $561 million.
EBITDA margin increased 220 basis points to 36.7%, on really great incrementals across the portfolio.
Adjusted DEPS was $3.60, 18% above prior year.
Free cash flow was $543 million, up 54%.
We continue to benefit from our business transformation to a more software-weighted model, where working capital boosts cash flow as our growth accelerates.
Our results were enhanced a bit by approximately $40 million of accelerated payments that were the result of wins at our UK-based CliniSys laboratory software business.
Aided by our outstanding cash flow performance, we reduced our debt by approximately $500 million in the quarter.
More on that to follow.
So in summary, a great start to 2021.
Turning to Page 7, an update on our deleveraging.
The charts on this page are a good preview for how we expect 2021 to look as we follow through on our commitment to reduce debt after our 2020 opportunistic capital deployment.
As each quarter passes by, we will benefit from meaningfully improved trailing EBITDA as the performance of last year's acquisitions rolls into Roper's financials.
EBITDA is then further enhanced by our accelerating organic growth.
Concurrently, our strong cash conversion allows us to apply our high levels of excess free cash flow toward consistent reduction of our debt.
In the first quarter, we reduced our debt by approximately $500 million.
Over the first three months of the year, our EBITDA growth, combined with debt reduction, enabled us to lower our net debt to EBITDA ratio from 4.7 to 4.2.
We expect this downward trend in leverage ratios to continue, moving forward.
As we turn to Page 9, revenues in our Application Software segment were $578 million, up 2% on organic basis.
EBITDA margins were an impressive 44.9% in the quarter.
Across this segment, we saw organic recurring revenue, which is about 75% of the revenue for this segment, increase approximately 6%.
This recurring revenue strength is based on strong customer retention and continued migration to our SaaS delivery models.
Of note, this quarter should be the last quarter of non-recurring revenue declines as we come across the COVID comp from last year.
From a business unit perspective, Deltek continued its long string of great performance.
As we expected, Deltek's recurring revenue grew nicely.
Of particular importance, Deltek saw an increase to the perpetual revenue during the quarter, coming off a decently strong quarter a year ago.
Also encouraging was the nature of the bookings activity, which was broad based across our architecture, engineering, creative and government contracting end markets.
For reference, the professional services end markets tied to AEC and creative have been slow since the onset of COVID.
Also, CliniSys, our European lab software business, just crushed it during the quarter.
As Rob mentioned, CliniSys had exceptionally strong cash flow as they gained tremendous market share within the clinical lab consolidation occurring within the United Kingdom.
CliniSys has approximately 85% market share in the UK and is now recognized as one of four critical IT vendors for the entire National Health Service.
Just outstanding execution by the CliniSys team, and congrats.
We also saw sign in the higher education markets that CBORD serves; certainly encouraging.
Finally, our 2020 cohort of acquisitions continues to perform very well.
Specific to Vertafore, we continue to be encouraged by their customers' comfort in having Roper as a long-term owner for the business.
Also, Amy and her team have done a great job transitioning to Roper and our governance model.
As we turn to the outlook for the balance of the year, we expect high single-digit organic growth for the segment.
This is based on the expectation for sustained levels of recurring revenue growth and resumption of non-recurring revenue growth.
As it relates specifically to the second quarter, we expect our growth to be a touch below high single digits due to our global lab software group coming off across a challenging comp from a year ago as they are instrumental standing up COVID testing on a global basis.
Solid and encouraging quarter for sure.
And with that, let's turn to our next slide, please.
Turning to Page 10.
Revenue in our network segment were $440 million, flat versus last year and down 3% on an organic basis.
EBITDA margins were 40.9% in the quarter.
Our software businesses in this segment, about 65% of the revenues were up 4% on an organic basis.
This revenue was broad based among our software businesses and driven by organic recurring revenue growth of approximately 6%.
Recurring revenue growth is underpinned by strong customer retention.
Recurring revenues are also benefited by increasing network participation.
At the business level, our Freight Match businesses, both in the US and Canada, continue to be solid growers for us.
As a reminder, our freight match networks are critical and necessary elements to help organize and transact the trucking, shipping spot markets.
Strength in our businesses has been on both sides of the network; brokers and carriers.
We also continue to see nice organic gains at ConstructConnect as their network enables commercial construction planning and bidding to occur in a more efficient and transparent manner.
Lastly, as it relates to our Network Software businesses, we saw improved end market activity, especially in the middle market for Foundry, our media and entertainment compositing software business.
Our non-software businesses in this segment were down 13% for the quarter; a touch better than we anticipated.
TransCore's New York project work continues and is tracking well.
TransCore's tag volumes declined versus a year ago based on lower traffic volumes across the US.
Turning to the outlook for the balance of the year.
We expect to see high single-digit organic revenue growth for the segment with consistent high single-digit growth through out -- through the balance of the year for our Network Software businesses.
As it relates specifically to the second quarter, we anticipate our segment organic growth to be a touch below HSD, given TransCore's should be stronger in the second half versus next quarter based on timing of project for execution and tag shipments.
All in all, a solid outlook for the balance of the year.
Please turn to the next slide.
As we turn to Page 11, revenues in our MAS segment were $381 million, up 2% on an organic basis.
EBITDA margins were 34.8% in the quarter.
As usual, in this segment, we will profile the three macro parts; medical products, Neptune and our industrial businesses.
To start, our medical product businesses performed very well this quarter.
Verathon continued its strength based on consistent factors; GlideScope unit placements and recurring consumables pull through and continued momentum and share gains with our single-use Bronchoscope product offering.
What is also encouraging to see is the growth in our Bladder Scan product line.
We believe this was based on a broader base trend of hospitals resuming some normal level of clinical capital spending.
We saw similar strength in our other medical product businesses as well.
For instance, Northern Digital had their best Q1 bookings quarter in history.
This trend bodes well for the balance of the year.
Neptune, as expected, declined in the quarter for the same reasons discussed in each of the last three quarters, having limited access to indoor meters in the Northeast United States and Canada.
However, we did see some easing of these restrictions in March, and Neptune's customers are beginning to increase their maintenance schedules throughout Q2 and into the second half of the year.
Finally, our industrial businesses benefited from improvements in their end market conditions.
For the balance of the year, we expect high single-digit growth for the segment.
This is based on broadly improving conditions both in medical and industrial end markets and increases to access in indoor meter replacements at Neptune.
This strength will be somewhat offset by the extraordinary prior-year COVID demand at Verathon.
We're encouraged by our expected high single-digit growth for the balance of the year.
Now, let's turn to our final segment, Process Tech.
As we turn to Page 12, revenues in our Process Technology segment were $131 million, down 10% on an organic basis, EBITDA margins hung in at 31% in the quarter.
The short story here is we're seeing improving end market conditions across virtually every one of our businesses in this segment after nearly two years of declines.
For instance, at CCC, we're seeing the resumption of previously deferred projects and demand for field services to come back online.
Also, greenfield bidding activity is back in full swing, especially on an international basis.
Cornell continues to perform well for us.
This is particularly partially based on market conditions, but also based on Cornell's product innovation as they're seeing very nice demand pick-up for their IoT-connected pumping solutions.
As we look to the outlook for the balance of the year, we see double-digit organic growth based on improving end market conditions and continued even comps.
Now, please turn to Page 14, where I'll highlight our increased guidance for 2021.
Based on strong Q1 performance and our increased confidence for the balance of the year, we're raising our full-year adjusted DEPS to be in the range of $14.75 and $15 per share and organic growth to be in the 6% to 7% range.
The 6% to 7% organic growth is against a 1% organic decline in 2020.
This demonstrates that we have meaningfully improved on an organic basis since 2019.
Our tax rate should continue to be in the 21% to 22% range.
For the second quarter, we're establishing adjusted DEPS guidance to be between $3.61 and $3.65 and expect second quarter organic revenue growth to be in line with the full-year organic growth rate.
Turning to Page 15 and our closing summary.
This was an encouraging start, and we're raising our outlook for the year.
We performed well across virtually every financial metric with double-digit increases in revenue, EBITDA, DEPS and cash flow.
EBITDA margins expanded nicely and free cash flow grew 54% to $543 million, which enabled us to continue our rapid deleveraging in the quarter.
Importantly, we are well positioned for continued double-digit compounding.
We are seeing improving conditions across virtually all of our end markets.
When combined with our leading market positions, we expect high single-digit organic growth for the remainder of the year.
As owners or prospective owners of Roper Tech, you should be encouraged by our increasing levels of recurring revenue and the stability of our recurring revenue growth.
Also, our 2020 cohort of acquisitions are performing very well and Vertafore has proven to be an excellent addition to our growing portfolio of software businesses.
We continue to focus on deleveraging our balance sheet and remain committed and focused on our long-term capital deployment strategy.
To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities.
As our balance sheet becomes more offensive toward the end of this year, our active pipeline of M&A targets will enable us to resume capital deployment in our usual process-oriented and disciplined manner.
Amy has been a tremendous Board Member since 2015 and will be a fantastic Board Chair.
I certainly look forward to working with Amy and the full Board for many years to come.
Bill has been a Roper Director since 1997 and has reached our mandatory Board retirement age.
He served as our Lead Independent Chair Director and became Board Chair during the CEO transition from Brian Jellison to myself.
Bill has been a wonderful Board Chair, enabling a smooth CEO transition and the continued evolution of our strategy and business model.
On a personal note, Bill has been a tremendous mentor to me, which I hope will continue on an informal basis for years to come. | sees fy adjusted earnings per share $14.75 to $15.00.
sees q2 adjusted earnings per share $3.61 to $3.65.
q1 adjusted earnings per share $3.60.
q1 revenue $1.53 billion. |
We begin with our Safe Harbor statement.
You should listen to today's call in the context of that information.
Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis.
During and subsequent to the third quarter Roper signed definitive agreements to divest it's TransCore, Zetec, and CIVCO radiotherapy businesses, results for these businesses are reported as discontinued operations for all periods presented.
For the third quarter the difference between our GAAP results and adjusted results consists of the following items: Amortization of acquisition-related intangible assets; purchase accounting adjustments to commission expense; and lastly, income tax restructuring associated with our pending divestitures.
We're looking forward to sharing with you the details of our solid quarter performance, as well as summarizing the acceleration of our portfolio transformation.
I'll then walk everyone through our segment by segment performance and our outlook for the balance of the year.
As we turn to Page five, this is another quarter of solid operational and excellent financial performance.
On a continuing ops basis we grew revenue, EBITDA and DEPS north of 20% in the quarter.
It is important to highlight and characterize the underlying strength of these results.
Revenue on an organic basis grew 12% in the quarter, end market and customer demand was very strong across our portfolio within both our software and product businesses.
Importantly, our software segments were strong operationally with 10% growth in one segment and 17% in the other.
Our software businesses recurring revenue grew low double-digits in the quarter, highlighting the underlying strength, stability and increasing quality of our revenue base.
To remind everyone about 80% our software revenues are recurring in nature.
It's also worth noting that our 2020 acquisition cohort, led by Vertafore, continues to perform very well.
As it relates to our product businesses like most other companies we are experiencing supply chain and logistical challenges, but the businesses nevertheless, performed very well during the third quarter.
As mentioned customer demand was very strong throughout the quarter and backlogs are up over 50% versus last year.
Given the strong operational performance we continue our disciplined deleveraging of our balance sheet with net debt at 3.5 times trailing EBITDA.
Also, we are improving the outlook for the year, which we will detail later in the call.
The addition of Irene and Tom to our Board is part of our long-term Board refreshment process both are tremendous additions to our Board.
Finally, we've been active over the last few months working to accelerate the transformation of our portfolio through the announced divestiture of three businesses.
Let's turn to the next slide, Page six, to walk through those details and highlights.
We agreed to divest TransCore to ST Engineering for $2.68 billion.
In our view, this is the right time and the right buyer for TransCore given their forward strategy and growth outlook.
Taken together we are divesting these three businesses for $3.15 billion or about 20 times this year's EBITDA.
Following the completion of these deals Roper will be improved.
We will have a higher quality portfolio characterized by having higher proportions of recurring revenue, a higher organic growth profile and be significantly more asset light.
Finally, we are and will be very active in deploying these after-tax proceeds.
Together with our internally generated cash flow we will have about $5 billion of available M&A firepower to deploy between now and the end of 2022.
None of which is included in our current financial outlook.
Our enterprise will be even further enhanced once we complete this activity.
As part of these transactions, we are retaining our DAT and Loadlink network software businesses, which are purchased together with TransCore in 2004 and we are retaining our CIVCO Medical Solutions business.
Given we do not usually get clean book-ins to transaction activity, this provides a unique opportunity to talk about the business buildings that occurs within Roper.
Specifically just after the acquisition of TransCore we established DAT and Loadlink as stand-alone businesses with independent strategies and management teams, who operate within Roper's governance and incentive system.
Over the course of the last 15 years, these businesses have consolidated freight networks, continuously innovate their product solutions, built go-to-market capability and grown revenues high single-digits on a compounded organic basis.
Similarly, the retained CIVCO Medical Solutions business has grown high single-digits on an organic basis over the last 15 years as well.
During this period of time CIVCO Medical Solutions has continually innovated their product solutions, including the recent gel free ultrasound products and fundamentally restructured their go-to-market strategy.
Net [Phonetic] Roper we buy great businesses and provide an environment and incentive system where they get even better over a long arc of time.
Turning to Page seven, on this page we will review some Q3 financial metrics on a basis that includes the discontinued operations in order to compare our Q3 results to our previous guidance on an apples-to-apples basis.
Including, the business is now classified as discontinued operations, we generated $1.621 billion of revenue and $602 million of EBITDA.
Total DEPS was $3.91, which exceeded our Q3 DEPS guidance of $3.80 to $3.84.
Free cash flow for the quarter was $431 million, down 2% versus prior year.
Year-to-date free cash flow is now up 29% through three quarters.
Now turning to Page right.
Here we will review some of the key income statement metrics on a continuing operations basis, revenue increased 22% to $1.463 billion.
Q2 organic revenue increased 12% with strong growth across all four reporting segments, led by 17% organic growth in our Network Software segment.
EBITDA increased 21% to $558 million.
Net earnings grew 24% to $384 million and DEPS also grew 24% to $3.60.
Turning to Page nine, this slide will update you on the latest instalment in our successful deleveraging story.
Year-to-date, we have reduced our net debt by nearly $1.3 billion and our total debt reduction is now $1.8 billion, since completing the last of the 2020 acquisitions approximately one year ago.
We continue to benefit from our excellent cash conversion as the nearly $2.3 billion of total EBITDA we generated over the last four quarters has converted to $1.94 billion of free cash flow, representing EBITDA to free cash flow conversion of 85%.
At the end of September, our net debt to EBITDA has decreased to 3.5 times.
We are on track to be near 3 times by the end of 2021 and therefore well positioned to return to capital deployment even before accounting for the divestitures.
The proceeds from the divestitures further amplify our capacity with $5 billion plus available for deployment through 2022 as Neil highlighted earlier.
Moving now to Page 10, a quick look here and how the divestitures meaningfully improve our working capital position moving forward.
This page repeat the working capital numbers we showed last October and as the Q3 '21 column, which shows the enterprise, including the removal of the three businesses being divested.
We are now at negative 12% net working capital to revenue, compared to negative 6% in the same quarter last year and negative 3% back in Q3 2019.
Divesting TransCore reduces our net working capital by approximately $200 million with the majority coming out of our unbilled receivables balance.
This structurally lower net working capital positions us very well for continued high cash conversion moving forward.
Let's turn to Page 12, and walk through our Application Software segment.
Revenues in this segment were $603 million, up 10% on an organic basis.
EBITDA margins were 44.4% in the quarter.
Across the segment, we saw organic recurring revenue, which is a touch north of 75% of the revenue for this segment increased approximately 10%.
This recurring revenue strength is based on strong customer retention, continued migration to our SaaS delivery models, cross-selling activity and new customer adds.
Across this group of companies, the financial strength was broad.
To highlight a few businesses Deltek our enterprise software business that serves the US federal contractor, architect, engineering, and other services end markets had another good quarter.
During the quarter demand was particularly strong and enterprise GovCon and construction end markets.
Importantly during the quarter Deltek also had success at the top in the market with their cloud or SaaS solutions.
Vertafore our agency management cloud software business focused on P&C insurance agencies also had a nice quarter with very strong new bookings and nice expansion activity in some of their largest customers.
Aderant our legal software business continued its momentum and market share gains.
As we talked about last quarter Aderant is gaining momentum for their SaaS solutions this quarter setting a record for SaaS bookings activity.
Consistent with the theme of this segment PowerPlan was strong as well, both in terms of new bookings and ads to the recurring revenue base, it's nice to see PowerPlan's refocused strategy start to pay dividends.
As it relates to our healthcare IT businesses, Strata, Data Innovations and CliniSys were rock solid in the quarter.
For Strata their recurring subscription-based software solutions continue to perform well and grew nicely.
Strata's integration of EPSi is on track and nearly complete.
The customer base continues to demonstrate excitement for this combination.
Finally CliniSys continues to gain market share in the UK lab market and has been established as one of the four strategic IT partners for the NHS.
As we turn to the outlook for the fourth quarter, we expect organic recurring -- excuse me, we expect organic revenue growth to be similar to that of the third quarter as recurring revenue growth rates are expected to remain strong.
A solid quarter here for sure.
And with that let's turn to the next slide.
Turning to Page 13, the financial performance for this segment, as well the next to MAS and PT are shown on a continuing ops basis.
Revenues in our network segment were $343 million, up 17% on organic basis, and EBITDA margins remained very strong at 51.6% in the quarter.
The software businesses and this segment are now greater than 90% of the segment's revenue.
Our NSS software growth was broad-based and driven by organic recurring revenue growth of approximately 17%.
At the business level, our Freight Match businesses, both in the US and Canada continue to be solid growers.
As a reminder, our Freight Match networks are critical and necessary helmets to help organize and transact the trucking, shipping, spot markets.
Strength in our businesses have been on both sides of the network brokers and carriers with continued strength in the quarter on the carrier side of the network.
In addition, these businesses had improving revenue per customer ARPU as a value of the network continues to increase with higher levels of network activity.
Foundry our Media and Entertainment Software business, which enables the combination of live-action and computer generated graphics to be combined into a single frame demonstrated continued recovery and growth in the quarter.
Worth pointing out as Foundry's continued commitment the product innovation and the recent release of their AI-enabled Nuke features that allow for more automated workflow steps within the video compositing process.
Our businesses that focus in and around the US long-term care markets MHA, SHP and SoftWriters did particularly well in the quarter.
iTradeNetwork our perishable food supply chain network business had a nice quarter as bookings growth was very strong and demonstrate this followed recovery in their end markets.
Finally, we saw growth across the two product businesses within this segment, RF IDeas and Inovonics with particular strength and our Health Care end markets.
As we look to the fourth quarter outlook, we expect to see low double-digit growth in this segment, again on a continuing ops basis.
Please turn to the next slide.
As we turn to Page 14 revenue in our MAS segment were $392 million, up 9% on organic basis.
Organic growth in this segment excluding Verathon was again north of 20%.
Notably, this is the last quarter for the very difficult Verathon COVID comp and we expect Verathon's return to growth in Q4.
EBITDA margins for this segment were 32.4% in the quarter.
The EBITDA margins in this segment were consistent with our expectations, but lower than prior year, due to Verathon's extraordinary prior-year quarter and the cost impacts of certain businesses is navigating their supply chain challenges.
Again, these results are on a continuing ops basis.
Before getting into business specific details across this segment demand can be characterized as being very strong.
The demand was across all businesses and across both capital and consumable products.
Product backlogs are up over 50%, as compared to a year ago.
Our businesses, each of which were impacted by supply chain challenges navigated through the quarter.
As it relates to individual business performance Verathon coming off unprecedented demand for their intubation family of products a year ago is roughly 40% larger today versus 2019.
The momentum within this business continues given the larger installed base of intubation capital equipment, which enables recurring consumable pull through volumes.
In addition Verathon is experiencing impressive growth when their Bronchoscope product family and sustained growth across their bladder scan ultrasound franchise.
Our other medical product businesses accelerated nicely in the quarter, with particular strength that NDI and CIVCO medical solutions.
Strong demand at Neptune continued in the quarter.
Neptune's end markets continue to open up and improved, but have not fully recovered, especially in the Northeast US and Canada.
Demand across our industrial business was robust as well and performance was strong, but somewhat impacted by supply chain challenges.
For the fourth quarter we expect low double-digit organic growth for this segment.
This is based on continued encouraging market conditions both in medical and industrial markets and easing prior year comps for Verathon.
Now let's turn to our final segment Process Tech.
As we turn to Page 15, revenues in our Process Tech segment were $124 million, up 16% on organic basis.
EBITDA margins were 31.6% in the quarter.
These results are also reported on a continuing ops basis.
The short story here is we're seeing improving end market conditions across virtually every one of our businesses in this segment and strong demand both orders and backlog were up approximately 50% in the quarter versus a year ago.
Recovery in our upstream oil and gas businesses accelerated in the quarter.
Cornell continues to perform well for us.
This is particularly pass excuse me this is partially based on market conditions, but also based on Cornell's product innovation as they're seeing very nice demand pickup for their IoT connected pumping solutions.
Similar to that of our MAS industrial businesses, the businesses in this segment are being impacted by supply chain challenges, but continue to navigate through these issues.
As we turn to the outlook for the fourth quarter, we expect high-teens organic growth based on improving market conditions.
Now please turn to Page 17, where I'll highlight our increased outlook for 2021.
Based on strong year-to-date performance and expected continued momentum we're establishing full-year 2021 guidance on a continuing ops basis, a $14.08 to $14.12.
As you read on this table you will note that the full-year DEPS impact for the businesses being divested is $1.18.
If you combine this with our newly established continuing ops guidance you will note, we are raising our full-year outlook on an apples-to-apples basis by $0.26 in the low-end and $0.10 on the high end.
As it relates to the fourth quarter, we're establishing again on a continuing ops basis guidance in the range of $3.62 and $3.66.
As we turn to Page 18 and our closing summary, our third quarter was a solid quarter from both an operational and financial perspective.
Simultaneously, we undertook significant work to further the transformation of our business portfolio.
Revenue, EBITDA and DEPS grew 20% plus, organic revenue was up 12%.
Across our enterprise end market and customer demand was strong in terms of software, product capital items and consumables.
Throughout the quarter, our product businesses navigated through the market based supply chain challenges.
Given all of this, we're able to increase on an apples-to-apples basis, our outlook for the full-year.
We also continue to deleverage our balance sheet by $1.8 billion since the 2020 acquisitions with net leverage now coming in at 3.5 times trailing EBITDA.
As it relates to the strategic governance of our enterprise we're excited to be announcing the addition of Irene and Tom as new members of our Board of Directors.
As part of our long-term Board refreshment strategy these two new Directors will complement our existing Directors and help enable Roper to continue our track record of long-term cash flow compounding.
Over the last decade, we have worked to enhance the quality of our portfolio.
To this end, recently we took actions to meaningfully improve the quality of our portfolio by agreeing to divest TransCore, Zetec and CIVCO Radiotherapy.
Once complete Roper will be a better version of Roper.
We'll have higher proportion of recurring revenue, higher organic growth prospects and be significantly more asset light.
In addition, we expect to have roughly $5 billion of capital available to deploy between now and the end of 2022.
And as it relates to our M&A pipeline it is and always has been characterized as having many high-quality opportunities.
So we're clear, we are 100% back on offense when it comes to our capital deployment portion of our strategy and have fully resumed our usual process oriented and disciplined M&A activities. | sees fy adjusted earnings per share $14.08 to $14.12 from continuing operations.
sees q4 adjusted earnings per share $3.62 to $3.66 from continuing operations.
compname says for q4 of 2021, company expects adjusted earnings per share from continuing operations of $3.62 - $3.66.
qtrly adjusted earnings per share $3.91. |
We hope everyone is doing well.
We begin with our Safe Harbor statement.
You should listen to today's call in the context of that information.
Today, we will discuss our results for the quarter and year primarily on an adjusted non-GAAP basis.
For the fourth quarter, the difference between our GAAP results and adjusted results consist of the following item: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquired deferred revenue and related commission expense; and lastly, transaction-related expenses for completed acquisition.
For today's agenda, we'll walk through our 2020 financials and operational highlights.
As we look back on 2020, it was quite a year.
Our businesses performed at a very high level during this period.
Revenues grew 3%, with organic revenue declining a single percent.
EBITDA also grew 3%, and free cash flow grew 16%.
This cash flow performance, $1.7 billion is just astounding.
This is a testament to many things.
Notably, our asset light business model, the intimacy we have with our customers and the high level of skill and execution of our field teams.
This cash flow is just simply a great result.
Perhaps more important, 2020 was a year of forward progress for our company.
We exit 2020 as a better company, a company with higher quality revenue streams, a company with improved future innovation prospects and a company with whose portfolio that was enhanced with $6 billion of capital deployment.
To this end, we saw our software recurring revenues increased mid single-digits in 2020, and were benefited by high levels of retention and an acceleration to the cloud.
We continue to be benefited by having close intimate relationships with our customers.
Most often, our software is mission critical to our customers' operations.
In addition, we continue to strategically invest throughout our portfolio during the year.
Based on our historical experience, we find times of market disruption, the best time to double down on innovation and market investments, which in turn will drive market share gains in the years to come.
Finally, we are able to deploy $6 billion to further enhance Roper's Group of companies' headlines by our Vertafore acquisition.
So when we look back on 2020, we highlight two key themes: First, we grew, cash flow increased 16% in the middle of a pandemic.
And second, the quality of our enterprise continue to improve during the year.
Net-net, we got bigger and better during 2020.
Let's turn to the next slide.
Over the past five years, we highlight that our revenue grew at a 9% compounded rate, EBITDA at 10% and cash flow at 13%.
We continue to grow and compound through macro economic cycles.
Also, during the time period, the quality of our enterprise meaningfully improved.
We are more software-focused with nearly two-thirds of our EBITDA coming from software, with higher levels of recurring revenue.
Conversely, we are much less tied to cyclical end markets today, a little over 15% of our portfolio.
Given our long-term strategy and these factors, we are a low risk enterprise.
We compound cash flow through cycle and do so with multiple growth drivers across both organic and inorganic fronts.
As we look to '21, we will continue our long-term stream of revenue and EBITDA and cash flow compounding.
So with that, let's turn to the next page and discuss the macro backdrop for '21.
As we look to 2021, we are set up for a strong year.
We expect revenue and EBITDA will grow well into the double digits likely in the mid-teens range with organic revenue growth in the mid-single digit plus range.
This is on top of growth in 2020, the compounding continues.
Breaking it down, our software businesses, both in our Application Software and Network segments are well positioned heading into '21.
These businesses enter the year with momentum from strong retention and recurring revenue gains.
They'll be further aided by growth in perpetual license as pipeline and customer activity are anticipated to recover to some extent.
Our non-Verathon medical product businesses are expected to return to a more normalized pattern of customer activity as healthcare facilities loosen restrictions.
But since 2020 was well below trend, we expect above trend growth here.
Of note, Verathon has a challenging comp.
However, the reoccurring revenue base will remain strong, given the large volume of capital placements in 2020 and continued growth of their new single-use Bronchoscope business.
We expect Neptune to recover and growing nicely as our customers especially in the Northeast US and Canada gain access to residential locations.
We expect our industrial and process tech businesses to continue their quarterly improvements and return to growth after two years of macro headwinds.
Finally, 2021 will be meaningfully aided by the contribution from our 2020 cohort of acquisitions.
To this end, we continue to work with a very full and high-quality M&A pipeline.
We are committed to deleveraging, but we also remain active in building and maturing our pipe.
So as I think back over the nearly 10 years I've been with Roper, I cannot think of a better set of tailwinds heading into a year.
Clearly, lots to do and lots of execution in front of us, but we have a strong momentum heading into '21.
Turning to page eight, while looking at our Q4 income statement performance.
Total revenue increased 8%, as we eclipsed $1.5 billion of quarterly revenue for the first half.
Organic revenue for the enterprise declined 2% versus prior year.
EBITDA grew 7% in the quarter to a record $552 million.
EBITDA margin was down 40 basis points versus prior year at 36.6%.
Tax rate came in at 19.9%, a little lower than last year's 21.6%.
So all-in, this resulted in adjusted diluted earnings per share of $3.56, which was above our guidance range.
Turning to page nine, reviewing the Q4 results by segment.
Neil will discuss the full-year 2020 segment performance in more detail later, so just touching on some of the Q4 highlights here by segment.
Application Software grew 35% with the addition of Vertafore.
Organic for the segment was minus 2% with mid single-digit recurring revenue growth continuing.
Sharp declines in our CBORD & Horizon businesses, serving K-12 and higher education impacted the segment as many schools unfortunately remain closed.
For Network Software & Systems, plus 2% organic growth with our software businesses, putting up a very solid plus 4% organic.
The TransCore was flat versus prior year.
For Measurement & Analytical Solutions, plus 1% organic growth, as we start to see some sequential recovery at Neptune in our Industrial businesses.
Segment margins were impacted a bit by the acceleration of some product and channel investments at Verathon as we discussed coming into the quarter, and it's really been exceptional year for Verathon overall.
Lastly, for Process Technologies, a 21% organic decline, with margins holding up well at 31.3%.
And once again here, we started to see some early signs of improvement after a couple of years of declines.
So turning to page 10, looking at net working capital.
Honestly, the slide mostly speaks for itself, ending the quarter with negative 8% net working capital as a percentage of Q4 annualized revenue.
While there are certainly some seasonal trends, primarily around timing of the software renewals.
They do typically benefit our Q4 performance.
You can see here a meaningful improvement versus 2018, improving from negative 3.4% to negative 8% in 2020.
Our asset light negative net working capital model drives our sustainable high cash conversion and fuels our cash flow compounding.
Our people focus on what we all believe matters and our culture is built around growing the right way.
Top line growth converts to cash flow and we are always mindful of the impact to our balance sheet.
So turning to cash flow.
Cash flow performance, as Neil mentioned, it was really pretty spectacular no matter how you look at it.
Q4 free cash flow of $558 million, was 23% higher than last year and represented 37% of revenue.
This excellent result was driven by the great working capital performance I just discussed, which is really across the enterprise along with meaningful cash contributions from Vertafore and the other recent acquisition.
So for the full-year 2020, we generated $1.72 billion of operating cash flow and $1.67 billion of free cash flow.
So to repeat, that's $1.7 billion of free cash flow in 2020.
Truly a great year.
Full-year free cash flow growth was 16% and our free cash flow conversion from EBITDA was a robust 84%.
So really tremendous cash flow performance, and it was broad based and very durable.
So turning to page 12, updating on our balance sheet.
As Neil mentioned earlier, we ended the year with total capital deployment of approximately $6 billion, which included the EPSi acquisition that closed during the fourth quarter on October 15th.
We were able to take advantage of attractive market conditions to complete and opportunistically fund this acquisition with a combination of internally generated cash flow proceeds from March 2019, Gatan divestiture and investment grade leverage.
Overall, cost of financing was approximately 1%.
Looking ahead, we plan to rapidly reduce leverage throughout 2021, taking advantage of our pre-payable revolver, which has a current balance of approximately $1.6 billion.
Our solid investment grade balance sheet supports long-term cash flow compounding, which we are well positioned to continue.
Let's turn to our recap for 2020.
To help orient you to this page, we're comparing our full-year outlook from last April to that of what actually happened.
It's worth reminding everyone that we felt our businesses and our business model had the level of recurring revenue, customer intimacy and the business leadership required to guide in the face of the COVID uncertainty, both in terms of supply and demand.
In aggregate, we thought our full-year organic revenues would be plus or minus flat, and we came in at down minus 1%.
The TransCore New York project is the primary reconciling item between being down a touch and being flat or slightly up.
And more on this in a minute.
We guided DEPS to be between $11.60 and $12.60 and came in at $12.74.
Looking back on this, we are very proud of our team's ability to look forward and operate through the uncertainty of last year.
Also, there is no better example of the durability of our model than this past year.
With that, let's walk through the macro drivers across each of our four segments.
Relative to Application Software, this segment played out as anticipated and was up 1% on an organic basis for the year.
Specifically, we saw recurring revenue up mid single-digits, aided by very strong retention rates as well as an acceleration to the cloud.
As a reminder, recurring revenue in this segment is about 70% of our revenue stream.
Perpetual revenues, about 10% of this segment's revenue were under pressure as expected.
We saw this revenue stream down mid-teens as new logo opportunities and wins were pushed and delayed.
That said, cross-selling activity remain active for much of 2020.
Relative to services revenue, we anticipated some pressure tied to shifting to remote installs and having fewer new implementations, which are tied to new perpetual transactions.
For 2020, we saw mid single-digit declines here principally tied to fewer new deals.
Our teams did a wonderful job shifting to remote installs, a trend we anticipate will continue in large part on the back side of the pandemic.
As it relates to our Network segment, we expect the organic revenue for the year to be up mid singles to double-digits when, in fact, we grew 3% for the full year.
Our Network Software businesses performed as anticipated, with recurring revenues growing low single-digits, again, benefited by high retention rates and high levels of recurring revenue.
This segment underperformed our expectations primarily due to TransCore's New York congestion infrastructure project timing.
In April, we expected approximately $75 million more in revenue from this project than actually occurred in 2020.
More on this when we turn to the segment overview.
But we expect this $75 million of pushed revenue to be recognized in '21.
It's also worth noting that the number of toll tag shipped last year were at historic lows, given the lower traffic volumes, but this was anticipated.
For our MAS segment, we've talked all year about this being the tale of four situations, Verathon, other medical products, Neptune and Industrial.
For the year, again back in April, we felt this group would be flat to up mid single-digits on an organic basis.
We posted 1% growth.
We feel very good about the execution across this group of companies.
The primary reconciliation factor is a slower recovery ramp tied to our non-Verathon medical product businesses and Neptune.
Specifically, we anticipated unprecedented demand for Verathon innovation product family.
For the year, Verathon grew substantially as COVID accelerated the further adoption of video intubation as the preferred technology.
Our other medical product businesses, which grow mid single-digits like clockwork were down mid single-digits for the year tied directly to lower elective procedure volumes and limited hospital capital spending.
Interestingly for Neptune, we highlighted municipal budget uncertainty in April.
This proved generally to be a non-factor, as municipalities budgets were approved and available.
However, the impact of the lockdowns, especially in the Northeast US and Canada had a prolonged impact on our customers' ability to do routine meter replacements.
As a result, Neptune was down low double-digits for the year, slightly worse than our initial expectations.
Finally, for this segment, we expected sharp industrial declines and that is what happened with these businesses being down low-double digits for the year.
That said, we are seeing sequential quarterly improvements across both Neptune and our Industrial businesses.
Finally, and as it relates to our Process Tech segment, we expected to be down 20% to 25%, and we were logging in it down 21%.
This played out as we anticipated with much lower energy-related spending, project timing pushes and the inability to get field service resources into customer locations.
So this is the play-by-play rewind for 2020.
Now let's turn to the segment pages for a bit more detail.
For Application Software, where revenues here were $1.81 billion, up 1% organically, with EBITDA of $772 million.
The broad macro activity for this segment has remained quite consistent for much of 2020.
Specifically, we continue to see accelerating demand for our cloud solutions.
This bodes well for our long-term recurring revenue growth and customer intimacy.
At a business unit level, Deltek's GovCon business continues to be super solid and grow very nicely.
But we did see some headwinds relative to their offerings that target the consulting, marketing services and AEC space.
That said, recent customer activity and top of funnel activity suggest some market following is occurring.
Aderant and PowerPlan delivered flat EBITDA in a year with nice recurring revenue gains.
We experienced very nice growth across our lab software group, again doing our part to help fight the COVID war.
Strata delivered double-digit organic growth and completed a strategic acquisition in EPSi.
Notably, the combined business will analyze roughly half of the US hospital spend.
Finally, our two businesses that serve the education space, CBORD and Horizon declined double digits in the year, simply due to having a customer base that was shut down.
A decent amount of revenues in these businesses are tied to student volumes.
Importantly, we acquired Vertafore last year, they're are off to a great start with strong earnings and very strong cash flow in the fourth quarter.
Looking to Q1, we see flat to low single-digit organic growth based on continued mid single-digit recurring revenue growth offset slightly by lower perpetual and services revenues given last year's non-COVID comp.
Now let's turn to our Network segment.
Here, revenues were $1.74 billion, up 3% on an organic basis, with EBITDA of $732 million.
Our Network Software businesses performed well during last year, growing low single-digits.
Specifically, DAT was strong growing double-digits.
DAT's network scale and innovation focus continues to enable very solid organic gains.
ConstructConnect grew based on network utilization tied to a tighter construction labor market.
iTrade, MHA and Foundry had some headwinds tied to their end markets being disrupted due to COVID.
That said, each of these businesses had high retention rates and the networks remained very strong.
iPipeline also performed well during their first year being with Roper, and completed two bolt-on acquisitions.
Our non-software businesses struggled a bit during the year, specifically, RF IDeas -- our RF IDeas, our multi-protocol credential reader business did well in our healthcare applications, but was hampered by meaningful declines in their Secure Print market.
For the full year, TransCore pushed about $100 million of revenue out of 2020 and to '21 associated with their New York project.
In addition, EBITDA margins were pressured due to lower tag shipments and a few non-New York project push outs.
As we look to the first quarter of 2021, we see organic revenue, as you can see in the lower right hand box to be down 3% to 5% for the quarter.
An important distinction to highlight, our software businesses will continue to grow in the low single-digit range.
But our non-software businesses driven by TransCore will decline in the high teens range in the first quarter due to much lower anticipated tag shipments and timing of revenue associated with the New York projects.
As a reminder, the first quarter of this year is coming off a mid-teens growth comp from a year ago.
Now let's turn to our MAS segment, revenues for the year were $1.47 billion, up 1% on an organic basis, with EBITDA $508 million.
Verathon was awesome in 2020.
The business grew substantially based on unprecedented demand for their video intubation product line.
Given Verathon's ability to fulfill this demand, we expect our meaningfully expanded installed base of GlideScope is to generate increased levels of reoccurring consumables pull through in the years to come.
In addition, the first year of their single-use Bronchoscope release was successful.
We believe we gained a substantial foothold in the market during the inaugural year of this product category.
Our other med product businesses declined, but they started to see more normalized patient volumes toward the end of the year.
Further, customer interactions are starting to resemble more normal levels of engagement.
Neptune declined low double-digits tied exclusively to our customers in the Northeastern US and Canada, not having access to indoor meters.
Other regions were flat during 2020.
Neptune's market share remained strong throughout the year.
Finally, our industrial businesses were down, but have shown sequential improvements throughout the year.
For Q1, we expect low single-digit organic growth for this segment with similar patterns to that of the fourth quarter.
Now let's turn to our final segment, Process Tech.
Revenues for the year were $519 million, down 21% on an organic basis, with EBITDA of $156 million or 30% of revenue.
Compared versus two years ago, these businesses are down about $90 million in EBITDA and yet maintained 30% EBITDA margins.
As a side note, Roper continue to compound despite these cyclical headwinds.
That said, this segment is pretty straightforward and has been the same story all year.
COVID has negatively impacted our oil and gas and short cycle businesses.
Certainly, low oil prices did not help either.
That said, we have seen some green shoots across this group as capital spending started to improve as we exited 2020.
As we look to the first quarter, we expect declines to moderate in the first quarter to be in the 10% range.
Importantly, we are easing comps as we enter the second quarter.
Also, over the last couple of years, these businesses continue to make product and channel investments to be best positioned to fully capture the cyclical upswing.
The next few years here should be pretty good.
Now let's turn to our guidance and the associated framework.
While this slide is somewhat busy, we wanted to line up for you the key macro differences between our 2021 full-year outlook on a segment basis versus our actual 2020 results.
In aggregate, we expect total revenue to increase in the mid-teens range with organic growth being in the mid single-digit plus area.
As we look across the revenue streams for our Application Software segment, we expect mid singles growth.
Specifically, we expect a slightly improved recurring revenue growth rate aided by last year's recurring momentum and an increased mix toward SaaS.
We expect flat services revenues and mid single-digit plus growth in perpetual as we expect a modest market recovery and easing second half comps.
Similarly, we expect mid single-digit organic growth in our Network segment, with our Network Software businesses growing mid-single digit plus.
We expect TransCore to complete the New York project and see recovering tag sales, when combined, TransCore should grow mid singles for the year.
We expect MAS to grow mid single-digits as well.
Our medical product businesses were exceptional last year, up 20%.
Importantly, the quality of our medical products revenue stream will continue to improve as Verathon's reoccurring revenue streams tied to GlideScope and BFlex continue to gain moment.
As we look to 2021, our medical product businesses are expected to grow low single-digits as elective procedures and hospital capital spending return to more normalized levels throughout 2021.
This return being partially offset by our difficult 2020 COVID comp.
Neptune should be at high single-digits plus with easing restrictions and more access to indoor meter replacements.
And finally, our industrial businesses should recover and grow in the high single-digit plus range after two years of declines.
Our PT businesses are expected to be up high single-digit three-year based on the resumption of deferred projects and field maintenance as well as modest improvements in these end markets.
So all in all, we expect organic revenues to increase mid single-digit plus and total revenue grow in the mid-teens range.
Let's turn to our guidance slide.
Based on what we just outlined, when you roll everything together, we are establishing our 2021 full-year adjusted DEPS guidance to be in the range of $14.35 and $14.75.
Our tax rate should be in the 21% to 22% range.
For the first quarter, we are establishing adjusted DEPS guidance to be between $3.26 and $3.32.
Of note, our guided Q1 adjusted DEPS is roughly 22% to 23% of our full year guidance range and is consistent with our long-term historical DEPS seasonality.
What a year, none of us will ever forget 2020.
Our business performed so very well last year.
We grew revenue 3% in aggregate and only declined a single percent on an organic basis.
EBITDA margins were steady at 35.8%, and cash flow grew 16% to $1.7 billion.
This means we had cash flow margins of 30%.
Given this performance, our business models ability to foresee these best performance, we stayed focused on executing our capital deployment strategy, which resulted in $6 billion of deployment on high quality, niche leading vertical software companies.
There is no doubt the quality of our enterprise improved during 2020.
Something we are incredibly proud to be able to say.
Our recurring revenue grew mid-single digits.
We increased innovation investments and increased the quality of our portfolio with our capital deployment spends.
So as we look to 2021, we feel we are incredibly well positioned.
We expect strong organic growth, that'll be further augmented by contributions from our recent acquisitions.
In 2021, we expect about two-thirds of our EBITDA to come from our software businesses, which provides us all the virtues of an increased mix toward recurring revenues.
We will continue to focus on deleveraging our balance sheet, but we remain committed and focused on our long-term capital deployment strategy.
To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities.
So as we look back over 2020, we are proud of our business models, durability and our leaders ability to successfully navigate last year's uncertainties.
We are proud that we continue to be forward-leaning and strategic.
We are proud that we improved our business last year with an increasing mix of growing recurring revenue and continued innovation focus.
In short, we got bigger and better during 2020.
This was certainly the case in 2020.
So with that, let's turn to our first question. | sees q1 adjusted earnings per share $3.26 to $3.32.
sees fy 2021 adjusted earnings per share $14.35 to $14.75.
q4 gaap and adjusted revenue increased 8% to $1.51 billion.
qtrly adjusted deps was $3.56. |
Joining me on the call today is Rusty Gordon, our vice president and chief financial officer; and Mike Laroche, vice president, controller, and chief accounting officer.
I'll begin by sharing broad commentary on our consolidated performance for the quarter.
Mike will provide details on our segment results and Rusty will conclude our formal comments with our outlook for the fiscal 2022 third quarter.
Our comments will be on an adjusted basis and all comparisons are to the second quarter of fiscal 2021 unless otherwise indicated.
For the fiscal 2022 second quarter, consolidated sales increased 10.3% to $1.64 billion driven by continued robust demand for paints, coatings, sealants, and other building materials.
This top-line performance was slightly ahead of the outlook we provided last quarter.
Our second quarter sales growth could have been even stronger if not for continuing supply chain challenges that limited access to certain raw materials and cost us roughly $200 million of lost or deferred sales in the quarter.
Organic sales growth was 8.6%, foreign currency translation provided a tailwind of 0.4% and acquisitions contributed 1.3%.
Adjusted earnings per share was $0.79 decreasing 26% compared to the strong adjusted diluted earnings per share growth of nearly 40% in the prior-year period.
Consolidated adjusted EBIT for the quarter was a $157.3 million decrease of 21%, which was in line with our outlook and as a result of continued material, wage, and freight inflation, as well as supply chain disruptions that were exacerbated by hurricane Ida.
At the beginning of the second quarter and increased our conversion costs because of this supply disruption.
We lost the equivalent of nearly 300 production days across RPM facilities globally during the second quarter, which was similar to our lost production days in the first quarter.
We partially offset these challenges with price increases, which average in the high single digits across RPM, and continued operational improvements from our map to growth program, which provided $19 million in incremental cost savings.
It's also worth noting that we face a difficult comparison to the prior year when consolidated adjusted EBIT increased nearly 30%.
Largely due to higher sales volumes driven by extraordinary demand for our home improvement products in our consumer group during the pandemic.
To recover lost margin from the inflation, we are implementing an additional round of price increases this quarter across our business segments as appropriate.
In many instances, this will be the third round of price increases in a 12-month period.
The next slide provides high-level results by segment much like last quarter.
Our performance reflects the benefits of our balanced business portfolio where softness in one segment is generally offset by strength in others.
During the second quarter of fiscal 2022, three of our four operating segments Construction Products Group, Performance Coatings Group, and Specialty Products Group generated strong double-digit sales growth.
Combined sales in these three segments increased more than 18% with roughly 10% being unit volume growth year over year while our Construction Products and Performance Coatings Group generated strong adjusted EBIT growth especially products and consumer group faced extreme supply chain constraints that put pressure on their earnings.
In particular, the Specialty Products Group restoration equipment business was affected by worldwide semiconductor chip shortages that delayed sales to a growing backlog and unfavorably drove product mix.
The Consumer Group continued to experience inflationary pressures, as well as shortages of key raw materials driven largely by last year's production outage at a key resins supplier that negatively impacted conversion costs.
In addition, the consumer group faced a difficult comparison to the prior-year period when sales increased more than 21% and adjusted EBIT was up 66%.
These growth rates in the prior-year period were largely due to the extraordinary DIY demand during the pandemic.
All indicators suggest that the underlying demand for our consumer products remains strong and that is continuing to grow in our third quarter.
Before we move to the details on our segment results, I'd like to touch on two larger trends and RPM is well-positioned to capitalize on.
First, as the US government has passed a number of bills over the last two years that will direct billions and potentially trillions of dollars toward construction in infrastructure and markets.
Based on our strong position with these markets with well recognized highly regarded brands such as Tremco roofing systems and commercial sealants, [Inaudible] corrosion control coatings, Euclid concrete admixtures, and Nudura Insulated Concrete Forms all of which have been gaining market share in this fiscal year.
We are well-positioned for continuing meaningful growth in North America and globally.
Two years ago, we introduced the tag line building a better world.
In a number of our communications, it certainly represents our products and services, which literally contribute to making structures better through beautification, protection, restoration, and sustainability.
But it's also meant to be aspirational, as we strive to make the world a better place for those we serve including our customers, entrepreneurs, associates, shareholders in the communities in which we operate.
As we all continue to manage through the global pandemic, we remain focused on coming together to make the world a better place for everyone.
There are many examples where RPM is doing so.
Some of the ways our PM is building a better world include, the development of sustainable products such as our AlphaGuar Liquid Applied roofing products, which are gaining market share and allowing roofs to be restored and eliminating the need for tear-off a replacement and significant contributions to waste sites.
In addition, our Tremco roofing business has been named a bio preferred program pioneered by the USDA because of our early adoption of sustainable product solutions within our roofing division and the industry.
Talent development which includes the right education and training initiative that is part of our WTI business and was developed in response to the shortage of qualified roofers includes an element called ELEVATE.
This involves the training of incarcerated individuals in roofing so that they have skills and job opportunities upon their release at which time they are guaranteed a job at our Tremco roofing business.
And sustainability practices across our operations such as initiatives to reduce water usage that are saving millions of gallons a year to Day-Glow, Rust-Oleum, and other businesses.
You can learn more about how RPM is building a better world on our website and in our ESG report at www.
We have a great story to tell and we will be organized to tell it better in the coming quarters and years.
We remain focused on long-term growth and despite COVID-related challenges especially in supply chains continue to invest in initiatives that will drive our business forward in the coming years.
This includes operational improvements, the development of innovative new products, acquisitions, and manufacturing capacity expansions.
Case in point 178,000 square foot plant we purchased in September, which is located on 120 acres in Texas.
This will serve as a manufacturing center of excellence for multiple RPM businesses.
In just two months, it is already improving the resiliency of our supply chain and fill rates.
During the second quarter, we began production of alkyd resins, which are the important raw materials for a number of our products, particularly in our Consumer Group.
In the coming quarters, the plant expansion expanded the production of a number of our high-growth product lines.
Turn to the next slide.
Our Construction Products Group generated all-time record sales of $614.2 million.
Sales grew 22% for the quarter the highest rate among our four segments,19.9% was organic.
Foreign currency translation provided at 0.3% tailwind and acquisitions contributed 1.8%.
CPG is market-leading top-line growth and positive mix were primarily driven by innovation and its high-performance building solutions, market share gains, and strong demand in North America for its construction and maintenance products.
The businesses that generated the highest growth included those providing insulated concrete forms, roofing systems, concrete admixture and repair products, and commercial sealants.
Sales of our Nudura ICF have been particularly robust because they offer an alternative to lumber, which is in short supply and experiencing skyrocketing costs, and because Nudura ICF provides structural, insulation, and labor benefits.
Performance in international markets was mixed with Europe fairly flat while emerging markets showed signs of recovery.
The segments adjusted EBIT increased 16.5% to a record level due to volume growth, operational improvements, and selling price increases, which helped offset material inflation.
Moving to the next slide, positive trends from the first quarter carried over into the second for our Performance Coatings Group.
Sales grew 16.9% to a record level reflecting organic growth of 12.2%, a foreign currency translation tailwind of 0.8% and a 3.9% contribution from acquisitions.
Nearly all of PCGs major business units contribute to the positive growth largely due to the catch-up of maintenance projects previously deferred by industrial customers.
Particularly, as COVID restrictions relaxed on contractor access to construction sites improved.
Sales growth was also facilitated by price increases and improved product mix driven by new decision support tools that helped improve salesforce efficiencies and product mix.
Leading the way, were the segments largest businesses providing polymer flooring systems and corrosion control coatings.
Serving growing end markets including electric vehicles, semiconductors, and pharmaceuticals.
Sales also remain strong and its recently acquired bison-raised flooring business and in emerging markets.
Adjusted EBIT increased 41.3% to a record level as a result of pricing, volume growth, operational improvements, and product mix.
Advancing to the next slide.
Our specialty products group reported a sales increase of 10% to a record level as its businesses capitalized on the strong demand in the outdoor recreation, furniture, and OEM markets they served.
The segments fluorescent pigments business also generated good top-line growth.
Organic sales increased 9%.
Recent acquisitions added 0.4% and foreign currency translation increased sales by 0.6%.
Adjusted EBIT decreased 29.4% due to higher raw material and conversion costs from supply disruptions, as well as unfavorable product mix.
Particularly, in our disaster restoration equipment business, which has been hindered by the semiconductor chip shortage as Frank had mentioned.
In addition, the segment experienced higher expenses resulting from investment, investments and future growth initiatives, plus higher legal expenses.
These factors were partially offset by operational improvements.
On the next slide, you'll see that the severe raw material shortages that the consumer group experienced during the fiscal 2022 first quarter persisted during the second quarter.
The resulting production outages negatively impacted segment sales by approximately $100 million.
Segment sales decreased 3.3% with organic sales down 3.5% and foreign currency translation of 0.2% despite raw material shortages.
The segments fiscal 2022 second quarter sales were still 17.4% above the pre-pandemic levels of the second quarter of fiscal 2020.
Demand for its products remains high and inventories and many of its channels are low.
We expect to recover these sales when raw material and supply conditions stabilize.
As Frank mentioned in his opening comments, the consumer group also faced a challenging comparison to the prior-year period when sales increased 21.4% and adjusted EBIT increased 65.8%.
Due to extraordinarily high demand for its home improvement products during the first phase of the pandemic.
Earnings decline during the fiscal 2022 second quarter from inflation of materials, freight, and labor, as well as the unfavorable impact of supply shortages on productivity.
These factors were partially offset by price increases and operational improvements.
The segment continues to add capacity to meet demand and build resiliency in its supply chain to secure the raw materials it requires in order to meet customer demand.
It is using contract manufacturing at higher costs until it can bring new manufacturing capacity online.
It is also qualifying new sources for raw materials including our new manufacturing plant in Texas.
Looking ahead to our fiscal 2022 third quarter we expect that the strong demand for our paints, coatings, sealants and other building materials will continue.
Supply chain challenges and raw material shortages have persisted in December further compounded by disruptions from the Omicron variant on RPM's operations and those of our supplier base.
These factors are expected to put pressure on our top line and productivity.
In spite of these challenges, we expect to generate double-digit consolidated sales growth in the fiscal 2022 third quarter versus last year's record third quarter sales, which increased 8.1%.
We anticipate high double-digit sales growth along with margin accretion in our Construction Products Group and Performance Coatings Group.
SPG sales are expected to be at the low double digits as compared to last year's third quarter.
The Consumer Group faces a tough comparison to the prior-year period when its sales increased 19.8% and as a result, its sales are anticipated to increase by low single-digit.
Consolidated adjusted EBIT for the third quarter of fiscal 2022 is expected to decrease 5% to 15% versus the same period last year when adjusted EBIT was up to 29.7%.
We anticipate that earnings will be affected by ongoing raw material, freight, and wage inflation, as well as the impact of raw materials shortages, on sales volume, plus the renewed COVID disruption from the surging Omicron variant.
These challenges will disproportionately impact our consumer segment.
We continue to work to offset these challenges by implementing price increases, improving operational efficiencies, and bringing on additional manufacturing capacity.
Finally, I'd like to note that we remain laser-focused on executing our strategies for sustained growth.
We remain vigilant about protecting the health of our employees, their families, and the communities in which we operate with the rise in COVID cases worldwide.
We remain focused on processes and procedures to maintain safe and productive working environments for our associates.
We continue to be agile in our management of the business allowing us to navigate supply chain issues, and meet customer needs.
We expect that margins will recover toward pre-pandemic levels once supply challenges abate.
Lastly, we are investing in employee training and other initiatives that will drive long-term growth including operational improvements, innovations, acquisitions, capacity expansions, and information technology.
These actions will optimally position RPM to deliver long-term growth and increased value for our stakeholders.
This concludes our formal comments. | q2 adjusted earnings per share $0.79.
q2 sales rose 10.3 percent to $1.64 billion.
expects to generate double-digit consolidated sales growth in fiscal 2022 q3 versus last year's q3 sales.
anticipates that q3 earnings will be affected by ongoing raw material, freight and wage inflation.
q3 sales volumes to be impacted by operational disruptions by surging omicron variant of covid-19 & raw material shortages. |
Matt will then review our fourth-quarter results in some detail, then Rusty will conclude with comments on our outlook for the first half of fiscal 2022.
On our April investor call, we referenced rising inflation across our P&L at structurally high single digits with some select spikes of 150% to 200%.
Someone in our call today thought that by now raw material costs and availability would have gotten better to the point of pressure from some customers to give back price.
That was wrong in April and way wrong today.
Raw material costs have increased to levels on average in the high teens.
More importantly, certain critical raw material shortages across our industry are negatively impacting our ability to produce and meet market demand.
In Q4, this raw material availability cost us an estimated $100 million in revenue.
It's likely to cost us more in Q1 and we anticipate having more raw material availability lost production days in Q1 this year than we had from the impact of COVID shutdowns in Q1 last year.
Our full-year consolidated sales increased 11% to $6.1 billion, our EBIT margin increased by 150 basis points, and adjusted EBIT was up 26.5%.
Operating cash flow climbed nearly 40% to a record $766.2 million, and our adjusted EBIT margin climbed to 12.8%, which was also a record.
Our MAP to Growth program has been the principal driver of this strong financial performance.
The successful execution of our MAP to Growth operating improvement plan, especially in light of the incredible disruptions caused by the COVID pandemic and more recently by unprecedented supply chain challenges, is a true testament to the dedication and resilience of the RPM associates worldwide.
At the program's onset, we recognized that RPM had reached the point where a center-led approach in selected areas of the business was required to take it to the next level of growth.
In manufacturing, we formed a center-led team that has created a lasting culture of manufacturing excellence and continuous improvement disciplines across the organization.
This team launched our MS-168 manufacturing system, which is allowing us to produce better products more quickly, more cost-effectively, and more sustainably.
In addition, we reduced our global manufacturing footprint by 28 facilities, consolidating production to more strategically advantageous plants.
Our original target was 31 plants but consolidation efforts were slowed by the COVID pandemic.
We expect to exceed the original target in the coming year.
We also created a center-led procurement team that has consolidated material spending across our operating companies, negotiated improved payment terms with our supplier base, and has helped us reduce working capital.
These initiatives have created millions of dollars in cost savings.
With stronger supplier partnerships, longer-term contracts, we are in a much better position to secure necessary raw materials and control costs through the current raw material supply shortages than we would have been just three years ago.
Additionally, we took significant steps to streamline many of our administrative functions.
Through our financial realignment, we consolidated 46 accounting locations, improved controls, developed more effective and efficient accounting processes, and reduced costs.
Similar initiatives were undertaken in our IT infrastructure as we have migrated 75% of our organization to one to four group-level ERP platforms.
Additionally, we have reduced the number of data centers we manage by shifting systems and hardware to the cloud, and we are creating a number of platforms for centralized data-driven decision making.
Over the course of the three-year MAP to Growth program, we have returned $1.1 billion of capital to shareholders through a combination of cash dividends and share repurchases.
Aside from a significantly improved profit margin profile and stronger cash generation, as reflected in the cumulative total return generated by RPM, which has exceeded our peer group over the three years of the MAP to Growth program, the lasting legacy of our MAP to Growth operating improvement plan is the revolutionary change in how people work together at RPM.
Our operating company leadership is managing today with a broader view of RPM as a whole, allowing us to better leverage resources.
Another permanent change has been the operational disciplines we developed that will continue to generate improvements in profitability, cash flow, and operating efficiency well into the future.
Perhaps more significant has been our ability to maintain our unique entrepreneurial growth-oriented culture, evidenced by the fact that our revenues continue to grow at or above industry averages throughout the MAP to Growth program.
The real heroes behind the MAP to Growth success were our associates worldwide, particularly our frontline workers who kept our manufacturing and distribution centers operating during the COVID pandemic.
We also owe a debt of gratitude to my good friend and one of RPM's great operating leaders, Steve Knoop, who is the architect of the MAP to Growth program and passed away prematurely in 2019.
Additionally, I'd like to recognize Mike Sullivan, vice president of operations and chief restructuring officer; Tim Kinser, vice president of operations procurement; and Gordy Hyde, vice president of operations, manufacturing, who successfully executed the program with an intense focus and strong leadership that were integral to delivering these results and instilling a permanent focus on operating efficiency and continuous improvement into our culture.
While we have reached the 2020 MAP to Growth conclusion, there will be some runoff from the MAP to Growth program in fiscal '22, during which we expect to capture approximately $50 million in incremental savings.
We will also be leveraging the lessons learned from this program to chart a course for 2025.
Over the next six to 12 months, we will be working on a MAP 2.0 program in conjunction with our operating leaders.
We remain fully committed to achieving our long-term goal of a 16% EBIT margin, and we will be sharing more information about our progress for a new program in the coming quarters.
Please keep in mind that my comments will be on an as-adjusted basis.
For the fourth quarter, we generated consolidated net sales of $1.74 billion, an increase of 19.6%, compared to the $1.46 billion reported in the year-ago period.
Sales growth was 13.9% organic, 2.2%, the result of recent acquisitions, and 3.5% due to foreign currency translation tailwinds.
We are very pleased with this strong top-line growth in light of raw material shortages and supply chain disruptions.
Adjusted diluted earnings per share increased 13.3% to $1.28, compared to $1.13 in the fiscal 2020 fourth quarter.
Our adjusted EBIT was $236.2 million, compared to $213.6 million during the year-ago period, which was an increase of 10.6%.
Keep in mind that last year's fourth quarter was impacted by the pandemic's onset, which created the extraordinary situation where our non-operating segment reported a profit due to lower medical expenses, incentive reversals, and other factors.
On the other hand, during this year's fourth quarter, we experienced higher insurance costs due to business interruptions created by hurricanes and the winter storm Uri as well as higher incentives tied to improve performance.
If you exclude the impact of our nonoperating segment from both years, our four operating segments combined generated impressive sales growth of 19.6% and adjusted EBIT growth of 27.5% as they overcame margin pressures and supply availability challenges.
Turning now to our segment performance for the quarter.
Our construction products group generated record results.
Construction, maintenance, and repair activity accelerated in the U.S. during the quarter and even more so in international markets.
Construction products group net sales were a record $629.4 million during the fiscal 2021 fourth quarter, which was an increase of 33.2%, compared to fiscal 2020 fourth-quarter net sales of $472.4 million.
Organic growth was 28.4% and foreign currency translation provided a tailwind of 4.8%.
Leading the way for the segment were our businesses in North America that provided commercial roofing materials and concrete admixtures and repair products as well as our European businesses, all of which generated record sales.
Demand for our Nudura Insulated Concrete Forms remained at elevated levels due to the relatively low installed cost, in addition to the environmental and structural benefits as compared to traditional building methods.
Adjusted EBIT was a record $110.4 million, compared to adjusted EBIT of $77.3 million reported during the year-ago period.
This represents an increase of 42.7%.
The bottom line was boosted by volume leveraging, savings from our MAP to Growth program, and higher selling prices.
Our performance coatings group also benefited from the release of pent-up demand for the construction, maintenance, and repair of structures in the U.S. and abroad, which has leveraged into strong financial results.
The segment's net sales were $283.3 million during the fiscal 2021 fourth quarter, which was an increase of 20.5%, compared to the $235.1 million reported a year ago.
Organic sales increased 12.9% and acquisitions contributed 2.9%.
Foreign currency translation increased sales by 4.7%.
This segment had been particularly challenged through the pandemic because of its greater exposure to international markets and the oil and gas industry as well as a greater reliance on facility access to apply its products.
Points of strength in the performance coatings group were its businesses providing commercial flooring systems and North American bridge and highway products as well as recovery in its international businesses.
Adjusted EBIT was $31 million during the fourth quarter of fiscal 2021, compared to $23.7 million during the year-ago period, representing an increase of 31.2%.
Segment earnings increased due to higher sales volumes, the MAP to Growth program, and pricing, which helped to offset raw material inflation.
Our consumer group reported record net sales of $628.9 million during the fourth quarter of fiscal 2021, an increase of 2%, compared to net sales of $616.2 million reported in the fourth quarter of fiscal 2020.
Organic sales decreased 3.8% since this was the first quarter in which we comped against the surge in demand at the beginning of the pandemic.
Acquisitions contributed 3.8% to sales.
Foreign currency translation increased sales by 2%.
During the first three quarters of this fiscal year, our consumer group sales and earnings have grown rapidly as it served the extraordinary demand for DIY home improvement products by consumers who were homebound during the pandemic.
As more Americans became vaccinated and were no longer confined to their homes, DIY home improvement activity began to slow from its torrid pace during the quarter, though the pace of sales remained higher than the pre-pandemic levels.
In international markets, many of which still have stay-at-home orders in place, they remain quite strong.
Fiscal 2021 fourth-quarter adjusted EBIT was $93.6 million, a decrease of 10.4%, compared to adjusted EBIT of $104.5 million reported during the prior-year period.
Helping to partially offset the cost pressures were selling price increases and savings from our MAP to Growth program, some of which was invested in advertising programs to promote new products.
The specialty products group reported record net sales of $202.8 million during the fourth quarter of fiscal 2021, which increased 49.9%, compared to net sales of $135.2 million in the fiscal 2020 fourth quarter.
Organic sales increased 46.2% while acquisitions contributed 0.7% to sales and foreign currency translation increased sales by 3%.
For the second quarter in a row, our specialty products group generated the highest organic growth among our four operating segments.
Its results have improved sequentially over the past three quarters, with excellent top- and bottom-line results by nearly all of its businesses, including those providing coatings for recreational watercraft, OEM equipment, wood, food, and pharmaceuticals as well as cleaning and restoration equipment and chemicals.
Adjusted EBIT was a record $36.3 million in the fiscal 2021 fourth quarter, an increase of 395%, compared to adjusted EBIT of $7.3 million in the prior-year period.
Its record results were driven by recent management changes, increased business development initiatives, and improving market conditions.
Lastly, I have a few comments on our liquidity.
Our fiscal 2021 cash flow from operations, as Frank mentioned, was a record $766.2 million, compared to last year's record of $549.9 million.
This is primarily due to continued good working capital management and margin improvement initiatives from our MAP to Growth program.
At year end, our total liquidity was $1.46 billion and included $246.7 million of cash and $1.21 billion in committed available credit.
Our net leverage ratio, as calculated under our bank agreements, was 2.17 as of May 31, 2021.
This was an improvement, as compared to 2.89 a year ago.
With a healthy balance sheet, we continue to use some of our record cash flow to reduce debt.
Total debt at the end of fiscal 2021 was $2.38 billion, compared to $2.54 billion a year ago.
And as Frank mentioned, we are also investing more aggressively in growth initiatives, including advertising, operating improvements and acquisitions, plus we are rewarding our shareholders through our cash dividend and our stock repurchase program.
Since the beginning of the fourth quarter, we repurchased approximately 38 million of stock.
As we discussed last quarter, various macroeconomic factors are creating inflationary and supply pressures on some of our product categories.
As a result of the lag impact from our FIFO accounting methodology, we expect that our fiscal 2022 first-half performance will be significantly impacted by inflation throughout our P&L, which is currently averaging in the upper teens.
We are working to offset these increased costs with incremental MAP to Growth savings and commensurate selling price increases, which we will continue to implement as necessary.
More importantly, the limited availability of certain key raw material components is negatively impacting our ability to meet demand.
Our most significant challenge for the first half of fiscal 2022 will be in our consumer group.
Several factors are compressing margins in this segment.
First, selling price negotiations took place last spring, and material costs have rapidly risen further since then.
Secondly, insufficient supply of raw material, several of which are severely constrained due to trucking shortages or force majeure being declared by suppliers, has led to intermittent plant shutdowns and low productivity.
Lastly, the Consumer Group has outsourced production in several cases to improve service levels at the expense of margins.
To address these first-half margin challenges, the consumer group is cutting costs and working with customers to secure additional price increases.
We expect that our other three segments will successfully manage supply challenges to continue their robust top and bottom-line momentum from the fourth quarter and carry it into the first half of fiscal 2022.
Turning now to Q1 of fiscal 2022.
We expect consolidated sales to increase in the low to mid-single digits compared to Q1 of fiscal 2021 when sales grew 9%, creating a difficult year-over-year comparison.
Additionally, supply constraints have slowed production in some product categories.
Despite these factors, our revenue growth is expected to continue in three of our four segments.
We anticipate our construction products group and performance coatings group to generate sales increases in the high single or low double digits.
The specialty products group is expected to generate double-digit sales increases.
These sales projections assume that global economies continue to improve.
Sales in our consumer group are expected to decline double digits as it continues to experience difficult comparisons to the prior year when organic growth was up 34%.
However, the consumer group's fiscal 2022 Q1 sales are expected to be above the pre-pandemic record, indicating that we have expanded the user base for our products since then.
We expect our Q1 adjusted EBIT to grow in three of our four segments, with the exception again being our consumer group.
Based on the anticipated decline in this one segment, our Q1 consolidated adjusted EBIT is expected to decrease 25% to 30% versus a difficult prior-year comparison when adjusted EBIT in last year's first quarter was up nearly 40%.
Moving to Q2 of fiscal 2022, we expect good performance again with the exception of the consumer group.
As discussed earlier, the challenges in this segment are anticipated to result in a significant decline in adjusted EBIT against difficult prior-year comparisons when sales were up 21% and adjusted EBIT was up 66%.
We anticipate that the Q2 decline in consumers will be mostly offset by the combined EBIT growth in our three other segments, leading to consolidated adjusted EBIT being roughly flat versus another difficult prior-year comparison when consolidated adjusted EBIT was up nearly 30%.
After we work through the temporary supply chain challenges, we expect to emerge with the consumer group that has broader distribution and a larger user base than it had pre-pandemic.
For our other three segments, good results are expected to continue due to recent strategic changes in our specialty products group continuing to pay off and the catch-up of deferred maintenance driving additional business at our construction products group and performance coatings group. | compname posts q4 adjusted earnings per share $1.28.
q4 adjusted earnings per share $1.28.
q4 sales $1.74 billion versus refinitiv ibes estimate of $1.68 billion.
supply chain challenges and margin pressure expected to persist during fiscal 2022 first-half.
rpm international - expect that fiscal 2022 h1 performance to be significantly impacted by inflation throughout our p&l.
limited availability of certain key raw material components is negatively impacting our ability to meet demand.
largest challenge for first half of fiscal 2022 will be in our consumer group.
expect q1 2022 consolidated sales to increase in low- to mid-single digits compared to fiscal 2021 q1. |
Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made.
I hope you and your families are all well.
Although the pandemic has created many challenges, we are seeing a resurgence in open-air shopping center demand as retailers gain a better understanding of the importance of a robust omnichannel distribution platform that includes well-located bricks-and-mortar retail.
Similarly, investors have taken notice and have been allocating more capital toward open-air shopping centers.
This is leading to compressing cap rates for certain retail segments in the private markets, unlocking M&A opportunities in the public markets and recently culminated in the shopping center sector's first IPO since 2013.
At RPT, we spent the last three years thinking strategically and outside the box to reinvent, advance and differentiate our company.
This exercise led to the formation of our grocery-anchored R2G joint venture and our groundbreaking net lease platform, RGMZ.
Together with our wholly owned portfolio, we have created a powerful engine that will drive our business forward and unleash opportunities across multiple retail channels, which we expect will result in strong and sustainable growth.
Within our investments platform, we have always used a rigorous underwriting methodology and acted with discipline and patience.
Investments and our buybacks must be accretive to portfolio quality, earnings and the balance sheet; and b, in our strategic markets.
With these must-haves, RPT transformed on a scale and at a speed that exceeded our own expectations, and we are excited to share the considerable accomplishments of the reinvented RPT.
During the depths of the pandemic in 2020, while we were working on RGMZ, we were also cultivating a significant investment pipeline.
We took a thoughtful and analytical approach to curate our external growth in markets like Boston, Atlanta, Tampa and Nashville that are flourishing in today's modern landscape.
While each of our acquisition markets has its own unique set of economic drivers, we believe they will all experience strong growth over the long term, which should position the portfolio well in the coming years.
Boston, for instance, is seeing a wave of demand centered around the life science industry.
And our centers have significant adjacency advantages with 186 life science companies within a 10-mile radius of the four Boston properties that will soon be part of the portfolio.
Once the remainder of our deals close and net of expected parcel sales, Boston will become our third largest market at just under 8% of ABR.
This underscores our size advantage versus peers as we can quickly reshape our portfolio, which is particularly important in today's rapidly evolving landscape.
Let me give you a few highlights on our investments in Boston that will fit in nicely with our previously acquired Wegmans-anchored Northborough Crossings property and collectively boast a robust $148,000 household income within a 3-mile radius.
Bedford Marketplace in the Boston MSA is situated in a highly affluent suburb right outside the 128 loop with a 3-mile average household income of $193,000.
This is a center where Whole Foods is doing over $1,000 per square foot and has a fresh, newly renewed 15-year lease term.
Marshalls has been here since 1973 and is also doing extremely well.
Shoppes of Canton, this has $133,000 household income within a 3-mile radius.
This is a top-volume Shaw's-anchored center, where the small shop demand is robust.
The expected NOI CAGR on this asset is about 4%.
Lastly, we are in negotiations on a true infill grocery-anchored center inside the 128 loop with above-average household incomes and population densities versus our portfolio averages with the potential for future densification opportunities, given its size and proximity to Boston.
In total, since our last call, we closed or are under contract on eight multi-tenant deals and are in advanced contract negotiations on a ninth asset with a gross value of $500 million, covering 2.6 million square feet, which will increase our AUM by over 20%.
To put this in context, this level of activity equates to almost 50% of our equity-marketed cap, which is quite remarkable.
RPT's pro rata share of all this activity and after expected parcel sales are complete will be around $285 million.
We were only able to execute at this scale because of the power of the platforms that we put together over the last 18 months.
As we discussed last quarter, Northborough is a $104 million deal we might not have pursued without RGMZ, given the large ticket size.
Our partnership with RGMZ also made Northborough a much more attractive use of capital, given the yield enhancement that we expect to generate upon the sale of certain parcels to RGMZ.
In the Southeast region, we acquired $115 million 4-property portfolio that was split between all three platforms: RPT, R2G and RGMZ.
Let me give you a breakdown of this portfolio.
Let's start with East Lake in Tampa.
This is another grocery-anchored center that was added to the R2G portfolio.
This center is anchored by a high-volume Walmart neighborhood market and over 65% essential or investment-grade tenancy.
This is a community center in the Atlanta MSA with a strong lineup of Aldi, Home Depot and Ross.
We are selling the Home Depot and LongHorn to RGMZ and RPT is left with an Aldi-anchored center at an 8.6% yield with almost 80% essential or investment-grade tenancy.
On balance sheet, we bought Woodstock Square in suburban Atlanta.
This center is shadow-anchored by one of the highest-volume Super Targets in the Atlanta MSA.
The center is in the heart of the rapidly growing Northwest Corridor of Atlanta and is adjacent to a luxury rental community owned by Greystar.
We see great mark-to-market opportunities on both the small shop and junior boxes at the center.
Woodstock has also demonstrated great stability over the years and has retained its original anchor tenants since it was developed in 2001.
Another balance sheet deal is Bellevue Place in suburban Nashville.
This center sits on incredible real estate, where we have conviction around a small redevelopment with a potential future grocery add.
To put everything we've done into context, R2G and RGMZ provided us with a lower cost of capital than we could have achieved even after the rally in our stock price since November.
This lower cost of capital, combined with the yield enhancements from fees and multi- to single-tenant arbitrage opportunities, allowed us to lock in higher economic spreads on our capital than we could have otherwise have achieved in the public markets, thereby accelerating our earnings growth and our portfolio transformation.
In summary, power of our platforms is allowing us to grow earnings and to advance our strategic objectives faster than we could do on our own.
When time permits, please take a look.
On the operational front, our second quarter results reflected RPT's reshaped portfolio and platform.
We continue to rebound from the COVID-induced downturn with another strong leasing quarter.
We signed 58 leases covering 442,000 square feet in the second quarter, which is 59% above the trailing 12-month quarterly average leasing volume we reported last quarter, highlighting the strong demand for our high-quality open-air centers.
Demand has been particularly robust from the junior anchor category and is as high as I've ever seen in my career.
Leasing highlights for the quarter was an REI deal at Town & Country in St. Louis that replaced the majority of a former Stein Mart space and a lululemon deal.
Both of these new tenants will significantly improve the vibrancy of the centers, making them more attractive for both customers and retailers alike while also improving the credit of the portfolio.
Reflective of the strength of the off-price category, we signed two new Burlington deals this quarter.
The first is at Winchester Center, where we are replacing our last Stein Mart box.
And the second is at Shoppes at Lakeland, where we are replacing an office supply tenant.
Our leasing pipeline is robust as we are in negotiations with several grocers and wholesale clubs and are eager to announce those soon.
Underpinning all of the accomplishments of the quarter is our belief that value creation lies in our ability to improve the quality, sustainability and growth of our cash flows.
Our success in replacing weaker tenants with stronger ones and our increased exposure to Boston and Atlanta speak to the improved quality and sustainability of our cash flows.
Our increased guidance and the 60% increase in our quarterly dividend reflects our accelerated growth trajectory.
Today, I'll discuss our second quarter results, provide an update on our balance sheet and end with commentary on our improving guidance expectations for the second half of this year.
Against the backdrop of an improving macro environment, second quarter operating FFO per share of $0.22 was up $0.03 from last quarter, driven by lower rent not probable collection and abatements of $0.02 and the reversal of prior period straight-line rent reserves of about $0.01 per share.
The largest driver of the decline in our bad debt was a reduction in our reserves taken for our Regal theaters.
As expected, they have been open for over two months and have resumed rent payments accordingly.
For some context, our rent not probable collection, including abatements, peaked at $5.9 million in the second quarter 2020 and have fallen quickly to the $1.1 million we reported this quarter.
We are down to just a handful of tenants for which we are still reserving and expect our bad debt will continue to be a tailwind to year-over-year growth in the second half of the year, which is in line with the expectations that we set out at the beginning of 2021.
Our fundamentals remain strong.
We continue to experience accelerating leasing demand with one million square feet signed year-to-date, which is just below the 1.2 million we completed for the entire year in 2019.
Our positive leasing momentum resulted in sequential increases for our leased and occupancy rates of 50 and 40 basis points, respectively.
This is in line with our expectations that the trough in occupancy is behind us as we continue to drive occupancy in our newly minted transformed portfolio.
Blended releasing spreads on comparable leases signed in the quarter were 6.6%, including another strong new lease spread of 17.8%, reflecting once again the embedded mark-to-market opportunity in the portfolio.
Over the past four quarters, our comparable new lease spread was 30%.
Our powerful operating platform continued to drive leasing velocity, improved occupancy and secure higher rents.
Remerchandising projects remain our best risk-adjusted use of capital.
And our pipeline of projects continue to grow.
This quarter, we delivered three remerchandising and out-lot projects: the ground lease with Wendy's at Coral Creek Shops; the ground lease with Chase Bank at West Broward; and the combination of the boxes for Aveda at Merchants Square.
These products were completed in an average return on capital of 17%.
We also started our new REI remerchandising project at Town & Country and an expansion project for Burlington at the Shoppes at Lakeland, where we expect returns of 9% to 13%.
We added five new pipeline projects this quarter in Northborough Crossing, Deerfield Towne Center, Southfield Plaza, River City Marketplace and Providence Marketplace, highlighting the demand at our centers and future rent upside.
We ended the second quarter with net debt to annualized adjusted EBITDA of 7.0 times, down from 7.2 times last quarter.
Leverage should fall toward our target range of 5.5 to 6.5 times as our bad debt reserve normalizes to pre-COVID levels and we restabilize occupancy.
From a liquidity perspective, we ended the second quarter with a cash balance of $38 million and our fully unused $350 million unsecured line of credit.
Subsequent to the end of the quarter, we drew down $135 million on the revolver to fund acquisitions, which we expect will be repaid by the end of the year as we close on parcel sales to RGMZ that are expected to generate roughly $142 million in proceeds.
During the quarter, we repaid our $37 million private placement note with cash on hand.
Looking ahead, we have no remaining debt maturing in 2021 and only $52 million maturing in 2022.
Our refinancing options are plentiful, and we are exploring both secured and unsecured options.
We will also continue to look beyond 2022 to refinance debt early to take advantage of a low interest rate environment while adding duration to our capital stack.
And lastly, turning to guidance.
We updated our operating FFO range to $0.88 to $0.92, which is up $0.05 or 6% than last quarter's guidance and about 10% from our initial 2021 guidance provided back in February.
The primary driver of the upside is an increase in our acquisition forecast.
We have closed on or under contract or are in advanced contract negotiation on $285 million of acquisitions at our share, which is above the $100 million of acquisition that was embedded in our prior guidance.
Also, given the strength in our core business and our accretive acquisitions, our Board of Trustees has increased the dividend by 60% to $0.12 per share quarterly.
This rate allows us to maintain a low payout ratio, providing us flexibility to continue to allocate capital accretively but also leaving room for additional dividend increases in the future as we grow earnings. | compname posts q2 operating ffo per share of $0.22.
q2 operating ffo per share $0.22. |
Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made.
I hope you and your families are all well.
Despite the challenges facing our industry, we experienced an excellent quarter of leasing activity and rent collections, in addition to making strong progress on several of our ESG initiatives and accomplishments.
Also, we continue to keep two eyes on the current business and a third eye on the future as we start to see opportunistic shifts in the retail real estate landscape.
While we will be disciplined with our capital, we are well positioned to be on the offensive.
We are pleased with the level of leasing demand that we are seeing so quickly after the economy reopened.
This quarter, we executed 106,000 square feet of total new leasing volume, the highest level since the first quarter of 2019.
As a result, our signed not open ABR of $3 million nearly doubled since last quarter.
As we look ahead, our leasing pipeline is very healthy.
Today, we have an additional $1.5 million of ABR that is currently in lease negotiations with significantly more in advanced LOI stages.
Much of this demand is coming from grocery, off-price, QSR and medical-use tenants.
We have also seen an acceleration of traditional mall tenants looking for space in open-air centers.
While this demand creates friction in the market and helps drive pricing, we are being highly selective in this area as we are not interested in turning our centers into outdoor malls with a heavy concentration of full price apparel.
Overall, visibility into our leasing pipeline and pending signed not open balance gives us comfort that incremental cash flows will provide some cushion from COVID-19 store closures.
Along with our solid leasing activity, we achieved double-digit growth in our releasing spreads, including a 43% increase on new leases, the highest level since the second quarter of 2018.
In fact, since mid-2018, after the new management team started, our new releasing spreads have averaged 30%, with an incremental return on capital of 12%, reflecting the mark-to-market opportunity embedded throughout the portfolio.
We look forward, we expect to continue to drive rent as we believe our Midwest and Southeast geographies have in-place rents that are more accessible to tenants.
Leasing highlights for the quarter were new deals with Nike, Sephora, Burlington and Bank of America, to name a few.
These credit tenants not only improve the quality of our cash flows, but are also providing a good return on capital in the mid-teens range.
During the quarter, we opened lululemon at our Woodbury Lake (sic) Woodbury Lakes property in Minneapolis, with initial sales significantly exceeding lulu's forecast.
Touching on our grocery initiative.
We continue to see tremendous opportunity for strongergrow and gain share, including Kroger, Sprouts and Publix.
Each reported impressive quarterly earnings and sales, while Aldi recently announced plans to open 70 new U.S. stores in 2020.
The demand is real, and we continue to see a unique opportunity to improve property values and strengthening the resiliency of our cash flows.
Our pipeline of deals includes the addition of grocers to nongrocery-anchored centers and then opportunities to enhance the existing grocer tenancy.
Negotiations are progressing well on several locations, and we hope to provide further updates in the coming weeks.
Our collection rates in the third quarter showed noticeable improvement, with 87% of base rent and recovery income collected as of October 30.
We have seen further improvements in October, with 90% collected thus far, which is ahead of the pace we experienced for September at the same point in time.
Our collection levels are rising quickly as deferral periods end and tenants resume payment in accordance with their deferred plans.
As a result, our second quarter collections have increased to 76%, up from 65% as reported last quarter.
We also continue to collect rent from our local mom-and-pop tenants at a very high rate of 94% in the third quarter.
Throughout this sector, these tenants have historically suffered the most in past downturns, and we believe our high collections are a reflection of the quality of our smaller tenants and our boots on the ground leasing and asset management approach.
We also believe our relatively lower exposure to this category of just about 10% should provide some shelter from potential future fallout.
With our percentage of open tenants by ABR at 94% and October collections sitting at 90%, absent any macro headwinds, we are cautiously optimistic that we will continue to drive collections higher.
While we are still in the throes of the pandemic, I think it's important to keep in mind that several of our top tenants are thriving today, including Whole Foods, Best Buy and Dick's.
We're also seeing a comeback with Bed Bath & Beyond, our fourth largest tenant.
They recently launched same-day delivery to complement their BOPIS and curbside pickup services that fueled an 89% increase in digital channel sales and the first positive comparable sales growth quarter in almost four years.
Gap recently announced its Power Plan 2023 strategy that will refocus the business on growing just the Old Navy and Athleta brands.
Today, 10 of our 13 Gap concepts are Old Navy and Athleta.
On the tenant risk front, about 3% of our ABR is currently in bankruptcy proceedings, and we expect to retain about half of this amount.
During the quarter, we recaptured eight of 15 ascena locations and we're actively working on backfills well before the bankruptcy filing.
We have already released one location and are in various stages of negotiations on the remaining 7.
We expect to vastly upgrade tenancy and experience positive mark-to-market opportunities for these locations.
In the fourth quarter, we expect to recapture two Stein Mart boxes, representing roughly 60,000 square feet.
We are in advanced negotiations on both with off-price concepts, providing us the opportunity to materially enhance credit and merchandising for both properties.
At just under $11.50 per square foot, we also see a sizable mark-to-market opportunity upon release of those spaces.
Given the recent headlines, I wanted to provide some color on our theater exposure.
In total, 4% of our ABR comes from theaters, 3% of which is with Regal, that recently announced that it would temporarily reclose due to a lack of studio releases.
While this news is disappointing, we believe that the theaters will remain a key source of distribution to the film studios and provide a difficult-to-replace form of entertainment to us, as consumers.
We are hopeful that the difficult steps taken will allow Regal to continue to weather the pandemic.
However, like every troubled tenant, we are not sitting idle and are proactively evaluating our alternatives at all four locations.
three of the four are stand-alone boxes that give us additional replacement options, including single-tenant replacements, box splits and potentially even some non-retail uses, including last-mile distribution.
The last location is at our Webster Place asset in Lincoln Park, Chicago, where we have been cultivating densification and mixed-use opportunities.
The highest and best use at this asset is residential.
We've been trying for quite some time to clear the site so that we can progress toward a JV with a residential partner.
Overall, we believe our exposure to the theater category is manageable, and we are taking the appropriate measures to minimize the impact on our business, including reserving a significant amount of our expanding theater uncollected rent.
I think it's worth noting that while many analysts have pointed to our somewhat higher exposure to the theater category as a reason for concern, our collection levels in the third quarter and in October are now at or above peer collection levels.
As you think about the risk profile of RPT, I would simply point to the convergence of our collection rates and our below-average, at-risk exposure to a broad range of groups versus narrowly focusing on individual tenants and categories that may be in the headlines today.
Turning to our strategic outlook.
Without the pressure to raise capital near term, we are in a position to play offense.
While we continue to manage our liquidity closely, we are actively scouring our target markets for acquisition opportunities.
We have roughly $95 million of excess cash on our balance sheet that we could strategically and accretively deploy as opportunities arise.
Though overall deal volumes in the open-air sector have been light, we are starting to see the first signs of activity, and I'm personally starting to get calls about stressed opportunities.
To date, these deals have not met our stringent underwriting criteria, but we believe more appropriate opportunities for RPT will emerge later in the year and in the early part of 2021.
At this point, the percentage of retail CMBS debt in special servicing is at an all-time high.
And stressed debt, which includes debt that is not yet in special servicing, is already above levels seen during the Great Recession.
We believe our excess cash and our strategic partnership with GIC will be a key advantage as deal flow materializes.
Also, while our current liquidity is strong, we are not resting on our laurels and are actively exploring additional options to generate even more capital at attractive pricing in order to be ready for further deployment opportunities that could be transformational for a company of our size.
Before turning the call over to Mike, I wanted to highlight the progress we made on our ESG initiatives.
I'm also proud to say that we filed our inaugural GRESB assessment as part of our commitment to sustainability, and launched our Diversity Inclusion Committee as we fulfill our corporate purpose of turning commercial ground into common ground.
Highlighting our efforts on the social front, we were recently recognized as the Top Place to Work by the Detroit Free Press, and were selected for the Crain's Detroit 2020 Cool Places to Work list.
And just yesterday, Commercial Property Executive announced that RPT won an award for one of 2019's Best Investment Transactions within the portfolio category for our joint venture with GIC.
Let's begin with a brief review of our third quarter results.
Third quarter same-property NOI and operating FFO were both up since last quarter, fueled by a smaller impact from rent not probable of collection, a direct result of improving collections as we move past the depths of a pandemic.
Our rent not probable of collection and abatements were roughly $4.5 million in the quarter, which included about $900,000 related to prior quarter billing, primarily our theaters.
The clean rent not probable of collection for the quarter was $3.6 million.
As detailed on page 33 of our supplemental, our third quarter rent, excluding prior period amounts, is down 7% or $3.7 million versus the pre-COVID first quarter level.
While this is a point-in-time number and not a run rate moving forward, it is a stark contrast to the decrease implied in our share price.
As we look forward, there are puts and takes to the trajectory of NOI.
The puts are items such as signed not open ABR backlog of $3 million, the $1.5 million of signed not open ABR associated with leases in negotiation and embedded annual contractual rent growth.
The takes are any reductions in rent or tenant fallout which is tough to speculate on, given the state of the pandemic.
Regarding third quarter uncollected rent, it's totaled about $6.4 million for the quarter, of which $3.6 million was reserved, as I noted earlier, and $2.6 million was deferred net of reserves, leaving about $200,000 unaddressed.
For reference, this is detailed in our supplemental on page 33.
Touching on our operating fundamentals.
During the third quarter, we signed 44 leases covering 279,000 square feet.
Blended rent spreads were 10.7% driven by our 43% new lease spread, our highest since mid-2018.
We ended the quarter with a leased rate of 93.3%, down 30 basis points sequentially as the effects of COVID-19 begin to impact our occupancy statistics.
Given our solid leasing activity during the quarter, our anchor leased rate was actually up 10 basis points from last quarter, fueled by our Nike and Burlington deals at Front Range Village in Fort Collins, Colorado, where we are seeing excellent leasing demand.
As Brian noted, our small shop leased rate was impacted this quarter as we recaptured eight ascena spaces, which unfavorably impacted our leased rate by 30 basis points.
Bolstered by our rising rent collections of nearly 90% and as a result of liquidity measures we took earlier in the year, we ended the quarter with a healthy cash balance of $220 million, including $125 million of revolver borrowings and $95 million of cash.
Our cash balance before debt repayments increased by about $20 million.
With our strong third quarter cash flow generation and incremental confidence in our business, we paid off another $50 million of our revolver during the quarter.
We expect to repay additional outstanding amounts on our revolver as stability in cash flow continues to improve and the economy overall returns to more steady state.
We will also continue to keep tight control over liquidity, capex and expenses.
This approach gives us the flexibility to strategically invest at the right time for the long term.
Regarding the dividend, we understand this is a very important piece of our total return to shareholders.
However, as I noted last quarter, we would not need to pay a common dividend for the balance of 2020 to meet our REIT taxable income payout requirement based on our current projections.
The timing of reinstatement remains a quarterly Board decision.
As previously noted, when we reinstate the common dividend, we will do so at a sustainable level that we can grow in conjunction with earnings.
We entered the third quarter with trailing 12-month net debt to pro forma adjusted EBITDA of 7.2 times, up slightly from 7.0 times last quarter as another COVID-impacted quarter entered the calculation.
We remain committed to bringing leverage into our long-term target range of 5.5 to 6.5 times as the impacts of the pandemic move behind us.
As I alluded to earlier, and as part of our continuing effort to improve transparency into our business, we have provided a granular breakdown of our first and third quarter recurring revenue and a bridge between reported base rent and recoveries to build an unaddressed rent on page 33 of our supplemental.
We hope you find this helpful as you evaluate the trajectory of NOI from COVID-19.
With respect to guidance, we will not be providing an update at this time, given the high degree of uncertainty surrounding the scale and duration of several macro factors, including the pandemic economic stimulus and the results of the election, to name a few.
We will continue to reassess the practicality of resuming guidance in future quarters. | 90% of october and 87% of q3 2020 rent and recovery income have been paid as of october 30, 2020.
94% of total tenants were open and operating, as of october 30, 2020, based on annualized base rent. |
Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made.
We had another very strong quarter, resulting in another raise in our 2021 operating FFO guidance.
We experienced balanced success across all our disciplines as we continue to refresh our portfolio, tenant mix, liquidity and balance sheet, all of which position us to deliver on future earnings growth.
We closed on several high-quality acquisitions across all three of our strategic investment platforms, bringing our gross acquisition volume to $500 million in 2021.
We continue to see strong demand for space in our centers and signed a number of key leases with well-capitalized tenants, driving our accelerated signed not opened balance to almost $4 million.
And lastly, we raised or received commitments on $670 million of capital from our equity, debt and joint venture partners, strengthening our liquidity profile and balance sheet.
Starting off with our capital-raising efforts.
I am very pleased with GIC's recent commitment of an additional $500 million to our core grocery-anchored R2G platform, positioning that platform to scale up to $1.7 billion.
We believe this is an endorsement of RPT and our ability to create value.
We are grateful to be in the company of top-tier REITs, like Ventas, Boston Properties, Equinix and others, that have partnered with GIC.
The new commitment provides us with the firepower to further accelerate our portfolio transformation while enhancing our management fee income stream.
We also recently obtained commitments for $130 million in the debt private placement market and received another $40 million through our ATM, demonstrating our ability to access multiple sources of capital to accretively fund our growth plans.
The size of our portfolio is an advantage as it allows us to rapidly reshape our geographic exposures toward higher-growth and more durable markets like Boston, which is now our third-largest market.
We also increased our exposure to Atlanta and Tampa while reducing our concentrations in Detroit, Cincy and Chicago.
This real-time shift in our mix not only improves our geographic diversification but also increases our visibility with retailers, brokers and other stakeholders, which is leading to increased deal flow on both the leasing and acquisition fronts.
To support our data-driven investment decisions, we have an in-house data scientist who developed a proprietary asset scoring model that combines advanced data analytics with a collective knowledge and experience of our investments, leasing, property management and portfolio management teams.
With this dynamic tool, we can continually assess our existing and potential future properties in real time to inform our capital allocation decisions.
Our scoring model was a key advantage for us as we underwrote our recent acquisitions and will continue to be used as we assess our future acquisitions and dispositions through the lens of quality, balance sheet and earnings accretion.
Regarding the acquisition environment, we are currently experiencing a very competitive landscape to acquire high-quality shopping centers, where cap rates for grocery-anchored centers in top U.S. metros are down approximately 50 basis points over the past few months.
As a result, we believe the $500 million of acquisitions that we closed on so far could be up as much as 10% relative to our transacted prices.
Despite the recent cap rate compression, our three investment platforms provide us a competitive advantage to acquire at higher returns, allowing us to remain active on the acquisition front in our target markets.
We continue to work tirelessly, sourcing additional acquisitions, focusing primarily on off-market, relationship-driven opportunities and expect 2022 to be another active year.
We continue to see a healthy pipeline of deals for grocery-anchored centers, smaller strips and wealthy infill suburbs in our core communities and larger high-quality centers over $70 million, where we can allocate the real estate between our platforms.
We also see unique opportunities to acquire value-add or opportunistic centers, where we can utilize our tenant relationships to create significant value after the purchase.
For example, we are currently under negotiation to buy an asset in the Southeast that has an empty anchor box related to a recent tenant bankruptcy.
We are in lease negotiation with a premier investment-grade grocer to take that space, which will drive the occupancy to about 99%, resulting in an estimated stabilized yield on cost of 7% in a 5% cap rate market.
On the other side of the coin, current market demand is also creating opportunities for us to monetize assets at attractive yields in non-core markets.
Earlier this week, we closed on the sale of Market Plaza in the Chicago market for $30 million.
We received 11 offers and sold the property at a high 5% buyer's cap rate.
Chicago is not a market that we are looking to expand in due to the less-than-business-friendly political environment.
We are also exploring other opportunities to further reduce our exposure to nonstrategic markets and take advantage of the current frothiness in the private markets.
Now turning to operations.
We continue to drive rent and sign leases with high-credit essential tenancy.
This quarter, we signed a lease with a new investment-grade grocer at our Crofton Centre in Baltimore, which is replacing a Shoppers Food Warehouse.
In October, we signed an expansion lease with Publix at The Crossroads in Palm Beach.
This will be a brand-new flagship prototype store, demonstrating Publix' commitment to the center and cementing the anchor tenancy for years to come.
In both cases, we locked in strong credit anchors, thereby enhancing the durability of the cash flows at these centers.
We also signed a new medical tenant, Piedmont Urgent Care, that replaces a sit-down restaurant at Promenade at Pleasant Hill just outside of Atlanta, swapping a high-COVID-risk tenant for an essential tenant at a mid-20% spread to the old brand.
Not only were we able to reduce tenant risk, but we were able to do so at attractive economics.
Lastly, we signed a new deal for a Ferguson gallery showroom at Providence Marketplace in the Nashville market.
This will be Ferguson's first showroom in Nashville, which we think will be a premier destination for residents to access the latest concepts in quality home fixtures and appliances.
With only five to six Ferguson showroom openings in a typical year, we think this deal is a testament to the strength of our center.
For those of you that are not familiar with Ferguson, they are a $34 billion market cap, BBB+-rated credit and the largest U.S. distributor of plumbing and second-largest distributor of industrial products.
We think they will be an attractive regional draw for the property based on the strong demographic match between the center and the Ferguson customer profile.
Looking forward, our leasing team remains active with a solid pipeline of deals lined up for the fourth quarter.
Notably, we are seeing strong demand in Florida, Boston and Detroit, where we are in negotiations on a number of major box deals, ranging from grocer to off-price retail as well as several national small shop deals.
Notably, we have seen a major pickup in demand in Detroit over the past few quarters and are in negotiations on over half a dozen grocery deals and another eight to 10 box leases with discount apparel, pet, outdoor recreation and homegood retailers.
Today, I'll discuss our third quarter results, provide an update on our balance sheet and end with commentary on our increased guidance.
Third quarter operating FFO per share of $0.27 was up $0.05 over last quarter primarily due to about $0.04 of higher NOI from acquisitions, $0.01 from lower rent not probable of collection and about $0.01 from higher lease termination fees, partially offset by lower straight-line rent.
The better-than-expected rent not probable of collection was primarily driven by the reversal of a prior period reserve following an unplanned payment from a theater tenant.
As we look ahead, we expect bad debt to continue to moderate as our collection rate tracks toward pre-COVID levels.
Notably, our collection rate for the third quarter was 98% as of the end of October.
As Brian mentioned, our operational performance in the quarter remained strong.
We signed 52 leases totaling 280,000 square feet at a blended comparable releasing spread of 8.2%, including a 5.2% renewal and 16% new lease spread.
Our renewal spread is the highest level it's been in over a year, and along with the continued strength of our new leasing spreads, is reflective of the increasing demand for our centers and the embedded mark-to-market opportunity within our portfolio.
These spreads are on a cash basis.
They don't capture future contractual rent steps, which were 160 basis points for the leases signed during the quarter.
Leasing activity in the third quarter pushed our signed not opened balance to $3.8 million, up 19% over last quarter's $3.2 million backlog, which we expect to open over the next 15 months.
On the remerchandising and outlet front, we delivered two projects totaling $3.3 million during the quarter at almost a 12% yield, which was ahead of budget.
We also added one new project, Ferguson gallery showroom at Providence Marketplace in Nashville, totaling $1.3 million at an expected yield in the 20% to 22% range.
This brings the active remerchandising and outlet project total to $14 million with expected yields in the 10% to 12% range.
We are in active negotiations on a number of other pipeline deals totaling about $30 million with strong box demand in Boston, Florida and Detroit.
Turning to the balance sheet.
We ended the third quarter with net debt to annualized adjusted EBITDA of 6.8 times, down from seven times last quarter.
This is a bit better than expected as a result of the $40 million raised through our ATM and due to better NOI performance.
We continue to expect our leverage to fall toward our target range of 5.5 to 6.5 times as bad debt and occupancy normalize to pre-COVID levels.
Despite the heavy level of acquisition activity in the quarter, our liquidity remains strong.
We ended the third quarter with a cash balance of approximately $10 million and have $295 million available on our unsecured line of credit.
We expect to repay the vast majority of the outstanding balance on the line of credit by the end of the year or shortly thereafter.
One of the core tenets of our balance sheet strategy, in addition to managing overall leverage, is to proactively address our pending debt maturities.
During the fourth quarter, we expect to refinance $177 million of debt.
Included in this amount are all of our private placement notes that mature in 2023 and 2024 and our Bridgewater mortgage that matures in 2022.
We expect to use proceeds from our recent private placement of unsecured notes totaling $130 million, our share of expected proceeds from mortgages placed on R2G assets that we locked rate on totaling $15 million and proceeds from the sale of Market Plaza totaling $30 million to fund these debt repayments.
Following all this activity, we will have reduced debt maturities through 2024 to just 16% of our debt stack.
Over the next two quarters, we also expect to generate $96 million in disposition proceeds from parcel sales to RGMZ, including sales from our recently acquired Northborough and Newnan Pavilion assets and the remaining seed portfolio sales.
These proceeds will effectively be used to fund our share of the debt of acquisition of $68 million and to repay amounts outstanding on our revolving line of credit.
Moving to our increased guidance for 2021.
We initiated a new range for operating FFO of $0.90 to $0.94 per share, which is up $0.02 or 2% over prior guidance.
The primary drivers of the upside were $0.01 from a prior period bad debt reversal and about another $0.01 of lease termination fees recognized in the third quarter.
The key factors that would drive results to the high or low end of the range are the timing of closing of the net lease parcel sales and bad debt reserves.
In addition, our incentive compensation is not finalized until the fourth quarter, which could result in an uptick in G-and-A expense, similar to what we experienced in late 2019.
But I wanted to provide insight into a couple of items as you start to establish your quarterly run rate for 2022.
Our third quarter operating FFO per share of $0.27 benefited from $0.02 related to nonrecurring items, including a prior period favorable bad debt adjustment and a one-time lease termination fee.
In addition, relative to our third quarter results, 2022 G-and-A is expected to increase by approximately $0.01 per quarter related to an uptick in travel-related expenses, similar to 2019 levels, and continued investments in talent to support our growth platforms.
Our framework can be summarized with three questions.
Does the property improve our overall portfolio quality?
How much future value-creation potential is there?
And can we fund the acquisition in a way that's both accretive to earnings and pushes us closer to our target leverage range of 5.5 to 6.5 times?
No deal is as simple as this.
And each has its own unique set of circumstances.
But we think it is important to understand our framework as you build out your own forecast.
Also, as a reminder, it is our normal practice not to include speculative acquisitions unless we have a strong line of sight on a potential close. | q3 operating ffo per share $0.27.
raising its 2021 operating ffo per diluted share guidance to $0.90 to $0.94. |
You will also find our 10-Q on Range's website under the Investors tab or you can access it using the SEC's EDGAR system.
For additional information, we've posted supplemental tables on our website to assist in the calculation of EBITDAX, cash margins and other non-GAAP measures.
The second quarter of 2021 saw Range make continued steady progress toward our key objectives: improving margins through cost controls, generating free cash flow, operating safely and efficiently and ultimately positioning the company to return capital to shareholders as the most efficient natural gas and NGL producer in Appalachia.
I'll touch briefly on each of these before turning it over to Dennis and Mark to cover in more detail.
Starting with unit cost and margin improvements.
Range's unit costs for the quarter were in line with our expectations.
As NGL prices strengthened during the quarter, processing costs increased as expected as a result of our percent of proceeds contracts, but this was more than offset by the improvement in natural gas liquids prices, resulting in vast improvements in Range's margins and cash flow.
This pricing uplift from liquids reduces ranges breakeven natural gas price and improves margins when compared to producing only dry gas.
In fact, Range's cash margin of approximately $1 per Mcfe for the first half of the year is roughly double where we were last year.
Given the improved fundamental backdrop for NGLs with approximately 65% of our activity in the liquids-rich window this year, Range is very well positioned to continue to benefit.
In the second quarter, Range produced $177 million in cash flow with capital spending coming in at just $120 million for the quarter, Range generated solid free cash flow despite seasonally weak pricing and the second quarter being the high point of capital spending for the year.
The team did an outstanding job leveraging our large contiguous acreage position to complete the operational plan safely and with peer-leading capital efficiency.
Range's blocky acreage position affords us operational advantages on multiple fronts, including water recycling, infrastructure, rig mobilization, long lateral development and e-fleet optimization.
When combined with the dedicated and focused technical team with years of experience in the basin, this equates to class-leading well cost and capital efficiency.
And having delivered operational programs below budget for the last three years, Range remains on track to do the same for the fourth consecutive year in 2021.
Taking this level of efficiency and combining it with strong recoveries, a shallow base decline of under 20%, a sizable inventory and liquids optionality, Range has what we believe is an unmatched foundation for generating sustainable free cash flow for the long term.
This organic free cash flow, supported by thoughtful hedging through the end of this year and into 2022, puts us well on our way toward meeting our balance sheet targets in the near future.
Mark will provide more detail, but at recent strip prices, leverages forecast below two times early next year.
The significant rate of improvement on our balance sheet is a testament to the progress we've made, reducing debt and improving our cost structure in recent years and that reflects the free cash flow potential of the business.
We are excited about where Range is today and equally excited about what the future holds.
Natural gas and natural gas liquids will continue to play a critical role as the world moves toward cleaner, more efficient fuels.
We believe that producers who can most efficiently deliver these products to end markets from a cost and emissions perspective will be the most successful.
And we believe Range is well positioned within that framework.
We remain ahead of schedule in achieving our absolute emissions reduction targets in our 2025 goal of net zero, and our emissions profile is near best-in-class among producers globally.
Importantly, what further differentiate Range from peers is our ability to efficiently deliver clean burning natural gas for an extended period of time given our multi-decade core inventory.
For context, Range's 2021 activity of approximately 60 wells is just a fraction of our 2,000 Marcellus locations with EURs that are greater than two Bcfe per 1,000 foot of lateral.
The average recovery of these thousands of wells is very similar to the wells Range has turned to sales for the last several years, providing Range and unmatched runway of high-quality wells that's measured in decades, A.nd that's before counting other horizons, such as the Utica, Mount Pleasant or Upper Devonian.
This type of runway is not found in most natural gas producers, and we believe Range's position as well as any upstream company to generate competitive returns and free cash flow over the medium and long term.
Before turning it over to Dennis and Mark, I'll just reiterate that Range remains committed to disciplined capital spending.
Over time, we believe Range will stand out among peers as a result of our low sustaining capital, competitive cost structure, liquids optionality and importantly, our multi-decade core inventory life, which is an increasingly competitive advantage as other operators exhaust their core inventories.
We will continue to focus on safe, efficient and environmentally sound operations, prudent capital allocation and generating sustainable returns to our shareholders.
Over to you, Dennis.
As we look back on the second quarter, all-in capital came in at $120 million, with drilling and completion spending of approximately $116 million.
Capital spend for the first half of the year totaled $226 million or approximately 53% of our annual plan.
During our first quarter call, we touched on some of our recent efficiencies driving this capital result, and we'll expand on those during the operations update today.
Looking forward, consistent with our activity forecast for the second half of the year, the remainder of our capital spending is expected to taper through year-end, in line with our activity forecast previously communicated and placing us at or below our all-in budget of $425 million.
Production for the quarter closed out at 2.1 Bcf equivalent per day.
Our activity resulted in 25 wells being turned to sales with 75% of the turn-in-line activity landing in the back half of the quarter, setting us up for higher sequential production for the balance of this year.
Looking back at the quarter, I'd like to point out six of our Marcellus wells turned to sales on an existing pad in the heart of our wet gas acreage position.
Initial development and production on this pad occurred in 2016.
Similar to the example we walked through during our first quarter call, we returned to this pad to add additional wells, building upon our prior technical learnings, efficiencies and cost savings.
Initial production rate for three of the new wells placed them at the top of our Marcellus program history, and the pad itself is now Range's top Marcellus pad to date based on average initial production per well.
And lastly, production from this pad was comprised of approximately 50% liquids from an average lateral length of just under 14,000 feet, and aligns with our liquids marketing results we will cover later in this section.
Not only does this provide further evidence of the quality and sustainability of our large contiguous acreage position, but it also demonstrates that even after more than a decade of Marcellus development.
We continue to optimize and enhance well performance through technical and operational innovation.
Looking at some of our operational highlights.
The drilling team operated two dual-fuel horizontal rigs during the second quarter, split between our dry and super-rich acreage footprint.
Average lateral lengths for the wells drilled in Q2 was approximately 12,000 feet with five wells exceeding 16,500 feet.
Similar to updates from prior quarters, we returned to pad sites for a significant portion of our activity in Q2, with approximately 75% of our new wells drilled on pads with existing production.
In addition to maximizing infrastructure utilization.
A combination of longer laterals and returning to existing pads continues to drive efficiency improvements and reduced drilling costs.
As an example, in the first half of 2021, we've seen a 10% reduction in average drilling cost per lateral foot versus full year 2020, which fell below $200 per foot.
It is improvements such as this that further support our year-to-date capital spend and ensuring that we deliver within our capital budget.
On the completion side, the team completed 20 wells with a total lateral footage of more than 225,000 feet with an average horizontal length of approximately 11,300 feet per well, including four wells with lateral lengths exceeding 18,000 feet per well.
These long laterals were turned to sales covering the end of Q2 and beginning of Q3, driving our second half of year production.
Similar to our drilling results, the completions team is capturing continued efficiency gains from longer laterals and cost savings by returning to pads with existing production.
The team successfully executed over 1,100 frac stages in the second quarter, while hydraulic fracturing efficiencies in the first half of the year increased by more than 6% versus the same time period a year ago.
In addition to these efficiency gains, our emissions reduction strategies were advanced by expanding the operations associated with our electric frac fleet to include electric powered pump-down equipment, wireline units, along with other supporting equipment.
The testing of electrification of additional on-site equipment, coupled with our production facility design and pilot program with Project Canary are just a few examples underway to deliver on our broader ESG goals and our emissions target of net zero by 2025.
Water operations once again exceeded our operational and capital efficiency expectations in the second quarter through increased utilization of third-party produced water.
The team was able to efficiently utilize just under one million barrels of third-party water in addition to Range's produced water.
And as a result, completion costs were reduced by over $1.6 million for the second quarter.
The continued success of our water operations, along with the efficiencies captured by the completions team has reduced our overall water costs for the first half of the year by just under $7 million or $15 per foot less in cost.
And it represents a 28% improvement in water costs versus the same time last year.
Water savings can vary each quarter, depending on the location of our operations, but generating these types of cost reductions has become a repeatable part of our program, and it aids in our ability to deliver at or below our 2021 drill and complete cost per foot target of $570 per foot.
Strong field run time continued in the second quarter.
Like the first quarter, unseasonable weather conditions threatened to hamper production with prolonged high ambient temperatures and storm events in June.
But the production and facilities teams worked diligently to keep the field running at a high rate with minimal impact to production or operating expenses.
With the winter behind us, lease operating expenses for the quarter closed out at $0.10 per Mcf equivalent and are projected to remain at a similar level for the remainder of the year.
To complement our operational results, I'd like to provide a quick update on Range's safety performance.
When looking at our key safety metrics year-to-date, we continue to see improvements compared to the same time period a year ago.
With our team's ongoing dedication to hazard identification and training, it has been over a year since our last employee recordable incident.
Year-to-date, this contributed to a total workforce recordable incident rate in line with last year, which was Range's best safety performance in the program history, and benchmarks in the top quartile for safety performance among our peer group.
Now shifting over to marketing.
Echoing the theme from our last call, market prices strengthened during the quarter for both NGLs and condensate with Mont Belvieu propane prices ending the quarter at its highest level in almost three years.
Demand for both NGLs and condensate continues to increase with supply remaining stable.
As a result of these tightening fundamentals and the corresponding improvement in prices throughout the quarter, Range's NGL price was $27.92 per barrel, a $2.24 premium to Mont Belvieu.
This represents a record for the highest premium to Mont Belvieu in company history, and the highest quarterly NGL price in absolute terms since 2014.
A key driver for the higher premium in the quarter was the new and diverse LPG export strategy that allowed Range to optimize its sales portfolio through increased flexibility in product placement and sales timing.
Due to the timing of Range's LPG exports, the second quarter average NGL barrel was heavier than normal, meaning that it included a higher propane and heavier component percentage than prior quarters.
During the second half of this year, we expect strong fundamentals to result in higher absolute prices for domestic propane and butane, which should compress our premiums of U.S. LPG exports.
Coupled with a lighter barrel from export timing and seasonality in domestic sales, we expect lower premiums to Mont Belvieu but improving overall NGL price realizations.
Range's premium NGL differential remains an expected positive $0.50 to $2 per barrel for the full year, showing the benefit of our diversified NGL portfolio and access to international markets.
On the condensate side, realized price for the second quarter was $57.60, a differential of $8.36 per barrel.
As expected, the condensate differential to WTI narrowed slightly quarter-over-quarter and is expected to stabilize near this level for the rest of the year.
As we previously discussed, condensate values are primarily supported by continued recovery in demand for transportation fuels as business and personal travel around the world continues to increase to prepandemic levels.
As we enter the second half of the year and continue into 2022, the value of Range's entire liquids portfolio is strongly supported by both domestic and international fundamentals.
-- and Range is uniquely positioned to maximize value in this constructive environment.
Similar to our results and view for liquids, positive movement is the theme of the day for natural gas.
During our Q1 call, several signs pointed toward the potential of an under supplied market.
With operators administering capital and production discipline this year, ongoing strength in LNG exports at 11 Bcf per day and overall storage levels running below the five year average, an undersupplied market has materialized, further impacting 2021 pricing and movement in the forward curve above $3 for 2022.
As we look at the second quarter, Range reported a Q2 natural gas differential of $0.39 under NYMEX, including basis hedging.
Looking ahead, we see potential for additional positive improvements for natural gas pricing and basis with regional storage levels behind the five year average.
As we reach the midyear point for the 2021 program, our second quarter and year-to-date results showcase some of our best milestones to date for the program by looking at our environmental and safety performance, operational efficiencies, cost and well results.
We will build on these operational results during the second half of the year while delivering our best program yet.
During first quarter comments, I started by saying efficient operations, delivering planned production, combined with margin-enhancing expense management drove free cash flow.
In other words, delivering on stated objectives, which is Range's fundamental strategy and something the team successfully executed again during the second quarter.
Reliably efficient operations again delivered planned production.
Our relentless focus on expenditures that drive cash flow in addition to diversity in sales points for natural gas, natural gas liquids and condensate resulted in cash flow from operations of $177 million before working capital compared to $120 million in capital spending.
Significant improvements in free cash flow compared to past periods were driven by a 100% improvement in pre-hedge realized prices per unit of production versus the prior year period, with realized price per unit reaching $3.25 in the second quarter.
This realized price per unit is $0.41 above NYMEX Henry Hub, driven by a 118% increase in NGL price per barrel, which reached $27.92 pre-hedge.
Realized NGL price on an Mcfe basis equates to $4.65 and condensate realizations equate to $9.60 per Mcfe, hence, the realized premium to Henry Hub.
Additionally, Range's NGL prices exceeded a Mont Belvieu equivalent NGL barrel by $2.24 due to our unique portfolio of domestic and international sales contracts.
Realizing the benefit of higher commodity prices during Q2 was possible in part due to a thoughtful approach to hedging.
We maintained our strategy of reducing risk through an active hedge program.
However, hedging too early before prices reached levels estimated as sufficient to support industry maintenance capital could have resulted in the loss of significant revenue.
For 2022, we've continued to be balanced in risk management, so as to not hedge away improved fundamentals.
Such that at quarter end and assuming the election of outstanding swaptions, Range was approximately 40% hedged on natural gas at a floor of $2.80 and with a ceiling of $3.04.
NGLs are typically hedged on a rolling three to six month basis.
Meaning exposure to higher NGL prices in the second half of 2021 was largely retained with improving hedge averages by quarter.
As an example, Range's average swap for condensate production improves by $10 per barrel in the third quarter, while propane, butane and natural gasoline averages all improved by approximately $0.20 per gallon versus second quarter.
This hedge book compares very favorably to the industry, allowing Range to capture improved pricing, growing cash flow per share while also accelerating deleveraging, particularly in the next several quarters.
and ultimately, cash returns to shareholders.
Margin-enhancing focus on unit cost is a constant state of mind at Range.
Lease operating expenses remain near historic lows at $0.10 per unit on the back of consistent efficient Marcellus operations.
Cash G&A expenses increased slightly to $31 million or $0.16 per unit.
The increase stems from two line items.
First, roughly $1.5 million related to legal expenses that should tail off next quarter.
And second, what appears to be a temporary increase in medical costs.
Absent these two transitory items, G&A spending was in line with the preceding quarter.
Cash interest expense was roughly $55 million, flat with the preceding quarter and with reduced debt balances should begin to decline in coming quarters.
Gathering, processing and transportation expense increased, but it is important to keep in mind that this is a positive byproduct of strong NGL prices that resulted in significantly higher NGL margins.
Recall that Range's processing costs are from percent of proceeds contracts such that we pay a percent of NGL revenues as the fee.
Consequently, a fraction of the materially higher prices received for NGLs is paid as a higher processing cost in the quarter.
As discussed previously, an increase in revenue of $1 per NGL barrel equates to approximately $0.01 per Mcfe in cost.
This structure is unique to range in the Appalachian Basin and is a right way risk arrangement that has led to reduced costs for several quarters of lower prices, and now continues to drive material margin expansion.
For reference, since February, Range's forecasted NGL realizations in 2021 have increased by approximately $7 per barrel, potentially resulting in an increase of approximately $250 million in pre-hedge revenue.
Net of price-linked processing costs, forecasted '21 pre hedge cash flow from NGLs has increased by approximately $200 million since February, demonstrating the significant margin expansion from rising NGL prices.
In aggregate, revenue improvements stemming from diverse marketing arrangements, coupled with prudent hedging and thoughtful expense management resulted in cash margin per unit of production expanding to $0.93.
Turning to the balance sheet.
As described last quarter, near-term maturities have been a focus such that we reduced bond maturities through 2024 by almost $1.2 billion, while at the same time, improving liquidity to nearly $2 billion.
During the second quarter, we reduced total debt by $66 million, including all subordinated bonds.
Forecasted cash flows at strip pricing are expected to exceed debt maturities in coming years and are backstopped by ample liquidity.
There has been substantial improvement in the debt markets, and it's evident in the trading levels of Range's bonds that both access to and cost of capital has improved.
Future debt retirement is expected to be funded primarily by organic free cash flow.
We will be cost conscious to effectively manage debt retirement, while also being mindful of the costs and benefits of potential refinancing activity.
Liability management over the last few years has, as expected, temporarily increased interest expense.
However, this avoided much higher cost forms of capital that allowed Range to retain per share exposure to growing free cash flow and a substantially improved natural gas and natural gas liquid environment.
Further improving the balance sheet remains a principal objective.
At current commodity prices, forecast indicates leverage in the mid-1 times area is achievable in the first half of 2022.
Tangible shareholder value accretion is first being driven by using free cash flow to reduce absolute debt, as target leverage levels come into sight, potentially as early as the first half of next year, the discussion of Range's return of capital framework becomes a logical next step in a balanced macro environment.
The second quarter and year-to-date results are a byproduct of relentless work by the entire Range team being focused on enhancing per share exposure to what we believe is the largest portfolio of quality inventory in Appalachia.
To put it concisely, we believe we are delivering on stated objectives.
We seek to continue this trend of disciplined value creation for our shareholders.
Jeff, back to you.
Operator, we'll be happy to answer questions. | qtrly production averaged 2.10 bcfe per day, about 31% liquids.
remains on track to spend at or below total capital budget of $425 million in 2021. |
Jon Vander Ark, our CEO; and Brian DelGhiaccio, our CFO, are joining me as we discuss our performance.
The material that we discuss today is time-sensitive.
If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is July 29, 2021.
I want to remind you that Republic's management team routinely participates in investor conferences.
We are very pleased with our strong performance in the second quarter.
Our results reflect strong execution and continued momentum on our strategic priorities which are building capabilities to further differentiate us from competitors.
These capabilities include: driving growth and building customer loyalty through a maniacal focus on the customer, which we call Customer Zeal; leveraging digital tools to the experience for our customers and employees, which we believe drives growth and generates operational efficiencies; and prioritizing sustainability by offering environmentally responsible solutions to our customers while protecting the planet.
During the second quarter, we delivered adjusted earnings per share of $1.09, which represents a 36% increase over the prior year, expanded EBITDA margin of 110 basis points to 30.6%, and generated $1 billion of adjusted free cash flow on a year-to-date basis.
We continue to effectively allocate capital by investing in value-creating acquisitions and returning excess cash to our shareholders.
Year-to-date, we invested $567 million in acquisitions to further enhance our market position and increase free cash flow.
Our pipeline of acquisition opportunities remains robust, with opportunities in both solid waste and the Environmental Solutions portion of our business.
We expect to invest well over $600 million in acquisitions for the full year.
Year-to-date, we returned $363 million to our shareholders through dividends and share repurchases, and our Board recently approved an 8% increase in the quarterly dividend.
The strength of the underlying business is irrefutable, and we continue to see the proof points that our strategy is working.
Retention in our small and large container business remains at historically high levels at 94%.
If you further consider all permanent units of service, retention is even higher at 95%.
As anticipated, the pricing environment was strong in the second quarter.
Total core price was 5.2%, and average yield was 2.6%.
This level of core price matches the highest level in our company's history.
During the second quarter, we delivered outsized growth in our business as the economy improved.
Second quarter volume increased 8.1% compared to the prior year, which exceeded our expectations.
The outlook for growth in the remainder of the year, both organically and through acquisitions, is strong.
We continue to see the benefits of our investments in technology and are well underway on the rollout of the next phase of our RISE platform.
Through the second quarter, we implemented tablets in approximately 40% -- 47% of our large and small container fleet.
We expect to be substantially complete by the end of this year, with plans to further deploy to the residential fleet beginning in 2022.
The in-cab tablets enable automated customer notifications, which provides customers real-time information about their service.
Next, we believe sustainability is more than environmental stewardship but also a platform for growth.
We recently published our new sustainability report, which highlights the progress we are making in our most significant opportunities to positively impact our stakeholders and the environment.
For example, we are proud to report a 5% reduction in operational greenhouse gas emissions in 2020 compared to the prior year.
This year, we expanded and converted a landfill gas energy plant to high BTU and have 15 additional projects in the pipeline.
These projects reduce landfill emissions, generate more renewable and improve our economics.
We are also making the communities in which we operate better places to live.
So far this year, we've supported more than 25 charitable efforts and neighborhood revitalization projects through financial contributions and volunteer efforts.
This is in addition to the ongoing support of our local divisions provide to their communities.
In recognition of our ESG performance and transparency, we were named to 3BL Media's 100 Best Corporate Citizens list for the second consecutive year.
Finally, turning to our outlook for the remainder of the year.
We expect continued strength in our business and to exceed the full year guidance we upwardly revised last quarter.
Accordingly, we are updating full year financial guidance as follows.
Adjusted earnings per share is now expected to be in a range of $4 to $4.05, and adjusted free cash flow is now expected to be in a range of $1.45 billion to $1.475 billion.
This represents an increase of over 6% from the midpoint of the prior guidance.
Second quarter core price was 5.2%, which included open market pricing of 6.5% and restricted pricing of 3%.
Core price in the open market was the highest level in company history.
The components of core price included small container of 7.9%, large container of 5.3% and residential of 5%.
Average yield was 2.6%, which increased 30 basis points from the first quarter.
This level of performance was in line with our expectations.
Second quarter volume increased 8.1%.
While we expected second quarter to be the highest reported volume for the year, the 8.1% growth exceeded our expectations.
The components of volume included an increase in small container of 8.6%, an increase in large container of 13.7% and an increase in landfill of 12.6%.
For reference, second quarter volumes in our small and large container businesses were down less than 1% from a 2019 pre-pandemic baseline, and MSW and C&D landfill volumes were both above the pre-pandemic baseline.
Moving on to recycling.
Commodity prices increased to $170 per ton in the second quarter.
This compared to $101 per ton in the prior year.
Recycling processing and commodity sales contributed 100 basis points to internal growth during the second quarter.
Next, turning to our Environmental Solutions business.
Second quarter Environmental Solutions revenue was essentially flat with the prior year.
Approximately 30% of our Environmental Solutions business is in the upstream oil and gas sector, and 70% is in the downstream petrochemical and broader industrial manufacturing sectors.
The downstream petrochemical and industrial manufacturing portion of this business grew 8% compared to the prior year.
Adjusted EBITDA margin for the second quarter was 30.6% and increased 110 basis points over the prior year.
This included 130 basis points, a 50 basis point increase from recycled commodity prices and a 70 basis point headwind from net fuel.
The margin expansion is a direct result of pricing in excess of our cost inflation realizing operating leverage as volumes return, and continued effective cost management.
SG&A was 10.7% of revenue, which was flat with the prior year.
SG&A included higher levels of incentive compensation due to projected financial outperformance.
SG&A would have been approximately 10%, excluding the additional incentive compensation expenses.
Year-to-date, adjusted free cash flow was $1 billion and increased $276 million or 38% compared to the prior year.
The drivers of growth included EBITDA growth in the business, a positive contribution from a 1.5-day improvement in DSO and the timing of capital expenditures.
We received approximately 40% of our projected full year capex during the first half of the year.
During the quarter, total debt was $9 billion, and total liquidity was $2.9 billion.
Interest expense decreased $13 million due to refinancing activities completed last year, and our leverage ratio was 2.9 times.
With respect to taxes, our second quarter adjusted effective tax rate was 21.6%.
We had an equivalent tax impact of 23.7% if you include noncash charges from solar investments.
We'll expect a full year equivalent tax impact of 26%, which includes the effective tax rate and noncash solar charges.
With that, operator, I would like to open the call to questions. | q2 adjusted non-gaap earnings per share $1.09.
sees fy adjusted earnings per share $4.00 to $4.05.
raised 2021 full-year financial guidance.
increased quarterly dividend by approximately 8 percent.
qtrly revenue $2,812.8 million versus $2,454.4 million. |
I will begin today with a high-level overview of our first quarter performance and capital allocation priorities.
Karla will then speak to our operating results and demand trends by end market, and Arthur will conclude with a review of our first quarter 2021 financials.
Our resilient business model, coupled with outstanding execution in a favorable market, resulted in record financial performance during the first quarter of 2021.
We experienced ongoing strength in metals pricing during the first quarter, led by multiple price increases for carbon steel products, along with improving demand in many markets, and leveraged our decentralized operating structure, small order sizes and diversification of products, end markets and geographies to achieve record gross profit margin for the third consecutive quarter of 33.6%, up 60 basis points from the fourth quarter of 2020 and up 330 basis points from the first quarter of 2020.
Our record quarterly gross profit margin, combined with average selling prices well above our expectations and our continued focus on expense control, contributed to record pre-tax income of $359 million in the first quarter of 2021, up over 100% from the prior quarter and up over 300% from the prior year period.
Our quarterly earnings per diluted share of $4.12 were also a record and substantially exceeded our outlook.
Our strong earnings and effective working capital management resulted in cash flow from operations of $161.8 million in the first quarter of 2021 despite $182.8 million of working capital investment.
This is a significant result as we typically use cash in the first quarter as we rebuild working capital from seasonal low fourth quarter levels, compounded by the significant increases in metals costs we are experiencing.
We improved our inventory turn rate to 5.4 times, surpassing our 2020 annual rate and companywide turn goal of 4.7 times.
Our ability to cross-sell inventory among our family of companies, which we believe is the key advantage and differentiator of our model and scale, was a significant contributor to our improved inventory management.
Despite extended mill lead times and inventory shortages, collaboration among our family of companies and strong long-standing relationships with our domestic mills enabled us to source the metal needed by our customers.
Our managers in the field effectively supported our valued customers by ensuring inventory availability while maximizing margin on opportunistic orders.
Our strong cash flow generation and significantly enhanced liquidity position enables us to maintain a flexible capital allocation strategy focused on both growth and stockholder returns.
Our 2021 capital expenditure budget of $245 million includes new buildings and other projects to expand, upgrade and maintain many of our existing operating facilities.
However, when factoring in project delays and extended lead times for equipment due to COVID-19, we believe our potential cash flow outlays for our capital expenditure will be closer to $300 million in 2021 due to the prior year holdover spending.
During the first quarter of 2021, we invested $43.7 million back into our business through capital expenditures, including several growth opportunities to address and exceed our customers' and suppliers' needs.
For instance, we've invested in toll processing expansions in Texas and Kentucky given the significant demand we've experienced in our toll processing capabilities throughout our footprint.
Operations at our Kentucky facility commenced in November 2020 and have been steadily ramping ever since.
Construction continues in Texas on our new greenfield facility focused on carbon steel tolling, which will support increased capacity of our toll processing customers who are primarily metals producers and their end customers.
We're very excited about these opportunities to expand our toll processing service offerings and see many more possibilities in the future for our toll processing capabilities moving forward.
As mentioned on our last call, we are installing energy-efficient lighting and solar panels in certain of our facilities as well as investing in additional innovative processing equipment to continue providing our customers with the highest quality products and services.
We continue to see a healthy pipeline of prospective opportunities, including in adjacent businesses in addition to traditional metals service center businesses as we've broadened our universe of potential acquisition candidates.
Nevertheless, we will maintain our strict transaction criteria, including our focus on quality of earnings when we evaluate any prospective targets to ensure a strong fit within our family of companies.
I will now turn to our stockholder return activity.
During the first quarter of 2021, we paid $44.8 million in dividends to our stockholders.
We've maintained our payment of regular quarterly dividends for 62 consecutive years without ever suspending payments or reducing our dividend rate.
In fact, we've increased our dividend 28 times since our 1994 IPO, including the most recent increase of 10% in the first quarter of 2021.
At March 31, 2021, approximately 2.8 million shares remained available for repurchase under our stock repurchase program.
We expect to remain a prudent allocator of capital by maintaining our flexible approach focused on both growth, which remains our top priority; and stockholder return activities, including opportunistic repurchases of our common stock.
In summary, I am inspired by the strong operational execution demonstrated by the entire Reliance team during the first quarter of 2021.
Our unwavering focus on the core elements of the Reliance business model, including health and safety, pricing discipline, diligent expense control when needed, inventory management, organic growth and innovation, enables us to perform from a position of strength in both good times and bad.
In the current environment characterized by extremely high metal pricing, strong demand from many of our customers and limited metal availability, we believe Reliance remains well positioned to continue generating strong earnings.
Given our strong liquidity position, we look forward to continuing to support the growth and needs of our customers and suppliers while also returning value to our stockholders.
We will continue to support our colleagues, customers, suppliers and communities in a sustainable manner through both the challenges and opportunities that lie ahead.
We remain confident that America is going to need Reliance to rebuild.
Strong demand conditions in the majority of our end markets resulted in our tons sold increasing 11.3% compared to the fourth quarter, which was within our guidance range of up 10% to 12% and above the typical seasonal improvement in shipping volumes we experienced in the first quarter.
While demand is healthy and continues to improve in most markets, our first quarter shipments did not reach pre-pandemic levels and were down 4% from the first quarter of 2020.
However, on a per day basis, our tons sold were down only 2.5%.
We believe underlying demand is stronger than our shipment levels reflect, given many factors holding back economic activity for us, our customers and our suppliers, including metal supply constraints, supply chain disruptions for various components and materials and labor and trucking shortages.
The good news is we expect to fill this demand in future periods and these factors support increased metal pricing.
This strengthened demand, coupled with rising input costs and limited metal availability, resulted in metal prices accelerating throughout the first quarter for many of the products we sell, most notably carbon steel products.
Our average selling price increased 20% compared to the fourth quarter of 2020, exceeding our guidance of up 12% to 14% by a significant margin.
These robust demand and pricing conditions contributed to an all-time high quarterly gross profit margin of 33.6%.
On a non-GAAP FIFO basis, which we believe is the best measure of our day-to-day operating performance, we achieved a record gross profit margin of 37.1%, an increase of 350 basis points compared to the prior quarter and up 600 basis points from the first quarter of 2020.
Way to go, team Reliance.
Our record gross profit margin was the result of outstanding execution by our managers in the field who once again effectively implemented price increases at the time of mill announcement prior to receiving the higher-cost metal into inventory, maintained their focus on higher-margin orders and were very selective given limited metal supply, which enabled us to capture an incremental margin benefit in excess of already strong levels.
I'll now turn to a high-level overview of our key end markets.
Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve, continue to improve with first quarter shipments approaching pre-pandemic levels.
We continue to experience strong quoting activity for projects for big-box retailers, healthcare facilities, schools, large warehouses and data processing centers, among others.
And given our healthy backlogs, quoting activity and positive customer sentiment, we believe demand will remain steady at current solid levels.
We saw continued strength in demand for the toll processing services we provide to the automotive market, surpassing activity levels in both the fourth and first quarters of 2020 with automotive OEMs and steel and aluminum mills continuing to ramp production.
Importantly, our tolling operations serving the automotive market saw only minimal impacts to date as a result of the global microchip shortage, and we expect tool processing volumes to remain strong.
Demand in heavy industry for both agricultural and construction equipment continued to improve in the first quarter as our customers increased production levels to meet customer demand and replenish dealer inventories.
Demand for industrial machinery used in manufacturing processes was also strong in the first quarter of 2021.
Absent disruptions for our customers that impact their production, we expect demand to continue at strong levels.
Semiconductor demand during the first quarter continued to strengthen from the fourth quarter, and we expect this to continue.
The semiconductor space continues to be one of our strongest end markets.
Demand in commercial aerospace began to experience limited signs of improvement compared to the fourth quarter of 2020, which we believe was the trough of the current cycle.
We expect limited improvement throughout 2021.
On the other hand, demand in the military, defense and space portions of our aerospace business remains strong with backlog improving during the quarter.
We anticipate strong demand continuing in the noncommercial aerospace market for the balance of the year.
Finally, demand in the energy sector, which is mainly oil and natural gas, saw a modest recovery toward the end of the first quarter of 2021.
We anticipate a slight improvement in the second quarter given current oil prices and customers needing to replenish inventory for certain products.
We entered the second quarter of 2021 with strong demand and pricing momentum that creates an environment for us to optimize our model and deliver strong results.
We remain dedicated to partnering with our key customers and suppliers during these extraordinary times, and we can only do this with the continued commitment to health and safety and operational excellence that our Reliance colleagues have demonstrated every day throughout very challenging times.
I'll start with a recap of our quarterly results.
Strong pricing, healthy demand and record gross profit margin contributed to record gross profit dollars, which in turn drove record pre-tax income and record earnings per share.
Turning to our sales.
The significant increase in metal pricing and healthy demand resulted in our first quarter sales increasing 33% over the fourth quarter of 2020.
Compared to the prior year period, our first quarter sales were up over 10%, supported by the strong pricing momentum for most carbon steel products.
As Jim and Karla mentioned, the strong pricing environment, along with our focus on higher-margin orders and continued investments in value-added processing capabilities, collectively resulted in record quarterly gross profit of $953.7 million and a record gross profit margin of 33.6% in the first quarter of 2021.
We incurred LIFO expense of $100 million in the first quarter of 2021.
This compares to LIFO income of $20 million in the first quarter of 2020 and LIFO expense of $15.5 million in the fourth quarter of 2020.
At the end of the first quarter, our LIFO reserve on our balance sheet was $215.6 million.
We revised our annual LIFO expense estimate to $400 million from $340 million primarily due to higher-than-anticipated costs for certain carbon steel products.
Consistent with our accounting policy, we allocate our annual estimate on a pro rata basis in each quarter.
As such, our current projected LIFO expense for the second quarter of 2021 is $100 million.
As in prior years, we will update our expectations each quarter based upon our inventory cost and metal pricing trends.
Now turning to our expenses.
Our SG&A expense was generally consistent with traditional seasonal trends, increasing $54.9 million or 11.8% compared to the fourth quarter of 2020 due to strong volume and pricing momentum.
The quarter-over-quarter increase was mainly a result of higher incentive-based compensation given our record gross profit and pre-tax income.
Overall, our head count remained relatively consistent with year-end levels.
In comparison to the prior year period, SG&A expense was roughly flat due to lower wages as a result of reduced head count, which was down approximately 8% year-over-year, and was offset by higher incentive compensation due to record earnings levels in the first quarter of 2021 and to a lesser extent, inflationary increases.
We will maintain our disciplined approach to expense management and continue to monitor our expense structure as we progress further into 2021.
Our non-GAAP pre-tax income of $357.1 million in the first quarter of 2021 was the highest in our company's history and represents an increase of $136.5 million or 61.9% from the first quarter of 2020 due to favorable demand and pricing conditions, strong execution and diligent expense management.
Our non-GAAP pre-tax income margin of 12.6% was also a record and exceeded the prior year period by 400 basis points.
Our effective income tax rate for the first quarter of 2021 was 25.3%, up from 24.3% in the first quarter of 2020 mainly due to higher profitability.
We currently anticipate a full year 2021 effective income tax rate of 25%.
As a result of all these factors, we generated record quarterly earnings per share of $4.12 in the first quarter of 2021 compared to $0.92 in the first quarter of 2020.
On a non-GAAP basis, our first quarter earnings of $4.10 per share significantly exceeded our outlook and were up 104% from $2.01 in the fourth quarter of 2020 and up 67.3% from $2.45 in the first quarter of 2020.
Turning to our balance sheet and cash flow.
Our operations continue to generate cash despite significantly higher working capital needs.
We generated strong cash flow from operations of $161.8 million during the first quarter of 2021 due to our profitable operations and effective working capital management, including our focus on inventory turns.
As of the end of the first quarter, our total debt outstanding was $1.66 billion, resulting in a net debt-to-EBITDA multiple of 0.85.
We had no borrowings outstanding on our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy while maintaining our investment-grade credit rating.
I'll now turn to our outlook.
While macroeconomic uncertainty stemming from the COVID-19 pandemic continues, we remain optimistic about business conditions with strong underlying demand in the majority of the end markets we serve.
However, factors impacting shipment levels in the first quarter of 2021 such as metal supply constraints and supply chain disruptions for many of our customers will continue to persist in the second quarter of 2021.
Despite these factors, we estimate tons sold will be flat to up 2% in the second quarter of 2021 compared to the first quarter of 2021.
We expect metal pricing will remain near current levels with the potential for further upside in certain products.
Since current metal prices are substantially higher than the average selling price in the first quarter of 2021, we estimate our average selling price per ton sold for the second quarter of 2021 will be up 5% to 7%.
Given the strong demand and pricing fundamentals, we anticipate continued strength in our gross profit margin in the second quarter of 2021.
Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $4.20 and to $4.40 for the second quarter of 2021.
In closing, we're extremely pleased with our record first quarter 2021 operational and financial performance, supported by strong pricing and demand trends as well as excellent execution by all of our colleagues in the field.
These factors collectively resulted in yet another quarter of robust profitability and cash flow, enabling us to continue executing on our capital allocation priorities of investing in the growth of our business and returning value to our stockholders. | q1 earnings per share $4.12.
sees q2 non-gaap earnings per share $4.20 to $4.40.
qtrly non-gaap diluted earnings per share $4.10.
estimates its average selling price per ton sold for q2 of 2021 will be up 5% to 7%.
company anticipates continued strength in its gross profit margin in q2 of 2021.
factors impacting shipment levels in q1 of 2021 will continue to persist in q2 of 2021. |
I will begin with a high-level overview of our second quarter performance and capital allocation priorities.
Karla will then speak to our operating results and demand trends by end market.
And Arthur will conclude with a review of our second quarter 2021 financials.
Our resilient business model, coupled with favorable market conditions, drove a second consecutive quarter of record financial performance.
I'm inspired by the ongoing operational excellence and performance demonstrated by all of my colleagues within the Reliance family of companies.
Despite lingering disruptions associated with the global pandemic, including limited metal availability and various other supply chain constraints, our managers in the field executed tremendous execution and, most importantly, maintained a relentless focus on safety.
During the second quarter, we continued to experience considerable strength in metals pricing led by multiple mill price increases for carbon and stainless steel products in particular.
The favorable pricing environment, along with continued strong underlying demand in the majority of the end markets we serve, drove record quarterly net sales of $3.42 billion.
Our business model, which is strategically highly diversified in terms of our products, end markets and geographies, and focused on small order sizes with quick turnaround is particularly effective during periods of tight supply and volatile pricing.
In addition, despite metal supply constraints, our strong, long-standing relationships with the domestic mills and our unique ability to cross-sell inventory among the family of companies allowed us to source the metal we needed to satisfy our valued customers.
Through continued price discipline by our managers in the field, we generated a strong gross profit margin of 31.7%, which, when combined with our record sales, resulted in a record quarterly gross profit of $1.08 billion in the second quarter of 2021.
Both our record quarterly gross profit and our continued focus on expense control contributed to our second consecutive quarter of record quarterly pre-tax income of $444.1 million.
Our quarterly earnings per diluted share of $5.08 were both another record and substantially in excess of our guidance as well as up 23.3% from our prior quarter.
Our resilient continuously improving business model has enabled us to maintain industry-leading gross profit margins throughout various metals pricing and demand cycles.
We most recently increased our long-term sustainable gross profit margin range to 28% to 30% during the first quarter of 2020.
And we have remained above this range throughout the uncertain COVID-19 pandemic environment.
We believe our sustainable outperformance resulted from our managers' disciplined approach to pricing and increased value-added processing that led to a greater focus on high-quality-high-margin business.
Today, we are very pleased to announce that we are once again increasing our estimated sustainable gross profit margin range to 29% to 31%.
We are confident in our ability to maintain this higher range on an annual basis as a result of our sustainable impacts the investments we have made in our business are having on our gross profit margins.
Let me touch on this a little bit more in detail.
Over the past five years, we have invested nearly $1 billion into our company through capital expenditures.
Approximately half of which was directly -- was directed toward state-of-the-art value-added processing equipment across the family of companies.
These investments not only introduced new processing capabilities and helped us increase the percentage of orders with processing from our historic levels of about 40% to our current level of about 50%, but also enhanced and upgraded our existing value-added processing equipment to improve the quality of our service offerings to our customers.
Our investments within our family of companies enables our managers in the field to provide additional value to our customers at an appropriate price, which further supports our increased sustainable gross profit margin range.
Looking ahead, we will continue to prioritize investing in our company's growth as a key element of our capital allocation strategy.
We maintain a flexible capital allocation strategy that is focused on both reinvesting in our company's growth and stockholder returns.
Beyond the significant investments, we are continuing to make in value-added processing equipment, our 2021 capital expenditures will also be focused on both new facilities and projects to expand, upgrade and maintain many of our existing operations.
As such, we are increasing our 2021 capital expenditure budget from $245 million to a new record of $310 million due to various key projects, including a significant expansion of our operation in South Korea that services the semiconductor and biochem and pharma markets, new expansion -- with new expanded toll processing capacity and increased investments in renewable energy at many of our existing facilities.
During the second quarter of 2021, we invested $80.1 million in capital expenditures.
Turning to our other avenue of growth, acquisitions.
We have a healthy pipeline of prospective opportunities, including both traditional metal service center businesses and adjacent businesses.
As always, we will adhere to our strict transaction criteria when evaluating prospective targets to ensure a strong fit within our family of companies.
In regard to stockholder returns, we returned $67.8 million to our stockholders during the second quarter of 2021 through the payment of $43.8 million in dividends and the repurchase of $24 million of Reliance common stock.
Since 2018, we have repurchased approximately $900 million of our common stock at a weighted average cost at $85.52 per share.
We expect to remain a prudent allocator of capital by maintaining our flexible approach focused on both growth which remains a top priority as well as stockholder return activities.
Finally, I would like to briefly comment on our recently announced executive officer succession matters.
Effective January 2022, Bill Sales will retire from Reliance following 24 years of service with our company.
As of July 1, Bill transitioned from his role as Executive Vice President of Operations to Special Adviser, where he will provide support on special projects and facilitate the transition of his responsibility.
Bill's deep industry experience and relationships have contributed significantly to Reliance and our success over the years.
And on behalf of all of us at Reliance, wish you the very best in your retirement.
Relatedly, as a part of our deliberate succession planning process, I'd also like to congratulate both Sean Mullins, who has been promoted to Senior Vice President, Operations; and Brian Yamaguchi, who has been promoted to Vice President, Supplier Development.
Both Sean and Brian have a long-standing history with Reliance as well as a significant industry experience and a passion for our business.
I applaud both of you for your well-deserved new roles.
In summary, I am beyond inspired by the outstanding operational execution demonstrated by the entire Reliance team and our unwavering focus on the core elements of our resilient business model, which drove our second consecutive quarter of record financial performance.
And in an environment characterized by extremely high metals pricing, strong demand from our customers and limited metal availability, we believe Reliance remains well positioned to continue supporting the growth and needs of our customers and our suppliers while generating strong earnings and returning value to our stockholders.
We remain confident that America is going to need Reliance to rebuild, and we will continue to support our colleagues, customers, suppliers and community in our collective efforts to do so.
Additionally, I'd like to extend my appreciation to our customers for their ongoing trust in Reliance and our mill partners for their continued support.
Turning now to our second quarter operational performance.
Continued strong underlying demand in the majority of our end markets resulted in our tons sold increasing 1% compared to the first quarter, which was within our guidance range of flat to up 2%.
We continue to believe, however, that underlying demand is stronger than our second quarter 2021 shipment levels reflect due to factors hindering economic activity such as metal supply constraints, labor shortages and other supply chain disruptions we are experiencing in our business as well as impacts on our customers and suppliers.
And we look forward to fulfilling this pent-up demand in future periods.
Disruptive supply chain factors, however, do support increased metal pricing resulting in ongoing metal price escalation for many of the products we sell during the second quarter, most notably for carbon and stainless steel products.
Our average selling price in the second quarter reached a new all-time high an increased 19.7% compared to the first quarter of 2021 and exceeded our guidance of up 5% to 7% by a significant amount.
As Jim noted, the robust demand and favorable pricing conditions contributed to record quarterly gross profit dollars of $1.08 billion in the second quarter of 2021 and a strong gross profit margin of 31.7%.
On a FIFO basis, which we believe better reflects our current operating performance, we achieved a record gross profit margin of 37.5%, our second consecutive record FIFO gross profit margin quarter.
To our managers in the field, we greatly appreciate your superb performance and continued focus on high-quality high-margin business.
We also applaud the level of cooperation you have exhibited across our family of companies to provide creative solutions to our customers.
In the current environment, we are experiencing even more business opportunities from new and existing customers.
Our size and scale combined with strong collaboration among our family of companies and support from our key mill partners have collectively helped ensure that we are able to meet our valued customers' needs.
I'll now turn to a high-level overview of our key end market trends on a sequential quarter basis.
Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve, continue to gain strength.
Our second quarter tons sold surpassed first quarter shipments and reached pre-pandemic levels.
We continue to experience solid quoting activity for projects in the areas of distribution and fulfillment centers, data processing and manufacturing facilities, big-box retail and the like.
Due to supply constraints, and increased pricing, we are also experiencing an uptick in smaller projects that can be completed quickly.
Given our healthy backlogs, solid quoting activity, positive customer sentiment and favorable key industry indicators, we are optimistic demand will continue to strengthen through the remainder of 2021.
Demand for the toll processing services Reliance provides to the automotive market softened slightly from first quarter levels.
Nevertheless, we believe underlying demand is stronger than our second quarter trends reflect due to the impact of global microchip shortages on production levels in certain automotive markets.
We are continuing to provide solutions to support our automotive customers' increased transportation and storage challenges through recent investments which include purchasing a new facility in Michigan and opening a new tolling facility in Indiana.
This increased capacity will allow us to service many new opportunities for our tolling business.
And looking ahead, we are cautiously optimistic that our tolling volumes to the auto market will strengthen in the back half of the year as we ramp up our expanded capacity and if auto production increases.
Importantly, we remain confident about the long-term strength of our toll processing business as evidenced by our ongoing investments in growth and innovation in this area.
As a reminder, our greenfield Kentucky tolling operation commenced production in November 2020 and has been steadily ramping ever since.
Construction also continues on our greenfield tolling facility in Texas which we expect will commence operations in the fourth quarter of 2021 and ramp throughout 2022.
We're very excited about these opportunities to expand our tolling presence.
Demand in heavy industry for both agricultural and construction equipment improved significantly during the second quarter, with our shipments exceeding pre-pandemic levels.
Demand for machinery use in manufacturing processes was also very strong in the second quarter of 2021, and we expect demand in the heavy equipment and manufacturing industries to continue at solid levels through the rest of the year.
Semiconductor demand during the second quarter continued to improve from solid first quarter levels.
The semiconductor space remains one of our strongest end markets, and we expect this trend to continue well into 2022.
With regard to aerospace, demand in commercial aerospace, which is roughly half of our aerospace exposure, softened in the second quarter compared to our first quarter shipment levels due to increased COVID-19 related shutdowns in Europe.
We believe we are slowly exiting the trough of the demand cycle and expect limited gradual improvement throughout the remainder of 2021.
Demand in the military, defense and space portions of our aerospace business, while also down from the first quarter due to COVID-19-related shutdowns in Europe remained solid with strong backlogs and exceeded our pre-pandemic shipment levels.
We anticipate strong demand in the noncommercial aerospace market will continue for the balance of the year.
Finally, demand in the energy sector, which we define as mainly oil and natural gas, improved slightly in the second quarter as a result of increasing oil prices and rig counts, along with customer inventory replenishments.
We expect demand in the energy sector that continue to improve at modest levels in the second half of the year.
In summary, the first half of 2021 was distinguished by back-to-back quarters of record financial performance.
Today, early in the third quarter of 2021, positive momentum in both demand and pricing continue, which, when combined with our proven and resilient business model, positions us to optimize our performance and deliver strong results once again.
I'll start with a recap of our quarterly results.
Once again, record pricing levels, healthy demand and strong gross profit margins contributed to record gross profit dollars, which in turn drove record pre-tax income and record earnings per share.
The significant increase in metal pricing and ongoing strength in demand resulted in record quarterly sales of $3.42 billion, up 20.4% from the first quarter of 2021 and up 69.3% from the second quarter of 2020.
Strong pricing momentum for most carbon and stainless steel products contributed to the 19.7% increase in our average selling price per ton over the first quarter of 2021.
As Jim and Karla mentioned, the continued pricing discipline and focus on higher-margin orders by our managers in the field, along with our ongoing investments in value-added processing capabilities collectively resulted in record quarterly gross profit of $1.08 billion and a strong gross profit margin of 31.7% in the second quarter of 2021.
Our non-GAAP FIFO gross profit margin of 37.5% in the second quarter of 2021 was a record and exceeded the prior quarter by 40 basis points, and the prior year period by 730 basis points.
We incurred LIFO expense of $200 million or $2.31 per share in the second quarter of 2021 compared to LIFO expense of $100 million or $1.16 per share in the first quarter of 2021.
As a result of higher-than-anticipated costs for certain carbon and stainless steel products, we revised our annual LIFO expense estimate to $600 million from $400 million for 2021.
Consistent with our accounting policy, we allocate our annual estimate on a pro rata basis in each quarter.
and had to true up to our new annual estimate in the second quarter of 2021 by incurring $200 million of LIFO expense, bringing our six-month 2021 LIFO expense to $300 million.
Our current projected LIFO expense for the third quarter of 2021 is $150 million based on this revised annual LIFO expense estimate.
As in prior years, we will update our expectations each quarter based upon our inventory cost and metal pricing trends.
At the end of the second quarter of 2021, our LIFO reserve on our balance sheet was $415.6 million and is projected to be $715.6 million at December 31, 2021, based on our current $600 million annual LIFO expense estimate.
This reserve can benefit earnings in future periods that include declining metal prices.
Now turning to our expenses.
Our second quarter SG&A expense increased $44.8 million or 8.6% compared to the first quarter of 2021.
The bulk of the quarter-over-quarter increase was a result of higher incentive-based compensation, given our record gross profit and pre-tax income levels.
Additionally, inflation contributed to increased variable expenses, most notably for fuel and freight as well as packaging costs.
In comparison to the prior year period, SG&A expense was up $124.8 million or 28.5% primarily as a result of higher incentive-based compensation, variable plant and delivery expenses associated with a 17.5% increase in shipments, and to a lesser extent, inflationary increases.
Overall, our headcount was relatively flat compared to both the first quarter of 2021 and the second quarter of 2020.
Our non-GAAP pre-tax income of $442.8 million in the second quarter of 2021 was the highest in our company's history.
Our non-GAAP pre-tax income margin of 13% was also a record.
Our effective income tax rate for the second quarter of 2021 was 25.6%, up from 20.9% in the second quarter of 2020, mainly due to higher profitability.
We currently anticipate a full year 2021 effective income tax rate of 25.5%.
We generated record quarterly earnings per share of $5.08 in the second quarter of 2021 compared to $4.12 in the first quarter of 2021 and $1.24 in the second quarter of 2020.
Now turning to our balance sheet and cash flow.
Our operations continue to generate cash despite significantly higher working capital needs attributable to rising metal costs.
In the second quarter, we again generated strong cash flow from operations of $101.6 million despite over $300 million in additional working capital requirements.
In addition, our second quarter of 2021 cash flow from operations was impacted by approximately $174 million of income tax payments compared to $7 million in the first quarter of 2021.
As of June 30, 2021, our total debt outstanding was $1.66 billion, resulting in a net debt to EBITDA multiple of 0.7 times.
We had no borrowings outstanding on our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy while maintaining our investment-grade credit ratings.
I'll now turn to our outlook.
We remain optimistic about business conditions in the current environment with strong underlying demand in the majority of the end markets we serve.
However, we expect factors impacting shipment levels in the second quarter of 2021, such as metal supply constraints, labor shortages and other supply chain disruptions will continue to persist in the third quarter of 2021.
As such, we estimate tons sold will be down 1% to up 1% in the third quarter of 2021 compared to the second quarter of 2021.
We expect metal pricing trends to remain strong in the third quarter.
As metal prices at the beginning of the third quarter of 2021 are higher than the average for the second quarter of 2021, we estimate our average selling price per ton sold for the third quarter of 2021 will be up 7% to 9%.
Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $5.55 to $5.75 for the third quarter of 2021.
In closing, we are thrilled with our operational and financial performance in the second quarter, supported by strong pricing and demand trends as well as outstanding execution by all of our colleagues in the field who continue supporting our customers' needs.
These factors, coupled with our resilient business model, resulted in yet another quarter of record financial performance and solid cash flow, enabling us to continue executing on our capital allocation priority of investing in the growth of our business and returning value to our stockholders. | reliance steel & aluminum q2 earnings per share $5.08.
sees q3 non-gaap earnings per share $5.55 to $5.75.
q2 earnings per share $5.08.
q2 sales $3.42 billion versus refinitiv ibes estimate of $3.17 billion. |
I continue to be inspired by the outstanding operational performance by my colleagues throughout the Reliance family of companies.
Our resilient business model favorable metals pricing trends and excellent execution combined to produce another quarter of record-setting financial results.
Beyond execution of our business model, operational excellence includes our top priority of ensuring the health and safety of all of our Reliance colleagues, and I'd like to extend my gratitude to each and every one of them for their unwavering commitment to operating safely despite the many challenges that have persisted during the ongoing pandemic.
I would especially like to recognize our teams that were directly impacted by Hurricane Ida last month.
While Ida had a minimal impact on our operations, some of our colleagues were impacted personally.
We're very happy that everyone is safe and that our employee-funded and company match program, Reliance Cares was available to support those who are impacted and in need of assistance.
Reliance Cares is an inspirational example of how the Reliance family of companies come together and meaningfully take care of each other.
Turning to our results.
The trends of strengthening metals pricing persisted through the third quarter, which featured multiple mill price increases, most notably for carbon and stainless steel products.
The favorable pricing environment, along with fundamentally strong underlying demand in many of the key end markets we serve drove record quarterly net sales of $3.85 billion.
In addition, strict pricing discipline by our managers in the field helped us generate a strong gross profit margin of 31.5%, which, when combined with our record sales, resulted in a record quarterly gross profit dollars of $1.21 billion in the third quarter of 2021.
Despite various supply disruptions and continued increases in metals pricing that drove LIFO expenses of $262.5 million in the third quarter, our record quarterly net sales, along with record gross profit dollars and our continued focus on expense control led to the third consecutive quarter of record quarterly pre-tax income of $532.6 million.
As a result, our earnings per diluted share of $6.15 were also a record, representing an increase of 21.1% from our record earnings per share achieved in the prior quarter and substantially exceeded both our guidance and analyst consensus.
We attribute this performance to our highly resilient business model, which is strategically designed to perform throughout changing macroeconomic circumstances.
First, we are highly diversified by end markets, products and geographies.
Second, our decentralized structure leaves the decision-making and resources close to the end customers.
We rely on our managers in the field to appropriately price the value of the products and services we provide, which is particularly important in times of tight metal supply and volatile pricing.
In this localized and entrepreneurial environment, our focus on small order sizes with quick turnaround has also proven particularly effective.
Further, our ability to purchase inventory in the spot market through our long-standing, strong relationships with our domestic mills coupled with our unique ability to cross-sell inventory among the family of companies allows us to source the metal we need despite tight supply.
We were pleased our inventory turn rate for the third quarter came in just below our companywide goal, which indicates that our inventory is properly balanced with current demand levels as we continue to secure the raw materials we need to meet customer demand.
Third, our significant investment in organic growth and innovative technology has significantly expanded our value-added processing capabilities, empowering us to focus on higher quality high-margin business and enabling us to increase our estimated sustainable gross profit margin range.
To expand on that last point, I'd like to emphasize that the strong cash flow generation our model provides fuels our flexible and dynamic capital allocation strategy that supports concurrent investments in growth and stockholder return activities.
We believe that it is our resilient business model and our execution of our capital allocation strategy that sets Reliance apart.
We estimate that approximately half of our $310 million capital expenditure budget this year will be directed toward new, innovative, value-added processing equipment, along with enhancements to existing equipment to strengthen our value proposition and overall service offerings.
As I highlighted earlier, these investments helped support our increased sustainable gross profit margin range as they provide our managers in the field the ability to offer additional value to our customers.
As discussed last quarter, our 2021 capital expenditures will also be focused on opening new facilities as well as expanding, upgrading and maintaining existing operations, including renewable energy investments at many of our facilities.
As our focus on growing the company is two-pronged, we also remain highly focused on M&A.
On October 1st, we completed our acquisition of Merfish United, a leading master distributor of tubular building products in the U.S. The company is based in Massachusetts and services 47 states through 12 strategically located distribution centers.
The Merfish acquisition aligns with our strategy of acquiring immediately accretive companies with strong management teams and significant customer, product and geographical diversification.
The Merfish transaction is a bit unique, in that Merfish is not a traditional metal service center and yet the transaction is one of the larger acquisitions that we have completed in our history, as Merfish had approximately $600 million in annual net sales in the 12-month period ending September 30, 2021.
However, Merfish's broad product offerings expands Reliance's exposure into copper and plastic products among others, which Merfish sells to wholesale distribution customers in adjacent end markets in the commercial, residential, municipal and industrial building spaces.
We expect Merfish will help position Reliance in the broader industrial distribution space as well as provide a platform for further growth in this area, both organically and through further acquisitions.
During the third quarter of 2021, we also returned $174.7 million to our stockholders through the payment of $43.7 million in dividends and the repurchase of $131 million of Reliance common stock at an average cost of $147.89 per share.
In the last five years, Reliance repurchased 11.7 million shares of our common stock at an average cost of $89.92 per share for a total of $1.05 billion.
We are extremely pleased to have the capital and the flexibility to simultaneously focus on both growth and stockholder returns and expect to maintain our dynamic approach moving forward, remain prudent allocator of capital.
Before I conclude, I'd like to announce that Reliance will be relocating our corporate headquarters from Los Angeles, California to Scottsdale, Arizona in the first half of 2022.
The Scottsdale office will serve as Reliance's new principal executive office and the company's senior corporate officers will have offices there.
Reliance is a Delaware corporation operating through approximately 300 divisions and subsidiary locations in 40 states and 13 countries outside of the United States, and the relocation of Reliance's principal executive office to Scottsdale reflects our growth and expansion as well as our evaluation of post-pandemic business opportunities and related operating practicalities.
We will, however, maintain a presence in Los Angeles with revamped and innovative office offerings that reflect and complement the redefined post-COVID workplace and meet the needs of our corporate and administrative colleagues who remain in California.
Dave has been a strategic and valued partner to Reliance for more than 30 years for his involvement in the metals industry, and Frank is a seasoned and respected public company senior executive and Chief Financial Officer.
We look forward to benefiting from both of their unique perspectives, experience and expertise.
With the addition of Dave and Frank, Reliance's Board consists of 12 members, 10 of whom are independent.
In summary, I am once again highly pleased to share our record-setting third quarter financial results and commend all of my colleagues for their hard work and unwavering focus during the quarter.
despite the challenges of the ongoing pandemic, supply chain disruptions and tight labor markets and limited metal availability, we sustained our efforts to ensure that we continued to provide value customers with the products they need, often in 24 hours or less.
At the same time, we also continued to successfully execute our growth strategy while generating strong earnings and returning value to our stockholders.
As we look ahead, we look forward to remaining a key contributor to the value chain through the ongoing support of our colleagues, customers, suppliers and communities and remain confident that America is going to need Reliance to rebuild.
I'll now turn to our third quarter operational performance.
Once again, we believe that underlying demand was stronger than our third quarter 2021 shipment levels reflect.
Our tons sold decreased 4.6% and from the second quarter, which was below our guidance of down one percent to up one percent, mainly due to more typical seasonality than we had anticipated combined with various supply chain issues.
Reliance, our customers and our suppliers all continue to experience supply disruptions, including limited metal availability, coupled with labor shortages that temporarily slowed demand for metal in the third quarter, and we believe Reliance is well positioned to satisfy the pent-up demand in future periods.
While disruptive from a demand standpoint, limited metal availability in the market helped support ongoing metal price escalation during the third quarter for many of the products we sell most notably carbon and stainless steel products.
Our average selling price per tons sold in the third quarter reached another all-time high of $2,862, an increase of 18.4% compared to the second quarter of 2021 and significantly in excess of our guidance of up seven percent to nine percent.
There is speculation that certain carbon steel products, namely flat rolled, may be at or near their peak.
We continue to see strong pricing for many of the other carbon steel products.
Stainless pricing remains very strong, and we are also seeing increased pricing for aluminum products.
Our product diversity reduces pricing volatility on our earnings, and we expect continued strong average selling prices at Reliance into 2022.
The favorable pricing environment, coupled with outstanding execution by our managers in the field, contributed to record quarterly gross profit dollars of $1.21 billion in the third quarter of 2021 and a strong gross profit margin of 31.5%.
On a FIFO basis, which we believe better reflects our current operating performance, we achieved a record gross profit margin of 38.3% marking our third consecutive quarter of record FIFO gross profit margin.
We applaud our managers in the field for their unwavering effort, relentless focus on high-quality, high-margin business and effective implementation of price increases at the time of no announcement, which enabled us to capture an incremental margin benefit in excess of already strong levels, and further supporting these efforts, with the enhanced cooperation across our family of companies to ensure we meet our valued customers' needs as well as selectively servicing new business opportunities.
I'll now turn to a high-level overview of our key end market trends on a sequential quarter basis.
Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve, remained at solid levels.
Our third quarter tons sold were down slightly compared to second quarter shipments, but remain near pre-pandemic levels.
We continued to experience solid quoting activity for projects in the areas of distribution and fulfillment centers, data processing and manufacturing facilities as well as utility infrastructure.
Due to supply constraints and increased pricing, we also continue to see an uptick in smaller projects that can be completed quickly.
Given our healthy backlog, solid quoting activity, positive customer sentiment and favorable key industry indicators, we are optimistic nonresidential construction demand will continue to steadily improve through the remainder of 2021 and into 2022.
Demand for the toll processing services Reliance provides to the automotive market fell slightly from second quarter levels due to normal seasonality as well as temporary shutdowns at certain automotive manufacturers due to the semiconductor chip shortage.
Our recent investments, which include purchasing a new facility in Michigan and opening a new tolling facility in Indiana as well as our other greenfield tolling expansions in Kentucky and Texas have allowed us to perform well despite challenging market conditions by increasing our capacity to support our customers' increased transportation and storage needs.
We are optimistic that underlying automotive demand is solid and will recover in 2022 as the impact of global microchip shortages on production levels in certain markets subside.
Longer term, we are confident our toll processing business will remain strong, given the significant level of investments we are continuing to make to support our growth and innovation in this area.
We continue to see new opportunities to expand our tolling presence for automotive, appliance, packaging and other end markets, some of which are already underway and will benefit us in 2022 and beyond.
Demand in heavy industry for both agricultural and construction equipment declined during the third quarter following exceptional growth during the second quarter from a combination of seasonal shutdowns at many customers, along with broad customer supply chain challenges and labor constraints.
That said, third quarter shipments remained above pre-pandemic levels, and underlying demand remains strong, and we expect demand from the heavy equipment and manufacturing industry to be delayed, not lost, and improve in the quarters to come.
Semiconductor demand during the third quarter remained strong.
While our third quarter shipments were somewhat impacted by global supply chain issues, the semiconductor space remains one of our strongest end markets in 2021, and we expect this trend to continue well into 2022.
With regard to aerospace, demand in commercial aerospace, which is roughly half of our aerospace exposure, was impacted by normal seasonal factors in the third quarter.
Looking ahead, we expect demand in commercial aerospace to slowly improve throughout 2022 as build rates increase and excess inventory in the supply chain continues to decline.
Demand in the military, defense and space portions of our aerospace business remains solid with strong backlogs and exceeded our pre-pandemic shipment levels.
We anticipate strong demand in the noncommercial aerospace market will continue into 2022.
Finally, demand in the energy sector, which we define as mainly oil and natural gas, continue to slowly improve, supported by higher oil and natural gas prices.
Looking ahead, we anticipate that increasing rig counts along with customer inventory replenishments will result in a modest improvement in demand levels into 2022.
In summary, the first three quarters of 2021 were distinguished by consecutive quarters of record financial performance.
And today, early in the fourth quarter of 2021, we see a positive landscape heading into 2022 with strong and improving underlying demand in most of the markets we serve, continued elevated metal pricing even if certain products may begin to decline and the best team in the industry.
Our proven, resilient and opportunistic business model, along with our diversity, scale and solid long-term relationships with our suppliers and our customers have set us apart in dynamic markets before and positions us once again to optimize our performance and deliver strong results.
I'll start with our sales trends.
Favorable metals pricing fueled by limited availability and solid demand trends in the vast majority of key end markets we serve resulted in record quarterly sales of $3.85 billion, up 12.5% from the second quarter of 2021 and up 84.5% from the third quarter of 2020.
Strong pricing momentum contributed to the 18.4% increase in our average selling price per tons sold over the second quarter of 2021.
In comparison to the same period of the prior year, our average selling price per tons sold was up 77.9% due to increases in metal prices, but the vast majority of the products we sell, notably carbon and stainless steel products.
As Karla noted, Reliance has limited exposure to the more volatile and lower-margin hot-rolled coil and sheet products that made up only about 11% of our third quarter sales.
While benchmark pricing for hot-rolled coil products was up over 275% from the third quarter of 2020, Reliance's average selling price per tons sold for the same period was up 77.9%.
This level of broad product diversification along with strong pricing discipline and significant investments in value-added processing capabilities have been instrumental in our ability to maintain both stable and industry-leading gross profit margins in both rising and falling price environment.
These factors collectively resulted in record quarterly gross profit of $1.21 billion and a strong gross profit margin of 31.5% in the third quarter of 2021 despite including a significant LIFO charge.
Our non-GAAP FIFO gross profit margin of 38.3% in the third quarter of 2021 was a record and exceeded the prior quarter by 80 basis points and the prior year period by 650 basis points.
We incurred LIFO expense of $262.5 million in the third quarter of 2021 compared to $200 million in the second quarter of 2021.
LIFO expense in effect reflects our cost of sales at current replacement costs and removes inventory gains from our results in an environment of rising metal costs and conversely, removes inventory losses from our results in times of declining metal costs.
Our guidance for Q3 2021 assumed LIFO expense of $150 million based on our $600 million annual estimate.
As a result of higher-than-anticipated costs for certain carbon and stainless steel products in the third quarter of 2021.
We revised our 2021 annual LIFO expense estimate from $600 million to $750 million.
Accordingly, we had to true up our third quarter 2021 LIFO expense by incurring an incremental charge of $112.5 million, which increased our total third quarter LIFO expense to $262.5 million.
Based on our revised annual LIFO expense estimate, we now project LIFO expense for the fourth quarter of 2021 to be $187.5 million or $2.21 per share and $750 million or $8.73 per share for the full year.
As in prior years, we will true up to our actual annual LIFO expense calculation based on our on-hand inventory cost at the end of the year.
As of today, the LIFO reserve on our balance sheet at the end of this year is expected to be $865.6 million based on our revised $750 million annual LIFO expense estimate.
This provides $865.6 million available to benefit future period operating results, significantly mitigating the impact of declining metal prices on our gross profit and pre-tax income.
Now turning to our expenses.
Our third quarter SG&A expense increased $43.5 million or 7.7% compared to the second quarter of 2021, and increased $157.6 million or 35.1% compared to the prior year period.
The bulk of the sequential and prior quarter increases were attributable to higher incentive-based compensation resulting from our record gross profit and pre-tax income levels.
Additionally, inflation continued to contribute to increased variable expenses, most notably for fuel and freight as well as packaging costs.
Overall, our headcount increased slightly compared to both the second quarter of 2021 and the third quarter of 2020, but is nonetheless down approximately 11% from pre-pandemic levels at the end of the third quarter of 2019.
As a reminder, approximately 65% of our total SG&A costs are people related.
Our pre-tax income of $532.6 million in the third quarter of 2021 was the highest in our company's history.
Our pre-tax income margin of 13.8% was also a record.
Our effective income tax rate for the third quarter of 2021 was 25.5%, up from 22.6% in the third quarter of 2020, mainly due to higher profitability.
We currently anticipate an effective income tax rate of 25.5% for the full year 2021.
We generated record quarterly earnings per share of $6.15 in the third quarter of 2021 compared to $5.08 in the second quarter of 2021 and $1.51 in the third quarter of 2020.
It's worth emphasizing again that our third quarter 2021 results were impacted by LIFO expense of $3.06 per share.
Turning now to our balance sheet and cash flow.
Despite significantly higher working capital needs attributable to ongoing rising metal costs, our operations continue to fuel our cash flow.
Our third quarter cash flow from operations was $142.2 million after servicing over $325 million in additional working capital requirements.
As of September 30, 2021, our total debt outstanding was $1.66 billion with a net debt-to-EBITDA multiple of 0.6 times.
We had no borrowings outstanding on our $1.5 billion revolving credit facility and had $638.4 million of cash on hand, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy, including funding our acquisition of Merfish United on October one and our record 2021 capex budget.
I'll now turn to our outlook.
We remain optimistic about business conditions in the current environment with solid or recovering underlying demand across most of the key end markets we serve.
However, we expect factors impacting shipment levels in the third quarter of 2021, such as metal supply constraints, labor shortages, and other supply chain disruptions will continue to persist in the fourth quarter of 2021.
In addition, we anticipate demand will be impacted by normal seasonal factors including customer holiday-related shutdown and fewer shipping days in the fourth quarter compared to the third quarter.
As such, we estimate tons sold will be down 5 percent to eight percent in the fourth quarter compared to the third quarter of 2021.
We expect pricing for certain stainless and aluminum products to increase in the fourth quarter, offsetting the impact of declining prices for certain carbon steel products.
Also, as metal prices at the beginning of the fourth quarter are higher than the average for the third quarter, we estimate our average selling price per ton sold for the fourth quarter of 2021 will be up by seven percent.
Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $5.05 to $5.15 for the fourth quarter of 2021.
In closing, we are extremely pleased with our record third quarter operational and financial performance against the backdrop of challenging market dynamics despite ongoing strong pricing and healthy demand trends.
Our record financial performance and strong cash flow enabled us to continue allocating capital to simultaneously invest in the growth of our business and return value to our stockholders. | compname reports q3 earnings per share $6.15.
sees q4 non-gaap earnings per share $5.05 to $5.15.
q3 earnings per share $6.15.
q3 sales $3.85 billion.
estimates its tons sold will be down 5% to 8% in q4 of 2021 versus q3 of 2021.
estimates its average selling price per ton sold for q4 of 2021 will be up 5% to 7%.
compname says estimates its average selling price per ton sold for q4 of 2021 will be up 5% to 7%.
reliance steel & aluminum - sees demand impacted by normal seasonal factors incl.
customer holiday-related shutdowns, fewer shipping days in q4 versus q3.
qtrly average selling price per ton sold$2,862 versus $2,418 in q2. |